1 Supply Chain Management A Holistic View of Inventories

2 Supply Chain Definition: Set of interconnected nodes integrating inventory flows and stocks from raw materials to finished goods provided to final customers Goal: Overall, system-wide coordination of inventory stock and flows to improve inventory efficiency throughout the system Supply chain management (SCM)

3 Inventories Four categories: –Raw materials (components, subassemblies, or materials purchased from suppliers – RM) –Work-in-process (unfinished parts or products released in a production system – WIP) –Finished goods inventory (finished products not yet sold to customers – FGI) –Spare parts (components used to repair or maintain equipment – SP)

4 Inventories Reasons for holding inventories vary according the type of inventory Raw materials: –Batching (cycle stock) –Variability (safety stock / planned-safety lead time) –Obsolescence –Reasons are interrelated

5 Processing Moving Queuing Wait for Batch Wait to Match Inventories WIP inventory: –Queuing (cause: high utilization - flow/process variability) –Processing –Waiting for batch (cause: large batch size and no lot splitting) –Moving –Waiting to match (cause: variability / no synch)

6 Inventories FGI: –Customer responsiveness (make-to-stock) –Batch production –Forecast errors –Production variability (compensate yield loss) –Seasonality (built-ahead inventory) –Factors are interrelated (seasonality-forecast)

7 Inventories FGI (continued): –View FGI holistically and use alternative production techniques (make/assemble-to- order, excess capacity, seasonal labour) Spare parts inventory –Service (parts available for repairs) –Purchasing / production lead times –Batch replenishment –Similarities/differences with FGI (service level)

8 Managing Inventory (RM) Goal: Have RM available when needed by the production process without carrying any more inventory than necessary –Visibility improvement (forecast-cycle time- schedule) –ABC classification (sophisticated mgt for A) –Just-in-time (frequent deliveries) –Appropriately setting safety stocks and safety lead times for purchased components

9 Managing Inventory (WIP) Goal: Minimize cycle time, which is equivalent to minimize WIP, according to Little’ s law (CT=WIP/TH) –Reduce queuing (increase capacity, FCS, set- ups, quality, reliability/maintainability) –Reduce wait for batch (lot splitting, layout) –Reduce wait to match (common work backlog, balanced batching)

10 Managing Inventory (FGI) Goal: Buffer between production and demand to insulate customers from cycle time, absorb variability and level-out capacity –Improve forecasting –Dynamic lead-time quoting –Cycle time (and variability) reduction –Late customization-postponement –Balancing labor, capacity and inventory

11 Managing Inventory (SP) Goal: To keep production process uninterrupted –Stratifying demand Preventive maintenance related parts handled using standard MRP logic, i.e., backwards planning with actual lead times Emergency repairs related parts handled using some safety stock, especially for critical components (army-navy example)

12 Multi-echelon Supply Chains Basic challenge: Balance the efficiency of central inventories with the responsiveness of distributed inventories to provide high system performance without excessive tied- up capital to non-value added resources –Central inventories = variability pooling, thus less safety stock holding –Distributed inventory = swifter response to demand due to geographic proximity

13 Multi-echelon Supply Chains Typical configurations: serial or arborescent Configuration is a decision variable (number or levels, warehouse locations, interconnection policies – Logistics)

14 Performance Measures Fill rates –Fraction of demand met out of stock Backorder level –Average number of orders waiting to be filled Lost sales –Orders lost due to stock-outs Probability of delays –Likelihood of activity delay due to lack of inventory

15 Bullwhip Effect Channel alignment or coordination of policies between various supply chain levels –Information sharing –Inventory control –Transportation –Etc Simple approach: Treat each level independently / local optimum policies

16 Bullwhip Effect Easy to implement and natural for “castle”- based organizations However, it leads to very poor performance at the overall supply chain –Inefficiency (inventory held in inefficient quantities and at inefficient locations) –Bullwhip effect: amplification of demand fluctuations from the bottom of the supply chain to the top

17 Bullwhip Effect

18 Bullwhip Effect Causes Batching (amplifications in order quantities due to economies of scale) Use of forecasting (independent decision- makers amplify variability) Remedies Reduce cost of orders, consolidate orders for Full Truck Load (FTL), or use 3PL Share demand data, vendor-managed- inventory, lead time reduction

19 Bullwhip Effect Causes Price discounts or sudden increases Gaming behaviour (exaggerate orders or order from multiple sources - cancel when demand is satisfied) Multi-echelon Remedies Every-day low price, Activity-based costing Allocate inventory according to past sales, reduce lead times, use stringent time fences Eliminate layers

20 Conclusions Understand why is inventory held Look for structural changes Use empirical evaluation procedures Cycle time reduction is crucial Coordinate levels in multi-echelon SC Coordinate incentive systems & objectives