Lecture 3Single Stage InventoryControlWang BhanggiongWHUTApril.2017
Lecture 3 Single Stage Inventory Control 1 Wang Zhangqiong WHUT April, 2017
ObjectivesUnderstandinginventoryina supplychainWhyinventoryisimportant?How to manage it?SingleStageInventoryControl-EconomicLotSizeModel-DemandUncertainty,safestockMultipleOrderOpportunities:RiskPooling(Centralizedsystem)
Objectives • Understanding inventory in a supply chain Why inventory is important? How to manage it? • Single Stage Inventory Control - Economic Lot Size Model - Demand Uncertainty, safe stock • Multiple Order Opportunities: • Risk Pooling (Centralized system) 2
2.2 Single Stage Inventory ControlSinglesupplychainstage·Variety of techniques-EconomicLotSizeModel-Demand Uncertainty-SinglePeriodModels- Multiple Order Opportunities-ContinuousReviewPolicy-VariableLeadTimes-PeriodicReviewPolicy-ServiceLevelOptimization3
2.2 Single Stage Inventory Control • Single supply chain stage • Variety of techniques – Economic Lot Size Model – Demand Uncertainty – Single Period Models – Multiple Order Opportunities – Continuous Review Policy – Variable Lead Times – Periodic Review Policy – Service Level Optimization 3
2.2.1. Economic Lot Size ModelEconomicOrderQuantity(EOQOrdersizeAverageosTimeFiG. 2-3: Inventory level as a function of time
2.2.1. Economic Lot Size Model Economic Order Quantity(EOQ) FIG. 2-3: Inventory level as a function of time 4
Assumptions D items per day: Constant demand rateQitems per order: Order quantities are fixedK, fixed setup cost, incurred every time the warehouseplaces an order. h, inventory carrying cost accrued per unit held ininventory per day that the unit is held. Lead time = 0(the time that elapses betweenthe placement of anorder and its receipt)Initial inventory = 0Planning horizon is long (infinite),5
Assumptions • D items per day: Constant demand rate • Q items per order: Order quantities are fixed. • K, fixed setup cost, incurred every time the warehouse places an order. • h, inventory carrying cost accrued per unit held in inventory per day that the unit is held. • Lead time = 0 (the time that elapses between the placement of an order and its receipt) • Initial inventory = 0 • Planning horizon is long (infinite). 5
Deriving EOQ Total cost at every cycle T:hTQC=K+2 Average inventory level in a cycle: Q/2· Cycle time T=Q/D Average total cost per unit time:KDhQhTQC/T=(K2292KDQh6
Deriving EOQ • Total cost at every cycle T: • Average inventory level in a cycle: Q/2 • Cycle time T =Q/D • Average total cost per unit time: 2 hTQ C K h KD Q * 2 6 T hTQ C T K )/ 2 / (
EOQ: Costs$160$140$120Total cost$100HoldingcostSO$80$60Ordercost$40$20$o05001,0001,500Q*Orderquantity(numberofunits)FlG 2-4:Economic lot size model:total cost per unit time7
EOQ: Costs FIG 2-4: Economic lot size model: total cost per unit time 7 Q*
SensitivityAnalysisTotal inventory cost is relatively insensitivetoorderquantitiesActual order quantity: QQ is a multiple b of the optimal order quantity Q*For a given b, the quantity ordered is Q = bQ*b2.91.5.81.11.21.5025250.5.48.92.51.6Increaseincost(%)The total cost is minimal when order quantity is Q*Actually the cost increases a little when order quantitychanges
Sensitivity Analysis b .5 .8 .9 1 1.1 1.2 1.5 2 Increase in cost(%) 25 2.5 0.5 0 .4 1.6 8.9 25 Total inventory cost is relatively insensitive to order quantities Actual order quantity: Q Q is a multiple b of the optimal order quantity Q*. For a given b, the quantity ordered is Q = bQ* The total cost is minimal when order quantity is Q*. Actually the cost increases a little when order quantity changes
2.2.2. the Effect of DemandUncertainty on inventory3 rules:.Theforecastis always.It'shard tomatch supplywrongand demand;The longer thePredict demand for a longforecast horizon, theperiod of time?worse theforecastGeographicalaggregation,Aggregateforecastsproductaggregationare more accurate>centralized strategy9
2.2.2. the Effect of Demand Uncertainty on inventory 3 rules: • The forecast is always wrong • The longer the forecast horizon, the worse the forecast • Aggregate forecasts are more accurate. 9 • It’s hard to match supply and demand; • Predict demand for a long period of time? • Geographical aggregation, product aggregation centralized strategy
Whatare theimpacts of demanduncertaintyon inventory policy?simple2.2.3. Single Period Modelssimplest situation (Short lifecycle products)2.2.5MultipleOrderOpportunitiesContinuousReviewPolicyPeriodic Review Policycomplex10
What are the impacts of demand uncertainty on inventory policy? 2.2.3. Single Period Models simplest situation (Short lifecycle products) 2.2.5 Multiple Order Opportunities Continuous Review Policy Periodic Review Policy 10 simple complex