SUPPLY CHAIN MANAGEMENT

SESSION 13

Safety Inventory: Managing

Uncertainty in a Supply Chain
 The Role of Safety Inventory
• Safety inventory is carried to satisfy demand
that exceeds the amount forecasted
– 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
The Case of Bloomingdales
Factors Affecting the Level of Safety Inventory
The desired level The uncertainty of
of product demand
availability
Factors Affecting
the Level Of
Safety Inventory

Inventory
The uncertainty of replenishment
supply policies
Measuring Product Availability
1. Product fill rate (fr)
– Fraction of product demand satisfied from
product in inventory
2. Order fill rate
– Fraction of orders filled from available inventory
3. Cycle service level (CSL)
– Fraction of replenishment cycles that end with
all customer demand being met
– Replenishment cycle – the interval between two
successive replenishment deliveries
 Measuring Demand Uncertainty

• Estimating the random component

– D = Average demand per period
– σD = Standard deviation of demand (forecast error) per
period
• Evaluating Demand Distribution over L periods
 Replenishment Policies
Replenishment Policies

Continuous review Periodic review

Inventory is Order for a lot size Q is

placed when the Inventory status is Order is placed to
raise the inventory
continuously inventory declines to checked at regular level to a specified
the reorder point (R O periodic intervals
tracked P) threshold
 Determining the Appropriate Level of
Safety Inventory
• Evaluating Safety Inventory Given a Reorder Point
Expected demand during lead time = D × L
Safety inventory, ss = ROP − D × L
Evaluating Safety Inventory Given a
Reorder Point

Average demand per week, D = 2,500

Standard deviation of weekly demand, sD = 500
Average lead time for replenishment, L = 2 weeks
Reorder point, ROP = 6,000
Average lot size, Q = 10,000
• Calculate Safety Stock, Cycle Inventory, and Average Inventory

Safety inventory, ss = ROP −DL = 6,000 −5,000 = 1,000

Q 10,000
Cycle inventory    5,000
2 2
Evaluating Safety Inventory Given a
Reorder Point

Average inventory = cycle inventory + safety inventory

= 5,000 + 1,000 = 6,000

average inventory 6,000

Average flow time    2.4 weeks
throughput 2,500
Evaluating Cycle Service Level Given a
Reorder Point

CSL  Prob(ddlt of L weeks  ROP )

(ddlt = demand during lead time)

CSL = F(ROP, DL, σL) = NORMDIST(ROP, DL, σL, 1)

Evaluating Cycle Service Level Given a
Reorder Point

Q = 10,000, ROP = 6,000, L = 2 weeks

D = 2,500/week, σD = 500

DL  D  L  2  2,500  5,000
 L  L D  2  500  707

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

1)
= NORMDIST(6,000, 5,000, 707, 1) = 0.92
 Evaluating Required Safety Inventory
Given a Desired Cycle Service Level
Desired cycle service level = CSL
Mean demand during lead time = DL
Standard deviation of demand during lead time = σL

Probability(demand during lead time  DL  ss )  CSL

• Identify safety inventory ss so that

F(DL + ss, DL, sL) = CSL
Evaluating Required Safety Inventory
Given a Desired Cycle Service Level

DL  ss  F –1(CSL,DL ,σ L )  NORMINV (CSL,DL ,σ L )

or

ss  F –1(CSL,DL ,σ L ) – DL  NORMINV (CSL,DL ,σ L ) – DL

ss  FS–1(CSL )   L  FS–1(CSL )  L D
 NORMSINV (CSL )  L D
Evaluating Required Safety Inventory Given
a Desired Cycle Service Level

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  Fs–1 (CSL )   L  NORMSINV (CSL )   L

 NORMSINV( 0.90)  707  906