Partners WorkshopV6

Supply Chain Planning

Stock Managementsby SC&L Team RDC FZE ©

March 2010

Schneider Electric 2

Training Objectives

To share Schneider Electric’s Supply Chain Planning Best Practices

with our valued partners in order to create more robust and efficient

downstream supply chain


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


Introduction

Today, excellent service & speed of execution has become a criticaldifferentiator and is now an improtant weapon in gaining competitiveadvantage.

As companies target better service levels & faster delivery, inventory levelsgenerally 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 universalgoal; albeit an elusive one.

As more industries see the balance between service levels and operational costsas a critical differentiator, businesses are realizing the impact that optimizingand automating supply chain planning practices can have on profitabilityand performance.

Reduce inventory, improve service levels and reduce delivery times with lowertransport and operational costs!!


MM concepts

●ABC/ FMR

●Stock Decision and Lead times

●Transportation mode

●Procurement frequency – fixed period

●Safety stocks

●Replenishment/ Procurement methodology


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


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

The way to obtain the classification is to sort

references by decreasing Average Monthly

Usage (AMU) in value and to calculate the

cumulated AMU.

C100%5161R9

C100%5152R8

C99%5135R7

C98%5087R6

C97%50113R5

B95%48811R4

B92%47727R3

B87%45050R2

A78%400150R1

A48%250250R0

ABCCumulate %

of AMU

Cumulated AMU

(Sales AED)AMU

(Sales AED)Ref.


Stock Decision (FMR Classification)

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:

On the last six months we have had 30

customer lines, so more than line per week.

● Conclusion: this is an F product.

125-07-08

104-07-08

202-07-08

030-06-08

127-06-08

123-06-08

113-06-08

031-05-08

228-05-08

127-05-08

123-05-08

420-05-08

112-05-08

005-05-08

801-05-08

030-04-08

129-04-08

124-04-08

031-03-08

220-03-08

119-03-08

104-03-08

Nb of lines for material R0Day


Stock Decision (Lead-Times)

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 company’s

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

PLT OLT

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

Procurement lead-time

Ex-Works LT Offer LT


Stock Decision (Lead-Times)

● For comparing the lead time, don’t forget to compare on the same time scale (Working Days or Calendar Days)

If Offer lead-time >

Procurement lead-time = No

need to Stock

If Offer lead-time <

Procurement lead-time = Need

to Stock

Offer LT

Procurement LT

Date order Send

by CustomersDate Delivery to

Customers

Date Delivery to

CustomersDate order Send

by Customers

Offer LT

Procurement LT

Need Forecast


Stock Decision (ABC/FMR Matrix)

Non Stock

Stock Items

Automatic

Replenishment

Stock Items

Automatic

Replenishment

CLow value Flow

Inventory cost low Opportunity cost

medium

Avoid StockD

Non movers

Avoid Stock

Risk of obsolescence

Stock Items

Monitor Parameters

&

Replenishment

Stock Items

Monitor Parameters

&

Replenishment

BMedium Value Flow

Inventory cost moderate Opportunity cost high

Avoid Stock

Risk of obsolescence

Stock Items

Monitor Parameters

&

Replenishment

Stock Items

Monitor Parameters

&

Replenishment

AHigh Value Flow

Inventory cost high Opportunity cost

very high

RLow

Frequency Flow

MMedium

Frequency Flow

FHigh

Frequency Flow

*Please note only items with PLT > OLT need to be considered in the stocking decision


Purchasing Decision (Transportation mode : Air/Sea freight)

Smart selection of transportation inbound mode can reduce our Procurement

Lead-Time and Inventory stock:

Example:

Item R3

Sea PLT: 25 days

Air PLT: 10 days

Offer LT: 18 days

Item price: 12,000AED

Item weight: 1kg

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.

A i r S h ip m e n t

D a y 1 D a y 5 D a y 1 5D a y 1 0 D a y 2 0

P L T A ir = 1 0 d a y s

O L T = 1 8 d a y s

Z e r o

I n v e n t o r y

Sea Shipmen t

Day 1 Day 5 Day 15 Day 20D ay 10 D ay 25

PLT Sea = 2 5 day s

OLT = 18 days7 day s

Inv entory


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 there’s 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.


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.

●It’s 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, it’s is better to received 500pcs close the gap

between the supplier invoice and your invoice to the customer

Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Week 1 Week 2 Week 3 Week 4

2000

1500

1000

500

0

2000

1500

1000

500

0

Incoming Shipments and Inventory

Incoming Shipments and Inventory


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


SS demand : risk with market demandSS demand : risk with market demand

Stock level

Estimated usage

ShortageTime

Supplier delivery date

Real usage

Longer the PLT,

higher the risk!


