View by Category

The presentation will start after a short

(15 second) video ad from one of our sponsors.

Hot tip: Video ads won’t appear to registered users who are logged in. And it’s free to register and free to log in!

(15 second) video ad from one of our sponsors.

Hot tip: Video ads won’t appear to registered users who are logged in. And it’s free to register and free to log in!

Loading...

PPT – Managing Flow Variability: Safety Inventory PowerPoint presentation | free to download - id: b7df4-ZDc1Z

The Adobe Flash plugin is needed to view this content

About This Presentation

Write a Comment

User Comments (0)

Transcript and Presenter's Notes

Chapter 7

Managing Flow Variability Safety

Inventory 7.1 Demand Forecasts and Forecast

Errors 7.2 Safety Inventory and Service

Level 7.3 Optimal Service Level The

Newsvendor Problem 7.4 Lead Time Demand

Variability 7.5 Pooling Efficiency through

Aggregation 7.6 Shortening the Forecast

Horizon 7.7 Levers for Reducing Safety

Inventory

7.1 Demand Forecast and Forecast Errors

- In review, we have 3 stages of a process
- 1. Input (e.g. raw materials)
- 2. Process
- 3. Output (finished goods)
- This is important to forecasting because it will

allow us to more closely match outputs to inputs

and vice versa.

7.1 Demand Forecasts and Forecast Errors

- We have previously assumed demand is known
- and is constant.
- Demand varies in predictable and unpredictable

ways. - Unpredictable, random factors affecting demand is

referred to as noise. - As a process of predicting future demand,
- forecasting is, among other things, an effort

to - deal with NOISE.

7.1 Demand Forecast and Forecast Errors

- Why do we forecast?
- We forecast so that we can make decisions about

the - future.
- We need to make rational decisions about

process - inventory.
- How to spend money and how not to spend money.
- When to buys more widgets.
- When to hire more workers.
- How to avoid stockouts (upset customers
- business losses)
- How to avoid holding excess inventory (

lost)

7.1 Demand Forecasts and Forecast Errors

- Forecasting methods
- Subjective Based on judgement and experience
- Surveys and expert judgements
- Objective Based on data analysis
- Causal models - Forecast methods that assume that

in addition to data, there are other factors that

influence demand (eg. Consumer

prices.) - Time series analyses - Methods that rely solely

on past data.

7.1 Demand Forecasts and Forecast Errors

- 4 Characteristics of Forecasts
- Forecasts are usually wrong.
- Because of random noise forecasts are

inaccurate. - Forecasts should be accompanied by a measure of

forecast error. - A measure of forecast error quantifies the

managers degree of confidence in the forecast. - Aggregate forecasts are more accurate than

individual forecasts. - Aggregate forecasts reduce the amount of

variability relative to the aggregate mean

demand. - Long-range forecasts are less accurate than

short-range forecasts. - Precise forecasting of events far out in the

future are much more difficult to predict than

something that will occur in a matter of moments

from now.

7.1 Demand Forecasts and Forecast Errors

- Forecasts should incorporate hard quantitaive

data as well as qualitative factors such as

managerial judgement, intuition, and market

savvy. - Forecasting is as much art as science.

7.1 Demand Forecast and Forecast Errors

Safety Inventory cushions the process against

supply disruptions or surges in demand.

Having adequate Safety Inventory reduces the

uncertainty in supply and demand. Ensuring

reliable suppliers and stable demand

eliminates the need for Safety Inventory.

7.2 Safety Inventory and Service Level

- Objective
- Review of common terms and a discussion of

Service Level - Where SL f (Safety Inventory, I safety)
- And some math using Excel

7.2 Safety Inventory and Service Level

- SL Service Level
- I safety Safety Inventory (or Safety Stock)
- I cycle Cycle Inventory
- LTD Lead Time Demand
- ROP Re-order Point
- L Replenishment Lead Time
- Q Order Size
- NORMDIST Standard Normal Tables
- NORMSINV Standard Normal Tables
- NORMINV Standard Normal Tables

7.2 Safety Inventory and Service Level

Inventory, I (t)

ORDER

ORDER

ROP

LTD, of Units used during lead time

Safety Inventory (I safety)

0

Time, t

L

L

7.2 Safety Inventory and Service Level

- I safety ROP LTD

Inventory, I (t)

ROP

LTD, of Units used during lead time

Safety Inventory (I safety)

0

7.2 Safety Inventory and Service Level

- An Inventory with an Order Size Q
- Average Inventory Q/2
- I cycle Q/2
- I I cycle I safety Q/2 I safety
- Average Flow Rate R
- Average Flow Time as expressed by Littles Law
- T I /R (Q/2 I safety )
- R

