SUCCESSFUL INVENTORY PLANNING REQUIRES A NEW APPROACH Presentation at GSK October 15, 2002

SUCCESSFUL INVENTORY PLANNING REQUIRES A NEW APPROACH

Presentation at GSKOctober 15, 2002

©2002 SmartOps Corporation 2

Fundamental, persistent forces behind supply chain inefficiency:

Inability to accommodate and actively manage inevitable uncertainty and increasing complexity across multistage supply chains

Local vs. global (“total cost”) optimization and incentives – uncoordinated inventory and logistics decisions within enterprises, across supply chains

Underutilization of current systems and available best practices, e.g., “planner variability”, "too much transactional data"

DESPITE ERP AND APS, THERE IS SIGNIFICANT INVENTORY INEFFICIENCY IN OUR ECONOMY

$1.0 trillion 50+% $500+ billion

U.S. inventoriesEstimated inefficiency

Economic opportunity

What is missing?

What is Missing?

Tactical and Strategic Inventory Planning to accommodate and manage these forces


ACADEMIC BUILDING BLOCKS:40+ YEARS OF EVOLUTION, BREAKTHROUGHS, AND APPLICATION

Late 1950s – 1960s

Fundamental issues identified setting the stage for decades of research

Early inventory and stochastic* optimization models created

Breaking of problems into manageable pieces

Practitioners use rules of thumb and put pieces together heuristically

1970s-1980s 1990s

Searching for simpler ways of computing optimal inventory policies for basic problems

Improved computational approaches developed to address larger problems in “isolation”

Stochastic optimization models developed to explicitly accommodate supply and demand variability, multiple time periods, capacitated, multi-echelon supply chains

Successful “one-off” application to industrial-size problems

Clark and Scarf Arrow, Karlin

Federgruen;Zipkin; Lee; Cohen; Roundy

Muckstadt;Thomas;Zheng Glasserman; Tayur

Key progress

Key contributors

©2002 SmartOps Corporation

* Stochastic: Involving or containing random or “uncertain” variables (e.g., uncertain demand, lead time, capacity, yield, etc.)


DRIVERS OF SUPPLY CHAIN INEFFICIENCYLimited

understanding and visibility into

inventory drivers

Complex multi-stage supply

chain

Uncoordinated inventory

targets across stages

Numerous, disparate planning

systems

Capacity vs. inventory trade-off

not modeled

Inconsistent approach to determining

shipment frequencies and quantities

Plants

Chicago, IL

Gary, IN

Cross-dock facilities/ distribution poolsWindsor, ONT

RTP, NC

Richmond, VA

Oshkosh, WI

Norcross, GA

Knoxville, TN

2,500 Dealers/retailers


UNDERSTANDING MODELING APPROACHES

Annually/quarterly Weekly/dailyQuarterly/monthly

Low detail/granularity High detail/granularity

N/A

N/A

Planner

Planner & O.R. engineer

O.R. engineer

Business Unit Planning and Operations

Corporate/ Business Unit Strategy

Org

an

iza

tio

n

Da

ta m

an

ag

em

en

t/u

pd

ate

p

roc

es

s

Relation to existing processes

Stand-alone Dynamic

One-off studies Driving execution

Structural changes

Continuous improvement

“Dynamic value chain”


ERP/APS detailed, dynamic data inputs

Manual, “meta-level” inputs, click and drag design

SWEET S

POT

The goal is to pick an approach that ensures confidence in the answer, quick hit improvements, and sustained execution

Timed, regular data loading

Data-loader with manual start

Data wizard and interface

Timing/dynamic frequency


UNDERSTANDING MODELING APPROACHES

Annually/quarterly Weekly/dailyQuarterly/monthly

Low detail/granularity High detail/granularity

Planner

Planner & O.R. engineer

O.R. engineer

Business Unit Planning and Operations

Corporate/ Business Unit Strategy

Org

an

izatio

n

Da

ta m

an

ag

em

en

t/u

pd

ate

pro

ce

ss

Relation to existing processes

Stand-alone Dynamic

One-off studies Driving execution

Structural changes Continuous improvement

“Dynamic value chain”

ERP/APS detailed, dynamic

data inputs

Manual, “meta-level” inputs, click and drag design

N/A

N/A

Timed, regular data loading

Data-loader with manual start

Data wizard and interface

Timing/dynamic frequency

The goal is to pick an approach that ensures confidence in the answer, quick hit improvements, and sustained execution.

