Académique Documents
Professionnel Documents
Culture Documents
Zied BABAI
Kedge Business School
mohamed-zied.babai@kedgebs.com
mohamed.babai@graduates.centraliens.net
Borj Cedria, Novembre 2016
Outline
-2-
Outline
-3-
Concept of Supply Chain
Stores
Warehouses
Stocking / Order preparation
Co-packing / Co-manufacturing
Plants, Factories
Production / Manufacturing / Assembly
components, semi-finished products, finished products
-4-
Third-party providers in Supply Chains
End
Manufacturer Retailer customer
Suppliers Suppliers Third Party Logistics Providers (3PL):
(Tier 2) (Tier 1) Warehousing Activities
Contract Manufacturers:
Manufacturing Activities
-5-
Various flows in Supply Chains
Material Flow
Suppliers
Suppliers
End
Manufacturer (OEM) Distributor/Retailer customer
Information Flow
Financial Flow
-6-
SC decisions and temporal horizons
-7-
Importance of Supply Chain Decisions
-8-
Supply Chain Objective and Performance
Efficiency-Responsiveness frontier
-9-
Overall trade-off: Responsiveness versus Efficiency
Facilities
Cost of the number, location, capacity, and type of facilities (efficiency) and the level of
responsiveness
Increasing the number of facilities increases facility and inventory costs but decreases
transportation costs and reduces response time
Increasing the flexibility or capacity of a facility increases facility costs but decreases
inventory costs and response time
Transportation
The cost of transporting a given product (efficiency) and the speed with which that
product is transported (responsiveness)
Using fast modes of transport raises responsiveness and transportation cost but lowers
the inventory holding cost
Inventory
Increasing inventory generally makes the supply chain more responsive
A higher level of inventory facilitates a reduction in production and transportation costs
because of improved economies of scale
Inventory holding costs increase
- 10 -
Process View of a Supply Chain
- 11 -
Cycle View of Supply Chain Processes
- 12 -
Push/Pull View of Supply Chain Processes
Supply chain processes fall into one of two categories depending on
the timing of their execution relative to customer demand
Pull: execution is initiated in response to a customer order (reactive)
Push: execution is initiated in anticipation of customer orders
(speculative)
Push/pull boundary separates push processes from pull processes
- 13 -
Push/Pull View of Supply Chain Processes
Useful in considering strategic decisions relating to supply chain
design more global view of how supply chain processes relate to
customer orders
Dell
- 14 -
Examples of Supply Chains
Zara
Toyota
Amazon
- 15 -
Outline
1 Overview
- 16 -
Decisions for the Supply Chain Design
Factories :
Specialisation degree and number of the factories (one product, family of products, all
products)
Factorys location and layout
Production capacity of the factory
Distribution Network
Network structure (Levels number)
Specialisation degree of the warehouses (family of products, all products, etc.)
Warehouse vs. Cross Docking hub
Warehouse/Cross Dock location
Transportation modes:
Road, rail, air, sea
Multimodal
etc
- 17 -
Supply Chain Design: Distribution Network
?
Customer
Factory
- 18 -
Distribution Systems
- 19 -
Direct Delivery Factories - Retailers
Stores
Factories
Supplier 1 Retailer 1
Stores
Factories
Supplier N Retailer P
- 20 -
Distribution via Supplier Warehouse
Stores
Factories
Warehouses
Supplier 1 Retailer 1
Stores
Factories
Warehouses
Supplier N Retailer P
- 21 -
Distribution via Distributor/retailer Warehouse
Stores
Factories
Warehouses
Supplier 1 Retailer 1
Stores
Factories
Warehouses
Supplier N Retailer P
- 22 -
Distribution via Supplier and retailer Warehouse
Stores
Factories
Warehouses Warehouses
Supplier 1 Retailer 1
Stores
Factories
Warehouses Warehouses
Supplier N Retailer P
- 23 -
Distribution via Cross Docks
Stores
Factories
Supplier 1 Retailer 1
Stores
Factories
Supplier N Retailer P
- 24 -
Cross-Docking
Popularized by Wal-Mart
- 25 -
Issues with Cross-Docking
Require a significant start-up investment and are very difficult to
manage
- 26 -
Distribution with Multi-Pick
Warehouses Warehouses
Stores
Factories
Supplier 1 Retailer 1
Stores
Factories
Warehouses Warehouses
Supplier N Retailer P
- 27 -
Distribution with Multi-Drop
Warehouses Warehouses
Stores
Factories
Supplier 1 Retailer 1
Stores
Factories
Warehouses Warehouses
Supplier N Retailer P
- 28 -
Distribution with Multi-Pick and Multi-Drop
Warehouses Warehouses
Stores
Factories
Supplier 1 Retailer 1
Stores
Factories
Warehouses Warehouses
Supplier N Retailer P
- 29 -
Distribution via Internet
Stores
Factories
Warehouses Warehouses
Supplier 1 Retailer 1
Stores
Factories
Warehouses Warehouses
Supplier N Retailer P
- 30 -
Distribution Via Internet and dedicated warehouse
Warehouses
Factories Stores
Warehouses
Supplier 1
Dedicated
Local Warehouse
Factories Retailer 1
Warehouses
Supplier N
- 31 -
Case study Produlact
- 32 -
Outline
1 Overview
Optimistic
Pessimistic
- 35 -
Optimistic Forecast
4.5 million.
