Global Supply Chain Management. Inventory Reduction Tactics Reduce lot sizes Improved demand...

Global Supply Chain Management

Inventory Reduction Tactics

Reduce lot sizesImproved demand forecastsReduce lead timesReduce supply uncertainties

R = dL + Z sqrt(L)

Themes• Supplier Consolidation / Purchasing and Procurement• RFID• VMI• Green• Information Technology• Lean• Pull

Total Sales = $10,000,000

Purchased Materials = 7,000,000Labor and Salaries = 2,000,000

Overhead = 500,000

Profit = 500,000

Purchasing / ProcurementHow can we double profits to $1,000,000?

Purchasing / ProcurementImportant Practices

•Leverage buying power

•Commit to small number of dependable suppliers

•Partner with suppliers to reduce total cost

• Supply Chain Management • Some Lingo• Some Global Issues• The Bullwhip Effect in Supply Chains• Information Technology• Improvement Ideas• Cases

Factors to be considered when moving from (mostly) domestic chains to global ones

HP and DeskJet Background.

Problems and Goals.

Potential Solutions.

HP Solution.

Bullwhip Effect due to Seasonal Sales of Campbell Soup

Shipments from Manufacturer to Distributors

Retailers’ Sales

Results:

• Supply Chain Management Systems (SCM): Automate flow of information between firm and suppliers to optimize production and delivery

• Supply Chain Management: Close linkage of activities involved in buying, making, moving a product

• Supply Chain: Network of organizations and business processes for production and distribution of products

Information Systems Can Help Supply Chain Participants:• • • • •

Information Technology

Upstream Downstream

Inboundlogistics

Productionprocesses

Outboundlogistics

Sales andmarketing

Customerservice

Information Technology

Upstream Downstream

• Most supply chains use inter-modal transportation, multiple transportation channels (railway, truck, etc) to move products from origin destination

• This creates supply chain complexities

Logistics

• Fulfillment

• Logistics

• Production

• Revenue and profit

• Cost and price

• Cooperation among SC partners

A Good SCM System will help a firm

• Decide when and what to produce, store, and move

• Rapidly communicate orders

• Track the status of orders

• Check inventory availability and monitor inventory levels

• Reduce inventory, transportation, and warehousing costs

• Track shipments

• Plan production based on actual customer demand

• Rapidly communicate changes in product design

Identify the problem(s) Haworth was facing.

What alternative solutions were available to management?

How well did the chosen solution work?

What people, organization, and technology issues need to be addressed?

• i2 Technologies – www.i2.com• Manugistics• Supply Chain Knowledge Base – supplychain.ittoolbox.com• Supply Chain Management Review – www.scmr.com• CIO Magazine – www.cio.com• About Inc. (Logistics/Supply Chain) – logistics.about.com• IBM - http://www-03.ibm.com/solutions/businesssolutions/scm/index.jsp

• Oracle/PeopleSoft Supply Chain – www.oracle.com/applications/scm• Institute for Supply Chain Management – www.ism.ws

Additional SCM Resources

Concepts Weeks of supply Turns ABC Analysis Q System Q Systems Total Costs P System Q System vs. P System

Inventory is a stock of anything held to meet some future demand. It is created when the rate of receipts exceeds the rate of disbursements.

A stock or store of goods.

Inventory Turns (Turnover)

COGS/Avg. Inventory Investment

Weeks of supply = Average aggregate Inventory Value / Weekly Sales (at cost)

IT = COGS / Average aggregate inventory value

The Eagle Machine Company averaged $2M in inventory last year, and the COGS was $10M. If the company has 52 business weeks per year, how many weeks of supply are held in inventory? What is the inventory turnover rate?

10 20 30 40 50 60 70 80 90 100

Percentage of SKUs

100 —

90 —

80 —

70 —

60 —

50 —

40 —

30 —

20 —

10 —

Class C

Class A

Class B

Booker’s Book Bindery divides SKUs into three classes, according to their dollar usage. Calculate the usage values of the following SKUs and determine which is most likely to be classified as class A.

