Days Of Supply Protects the plant from variation between forecasted and actual usage between vessels, and vessel delays

Sources of Variation Usage Lead time Forecast Accuracy …

What DoS Does More days of supply means –More inventory, warehouse space, etc –Less airfreight

DoS: The Standard View New Shipment arrives Days of Supply 6 Days of Supply in Inventory = 6*32 = 192 Weekly vessels deliver 6 days of supply 6*32 = 192 Average inventory is 9 days of supply

Safety Lead Time as a quantity Safety Lead Time: The next X days of forecasted demand But daily forecasts are not fixed

The Ship-to-Forecast Policy Periodic shipments every T days Safety lead time of S days Each shipment is planned so that after it arrives we should have S + T days of coverage. Coverage: Inventory on hand should meet S+T days of forecasted demand

If all goes as planned Safety Lead Time: The next X days of forecasted demand Planned Inventory Ship to this level

Safety Lead Time Airfreight & Inventory holding costs for 5 engines 6-8 days is best Reducing Safety Lead Time further will increase airfreight

Forecast Accuracy If we had accurate forecasts… Know –What to order –How much to order –When to order

Port Delays Source: Logistics Management December 3, 2004 Sailing time only 11 days!

Forecast Accuracy Doubling Forecast Accuracy Saves ~9% What can we do about in-transit inventory?

In-Transit Inventory Move closer so goods don’t travel so far Use faster modes so goods don’t travel so long Eliminate unnecessary travel, hand-offs and delays

BMW Case Wackersdorf Postpone packaging Reduce LT Reduce variability Use many ports

Forecast Accuracy Doubling Forecast Accuracy Saves ~9% What can we do about in-plant inventory?

In-Plant Inventory Increase frequency of deliveries –Reduces delivery size and so inventory –It also reduces risk and so safety stock –Challenge: Can we do both – increase frequency and reduce lead time?

Frequency More shipments means less inventory and less airfreight airfreight Total Avoidable Cost for 5 engines Change:25% Change:9% Change:7% Change:14%

Traditional Basics Basic tool to manage risk Time Stock on hand Safety Stock Order placed Lead Time Actual Lead Time Demand Avg LT Demand Experience risk MORE often!!! Should you increase your safety stock?

Impact of Frequency YearlyWeeklyTwiceThrice

Frequency Time Stock on hand Reorder Point Order placed Lead Time Reorder Point Actual Lead Time Demand Order Quantity Actual Lead Time Demand How much stock is available to cover demand in this period? Order-up-to level TL

Safety Stock in Periodic Review Probability of stock out is the probability demand in T+L exceed the order up to level, S P(X T+L >S) Order Up to Level: S= D(T+E[L]) + safety stock As T gets smaller: variance in Demand (X T+L ) is smaller: (T+E[L])  D 2 +D 2  L 2 Keep SS constant: But we face the risk more often

B

Impact of Frequency No effect on pipeline inventory Reduces inventory at the customer Reduces risk we will have to expedite Must have mixed deliveries

Impact of Frequency Ordering Cost!!!! Ocean Containers: –Annual Contract – Pay per container 1 Truck/week from each supplier Increase frequency to 3 trucks/week costs increase significantly, unless you can pool suppliers to a truck.

Frequency Total Avoidable Cost for 5 engines Change:25% Change:9% Change:7% Change:14%

Achieving Frequency Ocean carriers make frequency hard to achieve...

HK-Long Beach Day of Week Arrival for fastest 10% of transits Day of Week Arrival for fastest 30% of transits Day of Week Arrival for fastest 60% of transits

Hamburg - Charleston Day of Week Arrival for fastest 10 % of transits Day of Week Arrival for fastest 20 % of transits Day of Week Arrival for fastest 30% of transits

The Point These schedules –Don’t offer speed and frequency to shippers –Don’t use port capacity effectively –Contribute to congestion –Reduce reliability

Air Freight What can we do to reduce air freight? –Better control strategies –Better forecasts(!!!) –…

Air Freight What can we do to reduce air freight? –Postpone packaging so forecasts are better –Increase frequency so risks are lower –…

So… Different types of inventories: Different factors –In-plant –In-transit Expedites

Now What? What can BMW do?

The Problem Find the right balance between –Inventory cost –Transportation cost

The Ship-to-Forecast Policy Periodic shipments every T days Safety lead time of S days Each shipment is planned so that after it arrives we should have S + T days of coverage. Coverage: Inventory on hand should meet S+T days of forecasted demand

If all goes as planned Safety Lead Time: The next X days of forecasted demand Planned Inventory Ship to this level

Ship-to-Forecast Is this a good strategy? Motivation: constant in-plant inventory Effects: –Changing demands on mfg and transport –Heavy reliance on forecasts –Complexity That can’t be achieved!

Ship-to-Usage Motivation: constant total inventory Effects: –Changing demands on mfg and transport –Reduces reliance on forecasts –Reduces complexity –Have to accommodate longer term forecasts That’s doable!

New Strategy Ship-to-Average –Average usage or longer term forecast Motivation: flex inventory, keep mfg and shipments constant Effects: –Relatively constant demands on production and transport capacity –Reduced reliance on forecasts –Reduced complexity –Have to manage inventories

Ship-to-Average Forecast error behavior

Managing Inventory Inventory swings in all strategies Two inventories to manage –In-Plant: Parts must be available –Total: What you pay for and can control (without expediting) Proposed Mechanism: Control Band –When In-Plant inventories are “too low”, expedite up to a fixed level q –When Total inventory is “too high” (reach S), reduce shipments until it reaches a fixed level Q With no lead time, this is a best strategy

Role of Inventory The Old Idea: Ship to forecast and maintain (relatively) constant (low) inventory levels Average Daily Volume 3,400 cubic feet 90% of a truck Standard Deviation in Daily Volume 1,850 cu. ft. 50% of a truck Variability forces roughly 8 expedites per month

New Idea Forecasts are hopeless Inventory buffers manufacturing & transportation Ship a constant quantity and let inventory swing

Curtail shipments to control inventory Increase shipments to maintain supply Application with no LT

Control Band Requirements: –Occasionally calculate Average Qty and the controls: q, Q, S Advantages: –Easy on supplier and carriers – same every day –If supplier and carriers can “see” inventories, they can anticipate controls

Ship-to-Average & Forecasts

Shipments are nearly constant The Difference Expedite when inventory is low Inventory rises and falls

When pipeline inventory is too high The Difference Reduce shipments

Shipment Comparison ship-to-forecast ship-to-average (shipment adjustment: 66%) (shipment adjustment: 14%) Definition: Shipment Adjustment: shipment quantity changes more than 10% compared to previous one

Ship-to-Average Easier to manage supplies Suppliers and service providers can more efficiently plan production and manage labor Consistent and reliable supply makes managing expedites simpler

Policy Performance Total avoidable Costs* (In plant Inv. + In Transit Inv. + Expediting) Shipment adjustments S-t-FS-t-AS-t-FS-t-A Part 1100%99.44%66%14% Part 2100%99.64%70.79%23.68% Part 3100%93.53%73.45%41.23% Part 4100%94.30%60.18%43.86% Part 5100%99.55%64.60%8.77% Part 6100%96.13%76.97%47.37% Part 7100%98.33%68.14%19.30% * Ocean Transportation costs not included

Summary Forecasts important, but… Frequency is critical: –Reduced inventory –Risk Strategies –Ship-to-Forecast –Ship-to-Usage –Ship-to-Average

The Point Supply chains –Globalization –“Lean” –Product Complexity Supply chain design includes –Number and location –Frequency of service –What processes where –Managing uncertainty and variability