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Inventory control at Swedwood group

- A study mapping the current inventory control models and suggesting


on a model that is to be the company standard

Karl Kallin

Department of Industrial Management and Logistics,


Lund University, Faculty of Engineering
SE‐221 00 Lund, Sweden

This article is based upon the master thesis with the same name, written autumn 2008 – spring 2009.
The purpose of the study was to review the current inventory control models as well as suggest on a
setup that would enhance inventory performance. In the thesis, a strong emphasis was put on safety
stock calculation models and their impact on customer service.

INTRODUCTION concerning volume is derived from the fact


Swedwood is a member of the industrial that logistics centre is supplying both regional
group within IKEA and also one of IKEA’s main warehouses and stores with goods. The
suppliers. Swedwood is often used by IKEA as current inventory control model used to
an example of how a good supplier should act. manage stocks is a hybrid of a time-phased
It is therefore important for Swedwood to be order point system and a periodic ordering
well performing in its commitments towards system. The inventory control model does not
IKEA. The finished goods stock has a very use any classification model but all products
important role to play in order for Swedwood are treated equally. However, sometimes
to manage its obligations towards IKEA. products with higher requested service level
are prioritized but it is more a rule of thumb
PROBLEM DISCUSSION applied in some manufacturing units rather
Swedwood has setup its manufacturing units
than the company standard. The company has
to be consisting of two parts, one is the
not adopted its safety stock policy yet but
production unit, and the other is the logistics
Swedwood is going to use a safety stock
centre. The logistics centre is responsible for
calculation model based on normal
all aspects inventory control and is the
distribution and the Serv1 definition.
working in the interface between Swedwood
and IKEA. The logistics centre has two major METHODOLOGY
inputs from IKEA, long and short term To be able to evaluate to current setup and
forecasts, and orders. The short term forecast possibilities to enhance inventory control, an
is somewhat inaccurate on article level but on inductive normative study was conducted. The
the contrary fairly good in terms of estimated data was gathered from interviews for the
total sales value. Forecasts have the tendency primary data and from statistics originating
to fluctuate quite a lot from week to week. from the company enterprise resource
The other input, orders, is less fluctuating in planning system (ERP) for the secondary data.
weekly volume but it is not to be considered The study used a mix of qualitative and
as stable either. Much of the irregularities quantitative methods in order to highlight the
problem from both several perspectives. There are, however, more shortcomings in the
Many interviews were conducted and a lot of interaction between logistics centres and the
statistical data constituted the base for the production units. As previously mentioned the
analysis in order to obtain a high level of production units sometimes alter the
credibility. production plans generated in the logistics
centres. This does not just only apply
FINDINGS prioritization but also quantities. If service
During the study, several areas with problems
levels are to be held at the, by customer,
in need of improvement were identified.
requested levels, the plans generated in
Some of these problems could be educed to a
logistics centres need to be followed as much
lack of a company common policy on
as possible. Today the production units
prioritization. As the setup is at present the
change generated plans in order to keep the
logistics centres and the production units have
flow and capacity utilisation at a more or less
different prioritize even though they are
constant high level. Since fix production
supposed to be working towards a common
intervals are used the quantity produce should
goal; well maintained service levels versus
just be the quantity required by customers
IKEA. The production units today sometimes
between production cycles. The production
alter the production plans generated in the
plan generated from logistics centres is likely
logistics centres due to a lack of
to represent this need better than what could
understanding for the actual customer need.
be accomplished in the production unit.
Since no joint company policy on production
planning exists, the importance of producing a The trouble a logistics centre face when
certain product at a certain time may be lost generating production plans is to master its
in the communication between logistics two inputs, forecasts and orders.
centres and production units. This setup risks
having a negative impact on customer service
since the production unit will fail to
understand the importance of producing the
right products at the right quantity and time.

