Questions:
1. Consider a supply chain, which contains a single manufacturing facility, a cross dock and two retail outlet. Items are shipped from the manufacturing facility to the cross-dock facility and from there to the retail outlets. Let L 1 be the lead time from the factory to the cross-dock facility and L 2 be the lead time from cross-dock facility to each retail outlet. Let L = L 1 + L 2, in the following analysis below , we fixed L, and vary L 1 and L .
a. Compare the amount of safety stock in two systems, one in which lead time from cross-dock facility to retail outlet is zero(i.e., L 1 = L, L 2 = 0) and a second system in which the lead time from the factory to the cross-dock facility is equal to zero (i.e., (L 1 = 0, L 2 = L).
b.To reduce safety stock, should the cross-dock facility be closer to the factory or the retail outlet? For this purpose analyze the impact of increasing L 1 and therefore decreasing L 2 on total safety stock.
2. Suppose you are selecting a supplier. Would you prefer a supplier with a short but highly variable delivery lead time or a supplier with a longer but less variable lead time?
3. Although we typically model inventory-related costs as either fixed or variable, in the real world the situation is more complex. Discuss some inventory-related costs that are fixed in the short term but may be considered variable if a longer time horizon is considered.
Answers:
1. a) The safety stock for the system with lesser lead time in moving from cross dock facility to retail outlet will be higher (keeping the demand variability influence constant).
b) Clearly, the required amount of safety stock is smaller when the cross dock facility is closer to the retail outlet. This can be understood in sense that a longer L1 value allows the system more time before allocation of inventory to the retailers (which are provided by cross dock facility). Hence, the system can take advantage of the risk pooling concept.
2. The immediate answer to this situation cannot be given clearly as the entailed safety stock depends on both the variance and the average value of lead time. It is the relative choice of the retailer; dependent on these factors which call for the decision as choosing between an efficient or a responsive supplier. Moreover, the decision will also strongly depend on the demand variability or needs of the retailer’s customers at that time.
3. In the case of a fledged product, it is rational to regard that the demand and price are steady in the short term. However, time progresses and with parallel introduction of new products into the market, both the price and the demand for concerned product decreases fundamentally, which can result in writing off of its excessive inventories. Hence, the “inventory holding costs” (fixed in a short term) may be regarded as a variable cost associated with obsolescence.
Further example could be of the storage costs. For the occasion, a company may need to rent several warehouses for a fixed lease term due to large inventories. However, if turnover rates are increased and inventory policies are improved in this period of time, then it may be equally acceptable to rent lesser or a fewer number of warehouses at the time of renewal of lease contracts. Similar inferences can be drawn for personnel, insurance, storage racks and material handling equipment etc.
