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Inventory Aggregation Example

 

 

Version 1.0 – March 2014

Author: Stefano SAETTA

Dipartimento di Ingegneria Università di Perugia

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INTRODUCTION

The aim of this example is to give to the student an idea about the phenomen of Inventory aggregation.

 

This phenomenon can be easily explained with probability theory, nevertheless is not always simple for the students to catch the behaviour of aggregated inventories.

It is not always simple to understand why, when the number of inventories users increases (clients in the following), relative fluctuations of inventories demand deacreases and it is possible to save on inventories, while keeping a good service level.

On the other hand inventory aggregation is a common phenomenon in a every day life.In grocery, for instance you can save on inventory when you have big shops.

Also banks can reduce the available stock of money when the number of clients increases.Or electric power can be more efficiently used if you have a huge amount of clients.

Healtcare services can reach higher utilization level if the population served can be increased and so on. Inventory aggregation is one of the main benefit in online shops.

There of course conditions that must be verified in order to have Inventory Aggregation, first of all client demand must be independent (or better not correlated) from one client to the other.

So in order to support my students to better understand this phenomenon I prepared a numerical example that will be described in the following.

For an introduction to Inventory Aggregation, please refer to: Sunil Chopra, Peter Meindl, "Supply Chain Management, Strategy, Planning and Operation".

Some elementary probability is required for the example, please refer to Feller: "An Introduction to Probability Theory and Its Applications" or other probability books for more informations.