Page 460 -

440 CHAPTER 10 INVENTORY MODELS

MANAGEMENT SCIENCE IN ACTION

Dell Computers
ell was established by Michael Dell in 1984 suppliers are in Asia with transportation and delivery
Dusing a business model of selling computers times that may be up to 30 days. In one project a
and computer systems directly to customers team analyzed inventory management for one of the
through the Internet or phone rather than through major PC components used by Dell in its Texas
traditional retail systems. Once a customer order is assembly plant. Based on the inventory model
received the computer product can be manufac- developed by the team, Dell was able to reduce
tured in a matter of hours. Dell operates in a very relevant inventory by around 40 per cent with
competitive and price-conscious market so manag- estimated savings of around $40 million using net
ing its supply chain effectively is critical. One of the present value calculations. Dick Hunter, Vice
key elements is that Dell carries the minimum inven- President, Americas Manufacturing Operations, Dell
tory itself, relying on, and managing, its suppliers to Inc., commented ‘This model and corresponding
ensure an optimal flow of inventory supplies. Keep- logic changed our thinking by directing us to focus
ing inventory to a minimum clearly enables Dell to on the drivers of variation in our supply chain as
keep its costs low and this can then feed through a key method to reduce inventory and improve
into its pricing strategy. Minimizing inventory also velocity’.
brings benefits in terms of reducing risk from obso-
Based on R. Kapuscinski, R. Q. Zhang, P. Carbonneau, R. Moore and
lescence and rapidly changing technology develop-
B. Reeves, ‘Inventory Decisions in Dell’s Supply Chain’, Interfaces 34/3
ments. However, holding minimum inventory at (May–June 2004): 191–205.
Dell creates risks of its own given that many of Dell’s

Problem 19 gives you Although other probability distributions can be used to express the demand during
practise in calculating the
replenishment level for a the review period plus the lead-time period, if the normal probability distribution is
periodic review model used, the general expression for M is:
with probabilistic
demand.
M ¼ þ z (10:39)

where z is the number of standard deviations necessary to obtain the acceptable
stock-out probability.
Periodic review systems If demand had been deterministic rather than probabilistic, the replenishment
provide advantages of level would have been the demand during the review period plus the demand
coordinated orders for during the lead-time period. In this case, the replenishment level would have
multiple items. However,
periodic review systems been 250 units, and no stock-out would have occurred. However, with the
require larger safety probabilistic demand, we have seen that higher inventory is necessary to allow
stock levels than for uncertain demand and to control the probability of a stock-out. In the Dollar
corresponding Discounts problem, 355 250 ¼ 105 is the safety stock that is necessary to
continuous review
systems. absorb any higher-than-usual demand during the review period plus the demand
during the lead-time period. This safety stock limits the probability of a stock-
out to 1 per cent.

More Complex Periodic Review Models

The periodic review model just discussed is one approach to determining a replen-
ishment level for the periodic review inventory system with probabilistic demand.
More complex versions of the periodic review model incorporate a reorder point as

Copyright 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has
deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.