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SESSION#7: Design of Lean Supply Chains

Design of Lean Supply Chain:


Strategies for Inventory Reduction in
a Supply Chain
Dr RAVI SHANKAR
Dr.
Professor
Department of Management Studies
Indian Institute of Technology Delhi
Hauz Khas, New Delhi 110 016, India
Phone: +91-11-26596421 (O); 2659-1991(H); (0)-+91-9811033937 (m)
Fax: (+91)-(11) 26862620

Email: r.s.research@gmail.com
http://web.iitd.ac.in/~ravi1

What is an Inventory System

Inventory is defined as the


stock of any item or
resource used in an
organization.
An Inventory System is
made up of a set of policies
and controls designed to
monitor the levels of
inventory and designed to
answer the following
questions:

What levels should be


maintained?

When stock should be


replenished? and

How large orders


should be? i.e. what is
the optimal size of the
order?
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Inventories: Why and Why not


CONS

Large inventories hide operational


problems;
Financial costs to carrying excess inventory;
Risk of damage;
Tracking and accounting costs;
Risk of obsolescence and depreciation;

PROS

Allows managers to decouple operations;


Protects one system part from disruptions in others;
Reduces number of times orders are placed;
Provides a hedge against inflation;
Allows quantity discounts from suppliers;
Allows firms to meet unexpected demand.
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Creating a Lean Supply Chain


What is lean?

A philosophy that seeks to shorten the time


between the customer order and the shipment to
customer by eliminating waste John Shook

We can reduce lean to three elements (Womack


and Jones)--

Flow
Pull
Striving for excellence

Elements of a Lean Supply Chain


Lean (JIT) Purchasing
Lean Logistics or JIT Transportation
Lean (JIT) Operations: Toyota Production

System
y

[A] For Fast Moving Items


Reduction in Buffer stock by reducing uncertainty in
demand and supply

Buffer Stock = [Lm D2 + Dm2 L2 ]0.5


Where,
Where

Lm = Mean Lead Time


Dm = Mean Demand
D
= Standard Deviation of demand
L = Standard Deviation of lead time
= Factor for a given level of service
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[A] For Fast Moving Items


Reduction in Buffer stock by reducing uncertainty in
demand and supply

Buffer Stock = [Lm D2 + Dm2 L2 ]0.5

If better demand forecasting is done,

will be less

=== Leading to lesser Buffer stock

If Lead time (L) monitoring is done, L and will be less


m
L

=== Leading to lesser Buffer stock

STRATEGY 1: Avoid 99% syndrome

STRATEGY-1: Avoid 99% syndrome for all items


because for every 1% increase in Service level Buffer
Stock increases substantially after 90% level of service

100%
99%
90%

Service Level

Increase in Buffer
Stock for over 99% of
service level

50%
Buffer Stock
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STRATEGY 2:
Standardization,Variety Reduction &
Codification

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STRATEGY-2: Standardization,Variety Reduction


& Codification
If n varieties can be standardized into 1,

then required inventory is (1/ root of n) and


system cost is (1/ root of n).
If 2 parts can be standardized into 1 then
nearly 30% reduction in inventory.
If 4 parts can be standardized into 1 then 50 %
reduction & so on.

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STRATEGY 3: vendor development

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STRATEGY 3: Better vendor development to reduce


the lead time and increased quality level.
Develop long term partnership with vendor
Develop vendors by providing
Training
Quality and Inspection capability
Technology transfer
Assured long term contract
Reliable vendors:
Limited in number
But trusted ones
Located near by
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STRATEGY 4: Vendor
Managed
g Inventoryy ((VMI))

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Vendor Managed Inventory


VMI transfers inventory management (and

possibly ownership) from the customer to


the supplier
pp
VMI synchronizes the supply chain

through the process of collaborative


order fulfillment

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VMI in use today


In the Factory

At customer sites

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Advantages of VMI
Customer
less resources for inventory
management
assurance that product will be
available when required
q
Vendor
more freedom in when & how to
manufacture product and make
deliveries
better coordination of inventory levels
at different customers
better coordination of deliveries to
decrease transportation cost

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VMI Essentials
TRUST

Accurate information provided on a timely


basis
Inventory levels that meet demands
Confidential information kept confidential

TECHNOLOGY

Automated electronic messaging systems to


exchange sales and demand data, shipping
schedules, and invoicing
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STRATEGY 5: JIT Purchasing

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JIT Purchasing
Characteristics of JIT Purchasing-

Purchase in small lots with frequent deliveries


Mutual, consistent improvement by the buyer and
supplier
Collaborative efforts between buyer
y and supplier
Efficient point-to-point communication linkages
The rights- right quantity
right time
right quality

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JIT Purchasing

What kind of items are best suited


for a just-in-time purchasing
system?

