Example 12-1

Evaluating Cycle Service Level Given a Replenishment Policy (Example 12-1)

Inputs
Average demand per unit time D = 2,500
SD of demand per unit time sD = 500 Column A contains different levels of reorder point ROP
Column B contains corresponding safety inventory
Lead time, L = 2 Column C contains average inventory (Q/2 + ss)
Lot size Q = 10,000 Column D contains average flow time

Reorder Point Increment = 10

Reorder Point Safety Inventory Average Average

ROP ss = ROP - DL Inventory Flow Time
5000 0 5000 2.00
5010 10 5010 2.00
5020 20 5020 2.01
5030 30 5030 2.01
5040 40 5040 2.02
5050 50 5050 2.02
5060 60 5060 2.02
5070 70 5070 2.03
5080 80 5080 2.03
5090 90 5090 2.04
5100 100 5100 2.04
5110 110 5110 2.04
5120 120 5120 2.05
5130 130 5130 2.05
5140 140 5140 2.06
5150 150 5150 2.06
5160 160 5160 2.06
5170 170 5170 2.07
5180 180 5180 2.07
5190 190 5190 2.08
5200 200 5200 2.08
5210 210 5210 2.08
5220 220 5220 2.09
5230 230 5230 2.09
5240 240 5240 2.10
5250 250 5250 2.10
5260 260 5260 2.10
5270 270 5270 2.11
5280 280 5280 2.11
5290 290 5290 2.12
5300 300 5300 2.12
5310 310 5310 2.12
5320 320 5320 2.13
5330 330 5330 2.13
 Example 12-1

Reorder Point Safety Inventory Average Average

ROP ss = ROP - DL Inventory Flow Time
5340 340 5340 2.14
5350 350 5350 2.14
5360 360 5360 2.14
5370 370 5370 2.15
5380 380 5380 2.15
5390 390 5390 2.16
5400 400 5400 2.16
5410 410 5410 2.16
5420 420 5420 2.17
5430 430 5430 2.17
5440 440 5440 2.18
5450 450 5450 2.18
5460 460 5460 2.18
5470 470 5470 2.19
5480 480 5480 2.19
5490 490 5490 2.20
5500 500 5500 2.20
5510 510 5510 2.20
5520 520 5520 2.21
5530 530 5530 2.21
5540 540 5540 2.22
5550 550 5550 2.22
5560 560 5560 2.22
5570 570 5570 2.23
5580 580 5580 2.23
5590 590 5590 2.24
5600 600 5600 2.24
5610 610 5610 2.24
5620 620 5620 2.25
5630 630 5630 2.25
5640 640 5640 2.26
5650 650 5650 2.26
5660 660 5660 2.26
5670 670 5670 2.27
5680 680 5680 2.27
5690 690 5690 2.28
5700 700 5700 2.28
5710 710 5710 2.28
5720 720 5720 2.29
5730 730 5730 2.29
5740 740 5740 2.30
5750 750 5750 2.30
5760 760 5760 2.30
 Example 12-1

Reorder Point Safety Inventory Average Average

ROP ss = ROP - DL Inventory Flow Time
5770 770 5770 2.31
5780 780 5780 2.31
5790 790 5790 2.32
5800 800 5800 2.32
5810 810 5810 2.32
5820 820 5820 2.33
5830 830 5830 2.33
5840 840 5840 2.34
5850 850 5850 2.34
5860 860 5860 2.34
5870 870 5870 2.35
5880 880 5880 2.35
5890 890 5890 2.36
5900 900 5900 2.36
5910 910 5910 2.36
5920 920 5920 2.37
5930 930 5930 2.37
5940 940 5940 2.38
5950 950 5950 2.38
5960 960 5960 2.38
5970 970 5970 2.39
5980 980 5980 2.39
5990 990 5990 2.40
6000 1000 6000 2.40
6010 1010 6010 2.40
6020 1020 6020 2.41
6030 1030 6030 2.41
6040 1040 6040 2.42
6050 1050 6050 2.42
6060 1060 6060 2.42
6070 1070 6070 2.43
6080 1080 6080 2.43
6090 1090 6090 2.44
6100 1100 6100 2.44
6110 1110 6110 2.44
6120 1120 6120 2.45
6130 1130 6130 2.45
6140 1140 6140 2.46
6150 1150 6150 2.46
6160 1160 6160 2.46
6170 1170 6170 2.47
6180 1180 6180 2.47
6190 1190 6190 2.48
 Example 12-1

