utdallas.

edu/~metin
1
Safety Inventories
Chapter 11 of Chopra
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2
Why to hold Safety Inventory?
Desire for quick product availability
Ease of search for another supplier
I want it now culture
Demand uncertainty
Short product life cycles

Safety inventory
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Measures
Measures of demand uncertainty
Variance of demand
Ranges for demand
Delivery Lead Time, L
Measures of product availability
Stockout, what happens?
Backorder (patient customer, unique product or big cost advantage) or
Lost sales.
I. Cycle service level (CSL), % of cycles with no stockout
II. Product fill rate (fr), % of products sold from the shelf
Order fill rate, % of orders
Equivalent to product fill rate if orders contain one product
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Service measures: CSL and fr are different
CSL is 0%, fill rate is almost 100%
CSL is 0%, fill rate is almost 0%
inventory
inventory
time
time
0
0
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Replenishment policies
When to reorder?
How much to reorder?
Most often these decisions are related.

Continuous Review: Order fixed quantity when total
inventory drops below Reorder Point (ROP).
- ROP meets the demand during the lead time L.
- One has to figure out the ROP.
Information technology facilitates continuous review.
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Demand During Lead time
variance). (mean, or ), , ( Mostly
i. period in demand
2
N R Normal D
D
i i i
i
o
} }
=
= =
j i j i j i j j i i
j j i i j i j i
dD dD D D f R D R D
R D R D E D D
) , ( ) )( (
)} )( {( ) , cov(
,
2
,
o
}
= =
i i i i i i
dD D f D D E R ) ( ) (
D for functions density cumulative and density y probabilit F ,
i i i
f
i i i i i i i i i
dD D f R D R D E D Var ) ( ) ( } ) {( ) (
2 2 2
}
= = =o
n integratio of linearity by the ) (
1 1

= =
=
L
i
i
L
i
i
R D E
) , cov( ) , cov( ) (
1 1 1
2
1 1 1
j i
L
i
L
i j
j
L
i
i
L
i
L
j
j i
L
i
i
D D D D D Var

=
=
= = = = =
+ = = o
t coefficien n correlatio ) /(
2
, j i j i
o o o =
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Normal Density Function
Mean
3o 2o +2o +3o
95.44%
99.74%
x
) 1 , _ , , ( normdist : at x (cdf) function Cumulative
) 0 , _ , , ( normdist : at x (pdf) function Density
: functions l statistica Excel
dev st mean x
dev st mean x
normdist(x,.,.,0)
Prob
normdist(x,.,.,1)
frequency
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Cumulative Normal Density
) _ , , ( norminv : prob" " at cdf of function Inverse
) 1 , _ , , ( normdist : at x (cdf) function Cumulative
: functions l statistica Excel
dev st mean prob
dev st mean x
0
1
x
normdist(x,mean,st_dev,1)
prob
norminv(prob,mean,st_dev)
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Demand During Lead Time Determines ROP
Suppose that demands are identically and independently distributed.
To mean identically and independently distributed, use iid.
) , ( then ) , ( If
) ( and ) (
2
1
2
2
1 1
o o
o
L LR N D R N D
L D Var LR D E
L
i
i i
L
i
i
L
i
i

= =

=
= =
( ) ( ) 1 , , , Normdist , ;
1
o o L LR a L LR a F a D P
L
i
i
= = |
.
|

\
|
s

=
) ( / ) ( : D of n variatio of t Coefficien D E D Var cv =
F is the cumulative density function of the demand in a single period,
say a day. The second equality above holds if demand is Normal.
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Optimal Safety Inventory Levels
Lead Times
time
inventory
Shortage
An inventory cycle
ROP
Q
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I. Cycle Service Level: ROP CSL
) , ; ( Level Service Cycle o L L R ROP F CSL = =
Cycle service level: percentage of cycles with stock out
ROP] time lead during [Demand inventory] t [Sufficien
inventory sufficient has cycle single a y that Probabilit 0.7
7 . 0
otherwise 1 stockout, has cycle a if 0 Write
10
1 0 1 0 1 1 1 0 1 1
: cycles 10 consider example For
s =
= =
=
+ + + + + + + + +
=
CSL
CSL
CSL
ROP: Reorder point
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I. Cycle Service Level for Normal Demands
( )
( )
on distributi normal standard Obtaining ) 1 , 0 (
StDev by the Dividing
) , (