7.2 Safety Inventory and Service Level

- The Service Level for a given ROP is given by

- SL Prob (LTD lt ROP)
- To calculate SL, recall first that if LTD is

normally distributed with mean LTD and standard

deviation sLTD then - I safety z x sLTD , where z is a multiple of

sLTD - Or the number of standard deviations

7.2 Safety Inventory and Service Level

- Example
- At GE Lightings Paris warehouse,
- LTD (average Lead Time Demand) 20,000 lamps
- Actual Demand varies daily and sLTD 5,000
- The warehouse re-orders whenever ROP 24,000
- Therefore, I safety ROP LTD 24,000 20,000

4,000 - And z I safety / sLTD 4,000

/ 5,000 0.8 - And SL Prob (Zlt 0.8) from

Appendix II - SL 0.7881

7.2 Safety Inventory and Service Level

EXCEL

Service Level

7.2 Safety Inventory and Service Level

EXCEL

Safety Inventory

7.2 Safety Inventory and Service Level

EXCEL

Reorder Point

7.3 Optimal Service Level The Newsvendor Problem

- So Far
- Safety inventory has been defined for a desired

level of customer service. - But
- How do we choose what level of service a firm

should offer? - Examples
- Newspapers / Magazines
- Perishables (fish, produce, bread, milk, etc.)
- Seasonal Items (Summer Winter Apparel)

7.3 Optimal Service Level The Newsvendor Problem

Cost of Holding Extra Inventory

Improved Service

Optimal Service Level??

The Newsvendor Problem

Decision making under uncertainty whereby the

decision maker balances the expected costs of

ordering too much with the expected costs of

ordering too little to determine the optimal

order quantity.

7.3 Optimal Service Level The Newsvendor Problem

Predicted Demand for HDTVs

Cost Price Salvage

1,800 2,500 1,700

Demand Probability Cumulative Probability Complementary Cumulative Probability

r Prob(R r) Prob(R r) Prob(R gt r)

100 0.02 0.02 0.98

110 0.05 0.07 0.93

120 0.08 0.15 0.85

130 0.09 0.24 0.76

140 0.11 0.35 0.65

150 0.16 0.51 0.49

160 0.2 0.71 0.29

170 0.15 0.86 0.14

180 0.08 0.94 0.06

190 0.05 0.99 0.01

200 0.01 1 0

Profit Loss

700 100

Mean Std. Dev

151.6 22.44

7.3 Optimal Service Level The Newsvendor Problem

Demand

100 110 120 130 140 150 160 170 180 190 200

100 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000

110 69,000 77,000 77,000 77,000 77,000 77,000 77,000 77,000 77,000 77,000 77,000

120 68,000 76,000 84,000 84,000 84,000 84,000 84,000 84,000 84,000 84,000 84,000

130 67,000 75,000 83,000 91,000 91,000 91,000 91,000 91,000 91,000 91,000 91,000

140 66,000 74,000 82,000 90,000 98,000 98,000 98,000 98,000 98,000 98,000 98,000

150 65,000 73,000 81,000 89,000 97,000 105,000 105,000 105,000 105,000 105,000 105,000

160 64,000 72,000 80,000 88,000 96,000 104,000 112,000 112,000 112,000 112,000 112,000

170 63,000 71,000 79,000 87,000 95,000 103,000 111,000 119,000 119,000 119,000 119,000

180 62,000 70,000 78,000 86,000 94,000 102,000 110,000 118,000 126,000 126,000 126,000

190 61,000 69,000 77,000 85,000 93,000 101,000 109,000 117,000 125,000 133,000 133,000

200 60,000 68,000 76,000 84,000 92,000 100,000 108,000 116,000 124,000 132,000 140,000

Quantity Ordered

IF(A3gtB1,B1700-(A3-B1)100,A3700)

100 x 700 (110-100) x 100 69,000

7.3 Optimal Service Level The Newsvendor Problem

Demand

100 110 120 130 140 150 160 170 180 190 200

100 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000

110 69,000 77,000 77,000 77,000 77,000 77,000 77,000 77,000 77,000 77,000 77,000

120 68,000 76,000 84,000 84,000 84,000 84,000 84,000 84,000 84,000 84,000 84,000

130 67,000 75,000 83,000 91,000 91,000 91,000 91,000 91,000 91,000 91,000 91,000

140 66,000 74,000 82,000 90,000 98,000 98,000 98,000 98,000 98,000 98,000 98,000

150 65,000 73,000 81,000 89,000 97,000 105,000 105,000 105,000 105,000 105,000 105,000