The importance of a joint platform for


The quality of forecasts sent by IKEA is not
planning is hence obvious. An excellent
good enough to single handed without any
starting point for the mutual platform is the
modifications constitute the production plan.
use of a dual criterions ABC-classification
This in turn has lead Swedwood to change the
model. The classification model would make
inventory control principals into a hybrid of
both parties to see what products to prioritize
two systems. Sadly, this hybrid combines the
and this in turn is likely to enhance customer
downside from each of the two systems. To
service. The classification model should be
have a setup combining two downsides is
used to guarantee products of high
never positive and therefore it would be
importance to have a high share of production
beneficial to refine the current setup into one
capacity at its disposal and in contrast,
of these systems. The time-phased order point
products with lower importance should have a
system would be the most suitable due to its
smaller share of production capacity at its
abilities to keep capital employed at a low
disposal.
level. However, in order to practise the time-
phased order point system fully the quality of
forecasts need to be improved. Both However, demand can not be increasing
Swedwood and IKEA are influencing forever and when it is no longer does
parameters affecting forecast quality, managing safety stocks becomes important.
Swedwood with their delivery performance The company standard of keeping two weeks
and IKEA with their calculation models. With demand as safety stock will not serve its
good quality forecast and a time-phased order purpose well. There are problems with having
point system both customer service and safety stocks at prearranged levels, firstly it
capacity utilization could be improved. does not consider the demand structure
which often has a noticeable impact on stocks,
Improved forecast quality is only one part that secondly safety stocks risk being too big which
needs to be dealt with to fully practise a time- has a negative effect on capital deployment.
phased order point system, the other part is
to review current planning routines. At With the introduction of safety stock
present Swedwood uses a fix planning point calculations according to Serv1 based on
when planning its production and this point is normal distribution Swedwood has addressed
set to be on Fridays two weeks before an important issue. The question is whether or
production is due. At the point of planning, not this is the most suitable solution for
capacity utilization is planned to 100% and the Swedwood. Of course, to use the Serv1
production plan is not to be changed. calculation is far better than keeping the
However, in practise Swedwood is equivalent of two weeks demand in stock
occasionally forced to re-plan because of rush there is no doubt about that but is it really the
orders or material shortages. With a more most eligible solution?
dynamic planning process Swedwood would
not face the current problems with re- To be able to use the common Serv1
planning. A fix planning point two weeks calculation model the assumption of a normal
ahead of production ensures capacity distributed demand has to be fulfilled. The
utilization to be kept high but the entire type of distribution a demand follows is
largely affected by the lead time. In the
dynamic is lost wherefore the original
production plan may be obsolete and not Swedwood case the lead times are fairly short
represent customer demand. With a more which makes the gamma distribution more
dynamic planning process capacity utilization corresponding to the demand structure.
could be kept high without the loss of agility. However, it has to be stressed that for some
An example of such an approach could be to products the normal distribution works alright
gradually plan production instead of all at but the gamma distribution works for all
products. It would therefore be wise to base
once. The production plan would then allow
planners to make adjustments along time to safety stock calculations upon gamma
better be able to meet customer distribution instead of normal distribution.
requirements. Another aspect to consider is what
requirements IKEA has on service. The IKEA
SAFETY STOCKS
Swedwood has grown rapidly the last years definition service does not fully comply with
and the demand has been steadily increasing either the definitions of Serv1 or Serv2 but it is
making production capacity limited. Safety most compatible with the Serv2 definition.
stocks have never really been an issue with The Swedwood introduction of a Serv1 based
continuously increasing demand which the calculation there is an obvious risk of
current company standard illustrates. mismatching calculated safety stock with
required safety stock. To base safety stock
calculations on Serv2 instead of Serv1 is
consequently the best alternative. The
combination of gamma distribution and Serv2
would be the best solution for Swedwood.
However, safety stock calculations based on
gamma distribution is quite complex and
Swedwood is not likely manage these
calculations successfully just yet. The
transition to a safety stock calculation based
on gamma distribution is probably best
executed as a step-by-step transition. A
suitable first step is to adopt the calculation
based on normal distributed and Serv1, the
second step is calculations based on normal
distributions and Serv2, and the final step is a
calculation based on gamma distribution
based on Serv2.