Forecasting
Sales Planning
Estimates of the demand
under various scenarios
taking into account supply constraints
- 38 -
Various forecasting approaches
Forecasting
approaches
Qualitative Quantitative
approaches approaches
- 39 -
Qualitative Methods : Advantages & drawbacks
Advantages :
Take into account intangible factors
Used when there is little demand information
(launching a new product, new market, etc.)
Drawbacks :
Long delay of the process
Bias/subjectivity
High cost (ex. Experts consulting)
Not enough precision
Quantitative Qualitative
approaches approaches
Marketing/Sales
- 41 -
When to use extrapolation and causal methods
No
- 42 -
Identification of patterns: notion of trend
trend
- 43 -
Identification of patterns: notion of seasonality
cycle cycle
Seasonality patterns
and/or and/or
- 44 -
Yearly seasonality: due to products nature
Illustration of yearly seasonality on a month by month basis
- 45 -
Weekly seasonality: due to customers' behavior
Seasonality factors
- 46 -
Illustration of weekly seasonality at Orange stores in Romania
Seasonality factors
Seasonality factors
- 48 -
Outline
- 52 -
Operations and Supply Chain Planning: Why
- 53 -
Decision Levels & Horizons in the Supply Chain
Procurement Production Distribution
Supply chain design
Sourcing and Structure, focus Structure, focus
Long term
contract setting and design of and design of the
with suppliers the factory networkdistribution network
Supply chain planning (Sales and Operations Planning)
Adjustment/ Adjustment/ Adjustment/
Mid term
reservation of reservation of reservation of
suppliers capacityproduction capacitydistribution capacity
Production Planning and Flow management
Short term Procurement flow Production flow Distribution flow
management management management
- 54 -
54
The Sales & Operations Plan - The Master Production Schedule
Mid term plan (S&OP) Balance of the charge and capacity (Aggregate
planning (planning by family of products)
Short term plan (MPS) Taking into accounts the inventory and capacity
constraints
Available
inventories
Production
constraints
- 55 -
Part of an S&OP process
- 56 -
The S&OP and the MPS
How to satisfy the demand given by the S&OP if the capacity constraint
does not allow that?
S&OP
Capacity
Periods
Capacity Capacity
Periods Periods
Overtime working Anticipating stocks
Sub-contracting
- 57 -
Levers for Planning
Action on Action on
the the
capacity demand
Action on Action on
the the
inventory allocation
- 58 -
The S&OP and the MPS
Week Ratio 1 2 3 4 5 6 7 8 9 10 11 12
Product A1 1/3 20 20 20 20 25 25 25 25 30 30 30 30
Product A2 2/3 40 40 40 40 50 50 50 50 60 60 60 60
Product B1 1/4 15 15 15 15 20 20 20 20 10 10 10 10
Product B2 1/2 30 30 30 30 40 40 40 40 20 20 20 20
Product B3 1/4 15 15 15 15 20 20 20 20 10 10 10 10
- 59 -
The S&OP and the MPS
Week Ratio 1 2 3 4 5 6 7 8 9 10 11 12
Product A1 1/3 20 20 20 20 25 25 25 25 30 30 30 30
Product A2 2/3 40 40 40 40 50 50 50 50 60 60 60 60
Product B1 1/4 15 15 15 15 20 20 20 20 10 10 10 10
Product B2 1/2 30 30 30 30 40 40 40 40 20 20 20 20
Product B3 1/4 15 15 15 15 20 20 20 20 10 10 10 10
Illustration : Capacity constraint of 50 products per week
Week Ratio 1 2 3 4 5 6 7 8 9 10 11 12
Product A1 1/3 20 20 20 20 25 25 25 25 30 30 30 30
Product A2 2/3 50 50 50 50 50 50 50 50 50 50 50 50
Product B1 1/4 15 15 15 15 20 20 20 20 10 10 10 10
Product B2 1/2 30 30 30 30 40 40 40 40 20 20 20 20
Product B3 1/4 15 15 15 15 20 20 20 20 10 10 10 10
- 60 -
Case Study: C&C Company
- 61 -
Mini-Case: Production Planning Optimisation
SilComputer Example: SilComputer needs to meet the demand of its
largest corporate and educational customers for notebook computers
over the next four quarters (before its current model becomes obsolete).
