Supply Chain Planning

Stock Managements
by SC&L Team RDC FZE March 2010

Training Objectives
To share Schneider Electrics Supply Chain Planning Best Practices with our valued partners in order to create more robust and efficient downstream supply chain

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Agenda
Introduction Stock Decision
ABC/FMR Classification Offer, Ex-works and Procurement lead-times Transportation Mode

Purchasing Decision
Transportation Mode Fixed Period

Parameters Safety Stock

Order Quantity Qmax

Forecast (Why we need forecast) Replenishment

VMI DROP

Inventory Analysis
Stock Constitution
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Introduction
Today, excellent service & speed of execution has become a critical differentiator and is now an improtant weapon in gaining competitive advantage. As companies target better service levels & faster delivery, inventory levels generally increase & the risk of holding excess or obsolete stocks increases leading to potential huge write-offs. Better customer service at optimized inventory levels has become a universal goal; albeit an elusive one. As more industries see the balance between service levels and operational costs as a critical differentiator, businesses are realizing the impact that optimizing and automating supply chain planning practices can have on profitability and performance. Reduce inventory, improve service levels and reduce delivery times with lower transport and operational costs!!

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MM concepts
ABC/ FMR Stock Decision and Lead times Transportation mode Procurement frequency fixed period Safety stocks Replenishment/ Procurement methodology

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Stock Decision (ABC/FMR)

The ABC/FMR is a classification method of the references & stocks based on the Pareto Principle (20% of causes produce 80% of effects)
Pareto examples: 20% of products account for 80% of sales 20% of customers provide 80% of sales 20% of products in stock represent 80% of stock value .. .. 20% of efforts for 80% of results

ABC classification classifies flows in term of Turn-Over value FMR classification classifies flows in term of Sales frequency
*Please note that each organisation is different and the ABC/FMR limits will differ depending on the business dynamics

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Stock Decision (ABC Classification)

This classification splits the materials in 3 categories:

A products represent 80% of the sales B products represent 15% of the sales C products represent 5% of the sales
Ref. R0 R1

AMU (Sales AED) 250 150 50 27 11 13 7 5 2 1

Cumulated AMU (Sales AED) 250 400 450 477 488 501 508 513 515 516

Cumulate % of AMU 48% 78% 87% 92% 95% 97% 98% 99% 100% 100%

ABC A A B B B C C C C C

The way to obtain the classification is to sort references by decreasing Average Monthly Usage (AMU) in value and to calculate the cumulated AMU.

R2 R3 R4 R5 R6 R7 R8 R9

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Stock Decision (FMR Classification)

Day 04-03-08 19-03-08 Nb of lines for material R0 1 1 2 0 1 1 0 8 0 1 4 1 1 2 0 1 1 1 0 2 1 1
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This classification splits the materials in 3 categories like the ABC one:
F for fast moving, references with more than 1 order line per Week M for medium moving, references with minimum 1 order line per Month and 1 order a week maximum R for rare moving, references with less than 1 order line per Month For the example:

20-03-08 31-03-08 24-04-08 29-04-08 30-04-08 01-05-08 05-05-08 12-05-08 20-05-08 23-05-08 27-05-08 28-05-08 31-05-08 13-06-08 23-06-08 27-06-08 30-06-08 02-07-08 04-07-08 25-07-08

On the last six months we have had 30 customer lines, so more than line per week.
Conclusion: this is an F product.

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Stock Decision (Lead-Times)

Offer lead-time, Ex-works lead-time and Total Procurement lead-time

Ex-Works LT PLT

Offer LT OLT

Procurement lead-time

Offer lead-time: Period of time between order booking by the customer and availability or delivery of goods (depending on incoterm). The OLT will depend on the companys strategy in its market and how fast it needs to deliver in order to compete. Ex-works lead-time: Period of time from the moment the supplier receives an order to the moment it is delivered. The Ex-Works LT will depend on the upstream supply chain. Procurement lead-time: Period of time from the moment the supplier receives an order to the moment it delivered to the end customer

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Stock Decision (Lead-Times)

If Offer lead-time > Procurement lead-time = No need to Stock
Procurement LT Offer LT

If Offer lead-time < Procurement lead-time = Need to Stock

Procurement LT
Need Forecast

Offer LT
Date Delivery to Customers

Date order Send by Customers

Date Delivery to Customers

Date order Send by Customers

For comparing the lead time, dont forget to compare on the same time scale (Working Days or Calendar Days)

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Stock Decision (ABC/FMR Matrix)

