1
2
Dependent VS IndependentDependent VS Independent
E(1)
Independent Demand
(Demand not related to other items)
Dependent Demand
(Derived)
3
Dependent VS IndependentDependent VS Independent
Independent Demand
Dependent Demand
4
Independent Demand OrderingSystemsIndependent Demand OrderingSystems
•Main question now turns to when to placean order?•Main question now turns to when to placean order?
–Stock not ordered early enough may result in astockout situation–Stock not ordered early enough may result in astockout situation
–Stock ordered too soon may result in excessinventory–Stock ordered too soon may result in excessinventory
–How do you balance the two?–How do you balance the two?
5
DefinitionsDefinitions
•Lead Time : “The time between recognition of a need foran order and the receipt of the goods”•Lead Time : “The time between recognition of a need foran order and the receipt of the goods”
•Order Point: “A set inventory level where, if the stock onhand plus on-order falls to or below that point, action istaken to replenish the stock.”•Order Point: “A set inventory level where, if the stock onhand plus on-order falls to or below that point, action istaken to replenish the stock.”
•Safety Stock: “In general, a quantity of stock planned tobe in inventory to protect against fluctuations in demandand/or supply•Safety Stock: “In general, a quantity of stock planned tobe in inventory to protect against fluctuations in demandand/or supply
•Service Level: “… the percentage of orders filled fromstock…”•Service Level: “… the percentage of orders filled fromstock…”
APICS Dictionary
7th Edition
©1992
6
Independent Demand OrderingSystemsIndependent Demand OrderingSystems
•Reorder Systems Include:•Reorder Systems Include:
–Order Point System–Order Point System
–Periodic Review System–Periodic Review System
–MRP–MRP
•For dependent demand items•For dependent demand items
7
Independent Demand OrderingSystemsIndependent Demand OrderingSystems
•Order Point Systems•Order Point Systems
–A system where an order is placed whenever the on-hand inventory level falls to a predetermined levelknown as the order point–A system where an order is placed whenever the on-hand inventory level falls to a predetermined levelknown as the order point
•Quantity ordered is usually predetermined and based on theEOQ•Quantity ordered is usually predetermined and based on theEOQ
•An order must be placed when there is enough stock on handto satisfy demand from the time the order is placed until newstock arrives•An order must be placed when there is enough stock on handto satisfy demand from the time the order is placed until newstock arrives
8
Independent Demand OrderingSystemsIndependent Demand OrderingSystems
•The Order Point•The Order Point
–The point where there exists enough inventoryon hand to equal the demand during the leadtime plus some safety stock.–The point where there exists enough inventoryon hand to equal the demand during the leadtime plus some safety stock.
Order Point = Demand During Lead Time + Safety StockOrder Point = Demand During Lead Time + Safety Stock
OP = DDLT + SSOP = DDLT + SS
–Note that the demand during lead time is important asthis when a stockout could occur.–Note that the demand during lead time is important asthis when a stockout could occur.
9
Example: Order PointExample: Order Point
Q: Demand is 100 units a week, the lead time isthree weeks, and the safety stock has beenestablished at 300 units. Calculate the order point.Q: Demand is 100 units a week, the lead time isthree weeks, and the safety stock has beenestablished at 300 units. Calculate the order point.
A:Order Point = ?A:Order Point = ?
DDLT = (100 units per week x 3 weeks)DDLT = (100 units per week x 3 weeks)
SS = 300 unitsSS = 300 units
OP = DDLT + SS = (100 x 3) + 300 = 600 unitsOP = DDLT + SS = (100 x 3) + 300 = 600 units
10
Independent Demand OrderingSystemsIndependent Demand OrderingSystems
•Order Point•Order Point
Average Inventory = Q/2 + SS
Lead Time
Q = OrderQuantity
Order Point
SafetyStock
Units in Stock
11
Example: Average inventoryExample: Average inventory
Q: Order quantity is 7000 units and safetystock is 900 units. What is the averageannual inventory?Q: Order quantity is 7000 units and safetystock is 900 units. What is the averageannual inventory?
