SYST 4050 Supply Chain Management – Homework 5

1. Weekly demand for HP printers at a Sam’s Club store is normally distributed, with a
mean of 250 and a standard deviation of 150. The store manager continuously monitors
inventory and currently orders 1,000 printers each time the inventory drops below 600
printers. HP currently takes two weeks to fill an order.

a) How much safety inventory does the store carry?

ROP = 600
DL = DL = 250*2 = 500
ss = ROP – DL = 600 – 500 = 100

b) You may use Excel or the table below. What CSL does Sam’s Club achieve as a result of this
policy?

F(600,500,300) 0.631
F(600,250,212.13) 0.951
F(600,500,212.13) 0.681
F(1000,500,300) 0.952
F(1000,250,212.13) 0.999
F(1000,500,212.13) 0.991

L = LD = 2*150 = 212.13

CSL = F(ROP,DL,L) = F(600,500,212.13) = 0.681

c) You may use Excel or the table below. What product fill rate does Sam’s Club achieve as a
result of this policy?

ESC
–100*(1 – Fs(0.471)) + 212.13*fs(0.471) 43.861
–100*(1 – Fs(0.471)) + 426.26*fs(0.471) 120.317
–50*(1 – Fs(0.235)) + 212.13*fs(0.235) 62.356
–50*(1 – Fs(0.117)) + 426.26*fs(0.117) 146.221
–200*(1 – Fs(0.471)) + 426.26*fs(0.471) 87.723
–200*(1 – Fs(0.235)) + 426.26*fs(0.235) 88.001

Q = 1000
ss = ROP – DL = 600 – 500 = 100
L = LD = 2*150 = 212.13
ESC = -ss(1 – F(ss/L,0,1)) + Lf(ss/L,0,1) = -100*(1 – F(0.471,0,1)) + 212.13*f(0.471.13,0,1)
= 43.861
fr = 1 – ESC/Q = 1 – (43.861/1000) = 0.956
Sam’s Club wants to target a CSL of 95 percent. In order to achieve this it has to change its
reorder point.

d) You may use Excel or the table below. What is the resulting safety inventory that is achieved
as a result of the new CSL value?

F-1(0.95,500,212.13) 848.926
F-1(0.95,500,300) 993.456
F-1(0.95,600,212.13) 948.926
F-1(0.95,600,300) 1093.456
F-1(0.95,1000,300) 1493.456
Fs-1(0.95) 1.645

There are two ways to calculate the resulting safety inventory

Option 1
ss = Fs-1(CSL)*L = Fs-1(0.95)*212.13 = 348.926

Option 2
ROP = F-1(CSL, DL, L) = F-1(0.95, 500, 212.13) = 848.926
ss = ROP – DL = 848.926 – 500 = 348.926

In this lean operations world, in an effort to lower handling costs, speed delivery, and
reduce inventory, retailers are forcing their suppliers to do more and more in the way of
preparing their merchandise for their cross-docking warehouses, shipment to specific
stores, and shelf presentation. Your company, a small manufacturer of aquarium
decorations, is in a tough position. First, Mega-Mart wanted you to develop bar-code
technology, then special packaging, then small individual shipments bar coded for each
store (this way when the merchandise hits the warehouse it is cross-docked immediately to
the correct truck and store and is ready for shelf placement). And now Mega-Mart wants
you to develop RFID—immediately. Mega-Mart has made it clear that suppliers that
cannot keep up with the technology will be dropped.
Earlier, when you didn’t have the expertise for bar codes, you had to borrow money and
hire an outside firm to do the development, purchase the technology, and train your
shipping clerk. Then, meeting the special packaging requirement drove you into a loss for
several months, resulting in a loss for last year. Now it appears that the RFID request is
impossible. Your business, under the best of conditions, is marginally profitable, and the
bank may not be willing to bail you out again. Over the years, Mega-Mart has slowly
become your major customer and without them, you are probably out of business.

e) What would you do?

There is no single correct answer, but not implementing RFID is not an option (you’ll go
out of business). One thing that could be done is to negotiate with Mega-Mart to obtain
more accurate demand data after the implementation. With better demand data you can
make an improved demand forecast and as a result lower your safety inventory and lower
(inventory holding) cost.