F
High Frequency Flow Stock Items Monitor Parameters & Replenishment Stock Items Monitor Parameters & Replenishment

M
Medium Frequency Flow Stock Items Monitor Parameters & Replenishment Stock Items Monitor Parameters & Replenishment

R
Low Frequency Flow

A
High Value Flow Inventory cost high Opportunity cost very high

Avoid Stock Risk of obsolescence

B
Medium Value Flow Inventory cost moderate Opportunity cost high

Avoid Stock Risk of obsolescence

C
Low value Flow Inventory cost low Opportunity cost medium Stock Items Automatic Replenishment Stock Items Automatic Replenishment Non Stock

D Non movers

Avoid Stock

*Please note only items with PLT > OLT need to be considered in the stocking decision
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Purchasing Decision (Transportation mode : Air/Sea freight)

Smart selection of transportation inbound mode can reduce our Procurement Lead-Time and Inventory stock:
S ea S h ip m en t

Example: Item R3 Sea PLT: 25 days Air PLT: 10 days Offer LT: 18 days Item price: 12,000AED Item weight: 1kg

P LT S ea = 2 5 d ay s 7 d ay s In v en t or y

O LT = 1 8 d a ys

D ay 1

Da y 5

D ay 10

Da y 1 5

Da y 2 0

D ay 2 5

A i r S h ip m e n t P L T A ir = 1 0 d a y s Z e ro In v en tory O LT = 18 da ys

D ay 1

Day 5

D ay 10

Day 15

D ay 2 0

Pros and cons of each transportation mode:

Air = short lead time, but expensive cost Sea = cheap cost, but long lead time (inventory cost)

A balance between transportation and inventory costs will help to decide the best mode.
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Purchasing Frequency (Fixed period)

Is it wise to spend the same amount of time on each and every item reference when creating a replenishment order? How often should I procure? If you have taken the time to classify your inventory items into categories of frequency of consumption (FMR) vs. value (ABC) then theres every chance that you can work with your IT team and create distinct and manageable buckets or pools of items. These buckets will then go a long way in facilitating your decision making and replenishment order creation tasks.

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Purchasing Decision (Fixed period)

It acts to smooth out the flow and reception of material into the warehouse.
Example : instead of receiving 2000pcs of an item at the beginning of the month, it may feasible to receive 500pcs each week. This will allow for smoother flow, plus the greater felixibility and control in case of unexpected events.

Its also assists the supplier by smoothing the outbound flow of material. Allocating or classifying the period has also financial gains. Think the Inventory, instead of keeping 2000pcs in stock at the beginning of the month and wait to deplete them, its is better to received 500pcs close the gap between the supplier invoice and your invoice to the customer
In in Sh m ntsan In n ry com g ip e d ve to 2000 1500 1000 500 0 W 1 eek W 2 eek W 3 eek W k4 ee W 5 eek W ek 6 e W 7 eek W 8 eek 2000 1500 1000 500 0 W 1 eek W 2 eek W ek 3 e W 4 eek

In m Ship e tsan In en co ing m n d v tory

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Safety Stock (SS)

What is the purpose of the safety stock ? What are the important parameters ? How could you calculate a safety stock ?
Safety Stock is that quantity of stock which you need to carry to offset unexpected events which can be classified under two types of risks:
Delays (Supplier delay, Production delay or Transportation delay) Market demand (Real consumption > Forecasted)

There are many ways of calculating safety stock some are simpler than others and will suit each business differently. It is up to each company to decide based on data availible and exact needs.
ABC/FMR Procurement lead-time (PLT) Fixed period procurement frequency Average Daily usage (ADU) historical daily consumption (3-6month average) Forecasted Daily Usage forecast daily consumption
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SS demand : risk with market demand

Stock level
Supplier delivery date

Longer the PLT, higher the risk!

Estimated usage

Real usage

Shortage

Time

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SS supplier : risk of delivery delay

Stock level
Supplier delivery date Supplier delay delivery

Longer the PLT, higher the risk!

