Professional Documents
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Key issues:
Increasing customer service They defined customer service as their core competency of their firm High cost of customer service
Zappos responses:
Relocating to Las Vegas Employee training and hiring program
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Key issues:
Turning a dollar Short life cycle of products Component devaluation costs Price protection costs Product return costs Obsolescence costs Using a one stage supply chain Single central factory Airfreight to customers
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HP responses:
Chapter 2
Inventory Management and Risk Pooling
McGraw-Hill/Irwin
Uncertainty in supplies
Quality/Quantity/Costs/Delivery Times
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Uncertain demand makes demand forecast critical for inventory related decisions:
What to order? When to order? How much is the optimal order quantity?
INVENTORY POLICY!!
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Estimation of customer demand Replenishment lead time The number of different products being considered The length of the planning horizon Costs
Order cost:
Product cost Transportation cost State taxes, property taxes, and insurance on inventories Maintenance costs Obsolescence cost Opportunity costs
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Assumptions
D items per day: Constant demand rate Q items per order: Order quantities are fixed, i.e., each time the warehouse places an order, it is for Q items. K, fixed setup cost, incurred every time the warehouse places an order. h, inventory carrying cost accrued per unit held in inventory per day that the unit is held (also known as, holding cost) Lead time = 0 (the time that elapses between the placement of an order and its receipt) Initial inventory = 0 Planning horizon is long (infinite).
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EOQ: Costs
FIGURE 2-4: Economic lot size model: total cost per unit time
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Deriving EOQ
Average inventory holding cost in a cycle: Q/2 Cycle time T =Q/D KD hQ Average total cost per unit time: Q 2
Q
*
2 KD h
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It is even more difficult if one needs to predict customer demand for a long period of time More difficult to predict customer demand for individual SKUs Much easier to predict demand across all SKUs within one product family
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inventory is reviewed continuously an order is placed when the inventory reaches a particular level or reorder point. inventory can be continuously reviewed (computerized inventory systems are used)
inventory is reviewed at regular intervals appropriate quantity is ordered after each review. it is impossible or inconvenient to frequently review inventory and place orders if necessary.
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Daily demand is random and follows a normal distribution. Every time the distributor places an order from the manufacturer, the distributor pays a fixed cost, K, plus an amount proportional to the quantity ordered. Inventory holding cost is charged per item per unit time. Inventory level is continuously reviewed, and if an order is placed, the order arrives after the appropriate lead time. If a customer order arrives when there is no inventory on hand to fill the order (i.e., when the distributor is stocked out), the order is lost. The distributor specifies a required service level.
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AVG = Average daily demand faced by the distributor STD = Standard deviation of daily demand faced by the distributor L = Replenishment lead time from the supplier to the distributor in days h = Cost of holding one unit of the product for one day at the distributor = service level. This implies that the probability of stocking out is 1 -
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Order Quantity, Q:
2 K AVG Q h
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Inventory level before receiving an order = z STD L Inventory level after receiving an order = Q z STD L Average Inventory =
Q 2
z STD L
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1.29
1.34
1.41
1.48
1.56
1.65
1.75
1.88
2.05
2.33
3.08
z is chosen from statistical tables to ensure that the probability of stockouts during lead time is exactly 1 -
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Value
44.58
86.20
176
Order Quantity =
2 K AVG h
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Inventory level is reviewed periodically at regular intervals An appropriate quantity is ordered after each review Two Cases:
Define two inventory levels s and S During each inventory review, if the inventory position falls below s, order enough to raise the inventory position to S. (s, S) policy May make sense to always order after an inventory level review. Determine a target inventory level, the base-stock level During each review period, the inventory position is reviewed Order enough to raise the inventory position to the base-stock level. Base-stock level policy
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(s,S) policy
Calculate the Q and R values as if this were a continuous review model Set s equal to R Set S equal to R+Q.
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Determine a target inventory level, the basestock level Each review period, review the inventory position is reviewed and order enough to raise the inventory position to the base-stock level Assume: r = length of the review period L = lead time AVG = average daily demand STD = standard deviation of this daily demand.
