Module 5 Problems Mrnak
4.) What is the impact of lead time, and lead time variability, on inventory levels?
The lead time is the length of time, typically in days, from when the order was placed to the date he items are ready for use. Dunkin states, “the variance is calculated as the absolute value of the difference [expected or requested receipt date – actual receipt date] for each line on the purchase order” (2013, pp 1). Lead time variances can result in out of stock items if not properly forecasted. The variance of lead time simultaneously increases as the variability of demand increase. In return, the inventory levels will increase as a result in the increase in a higher variance of lead time and longer lead time.
5.) What factors should management consider when determining a target service level?
Service levels are the probability that stock will not be completely depleted during the lead time (Simchi-Levi., Kaminsky, & Simchi-Levi, 2008). The target service level is dependent on a multitude of factors such as cost. For example, if a distributor is out of stock of a particular item and the opportunity cost of not being able to fulfill an order is high, then the distributor may specify a service level rather close to 100%. The consumer markets can also play a vital role in determining target service levels. For products that are similar and interchangeable, known as a commodity, we would expect a rather high service level since customer can easily substituted for a competitor’s product. However, if there is a valuable product differentiation compared to competitors a lower service level may be tolerable. Take Keurig and Nespresso that specialize in single servings of coffee. Finding the availability of the k-cups for Keurig is much easier and therefore convenient than the Nespresso coffee maker. And now Keurig is taking coffee and convenience to a whole new level as GE and Keurig have geared up to launch the GE Café refrigerator with a built in Keurig single serve coffee maker
The lead time is the length of time, typically in days, from when the order was placed to the date he items are ready for use. Dunkin states, “the variance is calculated as the absolute value of the difference [expected or requested receipt date – actual receipt date] for each line on the purchase order” (2013, pp 1). Lead time variances can result in out of stock items if not properly forecasted. The variance of lead time simultaneously increases as the variability of demand increase. In return, the inventory levels will increase as a result in the increase in a higher variance of lead time and longer lead time.
5.) What factors should management consider when determining a target service level?
Service levels are the probability that stock will not be completely depleted during the lead time (Simchi-Levi., Kaminsky, & Simchi-Levi, 2008). The target service level is dependent on a multitude of factors such as cost. For example, if a distributor is out of stock of a particular item and the opportunity cost of not being able to fulfill an order is high, then the distributor may specify a service level rather close to 100%. The consumer markets can also play a vital role in determining target service levels. For products that are similar and interchangeable, known as a commodity, we would expect a rather high service level since customer can easily substituted for a competitor’s product. However, if there is a valuable product differentiation compared to competitors a lower service level may be tolerable. Take Keurig and Nespresso that specialize in single servings of coffee. Finding the availability of the k-cups for Keurig is much easier and therefore convenient than the Nespresso coffee maker. And now Keurig is taking coffee and convenience to a whole new level as GE and Keurig have geared up to launch the GE Café refrigerator with a built in Keurig single serve coffee maker
References: Dunkin, S. (2013). Why Lead Time impacts your Inventory Optimization and How To Fix It. Retrieved March 13, 2015, from http://www.data-profits.com/blog/lead-time-and-inventory-optimization/ Goldman, D. (2015). This $3,300 refrigerator has a Keurig coffee maker built in. Retrieved March 13, 2015, from http://money.cnn.com/2015/01/18/technology/innovationnation/keurig-coffee-fridge/ Simchi-Levi, D., Kaminsky, P., & Simchi-Levi, E. (2008). Designing and Managing the Supply Chain Concepts, Strategies, and Case Studies; 3rd ed. Boston: McGraw-Hill Irwin.