- 62 -
Production Planning solution using Linear Programming
Decisions: how many of each computer to produce in each period at
regular time, how many to produce at overtime, and how much inventory
to carry in each period.
- 63 -
Production Planning solution using Linear Programming
Now, anything that starts as inventory or is produced in the period must
either be used to meet demand or ends up as inventory at the end of period 1.
This means:
5000 x1 y1 7000 i1
For period 2, in addition to the upper bounds, we get the constraint
i1 x2 y2 15000 i2
For period 3, we get
i2 x3 y3 10000 i3
and for period 4 (assuming no inventory at the end):
i3 x4 y4 8000
For each quarter i, we clearly need:
x1 , x2 , x3 , x4 10000 & y1 , y2 , y3 , y4 2500
Our objective cost to minimize over the four quarters is:
2000x1 2000x2 2000x3 2000x4 2050y1 2050y2 2050y3 2050y4
Minimize
100i1 100i2 100i3
- 64 -
Production Planning Optimal Solution using Excel Solver
The optimal solution is:
x1 4500
x2 10000
Production with
regular time x3 10000
x4 8000
y1 0
y 2 2500
Production with
overtime y3 0
y4 0
i1 2500
Stock i2 0
i3 0
which gives the total cost: $70375000
- 65 -
Outline
- 66 -
Outline
4.2 BeerGame
- 67 -
Pharmacy case
- 68 -
Pharmacy case
You are pharmacist:
how would you manage the flow of
products?
?
1. What are the possible orders placed by
the pharmacist to the supplier?
Inventory
consumption
Forecasts
Firm
orders
Manufacturer (OEM)
MTO (Make-To-Order)
Products are manufactured in response to firm orders
MTS (Make-To-Stock)
Products are manufactured in anticipation of future
demands
- 74 -
Alternative strategies to respond customers demand
Reactivity Risks/Costs
- 75 -
Various Flow Management approaches
Make
To Firms MRP TYPE
Order orders METHODS
(MTO)
- 76 -
Various Flow Management approaches
Standard
inventory
management
methods
Inventory
Consumption
Kanban type
Make methods
To
Stock
Forecast based
(MTS) inventory
management
methods
Demand
Forecasts
MRP type
methods
- 77 -
Combining MTO and MTS strategies
Decoupling
Product point
variety
Production
MTS MTO stage
Location of the
decoupling point
upstream of
important product
Criteria differentiation steps
based on
product
variety
Criteria
based on Criteria
the strategy based on
of the value added
company
Location of the Location of the
decoupling point in decoupling point
order to achieve a upstream of activities
given reactivity to the with high value added
customers
- 79 -
MTS/MTO Strategy at the Whole Supply Chain Level
??? ???
Decoupling
point
End
Manufacturer (OEM) Distributor/Retailer customer
Suppliers Suppliers
(Tier 2) (Tier 1)
MTS MTO
- 80 -
Automotive Supply Chain: Original Flow Organization
Suppliers
Car Manufacturer
MTS MTO
- 81 -
Automotive Supply Chain: Local Suppliers
Remote Advanced
Suppliers Stock
Car Manufacturer
MTS MTO
- 82 -
Various financial stakes in Flow Management
Production
costs
Purchasing Transportation
cost cost
Inventory Shortage
holding cost cost
- 83 -
The cost of holding an inventory consists of three parts
The financial cost:
Pertaining to the financial investment of the products which are in stock
(opportunity cost)
The physical storage cost:
Pertaining to the physical aspect of the storage of products (stocking,
handling, administration, insurance, spoilage,)
The obsolescence cost:
Pertaining to the loss of value of products in stock due to obsolescence
or perishability
Obsolescence in case of short life cycle products, e.g. electronic components in the semi
conductor industry
Perishability in case of short life time products, e.g. dairy products in the food industry
- 84 -
Inventory holding (or carrying) costs
- 85 -
Illustration of inventory holding costs
Inventory level
6
- 86 -
Detailed analysis of inventory holding costs (1)
- 87 -
Detailed analysis of inventory holding costs (2)
rfin is provided by the CFO (chief finance officer). Can be taken as equal to
the WACC (weighted average cost of capital)
It can be determined by a cost analysis pertaining to the obsolescence for
this product
- 88 -
Shortage costs
a demand that
cannot be satisfied
immediately is
Backlog backordered and will
case be satisfied later (as
soon as products
are available again)
Two
situations
a demand that
Lost sale cannot be satisfied
case immediately is lost
- 89 -
Shortage costs
Backlog
case
External Internal Internal
Customer Customer Customer
(other B.U.) (same B.U.)
