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Determining the
Optimal Level of Product
Availability
PowerPoint presentation
to accompany
Chopra and Meindl
Supply Chain Management,
6e 2016 Pearson Education, Inc.
Copyright
13 1
Learning Objectives
1. Identify the factors affecting the optimal
level of product availability and evaluate
the optimal cycle service level
2. Use managerial levers that improve
supply chain profitability
3. Understand conditions under which
postponement is valuable in a supply
chain
4. Allocate limited supply capacity among
multiple products to maximize expected
profits
Copyright 2016 Pearson Education, Inc.
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Cost of overstocking, C
Cost of understocking, C
Possible scenarios
o
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Cumulative Probability
of Demand Being Di or
Less (Pi)
Probability of Demand
Being Greater than
Di(1 Pi)
0.01
0.01
0.99
0.02
0.03
0.97
0.04
0.07
0.93
0.08
0.15
0.85
0.09
0.24
0.76
0.11
0.35
0.65
10
0.16
0.51
0.49
11
0.20
0.71
0.29
12
0.11
0.82
0.18
13
0.10
0.92
0.08
14
0.04
0.96
0.04
15
0.02
0.98
0.02
16
0.01
0.99
0.01
17
0.01
1.00
0.00
Demand Di
(in
hundreds)
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1,000( p c) pi $49,900
i11
Expected profit
from extra 100 parkas = 5,500 x Prob(demand
1,100)
500 x Prob(demand < 1,100)
= $5,500 x 0.49 $500 x 0.51 =
Expected profit from
$2,440
ordering 1,300 parkas = $49,900 + $2,440 +
$1,240 + $580
= $54,160
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Expected
Marginal
Benefit
Expected
Marginal Cost
Expected
Marginal
Contribution
11th
5,500 x 0.49 =
2,695
2,695 255 =
2,440
12th
5,500 x 0.29 =
1,595
1,595 355 =
1,240
13th
5,500 x 0.18 =
990
14th
5,500 x 0.08 =
440
440 460 = 20
15th
5,500 x 0.04 =
220
16th
5,500 x 0.02 =
110
17th
5,500 x 0.01 = 55
55 495 = 440
TABLE 13-2
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fr 1 Prob(demand 1,300)
(1,300 / Di ) pi 0.99
Di 1,300
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p s Cu Co 1 Co / Cu
O* F 1(CSL*, , ) NORMINV(CSL*, , )
O
O
Expected profit ( p s) Fs
( p s) fs
O(c s)F (O, , ) O( p c) 1 F (O, , )
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Cu
150
CSL* Prob(Demand O*)
0.88
Cu Co 150 20
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59,500NORMDIST(1.18,0,1,1)
17,000NORMDIST(1.18,0,1,0)
9,360NORMDIST(468,350,100,1)
70,200 1 NORMDIST(468,350,100,1)
$49,146
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S
S
overstock
Expected (O )NORMDIST (O ) / ,0,1,1
overstock
NORMDIST (O ) / ,0,1,0
Expected ( O) 1 F O f O
S
S
understoc
k
Expected ( O) 1 NORMDIST (O ) / ,0,1,1
understoc
(O ) / ,0,1,0
NORMDIST
k
Copyright 2016 Pearson Education, Inc.
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overstock
NORMDIST (O ) / ,0,1,0
understoc
NORMDIST (O ) / ,0,1,0
k
(350 450) 1 NORMDIST (450 350) / 100,0,1,1
100NORMDIST (450 350) / 100,0,1,0 8
Copyright 2016 Pearson Education, Inc.
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Step 1, c = $50
Cost of understocking = Cu = p c = $200 $50 = $150
Cost of overstocking = Co = c s = $50 $0 = $50
Cu
150
CSL* Prob(Demand O*)
0.75
Cu Co 150 50
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Step 2, c = $45
Cost of understocking = Cu = p c = $200 $45 = $155
Cost of overstocking = Co = c s = $45 $0 = $45
Cu
150
CSL* Prob(Demand O*)
0.775
Cu Co 150 45
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= (Q/D)H
= (1 CSL)Cu
HQ
CSL* 1
DCu
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HQ
CSL* 1
HQ DCu
0.6 400
1
0.98
0.6 400 2 5,200
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Obvious actions
1. Increase salvage value of each unit
2. Decrease the margin lost from a
stockout
1.
