Inventory Control Model

Reorder level: when to order.

The time between the placement and receipt of an order,

called the lead time.

The reorder point (ROP) is :

ROP = (Demand per day) x (Lead time)
= d x LT
This equation for ROP assumes that demand is uniform and
constant and no safety stock is necessary.

d = D / (Number of working days in a year)

Example:

Let Annual demand (D) = 1000 units

Average daily demand (d) = 1000/321
Lead time (LT) = 5 days
Ordering cost (s)= $ 5 per order
Holding cost (h) = $ 1.25 per unit per day

The optimal order quantity (Q*) = (2DS)/H =89.4 unit

R = d x LT =( 1000/321) x 5 = 15.5 units

Buffer stock = Average demand x Average lead time

Example :

Demand rate is 100 units/month , the normal and

maximum lead time are 10 days and 30 days respectively,

BS= (100/30) x (10+30)/2

When no stock out is desired

Buffer stock = (Maximum demand during LT)

(Average demand during LT)
= Dmax x LT Davg x LT
= (Dmax - Davg) x LT

Reorder level = Davg x LT + BS

 Problem
The following information is provided for an item:
Annual usage = 12,000 units, ordering costs = Rs 60 per order,
Carrying cost 10%, unit cost of item = Rs 10 and
lead time = 10 days.

There are 300 working days in a year. Determine the EOQ and
the number of order per year. In the past two years the use rate
gone to 70 units per day. For a reordering system base in the
inventory level, What should be the reorder level at this buffer
stock? What should be the carrying costs for a year?

Find EOQ.= 1,200 units

No of orders / year = 12,000/1200 = 10

Average usage per day = 12,000/300 = 40 unit
Max usage = 70 unit/day
buffer stock = (70 - 40) x LT= 30 x 10 =300 unit
ROL = Average lead time demand x buffer stock
= 40 x 10 + 300 = 700 unit
Average inventory level = buffer stock + Q* /2
= 300+ 1200/2 = 900 unit
Inventory carrying cost = 900 x ( $ 1) =$ 900

Inventory Control System:

Fixed order Quantities System (Q System):

In this system of ordering there are three parameter of items
a) EOQ
b) Optimal buffer stock
c) ROL
 Problem

For a fixed order quantity system, find out

1) EOQ
2) Optimal buffer stock
3) Reorder level, for an item with the following data:
Annual consumption = 10,000 unit
Ordering cost Rs 12 per production run
Holding cost Rs 0.24 per unit
Working days 321days
Past lead time : 15 days, 25 days, 13 days, 14 days, 30 days,
17 days
Find
i) EOQ = 1,000 units
ii) Optimal buffer stock = (max lead time normal lead time ) x
monthly consumption
= (30 15)/30 x (10,000/12)
= 420 (approx) normal lead time 15 days
iii) Normal lead time consumption =
Normal lead time x monthly consumption
= (15/30) x (10,000/12) = 417 units
ROL = buffer stock + NLTC
= 420 + 417 = 837 units =840 (approx)
iv) Maximum inventory level
= buffer stock + EOQ
= 420 + 1000
= 1, 420 units
The average inventory= ( safety stock + Max inventory)/2
=(420 + 1,420)/2 = 920 unit
 Determination of Safety stock:

Safety Stock is additional inventory to reduce the probability

of running out of stock .

Service Level is the probability of not running out of on a

given replenishment cycle.

Service level = no. of units supplied without delay/ Number of

unit demand
This is a complement to safety stock.
Service level = 1- probability of a stock-out

The amount of safety stock needed is based on:

The degree of uncertainty in the Demand During lead Time
(DDLT)
The customer service level desired
DDLT (demand during lead time) Distribution:
Problem:
The distribution of the actual demand of an inventory
item of a manufacturer company, during a lead time of 9 days
is given below:
Number of units Probability
51- 60 0.01
61-70 0.04
71-80 0.11
81-90 0.20
91-100 0.29
101-110 0.20
111-120 0.10
121-130 0.04
131-140 0.01
a) Determine safety stock when no stock out is desired.
b) Determine safety stock corresponding service level of 95%.
Number mid-point(m) Probability (f) C.f f.m
of units
50.5- 60.5 0.01 0.01
60.5-70.5 0.04 0.05
70.5-80.5 0.11 0.16
80.5-90.5 0.20 0.36
90.5-100.5 0.29 0.65
100.5-110.5 0.20 0.85
110.5-120.5 0.10 0.95
120.5-130.5 0.04 0.99
130.5-140.5 0.01 1

Mean= 95.3
Setting safety stock level for constant lead time
and Normally Distributed DDLT:

DDLT is normally distributed, mean () and S.D ( ) , the

re-order point is obtained by locating the value DDLT,
determining the safety stock that probability of stock out(),

Problem:

The demand for an item during the order period is know to

be normal distributed with mean 600 units and standard
deviation 50 units. What service level can the firms expect to
offer (i) when it has 80 units of safety stock and (ii) also
determine the safety stock if it is provide a 99% service to the
customers.
 Q system with uncertainty Demand and Lead Time
Consider both demand and lead time is uncertain with fixed mean and
standard deviation of the demand during lead time. When a replenishment
order is placed, idea is to know the lead time and ROP. The additional
inventory is called reserve stock.
_ _____________
ROL= d X LT + Z LT d2 + d2 2LT

d= average demand(number of unit per time)

d2 = variance on demand (items per unit)
LT2= variance in lead time (units of time)
LT= average lead time (units of time)
_____________
Reserve Stock = Z LT d2 + d2 2LT
Example: Mean demand per day: 15 units
SD: 5 per day
Average Lead time=19 days
SD of Lead time: 7 days
Service level: 95% : Calculate the reserve stock.
Periodic Review System (P-System):

The size of order quantizes may vary with the fluctuation in

demand, but the order interval is fixed. In this case the inventory
is periodically review.

i) Review period ( t )
ii) Replenishment level (R)

Replenishment level = Average consumption rate x

(review period +normal lead time) + safety stock

Order quantity = Replenishment level Stock available

Problem:
For a periodic review system, find out the various
parameter for an item with the following data:

Annual consumption= 14,000 units

Cost of one unit = Rs 10
Suppliers minimum quantity = 1,000 units
Normal lead time = 10 days
Maximum lead time = 15 days
Maximum consumption = 1.02 of (average consumption)

The maximum number of order = 14,000/1000=14 orders

Review period = 1/14th year or 26 days (approx one month)
Safety stock = Max. consumption rate x (review period +
max lead time)
- Normal consumption rate (review period + normal lead time)

= (1.02) x(14000/12) x (1 + 15/30) - (14000/12) x (1 + 10/30)

= 548 = 550 (app.)

Replenishment level = Average consumption rate x

(review period + normal lead time) + safety stock

= (14000/12) x ( 1+ 10/30) + 550

= 2,105( approx.)
Maximum inventory when the supplies are received
= safety stock + order quantity
= 550 + (14000/12)= 1,710 unit (approx.)
Average inventory level = (1,710 + 550)/2
= 1,130 units