© 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