2.
3.
4.
Improved forecasting
Quick response
Postponement
Tailored sourcing
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FIGURE 13-2
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Improved Forecasts
uncertainty
Less uncertainty results in
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150
CSL* Prob(Demand O*)
0.88
150 20
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Optimal
Order
Size O*
Expected
Overstock
Expected
Understoc
k
Expected
Profit
150
526
186.7
8.6
$47,469
120
491
149.3
6.9
$48,476
90
456
112.0
5.2
$49,482
60
420
74.7
3.5
$50,488
30
385
37.3
1.7
$51,494
350
$52,500
TABLE 13-3
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FIGURE 13-3
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CSL*
p c 150 40
0.92
p s 150 30
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FIGURE 13-4
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FIGURE 13-5
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Key Point
If quick response allows multiple
replenishment orders in the season,
profits increase and the overstock and
understock quantities decrease.
Multiple replenishments allow the
supply chain to better match supply
and demand by being able to respond
to trends rather than having to forecast
them.
Copyright 2016 Pearson Education, Inc.
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0.75
p s 50 10
$23,664
412
= 75
4 x 1,337 = 5,348
4 x $23,644 =
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0.70
p s 50 10
A 4 1,000 4,000
A 4 500 1,000
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Key Point
Postponement allows a firm to increase
profits and better match supply and
demand if the firm produces a large
variety of products whose demand is
unpredictable and not positively
correlated, and is of about the same
size. The value of postponement
decreases us uncertainty decreases or
demand is positively correlated across
end products.
Copyright 2016 Pearson Education, Inc.
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Option 1
Red sweaters demand red = 3,100, red = 800
Other colors
= 300, = 200
*
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Value of Postponement:
Benetton
Other colors = 300, = 200
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Option 2
A 3,100 3 300 4,000
A 8002 3 2002 872
Total production = 4,475
Expected profit =
$99,872
Expected overstock =
623
Expected understock =
166
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Key Point
Postponement may reduce overall
profits for a firm if a single product
contributes the majority of the demand
because the increased manufacturing
expense due to postponement
outweighs the small benefit that
aggregation provides in this case for
the dominant product.
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Manufacturing
Policy
Q2
Average
Profit
Average
Overstock
Average
Understock
4,524
$97,847
510
210
1,337
$94,377
1,369
282
700
1,850
$102,730
308
168
800
1,550
$104,603
427
170
900
950
$101,326
607
266
900
1,050
$101,647
664
230
1,000
850
$100,312
815
195
1,000
950
$100,951
803
149
1,100
550
$99,180
1,026
211
1,100
650
$100,510
1,008
185
Q1
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Key Point
Tailored postponement allows a firm to
increase its profitability by postponing
only the uncertain part of the demand
and producing the predictable part at a
lower cost without postponement.
Tailored postponement is more
profitable than either no postponement
or complete postponement but can be
complex to implement.
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Tailored Sourcing
A firm uses a combination of two
supply sources
and demand
May be volume based or product based
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Tailored Sourcing
Volume-based tailored sourcing
Predictable part of demand produced at
efficient facility
Uncertain portion produced at flexible
facility
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High end
Mid-range
1 = 1,000
2 = 2,000
1 = 300
2 = 400
p1 = $150
p2 = $100
c1 = $50
c2 = $40
s1 = $35
s2 = $25
CSL = 0.87
O = 1,337
CSL = 0.80
O = 2,337
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Max i (Qi )
i1
i1
Qi 0
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Order Quantity
Capacity
Left
High End
Mid Range
High End
Mid Range
3,000
99.95
60.00
2,900
99.84
60.00
100
2,100
57.51
60.00
900
2,000
57.51
60.00
900
100
800
57.51
57.00
900
1,300
780
54.59
57.00
920
1,300
300
42.50
43.00
1,000
1,700
200
42.50
36.86
1,000
1,800
180
39.44
36.86
1,020
1,800
40
31.89
Copyright 2016 Pearson Education, Inc.
30.63
1,070
TABLE 13-5
1,890
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Key Point
When ordering multiple products under
a limited supply capacity, the
allocation of capacity to products
should be based on their expected
marginal contribution to profits. This
approach allocates a relatively higher
fraction of capacity to products that
have a high margin relative to their
cost of overstocking.
Copyright 2016 Pearson Education, Inc.
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