SCM-CHAPTER08_666701360
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chain Estimating and managing safety inventory in practice
r Assoc. P of. –Dr. LIU Dacheng
8-3
1
1
The Role of Safety Inventory in a Supply Chain
Forecasts are rarely completely accurate
8-8
Measuring Demand Uncertainty
Demand has a systematic component and a random component The estimate of the random component is the measure of
demand uncertainty Random component is usually estimated by the standard
Supply Chain Management (2nd Edition)
Chapter 8 Managing Uncertainty in the Supply Chain: Safety Inventory
r Assoc. P of. –Dr. LIU Dacheng
8-1
Role of Inventory in the Supply Chain
» Very important in high-tech or other industries where obsolescence is a significant risk (where the value of inventory, such as PCs, can drop in value)
Measuring demand uncertainty Measuring product availability Replenishment policies Evaluating cycle service level and fill rate Evaluating safety level given desired cycle service
Variability
Seasonal Variability
Cycle Inventory
Safety Inventory Seasonal Inventory
r Figure Error! No text oAf ssoc. P of. –Dr. LIU Dacheng
8-2
Outline
The role of safety inventory in a supply chain Determining the appropriate level of safety inventory Impact of supply uncertainty on safety inventory Impact of aggregation on safety inventory Impact of replenishment policies on safety inventory Managing safety inventory in a multi-echelon supply
Periodic review: inventory is checked at regular (periodic) intervals and an order is placed to raise the inventory to a specified threshold (the “order-up-to” level) r Assoc. P of. –Dr. LIU Dacheng
8-12
4
4
Continuous Review Policy: Safety Inventory and Cycle Service Level
L: Lead time for replenishment
D: Average demand per unit time
sD:Standard deviation of demand per period
What actions can be taken to improve product availability while reducing safety inventory?
r Assoc. P of. –Dr. LIU Dacheng
8-6
2
2
Determining the Appropriate Level of Safety Inventory
If average demand is 1000 units per week, then half the time actual demand will be greater than 1000, and half the time actual demand will be less than 1000; what happens when actual demand is greater than 1000?
when it is received Uncertainty of demand during lead time is what is important
r Assoc. P of. –Dr. LIU Dacheng
8-9
3
3
Measuring Demand Uncertainty
P = demand during k periods = kD W = std dev of demand during k periods = sRSqrt(k) Coefficient of variation = cv = m/s = mean/(std dev)
level or fill rate Impact of required product availability and uncertainty
on safety inventory
r Assoc. P of. –Dr. LIU Dacheng
8-7
Determining the Appropriate Level of Demand Uncertainty
Improve Matching of Supply and Demand
Improved Forecasting
Reduce Material Flow Time
Reduce Waiting Time Reduce Buffer Inventory
Supply / Demand
Economies of Scale
Order fill rate: fraction of orders that are filled from available inventory
Cycle service level: fraction of replenishment cycles that end with all customer demand met r Assoc. P of. –Dr. LIU Dacheng
satisfying demand that exceeds the amount forecasted
in a given period
r Assoc. P of. –Dr. LIU Dacheng
8-4
Role of Safety Inventory
Average inventory is therefore cycle inventory plus safety inventory
Stockout: a customer order arrives when product is not available
Product fill rate (fr): fraction of demand that is satisfied from product in inventory
» Compaq and Dell in PCs
r Assoc. P of. –Dr. LIU Dacheng
8-5
Two Questions to Answer in Planning Safety Inventory
What is the appropriate level of safety inventory to carry?