mean out the Taking ) , (
) , (
notation variance) (mean, Recall ) , , (
) 1 , 0 (
2
2
2
|
|
.
|

\
|

s =
|
|
|
|
.
|

\
|

s

=
s =
s =
=
R
R
N
R
R
R
R
R
L
L R ROP
N P
L
L R ROP
L
L R L L R N
P
L R ROP L R L L R N P
ROP L L R N P
N L L R ROP F CSL
o
o o
o
o
o
o

The last equality is a property of the Normal distribution.
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Example: Finding CSL for given ROP
R = 2,500 /week; o= 500
L = 4 weeks; Q = 10,000; ROP = 16,000


ss = ROP L R =
Cycle service level,


Average Inventory =
Average Flow Time =Average inventory/Thruput=
= = L o time lead during demand of Stdev
F ROP L R L ( ; , ) = o
If you wish to compute Average Inventory = Q/2 + ss
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Safety Inventory: CSL ROP
o
o o
o
o o
L
L CSL F L CSL F
L R L L R CSL F ss
L R ROP ss
L L R CSL F ROP L L R ROP F CSL
R
R R
=
= =
=
= =
= =

L,0,1) Norminv(CS
) 1 , 0 ; ( ) , 0 ; (
) , , (
: demand d distribute normally For
: stock Safety
) , , ( or ) , , (
1 1
1
1
The last two equalities are by properties of the Normal distribution.
Very important remark: Safety inventory is a more general concept.
It exists without lead time. It is the stock held minus the expected demand.
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Finding ROP for given CSL
R = 2,500/week; o= 500
L = 4 weeks; Q = 10,000; CSL = 0.90






Factors driving safety inventory
Replenishment lead time
Demand uncertainty
ss F CSL L
ROP L R ss
= =
= + =
1
0 1 ( ; , ) o
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II. Fill rate:
Expected shortage per cycle
ESC is the expected shortage per cycle
ESC is not a percentage, it is the number of units, also see next page






ESC E
ESC x ROP f x dx
x ROP
=

}
(max{
( ) ( )
Demand during lead time - ROP,0})
=

s
>
=
ROP Demand
ROP Demand
if
if
0
ROP Demand
Shortage
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Inventory and Demand during Lead Time
0
ROP
Demand
During LT
LT
Inventory
DLT: Demand
During LT
0
0
ROP
Inventory=
ROP-DLT
Upside
down
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Shortage and Demand during Lead Time
0
ROP
Demand
During LT
LT
Shortage
D
L
T
:

D
e
m
a
n
d

D
u
r
i
n
g

L
T

0
0
ROP
Shortage=
DLT-ROP
Upside
down
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Expected shortage per cycle
First let us study shortage during the lead time






DLT. of pdf is f where ) ( ) (
)) max( , 0 ( shortage Expected
D
}

=
=
=
ROP D
D
dD D f ROP D
ROP DLT E
Ex:




4
1
4
1
10)} - (11 max{0,
4
2
10)} - (10 max{0,
4
1
10)} - (9 max{0,
) ( )} (d )} ( max{0, shortage Expected
Shortage? Expected ,
1/4 prob with 11
2/4 prob with 10
1/4 prob with 9
, 10
11
10 d
3
1 i
3 3
2 2
1 1
= + + =
= = =

= =
= =
= =
= =

= =
d D P ROP p ROP d
p d
p d
p d
D ROP
i i
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Expected shortage per cycle
If demand is normal:




Does ESC decrease or increase with ss, L?
Does ESC decrease or increase with expected value of demand?
2 170 - 172
) 10 ( 10
2
10
6
1
) 12 ( 10
2
12
6
1
10
2 6
1
6
1
) 10 ( shortage Expected
Shortage? Expected ), 12 , 6 ( , 10
2 2
12
10
2
12
10
= =
|
|
.
|

\
|

|
|
.
|

\
|
=

\
|
= =
= =
=
=
=
}
D
D
D
D
D
dD D
Unif orm D ROP
Ex:




ESC ss normdist
ss
L
L normdist
ss
L
=
|
\

|
.
|
|
\

|
.
| +
|
\

|
.
| 1 011 010
o
o
o
, , , , , ,
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Fill Rate
Fill rate: Proportion of customer demand satisfied from stock
Q: Order quantity

Q
ESC
fr =1
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Finding the Fill Rate
ss fr
o= 500; L = 2 weeks; ss=1000; Q = 10,000;
Fill Rate (fr) = ?







fr = (Q - ESC)/Q = (10,000 - 25.13)/10,000 = 0.9975.

ESC ss normdist
ss
L
L normdist
ss
L
ESC normdist
nomdist
ESC
=
|
\

|
.
|
|
\

|
.
| +
|
\

|
.
|
=
+
=
1 0 11 0 1 0
1000 1 1000 707 0 11
707 1000 707 0 1 0
2513
o
o
o
, , , , , ,
( ( / , , , )
( / , , , )
.

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Finding Safety Inventory for a Fill Rate:
fr ss
If desired fill rate is fr = 0.975, how much safety
inventory should be held?

Clearly ESC = (1 - fr)Q = 250
Try some values of ss or use goal seek of Excel to solve

|
.
|

\
|
+
(

|
.
|

\
|
= 0 , 1 , 0 ,
707
707 1 , 1 , 0 ,
707
1 250
ss
normdist
ss
normdist ss
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Evaluating Safety Inventory For Given Fill Rate
Fill Rate Safety Inventory
97.5% 67
98.0% 183
98.5% 321
99.0% 499
99.5% 767
Safety inventory is very sensitive to fill rate. Is fr=100% possible?
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Factors Affecting Fill Rate
Safety inventory: If Safety inventory is up,
Fill Rate is up
Cycle Service Level is up.
Lot size: If Lot size Q is up,
Cycle Service Level does not change. Reorder point,
demand during lead time specify Cycle Service
Level.
Expected shortage per cycle does not change. Safety
stock and the variability of the demand during the
lead time specify the Expected Shortage per Cycle.
Fill rate is up.

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To Cut Down the Safety Inventory
Reduce the Supplier Lead Time
Faster transportation
Air shipped semiconductors from Taiwan
Better coordination, information exchange, advance retailer
demand information to prepare the supplier
Textiles; Obermeyer case
Space out orders equally as much as possible
Reduce uncertainty of the demand
Contracts
Better forecasting to reduce demand variability
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Lead Time Variability
2 2 2 2
1 1
: ) ( ) (
L
L
i
i
L
i
i
s R L D Var LR D E o o = + = =

= =
Suppliers lead time may be uncertain:
time lead of Variance time. lead Average
2
= = s L
2 2 2 1 1
) 1 , 0 ; ( ) 1 , 0 ; ( s R L CSL F CSL F ss
L
+ = =

o o
|
|
.
|

\
|
+
(

|
|
.
|

\
|
= 0 , 1 , 0 ; 1 , 1 , 0 ; 1
L
L
L
ss
nomdist
ss
normdist ss ESC
o
o
o
The formulae do not change:
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Impact of Lead Time Variability, s
R = 2,500/day; o= 500
L = 7 days; Q = 10,000; CSL = 0.90
StDev of LT ss Jump in ss
0 1695 -
1 3625 1930
2 6628 3003
3 9760 3132
4 12927 3167
5 16109 3182
6 19298 3189
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Methods of Accurate Response to Variability
Centralization
Physical, Laura Ashley
Information
Virtual aggregation, Barnes&Nobles stores
Specialization, what to aggregate
Product substitution
Raw material commonality - postponement

