Hospitality Management (Supply Chain)

Managing Uncertainty in a Supply Chain:
Safety Inventory

(Student Report)

(Contact the Author for full content)

Definition:

Uncertainty

•      A state of having limited knowledge such that it is impossible to exactly describe an existing state or future outcomes or to determine which of several possible outcomes will happen.

•      is a state of having limited knowledge of current conditions or future outcomes

Safety Inventory

•      Inventory carried for the purpose of satisfying demand that exceeds the amount forecasted in a given period.

Safety Inventory is Carried…

Because

•      Demand is Uncertain.

•      A Product Shortage may result if actual demand exceeds the forecast demand.

Example: Clothing Store

 

Role of Safety Inventory

•      Raising the level of safety inventory provides higher levels of product availability and customer service and thus the margin and thus the margin captured from customer purchases

 

•      Raising the level of safety inventory also raises the level of average inventory and therefore increases holding costs.

Key Questions to have a Safety Inventory:

1.  What is the appropriate level of product availability?
What actions can be taken to improve product availability while reducing safety inventory?

 

 

Determining Appropriate Level of Safety Inventory

1. Measuring Demand Uncertainty
2. Measuring Product Availability
3. Replenishment Policies
4. Evaluating Cycle Service Level and Fill Rate
5. Evaluating Safety Level Given Desired Cycle Service Level or Fill Rate
6. Impact of Required Product Availability and Uncertainty on Safety Inventory

 

Appropriate Level of Safety Inventory

Determined by:

-Uncertainty of both demand and supply

-The desired level of product availability.

1. Measuring Demand Uncertainty                

Ø  Demand has Systematic Component and Random Component

 

2.      Measuring Product Availability

 

3.      Replenishment Policy

 

Continuous Review Policy

 

Example:

Cycle Service

•       is the expected probability of not hitting a stock-out during the next replenishment cycle, and thus, it is also the probability of not losing sales.

Fill Rate

·         is the fraction of customer demand that is met through immediate stock availability, without backorders or lost sales. 

Fill Rate

Evaluating Fill Rate

Factors Affecting Fill Rate

Example:

Evaluating  Fill Rate Given A Replenishment Policy

5. Evaluating Safety Inventory given desired Cycle Service Level (CSL) and Fill Rate

·         Given Desired CSL

Given Desired Fill Rate

 

 

6. Impact of Required Product Availability and Uncertainty on Safety Inventory

 

                                     

 Appropriate Level of Safety Inventory

Determined by:

-Uncertainty of both demand and supply

-The desired level of product availability.

1. Measuring Demand Uncertainty                

Ø  Demand has Systematic Component and Random Component

 

2.      Measuring Product Availability

 

3.      Replenishment Policy

 

Continuous Review Policy

 

Example:

Cycle Service

•       is the expected probability of not hitting a stock-out during the next replenishment cycle, and thus, it is also the probability of not losing sales.

Fill Rate

·         is the fraction of customer demand that is met through immediate stock availability, without backorders or lost sales. 

Fill Rate

Evaluating Fill Rate

Factors Affecting Fill Rate

Example:

Evaluating  Fill Rate Given A Replenishment Policy

5. Evaluating Safety Inventory given desired Cycle Service Level (CSL) and Fill Rate

·         Given Desired CSL

Given Desired Fill Rate

 

 

6. Impact of Required Product Availability and Uncertainty on Safety Inventory