Inventory Issues In Supply Chains
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Inventory Issues In Supply Chains Presentation Transcript

  • 1. Inventory Issues in Supply Chains
  • 2. Three ways of viewing inventory management
    • Inventory-is-inventory,
      • no matter what form, nor source
      • Techniques: EOQ systems
    • Internal
      • Technique: Material Requirements Planning
    • External: between the firm & it’s customers/suppliers
      • Techniques:
        • Just-in-time (JIT)
        • Collaborative planning, forecasting, and Replenishment (CPFR),
        • Vendor Managed Inventory (VMI)
  • 3. Inventory
    • Definition--The stock of any item or resource used in an organization
      • Raw materials
      • Finished products
      • Component parts
      • Supplies
      • Work in process
      • Pipeline
  • 4. Reasons to have inventory
    • Tactical Reasons
      • To decouple processes
      • To allow for variations in
        • Demand
        • Delivery
        • Processes
      • To allow for flexibility in schedules
      • To get a lower material price
    • Strategic Reasons
      • To make money on commodity variations
      • To control sources of supply (and create barriers to entry)
  • 5. Remember this: EOQ Model: Inventory Replenishment Time Inventory L Q Reorder Point Demand Rate (R) Order Me Now Nice Stable Demand!
  • 6. And This: Service Level Model: How Much Safety Stock? Inventory stock out safety stock cycle stock Safety Stock = Buffer on top of forecasted demand to cover uncertainty
  • 7. Economic Order Quantity Model Assumptions
    • Production is instantaneous . There is no capacity constraint and the entire lot is produced simultaneously.
    • Delivery is immediate . There is no time lag between production and availability to satisfy demand.
    • Demand is deterministic . There is no uncertainty about the quantity or timing of demand.
    • Demand is constant over time . In fact, it can be represented as a straight line, so that if annual demand is 365 units this translates into a daily demand of one unit.
    • A production run incurs a constant setup cost . Regardless of the size of the lot or the status of the factory, the setup cost is the same.
    • Products can be analyzed singly . Either there is only a single product or conditions exist that ensure reparability of products.
  • 8. Three Traditional Inventory Questions (Plus some modern ones)
    • What to order?
    • How many to order?
    • When to order?
    • Who manages the inventory?
    • Who owns the inventory & when?
    • When is the inventory paid for?
  • 9. Types of Demand from an Inventory Perspective
    • Independent demand items are those items that are sold to customers.
      • Traditional solutions : EOQ, Fixed-period Ordering, Two-Bin inventory systems
    • Dependent demand are those items whose demand is determined by other items.
      • Traditional solutions : Material Requirements Planning
    • Supplies are items that are not used directly in the production of independent demand items
      • Traditional solutions: Same as for independent demand
    • Dealing with dependent demand:
      • MRP - Materials Requirements Planning
      • MRP II - Manufacturing Resources Planning
      • ERP - Enterprise Resource Planning
  • 10. Sample Dependent Demand Structure (a BOM) Clipboard Rivet (2) Iron Rod (3 in.) Spring (1) Spring Steel (10 in.) Bottom Clip (1) Top Clip (1) Pivot (1) Sheet Metal (8 in 2 ) Clip Assembly (10) Sheet Metal (8 in 2 ) Board (1) Pressboard (1) Finish (2oz.)
  • 11. MRP Production Schedule Material Requirements Planning - MRP Time Phased Order Point Exception messages Bills of Material General Item Data Inventory Records Input to Capacity Planning
  • 12. MRP II Business Plan Production Plan Master Production Schedule Material Requirements Planning Capacity Requirements Planning ? Shop Floor Control Bills of Material Work Center & Routing Files Inventory Records Purchase Order Files Purchasing System Vendor Quotes P.O. Processing Receiving Vendor Analysis General Item Data NO YES ? Rough -cut Capacity Analysis
  • 13.  
  • 14. Key Assumption:
    • Everything is in-house
    • Everything supplied is supplied on time, at the right quantity, at the right quality, to the right place
    • Not very realistic
      • Need others
      • One way to cooperate: VMI
  • 15. VMI: Vendor Managed Inventory
    • Other names:
      • Continuous replenishment Planning (CRP),
      • Supplier Managed Inventory (SMI)
    • the supplier is responsible for maintaining the customers inventory management. The supplier has access to the customers inventory data and is responsible for generating purchasing orders
  • 16. VMI in use today
    • In the Factory
    • At customer sites
  • 17. Why use VMI? Lehigh study 33.4% 18.1% 0% 5% 10% 15% 20% 25% 30% 35% Without VMI With VMI Comparison of Stockouts between Firms with VMI and without VMI 5.3 5.6 5.1 5.2 5.3 5.4 5.5 5.6 5.7 Without VMI With VMI Comparison of Inventory Turns Between Firms with VMI and without VMI
  • 18. VMI - Advantages
    • better forecasts (POS)
    • lower inventory
    • less errors in orders placed
    • leveling of production capacity
    • less stock-out
    • lower inventory
    • better service level
    • lower planning & ordering costs
    Distributor Manufacturer
    • Full truck load
    • Efficient route planning
  • 19. But should you cooperate? Two Game Theory Perspectives on SCM
    • Zero-sum game
      • Adversarial
      • I-win-you-lose approach
        • E.g., if your slice of the pie is bigger, mine must be smaller
      • Short term is the only term
    • Synergistic game
      • Cooperative
      • Size of the “pie” increases
      • Both short and long term is important
  • 20. Examples of the two types
    • “ In my opinion [Ford] seems to send its people to ‘hate school’ so that they learn how to hate suppliers. The company is extremely confrontational. After dealing with Ford, I decided not to buy its cars.
