Multi echelon-inventory-optimization

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Multi echelon-inventory-optimization

  1. 1. 18th May 2011
  2. 2. Table of Contents Need for Inventory Underlying Principles Current Philosophies of Inventory Mgmt Pros and Cons of IM Principles TOC and MEIO Primary Needs of an Effective IM System MapMySupplyChain5/27/2011 Strictly Private & Confidential 2
  3. 3. Need for Inventory Inventory Effective IM MapMySupply Principles Philosophies Pros and Cons TOC and MEIO Need System Chsin  To tide against Supply Chain Uncertainities – Transporter uncertainity, Supplier Lead Time, etc.  Ensure all Customers, at every location are served at the right time, with the right quantity  Normally, Sales People would like to Stock up, as much Inventory as possible, so that Stock Out scenarios are ruled out  On the other hand, the CFO would like to cut inventories, so that the capital costs are kept in check  If Planned properly, Inventory will have a positive impact on Customer Satisfaction  If Planning of Inventory is inaccurate, then it leads to either:  Stock outs, Customer Dissatisfaction, lost sales and indirect cost increase or  Increase in Capital Costs, Obsolescence and raises Operational challenges5/27/2011 Strictly Private & Confidential 3
  4. 4. Underlying Principles Effective IM MapMySupply Inventory Need Principles Philosophies Pros and Cons TOC and MEIO System Chsin  Underlying assumptions that define a Supply Chain Inventory model is often conflicting. This is depicted in the figure. Underlying principle conflict5/27/2011 Strictly Private & Confidential 4
  5. 5. Current Philosophies of Inventory Management Effective IM MapMySupply Inventory Need Principles Philosophies Pros and Cons TOC and MEIO System Chsin  Inventory Management in the current context, is designed to be held closer to the customers  But not all products/SKUs can be held close to the Customers, at all times. This means there would be further classification of SKUs as fast moving, slow moving, etc. and then the fast moving SKUs will be stocked closer to the Customer. At the same time, the slow moving will be held closer to the place of manufacture  This leads to formation of echelons. The fresh order receipts, are at the Regional Warehouse or Motherhouse and the SKUs are then moved to a local Distribution for further storage, before dispatch  The issues with Multi - echelon formation, is that Inventory Planning, at times are carried out for One – echelon, without taking into consideration its effect on other echelons  This may either lead to excess Inventory stocking in one or more of the echelons OR stock out situation in any one of the echelons Plant Regional Warehouse Local Warehouse Customer5/27/2011 Strictly Private & Confidential 5
  6. 6. Current Philosophies of Inventory Management Effective IM MapMySupply Inventory Need Principles Philosophies Pros and Cons TOC and MEIO System Chsin  Further, the quanity that needs to be held at each level is a question mark  A company may have around 1000 SKUs, out of which 10 may be fast moving, in one market and slow moving in 4 other markets.Similarly few other SKUs may be fast moving in a totally different market. So how much Inventory should we hold?  To be safe few companies, may not only stock excess inventory in the local warehouses but also in the regional warehouses  At one end the supply chain the question is how much to produce? And at the other end the question is how much will be consumed? Plant Regional Warehouse Local Warehouse Customer Quantity Quantity SKU SKU5/27/2011 Strictly Private & Confidential 6
  7. 7. Pros and Cons of IM Philosophies Effective IM MapMySupply Inventory Need Principles Philosophies Pros and Cons TOC and MEIO System Chsin Sr. No. Pros Cons 1. Customer Demands may The Inventory Carrying Cost to meet Customer be met Demand is too high 2. The Regional Warehouse The indirect cost of movement of inventory between can act as an extended Regional and Local warehouse may be high, in Buffer Stock for Local addition to the Inventory Carrying Cost, at both Warehouses places Excess Inventory may become Obsolete, if Market dynamics change Production of Products, with added buffers, may lead to shortfalls in production of other Products Sudden spike in demand for a particular product, may become difficult to meet Agility of the Supply Chain takes a hit Excess Inventory may have adverse effect on the Financials5/27/2011 Strictly Private & Confidential 7
  8. 8. Theory of Constraints and MEIO TOC and Effective IM MapMySupply Inventory Need Principles Philosophies Pros and Cons MEIO System Chsin  Theory of Constraints (TOC) has a different view to Multi – Echelon Inventory Optimization (MEIO) from the one we have already discussed  The Concept so used is called, Demand Pull and Buffer Management (DPBM) Demand Pull  The concept says, that instead of Placing the Inventory closer to the Customer, it subscribes to the principle of holding the Inventory closer to the source (Factory, in this case)  The Regional warehouse only maintains stock needed for replenish lead time  Once the customer places an order for a particular product with the Regional Warehouse, the ordered quantity will be simultaneously reported to the Regional Warehouse  The factory will deliver the products promptly, once they are produced5/27/2011 Strictly Private & Confidential 8
