Instructor:
Cecil Bozarth , PhD
North Carolina State University
Author of "Introduction to Operations and Supply Chain Management," 2nd edition, Pearson, Prentice-Hall
SECTION Index
Functions and Drivers of Inventory
Independent vs. Dependent Demand Inventory Systems
Two Classic Independent Demand Systems
EOQ, Reorder Point, and Safety Stock Analysis
1. EOQ Model
Related
SITE LINKS
Inventory Management Models : A Tutorial
SAFETY STOCK ANALYSIS
EOQ tells us HOW MUCH to order…but WHEN should we order?
What Happens when either Demand or Lead Time Varies?
What is the Chance of a Stockout?
Safety Stock
When both lead time & demand are constant, you know exactly what the reorder point is ...
- Under these assumptions:
Reorder point = demand during lead time
- Where
 |
= demand per time period |
 |
= lead time |
What Happens when either Demand or Lead Time Varies?
- Variances are caused by changes in demand rates and lead times.
- Additional inventory beyond amount needed to meet “average” demand during lead time
- Protect against uncertainties in demand or lead time
- Balance the costs of stocking out against the cost of holding extra inventory
- When holding safety stock (SS), the average inventory level is:
- Shown graphically:
What is the Chance of a Stockout?
Recalculating the reorder point to include safety stock
GRAPHIC
EXAMPLE
Calculating averages and variances of demand and lead time using historical data
Historical data for 10 weeks of demand, as well as 8 previous orders
Finding Z
- Z = number of standard deviations above average demand during lead time
- The higher z is:
- >> The lower the risk of stocking out
- >> The higher the average inventory level
- Typical choices for Z:
- Z = 1.29 >> 90% cycle service level
- Z = 1.65 >> 95% cycle service level
- Z = 2.33 >> 99% cycle service level
- Cycle service level:
- Once the reorder is placed, the probability that stocks will be depleted before the new order arrives