An Evaluation of the Implied Shortage Factor and Its Effect on the Air Force Logistics Command's Economic Order Quantity (EOQ) Variable Safety Level.
AIR FORCE INST OF TECH WRIGHT-PATTERSON AFB OH SCHOOL OF SYSTEMS AND LOGISTICS
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Adhering to policy guidelines established in DOD Instruction 4140.39, Headquarters Air Force Logistics Command HQ AFLC employs the Wilson Economic Order Quantity EOQ model and a derivation of the Presutti and Trepp Model IV to establish inventory variable safety levels. The safety level SL model minimizes the sum of total variable costs subject to a constraint on time-weighted, essentiality-weighted requisitions short backorders. The implied shortage factor, lambda is an arbitrary value that has a major effect on the SL formula and inventory levels at each wholesale supply depot, the Air Logistics Center. The objective of this thesis was to determine the effectiveness of the process by which lambda has been previously determined at HQ AFLC. Proposed changes to that methodology were to ensure consistency in calculations and to maintain adequate inventory safety levels subject to a budgetary constraint. Past inventory level cost data was analyzed to determine if inventory stock investments were near their spending goals. Then, computer simulations using a stratified sample of each ALCs past eight quarters of inventory historical data, a wide range of lambda values, and current management cost parameters were conducted.