Chapter 12 Flashcards
Inventory carried for the purpose of satisfying demand that exceeds the amount forecasted for a given period is
safety inventory.
Safety inventory is carried because
demand forecasts are uncertain.
The trade-off that a supply chain manager must consider when planning safety inventory is
increasing product availability versus increasing inventory holding costs.
The issue of product availability and the level of safety inventory is particularly significant in industries where
product life cycles are short and demand is very volatile.
The ability to provide a high level of product availability to customers while carrying very low levels of safety inventory in its supply chain has been a key to success at which company?
Dell
The fraction of product demand that is satisfied from product in inventory is the
product fill rate.
The fraction of replenishment cycles that end with all the customer demand being met is the
cycle service level (CSL).
The distinction between product fill rate and order fill rate is:
not significant in a single product situation.
A company that tracks inventory and places an order for a lot size Q when the inventory declines to the reorder point (ROP) is using
continuous review.
A company that checks inventory status at regular periodic intervals and places an order to raise the inventory level to a specified threshold is using
periodic review.
As the safety inventory is increased,
both fill rate and cycle service level increase.
For the same safety inventory, an increase in lot size
decreases both the fill rate and the cycle service level.
The required safety inventory
grows rapidly with an increase in the desired product availability.
The required safety inventory
increases with a decrease in the lead time and the standard deviation of periodic demand.
A goal of any supply chain manager is to
reduce the level of safety inventory required in a way that does not adversely affect product availability.
As the uncertainty of supply or demand ________, the required level of safety inventories ________.
grows, increases
The ________ is the average units of demand that are not satisfied from inventory in stock per replenishment cycle.
Expected Shortage per Replenishment Cycle (ESC)
Both ________ and ________ increase as the safety inventory is increased.
fill rate, cycle service level
Lead time is the gap between
when an order is placed and when it is received.
The coefficient of variation measures
the size of the uncertainty relative to demand.
Avon Barksdale’s operation uses large quantities of prepaid cell phones, on average 500 per week with a standard deviation of 45. The lead time for their own brand of prepaid cell phones is two weeks and they have a lot size of 125 phones.
What is the standard deviation of demand during their lead time?
64 phones
Avon Barksdale’s operation uses large quantities of prepaid cell phones, on average 500 per week with a standard deviation of 45. The lead time for their own brand of prepaid cell phones is two weeks and they have a lot size of 125 phones.
Suppose Mr. Barksdale sets his reorder point at 1100 phones. What is his average cell phone inventory?
162.5 phones
Avon Barksdale’s operation uses large quantities of prepaid cell phones, on average 500 per week with a standard deviation of 45. The lead time for their own brand of prepaid cell phones is two weeks and they have a lot size of 125 phones.
What is the average flow time of a phone if the reorder point used by Mr. Barksdale is 2000 phones?
2.13 weeks
Marlo Stanfield’s operation also uses large quantities of prepaid cell phones, on average 1500 per week with a standard deviation of 145. The lead time for their own brand of prepaid cell phones is three weeks and they have a lot size of 350 phones. To ensure they never run out, they keep a safety stock of 500 phones with Proposition Joe.
What is the standard deviation of demand during lead time?
251 phones
Marlo Stanfield’s operation also uses large quantities of prepaid cell phones, on average 1500 per week with a standard deviation of 145. The lead time for their own brand of prepaid cell phones is three weeks and they have a lot size of 350 phones. To ensure they never run out, they keep a safety stock of 500 phones with Proposition Joe.
What is the expected shortage per cycle under this policy?
2.2 phones
Marlo Stanfield’s operation also uses large quantities of prepaid cell phones, on average 1500 per week with a standard deviation of 145. The lead time for their own brand of prepaid cell phones is three weeks and they have a lot size of 350 phones. To ensure they never run out, they keep a safety stock of 500 phones with Proposition Joe.
What is the fill rate under this policy?
0.9998
Marlo Stanfield’s operation also uses large quantities of prepaid cell phones, on average 1500 per week with a standard deviation of 145. The lead time for their own brand of prepaid cell phones is three weeks and they have a lot size of 350 phones. To ensure they never run out, they keep a safety stock of 500 phones with Proposition Joe.
What safety stock should be held to put the expected shortage per cycle at 5 phones?
