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CPIM Exam – Basics of Supply Chain Management Practice Study Sheet
Chapter Eleven – Independent Demand Ordering Systems
• Main question – when to place a replacement order? Three basic systems 1) order point system (for independent demand) 2) periodic review system (for independent demand) 3) material requirements planning (for dependent demand)
• Order point system – when quantities fall to a predetermined level, an order is placed. Must be when there is stock available to satisfy demand until the new stock arrives (lead time). 1) quantities are fixed 2) order point is determined by average demand during the lead time 3) timing of reorders depend on actual demand not on a constant schedule
• Order point = demand during the lead time + safety stock
• Safety stock is a calculated extra amount of stock ordered to protect against uncertainty. Calculation depends on 1) variability of demand during lead time 2) frequency of reorder 3) service level desired 4) length of lead time (longer the time, the more safety stock that has to be carried)
• Safety lead time protects against timing uncertainty by planning order releases and order receipts earlier than required
• Safety factor – service level is directly related to the number of standard deviations provided as safety stock and is usually called the safety factor. The service level is the percentage of order cycles without a stockout
• Safety stock = sigma * safety factor (sigma = 1 standard deviation)
• The only time a stockout occurs is when stock is running low and this happens whenever an order is placed.
• If lead time is zero, the standard deviation of demand (during lead time) is zero. As lead time increases, the standard deviation increases at a slower rate. Sigma for lead time interval = sigma for forecast interval * square root of (lead time interval/forecast interval)
• Two bin system – a quantity of an item equal to the order point quantity is set aside (in a second bin) and not used until main quantity is gone. When the main quantity is gone, an order is placed, and manufacturing continues out of the safety stock
• Perpetual inventory record system is an up to date record of transactions. Contains permanent (header record) and variable information (quantities, balances, etc…)
• Target level demand is the quantity equal to the demand during the lead time plus the demand during the review period plus safety stock is the maximum level inventory (for periodic review system, which doesn’t automatically reorder)
• Distribution inventory includes all the finished goods held anywhere in the distribution system (central supply facility and distribution centers)
• Unless a firm delivers directly from factory to customer, demand on the factory is created by the distribution centers (served from central supply). Thus even if demand is uniform it won’t appear that way at the center because it depends on when the distribution centers place their replenishment orders
• Decentralized system – each distribution center determines what it needs and when and places orders on central supply. Local control is better but has negative impact on production. Stock is “pulled” through the system
• Centralized system – all forecasting and order decisions are made centrally. Distribution centers have no say in what they receive. Stock is “pushed” through the system. Generally stock that has been sold is replaced with extra inventory for promotions. Results in lower level of customer service