Role of Safety Inventory Average inventory =cycle inventory +safety inventory 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 Compaq and Dell in PCs 1990 Nordstrom,Macy's,and Saks during the 2008-2009 recession SEIEE AU406 6
+ - SEIEE AU406 6 Role of Safety Inventory Average inventory =cycle inventory +safety inventory 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 Compaq and Dell in PCs 1990 Nordstrom, Macy’s, and Saks during the 2008–2009 recession
Key Questions to Answer in Planning Safety Inventory What is the appropriate level of product availability? How much safety inventory is needed for the desired level of product availability? What actions can be taken to improve product availability while reducing safety inventory? SEIEE AU406 7
+ - SEIEE AU406 7 Key Questions to Answer in Planning Safety Inventory What is the appropriate level of product availability? How much safety inventory is needed for the desired level of product availability? What actions can be taken to improve product availability while reducing safety inventory?
Determining the Appropriate Level of Safety Inventory Measuring demand uncertainty Measuring product availability Replenishment policies Evaluating cycle service level and fill rate Evaluating safety level given desired cycle service level or fill rate Impact of required product availability and uncertainty on safety inventory SEIEE AU406 8
+ - SEIEE AU406 8 Determining the Appropriate Level of Safety Inventory Measuring demand uncertainty Measuring product availability Replenishment policies Evaluating cycle service level and fill rate Evaluating safety level given desired cycle service level or fill rate Impact of required product availability and uncertainty on safety inventory
Determining the Appropriate Level of Demand Uncertainty a 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 Higher levels of desired product availability require higher levels of safety inventory given a particular level of uncertainty SEIEE AU406 9
+ - SEIEE AU406 9 Determining the Appropriate Level of Demand Uncertainty 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 Higher levels of desired product availability require higher levels of safety inventory given a particular level of uncertainty
Measuring Demand Uncertainty Notations: D:Average demand per period p:Standard deviation of demand(forecast error)per period Usually assume the demand follows normal distribution Lead time is the gap between when an order is placed and when it is received.In our discussion,we denote the lead time by L. SEIEE AU406 10
+ - SEIEE AU406 10 Measuring Demand Uncertainty Notations: Usually assume the demand follows normal distribution Lead time is the gap between when an order is placed and when it is received. In our discussion, we denote the lead time by L