Best Practice in Inventory Management Chapter 8 Setting

Best Practice in Inventory Management Chapter 8 Setting the right stock levels Dr Tony Wild

Figure 8. 1 Inventory Level Order Supply Order Delivery Lead time Quantity In Stock Delivery Use Quantities Review Level Safety Stock Time Stock should consist of two basic parts: Delivery quantity stock, because stock is provided in bulk Safety stock to cope with excess short term demand (or supply failure) Best Practice in Inventory Management

Figure 8. 2 Items with average demand of 31 Average Best Practice in Inventory Management

Figure 8. 3 Review Levels Item Safety stock Review Level T 15 19. 7 112. 7 T 26 94. 2 187. 2 T 73 56. 3 149. 3 For LT 3 weeks & Availability 90% Best Practice in Inventory Management

Figure 8. 4 Varying the Conditions Item T 15 T 15 T 26 T 26 T 37 T 37 Supply Lead time (weeks) 2 2 2 4 4 4 Availability % 90 95 99 90 95 99 Safety Stock Review level 16. 07 20. 68 29. 22 22. 72 29. 25 41. 32 76. 93 99. 05 139. 92 108. 80 140. 08 197. 88 45. 25 58. 27 82. 31 64. 00 82. 40 116. 40 78. 07 82. 68 91. 22 146. 72 153. 25 165. 32 138. 93 161. 05 201. 92 232. 80 264. 08 321. 88 107. 25 120. 27 144. 31 188. 00 206. 40 240. 40

Figure 8. 5 A Safety Stock and Delivery Frequency 99% Availability 4, 5 4 Customer Service Factor in MADs 3, 5 3 2, 5 4 week LT 2 2 Weeks LT 1, 5 8 Weeks LT 1 0, 5 0 0 5 10 15 20 25 Delivery Interval in Weeks Best Practice in Inventory Management 30

Figure 8. 6 Effect of Supply batch size on Availability Best Practice in Inventory Management

Figure 8. 7 Safety stock correction for delivery quantity Multiply safety stock by 160% 140% 120% 99% Availability 100% 80% 95% Availability 60% 40% 20% 0% 0, 00 5, 00 10, 00 Ratio of Delivery frequency to lead time 15, 00 Best Practice in Inventory Management

Figure 8. 8 Periodic Review Level Review Cycle Stock level (units) Review Cycle 2000 Review Cycle Pre-determined stock level 1500 Target Stock Level 800* 1300* 1000 Stock level 500 * leadtime 0 1 2 3 leadtime 4 5 Time (weeks) leadtime 6 7 New stock is ordered at fixed points in time. Best Practice in Inventory Management Delivery 8 Quantity

Key Points • Calculate review level • Expedite • Forecast and don’t worry about supply lead times • Supplier Delivery patterns are key • MAD calculates safety stock • Co-ordinating supply using target stock levels Best Practice in Inventory Management