Page 277 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Logistics and Supply Chain Management

Notes 12.4.2 Threshold Service

To establish a threshold service level it is necessary to initiate network reengineering with
policies regarding desired inventory availability and capability. It is common practice to have
the customer service capability based on the existing order entry and processing system,
warehouse operations based on standard order fulfillment time at existing facilities, and
transportation delivery time-based on capabilities of least cost transportation methods. Given
these assumptions, existing performance is the starting point for evaluating potential service
improvement.
The typical starting point for customer service availability analysis is to assume performance at
a generally acceptable fill rate. Often the prevailing industry standard is used as a first
approximation.

Example: If the safety stock availability goal were established at a 97.75 percent
performance for combined probability of demand and lead time uncertainty, it would be
anticipated that approximately 98 out of 100 items ordered would be delivered to specification.
Given the initial assumptions, each customer is assigned a shipment location on the basis of
least total cost. In multiproduct situations, selection of service territories for each facility will
depend on the products stocked at each warehouse and the degree of consolidation required by
customers. Because costs have significant geographical differentials, the service area for any
given facility will vary in size and configuration.

12.4.3 Service Sensitivity Analysis

The threshold service resulting from the least total cost logistical design provides a basis for
sensitivity analysis. The basic service capabilities of a network can be increased or decreased by
variation in number of warehouses, change in one or more performance cycles to increase speed
or consistency of operations, and/or change in safety stock policy.

Locational Modification

The warehouse structure of the logistical system establishes the service that can be realized
without changing the performance cycle or safety stock policy. To illustrate the relationship
between number of warehouses and resultant service time, assume an important measure is the
percentage of demand fulfilled within a specified time interval.

First, incremental service is a diminishing function.

Example: The first five warehouse locations provided 24-hour performance to 42 percent
of all customers. To double the percentage of 24-hour service from 42 to 84 percent, 9 additional
warehouses, or a total of 14, are required.
Second, high degrees of service are achieved much faster for longer performance intervals than
for the shorter intervals.

Example: Four warehouse locations provide 85 percent performance within the 96-hour
performance cycle. Increasing the total locations from 4 to 14 improved the 96-hour performance
by only 9 percent. In contrast, a total of 14 warehouses cannot achieve 85 percent given a 24-hour
performance cycle.

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