D4.2
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Shaheed Zulfikar Ali Bhutto Institute of Science & Technology, Karachi *
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116A
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Industrial Engineering
Date
Nov 24, 2024
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docx
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2
Uploaded by JusticeSeaLion2906
Question 1: Explain how a reduction in lead time can help a supply chain reduce safety
inventory without hurting product availability? Give a specific example.
Lead time can be referred to as the difference or gap between placing an order and receiving it in
terms of supply chain. As lead time decreases, safety inventory decreases without hurting
product availability. This reduction can actually be helpful for a company in managing
unexpected events or circumstances in supply and demand as it lessens the time needed to place
an order and then actually receive it. Also, the company can keep up a desired level of inventory
in order to immediately attend to a customer’s order.
Question 2: What are the two types of ordering policies? What impact does each have on
safety inventory? Give an example of each.
The two types of ordering policies are:
Continuous review: Inventory is continuously tracked, and an order for a lot size
Q
is
placed when the inventory declines to the reorder point (ROP). As an example, consider
the store manager at B&M who continuously tracks the inventory of phones. She orders
600 phones when the inventory drops to ROP = 400. In this case, the size of the order
does not change from one order to the next. The time between orders may fluctuate, given
variable demand.
Periodic review: Inventory status is checked at regular periodic intervals, and an order is
placed to raise the inventory level to a specified threshold. As an example, consider the
purchase of flash drives at B&M. The store manager does not track flash drive inventory
continuously. Every Thursday, employees check flash drive inventory, and the manager
orders enough so that the total of the available inventory and the size of the order equals
1,000 flash drives. In this case, the time between orders is fixed. The size of each order,
however, can fluctuate given variable demand.
Question 3: Why can a Home Depot, with a few large stores, provide a higher level of
product availability with lower inventories than a hardware store chain such as True Value,
with many smaller stores?
Home Depot provides higher level of product availability because of two main reasons.
a) Substitution: Most of the customers coming to Home Depot will look for generic products and
not brand specific products. Most customers prefer to complete the entire shopping list in one
time and hence will buy a product of different brand if needed at the same store rather than going
to a new store.
b) Aggregation
Amazon is the largest online retailer in the United States. It has various retail websites in
different nations. It is able to provide a large variety of books and music with less safety
inventory through the power of aggregation. Amazon keeps its bestselling products in
geographically dispersed warehouses, Amazon can hold less inventory and still meet customer
demand. The saving through aggregation is quite better than that of retail stores.
Small retail stores have their own safety inventory for their customer base and most of this safety
inventory would decay on the shelves because it is localized and stockout will happen only
during high demand in that area.
A large centralized supply like Amazon would need less safety inventory as the demand
variances might cancel each other, e.g., high demand from one region is offset by low demand
from another .
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