8-11
Replenishment Policies
Replenishment policy: decisions regarding when to reorder and how much to reorder
Continuous review: inventory is continuously monitored and an order of size Q is placed when the inventory level reaches the reorder point ROP
= size of uncertainty relative to demand
r Assoc. P of. –Dr. LIU Dacheng
8-10
Measuring Product Availability
Product availability: a firm’s ability to fill a customer’s order out of available inventory
deviation of demand Notation:
D = Average demand per period sD = standard deviation of demand per period L = lead time = time between when an order is placed and
DL: Mean demand during lead time
sL: Standard deviation of demand during lead time
CSL: Cycle service level
Higher levels of desired product availability require higher levels of safety inventory given a particular level of uncertainty
r Assoc. P of. –Dr. LIU Dacheng
There is a fundamental tradeoff:
– Raising the level of safety inventory provides higher levels of product availability and customer service
– Raising the level of safety inventory also raises the level of average inventory and therefore increases holding costs
Appropriate level of safety inventory determined by:
– supply or demand uncertainty – desired level of product availability
Higher levels of uncertainty require higher levels of safety inventory given a particular desired level of product availability
If you kept only enough inventory in stock to satisfy verage demand, half the time you would run out
Safety inventory: Inventory carried for the purpose of
r Assoc. P of. –Dr. LIU Dacheng
8-3
1
1
The Role of Safety Inventory in a Supply Chain
Forecasts are rarely completely accurate
8-8
Measuring Demand Uncertainty
Demand has a systematic component and a random component The estimate of the random component is the measure of
demand uncertainty Random component is usually estimated by the standard
Supply Chain Management (2nd Edition)
Chapter 8 Managing Uncertainty in the Supply Chain: Safety Inventory
r Assoc. P of. –Dr. LIU Dacheng
8-1
Role of Inventory in the Supply Chain
» Very important in high-tech or other industries where obsolescence is a significant risk (where the value of inventory, such as PCs, can drop in value)
Measuring demand uncertainty Measuring product availability Replenishment policies Evaluating cycle service level and fill rate Evaluating safety level given desired cycle service
Variability
Seasonal Variability
Cycle Inventory
Safety Inventory Seasonal Inventory
r Figure Error! No text oAf ssoc. P of. –Dr. LIU Dacheng
8-2
Outline
The role of safety inventory in a supply chain Determining the appropriate level of safety inventory Impact of supply uncertainty on safety inventory Impact of aggregation on safety inventory Impact of replenishment policies on safety inventory Managing safety inventory in a multi-echelon supply
Periodic review: inventory is checked at regular (periodic) intervals and an order is placed to raise the inventory to a specified threshold (the “order-up-to” level) r Assoc. P of. –Dr. LIU Dacheng
8-12
4
4
Continuous Review Policy: Safety Inventory and Cycle Service Level
L: Lead time for replenishment
D: Average demand per unit time
sD:Standard deviation of demand per period
What actions can be taken to improve product availability while reducing safety inventory?
r Assoc. P of. –Dr. LIU Dacheng
8-6
2
2
Determining the Appropriate Level of Safety Inventory
If average demand is 1000 units per week, then half the time actual demand will be greater than 1000, and half the time actual demand will be less than 1000; what happens when actual demand is greater than 1000?
when it is received Uncertainty of demand during lead time is what is important
r Assoc. P of. –Dr. LIU Dacheng
8-9
3
3
Measuring Demand Uncertainty
P = demand during k periods = kD W = std dev of demand during k periods = sRSqrt(k) Coefficient of variation = cv = m/s = mean/(std dev)
level or fill rate Impact of required product availability and uncertainty
on safety inventory
r Assoc. P of. –Dr. LIU Dacheng
8-7
Determining the Appropriate Level of Demand Uncertainty
Improve Matching of Supply and Demand
Improved Forecasting
Reduce Material Flow Time
Reduce Waiting Time Reduce Buffer Inventory
Supply / Demand
Economies of Scale
Order fill rate: fraction of orders that are filled from available inventory
Cycle service level: fraction of replenishment cycles that end with all customer demand met r Assoc. P of. –Dr. LIU Dacheng
satisfying demand that exceeds the amount forecasted
in a given period
r Assoc. P of. –Dr. LIU Dacheng
8-4
Role of Safety Inventory
Average inventory is therefore cycle inventory plus safety inventory
Stockout: a customer order arrives when product is not available
Product fill rate (fr): fraction of demand that is satisfied from product in inventory
» Compaq and Dell in PCs
r Assoc. P of. –Dr. LIU Dacheng
8-5
Two Questions to Answer in Planning Safety Inventory
What is the appropriate level of safety inventory to carry?
8-11
Replenishment Policies
Replenishment policy: decisions regarding when to reorder and how much to reorder
Continuous review: inventory is continuously monitored and an order of size Q is placed when the inventory level reaches the reorder point ROP
= size of uncertainty relative to demand
r Assoc. P of. –Dr. LIU Dacheng
8-10
Measuring Product Availability
Product availability: a firm’s ability to fill a customer’s order out of available inventory
deviation of demand Notation:
D = Average demand per period sD = standard deviation of demand per period L = lead time = time between when an order is placed and
DL: Mean demand during lead time
sL: Standard deviation of demand during lead time
CSL: Cycle service level
Higher levels of desired product availability require higher levels of safety inventory given a particular level of uncertainty
r Assoc. P of. –Dr. LIU Dacheng
There is a fundamental tradeoff:
– Raising the level of safety inventory provides higher levels of product availability and customer service
– Raising the level of safety inventory also raises the level of average inventory and therefore increases holding costs
Appropriate level of safety inventory determined by:
– supply or demand uncertainty – desired level of product availability
Higher levels of uncertainty require higher levels of safety inventory given a particular desired level of product availability
If you kept only enough inventory in stock to satisfy verage demand, half the time you would run out
Safety inventory: Inventory carried for the purpose of