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Impact of CSL on Inventory Cost

Demand per period (week), R =


Standard deviation of demand, R =
Replenishment lead time, L =
Inventory Holding Cost =
Product Cost =
Mean demand during lead time RL =
SD of demand during lead time L =

CSL
96%
97%
98%
99%
99.99%

SS Level
(units)
1,238
1,330
1,452
1,645
2,630

2500 units

500
2 weeks
20%
250
5000
707

Inventory
Holding Cost
$
61,896
$
66,496
$
72,611
$
82,249
$
131,487

Inventory Holding Cost

$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$96% 96% 97% 97% 98% 98% 99% 99% 100% 100% 101%

CSL

Evaluating the Profit Maximizing Order Quantity at LL Bean


Cost to Mfg, c
$
45
Co = c-s
Sale price, p
$
100
Cu = p-c
Salvage value, s
$
40
Order Quantity =
1,300

$
$

Change the order quantity in Cell C5 to


in5Cell G23 and expected marginal cont
55 parkas in Cell F29. Entries in Cell C
100
of 100.

Order Quantity = 1300


Probability
Demand
Pi
pi
Di
=p(D<=Di)
0.01
400
0.01
0.02
500
0.03
0.04
600
0.07
0.08
700
0.15
0.09
800
0.24
0.11
900
0.35
0.16
1,000
0.51
0.20
1,100
0.71
0.11
1,200
0.82
0.10
1,300
0.92
0.04
1,400
0.96
0.02
1,500
0.98
0.01
1,600
0.99
0.01
1,700
1.00
Expected Value
1,026

sold
units
400
500
600
700
800
900
1,000
1,100
1,200
1,300
1,300
1,300
1,300
1,300
1,011

overstock
units
900
800
700
600
500
400
300
200
100
0
0
0
0
0
289

Order Quantity + 100=


Probability that additional 100 units do not sell=
Probability that additional 100 units sell=
Expected Profit
Expected Marginal Contribution of an additional 100 parkas

understock
units
0
0
0
0
0
0
0
0
0
0
100
200
300
400
15

$
$

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

profit
17,500
23,500
29,500
35,500
41,500
47,500
53,500
59,500
65,500
71,500
71,500
71,500
71,500
71,500
54,160

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

profit
17,000
23,000
29,000
35,000
41,000
47,000
53,000
59,000
65,000
71,000
77,000
77,000
77,000
77,000
54,140

1,400
0.92
0.08
54,140
(20)

Order Quantity = 1400


Probability
Demand
Pi
pi
Di
=p(D<=Di)
0.01
400
0.01
0.02
500
0.03
0.04
600
0.07
0.08
700
0.15
0.09
800
0.24
0.11
900
0.35
0.16
1,000
0.51
0.20
1,100
0.71
0.11
1,200
0.82
0.10
1,300
0.92
0.04
1,400
0.96
0.02
1,500
0.98
0.01
1,600
0.99
0.01
1,700
1.00
Expected Value
1,026

sold
units
400
500
600
700
800
900
1,000
1,100
1,200
1,300
1,400
1,400
1,400
1,400
1,019

overstock
units
1,000
900
800
700
600
500
400
300
200
100
0
0
0
0
381

understock
units
0
0
0
0
0
0
0
0
0
0
0
100
200
300
7

order quantity in Cell C5 to evaluate expected profit


nd expected marginal contribution of another
n Cell F29. Entries in Cell C5 should be multiples

Evaluating Profit, Overstock, and Understock Given Ordering Policy (Examples 13-1 and 13-2)

Input
Mean demand, mu =
Standard Deviation of Demand, =
Order size, O =
Cost per unit, c =
Retail price, p =
Salvage Value, s =
Substitute Product Margin
Cost of overstocking per unit, Co =
Cost of understocking per unit, Cu =
Expected overstock units (eqn 13.4) =
Expected understock units (eqn 13.5) =
Cycle service level, CSL (eqn. 13.1)=
Expected profit (eqn 13.3) =
Order quantity +1
Expected overstock units (eqn 13.4)
Expected understock units (eqn 13.5)
Expected Profit (eqn 12.3)
Expected Marginal Profit