SmartOps:GSK

SmartOps:John Deere

SmartOps:Giant Eagle


A SUPPLY CHAIN MODELING PROCESS

Map the current value chain

Select relevant variables, constraints, and objective function

Initial collection, cleaning, and QA of data

Selection of planning granularity

Select optimization algorithms

Commence data integration process

Full, partial, or no automation of inputs and outputs

Entire network or subset

All nodes or simplification of nodes

Simplifying assumptions to include or exclude variables, constraints, or nodes considering quality of answer vs. speed of answer

Understand underlying data assumptions

Ensure data makes sense in business and supply chain terms

Days, weeks, months

Product hierarchy – sales model vs. MA

# of nodes and time periods

Stationary or non-stationary model (e.g. # of forecast periods)

Single or multi-echelon or hybrid

Capacitated, un-capacitated

Load data and pre-process meta-data

Calculation/ optimization

Scenarios/ what-if

QA outputsPost-process and summarize

Review outputs - send to operational system/ process

Change structure of value chain

Run test cases vs. actual data

Understand processing speed

Design, build, and run logical scenarios

Test boundary conditions

Compare results with expectations based on theory and domain expertise

Aggregation/dis-aggregation

Units/$s/Weeks Rounding

Manual, exception-based, or automatic export of targets to planning systems

Changes to “nodes” and “arcs” vs. changes to echelons and BOMs

Compute meta-data: lead-times, lead time variabilites, forecast disagg. etc.

Refresh inputs




WHAT IS THE OPTIMAL INVENTORY DEPLOYMENT FOR YOUR BUSINESS?

Inventory FormsInventory Purposes


NOT ALL INVENTORY IS CREATED EQUAL

Buffers against supply and demand uncertainty

Results from economies of production, transport, procurement

In-transit and in-process inventory

Buffers against upstream capacity un-reliability

Covers expected demand, driven by capacity constraints

Display/demo stock

Safety Stock

Cycle Stock

Pipeline Stock

Shortfall Stock

Pre-build Stock

Merchandising



A COMPREHENSIVE APPROACH TO SUPPLY CHAIN PLANNING AND OPTIMIZATION

Measuring all inventory driversOutput for each SKU at each inventory stocking location over time

Target inventory positions– Cycle stock– Safety stock– Shortfall stock– Pipeline stock– Merchandising stock– Pre-build stock

Minimum total inventory needed to deliver current service levels

Optimal service levels and inventory required, given product margins

Scenario analysis for comparing different sets of inputs and outputs

Lead times and lead time variability Frequency of shipments, both factory to

warehouse and warehouse to dealer Demand, demand variability, intermittent Forecasts and forecast errors Seasonality, Non-stationary demand Service levels and amount of lost sales Customer wait times (patience levels) Promotions, Vendor Deals, Forward Buys Capacities at upstream production,

transportation, warehouse, retail outlets Transportation alternatives, expediting costs Budget constraints on total inventory dollars Showroom inventory levels Aggregation and disaggregation


STOCHASTIC OPTIMIZATION IS NECESSARY

Total Cost Optimization

– Cycle stock– Pre-build stock– Pipeline stock

APS challenges– Scheduling a factory– Packing a truck– Routing a truck

Managing uncertainty

Safety stock Shortfall stock

Certain or near-certain

“Deterministic”

Uncertain

“Stochastic”

Linear and Integer

Non-linear Linear, deterministic models are not appropriate for most critical inventory decisions in multistage, multi-product, capacitated, stochastic environments


