© The Delos Partnership 2007 page 1

Supply Chain TechniquesSupply Chain Techniques

Optimizing the parameters

© The Delos Partnership 2007page 2

Before MRP – Order PointBefore MRP – Order Point

0

100

200

300

400

500

600

700

800

900

1 2 3 4 5 6 7 8 9 10 11 12

Safety StockInventory Level

Average Demand = 100 per week

Lead Time= 4 periods

Safety Stock = 100

Order Quantity = 800

Order Point

© The Delos Partnership 2007page 3

What Determines Inventory?What Determines Inventory?

0

100

200

300

400

500

600

700

800

900

1 2 3 4 5 6 7 8 9 10 11 12

Safety StockInventory Level

Average Demand = 100 per week

Lead Time= 4 periods

Safety Stock = 100

Order Quantity = 800Lead Time

Ord

er

Qu

an

tity

S/S

© The Delos Partnership 2007page 4

Basic FormulaBasic Formula

Item DataBOM’s

And Routes

StockAnd

Capacity

Master Schedule

Forecasts Orders

Suppliers Factories

What do theyActually Want ?

What haveWe got ?

Whatdoes it need ?

What do we need to do ?

What do we thinktheyWant ?

© The Delos Partnership 2007page 5

MRP “Spreadsheet”MRP “Spreadsheet”

1 2 3 4 5 6 7 8Projected

Gross Requirements10 10 10 10 20 20 20 20

Scheduled Receipts 20Projected Available Balance

40

Planned Order Release

Periods

Part Number Description :

14356 Red Item

Lead Time : 2pds

Order Quantity : 40

Safety Stock : 0

30 40 30 20 0 - 20

40

20

0 -20

40

20

© The Delos Partnership 2007page 6

What determines Lead Time ?What determines Lead Time ?

Pick timeSet up TimeRun TimeQueueMovesWaits…ReprioritisationShortagesFirefighting…..

© The Delos Partnership 2007page 7

What determines Lead Time ?What determines Lead Time ?

Pick timeSet up TimeRun TimeQueueMovesWaits…ReprioritisationShortagesFirefighting…..

Should only includethese

© The Delos Partnership 2007page 8

CRP and the routingCRP and the routing

PutAway

Set-up& RunQMove

Set-up& RunQPick

1 day 1 day1 day

Dept 10

2 days2 days

Dept 30

Opn No

Dept Work Centre

Operation Set Run Set Run Total

Hrs

Total

Days

10 10 45 Inspect 0.5 0.1 0.5 10 10.5 2

20 30 55 Mix 1.0 0.5 1 50 51 7

Product 43768 Lot Size : 100Calc

2 day 7 days

WorksOrder Start

Date

WorksOrder Due

Date

Op Due Date

Op Due Date

© The Delos Partnership 2007page 9

What determines order quantity ?What determines order quantity ?

• Efficiency

• Quality

• Stability of plan

• Fewer changeovers

• Less hassle

• Quiet life

• Easier to manage

© The Delos Partnership 2007page 10

Order QuantityOrder Quantity

100 200 300 400 500 600

Set up cost per unit

£5.00 £ 2.50 £ 1.67 £ 1.25 £ 1.00 £ 0.83

Number of batches pa

12 6 4 3 2.4 2

Total Set up cost

£ 6,000 £ 3,000 £ 2,000 £ 1,500 £ 1,200 £ 1,000

Average Inventory £

50 100 150 200 250 300

Inventory Cost @ 20 %

£ 500 £ 1,000 £ 1,500 £ 2,000 £ 2,500 £ 3,000

Total Cost £ 6, 500 £ 4,000 £ 3,500 £ 3,500 £ 3,700 £ 4,000

Set up Cost per batch = £ 500 Annual Usage = 1,200Inventory Cost = 20 %Cost per unit = £ 50.00

“Minimum” OQ

© The Delos Partnership 2007page 11

Economic Order QuantityEconomic Order Quantity

£0

£1,000

£2,000

£3,000

£4,000

£5,000

£6,000

£7,000

100 200 300 400 500 600

InventorySet up

Minimum Cost

© The Delos Partnership 2007page 12

Order Quantity - MathsOrder Quantity - Maths

EOQ = 2 A S ____

i x Cost/unit

Set up Cost per batch = £ 500 Annual Usage = 1,200Inventory Cost = 20 %Cost per unit = £ 50.00

EOQ = 2 x 1200 x 500 _____________

0.20 x 50.00

= 346

Precisely !

© The Delos Partnership 2007page 13

Order QuantityOrder Quantity

Other considerations Manufacturing process Transport quantities Consolidation issues Space requirements Capacity utilisation

© The Delos Partnership 2007page 14

What Is Safety Stock?What Is Safety Stock?

•Safety stock is a request for buffer that is: Time related Quantity related Or both

•In order to meet variations from forecast demand in terms of:

Timing Quantity Both

© The Delos Partnership 2007page 15

How Much Safety Stock Should You How Much Safety Stock Should You Have?Have?

• Statistically Calculated To Maintain An agreed Service Level for existing products

• Estimated With Judgment For New Product And Promotion To Reduce Market Exposure

• Agreed With Customers In Order To Protect Them

© The Delos Partnership 2007page 16

Safety Stock ChoicesSafety Stock Choices

There are several ways of handling Safety stock Quantity Time

© The Delos Partnership 2007page 17

Averages and Standard DeviationsAverages and Standard Deviations

Observation Actual Forecast Squared

Error

1 25 30 25

2 20 30 100

3 30 30 0

4 60 30 900

5 40 30 100

6 10 30 400

7 30 30 0

8 40 30 100

9 20 30 100

10 25 30 25

“Average”Error =

13.2

Formula isSquare Root of

Average of these

Numbers

Formula isSquare Root of

Average of these

Numbers

© The Delos Partnership 2007page 18

Service Level and InventoryService Level and Inventory

Customer Service %

Related Z Value Forecast Error Safety Stock Cost/ Benefit ?

84.13 1.00 13.2 13.2

85.00 1.04 13.2

90.00 1.28 13.2

94.52 1.60 13.2

95.00 1.65 13.2

97.72 2.00 13.2 26.4

98.00 2.05 13.2

99.00 2.33 13.2

99.18 2.40 13.2

99.50 2.57 13.2

99.86 3.00 13.2 30.6

© The Delos Partnership 2007page 19

Safety Stock - MathsSafety Stock - Maths

Safety Stock = x K x Lead Time

Error Service Factor

© The Delos Partnership 2007page 20

Rules for Safety StockRules for Safety Stock

Having Safety Stock does not lessen the need for a Forecast

If you have any Safety Stock use it for abnormal demand

If you don’t have any left, don’t believe that the supply chain can magic up some more – manage demand

Work to reduce the need for Safety Stock

© The Delos Partnership 2007page 21

Correct parametersCorrect parameters

Having the correct choice for the parameters is an often crucially missed opportunity for :

• Reducing inventory

• Improving flexibility

• Improving service levels