Post on 26-Dec-2015
MIM 514Global Sourcing
Class seven
AgendaInventory & Variances
BasicsIs it good & why / why not
Cisco & Altera Inventory BubbleScientific Glass Case AnalysisStudent Analysis
Costs Associated withGoods for Sale1. Purchasing costs include NPI thru transportation costs.
2. Ordering costs include receiving,inspecting the items in the orders, as well as well as RMAs for defects .
3. Carrying costs include the opportunity costof the investment tied up in inventory andthe costs associated with storage. Amplified by return privileges.
Costs Associated withGoods for Sale4. Stock-out costs occur when an organization
runs out of a particular item for whichthere is a customer demand, far higherthan inventory costs.
5. Quality costs of a product or service is its lackof conformance with a pre-specified standard.Again, far higher than inventory carry costs.
Inventory Carry Costs – Is inventory an asset?Inventory Carrying rate example: total inventory = $34,400$800K – Storage$400K – Handling$600K – Obsolescence$800K – Damage$600K – Administrative$200K – Loss$3,400 – Total
Divide costs by Avg Inventory $3,400 / $34,400 = 10%Add: Opportunity costs of Capital 9%, Insurance 4%, Taxes 6%
=19%
Total Inventory carrying rate is 29%
Cash-to-Cash Cycle Time0ENLI009
Inventory days + Days sales outstanding – Average payment of supply period for materials
Inventory0OPPLAN012
Forecast Accuracy
0OPPLAN008
Production Lead Times
0OPMAKE017
Perfect Order Fulfillment
0OPDEL061
Faultless Invoices
0OPDEL023
Scheduled Achievement
0OPMAKE022Delivery
Performance to Scheduled Commit Date
0OPDEL019
Returns0OPDEL067
Scrap0OPMAKE023
Fill Rates0OPDEL025
Order Fulfillment Lead Time
0OPPLAN030
Machine wait time0OPMAKE007
Yield0OPMAKE033
Number of Supply
Sources0OPSO012Total Source
Lead Time0OPSO041
0ENLI015
Sales0ENPR026
0ENLI0030OPPLAN017
Reasons for Inventories• Improve customer service• Economies of purchasing• Economies of production• Transportation savings• Hedge against future• Unplanned shocks (labor strikes, natural
disasters, surges in demand, etc.)• To maintain independence of supply
chain
Adding Value through Inventory
• Quality - inventory can be a “buffer” against poor quality; conversely, low inventory levels may force high quality
• Speed - location of inventory has gigantic effect on speed
• Flexibility - location, level of anticipatory inventory both have effects
• Cost - direct: purchasing, delivery, manufacturingindirect: holding, stock-out.
Which begs the question “who is liable?” :
• Need for Finished Goods Inventories• Is the need to satisfy internal or external
customers?• Can someone else in the value chain carry the
inventory?
• Ownership of Inventories• Specific Contents of Inventories• Locations of Inventories• Tracking
10
Supply Chain Management – Key Issues
• Forecasts are never right• Very unlikely that actual demand will exactly equal
forecast demand
• The longer the forecast horizon, the worse the forecast• A forecast for a year from now will never be as accurate
as a forecast for 3 months from now
• Aggregate forecasts are more accurate• A demand forecast for all “related products” will be
more accurate than a forecast for a specific product / SKUNevertheless, forecasts (or plans, if you prefer) are important
management tools when some methods are applied to reduce uncertainty
Supply Chain Management – Key Issues
Overcoming functional silos with conflicting goals
PurchasingManufacturingDistributionCustomer Service/Sales
Few change- overs
Stable schedules
Long run lengths
High inventories
High service levels
Regional stocks
SOURCE MAKE DELIVER SELL
Low pur-chase price
Multiple vendors
Low invent-ories
Low trans-portation
Economic-Order-Quantity Decision Model: One of many metrics to balance Inv.
EOQ =2DP
C
D = Demand in units for a specified time period
P = Relevant ordering costs per purchase order
C = Relevant carrying costs of one unit in stock for the time period used for D
13
Supply Chain Integration – Pull StrategiesProduction and distribution are demand-driven
Coordinated with true customer demandNone or little inventory held
Only in response to specific ordersFast information flow mechanisms
POS dataDecreased lead timesDecreased retailer inventoryDecreased variability in the supply chain and
especially at manufacturersDecreased manufacturer inventoryMore efficient use of resourcesMore difficult to take advantage of scale opportunitiesExamples:
Supply Chain Integration – Push/Pull Postponement
Hybrid of “push” and “pull” strategies to overcome disadvantages of each
Early stages of product assembly are done in a “push” manner
Final product assembly is done based on customer demand for specific product configurations
Supply chain timeline determines “postponement boundary”
Supply Chain TimelineRaw
Materials Endconsumer
Push Strategy Pull Strategy
Post-ponementBoundary“Generic” Product “Customized” Product
Inventory Measures - Examples
Weeks of SupplyFord: 3.51 weeksSears: 9.2 weeks
Inventory Turnover (Turns)Ford: 14.8 turnsSears: 5.7 turnsGM: 8 turnsToyota: 35 turns
Variances are bad – PPV & Standards
“unfavorable variance” = is reduced from the budgeted expectation
“favorable variance” = is increased from budgeted expectation
When is cost reduction a bad thing?Note: Do not interpret directly as “bad” or
“good” behavior on the part of management; the goal is to be on target.
