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What are reasons for inventory? How can we reduce the need for inventory?
Reasons for inventory Work-in-process (unfinished products) Production process (you cannot produce each product in each period) Building up reserves for busy periods Inventories enable a quick reaction (for example in a responsive supply chain) Volume discounts (buying large quantities is much cheaper) Safety stocks.
Types of inventory
Pipeline Inventory: The amount of product needed en route in order to meet demand based on lead times and the quantity being shipped. Cycle Inventory: In production cycle inventory results from: minimum batch sizes or run quantities and or producing to keep machines fully utilized. In supply cycle inventory results from unit load quantities and shipping frequencies. Safety Stock: To buffer against uncertainty in demand, supply, and uncertainty inherent in the planning process. Anticipation Inventory: The amount of product that planners have built for known future events such as:
Seasonal peaks Shutdowns Promotions Potential strikes
Inventories form one component of the total cost, ideally minimize total cost not just inventory cost.
Time t
Lead time
Inventory models
Easy cases:
mathematical formulas from inventory theory
Assumptions: Demand is known and constant: D items per time period. The fixed `ordering costs' are constant: K per delivery. The variable `ordering costs' are constant per item ordered. The lead time is zero. No backlogging. The holding costs are constant: h per unit per year.
Hard cases:
Deterministic models: large ILPs Stochastic models: discrete-event simulation
Deterministic extensions
Positive lead time (but constant) Backlogging is allowed at a constant cost cB per item
q =
*
Reorder-point:
2 KD h
r *=0
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Stochastic model
Optimal values: q
Sources of uncertainty: Lead time Demand Cure: a stochastic model, but You need to know the probability distribution
Assumptions E(D) is the expected demand per period The fixed `ordering costs' are constant: K per delivery. The variable `ordering costs' are constant per item ordered. Stochastic lead time Backlogging cost: cB per item The holding costs are constant: h per unit per period.
q* =
2 KE( D) h
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Optimal values: r
Stock-out probability = Probability (demand during the lead time r) Compute r* using the optimal stock-out probability SOP:
Normal distribution
Stochastic variable X is normally distributed with: Expected value E(X)= (mean) Variance Var(X)= The standard deviation is the square root of the variance . Rules for computation (stochastic variables)
hq* SOP = c B E( D)
Compute r* such that the probability that you run out of stock is equal to the optimal SOP. The order fulfillment rate is equal to 1- SOP If SOP is unknown (for example if cB is hard to estimate), then use a target fulfillment rate. Optimal size of safety stock: r* - expected demand over the lead time
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Examples
Deterministic case Demand: 3000 units per year (D=3000) Fixed ordering cost: $300,- (K=300). Holding cost: $5,- per year (h=5). Lead time is zero. Stochastic case Demand per year is normally distributed with E(D)=3000 and Var(D)=5002. Assume weekly demands are independent Fixed ordering cost: $300,- (K=300). Holding cost: $5,- per year (h=5). Lead time is two weeks (fixed). Cost of backlogging is $50,- (cB=50).
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Product classification
Improve demand forecasts Improved tracking (RFID) Sharing supply chain information Reducing number of locations (DCs) Reducing product variety Postponing product customization
Divide the products into three classes: A, B, C items. A-items: top 20% of products in sales (causing 60% of sales) B-items: middle 20% of products in sales (causing 20% of sales) C-items: bottom 60% of products in sales (causing 20% of sales) These borders should be handled with caution. Set the SOP-values for these items differently (for A-items 20% in the previous version, now 10%).
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Long-term planning
Here, V is the throughput per year, and and are parameters that have to estimated. Procedure: Divide the products in product classes with equal behavior. Construct a simulation model per product class. Apply the simulation a large number of times on basis of historical data. Use the results of the simulations to estimate and using regression analysis.
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