STD=5STD=10AVG=303040501020FAvG = Average daily demand faced by the distributorSTD = Standard deviation of daily demand faced by thedistributorL=Replenishmentleadtimefromthesuppliertothedistributor in days h = Cost of holding one unit of the product for one dayat the distributorα=serviceleveli.e. the probability of stocking out is 1 - α6
• AVG = Average daily demand faced by the distributor • STD = Standard deviation of daily demand faced by the distributor • L = Replenishment lead time from the supplier to the distributor in days • h = Cost of holding one unit of the product for one day at the distributor • α = service level, i.e. the probability of stocking out is 1 - α 6 STD STD AVG=
Continuous Review Policy(Q,R)policy-wheneverinventorylevelfallstoareorderlevelR,placeanorderforQunitsWhat isthevalueof R?andvalueof Q?R+QInventorypositionLeadInventoryleveltimeRSafety stock0time
Continuous Review Policy • (Q,R) policy – whenever inventory level falls to a reorder level R, place an order for Q units • What is the value of R? and value of Q? 7 time R+Q R 0 Lead time Inventory position Inventory level Safety stock
ReorderLevel, RL× AVG+z×STD×LAverage demand during lead time:Lx AvGSafetystock,ssSS= z× STD×L??Why does a distributor holdsafety stock atthe warehouse?8
Reorder Level, R • Average demand during lead time: L x AVG • Safety stock, ss ss= z STD L L AVG z STD L 8 ??Why does a distributor hold safety stock at the warehouse?