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Inventory Theory.S7 The (R, S) Inventory Policy

This document discusses the (R,S) inventory policy, where inventory is reviewed periodically every R units of time. If inventory is at level y, an order is placed to increase it to the order level S. S is set high enough to prevent shortages in the time period R+L, where L is lead time. The cost of using this policy considers holding, replenishment, and shortage costs. Formulas are provided to calculate the optimal order level S based on the cost structure and demand distribution over R+L. An example compares applying the policy with monthly vs bi-monthly reviews.

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732 views4 pages

Inventory Theory.S7 The (R, S) Inventory Policy

This document discusses the (R,S) inventory policy, where inventory is reviewed periodically every R units of time. If inventory is at level y, an order is placed to increase it to the order level S. S is set high enough to prevent shortages in the time period R+L, where L is lead time. The cost of using this policy considers holding, replenishment, and shortage costs. Formulas are provided to calculate the optimal order level S based on the cost structure and demand distribution over R+L. An example compares applying the policy with monthly vs bi-monthly reviews.

Uploaded by

Sakline Minar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Operations Research Models and Methods

Paul A. Jensen and Jonathan F. Bard

Inventory Theory.S7
The (R, S) Inventory Policy
A different way to manage a stochastic inventory system is illustrated in Fig. 12 This is called a
periodic review policy in that the inventory level is only observed at time intervals of length R.
If the inventory is at level y, a quantity S – y is ordered to bring the inventory position to S. S is
called the order level. After a lead time interval L, the replenishment order is delivered. Fig. 6
shows the inventory position with dotted lines and the inventory level with solid lines.

0
0 L L L L Time
R R R

Figure 12. The (R, S) Inventory Policy

The analysis of this policy is much like the (s, Q) policy. For the (s,
Q) policy, the reorder point s is set to protect against the possibility of shortage
during the lead time L. For the (R, S) policy, the order level S is set to protect
against a shortage in the time interval R + L. In the event of a particular order at
time t, the lowest inventory that is affected by that order occurs at time t + R + L.
The quantity S must be large enough to keep the probability of a shortage in that
time interval small. The (R, S) policy is much more affected by variability than
the (s, Q) policy because of the longer interval. The advantage of the policy is
that it does not require continuous review.
To analyze this system we define the demand in the interval R + L to
be the random variable X. The p.d.f. and c.d.f. are fP(x) and FP(x). The mean and
variance during the interval are P and P (the subscript P stands for periodic).
The cost (per unit time) of operation of the inventory system expressed in terms of
R and S is
aR
EC(R, S) = h( 2 + S – ) Inventory Cost

9/9/01 Inventory Theory


Inventory Theory 2

K
+R Replenishment Cost

1
+ R CS Shortage Cost (54)

Evaluation of the shortage cost depends on the assumption of the costs


experienced in the event of a stockout.
∞
Fixed Cost per Stockout: CS = 1[1 – F(S)] = 1⌠
⌡fP(x) dx . (55)
S
∞
Charge per Unit Short: CS = 2ES = 2⌠
⌡(x – S)fP(x) dx . (56)
S
Charge per Unit Short per unit time:
∞
1⌠
CS = 3TS = 2a⌡(x – S)2fP(x) dx . (57)
S
∞
Charge per Lost Sale: CS = LES = L⌠
⌡(x – S)fP(x) dx . (58)
S
We cannot determine the optimum R easily in this case because CS
depends on R. In particular the distribution of demand in the expressions for CS
have a mean and variance that depends on the interval L + R. If we assume that
the review interval R is set elsewhere, the determination of the optimum order
level follows exactly the derivation for s* for the (s, Q) policy. The optimum
conditions are found in Table 1. We create Table 3 from Table 1 by:
S replaces s, aR replace Q, and R + L replaces L.
A similar table for discrete distributions can be constructed starting from Table 2.

Table 3. The (R, S) Policy for Continuous Distributions


Situation Cs Optimum reorder point Normal Solution
Fixed Cost per 1[1 – F(S)] hR PhR
fP(S*) = . (k*) = .
Stockout ( 1) 1 1
Charge per Unit 2Es hR hR
FP(S*) = 1 – (k*) = 1 –
Short ( 2) 2 2
Inventory Theory 3

Charge per Unit 3Ts haR haR


Short per Unit Time Es(S*) = G(k*) =
3 P 3
( 3)
Charge per Unit of LEs hR hR
F(S*) =1 – (k*) = 1 –
Lost Sales ( L) hR + L hR + L

Example 14
We consider again the situation of Example 9 except the inventory is reviewed
every month. The monthly demand for the product has a Normal distribution with
a mean of 100 and a standard deviation of 20. The holding cost is $10 per unit
per month. When it is necessary to backorder a customer request, the cost of
paperwork and good will is estimated to be $200 per unit. The lead time for
orders is zero. Find the optimum inventory policy.
The parameters of the model are
R = 1 month
h = $10, the cost of holding one unit for one month
2 = 200, the cost of backordering one unit

= 100 and = 20 during the review period. The distribution is Normal.


With these values the optimum policy determined.
hR
(k*) = 1 – = 1 – (10/200) = 0.95
2

Using a normal table, we find that the c.d.f. has the value 0.957 for
z = 1.65. The order level is
S = 100 + 20(1.65) = 133.
The optimum policy is to order a quantity (133 - x) each month. The probability
of a shortage during the month is
1 - (k*) = 0.05.
The safety stock is S – µ = 33 units.
Now we consider the same problem when the review period is every 2
months. The situation is the same except
R = 2 months
= 200 and = 20( 2 ) = 28.28 during the review period. Here we assume
that the monthly demands are independent.
hR
(k*) = 1 – = 1 – (10)(2)/200) = 0.90.
2
Inventory Theory 4

Using a Standard Normal table, we find that the c.d.f. has the value 0.899 for k =
1.28. Thus the reorder level is
S = 200 + 28.28(1.28) = 236.
The optimum policy is to order a quantity (236 - x) every two months. The safety
stock is: S – µ = 36. Three extra units of inventory are necessary for the longer
review period. For the continuous review of Example 9 the safety stock is 17
units.

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