The amount of safety stock needed to determine by the service level desired by their company. The service level id probably that amount of inventory on had during lead time is sufficient to meet expected demand - that is the probability that a stock out will not occur, a service level of 90% means that there ids a 90 probability that demand will be met during lead time
Service level (SL) is the ratio of the no. The units delivered without the delay to the
no. Of units demanded
No. Of units delivered without delay SL= ---
No. Of units demanded
No. Of units demanded - No. Of units short SL= ---
No. Of units demanded Preferred time span for calculation is 1 year SL Range: 0 < SL < 1
i.e. SL = 0 means complete Delivery failure SL = 1 means 100% Service ( No Shortages) SL is expressed as a %.
No. of order periods when stocks were zero
i) Percentage of stock-outs = SL = ---X 100 Total No. of order periods
This is indicative of the probability of being out of stock while awaiting a supplier's delivery and is, therefore independent of the order size.
No. of working days in which stocks were zero
ii) Percentage of stock-outs = SL = --- X 100
. Total No. of working days
This ratio is a measure of the probability of being out of stock during the year. No. of units
iii) Percentage of stock-outs = SL = --- X 100 No. of units demanded
This ratio would show the average potential sale lost.
Another method to determine Service Level is by considering the lower stocking cost (or under stocking) and the overstocking cost.
Under-stocking cost (Ku), merely the loss one could incur if the item was not available (missed deliveries, lost sales, dissatisfied customers and production bottlenecks).
Overstocking Cost (Ko) is not only the inventory carrying costs but may include
other factors like opportunity cost (ties up funds)
Ku
SL = --- Ku + Ko
Service Level is a target specified by management defined in terms of
a. Order Cycle Time b. Cash fill rate c. Line fill rate d. Order fill rte
e. Any combination of these
a) Order Cycle Time (Performance Cycle of Lead Time):
The performance cycle is the elapsed time between the release of a purchase order by a customer and the receipt of the corresponding shipment.
b) Case fill rate:
It defines percentage of cases or units ordered that can be shipped or requested e.g. 'a 95% case fill rate indicates that, on average, 95 cases out of 100 could be filled from available stock. The remaining 5 cases would be back - ordered or deleted.
c) Line fill rate:
It is the percentage of order lines that could be filled completely. Each line on an order is a request for an individual product. So at order may have multiple lines e.g. when a customer order is received requesting 80 units of Product A and 20 units of Product B, the order contains 100 cases and two lines. If there are only 75 units of Product A available and all 20 of product a, the case fill would be 955 [ 75 + 20) I (80 + 20)) and the Line fill would be 50%
d) Order fill rate:
It is the percentage of customer orders that could be filled completely. In the example above, the order could not be completely filled, so the resulting order fill would be zero.
The inventory function is a major element of the logistics process that must be integrated to meet service objectives. While a traditional approach is achieving a higher service level is to increase inventory, other approaches include use of faster transportation modes, better information management to reduce uncertainty, alternative sources of supply.
While it is the task of overall logistics management to meet the prescribed service objectives Inventory management plays a particular key role.
Inventory Policy: Inventory policy consists of guidelines concerning
• What to purchase or manufacture
• When to take action.
• In what quantity
It also includes decisions regarding inventory positioning and placement at plants & at distribution centers.
e.g.
• Some firms may decide to postpone inventory positioning by maintaining stock at the plant.
• Other firms may choose to place more products in local distribution centers i.e. nearer to market
Another inventory policy element concerns inventory management strategy. One approach is to manage inventory at each distribution centre independently.
Other approach is to manage inventory centrally. This requires more coordination & communication.
Average Inventory: Average inventory consists of the materials, components, work in process and finished products typically stocked in logistical facilities. From a policy viewpoint, the appropriate level of average inventories includes:
a. Cycle inventory or base stock or Lost size stock b. Safety Stock Inventory
c. Transit Inventory
a) Cycle inventory or base stock or Lot size stock is the portion of average inventory that results from replenishment process. At the beginning of a performance cycle, stock is at a maximum level. Daily customer demands "draw off' (consumes) inventory until the- stock level reaches zero. Prior to this, a replenishment order is initiated so that stock will arrive before a stock-out occurs. The replenishment order must be initiated when available inventory is greater than or equal to the customer demand during the performance cycle time.
The amount ordered for replenishment is called the order quantity.
The average inventory held as a result of the order process is referred to as Base Stock. Considering only the order quantity:
Order Quantity
Cycle inventory or base stock or Lot size stock = ---
2
b) Safety Stock Inventory: The second part of Average Inventory is the stock held to protect transit the impact of uncertainty on each facility. This portion of inventory is called safety stock. It is used only at the end of replenishment cycles when uncertainty has caused higher than expected demand or longer than expected performance cycle times.
Order Quantity
Average Inventory = --- + Safety Stock
2
Safety Stock Inventory is created by placing an order sooner that typically needed. The replenishment order most likely will arrive ahead of time protecting against there uncertainties.
1) Demand 2) Lead time & 3) Supply
c) Transit Inventory or pipeline Inventory: It is the stock that is either moving or awaiting movement in transportation vehicles.
Transit Inventory is necessary to achieve order replenishment. From a logistics management perspective, transit inventory introduces two sources of complexity into the supp\y chain. .
a) It represents real assets and must be paid for even though it is not accessible or usable.
b) There has typically been a high degree of uncertainty associated with transit inventory because shippers were unable to determine where a transport vehicle was located or when it was likely to arrive. .
Increased focus on small order amounts, more frequent order cycles. JIT Strategies have resulted in transit Inventory becoming a larger percentage of total inventory assets.
Ownership of Transit Inventory
• If transferred at destination: It is not owned by consignee. • If transferred at origin: It owned by consignee.