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BATCH 9
INVENTORY MODELS
Deterministic inventory models Probabilistic inventory models Deterministic inventory models : parameters like demand, ordering quantity costs are already known & there is no uncertainity Probabilistic inventory models : Here uncertain aspects are taken into account
Assumptions:
Demand (D) is at a constant rate Replacement of items is instantaneous (lead time is zero) The cost co-efficients are constant No shortage cost
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Single- and Multi- Period Models The classification applies to the probabilistic demand case In a single-period model, the items unsold at the end of the period is not carried over to the next period. The unsold items, however, may have some salvage values. In a multi-period model, all the items unsold at the end of one period are available in the next period. In the single-period model and in some of the multi-period models, there remains only one question to answer: how much to order?
SINGLE-PERIOD MODEL
EXAMPLES Computer & Mobiles that will be obsolete before the next order Perishable product Seasonal products such as bathing suits, winter coats, etc. Newspaper and magazine
Profit resulting from the items sold MP= Selling price - Purchase price Given costs of overestimating / underestimating demand and the probabilities of various demand sizes how many units will be ordered?
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Consider an order quantity Q Let P = probability of selling all the Q units = probability (demandQ) Then, (1-P) = probability of not selling all the Q units We continue to increase the order size so long as
P( MP) (1 P) ML ML or , P MP ML
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ML P MP ML
where P = probability (demandQ)
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Demand for cookies: Demand Probability of Demand 1,800 dozen 0.05 2,000 0.10 2,200 0.20 2,400 0.30 2,600 0.20 2,800 0.10 3,000 0,05 Selling price=$0.69, cost=$0.49, salvage value=$0.29 a. Construct a table showing the profits or losses for each possible quantity b. What is the optimal number of cookies to make?
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Prob Expected Revenue Revenue Total Cost Profit (Selling Number From From Revenue all the units) Sold Sold Unsold Items Items 1 1800 1242.0 0.0 1242 882 360 0.95 1990 1373.1 2.9 1376 980 396 0.85 2160 1490.4 11.6 1502 1078 424 0.65 2290 1580.1 31.9 1612 1176 436 0.35 2360 1628.4 69.6 1698 1274 424 0.15 2390 1649.1 118.9 1768 1372 396 0.05 2400 1656.0 174.0 1830 1470 360
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Example : The J&B Card Shop sells calendars. The once-a-year order for each years calendar arrives in September. The calendars cost $1.50 and J&B sells them for $3 each. At the end of July, J&B reduces the calendar price to $1 and can sell all the surplus calendars at this price. How many calendars should J&B order if the September-to-July demand can be approximated by b. normal distribution with = 500 and =120.
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ML P = 0.25 MP ML
Now, find the Q so that P = 0.25
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Example : A retail outlet sells a seasonal product for $10 per unit. The cost of the product is $8 per unit. All units not sold during the regular season are sold for half the retail price in an end-of-season clearance sale. Assume that the demand for the product is normally distributed with = 500 and = 100.
a. What is the recommended order quantity? b. What is the probability of a stockout? c. To keep customers happy and returning to the store later, the owner feels that
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Solution to Example : a. Selling price=$10, Purchase price=$8 Salvage value=10/2=$5 MP =10 - 8 = $2, ML = 8-10/2 = $3 Order maximum quantity, Q such that ML 3 P 0.6 ML MP 2 3 Now, find the Q so that P = 0.6 or, area (2)+area (3) = 0.6 or, area (2) = 0.6-0.5=0.10
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Find z for area = 0.10 from the standard normal table z = 0.25 for area = 0.0987, z = 0.26 for area = 0.1025 So, z = 0.255 (take -ve, as P = 0.6 >0.5) for area = 0.10 So, Q*=+z =500+(-0.255)(100)=474.5 units. b. P(stockout) = P(demandQ) = P = 0.6
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C. P(stockout)=Area(3)=0.15 From Appendix D, find z for Area (2) = 0.5-0.15=0.35 z = 1.03 for area = 0.3485 z = 1.04 for area = 0.3508 So, z = 1.035 for area = 0.35 So, Q*=+z =500+(1.035)(100)=603.5 units.
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MULTI-PERIOD MODELS
Outline
A fixed order quantity model A fixed time period model
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