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Centralization: Inventory Pooling


=
< = =
+ = =
K
i
j i
j i
K
i
i
C
K
i
i
C
D D
R R
1
1
2
2
1
) , cov( 2 ) ( ;
o o
) , (
1 1
1
o R
D
) , (
o
C C
R
Which of two systems provides a higher level of service for a given
safety stock?
Consider locations and demands:
) , (
3 3
3
o R
D
) , (
2 2
2
o R
D
) , (
4 4
4
o R
D
With k locations centralized, mean and variance of

=
=
K
i
i
C
D D
1
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Sum of Random Variables Are Less Variable

= =
s =
K
i
i
K
i
i
C
1 1
2
o o o

= = =
<
=
= |
.
|

\
|
= + =
K
i
i
K
i
i
K
i
K
j i
i
j i i
C
1
2
1 1 1
2
2 o o o o o o
When they are independent,
cov(D
i
,D
j
)=0
When they are perfectly positively correlated,
cov(D
i
,D
j
)=
i

j
When they are perfectly negatively correlated,
cov(Di,Dj)= -
i

j


= = =
<
=
s < =
K
i
i
K
i
i
K
i
K
j i
i
j i i
C
1 1
2
1 1
2
2 o o o o o o
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Factors Affecting Value of Aggregation
When to aggregate? Statistical checks: Positive correlation and
Coefficient of Variation.
Aggregation reduces variance almost always except when products are
positively correlated
Aggregation is not effective when there is little variance to begin with.
When coefficient of variation of demand is relatively small (variance w.r.t.
the mean is small), do not bother to aggregate.
In real life,
Is the electricity demand in Arlington and Plano are positively or negatively
correlated? Is there an underlying factor which affects both in the same
direction? Note that a big portion of electricity is consumed for
heating/cooling.
Are the Campbell soup sales over time positively or negatively correlated?
How many soups can you drink per day?
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Impact of Correlation on Aggregated Safety
Inventory (Aggregating 4 outlets)
Safety stocks are proportional to the StDev of the demand.
With four locations, we have total ss proportional to 4*

If four locations are all aggregated,
ss proportional to 4* with correlation 1
ss proportional to 2* with correlation 0

Benefit=SS before - SS after / SS before
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Impact of Correlation on Aggregated
Safety Inventory (Aggregating 4 outlets)
0
0.1
0.2
0.3
0.4
0.5
0.6
0 0.2 0.4 0.6 0.8 1
Benefit
Benefit=(SS before - SS after) / SS before
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EX 11.8: W.W. Grainger a supplier of
Maintenance and Repair products
About 1600 stores in the US
Produces large electric motors and
industrial cleaners
Each motor costs $500; Demand is iid
Normal(20,40x40) at each store
Each cleaner costs $30; Demand is iid
Normal(1000,100x100) at each store
Which demand has a larger coefficient of
variation?
How much savings if motors/cleaners
inventoried centrally?

