EOQ,types of inventory models,safety stock,ROL,ROP
Safety Stock It is the extra stock or buffer stock or minimum stock. This is kept to take care of
fluctuations in demand and lead time. If you maintain more safety stock, this helps in reducing the chances of being ³stock out´. But at the same time it increases the inventory carrying cost.
Usually in a business organization two things are uncertain Demand & Lead time
Need for inventory
Inventory is required for taking care of uncertainty in business, Ex raw material inventory required because of uncertainty of supply .i.e. .supplier is not prompt in supplying goods, Supply is also lesser than expected. Therefore to take care of these raw material supply uncertainty, you need raw material inventory.
Types of inventory:
1. Raw material inventory 2. Work in process inventory 3. Finished goods inventory 4. Supplies 5. Pipeline inventory 6. Buffer stock or Safety stock 7. Decoupling inventory 1,2,3,4 are the basic types of inventory where as others are named based on usage. Inventory models adopted by organizations depend upon the level of uncertainty with lead-time or demand.
The following table portrays the type of inventory model organizations has to be adopted against the lead-time and demand situations.
Table 2.6 Demand and lead time in different types of Model to be adopted
Situations 1 2 3 4
Demand Constant Constant Variable Variable
Lead time Constant Variable Constant Variable
Type of Model to be adopted Deterministic Model Probabilistic Model Probabilistic Model Probabilistic Model
Deterministic Model Unlike the probabilistic model the two parameters
TIME are constatnt as in case of EOQ model type discussed in EOQ problems
DEMAND & LEAD
PROBABILISTIC MODELS:In the previous section it is assumed that the lead time and
demand is constant. But in real life situations it is not so. The demand is always uncertain because it is difficult to exactly estimate the required quantity by the customer and the supplier is also usually not reliable. In the sense he doesn¶t supply in the specified time period. Considering this kind of situation the decision should be taken regarding the quantity of ordering, time at which the order to be placed, the time between the orders and how much inventory to be kept against the uncertainty of demand and lead time become cumbersome. To deal with the above scenarios the inventory model to be adopted is known as Probabilistic Inventory Model. The inventory models called probabilistic inventory model because the demand or lead-time or both are random variables. The probability distribution of demand and lead-time to be estimated. The inventory models answers for questions related to the decision raised above are called Probabilistic Inventory Model.
doc_930708457.docx
Safety Stock It is the extra stock or buffer stock or minimum stock. This is kept to take care of
fluctuations in demand and lead time. If you maintain more safety stock, this helps in reducing the chances of being ³stock out´. But at the same time it increases the inventory carrying cost.
Usually in a business organization two things are uncertain Demand & Lead time
Need for inventory
Inventory is required for taking care of uncertainty in business, Ex raw material inventory required because of uncertainty of supply .i.e. .supplier is not prompt in supplying goods, Supply is also lesser than expected. Therefore to take care of these raw material supply uncertainty, you need raw material inventory.
Types of inventory:
1. Raw material inventory 2. Work in process inventory 3. Finished goods inventory 4. Supplies 5. Pipeline inventory 6. Buffer stock or Safety stock 7. Decoupling inventory 1,2,3,4 are the basic types of inventory where as others are named based on usage. Inventory models adopted by organizations depend upon the level of uncertainty with lead-time or demand.
The following table portrays the type of inventory model organizations has to be adopted against the lead-time and demand situations.
Table 2.6 Demand and lead time in different types of Model to be adopted
Situations 1 2 3 4
Demand Constant Constant Variable Variable
Lead time Constant Variable Constant Variable
Type of Model to be adopted Deterministic Model Probabilistic Model Probabilistic Model Probabilistic Model
Deterministic Model Unlike the probabilistic model the two parameters
TIME are constatnt as in case of EOQ model type discussed in EOQ problems
DEMAND & LEAD
PROBABILISTIC MODELS:In the previous section it is assumed that the lead time and
demand is constant. But in real life situations it is not so. The demand is always uncertain because it is difficult to exactly estimate the required quantity by the customer and the supplier is also usually not reliable. In the sense he doesn¶t supply in the specified time period. Considering this kind of situation the decision should be taken regarding the quantity of ordering, time at which the order to be placed, the time between the orders and how much inventory to be kept against the uncertainty of demand and lead time become cumbersome. To deal with the above scenarios the inventory model to be adopted is known as Probabilistic Inventory Model. The inventory models called probabilistic inventory model because the demand or lead-time or both are random variables. The probability distribution of demand and lead-time to be estimated. The inventory models answers for questions related to the decision raised above are called Probabilistic Inventory Model.
doc_930708457.docx