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OPSM 301 Operations Management

Ko ç Un iversity. OPSM 301 Operations Management. Class 16: Inventory Management: safety inventory. Zeynep Aksin zaksin @ku.edu.tr. Levers for Managing Inventories. Theoretical Inventory I th =R x T th Reduce critical activity times Eliminate non-value added work

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OPSM 301 Operations Management

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  1. Koç University OPSM 301 Operations Management Class 16: Inventory Management: safety inventory Zeynep Aksin zaksin@ku.edu.tr

  2. Levers for Managing Inventories • Theoretical Inventory Ith=R x Tth • Reduce critical activity times • Eliminate non-value added work • Move work from critical to non-critical • Redesign process to replace serial with parallel processing • Cycle inventory • Average inventory per cycle=Q/2 • Reduce set-up to reduce cycle inventory

  3. Levers for Managing Inventories • Seasonal Inventory • Use pricing and incentive tactics to smooth demand • Increase resource flexibility • Safety inventory-this is next!

  4. Demand is uncertain • We may use historical data to forecast demand • Recall QMBU 301? • Some truths about forecasts • They are always wrong-measure error of forecast • Aggregate forecasts are more accurate than individual forecasts • Long range forecasts are less accurate than short-range forecasts

  5. orders Pipeline stock On-hand inventory Supply Inventory position Set Up: Simple Supply Chain • Three key questions: • How often to review? • When to place an order? • How much to order?

  6. How often to review • Continuous review • Periodic review

  7. Inventory Receive order Place an order Q Q/2 Inventory on hand Cycle Stock Çevrim Stoğu Safety Stock Emniyet Stoğu Lead time Time Q Pipeline stock Time

  8. Why hold Safety Inventory? • Demand uncertainty • Supply uncertainty Measures of product availability • Product fill rate (f): fraction of demand that is satisfied from product in inventory • Cycle service level (CSL): fraction of replenishment cycles that end with all the customer demand being met

  9. Reminder:The Normal Distribution Standard Deviation = 5 Standard Deviation = 10 Average = 30

  10. Service Level Frequency Inventory Level P(Stockout) Optimal Order Quantity X SS ROP Reorder Point (ROP) SafetyStock(SS) Place order Receive order Time Lead Time Probabilistic ModelsWhen to Order?

  11. Stochastic Model: Fixed-Order Quantity Order Quantity = same as before (EOQ) Safety stock

  12. Reorder Point andDesired Stockout Probability Desired Service Level 1.0-(Desired Service Level) Mean Demand During Lead Time Reorder Point (ROP) Reorder Point = Mean Demand During Lead Time + Safety Stock

  13. F(z) z 0 The Standard Normal Distribution Transform X = N(mean,s.d.) to z = N(0,1) z = (X - mean) / s.d. F(z) = Prob( N(0,1) <z) Transform back, knowing z*: X* = mean + z*s.d.

  14. Example If we want to have probability of not stocking out=95% (SL=95%) z=1.64 ROP=mean+1.64 Assume that for daily demand: Mean=20 std dev=10 Lead time=L=5 days Then:

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