ISQA 510Sourcing Strategies & Inventory
MGMTLecture 3
Agenda- Nike Shoe-town Questions / Observations?- Supply Chain mitigation strategies- Risks and drivers- Mitigation- Stress testing supply chain- Dual Sourcing..or- Inventory Management- Incentives- Scientific Glass- Tyco Electronics
Supply Chain Risks
Category of Risk
Drivers of Risk
Disruptions •Natural disaster•Labor dispute•Supplier bankruptcy•War & terrorism•Dependency on a single source of supply as well as the capacity & responsiveness of alternative suppliers
Delays •High capacity utilization at supply source•Inflexibility of supply source•Poor quality or yield at supply source•Excessive handling due to border crossings or to change in transportation modes.
Supply Chain Risks & Their Drivers
Category of Risk Drivers of Risk
Systems •Information infrastructure breakdown•System integration or extensive systems networking•E- commerce
Forecast •Inaccurate forecasts due to long lead times, seasonality, product variety, short life cycles, small customer base•“Bullwhip effect” or information distortion due to sales promos, incentives, lack of supply chain visibility & exaggeration of demand in times of product shortage
Intellectual property
•Vertical integration of supply chain•Global outsourcing and markets
Supply Chain Risks & Their Drivers
Category of Risk
Drivers of Risk
Procurement •Exchange rate risk•Percentage of a key component or raw material procured from a single source•Industry wide capacity utilization•Long-term vs, short-term contracts
Receivables •Number of customers•Financial strength of customers
Supply Chain Risks & Their Drivers
Assessing the Impact of Various Mitigation Strategies
Stress Testing Your Supply Chain
Tailoring Reserves for Risk Mitigation
Adding Suppliers to Mitigate RiskPros:-Excess Capacity-Good for low obsolescence & low holding costs-Good for high volume commodity parts-Negotiation leverage
Cons:-JIT systems-Bad for high obsolescence & high holding costs-Costly for low volume or custom parts-Double the ECOs & tolerance issues
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Supply Chain Management – Key Issues
• Forecasts are never right• Very unlikely that actual demand will exactly equal
forecast demand
• The longer the forecast horizon, the worse the forecast• A forecast for a year from now will never be as accurate
as a forecast for 3 months from now
• Aggregate forecasts are more accurate• A demand forecast for all “related products” will be
more accurate than a forecast for a specific product / SKU
Nevertheless, forecasts (or plans, if you prefer) are important management tools when some methods are applied to reduce uncertainty
Reasons for Inventories• Improve customer service• Economies of purchasing• Economies of production• Transportation savings• Hedge against future• Unplanned shocks (labor strikes, natural
disasters, surges in demand, etc.)• To maintain independence of supply
chain
Adding Value through Inventory
• Quality - inventory can be a “buffer” against poor quality; conversely, low inventory levels may force high quality
• Speed - location of inventory has gigantic effect on speed
• Flexibility - location, level of anticipatory inventory both have effects
• Cost - direct: purchasing, delivery, manufacturingindirect: holding, stock-out.
Which begs the question “who is liable?” :
• Need for Finished Goods Inventories• Is the need to satisfy internal or external
customers?• Can someone else in the value chain carry the
inventory?
• Ownership of Inventories• Specific Contents of Inventories• Locations of Inventories• Tracking
Inventory Carry Costs – Is inventory an asset?Inventory Carrying rate example: total inventory = $34,400$800K – Storage$400K – Handling$600K – Obsolescence$800K – Damage$600K – Administrative$200K – Loss$3,400 – Total
Divide costs by Avg Inventory $3,400 / $34,400 = 10%Add: Opportunity costs of Capital 9%, Insurance 4%, Taxes 6%
=19%
Total Inventory carrying rate is 29%
Cash-to-Cash Cycle Time0ENLI009
Inventory days + Days sales outstanding – Average payment of supply period for materials
Inventory0OPPLAN012
Forecast Accuracy
0OPPLAN008
Production Lead Times
0OPMAKE017
Perfect Order Fulfillment
0OPDEL061
Faultless Invoices
0OPDEL023
Scheduled Achievement
0OPMAKE022Delivery
Performance to Scheduled Commit Date
0OPDEL019
Returns0OPDEL067
Scrap0OPMAKE023
Fill Rates0OPDEL025
Order Fulfillment Lead Time
0OPPLAN030
Machine wait time0OPMAKE007
Yield0OPMAKE033
Number of Supply
Sources0OPSO012Total Source
Lead Time0OPSO041
0ENLI015
Sales0ENPR026
0ENLI0030OPPLAN017
Inventory Measures - Examples
Weeks of SupplyFord: 3.51 weeksSears: 9.2 weeks
Inventory Turnover (Turns)Ford: 14.8 turnsSears: 5.7 turnsGM: 8 turnsToyota: 35 turns
Variances are bad – PPV & Standards
“unfavorable variance” = is reduced from the budgeted expectation
“favorable variance” = is increased from budgeted expectation
When is cost reduction a bad thing?Note: Do not interpret directly as “bad” or
“good” behavior on the part of management; the goal is to be on target.
