Introduction
Variability in customer demand refers to the difference in what suppliers expect from customers and exactly what they order or buy. Firms use various variability tools in focusing variability in customer demand.
How can firms cope with huge variability in customer demand?
Risk pooling
The tool suggests that variability in customer demand reduces if one accumulates demand in different locations. The principle holds because as managers gather together to demand from different regions, low demand from one customer offsets high demand for another (Simchi-Levi, 2008).
Managing inventory from the supply chain
Considering a multi-facility series of the supply chain, a serial supply chain involves several stages. Each level supplies a downstream stage, until the achievement of customer’s demand at the final stage. The system-wide cost reduces if a single firm owns the serial supply chain. In this case, the management is close to the customers and thus can understand their demand (Simchi-Levi, 2008).
Practical issues
Inventory managers review their inventory levels periodically. This helps managers to recognize the slow-moving goods and obsolete products, which in turn helps in reducing inventory levels. The managers also give stiff management of safety stock, lead times, and rates of usage. It aides the firm in ensuring that inventory is appropriately kept (Simchi-Levi, 2008).
What is the relationship between service and inventory levels?
Service levels determine the number of individuals a firm has on hand to cooperate with customers, and trade their goods when they come to their warehouses. Inventory levels determine the number of goods or the number of supplies a firm has on hand to actually sell to its customers. Demand in the market partly measures both the service levels and the inventory levels (Simchi-Levi, 2008).
Inventory and service levels match together in the event that the business responds to customers’ demands as well as having what the customers want. A well builds up inventory might have little satisfaction to customers, if it is not associated with the necessary increase in levels to give enough service. Demand cycles resulting from inventing a new product or economic changes affect the inventory and service levels (Simchi-Levi, 2008).
A decline in the economy and a fall in demand forces businesses to decrease their inventories and to lower their service levels. Similarly, the introduction of a new product into the market by a firm leads to an increase in both the inventory and the service levels. Typically, many companies keep much inventory close to customers, holds a bit of inventory in every location as well as keeping raw materials, thus making service levels inconsistent across products and locations (Simchi-Levi, 2008).
What is the impact of lead time, and lead time variability, on inventory levels?
Lead-time refers to the time taken to make the placement of an order from a warehouse until the receipt of the products. Lead-time varies in the event that there is random demand placement. When this happens, the order arrives after the suitable lead-time. Variability of lead times affects the inventory levels. When the lead-time to the facility is long, the level of service provided by the facility is low (Simchi-Levi, 2008).
The subsidiary impact of the service level decreases the inventory level. Goods with short lead-time increases the service levels. Consequently, it increases a firm’s inventory level. For a fixed lead-time, irrespective of the uncertainty of supply and demand, delivery lead times lead to the holding of inventory. In a decentralized system, lead-time is short because warehouses are close to customers. Often, this leads to a reduced inventory level. However, in a centralized system, a long lead-time occurs, and thus there is an increased inventory level (Simchi-Levi, 2008).
Reference
Simchi-Levi, D., Kaminsky, P., Simchi-Levi, E., & Shankar, R. (2008). Designing and managing the supply chain: Concepts, strategies and case studies, (Third Ed.) New York: McGraw-Hill.