Scenario 1
Scenario 2
350
350
Scenario
1 allows calculatio
specific
order size (Cell E6).
100
100
Scenario 2 calculates the o
450
469
Cells E24 and E25 contain th
$
100.00
###order sizes in Cells E6 an
the
Example
13.1 The inputs a
$
250.00
###
F6,
$
80.00
###F15, F16 and F18.
Example 13.2 Enter 450 in
$
###
$
$

20.00 $
150.00 $
108
8
0.84
49,084 $

20.00
150.00
124
6
0.88
49,147

$
$

451
109
8
49,090 $
6.77 $

470
125
6
49,146
(0.17)

ario 1 allows calculation of profits, overstock and understock for a


fic order size (Cell E6).
ario 2 calculates the optimal order size (Cell F6) given the other inputs.
E24 and E25 contain the Expected Marginal Profit from increasing
der sizes in Cells E6 and F6 by 1 unit.
ple 13.1 The inputs are in Cells F4, F5, F7:F9. The solutions are in Cells
5, F16 and F18.
ple 13.2 Enter 450 in Cell E6. The solutions are in Cells E15 and E16

Obtaining Optimal order Quantities for Seasonal Items with Quantity Discount (Example 13-3)

Input
Mean demand, mu =
Standard Deviation of Demand, =
Cost per unit, c =
Retail price, p =
Salvage Value, s =
Intermediate Calculations
Cost of overstocking per unit, Co =
Cost of understocking per unit, Cu =
Optimal Results
Optimal Order quanity, O* (eqn 13.2) =
Optimal cycle service level, CSL* (eqn
13.1)=
Expected Profit (eqn 13.3) =
Expected overstock units (eqn 13.4) =
Expected understock units (eqn 13.5) =

No Discount Discount
150
150
40
40
$
50.00 $
45.00
$
200.00 $
200.00
$
$
Column
E contains the
$
$

50.00 $
150.00 $
177
0.75
#NAME? $
#NAME?
#NAME?

Column F contains the


Enter the desired orde
in Cell F17. Pick the o

45.00
155.00
200
0.89
20,595
52
2

ample 13-3)

Discount Pricing
< =Quantity
Price
200 $
50.00
$
45.00
Column E contains the results when quantity discounts are ignored.
Column F contains the results accounting for quantity discounts.
Enter the desired order quantity in Cell F15 to obtain expected profits
in Cell F17. Pick the order quantity with the highest profits.

Desired Cycle Level for Continuously Stocked Items

Inputs
Lot Size, Q
Weekly demand, D
SD of demand, D
Lead time, L
Unit cost, C
Holding cost fraction, h
Holding cost, hC
Demand during lead time
SD of demand during lead time
Cost of understocking
CSL
Reorder point
Safety stock

Demand during
stockout
Safety is backlogged
Evaluate
Stock
Safety
Given
Stock
400
400
100
100

Demand
during
stockout is
lost
Evaluate
Safety Stock
400
100

20
2
3
0.2
0.6

20
2
3
0.2
0.6

20
2
3
0.2
0.6

200
28.28
226.83
0.9998
300
100

200
28.28
2
0.9769
256.40
56.40

200
28.28
2
0.9774
256.67
56.67

For Example 13-4, enter reorder point (ROP) in Cell B17 to obtain cost of
understocking in Cell B15.
For Example 13-5, enter cost of understocking in Cell C15 to obtain
desired safety inventory when demand during stockout is
backlogged (Cell C18) and when demand during stockout is lost (Cell E18)

Increasing Supply Chain Profitability by Reducing the Standard Deviation of Demand

Input
Mean demand, mu =
Standard Deviation of Demand, =
Cost per unit, c =
Retail price, p =
Salvage Value, s =

w/Market Research

$
$
$

Intermediate Calculations
Cost of overstocking per unit, Co =
$
Cost of understocking per unit, Cu =
$
Expected overstock units (eqn 13.4) =
Expected understock units (eqn 13.5) =
Optimal Results
Optimal Order quanity, O* (eqn 13.2) =
Optimal cycle service level, CSL* (eqn
13.1)=
Expected Profit (eqn 13.3) =
$

350
150
100.00 $
250.00 $
80.00 $

350
Column E contains the resu
30
demand
uncertainty.
Column
F
contains results
100.00
reduces (change SD of dem
250.00
Cell F5 to build Table 13-3.
80.00

20.00 $
150.00 $

20.00
150.00

187
9

37
2

528

386

0.88

0.88

47,470 $

51,494

mn E contains the results for the current


and uncertainty.
mn F contains results as demand uncertainty
ces (change SD of demand in Cell F5). Change
F5 to build Table 13-3.