A: Average inventory = Q/2 + SSA: Average inventory = Q/2 + SS
= 7000 + 900 = 4400 units = 7000 + 900 = 4400 units
2 2
12
Independent Demand OrderingSystemsIndependent Demand OrderingSystems
•Uncertainty•Uncertainty
–Quantity uncertainty–Quantity uncertainty
•When the amount of supply or demand varies•When the amount of supply or demand varies
–Timing uncertainty–Timing uncertainty
•Time of receipt of supply or demand differs from that expected•Time of receipt of supply or demand differs from that expected
–Two ways to protect:–Two ways to protect:
•Carry extra stock (safety stock)•Carry extra stock (safety stock)
•Order early (safety lead time)•Order early (safety lead time)
13
Independent Demand OrderingSystemsIndependent Demand OrderingSystems
•Safety Stock•Safety Stock
–SS is used to protect against uncertainty insupply and demand.–SS is used to protect against uncertainty insupply and demand.
–SS depends on:–SS depends on:
•Variability of demand during lead time•Variability of demand during lead time
•Frequency of reorder•Frequency of reorder
•Service level desired•Service level desired
•Length of lead time•Length of lead time
14
Independent Demand OrderingSystemsIndependent Demand OrderingSystems
•Variability of Demand•Variability of Demand
–Actual demand will vary from theforecast due to bias and randomfluctuations.–Actual demand will vary from theforecast due to bias and randomfluctuations.
–Usually the variation of demand willfollow a normal distribution (bell curve)–Usually the variation of demand willfollow a normal distribution (bell curve)
15
Independent Demand OrderingSystemsIndependent Demand OrderingSystems
•Variability of Demand•Variability of Demand
–Actual demand will be–Actual demand will be
+1
Sigma
-1
Sigma
-2
Sigma
+2
Sigma
-3
Sigma
+3
Sigma
16
Average & DispersionAverage & Dispersion
17
Mean Absolute DeviationMean Absolute Deviation
Forecast
Forecast DForecast D
Actual DActual D
DeviationDeviation
100100
6666
3434
100100
110110
1010
100100
131131
3131
100100
103103
33
100100
9696
44
100100
119119
1919
100100
9292
88
100100
100100
00
100100
8080
2020
18
Standard Deviation (Sigma) Standard Deviation (Sigma)
ForecastDemandForecastDemand
ActualDemandActualDemand
DeviationDeviation
Dev SquaredDev Squared
100100
6666
3434
11561156
100100
110110
1010
100100
100100
131131
3131
961961
100100
103103
33
99
100100
9696
44
1616
100100
119119
1919
361361
100100
9292
88
6464
100100
100100
00
00
100100
8080
2020
400400
Total3067
19
Independent Demand OrderingSystemsIndependent Demand OrderingSystems
•Determining Safety Stock•Determining Safety Stock
–SS is needed only to cover those periods inwhich the demand during lead time is greaterthan average.–SS is needed only to cover those periods inwhich the demand during lead time is greaterthan average.
–Service level is a statement of the percentage oftime there is no stockout–Service level is a statement of the percentage oftime there is no stockout
–Safety Factor is derived from the service level–Safety Factor is derived from the service level
20
Independent Demand OrderingSystemsIndependent Demand OrderingSystems
•Safety Stock Equation•Safety Stock Equation
•Safety Stock = (Sigma x Safety Factor)•Safety Stock = (Sigma x Safety Factor)
21
Example: Safety Stock & Order PointExample: Safety Stock & Order Point
Using the figures in the last example problem in which the sigma was calculatedas 18.5 unitsSafety Stock = (Sigma x Safety Factor)Using the figures in the last example problem in which the sigma was calculatedas 18.5 unitsSafety Stock = (Sigma x Safety Factor)
Q: a) Calculate the safety stock and order point for an 84% service level.Q: a) Calculate the safety stock and order point for an 84% service level.
