Beruflich Dokumente
Kultur Dokumente
Sessions 13, 14
Amit Sharan Jain
December 2017
Inventory Management
2
Safety Stock
• Inventory carried for the purpose of satisfying demand that exceeds
the amount forecasted in a given period
• Trade-off
• Higher levels of product availability and customer service
• Higher level of average inventory and therefore increases holding costs
3
Calculating appropriate safety stock
Safety Stock
Z ( sD2 L + D2 sL2 )
4
Safety stock calculation:
Example
Motorola obtains cell phones from its contract manufacturer located in
China to serve the US market. The US market is served from a
Warehouse in Memphis, Tennessee. Daily demand at the Memphis
warehouse is normally distributed with a mean of 5000 and a standard
deviation of 4000. The warehouse aims for a CSL of 99 percent. The
company is debating whether to use sea and air transportation from
china. Sea transportation results in a lead time of 36 days and costs
$0.50 per phone. Air transportation results in a lead time of 4 days and
costs $1.50 per phone. Each phone costs $100 and Motorola uses
holding costs of 20 percent. Given the minimum lot sizes, Motorola
would order 100,000 phones at a time (on average, once every 20
days) if using sea transport and 5000 phones at a time (on average,
daily) if using air transport. Warehouse works 365 days in a year. (
NORMINV(0.99 ) = 2.33 )
5
Safety stock calculation:
Example solution
Z ( sD2 L + D2 sL2 )
Z = Norminv(CSL) = Norminv (0.99) = 2.33
sD = 4000, sL = 0
# Assumption for Ordering Cost: Safety stock is built-up during the start of the year and
maintained thereafter.
6
Calculations for annual ordering and holding cost for cycle stock depicted in earlier session
Steps to reduce safety stock levels
Z ( sD2 L + D2 sL2 )
8
Safety stock in an aggregated model
• Suppose there are n regions, with demand in each region being independent and
normally distributed
• Di : Mean period demand for each region i, i = 1,…,n
• si : Standard deviation of period demand in region i, i = 1,…,n
i =1
stocks for individual regions • Standard deviation of demand
n
Z ( si2 L)
i =1
sD=
C
n
s
2
i
i =1
Z Ls D
C
• Safety stock, SS =
9
Safety stock in an aggregated model:
Example 1
ABC Inc. produces printers in its Chinese factory for sale in SAARC countries.
Currently, ABC Inc. assembles and packs printers for direct sale in individual SAARC
countries. The distribution of weekly demand in different countries is normally
distributed with means and standard deviation as follows:
Z ( si
n
= s = s
C 2
2 L)
D i
i =1
i =1
= (100 * 102)
= 100 * Norminv(0.95) * (102*2)
= 100
= 2,326 units
• Safety stock = Z L C
sD
= (1.64) ( 2) (100) = 233 units
Note: Since the number of stocking units have reduced by a factor of 100, the safety
stock has reduced by a factor of 10 (viz. 100) 12
Supply Chain
Coordination
13
Supply chain coordination
• All stages in the supply chain take actions that are aligned and
increase total supply chain surplus
14
Bull-whip effect
• Fluctuations in orders
increase as they move up
the supply chain from
retailers to manufacturers
• Distorts demand
information within the
supply chain
16
Obstacles to Coordination
Incentive Obstacles Pricing Obstacles
• Local optimization • Lot-sized based quantity
• Sales force incentives decisions
• Price fluctuations leading to
forward buying
Information Processing
Obstacles
• Forecasting based on orders from Behavioral Obstacles
a supply chain stage instead of • Local view instead of end-to-end
demand supply chain view
• Lack of information sharing • Reactive thinking instead of root-
cause analysis
• Inter-functional blaming
Operational Obstacles • Trust-deficit
• Large lots
• Large replenishment lead times
• Rationing and shortage gaming
17
Achieving Supply Chain Coordination
Aligning Goals and Incentives Improving Information Accuracy
• Incentives to maximize supply • Sharing POS data
chain surplus • CPFR
• Align incentives across functions • Single stage control of
• Pricing for coordination replenishments
• Change sales force incentives from • CRP: POS data / retailer warehouse
retailer demand to customer data based regular replenishment
demand by wholesaler or manufacturer,
inventory owned by retailer
• VMI: Vendor (manufacturer /
Designing Pricing Strategies to supplier) responsible for all
inventory decisions, inventory may
Stabilize Orders / may not be owned by retailer
• Reduce forward buying
• Volume-based discounting instead
of lot-based discounting Improving Operational
• Stabilize prices Performance
• Building Strategic Partnerships and • Reduce replenishment lead time
Trust • Reduce lot-sizes (LTL + Milkrun)
• Rationing based on past sales and
sharing information to limit
gaming
18
Collaborative Planning, Forecasting, and
Replenishment (CPFR)
“A business practice that combine the intelligence of multiple
partners in the planning and fulfillment of customer demand”
- VICS Association
Sellers and buyers in a supply chain may collaborate along any or all of
the following:
• Strategy and planning: Scope of collaboration incl. roles,
responsibilities, extent and time period
• Demand and supply management: Forecasting
• Execution: Order placement to fulfillment
• Analysis: Exceptions and metrics assessment
19
Common CPFR Scenarios
Where Applied in Industries Where
CPFR Scenario
Supply Chain Applied
Retail event collaboration Highly promoted channels All industries other than
or categories those that practice EDLP
20
CPFR: Requirements and Risks
Requirements
• Organizational re-alignment to customer- or geography-specific
needs
• Technology enabler for timely and accurate information sharing
Risks
• Misuse of information
• Frequent alignment of technology
• Cultural mismatch
• Selection of right level of coordination
• Initiate CPFR with DC-level or event-level before moving to store-level
21
Transportation
22
Stakeholders
• Infrastructure providers
• Transportation Policy-makers
• Shipper (1PL)
• Transportation, inventory, information, sourcing and facility costs
• Carrier (2PL)
• Transportation equipment costs
• Operating costs
• 3rd Party (3PL)
• Outsourced logistics services provider
• 4th Party (4PL)
• Takes over a function (such as transportation, warehousing etc.)
