1. © The Delos Partnership 2007 page 1 Supply Chain Techniques Optimizing the parameters

2. © The Delos Partnership 2007 page 2 Before MRP – Order Point Average Demand = 100 per week Lead Time= 4 periods Safety Stock = 100 Order Quantity = 800 Order Point

3. © The Delos Partnership 2007 page 3 What Determines Inventory? Average Demand = 100 per week Lead Time= 4 periods Safety Stock = 100 Order Quantity = 800 Lead Time Order Quantity S/S

4. © The Delos Partnership 2007 page 4 Basic Formula Item Data BOM’s And Routes Stock And Capacity Master Schedule ForecastsOrders Suppliers Factories What do they Actually Want ? What have We got ? What does it need ? What do we need to do ? What do we think they Want ?

5. © The Delos Partnership 2007 page 5 MRP “Spreadsheet” 12345678 Projected Gross Requirements 10 20 Scheduled Receipts 20 Projected Available Balance 40 Planned Order Release Periods Part Number Description : 14356 Red Item Lead Time : 2pds Order Quantity : 40 Safety Stock : 0 30403020 0 - 20 40 20 0 -20 40 20

6. © The Delos Partnership 2007 page 6 What determines Lead Time ? Pick time Set up Time Run Time Queue Moves Waits… Reprioritisation Shortages Firefighting…..

7. © The Delos Partnership 2007 page 7 What determines Lead Time ? Pick time Set up Time Run Time Queue Moves Waits… Reprioritisation Shortages Firefighting….. Should only include these

8. © The Delos Partnership 2007 page 8 CRP and the routing Put Away Set-up & Run Q Move Set-up & Run Q Pick 1 day Dept 10 2 days Dept 30 Opn No DeptWork Centr e Operatio n SetRunSetRunTotal Hrs Total Days 10 45Inspect0.50.10.51010.52 203055Mix1.00.5150517 Product 43768 Lot Size : 100 Calc 2 day7 days Works Order Start Date Works Order Due Date Op Due Date Op Due Date

9. © The Delos Partnership 2007 page 9 What determines order quantity ? Efficiency Quality Stability of plan Fewer changeovers Less hassle Quiet life Easier to manage

10. © The Delos Partnership 2007 page 10 Order Quantity 100200300400500600 Set up cost per unit £5.00£ 2.50£ 1.67£ 1.25£ 1.00£ 0.83 Number of batches pa 126432.42 Total Set up cost £ 6,000£ 3,000£ 2,000£ 1,500 £ 1,200£ 1,000 Average Inventory £ 50100 150 200 250300 Inventory Cost @ 20 % £ 500£ 1,000£ 1,500£ 2,000£ 2,500£ 3,000 Total Cost £ 6, 500£ 4,000£ 3,500 £ 3,700£ 4,000 Set up Cost per batch = £ 500Annual Usage = 1,200 Inventory Cost = 20 % Cost per unit = £ 50.00 “Minimum” OQ

11. © The Delos Partnership 2007 page 11 Economic Order Quantity Minimum Cost

12. © The Delos Partnership 2007 page 12 Order Quantity - Maths EOQ = 2 A S ____ i x Cost/unit  Set up Cost per batch = £ 500Annual Usage = 1,200 Inventory Cost = 20 % Cost per unit = £ 50.00 EOQ = 2 x 1200 x 500 _____________ 0.20 x 50.00  = 346 Precisely !

13. © The Delos Partnership 2007 page 13 Order Quantity Other considerations  Manufacturing process  Transport quantities  Consolidation issues  Space requirements  Capacity utilisation

14. © The Delos Partnership 2007 page 14 What Is Safety Stock? Safety stock is a request for buffer that is:  Time related  Quantity related  Or both In order to meet variations from forecast demand in terms of:  Timing  Quantity  Both

15. © The Delos Partnership 2007 page 15 How Much Safety Stock Should You Have? Statistically Calculated To Maintain An agreed Service Level for existing products Estimated With Judgment For New Product And Promotion To Reduce Market Exposure Agreed With Customers In Order To Protect Them

16. © The Delos Partnership 2007 page 16 Safety Stock Choices There are several ways of handling Safety stock  Quantity  Time

17. © The Delos Partnership 2007 page 17 Averages and Standard Deviations ObservationActualForecastSquared Error 1253025 22030100 330 0 46030900 54030100 61030400 730 0 84030100 92030100 10253025 “Average” Error = 13.2 Formula is Square Root of Average of these Numbers Formula is Square Root of Average of these Numbers

18. © The Delos Partnership 2007 page 18 Service Level and Inventory Customer Service % Related Z ValueForecast ErrorSafety StockCost/ Benefit ? 84.131.0013.2 85.001.0413.2 90.001.2813.2 94.521.6013.2 95.001.6513.2 97.722.0013.226.4 98.002.0513.2 99.002.3313.2 99.182.4013.2 99.502.5713.2 99.863.0013.230.6

19. © The Delos Partnership 2007 page 19 Safety Stock - Maths  Safety Stock =  x K x Lead Time ErrorService Factor

20. © The Delos Partnership 2007 page 20 Rules for Safety Stock lHaving Safety Stock does not lessen the need for a Forecast lIf you have any Safety Stock use it for abnormal demand lIf you don’t have any left, don’t believe that the supply chain can magic up some more – manage demand lWork to reduce the need for Safety Stock

21. © The Delos Partnership 2007 page 21 Correct parameters Having the correct choice for the parameters is an often crucially missed opportunity for : Reducing inventory Improving flexibility Improving service levels