Periodic Inventory Systems

• Inventory level (on hand) is counted at specific time intervals

• An order placed that brings inventory up to a specified level
• Less costly to track of inventory level
• Requires a new order quantity each time an order is placed
• Used in smaller retail stores, drugstores, grocery stores and
offices
Periodic Review Order Quantity
 Assumptions
 Inventory position is reviewed at constant intervals.
 Demand during review period plus lead time period is
normally distributed with mean µ and standard
deviation .
 Service level is defined in terms of the probability of
no stockouts during a review period plus lead time
period and is reflected in z.
 On-hand inventory at ordering time: H

 Shortages are not backordered.

 Lead time is less than the review period length.

Order Quantity for Variable Demand

• For normally distributed variable daily demand:

Q  d (tb  L)  Z d tb  L  I

where:
d  average demand rate
tb  the fixed time between orders
L  lead time
 d  standard deviation of demand
Z d tb  L  safety stock
I  inventory in stock
Order Quantity for Variable Demand Example

• Corner Drug Store with periodic inventory system.

• Order size to maintain 95% service level:

d  6 bottles per day

 d  1.2 bottles
tb  60 days
L  5 days
I  8 bottles
Z  1.65 for 95% service level
Q  d (tb  L)  Z d tb  L  I
 (6)(60  5)  (1.65)(1.2) 60  5 8
 398 bottles
Example: Ace Brush
 Joe Walsh is a salesman for the Ace Brush Company.
Every three weeks he contacts Dollar Department Store
so that they may place an order to replenish their stock.
Weekly demand for Ace brushes at Dollar
approximately follows a normal distribution with a
mean of 60 brushes and a standard deviation of 9
brushes.
 Once Joe submits an order, the lead time until Dollar
receives the brushes is one week. Dollar would like at
most a 2% chance of running out of stock during any
replenishment period. If Dollar has 75 brushes in stock
when Joe contacts them, how many should they order?
Example: Ace Brush
 The review period plus the lead time totals 4 weeks
 This is the amount of time that will elapse before the next
shipment of brushes will arrive
 Weekly demand is normally distributed with:
Mean weekly demand, µ = 60
Weekly standard deviation,  = 9
Weekly variance,  2 = 81
 Demand for 4 weeks is normally distributed with:
Mean demand over 4 weeks, µ = 4 x 60 = 240
Variance of demand over 4 weeks,  2 = 4 x 81= 324
Standard deviation over 4 weeks,  = (324)1/2 = 18
Single-Period Order Quantity
 A single-period order quantity model
(sometimes called the newsboy problem) deals
with a situation in which only one order is
placed for the item and the demand is
probabilistic.
 If the period's demand exceeds the order
quantity, the demand is not backordered and
revenue (profit) will be lost.
 If demand is less than the order quantity, the
surplus stock is sold at the end of the period
(usually for less than the original purchase
price).
Single-Period Order Quantity
 Assumptions
 Period demand follows a known probability
distribution:
 normal: mean is µ, standard deviation is 
 uniform: minimum is a, maximum is b

 Cost of overestimating demand: $co

 Cost of underestimating demand: $cu

 Shortages are not backordered.

 Period-end stock is sold for salvage (not held in

inventory).
Single-Period Order Quantity
 Formulas
Optimal probability of no shortage:
P(demand < Q *) = cu/(cu+co)
Optimal probability of shortage:
P(demand > Q *) = 1 - cu/(cu+co)
Optimal order quantity, based on demand distribution:
normal: Q * = µ + z

uniform: Q * = a + P(demand < Q *)(b-a)

