Lecture

MANAGING

7b INVENTORIES IN
THE SUPPLY
CHAIN (ii)
 DETERMINING THE

13 OPTIMAL PRODUCT
AVAILABILITY

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OPTIMAL PRODUCT AVAILABILITY
Introduction

• Why is optimal product availability?

Why is this relevant?

• What is balanced to find optimal

product availability?

• What factors can help assuring a

good product availability?

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OPTIMAL PRODUCT AVAILABILITY
Introduction
• Product availability or Customer service level is one
of the primary measures of a supply chain
responsiveness.

• Optimal customer service level is finding a balance

between:
– Costs of overstocking a product
service
– Costs of understocking a product costs

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OPTIMAL PRODUCT AVAILABILITY
Examples of Service levels
• If a power plants runs out of
electricity is costly but also risk for
society

• When Nintendo launched the Wii

they missed $1.3 billion in sales
because of bad sales forecasts

• Walmart runs out of stock several

times a day for several products
without to much consequences.

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OPTIMAL PRODUCT AVAILABILITY
Continuously stocked items
• When an item which is continuously stocked is out of
stock two possible scenarios:
– All demand that arises when out-of-stock is backlogged
and filled later: for example by offering a rain check.
– All demand that arises when out-of-stock is lost.

• Based on the possibilities of following one of the

scenario’s the safety level can be adjusted

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OPTIMAL PRODUCT AVAILABILITY
One time orders
• When an item which is a one-time item (seasonal-
item) is out of stock two possible scenarios:
– Discount based on quantities ordered (during life time)
– Discount at the end of life cycle

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OPTIMAL PRODUCT AVAILABILITY
Improving supply chain profitability
• The service level is a good starting point to optimize
the supply chain profitability

• Two managerial levers:

– Increasing the salvage value
• Selling to outlet stores, or other markets (summer/winter)
– Decreasing the margin lost from a stock-out
• Backup sourcing, substitute products,

• But also:
– Reducing supply chain uncertainty

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OPTIMAL PRODUCT AVAILABILITY
Reducing demand uncertainty
• Demand uncertainty can be reduced by:
– Improved forecasting: The more accurate the forecast
is the lower the risk on over/understocking
– Quick response: The shorter the lead-time the lower
pressure is on accurate forecasting
– Postponement: The later product differentiation is
realized the more flexibility the shorter the lead-time
the lower the need accurate forecasting
– Tailored sourcing: Using a combination of two
suppliers. One with low flexibility producing the certain
part and one high flexibility the uncertain part.

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OPTIMAL PRODUCT AVAILABILITY
Product availability for multiple products
• When ordering multiple products and being
confronted with (supply) limitations the procedure is
advised:
– Compute the expected marginal contribution
– Decide for the products with the highest marginal
contribution

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