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12 in a Supply Chain
Safety Inventory
PowerPoint presentation
to accompany
Chopra and Meindl
Supply Chain Management,
6e 2016 Pearson Education, Inc.
Copyright 12 1
Learning Objectives
1. Describe different measures of
product availability
2. Understand the role of safety
inventory in a supply chain
3. Identify factors that influence the
required level of safety inventory
4. Utilize available managerial levers to
lower safety inventory without hurting
product availability
Copyright 2016 Pearson Education, Inc. 12 2
The Role of Safety Inventory
Safety inventory is carried to satisfy demand
that exceeds the amount forecasted demand
Raising the level of safety inventory increases
product availability and thus the margin captured
from customer purchases
Raising the level of safety inventory increases
inventory holding costs
Carrying excessive inventory can hurt when
demand dries up- obsolescence is a
significant risk (drop in value) in high-tech
companies (Compaq, Dell
FIGURE 12-1
L L
DL Di L i 2 ij i j
2
The coefficient of
i 1 i 1 i j
variation
measures the
DL D * L and L L * D
cv /
size of
uncertainty
1. Continuous review
Inventory is continuously tracked
Order for a lot size Q is placed when the inventory
declines to the reorder point (ROP)
2. Periodic review
Inventory status is checked at regular periodic intervals
Order is placed to raise the inventory level to a specified
threshold
Expected demand
during lead time
=DxL
Safety inventory,
ss = ROP D x L
Copyright 2016 Pearson Education, Inc. 12 11
Determining the
Appropriate Level of Safety
Inventory
Average demand per week, D = 2,500
Standard deviation of weekly demand, D = 500
Average lead time for replenishment, L = 2 weeks
Service level
Risk of
a stock-out
Probability of
no stockout
Expected
ROP DLT Demand Quantity
Safety
stock
0 z z-scale
ROP L D
P( z ) z:Standard normal variable
DLT
ROP L D
normsinv(CSL)
DLT
ROP L D ss DLT normsinv(CSL)
Copyright 2016 Pearson Education, Inc. 12 16
Determining the
Appropriate Level of Safety
Inventory
Q = 10,000, ROP = 6,000, L = 2 weeks
D = 2,500/week, D = 500
Stock out depends on demand during lead time!
DL D L 2 2,500 5,000
L L D 2 500 707
ss FS1(CSL) L FS1(CSL) L D
NORMSINV(CSL) L D
= z *DLT
Copyright 2016 Pearson Education, Inc. 12 19
Determining the
Appropriate Level of Safety
Inventory
D = 2,500/week, D = 500, CSL = 0.9, L = 2
weeks
DL DL 2 2,500 5,000
L L D 2 500 707
ss Fs1(CSL) L NORMSINV(CSL) L
NORMSINV(0.90) 707 906
ESC (x ROP) f (x) dx
xROP
ss ss
ESC ss 1 Fs L fs
L L
FIGURE 12-2
ESC = (1 fr)Q
No equation for ss
Try values or use GOALSEEK in Excel
FIGURE 12-3
ss NORMSINV(CSL) L D
NORMSINV(.95) 9 800 3,948
DL DL L L D2 D2 sL2
DC var DC
DC kD DC k 2 k k 1 2
Simplified to DC k D
Copyright 2016 Pearson Education, Inc. 12 40
Impact of Aggregation
on Safety Inventory
k
Require safety FS1(CSL) L DC
inventory i1
on aggregation
Holding cost savings
on aggregation per unit
sold
FS1(CSL) L H k
DC
i
C
D
i1
Disaggregate
Safety Aggregate
Inventory Safety Inventory
0 36.25 18.12
0.2 36.25 22.93
0.4 36.25 26.88
0.6 36.25 30.33
0.8 36.25 33.42
1.0 36.25 36.25
TABLE 12-3
FIGURE 12-4
Total required
safety ss 4 Fs1(CSL) L D
inventory,
4 NORMSINV(0.95) 4 300 3,948
Motors Cleaner
Manufacturer-driven substitution
increases overall profitability for
the manufacturer by allowing
some aggregation of demand,
which reduces the inventory
requirements for the same level of
availability.
Recognition of customer-driven
substitution and joint
management of inventories across
substitutable products allows a
supply chain to reduce the
required safety inventory while
ensuring a high level of product
availability.
Marginal Total
Number of Finished Safety Reduction in Reduction in
Products per Invento Safety Safety
Component ry Inventory Inventory
1 399,699
TABLE 12-5
Copyright 2016 Pearson Education, Inc. 12 60
Key Point
Component commonality
decreases the safety inventory
required. The marginal benefit,
however, decreases with
increasing commonality.
FIGURE 12-5
Total required
safety ss 100 Fs1(CSL) L D
inventory,
100 NORMSINV(0.95) 2 10 2,326
Standard deviation of
base paint weekly DC 100 10 100
demand,
ss Fs1(CSL) L DC NORMSINV(0.95) 2 100 233
DL D L
Mean demand during lead time,
Standard deviation of demand during lead L D
time,
L
FIGURE 12-6
ss FS1(CSL) DL NORMSINV(CSL) TL
NORMSINV(0.90) 1,225 1,570 boxes