160 64,000 72,000 80,000 88,000 96,000 104,000 112,000 112,000 112,000 112,000 112,000

170 63,000 71,000 79,000 87,000 95,000 103,000 111,000 119,000 119,000 119,000 119,000

180 62,000 70,000 78,000 86,000 94,000 102,000 110,000 118,000 126,000 126,000 126,000

190 61,000 69,000 77,000 85,000 93,000 101,000 109,000 117,000 125,000 133,000 133,000

200 60,000 68,000 76,000 84,000 92,000 100,000 108,000 116,000 124,000 132,000 140,000

Quantity Ordered

69,000(0.02) 77,000(0.05) 77,000(0.01)

76,840

7.3 Optimal Service Level The Newsvendor Problem

Order Quantity (Q) Expected Profit

100 70,000

110 76,840

120 83,280

130 89,080

140 94,160

150 98,360

160 101,280

170 102,600

180 102,720

190 102,200

200 101,280

7.3 Optimal Service Level The Newsvendor Problem

Net Marginal Benefit Net Marginal Cost

MB p c MC c - v

MB 2,500 - 1,800 700 MC 1,800 - 1,700

100

We receive Marginal Benefit when R gt Q, therefore

at any order quantity Q,

Expected MB MB x Prob(R gt Q)

We receive Marginal Cost when R Q, therefore at

any order quantity Q,

Expected MC MC x Prob(R Q)

MC x Prob(R Q) MB x Prob(R gt Q)

7.3 Optimal Service Level The Newsvendor Problem

Time for Algebra

MC x Prob(R Q) MB x Prob(R gt Q)

Since, Prob(R gt Q) 1 Prob(R

Q)

We can write, MC x Prob(R Q) MB x 1

Prob(R Q)

After rearranging, Prob(R Q)

Newsvendor formula SL Prob(R Q)

7.3 Optimal Service Level The Newsvendor Problem

Going back to the example

So what quantity corresponds to this service

level ?

If we assume demand is normally distributed then,

7.3 Optimal Service Level The Newsvendor Problem

7.4 Lead Time Demand Variability

Average Lead Time Demand

Variability in Periodic Demand

Variability in Lead Time

Variability in Demand and Lead Time

7.5 Pooling Efficiency through Aggregation

- Third characteristic of forecasts
- Aggregation pooling demand for several similar

products - Aggregate sales
- Safety Inventory Uncertain demand
- Assume Decentralized Warehouses operates

independently - Imbalance of inventory - Customer demand not

satisfied

7.5 Pooling Efficiency through Aggregation

- Physical Centralization that the firm can

consolidate all its stock in one location from

which is can serve all its customers. - ELIMINATES stock imbalance
- BETTER customer service
- SAME total inventory
- LESS inventory
- Location 1 Location 2
- Lead times demands LTD1 LTD2
- Mean of LTD Standard Deviation

7.5 Pooling Efficiency through Aggregation

- LTD1 and LTD2 statistically identically

distributed - To provide desired level of service, SL each

location must carry - Safety Inventory
- Z determined by the desired service level
- Each facility Identical demand and service

levels - Total safety inventory decentralized system

7.5 Pooling Efficiency through Aggregation

Independent Demands Centralizing the two

locations in one location when lead time demands

at the two locations are independent. LTD LTD1

LTD2 Centralized Pool The mean of total lead

time demand is LTD LTD 2 LTD Variance is

Standard Deviation is

7.5 Pooling Efficiency through Aggregation

- Comparing safety inventories of decentralized
- and centralized systems.
- Safety Inventory in Centralized system is

in a 2 - location decentralized system by a factor of

7.5 Pooling Efficiency through Aggregation

- Centralization of N locations
- Safety Inventory needed is
- Centralization will reduce inventory by factor of

7.5 Pooling Efficiency through Aggregation

- Example
- GE lighting operating 7 warehouses
- Consolidated in to one centralized warehouse
- Replenishment lead time remain at 10 days
- What will be the impact of accepting the task

force recommendations?

7.5 Pooling Efficiency through Aggregation

- A warehouse with average lead time demand of

20,000 units with a standard deviation of 5,000

units needs to carry a safety inventory

to provide a 95 service level. - Total safety inventory across 7 warehouses
- Task force accepted, single central warehouse

will face total lead time demand with mean and

standard deviation of

7.5 Pooling Efficiency through Aggregation

- 95 service level, the central warehouse must

carry a safety inventory - Safety inventory with the single central

warehouses is 35,894 less than that required

under the current decentralized network of 7

warehouses. - Decrease in safety inventory by a factor of

7.5 Pooling Efficiency through Aggregation

- Square Root Law
- States that the total safety inventory required

to provide a specific level of service increases

by the square root of the number of locations in

which it is held. - Previous example
- Correlated Demands
- Does centralization offer similar benefits when

demands in multiple locations are correlated?

