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Re-Order Point Problems Set 1: General

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2 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory Notations

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3 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory ROP Problems a) If average demand per day is 20 units and lead time is 10 days. Assuming zero safety stock. Isafety=0, compute ROP. b) If average demand per day is 20 units and lead time is 10 days. Assuming 70 units of safety stock. Isafety=70, compute ROP? c) If average demand during the lead time is 200 and standard deviation of demand during lead time is 25. Compute ROP at 90% service level. Compute safety stock. d) If average demand per day is 20 units and standard deviation of daily demand is 5, and lead time is 16 days. Compute ROP at 90% service level. Compute safety stock. e) If demand per day is 20 units and lead time is 16 days and standard deviation of lead time is 4 days. Compute ROP at 90% service level. Compute safety stock.

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4 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory ROP; Fixed R, Fixed L, Zero Safety Stock a) If average demand per day is 20 units and lead time is 10 days. Assuming zero safety stock. Isafety = 0, L=10, R=20 Compute ROP. ROP = average demand during lead time + safety stock ROP = LTD+ Isafety ROP = LTD + 0 LTD = L × R LTD = 20 × 10 = 200 ROP = 200

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5 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory ROP; Fixed R, Fixed L, Isafety >0 b) If average demand per day is 20 units and lead time is 10 days. Assuming 70 units of safety stock. Isafety = 70, L=10, R=20 Compute ROP. ROP = average demand during lead time + Safety Stock ROP = LTD + Isafety LTD = R × L = 20 × 10 = 200 Isafety = 70 ROP = = 270

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6 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory ROP; total demand during lead time is variable c) If average demand during the lead time is 200 and standard deviation of demand during lead time is 25. Compute ROP at 90% service level. Compute safety stock.

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7 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory Safety Stock and ROP Risk of a stockout Service level Probability of no stockout Safety stock 0 z Quantity z-scale Each Normal variable x is associated with a standard Normal Variable z x is Normal (Average x, Standard Deviation x) z is Normal (0,1) Average demand ROP There is a table for z which tells us a)Given any probability of not exceeding z. What is the value of z. b)Given any value for z. What is the probability of not exceeding z.

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8 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory Popular z Values RiskService level z value

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9 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory z = (x-Average x)/(Standard Deviation of x) x = Average x +z (Standard Deviation of x) μ = Average x σ = Standard Deviation of x x = μ +z σ ROP = LTD +z σ LTD ROP = LTD +Isafety ROP and Isafety

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10 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory ROP and Isafety LTD = Lead Time Demand (Demand during lead time) LTD = Average LTD = L×R LTD = Standard Deviation of Lead Time Demand Isafety = z LTD

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11 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory ROP; total demand during lead time is variable z = (X- μ )/σ X= μ +z σ ROP = LTD + Isafety Isafety = z σ LTD ROP=LTD + zσ LTD SL = 90% z = 1.28 LTD = 200 σ LTD = 25 ROP= × 25 ROP = ROP = 232 I safety = 32 c) If average demand during the lead time is 200 and standard deviation of demand during lead time is 25. Compute ROP at 90% service level. Compute safety stock

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12 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory d) If average demand per day is 20 units and standard deviation of demand is 5 per day, and lead time is 16 days. Compute ROP at 90% service level. Compute safety stock. ROP; Variable R, Fixed L

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13 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory Previous Problem: If average demand during the lead time is 200 and standard deviation of demand during lead time is 25. Compute ROP at 90% service level. Compute safety stock. This Problem: If average demand per day is 20 units and standard deviation of demand per day is 5, and lead time is 16 days. Compute ROP at 90% service level. Compute safety stock. If we can transform this problem into the previous problem, then we are done, because we already know how to solve the previous problem. ROP; Variable R, Fixed L

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14 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory d) If average demand per day is 20 units and standard deviation of demand is 5 per day, and lead time is 16 days. Compute ROP at 90% service level. Compute ss. What is the average demand during the lead time What is standard deviation of demand during lead time ROP; Variable R, Fixed R

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15 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory If Demand is variable and Lead time is fixed L: Lead Time R : Demand per period (per day, week, month) R: Average Demand per period (day, week, month) R : Standard deviation of demand (per period) LTD: Average Demand During Lead Time LTD = L × R LTD : Standard deviation of demand during lead time μ and σ of demand per period and fixed L

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16 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory If demand is variable and Lead time is fixed L: Lead Time = 16 days R : Demand per day R: Average daily demand =20 R : Standard deviation of daily demand =5 LTD: Average Demand During Lead Time LTD = L × R = 16 × 20 = 320 LTD : Standard deviation of demand during lead time μ and σ of demand per period and fixed L

