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    Assumptions of The Model:: TC DC + D/Q S+Q/2 H Q (Opt) (2DS/H) Reorder Point, R DL

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    arnabpramanik
    This document discusses fixed order quantity inventory models and how to incorporate safety stocks. - Fixed order quantity models only allow ordering a specific amount of an item at a time to limit mistakes and costs. The fixed quantity is linked to an automatic reorder point. - The model assumes constant demand, lead times, prices, and costs. It uses an equation to relate total annual costs to purchase, ordering, and holding costs. - Safety stocks are needed because demand is not perfectly known. Safety stock protects against stockouts. The probability approach calculates the risk of stockouts based on the normal distribution of expected demand. - For the fixed order model with safety stock, the reorder point includes both average demand during lead time and

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    Assumptions of The Model:: TC DC + D/Q S+Q/2 H Q (Opt) (2DS/H) Reorder Point, R DL

    Uploaded by

    arnabpramanik
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    This document discusses fixed order quantity inventory models and how to incorporate safety stocks. - Fixed order quantity models only allow ordering a specific amount of an item at a time to limit mistakes and costs. The fixed quantity is linked to an automatic reorder point. - The model assumes constant demand, lead times, prices, and costs. It uses an equation to relate total annual costs to purchase, ordering, and holding costs. - Safety stocks are needed because demand is not perfectly known. Safety stock protects against stockouts. The probability approach calculates the risk of stockouts based on the normal distribution of expected demand. - For the fixed order model with safety stock, the reorder point includes both average demand during lead time and

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    This document discusses fixed order quantity inventory models and how to incorporate safety stocks. - Fixed order quantity models only allow ordering a specific amount of an item at a time to limit mistakes and costs. The fixed quantity is linked to an automatic reorder point. - The model assumes constant demand, lead times, prices, and costs. It uses an equation to relate total annual costs to purchase, ordering, and holding costs. - Safety stocks are needed because demand is not perfectly known. Safety stock protects against stockouts. The probability approach calculates the risk of stockouts based on the normal distribution of expected demand. - For the fixed order model with safety stock, the reorder point includes both average demand during lead time and

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    Download as pptx, pdf, or txt
    27 views2 pages

    Assumptions of The Model:: TC DC + D/Q S+Q/2 H Q (Opt) (2DS/H) Reorder Point, R DL

    Uploaded by

    arnabpramanik
    This document discusses fixed order quantity inventory models and how to incorporate safety stocks. - Fixed order quantity models only allow ordering a specific amount of an item at a time to limit mistakes and costs. The fixed quantity is linked to an automatic reorder point. - The model assumes constant demand, lead times, prices, and costs. It uses an equation to relate total annual costs to purchase, ordering, and holding costs. - Safety stocks are needed because demand is not perfectly known. Safety stock protects against stockouts. The probability approach calculates the risk of stockouts based on the normal distribution of expected demand. - For the fixed order model with safety stock, the reorder point includes both average demand during lead time and

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    of 2

    Fixed Order Quantity Models

    A method that only allows for a specific amount of a given item to be ordered at one time.
    This type of rule helps to limit reorder mistakes, conserve storage space, and prevent
    unnecessary expenditures that would tie up funds that could be better utilized elsewhere
    The fixed order quantity may be linked to an automatic reorder point where a specific
    quantity of a product is ordered when stock on hand reaches a predetermined level.

    Assumptions of the model:


    Demand for the product is constant & uniform
    throughout
    Lead time is constant
    Price per unit is constant
    Inventory holding cost is based on average
    inventory
    Ordering or set up costs are constant
    All demands for the product will be satisfied
    For inventory model, a functional relationship between
    variables of interest and costs could be showed by the
    equation:
    Total annual cost = Annual Purchase Cost + Annual
    Ordering cost + Annual Holding Cost

    TC=DC + D/Q*S+Q/2*H
    From this optimal order quantity would be :

    Q(opt)= (2DS/H)
    Reorder Point, R=dL

    Safety Locks

    Previous model assumed demand was constant and known


    However, in reality there must be a safety stock to protect against stock outs
    Safety stock is defined as the amount of inventory carried in addition to expected demand
    One approach to determine safety stock is the probability approach

    Probability approach to safety lock


    It is assumed that demand for a product is normally distributed with a mean and standard
    deviation
    This approach calculates the probability of running out of stock and not how many units
    short
    To determine the probability of stocking out we can simply plot a normal distribution for the
    expectedOrder
    demandquantity
    and note where
    the amount
    have on
    hand lies on the curve
    Fixed
    model
    with we
    safety
    lock
    A fixed order system constantly monitors the inventory and places a new order when the
    stock reaches a certain level
    The danger of stock out only is during the lead times
    The amount of safety stock depends on the service level desired
    the key difference between the previous model and this is the reorder point

    R= dL + z Safety stock
    R= reorder point
    D= average daily demand
    L=Lead time in days
    Z= no of standard deviations for a specified
    service levels
    = standard deviation during lead time

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