scm presentation on estimated cost of stockouts

7/28/2019 SCM Presentation on Estimated cost of Stockouts

1/19

Presented by:

Deepti H

Divya G

Divya N

Ganapati Sabhahit

Girish V


2/19

Basic Inventory Concepts Cycle inventory (order or lot size

inventory) isinventory that results frompurchasing or producing in larger lots than are

needed for immediate consumption or sale.

Safety stock inventoryisan additionalamount of inventory that is kept over and

above the average amount required to meetdemand.

Basic Inventory Concepts


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Inventory managers deal with twofundamental decisions:

1. When to orderitems from a supplier

or when to initiate production runs ifthe firm makes its own items

2. How much to orderor produce each

time a supplier or production order isplaced

Managing Inventories


4/19

Inventory Management Decisions & Costs Shortage costsorstock-out costsare

the costs associated with a SKU beingunavailable when needed to meetdemand.

Unit costis the price paid for purchased

goods or the internal cost of producingthem.



5/19

Characteristics of Inventory Systems

Number of time periods in planninghorizon: short or long planning horizon such asdays, weeks, months, quarters, and years.

Size of time periods: hours, days, weeks,months, quarters.

Thelead timeis the time between placementof an order and its receipt.



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Characteristics of Inventory Systems

Astockoutis the inability to satisfy demand foran item. When a stockout happens, the item iseither back-ordered or a sale is lost.

Abackorderoccurs when a customer is willingto wait for an item.

Alost saleoccurs when the customer isunwilling to wait and purchases the itemelsewhere.



7/19

XX

Inventory at time of receipt

ReceiveReceive

orderorder

TimeTime

InventoryInventory

LevelLevel

OrderOrder

QuantityQuantity

PlacePlace

orderorder

Lead TimeLead Time

Actual Demand < Expected Demand

ROP

Lead Time Demand


8/19

Stockout

Point

Unfilled demand

ReceiveReceive

orderorder

TimeInventory

OrderOrder

QuantityQuantity

PlacePlace

orderorder

Lead TimeLead Time

If Actual Demand > Expected, we Stock Out


9/19

To reduce stock-outs add safety stock

ReceiveReceive

orderorder

TimeTime

PlacePlace

orderorder

Lead TimeLead Time

InventoryLevel

ROP =

Safety

Stock +

Expected

LTDemand

Order QuantityQ = EOQ

ExpectedLT Demand

Safety Stock


10/19

Service level

Safety

Stock

Probability

of stock-out

Diagrammatic representation of Stock-out

(Service level = probability of NOT stocking out)


11/19

ABC inventory (Pareto) analysis givesmanagers useful information to identify thebest methods to control each category ofinventory

A vital few SKUs represent a high

percentage of the total inventory value.

ABC Inventory Analysis


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The Economic Order Quantity (EOQ)model is a classic economic modeldeveloped in the early 1900s that minimizes total cost, which is the sum of the

inventory-holding cost and the ordering cost.

Cost of storing one unit in inventory for the year (denoted by Ch), is given by Ch= (I)(C), where Iis annual inventory-holding charge, Cis unit cost of theinventory item, and Qis the number of units in inventory.


annual inventory

holding cost

average

inventory

annual holding

cost per unit=

( )=

1

2

QCh

( )


14/19

Optimal Order Quantity: order quantity that minimizesthe total cost.

Q* is the quantity that minimizes the total cost and isknown as the economic order quantity, or EOQ.


Q* =

2DCo

Ch


15/19

In afixed quantity system (FQS),the order

quantity or lot size is fixed; the same amount, Q,is ordered every time.

The process of triggering an order is based on theinventory position.

Inventory position (IP)is the on-hand quantity(OH) plus any orders placed but which have notarrived (scheduled receipts, or SR), minus any

backorders (BO).

IP = OH + SR BO



16/19

Fixed Quantity System

When inventory falls at or below a certain value, r,called the reorder point, a new order is placed.

Reorder point depends on the lead time andnature of demandoftentimes, the reorder point isselected using the average demand during thelead time (L).

r= L= (d)(L)

Where dis average demand per unit of time and Lis the lead time expressed in the same units oftime.



17/19

Fixed Period Systems

An alternative to a fixed order quantity system is afixed period system (FPS)sometimes called aperiodic review systemin which the inventory position

is checked only at fixed intervals of time, T, rather thanon a continuous basis.

Two principal decisions in a FPS:

1. The time interval between reviews (T), and

2. The replenishment level (M)



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Fixed Period Systems (no uncertainty)

Economic time interval: T= Q*/D

Optimal replenishment level:

M= d (T + L)

Where d=average demand per time period

L= lead time in the same time unitsM= demand during the lead time plus

review period



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Single-Period Inventory Model

Applies to inventory situations in which oneorder is placed for a good in anticipation of afuture selling season where demand is

uncertain. At the end of the period, the product has either

sold out or there is a surplus of unsold items to

sell for a salvage value. Sometimes called a newsvendor problem,

because newspaper sales are a typical exampleof the single-period inventory problem.

Special Models for Inventory Management

scm presentation on estimated cost of stockouts

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