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Vol 26 - No 06 - July/August 2000 Best Practice in inventory management: an exchange of letters Dear Tony: I agree. I call the period just before re-order 'the point of vulnerability'. It is particularly relevant in assembly type work where the number of shortages of raw materials can be dramatically reduced by increasing batch sizes of the 'C' items without any real penalties in inventory stock holding... The maths is also very simple. If an assembly contains 100 parts and each is replenished weekly, the risk of shortage is on average 100 per week. If the 'C' items are replenished annually (typically 50% of the part numbers) the risk reduces to 51 per week, ie. 50 part numbers are still vulnerable every week but 50 part numbers are now only vulnerable once every 50 weeks (one per week on average). If you then increase the batch size of the 'B' items (typically 30% of the items) to say 2 weeks, you reduce the risk of shortage further to 36 per week (20 'A' risks + 15 'B' risks + 1'C' risk). If you then halve the batch size of the 'A' items to twice per week replenishment, you have taken out about 80% of the inventory carrying costs while only increasing the risk of shortages by 20%. In practice there is little extra risk simply because these items are usually produced on a flow type basis. Because the cost of material shortage is significantly higher than any other costs in terms of lost output and dissatisfied customers (who may go elsewhere), you get the benefits of Pareto from both ends (reduced inventory costs and reduced shortages). In practice I have used this technique many times now and have produced benefits at one end of the spectrum of a 40% reduction in stock holding without reducing a very high service level, and at the other end of the spectrum I have reduced shortages by a factor of 10 whilst simultaneously reducing stockholding by 10%. I have mentioned the technique, but have not gone into this detail, in the latest article I have submitted to Control for publication, because it has a broader scope on batch sizing and other topics, but I could? Yours sincerely Mike Thacker, MIOM Mike Thacker Associates A reply from the author Dear Mike I like this sort of discussion, because in practice I don't get much chance to go past the simplest approach to solve the real situations. I thought about calculations similar to the one you are using. Years ago there were calculations based on a 'k' factor which seemed to be quite rigorous (I have an old book "Automatic Inventory Control Techniques" - 1969! by Barrett which goes onto this). This does take me into another doubt in my mind about the statistics however, and just at the moment I can't think of the answer. When we talk about customer service level it is the 'risk of running out of stock' - but I'm not sure that this is what we are worried about in reality. For example, if I have a service level of 98%, this means the risk of running out is 2%. Which means that there is no stock during 2% of the time periods. If we are selling in single units, then the shortage will only affect a few customers. If we are selling in 50s, then the shortage will affect half(?) of the customers. Therefore, the safety stock should depend, not only on the delivery frequency, but on the sales batch size as well. It make's me think that the measurement of customer service may be wrong, and the measurement of 'how much' instead of 'how often' (or both) could be more useful. Have you any thoughts on this? Tony Wild, MIOM Midas Related Topics:
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