Basic Concepts of SCM

Question 1

Minimum lead time for retailer when goods shipped from:

Warehouse = X days DC = X days Supplier = X days

Answer 1

Warehouse = 3 days DC = 6 days Supplier = = 10

Question 2

If retail store’s order needs to be fulfilled within four days, what do you do?

Answer 2

Two possible solutions

1) Store in Ware house
2) Store in DC, and reduce information LT to zero

Question 3

Why do we prefer to store in the DC?

Answer 3

The reason why we would like to store in DC is inventory costs (is cheaper to store somewhere random where rent is lower and its bigger)

Question 4

What is the role of inventory?

Answer 4

• Fulfilment: Enable fulfilment of an order within a lead time acceptable to the ordering entity
• Manufacturing capacity smoothing: Store when demand less than capacity; use when demand exceeds capacity
• Meet promotion requirements: Be prepared to meet excess demand expected to result from a planned promotion
• Especially usefull when low on perishable and low on storing costs

Question 5

What are the consequences of too little or too much inventory?

Answer 5

Question 6

How is inventory linked to forecasting?

Answer 6

• Inventory is the storage of physical products at a location to fulfil anticipated orders within acceptable (lead) time.
• Need to make a forecast for a time bucket based on replenishment frequency, lead time period into the future.
  *

Question 7

What is a/the forecasting error?

Answer 7

Forecast error is a measure (e.g., standard deviation) of the difference between the actual and the forecasted demand (over a specific time bucket and a given lead time)

It is determined by looking at “history”

Question 8

How do you reduce inventory requirements?

Answer 8

To reduce inventory requirements, reduce the forecast error. Or, reduce the time bucket by more frequent deliveries.

Question 9

How can forecasting errors be minised? (other than better and more accurate data)

Answer 9

Forecast errors are (ideally) random and independent of each other; they can therefore partially cancel out when pooled

Question 10

What is the idea behind Service Level?

What is the needed to increase the service level?

Answer 10

1) Despite forecasting and having inventory, we may not be able to meet the entire demand during a replenishment cycle.

Service level is the percentage of orders or total
demand that must be fulfilled during a replenishment cycle (time bucket)

2)

Higher the service level, larger must the inventory be if future orders are to be met. Applies to both product variety and quantities for each product type .

Question 11

How do you decide on a service level?

Answer 11

To decide on a service level, we have to consider expected profits at different service levels (see pic):

As SL increases to 100%

• revenues flatten
• costs increase rapidly
• profits increase, then plunge

–> The ideal service level (SL*) is one that maximises expected profits and is typically less than 100%.