Cost of stockouts in the microprocessor business and its impact in determining the optimal service level/

Abstract

In order to develop optimal inventory policies, it is essential to know the consequences of stockouts and the costs related to each kind of stockout; at Intel, however, such costs have not yet been quantified. The primary goal of this internship is to quantify the cost of stockouts, focusing in the microprocessor business. The first stage of this thesis consists of describing the different consequences of stockouts. In a stockout situation, customers may opt to buy alternate products at either higher or lower price (buy up or buy down), postpone the purchase until the product is available (postponed sales), buy the product from a non-authorized distributor (sales lost to the open market) or buy a non-Intel product (sales lost to the competition). Each of those consequences has a different financial impact, so we quantify stockout cost for different stockout situations and different service levels. This analysis is conducted at an aggregated level and also by product line. The results of this project show that stockouts have a high financial impact in the microprocessor business.

(cont.) Due to the high margins, each sale lost to the competition means losing a significant dollar amount, which may easily out weigh the inventory related costs of that product. The result is service levels that are higher than Intel had believed would be appropriate. The quantification of the financial impact of the different stockout situations will be a valuable input into further supply chain optimization analysis including adjustment of finished good inventory levels.