Increasing Supply Chain Profitability by Reducing the Standard Deviation of Demand

Input
Mean demand, mu =
Standard Deviation of Demand, =
Cost per unit, c =
Retail price, p =
Salvage Value, s =

Order size =
Average Profit
SD (Profit)
Max Profit
Min Profit

Demand
Overstock Understock Profit
313.63138318
214
$ 42,757.34
249.32620287
279
$ 31,825.45
370.36653138
158
$ 52,402.31
633.44691123
105 $ 79,200.00
452.76901932
75
$ 66,410.73
474.90714495
53
$ 70,174.21
281.06613326
247
$ 37,221.24
355.61563671
172
$ 49,894.66
429.67034997
98
$ 62,483.96
273.53219266
254
$ 35,940.47
449.67209185
78
$ 65,884.26
562.27942276
34 $ 79,200.00
295.35253641
233
$ 39,649.93
322.46453891
206
$ 44,258.97
637.00432777
109 $ 79,200.00
272.20939874
256
$ 35,715.60
476.73865909
51
$ 70,485.57
119.74280336
408
$
9,796.28
320.82436572
207
$ 43,980.14
366.45387709
162
$ 51,737.16
238.89173896
289
$ 30,051.60
275.76006296
252
$ 36,319.21
179.21538748
349
$ 19,906.62
353.76690806
174
$ 49,580.37
533.17905801
5 $ 79,200.00

$
$
$

350
150
100.00
250.00
80.00

$
$
$
$

528
49,647.10
21,335.10
79,200.00
(15,190.80)

This simulation provides the SD


of profits (Cell E11), the max
profit (Cell E12) and min profit
(Cell E13) for the order size in
Cell E9. Press the F9 to simulate.
All results are over 300 trials.

263.33758881
412.75830513
462.41462223
409.15711307
264.95860039
468.90891532
359.48078948
489.1726813
409.55978909
431.07585685
24.955651061
387.42342341
135.30350482
198.91332389
420.81180855
296.4450654
485.15523389
491.17036228
407.57173201
197.55992866
348.90439326
333.6241873
345.50540637
454.95139479
486.1599197
515.91754954
583.45896474
389.05079777
16.487849631
425.71909963
380.04537634
687.84484477
408.89516436
259.38621976
289.67812734
483.43812229
438.26128596
333.76408151
379.23225406
649.9775707
369.70293638
208.82971174
416.96642716
569.53402869
479.03860847
413.22875516
450.48859647
333.64711894
335.25034

265
115
66
119
263
59
169
39
118
97
503
141
393
329
107
232
43
37
120
330
179
194
182
73
42
12
139
512
102
148
119
269
238
45
90
194
149
158
319
111
49
115
78
194
193

$
$
$
$
$
$
$
$
$
$
- $
$
$
$
$
$
$
$
$
$
$
- $
$
$
$
$
55 $
$
- $
$
$
160 $
$
$
$
$
$
$
$
122 $
$
$
$
42 $
$
$
$
$
$

34,207.39
59,608.91
68,050.49
58,996.71
34,482.96
69,154.52
50,551.73
72,599.36
59,065.16
62,722.90
(6,317.54)
55,301.98
12,441.60
23,255.27
60,978.01
39,835.66
71,916.39
72,938.96
58,727.19
23,025.19
48,753.75
46,156.11
48,175.92
66,781.74
72,087.19
77,145.98
79,200.00
55,578.64
(7,757.07)
61,812.25
54,047.71
79,200.00
58,952.18
33,535.66
38,685.28
71,624.48
63,944.42
46,179.89
53,909.48
79,200.00
52,289.50
24,941.05
60,324.29
79,200.00
70,876.56
59,688.89
66,023.06
46,160.01
46,432.56

100.17939795
338.21414185
437.93802105
197.27117819
579.25468391
297.42137658
593.17240242
85.149881956
220.18700159
524.78186895
379.07487838
196.91536797
565.59766812
273.22078737
483.28328373
59.482386478
366.06794744
177.33796457
461.29291128
266.18405214
483.58295327
441.80808475
335.4040705
562.41327677
643.08603104
423.44520777
342.55763753
494.72524045
472.97660238
267.22569721
217.26025556
374.96605809
507.39891038
508.02840598
572.48575794
178.26660501
327.86526716
392.26493529
212.2383297
193.33495943
513.06627885
-27.23998514
250.28669025
264.70996041
419.21331659
323.02178451
64.424907259
391.79505595
551.51851855

