Stevenson 13 Inventory Management Learning Objectives

Service Level

• Order cycle service level can be defined as the probability that demand will not exceed supply during lead time (i.e., that the amount of stock on hand will be sufficient to meet demand).
• A service level of 95 percent implies a probability of 95 percent that demand will not exceed supply during lead time.
• The risk of a stockout is the complement of service level; a customer service level of 95 percent implies a stockout risk of 5 percent.

• 12-

Reorder Point

• 12-

• ROP

• Risk of
• a stockout

• Service level

• Probability of
• no stockout

• Expected
• demand

• Safety
• stock

• 0

• z

• Quantity

• z-scale

• The ROP based on a normal
• Distribution of lead time demand

Fixed-Order-Interval Model

• 12-

• Orders are placed at fixed time intervals
• Order quantity for next interval?
• Suppliers might encourage fixed intervals
• May require only periodic checks of inventory levels
• Risk of stockout
• Fill rate – the percentage of demand filled by the stock on hand

Fixed-Interval Benefits

• 12-

• Tight control of inventory items
• Items from same supplier may yield savings in:
• Ordering
• Packing
• Shipping costs
• May be practical when inventories cannot be closely monitored

Fixed-Interval Disadvantages

• 12-

• Requires a larger safety stock
• Increases carrying cost
• Costs of periodic reviews