Demand and Stores - Coursework Example

Therefore, the average daily demand during lead time is equal to L ? AVG. The safety stock is determined scientifically and is applied with the average daily demand during lead time to ensure that there is an adequate supply of inventory is in stores to prevent a loss of sale due to stock-out. The safety stock, which is the minimum level to which stock is expected to fall, is represented by the formula: z ? STD ? vL It is expected that inventory will fall to this minimum level just before the order for Q is received.

Immediately after the order for Q units is received the inventory will return to its maximum level but will be depleted over time based on the average daily demand (AVG). The reorder level depends on AVG which is reviewed continuously. When Q units are added to the safety stock the maximum inventory level is achieved. This inventory is depleted over time. Therefore, it is expected that the expected level of inventory before receiving the order is: z ? STD ? vL While the expected level of inventory immediately after receiving the order is: Q + z ? STD ? vL Solution to Question 2 The periodic review inventory replenishment policy requires that inventory be reviewed periodically at regular intervals and that an appropriate quantity is ordered so as to achieve the base stock level after each review.

This level of inventory should be sufficient to cover demand during the review period (r) and the lead time (L), in order to prevent stock out before the next order arrives. This implies that the base-stock level includes the average demand during the combined interval of r + L which is: (r + L) ? AVG as well as the safety stock which is calculated as: z ? STD ? v(r+ L) According to Simchi-Levi et al (2008), the maximum inventory level is reached immediately after receiving an order while the minimum level of inventory is reached just before receiving the order.

It is therefore very clear that the expected level of inventory after receiving an order is equal to: r ? AVG + z ? STD ? v(r+ L) while, the level of inventory immediately before order arrives is: z ? STD ? v(r+ L) which is the safety stock. Solution to Question 3 The target service level defines the percentage of orders received that must be filled. A good criterion that can be used is price. The five products that I sell in my department store are: shoes, clothes, appliances, furniture, and food items.

In order of target service level from lowest to highest they will be listed as follows: Furniture – more expensive than all other items, profit margin is low, volume is relatively low, demand variability and lead time is high. Appliances – less expensive than furniture but tend to be more expensive than all other items, profit margin is high compared to furniture, volume medium range, while both demand variability and lead time is relatively high Foot-wear – the profit margin is high, volume relatively high, demand variability is not as low as with clothes, and lead time is not as low as with clothes Clothes – the profit margin is high, volume relatively high, demand variability is also relatively low while lead time may not be as low as with food items.

Food items – they are cheaper than all other items; the profit margin tend to be low but turnover rate and volume is high, both demand variability and lead time is generally low. According to Simchi-Levi (2008) the service level is generally higher for products with high profit margin, high volume, low variability