428
190
90
331
231
443
308
3
149
331
255
45
469
162
351
67
262
44
86
193
105
185
33
55
261
311
153
21
20
350
200
136
316
335
15
555
278
263
109
205
464
136
-

$
6,470.50
$ 46,936.40
$ 63,889.46
$ 22,976.10
51 $ 79,200.00
$ 40,001.63
65 $ 79,200.00
$
3,915.48
$ 26,871.79
$ 78,652.92
$ 53,882.73
$ 22,915.61
38 $ 79,200.00
$ 35,887.53
$ 71,598.16
- $
(447.99)
$ 51,671.55
$ 19,587.45
$ 67,859.79
$ 34,691.29
$ 71,649.10
$ 64,547.37
$ 46,458.69
34 $ 79,200.00
115 $ 79,200.00
$ 61,425.69
$ 47,674.80
$ 73,543.29
$ 69,846.02
$ 34,868.37
$ 26,374.24
$ 53,184.23
$ 75,697.81
$ 75,804.83
44 $ 79,200.00
$ 19,745.32
$ 45,177.10
$ 56,125.04
$ 25,520.52
$ 22,306.94
$ 76,661.27
- $ (15,190.80)
$ 31,988.74
$ 34,440.69
$ 60,706.26
$ 44,353.70
$
392.23
$ 56,045.16
24 $ 79,200.00

647.23238148
657.50501076
83.645136687
341.87274844
468.78009854
617.02365604
466.60736525
234.70095193
636.98223452
212.97640252
148.12799743
299.78724469
274.91211475
752.89780405
317.81984891
162.48396667
390.38647738
344.8186236
427.9784823
520.39094287
620.83935429
350.87421161
404.92712112
235.12514008
387.93393744
409.33188732
344.4090333
530.42237548
409.15982042
126.18164046
535.94477274
236.93136288
499.62395814
395.56367753
419.68105658
325.70348928
216.52290175
448.90665583
90.013682051
299.89152671
424.25911831
307.58317046
182.26804668
250.04645595
258.15226916
82.033972017
352.19805881
179.93108278
326.87438338

444
186
59
61
293
315
380
228
253
210
366
138
183
100
8
177
123
293
140
119
184
119
402
291
28
132
108
202
311
79
438
228
104
220
346
278
270
446
176
348
201

119 $
130 $
$
$
$
89 $
$
$
109 $
$
$
$
$
225 $
$
$
$
$
$
$
93 $
$
$
- $
$
$
$
2 $
$
$
8 $
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

79,200.00
79,200.00
3,659.67
47,558.37
69,132.62
79,200.00
68,763.25
29,339.16
79,200.00
25,645.99
14,621.76
40,403.83
36,175.06
79,200.00
43,469.37
17,062.27
55,805.70
48,059.17
62,196.34
77,906.46
79,200.00
49,088.62
58,277.61
29,411.27
55,388.77
59,026.42
47,989.54
79,200.00
58,997.17
10,890.88
79,200.00
29,718.33
74,376.07
56,685.83
60,785.78
44,809.59
26,248.89
65,754.13
4,742.33
40,421.56
61,564.05
41,729.14
20,425.57
31,947.90
33,325.89
3,385.78
49,313.67
20,028.28
45,008.65

562.79058865
384.30922801
244.91936924
151.87861619
292.84977799
370.4406336
327.68807918
150.63327968
348.97411818
358.46722837
504.47135073
392.05909266
308.46140773
242.98382882
572.91450887
357.32667728
330.64990323
344.9124023
225.36384882
399.70374915
502.8709865
214.24073697
238.53326022
336.78713485
401.62278648
115.80475644
201.87783418
349.19238058
397.11785442
614.97857385
339.34742602
520.44200159
347.68800145
295.95857328
188.32414258
467.11510659
290.33991362
424.69471197
378.27352345
217.83915416
461.53975541
495.90020239
491.57789525
413.90633145
462.15968168
393.28033198
564.86251034
210.2312447
411.86723062

