Periodic Review Policies for Inventory Replenishment Require Safety Inventory to Cover Demand During
In this section, we depict the evaluation of condom inventories for both continuous and periodic- review replenishment policies. Nosotros highlight the fact that periodic review policies require more safety inventory than continuous review policies for the same level of product availability. To simplify the discussion, we focus on the CSL as the mensurate of product availability. The managerial implications are the same if we use fill charge per unit; the analysis, nevertheless, is more cumbersome.
1. Continuous Review Policies
Given that continuous review policies were discussed in detail in Section 12.2, we reiterate only the primary points here. When using a continuous review policy, a manager orders Q units when the inventory drops to the ROP. Clearly, a continuous review policy requires technology that monitors the level of available inventory. This is the case for many firms such as Walmart and Dell, whose inventories are monitored continuously.
Given a desired CSL, our goal is to identify the required safe inventory ss and the ROP. We assume that demand is usually distributed, with the following inputs:
D: Boilerplate need per menstruation
σD: Standard deviation of demand per period
Fifty: Boilerplate atomic number 82 time for replenishment
The ROP represents the available inventory to meet need during the lead time L. A stockout occurs if the demand during the lead fourth dimension is larger than the ROP. If demand across periods is independent, demand during the lead time is commonly distributed with the following:
Given the desired CSL, the required rubber inventory (ss) obtained using Equation 12.v and the ROP obtained using Equation 12.3 are
A manager using a continuous review policy has to account only for the dubiety of demand during the lead time. This is because the continuous monitoring of inventory allows the director to adjust the timing of the replenishment guild, depending on the demand experienced. If demand is very high, inventory reaches the ROP quickly, leading to a quick replenishment society. If demand is very low, inventory drops slowly to the ROP, leading to a delayed replenishment club. The managing director, however, has no recourse during the lead fourth dimension once a replenishment society has been placed. The available safety inventory thus must cover for the dubiety of demand over this menses.
Typically, in continuous review policies, the lot size ordered is kept fixed between replenishment cycles. The optimal lot size may be evaluated using the EOQ formula discussed in Chapter xi.
2. Periodic Review Policies
In periodic review policies, inventory levels are reviewed afterwards a fixed period of time T and an club is placed such that the level of electric current inventory plus the replenishment lot size equals a prespecified level called the order-upwards-to level (OUL). The review interval is the time Tbetween successive orders. Observe that the size of each order may vary, depending on the demand experienced betwixt successive orders and the resulting inventory at the time of ordering. Periodic review policies are simpler for retailers to implement because they practise not crave that the retailer have the capability of monitoring inventory continuously. Suppliers may as well adopt them because they result in replenishment orders placed at regular intervals.
Let us consider the store managing director at Walmart who is responsible for designing a replenishment policy for Lego edifice blocks. He wants to clarify the impact on safety inventory if he decides to use a periodic review policy. Demand for Legos is ordinarily distributed and independent from one week to the next. We assume the post-obit inputs:
D: Average demand per period
due southD: Standard deviation of demand per period
L: Average lead fourth dimension for replenishment
T: Review interval
CSL: Desired cycle service level
To empathise the rubber inventory requirement, we track the sequence of events over time equally the shop director places orders. The store manager places the first order at time 0 such that the lot size ordered and the inventory on mitt sum to the OUL. In one case an lodge is placed, the replenishment lot arrives after the lead time 50. The next review period is time T, when the store manager places the next order, which and then arrives at time T + L. The OUL represents the inventory available to run across all demand that arises betwixt periods 0 and T + L. The Walmart store will experience a stockout if demand during the time interval betwixt 0 and T + L exceeds the OUL. Thus, the store director must identify an OUL such that the following is true:
Probability (demand during T + L < OUL) = CSL
The next footstep is to evaluate the distribution of need during the time interval T + L. Using Equation 12.2, demand during the time interval T + L is normally distributed, with
The safety inventory in this example is the quantity in excess of DT+50 carried by Walmart over the time interval T + L. The OUL and the safety inventory ss are related as follows:
Given the desired CSL, the safe inventory (ss) required is given by
The boilerplate lot size equals the average demand during the review period T and is given every bit
Boilerplate lot size, Q = DT = D X T (12.twenty)
In Figure 12-7, we show the inventory profile for a periodic review policy with pb time L = four and reorder interval T = 7. On twenty-four hours 7, the company places an order that determines available inventory until day 18 (equally illustrated in Effigy 12-7 by the dashed line from point 1 to signal two). As a outcome, the safe inventory must be sufficient to buffer demand variability over T + L = 7 + four = xi days.
We illustrate the periodic review policy for Walmart in Instance 12-xiii (see worksheet Example 12-13).
Case 12-13 Evaluation Condom Inventory for a Periodic Review Policy
Weekly demand for Legos at a Walmart shop is commonly distributed, with a mean of ii,500 boxes and a standard departure of 500. The replenishment lead time is ii weeks, and the shop manager has decided to review inventory every 4 weeks. Bold a periodic-review replenishment policy, evaluate the condom inventory that the shop should carry to provide a CSL of 90 pct. Evaluate the OUL for such a policy.
Analysis:
In this case, we have
Average demand per menstruum, D = ii,500
Standard deviation of demand per period, sD = 500
Average lead time for replenishment, L = ii weeks
Review interval, T = iv weeks
Nosotros first obtain the distribution of demand during the time interval T + 50. Using Equation 12.ii, need during the time interval T + L is normally distributed, with
From Equation 12.19, the required safety inventory for a CSL = 0.xc is given as
Using Equation 12.18, the OUL is given by
OUL = DT + Fifty + ss = xv,000 + 1,570 = 16,570
The store manager thus orders the deviation between 16,570 and current inventory every four weeks.
We can now compare the safety inventory required when using continuous and periodic review policies. With a continuous review policy, the safety inventory is used to comprehend for demand uncertainty over the lead time L. With a periodic review policy, the safety inventory is used to cover for demand uncertainty over the atomic number 82 time and the review interval L + T. Given that higher dubiety must be accounted for, periodic review policies require a higher level of safety inventory. This statement can be confirmed by comparison the results in Examples 12-4 and 12-13. For a ninety percent CSL, the store manager requires a prophylactic inventory of 906 boxes when using a continuous review and a safety inventory of ane,570 boxes when using a periodic review.
Of course, periodic review policies are somewhat simpler to implement considering they exercise not require continuous tracking of inventory. Given the broad utilise of bar codes and POS systems as well as the emergence of RFID technology, continuous tracking of all inventories is much more commonplace today than it was a decade ago. In some instances, companies segmentation their products based on their value. Loftier-value products are managed using continuous review policies, and low-value products are managed using periodic review policies. This makes sense if the cost of perpetual tracking of inventory is more than the savings in safety inventory that result from switching all products to a continuous review policy.
Source: Chopra Sunil, Meindl Peter (2014), Supply Concatenation Management: Strategy, Planning, and Operation, Pearson; sixth edition.
Source: https://phantran.net/impact-of-replenishment-policies-on-safety-inventory-in-a-supply-chain/
0 Response to "Periodic Review Policies for Inventory Replenishment Require Safety Inventory to Cover Demand During"
Post a Comment