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s sD
time
sD:Standard deviation of L
L
demand per period
ss F S (CSL) s L
1
DL: Mean demand during lead
time
sL: Standard deviation of ROP D L ss
demand during lead time
CSL: Cycle service level CSL F ( ROP, D L ,s L )
ss: Safety inventory
ROP: Reorder point Average Inventory = Q/2 + ss
Dr. Srikanta Routroy 11
Estimating Safety Inventory
(Continuous Review Policy)
D = 2,500/week; sD = 500
L = 2 weeks; Q = 10,000; ROP = 6,000
DL = DL = (2500)(2) = 5000
ss = ROP - RL = 6000 - 5000 = 1000
Cycle inventory = Q/2 = 10000/2 = 5000
Average Inventory = cycle inventory + ss = 5000 + 1000
= 6000
Average Flow Time = Avg inventory / throughput =
6000/2500 = 2.4 weeks
Dr. Srikanta Routroy 12
Estimating Cycle Service Level
(Continuous Review Policy)
D = 2,500/week; sD = 500
L = 2 weeks; Q = 10,000; ROP = 6,000
s s L R
L (500) 2 707
Cycle Service Level, CSL = Prob. (z less than equal to 1.414)=
0.92.
(This value is determined from a Normal probability
distribution table).
x DL 2
x D ss
1 1 2s L 2
ESC * e dx
x RL ss
L
2 sL
Put
x DL
z
s dx s l dz
L
zs ss
1 1
ESC * e 2
dz
ss
L
2 sL
z
sL
z2 z2
1 1
ss e 2
dz s z e 2
dz
2 2
L
ss ss
z z
sL sL
ss
1
z2
ss 1 FS s
2
s z e dz
2
L
L z
ss
sL
Put
z2
w dw zdz
2
Dr. Srikanta Routroy 16
Fill Rate
ss
1 w
ESC ss 1 FS s L e dw
s L w
ss 2 2
2s L 2
ss ss
ESC ss 1 FS s L f s
sL sL
1,0001 0.9207
707
2 * e
79.3 103.776 24.5 25
DL DL
s s
2 2 2
L
L D D s L
Dr. Srikanta Routroy 24
Impact of Supply Uncertainty
Demand information at Dell for PC is given as
D = 2,500/day; sD = 500. Target CSL = 0.90 and
Hard Drive supplier information as follows L = 7 days; sL = 7 days
Evaluate the safety inventory of hard drive, Dell has to carry.
DL = DL = (2500)(7) = 17500
s L
L s D sL
2
D
2 2
Information centralization
Specialization
Product substitution
Component commonality
Postponement
D D
C
i
i 1
n
s s
C 2
D i
i 1
s Ls D
C C
L
ss F s (CSL) s L
1 C
Savings
Motors Cleaner
Total inventory saving $102,968,000 $15,397,230
Total holding cost on agg. $25,742,000 $3,849,308
Holding cost saving/unit $15.47 $0.0046
Saving as a percentage of 3.09% 0.15%
product cost
Case 2:
Each component ends up in nine different finished products.
Aggregating across the nine products, the monthly demand for each
component be normally distributed with the following:
Mean demand of common component (CC) across nine products=4,500
Standard deviation of CC across nine products= (9)0.5*3000=9000
Safety inventory required for each CC= F-1(0.95)* 9000=14,804
Total safety inventory=14,804*9= 133,236
Case 2:
Each component ends up in nine different finished products.
Aggregating across the nine products, the monthly demand for each
component be normally distributed with the following:
Mean demand of common component (CC) across nine products=4,500
Standard deviation of CC across nine products= (9)0.5*3000=9000
Safety inventory required for each CC= F-1(0.95)* 9000=14,804
Total safety inventory=14,804*9= 133,236
SS FS (CSL) * s T L
Average Lot Size=Q
OUL DT L SS =DT=D*T
s T L T L * s D 6 * 500 1,225
The required safety stock for a CSL of 0.90=
F-1(CSL)*s T L 1.28*1225=1,570
OUL= 15,000+1,570=16,570