QSO-630-Q2870: Supply Chain Management

Answer Question 9
a). Let L1 be the lead time from the factory to the cross-dock facility
L2 be the lead time from the cross-dock facility to each retail outlet.
If L1 = L and L2=0
Let L = L1 + L2. And in the analysis, L is fixed, while L1 and L2 varies
Safety stock = z x STD x SQRT (L),
Where L is the lead time
Assuming a service level of 97% (z=1.88) and STD of 1.7
When L1 is zero
When the lead time from the cross-dock facility to a retail outlet is zero, the
equation becomes 1.88x 1.7 x SQRT (L2) the safety stock will depend on the distance
from the cross-dock facility to a retail outlet. Long distance would mean long lead time
and enough safety stock needed at the warehouse to protect against deviations from
average demand during lead time.
On the other way round when L2 is zero, it means that the lead time from the
factory to the cross-dock facility will longer, and will affect the average inventory level
which is closely related to the average demand during lead time and depend on the safety
stock

QSO-630-Q2870: Supply Chain Management

b). Since safety stock declines as average supplier lead time declines it would be
better for the cross-dock facility to be closer to the retail outlets because the longer the
lead time to a facility, the lower the level of service that can be provided by the facility,
and from the equation above, safety stock is a function of the service level. Everything
being equal, service level will be higher for product with short lead time which to a
greater extent depends on the time to transport the product to the retailer, so increasing
L1 will have impact at the cross-dock facility and will affect the lead time for product
delivered at the retail outlet and on the safety stock because of the variability that may
arise. Decrease L2 will reduce the safety stock level (D. Simchi-Levi, E. Simchi-Levi &
Kaminsky, 2008).

Answer to Question 10
When it comes to supplier selection, safety stock help guide against variability in
both demand and lead times. So it is important to set the correct levels of safety stock and
a thorough understanding of its drivers
Assuming I have to provide 97% service level for customers, average demand for
product is 10 and forecast error of 1.2
And I am considering two suppliers to add to my approved suppliers list for this
particular product. Supplier A has an average lead time of 10 days and the standard
deviation is 5 days and Supplier B has an average lead time of 14 days and the standard
deviation is 1 day.
Safety stock = z x STD x SQRT (L),
Service level of 97% (z=1.88) and STD of 1.7
Safety stock
Supplier A = 1.88 x 5 x SQRT (10) = 30
Supplier A = 1.88 x 1 x SQRT (14) = 7

QSO-630-Q2870: Supply Chain Management

Since in both cases I have to safeguard my inventory for 15 days, but the safety
stock values are different for each of them. Using the equation for safety stock, supplier 2
will have the lowest safety stock. Since it is already known that the lead time is 14 days,
ordering will be done in such a way to satisfy the demand for 24 days and I will only
need to safeguard with a safety stock for 1 extra day which is the variability here
compared to supplier 1 with the 10 days demand and a safety stock to safeguard for extra
5 days variability

Answer to Question 11
Although in accounting, costs can be described as either fixed costs or variable
costs. But there are costs that fixed for a short term but fluctuate with time as production
increases. Warehouse cost may be regarded as fixed in the short term but as time horizon
gets longer this may change, and there may be the need to rent additional warehouses due
to production increase and high turnover rate. In this situation the management would
have to rent additional warehouse or buy additional land to extend the warehouse so as to
accommodate the increase in production and inventory. The same goes for personnel, an
organization may have a fixed amount assigned as a fixed cost for employee salary, but as
production increase they may be the need for additional hands to meet demand. So, when
an organization is deciding on increasing its production levels, the primary factors in this
decision would be described as a fluctuation of a fixed in the short or time incremental
costs of the production of additional units of output.

QSO-630-Q2870: Supply Chain Management

Reference
Simchi-Levi, D., Simchi-Levi, E. & Kaminsky, P., (2008). Designing and
Managing the Supply Chain: Concepts, Strategies and Case Studies (3rd Ed.). New York,
NY: McGraw Hill