Reorder Point Safety Inventory Average Average

ROP ss = ROP - DL Inventory Flow Time
6200 1200 6200 2.48
6210 1210 6210 2.48
6220 1220 6220 2.49
6230 1230 6230 2.49
6240 1240 6240 2.50
6250 1250 6250 2.50
6260 1260 6260 2.50
6270 1270 6270 2.51
6280 1280 6280 2.51
6290 1290 6290 2.52
6300 1300 6300 2.52
6310 1310 6310 2.52
6320 1320 6320 2.53
6330 1330 6330 2.53
6340 1340 6340 2.54
6350 1350 6350 2.54
6360 1360 6360 2.54
6370 1370 6370 2.55
6380 1380 6380 2.55
6390 1390 6390 2.56
6400 1400 6400 2.56
6410 1410 6410 2.56
6420 1420 6420 2.57
6430 1430 6430 2.57
6440 1440 6440 2.58
6450 1450 6450 2.58
6460 1460 6460 2.58
6470 1470 6470 2.59
6480 1480 6480 2.59
6490 1490 6490 2.60
6500 1500 6500 2.60
6510 1510 6510 2.60
6520 1520 6520 2.61
6530 1530 6530 2.61
6540 1540 6540 2.62
6550 1550 6550 2.62
6560 1560 6560 2.62
6570 1570 6570 2.63
6580 1580 6580 2.63
6590 1590 6590 2.64
6600 1600 6600 2.64
6610 1610 6610 2.64
6620 1620 6620 2.65
 Example 12-1

Reorder Point Safety Inventory Average Average

ROP ss = ROP - DL Inventory Flow Time
6630 1630 6630 2.65
6640 1640 6640 2.66
6650 1650 6650 2.66
6660 1660 6660 2.66
6670 1670 6670 2.67
6680 1680 6680 2.67
6690 1690 6690 2.68
6700 1700 6700 2.68
6710 1710 6710 2.68
6720 1720 6720 2.69
6730 1730 6730 2.69
6740 1740 6740 2.70
6750 1750 6750 2.70
6760 1760 6760 2.70
6770 1770 6770 2.71
6780 1780 6780 2.71
6790 1790 6790 2.72
6800 1800 6800 2.72
6810 1810 6810 2.72
6820 1820 6820 2.73
6830 1830 6830 2.73
6840 1840 6840 2.74
6850 1850 6850 2.74
6860 1860 6860 2.74
6870 1870 6870 2.75
6880 1880 6880 2.75
6890 1890 6890 2.76
 Example 12-1

reorder point ROP

ety inventory
(Q/2 + ss)
e
 Example 12-2

Evaluating Cycle Service Level Given a Replenishment Policy (Example 12-2)

Inputs
Average demand per unit time D = 2,500
SD of demand per unit time sD = 500
Lead time, L = 2 Cycle Service Level is calculated in Column C using
Lot size Q = 10,000 Equation 12.4

Intermediate Calculation 𝐶𝑆𝐿 (𝐶𝑜𝑙𝑢𝑚𝑛 𝐶)=𝑁𝑂𝑅𝑀𝐷𝐼𝑆𝑇(𝑅𝑂𝑃, 𝐷_𝐿,𝜎_𝐿,1)

