American Lighting Products What drives inventory in this system? Safety stock at the MDC’s Shipping quantities to the MDC’s (Truckload) Production lot sizes Number of products ...

Inventory for a product What is average system inventory for a product?

Net System Inventory Objective “Set for each product item at each MDC based on historical sales levels” “The NSO is the reorder point for the factory to produce another lot of product” “the Average system inventory for a product is the NSO + 1/2 a lot size”

Is this Consistent? “The NSO is the reorder point for the factory to produce another lot of product” “the Average system inventory for a product is the NSO + 1/2 a lot size”

System Inventory Inventory NSO Production Time

At an MDC Truckload Inventory Base Stock Level Production begins Time

What is Base stock level at MDC? Expected “Lead Time” Demand Demand from time MDC hits base stock level to time first truck load arrives Production times delivery lead times time till system inventory hits NSO Safety stock to cover for variability

What can distribution do? Lot sizes? Expected lead time demand? Can consolidation affect this? How? Safety stock?

Safety Stock Customer Service level Variance in lead time demand Estimating effect of consolidation Square root law Poisson Demand Forecast Error

Square Root Law (For Safety Stock!) Two independent random variables X with mean  and variance 2 Y with mean  and variance 2 What about X+Y? 2  2 2 Standard Deviation of “Consolidated MDC” 2 

Poisson Demand If we don’t know variance… Assume Poisson demand variance = mean Std Deviation of Lead Time Demand = square root of Average Lead Time Demand

Forecast Error Forecast errors due to variability of demand Forecast Accuracy Product at MDC <50% Product 50-70% Product Family 70-90% Market 90-100%

What is the Safety Stock? Poisson Model At the very worst all 700 products have the same volume Safety stock < 2*700*sqrt(Volume/700) That gives total safety stock of <2 million That’s less than 8% of inventory!

Production Lead Time (Again) Inventory To MDC 1 To MDC 3 Truck load Time

Reducing Average Lead Time Demand Base Stock at MDC depends on how many MDCs carry the same product With 8 MDCs Expect to wait till the fourth truck With 4 MDCs Expect to wait till the 2nd truck

What is Base Stock Level? Safety Stock Expected Lead Time Demand Inbound lead time < 7 days Guess at time to load a truck Total Volume = nearly 5,000 truckloads 2,500 truckload per plant 50 truckloads per week per plant 7 truckloads per day Difference between 2nd truck and 4th is a matter of hours.

Conclusions Safety Stock < 8% of inventory Expected lead time demand insensitive to consolidation Distribution cannot get close to 20% inventory reduction without affecting customer service levels

How to Reduce Inventory Smaller lot sizes at the factory Spread out 3 weeks maintenance and vacations Trim product line

Critique What did we ignore? Where else can Distribution look for inventory reductions?

NSO vs Base Stock Time till System reaches NSO after MDC reaches base stock Interested in the Mean? std. Deviation?

Guesses Mean is zero Std. Dev. grows with the number of MDCs (simple simulation supports this)

NSO effects How big is the effect? Can we change replenishment policy to eliminate effect? Can we reduce effect with consolidation?

What is NSO? Estimate NSO due to this delay Probably significant because we have such poor service levels (as low as 78%) with such high inventory levels. How to get better numbers? Ask (not an option here) Analysis Simulation