A: Safety stock = Sigma x safety FactorA: Safety stock = Sigma x safety Factor
= 18.5 x 1.00 = 18.5 units = 18.5 x 1.00 = 18.5 units
Order point = DDLT + SSOrder point = DDLT + SS
= 100 + 18.5 = 118.5 units = 100 + 18.5 = 118.5 units
From safety factor on page 291
22
Example: Safety Stock & Order PointExample: Safety Stock & Order Point
Using the figures in the last example problem in which the sigma was calculatedas 18.5 unitsSafety Stock = (Sigma x Safety Factor)Using the figures in the last example problem in which the sigma was calculatedas 18.5 unitsSafety Stock = (Sigma x Safety Factor)
Q: b) If a safety stock equal to 95.5% is carried, calculate the safety stockand the order point. Q: b) If a safety stock equal to 95.5% is carried, calculate the safety stockand the order point.
A: Safety stock = Sigma x safety FactorA: Safety stock = Sigma x safety Factor
= 18.5 x 1.65 = 30.525 or 31 units = 18.5 x 1.65 = 30.525 or 31 units
Order point = DDLT + SSOrder point = DDLT + SS
= 100 + 31 = 131 units = 100 + 31 = 131 units
23
Safety Factor
Generated using Excel function NORMSINV
24
Example: Safety Stock & Order PointExample: Safety Stock & Order Point
Q: If the standard deviation is 18.5 units, what safety stockshould be carried to provide a service level of 90%? If theexpected demand during the lead-time is 500 units, what isthe order point?Q: If the standard deviation is 18.5 units, what safety stockshould be carried to provide a service level of 90%? If theexpected demand during the lead-time is 500 units, what isthe order point?
A: The safety factor for a service level of 90% is 1.28A: The safety factor for a service level of 90% is 1.28
Safety stock = sigma x safety factor Safety stock = sigma x safety factor
= 18.5 x 1.28 = 23.68 or 24 units = 18.5 x 1.28 = 23.68 or 24 units
Order point = DDLT + SS Order point = DDLT + SS
= 500 + 24 = 524 units = 500 + 24 = 524 units
25
Independent Demand OrderingSystemsIndependent Demand OrderingSystems
•Service Level•Service Level
–Stockouts lead to costs such as–Stockouts lead to costs such as
•Back-order costs•Back-order costs
•Lost Sales•Lost Sales
•Lost Customers•Lost Customers
•Possible only when stock is running low, usually the timewhen an order is placed•Possible only when stock is running low, usually the timewhen an order is placed
•Chances of a stockout are directly proportional to frequency ofreorder•Chances of a stockout are directly proportional to frequency ofreorder
26
Independent Demand OrderingSystemsIndependent Demand OrderingSystems
•Service Level•Service Level
–The service level will determine the number ofstockouts that will occur each year.–The service level will determine the number ofstockouts that will occur each year.
–Service level decisions are the responsibility ofsenior management and should reflect thecompany’s corporate and marketing strategy.–Service level decisions are the responsibility ofsenior management and should reflect thecompany’s corporate and marketing strategy.
27
Independent Demand OrderingSystemsIndependent Demand OrderingSystems
•Determining When the Order Point is Reached•Determining When the Order Point is Reached
–Two-Bin System–Two-Bin System
•A quantity of an item equal to the order point is set aside andnot touched until the main stock has been used•A quantity of an item equal to the order point is set aside andnot touched until the main stock has been used
•Variations include tags and indicators•Variations include tags and indicators
Full
Empty
Order One Bin of
Inventory
28
Independent Demand OrderingSystemsIndependent Demand OrderingSystems
•Determining When the Order Point is Reached•Determining When the Order Point is Reached
–Perpetual Inventory System–Perpetual Inventory System
•A continual account of inventory transactions as they occur•A continual account of inventory transactions as they occur
•Contains “permanent” and “variable” information•Contains “permanent” and “variable” information
–Barcoding–Barcoding
29
Independent Demand OrderingSystemsIndependent Demand OrderingSystems
•Periodic Review System•Periodic Review System
–The quantity on hand of a particular item is determinedat specified, fixed-time intervals.–The quantity on hand of a particular item is determinedat specified, fixed-time intervals.
–The review period is fixed and the order quantity isallowed to vary.–The review period is fixed and the order quantity isallowed to vary.
–The quantity on hand plus the quantity ordered must besufficient to last until next shipment is received.–The quantity on hand plus the quantity ordered must besufficient to last until next shipment is received.