1. A "lost sales" approach to determining inventory levels at retail locations Brian Egles www.bjpce.co.uk 07785 527324

2. The Beer Game…

3. … predicts amplification

4. Small retail stores

5. The Supply Chain Factory Imports Dedicated Warehouse Retail Stores Customer Off-the-shelf Sales Customer Catalogue Sales Distributor NDC Other Manufacturer Imports 5 – 70 days 5 – 70 days 1 - 3 days 1 - 3 days Next day

6. Bullwhip seen in practice

7. Very intermittent demand

8. … with no regular pattern

10. Reorder point method

11. Expects normal demand

12. More like POISSON distribution

13. Use to simulate current policies

16. Lost profit example If: Target stock (order up to) level = 1 If: Demand = 2, Risked sales = 1 with probability 0.0503 = 0.0503 Demand = 3, Risked sales = 2 with probability 0.0065 = 0.0130 Demand = 4, Risked sales = 3 with probability 0.0006 = 0.0018 … ..until probability effectively 0 Total = 0.0653 Estimate of lost profit = 0.0651 x 100% x 100% x £100 x 63 = £409 =POISSON(sales, average, 0)

17. What will average inventory be? Note: different if inventory would go below zero but that is not relevant

18. Lost profit v inventory tradeoff Minimum

19. Effect on examples (1)

20. Effect on examples (2)

21. Effect on examples (3)

24. Simulation to validate method Supply Warehouse Retail Generate probabilistic demands Set key decision variables (e.g safety stock) Simulate replenishment Simulate replenishment Calculate total inventory Determine lost sales Establish overall cost objective

25. Thankyou Brian Egles www.bjpce.co.uk 07785 527324 http://bjpce.co.uk/index.php/contactlist/thesisrequestmenu