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Transcript of Supply Chain Management Lecture 20. Outline Today –Chapter 11 Sections 1, 2, 3, 7, 8 –Skipping...
![Page 1: Supply Chain Management Lecture 20. Outline Today –Chapter 11 Sections 1, 2, 3, 7, 8 –Skipping 11.2 “Evaluating Safety Inventory Given Desired Fill rate”](https://reader034.fdocuments.in/reader034/viewer/2022051618/56649c8f5503460f94947f4f/html5/thumbnails/1.jpg)
Supply Chain Management
Lecture 20
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Outline
• Today– Chapter 11
• Sections 1, 2, 3, 7, 8– Skipping 11.2 “Evaluating Safety Inventory Given Desired Fill rate”
• Thursday– Homework 4 due before class– Chapter 12
• Sections 12.1, 12.2 up to and including Example 12.2, 12.3
• Friday– Homework 5 online
• Due Thursday April 8 before class
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Staples Visit
• Date– Friday April 2, 10:30am – 2:30pm
• (11:30am – 1:30pm on site, the rest in transit)• Free transportation
• Location– Staples fulfillment Center, Brighton, CO
• What– Lunch and Learn
Email: [email protected]
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Summary
• Inventory is an asset, but it's also a liability until it has been sold– Inventory is cash in-transit
• Inventory does not improve with time. Inventory becomes less valuable with every passing day – It takes space, heat, light, power, handling, insurance,
interest to carry, …
Effective inventory management is key to running a profitable business
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Inventory Management
Apple beats competitors at inventory turn over
Company Days of inventoryApple 5 daysDell 7 daysLenovo 15 daysHP 32 daysIntel 89 daysD-Link 131 days
Source: The Mac Observer, March 5, 2009
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Summary
• Lot sizing for a single product– Economic order quantity
• Lot sizing with multiple products (complete aggregation)– Find order frequency (same for all products)
– Calculate order quantity for each product Q = D/n
hC
DSQ
2*
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S
ChDn
k
i iii
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Safety Inventory
Inventory
Time
AverageInventory
CycleInventory
SafetyInventory
Cycle
Demand (D)Order quantity/lot size (Q)
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Example 11-1: Evaluating safety inventory given an inventory policy • Assume that weekly demand for Palms at B&M
Computer World 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 Palms when the inventory drops to 6,000. Evaluate the safety inventory carried by B&M and the average inventory carried by B&M. Also evaluate the average time spent by a Palm at B&M
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Safety Inventory
Inventory
Time
AverageInventory
CycleInventory
SafetyInventory
CycleLead time (L)
Reorder point (ROP)
Demand (D)
Demand during lead time DL = LD
Order quantity/lot size (Q)
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Example 11-1: Evaluating safety inventory given an inventory policy
Inventory
Time0
Reorder point
11,000
6,000
Safety Inventory1,000
Lead time
Order quantity/Lot size
Demand during lead time
Cycle
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Example 11-1: Evaluating safety inventory given an inventory policy• Reorder point (ROP)
= demand during lead time + safety inventory= DL + ss
• Average flow time = (avg. inventory) / (avg. demand)
ROP = DL + ss
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Role of Safety Inventory
• There is a fundamental tradeoff– Raising the level of safety inventory provides higher
levels of product availability and customer service– Raising the level of safety inventory also raises the
level of average inventory and therefore increases holding costs
Product availability reflects a firm’s ability to fill a customer order out of available inventory
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Measuring Product Availability1. Cycle service level (CSL)
• Fraction of replenishment cycles that end with all customer demand met
• Probability of not having a stockout in a replenishment cycle
2. Product fill rate (fr)• Fraction of demand that is satisfied from product in inventory• Probability that product demand is supplied from available
inventory
3. Order fill rate• Fraction of orders that are filled from available inventory
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CSL and fr are different!
CSL is 0%, fill rate is almost 100%inventory
time0
CSL is 0%, fill rate is almost 0% inventory
time0
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Example 11-2: Evaluating cycle service level given a replenishment policy• Weekly demand for Palms is normally
distributed, with a mean of 2,500 and a standard deviation of 500. The replenishment 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 Palms when there are 6,000 Palms in inventory
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Example 11-2: Evaluating cycle service level given a replenishment policy
Inventory
Time0
Reorder point
11,000
6,000
1,000
CSL = Prob(of not stocking out in a cycle)
Lead time
= Prob(demand during lead time ROP)
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Measuring Demand Uncertainty
Inventory
Time
AverageInventory
CycleInventory
SafetyInventory
CycleLead time (L)
Reorder point (ROP)
Demand (D)Order quantity/lot size (Q)
Demand during lead time DL = LDStandard deviation of demand over lead time L = (L)D
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Example 11-2: Evaluating cycle service level given a replenishment policy
mean
D = 500
D = 2500
stdev
DL = LD = 2 x 2500 = 5000
L = L D = 2 x 500 = 707
mean
stdev
CSL = Prob(demand during lead time ROP)
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Example 11-2: Evaluating cycle service level given a replenishment policy
mean
D = 500
D = 2500
stdev
CSL = Prob(demand during lead time ROP)
DL = LD = 2 x 2500 = 5000
L = L D = 2 x 500 = 707
mean
stdev
CSL = F(ROP,DL,L)
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Example 11-4: Evaluating safety inventory given a desired service levelAverage demand during lead time
DL =
Standard dev. of demand during lead time
L =
Cycle service level CSL =
LD = 2*2,500 = 5,000
SQRT(L)D = SQRT(2)*500 = 707F(ROP, DL, L) = F(6000, 5000, 707) = 0.92
F(ROP, DL, L) = NORMDIST(ROP, DL, L, 1)
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Example 11-4: Evaluating safety inventory given a desired service level• Weekly demand for Lego at a Wal-Mart 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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Example 11-4: Evaluating safety inventory given a desired service level
mean
D = 500
D = 2500
stdev
CSL = Prob(demand during lead time ROP)
DL = LD = 2 x 2500 = 5000
L = L D = 2 x 500 = 707
mean
stdev
CSL = F(ROP,DL,L)
ROP = F-1(CSL,DL,L)
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Example 11-4: Evaluating safety inventory given a desired service levelAverage demand during lead time
DL =
Standard dev. of demand during lead time
L =
Desired cycle service level
CSL =
Safety inventory ss =
LD = 2*2,500 = 5,000
SQRT(L)D = SQRT(2)*500 = 7070.90
Option 1:ROP = F-1(CSL, DL, L) =F-1(0.90, 5000, 707) = 5,906
ss = ROP – DL = 5906 – 5000 = 906
F-1(CSL, DL, L) = NORMINV(CSL, DL, L)
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Ethical Dilemma
Wayne Hills Hospital in Wayne, Nebraska, faces a problem common to large urban hospitals, as well as to small remote ones as itself.