 Example: McHardee Fashion
 McHardee Fashion produces a jacket and wishes to
determine how many units to manufacture. There
is a fixed cost of $5,000 to produce the item and the
incremental profit per unit is $0.45. Any unsold
items can be sold at salvage at a $.55 loss. Sales for
this item are estimated to be normally distributed.
The most likely sales volume is 12,000 units and
they believe there is a 5% chance that sales will
exceed 20,000. How many units should be printed?
 Solution
 µ = 12,000
 To find , note that z = 1.65 corresponds to a 5% tail
probability
 Therefore, (20,000 - 12,000) = 1.65 or  = 4848
 Co=.55 and Cu=.45, (Cu/(Cu+Co))=.45/(.45+.55)=.45
 Find Q * such that P(D < Q *) = .45.
 The probability of 0.45 corresponds to z = -.12. Thus,
Q * = 12,000 - .12(4848) = 11,418 Jackets
 Solution-Cont.
 If any unsold copies can be sold at salvage at a $.65
loss, how many units should be produced?
 Co=.65, (Cu/(Cu+Co))=.45/(.45+.65) = .4091
 Find Q * such that P(D < Q *) = .4091. z = -.23 gives
this probability.
 Thus, Q * = 12,000 - .23(4848) = 10,885 units
 However, since this is less than the breakeven volume
of 11,111 jackets (= 5000/.45), no item should be
produced because if the company produced only
10,885 units it will not recoup its $5,000 fixed cost.
Multi Inventory Control Models with Constraints

 Selective Inventory Control: Concept of Selective

Inventory Control,
 ABC analysis, VED analysis, HML analysis, SDE
analysis, SOS analysis, FSN analysis, GOLF analysis.
 Safety Stock Evaluation and ways to minimize lead
time,
 Different types of replenishment systems like Fixed
order quantity system, Fixed order interval system,
Combination of fixed order interval and quantity
system, Two Bin System.
 Total warehouse space, total investment in
inventories, total number of orders to be placed per
year for all items.
 Selective Inventory Control
 Concept of Selective Inventory Control,
 Determine the importance of items
 To identify items, which bring significant benefit by
proper management

 Concept of SKU
 Selective Inventory Control Techniques

 ABC Analysis
 HML Analysis
 Movement Analysis (FSN Analysis)
 Criticality criteria (VED Analysis)
 GOLF
 SDE
 SOS
 XYZ Analysis
 MUSIC – 3D (Multi-Unit Selective Inventory Control
– Three Dimensional)
ABC Analysis
Identify A, B and C class items

Usage as a
Item Annual Total cost
Unit cost % of total
number demand per year
usage
101 5 48,000 240,000 32,5%
102 11 2,000 22,000 3%
103 15 300 4,500 0,6%
104 8 800 6,400 0,9%
105 7 4,800 33,600 4,6%
106 16 1,200 19,200 2,6%
107 20 18,000 360,000 48,8%
108 4 300 1,200 0,2%
109 9 5,000 45,000 6,1%
110 12 500 6,000 0,8%
Total usage 737,900 100%
Sorting
Arrange in descending order of AUV

Item Cumulative Unit Annual Total cost per Usage as a % Cumulative % of

number % of items cost demand year of total usage total

107 10% 20 18,000 360,000 48,8% 48,8%

101 20% 5 48,000 240,000 32,5% 81,3%

109 30% 9 5,000 45,000 6,1% 87,4%

105 40% 7 4,800 33,600 4,6% 92%

102 50% 11 2,000 22,000 3,0% 94,9%

106 60% 16 1,200 19,200 2,6% 97,5%

104 70% 8 800 6,400 0,9% 98,4%

110 80% 12 500 6,000 0,8% 99,2%

103 90% 15 300 4,500 0,6% 99,8%

108 100% 4 300 1,200 0,2% 100%

Total usage 737,900 100%

 Final Answer

Percentage of Percentage
Cathegory Items Action
items usage (%)

Class A 107, 101 20% 81.6% Close control

Regular
Class B 109, 105, 102, 106 40% 16.2%
review

Infrequent
Class C 104, 110, 103, 108 40% 2.5%
review
 Final Answer

Category Action

A Class A 1 Infrequent review

B Class B 2 Close control

C Class C 3 Regular review

Example
 Replenishment systems and Review
Mechanism
Fixed Order Quantity System
Fixed Order Quantity System
Fixed Order Interval System
Fixed Order Interval System
2 Bin System
2 Bin Design & Orientation

Part-1 Part-1

Part-2 Part-2

Part-3 Part-3
 2 Bin Design & Orientation

Part-1

Part-1