inventory issues in supply chains
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Inventory Issues in Supply Chains
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)
Inventory
Definition--The stock of any item or resource used in an organizationRaw materialsFinished productsComponent partsSuppliesWork in processPipeline
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)
Remember this:EOQ Model: Inventory Replenishment
Time
Inve
ntor
y
L
Q
ReorderPoint
Demand Rate (R)
Order
Me
Now
Nice Stable Demand!
And This:Service Level Model: How Much Safety Stock?
Inve
ntor
y
stock out
safety stock
cycle stock
Safety Stock = Buffer on top of forecasted demand to cover uncertainty
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.
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?
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
Clipboard
Rivet (2)
Iron Rod (3
in.)
Spring (1)
Spring Steel (10
in.)
Bottom Clip (1)
Top Clip (1)
Pivot (1)
Sheet Metal (8 in2)
Clip Assembly (10)
Sheet Metal (8 in2)
Sample Dependent Demand Structure (a BOM)
Board (1)
Pressboard (1)
Finish (2oz.)
MRP
Production Schedule
Material Requirements Planning - MRP
Time Phased
Order Point
Exception messages
Bills of Material
GeneralItem Data
Inventory Records
Input to Capacity Planning
Business Plan
Production Plan
Master Production Schedule
Material RequirementsPlanning
Capacity RequirementsPlanning
?
Shop Floor Control
Bills of Material
Work Center &Routing
Files
Inventory Records
Purchase Order Files
Purchasing SystemVendor QuotesP.O. Processing
ReceivingVendor Analysis
GeneralItem Data
NO
YES
?
Rough -cut CapacityAnalysis
MRP II
Key Assumption:
Everything is in-houseEverything supplied is supplied on time,
at the right quantity, at the right quality, to the right place
Not very realisticNeed othersOne way to cooperate: VMI
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
VMI in use today
In the Factory
At customer sites
Why use VMI?
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
Lehigh study
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
DistributorManufacturer Full truck load Efficient route
planning
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
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
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
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
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
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
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
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
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
Cooperation Always Work?
No,Need to have sufficient resources to last for
the long runNot everyone plays the same game
i.e., there may be goal misalignment
EXTRA SLIDES
development purchasing fabrication assembly packaging delivery
make-to-stock
engineer-to-order
make-to-order
Differences in Inventory by type of manufacturing
Supply Chain Practices - 1
operational improvements: reduction of lead timesevery day low price (EDLP)make delivery appointments
Supply Chain Practices - 2
exchange of information: use point-of-sale data (POS)electronic data interchange (EDI) internet orderingsharing sales and forecast datesharing capacity and planning datasharing inventory data transparency of “available to promise”
Supply Chain Practices - 3
supply chain alignmentblanket orders and call-off family contracts, capacity purchaseco-design, early supplier involvementECR: efficient consumer responseJIT-relationships and KanbanVMI (vendor managed inventory)CPFR (Collaborative planning, forecasting and
replenishment)
Data exchange
Stock level from the customerSales forecasts from the customerSales reports from the customerReplenishment orders from the supplier
Agreement Invoice the customer directly at shipmentor Consignment stock: supplier placing goods at a
customer location without receiving payment until after the goods are used or sold
Sharing data
The following information may be exchanged:business plan
promotion plannew product introduction information inventory dataPOS data and forecastproduction and capacity plan lead-time information
Supply Chain Practices - 4
supply chain redesign “consumer direct”design for logisticsdesign for local product adaptation postponed manufacturingchanges in transportation: mixed-SKU
truckloads, cross-dockingoutsourcing of logistics to 3PL or 4PL
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