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Strategies for Inventory Reduction in a

Supply Chain

Prof. Ravi Shankar

Dr. RAVI SHANKARProfessorDepartment of Management Studies

Indian Institute of Technology DelhiHauz Khas, New Delhi 110 016, India

Phone: +91-11-26596421 (O); 2659-1991(H); (0)-+91-9811033937 (m)Fax: (+91)-(11) 26862620

Email: r.s.research@gmail.comhttp://web.iitd.ac.in/~ravi1

SESSION#5: Design of Lean Supply Chains (CFVG: 2012)

Design of Lean Supply Chain:

Strategies for Inventory Reduction in

a Supply Chain

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What is an Inventory System

� Inventory is defined as the stock of any item or resource used in an organization.

� An Inventory System is made up of a set of policies and controls designed to monitor the levels of inventory and designed to answer the following questions:� What levels should be

maintained?� When stock should be

replenished? and� How large orders

should be? i.e. what is the optimal size of the order?

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Inventories: Why and “Why not”

CONS

� Large inventories hide operational problems;

� Financial costs to carrying excess inventory;

� Risk of damage;

� Tracking and accounting costs;

� Risk of obsolescence and depreciation;

PROS

� Allows managers to decouple operations;

� Protects one system part from disruptions in others;

� Reduces number of times orders are placed;

� Provides a hedge against inflation;

� Allows quantity discounts from suppliers;

� Allows firms to meet unexpected demand.

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Creating a Lean Supply Chain

� What is lean?� “A philosophy that seeks to shorten the time

between the customer order and the shipment to customer by eliminating waste” John Shook

� We can reduce lean to three elements (Womack and Jones)--

� Flow

� Pull

� Striving for excellence

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Elements of a Lean Supply Chain

� Lean (JIT) Purchasing

� Lean Logistics or JIT Transportation

� Lean (JIT) Operations: Toyota Production

System

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[A] For Fast Moving Items

� Buffer Stock = α [Lm σD2 + Dm

2 σL2 ]0.5

� Where,

� Lm = Mean Lead Time

� Dm = Mean Demand

� σD = Standard Deviation of demand

� σL = Standard Deviation of lead time

� α = Factor for a given level of service

Reduction in Buffer stock by reducing uncertainty in

demand and supply

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[A] For Fast Moving Items

� Buffer Stock = α [Lm σD2 + Dm

2 σL2 ]0.5

� If better demand forecasting is done, σDwill be less

�=== Leading to lesser Buffer stock

� If Lead time (L) monitoring is done, Lm and σL

will be less

�=== Leading to lesser Buffer stock

Reduction in Buffer stock by reducing uncertainty in

demand and supply

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STRATEGY 1: Avoid 99% syndrome

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STRATEGY-1: Avoid 99% syndrome for all items

because for every 1% increase in Service level Buffer

Stock increases substantially after 90% level of service

Buffer Stock

Service Level

50%

99%

100%

90%

Increase in Buffer Stock for over 99% of service level

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STRATEGY 2: Standardization,Variety Reduction &

Codification

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STRATEGY-2: Standardization,Variety Reduction

& Codification

� If n varieties can be standardized into 1,

� then required inventory is (1/ root of n) and system cost is (1/ root of n).

� If 2 parts can be standardized into 1 then nearly 30% reduction in inventory.

� If 4 parts can be standardized into 1 then 50 % reduction & so on.

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STRATEGY 3: vendor development

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STRATEGY 3: Better vendor development to reduce

the lead time and increased quality level.

� Develop long term partnership with vendor

� Develop vendors by providing

� Training

� Quality and Inspection capability

� Technology transfer

� Assured long term contract

� Reliable vendors:

� Limited in number

� But trusted ones

� Located near by

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STRATEGY 4: Vendor

Managed Inventory (VMI)

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Vendor Managed Inventory

� VMI transfers inventory management (and

possibly ownership) from the customer to

the supplier

� VMI synchronizes the supply chain

through the process of collaborative

order fulfillment

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VMI in use today

� In the Factory

� At customer sites

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Advantages of VMI

� Customer

� less resources for inventory

management

� assurance that product will be available when required

� Vendor

� more freedom in when & how to

manufacture product and make

deliveries

� better coordination of inventory levels

at different customers

� better coordination of deliveries to

decrease transportation cost

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VMI Essentials

� TRUST

� Accurate information provided on a timely basis

� Inventory levels that meet demands

� Confidential information kept confidential

� TECHNOLOGY

� Automated electronic messaging systems to

exchange sales and demand data, shipping schedules, and invoicing

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STRATEGY 5: JIT Purchasing

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JIT Purchasing

� Characteristics of JIT Purchasing--

� Purchase in small lots with frequent deliveries

� Mutual, consistent improvement by the buyer and supplier

� Collaborative efforts between buyer and supplier

� Efficient point-to-point communication linkages

� The “rights”--

� right quantity

� right time

� right quality

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JIT Purchasing

What kind of items are best suited

for a just-in-time purchasing system?

