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

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

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

4. 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

5. 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

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

7. 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

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

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

10. Return on Assets (ROA)= Net Income Total Assets

11. ROA SENSITIVITY ANALYSIS

12. 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.

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

14. 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.

15. RECOMMENDATIONS
General Information

16. RECOMMENDATIONS
Individual SKU Information

17. RECOMMENDATIONS
Output Information and Recommendation

18. Thank You!

19. Q&A