The Impact of “Never Run Out” Policies · Stanton 22 May 2008 1 The Impact of “Never Run...

Stanton 22 May 2008 1

The Impact of “Never Run Out”

PoliciesDaniel J. Stanton

Gil-Su Lee

(22 May 2008)Advisor: Dr. Chris Caplice

Stanton & Lee 22 May 2008 2

Roadmap

Research QuestionResearch MethodNon-Inventory AlternativesCase StudyAnalysis and ResultsRecommendations


Research Question

What is the impact of a “Never Run Out” rule?• How well does it work?• How much does it cost?• Is there a better way?


Typical Restaurant Supply Chain

Hub

Distribution CenterSupplier

Restaurant

Multi-echelon supply chain.Inventory held at each echelon as a buffer against variability in supply and demand.Common objective is “Never Run Out.”


Is There a Better Way?

Increasing inventory is one way to improve buffer against uncertainty in supply and demand.Four non-inventory alternatives:• Alternate transportation.• Forward warehouses.• Lateral transfers.• Alternate suppliers.


Is There a Better Way?

Researched to estimate impact of change.

Researched to estimate impact of change.

Increasing inventory is one way to improve buffer against uncertainty in supply and demand.Four non-inventory alternatives:• Alternate transportation.• Forward warehouses.• Lateral transfers.• Alternate suppliers.


Case Study BackgroundMajor player in $50B fast food industry• Low switching costs for customers• Stockout cost = Lost sale + Brand erosion

Multi-echelon supply chain operated by 3rd parties• Goal: Assured Supply• Policy: Never Run Out• Result: Safety Stock Syndrome1

1. Snyder, R. (2001) The Safety Stock Syndrome. The Journal of the Operational Research Society. 31, 9, 833.


Available Data

Supplier shipmentsHub shipmentsDC receiptsDC inventory (daily)

Hub

Distribution CenterSupplier

Restaurant


Research Methods

Qualitative:• Selected four products with different

characteristics to understand dynamics.Quantitative:• Selected one product at one distribution

center for detailed analysis.Scenario:• Defined relevant supply chain costs and

compared impact of two alternatives.


Step One: QualitativeTotal Value of Distibution Center

Replenishments by SKU

$0.01$0.10$1.00

$10.00$100.00

$1,000.00$10,000.00

$100,000.00$1,000,000.00

$10,000,000.00$100,000,000.00

$1,000,000,000.00

0% 25%

50%

75%

Percentage of SKUs

Tota

l Val

ue o

f Rep

leni

shm

ents

(Log

)Primary research focus.

Primary research focus.


Four Products

High Demand

(> $100M)

Medium Demand($1M - $100M)

Low Demand

(<$1M)

Frozen (and refrigerated) |X| |X|

Dry |X| |X|


How Well Does It Work?Percent stockouts in all DCs on average

0%

10%

20%

High DemandFrozen

MediumDemandFrozen

MediumDemand Dry

Low DemandDry

Product


How Well Does It Work?Percent of DCs with at least one stockout

0%

25%

50%

75%

100%

High DemandFrozen

MediumDemandFrozen

MediumDemand Dry

Low DemandDry

Product


How Well Does It Work?Percent of DCs with at least one stockout

0%

25%

50%

75%

100%

High DemandFrozen

MediumDemandFrozen

MediumDemand Dry

Low DemandDry

Product

Possible explanations:• Insufficient safety stock.• Inaccuracies caused by timing.• Supply chain management practices.

Percent stockouts in all DCs on average

0%

10%

20%

High DemandFrozen

MediumDemandFrozen

MediumDemand Dry

Low DemandDry

Product


How Much Does It Cost?

Observation:• Not enough information to quantify cost, but....• Higher volume products have less inventory

at the distribution center, as indicated by inventory turns.


Step 2: Quantitative

High Demand

(> $100M)

Medium Demand($1M - $100M)

Low Demand

(<$1M)

Frozen (and refrigerated) |X| |X|

Dry |X| |X|

Selected for quantitative analysis

Selected for quantitative analysis


Product flow analysis

Medium demand, frozen product from one supplier to one distribution center.1,000 miles apart.• Currently use truck.• ~$300K transportation.

68% cycle service level.


Step 3: Scenario

Look at the impact of switching from truck to rail.

