The role of Safety Inventory in a Supply ChainSafety inventory:Inventory carried for the purpose of satisfying demand that exceeds the amount forecasted in a given period.Safety Inventory Is Carried because Demand is Uncertain. A Product Shortage may result if actual demand exceeds the forecast demand.Safety inventory is the average inventory remaining hen the replenishment lot arrives.Role of Safety Inventory Average inventory is therefore cycle inventory plus safety inventory !here is a fundamental tradeoff: "aising the level of safety inventory provides higher levels of product availability and customer service and thus the margin captured from customer purchases. "aising the level of safety inventory also raises the level of average inventory and therefore increases holding costs. #oever$ both the increased variety of products and the greater pressure for availability push firms to raise the level of safety inventory they hold. %ery important in high&tech or other industries here obsolescence is a significant ris'$ here the product life cycles are short and demand is very volatile (here the value of inventory$ such as PCs$ can drop in value).!o *uestions to Anser in Planning Safety Inventory +hat is the appropriate level of safety inventory to carry, +hat actions can be ta'en to improve product availability hile reducing safety inventory,-x: Compa. and Dell in PCs$ in /001$ hen prices dropped. Compa. carried /22 days of inventory compared to Dell hich carried only /2 days of inventory. Declining prices hurt Compa. much more$ given the extra inventory that it carried. Compa. did not ma'e any profit in the first .uarter of /001. A 'ey to Dell3s success has been its ability to provide a high level of product availability hile carrying very lo levels of safety inventory in its supply chain.4orecasts are rarely completely accurateIf average demand is /222 units per ee'$ then half the time actual demand ill be greater than /222$ and half the time actual demand ill be less than /2225 hat happens hen actual demand is greater than /222,If you 'ept only enough inventory in stoc' to satisfy average demand$ half the time you ould run out.Determining the Appropriate Level of Safety Inventory 6easuring demand uncertainty 6easuring product availability "eplenishment policies -valuating cycle service level and fill rate -valuating safety level given desired cycle service level or fill rate Impact of re.uired product availability and uncertainty on safety inventoryAppropriate level of safety inventory is determined by:a. supply or demand uncertaintyb. desired level of product availability Higher levels of supply or demand uncertainty re.uire higher levels of safety inventory given a particular desired level of product availability. +hen a ne Palm (PDA) model is introduced in the mar'et$ demand is highly uncertain$ and the retailer 786 thus carries a much higher level of safety inventory relative to demand. As the mar'et3s reaction to the ne model becomes clearer$ uncertainty is reduced and demand is easier to predict. Higher levels of desired product availability re.uire higher levels of safety inventory given a particular level of supply or demand uncertainty. If 786 targets a higher level of product availability for the ne Palm model$ it must carry a higher level of safety inventory for that model. Measuring Demand Uncertainty Demand has a systematic component and a random component. !he goal of forecasting is to predict the systematic component and estimate the random component. !he estimate of the random component is the measure of demand uncertainty "andom component is usually estimated by the standard deviation of demand or forecast error. 9otation:D : Average demand per periodSD : standard deviation of demand per period; : lead time : time beteen hen an order is placed and hen it is received Uncertainty of demand during lead time$ and not P). 786 managers orders ?22 Palms hen the inventory falls belo A22. Si@e of the order remains constant$ time beteen orders may fluctuate given variable demand. Periodic revie: inventory is chec'ed at regular (periodic) intervals and an order is placed to raise the inventory to a specified threshold (the Border&up&toC level). -very Saturday$ employees at 786 chec' film inventory and the manager orders enough so that the available inventory and the si@e of the order total e.uals /$222 films. !ime beteen orders is fixed$ si@e of each order$ can fluctuate$ given variable demand. Importance of the Level of Product AvailailityProduct availability measured by cycle service level or fill rate. Also referred to as the customer service levelProduct availability affects supply chain responsiveness!rade&off:D #igh levels of product availability increased responsiveness and higher revenuesD #igh levels of product availability increased inventory levels and higher costsProduct availability is related to profit ob