Estimated usage

Real usage

Shortage

Time

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SS Calculation: Basic
Basic Formula: SS = a*PLT*ADU
PLT : shortest Procurement Lead Time. You may wish to cap the PLT at 1 month a :coefficient which depends on the variance of sales and the required level of service More erratic demand Less value
a A B C F (0,3) - 0,6 0,6 - 1 1 - 1,2 M 0,8 - 1 1 - 1,5 1,5 - 2 R 0,8 - 1 1 - 1,2 1,5 - 2

Examples of basic formula:

Example 1 : ADU = 40 ; PLT = 10; cat = AF Solution: a = 0,6 ==> SS = 0,6 x 10 x 40 = 240 Example 2 : ADU = 50 ; PLT = 35; cat = AM Solution: a = 1 ==> SS = 1 x 30 x 50 = 1500 Example 3 : ADU = 30 ; PLT = 15; cat = CM Solution: a = 2 ==> SS = 2 x 15 x 30 = 900
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Cap on 1 month (30 days)

SS Calculation: Advanced
Advanced Formula: SS = SSdemand + SSsupplier = (K*Z*PLT*ADU) + X*PLT*ADU
PLT: supplier lead time (cap at 1 month) Z: coefficient which depends on the ABC/FMR classification K: coefficient based on experience of the stock controller for fine tuning (usually 1) X: coefficient based on the suppliers OTD performance (lower X for reliable suppliers) ADU: historical daily usage (can use forecasted daily usage - FDU) SS supplier = X* PLT*ADU can be ignored depending on your requirements Z
Z A B C

More erratic demand

F 3 5 7 M 5 7 10 R 5 7 10

Value of X
Reliability 95%-97% 90%-95% 85%-90% 75%-85% X 5% 7% 10% 15%

Less value

Example 1 : ADU = 40 ; PLT = 10; cat = AF; Reliable supplier (5%) Solution: k = 1; Z = 3; since reliable supplier, X = 5% SS = 1*3* Sqr10 * 40 + 5%*Sqr10* 40 = 386 Example 2 : ADU = 50 ; PLT = 35; cat = AM; Unreliable supplier (20%) Solution: k = 1; Z = 5; X = 15% SS = 1 * 5 * Sqr 30 * 50 +15%*Sqr 30*50= 1424 (CAP PLT AT 30 days) There are other statistical formulas to calculate SS but these require more data and parameter preparation, and generally add more complexity. They dont necessarily add much more value or accuracy to SS
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Procurement / Replenishment formula

How much Do I Order?

Once stock parameters are understood and set up, we need to understand: when to replenish (procure) from suppliers, and how much to replenish to ensure the correct stocks & quantity are received on time to serve our customers Needs / resources balance - principles The replenishment calculation compares the needs with available resources, for each item, in replenishment lead-time window (PLT). Basically, all MRP systems are using a needs/resources philosophy:

Needs
safety stock open customer orders forecast

Resources
stock on hands open purchase orders

If needs > resources

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a purchase order is placed to the supplier

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Procurement/ replenishment methods

The 2 main methods of replenishment of stocks are: 1. Fixed reorder point 2. Dynamic reorder point MRP

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Replenishment Methods - Comparison

Fixed ROP
Process simple to implement (IT)
Stock maintained at pre-determined level Independent item demand management Less flexibility & reactivity Risk of damaging service rate

MRP (Dynamic ROP)

Method for All references. Unique way of management Visibility of real demand. More flexibility & fast reactivity Balancing stocks, client needs and forecasts. Stocks aligned with market needs Requires more accurate forecasts (market needs) risk if inaccurate Daily-Production-Planning (per day / Shift)
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Replenishment Methods : Fixed Reorder Point

Fixed reorder point = SS + (ADU x PLT) Then 2 options : total needs = fixed reorder point
PLT D

total needs = fixed reorder point + real orders To use fixed ROP + real orders brings : advantage : take into account backlog and big orders within PLT disadvantage : overstock if forecast is not correct

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Replenishment Methods : Fixed Reorder Point

ROP = SS+(ADU*PLT) ===> = 2+(1*10) = 12
Qty

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S T O C K

Reorder Point = 12

15
3 2 7 3 8 Safety Stock = 2

ADU = 1
d day
PLT

PO Quantity = (12+ (3+2+7+3+8)) - (15+0) = 20 Resultant Stock Level = 12

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ORDER QTY = (ROP + Customer orders) - (Stock + Purchase orders) PLT = 10

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Dynamic Reorder Point

MRP

Total needs = SS + Real past orders + max (Real orders, FDU)

PLT = customer orders with past due date d PLT = cust. Orders with due date within replenishment horizon

Qty

S T O C K

Max between cust needs and forecasts during D

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3

SS
=12
2*

1*

7 3 4 5 5 5 5 Cust needs

8 5

today d=3 days

PLT =12 days

5 5 6 6 Forecasts

Total resources = Current Stock + Incoming Supplier Orders

PLT = supplier orders with due date within replenishment horizon

ORDER POINT = Total resources - Total needs

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Exercise : represent the needs / resources balance

