1. FACILITIES PLANNING ISE310L SESSION 7 September 15, 2015 Geza P. Bottlik Page 1 Outline Questions? Inventory experiences? Background quiz results Questionnaire results Team Questionnaire Results Newspaper Problem Uneven demand –Lot for lot, Least Unit Cost, Part-Period Balancing, Silver-Meal Quiz on Thursday

2. FACILITIES PLANNING ISE310L SESSION 7 September 15, 2015 Geza P. Bottlik Page 2 Background Quiz Results

3. FACILITIES PLANNING ISE310L SESSION 7 September 15, 2015 Geza P. Bottlik Page 3 Questionnaire Results

4. FACILITIES PLANNING ISE310L SESSION 7 September 15, 2015 Geza P. Bottlik Page 4

5. FACILITIES PLANNING ISE310L SESSION 7 September 15, 2015 Geza P. Bottlik Page 5

6. FACILITIES PLANNING ISE310L SESSION 7 September 15, 2015 Geza P. Bottlik Page 6

7. FACILITIES PLANNING ISE310L SESSION 7 September 15, 2015 Geza P. Bottlik Page 7 Newspaper problem Newspaper person’s cost = $0.25, no salvage value Profit on a paper = $0.50 Estimated average sales = 60 Estimated standard deviation of sales = 5 Percentage (Service level) = 0.50/(0.50+0.25) =.667 NORMINV(0.667, 60, 5) = 63 or Q= average + z(std. dev) If the overage cost is lower than the shortage cost we order more than the average Underage cost = lost profit = Selling price – Cost Overage cost = Excess unsalvageable inventory = Cost – salvage value Service level = Underage cost/ (Underage + overage cost)

8. FACILITIES PLANNING ISE310L SESSION 7 September 15, 2015 Geza P. Bottlik Page 8 The newspaper problem Expected Profit at Q = 62: $28.64 Expected Profit at Q = 63: $28.62 The formula for expected profit comes from the probability of demand being less or more than the order quantity

9. FACILITIES PLANNING ISE310L SESSION 7 September 15, 2015 Geza P. Bottlik Page 9 The newspaper problem

10. FACILITIES PLANNING ISE310L SESSION 7 September 15, 2015 Geza P. Bottlik Page 10 The newspaper problem

11. FACILITIES PLANNING ISE310L SESSION 7 September 15, 2015 Geza P. Bottlik Page 11 Uneven demand But what should we do if the demand pattern is not constant? Example:

12. FACILITIES PLANNING ISE310L SESSION 7 September 15, 2015 Geza P. Bottlik Page 12 Lot for Lot (LforL) We order the exact amount for each period’s demand –No inventory cost –Ordering cost for each period

13. FACILITIES PLANNING ISE310L SESSION 7 September 15, 2015 Geza P. Bottlik Page 13 Least Unit Cost (LUC) Add the order cost to the carrying cost of adding succeeding periods’ demand and divide by the total units ordered. As long as this result continues to decrease, we keep adding the demands to the amount ordered

14. FACILITIES PLANNING ISE310L SESSION 7 September 15, 2015 Geza P. Bottlik Page 14 Part Period Balancing This method sets the order horizon equal to the number of periods that most closely matches the total holding cost with the setup cost Economic Part Period (EPP)=Order Cost/Carrying rate*value = A/kC Part Period (PP) = parts*periods stored We keep increasing the order quantity by the next period’s demand as long the cumulative part-Periods do not exceed the EPP

15. FACILITIES PLANNING ISE310L SESSION 7 September 15, 2015 Geza P. Bottlik Page 15 Silver-Meal heuristic Similar to Least unit cost, except we compare the average cost per period

16. FACILITIES PLANNING ISE310L SESSION 7 September 15, 2015 Geza P. Bottlik Page 16 EOQ Calculate the EOQ using the total demand over the number of periods for which you demand Adjust the carrying for the total periods Accumulate demand until it approaches the EOQ (or is closest to it)