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MANGT 660
DEMAND BASED MANAGEMENT FOR SUPPLY CHAIN
Instructor: Dr Gangshu Cai
Homework 2
By
Rajasekhar Bana
E!a"#$ %enka&a'(ks)*e)
S)'!"&&e +n
0,-./-.00,
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2). How can firms cope with high variability in customer eman!
"). #irms can cope up with variabilities in customers eman by forecasting the eman
accurately. $ut the firms shoul reali%e the facts such as:
#orecasting is always wrong.
&he longer the forecasting hori%on' the worst is the forecast
"ggregate forecasts are more accurate an reliable ()isk *ooling Concept).
In orer to compensate for the forecasting errors an variability in emans the organi%ation
shoul involve in proper assessment of inventory levels using inventory policies. In oing these
the management shoul consier the following factors:
a). +nerstaning the customer tastes an relying in proper analysis an usage of historical
ata. "lso' the eman can be consiere to be ranom an can be preicte using
istributions such as ,ormal' *oison istributions.
b). "ssessing the esire -.ervice /evels0. &he company shoul ecie on the service levels
that they woul like to provie to the customers.
c). )eplenishment /ea &ime.
). +nerstaning the internal root causes for variability' such as improper placement of
warehouses' istribution centers1 incorrect inventory policies.
e). &hey shoul be clever enough to check whether it is better to involve in *erioic or
continuous review inventory policies.
f). 2rering proucts such that inventory an holing costs are reuce in the least way.
g). $e careful regaring the planning hori%on (i.e. the length of forecasting).
h).Consiering the proucts that the company manufactures' as the characteristics of the
proucts affect the inventory management.
3). 4hat factors shoul management consier when etermining target service level!
"). 5aintenance of Desire .ervice /evels is one way in which the companies try to overcome
the fluctuations6variabilities in eman an lea7times. .ervice /evel (8) signifies the
probability that the customer receives orers without fail or back7orer for the mentione
level (in 8).
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5anagement shoul involve in the following Inventory *olicies to etermine the &arget service
levels:
a). Continuous )eview *olicy' .uch as (.' s) or (9' )) policies on a aily (continuous) basis.
Continuous review policy shoul be enforce in the supply chain to maintain a proper
flow of proucts to the customers without any elay
&he reorer level must always satisfy the conition :7;' 4here ; is the service level an
:7; is the stocking out probability.
b). *erioic )eview *olicy such as $ase7.tock 5oel can also be use to etermine the target
service levels that are to be achieve on a perioic basis i.e. either weekly or monthly.
<). Consier the (9')) policy analy%e in section 2.2.< e=plain why the e=pecte level of
inventory before receiving the orer is
01STD12L
4hile the e=pecte level of inventory after receiving the orer is
34 01STD12L
"). Here 9 > 2ptimal 2rere 9uantity
? > .afety #actor' .&D > .tanar Deviation in Deman
/ > )eplenishment /ea time before getting the orer from the supplier.
In (9' )) 5oel the e=pecte level of inventory before receiving the orers is 01STD12L5
since' this value is to ahere to the variability in eman' so as to maintain esire service
levels.
$ut once the orer is receive it will the sum of the inventory orere uring lea time which
is 9 (i.e. .7s) plus the inventory that is maintaine to answer the variability in eman.
Hence the total inventory level is represente as 34 01STD12L
@). Consier the base stock policy analy%e in section 2.2.A e=plain why the e=pecte level of
inventory after receiving the orer is
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6r1A7G84601STD126r4L88
4hile the e=pecte level of inventory before receiving the orer is
01STD126r4L8*
"). $ase .tock 5oel is use for *erioic )eviewing of Inventory /evels in an organi%ation.
"ccoring to the $ase .tock 5oel the inventory levels shoul be maintaine6orere such
that it is eBual to the base7stock level in orer to maintain the esire service7levels. In this
moel in orer to comply with the variability in emans uring lea time' the inventory
level that shoul be maintaine is ?1STD126r4L8 (i.e. mainly to maintain esire service
level).
Here ? > .afety #actor (Depenent on the esire .ervice /evel).
.&D > .tanar Deviation in Deman.
r > is the *erio (time)
/ > is the )eplenishment lea time in orer to obtain the proucts6orer from the supplier.
&his value only provies inventory to hanle the eman ue to variability.
$ut the term 6r1A7G84601STD126r4L88 signifies the $ase7.tock level that nees to be
maintaine for satisfying the eman in the given perio plus the eman ue to variability.
:C). 4hat are the *enalties in facing highly variable eman! "re there any avantages!
"). &he penalties in facing Highly Dariable Deman are:
a). Improper orering of inventories (ue to uncertainty in forecasting).
b). Dariability in /ea time to obtain the prouct.
c). High Inventory holing cost ue to confusion in forecasting eman an in meeting
service levels.
). .carcity or wastage of 2n han Inventory1 which might be ue to the e=piration of life
cycle of the prouct or fast pace avancements in technology.
"vantages:
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a). "s inventory levels will be high in orer to compensate for the eman variability the
service levels will be high.
b). "s the company prepares to take in less risk ue to the eman variability' the reliability
will he high.
c). 2ver the perio the company will become strong to survive uring fluctuations in
eman an coul involve in optimal inventory policy to manage inventory.
:E). Give a specific e=ample for risk pooling a)."cross /ocation b)."cross *rouct c)."cross
&ime!
"). )isk pooling concept is for reucing variability ue to eman an lea7times in inventory
control' so as to maintain anticipate service levels. It is evelope on the principle that
-forecasting1 base on aggregate emans will result in reuce variability ue to the cut7
off effects between ifferent parameters an thereby results in appropriate management of
inventory control0 (uner variability).
F=amples of )isk *ooling "cross /ocation' "cross *rouct an "cross &ime are as follows:
a). "cross /ocation: Consier a company that hols two ifferent warehouses in orer to serve
the customers at two ifferent locations. &he company bears two istribution centers because
it can maintain the reBuire service levels to answer the customer emans. ,ow risk pooling
across locations' involves accommoating a single warehouse instea of two in a logistically
correct place' from which the lea7times uring the eman from the single warehouse to the
two locations is same as that of having two ware houses. &he avantage of )isk *ooling
across locations is that the warehouse maintains the same value of total inventory but can
aapt to the changes in eman of the iniviual proucts' thus resulting in lower inventory
level.
b). "cross *rouct: )isk *ooling across prouct' involves orering inventory as a whole i.e. by
consiering all proucts as a single entity ("ggregate Deman)' such that the variability
coul be reuce on an aggregate basis. .uppose if the eman for a prouct -"0 is higher
than the orere Buantity (Dery #ast Deman)' the lost in sales ue to back orers in this case
is offset by maintain higher service levels for a slow eman prouct' i.e. suppose -$01
resulting in overall esire service levels.
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c). "cross &ime: )isk *ooling across time involves in proviing the iniviual components
before time' such that for a *rouct with High eman is answere appropriately with high
service levels an the prouct with low eman will have stock on han' such that the lea7
time variability for the iniviual proucts can cancel off1 which woul help in maintaining
the reBuire service levels.