SS supplier : risk of delivery delaySS supplier : risk of delivery delay

Stock level

Estimated usage

Real usage

ShortageTime

Supplier delivery date Supplier delay delivery

Longer the PLT,

higher the risk!


SS Calculation: BasicSS Calculation: Basic

A

Fa M R

C

B

0,8 - 1

1 - 1,2

1,5 - 2 1,5 - 2

1 - 1,5

0,8 - 1

1 - 1,2

0,6 - 1

(0,3) - 0,6

Basic Formula:

SS = a*PLT*ADU

PLT : shortest Procurement Lead Time. You may wish to cap the PLT at 1 montha :coefficient which depends on the variance of sales and the required level of service

More erratic demand

Less value

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

Cap on 1 month (30 days)


SS Calculation: AdvancedSS Calculation: AdvancedAdvanced Formula:

SS = SSdemand + SSsupplier = (K*Z*√PLT*ADU) + X*√PLT*ADUPLT: 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 supplier’s 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

10107C

775B

553A

RMFZ

More erratic demand

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 don’t necessarily add much more value or accuracy to SS

15%75%-85%

10%85%-90%

7%90%-95%

5%95%-97%

XReliability

Value of XZ


Procurement / Replenishment formula Procurement / Replenishment formula �� How much Do I Order?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 Needs / resources balance -- principlesprinciples

● 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:

If needs > resources �� a purchase order is placed to the supplier

safety stock

open customer orders

forecast

stock on hands

open purchase orders

Needs Resources


Procurement/ replenishment methods

The 2 main methods of replenishment of stocks are:

1. Fixed reorder point

2. Dynamic reorder point – MRP


Replenishment Methods Replenishment Methods -- ComparisonComparison

• 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)

• Process simple to implement (IT)

• Stock maintained at pre-determined level

• Independent item demand management

• Less flexibility & reactivity

• Risk of damaging service rate

Fixed ROP

MRP (Dynamic ROP)


Fixed reorder point = SS + (ADU x PLT)

Then 2 options :

● total needs = fixed reorder point

● 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

Replenishment Methods : Fixed Reorder PointReplenishment Methods : Fixed Reorder Point

∑∞

D

-

PLT

Schneider Electric 24PLT = 10

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

Replenishment Methods : Fixed Reorder PointReplenishment Methods : Fixed Reorder Point

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

3

PLT

Reorder Point = 12

23

d day

Qty

t∞−

Safety Stock = 215

S

T

O

C

K7

20

8

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

Resultant Stock Level = 12

ADU = 1


ORDER POINT = Total resources - Total needs

Qty

5 5 5 5 5 5 5 5 5 5 6 68

437

SS=12

PLT =12 days

Cust needs Forecasts23

today

Max between cust needs and forecasts during D

2*1*

t∞−

Dynamic Reorder Point Dynamic Reorder Point �� MRPMRP

− ∞ → PLT = customer orders

with past due date

Total needs = SS + Σ Real past orders + Σ max (Real orders, FDU)d → PLT = cust. Orders with due date within

replenishment horizon

Total resources = Current Stock + Σ Incoming Supplier Orders

− ∞ → PLT = supplier orders with due

date within replenishment horizon

d=3 days

15

S

T

O

C

K


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

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

= 12 + 5 + 67 = 84

Total resources = Current Stock + Σ Incoming Purchase Orders (assume 0)

= 40 + 0 = 40

To procure = NEEDS – RESOURCES = 84-40 = 44

Global view of example – what to buy now?


35

16

11

6

1

PLT = 12

AVAILABILITY

23

18

13

8

3

23

18

12

6

Po1(25) Po2(25)

23

T

O

T

A

L

S

T

O

C

K

40

today t

Qty

Max between cust needs and forecasts during D

1*

*remaining forecast

5 5 5 5 5 5 5 5 5 5 6 6

Forecasts4

No considered

outside PLT

No proposed order

availability > 0

SS=12

SS level

3

2*

47

Cust needs

8

-


5 5 5 5 5 5 5 5 5 5 6 68

437

35SS=12

16

11

6

1

D = 12

T

O

T

A

L

S

T

O

C

K

AVAILABILITY

23

18

13

2

-3

14

5

24

18

Po1(25)

Po2(25)

23

40

today t

Qty

2*1*

4

New order

compressed

Po3(25)

11 9

New cust orders

> forecast

8

-1

-7

OR

Use of SS

Po3(25)