Cash flow impact Internal costs
Mostly
Penalty costs (in B2B similar to (production costs,
context) external transportation costs)
Additional costs customer Additional costs if it
(express delivery situation eventually impacts an
costs, litigation external customer are
costs,...) mostly similar to
external customer
Loss of goodwill situation
(implicit cost)
- 90 -
Shortage costs
Lost sale
case
- 91 -
Transportation costs
Distance
Load
- 92 -
Transportation costs based on quantity (for a given distance)
A(Q)
slope AV
AF
Q
number of products
(or cases, pallets,)
Reasonable assumption : transportation cost = fixed cost + variable cost
(proportional to quantity)
AF : transportation fixed cost (whatever the quantity is)
AV : variable transportation cost (cost per unit of load)
Transportation cost : A(Q) = AF+AVQ
- 93 -
Purchasing costs
Two situations:
Purchasing cost is independent of the quantity ordered
Purchasing cost does depend on the quantity ordered
There is an incentive to buy in large quantities
- 94 -
Outline
4.2 BeerGame
- 95 -
The traditional Beergame
Forrester & John Sterman developed a table game called BeerGame at MIT.
Each player takes charge as one of the centers in the supply chain.
- 96 -
The traditional Beergame (cont.)
- 97 -
Considered Supply Chain
- 98 -
Supply chain major costs (not all considered in this game)
Factory:
Production cost
- 99 -
Supply chain considered costs (cont.)
Backordering cost
- 100 -
This version of the Beergame
- 101 -
Steps to connect to the Beergame
Click on the link on the right hand side of the institution name.
- 102 -
Steps to play the Beergame
When a player clicks on the link to play the game, he would see the entire list
of groups registered to play this game. The player would be directed to click
on his group (e.g. 465-Spring06), which would direct him to the list of games.
When the player clicks on the game button, he would see a snapshot of the
supply chain as shown below,
- 103 -
This version of the Beergame (example screen of retailer)
The player just has to decide how much to order from his upstream partner.- 104 -
The Bullwhip Effect
Consumer Sale Retailers order to
Manufacturer
Order Order
Quantity Quantity
Time Time
Time
Time
Lee et al, 1997)
- 105 -
Some Examples
- 106 -
Bullwhip Effect - Causes
Bullwhip
Effect
- 107 -
Reducing the Bullwhip Effect
Information Sharing
Reduction
of Bullwhip
Channel Alignment Effect
Operational Efficiency
- 108 -
What are the other real world issues that could cause additional
difficulties? (I)
For the factory:
Shortage in raw materials
Capacity constraint
Multi-product environment
Sharing capacity between products
- 109 -
What are the other real world issues that could cause
additional difficulties? (II)
Variability in delays associated with flows:
Information flow
Physical flow
Production
Transportation
In the long term, lack of goodwill of customers and loss of market share
Primary Secondary
Store
WH WH
Primary Secondary
Factory Store
WH WH
Primary Secondary
WH Store
WH
- 111 -
Outline
3.1 BeerGame
- 112 -
MRP uses advance demand information given by the MPS
Demand forecast
Example: forecast of the need in terms of number of products of each type for each
week
Obtained from :
Internal forecasting process (causal methods, statistical extrapolative methods, etc..)
Information on customers expected orders (market behavior, questionnaires, etc..)
