Supply Chain Management

A Holistic View of Inventories

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Supply Chain
Definition: Set of interconnected nodes
integrating inventory flows and stocks from
raw materials to finished goods provided to
final customers
Goal: Overall, system-wide coordination of
inventory stock and flows to improve
inventory efficiency throughout the system
Supply chain management (SCM)
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Inventories
Four categories:
Raw materials (components, subassemblies, or
materials purchased from suppliers RM)
Work-in-process (unfinished parts or products
released in a production system WIP)
Finished goods inventory (finished products not
yet sold to customers FGI)
Spare parts (components used to repair or
maintain equipment SP)
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Inventories
Reasons for holding inventories vary according
the type of inventory
Raw materials:
Batching (cycle stock)
Variability (safety stock / planned-safety lead time)
Obsolescence
Reasons are interrelated

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Inventories
Processing
Wait to Match
Moving

WIP inventory: Wait for Batch

Queuing
Queuing (cause: high utilization -
flow/process variability)
Processing
Waiting for batch (cause: large batch size and
no lot splitting)
Moving
Waiting to match (cause: variability / no synch)
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Inventories
FGI:
Customer responsiveness (make-to-stock)
Batch production
Forecast errors
Production variability (compensate yield loss)
Seasonality (built-ahead inventory)
Factors are interrelated (seasonality-forecast)

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Inventories
FGI (continued):
View FGI holistically and use alternative
production techniques (make/assemble-to-
order, excess capacity, seasonal labour)
Spare parts inventory
Service (parts available for repairs)
Purchasing / production lead times
Batch replenishment
Similarities/differences with FGI (service level)
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Managing Inventory (RM)
Goal: Have RM available when needed by
the production process without carrying any
more inventory than necessary
Visibility improvement (forecast-cycle time-
schedule)
ABC classification (sophisticated mgt for A)
Just-in-time (frequent deliveries)
Appropriately setting safety stocks and safety
lead times for purchased components
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Managing Inventory (WIP)
Goal: Minimize cycle time, which is
equivalent to minimize WIP, according to
Little s law (CT=WIP/TH)
Reduce queuing (increase capacity, FCS, set-
ups, quality, reliability/maintainability)
Reduce wait for batch (lot splitting, layout)
Reduce wait to match (common work backlog,
balanced batching)
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Managing Inventory (FGI)
Goal: Buffer between production and demand
to insulate customers from cycle time, absorb
variability and level-out capacity
Improve forecasting
Dynamic lead-time quoting
Cycle time (and variability) reduction
Late customization-postponement
Balancing labor, capacity and inventory

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Managing Inventory (SP)
Goal: To keep production process
uninterrupted
Stratifying demand
Preventive maintenance related parts handled using
standard MRP logic, i.e., backwards planning with
actual lead times
Emergency repairs related parts handled using some
safety stock, especially for critical components
(army-navy example)

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Multi-echelon Supply Chains
Basic challenge: Balance the efficiency of
central inventories with the responsiveness
of distributed inventories to provide high
system performance without excessive tied-
up capital to non-value added resources
Central inventories = variability pooling, thus
less safety stock holding
Distributed inventory = swifter response to
demand due to geographic proximity
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Multi-echelon Supply Chains
Typical configurations: Level 1 Level 2 Level 3

serial or arborescent Serial

System
Configuration is a
decision variable
Arborescent
(number or levels, System

warehouse locations,
interconnection policies
Logistics)
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Performance Measures
Fill rates
Fraction of demand met out of stock
Backorder level
Average number of orders waiting to be filled
Lost sales
Orders lost due to stock-outs
Probability of delays
Likelihood of activity delay due to lack of inventory
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Bullwhip Effect
Channel alignment or coordination of
policies between various supply chain levels
Information sharing
Inventory control
Transportation
Etc
Simple approach: Treat each level
independently / local optimum policies
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Bullwhip Effect
Easy to implement and natural for castle-
based organizations
However, it leads to very poor performance
at the overall supply chain
Inefficiency (inventory held in inefficient
quantities and at inefficient locations)
Bullwhip effect: amplification of demand
fluctuations from the bottom of the supply
chain to the top 16
Bullwhip Effect
1600
1400
Dem and Quantity

1200
1000
800
600
400
200
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Time

Retail Orders to Distributor Distributor Orders to Manufacturer

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Bullwhip Effect
Causes Remedies
Batching Reduce cost of orders,
(amplifications in consolidate orders for
order quantities due to Full Truck Load
economies of scale) (FTL), or use 3PL
Use of forecasting Share demand data,
(independent decision- vendor-managed-
makers amplify inventory, lead time
variability) reduction
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Bullwhip Effect
Causes Remedies
Price discounts or Every-day low price,
sudden increases Activity-based costing
Gaming behaviour Allocate inventory
(exaggerate orders or according to past
order from multiple sales, reduce lead
sources - cancel when times, use stringent
demand is satisfied) time fences
Multi-echelon Eliminate layers
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Conclusions
Understand why is inventory held
Look for structural changes
Use empirical evaluation procedures
Cycle time reduction is crucial
Coordinate levels in multi-echelon SC
Coordinate incentive systems & objectives

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