Inventory Control 2 Notes

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Lecture 17: Inventory (Stock) Control 2

Summary

Stochastic Demand
• Given stochastic (probabilistic) demand, there is always the possibility of demand
exceeding the amount in stock
○ ∴ customers will be delayed in the supply of their goods
○ ∴ stock control policy will be affected by stockouts
• Sometimes the cost of a stockout can be found in cash terms
○ Cost equation can be formed and minimised
• Other times, a 'service' level to customers is decided on
○ The inventory policy is then determined to meet this level
• We can choose between:
a. Continuous review policy (fixed order quantity)
b. Periodic review policy (variable order quantity)

Periodic Review: Instant Delivery
• Stock is inspected at regular intervals of time T
• Decision to restock is made at T
• Any order is supplied instantly
• Sufficient stock must be held after replenishment to cater for predicted demand until
the next reorder period
• A reasonable policy is to replenish the stock to some fixed level L every T units of time

• T = the reorder period
○ Time between inspections of stock
• R = shortage cost per unit stocked out
○ Independent of time
○ No backlogging
• C = order cost
○ Independent of order size
• B = stockholding cost per unit per unit time
○ Based on average stock level
• = prob (j units demanded in T)
• Average Stock Level = Half the opening stock + Half the average closing stock during T

• Probability of a stock out =
• Expected number of units stocked out =
• Expected stock level just before an order comes in =
• Expected difference between supply and demand =

Graph demonstrating the pattern of stock level over time

Course Notes Page 46

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