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Assume:
distributor places an order for TVs every 3 weeks Lead time is 2 weeks Base-stock level needs to cover 5 weeks
Average demand = 44.58 x 5 = 222.9 Safety stock = 1.9 32 .8 5 Base-stock level = 223 + 136 = 359 .58 1.9 32.08 5 203.17 Average inventory level = 344 2
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may require the supplier, to maintain a specific service level Supplier will use that target to manage its own inventory
Facility may have the flexibility to choose the appropriate level of service
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FIGURE 2-11: Service level inventory versus inventory level as a function of lead time
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Trade-Offs
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Retail Strategy
Given a target service level across all products determine service level for each SKU so as to maximize expected profit. Everything else being equal, service level will be higher for products with:
high profit margin high volume low variability short lead time
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Demand Variation
Standard deviation measures how much demand tends to vary around the average
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Electronic equipment manufacturer and distributor 2 warehouses for distribution in New York and New Jersey (partitioning the northeast market into two regions) Customers (that is, retailers) receiving items from warehouses (each retailer is assigned a warehouse) Warehouses receive material from Chicago Current rule: 97 % service level Each warehouse operate to satisfy 97 % of demand (3 % probability of stock-out)
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New Idea
Replace the 2 warehouses with a single warehouse (located some suitable place) and try to implement the same service level 97 % Delivery lead times may increase But may decrease total inventory investment considerably.
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Historical Data
PRODUCT A
Week Massachusetts New Jersey Total 1 33 46 79 2 45 35 80 3 37 41 78 4 38 40 78 5 55 26 81 6 30 48 78 7 18 18 36 8 58 55 113
PRODUCT B
Week Massachusetts New Jersey Total 1 0 2 2 2 3 4 6 3 3 3 3 4 0 0 0 5 0 3 3 6 1 1 2 7 3 0 3 8 0 0 0
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Total
Total
A
B
77.9
2.375
20.71
1.9
0.27
0.81
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Inventory Levels
Product Average Demand During Lead Time 39.3 1.125 38.6 1.25 77.9 2.375 Safety Stock Reorder Point Q
A B A B A B
65 4 62 5 118 6
132 25 31 24 186 33
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Critical Points
The higher the coefficient of variation, the greater the benefit from risk pooling The higher the variability, the higher the safety stocks kept by the warehouses. The variability of the demand aggregated by the single warehouse is lower The benefits from risk pooling depend on the behavior of the demand from one market relative to demand from another risk pooling benefits are higher in situations where demands observed at warehouses are negatively correlated
Reallocation of items from one market to another easily accomplished in centralized systems. Not possible to do in decentralized systems where they serve different markets
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Safety stock: lower with centralization Service level: higher service level for the same inventory investment with centralization Overhead costs: higher in decentralized system Customer lead time: response times lower in the decentralized system Transportation costs: not clear. Consider outbound and inbound costs.
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Inventory decisions are given by a single decision maker whose objective is to minimize the system-wide cost The decision maker has access to inventory information at each of the retailers and at the warehouse Echelons and echelon inventory Echelon inventory at any stage or level of the system equals the inventory on hand at the echelon, plus all downstream inventory (downstream means closer to the customer)
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Echelon Inventory
lead time between the retailer and the distributor plus the lead time between the distributor and its supplier, the wholesaler.
AVG = average demand at the retailer STD = standard deviation of demand at the retailer e e R L AVG z STD L Reorder point
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45 45 45 45
1.2 .9 .8 .7
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Follow the same approach Echelon inventory at the warehouse is the inventory at the warehouse, plus all of the inventory in transit to and in stock at each of the retailers. Similarly, the echelon inventory position at the warehouse is the echelon inventory at the warehouse, plus those items ordered by the warehouse that have not yet arrived minus all items that are backordered.
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Chapter 5
McGraw-Hill/Irwin
5.1 Introduction
Value of using any type of information technology Potential availability of more and more information throughout the supply chain Implications this availability on effective design and management of the integrated supply chain
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Information Types
Inventory levels Orders Production Delivery status
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More Information
Helps reduce variability in the supply chain. Helps suppliers make better forecasts, accounting for promotions and market changes. Enables the coordination of manufacturing and distribution systems and strategies. Enables retailers to better serve their customers by offering tools for locating desired items. Enables retailers to react and adapt to supply problems more rapidly. Enables lead time reductions.
