Level of product availability

Customer service is a complex subject. However, it is usually measured in terms of the level of product availability, speed and consistency of the customer s order cycle, and communication that takes place between seller and customer. Management should establish customer service levels only after carefully studying customer needs. 

One of the exemplars of world class demand management and planning is Dell Inc., the computer company. Their ability to offer high levels of product availability with minimal inventory has given then a leadership position in many markets (see box below). 

Service level required A customer placing an emergency order expects a high level of product availability. This customer may go elsewhere if all parts of the order are not immediately available. This is not apt to happen in the case of the construction order, for which a long lead time is likely. 

LEVEL OF PRODUCT AVAILABILITY Level of product availability is the fraction of demand that is served on time from product held in inventory. A high level of product availability provides a high level of responsiveness but increases cost because much inventory is held but rarely used. In contrast, a low level of product availabihty lowers inventory holding cost but results in a higher fraction of customers who are not served on time. The basic trade-off when determining the level of product availability is between the cost of inventory to inCTease product availability and the loss from not serving customers on time. 

Product availability Easy to provide a high level of product availability because of aggregation at manufacturer. 

Lack of coordination hurts the level of product availability and results in more stockouts in the snpply chain. The large fluctuations in orders make it harder for P G to supply all distributor and retailer orders on time. This increases the likelihood that retailers will run out of stock, resulting in lost sales for the supply chain. 

The lack of coordination hurts both responsiveness and cost in a supply chain by making it more expensive to provide a given level of product availability. 

As product variety has grown, however, product life cycles have shmnk. Thus, it is more likely that a product that is hof today will be obsolete tomorrow, which increases the cost to firms of carrying too much inventory. Thus, a key to the success of any supply chain is to figure out ways to decrease the level of safety inventory carried without hurting the level of product availability. 

How much safety inventory is needed for the desired level of product availability ... 

The first question is discussed in detail in Chapter 13. The remainder of this chapter focuses on answering the second and third questions, assnming a desired level of product availability. Next, we consider factors that influence the appropriate level of safety inventory. 

As the desired level of product availability increases, the required level of safety inventory also increases. If the supermarket targets a higher level of product availability for a certain spice, it must carry a higher level of safety inventory for that spice. 

The two key factors that affect the required level of safety inventory are the desired level of product availability and uncertainty. We now discuss the impact that each factor has on the safety inventory. 

Reduce the supplier lead time L If lead time decreases by a factor of k, the required safety inventory decreases by a factor of V. The only caveat here is that reducing the supplier lead time requires significant effort from the supplier, whereas reduction in safety inventory occurs at the retailer. Thus, it is important for the retailer to share some of the resulting benefits, as discussed in Chapter 10. Walmart, Seven-Eleven Japan, and many other retailers apply tremendous pressure on their supphers to reduce the replenishment lead time. Apparel retailer Zara has built its entire strategy around using local flexible production to reduce replenishment lead times. In each case, the benefit has manifested itself in the form of reduced safety inventory while maintaining the desired level of product availability. 

Retailers such as Gap also use information centralization effectively. If a store does not have the size or color that a customer wants, store employees can use their information system to inform the customer of the closest store with the product in inventory. Customers can then either go to this store or have the product delivered to their house. Gap thus uses information centtal-ization to virtually aggregate inventory across all retail stores even though the inventory is physically separated. This allows Gap to reduce the amount of safety inventory it carries while providing a high level of product availability. 

A good understanding of customer-driven substitution is important in the retail industry. It must be exploited when merchandising to ensure that substitute products are placed near each other, allowing a customer to buy one if the other is out of stock. In the online channel, substitution requires a retailer to present the availability of substitute products if the one the customer requests is out of stock. The supply chain is thus able to reduce the required level of safety inventory while providing a high level of product availability. 

Recognition of customer-driven substitution and joint management of inventories across substitutable products allows a supply chain to reduce the required safety inventory while ensuring a high level of product availability. 

In this section, we describe the evaluation of safety inventories for both continuous and periodic-review replenishment policies. We highlight the fact that periodic review policies require more safety inventory than continuous review policies for the same level of product availability. To simplify the discussion, we focus on the CSL as the measure of product availability. The managerial implications are the same if we use fiU rate the analysis, however, is more cumbersome. 

Periodic review replenishment policies require more safety inventory than continuous review policies for the same lead time and level of product availability. 

Understand the role of safety inventory in a supply chain. Safety inventory helps a supply chain provide customers with a high level of product availability in spite of supply and demand uncertainty. It is carried just in case demand exceeds the amount forecasted or supply arrives later than expected. 

Why can a Home Depot, with a few large stores, provide a higher level of product availability with lower inventories than a hardware store chain such as True Value, with many small stores ... 

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

In this chapter, we explore the process of determining the optimal level of product availability to be offered to customers. The chapter examines factors that influence the optimal cycle service level. We discuss and demonstrate how different managerial levers can be used to improve supply chain profitability by increasing the level of product availability while reducing inventories. 

The level of product availability is measured using the cycle service level or the fill rate, which are metrics for the amount of customer demand satisfied from available inventory. The level of product availability, also referred to as the customer service level, is one of the primary measures of a supply chain s responsiveness. A supply chain can use a high level of product availability to improve its responsiveness and attract customers, thus increasing revenue for the supply chain. However, a high level of product availability requires large inventories, which raise supply chain costs. Therefore, a supply chain mnst achieve a balance between the level of availability and the cost of inventory. The optimal level of prodnct availability is one that maximizes supply chain profits. 

Chapter 13 Determining the Optimal Level of Product Availability... 

Whether the optimal level of availability is high or low depends on where a particular company believes it can maximize profits. Nordstrom has focused on providing a high level of product availability and has used its reputation for responsiveness to become a successful department store chain. However, prices at Nordstrom are higher than those at a discount store, where the level of product availability is lower. Power plants ensure that they (almost) never run out of fuel because a shutdown is extremely expensive, resulting in several days of lost production. Some power plants try to maintain several months of fuel supply to avoid any probability of running out. In contrast, most supermarkets carry only a few days supply of product, and out-of-stock situations do occur with some frequency. 

The Internet allows a customer to easily shop at an alternative store if the first choice is out of stock. This competitive environment puts pressure on online retailers to increase their level of availability. Simultaneously, significant price competition has lowered prices online. Web retailers with excess inventory find it difficult to be profitable. Providing the optimal level of product availability is thus a key to success online. 

In the examples described earlier, firms provide different levels of product availability. Every supply chain manager must use factors that influence the optimal level of product availability to target that optimal level and identify managerial levers that increase supply chain surplus. Next, we identify factors that affect the optimal level of product availability. 

FACTORS AFFECTING OPTIMAL LEVEL OF PRODUCT AVAILABILITY... 

The cost of overstocking, denoted by Cg, is the loss incurred by a firm for each unsold unit at the end of the selling season. The cost of understocking, denoted by C , is the margin lost by a firm for each lost sale because there is no inventory on hand. The cost of understocking should include the margin lost from current sales, as well as future sales if the customer does not return. In summary, the two key factors that influence the optimal level of product availability are... 

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