urer is the third tier but this relationship will not be discussed until the topics of centralized and decentralized information are discussed. Therefore, until these sections of the paper, ignore the left most box labeled belt manufacturer in Figure 1.Oftentimes the Orem Studio acts as a supplier of goods to other studios. On a monthly basis, Orem supplies materials, such as belts, to various studios to be used in the promotion ceremony of their students. Simply put, the small franchise places an order for belts in response to customer demand. The Orem studio must try and predict this order based on the historical ordering pattern of the small franchise, so that it will have the goods in stock at the time the small franchise orders them (demand for belts did not exist until the order was placed). For the time being, let us assume that the franchise doesnt know exactly what customer demand is for the up coming period, t. The franchise must therefore try and predict what the demand will be in order to inform the Orem Studio of the belts they will need. It is assumed that the franchise is using a simple moving average (based on historical data) to estimate the mean demand, AVG, and its standard deviation, STD, at time t. That is: (1) (2)where:t = the current observation periodp = the total number of observation periodsD = demand at any given timeIt is further assumed that the franchise is using a simple reorder point inventory policy. The reorder point, s, will be estimated from any given period by first using the equations listed above and secondly, using the following equation: (3)where:L = lead time (months)AVG = the mean value of demand (per month)STD = the standard deviation of demand (per month)Z = the z-score as dictated by the service level desiredAlthough there are many different systems for inventory management, there will be no further discussion of them in this paper. The interested reader can turn to chapter 3 of t...
