Multi echelon-inventory-optimization

18th May 2011

Table of Contents

5/27/2011 Strictly Private & Confidential 2

Need for Inventory

Underlying Principles

MapMySupplyChain

Current Philosophies of Inventory Mgmt

Pros and Cons of IM Principles

TOC and MEIO

Primary Needs of an Effective IM System

Need for Inventory

To tide against Supply Chain Uncertainities – Transporter uncertainity, Supplier Lead

Time, etc.

Ensure all Customers, at every location are served at the right time, with the right

quantity

Normally, Sales People would like to Stock up, as much Inventory as possible, so that

Stock Out scenarios are ruled out

On the other hand, the CFO would like to cut inventories, so that the capital costs are

kept in check

If Planned properly, Inventory will have a positive impact on Customer Satisfaction

If Planning of Inventory is inaccurate, then it leads to either:

Stock outs, Customer Dissatisfaction, lost sales and indirect cost increase or

Increase in Capital Costs, Obsolescence and raises Operational challenges

5/27/2011 3Strictly Private & Confidential

Inventory Need

Principles Philosophies TOC and MEIOMapMySupply

ChsinPros and Cons

Effective IM System

Underlying Principles

Underlying assumptions that define a Supply Chain Inventory model is often

conflicting. This is depicted in the figure.


Underlying principle

conflict

Inventory Need Principles Philosophies TOC and MEIOMapMySupply

ChsinPros and Cons

Effective IM System

Current Philosophies of Inventory Management

Inventory Management in the current context, is designed to be held closer to the

customers

But not all products/SKUs can be held close to the Customers, at all times. This means

there would be further classification of SKUs as fast moving, slow moving, etc. and then

the fast moving SKUs will be stocked closer to the Customer. At the same time, the slow

moving will be held closer to the place of manufacture

This leads to formation of echelons. The fresh order receipts, are at the Regional

Warehouse or Motherhouse and the SKUs are then moved to a local Distribution for

further storage, before dispatch

The issues with Multi - echelon formation, is that Inventory Planning, at times are

carried out for One – echelon, without taking into consideration its effect on other

echelons

This may either lead to excess Inventory stocking in one or more of the echelons OR

stock out situation in any one of the echelons


Plant Regional Warehouse Local Warehouse Customer


ChsinPros and Cons

Effective IM System

Current Philosophies of Inventory Management

Further, the quanity that needs to be held at each level is a question mark

A company may have around 1000 SKUs, out of which 10 may be fast moving, in one

market and slow moving in 4 other markets.Similarly few other SKUs may be fast

moving in a totally different market. So how much Inventory should we hold?

To be safe few companies, may not only stock excess inventory in the local

warehouses but also in the regional warehouses

At one end the supply chain the question is how much to produce? And at the other

end the question is how much will be consumed?


Plant Regional Warehouse Local Warehouse Customer

Quantity

SKU

Quantity

SKU


ChsinPros and Cons

Effective IM System

Pros and Cons of IM Philosophies

Sr. No. Pros Cons

1. Customer Demands may

be met

The Inventory Carrying Cost to meet Customer

Demand is too high

2. The Regional Warehouse

can act as an extended

Buffer Stock for Local

Warehouses

The indirect cost of movement of inventory between

Regional and Local warehouse may be high, in

addition to the Inventory Carrying Cost, at both

places

Excess Inventory may become Obsolete, if Market

dynamics change

Production of Products, with added buffers, may lead

to shortfalls in production of other Products

Sudden spike in demand for a particular product, may

become difficult to meet

Agility of the Supply Chain takes a hit

Excess Inventory may have adverse effect on the

Financials



ChsinPros and Cons

Effective IM System

Theory of Constraints and MEIO

Theory of Constraints (TOC) has a different view to Multi – Echelon Inventory

Optimization (MEIO) from the one we have already discussed

The Concept so used is called, Demand Pull and Buffer Management (DPBM)

Demand Pull

The concept says, that instead of Placing the Inventory closer to the Customer, it

subscribes to the principle of holding the Inventory closer to the source (Factory, in

this case)

The Regional warehouse only maintains stock needed for replenish lead time

Once the customer places an order for a particular product with the Regional

Warehouse, the ordered quantity will be simultaneously reported to the Regional

Warehouse

The factory will deliver the products promptly, once they are produced


Inventory Need Principles PhilosophiesTOC and

MEIOMapMySupply

ChsinPros and Cons

Effective IM System


Buffer Management

Buffer Management is a method used to monitor the inventory in Factory or Regional

