Question & Answer
Question
Optimum stocking levels (IBM Maximo MRO Inventory Optimization)
Answer
Service Level definition
The red lines show the usage, 50% of the time the stock will be replenished before the Safety Stock Level is reached, 50% of the time we will use some Safety Stock. Perhaps, 5 % of the time the usage will be too high and we will stock out. The Service level is then 100 minus the chance of a stock out = 95% in the example.
If we RAISE the SS level and thus the ROP the Service Level is increased. Lifting the SS will increase the holding cost.
Service Level definition
Look at previous graph: Between Safety Stock level and 0 is the chance we will get an item before we stock out, say 97%. The chance that we hit zero will be say 100% - 97%.
The SS level is lifted if the stock out cost is high. Lifting the SS will increase the holding cost.
IBM Maximo MRO Inventory Optimization Calculation
IBM Maximo MRO Inventory Optimization balances purchasing cost against holding cost
Rule 1: The less we hold, the less the holding cost
Rule 2: The more we purchase, the less the purchase cost per item
Balancing the Holding & Purchasing Costs is called the Economic Order Quantity & is represented with the following formula:
Example:
Holding Cost is 20% per item
Purchasing Cost is $20 per order
Usage is 120 per year
When you consider the costs associated to purchasing & holding, the combined costs bottom out at the optimum ROQ as 50 items, with a total cost of $98...the economical lowest cost.
Service Level
In a real life inventory one can expect IBM Maximo MRO Inventory Optimization to set items to a wide variety of service levels. Generally, the high cost items with low business impacts will have a relatively low Customer Service Level, whilst conversely the lower cost items with a significant Business Impact will have high Service Levels.
In most cases when IBM Maximo MRO Inventory Optimization optimizes an inventory for the first time the overall customer Service Level will be found to increase whilst the Inventory Value will decrease.
Example:
Holding Cost is $60 per item
Stock Out Cost is $3000 per incident
IBM Maximo MRO Inventory Optimization balances out the 2 rules to find an optimum Safety Stock of 10, with a minimum cost of $750.
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Modified date:
12 February 2019
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ibm10871430