SMARTOPS AT GLAXOSMITHKLINE

Overview Operational Features

$40 billion Global Pharmaceutical manufacturer

SAP and Manugistics customer Product supply chains: 21 Echelons per supply chain: 7-9 Nodes per supply chain: 100s Planning periods: 36 months Number of product-location-periods:

25,000+ Users: Corporate supply chain and

business planners/super users as well as business unit planners

Objective: Maximize product availability to meet high customer service targets at minimum total chain cost, inventory, and risk

Time-varying multi-period forecast with error Availability (advance order information)

/customer service levels LT variability Capacity constraints Varying batch sizes Different pbs/review periods Policies other than base-stock Yield variability BOM/common components Multiple sourcing options used simultaneously What –if Analysis Forecast error Lead times Lead time variability Batch sizes

Reporting

Breakdown of inventory components By $’s By days-on-hand By units



Imigran Detailed Supply Chain

BULK IMIGRAN INJECTION VIAL 12MG/ML X 0.5ML

BULK IMIGRAN SYRINGE 6MG/0.5ML GD SYRINGE X0.5ML

BARNARD CASTLE



ZEBULON

MISSISSAUGABULK IMIGRAN SYRINGE 6 MG/0.5MLOM SYRINGE X 0.5ML

ZEBULON

BULK IMIGRAN SYRINGE 6 MG/0.5ML GDSYRINGE X 0.5ML

IMIGRAN SUPPOSITORY 25 MG

BULK IMIGRAN INJECTION AMPOULE 3MG/ML AMPOULE X 1ML

IMIGRAN TABLET 50 MG

IMIGRAN INTRANASAL 10 MG




WARE

IMIGRAN TABLET 100 MGIMIGRAN TABLET 100 MG








SUMITRIPTAN

EVREUX

IMAICHI

PARMA

ZEBULON

SUMITRIPTAN

SUMITRIPTAN

SUMITRIPTAN

SUMITRIPTAN

SUMITRIPTAN

SUMITRIPTAN

JURONG

SULPHAZINE

BISULPHITEADDUCT

IMIGRAN TABLET 50 MG DFB X 4TAB 1 SPAIN IMIGRAN TABLET 50 MG DFB X 4TAB 1 SPAIN

IMIGRAN TABLET 100 MG DFB X 3TAB 1 GERMANY IMIGRAN TABLET 100 MG DFB X 3TAB 1 GERMANY

IMIGRAN TABLET 100 MG DFB X 6TAB 1 GERMANYIMIGRAN TABLET 100 MG DFB X 6TAB 1 GERMANY

IMIGRAN TABLET 50 MG DFB X 6TAB 1 GERMANY

IMIGRAN SYRINGE 6 MG/0.5ML GD SYRINGE X 0.5ML 2 AUSTRALIA

IMIGRAN SYRINGE 6 MG/0.5ML GD SYRINGE X 0.5ML 2 FRANCE

IMIGRAN SYRINGE 6 MG/0.5ML GD SYRINGE X 0.5ML 2 GERMANY

IMIGRAN SYRINGE 6 MG/0.5ML GD SYRINGE X 0.5ML 2 UK

