Inventory Control Guide Page 24
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404.3 Objective 1: Stockout Probability
With a (Q,R) policy (also called lot size - reorder point), it is decided to order Q units when the
inventory level hits the reorder point R, that is when exactly R units are left in the inventory.
Since the order will arrive exactly Lt days later, R will cover the average demand during this
time plus some safety stock.
Decision
Select Q and R = Lt × D + SS
D = 1 , Q = 8 , L t = 5 , R = 5 + 1 = 6
In v en to ry
1 0
9
8
7
R
6
5
4
3
2
1
0
0
5
1 0
1 5
2 0
2 5
3 0
3 5
Objective 1
Minimize the total costs and
Guarantee a maximum stockout frequency (f)
Minimize C(Q,R) ≈ O (D/Q)+ H (Q/2+R-LtD)+ ID
> R ] ≤ α
Guarantee Probability[ D
Lt
Since we have to minimize the holding cost, we should minimize the safety stock.
Q = 2OD / H ; minimize R
> R] ≤ α
Guarantee Probability[D
Lt
We choose the R value which keeps the stockout probability at the specified level.
Method 1:
If a stockout frequency (f) is specified, then
Set Q = EOQ
Based on the cycle length, determine α
> R ] = α
Compute R such that : Prob[ D
Lt
Let us take an example with f=1stockout per year. If D=365/year and Q=30, we will order
about 12 times a year. That means that in each of these cycles, the stockout probability
cannot exceed f/(D/Q)=1/12. We should therefore find the reorder point which keeps the cycle
stockout probability below 1/12.
Prod 2100-2110
Inventory Control
23
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