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17 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory The Problem originally was: If average demand per day is 20 units and standard deviation of demand is 5 per day, and lead time is 16 days. Compute ROP at 90% service level. Compute safety stock. We transformed it to: The average demand during the lead time is 320 and the standard deviation of demand during the lead time is 20. Compute ROP at 90% service level. Compute safety stock. Which is the same as the previous problem: If average demand during the lead time is 200 and standard deviation of demand during lead time is 25. Compute ROP at 90% service level. Compute safety stock. Now It is Transformed

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18 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory SL = 90% z = 1.28 x = μ + z σ ROP= LTD +z σ LTD LTD = 320 σ LTD = 20 ROP= × 20 ROP= ROP= ROP = 346 I safety = 26 ROP; Variable R, Fixed L

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19 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory e) If demand per day is 20 units and lead time is 16 days and standard deviation of lead time is 4 days. Compute ROP at 90% service level. Compute Isafety. What is the average demand during the lead time What is standard deviation of demand during lead time ROP; Variable R, Fixed L

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20 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory If Lead time is variable and Demand is fixed L : Lead Time L: Average Lead Time L : Standard deviation of Lead time R: Demand per period LTD: Average Demand during lead time LTD = L × R LTD : Standard deviation of demand during lead time μ and σ of L and Fixed R

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21 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory If Lead time is variable and Demand is fixed L : Lead Time L: Average Lead Time = 16 days L : Standard deviation of Lead time = 4 days R: Demand per period = 20 per day LTD: Average Demand During Lead Time LTD = 16 × 20 = 320 LTD : Standard deviation of demand during lead time μ and σ of L and Fixed R

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22 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory LDT = 320 LTD = 80 SL = 90% z =1.28 ROP = LTD +z LTD ROP = (80) ROP = Isafety = μ and σ of L and Fixed R

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23 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory Average lead time demand is 20,000 units. Standard deviation of lead time demand is estimated to be 5,000 units. The warehouse currently orders a 14-day supply, 28,000 units, each time the inventory level drops to 24,000 units. Suppose holding cost is $2 per unit per year. LTD = 20,000, LTD = 5,000, ROP = 24,000, H=$2, R = 2,000 / day, Q or EOQ = 28,000. a) Compute the service level. ROP = LTD + Isafety Isafety = 24,000 – 20,000 = 4,000 ROP = LTD +z LTD Isafety = z LTD =4000 z(5,000) = 4,000 z = 4,000/5,000 = 0.8 z =0.8 P(z ≤ Z) = = 78.81% In % of the order cycles, the warehouse will not have a stockout. Risk = 21.19%. Given Safety Inventory Compute Service Level

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24 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory b) Compute the cycle inventory, and average inventory. At reorder point we order 28,000 units. Icycle = Q/2 = 28,000/2 = 14,000 Isafety = 4,000 Average Inventory = I = Icycle + Isafety =14, ,000 = c) Compute the total holding costs per year. H(Average Inventory) = H(I) = 2 18,000 = 36,000/year d) Compute the average flow time. R = 2,000 / day, I = 18,000 RT = I 2000T = 18,000 T = 9 9 days Given Safety Inventory Compute Service Level

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25 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory MassPC Inc. produces a 4-week supply of its PC Pal model when stock on hand drops to 500 units. It takes 1 week to produce a batch. Orders average 400 units per week, and standard deviation of forecast errors is estimated at 125 units. Problem 7.1 Normal table Up to the first digit after decimal Second digit after decimal Probability z LTD = N(400, 125). ROP = LTD + Isafety ROP = LTD +z LTD 500= 400+z(125) 100 = 125z z = 100/125 = 0.8 ROP = 500 Q = L = 1 week LTD = 400/week 4(400)

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26 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory Safety Stock Service Level Increasing service level increases the required safety inventory more than proportionately. Problem 7.1 b) Compute Isafety for 80%, 90%, 95%, 99% service levels.

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27 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory Selecting service level and safety inventory level is an important strategic decision. A firm may choose high quality service in terms of product availability. Or The firm may choose to be a low cost supplier by holding down inventory costs. In either case, it is positioning itself along the quality vs. cost trade-off curve. This graph is a perfect example to show how a strategic position could be operationalized. Problem 7.1 Cost Quality

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28 Ardavan Asef-Vaziri Sep-2012Flow Variability; Safety Inventory Within 100 time intervals, stockouts occur in 20. Service Level = 80/100 = 80%. Probability of stock-out = 20%. Risk = # of stockout intervals/ Total # of intervals Service Level = 1- (# of stockout intervals/ Total # of intervals) Suppose that in each time interval in which a stockout occurred, the number of units by which we were short. Suppose that cumulative demand during the 100 time intervals was 15,000 units and the total number of units short in the 20 intervals with stockouts was 1,500 units. Fill rate = (15,000-1,500)/15,000 = 13,500/15,000 = 90%. Fill Rate = Expected Sales / Expected Demand Fill Rate = (1- Expected Stockout )/ Expected Demand Service Level, Fill Rate

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