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Raw Material Inventory Strategy for Make-to-Order Manufacturing MIT SCM Research FEST May 19, 2016 Authors: Vikash Chandra, Michael Tully Advisor: Fredrik Eng Larsson

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Raw Material Inventory Strategy for Make-to-Order Manufacturing

MIT SCM Research FEST May 19, 2016

Authors: Vikash Chandra, Michael Tully Advisor: Fredrik Eng Larsson

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Agenda

˃  Context˃  CurrentStructure˃  Approach˃  Results˃  Ques5ons

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Context

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Point4Make-to-Ordermanufacturer

Shortlead5mesHighservicelevel

HighgrowthratesustainedforthelastdecadeThefocuswasmarketshare

Point2Highvalueoffinishedgoodsincomparisontorawmaterials

LegacyinventorypoliciesuntouchedHaveworkedreasonablywell

FMCGmanufacturer

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Contextcontd.

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Supplierservicelevelsarevariable

Costinforma?onnotavailable

˃  Supplierservicelevels(SSL)arevariableandcangreatlyimpactproduc5on˃  Theactualqualityoftherawmaterialistheproblem˃  Switchingtoanothersuppliernotalwaysprac5calCanInventorypolicychangesmi4gatetheeffectofSSLdecline?

˃  Tradi5onalinventorypolicydetermina5onrequirescostand/orservicelevelinforma5on

˃  Trade-offinforma5onisneededinordertodevisestrategies˃  Anevalua5ontoolismoreappropriatetohelpunderstandpolicychangeeffectsCanamodelfortes4ngtheeffectsofinventorypolicychangesbebuiltwithoutcostinforma4on?

Sowhychangeinventorypoliciesandwhynotdoittheconven?onalway?

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CurrentStructure

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Twoechelon,centralizedinventorymanagement

Consignment

Plant1 Plant2

Expedited Regular

Transshipment

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CurrentStructurecontd.

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Demand˃  Make-to-Orderandforecast

errorslimitdemandvisibility˃  Suddenspikesindemand

cantriggertheorderingcycle

Replenishment˃  Decisionbasedon

daysonhand(DOH)˃  Differentshipments

havedifferentDOHlevels

QA&Backorders˃  Packagingallows

limitedinspec5on˃  Realcheckjustbefore

produc5on˃  Backorderscompleted

assoonaspossible

Transporta?on˃  Regularshipments

preferred˃  Regularshipment

costisincludedinmaterialcosts

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Understandcurrentprocess

Understandcurrentprocess˃ Thecurrentprocessesaredeeplyembeddedinorganiza5on˃ Improvetheprocessforprac5calapplica5on

Iden?fykeymetrics

Findcostsubs?tutes

Iden?fykeymetrics˃ Keycriteriaistomeetproduc5onplan˃ Produc5onFillRate(PFR)isthemeasureofadherencetoproduc5onplanning˃ Inconjunc5onwithshipmentsandinventorylevels

Decidemathema?calformula?on

Findcostsubs?tutes˃ Hardtoputacosttodifferentshipments,inventoryholdingcosts,etc.˃ NumberofeventsgiveabeXerunderstandingtomanagement

Decidemathema?calformula?on˃ Numericalmodelorsimula5onmodel?˃ Flexibilityandeaseoffutureusagebysponsormainconcerns

Approach

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˃  Shipmentmodedependsonrequirementurgencyandavailability

˃  Everyeffortismadetoensurefulltruckloadshipment

˃  Theconsignmentmusthaveenoughtoship

˃  Totransship,thesendingplantmustholdbackcertainamounttocoveritsownrequirements.Thislevelistheholdbacklevel.

˃ DOHsufficiencyismeasured˃ Re-orderpointis15DOHinventory˃ Orderquan5tyisforfurther15days˃ DOHcanfluctuatesuddenlybecauseofqualityfailures

Checkinventoryadequacy

Checkavailability

Decideshipmentmode

Currentprocess

Approachcontd.

