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P System

P System. Review. Review: In the EOQ model we order the same amount at essentially the same interval of time. In the Q System we order the EOQ amount each time but order it when the stock position reaches a “trigger” level R. R will depend on actual demand.

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P System

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  1. P System

  2. Review Review: In the EOQ model we order the same amount at essentially the same interval of time. In the Q System we order the EOQ amount each time but order it when the stock position reaches a “trigger” level R. R will depend on actual demand. In the P System we order at a regular interval P(maybe because a delivery truck always stops by on a regular interval), but we order an amount so that our stock position gets up to a target level T. Recall the EOQ formula Q = Sqrt[{2(S)(D)}/{i(c)}]. Remember this is how much of the annual demand should be ordered when an order is made under EOQ or the Q System.

  3. P System With Q ordered each time and an average daily demand amount, the review period should be P = Q from EOQ divided by average daily demand. So, an order will be placed every P days. Remember that once an order is placed it will take L days to arrive. Say P = 5 and L = 4. Say on day 1 an order is placed. Once that order is placed it is included in the stock position. The target level T has to be such that on day 1 after the order is placed enough inventory will be around to get us to the next review period and the lead time of that delivery. So our target inventory level should get us through P + L days.

  4. P System The target inventory should then equal Average daily demand times (P + L) + z (sqrt(P + L)) standard deviation of daily demand. Example: Let’s use the same example as used in the Q system – that one started on page 344 EOQ Q = 1000 cases P is then 1000/200 = 5. L is stated as 4. Average daily demand is stated as 200. The standard deviation of daily demand is 150. Recall z is based on a service level desired and if we want 95% service level we use z = 1.65. Thus the target inventory level is 200(9) + 1.65(sqrt(9))(150 ) = 1800 + 1.65(3)(150) = 2542

  5. P System So, in our example the target inventory level is 2542. But this is not the amount to order each time. The amount to order is this target minus the stock position at the time of the order. This amount will differ from order to order because the demand is not constant, but random. So, if the stock position is already 1756 the order at that time should 2542 minus 1756 = 786. Then with random demand over the next 5 days the stock position will be something else and only 2542 minus that new stock position will be ordered.

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