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Chapter 6_Inventory P2

The document discusses safety inventory in inventory management, emphasizing its necessity due to uncertain demand and potential product shortages. Key considerations include determining appropriate product availability levels, the amount of safety inventory needed, and strategies to minimize safety inventory without compromising availability. It also covers factors affecting safety inventory levels, measurement of product availability, replenishment policies, and evaluating safety inventory and cycle service levels based on demand distributions.

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Duyên Nguyễn Thị Ngọc
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19 views23 pages

Chapter 6_Inventory P2

The document discusses safety inventory in inventory management, emphasizing its necessity due to uncertain demand and potential product shortages. Key considerations include determining appropriate product availability levels, the amount of safety inventory needed, and strategies to minimize safety inventory without compromising availability. It also covers factors affecting safety inventory levels, measurement of product availability, replenishment policies, and evaluating safety inventory and cycle service levels based on demand distributions.

Uploaded by

Duyên Nguyễn Thị Ngọc
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 6 – INVENTORY MANAGEMENT –

SAFETY INVENTORY

Faculty of International Economic Relations


University of Economics and Law

‹#› Het begint met een idee


SAFETY INVENTORY

The amount of inventory carried to satisfy demand that exceed the


amount forecast.
Safety inventory is required because demand is uncertain and a
product shortage may result if actual demand exceeds the forecast
demand.
Quantity

Expected demand
during lead time

ROP

Safety stock
LT Time
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3 KEY QUESTIONS NEED TO BE CONSIDERED

When planning safety inventory, supply chain need consider


1. What is the appropriate level of product availability?
2. How much safety inventory is needed for the desired level of
product availability?
3. What actions can be taken to reduce safety inventory without
hurting product availability?

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FACTORS AFFECTING THE LEVEL OF SAFETY INVENTORY

1. The uncertainty of both demand and supply


❖ The more uncertainty, the higher level of safety inventory
❖ Example of milk and spice

2. The desired level of product availability


❖ The higher desired level, the higher level of safety
inventory

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PRODUCT AVAILABILITY MEASUREMENT

▪ Product fill rate (fr): a fraction of product demand satisfied from


product in inventory
▪ Order fill rate: a fraction of orders filled from available inventory
▪ Cycle service level (CSL): a fraction of replenishment cycles
ending with all the customer demand being met. Replenishment
cycle is the interval between two successive replenishment
deliveries. CSL should be measured over a specified number of
replenishment cycles.

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REPLENISHMENT POLICIES

A replenishment policy consists of decisions regarding when to


reorder and how much to reorder. These decisions determine the
cycle and safety inventories along with the fill rate fr and the
cycle service level CSL.
1. Continuous review: continuous tracked, order for lot size Q when
inventory declines to ROP
2. Periodic review: checked regular periodic intervals, raise
inventory level to a specified threshold

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REORDER POINT

1. Receive an order quantity Q. 4. The cycle then repeats.

Number
of units
on hand Q Q Q

R
2. Start using them L L
up over time. 3. When inventory reaches
Time down to a level of R, place
the next Q sized order.

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EVALUATING SAFETY INVENTORY GIVEN A REPLENISHMENT POLICY

Given the lead time of L weeks and a mean weekly demand of D we


have
Expected demand during lead time 𝐷𝐿 = 𝐷 × 𝐿
Given that the store manager places a replenishment order when
ROP are on hand, we have

𝑆𝑎𝑓𝑒𝑡𝑦 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦, 𝑠𝑠 = 𝑅𝑂𝑃 − 𝐷 × 𝐿

D x L unit of product will sell over the L weeks between when the
order is placed and when the lot arrives. The average safety
inventory when the replenishment lot arrives is thus ROP - D x L.

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CYCLE SERVICE LEVEL

The probability of not having a stock-out in a replenishment cycle

Service level
Risk of
Probability of a stock-out
no stockout

Expected ROP Quantity


demand Safety
stock
0 z z-scale

𝑊ℎ𝑒𝑛 𝑑𝑒𝑚𝑎𝑛𝑑 𝑎𝑛𝑑/𝑜𝑟 𝑙𝑒𝑎𝑑 𝑡𝑖𝑚𝑒 𝑎𝑟𝑒 𝑢𝑛𝑐𝑒𝑟𝑡𝑎𝑖𝑛:


𝑅𝑂𝑃 = 𝐷𝐿 + 𝑠𝑠

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EVALUATING SAFETY INVENTORY GIVEN A REPLENISHMENT POLICY

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 inventory and the average inventory carried by B&M.

