Stevenson 13 Inventory Management Learning Objectives

Single Period Model

• 12-

• Single period model: model for ordering of perishables and other items with limited useful lives
• Shortage cost: generally the unrealized profits per unit
• Excess cost: difference between purchase cost and salvage value of items left over at the end of a period

Optimal Stocking Level

• 12-

• Service Level

• So

• Quantity

• Ce

• Cs

• Balance point

• Service level =

• Cs

• Cs + Ce

• Cs = Shortage cost per unit Ce = Excess cost per unit

Example

• 12-

• Ce = $0.20 per unit
• Cs = $0.60 per unit
• Service level = Cs/(Cs+Ce) = .6/(.6+.2)
• Service level = .75

• Service Level = 75%

• Quantity

• Ce

• Cs

• Stockout risk = 1.00 – 0.75 = 0.25

Operations Strategy

• 12-

• Too much inventory
• Tends to hide problems
• Easier to live with problems than to eliminate them
• Costly to maintain
• Wise strategy
• Reduce lot sizes
• Reduce safety stock