Outline. Influential Factors. Role. Logistics and Supply Chain Management. Optimal Level of Product Availability

Transcription

1 Logistics and Supply Chain Management 1 Outline Importance of the level of product availability Optimal Level of Product Availability Chopra and Meindl (2006) Supply Chain Management: Strategy, Planning and Operation. Prentice Hall Pearson Education Factors affecting the optimal level of product availability Managerial levers to improve supply chain profitability Amir Samimi Civil Engineering Department, Sharif University of Technology Role Influential Factors 2 Product availability measured by cycle service level or fill rate Also referred to as the customer service level Product availability affects supply chain responsiveness: High levels of product availability increased responsiveness High levels of product availability increased inventory levels 3 Key factors influencing optimal CSL or FR: Cost of overstocking Cost of understocking Product availability is related to profit objectives, and strategic and competitive issues Power plants What is the level of fill rate or cycle service level that will result in maximum supply chain profits? 1

2 Buying Decision at L.L.Bean Possible Scenarios 4 Each parka costs c = $45 and is priced in the catalog at p = $100. Any unsold parkas at the end of the season are sold at the outlet store for $50. Holding the parka in inventory and transporting it to the outlet store costs L.L.Bean $10. Thus, L.L.Bean recovers a salvage value of s = $40 for each parka that is unsold at the end of the season. L.L.Bean makes a profit of p - c = $55 on each parka it sells and incurs a loss of c - s = $5 on each unsold parka that is sent to the outlet store. (Excel File) 5 Seasonal items with a single order in a season Continuously stocked ditems Demand during stockout is backlogged Demand during stockout is lost Seasonal Items (single order) Seasonal Items (single order) 6 Assumption: Leftovers are not used to satisfy demand for the next season. Notation: C 0 : C u : CSL * : O * : Cost of overstocking by one unit, C 0 = c - s Cost of understacking by one unit, C u = p - c Optimal cycle service level Corresponding optimal order size Expected Marginal Benefit: c: Cost s: Salvage p: Price Expected benefit of purchasing extra unit = ( 1 - CSL * )(p - c) Expected cost of purchasing extra unit = CSL * (c - s) Expected marginal contribution must be 0 at CSL * 7 Given a normally distributed: Optimal order quantity is: Expected profit (Appendix 12C) is: 2

3 Example 1 Example 1 8 Optimal Service Level for Seasonal Items 9 The manager of a sporting goods store, has to decide on the number of skis to purchase for the winter season. A normally distributed demand, with a mean of 350 and a standard deviation of 100 is forecasted. Each pair of skis costs $100 and retails for $250. Any unsold skis at the end of the season are disposed of for $85. Assume that it costs $5 to hold a pair of skis in inventory for the season. How many skis should the manager order to maximize expected profits? Expected Over/Understock Example 2 10 Expected Overstock (Appendix 12D) = 11 Evaluating expected over- and understock Expected Understock (Appendix 12E) = The manager of a sporting goods store has decided to order 450 pairs of skis for the upcoming season. A normally distributed demand, with a mean of 350 and a standard deviation of 100 is forecasted. Evaluate the expected over- and understock as a result of this policy. 3

4 Example 2 One in Quantity Discounts Such a situation may arise When the manufacturer offers a lower price per unit if order quantities exceed a given threshold. At the end of the life cycle for a product or spare parts. Note: There is a positive expected understock and overstock. This result may seem counterintuitive? How do you explain this? Notation: p: c: s: c d : Retail price per unit, Cost to the retailer Salvage value Discounted price if the retailer orders at least K units. One in Quantity Discounts Example 3 14 Retailer can decide using the following steps: 1. Ui Using C dc * do * o = c - s and u = p - c, evaluate CSL and without a discount. Evaluate the expected profit. 2. Using C o = c d - s and C u = p - c d, evaluate CSL d* and O d* with a discount. a. If O d* > K, evaluate the expected profit from ordering O d * b. If O d* < K, evaluate the expected profit from ordering K 3. If the profit in step 1 is higher, O * units. 4. If the profit in step 2 is higher, a. If O d* > K, order O d* units b. If O d* < K, order K units 15 Service Level with Quantity Discounts An auto parts retailer, must decide on the order size for a 20-year-old model of brakes. The manufacturer plans to discontinue production of these brakes after this last production run. Management has forecasted remaining demand for the brakes to be normally distributed, with a mean of 150 and a standard deviation of 40. The brakes have a retail price of $200. Any unsold brakes are useless and have no salvage value. The manufacturer plans to sell each brake for $50 if the order is for less than 200 brakes and $45 if the order is for at least 200 brakes. How many brakes should be ordered? 4

5 Example 3 Continuously Stocked Items 16 Without a discount: 17 Assumption: Leftovers can be used to satisfy demand for the next season. Products are ordered repeatedly (detergents) by a retail store. Two extreme scenarios: With a discount: All demand that arises when the product is out of stock is backlogged and filled later. All demand arising when the product is out of stock is lost. Thus, it is optimal to order 200 units. Continuously Stocked Items Backlogged Demand 18 Notation: Q: S: ROP: D: Replenishment lot size Fixed cost associated with each order Reorder point Average demand per unit time : Standard deviation of demand per unit time ss: Safety inventory (recall that ss = ROP - D L ) CSL: C: h: H: Cycle service level Unit cost Holding cost as a fraction of product cost per unit time Cost of holding one unit for one unit of time. H = hc 19 Consider AW Wal-Mart store selling detergent. t The manager offers a discount of C u to each customer wanting to buy detergent when it is out of stock. This ensures that all these customers return when inventory is replenished. Higher safety inventory: Decreases the backlogging cost, Increases cost of holding inventory. The optimal cycle service level is given by: 5