Warehouse

In TOC, the biggest quantity required in replenish lead time is regarded as the target buffer

stock

Once the target buffer stock has been determined, it is divided into 3 parts

Neglected Zone (Green Zone)

Warning Zone (Yellow Zone)

Rush Zone (Red Zone)

If Inventory is in the Neglected Zone, it is required to reduce the Inventory

If Inventory is in the Rush Zone, it is required to increase Inventory

By using Buffer Management, the Inventory can be maintained at an appropriate level,

without running out of stock



MEIOMapMySupply

ChsinPros and Cons

Effective IM System


Performance Evaluation

Further, in the aspect of Performance Evaluation – the commonly used terms like Inventory

Turn – Over Rate and Stock – Out Rate are modified to TDD and IDD

TDD index measure reliability. That is it measures “How much work is uncompleted”

IDD index measures effeciency. That is “How much work is overdone”

TDD

When the company or department is unable to meet the deadline for delivery, TDD is index

will be computed to show the level of incompletion.

The computation is to multiply the effective production value by the number of days delayed

The bigger the TDD value, the longer is the order delayed, which means more damages to

the company

An Organization or department should follow the principle of zero TDD



MEIOMapMySupply

ChsinPros and Cons

Effective IM System


IDD

When a company produces more than enough products, it is considered ineffecient

This not only raises the cost of Inventory but also wastes raw materials

The computation is to multiply the Inventory Value by the Total Time Spent in the

warehouse

Bigger the IDD value means, higher overstock which leads to higher Inventory Costs

and delivery delays due to insufficient raw materials, resources for manufacturing

other products

Therefore, company or department should strive to lower the IDD



MEIOMapMySupply

ChsinPros and Cons

Effective IM System

Primary Needs of an Effective IM System

A System which makes an Inventory Management System effective should factor in:

Demand Forecasts

Manufacturing Capcities

Supplier Capabilities

Integrated Planning Environment

Linking Planned parameters (TDD, IDD, etc.) with key Financial Measures

That would basically mean, an Organization can review supply chain planning decisions

based on their financial impact, especially when it comes to revenue, profitability, and

return-on-assets.

If in addition to these parameters, an actual real-time end to end visibility is brought in,

then the decision making and planning, can have an actual view of the impact of thier

decisions



ChsinPros and Cons

Effective IM System

MapMySupplyChain

1. All of the essential parameters that we discussed are covered in the product –

MapMySupplyChain

2. The product uses Google Map to provide location of Factories, Warehouses, Markets

and Inventory availability SKU wise

3. This allows the Management and Operations Team likewise to see their Market in

front of them

4. It further alllows the simulation of decisions, even before the decision is actually

implemented. Which means, the plan to produce extra quantity of a partcular product,

can be traced right up to the forecasted consumption, in a particular market. So, if a

particular warehouse runs out of stock, then an immediate corrective action, can be

taken, at the simulation stage itself

5. The product can be further used to Optimize Inventory, Resource, Location, Network,

etc.



ChsinPros and Cons

Effective IM System

MapMySupplyChain – MEIO Solution


Warehouses

Plant

1.Each echelon and its entities

are depicted on Google Map

as per its location

2.Location based

replenishment policy like

safety stock, cyclic stock,

replenish lead time, replenish

quantity and replenish

triggering point, can be

configured

3.Simulate complete end to

end supply chain with each

echelon’s entities

4.Heuristic based optimization

approach and encapsulates

TOC fundamentals

5.Intimate business users as

replenish trigger point comes


ChsinPros and Cons

Effective IM System

MapMySupplyChain – MEIO Solution


6. Optimize ordering policy like

replenish quantity, lead time

& triggering point

7. Adaptive enough to

incorporate change in

supply & demand

fluctuations

8. Makes system immune to

supply & demand variations

9. Easy to use and implement,

same experience as with

excel - spreadsheet solution


ChsinPros and Cons

Effective IM System

Warehouses

Plant

MapMySupplyChain – TOC Approach


1.All Supply Chain entities are

mapped on the interactive Map

2.Lead time drives ordering policy

at each location

3.IDD & TDD are computed and

optimized

4.At every echelon Buffer

Inventory, with largest replenish

lead time becomes critical and

hence requires zone computation

for replenishments

5.The production run is in batches,

as per need and maximum

Inventory is held closer to the

Manufacturing Plant

6.The complete supply chain is

based on the Demand Pull and

Buffer Management Principle


ChsinPros and Cons

Effective IM System

Warehouses

Plant

Business

Multi echelon-inventory-optimization