Chapter 12: Managing uncertaintiy
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Questions and Answers

Which of the following factors influences the level of safety inventory?

  • Desired level of product availability (correct)
  • Uncertainty of demand (correct)
  • Uncertainty of supply (correct)
  • Inventory replenishment policies (correct)
  • All of the above

Increasing safety inventory levels always leads to higher product availability and increased profits.

False (B)

What is the purpose of safety inventory?

Safety inventory is carried to meet demand that exceeds the forecasted amount.

The fraction of product demand satisfied from inventory is known as the ______.

<p>product fill rate</p> Signup and view all the answers

Match the following inventory replenishment policies with their descriptions:

<p>Continuous review = Inventory is continuously tracked and an order is placed when the inventory level reaches the reorder point. Periodic review = Inventory is checked at regular intervals and an order is placed to raise the inventory level to a specified threshold.</p> Signup and view all the answers

Which of these is NOT a measure of product availability?

<p>Inventory turnover rate (D)</p> Signup and view all the answers

In a continuous review system, an order is placed when the inventory level reaches the reorder point.

<p>True (A)</p> Signup and view all the answers

Explain the difference between product fill rate and order fill rate.

<p>Product fill rate measures the percentage of customer demand met from available inventory, while order fill rate measures the percentage of customer orders filled from available inventory.</p> Signup and view all the answers

How does a higher desired product availability impact the required safety inventory?

<p>It increases safety inventory. (D)</p> Signup and view all the answers

Reducing supplier lead time (L) can help to decrease the required safety inventory.

<p>True (A)</p> Signup and view all the answers

What are the two main ways to reduce demand uncertainty?

<p>Reduce information distortion through sharing and aggregate demand.</p> Signup and view all the answers

To address lumpy demand, safety inventory should be raised by ______ the average size of a customer order.

<p>half</p> Signup and view all the answers

Match the following inventory strategies with their primary purpose:

<p>Information centralization = Reduces the need for safety inventory by improving product visibility Specialization = Optimizes inventory placement based on product characteristics and demand patterns Product substitution = Aggregates demand and reduces safety inventory by using one product to fulfill demand for another Component commonality = Reduces inventory by aggregating demand for common components across different products Postponement = Delays final product customization until closer to sale, allowing for greater demand aggregation and reduced safety inventory</p> Signup and view all the answers

Which of the following is NOT a primary leverage point to reduce safety inventory?

<p>Increase of lead times (B)</p> Signup and view all the answers

Fast-moving, predictable items with low value are typically best suited for decentralized inventory strategies.

<p>False (B)</p> Signup and view all the answers

What is the key difference between manufacturer-driven substitution and customer-driven substitution?

<p>Manufacturer Driven Substitution allows aggregation of demand by allowing one product to be used to fulfill the demand for a different product. Customer Driven Substitution allows aggregation of safety inventory by letting the customer choose to purchase an alternative product where the first choice product was unavailable.</p> Signup and view all the answers

How does component commonality impact safety inventory levels?

<p>It reduces safety inventory by allowing for aggregated demand for components. (C)</p> Signup and view all the answers

Postponement strategies aim to delay ______ until closer to the sale of the product.

<p>product differentiation or customization</p> Signup and view all the answers

Flashcards

Safety Inventory

The excess inventory held to mitigate uncertainty in demand.

Fill Rate

The percentage of customer demand that is met without backorders.

Lead Time (L)

The total time taken from placing an order until it is received.

Demand Uncertainty (σD)

The unpredictability of customer demand over time.

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Reorder Point (ROP)

The inventory level at which a new order should be placed.

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Information Centralization

A system that improves product availability by sharing stock information.

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Product Substitution

Using one product to meet the demand for another product.

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Component Commonality

The practice of using shared components in multiple products.

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Postponement

Delaying product customization until closer to delivery.

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Echelon Inventory

The inventory held at each stage between the supplier and the final customer.

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Impact of Safety Inventory

Increasing safety inventory boosts availability but raises holding costs.

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Key Questions for Safety Inventory

  1. Appropriate availability level? 2. Needed inventory? 3. How to reduce safely?
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Factors Affecting Safety Inventory

Include desired product availability, demand uncertainty, supply uncertainty, and policies.

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Product Fill Rate (fr)

Fraction of demand satisfied from available inventory.

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Order Fill Rate

Fraction of orders completely filled from inventory.

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Cycle Service Level (CSL)

Fraction of cycles meeting all customer demand.

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Replenishment Policies

Methods to restock inventory, including continuous and periodic reviews.

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Study Notes

Safety Inventory Management

  • Safety inventory is held to meet unexpected demand exceeding forecasts. Increasing safety stock improves product availability and sales but increases holding costs.

Measuring Product Availability

  • Product fill rate (fr): Percentage of demand met from inventory.
  • Order fill rate: Percentage of orders fulfilled from inventory.
  • Cycle service level (CSL): Percentage of replenishment cycles where all customer demand is met (measured between successive replenishment deliveries).

Replenishment Policies

  • Continuous review: Inventory constantly monitored; order (quantity Q) placed when inventory hits a reorder point (ROP).
  • Periodic review: Inventory checked at regular intervals; order placed to reach a predetermined inventory level.

Factors Affecting Safety Inventory

  • Desired product availability
  • Demand uncertainty
  • Supply uncertainty
  • Inventory replenishment policies

Impact of Availability and Uncertainty

  • Higher product availability demands more safety inventory.
  • Reducing supplier lead time (L) and demand uncertainty (σD) decrease needed safety stock.

Impact of Demand Characteristics

  • Lumpy demand: Safety stock should be roughly half the average size of customer orders.
  • Seasonal demand: Maintain a constant reorder point (ROP) in terms of days of demand to avoid stockouts.

Reducing Safety Inventory

  • Information centralization: Improved online stock locating systems increase product availability without excess inventory.
  • Specialization: Optimal inventory placement depends on product type (fast-moving/predictable versus slow-moving/unpredictable) and cost factors.
  • Product substitution: Using one product to fulfill another's demand allows aggregated demand and reduced safety stock (manufacturer or customer driven).
  • Component commonality: Using common components aggregates demand, reducing uncertainty and safety stock for the components.
  • Postponement: Delaying product differentiation/customization until later in the supply chain keeps common components until closer to the point of sale; this allows aggregation of inventory.

Multi-echelon Supply Chains

  • In complex supply chains, individual stages may not have full information about demand and supply distributions.
  • Echelon inventory is inventory between a stage and the customer.
  • Reorder points and order-up levels must consider the echelon inventory.
  • Appropriate safety inventory levels must be decided for each stage.

Managerial Strategies

  • Reduce supply uncertainty: Information sharing and coordinated demand.
  • Reduce lead times: Minimize delays beyond production and transportation times.
  • Reduce demand uncertainty: Reduce information distortion by sharing information and aggregating demand.

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Description

Test your knowledge on safety inventory and product availability. This quiz covers key concepts such as inventory replenishment policies and differentiating between product fill rate and order fill rate. Enhance your understanding of essential inventory management principles.

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