6 Example 4 Example 4 20 Imputing Cost of Stockout from Inventory Policy Weekly demand d for detergent tat twal-mart tis normally distributed, with a mean of 100 gallons and a standard deviation of 20. The replenishment lead time is 2 weeks. The store manager at Wal-Mart orders 400 gallons when the available inventory drops to 300 gallons. Each gallon of detergent costs $3. The holding cost Wal-Mart incurs is 20 percent. If all unfilled demand is backlogged and carried over to the next cycle, evaluate the cost of stocking out implied by the current replenishment policy. 21 Stockout cost of detergent is unlikely to be $230.8 per gallon! Lost Demand Managerial Levers to Improve Profitability 22 CSL * is given as: 23 Obvious actions Increase salvage value of each unit Decrease the margin lost from a stockout Reduction of demand uncertainty: Improved forecasting Quick response Postponement t Tailored sourcing 6

7 Improved Forecasts Example 6 24 Improved forecasts result in reduced uncertainty Less uncertainty t results in either: Lower levels of safety inventory, Higher product availability, or Both 25 Impact of Improved Forecasts Consider a buyer at tbloomingdale's l who is responsible for purchasing dinnerware with Christmas patterns. The dinnerware sells only during the Christmas season, and the buyer places an order for delivery in early November. Each dinnerware set costs $100 and sells for $250. Any sets unsold by Christmas are sold for $80. The buyer has estimated that demand is N(350,150). Evaluate the impact of improved forecast accuracy as the buyer reduces stdv from 150 to 0 in increments of 30. Example 6 Quick Response Set of actions taken by managers to reduce lead time Reduced lead time results in improved forecasts Typical example is multiple orders in one season for retail items A buyer can usually make accurate forecasts after the first week Multiple orders are only possible if the lead time is reduced Benefits: Lower order quantities less inventory, same availability Less overstock Higher profits 7

8 28 Example Quick Response: Multiple s Per Season Od ing shawls at a department tstore Selling season = 14 weeks Cost per handbag = $40 Sale price = $150 Disposal price = $30 Holding cost = $2 per week Expected weekly demand N (20,15) We compare the following policies: A single order at the beginning of the season. Two orders, one to be delivered at the beginning of the season and the other at the beginning of the eighth week. 29 CSL Example No improvement in 2 nd forecast (SD=15): Size Single Average Expected overstock Profit Initial OUL for 2 nd Two s Average Average total order overstock Expected Profit $23, $26, $24, $27, $24, $27, $24, $26, $24, $27, $25, $26,916 Example Postponement 30 CSL Improvement in 2 nd forecast (SD=3): Size Single Average Expected overstock Profit Initial OUL for 2 nd Two s Average Average total order overstock Expected Profit $23, $27, $24, $27, $24, $26, $24, $27, $24, $27, $24, $27, Delay of product differentiation until closer to the time of the sale of the product All activities prior to product differentiation require aggregate forecasts. More accurate than individual product forecasts Valuable in e-commerce Time lag between when an order is placed and when customer receives the order Higher profits, better match of supply and demand 8

9 Value of Postponement: Benetton Postponement: Dominant Product 32 For each color Mean demand = 1,000; 000;SD= 500 For each garment Sale price = $50 Salvage value = $10 Production cost using Option 1 (long lead time) = $20 Production cost using Option 2 (uncolored thread) = $22 What is the value of postponement? Expected profit increases from $94,576 to $98, Color with dominant demand: Mean = 3,100, SD = 800 Other three colors: Mean = 300, SD = 200 Expected profit without postponement = $102,205 Expected profit with postponement = $99,872 Postponement is not very effective if a large fraction of demand comes from a single product. Tailored Postponement: Benetton Tailored Sourcing 34 Produce Q 1 units for each color using Option 1 and Q A units (aggregate) using Option 2 Results: 35 A firm uses a combination of two supply sources 1. Lower cost, unable to deal with uncertainty well, 2. More flexible, deal with uncertainty, but is higher cost. Q 1 = 800 Q A = 1,550 Profit = $104,603 Tailored sourcing may be: Volume based, or Product based. Increase profits, better match supply and demand 9

10 Tailored Sourcing Tailored Sourcing Strategies 36 Sourcing alternatives Low cost, long lead time supplier Cost = $245, Lead time = 9 weeks High cost, short lead time supplier Cost = $250, Lead time = 1 week 37 Fractionofdemandfrom of from Annual Profit overseas supplier 0% $37,250 50% $51,613 60% $53, % $48,875 CSL for Multiple Products Homework 8 38 Allocates each unit of capacity to the product with the highest expected marginal contribution. 1. Set quantity Q i = 0 for all products i. 2. Compute the expected marginal contribution MC i (Q i ) for each product i. 39 Exercises: Chapter If no expected marginal contribution is positive, stop. Else, Increase the product with the highest expected marginal contribution by one unit. 4. If the total quantity across all products is less than B, return to step 2. Else, stop. 10