Chapter 9: Inventory Management

Example 3

• Let us return to the bird feeder in Example 2 see slide #17.
• The E O Q is 75 units.
• Suppose that the average demand is 18 units per week with a standard deviation of 5 units.
• The lead time is constant at two weeks.
• -> Standard deviation( of two weeks = 5 * 2 = 7.07
• Determine the safety stock and reorder point if management wants a 90 percent cycle-service level. -> Z score for 90% = 1.28

Factors Affecting Re-order Point

• The higher reorder point, the more inventory held.

• Factors affecting the size of reorder point
• Customer service level
• The higher customer service level, the higher reorder point
• Variability of demand during delivery lead time
• The higher variability in demand, the higher reorder point
• Average demand during delivery lead time
• The higher average demand during lead time, the higher reorder point

Periodic Review System

• Review inventory in a fixed interval
• At the review point, the different amount between the target and inventory position is ordered.
• Target is 100 and the inventory position at the first review is 50. So, we have to order 50 units (=100-50)

Comparison of Q and P systems

• Advantages of the Q System

• More accurate – lower safety stock
• Fixed lot size – easy to remember
• The review frequency of each S K U may be individualized.

• Advantages of the P System

• Convenient because fixed interval of reviews
• Combining multiple orders from the same supplier into a single order
• Less investment for inventory tracking system

• If your company has a good tracking system for inventory, the continuous review system (Q system) is better because the inventory held becomes lower.