Expert Systems with Applications

Questions: 1. Discuss what happens to the average inventory level if the demand uncertainty is high. 2. Discuss what happens to the reorder level if the lead time is long. 3. Discuss what happens to the order quantity and the average inventory level if the ordering cost is high. 4. Discuss what happens to the average inventory level if the desired service level is high. Answers: Since the manufacturer is concerned that the distribution centre might bring not all of the products because it tends to depends on seasonal demand variability of the distribution centre. If the demand is less that the initial level, i.e., 1000 units, then the manufacturers should concentrate fewer productions for the upcoming season for maintaining the expected profit in the long run (Crdenas-Barrn et al. 2012). In that case, it does not make any sense for the distribution centre to give an incentive to manufacturer to produce more in the seasonal because demand is low and it will be difficult to sustain the expected return in the upcoming season. In the given scenario, penalty should be imposed on the manufacturer for each product produced but the distribution centre should buy effect because for this penalty imposition, the demand will fluctuate and cost will be higher for fixed cost of production. It is always advisable to keep the inventory level less while making the client satisfy and ensure the maximum profitability (Chen, et al. 2014). Less inventory means, fewer currencies tied up in stock, fewer storage costs and lower risk of being stuck with unsellable products. The uncertainty of demand is one of the most vital factors influencing average inventory levels. But the firm should maintain the certain level of inventory for unstoppable production is called the safety stock which is an important item at the time of calculating average inventory level at the time of high demand uncertainty. Therefore, safety stock is referred as buffer against high demand. As a result, shorter inventory cycles tend to decrease the level of uncertainty, which lowers volatility in average inventory levels. As per the formula, the greater the demand uncertainty reflects higher the standard deviation of demand for a product. In that circumstances, the larger the average inventory must be to ret ain the same service level. The Reorder level formula is level of inventory when an entity should issue a purchase order to replenish the amount on hand (Taleizadeh, et al. 2012). On the other hand, lead time is determined the duration between the placing an order and the receipt of that order. In the circumstances, when lead time is long means that it is not required to order for inventory in the recent time and it also indicates that the actual level of inventory usage of a firm has been declined. The basic EOQ model is significant for measuring the optimum ordering size at the minimising carrying costs and ordering costs. The basis assumption here is the order quantity received all at once. Now, if the ordering costs are high, then the total order quantity will be higher along with the average level of inventory. Therefore, the optimum ordering size determination cannot be possible in that circumstance. It is always recommended to maintain a high service level because the chances of out of inventory become less in that circumstances (Teng et al. 2012). Now if the desired service level is high for any firm, then the safety stock will be higher and the average inventory level will be greater in that case. In addition, it will be difficult to maintain the requisite demand in that circumstances and Q will no longer be considered the best order quantity for that firm. References: Crdenas-Barrn, L. E., Trevio-Garza, G., Wee, H. M. (2012). A simple and better algorithm to solve the vendor managed inventory control system of multi-product multi-constraint economic order quantity model.Expert Systems with Applications,39(3), 3888-3895. Chen, S. C., Crdenas-Barrn, L. E., Teng, J. T. (2014). Retailers economic order quantity when the supplier offers conditionally permissible delay in payments link to order quantity.International Journal of Production Economics,155, 284-291. Taleizadeh, A.A., Pentico, D.W., Aryanezhad, M. and Ghoreyshi, S.M., 2012. An economic order quantity model with partial backordering and a special sale price.European Journal of Operational Research,221(3), pp.571-583. Teng, J. T., Min, J., Pan, Q. (2012). Economic order quantity model with trade credit financing for non-decreasing demand.Omega,40(3), 328-335.