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Chapter 12

BU435 Chapter 12: BU435 Chapter 12

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Hamidreza Faramarzi

Ch.12: Managing Uncertainty in a Supply Chain Role of Safety Inventory Safety inventory is carried to satisfy demand that exceeds the amount forecasted Raising the level of safety inventory increases product availability and thus the margin captured from customer purchases Raising the level of safety inventory increases inventory holding costs Three key questions 1. What is the appropriate level of product availability? 2. How much safety inventory is needed for the desired level of product availability? 3. What actions can be taken to reduce safety inventory without hurting product availability? The Level of Safety Inventory Determined by 2 factors The uncertainty of both demand and supply The desired level of product availability Measuring Product Availability 1. Product fill rate (fr): Fraction of product demand satisfied from product in inventory 2. Order fill rate: Fraction of orders filled from available inventory 3. Cycle service level (CSL): Fraction of replenishment cycles that end with all CR demand being met Replenishment cycle the interval bw two successive replenishment deliveries o Continuous review Inventory is continuously tracked Order for a lot size Q is placed when the inventory declines to the reorder point (ROP) o Periodic review Inventory status is checked at regular periodic intervals Order is placed to raise the inventory level to a specified threshold Evaluating Fill Rate Given a Replenishment Policy Expected shortage per replenishment cycle (ESC) is the average units of demand that are not satisfied from inventory in stock per replenishment cycle KEY POINT: Both FILL RATE CYCLE SERVICE LEVEL INCREASE AS SAFETY INVENTORY IS INCREASED. For the same safety inventory, an increase in lot size increases the fill rate but not the cycle service level. Impact of Desired Product Availability Uncertainty: As desired product availability goes up the required safety inventory increases The required safety inventory increases with an increase in the LT the uncertainty of periodic demand. Goal is to reduce the level of safety inventory required in a way that doesnt adversely affect product availability Reduce the supplier lead time L Reduce the underlying uncertainty of demand (represented by s )D KEY POINT: A reduction in supply uncertainty can help to dramatically reduce the required safety inventory without hurting product availability. Impact of Aggregation on Safety Inventory The safety inventory savings on aggregation increase with the desired cycle service level CSL The safety inventory savings on aggregation increase with the replenishment lead time L The safety inventory savings on aggregation increase with the holding cost H The safety inventory savings on aggregation increase with the coefficient of variation of demand (D D) The safety inventory savings on aggregation decrease as the correlation coefficients increase
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