utdallas.edu/~metin
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Use CSL=0.95
Supply lead time L=4 weeks for motors and cleaners
o L = L,0,1) Norminv(CS ss : demand d distribute normally For
For a single store
Motor safety inventory=Norminv(0.95,0,1) 2 (40)=132
Cleaner safety inventory=Norminv(0.95,0,1) 2 (100)=329
Value of motor ss=1600(132)(500)=$105,600,000
Value of cleaner ss=1600(329)(30)=$15,792,000
Standard deviation of demands after aggregating 1600 stores
Standard deviation of Motor demand=40(40)=1,600
Standard deviation of Cleaner demand=40(100)=4,000
For the aggregated store
Motor safety inventory=Norminv(0.95,0,1) 2 (1600)=5,264
Cleaner safety inventory=Norminv(0.95,0,1) 2 (4,000)=13,159
Value of motor ss=5264(500)=$2,632,000
Value of cleaner ss=13,159(30)=$394,770
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EX. 11.8: Specialization: Impact of cv on
Benefit From 1600-Store Aggregation , h=0.25
Motors Cleaner
Mean demand/wk 20 1,000
SD of demand 40 100
Disaggregate cv 2 0.1
Value/Unit $500 $30
Disaggregate ss value $105,600,000 $15,792,000
Aggregate cv 0.05 0.0025
Aggregate ss value $2,632,000 $394,770
Inventory cost savings $102,968,000 $15,397,230
Holding Cost Saving $25,742,000 $3,849,308
Saving / Unit 2574200/(1600*20*52)=$15.47 $0.046


utdallas.edu/~metin
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Slow vs Fast Moving Items
Low demand = Slow moving items, vice versa.
Repair parts are typically slow moving items
Slow moving items have high coefficient of variation, vice versa.
Stock slow moving items at a central store

Buying a best seller at Amazon.com vs. a Supply Chain book vs. a Banach spaces
book, which has a shorter delivery time?

- Why cannot I find a driver-side-door lock cylinder for my 1994 Toyota
Corolla at Pep Boys?
- Your instructor on March 26 2005.

- Case Interview books are not in our s.k.u. list. You must check with our
central stores.
- Store keeper at Barnes and Nobles at Collin Creek, March 2002.

utdallas.edu/~metin
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Product Substitution
Manufacturer driven
Customer driven

Consider: The price of the products substituted for each other and
the demand correlations

One-way substitution
Army boots. What if your boot is large? Aggregate?
Two-way substitution:
Grainger motors; water pumps model DN vs IT.
Similar products, can customer detect specifications.

If products are very similar, why not to eliminate one of them?
utdallas.edu/~metin
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Component Commonality. Ex. 11.9
Dell producing 27 products with 3 components
(processor, memory, hard drive)
No product commonality: A component is used in only 1
product. 27 component versions are required for each
component. A total of 3*27 = 81 distinct components
are required.
Component commonality allows for component
inventory aggregation.
utdallas.edu/~metin
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Max Component Commonality
Only three distinct versions for each component.
Processors: P1, P2, P3. Memories: M1, M2, M3. Hard drives: H1, H2, H3
Each combination of components is a distinct product. A
component is used in 9 products.
Each way you can go from left to right is a product.
P1
P2
P3
M1
M2
M3
H1
H2
H3
Left Right
utdallas.edu/~metin
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Example 11.9: Value of Component Commonality
in Safety Inventory Reduction
0
50000
100000
150000
200000
250000
300000
350000
400000
450000
1 2 3 4 5 6 7 8 9
SS
# of products a component is used in
Aggregation provides reduction in total standard deviation.
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Standardization
Standardization
Extent to which there is an absence of variety in a product,
service or process
The degree of Standardization?
Standardized products are immediately available to
customers
Who wants standardization?
The day we sell standard products is the day we lose a
significant portion of our profit
A TI manager on November 1, 2005

utdallas.edu/~metin
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Advantages of Standardization
Fewer parts to deal with in inventory & manufacturing
Less costly to fill orders from inventory
Reduced training costs and time
More routine purchasing, handling, and inspection
procedures
Opportunities for long production runs, automation
Need for fewer parts justifies increased expenditures on
perfecting designs and improving quality control
procedures.

utdallas.edu/~metin
45
Disadvantages of Standardization
Decreased variety results in less consumer appeal.
Designs may be frozen with too many imperfections remaining.
High cost of design changes increases resistance to improvements
Who likes optimal Keyboards?
Standard systems are more vulnerable to failure
Epidemics: People with non-standard immune system stop the
plagues.
Computer security: Computers with non-standard software stop the
dissemination of viruses.
Another reason to stop using Microsoft products!

