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1、Chapter 3 Inventory Management and Risk Pooling1n3.1 Introductionn3.2 A Single Warehouse Inventory Examplen3.3 Risk Poolingn3.4 Centralized versus Decentralized Systemsn3.5 Managing Inventory in the Supply Chainn3.6 Practical Issues23.1 Introduction Inventory appears in the supply chain in several f
2、orms:1.Raw material inventory2.Work-in-process (WIP) inventory3.Finished product inventory3 Each of these needs its own inventory control mechanism. The difficulty in determining these mechanisms is that efficient production, distribution, and inventory control strategies and improve service levels
3、must take into account the interactions of the various levels in the supply chain.4 Why hold inventory at all? Some of the reasons include: 1.To protect the firm from unexpected changes in customer demand.2. Customer demand has always been hard to predict, and uncertainty in customer demand has incr
4、eased in the last few years owing to:5The short life cycle of an increasing number of products.The presence of many competing products in the marketplace.62.The presence in many situations of a significant uncertainty in the quantity and quality of the supply, supplier costs, and delivery times.73.E
5、conomies of scale offered by transportation companies which encourage firms to transport large quantities of items, and therefore hold large inventories.8 Managing inventory effectively is often difficult.Examples illustrate(P42)9 These examples raise two important issues in inventory management:1.D
6、emand forecasting2.Order quantity calculation103.2 A Single Warehouse Inventory ExampleWhat are the key factors affecting inventory policy?1.Customer demand2.Replenishment lead time3.The number of different products stored at the warehouse4.The length of the planning horizon5.Costs, including order
7、cost and inventory holding cost6.Service level requirement113.2.1 The Economic Lot Size Model The classic Economic Lot Size Model, introduced by Ford W. Harris in 1915, is a simple model that illustrates the trade-offs between ordering and storage costs.12 The model assumes the following: 1.Demand i
8、s constant at a rate of D items per day2.Order quantities are fixed at Q items per order3.A fixed setup cost ,k ,is incurred every time the warehouse places an order134.An inventory carrying cost ,h, also referred to as a holding cost, is accrued for every unit held in inventory per day5.The lead ti
9、me, the time that elapses between the placement of an order an its receipt, is zero6.Initial inventory is zero7.The planning horizon is long (infinite)14 This quantity is referred to as the economic order quantity (EOQ)15 This simple model provides two important insights:1.An optimal policy balances
10、 between inventor holding cost per unit time and setup cost per unit time2.Total inventory cost is insensitive to order quantities163.2.2 The Effect of Demand Uncertainty The previous model illustrates the trade-offs between setup costs and inventory holding costs. It ignores, however, issues such a
11、s demand uncertainty and forecasting.17Case:swimsuit productionProbabilistic forecast1.Suppose the manufacturer produces 10,000 units while demand ends at 12,000 swimsuitsProfit=125(10,000)-80(10,000)-100,000=350,0002.If the company produces 10,000swimsuits and demand is only 8,000 units3.Profit=125
12、(10,000)+20(2,000)-80(10,000)-100,000=140,00018Case:swimsuit production19Case:swimsuit production2021nTo summarize:1.The optimal order quantity is not necessarily equal to forecast, or, average, demand2.As the order quantity increases, average profit typically increases until the production quantity
13、 reaches a certain value, after which the average profit atarts decreasing223.As we increase the production quantity, the risk-that is, the probability of large losses-always increases.4. At the same time, the probability of large gains also increases.5. This is the risk/reward trade-off23The effect
14、 of Initial InventoryThe effect of initial inventory (learn it by yourself)243.2.3 Multiple Order Opportunities Consider, for instance, a distributor of TV sets. The distributor faces random demand for the product and receives the supply from the manufacturer. Since demand is random and the manufact
15、urer has a fixed delivery lead time, the distributor needs to hold inventory, even if no fixed setup cost is charged for ordering the products.25 At least 3 reasons explain why the distributor holds inventory:1.To satisfy demand occurring during lead time2.To protect against uncertainty in demand3.T
16、o balance annual inventory holding costs and annual fixed order costs.263.2.4 No Fixed Order Costs To answer these questions, we make the following additional assumptions:1.Daily demand is random and follows a normal distribution.2.There is no fixed order cost.3.Inventory holding cost is charged per
17、 item per unit time. 274.If a customer order arrives when there is no inventory on hand to fill the order, the order is lost.5.The distributor specifies a required service level. The service level is the probability of not stocking out during lead time.28 To characterize the inventory policy that th
18、e distributor should use, we need the following information:AVG = Average daily demand faced by the distributorSTD = Standard deviation of daily demand faced by the distributor29L= Replenishment lead time from the supplier to the distributor in daysh= Cost of holding one unit of the product for one
19、day at the distributor= Service level30The average demand during lead time=Safety stock=The order-up-to-level=z=(chosen form statistical tables:table 3.2)31Example 3.2.1(p53)Average weekly demand=Standard deviation of weekly demand=323.2.4 No Fixed Order Costs33Reorder point=EOQ=ss=The order-up-to-l
20、evel=Example3.2.2(p55)343.3 Risk Pooling ACME is considering the following alternative strategy. Replace the two warehouses with a single warehouse located between Paramus and Newton that will serve all customer orders. It allows ACME to achieve either the same service level of 97 percent with much
21、lower inventory or a higher service with the same amount of total inventory.35Intuitively this is explained as follows: With random demand, it is very likely that a higher-than-average demand at one retailer will be offset by a lower-than-average demand at another. As the number of retailers served
22、by a warehouse goes up, this likelihood also goes up. 36 How much can ACME reduce inventory if the company decides to switch to the centralized system but maintain the same 97 percent service level?37平均库存=产品A在NJ产品A在M平均库存=91产品A在C平均库存=132，平均库存降低=（88+91-132）/（88+91）*100%38 We summarize the three critic
23、al points we have made about risk pooling.1.Centralizing inventory reduces both safety stock and average inventory in the system.2.The higher the coefficient of variation, the greater the benefit obtained from centralized systems3.The benefits from risk pooling depend on the behavior of demand from
24、one market relative to demand from another.393.4 Centralized versus Decentralized Systems What are the trade-offs that we need to consider in comparing centralized distribution systems with decentralized distribution systems?1.Safety stock2.Service level3.Overhead costs4.Customer lead time5.Transpor
25、tation costs403.5 Managing Inventory in the Supply Chain An inventory policy based on the so-called echelon inventory is an effective way to manage the system. It is necessary to introduce the concept of echelon inventory. In a distribution system, each stage or level (i.e., the warehouse or the ret
26、ailers) is often referred to as an echelon. The echelon inventory at any stage or level of the system is equal to the inventory on hand at the echelon, plus all downstream inventory.41423.6 Practical Issues The top five strategies in this survey are:1.Periodic inventory review policy2.Tight manageme
27、nt of usage rates, lead times, and safety stock3.ABC approach4.Reduce safety stock levels5.Quantitative approaches43Reviewn3.1 Introductionn3.2 A Single Warehouse Inventory Examplen3.3 Risk Poolingn3.4 Centralized versus Decentralized Systemsn3.5 Managing Inventory in the Supply Chainn3.6 Practical Issues44