SS level

Mistake on forecast


5 5 5 5 5 5 5 5 5 5 6 68

437

35

SS=12

9

4

-1

-6

PLT = 12

T

O

T

A

L

S

T

O

C

K

AVAILABILITY

16

11

6

1

-4

16

11

5

24

Cust needs Forecasts

Po1(25) Po2(25)

23

33

today t

Qty

2*1*

*remaining forecast

4

No considered

outside PLT

New order

compressed

Discrepancy(-7)

Po3(25)

SS level

Discrepancy of inventory


5 5 5 5 5 5 5 5 5 5 6 68

437

35SS=12

16

11

6

1

PLT = 12

T

O

T

A

L

S

T

O

C

K

AVAILABILITY

23

18

13

8

3

-2

-7

12

6

Cust needs Forecasts

Po1(25) (Po2) late

23

40

today t

Qty

2*1*

4

Po2(25)

Use of SS

SS level

Supplier delay


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):

The theoretical order quantity (Qcc) will be adjusted considering the different

logistics profiles available to maximise the relation between stock coverage and

operational efficiency.

LP4 - Pallet

LP3 - Box

LP2 - Package

LP1 - Indivisible Sales Unit (usually piece)

FMRLogistic Profile

F

M

R


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


Summary

Typically Non Stock.

Stock for exceptions

Automatic

Replenishment Monthly.

Use multiples

Automatic

Replenishment Monthly.

Use multiples

CLow value Flow

Inventory cost low Opportunity cost

medium

Avoid Stock. Buy by air. Monitor Closely

FMC Low

SS Medium

Consume from SS then replenish

Monitor consumption levels closely; keep good amount of inventory and

SS on-hand.

Replenish every two weeks. Use multiples


SS on-hand.

Replenish weekly.

Use multiples

BMedium Value Flow

Inventory cost moderate Opportunity cost high

Avoid Stock.

Monitor Closely

FMC Low

SS High

Consume from SS then replenish


SS on-hand.

Replenish every two weeks. Use multiples


SS on-hand.

Replenish weekly.

Use multiples

AHigh Value Flow

Inventory cost high Opportunity cost

very high

RLow

Frequency Flow

MMedium

Frequency Flow

FHigh

Frequency Flow


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.


Qmax Example

I f n o Q m a x ; 2

c u s to m e r s a r e

H a p p y

I f Qm a x s e t

t o 5 0 0 p cs

th e n a l l

C u s to m e rs

a re H a p p y

C u s to m e r A : O rd e r s 5 0 0 p cs

C u s to m e r B : O rd e rs 1 5 0 0 p c s

C u s to m e r C : O rd e r s 1 0 0 p cs

C u s to m e r D : O rd e r s 2 0 p c s

2000 pcs are stock in the

warehouse

Total Orders : 2,120 pcs2 Happy

Customers4 Happy

Customers


Forecasting (Why are forecast needed?)

● In most cases, offer lead-time is shorter than procurement one

● To anticipate trends, promotion and business cycles

W 1 W 3W 2 W 4 W 5 W 6 W 8W 7 W 9 W 10 W 16W 11 W 12 W 14 W 15 W 17 W 19W 18W 13

C u s to m e r o rd e r d a te P ro m is e d d e liv e ry d a teO ffe r L T

M a te r ia ls s u p p ly L T + P ro d u c t io n L T + O rd e r fu lf i l lm e n t L T

P ro c u re m e n t L T

W 1 W 3W 2 W 4 W 5 W 6 W 8W 7 W 9 W 10 W 16W 11 W 12 W 14 W 15 W 17 W 19W 18W 13

C u s to m e r o rd e r d a te P ro m is e d d e liv e ry d a teO ffe r L T

M a te r ia ls s u p p ly L T + P ro d u c t io n L T + O rd e r fu lf i l lm e n t L T

P ro c u re m e n t L T

Demand

TrendCap

acity

Demand

seasonal

ity

Volume

Average

FuturePast

Demand

TrendCap

acity

Demand

seasonal

ity

Volume

Average

FuturePast



● The Product Life Cycle requires specific actions at each stage



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

=S= factories

=S= factoriesExternal suppliers IDC

Stock of Raw Materials = 2500

Monthly Capacity/Production =

2500

Total Monthly Deliveries = 2500

Customer A

Other Customers

Dubai RDC

Average Monthly Sales 2009 = 500

Average Monthly Sales = 150

Average Monthly Sales = 350Other RDC

5 000 pcs

needed for

the special

Event

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


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).

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.

Stock CoverageAnticipated

Stock

GIT

Targeted

Stock

Excess Stock

Working inventory

Strategic

Stock

Slow moving or

Obsolete Stock

Forecasting

Errors


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


Thanks foryour participation!

Partners WorkshopV6

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