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EVALUATING SAFETY INVENTORY GIVEN A REPLENISHMENT POLICY

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EVALUATING CSL GIVEN A REPLENISHMENT POLICY

Given a continuous replenishment policy, our goal is to evaluate the CSL,


the probability of not stocking out in a replenishment cycle.
The lead time is L weeks and weekly demand is normally distributed, with
a mean of D and a standard deviation. Observe that a stockout occurs in
a cycle if demand during the lead time is larger than the ROP. Thus, we
have
𝐶𝑆𝐿 = 𝑃𝑟𝑜𝑏(𝑑𝑒𝑚𝑎𝑛𝑑 𝑑𝑢𝑟𝑖𝑛𝑔 𝑙𝑒𝑎𝑑 𝑡𝑖𝑚𝑒 𝑜𝑓 𝐿 𝑤𝑒𝑒𝑘𝑠 ≤ 𝑅𝑂𝑃)

We know that demand is normally distributed


𝐶𝑆𝐿 = 𝐹(𝑅𝑂𝑃, 𝐷𝐿 , σ𝐿 ) = NORMDIST(𝑅𝑂𝑃, 𝐷𝐿 , σ𝐿 )

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EVALUATING CSL GIVEN A REPLENISHMENT POLICY

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EVALUATING CSL GIVEN A REPLENISHMENT POLICY

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EVALUATING CSL GIVEN A REPLENISHMENT POLICY

Weekly demand for phones at B&M is normally distributed, with a


average demand D phi D: standard deviation of weekly demand
mean of 2,500 and a standard deviation of 500. The replenishment
L
lead time is two weeks. Assume that the demand is independent from
one week to the next. Evaluate the CSL resulting from a policy of
ordering 10,000 phones when there are 6,000 phones in inventory.
Q ROP
DL = DxL = 2500x2 = 5000
phiL=sqrt(L) *phiD [vì DL = L*D] = 500sqrt2
Z-score = (ROP-DL)/phiL = sqrt2 ==> CSL = phi(Z-score) = 92.07%

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EVALUATING CSL GIVEN A REPLENISHMENT POLICY

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EVALUATING SAFETY INVENTORY GIVEN A DESIRED CSL

𝐶𝑆𝐿 = 𝐹(𝑅𝑂𝑃, 𝐷𝐿 , σ𝐿 ) = NORMDIST(𝑅𝑂𝑃, 𝐷𝐿 , σ𝐿 )


𝐶𝑆𝐿 = 𝐹(𝐷𝐿 + 𝑠𝑠, 𝐷𝐿 , σ𝐿 )

𝐷𝐿 + 𝑠𝑠 = 𝐹 −1 (𝐶𝑆𝐿, 𝐷𝐿 , σ𝐿 ) = NORMINV(𝐶𝑆𝐿, 𝐷𝐿 , σ𝐿 )

𝑠𝑠 = 𝐹 −1 (𝐶𝑆𝐿, 𝐷𝐿 , σ𝐿 ) - 𝐷𝐿 = NORMINV(𝐶𝑆𝐿, 𝐷𝐿 , σ𝐿 ) - 𝐷𝐿

σ𝐿 = 𝐿σ𝐷

𝑠𝑠 = 𝐹𝑆−1 𝐶𝑆𝐿 x σ𝐿 = 𝐹𝑆−1 𝐶𝑆𝐿 x 𝐿σ𝐷


= NORMSINV(𝐶𝑆𝐿) x 𝐿σ𝐷

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EVALUATING SAFETY INVENTORY GIVEN A DESIRED CSL

𝐶𝑆𝐿 = 𝐹(𝑅𝑂𝑃, 𝐷𝐿 , σ𝐿 ) = NORMDIST(𝑅𝑂𝑃, 𝐷𝐿 , σ𝐿 )

𝐶𝑆𝐿 = 𝐹(𝐷𝐿 + 𝑠𝑠, 𝐷𝐿 , σ𝐿 )

𝐷𝐿 + 𝑠𝑠 = 𝐹 −1 (𝐶𝑆𝐿, 𝐷𝐿 , σ𝐿 ) = NORMINV(𝑅𝑂𝑃, 𝐷𝐿 , σ𝐿 )

𝑠𝑠 = 𝐹 −1 (𝐶𝑆𝐿, 𝐷𝐿 , σ𝐿 ) - 𝐷𝐿 = NORMINV(𝑅𝑂𝑃, 𝐷𝐿 , σ𝐿 ) - 𝐷𝐿

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EVALUATING SAFETY INVENTORY GIVEN A DESIRED CSL

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EVALUATING SAFETY INVENTORY GIVEN A DESIRED CSL

Weekly demand for B&M store is normally distributed, with a mean of


2,500 boxes and a standard deviation of 500. The replenishment lead
time is two weeks. Assuming a continuous-review replenishment policy,
evaluate the safety inventory that the store should carry to achieve a CSL
of 90 percent.

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EVALUATING SAFETY INVENTORY GIVEN A DESIRED CSL

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PRACTICE EXERCISES

Exercises 1, 2, 3 in Chapter 12

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CHAPTER 5 – INVENTORY MANAGEMENT

THANK YOU!

‹#› Het begint met een idee

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