            • Senior Executive, supplier to Ford, October 2002
    • Toyota to helped us dramatically improve our production system. We started by making one component, and as we improved, Toyota rewarded us with orders were more components. Toyota is our best customers.
            • Senior executive, supplier to Ford, GM, Chrysler, and Toyota, July 2001.
    Source: Liker & Choi, "Building a deep supplier relationships," Harvard Business Review , 2004
  • 21. Key Steps in the Supplier-Partnering Hierarchy
    • Understand how your suppliers work.
      • i.e., what do they really sell?
    • Turn supplier rivalry into opportunity.
      • Team approach vs adversarial
    • Supervise your suppliers
      • Everyone needs coaching, but not a dictator
    • Share information intensively but selectively.
      • Give enough information and latitude based on current relationship
    • Conduct joint improvement activities.
      • Help the entire team, not just one player
    Source: Liker & Choi, "Building a deep supplier relationships," Harvard Business Review , 2004
  • 22. The Foundation: Understand how your suppliers work
    • Learn about suppliers business.
    • Go see how suppliers work.
    • Respect supplier's capabilities.
    • Commit to cooperating.
    • Why?
      • Shows that the buyer is in it for the long run
      • What elements of the HC supply chain are most interested in this?
    Source: Liker & Choi, "Building a deep supplier relationships," Harvard Business Review , 2004
  • 23. Turn supplier rivalry into opportunity
    • Source each component from two or three vendors.
    • Create compatible production philosophies and systems.
    • Set up joint ventures with existing suppliers to transfer knowledge and maintain control.
    • Why? Examples?
    Source: Liker & Choi, "Building a deep supplier relationships," Harvard Business Review , 2004
  • 24. Supervise your suppliers
    • Send monthly report cards to core suppliers.
    • Provide immediate and constant feedback.
    • Get senior managers involved in problem solving.
    • Why? Examples?
    Source: Liker & Choi, "Building a deep supplier relationships," Harvard Business Review , 2004
  • 25. Develop suppliers' technical capabilities
    • Build suppliers' problem solving skills.
    • Develop a common lexicon.
    • Hone core suppliers' innovation capabilities.
    • Why? Examples?
    Source: Liker & Choi, "Building a deep supplier relationships," Harvard Business Review , 2004
  • 26. Share information intensively but selectively.
    • Set specific times, places and agendas for meetings.
    • Use rigid formats for sharing information.
    • Share formation in a structured fashion.
    • Insist on accurate data collection.
    • Why? Examples?
    Source: Liker & Choi, "Building a deep supplier relationships," Harvard Business Review , 2004
  • 27. Conduct joint improvement activities
    • Exchange best practices with suppliers.
    • Initiate ties and projects at suppliers facilities.
    • Setup supplier study groups.
    • Can you thing of a non-Japanese firm that does all these actions?
    Source: Liker & Choi, "Building a deep supplier relationships," Harvard Business Review , 2004
  • 28. Cooperation Always Work?
    • No,
      • Need to have sufficient resources to last for the long run
      • Not everyone plays the same game
        • i.e., there may be goal misalignment
  • 29.
  • 30. Differences in Inventory by type of manufacturing development purchasing fabrication assembly packaging delivery make-to-stock engineer-to-order make-to-order
  • 31. Supply Chain Practices - 1
    • operational improvements:
      • reduction of lead times
      • every day low price (EDLP)
      • make delivery appointments
  • 32. Supply Chain Practices - 2
    • exchange of information:
      • use point-of-sale data (POS)
      • electronic data interchange (EDI)
      • internet ordering
      • sharing sales and forecast date
      • sharing capacity and planning data
      • sharing inventory data
      • transparency of “available to promise”
  • 33. Supply Chain Practices - 3
    • supply chain alignment
      • blanket orders and call-off
      • family contracts, capacity purchase
      • co-design, early supplier involvement
      • ECR: efficient consumer response
      • JIT-relationships and Kanban
      • VMI (vendor managed inventory)
      • CPFR (Collaborative planning, forecasting and replenishment)
  • 34. Data exchange
        • Stock level from the customer
        • Sales forecasts from the customer
        • Sales reports from the customer
        • Replenishment orders from the supplier
        • Invoice the customer directly at shipment
        • or
        • Consignment stock: supplier placing goods at a customer location without receiving payment until after the goods are used or sold
  • 35. Sharing data
    • The following information may be exchanged:
    • business plan
      • promotion plan
      • new product introduction information
      • inventory data
      • POS data and forecast
      • production and capacity plan
      • lead-time information
  • 36. Supply Chain Practices - 4
    • supply chain redesign
      • “consumer direct”
      • design for logistics
      • design for local product adaptation
      • postponed manufacturing
      • changes in transportation: mixed-SKU truckloads, cross-docking
      • outsourcing of logistics to 3PL or 4PL