418 phones
Marlo Stanfield’s operation also uses large quantities of prepaid cell phones, on average 1500 per week with a standard deviation of 145. The lead time for their own brand of prepaid cell phones is three weeks and they have a lot size of 350 phones. To ensure they never run out, they keep a safety stock of 500 phones with Proposition Joe.
What safety stock should be held to put the fill rate at 0.99?
0 phones
The expected shortage per replenishment cycle (ESC) is
the average units of demand that are not satisfied from inventory in stock per replenishment cycle.
Given a lot size of Q (which is also the average demand in a replenishment cycle),
the fraction of demand lost is thus ESC/Q.
A shortage occurs in a replenishment cycle
only if the demand during the lead time exceeds the ROP.
Often, safety inventory calculations in practice
do not include any measure of supply uncertainty, resulting in levels that may be lower than required.
A(n) ________ in supply uncertainty can help ________ safety inventory required without hurting product availability.
reduction, reduce
Daily demand for cat litter at the Cat Café in Jones is 1500 ounces with a standard deviation of 300 ounces. The proprietor orders the best cat litter money can buy online, and the average shipping time is 5 days. Of course, if the order is placed at the end of the week, then it may take a while longer to receive the shipment, so the standard deviation of lead time is 2 days. The state health department keeps a close eye on the condition of the Cat Café; a cat-loving inspector visits at least twice a week, ostensibly to inspect, but mostly to pet his favorite Scottish Fold cat named Groundskeeper Willie.
Suppose the café wishes to erase any hint of impropriety and wants to peg their service level at 99.5%. What is the level of safety inventory they should carry?
7918 ounces
Daily demand for cat litter at the Cat Café in Jones is 1500 ounces with a standard deviation of 300 ounces. The proprietor orders the best cat litter money can buy online, and the average shipping time is 5 days. Of course, if the order is placed at the end of the week, then it may take a while longer to receive the shipment, so the standard deviation of lead time is 2 days. The state health department keeps a close eye on the condition of the Cat Café; a cat-loving inspector visits at least twice a week, ostensibly to inspect, but mostly to pet his favorite Scottish Fold cat named Groundskeeper Willie.
Suppose the café wishes to erase any hint of impropriety and wants to peg their service level at 99%. How many days of safety inventory they should carry?
4.77 days
Daily demand for cat litter at the Cat Café in Jones is 1500 ounces with a standard deviation of 300 ounces. The proprietor orders the best cat litter money can buy online, and the average shipping time is 5 days. Of course, if the order is placed at the end of the week, then it may take a while longer to receive the shipment, so the standard deviation of lead time is 2 days. The state health department keeps a close eye on the condition of the Cat Café; a cat-loving inspector visits at least twice a week, ostensibly to inspect, but mostly to pet his favorite Scottish Fold cat named Groundskeeper Willie.
Suppose the café wishes to carry 8 days of demand as their safety inventory. What service level would they achieve?
94.4%
______ is the ability of a supply chain to delay product differentiation or customization until closer to the time the product is sold.
Postponement
Aggregation reduces the standard deviation of demand
only if demand across the regions being aggregated is not perfectly positively correlated.
Which approach to aggregation requires an information system that allows access to current inventory records from each location?
Information centralization
Which approach to aggregation would stock the fast-moving items at decentralized locations close to the customer and slow-moving items at a centralized location?
Specialization
The use of one product to satisfy demand for a different product is
product substitution.
Which use of common components in a variety of products has been a very effective supply chain strategy to exploit aggregation and reduce component inventories?
Information centralization
The ability of a supply chain to delay product differentiation or customization until closer to the time the product is sold is
postponement.
Which approach to aggregation has the goal of moving product differentiation as close to the pull phase of the supply chain as possible?
Postponement
What is the descriptive term for demand that occurs not in a steady stream of single units but in periodic large lots?
Lumpy
What is an explanation offered for why firms have not historically tracked stockouts very well?
Stockouts are difficult to track.
Discuss the role of safety inventory in the supply chain and the trade-offs involved.
The primary role of safety inventory is providing product availability for customers when demand and supply are uncertain. The trade-offs that a supply chain manager must consider when planning safety inventory involve product availability and inventory holding costs. On one hand, raising the level of safety inventory increases product availability and thus the margin captured from customer purchases. Raising the level of safety inventory however, increases inventory holding costs. This issue is particularly significant in industries where product life cycles are short and demand is very volatile. Carrying excessive inventory can help counter demand volatility but can really hurt if new products come on the market and demand for the product in inventory dries up. The inventory on hand then becomes worthless.
