Sc Physics 2 12 9 09 Webinar Final Web

The Very Real Decision Space of

Supply Chain Physics 2

Copyright © 2009 Cadent Resources, Inc. All rights reserved. Not for distribution

®

Mark Gavoor

Direct: 630.242.0502

Toll Free: 866.865.2714 ext. 4

E-Mail: [email protected]

Web-Site: www.demandcaster.com

The Very Real Decision Space of

Supply Chain Physics

December 9, 2009

Welcome

Part I: The Concept of Supply Chain Physics

Part II: December 9, 2009

The Very Real Decision Space of Supply

Physics

Copyright © 2009 Cadent Resources Group, LLC All rights reserved. Not for distribution

Physics

Part III: January 20, 2010 – 12 p.m. CST

Strategies for Communication &

Improvement

Agenda

Re-Cap from Part 1

Four Examples

Supply Chain Optimization



Two Categories of Violations

Conclusion

Why Supply Chain Physics?

Supply Chain Physics is a concept

Based on science, engineering, and

business


It is language and set of principles to foster

Accountabilities across functions

Improvement across the enterprise

�� Information Flow

PurchasingMfg

PlanningOrder

ProcessingPlaces

Order

Forecasting

Order Taking


Inventory

Allocation

Manufacturing

Suppliers Trade

Distribution

Warehouse

Order Taking

& FulfillmentManufacturing

Material/Product flow ��

The Three Laws of SC Physics

1. Law of Interdependency

2. Law of Constraints


3. Law of Information



Inventory, Service, Quality, Costs are interdependent

In business improvement, silo-ed functional

improvement can only take you so far. All further

improvements require cross-functional efforts.


improvements require cross-functional efforts.






How much of any item can be produced in a finite

amount of time?


amount of time?

How far, fast, & in what quantities can goods be

shipped from Point A to Point B?

Yes … very related to the Theory of Constraints








Information moves at the speed of light, er… the

internet

Independent of accuracy of the information

Speed of information >> Lead times

Speed of information >> Production rates

Supply Chain Whack-a-Mole

• Quality

• Cost

• Service

• Inventory


Optimize all to a point

Then trade-off

optimization

Need structural

change to optimize all

further

http://www.mmt-inst.com/End_of_management_whack_a_mole.html

Agenda

Re-Cap from Part 1

Four Examples





Conclusion

Three Examples

Cadent Resources is a company dedicated

to helping companies

Reduce Inventory

Improve Service

Generate Cash


Generate Cash

So, let’s look at three Supply Chain Physics

examples in terms of inventory

Example I: Simple Inventory Model – Single SKU

Re-Order

Point

Order Quantity


Point

Safety Stock

Simple Inventory Model – Single SKU

Re-Order

Point

OQ


Safety

Stock

Point

Due to Manufacturing and

Transit time Variation…


Re-Order

Point

OQ


Safety

Stock

Point

Due to Manufacturing LT and

Transit time Variations…

and Demand Volatility


Re-Order

Point

OQ


Safety

Stock

Point Supply Chain

LT & Variations

Demand Chain

Variations


Re-Order

Point

OQ

We in the Supply Chain

are responsible for these

parts?


Safety

Stock

Point Supply Chain

LT & Variations

Demand Chain

Variations


Re-Order

Point

OQ

Is the Supply Chain

responsible for this part?


Safety

Stock

Point Supply Chain

LT & Variations

Demand Chain

Variations


Re-Order

Point

OQ

You need to know this

breakdown for your company

We have seen LTs dominate

making it 80-20 & Demand

Volatility making it 20-80


Safety

Stock

Point Supply Chain

LT & Variations

Demand Chain

Variations

We can actually assign an inventory

objective to Sales?


If we wanted to…

Example II: E&O Inventory

E&O

Excess & Obsolete Inventory

Some call it SLOB

Slow & Obsolete


Slow & Obsolete

These inventories are the result of both

Forecasting errors

Historical violations of the Laws of Supply

Chain Physics


You are tasked with reducing the E&O

which is 20% of all inventory.

(We have seen it as high as 60%!!)

Yet…


Yet…

You are not allowed to write any of it off

And the goal is to sell it at full margin i.e. no

fire sales

This is a very real scenario


No one can has ever been able to explain

How this is tasked to the Supply Chain

Cannot sell it

Cannot dispose of it

Yet we have to reduce it????


Yet we have to reduce it????

