Joint Inventory and Sourcing Strategy to Balance Efficiency versus Risk Christine Huang & Jierui (Jerry) Liu Advisor: Bruce C Arntzen May 22, 2014

AGENDA 1 Background 2 Methodology and Data Analysis 3 Key Insights 4 Recommendations

BACKGROUND Global leader in the medical device industry 4 Major Business Units - Orthopedics - Spinal care - Sports medicine - Neurosciences Single source practice

BACKGROUND What is the optimal strategy to mitigate the risk of supplier disruption? 1. Holding additional inventory 2. Establishing a second source 3. Tolerating the risk Scope - Orthopedics Business Unit - 320 SKUs of instruments

SKU CLASSIFICATION By Demand and Importance Importance High Low Core Non-Core Sum Fast Mover 130 32 162 Slow Mover 6 152 158 136 184 320 Monthly Demand ≥6 <6

Number of Core SKUs in Different Time-to-Recovery Non-Core SKUs: 13 months Core SKUs: 4.25 to 5.75 months Number of Core SKUs in Different Time-to-Recovery

Number of SKUs with Different Additional Inventory Monthly Demand * Time-to-Recovery Cycle Stock + Safety Stock Additional Inventory = Fast Movers: Safety Stock Equation Slow Movers: Entitlement Model (Poisson distribution) Number of SKUs with Different Additional Inventory Holding Cost: 9% Ordering Cost: $26

SECOND SOURCE $15,000 to $75,000 $30,000 Annual Cost ($655) * Life Cycle (10 years)

Expected Lost Revenue for each SKU = Probability of an SKU disruption * Potential Lost Revenue over Time-to-Recovery

Return on Assets (ROA)= Net Income Total Assets

ROA SENSITIVITY ANALYSIS

KEY INSIGHTS Proactive Strategies for Risk Management Holding additional inventory is a better strategy for most SKUs. Establishing a second source is an optimal strategy ONLY for SKUs with combination of high cost, high demand, and high demand variability.

KEY INSIGHTS “Probability of Supplier Disruption” is a key factor Strategy selection Total investment amount for risk management

RECOMMENDATIONS Take “holding additional inventory” as a primary strategy to reduce the risk of supplier disruption. Strengthen the qualification process of supplier selection as a fundamental solution. Use the “Application Tool” to identify the optimal strategy on the SKU level.

RECOMMENDATIONS General Information

RECOMMENDATIONS Individual SKU Information

RECOMMENDATIONS Output Information and Recommendation

Thank You!

Q&A