Professional Documents
Culture Documents
Outline
The role of safety inventory in a supply chain
Determining the appropriate level of safety
inventory
Impact of supply uncertainty on safety
inventory
Impact of replenishment policies on safety
inventory
Estimating and managing safety inventory in
practice
Safety Stock
When both lead time and demand are
constant, you know exactly when your
reorder point is ...
Q
R
L
Safety Stock
Under these assumptions:
Reorder point = total demand during the lead time
between placement of the order and its receipt.
ROP = d L, where
d = demand per unit time, and
L = lead time in the same time units
Safety Stock
(Uncertainties)
But what happens when either demand or lead
time varies?
R
L1
L2
Safety Stock
Additional inventory beyond amount
inventory to carry?
What actions can be taken to improve
product availability while reducing safety
inventory?
determined by:
supply or demand uncertainty
desired level of product availability
Measuring Demand
Uncertainty
demand uncertainty
Random component is usually estimated by the standard
deviation of demand
Notation:
D = Average demand per period
D = standard deviation of demand per period
L = lead time = time between when an order is placed and
when it is received
Uncertainty of demand during lead time is important
Measuring Demand
Uncertainty
Demand during L periods = LD
L = std dev of demand during L
periods = DSqrt(L)
Coefficient of variation = cv = =
stddev/mean = size of uncertainty
relative to demand
Measuring Product
Availability
Product availability: a firms ability to fill a
Replenishment Policies
Replenishment policy: decisions regarding when
Q
Inventory
level
R
L-T
lead time to
get a new
order in
Time
Inventory
level
Time
Determining z
z = number of standard deviations
above the average demand during
lead time
The higher z is:
The lower the risk of stocking out
The higher the average inventory
level
Determining z
Typical choices for z:
z = 1.29
90%
service level z = 1.65
95% service level z =
2.33
99% service
level
Average Inventory =
Q/
DL
L
D
L
ss F S (CSL) L
1
ROP D L ss
CSL F ( ROP, D L , L )
Average Inventory = Q/2
Example
Estimating Safety Inventory
D = 2,500/week; D = 500
L = 2 weeks; Q = 10,000; ROP = 6,000
DL = DL = (2500)(2) = 5000
ss = ROP - DL = 6000 - 5000 = 1000
Cycle inventory = Q/2 = 10000/2 = 5000
Average Inventory = cycle inventory + ss
= 5000 + 1000 = 6000
Evaluating
Safety Inventory Given CSL
D = 2,500/week; D = 500
L = 2 weeks; Q = 10,000; CSL = 0.90
DL = 5000, L = 707 (from earlier example)
FS-1(CSL)=Z
ss = FS-1(CSL)L = [NORMSINV(0.90)](707) = 906
(this value determined from a Normal probability
distribution table)
ROP = DL + ss = 5000 + 906 = 5906
suppliers)
reduce uncertainty in demand, L (better forecasts,
better information collection and use)
Impact of Supply
Uncertainty
D: Average demand per period
D: Standard deviation of demand per
period
L: Average lead time
sL: Standard deviation of lead time
DL
D
D
2
L
Impact of Supply
Uncertainty
D = 2,500/day; D = 500
L = 7 days; Q = 10,000; CSL = 0.90; sL = 7 days
DL = DL = (2500)(7) = 17500
L 2D D 2 s L2
Impact of Supply
Uncertainty
Safety
Safety
Safety
Safety
Safety
Safety
Safety
inventory
inventory
inventory
inventory
inventory
inventory
inventory
when
when
when
when
when
when
when
sL
sL
sL
sL
sL
sL
sL
= 0 is 1,695
= 1 is 3,625
= 2 is 6,628
= 3 is 9,760
= 4 is 12,927
= 5 is 16,109
= 6 is 19,298
is lumpy
Adjust inventory policies if demand is seasonal
Use simulation to test inventory policies
Start with a pilot
Monitor service levels
Focus on reducing safety inventories
11-29
THANK YOU