IMIGRAN SYRINGE 6 MG/0.5ML GD SYRINGE X 0.5ML 6 UKIMIGRAN SYRINGE 6 MG/0.5ML GD SYRINGE X 2DEV 1 UK

IMIGRAN SYRINGE 6 MG/0.5ML OM SYRINGE X 0.5ML 2 GERMANY

IMIGRAN INJECTION VIAL 12 MG/ML VIAL X 0.5ML 5 CANADAIMIGRAN INJECTION VIAL 12 MG/ML VIAL X 0.5ML 5 CANADA

IMIGRAN SYRINGE 6 MG/0.5ML OM SYRINGE X 0.5ML 2 CANADA IMIGRAN SYRINGE 6 MG/0.5ML OM SYRINGE X 0.5ML 2 CANADA

MISSISSAUGA

IMIGRAN INJECTION AMPOULE 3 MG/ML AMPOULE X 1ML 2 JAPANIMIGRAN INJECTION AMPOULE 3 MG/ML AMPOULE X 1ML 2 JAPAN

IMIGRAN INJECTION VIAL 12 MG/ML VIAL X 0.5ML 5 USA IMIGRAN INJECTION VIAL 12 MG/ML VIAL X 0.5ML 5 USA

IMIGRAN INTRANASAL 10 MG BLISTER X 1DEV 1 FRANCE

IMIGRAN INTRANASAL 10 MG BLISTER X 2DEV 1 AUSTRALIA


IMIGRAN INTRANASAL 10 MG BLISTER X 2DEV 1 GERMANY


IMIGRAN INTRANASAL 20 MG BLISTER X 1DEV 1 MEXICO

IMIGRAN INTRANASAL 20 MG BLISTER X 1DEV 1 USAIMIGRAN INTRANASAL 20 MG BLISTER X 2DEV 1 AUSTRALIA

IMIGRAN INTRANASAL 20 MG BLISTER X 2DEV 1 CANADAIMIGRAN INTRANASAL 20 MG BLISTER X 2DEV 1 FRANCEIMIGRAN INTRANASAL 20 MG BLISTER X 2DEV 1 GERMANYIMIGRAN INTRANASAL 20 MG BLISTER X 2DEV 1 ITALYIMIGRAN INTRANASAL 20 MG BLISTER X 2DEV 1 SPAIN

IMIGRAN INTRANASAL 20 MG BLISTER X 2DEV 3 CANADAIMIGRAN INTRANASAL 20 MG BLISTER X 2DEV 3 FRANCEIMIGRAN INTRANASAL 20 MG BLISTER X 2DEV 3 UKIMIGRAN INTRANASAL 20 MG BLISTER X 2DEV 3 USAIMIGRAN INTRANASAL 20 MG BOTTLE X 2DEV 1 JAPAN

IMIGRAN INTRANASAL 20 MG INTRANASAL X 2DEV 1 UKIMIGRAN INTRANASAL 20 MG INTRANASAL X 2DEV 3 GERMANY


IMIGRAN INTRANASAL 10 MG BLISTER X 2DEV 1 AUSTRALIA


IMIGRAN INTRANASAL 10 MG BLISTER X 2DEV 1 GERMANY


IMIGRAN INTRANASAL 20 MG BLISTER X 1DEV 1 MEXICO

IMIGRAN INTRANASAL 20 MG BLISTER X 1DEV 1 USAIMIGRAN INTRANASAL 20 MG BLISTER X 2DEV 1 AUSTRALIA

IMIGRAN INTRANASAL 20 MG BLISTER X 2DEV 1 CANADAIMIGRAN INTRANASAL 20 MG BLISTER X 2DEV 1 FRANCEIMIGRAN INTRANASAL 20 MG BLISTER X 2DEV 1 GERMANYIMIGRAN INTRANASAL 20 MG BLISTER X 2DEV 1 ITALYIMIGRAN INTRANASAL 20 MG BLISTER X 2DEV 1 SPAIN

IMIGRAN INTRANASAL 20 MG BLISTER X 2DEV 3 CANADAIMIGRAN INTRANASAL 20 MG BLISTER X 2DEV 3 FRANCEIMIGRAN INTRANASAL 20 MG BLISTER X 2DEV 3 UKIMIGRAN INTRANASAL 20 MG BLISTER X 2DEV 3 USAIMIGRAN INTRANASAL 20 MG BOTTLE X 2DEV 1 JAPAN

