Inventory Control Guide Page 36
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401. Cost Minimization
For facility reasons, we can address the following questions sequentially:
When to order: at every Rt or less often ?
This question can be easily solved by compromising the holding costs and the order costs. A
reasonable goal consists in ordering at the frequency close to that of the EOQ model. Given
now the ordering frequency, we can proceed.
How much to order ?
The answer is: enough to cover the average demand till the next delivery plus some safety
stock. The “time till the next delivery” must be clearly identified.
1. Vulnerability Period = Review time + Lead time
Let us consider the example of previous page again. At time 0, we observe some inventory, let
us say 10 and we decide to order some quantity, let us say 3. After we have placed this order,
we cannot interfere with our inventory before time 13! Indeed, the earliest time we can order
again is time 8 and we will be delivered 5 days (the lead time) later. In another words, when
we place our order for 3 units, then we cannot modify the evolution of the inventory up to time
13. This is the “vulnerability period” in this case.
Let us consider the items which will be used to cover the demand during this vulnerability
period. We observed an inventory of 10 units and we ordered 3 units. Altogether, these 13
units will be used to cover the demand during these 13 days.
2. Demand (Vulnerability Period) = D
Vp
3. Safety stock
Once the demand over the vulnerability period is known, we can chose a safety stock.
For example, in the previous example, the demand over 13 days has a mean of 13 with some
variation. In the simulation, no safety stock was used.
The calculation of a safety stock which aims at meeting some service performance is
described next. However, a pure cost minimization objective can be pursued if the penalty
cost associated with a stockout can be estimated.
Prod 2100-2110
Inventory Control
35
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