Equations for Inventory Management

Chapter 1 Stocks and inventories

Empirical observation for the amount of stock held in a number of locations:
AS(N
2
) = AS(N
1
)
_
N
2
N
1
where:
N
2
= number of planned future facilities
N
1
= number of existing facilities
AS(N
i
) = aggregate stock with N
i
facilities
Chapter 3 Economic order quantity
The variables used here, and throughout the book, are:
Q = order quantity Qo = optimal order quantity
D = demand
UC = unit cost
RC = reorder cost
HC = holding cost
T = cycle length To = optimal cycle length
VC = variable cost per unit time VCo = optimal variable cost per unit time
TC = total cost per unit time TCo = optimal total cost per unit time
ROL = reorder level
LT = lead time
Economic order quantity:
Qo =
_
2 RC D
HC
Optimal stock cycle length:
To = Qo/D =
_
2 RC
DHC
230 Equations for Inventory Management
Variable cost per unit time:
VC =
RC D
Q
+
HC Q
2
Optimal value of variable cost per unit time:
VCo = HC Qo =
2 RC D
Qo
=

2 RC HC D
Total cost per unit time:
TC = UC D+VC
Optimal cost per unit time:
TCo = UC D+VCo
Change of variable cost moving away from the EOQ:
VC
VCo
=
1
2

_
Qo
Q
+
Q
Qo
_
Reorder level:
Reorder level = lead time demand stock on order
ROL = LT Dn Qo
Chapter 4 Models for known demand
Model for nite replenishment rate, P
Optimal order quantity:
Qo =
_
2 RC D
HC

_
P
P D
Optimal time cycle time:
To =
_
2 RC
HC D

_
P
P D
Optimal variable cost:
VCo =

2 RC HC D
_
P D
P
Optimal total cost:
TCo = UC D+VCo
Equations for Inventory Management 231
Model for planned shortages and backorders
SC = shortage cost per unit per unit time
Optimal order quantity:
Qo =
_
2 RC D(HC +SC)
HC SC
Optimal amount to be backordered:
So =
_
2 RC HC D
SC (HC +SC)
Time during which demand is met:
T
1
= (Qo So)/D
Time during which demand is backordered:
T
2
= So/D
Cycle time;
T = T
1
+T
2
Model for shortages with lost orders
R = revenue
Z = proportion of demand met
Cost of each unit of lost sales including loss of prots:
LC = DC +SP UC
Optimal revenue:
Ro = Z [DLC

2 RC HC D]
Model for constraints on space
AC = additional cost related to the storage area (or volume)
used by each unit of the item.
S
i
= amount of space occupied by one unit of item i.
The total holding cost per unit per unit time:
HC +AC S
i
232 Equations for Inventory Management
Optimal order quantities:
Q
i
=
_
2 RC
i
D
i
HC
i
+AC S
i
Model for constraint on investment
UL = upper limit on the total average investment
Optimal order quantities:
Q
i
= Qo
i

2 UL HC
UC
N

i=1
VCo
i
Model for discrete variable demand
Test for the point where it is more expensive to order for N+1 periods than to
order for N periods:
N(N+1) D
N+1
>
2 RC
HC
Conrming that it is more expensive to order for N+2 periods than to order
for N periods:
N(N+2) [D
N+1
+D
N+2
] >
4 RC
HC
Variable cost per period:
VC
N
=
RC
N
+
HC
N

i=1
D
i
2
Chapter 5 Models for uncertain demand
Model for the newsboy problem
SP = selling price
SV = scrap value
Test for the optimal order size:
Prob(D Qo) >
UC SV
SP SV
> Prob(D Qo +1)
Expected prot with buying Q units:
EP(Q) = SP
_
_
Q

D=0
DProb(D) +Q

D=Q+1
Prob(D)
_
_
QUC
Equations for Inventory Management 233
Model for discrete demand with shortages
A = Actual stock level
Test for the optimal stock level:
Prob(D Ao)
SC
HC +SC
Prob(D Ao 1)
Approach to intermittent demand
Service level = 1 Prob(shortage)
= 1 [Prob(there is a demand) Prob(demand > A)]
Joint calculation of order quantity and reorder level with shortages
Calculation for order quantity:
Q =

_
2 D
HC

_
RC +SC

D=ROL
(DROL) Prob(D)
_
Calculation for reorder level:
HC Q
SC D
=

D=ROL
Prob(D)
Model for order quantity with shortages
Order quantity:
Q =

_
2 D
HC

_
RC +SC

D=ROL
(DROL) Prob(D)
_
Model for uncertain lead time demand
Safety stock:
SS = Z standard deviation of lead time = Z

LT
Reorder level:
ROL = lead time demand +safety stock = LT D+Z

LT
Model for service level with uncertain lead time
Service level = Prob (LT D < ROL) = Prob(LT < ROL/D)
234 Equations for Inventory Management
Model for periodic review method
Target stock level:
TSL = D(T +LT) +Z

(T +LT)
Chapter 6 Sources of information
Accounting information
Cost of products sold = opening stock +net purchases closing stock
Value of stock = number of units in stock unit value
Average cost =
Total cost of units
Number of units bought
Closing stock = opening stock +purchases sales
Gross prot = sales revenue cost of units sold
Chapter 7 Forecasting demand
Value of demand in a time series
Actual demand = underlying pattern +random noise
Linear relationship
dependent variable = a +b independent variable
y = a +bx
x = value of the independent variable
y = value of the dependent variable
a = intercept, where the line crosses the y axis
b = gradient of the line.
Equations for linear regression:
b =
n

(x y)

y
n

x
2

x
_
2
a =

y
n
b

x
n
coefcient of determination = (coefcient of correlation)
2
Equations for Inventory Management 235
Multiple regression
y = a +b
1
variable 1 +b
2
variable 2 +b
3
variable 3 +b
4
variable 4 . . . .
Exponential smoothing
New Forecast = latest demand +(1 ) previous forecast
is the smoothing constant (usually between 0.1 and 0.2)
Tracking signal =
sum of forecast errors
mean absolute deviation
Seasonal index =
seasonal value
deseasonalized value
Demand = (underlying value +trend) seasonal index +noise
Chapter 8 Planning and stocks
Stock and planning
Stock at end Stock at Production Demand Backorders Backorders of this =
end of last +during met during from earlier +met in later period period
this period this period periods periods
Chapter 9 Material requirements planning
Basic calculation
Gross requirements = number of units made amount of material
for each unit
Net requirements = gross requirements current stock stock on order
Batching rule to nd N
N(N+1) D
N+1
>
2 RC
HC
Where:
N= the period number in a cycle
D
N+1
= demand in period N+1 of a cycle
236 Equations for Inventory Management
Chapter 10 Just-in-time
Number of kanbans to maintain smooth operations
Number of kanbans =
demand in the cycle
size of each container
K =
D(TP +TD)
C
Where:
C = number of units held in each container
TP = time container spends in production part of a cycle (waiting,
being lled and moving to the store of work in progress)
TD = time container spends in demand part of a cycle (waiting,
being emptied and moving to the store of work in progress).
Totalcyclelength = TP +TD
Number of kanbans with safety factor
SF = safety factor (generally less than 0.1)
K <
D(TP +TD) (1 +SF)
C
Maximum stock of work in progress
Maximum stock level = K C = D(TP +TD) (1 +SF)