ElecComp Case Large contract manufacturer of circuit boards and other high tech parts. About 27,000 high value products with short life cycles Fierce competition => Low customer promise times < Manufacturing Lead Times High inventory of SKUs based on long-term forecasts => Classic PUSH STRATEGY High shortages Huge risk PULL STRATEGY not feasible because of long lead times

New Supply Chain Strategy OBJECTIVES: Reduce inventory and financial risks Provide customers with competitive response times. ACHIEVE THE FOLLOWING: Determining the optimal location of inventory across the various stages Calculating the optimal quantity of safety stock for each component at each stage Hybrid strategy of Push and Pull Push Stages produce to stock where the company keeps safety stock Pull stages keep no stock at all. Challenge: Identify the location where the strategy switched from Push-based to Pull-based Identify the Push-Pull boundary Benefits: For same lead times, safety stock reduced by 40 to 60% Company could cut lead times to customers by 50% and still reduce safety stocks by 30%

Notations Used FIGURE 3-11: How to read the diagrams

Trade-Offs If Montgomery facility reduces committed lead time to 13 days assembly facility does not need any inventory of finished goods Any customer order will trigger an order for parts 2 and 3. Part 2 will be available immediately, since it is held in inventory Part 3 will be available in 15 days 13 days committed response time by the manufacturing facility 2 days transportation lead time. Another 15 days to process the order at the assembly facility Order is delivered within the committed service time. Assembly facility produces to order, i.e., a Pull based strategy Montgomery facility keeps inventory and hence is managed with a Push or Make-to-Stock strategy.

Current Safety Stock Location FIGURE 3-12: Current safety stock location

Optimized Safety Stock Location FIGURE 3-13: Optimized safety stock

Current Safety Stock with Lesser Lead Time FIGURE 3-14: Optimized safety stock with reduced lead time

Supply Chain with More Complex Product Structure FIGURE 3-15: Current supply chain

Optimized Supply Chain with More Complex Product Structure FIGURE 3-16: Optimized supply chain

Key Points Identifying the Push-Pull boundary Taking advantage of the risk pooling concept Demand for components used by a number of finished products has smaller variability and uncertainty than that of the finished goods. Replacing traditional supply chain strategies that are typically referred to as sequential, or local, optimization by a globally optimized supply chain strategy.

Local vs. Global Optimization FIGURE 3-17: Trade-off between quoted lead time and safety stock

Global Optimization For the same lead time, cost is reduced significantly For the same cost, lead time is reduced significantly Trade-off curve has jumps in various places Represents situations in which the location of the Push-Pull boundary changes Significant cost savings are achieved.

Problems with Local Optimization Prevalent strategy for many companies: try to keep as much inventory close to the customers hold some inventory at every location hold as much raw material as possible. This typically yields leads to: Low inventory turns Inconsistent service levels across locations and products, and The need to expedite shipments, with resulting increased transportation costs

Integrating Inventory Positioning and Network Design Consider a two-tier supply chain Items shipped from manufacturing facilities to primary warehouses From there, they are shipped to secondary warehouses and finally to retail outlets How to optimally position inventory in the supply chain? Should every SKU be positioned both at the primary and secondary warehouses?, OR Some SKU be positioned only at the primary while others only at the secondary?

Integrating Inventory Positioning and Network Design FIGURE 3-18: Sample plot of each SKU by volume and demand

Three Different Product Categories High variability - low volume products Low variability - high volume products, and Low variability - low volume products.

Supply Chain Strategy Different for the Different Categories High variability low volume products Inventory risk the main challenge for Position them mainly at the primary warehouses demand from many retail outlets can be aggregated reducing inventory costs. Low variability high volume products Position close to the retail outlets at the secondary warehouses Ship fully loaded tracks as close as possible to the customers reducing transportation costs. Low variability low volume products Require more analysis since other characteristics are important, such as profit margins, etc.