  9. 9. Theory of Constraints and MEIO TOC and Effective IM MapMySupply Inventory Need Principles Philosophies Pros and Cons MEIO System Chsin Buffer Management  Buffer Management is a method used to monitor the inventory in Factory or Regional Warehouse  In TOC, the biggest quantity required in replenish lead time is regarded as the target buffer stock  Once the target buffer stock has been determined, it is divided into 3 parts  Neglected Zone (Green Zone)  Warning Zone (Yellow Zone)  Rush Zone (Red Zone)  If Inventory is in the Neglected Zone, it is required to reduce the Inventory  If Inventory is in the Rush Zone, it is required to increase Inventory  By using Buffer Management, the Inventory can be maintained at an appropriate level, without running out of stock5/27/2011 Strictly Private & Confidential 9
  10. 10. Theory of Constraints and MEIO TOC and Effective IM MapMySupply Inventory Need Principles Philosophies Pros and Cons MEIO System Chsin Performance Evaluation  Further, in the aspect of Performance Evaluation – the commonly used terms like Inventory Turn – Over Rate and Stock – Out Rate are modified to TDD and IDD  TDD index measure reliability. That is it measures “How much work is uncompleted”  IDD index measures effeciency. That is “How much work is overdone” TDD  When the company or department is unable to meet the deadline for delivery, TDD is index will be computed to show the level of incompletion.  The computation is to multiply the effective production value by the number of days delayed  The bigger the TDD value, the longer is the order delayed, which means more damages to the company  An Organization or department should follow the principle of zero TDD5/27/2011 Strictly Private & Confidential 10
  11. 11. Theory of Constraints and MEIO TOC and Effective IM MapMySupply Inventory Need Principles Philosophies Pros and Cons MEIO System Chsin IDD  When a company produces more than enough products, it is considered ineffecient  This not only raises the cost of Inventory but also wastes raw materials  The computation is to multiply the Inventory Value by the Total Time Spent in the warehouse  Bigger the IDD value means, higher overstock which leads to higher Inventory Costs and delivery delays due to insufficient raw materials, resources for manufacturing other products  Therefore, company or department should strive to lower the IDD5/27/2011 Strictly Private & Confidential 11
  12. 12. Primary Needs of an Effective IM System Effective IM MapMySupply Inventory Need Principles Philosophies Pros and Cons TOC and MEIO System Chsin A System which makes an Inventory Management System effective should factor in:  Demand Forecasts  Manufacturing Capcities  Supplier Capabilities  Integrated Planning Environment  Linking Planned parameters (TDD, IDD, etc.) with key Financial Measures That would basically mean, an Organization can review supply chain planning decisions based on their financial impact, especially when it comes to revenue, profitability, and return-on-assets. If in addition to these parameters, an actual real-time end to end visibility is brought in, then the decision making and planning, can have an actual view of the impact of thier decisions5/27/2011 Strictly Private & Confidential 12
  13. 13. MapMySupplyChain Effective IM MapMySupply Inventory Need Principles Philosophies Pros and Cons TOC and MEIO System Chsin 1. All of the essential parameters that we discussed are covered in the product – MapMySupplyChain 2. The product uses Google Map to provide location of Factories, Warehouses, Markets and Inventory availability SKU wise 3. This allows the Management and Operations Team likewise to see their Market in front of them 4. It further alllows the simulation of decisions, even before the decision is actually implemented. Which means, the plan to produce extra quantity of a partcular product, can be traced right up to the forecasted consumption, in a particular market. So, if a particular warehouse runs out of stock, then an immediate corrective action, can be taken, at the simulation stage itself 5. The product can be further used to Optimize Inventory, Resource, Location, Network, etc.5/27/2011 Strictly Private & Confidential 13
  14. 14. MapMySupplyChain – MEIO Solution Effective IM MapMySupply Inventory Need Principles Philosophies Pros and Cons TOC and MEIO System Chsin 1.Each echelon and its entities Warehouses are depicted on Google Map Plant as per its location 2.Location based replenishment policy like safety stock, cyclic stock, replenish lead time, replenish quantity and replenish triggering point, can be configured 3.Simulate complete end to end supply chain with each echelon’s entities 4.Heuristic based optimization approach and encapsulates TOC fundamentals 5.Intimate business users as replenish trigger point comes5/27/2011 Strictly Private & Confidential 14
  15. 15. MapMySupplyChain – MEIO Solution Effective IM MapMySupply Inventory Need Principles Philosophies Pros and Cons TOC and MEIO System Chsin 6. Optimize ordering policy like Plant Warehouses replenish quantity, lead time & triggering point 7. Adaptive enough to incorporate change in supply & demand fluctuations 8. Makes system immune to supply & demand variations 9. Easy to use and implement, same experience as with excel - spreadsheet solution5/27/2011 Strictly Private & Confidential 15
  16. 16. MapMySupplyChain – TOC Approach Effective IM MapMySupply Inventory Need Principles Philosophies Pros and Cons TOC and MEIO System Chsin 1.All Supply Chain entities are Warehouses mapped on the interactive Map Plant 2.Lead time drives ordering policy at each location 3.IDD & TDD are computed and optimized 4.At every echelon Buffer Inventory, with largest replenish lead time becomes critical and hence requires zone computation for replenishments 5.The production run is in batches, as per need and maximum Inventory is held closer to the Manufacturing Plant 6.The complete supply chain is based on the Demand Pull and Buffer Management Principle5/27/2011 Strictly Private & Confidential 16

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