7.5 Pooling Efficiency through Aggregation

- LTD1 and LTD2 are statistically identically

distributed but correlated. - Correlation between two locations with

coefficient - Mean of total lead time LTD LTD 2 LTD
- Variance is
- Total safety in centralized system is

7.5 Pooling Efficiency through Aggregation

- The total safety inventory in the decentralized

system - The safety inventory in the two-location

decentralized system is larger than in the

centralized system by a factor of - If demand is positively correlated

centralization offers no benefits in the

reduction of safety inventory

7.5 Pooling Efficiency through Aggregation

- Advantages
- 1. Centralized systems as the

demand on the two locations - become negatively correlated.
- 2. Centralized systems diminishes as the demand

in the two locations - become positively correlated
- Disadvantages of Centralization
- 1. Response time to Customers
- 2. Shipping Cost

7.5.2 Principle of Aggregation and Pooling

Inventory

- Statistical Principle
- Principle Aggregation the standard deviation of

the sum of random variables is less than the sum

of the individual standard deviations. - Pooling inventory available inventory is shared

among various sources of demand - Pooling inventory applied in other ways other

than physical centralization

7.5.2 Principle of Aggregation and Pooling

Inventory

- Virtual Centralization
- Specialization
- Component Commonality
- Product Substitute

7.5.2 Principle of Aggregation and Pooling

Inventory

- Virtual Centralization
- Distribution System
- Location A

Location B - Exceeds Available stock Available
- 1. Information about product demand and

availability must be available at both locations - 2. Shipping the product from one location to a

customer at another location must be fast and

cost effective

7.5.2 Principle of Aggregation and Pooling

Inventory

- Correlation is less than one Pooling is

Effective - Inventory Decentralized instead of physically

consolidated - Virtual Centralization is a system in which

inventory pooling in a network of locations is

facilitated using information regarding

availability of goods and subsequent

transshipment of goods between locations to

satisfy demand.

7.5.2 Principle of Aggregation and Pooling

Inventory

- Specialization
- Each product only one specialized warehouse
- EXAMPLE
- Location A Location B
- P1 P2
- Safety Inventory is reduced because each

inventory is now centralized at one location

7.5.2 Principle of Aggregation and Pooling

Inventory

- Component Commonality
- Aggregating demand across various products.
- Computer companies with models that vary.
- Make-to-stock produce in anticipation of product

demand - Make-to-Order Produce in response to customer

orders - Reduce inventory investment maintaining the same

level of service and product variety

7.5.2 Principle of Aggregation and Pooling

Inventory

- Disadvantage Make-to-Order Strategy
- Customer must wait for firm to produce product
- Advantage Make-to-Stock Strategy
- Available for immediate consumption

7.6 Shortening the Forecast Horizon through

Postponement

- Postponement (or Delayed Differentiation) More

Effective - Short-Range forecast more accurate
- Two Alternative processes (both two weeks)
- Process A Coloring the fabric, assembling
- Process B Assembling T-shirts, coloring
- Does one have the advantage over the other?

7.6 Shortening the Forecast Horizon through

Postponement

- By Reversing assembling and dyeing process
- Process B postponed the color difference until

one week closer to the time of sale - Postponement the practice of delaying part of a

process in order to reduce the need for safety

inventory

7.6 Shortening the Forecast Horizon through

Postponement

- Process B has the advantage
- Aggregation Reduces Variability
- Aggregates demands by color in the first phase
- Requires shorter-range forecasts of individual

T-shirts needed by color in the second phase. - Less Demand Variability
- Less Total Safety Inventory

7.7 Levers for Reducing Safety Inventory

- Levers for Reducing Flow Variability and the

Required Safety Inventory - 1. Reduce demand variability through improved

forecasting - 2. Reduce replenishment lead time
- 3. Reduce variability in replenishment lead time
- 4. Pool safety inventory for multiple locations

or products

7.7 Levers for Reducing Safety Inventory

- 5. Exploit product substitution
- 6. Use common components
- 7. Postpone product-differentiation processing

until closer to the point of actual demand

About PowerShow.com

PowerShow.com is a leading presentation/slideshow sharing website. Whether your application is business, how-to, education, medicine, school, church, sales, marketing, online training or just for fun, PowerShow.com is a great resource. And, best of all, most of its cool features are free and easy to use.

