demand management

Chapter 11-
Independent Demand Ordering Systems

2-Apr-01

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Main question now turns to when to place an order?
Stock not ordered early enough may result in a stockout situation

Stock ordered too soon may result in excess inventory

How do you balance the two?

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Definitions
Lead Time : The time between recognition of a need for an order and the receipt of the goodsOrder Point: A set inventory level where, if the stock on hand plus on-order falls to or below that point, action is taken to replenish the stock.Safety Stock: In general, a quantity of stock planned to be in inventory to protect against fluctuations in demand and/or supplyService Level: the percentage of orders filled from stock
APICS Dictionary

7th Edition
1992
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Reorder Systems Include:
Order Point System

Periodic Review System

MRP

For dependent demand items

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Order Point Systems
A system where an order is placed whenever the on-hand inventory level falls to a predetermined level known as the order point.

Quantity ordered is usually predetermined and based on the EOQ.

An order must be placed when there is enough stock on hand to satisfy demand from the time the order is placed until new stock arrives.

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The Order Point
The point where there exists enough inventory on hand to equal the demand during the lead time plus some safety stock.
OP = DDLT + SS
Note that the demand during lead time is important as this when a stockout could occur.

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Example: Order Point

Q: Demand is 100 units a week, the lead time is three weeks, and the safety stock has been established at 300 units. Calculate the order point.

A:OP = ?

DDLT = (100 units/week x 3 weeks)

SS = 300 units

OP = DDLT + SS = (100 x 3) + 300

= 600 units

Order Point
Average Inventory = Q/2 + SS

Lead Time

Q = Order Quantity

Order Point

Safety Stock

Units in Stock

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Uncertainty
Quantity uncertainty

When the amount of supply or demand varies

Timing uncertainty

Time of receipt of supply or demand differs from that expected

Two ways to protect:

Carry extra stock (safety stock)

Order early (safety lead time)

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Safety Stock
SS is used to protect against uncertainty in supply and demand.

SS depends on:

Variability of demand during lead time

Frequency of reorder

Service level desired

Length of lead time

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Variability of Demand
Actual demand will vary from the forecast due to bias and random fluctuations.

Usually the variation of demand will follow a normal distribution

Average (mean)

Dispersion (range, MAD, Std. Deviation [Sigma])

Actual demand will be:

+/-1 sigma of the fcst average 68% of the time

+/-2 sigma of the fcst average 98% of the time

+/-3 sigma of the fcst average 99.88% of the time

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Determining Safety Stock
SS is needed only to cover those periods in which the demand during lead time is greater than average.

Service level is a statement of the percentage of time there is no stockout.

Is directly related to the number of standard deviations provided as safety stock and sometimes called the safety factor, or service factor.

Safety Stock = (Sigma x Safety Factor)

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Safety Factor

Generated using Excel function NORMSINV
Sheet1Service LevelSafety StockService LevelSafety Stock50.00%0.0090.00%1.2855.00%0.1391.00%1.3460.00%0.2592.00%1.4165.00%0.3993.00%1.4870.00%0.5294.00%1.5575.00%0.6795.00%1.6480.00%0.8496.00%1.7581.00%0.8897.00%1.8882.00%0.9298.00%2.0583.00%0.9599.00%2.3384.00%0.9999.50%2.5885.00%1.0499.60%2.6586.00%1.0899.70%2.7587.00%1.1399.80%2.8888.00%1.1799.90%3.0989.00%1.2399.99%3.72Sheet2Sheet3

Stockouts
Stockouts lead to costs such as

Back-order costs

Lost Sales

Lost Customers

Stockouts are possible only when stock is running low, usually the time when an order is placed.

The chances of a stockout are directly proportional to the frequency of reorder.

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Service Level
The service level will determine the number of stockouts that will occur each year.

Service level decisions are the responsibility of senior management and should reflect the companys corporate and marketing strategy.

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Different Forecast & Lead-time Intervals
Usually there exists many items in inventory with each having a different lead time.

Forecasts are usually made on a weekly or monthly basis regardless of lead time.

As lead time increases so does the standard deviation

But not in direct proportion to the LT

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Different Forecast & Lead-time Intervals
The standard deviation must be adjusted to compensate for differences between lead time interval (LTI) and forecast interval (FI):
Sigma for LTI = (Sigma for FI) [SQRT(LTI/FI)]
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Determining When the Order Point is Reached
Two-Bin System

A quantity of an item equal to the order point is set aside and not touched until the main stock has been used

Variations include tags and indicators

Perpetual Inventory System

A continual account of inventory transactions as they occur

Contains permanent and variable information

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Periodic Review System
The quantity on hand of a particular item is determined at specified, fixed-time intervals.

The review period is fixed and the order quantity is allowed to vary.

The quantity on hand plus the quantity ordered must be sufficient to last until next shipment is received.

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Distribution Inventory
Includes all the finished goods held anywhere in the distribution system

Generally, utilizes distribution centers so as to improve customer service by locating stock near the customer

Distribution Inventory Management:

Provide the required level of customer service

Minimize transportation costs

Minimize scheduling problems with the factory

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The Distribution System
Factory

Central Supply

Distribution Center B

Distribution Center C

Distribution Center A

Customers

Customers

Customers

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Decentralized Distribution

Each center determines needs and then places orders without regard for the other centers

Advantage- reduction in communication and coordination costs

Disadvantage - The effects on customer service and inventory levels

Centralized Distribution

All forecasting and other decisions are made centrally.

Stock is pushed in the system from central supply

Attempt to balance the available inventory with the needs of each distribution center

Advantage: Coordination

Disadvantage: Inability to respond to local demand

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Distribution Requirements Planning

A system that forecasts when the various demands will be made on central supply.

DRP responds to customer demand and coordinate planning and control

Translates the logic of MRP to the distribution system.

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Next Week. . .
Work and Be Prepared to Discuss - 11.1 11.7 11.11 11.13 11.17 Read Chapter 12 Physical Inventory and Warehouse Management Read Chapter 13 Physical Distribution

demand management

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