IMIGRAN INTRANASAL 20 MG INTRANASAL X 2DEV 1 UKIMIGRAN INTRANASAL 20 MG INTRANASAL X 2DEV 3 GERMANY

IMIGRAN INTRANASAL 5 MG BLISTER X 2DEV 3 CANADA

IMIGRAN INTRANASAL 5 MG BLISTER X 2DEV 3 USA

IMIGRAN INTRANASAL 5 MG BLISTER X 2DEV 3 CANADA

IMIGRAN INTRANASAL 5 MG BLISTER X 2DEV 3 USA

IMIGRAN SUPPOSITORY 25 MG BLISTER MOULD X 6SUP 1 GERMANY

IMIGRAN SUPPOSITORY 25 MG BLISTER MOULD X 2SUP 1 ITALY

IMIGRAN SUPPOSITORY 25 MG BLISTER MOULD X 6SUP 1 GERMANY

IMIGRAN SUPPOSITORY 25 MG BLISTER MOULD X 2SUP 1 ITALY

IMIGRAN SYRINGE 6 MG/0.5ML GD SYRINGE X 0.5ML 2 SPAINIMIGRAN SYRINGE 6 MG/0.5ML GD SYRINGE X 0.5ML 2 SPAIN

IMIGRAN SYRINGE 6 MG/0.5ML GD SYRINGE X 0.5ML 2 USA

IMIGRAN SYRINGE 6 MG/0.5ML GD SYRINGE X 0.5ML 2 USA

IMIGRAN SYRINGE 6 MG/0.5ML OM SYRINGE X 0.5ML 1 MEXICO

XOCHIMILCO - MEXICO CITY

BULK IMIGRAN SYRINGE 6 MG/0.5MLOM SYRINGE X 0.5ML

IMIGRAN SYRINGE 6 MG/0.5ML OM SYRINGE X 0.5ML 1 MEXICO

IMIGRAN TABLET 50 MG DFB X 4TAB 1 ITALY

IMIGRAN TABLET 50 MG DFB X 6TAB 1 UKIMIGRAN TABLET 50 MG DFB X 6TAB 2 UK

IMIGRAN TABLET 50 MG DFB X 4TAB 1 ITALY

IMIGRAN TABLET 50 MG DFB X 6TAB 1 UKIMIGRAN TABLET 50 MG DFB X 6TAB 2 UK

IMIGRAN TABLET 100 MG DFB X 6TAB 1 UK IMIGRAN TABLET 100 MG DFB X 6TAB 1 UK

IMIGRAN TABLET 100 MG BLISTER X 1TAB 1 USAIMIGRAN TABLET 100 MG BLISTER X 3TAB 3 USA



IMIGRAN TABLET 25 MG BLISTER X 6TAB 4 CANADAIMIGRAN TABLET 25 MG BLISTER X 6TAB 4 CANADA

IMIGRAN SYRINGE 6 MG/0.5ML OM SYRINGE X 0.5ML 2 USA

IMIGRAN SYRINGE 6 MG/0.5ML OM SYRINGE X 0.5ML 2 USA

IMIGRAN TABLET 100 MG DFB X 2TAB 1 AUSTRALIA IMIGRAN TABLET 100 MG DFB X 2TAB 1 AUSTRALIA

IMIGRAN TABLET 100 MG BLISTER X 6TAB 4 CANADA

MISSISSAUGA

IMIGRAN TABLET 100 MG BLISTER X 6TAB 4 CANADA

IMIGRAN TABLET 100 MG DFB X 4TAB 1 ITALY IMIGRAN TABLET 100 MG DFB X 4TAB 1 ITALY

IMIGRAN TABLET 100 MG DFB X 2TAB 1 MEXICO IMIGRAN TABLET 100 MG DFB X 2TAB 1 MEXICOXOCHIMILCO - MEXICO CITY



IMIGRAN TABLET 50 MG DFB X 2TAB 1 AUSTRALIAIMIGRAN TABLET 50 MG DFB X 2TAB 1 AUSTRALIAIMIGRAN TABLET 50 MG DFB X 4TAB 1 AUSTRALIAIMIGRAN TABLET 50 MG DFB X 4TAB 1 AUSTRALIA

