Presentation on theme: "OPSM 501: Operations Management Week 12: Inventory Management Order-up-to model Koç University Graduate School of Business MBA Program Zeynep Aksin"— Presentation transcript:
OPSM 501: Operations Management Week 12: Inventory Management Order-up-to model Koç University Graduate School of Business MBA Program Zeynep Aksin
Levers for Managing Inventories Theoretical Inventory I th =R x T th –Reduce critical activity times –Eliminate non-value added work –Move work from critical to non-critical –Redesign process to replace serial with parallel processing Cycle inventory –Average inventory per cycle=Q/2 –Reduce set-up to reduce cycle inventory
Levers for Managing Inventories Seasonal Inventory –Use pricing and incentive tactics to smooth demand –Increase resource flexibility Safety inventory-this is next!
4 A Multi-Period Inventory Model Often, there are multiple reorder opportunities Consider a central distribution facility which orders from a manufacturer and delivers to retailers. The distributor periodically places orders to replenish its inventory
5 Set Up: Simple Supply Chain Three key questions: –How often to review? –When to place an order? –How much to order? orders Pipeline stock Supply On-hand inventory Inventory position
Timing in the order up-to model Time is divided into periods of equal length, e.g., one hour, one month. During a period the following sequence of events occurs: –A replenishment order can be submitted. –Inventory is received. –Random demand occurs. Lead times: –An order is received after a fixed number of periods, called the lead time. –Let l represent the length of the lead time. An example with l =
Order up-to model vs. newsvendor model Both models have uncertain future demand, but there are differences… –Newsvendor applies to short life cycle products with uncertain demand and the order up-to applies to long life cycle products with uncertain, but stable, demand. NewsvendorOrder up-to Inventory obsolescenceAfter one periodNever Number of replenishments One (maybe two or three with some reactive capacity) Unlimited Demand occurs during replenishment NoYes 13-7
8 Periodic Review, Order-up-to Policy Inventory Position = Quantity + Quantity on hand on order S - Base stock level/Order-up-to Point p - Review period; l - Replenishment lead time - Demand per unit time ss - Safety stock Ordering Rule: Place an order every p periods so as to bring your inventory position to the Base Stock Level, S.
9 Periodic review with no demand variability Inventory Level time (p+ l ) pp ll lp+l2p+l3p+l p2p3p4p On-hand inventory Inventory position 0
10 Periodic review with no demand variability Order Quantity, Q = p Average Cycle stock = Q/2 = p / 2 Pipeline stock = l Order-up-to point, S = (p + l )
11 Why hold Safety Inventory? Demand uncertainty Supply uncertainty Measures of product availability –Product fill rate (f): fraction of demand that is satisfied from product in inventory –Cycle service level (CSL): fraction of replenishment cycles that end with all the customer demand being met
12 Periodic review with variable demand Order-up-to point (S) = ( p+l ) + Safety Stock (ss) Average Order Quantity (Q) = p Average Pipeline stock = l Average Cycle stock = Q/2 = p / 2 Safety Stock = ss = ?
13 Determination of the Safety Stock Inventory Level p+ss l + ss ss time On-hand inventory Inventory position p+ l+ss l p+l2p+l3p+l p2p3p 4p 0
14 Probabilistic Models X + = S Key idea:Order-up-to target covers demand over time period of p+l
15 Designing for a target CSL Safety Stock (ss) = Choosing z: =CSL= P(demand during p+l <= S) z= F s -1 (CSL)
16 Example #1 Given:p = 2 weeks l = 3 weeks = 1.5 units per week = 4 units per week Target service level, CSL=95% Solve: Safety stock = Base stock level = so from table, z = 1.64 Average on-hand inv= 1.5x2/2 + safety stock= =8.86
17 Example #2 Given:p = 2 weeks l = 1 week = 1.5 units per week = 4 units per week Target service level, CSL=95% Solve: Safety stock = Base stock level = so from table, z = 1.64
18 Computer example continued Suppose we do not know the base-stock level S We know the company uses a periodic-review, order-up-to policy From company data we know that average on- hand inventory is 12.6 units What service level is the store providing?
19 Example #3 12.6= (1.5 x 2)/2 + z x 2 x z =2.48 F(2.48)=0.993
20 Computer store: determining policy parameters Store wants to re-evaluate order frequency Retain service level of 95% Apple charges a fixed fee of $25 for shipping and handling of order Store’s order processing cost is $15 The model being considered has wholesale price of $3000 Holding cost rate is estimated to be 20%
22 Delayed Product Differentiation Products start off undifferentiated; at some point, product variety explodes Trade-off between product variety vs. inventory and service levels Design the product so the point of differentiation is delayed as much as possible Don’t commit to FGI early on
23 DPD- Standardization Using common components or processes –Reduces complexity of manufacturing –Increases “flexibility” of work-in-process –Improves service level Examples: –standardizing head driver board & print mechanism interface in b&w and color printers –generic printer for Mac and Windows users
24 DPD-Modular Design Decomposing the complete product into submodules that are easily assembled; delay assembly of product specific modules –Can increase no. of modules –Same benefits as standardization Examples: –Power supply module in the HP Deskjet printer –Inserting plastic color panel to generic products –Channel assembly in PC industry
25 DPD – Process Restructuring Postponing (if necessary) reverse operations Operation divided into two steps, first step common to all products Reverse the order of two operations with first operation common to all products Example: –Benetton (dye & knit knit & dye)
29 When is DPD appropriate? High uncertainty in demand mix Long lead times Short product life cycle High inventory /stock out costs Not too costly/time consuming to customize High value to core component Low variable cost of differentiating components
Announcement 1 Next week field trip to Mercedes coach plant Departure from campus 8:10-visit 9:30 Bus info: MUHAMMET GÜLER ZP 4194 Intermediate stop at Ataturk Oto Sanayi: 8:35 HOŞDERE OTOBÜS FABRİKASI-check web site for directions Sanayi Mah. Mercedes Bulvarı No. 5, Esenyurt / İstanbul Tel: (0 212) Pbx Fax: (0 212)
Announcement 2 Read the Temsa case before the trip Bonus assignment-can be done in pairs (5%): Take notes-ask questions-take photos if allowed to –Strategy: Comment on the 4 product attributes for Mercedes: PQTV –Process documentation: Provide a high level process flow chart –Process Selection: Analyze volume, variety level and its fit with the type of process (position the plant on the product-process matrix based on this analysis)
Announcement 3 Last session: will play the beer game in-class –Need to read the handout that I will distribute before coming to class –Need to be on time since we will start at 11:00 sharp- aim for arrival at 10:45. Final exam on January 10:00 Room will be announced