Continuous Review Systems in Inventory Management Talia Gruber Marriott School November 2011
Dec 22, 2015
Continuous Review Systems in Inventory Management
Talia GruberMarriott SchoolNovember 2011
Agenda
• Continuous review systems defined
• Inventory positions and reorder points
• Reorder points with constant demand and lead time
• Reorder points with variable demand and constant lead time
• Reorder points with variable demand and lead time
• Two-Bin System
What are Continuous Review Systems?
• Systems that determine whether it is time to reorder a product by tracking the remaining inventory levels of the product each time a withdrawal is made.
Alternate Names• The Continuous Review System may also be called:
– Reorder Point (ROP) System
– Fixed Order-quantity System
– Quantity and Reorder Point (QR) System
– Q System
Inventory Position
Inventory Position (IP) measures the level of the current product’s ability to fulfill future orders.
IP = OH + SR - BO
Reorder Point
A predetermined minimum level that triggers the order of a fixed quantity of the product.
Selecting the Reorder Point with Constant Demand and Lead Time
On-hand
Inventory
Time
Order
Received
Order Placed
Inventory Position
R
L L L
Practice Problem with Constant Demand and Lead Time
Demand for water bottles from a particular concession stand is always 30 per day and the lead time is always 2 days. The on hand inventory is currently 15 bottles, and there is is an incoming order of 50 water bottles. If there are currently no backorders, what is the inventory position? Should a new order be placed?
Solution
R = Total demand during lead time = 30*2 = 60 bottles
IP = OH + SR – BO
= 15 + 50 – 0 = 65 bottles
65 > 60 so a new order is NOT needed
Selecting Reorder Point with Variable Demand and Constant
Lead Time• Demand is not usually constant and
predictable
• To guard against stock-outs, reorders that include safety stock should be selected
Reorder Point = Avg. demand during lead time + Safety stock
Selecting Reorder Point with Variable Demand and Constant
Lead Time
On-hand
Inventory
TimeOrder Placed
Inventory Position
R
Order Received
Selecting Reorder Point with Variable Demand and Constant
Lead Time
Three steps to selecting a reorder point:
1. Choose an appropriate service-level policy
2. Determine the demand during lead time probability distribution
3. Determine the safety stock and reorder point levels
Step 1: Service Level Policy
Service Level: The desired probability of not running out of stock during an order cycle
An 80% service cycle = An 80% chance that the stock will not run out during the lead time.
Step 2: Demand During Lead Time Distribution
• In order to calculate the specific safety stock level, you must determine the demand during lead time distribution by knowing the:– Mean– Standard Deviation
Step 2 Continued• Determine the demand during the lead time
distribution by making the following assumptions:– Average demand is known– Standard deviation of demand is known– Probability distributions of demand are
independent and identical over each time period.
Step 2 Formulas
Average demand during lead time:
d + d + d + … = dL
Variance of demand during lead time:
σ2d+ σ2
d + σ2d + … = σ2
dL
Standard deviation of demand during lead time:
σdLT = √( σ2dL) = σd√ (L)
Step 2 Calculations
+ + =
Demand week 1 Demand week 2 Demand week 3 Demand for 3-week
lead time
σd = 10 σd = 10 σd = 10
50 50 50 150
σdLT = 17.32
Step 3: Safety Stock and Reorder Point
Average
demand
during lead
time
50%
Service Level = 50% Service Level = 90%
Average
demand
during lead
time
90%
=
Step 3 Continued: Formulas
Safety Stock = zσdLT
Z = The number of standard deviations needed to achieve the service level
σdLT = Standard deviation of demand during lead time
Reorder Point = dL + safety stock
Practice Problem with Variable Demand and Constant Lead Time
The average weekly demand for water bottles from a particular concession stand is 80 bottles per week, and the constant lead time is 3 weeks. There is a standard deviation of 10 bottles. If a 95% service level is desired, what would the safety stock and reorder point be?
Solutiond = 80 bottles
σd = 10 bottles
L = 3 weeks
σdLT = σd√ (L) = 10√(3) = 17.32
z = 1.64
Safety stock = zσdLT = (1.64)(17.32) = 28.40 or 28 bottles
Reorder Point = dL + safety stock = (80)(3) + 28 = 268 bottles
Selecting Reorder Point with Variable Demand and Lead Time
Two assumptions:
– Demand and lead time are measured in the same time units (i.e. days, weeks, etc.)
– Demand and lead time are independent of one another
Formulas for Variable Demand and Variable Lead Time
Safety stock = zσdLT
R = (Avg. weekly demand x Avg. lead time in weeks) + safety stock
= dL + safety stock
Practice Problem with Variable Demand and Lead Time
The average weekly demand for water bottles from a particular concession stand is 50 bottles per week, with a standard deviation of 10 bottles. The average lead time is 2 weeks, with a standard deviation of 1 week. If an 80% service level is desired, what would the reorder point be?
Solutiond = 50 bottles
σd = 10 bottles
L = 2 weeks
σLT = 1 week
σdLT = √(Lσ2d + d2σ2
LT) = √[(2)(10)2 + (50)2(1)2] = 51.96 bottles
z = 0.84
Safety stock = zσdLT = (0.84)(51.96) = 43.64 or 44 bottles
Reorder point = dL + safety stock = (50)(2) + 44 =144 bottles
Two-Bin System
The two-bin system is a type of continuous review visual system, used to help employees keep track of inventory levels without maintaining formal written records of the inventory’s current position.
How it Works
Divide inventory between bin 1 and bin 2
Bin 1: Use all the inventory in bin 1 first.
Bin 2: Once the inventory in bin 1 runs out, place a new order and then begin using the inventory in bin 2 until the new order arrives.
Summary• Continuous review systems assist management by
informing them when new inventory needs to be ordered and how much inventory to order.
• Reorder points and safety stock can be calculated under 3 circumstances:– Constant demand and lead time
– Variable demand and constant lead time
– Variable demand and lead time
• The two-bin system is a visual Q System
Sources• Chapman, S. N., Clive, L. M., Tony Arnold, J. R. (2008). Introduction to
Materials Management. New Jersey: Pearson Prentice Hall.• Dreckshage, B. J., Kerber B. (2011). Lean Supply Chain Management
Essentials: A Framework for Materials Managers. Florida: Taylor and Francis Group, LLC
• Krajewski, Malhotra, Ritzman (2010). Operantions Management: Processes and Supply Chains. New Jersey: Pearson Prentice Hall.
• Tersine, R. J. (1994). Principles of Inventory Management. New Jersey: PTR Prentice-Hall
• Toomey, J. W. (2000). Inventory Management: Principles, Concepts and Techniques. Massachusetts: Kluwer Academic Publishers