BU435 Chapter Notes - Chapter 12: Carrying Cost, Product Differentiation, Marginal Utility
Document Summary
Role of safety inventory: safety inventory is carried to satisfy demand that exceeds the amount forecasted. Raising the level of safety inventory increases product availability and thus the margin captured from customer purchases. The level of safety inventory: determined by 2 factors. The uncertainty of both demand and supply. Inventory is continuously tracked: order for a lot size q is placed when the inventory declines to the reorder point (rop, periodic review. Inventory status is checked at regular periodic intervals: order is placed to raise the inventory level to a specified threshold. Evaluating fill rate given a replenishment policy: expected shortage per replenishment cycle (esc) is the average units of demand that are not satisfied from inventory in stock per replenishment cycle. Key point: both fill rate & cycle service level increase as safety. For the same safety inventory, an increase in lot size increases the fill rate but not the cycle service level.
