Chapter 12
Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd.
Managing Uncertainty in a Supply
Chain: Safety Inventory
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Learning Objectives
• Understand the role of safety inventory in a supply chain
Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd.
• Identify factors that influence the required level of safety
inventory
• Describe different measures of product availability
• Utilize managerial levers available to lower safety inventory and
improve product availability
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
The Role of Safety Inventory
Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd.
• Safety inventory is carried to satisfy demand that exceeds the
amount forecasted
Raising the level of safety inventory increases product availability
and thus the margin captured from customer purchases
Raising the level of safety inventory increases inventory holding
costs
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
The Role of Safety Inventory
Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd.
• Three key questions
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?
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
The Role of Safety Inventory
Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd.
Figure 12-1
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Determining the Appropriate Level
Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd.
• Determined by two factors
The uncertainty of both demand and supply
The desired level of product availability
• Measuring Demand Uncertainty
D= Average demand per period
sD = Standard deviation of demand (forecast error) per
period
Lead time (L) is the gap between when an order is placed and
when it is received
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Evaluating Demand Distribution Over L
Periods
Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd.
The coefficient of variation
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Measuring Product Availability
Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd.
• Product fill rate (fr)
Fraction of product demand satisfied from product in inventory
• Order fill rate
Fraction of orders filled from available inventory
• Cycle service level (CSL)
Fraction of replenishment cycles that end with all customer
demand being met
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Replenishment Policies
Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd.
• Continuous review
Inventory is continuously tracked
Order for a lot size Q is placed when the inventory declines to the
reorder point (ROP)
• Periodic review
Inventory status is checked at regular periodic intervals
Order is placed to raise the inventory level to a specified
threshold
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Evaluating Cycle Service Level
and Fill Rate
• Evaluating Safety Inventory Given a Replenishment Policy
Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd.
Expected demand during lead time = DL
Safety inventory, ss = ROP – DL
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Evaluating Cycle Service Level
and Fill Rate
Assume that weekly demand for phones at B&M Office Supplies is normally distributed,
with a mean of 2,500 and a standard deviation of 500. The manufacturer takes two
weeks to fill an order placed by the B&M manager. The store manager currently orders
10,000 phones when the inventory on hand drops to 6,000. Evaluate the safety
Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd.
inventory and the average inventory carried by B&M. Also evaluate the average time a
phone spends at B&M.
Average demand per week, D = 2,500
Standard deviation of weekly demand, sD = 500
Average lead time for replenishment, L = 2 weeks
Reorder point, ROP = 6,000
Average lot size, Q = 10,000
Safety inventory, ss = ROP – DL = 6,000 – 5,000 = 1,000
Cycle inventory = Q/2 = 10,0002 = 5,000
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
Evaluating Cycle Service Level
and Fill Rate
Average inventory = Cycle inventory + Safety inventory
Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd.
= 5,000 + 1,000 = 6,000
Average flow time = Average inventory/Throughput
= 6,000/2,500 = 2.4 weeks
Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra