Basestock Model

[Pages:39]Basestock Model

Chapter 13

These slides are based in part on slides that come with Cachon & Terwiesch book Matching Supply with Demand . If you want to use these in your course, you may have to adopt the book as a textbook

or obtain permission from the authors Cachon & Terwiesch. 1

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Learning Goals

Basestock policy:Inventory management when the leftover inventory is not salvaged but kept for the next season/period

Demand during lead time Inventory position vs. inventory level

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Medtronic's InSync pacemaker supply chain

Supply chain:

? 1 Distribution Center (DC) in Mounds View, MN. ? ~ 500 sales territories throughout the country.

? Consider Susan Magnotto's territory Madison, WI.

Objective:

? Because the gross margins are high, develop a system to minimize inventory investment while maintaining a very high service target, e.g., a 99.9% in-stock probability or a 99.9% fill rate.

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InSync demand and inventory, the DC Normal distribution

DC receives pacemakers with a delivery lead time of 3 weeks.

700

600

(Evaluations for weekly demand assume 4.33 weeks

per month and demand independence across weeks.)

500

Units Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

400

Average monthly demand (MD)= 349 units

300

Standard deviation of demand = 122.28

200

MD=W1D+W2D+W3D+W4D+0.33W5D

100

0

Month

DC shipments (columns) and end of month inventory (line)

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Average weekly demand = 349/4.33 = 80.6 Standard deviation of weekly demand =

122.38 / 4.33 58.81

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InSync demand and inventory, Susan's territory

Units Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

16 14 12 10

8 6 4 2 0

Month Susan's shipments (columns) and end of

month inventory (line)

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Total annual demand = 75 units Average daily demand = 0.29 units (75/260), assuming 5 days per week.

Poisson demand distribution better for slow moving items

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Order Up-To (=Basestock) Model

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Sequence of events: Timing in the basestock (=order up-to) model

Time is divided into periods of equal length, e.g., one hour, one month. During a period the following sequence of events occurs:

? A replenishment order can be submitted. ? Inventory is received. ? Random demand occurs.

Lead time l: Number of periods after which the order is received.

Recall the production planning example of LP notes.

An example with l = 1

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Newsvendor model vs. Order up-to model

Both models have uncertain future demand, but there are differences...

Inventory obsolescence

Number of replenishments

Demand occurs during replenishment

Newsvendor After one period

One No

Order up-to Never

Unlimited Yes

Newsvendor applies to short life cycle products with uncertain demand and the order up-to applies to long life cycle products with uncertain demand.

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