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Supplier Relationships
Long-term, steady relationships with a few suppliers.
Negotiation based on a long term commitment to

productivity and quality improvement.

Interested in supplier capabilities.


Continuous improvement.
Product/process technology.
Design for manufacturability.

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STRATEGY 6: Lean Logistics

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STRATEGY 6: Lean Logistics


Production

Supplier

Production

Trucking

Transport

Inspection
Packing
Storage
Shi i
Shipping
Transport
Receiving
Inspection
Storage
Production

Traditional

Customer

Production

Just-in-Time

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Lean Logistics
Replacement of expendable packaging with

reusable containers
Frequent deliveries made to the point of use
Regular and repeatable delivery schedules

(closed loop systems)

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Lean Logistics
Long-term dedicated contract carriage replaces

commercial carriage as the primary mode of


transportation
Focus on frequent deliveries of small quantities of
many parts versus large quantities of fewer parts
Modified shipping and handling equipment
Side loading trucks
Smaller trucks (similar to beverage trucks)
Delivery at Point of use

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STRATEGY 7:
CENTRALISATION OF
STOCKING

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STRATEGY 7: Centralization of stocking in a multiechelon distribution system

Supplier

Warehouses

Retailers

Traditional: Decentralized System


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Centralized Systems
Supplier

Warehouse

Retailers

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STRATEGY 8: Staggering the


supplies

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STRATEGY 8: Staggering the


supplies

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[B] Slow Moving Items: Expensive


slow moving spares
(1)Specials-required only at predetermined
date in scheduled shut down or project
materials.
Policy:
y MRP policy.
y
Do not stock but place an order just in time so
that it arrives on a due date.

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Required date
KL
ORD

L
Order Released
Date (ORD)

If L is uncertain with (Lm, L):

then KL= safety lead time


K is a factor which depends up on acceptable risk of delay

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Adequate Warning Spare


If lead time is less than the deterioration

signal in the item


then do not stock but place an order on
warning.

If lead time is reduced by faster mode then


inventory can come down substantially
Procurement simplification and expediting is a
better strategy than stocking
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[C] STRATEGY: Spare bank or


spare pooling
Consider these two systems:
Decentralized store#1

Project site#1

Decentralized store#2

Project site#2

Supplier

Project site#1
Supplier

Centralized
store
Project site#235

[C] Spare parts pooling


If there are n locations then keeping 1/ root n

centrally will meet the demand adequately


This is particularly useful for slow-moving

expensive
p
spares:
p

Turbine rotor

Project site#1
Supplier

Centralized
store
Project site#236

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[C] Indadequate Warning Spares


One for one ordering
[(s-1), s] policy:

s is the optimal number of spares to be


stocked which will be typically
yp
y 1 or 2.

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[D] Non-moving materials: Dead


stock
Return to vendor
Redistribute among other locations
Reuse elsewhere
Sell at a discount
Donate to earn goodwill
Dispose off optimally: Inventory control in

reverse gear

Disposal Policy: Frequency of disposal and


process
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Implementing the Lean Supply Chain


through focus on Lean Operations

Inventory pull systems/visible signals


Facility layout changes/work cells
Set up reductions
Level build schedules
Uniform loading
Total quality and continuous improvement
Standardized material handling/containers
Product and process simplification
Total preventive maintenance
Flexible workforce
Teamwork
Right performance measures

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Implementing the Lean Supply Chain

Find the best supplier and engage early in the


design process
Partner with key suppliers that have high
capability for design and supply
Suppliers should be located in the country
where you build your product
Shorten the supply chain by having suppliers
close, frequent deliveries, and leveled
production plans
Develop pull systems with suppliers
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