Mean demand during lead time DL = 5,000
SD of demand during lead time sL = 707

Reorder Point Increment = 10

Safety Average
Reorder Inventory ss CSL (Equation Inventory Average
Point ROP = ROP - DL 12.4) Q/2 + ss Flow Time
5000 0 0.500 5000 2.00
5010 10 0.506 5010 2.00
5020 20 0.511 5020 2.01
5030 30 0.517 5030 2.01
5040 40 0.523 5040 2.02
5050 50 0.528 5050 2.02
5060 60 0.534 5060 2.02
5070 70 0.539 5070 2.03
5080 80 0.545 5080 2.03
5090 90 0.551 5090 2.04
5100 100 0.556 5100 2.04
5110 110 0.562 5110 2.04
5120 120 0.567 5120 2.05
5130 130 0.573 5130 2.05
5140 140 0.578 5140 2.06
5150 150 0.584 5150 2.06
5160 160 0.590 5160 2.06
5170 170 0.595 5170 2.07
5180 180 0.600 5180 2.07
5190 190 0.606 5190 2.08
5200 200 0.611 5200 2.08
5210 210 0.617 5210 2.08
5220 220 0.622 5220 2.09
5230 230 0.628 5230 2.09
5240 240 0.633 5240 2.10
5250 250 0.638 5250 2.10
5260 260 0.643 5260 2.10
5270 270 0.649 5270 2.11
 Example 12-2

Safety Average
Reorder Inventory ss CSL (Equation Inventory Average
Point ROP = ROP - DL 12.4) Q/2 + ss Flow Time
5280 280 0.654 5280 2.11
5290 290 0.659 5290 2.12
5300 300 0.664 5300 2.12
5310 310 0.669 5310 2.12
5320 320 0.675 5320 2.13
5330 330 0.680 5330 2.13
5340 340 0.685 5340 2.14
5350 350 0.690 5350 2.14
5360 360 0.695 5360 2.14
5370 370 0.700 5370 2.15
5380 380 0.705 5380 2.15
5390 390 0.709 5390 2.16
5400 400 0.714 5400 2.16
5410 410 0.719 5410 2.16
5420 420 0.724 5420 2.17
5430 430 0.728 5430 2.17
5440 440 0.733 5440 2.18
5450 450 0.738 5450 2.18
5460 460 0.742 5460 2.18
5470 470 0.747 5470 2.19
5480 480 0.751 5480 2.19
5490 490 0.756 5490 2.20
5500 500 0.760 5500 2.20
5510 510 0.765 5510 2.20
5520 520 0.769 5520 2.21
5530 530 0.773 5530 2.21
5540 540 0.777 5540 2.22
5550 550 0.782 5550 2.22
5560 560 0.786 5560 2.22
5570 570 0.790 5570 2.23
5580 580 0.794 5580 2.23
5590 590 0.798 5590 2.24
5600 600 0.802 5600 2.24
5610 610 0.806 5610 2.24
5620 620 0.810 5620 2.25
5630 630 0.814 5630 2.25
5640 640 0.817 5640 2.26
5650 650 0.821 5650 2.26
5660 660 0.825 5660 2.26
5670 670 0.828 5670 2.27
5680 680 0.832 5680 2.27
5690 690 0.835 5690 2.28
 Example 12-2

Safety Average
Reorder Inventory ss CSL (Equation Inventory Average
Point ROP = ROP - DL 12.4) Q/2 + ss Flow Time
5700 700 0.839 5700 2.28
5710 710 0.842 5710 2.28
5720 720 0.846 5720 2.29
5730 730 0.849 5730 2.29
5740 740 0.852 5740 2.30
5750 750 0.856 5750 2.30
5760 760 0.859 5760 2.30
5770 770 0.862 5770 2.31
5780 780 0.865 5780 2.31
5790 790 0.868 5790 2.32
5800 800 0.871 5800 2.32
5810 810 0.874 5810 2.32
5820 820 0.877 5820 2.33
5830 830 0.880 5830 2.33
5840 840 0.883 5840 2.34
5850 850 0.885 5850 2.34
5860 860 0.888 5860 2.34
5870 870 0.891 5870 2.35
5880 880 0.893 5880 2.35
5890 890 0.896 5890 2.36
5900 900 0.898 5900 2.36
5910 910 0.901 5910 2.36
5920 920 0.903 5920 2.37
5930 930 0.906 5930 2.37
5940 940 0.908 5940 2.38
5950 950 0.910 5950 2.38
5960 960 0.913 5960 2.38
5970 970 0.915 5970 2.39
5980 980 0.917 5980 2.39
5990 990 0.919 5990 2.40
6000 1000 0.921 6000 2.40
6010 1010 0.923 6010 2.40
6020 1020 0.925 6020 2.41
6030 1030 0.927 6030 2.41
6040 1040 0.929 6040 2.42
6050 1050 0.931 6050 2.42
6060 1060 0.933 6060 2.42
6070 1070 0.935 6070 2.43
6080 1080 0.937 6080 2.43
6090 1090 0.938 6090 2.44
6100 1100 0.940 6100 2.44
6110 1110 0.942 6110 2.44
 Example 12-2

