SCM Final Exam Pages 334 341 Periodic Review Systems 04 09 2014 Simplest approaches to managing independent demand inventory A company checks the inventory level of an item at regular intervals and restocks to some predetermined level R The actual order quantity Q is the amount required to bring inventory levels back up to R o Q R I o Q order quantity o R restocking level o I inventory level Inventory levels start out full and eventually drain out as units are pulled from it Downward line is only straight if demand is constant Illustrates the use of both cycle stock and safety stock The organization spreads the cyclical cost of restocking across more units Increasing the restocking level effectively increases safety stock the higher the level the less likely the organization is to run out of inventory before the net replenishment period On the flip side because inventory is checked only at regular intervals the company could run out of an item before the inventory is replenished This system is best suited for items for which periodic restocking is economical and the cost of a high restocking level is not prohibitive Example snack food display at a grocery store no economic sense to constantly monitor for snack pretzels and chips rather a vendor will stop by a store regularly and top off the supply of all the items usually with more than enough to meet demand until next replenishment date Fixed order intervals variable order sizes orders may be combined inventory position only required at review Restocking Levels R Key question in setting up periodic review system is determining R R should be high enough to meet all but the most extreme demand levels during the reorder period RP and the time it takes for the order to come on L R M RP L z RP L M RP L average demand during reorder period and order lead time RP L standard deviation of demand during reorder period and order lead time z number of standard deviations above the average demand higher z values increase the restocking level thereby lowering the probability of a stock out Service level by setting R a certain number of standard deviations above the average a firm can establish this it indicates what percentage of the time inventory levels will be high enough to meet demand during the reorder period Usually expressed in statistical terms During the reorder period Is a managerial decision we should have stock available 90 of the time The higher the service level the less willing management is to tolerate a stockout and more safety stock is needed Continuous Perpetual Review Systems approach for critical and expensive inventory items inventory level for an item is constantly monitored and when the reorder pint is reached an order is released Next order is placed when the reorder point is reached R dL Varying order intervals fixed order sizes allows individual review frequencies possible quantity discounts lower less expensive safety stocks Key Features reached Inventory levels are monitored constantly and a replenishment order is issued only when a pre established reorder point has been The size of a replenishment order is typically based on the trade off between holding costs and ordering costs The reorder point is based on both demand and supply considerations and also how much safety stock managers want to hold Assuming that the variables are constant The inventory item we are interested in has a constant demand period d there is no variability in demand from one period to the next Demand for year is D L is the lead time or number of periods that must pass before a replenishment order arrives L is constant H is the cost of holding a single unit in inventory for a year It includes the cost of the space needed to store the unit cost of potential obsolescence and opportunity cost of tying up the organizations funds in inventory H is known and fixed S is the cost of placing an order regardless of order quantity Whether it is ordering 10 or 1000 units it costs the same Known and fixed P is the price of each unit it is fixed Average inventory level is Q 2 Economics Order Quantity EOQ How managers choose how much to order Total holding and ordering costs for the year total yearly holding cost total yearly ordering costs Q 2 H D Q S There is a trade off between yearly holding and ordering costs EOQ 2DS H Q order quantity H annual holding costs D annual demand S ordering costs Reorder Points and Safety Stock Tells managers when to order ROP average of dL SS SS safety stock Safety stock is an extra amount beyond that needed to meet average demand during lead time It is added to the reorder point to protect against variability in both demand and lead time It raises the reorder point forcing a company to reorder earlier than Helps to ensure that future orders will arrive before the existing Decisions on how much safety stock to hold depends on these things usual inventory runs out 1 The variability of demand 2 Variability of lead time 3 Average length of lead time 4 Desired service level 5 Average demand The more the demand level and lead time vary the more likely it is that inventory will run out to hold more safety stock Therefore higher variability in demand and lead time will force a company A longer average lead time exposes a firm to this variability for a longer When lead times are extremely short JIT situations safety stock is small period Pgs 347 350 Inventory in the Supply Chain The Bullwhip Effect an extreme change in the supply position upstream in a supply chain generated by a small change in demand downstream in the supply chain EOQ doesn t consider how other firms will deal with changes in order quantities and costs Ex Supposed ABC Company makes pool cleaners that are sold through 6 distributors They have similar demand patterns and identical EOQ and ROP quantities Avg Weekly demand 500 pool cleaners standard dev 100 Order quantity 1 500 Reorder point 750 In order to reduce the Bullwhip Effect many supply chain partners are working together to reduce order quantities by removing volume discount incentives and reducing ordering costs Inventory Positioning Managers must decide where in the supply chain to hold inventory Based on two general truths o 1 The cost and value of inventory increases as material move down supply chain o 2 The flexibility of inventory decreases as inventory decreases as materials move down the supply chain Loss of flexibility is major reason materials are often held back in the supply chain