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Continuous Review Systems in Inventory Management

Continuous Review Systems in Inventory Management. Talia Gruber Marriott School November 2011. Agenda. Continuous review systems defined Inventory positions and reorder points Reorder points with constant demand and lead time Reorder points with variable demand and constant lead time

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Continuous Review Systems in Inventory Management

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  1. Continuous Review Systems in Inventory Management Talia Gruber Marriott School November 2011

  2. Agenda • Continuous review systems defined • Inventory positions and reorder points • Reorder points with constant demand and lead time • Reorder points with variable demand and constant lead time • Reorder points with variable demand and lead time • Two-Bin System

  3. What are Continuous Review Systems? • Systems that determine whether it is time to reorder a product by tracking the remaining inventory levels of the product each time a withdrawal is made.

  4. The Continuous Review System may also be called: Reorder Point (ROP) System Fixed Order-quantity System Quantity and Reorder Point (QR) System Q System Alternate Names

  5. Inventory Position Inventory Position (IP) measures the level of the current product’s ability to fulfill future orders. IP = OH + SR - BO

  6. A predetermined minimum level that triggers the order of a fixed quantity of the product. Reorder Point

  7. Selecting the Reorder Point with Constant Demand and Lead Time Order Received Inventory Position On-hand Inventory R Order Placed L L L Time

  8. Practice Problem with Constant Demand and Lead Time Demand for water bottles from a particular concession stand is always 30 per day and the lead time is always 2 days. The on hand inventory is currently 15 bottles, and there is is an incoming order of 50 water bottles. If there are currently no backorders, what is the inventory position? Should a new order be placed?

  9. Solution R = Total demand during lead time = 30*2 = 60 bottles IP = OH + SR – BO = 15 + 50 – 0 = 65 bottles 65 > 60 so a new order is NOT needed

  10. Selecting Reorder Point with Variable Demand and Constant Lead Time • Demand is not usually constant and predictable • To guard against stock-outs, reorders that include safety stock should be selected Reorder Point = Avg. demand during lead time + Safety stock

  11. Selecting Reorder Point with Variable Demand and Constant Lead Time Order Received Inventory Position On-hand Inventory R Order Placed Time

  12. Selecting Reorder Point with Variable Demand and Constant Lead Time Three steps to selecting a reorder point: • Choose an appropriate service-level policy • Determine the demand during lead time probability distribution • Determine the safety stock and reorder point levels

  13. Step 1: Service Level Policy Service Level: The desired probability of not running out of stock during an order cycle An 80% service cycle = An 80% chance that the stock will not run out during the lead time.

  14. Step 2: Demand During Lead Time Distribution • In order to calculate the specific safety stock level, you must determine the demand during lead time distribution by knowing the: • Mean • Standard Deviation

  15. Step 2 Continued • Determine the demand during the lead time distribution by making the following assumptions: • Average demand is known • Standard deviation of demand is known • Probability distributions of demand are independent and identical over each time period.

  16. Step 2 Formulas Average demand during lead time: d + d + d + … = dL Variance of demand during lead time: σ2d+ σ2d + σ2d + … = σ2dL Standard deviation of demand during lead time: σdLT = √( σ2dL) = σd√ (L)

  17. Step 2 Calculations σdLT = 17.32 σd = 10 σd = 10 σd = 10 + + = 50 150 50 50 Demand for 3-week lead time Demand week 1 Demand week 2 Demand week 3

  18. Step 3: Safety Stock and Reorder Point Service Level = 90% Service Level = 50% 90% 50% 50% 10% Average demandduring lead time R Average demandduring lead time = R

  19. Step 3 Continued: Formulas Safety Stock = zσdLT Z = The number of standard deviations needed to achieve the service level σdLT = Standard deviation of demand during lead time Reorder Point = dL + safety stock

  20. Practice Problem with Variable Demand and Constant Lead Time The average weekly demand for water bottles from a particular concession stand is 80 bottles per week, and the constant lead time is 3 weeks. There is a standard deviation of 10 bottles. If a 95% service level is desired, what would the safety stock and reorder point be?

  21. Solution d = 80 bottles σd = 10 bottles L = 3 weeks σdLT = σd√ (L) = 10√(3) = 17.32 z = 1.64 Safety stock = zσdLT = (1.64)(17.32) = 28.40 or 28 bottles Reorder Point = dL + safety stock = (80)(3) + 28 = 268 bottles

  22. Selecting Reorder Point with Variable Demand and Lead Time Two assumptions: • Demand and lead time are measured in the same time units (i.e. days, weeks, etc.) • Demand and lead time are independent of one another

  23. Formulas for Variable Demand and Variable Lead Time Safety stock = zσdLT R = (Avg. weekly demand x Avg. lead time in weeks) + safety stock = dL + safety stock

  24. Practice Problem with Variable Demand and Lead Time The average weekly demand for water bottles from a particular concession stand is 50 bottles per week, with a standard deviation of 10 bottles. The average lead time is 2 weeks, with a standard deviation of 1 week. If an 80% service level is desired, what would the reorder point be?

  25. Solution d = 50 bottles σd = 10 bottles L = 2 weeks σLT = 1 week σdLT = √(Lσ2d + d2σ2LT) = √[(2)(10)2+ (50)2(1)2] = 51.96 bottles z = 0.84 Safety stock = zσdLT = (0.84)(51.96) = 43.64 or 44 bottles Reorder point = dL + safety stock = (50)(2) + 44 =144 bottles

  26. Two-Bin System The two-bin system is a type of continuous review visual system, used to help employees keep track of inventory levels without maintaining formal written records of the inventory’s current position.

  27. How it Works Divide inventory between bin 1 and bin 2 Bin 1: Use all the inventory in bin 1 first. Bin 2: Once the inventory in bin 1 runs out, place a new order and then begin using the inventory in bin 2 until the new order arrives.

  28. Summary • Continuous review systems assist management by informing them when new inventory needs to be ordered and how much inventory to order. • Reorder points and safety stock can be calculated under 3 circumstances: • Constant demand and lead time • Variable demand and constant lead time • Variable demand and lead time • The two-bin system is a visual Q System

  29. Sources • Chapman, S. N., Clive, L. M., Tony Arnold, J. R. (2008). Introduction to Materials Management. New Jersey: Pearson Prentice Hall. • Dreckshage, B. J., Kerber B. (2011). Lean Supply Chain Management Essentials: A Framework for Materials Managers. Florida: Taylor and Francis Group, LLC • Krajewski, Malhotra, Ritzman (2010). Operantions Management: Processes and Supply Chains. New Jersey: Pearson Prentice Hall. • Tersine, R. J. (1994). Principles of Inventory Management. New Jersey: PTR Prentice-Hall • Toomey, J. W. (2000). Inventory Management: Principles, Concepts and Techniques. Massachusetts: Kluwer Academic Publishers

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