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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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