(PREVIEW) Performance Measures for Supply Chain Management
Module SCM105
 
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SCM105: Performance Measures for Supply Chain Management
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...Suppose we set inventory levels so that on average we maintain a 95% Line Item Fill Rate,3 and suppose there are 14 line items on a typical order. Then what is the probability that a typical order will be filled completely, without delay? Looking at our average 95% line item fill rates, if we had only two lines on an order, then the probability the first item is in stock is 95%, and the probability the second item is in stock is also 95%. To fill the total order we need to multiply these probabilities:

Probability of complete order fill for 2-line order = .95 * .95 = 0.9025 or 90.25%.

With 14 items we multiply the probabilities for all 14 items:

Probability of complete order fill for 14-line order = (0.95)14 = 0.4877 or 48.77%.

The probability of complete order fill for a 14-line order is below 50%! The figure below shows the order fill rate corresponding to a 95% line item fill rate, based on the number of items in the order:

Figure 2: Order Fill Rate
(Given 95% Line Item Fill Rate)

This figure should convince you that if there are a large number of items on a single customer order, then the chances are good that it won't be filled completely...

(Footnotes are numbered as they are in the module)
3 To implement this you could follow the procedure in Chapter 8 of Bonini, Hausman and Bierman, "Quantitative Analysis for Management", McGraw-Hill, 1997, to determine the corresponding safety stock levels. (back)