Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

Course 11 – Inventory Management and Stochastic Materials Management

Intended learning outcomes: Describe usage statistics, analyses, and classifications. Explain in detail the order point technique. Disclose how to calculate safety stock. Differentiate various batch or lot sizing techniques.


Inventory has a buffer function, to achieve synchronization between use, on the one hand, and design and manufactu­ring, on the other. This makes inventory management another im­portant task for planning & control. Inventory transactions are the basis for usage statistics. Together with ABC and XYZ analyses, and also other evaluative procedures, usage statistics build the principle of techniques of stochastic materials management —in particular demand fore­casting. This chapter deals with the translation of forecasted demand into production or procurement proposals through the function of materials management in the stochastic case. The relevant tasks and processes are shown on a dark background in Figure 11.0.0.1. The tasks and processes refer back to the reference model for business processes and planning & control tasks in Figure 5.1.4.2. Sections 5.3.1, and 5.3.2 provide useful overviews.

Fig. 11.0.0.1       The parts of the system discussed in this chapter (shown on darker background).

For goods upstream or at the order penetration point, production or procurement orders must be released prior to customer demand. Inventory in stock or work in process must cover total demand up to the point when newly proposed orders will be filled. Here, because of its simplicity, the order point technique is widely used. The order point technique proposes orders with a quantity and a completion date. In medium-term planning, the proposals serve to reconcile inventory to blanket orders. In short-term planning, they trigger order releases. In the case of a production order, the proposal yields the requirements for com­po­nents that, in turn, come under the direction of materials management.

Because of the inexact nature of demand forecasting and lead time, safety stock is carried to protect against the differences between forecast and actual usage and fluctuations in lead time. The level of safety stock thus affects stockout probability, carrying cost, and eventually the fill rate (also called customer service ratio).

In materials management, lot or batch size mainly affects costs. In sched­uling and capacity management, additional considerations reveal the ef­fect of batch size on lead time and flexibility. In the stochastic case, the com­position of customer demand over time is unknown. This leads to impre­cise proposals. The stochastic calculation technique presented in this chapter is robust at least in the face of forecast errors and incomplete parameters.



Course sections and their intended learning outcomes

  • 11.3 Order Point Technique and Safety Stock Calculation

    Intended learning outcomes: Explain the order point technique and variants thereof. Describe the safety stock calculation with continuous demand. Disclose the determination of the service level and the relation of service level to fill rate.

  • 11.4 Batch Sizing, or Lot Sizing

    Intended learning outcomes: Produce an overview on production or procurement costs, batch-size-dependent unit costs, setup and ordering costs, and carrying cost. Explain optimum batch size, optimum length of order cycle, the classic economic order quantity formally and in practical application. Disclose extensions of the batch size formula.

  • 11.5 Summary

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  • 11.6 Keywords

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  • 11.7 Scenarios and Exercises

    Intended learning outcomes: Calculate examples for the ABC Classification and for the combined ABC-XYZ classification. Differentiate between Safety Stock Variation and Demand Variation. Determine batch size depending on stockout costs. Assess the effectiveness of the order point technique.

  • 11.8 References

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