- 113 -
The Master Production Schedule (MPS)
The Master Production Schedule (MPS) prescribes the quantities to produce
in each period and for each type of products
Week 1 2 3 4 5 6 7 8 9 10
Product A 100 180 140 110 120 120 180 80 110 160
Product B 80 90 70 40 80 90 120 90 100 110
Product C 340 360 320 280 340 360 260 280 250 210
Firm zone Forecast zone
- 114 -
Objectives of the MRP Method
The time periods and the quantities ( How much and When ) of
Production orders (production or assembling) in the different production stages
Replenishment orders
- 115 -
Principle of the MRP Method
- 116 -
Bill Of Material (BOM)
The components produced inside the system (from the purchased components)
- 117 -
Illustration of a Bill Of Material
Coefficient
of utilisation
3 A Level 0
3 E 3 F 1 G 5 H Level 2
2 I 4 J 1 K 3 L Level 3
6 M 2 N 2 O Level 4
- 118 -
Requirements computation for a component : Illustration
A1 A2
(4) (1)
(4)
B J
(1) (6)
E
(2) (2)
J J
- 119 -
Material Requirements Planning: Illustration
Three stages system 2 A1
Bill of Material:
(1) (2)
Independent demand: 2 end products A1 et A2
1 B1 3 C
Dependant demand: 4 components B1, B2, C et D
(1)
Advance information on demand for end products
1 D
1 1 B1
2 A2
D B2
Fab 1 Fab 2 2 A1 (4) (1)
A2 1 B2 3 C
3
Ass
C (1)
Fab 3 1 D
- 120 -
Material Requirements Planning: Example (10 units for A1 in day 6)
Offset L=2
Production of 10A1 d4
Coefficient = 1 Coefficient = 2
Production of 10D d2
- 121 -
Illustration of the MRP approach:
Example of a MPS with 10 products A1 and 20 products A2 required in day 6
Scheduled Receipts Quantity already ordered and that will be available (at
the beginning of the period)
Projected On Hand Quantity projected to be available (at the end of the
Inventory period)
Net Requirements Quantity effectively required (at the beginning of the
period)
Planned Order Receipts Quantity to have (at the beginning of the period)
Planned Order Releases Quantity to order (at the beginning of the period)
- 123 -
MRP Procedure
The MRP method enables to determine the required quantity for each
component at each time period by using the following procedure :
1. Planned Order Releases for each component are computed by using the Gross
Requirements of this component
2. The Gross Requirements for each component are obtained by using the Planned
Order Releases of all the components in the upper level that uses this component
- 124 -
MRP Procedure: Example
Lead-time = 2
Periods 0 1 2 3 4 5 6 7 8 9 10 11 12
Gross Requirements 0 60 70 260 67 90 180 40 200 65 110 10
Scheduled Receipts 15
On Hand Inventory 20
Net requirements
Planned Order Receipts
Planned Order Releases
Periods 0 1 2 3 4 5 6 7 8 9 10 11 12
Gross Requirements 0 60 70 260 67 90 180 40 200 65 110 10
Scheduled Receipts 15
On Hand Inventory 20 35 0 0 0 0 0 0 0 0 0 0 0
Net requirements 0 25 70 260 67 90 180 40 200 65 110 10
Planned Order Receipts 0 25 70 260 67 90 180 40 200 65 110 10
Planned Order Releases 25 70 260 67 90 180 40 200 65 110 10 0 0
- 125 -
Illustration with MRP Tables : Example
The table below gives the gross requirements for the finished products A1 and
A2 over an horizon composed of 12 periods
1 2 3 4 5 6 7 8 9 10 11 12
A1 0 0 0 0 0 120 65 220 10 0 150 60
A2 0 0 0 0 0 90 180 40 200 65 110 10
Initial stocks and scheduled receipts for each entity are given below :
0 1 2
A1 15 A1 30 20
A2 20 A2 15 0
C 25 C 40
- 126 -
Illustration with MRP Tables (cont.)
Requirements for product A1 :
Periods 0 1 2 3 4 5 6 7 8 9 10 11 12
Gross Requirements 0 0 0 0 0 120 65 220 10 0 150 60
Scheduled Receipts 30 20
On Hand Inventory 15
Net requirements
Planned Order Receipts
Planned Order Releases
- 127 -
Illustration with MRP Tables (cont.)
Requirements for product A1 :
Periods 0 1 2 3 4 5 6 7 8 9 10 11 12
Gross Requirements 0 0 0 0 0 120 65 220 10 0 150 60
Scheduled Receipts 30 20
On Hand Inventory 15 45 65 65 65 65 0 0 0 0 0 0 0
Net requirements 0 0 0 0 0 55 65 220 10 0 150 60
Planned Order Receipts 0 0 0 0 0 55 65 220 10 0 150 60
Planned Order Releases 0 0 0 55 65 220 10 0 150 60 0 0
- 128 -
Illustration with MRP Tables (cont.)
Requirements for product B1 :
Periods 0 1 2 3 4 5 6 7 8 9 10 11 12
Gross Requirements 0 0 0 55 65 220 10 0 150 60 0 0
Scheduled Receipts 0
On Hand Inventory 0
Net requirements 0 0 0 55 65 220 10 0 150 60 0 0
Planned Order Receipts 0 0 0 55 65 220 10 0 150 60 0 0
Planned Order Releases 0 0 55 65 220 10 0 150 60 0 0 0
- 129 -
Illustration with MRP Tables (cont.)
Periods 0 1 2 3 4 5 6 7 8 9 10 11 12
. . . . . .
