Notes/Inventory Management Note (EBM026A05)

Aantekeningen / Notes
-
Inventory Management
(EBM026A05)
Lecturers: Semester 2B year 2022/2023
- dr. O.A. Kilic
- Gijs Bakker

Index
Lecture 1 – Introduction & Inventory management concepts ................................................................ 3
Course introduction............................................................................................................................. 3
Concepts .............................................................................................................................................. 4
Lecture 2 – Inventory models with deterministic demand & Economic order quantity model and
extensions................................................................................................................................................ 5
Deterministic Demand......................................................................................................................... 5
EOQ model .......................................................................................................................................... 6
EOQ model with backorders ............................................................................................................. 10
EOQ model with quantity discounts.................................................................................................. 11
EOQ model with lead time ................................................................................................................ 13
EPQ model (production) .................................................................................................................... 14
Lecture 3 – Dynamic LS Model and Extensions ..................................................................................... 15
DLS model .......................................................................................................................................... 15
EOQ-approximation........................................................................................................................... 16
Silver-meal heuristic .......................................................................................................................... 18
Mixed Integer programming Model (MIP) ........................................................................................ 19
Lecture 4 - Robust inventory management; Demand modelling; Forecasting ..................................... 20
Tutorial week 4 - Forecasting ............................................................................................................ 24
Lecture 5 – Inventory models with stochastic demands; Newsvendor model and extensions ............ 24
Inventory models with stochastic demand ....................................................................................... 24
Newsvendor model ........................................................................................................................... 26
Lecture 6 – Inventory Policies I; Basestock policy; Quality-based policies; Time-based policies;
Decision rules for setting policy parameters ......................................................................................... 30
Policies ............................................................................................................................................... 31
Base-stock policy ............................................................................................................................... 31
(s, Q) policy ........................................................................................................................................ 31
(T, S) policy ........................................................................................................................................ 32

, Performance evaluation with simulation .......................................................................................... 33
Lecture 7 – Inventory Policies II; Multi-item systems; Course overview .............................................. 33
Multi-item systems with stochastic demand .................................................................................... 33
Can-order policy ................................................................................................................................ 34
(T, s, S) policy ..................................................................................................................................... 34
Wrap-up............................................................................................................................................. 35

,Lecture 1 – Introduction & Inventory management concepts
Course introduction
Why Inventory Management? For businesses.
- Walmart in 2013 $3 billion loss
o Misplaced goods
- Target in 2015 $2 billion loss
o Stock-outs


Why Inventory
Management? For you.




Why Inventories?
- To meet demand (at minimum cost)
- Definition of inventory = basically stuff that you store somewhere.

Factors leading to inventories
- Economies of scale
o Procurement and transportation
- Uncertainty
o Demand, supply
- Capacity limitations in supply
o Production, seasonality

Fundamental decisions
- When should an order be placed?
- How much should be ordered?

Modelling inventories
Systems  Models  Policies  Decisions
System: is the simple description
Model: what goes on over time?
Policies: How to make the decisions to answer how and when place an order?
Decisions: use of models and policies
Plans are worthless, but planning is everything.
D. D. Eisenhower
Organization of the course
- Manual first!
- Let us know if there is anything that is not clear.

Course objectives:
1. Analyze inventory management practices
2. Apply inventory control models
3. Design procedures to improve inventory management in practice.

, Teaching
- Lectures
o Theoretical background, modelling and analyzing inventory systems
- Computer practical and tutorials
o Computational methods, problem-solving sessions
- Course booklet
o Exercises and worked solutions
- Computational tracks
o Programming with Python
o Spreadsheet with Excel

Assessment
- Individual assignment
o Refresher for modelling skills
- Group assignment
o Two subsequent parts
o System analysis, computational methods, policy design
- Exam
o Theoretical background
o Implementation and interpretation and on simple computations

Concepts
Modelling inventories
Systems  Models  Policies  Decisions

Inventory systems
- The context in which inventory decisions are made
- Can be quite specific (e.g. planning horizon, demand and supply characteristics, capacity
limitations, objectives)

Components of inventory systems
- Planning horizon
o One-off, finite, infinite
- Inventory review
o Periodic, continuous
- Demand
o Deterministic, stochastic, time-invariant, time-variant
- Lead time
o Instantaneous, non-instantaneous
- Capacity
o Limited supply / inventory

Components of inventory systems
- Service discipline
o Backorders, lost sales
- Service quality
o Ready rate (think of it time what inventory to delivery 90% of the times = time),
o fill rate (drop time, I satisfy 85% of the consumers, only 15% of consumers have to
wait = consumers).
- Costs
o Fixed ordering cost, procurement cost, holding and backlog costs