Chapter Six: Inventory

1
Chapter Six Inventory

• Part 3
• When Demand Varies.

2
When Demand Varies

• Things become more complicated.
• How do I know how much inventory to keep in stock
  when some days demand is higher or lower than
  other days?

3
a
Average Inventory Investment Under Conditions of
Uncertainty
6-4 a
When Demand Varies
The ordering quantity is 200
The ordering quantity is 200
8 10 20
30 40

Days
From instructors material Strategic Logistics
Management by Stock and Lambert(2001).
4
a
Average Inventory Investment Under Conditions of
Uncertainty
6-4 a
When Demand Varies
The ordering quantity is 200
The ordering quantity is 200 and the average
cycle order is 100,
8 10 20
30 40

Days
From instructors material Strategic Logistics
Management by Stock and Lambert(2001).
5
a
Average Inventory Investment Under Conditions of
Uncertainty
6-4 a
When Demand Varies
The ordering quantity is 200
The ordering quantity is 200 and the average
cycle order is 100, but demand has risen to 25
units per day
8 10 20
30 40

Days
From instructors material Strategic Logistics
Management by Stock and Lambert(2001).
6
a
Average Inventory Investment Under Conditions of
Uncertainty
6-4 a
When Demand Varies
The ordering quantity is 200
The ordering quantity is 200 and the average
cycle order is 100, but demand has risen to 25
units per day meaning we will stock out on the
8th day (25 x 8 200).
10 20
30 40

Days
From instructors material Strategic Logistics
Management by Stock and Lambert(2001).
7
a
Average Inventory Investment Under Conditions of
Uncertainty
6-4 a
When Demand Varies
The ordering quantity is 200
The ordering quantity is 200 and the average
cycle order is 100, but demand has risen to 25
units per day meaning we will stock out on the
8th day (25 x 8 200).
10 20
30 40

Days
From instructors material Strategic Logistics
Management by Stock and Lambert(2001).
8
a
Average Inventory Investment Under Conditions of
Uncertainty
6-4 a
When Demand Varies
The ordering quantity is 200
The ordering quantity is 200 and the average
cycle order is 100, but demand has risen to 25
units per day meaning we will stock out on the
8th day (25 x 8 200). Since delivery still
takes 10 days
From instructors material Strategic Logistics
Management by Stock and Lambert(2001).
9
a
Average Inventory Investment Under Conditions of
Uncertainty
6-4 a
When Demand Varies
The ordering quantity is 200
The ordering quantity is 200 and the average
cycle order is 100, but demand has risen to 25
units per day meaning we will stock out on the
8th day (25 x 8 200). Since delivery still
takes 10 days we will be stocked out for 2
days.
From instructors material Strategic Logistics
Management by Stock and Lambert(2001).
10
a
Average Inventory Investment Under Conditions of
Uncertainty
6-4 a
When Demand Varies
The ordering quantity is 200 and the average
cycle order is 100, but demand has risen to 25
units per day meaning we will stock out on the
8th day (25 x 8 200). Since delivery still
takes 10 days we will be stocked out for 2 days.
To avoid this, we need a safety stock of 50
products, or an extra 5 products per day.
From instructors material Strategic Logistics
Management by Stock and Lambert(2001).
11
a
Average Inventory Investment Under Conditions of
Uncertainty
6-4 a
When Demand Varies
The ordering quantity is 200 and the average
cycle order is 100, but demand has risen to 25
units per day meaning we will stock out on the
8th day (25 x 8 200). Since delivery still
takes 10 days we will be stocked out for 2 days.
To avoid this, we need a safety stock of 50
products, or an extra 5 products per day.
From instructors material Strategic Logistics
Management by Stock and Lambert(2001).
12
a
Average Inventory Investment Under Conditions of
Uncertainty
6-4 a
When Demand Varies
The ordering quantity is 200 and the average
cycle order is 100, but demand has risen to 25
units per day meaning we will stock out on the
8th day (25 x 8 200). Since delivery still
takes 10 days we will be stocked out for 2 days.
To avoid this, we need a safety stock of 50
products, or an extra 5 products per day. Added
to our regular average inventory, it means our
average inventory is now 150.
From instructors material Strategic Logistics
Management by Stock and Lambert(2001).
13
a
Average Inventory Investment Under Conditions of
Uncertainty
6-4 a
When Demand Varies
When demand varies, we must keep safety stock on
hand.
From instructors material Strategic Logistics
Management by Stock and Lambert(2001).
14
Average Inventory Investment Under Conditions of
Uncertainty
b
6-4 b
When Lead Time Varies
From instructors material Strategic Logistics
Management by Stock and Lambert(2001).
15
When Lead Time Varies
Inventory
200
100
10 days
20 days
30 days
40 days
16
When Lead Time Varies
Inventory
200
Demand 20 units per day.
100
10 days
20 days
30 days
40 days
17
When Lead Time Varies
Inventory
200
Demand 20 units per day.
100
10 days
20 days
30 days
40 days
Shipping lead time /- 2 days around 10 (8-12
days).
18
When Lead Time Varies
Inventory
200
Demand 20 units per day.
100
10 days
20 days
30 days
40 days
Shipping lead time /- 2 days around 10 (8-12
days).
19
When Lead Time Varies
Inventory
200
If order of 200 units arrives 2 days early
100
10 days
20 days
30 days
40 days
Day 8
20
When Lead Time Varies
Inventory
200
If order of 200 units arrives 2 days early
100
10 days
20 days
30 days
40 days
Day 8
21
When Lead Time Varies
Inventory
200
If order of 200 units arrives 2 days
early inventory increases to 240 units, a
12-day supply.
100
10 days
20 days
30 days
40 days
Day 8
22
When Lead Time Varies
Inventory
200
If order of 200 units arrives 2 days late
100
10 days
20 days
30 days
40 days
Day 12
23
When Lead Time Varies
Inventory
200
If order of 200 units arrives 2 days late
100
10 days
20 days
30 days
40 days
Day 12
There will be a 2-day stockout.
24
When Lead Time Varies
Inventory
200
If order of 200 units arrives 2 days late
100
As a result, There should Be 2 days of Safety
stock (2 x demand of 20 40 units).
10 days
20 days
30 days
40 days
40
25
Back to Certainty of Demand and Lead Time
26
Back to Certainty of Demand and Lead Time

