Supply Chain Management

1
Supply Chain Management

• Chapter 12
• Product Availability

2
Product Availability

• High or low?
• Depends on where a company believes they can
  maximize profit
• Nordstrom, e-commerce

3
Factors Affect Product Availability

• Cost of overstocking a product
• Cost of understocking a product

4
The idea

• Expected benefit (profit) of purchasing one extra
  unit (avoid a lost sale) (1-CSL)(Cu)
• Expected cost of purchasing one extra unit
  (purchase too much) CSLCo
• Then optimal cycle service level is one where
  expected benefit and expected cost are equal
• CSL Cu/(Cu Co)

5
Example

• See L.L.Bean Example on pp. 348-349, which is
  illustrated in Tables 12-1 and 12-2.

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Single Order in 1 Season

• See Example 12.1.
• What happens to the order size if salvage value
  is reduced to 70? Increased to 90?
• See Example 12.2
• What happens if the manager changes the order
  size to 350?

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Managerial Levers

• Increase salvage value
• Sell to outlets, e.g.
• Decrease margin lost in stockout
• Arrange for backup sourcing
• Reduce demand uncertainty!
• Improved forecasting
• Quick response
• Postponement
• Tailored sourcing

Know these and how they work!
8
Improved forecasting

• See Table 12.3, p. 358 for impact of improved
  forecasting.
• This is also illustrated in Example 12-6.

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Quick Response

• Saks Fifth Avenue Example place more than 1
  order in a season.
• Observe demand for a week or two, and then place
  order for more
• Observe demand for a week or two, and then place
  order for more with improved forecast accuracy
• See Tables 12-4 and 12-5, p. 360 and 362.

10
Quick Response

• Results of Saks policy
• Same level of availability for less inventory
• Less overstock
• Higher profit
• Caveat
• Lower profits of manufacturer in short term.

11
Postponement

• See Postponement spreadsheet.
• Two cases
• Demand spread equally across products
• Demand spread unequally across products.

12
Tailored Sourcing

• Combination of supply sources
• Lower cost, doesnt handle uncertainty well
• Higher cost, but can handle uncertainty
• Volume based (Bennetton retailers place 65 of
  orders 7 months before season)
• Product based (Levi Strauss produced standard
  jeans at efficient source, custom jeans at
  flexilble source)

13
Setting Optimal Levels of Product Availability in
Practice

• Use analytic frameworks.
• Beware of present levels of availability.
• Use approximate costs (robust)
• Estimate a range for stocking out.
• Ensure levels of product availability fit with
  strategy.