Safety Average
Reorder Inventory ss CSL (Equation Inventory Average
Point ROP = ROP - DL 12.4) Q/2 + ss Flow Time
6120 1120 0.943 6120 2.45
6130 1130 0.945 6130 2.45
6140 1140 0.947 6140 2.46
6150 1150 0.948 6150 2.46
6160 1160 0.950 6160 2.46
6170 1170 0.951 6170 2.47
6180 1180 0.952 6180 2.47
6190 1190 0.954 6190 2.48
6200 1200 0.955 6200 2.48
6210 1210 0.956 6210 2.48
6220 1220 0.958 6220 2.49
6230 1230 0.959 6230 2.49
6240 1240 0.960 6240 2.50
6250 1250 0.961 6250 2.50
6260 1260 0.963 6260 2.50
6270 1270 0.964 6270 2.51
6280 1280 0.965 6280 2.51
6290 1290 0.966 6290 2.52
6300 1300 0.967 6300 2.52
6310 1310 0.968 6310 2.52
6320 1320 0.969 6320 2.53
6330 1330 0.970 6330 2.53
6340 1340 0.971 6340 2.54
6350 1350 0.972 6350 2.54
6360 1360 0.973 6360 2.54
6370 1370 0.974 6370 2.55
6380 1380 0.975 6380 2.55
6390 1390 0.975 6390 2.56
6400 1400 0.976 6400 2.56
6410 1410 0.977 6410 2.56
6420 1420 0.978 6420 2.57
6430 1430 0.978 6430 2.57
6440 1440 0.979 6440 2.58
6450 1450 0.980 6450 2.58
6460 1460 0.981 6460 2.58
6470 1470 0.981 6470 2.59
6480 1480 0.982 6480 2.59
6490 1490 0.982 6490 2.60
6500 1500 0.983 6500 2.60
6510 1510 0.984 6510 2.60
6520 1520 0.984 6520 2.61
6530 1530 0.985 6530 2.61
 Example 12-2

Safety Average
Reorder Inventory ss CSL (Equation Inventory Average
Point ROP = ROP - DL 12.4) Q/2 + ss Flow Time
6540 1540 0.985 6540 2.62
6550 1550 0.986 6550 2.62
6560 1560 0.986 6560 2.62
6570 1570 0.987 6570 2.63
6580 1580 0.987 6580 2.63
6590 1590 0.988 6590 2.64
6600 1600 0.988 6600 2.64
6610 1610 0.989 6610 2.64
6620 1620 0.989 6620 2.65
6630 1630 0.989 6630 2.65
6640 1640 0.990 6640 2.66
6650 1650 0.990 6650 2.66
6660 1660 0.991 6660 2.66
6670 1670 0.991 6670 2.67
6680 1680 0.991 6680 2.67
6690 1690 0.992 6690 2.68
6700 1700 0.992 6700 2.68
6710 1710 0.992 6710 2.68
6720 1720 0.993 6720 2.69
6730 1730 0.993 6730 2.69
6740 1740 0.993 6740 2.70
6750 1750 0.993 6750 2.70
6760 1760 0.994 6760 2.70
6770 1770 0.994 6770 2.71
6780 1780 0.994 6780 2.71
6790 1790 0.994 6790 2.72
6800 1800 0.995 6800 2.72
6810 1810 0.995 6810 2.72
6820 1820 0.995 6820 2.73
6830 1830 0.995 6830 2.73
6840 1840 0.995 6840 2.74
6850 1850 0.996 6850 2.74
6860 1860 0.996 6860 2.74
6870 1870 0.996 6870 2.75
6880 1880 0.996 6880 2.75
6890 1890 0.996 6890 2.76
 Example 12-2

olumn C using

, 𝐷_𝐿,𝜎_𝐿,1)
 Example 12-3

Evaluating Safety Inventory Given Cycle Service Level (Example 12-3)