In today’s business environment, firms experience great pressure to improve product availability while increasing product variety through customization. As a result, markets have become increasingly heterogeneous and demand for individual products is very unstable and difficult to forecast. Both the increased variety and the increased pressure for availability push firms to increase the level of safety inventory they hold.
At the same time, product life cycles have shrunk. This increases the risk to firms of carrying too much inventory. Thus, a key to the success of any supply chain is to figure out ways to decrease the level of safety inventory carried without hurting the level of product availability.
Discuss the various measures of product availability.
Product availability reflects a firm’s ability to fill a customer order out of available inventory. A stockout results if a customer order arrives when product is not available. There are several ways to measure product availability. All availability measures are defined on average over a given time frame, which can range from hours to a year.
Product fill rate (fr) is the fraction of product demand that is satisfied from product in inventory. It is equivalent to the probability that product demand is supplied from available inventory.
Order fill rate is the fraction of orders that are filled from available inventory. In a multi-product scenario, an order is filled from inventory only if all products in the order can be supplied from the available inventory. Order fill rates tend to be lower than product fill rates because all products must be in stock for an order to be filled.
Cycle service level (CSL) is the fraction of replenishment cycles that end with all the customer demand being met. A replenishment cycle is the interval between two successive replenishment deliveries. The CSL is equal to the probability of not having a stockout in a replenishment cycle. Observe that a CSL of 60 percent will typically result in a much higher fill rate.
The distinction between product fill rate and order fill rate is not significant in a single product situation. When a firm is selling multiple products, however, this difference may be significant. For example, if most orders include 10 or more different products that are to be shipped, an out-of-stock situation of one product results in the order not being filled from stock. The firm in this case may have a poor order fill rate even though it has good product fill rates. Tracking order fill rates is important when customers place a high value on the entire order being filled simultaneously.
Explain the impact of supplier lead time on safety inventory.
The required safety inventory increases with an increase in the lead time and the standard deviation of periodic demand. Reducing the supplier lead time (L) will reduce the need for safety inventory. If lead time decreases by a factor of k, the required safety inventory decreases by a factor of k. The only caveat here is that reducing the supplier lead time requires significant effort from the supplier, while reduction in safety inventory occurs at the retailer. Thus it is important for the retailer to share some of the resulting benefits. A reduction in supply uncertainty can help dramatically reduce safety inventory required without hurting product availability.
Often, safety inventory calculations in practice do not include any measure of supply uncertainty, resulting in levels that may be lower than required. This hurts product availability.
Explain the impact of aggregation on safety inventory.
Aggregation reduces the standard deviation of demand only if demand across the regions being aggregated is not perfectly positively correlated. Demand for most products does not show perfect positive correlation across different geographical regions. In case demand in different geographical regions is about the same size and independent, aggregation reduces safety inventory by the square root of the number of areas aggregated. In other words, if the number of independent stocking locations decreases by a factor of n, the average safety inventory is expected to decrease by a factor of n.
There are two major disadvantages of aggregating all inventory in one location:
- Increase in response time to customer order
- Increase in transportation cost to customer
Both disadvantages result because the average distance between the inventory and the customer increases with aggregation. With this situation, either the customer has to travel more to reach the product or the product has to be shipped over longer distances to reach the customer. However, there are clear benefits to aggregating safety inventory.
Continuous Review
inventory is continuously tracked, and an order for a lot size Q is placed when the inventory declines to the reorder point (ROP)
In continuous review, the size of the order
does not change from one order to the next.
The time between order may fluctuate, given variable demand.
Periodic Review
inventory status is checked at regular periodic intervals, and an order is placed to raise the inventory level to a specified threshold.
In periodic review, the size of each order
can fluctuate given variable demand.
The time between orders if fixed though.
A stockout occurs in a cycle if
demand during the lead time is larger than the ROP.
CSL=prob.(demand during lead time of L weeks <= ROP).
Both fill rate and cycle service level
increase as the safety inventory is increased.
For the same safety inventory, an increase in lot size increases the fill rate but not the cycle service level.
The primary role of safety inventory is
Proving
