1. Logistics Forum 2011 Kyiv, March 22 nd, 2011 Just-in-Time and nothing more Oleg Kalensky Managing Partner, 3e consultants

2. A little bit of economics… Just-in-Time and nothing extra value cost Production of raw Processing of raw Transportation of half-finished product Production of end product Storage at WH of producer Transportation to consolidation WH of port Marking, packaging etc. ( marketing ) Container shipment into Ukraine Customs clearance Transportation to consolidation WH of trader Localization of packaging, marking etc. ( marketing ) Storage at WH of trader Transportation to customer Merchandizing storage at WH of raw producer Storage at WH in port storage at WH of raw producer S t o r a g e a t W H o f p r o d u c e r Storage at WH in port Storage at WH of trader In consumers’ goods total storage costs (of inventory) within a supply chain may reach up to 30% of all logistics costs

3. …stock management… Just-in-Time and nothing extra Total costs related to inventory management: 1) procurement costs 2) inventory carrying costs 3) out-of-stock costs Inventory carrying costs: 1) capital costs, interest of opportunity costs 2) storage costs, operational costs 3) inventory service costs 4) inventory risk costs Structure of inventory carrying costs (case – the U.S., machine-building): CostsShareAv. share in logistics costsVariation range Capital + interest82.0%15.0%8-40% Storage + operations3.25%2%0.0-4% Inventory service0.75%1.05%0.5-2% Inventory risk14.0%1.2%0.5-2% TOTAL100%19.25%9-50%

4. …inter-functional conflicts… Just-in-Time and nothing extra Normally, a logistics department naturally conflicts with allied departments on:  assortment  regions for sales  customer service policy  supply terms from suppliers (provisions, type of vehicle, marking, trays)  consignments of supplies  minimal unit for storage, account and handling  timing for loading/ unloading

5. …case… Just-in-Time and nothing extra Case: service level vs. total losses Input data ParameterValue Daily sales by SKU, av.250 pallets Duration of transportation by supplier20 days Interval between allocation of orders at supplier40 days Av. sales during cycle (interval between allocation of orders + time for transportation) 15,000 pallets Typical deviation in sales during cycle645.47 pallets Typical deviation in sales per day83.33 pallets Buying price of 1 pallet of goods1,000 USD Earnings from sales of 1 pallet of goods450 USD Cost of storage of 1 pallet of goods100 USD / year Alternative cost of capital, interest of opportunity cost13% per annum What will happen to logistics costs, if Sales & Marketing Dep. insists on increasing the service level from 90% to 99.9%?

6. …case… Just-in-Time and nothing extra SL, % Accepted loss, % Safety stock, pallets Capital costs, $/y Storage costs, $/y Lost sales, $/y Total costs, $/y 900,047833108 24683 26683 048274 559 910,042865112 44186 49374 213273 147 920,037910118 31591 01165 378274 704 930,031955124 18995 53054 776274 495 940,0261 007130 902100 69445 941277 536 950,0211 065138 454106 50337 106282 063 960,0161 130146 845112 95728 272288 074 970,0121 213157 753121 34921 204300 306 980,0081 323172 018132 32214 136318 476 990,0031 504195 513150 3955 301351 209 99,90,01 988258 447198 8050,0457 252 SL, % Accepted loss, % Safety stock, pallets Capital costs, $/y Storage costs, $/y Lost sales, $/y Total costs, $/y 900.047833108,24683,26683,048273,559 910.042865112,44186,49374,213274,147 920.037910118,31591,01165,378274,704 930.031955124,18995,53054,776276,495 940.0261,007130,902100,69445,941277,536 950.0211,065138,454106,50337,106282,063 960.0161,130146,845112,95728,272288,074 970.0121,213157,753121,34921,204300,306 980.0081,323172,018132,32214,136318,476 990.0031,504195,513150,3955,301351,209 99.90.00.01,988258,447198,8050.00.0457,252 In this case the optimum SL for the company = 93%

7. …and Just-in-Time Just-in-Time and nothing extra costs consignment Total costs: 1) procurement costs 2) inventory carrying costs 3) out-of-stock costs vs. transportation costs ‘under order’ (just-in-time costs) inventory carrying costs procurement, out-of-stock costs total costs $m$m VoVo just-in- time costs total costs

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