Discuss the relationship between service level, uncertainty, safety stock, and order quantity. How can trade-offs between these elements be made?
Two of the most important factors regarding the level of service delivered are availability and speed. Availability and speed of service are affected by the uncertainties of demand and replenishment cycles. To maximize certainty in service levels, safety stocks are often maintained at logistical facilities across the network. Hefty quantities of safety stock significantly increase inventory carrying costs and the total cost. Should orders be submitted in larger quantities by customers, uncertainties may be reduced, alleviating the need for safety stock. Close communications between suppliers and customers perhaps most substantially reduces uncertainty.
2. Discuss the disproportionate risk of holding inventory by retailers, wholesalers, and manufacturers. Why has there been a trend to push inventory back up the channel of distribution?
Holding inventory is risky because of the tied-up capital investment and the potential for obsolescence. The nature and the extent of the risk varies depending on the position of the company in the supply chain. Manufacturers’ inventories have a long-term dimension. Their inventory commitment is relatively deeper and of longer duration. Wholesalers have a more broad exposure, but a shorter duration compared to the manufacturers. For retailers, inventory management is no more than a buying-selling process. Retailers have an extensive breadth of inventory and their inventory holding costs are typically higher than those of the manufacturers and wholesalers. Thus, they try to push the inventory responsibility back up the channel to avoid those high costs.