Carrying excessive inventory can help counter demand volatility but can really

Carrying excessive inventory can help counter demand

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product life cycles are short and demand is very volatile. Carrying excessive inventory can help counter demand volatility but can really hurt if new products come on the market and demand for the product in inventory dries up. The inventory on hand then becomes worthless. In today's business environment, firms experience great pressure to improve product availability while increasing product variety through customization. As a result, markets have become increasingly heterogeneous and demand for individual products is very unstable and difficult to forecast. Both the increased variety and the increased pressure for availability push firms to increase the level of safety inventory they hold. At the same time, product life cycles have shrunk. This increases the risk to firms of carrying too much inventory. Thus, a key to the success of any supply chain is to figure out ways to decrease the level of safety inventory carried without hurting the level of product availability. Diff: 3 Topic: 12.1 The Role of Safety Inventory in a Supply Chain AACSB: Application of knowledge Objective: LO 12.2: Understand the role of safety inventory in a supply chain. 21 Cost Accounting: A Managerial Emphasis
2) Discuss the various measures of product availability. Answer: Product availability reflects a firm's ability to fill a customer order out of available inventory. A stockout results if a customer order arrives when product is not available. There are several ways to measure product availability. All availability measures are defined on average over a given time frame, which can range from hours to a year. Product fill rate ( fr ) is the fraction of product demand that is satisfied from product in inventory. It is equivalent to the probability that product demand is supplied from available inventory. Order fill rate is the fraction of orders that are filled from available inventory. In a multi-product scenario, an order is filled from inventory only if all products in the order can be supplied from the available inventory. Order fill rates tend to be lower than product fill rates because all products must be in stock for an order to be filled. Cycle service level (CSL) is the fraction of replenishment cycles that end with all the customer demand being met. A replenishment cycle is the interval between two successive replenishment deliveries. The CSL is equal to the probability of not having a stockout in a replenishment cycle. Observe that a CSL of 60 percent will typically result in a much higher fill rate. The distinction between product fill rate and order fill rate is not significant in a single product situation. When a firm is selling multiple products, however, this difference may be significant. For example, if most orders include 10 or more different products that are to be shipped, an out- of-stock situation of one product results in the order not being filled from stock. The firm in this case may have a poor order fill rate even though it has good product fill rates. Tracking order fill

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