Inventory Issues in Supply Chains

Three ways of viewing inventory management

Inventory-is-inventory, no matter what form, nor source Techniques: EOQ systems

Internal Technique: Material Requirements Planning

External: between the firm & it’s customers/suppliers Techniques:

Just-in-time (JIT) Collaborative planning, forecasting, and Replenishment

(CPFR), Vendor Managed Inventory (VMI)

Inventory

Definition--The stock of any item or resource used in an organizationRaw materialsFinished productsComponent partsSuppliesWork in processPipeline

Reasons to have inventory

Tactical Reasons To decouple processes To allow for variations in

Demand Delivery Processes

To allow for flexibility in schedules To get a lower material price

Strategic Reasons To make money on commodity variations To control sources of supply (and create barriers to

entry)

Remember this:EOQ Model: Inventory Replenishment

Time

Inve

ntor

y

L

Q

ReorderPoint

Demand Rate (R)

Order

Me

Now

Nice Stable Demand!

And This:Service Level Model: How Much Safety Stock?

Inve

ntor

y

stock out

safety stock

cycle stock

Safety Stock = Buffer on top of forecasted demand to cover uncertainty

Economic Order Quantity Model Assumptions

Production is instantaneous. There is no capacity constraint and the entire lot is produced simultaneously.

Delivery is immediate. There is no time lag between production and availability to satisfy demand.

Demand is deterministic. There is no uncertainty about the quantity or timing of demand.

Demand is constant over time. In fact, it can be represented as a straight line, so that if annual demand is 365 units this translates into a daily demand of one unit.

A production run incurs a constant setup cost. Regardless of the size of the lot or the status of the factory, the setup cost is the same.

Products can be analyzed singly. Either there is only a single product or conditions exist that ensure reparability of products.

Three Traditional Inventory Questions (Plus some modern ones)

What to order?How many to order?When to order?

Who manages the inventory?Who owns the inventory & when?When is the inventory paid for?

Types of Demand from an Inventory Perspective

Independent demand items are those items that are sold to customers.

Traditional solutions: EOQ, Fixed-period Ordering, Two-Bin inventory systems

Dependent demand are those items whose demand is determined by other items.

Traditional solutions: Material Requirements Planning

Supplies are items that are not used directly in the production of independent demand items

Traditional solutions: Same as for independent demand

Dealing with dependent demand: MRP - Materials Requirements Planning MRP II - Manufacturing Resources Planning ERP - Enterprise Resource Planning

Clipboard

Rivet (2)

Iron Rod (3

in.)

Spring (1)

Spring Steel (10

in.)

Bottom Clip (1)

Top Clip (1)

Pivot (1)

Sheet Metal (8 in2)

Clip Assembly (10)

Sheet Metal (8 in2)

Sample Dependent Demand Structure (a BOM)

Board (1)

Pressboard (1)

Finish (2oz.)

MRP

Production Schedule

Material Requirements Planning - MRP

Time Phased

Order Point

Exception messages

Bills of Material

GeneralItem Data

Inventory Records

Input to Capacity Planning

Business Plan

Production Plan

Master Production Schedule

Material RequirementsPlanning

Capacity RequirementsPlanning

?

Shop Floor Control

Bills of Material

Work Center &Routing

Files

Inventory Records

Purchase Order Files

Purchasing SystemVendor QuotesP.O. Processing

ReceivingVendor Analysis

GeneralItem Data

NO

YES

?

Rough -cut CapacityAnalysis

MRP II

Key Assumption:

Everything is in-houseEverything supplied is supplied on time,

at the right quantity, at the right quality, to the right place

Not very realisticNeed othersOne way to cooperate: VMI

VMI: Vendor Managed Inventory

Other names: Continuous replenishment Planning (CRP), Supplier Managed Inventory (SMI)

the supplier is responsible for maintaining the customers inventory management. The supplier has access to the customers inventory data and is responsible for generating purchasing orders

VMI in use today

In the Factory

At customer sites

Why use VMI?

33.4%

18.1%

0%

5%

10%

15%

20%

25%

30%

35%

Without VMI With VMI

Comparison of Stockouts between Firms with VMI

and without VMI

5.3

5.6

5.1

5.2

5.3

5.4

5.5

5.6

5.7

Without VMI With VMI

Comparison of Inventory Turns Between Firms with VMI and without VMI

Lehigh study

VMI - Advantages

better forecasts (POS)

lower inventory less errors in orders

placed leveling of production

capacity

less stock-out lower inventory better service level lower planning &

ordering costs

DistributorManufacturer Full truck load Efficient route

planning

But should you cooperate?Two Game Theory Perspectives on SCM

Zero-sum game Adversarial I-win-you-lose approach

E.g., if your slice of the pie is bigger, mine must be smaller Short term is the only term

Synergistic game Cooperative Size of the “pie” increases Both short and long term is important

Examples of the two types

“In my opinion [Ford] seems to send its people to ‘hate school’ so that they learn how to hate suppliers. The company is extremely confrontational. After dealing with Ford, I decided not to buy its cars.