We can

Stack it neatly

Dust it off now and again

Report on the value of it monthly

Example III: Good E&O Example

Not all examples are violations of Supply

Chain Physics

Strategy in all Subsidiaries of a global CPG

company

New GM comes in


New GM comes in

Is shocked by the level of E&O

Disparages the old GM for letting this happen

Clears the decks: Fire Sale & Write-offs

Then rebuilds E&O to the same level until his

next promotion


Argentina Subsidiary

GM realized that this was not a Supply

Chain problem alone

Sales

Finance


Finance

Assigned:

An Inventory Czar

A Sales person focused only on E&O


Underselling or

Overproducing promotions

was the largest cause of E&O

10+% in Obsolete alone


Two pronged attack

Better promotion planning &

performance measures

Selling off the E&O


Better promotion planning & performance

measures

Tracked Demand Plan vs Actual by Account

Manufacturing to begin promotion month with

forecast volume in inventory ready to go


forecast volume in inventory ready to go

At mid-month checked Account Forecast vs.

Sales

This practice led to co-development of

Promotions Management Module with ERP

provider


Marketing folks are paid to

Look forward

Come up with new news

Old promotions, failed products, is so…

yesterday


No rearview mirrors in No rearview mirrors in No rearview mirrors in No rearview mirrors in

Marketing CarsMarketing CarsMarketing CarsMarketing Cars


Selling off the E&O

Created a space in DC for Saleable E&O

Showroom

Old promotions considered in new promotions

planning


planning

Sales person hosted sales managers monthly

Review offerings

Use E&O in trade promotions

Offer cases of E&O as the free goods in BOGOs

Finance needed to sign-off on promotions for

margin purposes

Aggregate Product Category

Demand always goes down year end

This year going up with big spikes

Example IV: Law of Constraints/Information


2008 Drop

Even larger because of economic downturn

Had to downsize inventory

2009 Increase



2009 Increase

Due to coming out of recession?

Returning to pre-recession level of demand?

Within LT, cannot react fast enough

Seeing and hearing



Actual Sales and Demand Plans can be communicated at the speed of the internet

Given our global Supply Chains, that is good

But we still have to move the camera from Point A to the store near you and me



While Information was almost instantaneous

Lean is not JIT

Cannot react to demand spikes or changes within LT

Different product category

Same issue



In one SKU, 2 big spikes within lead time

Overseas vendor

Vendor Stated lead time 75 days

Planned lead time 120 days

Actual lead time 133 days



Actual lead time 133 days

120 Day LT 133 Day LT 75 Day LT No Spikes

Unit Cost $2.50 $2.50 $2.50 $2.50

Service Level 98% 98% 98% 98%

Projected Demand 100,754 104,291 83,512 90,606

Safety Stock 49,900 51,267 39,008 25,741

Target Inv. Level 150,654 155,558 122,520 116,347

Change 0 4904 -28134 -34307

% Change 0 3% -19% -23%



% Change 0 3% -19% -23%

$ Impact $0.00 $12,260.00 -$70,335.00 -$85,767.50

Summary of Examples

We believe that Inventory and Service are

the final arbiter of Supply Chain

Performance

It is the indicator of a company’s

Operating Practices & Processes


Operating Practices & Processes

Good & bad

Silo improvements only go so far

Cross-Functional effort is required when

the Interdependent Level is reached

Agenda

Re-Cap from Part 1

Four Examples





Conclusion

Isn’t there a lot of Math in Physics???


When we VIOLATE THE LAWS VIOLATE THE LAWS VIOLATE THE LAWS VIOLATE THE LAWS

We compromise

Inventory

Service

Quality


Quality

Cost

When we VIOLATE THE LAWSVIOLATE THE LAWSVIOLATE THE LAWSVIOLATE THE LAWS

We compromise

Inventory � Cash, Profit

Service � Customer Loyalty, Revenue

Quality � Customer Loyalty, Profit


Quality � Customer Loyalty, Profit

Cost � Profit

We Compromise Performance!

