Impact of Supply Uncertainty on Safety Inventory

In our discussion to this point, we have focused on situations with demand uncertainty in the form of a forecast error. In many practical situations, supply uncertainty also plays a significant role. The impact of supply uncertainty is well illustrated by the impact of the grounding of MSC 

In this section, we incorporate supply uncertainty by assuming that lead time is uncertain and identify the impact of lead time uncertainty on safety inventories. Assume that the customer demand per period for tablets at Amazon and the replenishment lead time from the supplier are normally distributed. We are provided the following inputs  

D Average demand per period (To. Standard deviation of demand per period L Average lead time for replenishment Si. Standard deviation of lead time 

We consider the safety inventory requirements given that Amazon follows a continuous review policy to manage tablet inventory. Amazon experiences a stockout of product if demand during the lead time exceeds the ROP— that is, the quantity on hand when Amazon places a replenishment order. Thus, we need to identify the distribution of customer demand during the lead time. Given that both lead time and periodic demand are uncertain, demand during the lead time is normally distributed with a mean of and a standard deviation ai, where 

Given the distribution of demand during the lead time in Equation 12.11 and a desired CSL, Amazon can obtain the required safety inventory using Equation 12.5. If product availability is specified as a fill rate, Amazon can obtain the required safety inventory using the procedure outlined in Example 12-5. In Example 12-7, we illustrate the impact of lead time uncertainty on the required level of safety inventory at Amazon (see worksheet Example 12-7). 

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What is the impact of supply uncertainty on safety inventory ... 

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