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Demand Management
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Chapter 11-
Independent Demand Ordering Systems
2-Apr-01
1
Independent Demand Ordering Systems
Main question now turns to when to place an order?Stock not ordered early enough may result in a stockout situation
Stock ordered too soon may result in excess inventory
How do you balance the two?
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Definitions
Lead Time : The time between recognition of a need for an order and the receipt of the goodsOrder Point: A set inventory level where, if the stock on hand plus on-order falls to or below that point, action is taken to replenish the stock.Safety Stock: In general, a quantity of stock planned to be in inventory to protect against fluctuations in demand and/or supplyService Level: the percentage of orders filled from stockAPICS Dictionary
7th Edition
19923
Independent Demand Ordering Systems
Reorder Systems Include:Order Point System
Periodic Review System
MRP
For dependent demand items
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Independent Demand Ordering Systems
Order Point SystemsA system where an order is placed whenever the on-hand inventory level falls to a predetermined level known as the order point.
Quantity ordered is usually predetermined and based on the EOQ.
An order must be placed when there is enough stock on hand to satisfy demand from the time the order is placed until new stock arrives.
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Independent Demand Ordering Systems
The Order PointThe point where there exists enough inventory on hand to equal the demand during the lead time plus some safety stock.
OP = DDLT + SSNote that the demand during lead time is important as this when a stockout could occur.
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Example: Order Point
Q: Demand is 100 units a week, the lead time is three weeks, and the safety stock has been established at 300 units. Calculate the order point.
A:OP = ?
DDLT = (100 units/week x 3 weeks)
SS = 300 units
OP = DDLT + SS = (100 x 3) + 300
= 600 units
Independent Demand Ordering Systems
Order PointAverage Inventory = Q/2 + SS
Lead Time
Q = Order Quantity
Order Point
Safety Stock
Units in Stock
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Independent Demand Ordering Systems
UncertaintyQuantity uncertainty
When the amount of supply or demand varies
Timing uncertainty
Time of receipt of supply or demand differs from that expected
Two ways to protect:
Carry extra stock (safety stock)
Order early (safety lead time)
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Independent Demand Ordering Systems
Safety StockSS is used to protect against uncertainty in supply and demand.
SS depends on:
Variability of demand during lead time
Frequency of reorder
Service level desired
Length of lead time
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Independent Demand Ordering Systems
Variability of DemandActual demand will vary from the forecast due to bias and random fluctuations.
Usually the variation of demand will follow a normal distribution
Average (mean)
Dispersion (range, MAD, Std. Deviation [Sigma])
Actual demand will be:
+/-1 sigma of the fcst average 68% of the time
+/-2 sigma of the fcst average 98% of the time
+/-3 sigma of the fcst average 99.88% of the time
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Independent Demand Ordering Systems
Determining Safety StockSS is needed only to cover those periods in which the demand during lead time is greater than average.
Service level is a statement of the percentage of time there is no stockout.
Is directly related to the number of standard deviations provided as safety stock and sometimes called the safety factor, or service factor.
Safety Stock = (Sigma x Safety Factor)
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Safety Factor
Generated using Excel function NORMSINV
Sheet1Service LevelSafety StockService LevelSafety Stock50.00%0.0090.00%1.2855.00%0.1391.00%1.3460.00%0.2592.00%1.4165.00%0.3993.00%1.4870.00%0.5294.00%1.5575.00%0.6795.00%1.6480.00%0.8496.00%1.7581.00%0.8897.00%1.8882.00%0.9298.00%2.0583.00%0.9599.00%2.3384.00%0.9999.50%2.5885.00%1.0499.60%2.6586.00%1.0899.70%2.7587.00%1.1399.80%2.8888.00%1.1799.90%3.0989.00%1.2399.99%3.72Sheet2Sheet3Independent Demand Ordering Systems
StockoutsStockouts lead to costs such as
Back-order costs
Lost Sales
Lost Customers
Stockouts are possible only when stock is running low, usually the time when an order is placed.
The chances of a stockout are directly proportional to the frequency of reorder.
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Independent Demand Ordering Systems
Service LevelThe service level will determine the number of stockouts that will occur each year.
Service level decisions are the responsibility of senior management and should reflect the companys corporate and marketing strategy.
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Independent Demand Ordering Systems
Different Forecast & Lead-time IntervalsUsually there exists many items in inventory with each having a different lead time.
Forecasts are usually made on a weekly or monthly basis regardless of lead time.
As lead time increases so does the standard deviation
But not in direct proportion to the LT
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Independent Demand Ordering Systems
Different Forecast & Lead-time IntervalsThe standard deviation must be adjusted to compensate for differences between lead time interval (LTI) and forecast interval (FI):
Sigma for LTI = (Sigma for FI) [SQRT(LTI/FI)]15
Independent Demand Ordering Systems
Determining When the Order Point is ReachedTwo-Bin System
A quantity of an item equal to the order point is set aside and not touched until the main stock has been used
Variations include tags and indicators
Perpetual Inventory System
A continual account of inventory transactions as they occur
Contains permanent and variable information
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Independent Demand Ordering Systems
Periodic Review SystemThe quantity on hand of a particular item is determined at specified, fixed-time intervals.
The review period is fixed and the order quantity is allowed to vary.
The quantity on hand plus the quantity ordered must be sufficient to last until next shipment is received.
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Independent Demand Ordering Systems
Distribution InventoryIncludes all the finished goods held anywhere in the distribution system
Generally, utilizes distribution centers so as to improve customer service by locating stock near the customer
Distribution Inventory Management:
Provide the required level of customer service
Minimize transportation costs
Minimize scheduling problems with the factory
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Independent Demand Ordering Systems
The Distribution SystemFactory
Central Supply
Distribution Center B
Distribution Center C
Distribution Center A
Customers
Customers
Customers
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Independent Demand Ordering Systems
Distribution InventoryDecentralized Distribution
Each center determines needs and then places orders without regard for the other centers
Advantage- reduction in communication and coordination costs
Disadvantage - The effects on customer service and inventory levels
Centralized Distribution
All forecasting and other decisions are made centrally.
Stock is pushed in the system from central supply
Attempt to balance the available inventory with the needs of each distribution center
Advantage: Coordination
Disadvantage: Inability to respond to local demand
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Independent Demand Ordering Systems
Distribution InventoryDistribution Requirements Planning
A system that forecasts when the various demands will be made on central supply.
DRP responds to customer demand and coordinate planning and control
Translates the logic of MRP to the distribution system.
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Next Week. . .
Work and Be Prepared to Discuss - 11.1 11.7 11.11 11.13 11.17 Read Chapter 12 Physical Inventory and Warehouse Management Read Chapter 13 Physical Distribution