Product Availability

Product AvailabilityLevel of product availability Also referred as customer service level.

Is measured using the cycle service level or fill rate.

Is high to improve the responsiveness and attract customers.

But high level requires large inventories.These large inventories tend to raise cost for SC.

Therefore, SC needs to balance between level of inventory and cost of inventory. Factors affecting optimal level of product availability Before understanding factors consider one example of a storekeeper who sells jacket.He buys the stock for entire seasons supply of jacket before start of selling season. High level of product availability requires large number of jackets.It is likely to satisfy all demands.However, it results in a large number of unsold jackets at the end of season.

ExampleOn the other hand, low level of product availability results in few unsold jackets.

In this scenario, a loss of potential customers has to bear.

Must balance the loss from having too many unsold jackets and lost profit from turning away customers.12-5Mattel, Inc. & Toys R UsMattel was hurt last year by inventory cutbacks at Toys R Us, and officials are also eager to avoid a repeat of the 1998 Thanksgiving weekend. Mattel had expected to ship a lot of merchandise after the weekend, but retailers, wary of excess inventory, stopped ordering from Mattel. That led the company to report a $500 million sales shortfall in the last weeks of the year ... For the crucial holiday selling season this year, Mattel said it will require retailers to place their full orders before Thanksgiving. And, for the first time, the company will no longer take reorders in December, Ms. Barad said. This will enable Mattel to tailor production more closely to demand and avoid building inventory for orders that don't come.- Wall Street Journal, Feb. 18, 199912-6Key QuestionsHow much should Toys R Us order given demand uncertainty?How much should Mattel order?Will Mattels action help or hurt profitability?What actions can improve supply chain profitability?Importance of the Levelof Product AvailabilityProduct availability measured by cycle service level or fill rateAlso referred to as the customer service levelProduct availability affects supply chain responsivenessTrade-off:High levels of product availability increased responsiveness and higher revenuesHigh levels of product availability increased inventory levels and higher costsProduct availability is related to profit objectives, and strategic and competitive issues (e.g., Nordstrom, power plants, supermarkets, e-commerce retailers)What is the level of fill rate or cycle service level that will result in maximum supply chain profits?Factors Affecting the Optimal Level of Product AvailabilityCost of overstockingCost of understockingPossible scenariosSeasonal items with a single order in a seasonOne-time orders in the presence of quantity discountsContinuously stocked itemsDemand during stockout is backloggedDemand during stockout is lostCost of overstocking = C0Is the loss incurred by a firm for each unsold unit at the end of selling season.of understocking = CuIs the margin lost by a firm for each lost sale from current and future sales if customer does not return.Two factors that affect optimal level of product availability. Cost of overstocking Cost of understocking Optimal level of product availability Makes sense in the context of demand uncertainty.

Firms have forecast a consensus estimate of demand without any measure of uncertainty.

Now they have better appreciation for uncertainty.

Incorporation of uncertainty and optimal level of product availability can increase profit. Example Demand distribution for jackets Demand Di (*100)Probability Cumulative probability of demand being Di or lessprobability of demand being greater then Di40.010.010.9950.020.030.9760.040.070.9370.080.150.8580.090.240.7690.110.350.65100.160.510.49110.200.710.29120.110.820.18130. 100.920.08140.040.960.04150.020.980.02160.010.990.01170.011.000.00ExampleExpected profit from ordering a thousands of jacket

=$49,900Potential outcome to buy 100 more jacketsIf extra 100 are sold, then profit=$5,500If 100 units are send to outlet, then loss=$500

From table, there is 0.49 probability that demand is 1100 or higher and a 0.51 probability that demand will be 1000 or less.

Expected profit=$5,500Xprob[Demand1,100]-$500Xprob[Demand