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Chapter 13

BU435 Chapter 13: BU435 Chapter 13

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Hamidreza Faramarzi

Ch.13: Determining the Optimal Level of Product Availability Importance of the Level of Product Availability Product availability measured by cycle service level or fill rate Also referred to as the customer service level Product availability affects supply chain responsiveness Tradeoff: High levels of product availability increased responsiveness and higher revenues High levels of product availability increased inventory levels and higher supply chain costs Product availability is related to profit objectives and strategic and competitive issues Factors Affecting the Optimal Level of Product Availability Cost of overstocking, C osc ; Cost of under stocking, C upc Possible scenarios Seasonal items with a single order in a season Onetime orders in the presence of quantity discounts Continuously stocked items Demand during stock out is backlogged Demand during stock out is lost Desired Cycle Service Level for Continuously Stocked Items Two extreme scenarios 1. All demand that arises when the product is out of stock is backlogged and filled later, when inventories are replenished 2. All demand arising when the product is out of stock is lost Managerial Levers to Improve Supply Chain Profitability Obvious actions 1. Increase salvage value of each unit (higher availability) Selling to outlet stores 2. Decrease the margin lost from a stock out (higher profit by lower availability) Back up sourcing Substitute products Reducing demand uncertainty Supply and demand are matched better Over and under stocking are reduced 1. Improved forecasting Improved forecasts result in reduced uncertainty Less uncertainty results in Lower levels of safety inventory (and costs) for the same level of product availability, or Higher product availability for the same level of safety inventory, or both 2. Quick response (impact profitsinventories) Set of actions taken by managers to reduce replenishment lead time Reduced lead time results in improved forecasts Benefits o Lower order quantities thus less inventory with same product availability o Less overstock o Higher profits Multiple Orders Per Season: Two ordering policies o Supply lead time is more than 15 weeks Single order placed at the beginning of the season o Supply lead time is reduced to six weeks Two orders are placed for the season One for delivery at the beginning of the season
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