Safety stock costs

For supply chains, transportation flows enable products or components to change location, thus enabling them to be used at their demand points. The timing of these transportation flows in turn interacts with transport capacity and chain structure to impact supply chain performance. Given this interaction, the total supply chain impact of a choice of transportation flows has to include transport costs, cycle stock costs, safety-stock costs, and in-transit inventory costs. For each possible transport mode, there are... 

Safety stock costs If the demand time, the transit time, or both are uncertain, it may be necessary to carry inventory as a buffer against demand uncertainty. As discussed earlier, the extent of this inventory buffer depends on the magnitude of the demand uncertainty during the supply lead time and the planned in-stock service level. If the planned in-stock probability is expressed as service and the demand over lead time has a standard deviation of ct i, then the safety stock level is expressed as (Note that we assume that... 

Another important feature of the case study scenario and the resulting cost model is inventory control. High seasonality effects and long campaign durations necessitate considerable build-up of stocks. To avoid an unbalanced build-up of stock, soft constraints for safety stock and maximum stock levels are used. To achieve an even better inventory leveling across products and locations, piece-wise linear cost functions for falling below safety stock as well as for exceeding maximum stock levels are employed. 

Gupta/Maranas (2003) as one example for a demand uncertainty model present a demand and supply network planning model to minimize costs. Production decisions are made here and now and demand uncertainty is balanced with inventories independently incorporating penalties for safety stock and demand violations. Uncertain demand quantity is modeled as normally distributed random variables with mean and standard deviation. The philosophy to have one production plan separated from demand uncertainty can be transferred to the considered problem. Penalty costs for unsatisfied demand and normally distributed demand based on historical data... 

Based on the average transport duration, inventory carrying costs for pipeline inventory are calculated (3.18). Further safety stocks are considered to be independent of the chosen network design and hence not considered. 

Doubling up on materials and people was essential as backup to the inevitable misjudgments of the real-time state of play in a company. Judgments were made from information that was hours, days, or even weeks old. Accordingly, production planning required adequate, but costly, inventory safety stocks, and backup teams of people to maintain quality control and for emergency response to the unanticipated and the misjudged. 

Cycle and safety stock carrying costs More warehouses means more total system inventory. Inventory theory supports that seifety stocks will increase with the number of fadlities. 

An increase in inventory costs due to increased safety stocks required to protect each warehouse against uncertainties in customer demand... 

The traditional trade-off in supply chain management has been the maintenance of costly buffers of inventory vs. the ability to meet complex customer prerequisites. Reduce safety stocks and costs will be reduced, but customer service may suffer. Due mainly to advanced planning and scheduling systems and improved forecasting applications, production planners now have the opportunity to reduce reliance on safety stock—while stiU meeting customer demand—by trading inventory for information. 

For example, a manufacturer whose product availability is poor and order cycle times inconsistent may force wholesalers to carry more inventory as safety stock in order to offer an acceptable level of service to the retailers. In this case, lower logistics costs for the manufacturer were achieved at the expense of other members of the supply chain, and the entire supply chain may be less efficient. 

From example 9 it is known that the pipeline transport is assumed to induce negligible fixed costs such that a continuous supply of both sites minimizes the cycle stocks. Hence, it is concluded that Si = Si + for = 1,2 such that at both sites only safety stocks... 

The distributors are able to stock inventories in reasonable amounts unless they don t increase the inventory costs dramatically. This way, they lower the risk that the retailers cannot obtain the product. It is simply called safety stock and manufacturers sometimes may not be able to keep inventories if their forecasting and information systems are not good. By having distributors, the facilities/manufac-turers can focus on manufacturing instead of focusing on the distribution to retailers and/or customers. Hence, they increase their efficiency and effectiveness. 

However, if we prioritize access to capacity for product 1 (which has a higher variability), then the new lead times, using the formulas provided earlier, would be Z, = 1.12 and L2 = 4.03 days. With these lead times, notice that the corresponding safety stock for the first product would be 272.55 units (which decreases from the earlier case), while the safety stock for the second product would be 103.15 units (which increases from the earlier case). Note that the total inventory across both products is now 375.72 units. This decrease in inventory reflects the benefit of tailoring access to the supply chain based on product demand characteristics. Notice that giving priority to the more variable product permits its lead time to decrease, thus decreasing the safety stock for that product. But clearly this comes at a cost to the less variable product, whose lead time increases but at a slower rate. Thus, we have traded off lead time customization for an aggregate decrease in the overall inventory. 

