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Managing Safety inventory in supply
chain
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Agenda
Safety inventory
Appropriate level of safety inventory
Measuring Demand Uncertainty
Replenishment Policies
Levers to Improve Supply Chain
Profitability
problems
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Safety inventory
Safety inventoryis inventory carried tosatisfy 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 hurtingthe level of product availability.
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Appropriate level of safety
inventory
The appropriate level of safety inventoryis determined by the following twofactors:
The uncertainty of both demand andsupply
The desired level of product
availability
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Measuring DemandUncertainty 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 5
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Contd..
Lead timeis the gap between when anorder is placed and when it is
received. we denote the lead time by
L.
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Measuring Product Availability
Product availability reflects a firm'sability 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)
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Product fill rate
Is the fraction of product demand thatis satisfied from product in inventory.
Fill rate should be measured over
specified amounts of demand ratherthan time.
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Order fill rate(OFL)
The fraction of orders that are filledfrom available inventory.
OFL should also be measured over a
specified number of orders rather thantime.
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Cycle service level (CSL)
The fraction ofreplenishment cyclesthat end with all the customer demand
being met.
The CSL is equal to the probability ofnot having a stock out in a
replenishment cycle.
CSL should be measured over aspecified number of replenishment
cycles.
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Replenishment Policies
A replenishment policy consists ofdecisions regarding when to reorder andhow much to reorder.
Continuous review:Inventory iscontinuously tracked and an order for alot size Q is placed when the inventorydeclines to the reorder point (ROP).
Periodic review:Inventory status ischecked at regular periodic intervals andan order is placed to raise the inventorylevel to a specified threshold.
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Levers to Improve Supply
Chain Profitability
Reduce the supplier lead time L:Iflead time decreases by a factor of k, therequired safety inventory decreases by
a factor of k
Reduce the underlying uncertainty of
demand (represented by uv):If aD isreduced by a factor of k, the requiredsafety inventory also decreases by a
factor of k. 12
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Problem
Assume that weekly demand for palmsat B&M computer world is normallydistributed, with a mean of 2,500 & astd.dev of 500. The manufacturer takes 2
wks to fill an order placed by the B&Mmanager. The store currently orders10,000 palms when the inventory onhand drops to 6000. Evaluate the safetyinventory carried by B&M and theaverage inventory carried by B&M. Alsoevaluate the average time spent by apalm at B&M.
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Presented by
Ashwini.k
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