Important points to keep in mind• Segment customers based on service needs.• Modify the supply chain to meet these service
requirements profitably.• Customize the logistics network.• Develop forecasts collaboratively involving every
link of the supply chain.• Locate the leverage point where the product is
unalterably configured to meet a single requirement
• Delay product differentiation till the last possible moment.
• Assess options such as modularized design or modification of manufacturing processes that can increase flexibility.
• Cultivate strong relationships (guanxi) with suppliers.
• Efficient supply chain management has to be accompanied by a technology strategy.
Cisco / Altera
Yr. 2000 – Cisco wrote off $2.25BAltera’s answer? – A new PostponementCapacity utilization – 2000 (97%) 2001
(66.2%) What should it be?What is happening now in component lead-
times? Is it real?Is VMI the real answer?Value drops 1.3% per month
Scientific Glass
Helpful Hints:1. What are the Options & savings with
each?1. Fill rate lowered & trunk stock
eliminated2. One Warehouse vs. logistics costs3. Outsource 4. Combination of the above?5. What about Cash????
Scientific Glass
Case Questions:What are the problems facing SG in January 2010?How much external funding will have to be raised in
2010 to finance ops?How so SG’s problems illustrate the relationship
between the number of warehouses and inventory levels?
What are the alternatives & how do you evaluate those?
What actions should Ava propose?
Scientific Glass
Assessment alternatives: 5 questions1. Implement proposed policy changes?2. Consolidate warehouses?3. Outsource warehousing?4. Reduce the target total order fill-rate?5. Other considerations?
Scientific Glass – Inventory CaseWhat we know:- Exceeded their target debt/capital of 40%- $2B market; 5% share- High volume / low mix? 3000SKUs- Niche player, custom SKUs, competitive
pressure.- Does the 3-6 month sales cycle matter to
SCM? - Inventory growing faster than sales- Emphasis on short lead-times & customer
satisfaction
Scientific Glass – Inventory CaseWhat do we know?- Dedicated Sales force – Trunk stock 32*$10K- 93% fill-rate, 2 week lead-time- Overage cost .6%. BO 10% GM.- Incentive is on fill-rate to 99%- 8 DCs * $750K + 2 new ones planned- Sales forecasted to grow 20%; Capacity
requested to support = $10M
Scientific Glass – Inventory Case
What do we know?- Warehouse Inventory <60days; 120K orders
processed- Used Min-Max system for each SKU- Period expenses of 1% of cogs – Too much?- Freight Factory -> DC is $.4 / Ilbs- Inventory accuracy was declining – what
happens?
Scientific Glass – Inventory Case
What do we know?- Policy changes proposed- Capex is low – 14% ($1.4M..)- Turns were 6- 25% is Raw + WIP; rest is FGI (good?)- Balance sheet – Inventory growth > Sales- Cash 6%
Scientific GlassOption 1 – Implement proposals- These fail to address the problems of too
high fill-rate target & # of warehouses.- Too enamored with the metric fill-rate;
what do customers really want? Lower it to find the “sweet spot” and change Sales commission to “order” not “shipment”
- Trunk stock is negligible, keep it to make sales happy while changing their commission structure.
Scientific GlassOption 2 – Consolidating Warehouses- By going from 8 warehouses to 2, even
with a 99% fill-rate they can reduce inventory ~25%, 1 then ~40%.
- Warehouse in Waltham is the largest and appears to have capacity to fill all orders.
- Cost of the each warehouse is 15% of the inventory value saving $800K.
- Downside is freight – 145K orders equates to $400K in increased costs.
Scientific GlassOption 3 – Outsource Warehousing- Winged Fleet could operate all distribution
functions.- Save similar to option 2- Higher shipping costs due to region fees of
~$800K- Increase savings if outsourcing packaging
& order fulfillment would save incremental $$.
- Least interesting unless outsourcing is your fundamental strategy
Scientific Glass
Option 4 – Lower target fill-rate- 95% might reduce:
- inventory by ~$1M- Operating expenses by ~$125K- E&O by 15% - 40% pending SKU
analysis
Scientific Glass
The real savings:- Cash saved by not increasing the capacity
since inventory is not needed.- Saving $10M- Shipments to new regions could be a 3PL
strategy