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Production Fill Rate = Production quantity fulfilled on time / Total production quantity

Regular shipments = Number of regular shipments in a year

Expedited shipments = Number of expedited shipments in a year

Transshipments = Number of transshipments in a year

1

2

3

4

Average inventory = Sum of daily starting inventory / 365 5

Keymetricsandcostfactors

Approachcontd.

Note:Allmetricsareaveragedovertwoplants

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NumericalModel

˃  Providestheop5malsolu5on˃  Hardertoformulate˃  Withoutcostinfo,certainvalues

cannotbededuced˃  Lessflexible˃  Futurechangescanbedifficulttoadd

Simula?onModel

˃  Doesnotprovideop5malsolu5onbutcanbeagoodevalua?ontool

˃  Easiertoimplement˃  Canworkwithnumberofevents

insteadofcosts˃  Flexible,modifica5onseasierto

implement˃  Easytousewithinsponsor

organiza5on

Whichmodeltouse?

Approachcontd.

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˃  Withtheassignedholdbacklevel,simulatefordifferentcombina5onsofthere-orderpointandre-orderquan5ty(R,Q)(s,S)

˃  Recordtheresultsintermsofevents˃  Checkthesensi5vityofthedifferentpoliciesforvariousSSLand

standarddevia5onsofdemand

Phase-1

Phase-2

˃  Decidethetransshipmentholdbacklevel˃  TestthisholdbacklevelatdifferentSSLandstandarddevia5ons

ofdemand˃  Fixthechosenvaluefortheuseinnextphase

˃  Thepossiblecombina5onsofparametersundervariousinventorypoliciesisextremelyhigh

˃  Needtoreducethenumberofcombina5ons

Approachcontd.Solu?onapproach

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InventoryCosts

ShipmentCostsProduc?onFillRate

ManagementDecision

Intheabsenceofcostinforma5on,acomparisoncanbemadebetweenimprovementinproduc5onplanadherenceandthecostsincurredintermsofeventstoachievethatperformance

Cost:Benefit

Results

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Holdbacklevel˃ Currentvalueof15canbeimproved

˃ Lowerholdbacklevelsenablemoretransshipments,especiallywithlowSSL

˃ BeXerdistribu5onofrawmaterials

˃  ImprovesthePFRslightlyandgenerallygivesbeXerresults

Resultscontd.Phase-1Fixholdbacklevel

SSL=97%

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Resultscontd.

SSL=91%

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Resultscontd.Phase-2Varyinventorypolicyspecificsandrecordevents

SSL=97%

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Sensi?vitytoSSLchanges˃ PFRishighlysensi5vetoSSL

˃ A2percentagepointsreduc5oninSSLcanhaveupto5percentagepointsreduc5oninPFR

˃ ThenumberofshipmentswillneedtobemuchhighertomeettheoldPFRrequirements

Resultscontd.Sensi?vityChecks-SSL

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Sensi?vitytostandarddevia?onchanges˃ PFRiscompara5velystabletostandarddevia5onchanges

˃ SamepolicycanbeapplicableoverawiderangeofSKUs

Resultscontd.Sensi?vityChecks–standarddevia?on

SSL=97%

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CaninventorypoliciesoffsetSSLdecline?No,butitcanhelpmi5gatethedamage.Toacertainextent,PFRcanberecovered.

Thecurrentsystemnotgoodenough?Thecurrentsystemplaceslargeorderconstraintsontheconsignmentwhichthenneedstobereplenisheditself.

Whattodoimmediately?Reducetheholdbacklevelfortransshipment.ThiswillhelpthePFRimproveslightly.

Results-  Increasereorder

point-  Reducereorder

quan5ty-  Increasefrequency

ofshipments-  Analyzeevent-

basedtradeoffs

Changethesupplier?ToovercomethedropinPFRduetolowSSL,theul5matesolu5onistofindabeXersupplier

Longtermrecommenda?ons?Increasethere-orderpointanddecreasetheorderquan5ty.ThiswillimprovePFRbutwillincreasecostselsewhere.

Can’tchangesupplier?Incen5vizethesuppliertoincreasetheSSL.Itwillprobablybemoneywellspent.

Resultscontd.

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