Truck


Total Supply Chain Costs

$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

Pipelineinventory cost

DC inventorycost

Transportationcost

Determine Breakeven Cost

~$1,600 per load

~$2,000 per load

Truck


Results

As cost of truck increases, rail becomes more attractive.• Transportation cost dominates.

As service level requirement increases, truck becomes more attractive.• Holding cost dominates.


Recommendations

Safety stock is only one option.Non-inventory options can lower total costs, and add agility and adaptability.Need to compare alternatives using total relevant supply chain costs.Strategic focus on lowest cost to minimize stockouts at the restaurant, not the upstream echelons.


Inventory Manager’s Dilemma

Demand Uncertainty

PromotionNew productSeasonality

LeadtimeUncertainty

Cost savingCheaper mode

NEVER RUN OUT!!!

No Information

DecentralizedNo cooperation

No IT


Dual Reorder Point Expediting (s1 , s2 , Q) Policy

t1

t2

L1

L2s2

s1

D2

D1

Q

Q

t3

Inventory

D3D4

Dual Reorder Point Inventory Management

L3 L4

Time

21

21

21111 ))(()( LDL DELEkXs σσ ++=

)( 21212 LLDss −−=

DCV

DDemand

×=δ

2

DkkSafetyStoc σ=


Simulation Modeling – Expedited order

24

IP < s1 ? IOH < s2

Stock out Expected?

ExpeditingEffective ?

Expedited Order

Y

Y

Y

Normal Order

Y

Inv Status Update:IOH, Pipeline, Inv Position

StockOut

Normal Order

Receiving

SUPPLIER

Loading

Expedited Order

Receiving

Packaging

Production

Order Fulfillment

Demand From

RestaurantRestaurant

DC Ordeing Procedure

Inventory Review


Simulation Modeling: Input & Output


Simulation Modeling

For k = 0.8 to 3.0For = 0.2 to 1.1

+ 0.05k = k + 0.5

Simulation Run=> Observation

Observation 1

………

Avg of n Observations

Observation n

Observation 3

Observation 2

Observation 4

TC ( ,

…TC ( ,

TC ( ,

TC ( ,

TC ( ,

…TC ( ,

TC ( ,

TC ( ,

………

TC ( ,

…TC ( ,

TC ( ,

TC ( ,

Result 1

…Result 20

Result 3

Result 2

Result 1

…Result 20

Result 3

Result 2

………

Result 1

…Result 20

Result 3

Result 2

Algorithm 1


Simulation Results

Does it work?

CSLTotal Cost

Not ExpeditedTotal CostExpedited

Saving%

100.0000% $79,526 $65,139 18.1%

99.999% $77,891 $65,139 16.4%

99.990% $74,948 $65,139 13.1%

99.900% $70,697 $65,139 7.9%

99.000% $65,465 $65,139 0.5%


When does it work?When is the best?

Feasible Soluation - Algorithm 1

50,000

55,000

60,000

65,000

70,000

75,000

80,000

85,000

1 21

41

61

81

101

121

141

161

181

201

221

241

261

281

301

322

342

362

382

402

422

(k, delta)

Total Cost

Simulation Results


When does it work?When is the best?

Simulation Results

Feasible Solutions - (k, delta)

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

0.65

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

k

delta


Target Service Level vs. Total Cost

Costs with Expedite Scenario (k*=3.40)

0

50,000

100,000

150,000

200,000

250,000

0.80 1.00 1.20 1.40 1.60 1.80 2.00 2.20 2.40 2.60 2.80 3.00 3.20 3.40 3.60 3.80 4.00

Total Cost Holding Cost Rail Cost Expedite Cost

Simulation Results


Expedited Transportation as an alternativeInformation sharing is the keyIT support for demand-driven triggering

Challenges • Complicated process• Reorder point is DC/Product dependant• Data assumption: rail lead time and cost

Insight & Conclusion

Stanton 22 May 2008 32

The Impact of “Never Run Out”

PoliciesDaniel J. Stanton

Gil-Su Lee

(22 May 2008)Advisor: Dr. Chris Caplice

The Impact of “Never Run Out” Policies · Stanton 22 May 2008 1 The Impact of “Never Run...

Documents

Transcript of The Impact of “Never Run Out” Policies · Stanton 22 May 2008 1 The Impact of “Never Run...