PLT = 12 days FDU = 5 from day 1 to day 10; 6 for day 11 and 12 SS = 12 ; MOQ = 25 Customer needs = 31
Detail of customer needs:
day-3=3; day-2=2; day1=7; day2=3; day3=4; day5=8; day14=4

Stock = 40
Global view of example what to buy now?
Total needs = SS + Real past orders + max (Real orders, FDU) = 12 + 5 + 67 = 84 Total resources = Current Stock + Incoming Purchase Orders (assume 0) = 40 + 0 = 40 To procure = NEEDS RESOURCES = 84-40 = 44

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Qty

Po1(25)

Po2(25)

T O T A L
40

S T O C K
3 2

A V A I L A B I L 16 I 11 T Y

23 18 13 6
1

18 12 8 3 6

No proposed order availability > 0

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SS level

35 SS
=12

Max between cust needs and forecasts during D

2* 1*

*remaining forecast
No considered outside PLT

7 5 5 5 5 3 4 Cust needs

8 5

5 5 6 6 Forecasts

4 t

today

PLT = 12

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Mistake on forecast
Qty Po3(25) Po1(25)
A V A I L A B I L I T Y

T O T A L
40

Po2(25)

Po3(25)

New order compressed

24 18 16 11 6
1

OR
18 Use of SS

S T O C K
3 2

13 2 -3

14 5 -1 -7
SS level

23

35 SS
=12
2*

New cust orders > forecast 4 t

1*

7 5 today

5 3

5 4

8 5

11 5 5 5

8 5

9 5

D = 12

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Discrepancy of inventory
Discrepancy
(-7) Qty Po3(25)

T O T A L S T O C K
33

Po1(25)

Po2(25)

New order compressed 24

A V A I L A B I L I T Y

16 9 4 -1
-6

11 6 1 -4

11 5
SS level

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*remaining forecast
No considered outside PLT

SS
=12 35
2*

1*

2 today

7 5 5 5 5 3 4 Cust needs

8 5

5 5 6 6 Forecasts

4 t

PLT = 12

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Supplier delay
Qty Po1(25) (Po2) late

T O T A L
40

S T O C K
3 2

A V A I L A B I L 16 I 11 T Y

Po2(25)

18 13 6
1

12 8 3 -2
SS level

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Use of SS

35 SS
=12
2*

-7
1*

7 5 5 5 5 3 4 Cust needs

8 5

5 5 6 6 Forecasts

4 t
30

today
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PLT = 12

Parameters : Order Quantity & Logistics Multiples

Order Quantity (OQ) is a compromise between stock coverage on one side and administrative, warehouse and transportation efficiency on the other. Usually, items are available in the following different Logistic Profiles (LP -packaging options):

Logistic Profile
LP1 - Indivisible Sales Unit (usually piece) LP2 - Package LP3 - Box LP4 - Pallet

FMR R M F

The theoretical order quantity (Qcc) will be adjusted considering the different logistics profiles available to maximise the relation between stock coverage and operational efficiency.

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Summary
Lead Time :
If OLT > PLT then NO NEED TO STOCK If OLT < PLT then NEEDS to STOCK

ABC/FMR :
ABC Turn-over value classification FMR Sales frequency classification ABC/FMR Matrix classification of what to stock, avoid stock and not to stock

Mode of Shipment :
MOS need to balance between Transportation Cost and Inventory Cost

Fixed Period :
Time managements, allocating time for each items Smoothing the flows from Suppliers to Warehouse operations

Safety Stock :
Deciding how much of Inventory you need to carry for the unexpected events

Multiples or Order Quantity :

Efficiency of Administrative, Transportation and Warehouse

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Summary
F
High Frequency Flow

M
Medium Frequency Flow

R
Low Frequency Flow

A
High Value Flow Inventory cost high Opportunity cost very high Monitor consumption Monitor consumption Avoid Stock. levels closely; keep good levels closely; keep good Monitor Closely amount of inventory and amount of inventory and FMC Low SS on-hand. SS on-hand. SS High Replenish weekly. Replenish every two Consume from SS then weeks. Use multiples Use multiples replenish

Monitor consumption Monitor consumption Avoid Stock. Buy by air. levels closely; keep good levels closely; keep good Monitor Closely Medium Value Flow amount of inventory and amount of inventory and FMC Low Inventory cost moderate SS on-hand. SS on-hand. SS Medium Opportunity cost high Replenish weekly. Replenish every two Consume from SS then weeks. Use multiples Use multiples replenish