When we VIOLATE THE LAWSVIOLATE THE LAWSVIOLATE THE LAWSVIOLATE THE LAWS

• Inventory

• Service

Quality

• Manufacturing Lead Times• Transit Times

• Production rates

• Production capacities

Not Accounting for Realities of

Supply Chain Physics

Compromise & Cause

Trade-offs in Performance


• Quality• Cost

• Production capacities• Warehouse utilization

• Transportation equipment

availability

• Demand Volatility

It is a complex Multi-Criteria Problem

Optimize all i Cost i, Inventory i, Service i, Quality i

Subject to:

Manufacturing Lead Times > MLTij

Transit Times > TTijk

Production rates < PRij

Production capacities < PC


Production capacities < PCij

Warehouse utilization < Wik

Transportation equipment availability < Eijk

Demand Volatility = σi

i = SKU number

j = Plant or Supplier (how many plants/suppliers?)

k = DC number

It is a Multi-Criteria Problem

Optimize Cost i, Inventory i, Service i, Quality i

Subject to:

Manufacturing Lead Times > MLTij

Transit Times > TTijk

Production rates < PRij

Production capacities < PC


Production capacities < PCij

Warehouse utilization < Wik

Transportation equipment availability < Eijk

Demand Volatility = σi

i = SKU number

j = Plant or Supplier (how many plants/suppliers)

k = DC number

Multi-Criteria Optimization?

This is the Whack-a-Moley stuff

We can optimize in one dimension

When you have two or more dimensions, it

is more complicated


is more complicated

Are the criteria independent or dependent?

Multi-Criteria Optimization?

How is this done mathematically?

1. Prioritize and Optimize – one by one

2. Find the efficient set

3. Map the Criteria into one dimension


4. Change some of the criteria into

constraints

Money is a Good Unifying Dimension

Money is additive

My money, your

money becomes our

money

We add up revenues

and cost


and cost

We minimize costs in

the Supply Chain

We subtract costs

from revenues & try

to maximize profits

Make some of the Criteria Constraints

This is done in inventory management

We want to maximize Service & minimize

Inventory


They are different units of measure

Service is % Case or Unit Fill

Inventory is in units or dollars

Make some of the Criteria Constraints

Ideally: Want 100% Service but cannot

afford that level of inventory

So we prioritize using by ABC classification

of SKUs or items


of SKUs or items

We set minimum service target levels

Service: From Objective Criteria to

Constraint

SKU/Item

Classification

Top Down of

Sales or Margin

Minimum

Service Level

A 80% 99%


B 15% 97%

C 5% 95%

3 dimensional product segmentation

Set demand plan policy based on:

Importance

Order Frequency

Forecastability

Segmentation


Forecastability

ImportanceA B C

Frequency

H

M

L

H

ML

Multi-Criteria Optimization

Hard to do as pure mathematics

Close to impossible to get all the equations

Things are constantly changing


The Supply Chain Physical World

Is a world of constant change

New Supply Sources

Material and Commodity Pricing

Competition


Competition

Economic factors

Technology

Make for a world of constant flux

Multi-Criteria

Hard to do as pure mathematics

Close to impossible to get all the equations

Things are constantly changing


So we use a combination of Math, Physics,

and Heuristics as we do with our

DemandCaster software tool

Agenda

Re-Cap from Part 1

Four Examples





Conclusion

Two categories of VIOLATIONSVIOLATIONSVIOLATIONSVIOLATIONS

1. That which maybe can be done

2. Impossible to get there from here


Two categories of VIOLATIONSVIOLATIONSVIOLATIONSVIOLATIONS




• These are violations of the:

• Law of Constraints

• Law of Information

Two kinds of VIOLATIONSVIOLATIONSVIOLATIONSVIOLATIONS


Not necessarily impossible

But will require efforts of epic proportions

And will most likely have a Whack-a-Moley

effect on performance


effect on performance






Are you freaking kidding me?

How did you ever get into your position?

And remarkably you have kept the job





Are you freaking kidding me?

How did you ever get into your position?

And remarkably you have kept the job

On the inside





We calmly, clearly, and politely explain

Why no how, no way

We can get there from here




Why can we communicate #2 when we

have to?


have to?

But never communicate #1 with any

force?


In the Supply Chain

We are good corporate citizens

We are businessmen

We are paid to get things done & have a can

do attitude


do attitude

That is why when thing are just “iffy” we

say we can do it.

We will explore these categories a bit more

in Supply Chain Physics 3.

Agenda

Re-Cap from Part 1

Four Examples





Conclusion

Conclusion

Reviewed the concepts

Presented a mathematical optimization model

Concept

Strategies for Multi-Criteria Optimization

Looked at Five Examples


Looked at Five Examples

Set the stage for Supply Chain Physics 3


Thank You!

Please join us for the final part of Supply

Chain Physics

Part III: January 20, 2010 – 12 p.m. CST




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Sc Physics 2 12 9 09 Webinar Final Web