SKU Number Description Quantity Used per Year

Unit Value ($)

1 Boxes 500 3.00

2 Cardboard (square feet)

18,000 0.02

3 Cover stock 10,000 0.75

4 Glue (gallons) 75 40.00

5 Inside covers 20,000 0.05

6 Reinforcing tape (meters)

3,000 0.15

7 Signatures 150,000 0.45

SKU Number Description

Quantity Used per

Unit Value ($)

Annual Dollar Usage ($)

1 Boxes 500 3.00 = 1,500

2 Cardboard (square feet)

18,000 0.02 = 360

3 Cover stock 10,000 0.75 = 7,500

4 Glue (gallons) 75 40.00 = 3,000

5 Inside covers 20,000 0.05 = 1,000

6 Reinforcing tape (meters)

3,000 0.15 = 450

7 Signatures 150,000 0.45 = 67,500

Total 81,310

Fixed Quantity Model, Q Continuous Review SystemOrder a fixed amountOrder cycle (time between orders) varies

EOQ, C (holding and ordering costs)

R- Constant demand, constant lead time- Variable demand~N, constant lead time

Fixed Interval Model, P Periodic Review SystemOrder various amountsOrder cycle is fixed or constant

Constant demand, constant lead time.

EOQ=Economic Order QuantityQ=Order QuantityD=Annual demandS=Order cost per orderH=Annual holding cost per unitTC=Total annual costsTBO=Time between orders, order cycle time

R=Reorder Point, used when LT>0d=demand rate, dbar mean demand rateL=Lead time

Constant means fixed or non-fluctuating.

Constant demand, constant lead time.O

Averagecycleinventory

1 cycle

Receive order

Inventory depletion (demand rate)

TBO TBO

Orderplaced

IP IPIP

OH OHOH

Orderreceived

Ex: Find EOQ, TBO, and make cost comparisonsEx: Find EOQ, TBO, and make cost comparisons

Constant demand, constant lead time, LT=0.

Suppose that you are reviewing the inventory policies on an item stocked at a hardware store. The current policy is to replenish inventory by ordering in lots of 360 units. Additional information given:

D = 60 units per week, or 3120 units per yearS = $30 per orderH = 25% of selling price, or $20 per unit per year

Ex: Determine ROPEx: Determine ROP

Constant demand, constant lead time, LT>0.

Q=300 units, LT=8 days, TBO=30 days.

TBO1 TBO2 TBO3

L1 L2 L3

Orderreceived

Orderplaced

Orderreceived

Orderplaced

Orderreceived

Average demand

during lead time

Cycle-service level = 85%

Probability of stockout(1.0 – 0.85 = 0.15)

zσdLT

Ex: Determine EOQ, ROP Q SystemEx: Determine EOQ, ROP Q System

Variable demand~N, constant lead time, LT>0.

The Discount Appliance Store uses a fixed order quantity model. One of the company’s items has the following characteristics:

Demand = 10 units/wk (assume 52 weeks per year, normally distributed)Ordering and setup cost (S) = $45/orderHolding cost (H) = $12/unit/yearLead time (L) = 3 weeksStandard deviation of demand = 8 units per weekService level = 70%

Periodic Review System (P)Periodic Review System (P)

Protection interval

OrderplacedOrderplaced

Orderplaced

Orderreceived

IP IPIP

OH OHQ1

The on-hand inventory is 10 units, and T is 400. There are no back orders, but one scheduled receipt of 200 units. Now is the time to review. How much should be reordered?

Calculating P and TCalculating P and T

Demand for the bird feeder is normally distributed with a mean of 18 units per week and a standard deviation in weekly demand of 5 units. The lead time is 2 weeks, and the business operates 52 weeks per year. The Q system called for an EOQ of 75 units and a safety stock of 9 units for a cycle-service level of 90 percent. What is the equivalent P system?

SOLUTION

We first define D and then P. Here, P is the time between reviews, expressed in weeks because the data are expressed as demand per week:

D = (18 units/week)(52 weeks/year) = 936 units

P = (52) =EOQ

D(52) = 4.2 or 4 weeks

With d = 18 units per week, an alternative approach is to calculate P by dividing the EOQ by d to get 75/18 = 4.2 or 4 weeks. Either way, we would review the bird feeder inventory every 4 weeks.

Calculating P and TCalculating P and T

We now find the standard deviation of demand over the protection interval (P + L) = 6:

Before calculating T, we also need a z value. For a 90 percent cycle-service level z = 1.28. The safety stock becomes

Safety stock = zσP + L = 1.28(12.25) = 15.68 or 16 units

We now solve for T:

= (18 units/week)(6 weeks) + 16 units = 124 units

T = Average demand during the protection interval + Safety stock

= d(P + L) + safety stock

units 12.2565 LPdLP

Ex: P System, Determine the Amount to OrderEx: P System, Determine the Amount to Order

d=30 units per dayd=3 units per dayLT=2 daysService level 99%P=7 daysOH=71 units

Q Model vs. P Model Q Model vs. P Model

Global Supply Chain Management. Inventory Reduction Tactics Reduce lot sizes Improved demand...

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