144
283
376
235
158
200
377
179
170
24
136
220
285
171
197
183
303
128
25
314
289
191
126
412
326
179
131
189
8
180
232
340
61
238
103
150
310
66
32
36
114
66
135
318
116

35 $
$
$
$
$
$
$
$
$
$
$
$
$
$
45 $
$
$
- $
$
$
$
$
$
$
$
$
$
$
$
87 $
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
37 $
$
$

79,200.00
54,772.57
31,076.29
15,259.36
39,224.46
52,414.91
45,146.97
15,047.66
48,765.60
50,379.43
75,200.13
56,090.05
41,878.44
30,747.25
79,200.00
50,185.54
45,650.48
48,075.11
27,751.85
57,389.64
74,928.07
25,860.93
29,990.65
46,693.81
57,715.87
9,126.81
23,759.23
48,802.70
56,950.04
79,200.00
47,129.06
77,915.14
48,546.96
39,752.96
21,455.10
68,849.57
38,797.79
61,638.10
53,746.50
26,472.66
67,901.76
73,743.03
73,008.24
59,804.08
68,007.15
56,297.66
79,200.00
25,179.31
59,457.43

468.87948261
244.84757947
310.41141645
333.016227
183.63681062
269.21463257
427.04667427
272.64647028
126.86558136
293.39858974
377.75353393
490.8226696
358.02469682
293.65056839
586.05330504
279.4889451
515.90906459
339.01548633
184.27442784
410.7538948
367.00928669
249.61689127
218.94154829
245.42908257
464.59837628
162.79707559
313.12144164
436.03325348
219.28964163
431.53460463
380.38863189
503.82622441
349.24523292
636.01430339
409.82532676
595.39562626
470.79149621
349.14111243
293.5873218
264.76109146
482.81546959
340.79398804
449.62982841
466.02411273
657.6622759
339.3331917
248.56303063
337.0343721
445.93780609

59
283
218
195
344
259
101
255
401
235
150
37
170
234
249
12
189
344
117
161
278
309
283
63
365
215
92
309
96
148
24
179
118
57
179
234
263
45
187
78
62
189
279
191
82

58
108
67
130
-

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

69,149.51
31,064.09
42,209.94
46,052.76
20,658.26
35,206.49
62,037.93
35,789.90
11,007.15
39,317.76
53,658.10
72,879.85
50,304.20
39,360.60
79,200.00
36,953.12
77,144.54
47,072.63
20,766.65
59,268.16
51,831.58
31,874.87
26,660.06
31,162.94
68,421.72
17,115.50
42,670.65
63,565.65
26,719.24
62,800.88
54,106.07
75,090.46
48,811.69
79,200.00
59,110.31
79,200.00
69,474.55
48,793.99
39,349.84
34,449.39
71,518.63
47,374.98
65,877.07
68,664.10
79,200.00
47,126.64
31,695.72
46,735.84
65,249.43

391.52910445
377.23598349
326.22366443
649.67964873
339.87341947
196.3968878
403.64412675
521.00535623
86.673493373
355.80784909
281.17385816
200.75192941
350.06659684
451.46959174
685.58324081
393.35873713
343.63467054
317.68330877
132.55550422
608.26284097
116.33591681
256.08841326
338.16303513
186.50750552
192.75367818
506.20971013
363.49547347
473.18623591
617.34482752
405.01365521

136
151
202
188
332
124
7
441
172
247
327
178
77
135
184
210
395
412
272
190
341
335
22
165
55
123

$
$
$
122 $
$
$
$
$
$
$
$
$
$
$
158 $
$
$
$
- $
80 $
- $
$
$
$
$
$
$
$
89 $
$

55,999.95
53,570.12
44,898.02
79,200.00
47,218.48
22,827.47
58,059.50
78,010.91
4,174.49
49,927.33
37,239.56
23,567.83
48,951.32
66,189.83
79,200.00
56,310.99
47,857.89
43,446.16
11,974.44
79,200.00
9,217.11
32,975.03
46,927.72
21,146.28
22,208.13
75,495.65
51,234.23
69,881.66
79,200.00
58,292.32

mulation provides the SD


fits (Cell E11), the max
Cell E12) and min profit
13) for the order size in
9. Press the F9 to simulate.
ults are over 300 trials.

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