utdallas.edu/~metin
46
InventoryTransportation Costs:
Eastern Electric Corporation: p.427
Major appliance manufacturer, buys motors from Westview motors in Dallas
Annual demand = 120,000 motors
Cost per motor = $120; Weight per motor 10 lbs.
Current order size = 3,000 motors
30,000 pounds = 300 cwt
1 cwt = centum weight = 100 pounds; Centum = 100 in Latin.
Lead time = 1 + the number of days in transit
Safety stock carried = 50% of demand during delivery lead time
Holding cost = 25%
Evaluate the mode of transportation for all unit discounting based on shipment
weight

utdallas.edu/~metin
47
AM Rail proposal:
Over 20,000 lbs at 0.065 per lb in 5 days
For the appliance manufacturer
No fixed cost of ordering besides the transportation cost
No reason to transport at larger lots than 2000 motors, which
make 20,000 lbs.
Cycle inventory=Q/2=1,000
Safety inventory=(6/2)(120,000/365)=986
In-transit inventory
All motors shipped 5 days ago are still in-transit
5-days demand=(120,000/365)5=1,644
Total inventory held over an average day=3,630 motors
Annual holding cost=3,630*120*0.25=$108,900
Annual transportation cost=120,000(10)(0.065)=$78,000
utdallas.edu/~metin
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InventoryTransportation trade off: Eastern
Electric Corporation, see p.426-8 for details
Alternative
(Lot size)

Transport
Cost
Cycle
Inventory
Safety
Inventory
Transit
Inventory
Inventory
Cost
Total
Cost
AM Rail
(2,000)
$78,000
120000(0.65)
1,000 986 1,644
120000(5/365)
$108,900 $186,900
Northeast
Trucking
(1,000)
$90,000 500 658 986 $64,320 $154,320
Golden
(500)
$96,000
120000(0.80)
250 658 986
120000(3/365)
$56,820 $152,820
Golden
(2,500)
$86,400 1,250 658 986 $86,820 $173,220
Golden
(3,000)
$78,000 1,500 658 986 $94,320 $172,320
Golden
(4,000)
$67,500 2,000 658 986 $109,320 $176,820


If fast transportation not justified cost-wise, need to consider rapid response
utdallas.edu/~metin
49
Physical Inventory Aggregation:
Inventory vs. Transportation cost: p.428
HighMed Inc. producer of medical equipment
sold directly to doctors
Located in Wisconsin serves 24 regions in USA
As a result of physical aggregation
Inventory costs decrease
Inbound transportation cost decreases
Inbound lots are larger
Outbound transportation cost increases
utdallas.edu/~metin
50
Inventory Aggregation at HighMed
Highval ($200, .1 lbs/unit) demand in each of 24 territories

H
= 2, o
H
= 5
Lowval ($30/unit, 0.04 lbs/unit) demand in each territory

L
= 20, o
L
= 5
UPS rate: $0.66 + 0.26x {for replenishments}
FedEx rate: $5.53 + 0.53x {for customer shipping}
Customers order 1 H + 10 L
utdallas.edu/~metin
51
Inventory Aggregation at HighMed
Current
Scenario
Option A Option B
# Locations 24 24 1
Reorder Interval 4 weeks 1 week 1 week
Inventory Cost $54,366 $29,795 $8,474
Shipment Size 8 H + 80 L 2 H + 20 L 1 H + 10 L
Transport Cost $530 $1,148 $14,464
Total Cost $54,896 $30,943 $22,938