C
Low value Flow Inventory cost low Opportunity cost medium Automatic Automatic Replenishment Monthly. Replenishment Monthly. Use multiples Use multiples Typically Non Stock. Stock for exceptions

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Qmax Concept
As a distributor of Schneider products, given the huge amount of growth in the region, you may have often felt that no matter what you do in terms of inventory planning, there are often instances when your inventory keeps running out. One way to counter this would be a large amount of Safety Stock, however high SS means high inventory cost. A way to keep your customers adequately supplied is by introducing and using the concept of Qmax Qmax is the maximum quantity in the stated lead time that you commit to supply when a customer places an order. Qmax is in no way a restrictive measure or a tool to discourage sales. All the Qmax aims to do is ensure that the highest possible no. of customers will be satisfied, rather than a handful of customers.

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Qmax Example
2000 pcs are stock in the warehouse
If no Q m a x; 2 c u s to m e r s a r e Happy If Q m a x s et t o 5 0 0 p cs th e n a ll C u s t o m e rs a re H a p p y

C u s t o m e r A : O rd e r s 5 0 0 p cs C u s t o m e r B : O rd e rs 1 5 0 0 p c s C u s t o m e r C : O rd e r s 1 0 0 p cs C u s t o m e r D : O rd e r s 2 0 p c s

Total Orders :

2,120 pcs

2 Happy Customers

4 Happy Customers

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Forecasting (Why are forecast needed?)

In most cases, offer lead-time is shorter than procurement one
C u s to m e r o rd e r d a te O ffe r L T
W1 W2 W3 W4 W5 W6 W7 W8 W9 W 10 W 11 W 12 W 13 W 14 W 15

P ro m is e d d e liv e ry d a t e
W 16 W 17 W 18 W 19

M a te r ia ls s u p p ly L T + P r o d u c tio n L T + O rd e r fu lfillm e n t L T P ro c u r e m e n t L T

To anticipate trends, promotion and business cycles

Volume
acity Cap rend nd T a ity Dem onal seas and Dem

Average Past Future

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Forecasting (Why are forecast needed?)

The Product Life Cycle requires specific actions at each stage

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Forecasting (Why are forecast needed?)

Average Monthly Sales = 150 Stock of Raw Materials = 2500 Monthly Capacity/Production = 2500 Total Monthly Deliveries = 2500 Average Monthly Sales 2009 = 500 5 000 pcs needed for the special Event

External suppliers =S= factories

=S= factories

IDC

Dubai RDC Customer A Average Monthly Sales = 350 Other Customers

Other RDC

Without forecasting these special event (like Promotion, New distributor/Customer, Big project, etc) the result are : Suppliers/Factories will end up splitting the deliveries Long lead time Pressures from all supply chain for the delivery improvements Losing customer satisfaction
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Forecasting these special event will resulting to : Supply Chain can plan accordingly (Suppliers/Factories can plan the raw materials needed, IDC/RDC prepares the logistical movements) Orders can be completely fulfilled accordingly Customer satisfaction

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Inventory Analysis: Stock Constitution

Managing the correct levels of stock is key to the success of any business. Optimising the stock levels is not easy but can bring much value. Holding extra, unwanted or wrong stocks reduces cash flow and has an associated cost (cost of capital).
Stock Coverage Forecasting Errors Slow moving or Obsolete Stock Strategic Stock Excess Stock Working inventory Targeted Stock Anticipated Stock GIT

As a first step, it is important that we know what stocks we are holding and why. Stock can be classified as per its origin, age and number of days coverage. It is important to classify your inventory into manageable and meaningful buckets and then set realistic targets of the amount of inventory that may be carried in each bucket.
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Stock Management
Dedicated resource full time or part time. It is important that someone is responsible for managing stocks, monitoring trends and updating all parameters Days of Inventory coverage: The concept of stock coverage is important when monitoring and targeting improvement. Days of inventory or stock coverage is calculated as: Stock on hand/ COGS x 30. Measuring coverage can be done at item level or on a global level. We categorise our stocks (stock on hand+ GIT) into various categories based on the coverage: Excess, OK, Short, Slow moving and Obsolete/ provision stocks etc Excess stocks
All items for which the Resources > Needs, could be classified as Excess. This can be a bit conservative and thus together with coverage is a better indicator of real Excess Sometimes we have specific reasons for holding excess (product launch, end of life, promotion, returns, parameter changes etc). It is important to understand the source of all excess and prevent future excess build up

Obsolete/ Proivision stocks

There are many ways to classify provision stocks it depends on specific company

Alerts on excess and shortage

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Thanks for your participation!

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