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Sales quite flat Distributor orders fluctuate more than retail sales Supplier orders fluctuate even more
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Periodic review policy Characterized by a single parameter, the base-stock level. Base-stock level = Average demand during lead time and review period + a multiple of the standard deviation of demand during lead time and review period (safety stock) Estimation of average demand and demand variability done using standard forecast smoothing techniques. Estimates get modified as more data becomes available Safety stock and base-stock level depends on these estimates Order quantities are changed accordingly increasing variability
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Increase in variability magnified with increasing lead time. Safety stock and base-stock levels have a lead time component in their estimations. With longer lead times:
a small change in the estimate of demand variability implies a significant change in safety stock and base-stock level, which implies significant changes in order quantities leads to an increase in variability
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Retailer uses batch ordering, as with a (Q,R) or a min-max policy Wholesaler observes a large order, followed by several periods of no orders, followed by another large order, and so on. Wholesaler sees a distorted and highly variable pattern of orders. Such pattern is also a result of:
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Large
order during the discounts Relatively small orders at other time periods
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t Di
t 1 i t p
S t2
2 ( D i t p i t )
t 1
p 1
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Var(D), variance of the customer demand seen by the retailer Var(Q), variance of the orders placed by that retailer to the manufacturer
Var(Q) 2 L 2 L2 1 2 Var( D) p p
When p is large and L is small, the bullwhip effect is negligible. Effect is magnified as we increase the lead time and decrease p.
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Assume p = 5, L=1
Var (Q ) 1.4 Var ( D )
Increasing the number of observations used in the moving average forecast reduces the variability of the retailer order to the manufacturer
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Var(D), variance of the customer demand seen by the retailer Var(Qk), variance of the orders placed by the kth stage to its Li, lead time between stage i and stage i + 1
Var(Q ) 1 Var( D)
k
2i 1 Li
k
2(i 1 Li ) 2
k
p2
Variance of the orders placed by a given stage of a supply chain is an increasing function of the total lead time between that stage and the retailer
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Retailer does not make its forecast information available to the remainder of the supply chain Other stages have to use the order information
k 2Li 2L2 Var(Q k ) (1 2i ) Var( D) p p i 1
becomes larger up the supply chain increases multiplicatively at each stage of the supply chain.
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Managerial Insights
Variance increases up the supply chain in both centralized and decentralized cases Variance increases:
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Lead-time reduction
Lead times magnify the increase in variability due to demand forecasting. Two components of lead times:
order lead times [can be reduced through the use of crossdocking] Information lead times [can be reduced through the use of electronic data interchange (EDI).]
Strategic partnerships
Changing the way information is shared and inventory is managed Vendor managed inventory (VMI)
Manufacturer manages the inventory of its product at the retailer outlet VMI the manufacturer does not rely on the orders placed by a retailer, thus avoiding the bullwhip effect entirely.
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manufacturing, storage, transportation, and retail systems the outputs from one system within the supply chain are the inputs to the next system trying to find the best set of trade-offs for any one stage isnt sufficient. need to consider the entire system and coordinate decisions
each facility in the supply chain does what is best for that facility the result is local optimization.
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Global Optimization
Issues:
Who will optimize? How will the savings obtained through the coordinated strategy be split between the different supply chain facilities?
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Meet customer demand from available retailer inventory What if the item is not in stock at the retailer?
Being able to locate and deliver goods is sometimes as effective as having them in stock If the item is available at the competitor, then this is a problem
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Numerous benefits:
The ability to quickly fill customer orders that cant be filled from stock. Reduction in the bullwhip effect. More accurate forecasts due to a decreased forecast horizon. Reduction in finished goods inventory levels
Many firms actively look for suppliers with shorter lead times Many potential customers consider lead time a very important criterion for vendor selection. Much of the manufacturing revolution of the past 20 years led to reduced lead times
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Trade-Offs:
Inventory-Lot Size Inventory-Transportation Costs Lead Time-Transportation Costs Product Variety-Inventory Cost-Customer Service
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Obtaining and sharing information is not free. Many firms are struggling with exactly how to use the data they collect through loyalty programs, RFID readers, and so on. Cost of exchanging information versus the benefit of doing so.
May not be necessary to exchange all of the available information, or to exchange information continuously. Decreasing marginal value of additional information
In multi-stage decentralized manufacturing supply chains many of the performance benefits of detailed information sharing can be achieved if only a small amount of information is exchanged between supply chain participants. Exchanging more detailed information or more frequent information is costly.
Understand the costs and benefits of particular pieces of information How often this information is collected How much of this information needs to be stored How much of this information needs to be shared In what form it needs to shared
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