managing uncertainty in the supply chain safety inventory8&9
TRANSCRIPT
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Managing Uncertainty in theSupply Chain: Safety
Inventory
Supply Chain Management
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Outline
The role of safety inventory in a supply chain
Determining the appropriate level of safetyinventory
Impact of supply uncertainty on safetyinventory
Impact of replenishment policies on safetyinventory
Estimating and managing safety inventory inpractice
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The Role of Safety Inventoryin a Supply Chain
Forecasts are rarely completely accurate
If average demand is 1000 units per week, then halfthe time actual demand will be greater than 1000, andhalf the time actual demand will be less than 1000what happens when actual demand is greater than1000!
If you kept only enough inventory in stock to satisfyaverage demand, half the time you would run out
"afety inventory# Inventory carried for the purpose ofsatisfying demand that e$ceeds the amountforecasted in a given period
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Role of Safety Inventory
%verage inventory is therefore cycleinventory plus safety inventory
There is a fundamental tradeo'aising the level of safety inventory
provides higher levels of product availabilityand customer service
'aising the level of safety inventory alsoraises the level of average inventory andtherefore increases holding costs
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Safety Stock(hen both lead time and demand are
constant, you know e$actly when yourreorder point is )))
Q
L
R
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Safety Stock
*nder these assumptions#
'eorder point + total demand during the lead timebetween placement of the order and its receipt)
'- + d . /, where
d + demand per unit time, and
/ + lead time in the same time units
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Safety Stock(Uncertainties
ut what happens when either demand or leadtime varies!
Q
L!
R
L"
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Safety Stock
%dditional inventory beyond amountneeded to meet average2 demand duringlead time
-rotects against uncertaintiesin demandor lead time
alancesthe costs of stocking out againstthe cost of holding e$tra inventory
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T#o Questions to $ns#er in%lanning Safety Inventory
(hat is the appropriate level of safetyinventory to carry!
(hat actions can be taken to improve
product availability while reducing safetyinventory!
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&eter'ining the $ppropriateLevel of Safety Inventory
3easuring demand uncertainty
3easuring product availability
'eplenishment policies
Evaluating cycle service level and 4ll rate
Evaluating safety level given desired cycleservice level or 4ll rate
Impact of re5uired product availability anduncertainty on safety inventory
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&eter'ining the $ppropriateLevel of &e'an Uncertainty
%ppropriate level of safety inventorydetermined by#supply or demand uncertainty
desired level of product availability6igher levels of uncertainty re5uire higher
levels of safety inventory
6igher levels of desired product availability
re5uire higher levels of safety inventorygiven a particular level of uncertainty
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Measuring &e'anUncertainty
Demand has a systematic component and a random componentThe estimate of the random component is the measure of
demand uncertainty
'andom component is usually estimated by the standarddeviation of demand
7otation#
D + %verage demand per period
D + standard deviation of demand per period
/ + lead time + time between when an order is placed and
when it is received*ncertainty of demand during lead time is important
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Measuring &e'anUncertainty
Demand during / periods + /D
/+ std dev of demand during /
periods + D"5rt8/9:oe;cient of variation + cv + /+
stddev
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Measuring %rouct$vaila)ility
-roduct availability# a 4rm>s ability to 4ll acustomer>s order out of available inventory
"tockout# a customer order arrives when productis not available
-roduct 4ll rate 8fr9# fraction of demand that is
satis4ed from product in inventory
rder 4ll rate# fraction of orders that are 4lled
from available inventory:ycle service level# fraction of replenishment
cycles that end with all customer demand met
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Replenish'ent %olicies
'eplenishment policy# decisions regarding whento reorder and how much to reorder
:ontinuous review# inventory is continuously
monitored and an order of si=e ? is placed whenthe inventory level reaches the reorder point'-
-eriodic review# inventory is checked at regular
8periodic9 intervals and an order is placed toraise the inventory to a speci4ed threshold 8theorder@up@to2 level9
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Continuous Revie# Syste'(Orers #hen inventory rops to R
L*T
Q
R
Inventorylevel
Time
lea ti'e toget a ne#orer in
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%erioic Revie# Syste'(Orers at regular intervals
Inventorylevel
Time2 4 6
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Recalculating the Reorer%oint to inclue Safety Stock
timeleadduringdemandaverage
theabovedeviationsdardtansofnumberztimeleadofvariance
periodtimeduringdemandofvariance
timeleadaverageLperiodtimeperdemandaveraged
where
dLzLdSSLdROP
L
d
Ld
=
=
=
=
=
++=+=
2
2
222
:
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&eter'ining +z
z + number of standard deviationsabove the average demand duringlead time
The higherzis#
The lower the risk of stocking out
The higher the average inventorylevel
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Determining z
Typical choices forz#
z+ 1)AB
B0Cservice levelz+ 1)BC service levelz+
A) BBC servicelevelAverage Inventory = Q
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Safety Inventory an CycleService Level
L#/ead time for replenishment
D: %verage demand perunit time
D:"tandard deviation of
demand per period
DL#3ean demand during lead
time
L# "tandard deviation of
demand during lead time
CSL# :ycle service levelss# "afety inventory
ROP# 'eorder point ),,(
)(1
LL
L
LS
DL
L
D
D
F
D
ROPFCSL
ssROP
CSLss
L
DL
=
+=
=
=
=
Average Inventory = Q/2
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,-a'ple,sti'ating Safety Inventory
D ="./001#eek2 D 3 /00
L3 " #eeks2 Q3 !0.0002 ROP3 4.000
DL= DL 3 ("/00(" 3 /000
ss3 ROP - DL=4000 * /000 3 !000
Cycle inventory 3 Q1" 3 !00001" 3 /000
$verage Inventory 3 cycle inventory 5 ss3 /000 5 !000 3 4000
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,sti'ating Cycle ServiceLevel
D =A,00
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,valuatingSafety Inventory 6iven CSL
D =A,00
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I'pact of Re7uire %rouct$vaila)ility an Uncertainty on
Safety InventoryDesired product availability 8cycle service level or 4llrate9 increases, re5uired safety inventory increases
Demand uncertainty 8/9 increases, re5uired safety
inventory increases
3anagerial levers to reduce safety inventorywithout reducing product availabilityreduce supplier lead time, / 8better relationships with
suppliers9
reduce uncertainty in demand, / 8better forecasts,better information collection and use9
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I'pact of SupplyUncertaintyD:%verage demand per period
D#"tandard deviation of demand per
period
L# %verage lead times/# "tandard deviation of lead time
sD
D
LDL
L
L
DL
222
+=
=
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I'pact of SupplyUncertainty
D =A,00
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I'pact of SupplyUncertainty
"afety inventory when sL + 0 is 1,B
"afety inventory when sL+ 1 is ,A
"afety inventory when sL+ A is ,AN
"afety inventory when sL+ is B,H0
"afety inventory when sL+ M is 1A,BAH
"afety inventory when sL+ is 1,10B
"afety inventory when sL+ is 1B,ABN
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11@AB
,sti'ating an ManagingSafety Inventory in %ractice
%ccount for the fact that supply chain demandis lumpy
%dOust inventory policies if demand is seasonal
*se simulation to test inventory policies"tart with a pilot
3onitor service levels
Focus on reducing safety inventories
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T6%7P Q*