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Timing Decisions
Quantity decisions made together with decision
When to order?
One of the major decisions in management of the inventory systems.
Impacts: inventory levels, inventory costs, level of service provided
Models:
One time decisions
Continuous review systems
Periodic review systems
Timing Decisions
One-Time
Decisions
Continuous Decisions
Continuous Review
System
Intermittent-Time
Decisions
Periodic Review
Systems
EOQ, EPQ
EOQ
(Q, R) System
(S, T) System
Base Stock
(s, S) System
Two Bins
Optional
Replenishment
One-Time Decision
Situation is common to retail and manufacturing environment
Consider seasonal goods, which are in demand during short period only.
Product losses its value at the end of the season. The lead time can be
longer than the selling season if demand is higher than the original
order, can not rush order for additional products.
Example
newspaper stand
Christmas ornament retailer
Christmas tree
finished good inventory
newsboy model
or
Christmas tree model
Probability,
f(D)
22
0.05
24
0.10
26
0.15
28
0.20
30
0.20
32
0.15
34
0.10
36
0.05
Solution:
Q order quantity; Q* - optimal
D demand: random variable with
probability density function f(D)
F(D) cumulative probability function:
F(D) = Pr (demand D)
co cost per unit of positive inventory
cu cost per unit of unsatisfied demand
Economics marginal analysis: overage
and underage costs are balanced
cu
FQ
cu co - probability of satisfying demand during the
So,
22
0.05
0.05
24
0.10
0.15
26
0.15
0.30
28
0.20
0.50
30
0.20
0.70
32
0.15
0.85
34
0.10
0.95
36
0.05
1.00
cu
40
FQ
0.50
cu co 40 40
Q 28
Q z 15.24
Describing Demand
Decision Variables
For EOQ model there was a single decision variable Q.
The value of the reorder level, R, was determined by Q:
Q= T
R = , if < T
R = *MOD(/T), if > T
Initiate Q0=EOQR0n(R)Q1R1
1 F ( R ) Qh / p
2)
Computations
For type 1 service, if the desired service level is then one
finds R from F(R)= and sets Q=EOQ
Type 2 service requires a complex iterative solution
procedure to find the best Q and R.
See Example 5.5 on page 256.
Type 1 finds fraction of periods in which there is no stockout (no matter one item short or 1000).
Type 2 measures the percentage of all filled orders in all
periods (95% or 98% service objective).
Demand
Stock-Outs
0
0
45
0
0
10
0
0
0
0
For a type 1 service objective there are two cycles out of ten in which a stock-out occurs, so
the type 1 service level is 80%. For type 2 service, there are a total of 1,450 units demand and
55 stockouts (which means that 1,395 demand are satisfied). This translates to a 96% fill rate.
(s, S) Policies
The (Q,R) policy is appropriate when inventory levels are reviewed
continuously. In the case of periodic review, a slight alteration of
this policy is required. Define two levels, s < S, and let u be the
starting inventory at the beginning of a period. Then
If u s, order S u.
In general, computing the optimal values of s and S is much more
If u s,Q don't
difficult than computing
and R. order.
Homework Assignment
Read Ch. 5 (5.1 5.8)
5.3, 5.6 5.8, 5.12, 5.15, 5.19, 5.25 5.27