IMIGRAN TABLET 50 MG BLISTER X 2TAB 1 FRANCEIMIGRAN TABLET 50 MG BLISTER X 6TAB 1 FRANCE

IMIGRAN TABLET 50 MG THERMOFORMED BLISTER X 6TAB 10 JAPANIMIGRAN TABLET 50 MG THERMOFORMED BLISTER X 6TAB 2 JAPAN

IMIGRAN TABLET 50 MG THERMOFORMED BLISTER X 6TAB 10 JAPANIMIGRAN TABLET 50 MG THERMOFORMED BLISTER X 6TAB 2 JAPAN

IMIGRAN TABLET 50 MG BLISTER X 6TAB 4 CANADA IMIGRAN TABLET 50 MG BLISTER X 6TAB 4 CANADA

IMIGRAN SYRINGE 6 MG/0.5ML GD SYRINGE X 0.5ML 2 AUSTRALIA

IMIGRAN SYRINGE 6 MG/0.5ML GD SYRINGE X 0.5ML 2 FRANCE

IMIGRAN SYRINGE 6 MG/0.5ML GD SYRINGE X 0.5ML 2 GERMANYIMIGRAN SYRINGE 6 MG/0.5ML GD SYRINGE X 0.5ML 2 UK

IMIGRAN SYRINGE 6 MG/0.5ML GD SYRINGE X 0.5ML 6 UK

IMIGRAN SYRINGE 6 MG/0.5ML GD SYRINGE X 2DEV 1 UK

IMIGRAN SYRINGE 6 MG/0.5ML OM SYRINGE X 0.5ML 2 GERMANY


BORONIAIMIGRAN TABLET 100 MG


EVREUXIMIGRAN TABLET 50 MG




BAD OLDESLOE

PARMA

BAD OLDESLOEIMIGRAN TABLET 50 MG DFB X 6TAB 1 GERMANY

BORONIA

ARANDA

IMIGRAN TABLET 50 MG BLISTER X 2TAB 1 FRANCEIMIGRAN TABLET 50 MG BLISTER X 6TAB 1 FRANCE

MISSISSAUGA

MISSISSAUGA

IMIGRAN TABLET 50 MG DFB X 2TAB 1 MEXICO

XOCHIMILCO - MEXICO CITYIMIGRAN TABLET 50 MG

IMIGRAN TABLET 50 MG DFB X 2TAB 1 MEXICO

MIGRAN TABLET 50 MG DFB X 4TAB 1 OTHERIMIGRAN TABLET 50 MG MIGRAN TABLET 50 MG DFB X 4TAB 1 OTHER

DUMMY SITE

IMIGRAN SYRINGE 6 MG/0.5ML GD SYRINGE X 0.5ML 2 OTHERDUMMY SITE


IMIGRAN SYRINGE 6 MG/0.5ML GD SYRINGE X 0.5ML 2 OTHER

IMIGRAN INTRANASAL 20 MG BLISTER X 1DEV 1 OTHERIMIGRAN INTRANASAL 20 MG BLISTER X 1DEV 1 OTHER

DUMMY SITEBULK IMIGRAN INTRANASAL10 MG

BULK IMIGRAN SYRINGE 6MG/0.5ML OM SYRINGE X0.5ML

BULK IMIGRAN SYRINGE 6 MG/0.5ML OMSYRINGE X 0.5ML


“TOTAL CHAIN” INVENTORY OPTIMIZATION DRIVES KEY BUSINESS DECISIONS

Where should we be now? (Finished Goods and Raw Materials/Components) Based on target manufacturing lead times, target availabilities, and capacities where should we strategically place

inventory? At what target inventory levels?

What are optimal inventory levels by product, component, and location over time?

– Markets as well as factory, warehouse, and pool inventories

What are the key factors that shift the optimal inventory curve?

What happens to the optimal inventory curve in different demand scenarios?

How low can we go? In what stages? By when? How low can we reduce inventory before we begin to impact sales?

What is the sensitivity of inventory to certain key factors?

– Lead time, forecast error, target availability, customer wait time, merchandising requirements, etc.

– What is the cost/benefit of inflexible/flexible capacity?

What is the benefit or business case for attacking certain supply chain parameters – e.g. lead times, availabilities,

flexible capacity?

For a given corporate inventory budget constraint, where should I deploy inventory and what does this mean for

customer service and product availability?



