BA331-Supply Chain Management Chapter 5 Shay Scott, Ph.D. Department of Marketing and SCM Managing Director, Global Supply Chain Institute University of Tennessee [email protected] BA331-Supply Chain Management“Elapsed time from recognition of need until product is available for use or resale.” Order complete Recognize need Order preparation Order transmittal Order Receipt/Processing Order shipment Invoice and billing Order fulfillment Buyer Service and support Order Cycle SellerInventory BOH Service Level Policy Quantities & Lead Times Decision Rules 1.What should we produce or purchase? 2. How much should we produce or purchase? 3. Where should we position the product? Forecast for Next Period • Determining transportation modes, carriers, and loading sequences • Inventory assignments, preparing picking and packing lists • Warehouse picking and packing • Updating the inventory file, subtracting actual products picked • Automatically printing replenishment lists • Preparing shipping documents (e.g., bills of lading) •Shipping products to customers Fulfillment DecisionsDemand is supported by deploying inventory in anticipation of projected sales levels and location Order Anticipatory Forecast Actual Demand Inventory Deployment Inventory Replenishment or Reclamation When and How Much to Order? • Order Point Systems, e.g., Min-Max, 2 Bin, Visual Review, Bin Marker, Weeks of Supply • Distribution Resources Planning (DRP) Anticipatory Fulfillment• EOQ balances fixed order costs against inventory carrying costs to determine least-costs order frequency to determine optimum order quantity • For manufacturing settings, substitute production set-up costs for order costs • Can be modified to accommodate volume transportation rates and purchase quantity discounts • Ignores VARIANCE Annual Cost Size of Order Quantity Inventory Carrying Costs Order or Set-up Costs Total Costs Economic Order Quantity Model (EOQ) 60Average Inventory 0.5 month 1 2 EOQ = 1 month Daily inventory level EOQ ROP = Average Lead Time * Average Daily Demand Replenishment Lead Time “Naïve” Reorder Point or Sawtooth Inventory ModelImpact of VariabilityEOQ = 1 month Daily inventory level EOQ ROP = LT * DD + SS Replenishment Lead Time 1 2 Average Inventory = 1.5 month In transit, Obsolete/Damaged, Speculative, and Safety Stock Complete Cycle 1 month EOQ Inventory Model with VarianceManufacturing Warehousing/Kitting Supply Base Management Inbound Logistics Outbound Logistics Distribution / Product Support We need: 3 product A, 2 product B, 6 product C….NOW!!!! Demand fluctuation and lengthy lead times caused by large lot, low frequency ordering are covered by maintaining large stock. This results in increased capital investment and reduced customer service. Anticipatory Order Fulfillment OperationsReduce uncertainty by managing demand and order cycle time variance Order Collaborative Plan Actual Demand Small Inventory Deployment Flexible, Rapid Response  Synchronization of activities through shared information  Process reengineering  Supplier partnerships/delivery lead time and variance reduction, quality improvement  Reduce process and network complexity  Performance cycle acceleration and postponement  Use appropriate metrics Lean Fulfillment – “Containing little fat” 10Annual Cost Size of Order Quantity Inventory Carrying Costs Order or Set-up Costs Total Costs Average Inventory = 0.25 month 0.5 month Reducing Cycle Stock Reduction in ordering or setup costs drives lower total cost at lower order quantity1 2 Average Inventory = 1.25 month In transit, Obsolete/Damaged, Speculative, and Safety Stock .5 month Replenishment Lead Time 0.5 Complete Cycle 1 month Reduced Cycle Stock Model with Safety Stock1 Average Inventory = 0.75 month Safety Stock (In-transit, Obsolete, Damaged, and Speculative) 0.5 month 0.5 month Replenishment Lead Time 0.5 To optimize fulfillment, you must lower both Cycle Stock AND Safety Stock: •Lower Cycle Stock by reducing average lead time •Lower Safety Stock by reducing •Demand Variance - Use demand smoothing, Demand/Supply Integration, etc. •Supply Variance - Use Lean, Supplier Relationships, etc. Beating the safety stock monster Cycle StockManufacturing Warehousing/Kitting Supply Base Management Inbound Logistics Outbound Logistics Distribution / Product Support We need: 3 product A, 2 product B, 6 product C….NOW!!!! Shrink total order cycle time to reduce cycle stock and improve responsiveness to demand and manage variation to reduce safety stock Lean Order Fulfillment OperationsEliminate uncertainty by postponing form and/or time and place utility until order received and then rapidly respond when order is received. Capacity Collaborative Plan Actual Demand Flexible, Rapid Response Agile Fulfillment – “Nimble” 15 • Customer Focus vs. Product Focus • Cross-functional and cross-organizational process integration • Leveraging relationships • Information visibilityMajor Shift in Mentality The move to lean and then agile operations requires a paradigm shift from a push demand management philosophy to collaborative pull management From Product-focused push… To Customer-focused pull… Mfr. Retailer Distribution Consumer  Financial/market driven forecast  Pre-set safety stock level  Order point based upon DC inventory and past forecasts  Forward buying Mfr. Retailer Distribution Consumer  Order point based upon shelf inventory and forecasting  Deals, promotions  Purchase merchandise / service  Demand driven forecast  Short cycles  UPC ticketing  Auto replenishment  Auto reordering  Shipping container marking  Cross-dock receiving  POS data collection  Contract purchasing  Perpetual inventory tracked at SKU level  Purchase merchandise / service 16Manufacturing Warehousing/Kitting Supply Base Management Inbound Logistics Outbound Logistics Distribution / Product Support We need: 3 product A, 2 product B, 6 product C….NOW!!!! Postpone some steps in the total SC order cycle until actual demand occurs, then accelerate cycle time using higher unit cost operations. Agile Order Fulfillment OperationsLean OR Agile OR ?? 18 Agile Lean Variety/Variability high high low low Volume Agility is needed in less predictable environments where the demand for variety is high. Lean works best in high volume, low variety and predictable environments Figure