Inventory Optimization

Models and Simulations

Nicolas Vandeput

• Publisher: De Gruyter
• Year: 2020
• ISBN:
  9783110673999
• Edition: 1
• Topic: Commerce
• Subtopic: Leadership

In this book... Nicolas Vandeput hacks his way through the maze of quantitative supply chain optimizations. This book illustrates how the quantitative optimization of 21st century supply chains should be crafted and executed.... Vandeput is at the forefront of a new and better way of doing supply chains, and thanks to a richly illustrated book, where every single situation gets its own illustrating code snippet, so could you.

--Joannes Vermorel, CEO, Lokad

Inventory Optimization argues that mathematical inventory models can only take us so far with supply chain management. In order to optimize inventory policies, we have to use probabilistic simulations. The book explains how to implement these models and simulations step-by-step, starting from simple deterministic ones to complex multi-echelon optimization.

The first two parts of the book discuss classical mathematical models, their limitations and assumptions, and a quick but effective introduction to Python is provided. Part 3 contains more advanced models that will allow you to optimize your profits, estimate your lost sales and use advanced demand distributions. It also provides an explanation of how you can optimize a multi-echelon supply chain based on a simple—yet powerful—framework. Part 4 discusses inventory optimization thanks to simulations under custom discrete demand probability functions.

Inventory managers, demand planners and academics interested in gaining cost-effective solutions will benefit from the "do-it-yourself" examples and Python programs included in each chapter.

Events around the book

Link to a De Gruyter Online Event in which the author Nicolas Vandeput together with Stefan de Kok, supply chain innovator and CEO of Wahupa; Koen Cobbaert, Director in the S&O Industry practice of PwC Belgium; Bram Desmet, professor of operations & supply chain at the Vlerick Business School in Ghent; and Karl-Eric Devaux, Planning Consultant, Hatmill, discuss about models for inventory optimization.
The event will be moderated by Eric Wilson, Director of Thought Leadership for Institute of Business Forecasting (IBF):
https://youtu.be/565fDQMJEEg

Part I Deterministic Supply Chains

1 Inventory Policies

An inventory policy determines how much and when a product should be ordered (or produced).¹ Inventory policies determine how the products flow through a supply chain. We can categorize them into two types, based on when the inventory review is done:

• Continuous review policies: an order can be made at any time.
• Periodic review policies: the orders can only be made at specific times.

Let’s discuss in detail three of the main inventory policies used in practice.

1.1 Policy #1 – Continuous Review and Reorder Point

In this first inventory policy, we order our products based on a fixed threshold: as soon as the net inventory reaches the threshold (or goes below), we order a predetermined number of units from our supplier (or launch a production batch). This threshold is called the reorder point or ROP.

With a continuous review policy, the elapsed time between two consecutive orders will vary (as the demand fluctuates), but the order quantity will always be the same (as you can see in Figure 1.1).

Figure 1.1 Fixed reorder point policy (with immediate replenishment): “Order 10 when less than 3 left.”

Typically, with such a policy, you could say that:

• When the stock level reaches 3 pieces, I order 10.
  Here the fixed reorder point is 3, and the order quantity is 10 (see Figure 1.1). Note that, even if you only have 2 pieces in stock, you will still only order 10 pieces. Remember: with the fixed reorder point, the order quantity (10 in this case) is always fixed.
• As soon as I am left with 2 bottles of milk in my refrigerator, I’ll go to the supermarket and buy 6.
• When my printer says that I am left with only 10% of ink, I’ll order a new set of cartridges.

Advantages

This policy is safe (i. e., the risk of being out-of-stock is low) as it assumes you can make an order whenever you need to. It is therefore a good policy for expensive and/or important items that need to be monitored closely.

Another important advantage of this policy is that you can optimize the order quantity based on some (often obvious) constraints or costs. For example, you might get a rebate if you order a full pallet or a truckload. With such a policy you are sure to get the reduction each time you make an order.

Limitations

First, it ...