Discussion 2

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Determining the Optimal Level of Product Availability

PowerPoint presentation to accompany

Chopra and Meindl Supply Chain Management, 5e

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https://www.youtube.com/watch?v=FjRfnqKm-ao

Learning Objectives

Identify the factors affecting the optimal level of product availability and evaluate the optimal cycle service level

Use managerial levers that improve supply chain profitability through optimal service levels

Understand conditions under which postponement is valuable in a supply chain

Allocate limited supply capacity among multiple products to maximize expected profits

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Notes:

Importance of the Level of Product Availability

Product availability measured by cycle service level or fill rate

Also referred to as the customer service level

Product availability affects supply chain responsiveness

Trade-off:

High levels of product availability  increased responsiveness and higher revenues

High levels of product availability  increased inventory levels and higher costs

Product availability is related to profit objectives and strategic and competitive issues

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What is the importance of product availability?

Responsiveness to meet demand

Factors Affecting the Optimal Level of Product Availability

Cost of overstocking, Co

Cost of understocking, Cu

Possible scenarios

Seasonal items with a single order in a season

One-time orders in the presence of quantity discounts

Continuously stocked items

Demand during stockout is backlogged

Demand during stockout is lost

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Optimum level of productivity

Desired Cycle Service Level for Continuously Stocked Items

Two extreme scenarios

All demand that arises when the product is out of stock is backlogged and filled later, when inventories are replenished

All demand arising when the product is out of stock is lost

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Managerial Levers to Improve Supply Chain Profitability

“Obvious” actions

Increase salvage value of each unit

Decrease the margin lost from a stockout

Improved forecasting

Quick response

Postponement

Tailored sourcing

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Improved Forecasts

Improved forecasts result in reduced uncertainty

Less uncertainty results in

Lower levels of safety inventory (and costs) for the same level of product availability, or

Higher product availability for the same level of safety inventory, or

Both

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Quick Response: Impact on Profits and Inventories

Set of actions taken by managers to reduce replenishment lead time

Reduced lead time results in improved forecasts

Benefits

Lower order quantities thus less inventory with same product availability

Less overstock

Higher profits

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Quick Response: Multiple Orders Per Season

Three important consequences

The expected total quantity ordered during the season with two orders is less than that with a single order for the same cycle service level

The average overstock to be disposed of at the end of the sales season is less if a follow-up order is allowed after observing some sales

The profits are higher when a follow-up order is allowed during the sales season

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Quick Response: Multiple Orders Per Season

Figure 13-4

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Quick Response: Multiple Orders Per Season

Figure 13-5

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Postponement: Impact on Profits and Inventories

Delay of product differentiation until closer to the sale of the product

Activities prior to product differentiation require aggregate forecasts more accurate than individual product forecasts

Individual product forecasts are needed close to the time of sale

Results in a better match of supply and demand

Valuable in online sales

Higher profits through better matching of supply and demand

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Tailored Sourcing

A firm uses a combination of two supply sources (vendors)

One is lower cost but is unable to deal with uncertainty well

Second more flexible but is higher cost

Focus on different capabilities

Increase profits, better match supply and demand

May be volume based or product based

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Summary of Learning Objectives

Identify the factors affecting the optimal level of product availability and evaluate the optimal cycle service level

Use managerial levers that improve supply chain profitability through optimal service levels

Understand conditions under which postponement is valuable in a supply chain

Allocate limited supply capacity among multiple products to maximize expected profits

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Notes:

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher.

Printed in the United States of America.

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376 Chapter 13 • Determining the Optimal Level of Product Availability

Unsold Inventory at End of Season

Number of Order Cycles per Season

FIGURE 13-4 Leftover Inventory versus Number of Order Cycles per Season

Expected Profit

Number of Order Cycles per Season

FIGURE 13-5 Expected Profit versus Number of Order Cycles per Season

1. The expected total quantity ordered during the season with two orders is less than that with a single order for the same cycle service level. In other words, it is possible to provide the same level of product availability to the customer with less inventory if a second, follow- up order is allowed after observing some sales.

2. The average overstock to be disposed of at the end of the sales season is less if a follow-up order is allowed after observing some sales.

3. The profits are higher when a follow-up order is allowed during the sales season.

In other words, as the total quantity for the season is broken up into multiple smaller orders with the size of each order based on some observed sales, the buyer is better able to match supply and demand and increase profitability for Saks. These relationships are shown in Figures 13-4 and 13-5.

We now consider the case in which the buyer improves her forecast accuracy for the second order after observing some of the season’s demand. As a result, the standard deviation of weekly demand forecast drops from 15 to 3 for the second seven-week period. In this setting, the first order stays at 195 shawls as discussed earlier. For the second order, however, we must

M13_CHOP3952_05_SE_C13.QXD 11/14/11 8:04 PM Page 376

376 Chapter 13 • Determining the Optimal Level of Product Availability

Unsold Inventory at End of Season

Number of Order Cycles per Season

FIGURE 13-4 Leftover Inventory versus Number of Order Cycles per Season

Expected Profit

Number of Order Cycles per Season

FIGURE 13-5 Expected Profit versus Number of Order Cycles per Season

2. The average overstock to be disposed of at the end of the sales season is less if a follow-up order is allowed after observing some sales.

3. The profits are higher when a follow-up order is allowed during the sales season.

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