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Supplier Relationships

� Long-term, steady relationships with a few suppliers.

� Negotiation based on a long term commitment to productivity and quality improvement.

� Interested in supplier capabilities.

� Continuous improvement.

� Product/process technology.

� Design for manufacturability.

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STRATEGY 6: Lean Logistics

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STRATEGY 6: Lean Logistics

ProductionProduction

InspectionInspection

PackingPacking

StorageStorage

ShippingShipping

TransportTransport

ReceivingReceiving

InspectionInspection

StorageStorage

ProductionProduction

Supplier

Trucking

Customer

ProductionProduction

TransportTransport

ProductionProduction

TraditionalJust-in-Time

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Lean Logistics

� Replacement of expendable packaging with

reusable containers

� Frequent deliveries made to the point of use

� Regular and repeatable delivery schedules

(closed loop systems)

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Lean Logistics

� Long-term dedicated contract carriage replaces commercial carriage as the primary mode of

transportation

� Focus on frequent deliveries of small quantities of

many parts versus large quantities of fewer parts

� Modified shipping and handling equipment

� Side loading trucks

� Smaller trucks (similar to beverage trucks)

� Delivery at Point of use

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STRATEGY 7:

CENTRALISATION OF

STOCKING

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Traditional: Decentralized System

Supplier

Warehouses

Retailers

STRATEGY 7: Centralization of stocking in a

multi-echelon distribution system

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Supplier

Warehouse

Retailers

Centralized Systems

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STRATEGY 8: Staggering the

supplies

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STRATEGY 8: Staggering the

supplies

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[B] Slow Moving Items: Expensive

slow moving spares

(1)Specials-required only at predetermined

date in scheduled shut down or project

materials.

Policy: MRP policy.

Do not stock but place an order just in time so

that it arrives on a due date.

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Required date

L

Order Released

Date (ORD)

KσL

ORD

If L is uncertain with (Lm, σL):

then KσL= safety lead time

K is a factor which depends up on acceptable risk of delay

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Adequate Warning Spare

� If lead time is less than the deterioration signal in the item

then do not stock but place an order on warning.

If lead time is reduced by faster mode then inventory can come down substantially

Procurement simplification and expediting is a better strategy than stocking

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Project site#2

[C] STRATEGY: Spare bank or

spare pooling

� Consider these two systems:

Supplier

Decentralized store#1

Decentralized store#2

Project site#1

Project site#2

SupplierCentralized

store

Project site#1

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[C] Spare parts pooling

� If there are n locations then keeping 1/ root n

centrally will meet the demand adequately

� This is particularly useful for slow-moving

expensive spares:

� Turbine rotor

Project site#2

SupplierCentralized

store

Project site#1

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[C] Indadequate Warning Spares

� One for one ordering

� [(s-1), s] policy:

� s is the optimal number of spares to be

stocked which will be typically 1 or 2.

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[D] Non-moving materials: Dead

stock

� Return to vendor

� Redistribute among other locations

� Reuse elsewhere

� Sell at a discount

� Donate to earn goodwill

� Dispose off optimally: Inventory control in

reverse gear

� Disposal Policy: Frequency of disposal and

process

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� Inventory pull systems/visible signals

� Facility layout changes/work cells

� Set up reductions

� Level build schedules

� Uniform loading

� Total quality and continuous improvement

� Standardized material handling/containers

� Product and process simplification

� Total preventive maintenance

� Flexible workforce

� Teamwork

� Right performance measures

Implementing the Lean Supply Chain through focus on Lean Operations

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� Find the best supplier and engage early in the design process

� Partner with key suppliers that have high capability for design and supply

� Suppliers should be located in the country where you build your product

� Shorten the supply chain by having suppliers close, frequent deliveries, and leveled production plans

� Develop pull systems with suppliers

Implementing the Lean Supply Chain