Senior Executive, supplier to Ford, October 2002 Toyota to helped us dramatically improve our

production system. We started by making one component, and as we improved, Toyota rewarded us with orders were more components. Toyota is our best customers.

Senior executive, supplier to Ford, GM, Chrysler, and Toyota, July 2001.

Source: Liker & Choi, "Building a deep supplier relationships," Harvard Business Review, 2004

Key Steps in the Supplier-Partnering Hierarchy

Understand how your suppliers work. i.e., what do they really sell?

Turn supplier rivalry into opportunity. Team approach vs adversarial

Supervise your suppliers Everyone needs coaching, but not a dictator

Share information intensively but selectively. Give enough information and latitude based on

current relationship Conduct joint improvement activities.

Help the entire team, not just one player

Source: Liker & Choi, "Building a deep supplier relationships," Harvard Business Review, 2004

The Foundation: Understand how your suppliers work

Learn about suppliers business. Go see how suppliers work. Respect supplier's capabilities. Commit to cooperating.

Why? Shows that the buyer is in it for the long run What elements of the HC supply chain are most

interested in this?

Source: Liker & Choi, "Building a deep supplier relationships," Harvard Business Review, 2004

Turn supplier rivalry into opportunity

Source each component from two or three vendors.

Create compatible production philosophies and systems.

Set up joint ventures with existing suppliers to transfer knowledge and maintain control.

Why? Examples?

Source: Liker & Choi, "Building a deep supplier relationships," Harvard Business Review, 2004

Supervise your suppliers

Send monthly report cards to core suppliers. Provide immediate and constant feedback. Get senior managers involved in problem

solving.

Why? Examples?

Source: Liker & Choi, "Building a deep supplier relationships," Harvard Business Review, 2004

Develop suppliers' technical capabilities

Build suppliers' problem solving skills.Develop a common lexicon.Hone core suppliers' innovation

capabilities.

Why? Examples?

Source: Liker & Choi, "Building a deep supplier relationships," Harvard Business Review, 2004

Share information intensively but selectively.

Set specific times, places and agendas for meetings.

Use rigid formats for sharing information.Share formation in a structured fashion.Insist on accurate data collection.

Why? Examples?

Source: Liker & Choi, "Building a deep supplier relationships," Harvard Business Review, 2004

Conduct joint improvement activities

Exchange best practices with suppliers.Initiate ties and projects at suppliers

facilities.Setup supplier study groups.

Can you thing of a non-Japanese firm that does all these actions?

Source: Liker & Choi, "Building a deep supplier relationships," Harvard Business Review, 2004

Cooperation Always Work?

No,Need to have sufficient resources to last for

the long runNot everyone plays the same game

i.e., there may be goal misalignment

EXTRA SLIDES

development purchasing fabrication assembly packaging delivery

make-to-stock

engineer-to-order

make-to-order

Differences in Inventory by type of manufacturing

Supply Chain Practices - 1

operational improvements: reduction of lead timesevery day low price (EDLP)make delivery appointments

Supply Chain Practices - 2

exchange of information: use point-of-sale data (POS)electronic data interchange (EDI) internet orderingsharing sales and forecast datesharing capacity and planning datasharing inventory data transparency of “available to promise”

Supply Chain Practices - 3

supply chain alignmentblanket orders and call-off family contracts, capacity purchaseco-design, early supplier involvementECR: efficient consumer responseJIT-relationships and KanbanVMI (vendor managed inventory)CPFR (Collaborative planning, forecasting and

replenishment)

Data exchange

Stock level from the customerSales forecasts from the customerSales reports from the customerReplenishment orders from the supplier

Agreement Invoice the customer directly at shipmentor Consignment stock: supplier placing goods at a

customer location without receiving payment until after the goods are used or sold

Sharing data

The following information may be exchanged:business plan

promotion plannew product introduction information inventory dataPOS data and forecastproduction and capacity plan lead-time information

Supply Chain Practices - 4

supply chain redesign “consumer direct”design for logisticsdesign for local product adaptation postponed manufacturingchanges in transportation: mixed-SKU

truckloads, cross-dockingoutsourcing of logistics to 3PL or 4PL