• Manages 3PLs
Then there were other parties such as 5PL, 6PL, … 10PL etc.
23
Transportation Modes
• Air
• Rail
• Water
• Package Carriers
• Trucks
• TL
• LTL
• Pipeline
• Intermodal
24
Transportation Modes
Air Package Carriers
• Fast and expensive • Companies like FedEx, UPS, etc.
• Mostly used for small items or • Usually carry small packages:
time-sensitive shipments letters to shipments of about 150
pounds
• Costs • Use air, truck and rail modes
• Fixed infrastructure cost
• Expensive
• Fixed per flight costs (crew & fuel)
• Variable costs based on cargo • Rapid and reliable delivery
• Key issues • Value added-services such as
processing, product assembly and
• Location/number of hubs package tracking
• Location of fleet bases/crew bases
• Consolidation of shipments
• Schedule optimization
• Fleet assignment • Key Issues
• Crew scheduling • Location and capacity of transfer
points
• Yield management • Scheduling and routing of delivery
• IT capability to track packages
25
Transportation Modes
Truck
• More expensive than rail but benefit of door delivery
• Large shipment sizes
Truckloads (FTL) Less than Truckloads (LTL)
• Low fixed costs • Suited for shipments too large for
• Key Issues package carriers
• Imbalance in inbound and • Hub-and-spoke networks
outbound flows
• Longer lead time vis-à-vis TL due to
• Utilization multiple pickups and deliveries
• Service consistency
• Empty backhauls • Key issues
• Location of consolidation facilities
• Utilization
• Vehicle routing
• Service consistency
26
Transportation Modes
Water Rail
• Limited to certain geographic • Costs
areas • High fixed costs for tracks,
locomotives, cars and yards
• Ocean, inland waterway system,
coastal waters • Trip related fixed costs such as labour
• Variable costs based on distance, # of
• Large loads at slow speed cars etc.
• Containerization • Used for large, heavy or high-
• Dominant in global trade density products (such as
commodities) over long distances
• Key Issues
• Delays at ports, customs and • Key Issues
security • Utilization of crew and locomotives
• Container management • On-time performance due to track
and terminal delays
27
Transportation Modes
Pipeline Intermodal
• Primarily for crude petroleum, • Use of more than one mode of
refined petroleum products, transportation
natural gas • Most common example: rail/truck
• Significant initial fixed cost • Grown considerably with increased
• Best for large and predictable use of containers
demand • Enabler of global trade
• Not suited for sending petrol to • Single-point-of-contact for
petrol station shippers
• Key issue
• On-time transfer of cargo from one
mode to the next
28
Design options for Transportation Networks
• Direct shipping network
• Direct shipping with milk runs
• All shipments via Intermediate DC with storage
• All shipments via Intermediate Transit Point with Cross-Docking
• Shipping via DC using milk runs
• Tailored network
29
Design options for Transportation Networks
Network Structure Pros Cons
Direct shipping No warehouse, easy to High inventories (due to
coordinate large lot sizes)
Direct shipping with milk Lower inventories Increased coordination
runs May have lower
transportation costs
All shipments via Lower inbound Increased inventory and
Intermediate DC with transportation costs increased handling at DC
storage
All shipments via Low inventory, low Increased coordination
Intermediate Transit Point inbound transportation
with Cross-Docking costs
Shipping via DC using milk May have low outbound Increased coordination
runs transportation costs
Tailored network Match of mode with Highest coordination
customer / product complexity
requirements 30
Trade-offs in Transportation Design
Transportation vs. inventory cost trade-off
• Choice of transportation mode
• Inventory costs include cycle stock, safety stock and in-transit stock
• Faster modes for products with high value / weight ratio and vice versa
• Inventory aggregation
• Aggregation reduces inventory and inbound transportation costs, but increase
outbound transportation costs
• Aggregate when value / weight ratio is high, demand uncertainty is high or
customer orders in small lot-sizes
32
Role of IT in Transportation
• Required due to the complexity and scale of transportation
33