Input
Demand per period (week), D = 2500 boxes
Standard deviation of demand, sD = 500
Replenishment lead time, L = 2 weeks
Desired cycle service level, CSL = 0.9
Desired Cycle Service Level is set in Cell D6
Solution Safety inventory is calculated in Cell D14
Intermediate Calculation
Mean demand during lead time DL = 5000
SD of demand during lead time sL = 707
𝑠𝑠(𝐶𝑒𝑙𝑙 𝐷14)=𝑁𝑂𝑅𝑀𝑆𝐼𝑁𝑉(𝐶𝑆𝐿)×𝜎_𝐿
Result
Required safety inventory, ss = 906
 Example 12-4

Inputs
Q D sD L ss
10,000 2,500 500 2 1,000
Distribution of Demand during Lead Time
DL sL
5000 707
Cycle Service Level and Fill Rate
CSL ESC fr
0.92 25.13 0.9975
Expected Shortage per Cycle (ESC) is calculated in
Cell D9 using Equation 12.9
Fill Rate is calculated in Cell C9 using Equation 12.5

𝐸𝑆𝐶(𝐶𝑒𝑙𝑙 𝐵9)=−𝑠𝑠[1− NORMDIST(ss/𝜎_𝐿,0,1,1) +

𝜎_𝐿 𝑁𝑂𝑅𝑀𝐷𝐼𝑆𝑇(𝑠𝑠/𝜎_𝐿 , 0,1,0))
fr (Cell C9) = (Q - ESC)/Q

Change the batch size Q in Cell A3 and the safety inventory

in Cell E3 to see how it impacts the CSL (Cell A9) and the
fill rate fr (Cell C9)

Evaluating Fill Rate Given Safety Inventory (Example 12-4)

Page 14
 Example 12-5

Input Calculation Variable

fr σL Q Desired ESC ss
0.975 707 10000 250 67
Formula
Actual ESC
250
Impact of Reducing Lead Time and Forecast Error (Example 12-6)
Input
Change standard deviation of demand in Cell D4
Demand per period (week), D = 2500 shirts and Lead time in Cell D5 to see impact on
Standard deviation of demand, sD = 800 Safety inventory calculated in Cell D14
Replenishment lead time, L = 9 weeks
Desired cycle service level, CSL = 0.95

Solution
Intermediate Calculation
Mean demand during lead time DL = 22500
SD of demand during lead time sL = 2,400

Result
Required safety inventory, ss = 3,948
𝑠𝑠(𝐶𝑒𝑙𝑙 𝐷14)=𝑁𝑂𝑅𝑀𝑆𝐼𝑁𝑉(𝐶𝑆𝐿)×𝜎_𝐿
d in Cell D4
on
4
 Example 12-7

Evaluating the Impact of Lead Time Uncertainty on Safety Inventory (Example 12-7)
Input Cell E12 is calculated using Equation 12.11.
Demand per period (day), D = 2500 Change standard deviation of lead time in
Standard deviation of demand, sD = 500 Cell D6 to see impact on safety inventory in
Cell D15 and build Table 12-2.
Avg. replenishment lead time, L = 7 days
Standard deviation of lead time, sL = 7 days
Desired cycle service level, CSL = 0.90

Solution 𝜎_𝐿 (𝐶𝑒𝑙𝑙 𝐸12)=√(𝐿 〖𝜎 _𝐷 〗 ^2+𝐷^2

Intermediate Calculation 〖𝑠 _𝐿 〗 ^2 )
Mean demand during lead time DL = 17,500
SD of demand during lead time sL = 17,550

Resulting Safety Inventory Level

Estimated safety inventory (units), ss = 22,491
# of days' demand = 9.00
 Example 12-7