Fixits accounting group has estimated that the annual holding cost is 20% of the cost of the product . Acme supplies a case of widgets for a price of 15 per pack. Assume a desired service level of 95% and a current safety stock of 1 day of inventory at Pittsburgh to counter delivery lead time variation. The cost for a truckload shipment from Seattle to Pittsburgh, by third-party carrier, is 3,000. 

In particular, consider an alternate proposal for the rail option, whereby the trains travel at a lower average lead time that is less variable. Since transport cost per unit of train shipments is low, these lower average lead time and less variability could reduce both the in-transit inventory holding costs to ship by rail and the associated safety stock. We examine next the impact of these changes on the total supply chain cost experienced by the shipper. 

But to make VMI economical, the manufacturer may have to pool dehveries across multiple retailers to optimize costs associated with frequent delivery. In addition, VMI may require the manufacturer to have access to detailed outbound retail shipment information in order to lower manufacturer forecast error and decrease safety stock at the retailer DC required to maintain the desired service level. 

It is clear that the cost associated with inventory depends on the variance of demand during lead time. In such a case, the larger the demand variance, the greater the effect of lead time on safety stock. Now suppose orders to a fadlity came from two sources that differ in their demand variability. Suppose we provide priority to the higher demand variance orders and low priority to the low demand variance order what is the impact Note that, as shown analytically and illustrated with a numerical example in Chapter 4 on capacity management, if one set of orders receives a priority, the lead time for those orders will decrease. But, since the capacity level is unchanged, the lead time for the lower priority orders will increase. Thus, priorities are one mechanism to offer differentiated lead times across order streams and thus improve supply chain performance for spare parts. 

The supply chain is described along with production times, maximum demands over time, and costs. If for a location i, the inbound service level is 5 j, the production time is 7], and the outbound service level is S, then the net replenishment interval is + 7] — -S]. In order to guarantee that demands up to a certain service level sef) will be satisfied, the safety stock level that has to be maintained isZ, o-V5, i + 7] — 5,. A key result is that at each location i, it is optimal to have either 5 = 0or5 = i -i -h Ti. This result implies that each location either carries no safety stock and is a pass-through location or that it decouples that stage from the result of the network upstream by providing a zero service time. 

With low forecast accuracy and/or high demand variability, companies usually have to increase safety stock levels or transship products from one warehouse to another, on an expedite basis, when a warehouse is short of inventory, otherwise they will lose profit margin and become less competitive. However, these operational initiatives despite allowing companies to achieve the required service level, hurt operational efficiency and increase supply chain costs. 

The service level desired in this system is 90%, which means that safety stock adequate to meet 1.282 standard deviations of demand on the warehouse must be carried at each warehouse. For example, if there is only one warehouse with a standard deviation of demand at the warehouse of283, then 283 1.282 = 363 units. The delivery time to the warehouse is 1 week. So, the required safety stock is added to the demand during the lead time to determine the reorder point (ROP) for each warehouse. For example, when there is one warehouse, the ROP becomes 8,000 + 363 units or 8,363 units. But, this is less than 1 truck load (LTL), which means the warehouse would have to pay higher transportation costs. 

To achieve the lowest transportation costs to the warehouse, the decision was made in this example to order only in truck load quantities (TL). In this example, that means that 15,000 units are ordered at one time. Since delivery time to the warehouse is one week, this means that the safety stock is still 363 if there is one warehouse, so the ROP is 15,363 units. The average inventory in the warehouse is the beginning inventory plus the ending inventory divided by two. If there is one warehouse, this is (15,363 + 363)/2 = 7,823 units. The ending inventory is 363 because this is the level of the safety stock and it is equally probable that the inventory will be higher than this as it is that the inventory will be lower than this. Regardless of the number of warehouses in the system, there will be a total of 28 deliveries to the warehouses, when the deci-... 

The authors recommend forsaking their traditional forecasting as if they were dealing with independent demand. In place of this, they would utilize end-user sales for their production decisions and communicate it throughout the chain, an application of the demand-driven supply chain concept. They note one obstacle is that the source of the information, the retailer, has the least amount of safety stock — only 10 percent. So it has that much less motivation to participate. The upstream inventory, and its cost, is invisible. 

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