Managing Safety inventory in supply chain

Agenda
Safety inventory Appropriate level of safety inventory Measuring Demand Uncertainty Replenishment Policies Levers to Improve Supply Chain Profitability problems

Safety inventory
Safety inventory is inventory carried to satisfy demand that exceeds the amount forecasted for a given period. Key to success of any supply chain is to figure out ways to decrease the level of safety inventory carried without hurting the level of product availability.

Appropriate level of safety inventory

The appropriate level of safety inventory is determined by the following two factors: The uncertainty of both demand and supply The desired level of product availability

Measuring Demand Uncertainty

The goal of forecasting is to predict the systematic component and estimate the random component.

We assume the following inputs for demand: D: Average demand per period aD: Standard deviation of demand (forecast error) per period
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Contd..

Lead time is the gap between when an order is placed and when it is received. we denote the lead time by L.

Measuring Product Availability

Product

availability reflects a firm's ability to fill a customer order out of available inventory. Ways to measure product availability: Product fill rate (fr) Order fill rate(OFL) Cycle service level (CSL)

Product fill rate

Is the fraction of product demand that is satisfied from product in inventory. Fill rate should be measured over specified amounts of demand rather than time.

Order fill rate(OFL)

The fraction of orders that are filled from available inventory. OFL should also be measured over a specified number of orders rather than time.

Cycle service level (CSL)

The fraction of replenishment cycles that end with all the customer demand being met. The CSL is equal to the probability of not having a stock out in a replenishment cycle. CSL should be measured over a specified number of replenishment cycles.

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Replenishment Policies
A replenishment policy consists of decisions regarding when to reorder and how much to reorder. Continuous review: Inventory is continuously tracked and an order for a lot size Q is placed when the inventory declines to the reorder point (ROP). Periodic review: Inventory status is checked at regular periodic intervals and an order is placed to raise the inventory level to a specified threshold.
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Levers to Improve Supply Chain Profitability

Reduce

the supplier lead time L: If lead time decreases by a factor of k, the required safety inventory decreases by a factor of k the underlying uncertainty of demand (represented by uv): If aD is reduced by a factor of k, the required safety inventory also decreases by a factor of k.
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Reduce

Problem

Assume that weekly demand for palms at B&M computer world is normally distributed, with a mean of 2,500 & a std.dev of 500. The manufacturer takes 2 wks to fill an order placed by the B&M manager. The store currently orders 10,000 palms when the inventory on hand drops to 6000. Evaluate the safety inventory carried by B&M and the average inventory carried by B&M. Also evaluate the average time spent by a palm at B&M.
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Presented by

Ashwini.k

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