Gross Requirements 0 0 0 165 310 480 220 65 410 130 0 0
Scheduled Receipts 40
On Hand Inventory 25 65 65 65 0 0 0 0 0 0 0 0 0
Net Requirements 0 0 0 100 310 480 220 65 410 130 0 0
Planned Order Receipts 100 310 480 220 65 410 130 0 0
Planned Order Releases 100 310 480 220 65 410 130 0 0 0 0 0
- 130 -
Issues to take into account (constraints and uncertainties)
Non-quality
Forecasting unreliability
Quantities and due dates
Non-quality
Forecasting unreliability
Quantities and due dates
Non-quality
Safety stock
Forecasting unreliability Safety quantities
Quantities requirements
Setup constraints
Lot Sizing
Setup Time and/or Cost
- 133 -
Coordination of distribution flows with MRP :
The DRP (Distribution Requirements Planning)
Offsetting 3 days
Offsetting 4 days
Requir.
LT 3 days
Offsetting 1 jour
Requirements
Requirements
Requirements
LT 4 days
Primary LT 1 day
Warehouse
Requir.
LT 1 day
LT 2 days
Offsetting 1 day
Secondary
warehouse
Offsetting 2 Local
days warehouses
- 134 -
MRP II (Manufacturing Resource Planning)
- 135 -
Boundaries of MRP II (Manufacturing Resource Planning)
MPS
Marketing
Short term
planning and flow MRP
management
CRP Accountancy
.
. MRP II
Scheduling
.
- 136 -
Evolution of MRP (Software: CRP, CAPM, MRP II, ERP, APS, etc.)
- 137 -
Commercial ERPs and APS (2004 report)
Other
- 138 -
Outline
3.1 BeerGame
- 139 -
What is inventory management?
- 140 -
Functions of Inventory
Statement:
either an inventory has a function and therefore a justification
- 141 -
Why do firms have inventory?
- 142 -
Inventories: 4 aggregate categories (1/5)
- 143 -
Inventories: 4 aggregate categories (2/5)
Work-In-Progress (WIP)
inventories:
Consisting of items
such as components or
assemblies considered
to be input to the
transformation
processes of the firm
- 144 -
Inventories: 4 aggregate categories (3/5)
Maintenance/Repair/
Operating (MRO)
inventories:
Consisting of spare
parts and items
necessary to keep
machinery and
processes
productive
- 145 -
Inventories: 4 aggregate categories (4/5)
- 146 -
Inventories: 4 aggregate categories (5/5)
Supplier
Manufacturing Plant
Raw
Materials
Retailer Distribution
Center
- 147 -
Inventory System
Ordered
Quantity
Stock RM Stock FG
System Demand
Lead-time
Issues and decisions:
Is it important to keep a product in stock ?
Low
C
Few Many
Number of Items
Other criteria can be used to classify items
Demand rate, demand frequency, etc.
Classified products are hence allocated in storage areas based on their rotation rate
Different inventory management systems to different classes of products
- 149 -
ABC analysis method
- 150 -
Analyse ABC [Paretto] - Example
Demand Cumulated 5 59
Products in % Class
rate demand rate 6 9
9 221 221 29,9% A 7 12
10 165 386 52,2% A 8 23
2 45 646 87,4% B
4 34 680 92,0% B
8 23 703 95,1% C
1 15 718 97,2% C
7 12 730 98,8% C
6 9 739 100,0% C
- 151 -
ABC graphic
800
400
386
300
200
100
221
A B C
0
9 10 3 5 2 4 8 1 7 6
Products
- 152 -
Example of warehouse organisation using the ABC Analysis
50 m 60 m 70 m 80 m
Zone C
30 m 40 m 50 m 60 m
Zone A
Inbays/
Outbays 30 m 40 m 50 m 60 m
Zone B
30 m 40 m 50 m 60 m
50 m 60 m 70 m 80 m
- 153 -
Characteristics of Inventory Systems
Review time
Continuous Review vs. Periodic Review
Continuous review: System that keeps track of removals from inventory continuously, thus
monitoring current levels of each item (e.g.: supermarket shelf inventories)
Periodic review: Physical count of items made at periodic intervals (e.g. soda machine)
Advantages and drawbacks ?
- 154 -
Stock evolution and review policy: illustration
Exemple 1
Monthly demand
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
30 30 10 30 40 40 10 0 30 30 20 20
Demands are backordered if they can not be satisfied directly from the stock
- 155 -
Stock evolution and review policy: illustration
Policy 1 Policy 2
Monthly
Initial stock Stock at Initial stock Stock at the
demand
Replenish. (after the end of Replenish. (after end of the
replenishment) the month replenishment) month
Jan
Feb
Mar
Apr
May
Jun
July
Aug
Sept
Oct
Nov
Dec
- 156 -
Stock evolution and review policy: illustration
- 157 -
Stock evolution: continuous review
The policy 3 consists in a continuous review with a reorder point equal to 30 (the
orders are launched only if the physical stock at the end of the month is strictly less
than 30). The ordered quantity is equal to 50.
