Design. Analyze. Optimize.

Item Optimization

Stock item "Bearing 23456" has a current storage strategy as follows: Reorder point = 3, Order size = 10. The item has only unplanned consumption and the amount of storage visits is in average 3 visits per year with a standard deviation of 1.5. An expert also has information that maximum amount of stock visits per year is 6. When an unplanned stock visit occurs the need is usually for a pair of bearings, but sometimes only one bearing is enough. This leads to the following consumption probabilities: Consumption 2 - Probability 0.8, Consumption 1 - Probability 0.2.

Item delivery time is in average 9 days with a standard deviation of 3 days. The internal order time of the storage (time that it takes to provide the order to the supplier) is 0.4 days with a standard deviation of 0.5 days. By combining the order and delivery times we can calculate that 95% of order occasions provide item to the storage in under 15.9 days from the need. There is also a possibility to order the item in emergency cases from another storage of the same supplier in which case the delivery time is 12 hours with a standard deviation of 12 hours.

What is the most cost-efficient way to store the item when the cost data is as follows:

  • Item price = 120 EUR
  • Order costs = 20 EUR / order
  • Delivery costs = 20 EUR / delivery
  • Emergency delivery with taxi = 200 EUR / delivery
  • Shortage penalty = 10000 EUR / h
  • Annual interest of funds = 12%
  • Space and upkeep costs = 20 EUR / item / year

StockOptim software can be used to solve the problem by first inputting the basic data for the item created to the software and then optimizing the item. StockOptim optimization tool suggests the cost-optimal storage strategy to be Reorder point = 5, Order size = 4.

As a result StockOptim provides a report that allows the comparison between the current storage strategy and the optimized one. It is also possible to add other storage strategy results to the report. In this example the goal was to locate the most cost-efficient storage strategy and the results concerning it and the current strategy can be found in the table below.

Cost (EUR) Current storage strategy
Reorder point = 3
Order size = 10
Optimized storage strategy
Reorder point = 5
Order size = 4
Ordering (a) 10.80 26.82
Ordering (s.d.) 10.16 15.95
Ordering (95%) 20.00 60.00
Cargo (a) 10.94 26.82
Cargo (s.d.) 11.52 15.95
Cargo (95%) 20.00 60.00
Space and upkeep (a) 167.93 147.51
Space and upkeep (s.d.) 35.97 14.09
Space and upkeep (95%) 228.70 172.10
Interest (a) 120.45 105.81
Interest (s.d.) 25.80 10.11
Interest (95%) 164.05 123.45
Shortages (a) 122.60 0.00
Shortages (s.d.) 5841.90 0.00
Shortages (95%) 0.00 0.00
Sum (a) 432.72 306.95
Sum (s.d.) 5842.80 31.74
Sum (95%) 416.82 359.04
(a = average value, s.d. = standard deviation and 95% = 95% quantile)

In addition to normal storage-related cost results also other performance indicators are available:

Current storage strategy
Reorder point = 3
Order size = 10
Optimized storage strategy
Reorder point = 5
Order size = 4
Probability for no shortage situations in a year 0.99918 1.00000
Items in storage in average [pcs] 8.36 7.35
Number of supplies (a) 0.54 1.34
Turnover (a) 0.68 0.74
(a = average value, s.d. = standard deviation ja 95% = 95% quantile)