Ralph and InventoryManagement
During discussions, Ralph, our hospital stockroom managergestures proudly at the ceiling-high stocked warehouse and statesthat he has never had to turn away any request for any item. Inother words, he is providing his users 100% CSL (cycle servicelevel). We ask him what the average lead times are for the mostused meds and he responds âwithin 3 days for most itemsâ. He thengoes quiet, as the implications of what he has just said sink in âwhy keep so much inventory of everything when replenishments areonly 3 days away? Well, he says defensively, after a pregnantpause, âAs I said, I have never had to turn any user away and youdonât know how wildly variable demand can be in a hospitalâ. Sure,we think, but not so variable as to call for a warehouse full ofmed items! Letâs help Ralph out.
- Pick a few âAâ or vital SKUs from inventory,based on importance in terms of sales, profits, stockoutconsequences to customers, or cost of holding.
We pick a high cost and vital item, heart stents, with uncertaindemand.
- Find out the current formal inventorypolicies, if any, in use for those items (and when these wereset).
Ralph uses a continuous inventory management system forstents:
Order size: 300 units per order
ROP: 200 units (inclusive of safety stock of 50 units), i.e.,order whenever the inventory position falls to 200 units
- Find out whether these policies are beingfollowed.
Ralph confirms that he inherited these policies and followsthem.
- Ascertain current operational inventorymanagement parameters.
Ralph provides the following estimates:
Holding cost H = 25% of item cost
Ordering cost S = $100/order
Current supply lead times LT: 3 days stable
Average daily demand d: 50 units/day
Standard deviation of daily demand Ïd:3units
Actual customer cycle service level: 100%
Item cost: $1000/unit
Assume 365 working days in a year
1. Develop recommended order size (EOQ) and aROP for the selected SKU using the above current operationalinventory management parameters. Maintain CSL at 100%.
a) Recommended EOQ = ? units
b) Recommended ROP = ? units
EOQ = â (2*D*S)/H; where D = Annualdemand; S = Cost of placing one order; H = Cost of holding 1 unitin inventory for 1 yr
ROP = d * Leadtime + Safety Stock
Safety Stock = z value correspondingto CSL of 100% * Ïd âLT;
where d is average daily demand,Ïd = standard deviation of demand, LT = leadtime
# of orders/yr= D/EOQ (order qty)
2. Compute and show the differences inrecommended order size, ROP, and total costs for the selected SKUvs. current figures.
Current System
Total cost = TotalHolding Cost + Total Ordering Cost
= Avg Inventory * H + # of Orders/yr *S
= Avg Inventory * H + (D/Order Qty) *S
= ?
Average Inventory = ? units
Recommended System
Total cost = ?
Average Inventory = ? units
Total cost saving with recommendedsystem comparted to current system= $?
Capital investment avoided = ? (fromreducing average inventory @$1000/unit)
3. Can we do even better?
a) If Ralph could reduce the current lead time of 3 days to 2days without significant cost increases:
Revised ROP = ? units
Reduced safety stock = ? units
Reduced average inventory = ?units
b) If Ralph could reduce the cost of placing an order (S) to say$50 instead of the current $100/order by migrating the orderingprocess to a web based system:
Revised EOQ = ? units
Which means that:
Revised average inventory = ?units
and,
Revised total costs = $?
c) Anything else Ralph can do tolower the Total Cost?
PLEASE SHOW EVERY STEP OFTHIS PROBLEM PRECISILY WHEN SOLVED SO I CAN UNDERSTAND THE STEPS. IWOULD REALLY APPRECIATE IF THE SOLUTIONS WOULD BE SHOWN OUT STEP BYSTEP