SUPPLY CHAIN PLANNING WORKFLOW

Supply plan

Operational planning synchronizing demand to material

and capacity constraints

Visibility into inventory drivers

What-if analysis

Derived supply data

Pricing Lead times Logistics Capacity

constraints Variability,

uncertainty

Supply

Execution systems

115±Time-phased key operating targets

Multistage inventory positions

Lot sizes Service

levels

Demand

100 125 115

Uncertainty & variability

Product management

Sales channels

Historical demand

Deterministic consensus demand forecast

Derived demand

data

Strategic & Tactical Budgeting Design S&OP

Strategic & Tactical Budgeting Design S&OP


Strategic(Yearly/quarterly)

Tactical(Quarterly/monthly)

Operational(Weekly/daily)

Inventory Budgeting Designing rapid response

supply networks Sourcing Postponement Strategy

Sales and operations planning Inventory planning Scenario analysis

Inventory management Order execution and fulfillment

Aggregate inventory budgets Inventory policies and

placement Expediting policies

Optimal planning parameters– Form of inventory: raw, WIP,

postponement, finished– Purpose of inventory: safety,

cycle, shortfall, pipeline, pre-build, merchandising

Alerts and exceptions Updated supply and demand

statistics

Activity Planning process Key outputs

INVENTORY PLANNING AND OPTIMIZATION SUPPORTS CRITICAL BUSINESS PROCESSES


Product Architecture


DEFINING AND AN ORDER FULFILLMENT STRATEGY

Availability management Key policy choices

Promising and meeting order fulfillment lead times

Set to maintain or gain market share

Capacity management

Stabilizing production rate to maximize efficiency or flexing capacity to meet demand

Demand management

Managing sales/order rate variation Limiting number of allowed “standard”

configurations in build-to-stock environment

Inventory management

Optimal deployment of inventory to maximize availability at minimum cost

Also used to insulate manufacturing from demand variability

Lead time management

Consistent with Lean principles - working to reduce supply and in-process lead-times

Monitoring and managing lead-time variability

Fixed or flexible Segmentation by product or customer

(e.g. sales vs. rentals)

Fixed or flexible capacity Willingness to subject plant to incresed

demand variability

Static or dynamic inventory targets Rules of thumb vs. product/location/time

specific targets Based on total chain or local viewpoint

To achieve maximum availability at minimum cost: A comprehensive

order fulfillment strategy must appropriately define a coordinated set of policies for these interrelated variables

No one variable can be managed in isolation and changing or fixing one variable has implications for the others

Active management of demand variability (e.g. promotions/incentives)

Monitoring and managing forecast error

Active management of lead-times and lead-time variability

Incentives and penalties for performance


REALIZING THE POTENTIAL VALUE OF ENTERPRISE-WIDE INVENTORY OPTIMIZATION

Cost

(inventory, variable, period cost)

“Cost of availability”

Availability and customer service

x

Quick hits (12-18 months) Focused, prioritized lead time and lead time

variability reductions and ongoing management

Reduction in self-imposed demand variability

Managing to optimal total chain inventory targets

Longer term (24-28 months) Structurally alter supply chain Rationalize number of standard

configurations and decrease forecast error Flex capacity Manage to OF strategy key metricsThrough better strategic,

tactical, and operational planning we are trying to improve, stabilize, and sustain availability at lower total chain cost

Availability focused

Cost focused



CLOSING REMARKS

Despite ERP and APS investments significant inventory inefficiencies persist

Fundamental causes of supply chain inefficiency must be addressed:– Inherent uncertainty and complexity in multistage supply chains

• Stochastic optimization approach is the appropriate solution

– Uncoordinated planning decisions• Total cost optimization by providing visibility and coordination between functional and

external groups

– Inconsistent and/or insufficient planning practices• Software can provide a standardized “best planning” solution

All the drivers of inventory must be measured to determine:– Optimal inventory targets for all inventory purposes

• safety, cycle, shortfall, pipeline, pre-build, and merchandising stock

– Total cost solution to deliver service levels– Optimal service levels given budget objectives, product margins, and portfolio

of products

Documents

SUCCESSFUL INVENTORY PLANNING REQUIRES A NEW APPROACH Presentation at GSK October 15, 2002