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  1. If I want to have a probability of 30% to have stock out, how much has to be the safety stock?. Data to calculate.
    1. Average demand = 600 units/month
    2. Current stock on hand = 112 units.
    3. Unit cost price = 221 Euros

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Ralph and InventoryManagement

During discussions, Ralph, our hospital stockroom managergestures proudly at the ceiling-high stocked warehouse and statesthat he has never had to turn away any request for any item. Inother words, he is providing his users 100% CSL (cycle servicelevel). We ask him what the average lead times are for the mostused meds and he responds “within 3 days for most items”. He thengoes quiet, as the implications of what he has just said sink in –why keep so much inventory of everything when replenishments areonly 3 days away? Well, he says defensively, after a pregnantpause, “As I said, I have never had to turn any user away and youdon’t know how wildly variable demand can be in a hospital”. Sure,we think, but not so variable as to call for a warehouse full ofmed items! Let’s help Ralph out.

- Pick a few ‘A’ or vital SKUs from inventory,based on importance in terms of sales, profits, stockoutconsequences to customers, or cost of holding.

We pick a high cost and vital item, heart stents, with uncertaindemand.

- Find out the current formal inventorypolicies, if any, in use for those items (and when these wereset).

Ralph uses a continuous inventory management system forstents:

Order size: 300 units per order

ROP: 200 units (inclusive of safety stock of 50 units), i.e.,order whenever the inventory position falls to 200 units

- Find out whether these policies are beingfollowed.

Ralph confirms that he inherited these policies and followsthem.

- Ascertain current operational inventorymanagement parameters.

Ralph provides the following estimates:

Holding cost H = 25% of item cost

Ordering cost S = $100/order

Current supply lead times LT: 3 days stable

Average daily demand d: 50 units/day

Standard deviation of daily demand σd:3units

Actual customer cycle service level: 100%

Item cost: $1000/unit

Assume 365 working days in a year

1. Develop recommended order size (EOQ) and aROP for the selected SKU using the above current operationalinventory management parameters. Maintain CSL at 100%.

a) Recommended EOQ = ? units

b) Recommended ROP = ? units

EOQ = √ (2*D*S)/H; where D = Annualdemand; S = Cost of placing one order; H = Cost of holding 1 unitin inventory for 1 yr

ROP = d * Leadtime + Safety Stock

Safety Stock = z value correspondingto CSL of 100% * σd √LT;

where d is average daily demand,σd = standard deviation of demand, LT = leadtime

# of orders/yr= D/EOQ (order qty)

2. Compute and show the differences inrecommended order size, ROP, and total costs for the selected SKUvs. current figures.

Current System

Total cost = TotalHolding Cost + Total Ordering Cost

= Avg Inventory * H + # of Orders/yr *S

= Avg Inventory * H + (D/Order Qty) *S

= ?

Average Inventory = ? units

Recommended System

Total cost = ?

Average Inventory = ? units

Total cost saving with recommendedsystem comparted to current system= $?

Capital investment avoided = ? (fromreducing average inventory @$1000/unit)

3. Can we do even better?

a) If Ralph could reduce the current lead time of 3 days to 2days without significant cost increases:

Revised ROP = ? units

Reduced safety stock = ? units

Reduced average inventory = ?units

b) If Ralph could reduce the cost of placing an order (S) to say$50 instead of the current $100/order by migrating the orderingprocess to a web based system:

Revised EOQ = ? units

Which means that:

Revised average inventory = ?units

and,

Revised total costs = $?

c) Anything else Ralph can do tolower the Total Cost?

PLEASE SHOW EVERY STEP OFTHIS PROBLEM PRECISILY WHEN SOLVED SO I CAN UNDERSTAND THE STEPS. IWOULD REALLY APPRECIATE IF THE SOLUTIONS WOULD BE SHOWN OUT STEP BYSTEP

Sharon Ltd has in the past ordered rawmaterial T in quantities of 3,000 units which is half a year’ssupply. Management has instructed you, an inventory costconsultant, to advise them as to the most desired order quantities.The factory closes for 4 weeks annual leave per annum.

You are given the following data:

Inventory usage rate: 125 per week, Lead time: 3 weeks

Unit price: $1.50, Annual requirement: 6,000 units

Order cost: $9.00 per order, Carrying cost: $0.30 per unit peryear Required:

Calculate the economic order quantity.

Calculate the reorder point.

How much would the company save by using this new method?(Assume the order point calculated in part b is used)

Solution:

For Requirement (a) formula is alreadyprovided in lecture slide.

For Requirement (b): Re-Order point =Lead time usage (No of weeks * Usage per week) For Requirement (c):Savings per year by ordering at EOQ (= Existing policy – EOQpolicy) Existing policy = Cost of ordering + Cost of holding +safety stock

Cost of ordering = No of orders perannum * Cost of an order

Cost of holding = Average Inventory *Carrying cost per unit per annum Safety Stock = Usage per week *Lead Time * Carrying cost

EOQ policy = Cost of ordering + Costof holding + Safety stock

For Requirement (c): Savings per yearby ordering at EOQ (= Existing policy – EOQ policy)

Suppose we have two ways to source a product. One way is fromthe local supplier, while a second way is from a distant supplier.The terms and parameters for each source are as given in followingtable:

?Local Supplier Distant Supplier
Cost per unit, c $1.15 $1.00
Lead time (no uncertainty), L 3 weeks 12 weeks
Transportation cost per unit, c?t $0.10 $0.12

Suppose demand for the component is ?=500/week; ?=100/week.(Assume normally distributed demand)

Suppose we have a holding cost of h=$0.01/week. This applies toall inventory in the system.

- Compute the total landed cost per unit (equal to theprocurement cost plus transportation cost plus holding cost forpipeline stock) for each source. Local supplier total landed cost(TLC)= Distant supplier total landed cost (TLC)=

- Suppose we source from a single supplier, and suppose weassume a periodic review policy with r = 1 week; suppose we have ashortage cost ? = 0.30/unit. What is the base stock for each optionthat minimizes the expected costs? Base Stock for Local Supplier=Base Stock for Distant Supplier=

- Suppose we follow the base stock policy calculated in part 2.What is the expected total cost per week for each option? Theexpected total cost is the sum of the procurement cost, thetransportation cost, the inventory holding cost for the pipelineinventory plus the cycle stock and safety stock, and the shortagecost. Local Supplier= Distant Supplier=

- Suppose we implement a dual sourcing strategy, and we place astanding order with the distant supplier for 350 units per week.Suppose it is Jan. 7, 2019, which is a review epoch at which weplace an order to the local supplier. The prior orders from boththe local and distant supplier have been received and the inventoryon hand is 1000 units.

There are two orders in process with the local suppler: an orderfor 75 units to be delivered on Jan. 14, and on order for 100 unitsto be delivered on Jan. 21. In addition, under the terms of thestanding order, the distant supplier will deliver 350 units on Jan.14, Jan. 21, Jan. 28, etc.

Suppose the base stock level for the local supplier is 2370.

How much is the local supplier order on Jan. 7 for delivery onJan. 28?

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