That problem is deciding how much of each type of whole blood to keep in stock. Because blood is expensive and has a limited shelf
life, Wayne Hills naturally wants to keep its stocks as low as possible. Unfortunately, past disasters such as a major tornado and a train wreck demonstrated that lives would be lost when not enough
blood was available to handle massive needs.
Source: Operations Management, J. Heizer and B. Render
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Summary
L: Lead time for replenishment
D: Average demand per unit time
D:Standard deviation of demand per period
DL: Average demand during lead time
L: Standard deviation of demand during lead time
CSL: Cycle service level
ss: Safety inventory
ROP: Reorder point),,(
),,(1
LL
LL
L
DL
L
DD
D
D
CSLFROP
ROPFCSL
ssROP
L
LD
Average Inventory = Q/2 + ss
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Safety Inventory
What actions can be taken to improve product availability without hurting safety inventory?
ROP = F-1(CSL,DL,L)
ROP – DL = F-1(CSL,0,L)
(ROP – DL)/L = F-1(CSL,0,1)
ss/L = Fs-1(CSL)
ss = Fs-1(CSL)L
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Safety Inventory
Why is it that successful retailers and manufacturers (i.e. Wal-Mart, Seven-Eleven Japan, Dell) carry only little inventory but
still have high levels of product availability?
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Measuring Product Availability1. Cycle service level (CSL)
• Fraction of replenishment cycles that end with all customer demand met
• Probability of not having a stockout in a replenishment cycle
2. Product fill rate (fr)• Fraction of demand that is satisfied from product in inventory• Probability that product demand is supplied from available
inventory
3. Order fill rate• Fraction of orders that are filled from available inventory
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Product Fill Rate
ESC = 10
inventory
inventory
time
time
0
0
Q = 1000
Q = 1000
fr = 1 – 10/1000 = 1 – 0.01 = 0.99
fr = 1 – 970/1000 = 1 – 0.97 = 0.03
ESC = 970
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Expected Shortage per Replenishment Cycle• Expected shortage during the lead time
• If demand is normally distributed
L
ROPx
Df(x)dxxfROPxESC of pdf is where)()(
LsL
Ls
ssf
ssFssESC
1
Does ESC decrease or increase with ss?
Does ESC decrease or increase with L?
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Product Fill Rate
• fr: is the proportion of customer demand satisfied from stock.
Probability that product demand is supplied from inventory.
• ESC: is the expected shortage per replenishment cycle (is the demand not satisfied from inventory in stock per replenishment cycle)
• ss: is the safety inventory
• Q: is the order quantity
LSL
LS
ssf
ssFssESC
Q
ESCfr
}1{
1
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Example 11-3: Evaluating fill rate given a replenishment policy• Recall that weekly demand for Palms at B&M is
normally distributed, with a mean of 2,500 and a standard deviation of 500. The replenishment lea time is two weeks. Assume that the demand is independent from one week to the next. Evaluate the fill rate resulting from the policy of ordering 10,000 Palms when there are 6,000 Palms in inventory.
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Example 11-3: Evaluating fill rate given a replenishment policyLot size Q =
Average demand during lead time
DL =
Standard dev. of demand during lead time
L =
Expected shortage per replenishment cycle
ESC =
Product fill rate fr =
10,000
LD = 2*2,500 = 5,000
SQRT(L)D = SQRT(2)*500 = 707-ss(1-Fs(ss/L))+Lfs(ss/L) =-1000*(1-Fs(1,000/707) +707fs(1,000/707) =
25.13
1 – ESC/Q = 1 – 25.13/10,000 = 0.9975
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Cycle Service Level versus Fill Rate
What happens to CSL and fr when the safety inventory (ss) increases?
What happens to CSL and fr when the lot size (Q) increases?
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Managing Inventory in Practice• India’s retail market
– Retail market (not inventory) projected to reach almost $308 billion by 2010
– Due to its infrastructure (many mom-and-pop stores and often poor distribution networks) lead times are long
ss = Fs-1(CSL)L
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Managing Inventory in Practice• Department of Defense
– DOD reported (1995) that it had a secondary inventory (spare and repair parts, clothing, medical supplies, and other items) to support its operating forces valued at $69.6 billion
– About half of the inventory includes items that are not needed to be on hand to support DOD war reserve or current operating requirements