Safety inventory replenishment policies

Although the integer policies discussed above synchronize replenishment within the supply chain and decrease cycle inventories, they increase safety inventories, because of the lack of flexibility with the timing of a reorder, as discussed in Chapter 12. Thus, these polices make the most sense for supply chains in which cycle inventories are large and demand is relatively predictable. 

A replenishment policy consists of decisions regarding when to reorder and how much to reorder. These decisions determine the cycle and safety inventories along with the fill rate fr and the cycle service level CSL. Replenishment policies may take any of several forms. We restrict attention to two types ... 

We now discuss the relationship between safety inventory and the CSL and fr. In this section, we restrict our attention to the continuous review policy. The periodic review policy is discussed in detail in Section 12.6. The continuous review policy consists of a lot size Q ordered when the inventory on hand declines to the ROP. Assume that weekly demand is normally distributed, with mean D and standard deviation o-d. Assume replenishment lead time of L weeks. 

EVALUATING SAFETY INVENTORY GIVEN A REPLENISHMENT POLICY In the case of B M, safety inventory corresponds to the average number of phones on hand when a replenishment order arrives. Given the lead time of L weeks and a mean weekly danand of D, using Equation 12.2, we have... 

This is because, on average, D X L phones will seU over the L weeks between when the order is placed and when the lot arrives. The average safety inventory when the replenishment lot arrives is thus ROP — D X L. The evaluation of safety inventory for a given inventory policy is described in Example 12-1 (see spreadsheet Chapter 12-examples worksheet Example 12-1). 

Weekly demand for Legos at a Walmart store is normally distributed, with a mean of 2,5(X) boxes and a standard deviation of 500. The replenishment lead time is two weeks. Assuming a continuous-review replenishment policy, evaluate the safety inventory that the store should carry to achieve a CSL of 90 percent. 

We now show how fiU rates can be evaluated given a replenishment policy (and thus the corresponding safety inventory). We then show how to determine the required safety inventory given a desired fill rate. 

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... 

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. 

Let us consider the store manager at Walmart who is responsible for designing a replenishment policy for Lego building blocks. He wants to analyze the impact on safety inventory if he decides to use a periodic review policy. Demand for Legos is normally distributed and independent from one week to the next. We assume the following inputs ... 

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

Identify factors that influence the required level of safety inventory. Safety inventory is influenced by demand uncertainty, replenishment lead times, lead time variability, and desired product availability. As any one of them increases, the required safety inventory also increases. The required safety inventory is also influenced by the inventory policy implemented. Continuous review policies require less safety inventory than periodic review policies. 

Weekly demand for gaming consoles at Liverpool, a Mexican department store chain, is normally distrihnted with a mean of 1,000 and a standard deviation of 400. The replenishment lead time from the suppher is four weeks. Liverpool is targeting a CSL of 95 percent and uses a periodic review policy under which it reorders consoles every eight weeks. What is the average order size How much safety inventory of consoles should Liverpool carry What should its order up to level be How much safety inventory would be required if Liverpool switched to a continuous review policy ... 

The task force identified that plant capacities allowed any reasonable order to be produced and delivered in five days. The replenishment lead time was thus five days. The DCs ordered using a periodic review policy with a reorder interval of six days. The holding cost incurred was 0.15 per unit per day whether the unit was in transit or in storage. All DCs carried safety inventories to ensure a CSL of 95 percent. 

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