Inv Mgmt Probabilistic Demand

Inventory Management

Probabilistic Demand

Chris Caplice ESD.260/15.770/1.260 Logistics Systems Oct 2006

Assumptions: Probabilistic Demand

Demand Lead time

Constant vs Variable Known vs Random Continuous vs Discrete Instantaneous Constant or Variable (deterministic/stochastic) Independent Correlated Indentured Continuous Periodic One Multi (>1)

Discounts

Excess Demand

None All Units or Incremental None All orders are backordered All orders are lost Substitution None Uniform with time Single Period Finite Period Infinite One Many

Dependence of items

Perishability

Review Time

Planning Horizon

Number of Echelons Capacity / Resources

Number of Items Form of Product

2

Unlimited Limited / Constrained

Single Stage Multi-Stage

© Chris Caplice, MIT

MIT Center for Transportation & Logistics – ESD.260

Key Questions

What are the questions I should ask to determine the type of inventory control system to use?

How important is the item? Should review be periodic or continuous? What form of inventory policy should I use? What cost or service objectives should I set?

MIT Center for Transportation & Logistics – ESD.260

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© Chris Caplice, MIT

How important is the item?

Standard ABC analysis

A Items

Very few high impact items are included Require the most managerial attention and review Expect many exceptions to be made Many moderate impact items (sometimes most) Automated control w/ management by exception Rules can be used for A (but usually too many exceptions) Many if not most of the items that make up minor impact Control systems should be as simple as possible Reduce wasted management time and attention Group into common regions, suppliers, end users

B Items

C Items

But – these are arbitrary classifications

MIT Center for Transportation & Logistics – ESD.260

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© Chris Caplice, MIT

Continuous or Periodic Review?

Periodic Review

Know stock level only at certain times Review periods are usually scheduled and consistent Ordering occurs at review...