Hammer Article: Cisco / Altera
Yr. 2000 – Cisco wrote off $2.25BAltera’s answer? – A new PostponementCapacity utilization – 2000 (97%) 2001
(66.2%) What should it be?What is happening now in component lead-
times? Is it real?Is VMI the real answer?Value drops 1.3% per month
Manufacturing PostponementPostponement – A form of DFM that is applicable when
producing families of productsPostponement is defined as “redesigning the product or
production process so that the point of differentiation is delayed as much as possible”a.k.a. delayed product differentiation (DPD), product
differentiation postponement (PDP), design for localization
General postponement strategies:Component and Process StandardizationModular Product DesignProcess RestructuringDesign for Logistics
General Postponement StrategiesComponent and Process Standardization
allow facilities to perform identical operationsreduces complexity of operationsincreases flexibility of WIP inventory usage
Modular Product Designallows for easier assemblyintegration can be performed at later points
Process RestructuringPostponement of operations (postpone operations
downstream)Reversal of operations (re-order adjacent operations)
Design for Logisticsdesigning products for cheaper transportation, with smaller
packaging to reduce freight costs
Postponement of Operations (Sherwin-Williams)
Important points to keep in mind• Segment customers based on service needs.• Modify the supply chain to meet these service
requirements profitably.• Customize the logistics network.• Develop forecasts collaboratively involving every
link of the supply chain.• Locate the leverage point where the product is
unalterably configured to meet a single requirement
• Delay product differentiation till the last possible moment.
Supply Chain Management – Key Issues
Overcoming functional silos with conflicting goals
PurchasingManufacturingDistributionCustomer Service/Sales
Few change- overs
Stable schedules
Long run lengths
High inventories
High service levels
Regional stocks
SOURCE MAKE DELIVER SELL
Low pur-chase price
Multiple vendors
Low invent-ories
Low trans-portation
Scientific Glass
Assessment alternatives: 5 questions1. Implement proposed policy changes?2. Consolidate warehouses?3. Outsource warehousing?4. Reduce the target total order fill-rate?5. Other considerations?
Scientific GlassHelpful Hints:1. What are the Options & savings with
each?1. Fill rate lowered & trunk stock
eliminated2. One Warehouse vs. logistics costs3. Outsource 4. Combination of the above?5. What about Cash????6. Look at incentives
Scientific Glass
Case Questions:What are the problems facing SG in January 2010,
how does the proposed changes fit?How much external funding will have to be raised in
2010 to finance ops & why?How so SG’s problems illustrate the relationship
between the number of warehouses and inventory levels?
What are the alternatives & how do you evaluate those?
What actions should Ava “really” propose?
Scientific Glass – Inventory CaseWhat we know:- Exceeded their target debt/capital of 40%- $2B market; 5% share- High volume / low mix? 3000SKUs- Niche player, custom SKUs, competitive
pressure.- Does the 3-6 month sales cycle matter to
SCM? - Inventory growing faster than sales- Emphasis on short lead-times & customer
satisfaction
Scientific Glass – Inventory CaseWhat do we know?- Dedicated Sales force – Trunk stock 32*$10K- 93% fill-rate, 2 week lead-time- Overage cost .6%. BO 10% GM.- Incentive is on fill-rate to 99%- 8 DCs * $750K + 2 new ones planned- Sales forecasted to grow 20%; Capacity
requested to support = $10M
Scientific Glass – Inventory Case
What do we know?- Warehouse Inventory <60days; 120K orders
processed- Used Min-Max system for each SKU- Period expenses of 1% of cogs – Too much?- Freight Factory -> DC is $.4 / Ilbs- Inventory accuracy was declining – what
happens?
Scientific Glass – Inventory CaseWhat do we know?- Policy changes proposed- Capex is low – 14% ($1.4M..)- Turns were 6- 25% is Raw + WIP; rest is FGI (good?)- Balance sheet – Inventory growth > Sales- Cash 6%
In the end, give trunk stock, consolidate DCs, lower fill rate to 90%,
SAVE $10M on Capex
Tyco Electronics- Provider of engineered electronic components, network
solutions, undersea telecommunication systems, and specialty products for customers in more than 150 countries
- Transportation Solutions (40%)Communications & Industrial Solutions (40%)Network Solutions (20%)Total $12.1 billionThe company has 97,000 employees operating in almost
50 countries. (FY2010)- Wilsonville location designs and distributes connectivity
devices for the medical industry- Look for layout, labor content, factory within a factory
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