You can use PowerShow.com to find and download example online PowerPoint ppt presentations on just about any topic you can imagine so you can learn how to improve your own slides and presentations for free. Or use it to find and download high-quality how-to PowerPoint ppt presentations with illustrated or animated slides that will teach you how to do something new, also for free. Or use it to upload your own PowerPoint slides so you can share them with your teachers, class, students, bosses, employees, customers, potential investors or the world. Or use it to create really cool photo slideshows - with 2D and 3D transitions, animation, and your choice of music - that you can share with your Facebook friends or Google+ circles. That's all free as well!

For a small fee you can get the industry's best online privacy or publicly promote your presentations and slide shows with top rankings. But aside from that it's free. We'll even convert your presentations and slide shows into the universal Flash format with all their original multimedia glory, including animation, 2D and 3D transition effects, embedded music or other audio, or even video embedded in slides. All for free. Most of the presentations and slideshows on PowerShow.com are free to view, many are even free to download. (You can choose whether to allow people to download your original PowerPoint presentations and photo slideshows for a fee or free or not at all.) Check out PowerShow.com today - for FREE. There is truly something for everyone!

You can use PowerShow.com to find and download example online PowerPoint ppt presentations on just about any topic you can imagine so you can learn how to improve your own slides and presentations for free. Or use it to find and download high-quality how-to PowerPoint ppt presentations with illustrated or animated slides that will teach you how to do something new, also for free. Or use it to upload your own PowerPoint slides so you can share them with your teachers, class, students, bosses, employees, customers, potential investors or the world. Or use it to create really cool photo slideshows - with 2D and 3D transitions, animation, and your choice of music - that you can share with your Facebook friends or Google+ circles. That's all free as well!

For a small fee you can get the industry's best online privacy or publicly promote your presentations and slide shows with top rankings. But aside from that it's free. We'll even convert your presentations and slide shows into the universal Flash format with all their original multimedia glory, including animation, 2D and 3D transition effects, embedded music or other audio, or even video embedded in slides. All for free. Most of the presentations and slideshows on PowerShow.com are free to view, many are even free to download. (You can choose whether to allow people to download your original PowerPoint presentations and photo slideshows for a fee or free or not at all.) Check out PowerShow.com today - for FREE. There is truly something for everyone!

presentations for free. Or use it to find and download high-quality how-to PowerPoint ppt presentations with illustrated or animated slides that will teach you how to do something new, also for free. Or use it to upload your own PowerPoint slides so you can share them with your teachers, class, students, bosses, employees, customers, potential investors or the world. Or use it to create really cool photo slideshows - with 2D and 3D transitions, animation, and your choice of music - that you can share with your Facebook friends or Google+ circles. That's all free as well!

For a small fee you can get the industry's best online privacy or publicly promote your presentations and slide shows with top rankings. But aside from that it's free. We'll even convert your presentations and slide shows into the universal Flash format with all their original multimedia glory, including animation, 2D and 3D transition effects, embedded music or other audio, or even video embedded in slides. All for free. Most of the presentations and slideshows on PowerShow.com are free to view, many are even free to download. (You can choose whether to allow people to download your original PowerPoint presentations and photo slideshows for a fee or free or not at all.) Check out PowerShow.com today - for FREE. There is truly something for everyone!

For a small fee you can get the industry's best online privacy or publicly promote your presentations and slide shows with top rankings. But aside from that it's free. We'll even convert your presentations and slide shows into the universal Flash format with all their original multimedia glory, including animation, 2D and 3D transition effects, embedded music or other audio, or even video embedded in slides. All for free. Most of the presentations and slideshows on PowerShow.com are free to view, many are even free to download. (You can choose whether to allow people to download your original PowerPoint presentations and photo slideshows for a fee or free or not at all.) Check out PowerShow.com today - for FREE. There is truly something for everyone!

Recommended

«

/ »

Page of

«

/ »

Promoted Presentations

Related Presentations

Page of

Page of

CrystalGraphics Sales Tel: (800) 394-0700 x 1 or Send an email

Home About Us Terms and Conditions Privacy Policy Contact Us Send Us Feedback

Copyright 2016 CrystalGraphics, Inc. — All rights Reserved. PowerShow.com is a trademark of CrystalGraphics, Inc.

Copyright 2016 CrystalGraphics, Inc. — All rights Reserved. PowerShow.com is a trademark of CrystalGraphics, Inc.

The PowerPoint PPT presentation: "Managing Flow Variability: Safety Inventory" is the property of its rightful owner.

Do you have PowerPoint slides to share? If so, share your PPT presentation slides online with PowerShow.com. It's FREE!

Committed to assisting Csun University and other schools with their online training by sharing educational presentations for free