Replenishment policies continuous review

Weekly demand for Legos at a Walmart store is normally distributed, with a mean of 2,5(X) boxes and a standard deviation of 500. The replenishment lead time is two weeks. Assuming a continuous-review replenishment policy, evaluate the safety inventory that the store should carry to achieve a CSL of 90 percent. 

In this section, we describe the evaluation of safety inventories for both continuous and periodic-review replenishment policies. We highlight the fact that periodic review policies require more safety inventory than continuous review policies for the same level of product availability. To simplify the discussion, we focus on the CSL as the measure of product availability. The managerial implications are the same if we use fiU rate the analysis, however, is more cumbersome. 

Periodic review replenishment policies require more safety inventory than continuous review policies for the same lead time and level of product availability. 

We now discuss the relationship between safety inventory and the CSL and fr. In this section, we restrict our attention to the continuous review policy. The periodic review policy is discussed in detail in Section 12.6. The continuous review policy consists of a lot size Q ordered when the inventory on hand declines to the ROP. Assume that weekly demand is normally distributed, with mean D and standard deviation o-d. Assume replenishment lead time of L weeks. 

EVALUATING FILL RATE GIVEN A REPLENISHMENT POLICY RecaU that fiU rate measures the proportion of customer demand that is satisfied from available inventory. EiU rate is generally a more relevant measure than cycle service level because it allows the retailer to estimate the fraction of demand that is turned into sales. The two measures are closely related, as raising the cycle service level also raises the fill rate for a firm. Our discussion focuses on evaluating fill rate for a continuous review policy under which Q units are ordered when the quantity on hand drops to the ROP. 

We consider the safety inventory requirements given that Amazon follows a continuous review policy to manage tablet inventory. Amazon experiences a stockout of product if demand during the lead time exceeds the ROP— that is, the quantity on hand when Amazon places a replenishment order. Thus, we need to identify the distribution of customer demand during the lead time. Given that both lead time and periodic demand are uncertain, demand during the lead time is normally distributed with a mean of and a standard deviation ai, where... 

Typically, in continuous review policies, the lot size ordered is kept fixed between replenishment cycles. The optimal lot size may be evaluated using the EOQ formula discussed in... 

Identify factors that influence the required level of safety inventory. Safety inventory is influenced by demand uncertainty, replenishment lead times, lead time variability, and desired product availability. As any one of them increases, the required safety inventory also increases. The required safety inventory is also influenced by the inventory policy implemented. Continuous review policies require less safety inventory than periodic review policies. 

Weekly demand for gaming consoles at Liverpool, a Mexican department store chain, is normally distrihnted with a mean of 1,000 and a standard deviation of 400. The replenishment lead time from the suppher is four weeks. Liverpool is targeting a CSL of 95 percent and uses a periodic review policy under which it reorders consoles every eight weeks. What is the average order size How much safety inventory of consoles should Liverpool carry What should its order up to level be How much safety inventory would be required if Liverpool switched to a continuous review policy ... 

DoorRed Pharmacy replenishes one of its best-selling drugs using a continuous review policy. Daily demand for the drug is normally distributed, with a mean of 300 and a standard deviation of 100. The wholesaler can process a replenishment request in two days. The current replenishment policy is to order 1,500 units when there are 750 units on hand. 

Currently, a production facility in Malaysia is used to manufacture, label, and pack all products. The manufacturing facility replenishes a DC in St. Louis, from which the contract manufacturer fills all customer orders. The manufacturing and transportation lead time from Penang to St. Louis is nine weeks. PE uses a continuous review policy to manage inventories at its DC and aims to provide a cycle service level of 95 percent for each product to every customer. 

In periodic review policies, inventory levels are reviewed after a fixed period of time T and an order is placed such that the level of current inventory plus the replenishment lot size equals a prespecified level called the order-up-to level (OUL). The review interval is the time T between successive orders. Observe that the size of each order may vary, depending on the demand experienced between successive orders and the resulting inventory at the time of ordering. Periodic review policies are simpler for retailers to implement because they do not require that the retailer have the capability of monitoring inventory continuously. Suppliers may also prefer them because they result in replenishment orders placed at regular intervals. 

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