Presentation on theme: "OPSM 501: Operations Management"— Presentation transcript:
1 OPSM 501: Operations Management Koç University Graduate School of BusinessMBA ProgramOPSM 501: Operations ManagementWeek 12:Inventory ManagementOrder-up-to modelZeynep Aksin
2 Levers for Managing Inventories Theoretical Inventory Ith=R x TthReduce critical activity timesEliminate non-value added workMove work from critical to non-criticalRedesign process to replace serial with parallel processingCycle inventoryAverage inventory per cycle=Q/2Reduce set-up to reduce cycle inventory
3 Levers for Managing Inventories Seasonal InventoryUse pricing and incentive tactics to smooth demandIncrease resource flexibilitySafety inventory-this is next!
4 A Multi-Period Inventory Model Often, there are multiple reorder opportunitiesConsider 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 ordersPipelinestockSupplyOn-handinventoryInventory positionThree key questions:How often to review?When to place an order?How much to order?
6 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 = 113-6
7 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-toInventory obsolescenceAfter one periodNeverNumber of replenishmentsOne (maybe two or three with some reactive capacity)UnlimitedDemand occurs during replenishmentNoYes13-7
8 Periodic Review, Order-up-to Policy Inventory Position = Quantity + Quantityon hand on orderS - Base stock level/Order-up-to Pointp - Review period; l - Replenishment lead time - Demand per unit timess - Safety stockOrdering Rule:Place an order every p periods so as to bring yourinventory position to the Base Stock Level, S.
9 Periodic review with no demand variability Inventory Leveltime(p+l)pllp+l2p+l3p+lp2p3p4pOn-hand inventoryInventory position
10 Periodic review with no demand variability Order Quantity, Q = pAverage Cycle stock = Q/2 = p / 2Pipeline stock = lOrder-up-to point, S = (p + l)
11 Why hold Safety Inventory? Demand uncertaintySupply uncertaintyMeasures of product availabilityProduct fill rate (f): fraction of demand that is satisfied from product in inventoryCycle 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) = pAverage Pipeline stock = lAverage Cycle stock = Q/2 = p / 2Safety Stock = ss = ?
13 Determination of the Safety Stock Inventory Levelp+ssl+sssstimeOn-hand inventoryInventory positionp+l+sslp+l2p+l3p+lp2p3p4p
14 Probabilistic Models + = S Key idea: Order-up-to target covers demand over time period of p+lX+= S
15 Designing for a target CSL Safety Stock (ss) =Choosing z:a=CSL= P(demand during p+l <= S)z= Fs-1(CSL)
16 Example #1 Given: p = 2 weeks l = 3 weeks = 1.5 units per week Target service level, CSL=95%Solve:Safety stock =Base stock level =so from table, z = 1.64Average 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 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 SWe know the company uses a periodic-review, order-up-to policyFrom company data we know that average on-hand inventory is 12.6 unitsWhat service level is the store providing?
19 Example #312.6= (1.5 x 2)/2 + z x 2 xz =2.48F(2.48)=0.993
20 Computer store: determining policy parameters Store wants to re-evaluate order frequencyRetain service level of 95%Apple charges a fixed fee of $25 for shipping and handling of orderStore’s order processing cost is $15The model being considered has wholesale price of $3000Holding cost rate is estimated to be 20%
21 Example #4 Compute EOQ h= (3000x0.2)/52weeks/yr=$11.5 K=15+25=40 p = Q*/m=3.2/1.5=2.15
22 Delayed Product Differentiation Products start off undifferentiated; at some point, product variety explodesTrade-off between product variety vs. inventory and service levelsDesign the product so the point of differentiation is delayed as much as possibleDon’t commit to FGI early on
23 DPD- Standardization Using common components or processes Examples: Reduces complexity of manufacturingIncreases “flexibility” of work-in-processImproves service levelExamples:standardizing head driver board & print mechanism interface in b&w and color printersgeneric printer for Mac and Windows users
24 DPD-Modular DesignDecomposing the complete product into submodules that are easily assembled; delay assembly of product specific modulesCan increase no. of modulesSame benefits as standardizationExamples:Power supply module in the HP Deskjet printerInserting plastic color panel to generic productsChannel assembly in PC industry
25 DPD – Process Restructuring Postponing (if necessary) reverse operationsOperation divided into two steps, first step common to all productsReverse the order of two operations with first operation common to all productsExample:Benetton (dye & knit knit & dye)
29 When is DPD appropriate? High uncertainty in demand mixLong lead timesShort product life cycleHigh inventory /stock out costsNot too costly/time consuming to customizeHigh value to core componentLow variable cost of differentiating components
30 Announcement 1 Next week field trip to Mercedes coach plant Departure from campus 8:10-visit 9:30Bus info: MUHAMMET GÜLER ZP 4194Intermediate stop at Ataturk Oto Sanayi: 8:35HOŞDERE OTOBÜS FABRİKASI-check web site for directionsSanayi Mah. Mercedes Bulvarı No. 5, Esenyurt / İstanbul Tel: (0 212) Pbx Fax: (0 212)
31 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 toStrategy: Comment on the 4 product attributes for Mercedes: PQTVProcess documentation: Provide a high level process flow chartProcess 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)
32 Announcement 3 Last session: will play the beer game in-class Need to read the handout that I will distribute before coming to classNeed to be on time since we will start at 11:00 sharp-aim for arrival at 10:45.Final exam on January 10:00Room will be announced