Question
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$10.00 Reorder Point
- From Business: General-Business , Business: Management
- Closed, but you can still post tutorials
- Due on Jul. 11, 2009
- Asked on Jul. 08, 2009 at 11:22:07AM
Q:The Excel spreadsheet provided below presents a simulation of an order point inventory system. Average daily demand is about 10 units, with a standard deviation of 2. The order lead time is 4 days*. The spreadsheet simulates 500 days of inventory operation, although only the first 150 days are displayed on the graphs.
Cell D12 of the spreadsheet reports the minimum ending inventory over the 500 day simulation. If cell D12 is negative, that means we had at least one shortage during the 500 day simulation. (Negative inventory levels in column D represent backorders.) Cell J13 presents the fraction of the 500 simulated days that ended with negative inventory position.
Cell E13 displays the average daily ending inventory level over the 500 day simulation. Note that this average inventory level includes average cycle stock as well as safety stock resulting from the (Q, R) policy in place. (The first 10 days of the simulation are ignored when computing these statistics.)
Right now the model is set to use Q = 150 and R = 50. With an average daily demand of about 10 units, we should end up ordering about every 15 days. Notice, this means we are to stock-out (our inventory level gets close to zero) about every 15 days. If you use a larger Q, you will spread out these by reducing the number of orders that need to be placed.
This model implements one refinement of the fixed order quantity: Once inventory falls below R, if the standard order quantity Q is not large enough to raise the inventory position to at least R, the order quantity is increased to R minus current inventory. (In effect, R becomes a minimum order up to level. This prevents the inventory position from simply going more and more negative if Q is less than average daily demand.)
Every time you hit the F9 key, the simulation is regenerated under a new random demand pattern (still normal with mean of 10 units per day, and standard deviation 2).
The Question
What is the best way to prevent shortages in this situation? Should I use a larger order quantity, Q, or a larger reorder point, R? Notice, either approach will cause shortages to become less frequent, but both approaches will increase my average inventory level as well. Increasing Q will increase my average cycle stock (Q/2), while increasing R will increase my safety stock. Increasing Q will provide fewer to stock-out by making ordering less frequent, while larger R will increase the service level, and decrease the probability of experiencing a stock-out at each .
Your task is to find the (Q,R) policy that essentially eliminates shortages (so you can hit the F9 key repeatedly, and not get a negative value in cell D12), while minimizing the average inventory level reported in cell E13.
Experiment with the (Q, R) parameters, and try to find the (Q, R) policy that minimizes the average inventory reported in cell E13, while producing essentially no inventory shortages (no negative values reported in cell D12 with repeated hits on the F9 key). Post your policy to the Lesson 9 Discussion, and explain why you think this policy eliminates shortages with minimum average inventory.
Notice, whether or not we would want to carry enough inventory to essentially eliminate shortages is a separate question here. What we are examining now is, assuming we wanted to essentially eliminate all shortages by carrying sufficient inventory, which type of inventory should it be? (Cycle stock or safety stock ?) Put another way, in a (Q, R) system, if I want to reduce the frequency of inventory shortage, what is the most efficient way to do so? Should I use a larger order quantity, or a large reorder point? How do you think this result would translate into the periodic review policy?
Respond to at least two classmates' postings. Check the course calendar for due dates.
Footnote:
*This simulation checks the inventory level at the end of each day, and orders if the inventory position (units on hand plus on order) is less than the reorder point R. Since we only check inventory levels at the end of the day, our inventory level could actually be well below R before an order is actually placed. This is actually a more typical mode of operation for an order point system. Once the inventory level falls below R, the subsequent time required to recognize the need for an order, and to prepare and actually send the order, should be considered part of the order lead time. So in effect our lead time, (including the time to get the order out), is slightly longer than 4 days, probably about 4.5 days if we consider the effective lead time to start the instant inventory drops below R.Attachments:
Reorder Point Simulation Post.xlsx (73K)