If shipment size to customer is 0.5H + 5L, total cost of option B
increases to $36,729.
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Summary of Cycle and Safety Inventory
Reduce Buffer Inventory
Economies of Scale
Supply / Demand
Variability
Seasonal
Variability
Cycle Inventory Safety Inventory
Seasonal Inventory
Match Supply & Demand
Reduce fixed cost
Aggregate across
products
Volume discounts
Promotion on Sell
thru
Quick Response measures
Reduce Info Uncertainty
Reduce lead time
Reduce supply
uncertainty
Accurate Response measures
Aggregation
Component commonality
and postponement
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Mass customization:
A strategy of producing standardized goods or services,
but incorporating some degree of customization
Modular design
Delayed differentiation
Mass Customization
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Mass Customization I: Customize
Services Around Standardized Products
DEVELOPMENT PRODUCTION MARKETING
DELIVERY
Deliver customized services as
well as standardized products
and services
Market customized services with standardized
products or services
Continue producing standardized products or services
Continue developing standardized products or services
Source: B. Joseph Pine
Warranty for contact lenses:
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Mass Customization II: Create
Customizable Products and Services
DEVELOPMENT PRODUCTION MARKETING
DELIVERY
Deliver standard (but
customizable) products
or services
Market customizable products or services
Produce standard (but customizable) products or services
Develop customizable products or services
Customizing the look of screen with windows operating system
Gillette sensor adjusting to the contours of the face
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Mass Customization III: Provide Quick
Response Throughout Value Chain
DEVELOPMENT PRODUCTION MARKETING
DELIVERY
Reduce Delivery Cycle Times
Reduce selection and order processing cycle
times
Reduce Production cycle time
Reduce development cycle time
Skiing parkas manufactured abroad vs. in the U.S.A.:
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Mass Customization IV: Provide Point of
Delivery Customization
DEVELOPMENT PRODUCTION MARKETING
DELIVERY
Deliver standardize portion
Market customized products or services
Produce standardized portion centrally
Develop products where point of delivery customization is feasible
Point of delivery
customization
Paint mixing
Lenscrafters for glasses.
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Mass Customization V: Modularize
Components to Customize End Products
DEVELOPMENT PRODUCTION MARKETING
DELIVERY
Deliver customized product
Market customized products or services
Produce modularized components
Develop modularized products
Computer industry, Dell computers:
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Modular Design
Modular design is a form of standardization in which component parts are
subdivided into modules that are easily replaced or interchanged.

Good example: Dell uses same components to assemble various
computers.
Bad example: Earlier Ford SUVs shared the lower body with Ford cars.
Ugly example:

It allows:

easier diagnosis and remedy of failures
easier repair and replacement
simplification of manufacturing and assembly
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Types of Modularity for Mass
Customization
Component Sharing Modularity, Dell
Cut-to-Fit Modularity,
Gutters that do not require
seams
Bus Modularity, E-books
Mix Modularity, Paints
Sectional Modularity, LEGO
+ =
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Periodic Review
Order at fixed time intervals (T apart) to raise total inventory
(on hand + on order) to Order up to Level (OUL)
Inventory
OUL
LT
T
LT
T+LT
OUL must cover
the Demand during
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Periodic Review Policy: Safety Inventory
T: Reorder interval
o
R
: Standard deviation of demand per unit time
o
L+T
: Standard deviation of demand during L+T periods
OUL: Order up to level
ss OUL
CSL F ss
T L
R L T
R
R
L T
L T
L T
L T
+ =
=
+ =
+ =
+
+

+
+
o
o
o
) 1 , 0 ; (
) (
1
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Example: Periodic Review Policy
R = 2,500/week; o
R
= 500
L = 2 weeks; T = 4 weeks; CSL = 0.90
What is the required safety inventory?


Factors driving safety inventory
Demand uncertainty
Replenishment lead time
Reorder interval
1570 ) 1 , 0 ; (
1
= =
+

L T
CSL F ss o
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Periodic vs Continuous Review
Periodic review ss covers the uncertainty over
[0,T+L], T periods more than ss in continuous case.
Periodic review ss is larger.
Continuous review is harder to implement, use it for
high-sales-value per time products