Equation 12.11.
of lead time in
fety inventory in
-2.
 Example 12-8

Value of Aggregation (Example 12-8) Cell E22 contains safety inventory on aggregation while
Demand per period (weekly) per location, D (cars)= 25 Cell D22 contains safety inventory on disaggregation.
Standard deviation of demand, sD = 5 Cell E28 contains the holding cost savings on aggregation
Avg replenishment lead time, L (weeks)= 2
Change the various inputs in Cells D3:D9 to see how
Desired cycle service level, CSL = 0.90 they affect the savings in Cell E28.
Correlation Coefficient, r= 0.00
Number of retail outlets 4 Change correlation coefficient in Cell D7 to build Table 12
Cost per Vehicle $ 20,000
Inventory Holding Cost 0.20

Disaggregate
Intermediate calculation Option Aggregate Option
Mean Weekly Demand, DC 100
Standard Deviation of demand, sDC 10
Mean demand during lead time DL = 50 200
SD of demand during lead time sL = 7.07 14.14

Resulting Safety Inventory Level at Each Retail Outlet

Estimated safety inventory (units) = 9.06 0
# of weeks' demand = 0.36 0

Total Safety Inventory Required

Total Safety Inventory Required 36.25 18.12
# of weeks' demand = 1.45 0.72
Safety Inventory Savings through Aggregation
Unit Savings 18.12
Inventory Savings $ 362,478
Annual Holding Cost Savings $ 72,496
 Example 12-8

ventory on aggregation while

nventory on disaggregation.
ing cost savings on aggregation.

s in Cells D3:D9 to see how

Cell E28.

cient in Cell D7 to build Table 12-3.

 Example 12-9

Trade-offs of Physical Aggregation (Example 12-9)

Demand per period (weekly) per location, D (cars)= 1000
Standard deviation of demand, sD = 300
Cell E28 contains the holding cost savings on aggregation.
Avg replenishment lead time, L (weeks)= 4 Cell E35 contains the operation and transportation cost in
Desired cycle service level, CSL = 0.95 on aggregation.
Correlation Coefficient, r= 0.00 It is better to aggregate if Cell E28 is larger than Cell E35.
Number of retail outlets 4 it is better to avoid aggregation.
Cost per unit $ 1,000
Inventory Holding Cost 0.20

Disaggregate
Intermediate Calculation Option Aggregate Option
Mean Weekly Demand, DC 4000
Standard Deviation of demand, sDC 600
Mean demand during lead time DL = 4000 16000
SD of demand during lead time sL = 600.00 1200.00

Resulting Safety Inventory Level at Each Retail Outlet

Estimated safety inventory (units) = 986.91 0
# of weeks' demand = 0.99 0

Total Safety Inventory Required

Total Safety Inventory Required 3948 1974
# of weeks' demand = 3.95 1.97
Safety Inventory Savings through Aggregation
Unit Savings 1973.82
Inventory Savings $ 1,973,824
Annual Holding Cost Savings on Aggregation $ 394,765

Change in Operating and Transportation Cost

Operating cost decrease on aggregation $ 150,000
Transportation cost/unit $ 10 $ 13
Total transportation cost $ 2,080,000 $ 2,704,000
Increase in transportation cost on aggregation $ 624,000
Total increase in operating and transportation cost on aggregation $ 474,000
 Example 12-9

ing cost savings on aggregation.

ation and transportation cost increase

Cell E28 is larger than Cell E35. Else,

ation.
Example 12-10 Impact of Coefficient of Variation on Value of Aggregation
Motors Cleaner
Inventory Is Stocked in Each Store
Mean weekly demand per store 20 1,000
Standard deviation 40 100
Coefficient of variation 2.0 0.1
Safety inventory per store 132 329
Total safety inventory 210,541 526,353
Value of safety inventory $ 105,270,632 $ 15,790,595
Inventory Is Aggregated at DC
Mean weekly aggregate demand 32,000 1,600,000
Standard deviation of aggregate demand 1,600 4,000
Coefficient of variation 0.05 0.0025
Aggregate safety inventory 5,264 13,159
Value of safety inventory $ 2,631,766 $ 394,765
Savings
Total inventory saving on aggregation $ 102,638,866 $ 15,395,830
Total holding cost saving on aggregation $ 25,659,717 $ 3,848,957
Holding cost saving per unit sold $ 15.42 $ 0.05
Savings as a percentage of product cost 3.08% 0.15%

The numbers above are slightly different from the numbers in Table 12-4 because
inventory values are not rounded (in the book they are rounded).