Policy 3
Monthly
demand Initial stock Stock at the
Replenish. (after end of the
replenishment) month
Jan 30 50
Feb 30
Mar 10
Apr 30
May 40
Jun 40
Jul 10
Aug 0
Sept 30
Oct 30
Nov 20
Dec 20
- 158 -
Stock evolution: continuous review (cont.)
Policy 3
Monthly
Initial stock Stock at the
demand
Replenish. (after end of the
replenishment) month
Jan 30 50 20
Feb 30 50 70 40
Mar 10 40 30
Apr 30 30 0
May 40 50 50 10
Jun 40 50 60 20
Jul 10 50 70 60
Aug 0 60 60
Sept 30 60 30
Oct 30 30 0
Nov 20 50 50 30
Dec 20 30 10
- 159 -
Inventory performance measures
- 160 -
Inventory Costs
Holding cost
The sum of all costs that are proportional to the amount of inventory on hand at any time
The opportunity cost of money invested
The expenses incurred (warehousing, handling, deterioration, theft, insurance, taxes etc.)
Penalty cost
Cost of having an item out-of-stock when it is Demanded
In case of backorders, there is a cost of special handling of the backordered item.
In case a substitute part is used, there may be a cost of customer goodwill loss or opportunity
loss
- 161 -
Inventory holding cost calculation: example
Example
Initial Stock si = 100 units
Calculate the holding cost over a period of 30 days in the following cases:
Demand occurring at the beginning of the period
- 162 -
Inventory holding cost calculation: example
Cs = 20 * 0.15 * 30 = 90
- 163 -
Total inventory cost calculation
Total inventory cost: Ct
Holding cost : Cs
Ordering cost : Ca
Shortage cost : Cr
Ct = Cs + Ca + Cr
where
- 164 -
Total inventory cost calculation: illustration
Consider again the example 1 (slide 80) and calculate the total inventory
cost of each replenishment policy knowing that:
We assume that the demand occurs continuously and uniformly over every
month
- 165 -
Total inventory cost calculation: illustration
Policy 1 Policy 2
Monthly
Initial stock Stock at the Initial stock Stock at the
demand
Replenish. (after end of the Replenish. (after end of the
replenishment) month replenishment) month
Jan 30 75 65 35 50 40 10
Feb 30 35 5 10 -20
Mar 10 5 -5 50 30 20
Apr 30 75 70 40 20 -10
May 40 40 0 50 40 0
Jun 40 0 -40 0 -40
July 10 75 35 25 50 10 0
Aug 0 25 25 0 0
Sept 30 25 -5 50 50 20
Oct 30 75 70 40 20 -10
Nov 20 40 20 50 40 20
Dec 20 20 0 20 0
- 166 -
Total inventory cost calculation: illustration
= 0.83
- 167 -
Total inventory cost calculation: illustration
Policy 1 Policy 2
Cs Ca Cr Cs Ca Cr
Jan
Feb
Mar
Apr
May
Jun
July
Aug
Sept
Oct
Nov
Dec
Total
- 168 -
Total inventory cost calculation: illustration
Policy 1 Policy 2
Cs Ca Cr Cs Ca Cr
Jan 7.5 12 3.75 12
Feb 3 0.25 13.33
Mar 0.18 2.5 3.75 12
Apr 8.25 12 1 3.33
May 3 3 12
Jun 0 40 0 40
July 4.5 12 0.75 12
Aug 3.75 0
Sept 1.5 0.833 5.25 12
Oct 8.25 12 1 3.33
Nov 4.5 4.5 12
Dec 1.5 1.5
Total
137,33 156,75
- 169 -
Inventory sizing
High Or Low
Inventories?
- 170 -
Pressures for small inventories
Cost of Capital
Weighted Average
Cost of Capital
(WACC)
- 171 -
Pressures for small inventories
Inventory
requires space
(to be bought
or to be rented)
Inventory
should be
moved onto &
out of storage
- 172 -
Pressures for small inventories
Are depending on
Insurance Costs the level of the
end-of-year
inventory
Taxes
- 173 -
Pressures for large inventories
Customer Service
Inventory may
speed delivery and
improve the firms
on-time delivery.
