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Risk Pooling
Introduction
General Motors in 1984:
Operational
Need
Inventory
retailers
WIP
raw materials
finished goods
Functions of Inventory
To meet
anticipated demand
To smooth
production requirements
To decouple
To protect
operations
against stock-outs
To take
To help
To take
Lead Time
os
C
l
Tota
ts
250
C
or
200
ng
i
y
rr
sts
o
C
50
0
1000
2000
3000
4000
5000
6000
Demand forecast
The marketing department uses historical data from the last
five years, current economic conditions, and other factors to
construct a probabilistic forecast of the demand.
Swimsuit Costs
One:
Scenario
Two:
Will
So
decisions.
A frequency
Probability of Outcomes
Initial Inventory
Suppose
The case motivates a powerful (s,S) inventory policy (or a min max
policy): s is the reorder point and S is the order-up-to-level
Multi-Order Opportunities
under Uncertainties
Inventory Policies
Continuous
review policy
Reorder
point, R
LT
LT
Time
Result of
uncertainty
Inventory level
Q
Reorder
point, R
Safety Stock
LT
LT
Time
ph
Safety stock is
z STD
L AVG z STD L
2 K AVG
Q
h
z STD
Q z STD L
(highest level)
Q
z STD
2
rL
r AVG z STD r L
z STD r L
z STD r L
RISK POOLING
Risk Pooling
Market One
Warehouse Two
Market Two
Supplier
Market One
Supplier
Warehouse
Market Two
Questions:
Q1: For the same service level, which system will require more inventory?
Q2: For the same total inventory level, which system will have better service?
Supplier
Supplier
Retail DC
Capacity Pooling
3 Links no flexibility
Capacity Pooling
Advantages / Disadvantages
Location Pooling
Advantages
Disadvantages
Product Pooling
Capacity Pooling
Example
Q/2+SS
AVG STD
SS
Orderup-to Level
Average
Inventory
Warehouse 1 39.3
13.2
25.08
65
132
197
91
Warehouse 2 38.6
12.0
22.8
62
131
193
88
Centralized
Warehouse
20.7
39.35 118
186
304
132
77.9
Service Level:97%
k=1.88
Warehouse 1
Warehouse 2
Market 1
Market 2
Market 1
Warehouse
Market 2
D2: (2, )
2
2
Conclusions:
Conclusions:
1.1.Stdev
Stdevofofaggregated
aggregateddemand
demandisis
less
lessthan
thanthe
thesum
sumofofstdev
stdevofofindividual
individual
demands
demands
2.2.IfIfdemands
demandsare
areindependent
independentoror
negatively
negativelycorrelated,
correlated, the
thestd
stdofof
aggregated
aggregateddemand
demandisismuch
muchless
less
As (safety) stock is based on standard deviation
Square Root Law: stock for combined demands
usually less than the combined stocks
22
where-1
-111
where
D1+D2: (, 2)
= 1 + 2
= ??
21
2
1+
1+
2
1. If D1, D2 positively correlated, > 0
2. If D1, D2 are independent, = 0
3. If D1, D2 negatively correlated, < 0
1+2
12 22
-1
N.C.
Ind.
P.C.
Risk Pooling
Effect of Coefficient of Variation
Decentralized
Case Study
PART 2
CHARLESTON ($7)
14
8
14
PART 5
CHICAGO ($155)
45
5
45
PART 6
CHARLESTON ($2)
32
32
PART 7
CHARLESTON ($30)
PART 3
AUSTIN ($2)
14
14
PART 4
BALTIMORE ($220)
PART 1
DALLAS ($260)
15
55
14
14
14
8
14
PART 5
CHICAGO ($155)
45
5
45
PART 6
CHARLESTON ($2)
32
32
PART 7
CHARLESTON ($30)
PART 3
AUSTIN ($2)
14
14
PART 4
BALTIMORE ($220)
7
55
14
14
Produce
to order
Long CST to customer
No inventory held in system
PART 1
DALLAS ($260)
15
77
14
8
14
PART 5
CHICAGO ($155)
45
5
45
PART 6
CHARLESTON ($2)
32
32
PART 7
CHARLESTON ($30)
PART 3
AUSTIN ($2)
14
14
PART 4
BALTIMORE ($220)
PART 1
DALLAS ($260)
15
55
14
14
Produce
to forecast
Zero CST to customer
Hold lots of finished goods inventory
7
8
14
PART 5
CHICAGO ($155)
45
5
45
PART 6
CHARLESTON ($2)
32
32
PART 7
CHARLESTON ($30)
8
14
PART 3
AUSTIN ($2)
14
PART 4
BALTIMORE ($220)
PART 1
DALLAS ($260)
30
15
push/pull boundary
14
Part
$14,000
$12,000
Push-Pull System
$10,000
$8,000
$6,000
$4,000
Pull System
$2,000
$0
0
10
20
30
40
50
60
70
80
Supplier
Warehouse
echelon lead
time
Warehouse
Retailers
Warehouse
echelon
inventory
s L AVG z STD L
where Le = echelon lead time, defined as the lead time between the
retailers and the warehouse plus the lead time between the
warehouse and its supplier
AVG = average demand across all retailers (i.e., the
average of the aggregate demand)
STD = standard deviation of (aggregate) demand across
all retailers
Forecasting
Recall
methods
Market research methods
Time Series methods
Causal methods
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