Rounded Numbers as Shown in Table 12-4

Motors Cleaner
Inventory Is Stocked in Each Store
Mean weekly demand per store 20 1,000
Standard deviation 40 100
Coefficient of variation 2.0 0.1
Safety inventory per store 132 329
Total safety inventory 211,200 526,400
Value of safety inventory $ 105,600,000 $ 15,792,000
Inventory Is Aggregated at DC
Mean weekly aggregate demand 32,000 1,600,000
Standard deviation of aggregate demand 1,600 4,000
Coefficient of variation 0.05 0.0025
Aggregate safety inventory 5,264 13,159
Value of safety inventory $ 2,632,000 $ 394,770
Savings
Total inventory saving on aggregation $ 102,968,000 $ 15,397,230
Total holding cost saving on aggregation $ 25,742,000 $ 3,849,308
Holding cost saving per unit sold $ 15.47 $ 0.046
Savings as a percentage of product cost 3.09% 0.15%
Example 12-11 Value of Component Commonality
Mean demand per server 5000
Standard deviation of demand 3000
Replenishment lead time 1
CSL 0.95
Number of distinct server types 27
Number of components per server 3

Number of Finished Products per Safety Marginal Reduction in Total Reduction in

Component Inventory Safety Inventory Safety Inventory

1 399,699
2 282,630 117,069 117,069
3 230,767 51,864 168,933
4 199,850 30,917 199,850
5 178,751 21,099 220,948
6 163,177 15,574 236,523
7 151,072 12,104 248,627
8 141,315 9,757 258,384
9 133,233 8,082 266,466
 Example 12-12

Value of Postponement (Example 12-12)

Demand per period (weekly) per color, D = 30
Standard deviation of demand, sD = 10
Avg replenishment lead time, L (weeks)= 2
Desired cycle service level, CSL = 0.95
Number of different paint colors = 100

Without With
Intermediate Calculation Postponement Postponement
Mean Weekly Demand, DC 3000
Standard Deviation of demand, sD
C
100
Mean demand during lead time DL = 60 6000
SD of demand during lead time sL = 14.14 141.42

Resulting Safety Inventory Level for Each Color

Estimated safety inventory (units) = 23.26 0
# of weeks' demand = 0.78 0

Total Safety Inventory Required

Total Safety Inventory Required 2326 233
# of weeks' demand = 77.54 7.75
Safety Inventory Savings through Postponement
Unit Savings 2094

Postponement aggregates the inventory in the form of base paint. Thus,

the standard deviation of demand with postponement is calculated in
Cell E10 as the aggregation of a hundred colors using Equation 12.15.
 Example 12-13

Evaluating Safety Inventory for Periodic Review Policies (Example 12-13)

Input
Demand per period (week), D (boxes) = 2500 Cell D14 is calculated using Equation 12.19
Cell D15 is calculated using Equation 12.18
Standard deviation of demand, sD = 500 Study the impact of changing review interval
Replenishment lead time, L (weeks)= 2 T (Cell D6) on safety stock (Cell D14)
Review interval, T (weeks)= 4
Desired cycle service level = 0.90

Intermediate Calculation Periodic

Mean demand during time T+L, DT+L = 15,000
𝜎_(𝑇+𝐿) (𝐶𝑒𝑙𝑙 𝐷11)=√(𝑇+𝐿) 〖 𝜎〗
SD of demand during time T+L, sT+L = 1,225 _𝐷
Result
Desired safety inventory, ss = 1,570 𝑠𝑠(𝐶𝑒𝑙𝑙 𝐷14)=𝑁𝑂𝑅𝑀𝑆𝐼𝑁𝑉(𝐶𝑆𝐿)×𝜎_(𝑇+𝐿)
Order up to level, OUL = 16,570
𝑂𝑈𝐿 (𝐶𝑒𝑙𝑙 𝐷15)= 𝐷_(𝑇+𝐿)
+𝑠𝑠

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