Managing Safety Inventory in Supply Chain_

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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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