High inventory may
reduce the
potential for
stockouts and
backorders
- 174 -
Pressures for large inventories
Ordering cost
- 175 -
Pressures for large inventories
Setup cost
Changing over a
machine or
workspace to
produce a different
item represents a
setup cost
(This cost represents
a pressure to work
on big batches)
- 176 -
Pressures for large inventories
- 177 -
Pressures for large inventories
Transportation cost
Outbound or
inbound
transportation cost
may be reduced by
increasing
inventory levels
(It allows more full-
carload shipments )
- 178 -
Pressures for large inventories
Payment to
suppliers
- 179 -
Inventory Management : Economic Order Quantity
Total cost:
Annual Annual
Total cost = holding + ordering
cost cost
Q + D S
TC = H
2 Q
Using calculus, we take the derivative of the total cost function and set
the derivative (slope) equal to zero and solve for Q.
- 180 -
Characteristics of an Inventory Management policy
When ?
r
time time
How much ?
- Fixed quantity Q
- Order-Up-To-Level S
- 181 -
Four Policies for managing Inventories
How Much
Fixed quantity: Order-Up-To:
Q S
When
Periodically: (T,Q) (T,S)
T
Continuous: (r,Q) (r,S)
r
(r,Q) : Continuous review system with reorder point and fixed quantity
- 182 -
Role of Parameters and Notion of
Safety Stock
- 183 -
Reorder point
Reorder point without safety stock
d = Daily demand
L = Order lead time
- 185 -
Continuous Review Reorder Point Policy
Safety stock:
z STD L
Reorder Level, R:
L AVG z STD L
- 187 -
Service Level & Safety Factor, z
Service 90% 91% 92% 93% 94% 95% 96% 97% 98% 99% 99.9%
Level
z 1.29 1.34 1.41 1.48 1.56 1.65 1.75 1.88 2.05 2.33 3.08
- 188 -
Continuous Review Policy: Example
Month Sept Oct Nov. Dec. Jan. Feb. Mar. Apr. May June July Aug
Sales 200 152 100 221 287 176 151 198 246 309 98 156
- 189 -
Periodic Review Reorder Point Policy
Review period:
Safety stock:
Reorder Level, R:
- 190 -
Safety stock based on demand histogram
Demand Histogram
20
Nb of observations
18
16
14
12
10
8
6
4
2
0
Demand
- 191 -
Reorder point calculation based on demand probabilities
Probability distribution of the
0,3 cumulative demand during
lead-time Probability of 95% for
having a demand 28
0,25
0,2
0,1
0,05
0
20-6 21
-5 22
-4 23
-3 24
-2 25-1 260 271 28
2 3 Maximal 6 for a service
4 5demand
Level of 95%: Reorder point
- 192 -
Reorder point calculation based on demand probabilities
1,2
Target service level
1
1
0.95
0,6
0,4
0
20 21 22 23 24 25 26 27 28 29 30 31 32
-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6
- 193 -
Outline
- 194 -
Supply Chain Operations
Reference model (SCOR)
- 195 -
Structure of the SCOR Reference Sourcebook
- 196 -
SCOR Performance Attributes
Attribute Strategy
Reliability Consistently getting the orders right, product meets
(RL) quality requirements
Customer
- 197 -
Anatomy of SCOR Processes
Plan
Customer processes
Supplier processes
Sourc
Make Deliver
e
Return
Enable
- 198 -
SCOR Processes and the Supply Chain
Plan
Plan Plan
- 199 -
Levers for supply chain
performance
- 200 -
Forms of Supplier/Customer Relationships
Supplier Customer
- 201 -
Forms of Supplier/Customer Relationships
Customer
Supplier
Supplier Customer
- 202 -
Consigned Inventory
Supplier Customer
- 203 -
Vendor Management Inventory : New ordering process
Traditional ordering process
Data sharing
VMI or CMI?
- 205 -
Vendor Management Inventory
Manufacturer
Retailer
- 206 -
VMI or CMI ?
1
Order proposal elaborated by
supplier
2
Supplier Procurement by supplier Retailer
Customer
Supplier
Supplier Customer
Who bears the Who bears the
transportation costs? warehouse costs?
- 208 -
Centralized inventory/flow management
Each store
decides when
and how much to
order Order
Inventory level
Centralized
flow
management Shipments
A central team
decides when
and how much to
ship to each
store
Central
Warehouse
End
stores Customers
- 210 -
Collaborating with suppliers or customers may provide higher global
performance
Supplier Customer
CPFR (Collaborative Planning, Forecasting and Replenishment)
Retailer
Web
1 Server
The supplier transfers its sales
forecasts (including promotions).
2
The retailer gives its sales
forecasts (including
promotions and
merchandising).
- 212 -