• In replenishing inventory there is a tradeoff
  between inventory carrying costs and ordering
  costs.

27
Back to Certainty of Demand and Lead Time

• In replenishing inventory there is a tradeoff
  between inventory carrying costs and ordering
  costs.
• In other words, when there is no variability in
  demand and lead time, how often should we place
  an order?

28
Back to Certainty of Demand and Lead Time

• In replenishing inventory there is a tradeoff
  between inventory carrying costs and ordering
  costs.
• In other words, when there is no variability in
  demand and lead time, how often should we place
  an order?
• Because of inventory carrying cost, we do not
  want too much inventory.

29
Back to Certainty of Demand and Lead Time

• In replenishing inventory there is a tradeoff
  between inventory carrying costs and ordering
  costs.
• In other words, when there is no variability in
  demand and lead time, how often should we place
  an order?
• Because of inventory carrying cost, we do not
  want too much inventory.
• But we dont want to order too often, because
  there are costs in ordering.

30
Ordering costs

• Ordering costs for product from outside suppliers.

31
Ordering costs

• Ordering costs for product from outside
  suppliers.
• Ordering costs to restock a companys own field
  warehouses.

32
Ordering costs

• Ordering costs for product from outside
  suppliers.
• Cost of transmitting the order.
• Ordering costs to restock a companys own field
  warehouses.

33
Ordering costs

• Ordering costs for product from outside
  suppliers.
• Cost of transmitting the order.
• Cost of receiving the product.
• Ordering costs to restock a companys own field
  warehouses.

34
Ordering costs

• Ordering costs for product from outside
  suppliers.
• Cost of transmitting the order.
• Cost of receiving the product.
• Cost of placing it in storage.
• Ordering costs to restock a companys own field
  warehouses.

35
Ordering costs

• Ordering costs for product from outside
  suppliers.
• Cost of transmitting the order.
• Cost of receiving the product.
• Cost of placing it in storage.
• Cost of processing invoice for payment.
• Ordering costs to restock a companys own field
  warehouses.

36
Ordering costs

• Ordering costs for product from outside
  suppliers.
• Ordering costs to restock a companys own field
  warehouses.

37
Ordering costs

• Ordering costs for product from outside
  suppliers.
• Ordering costs to restock a companys own field
  warehouses.
• Cost of transmitting and processing inventory
  transfer.

38
Ordering costs

• Ordering costs for product from outside
  suppliers.
• Ordering costs to restock a companys own field
  warehouses.
• Cost of transmitting and processing inventory
  transfer.
• Cost of handling the product it is in stock or
  setting up product to produce it.

39
Ordering costs

• Ordering costs for product from outside
  suppliers.
• Ordering costs to restock a companys own field
  warehouses.
• Cost of transmitting and processing inventory
  transfer.
• Cost of handling the product it is in stock or
  setting up product to produce it.
• Cost of receiving at field location.

40
Ordering costs

• Ordering costs for product from outside
  suppliers.
• Ordering costs to restock a companys own field
  warehouses.
• Cost of transmitting and processing inventory
  transfer.
• Cost of handling the product it is in stock or
  setting up product to produce it.
• Cost of receiving at field location.
• Cost of documentation.

41
Back to Certainty of Demand and Lead Time

• In replenishing inventory there is a tradeoff
  between inventory carrying costs and ordering
  costs.
• In other words, when there is no variability in
  demand and lead time, how often should we place
  an order?
• Because of inventory carrying cost, we do not
  want too much inventory.
• But we dont want to order too often, because
  there are costs in ordering.

42

• End of Part Two.