Optimal level of product availability

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. 

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

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... 

In the L. L. Bean example, we have a cost of overstocking of Q = c — s = 5 and a cost of understocking of C = p - i = 55. As these costs change, the optimal level of product availability also changes. In the next section, we develop the relationship between the desired CSL and the cost of overstocking and understocking for seasonal items. 

Having identified the factors that influence the optimal level of product availability, we now focus on actions a manager can take to improve supply chain profitability. We have shown in Section 13.2 that the costs of overstocking and understocking have a direct impact on both the... 

SETTING OPTIMAL LEVELS OF PRODUCT AVAILABILITY IN PRACTICE... 

---