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UT Knoxville BUAD 331 - BA 331 Chapter 5

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Slide 1Slide 2Slide 3Slide 4Order CycleFulfillment DecisionsSlide 7Slide 8Anticipatory FulfillmentEconomic Order Quantity Model (EOQ)“Naïve” Reorder Point or Sawtooth Inventory ModelImpact of VariabilityEOQ Inventory Model with VarianceSlide 14Lean Fulfillment – “Containing little fat”Reducing Cycle StockReduced Cycle Stock Model with Safety StockBeating the safety stock monsterSlide 19Slide 20Slide 21Agile Fulfillment – “Nimble”Slide 23Major Shift in MentalitySlide 25Slide 26Lean OR Agile OR ??Flexibility in Order FulfillmentSlide 29Key Product & Demand CharacteristicsMatching a Supply Chain with ProductsSlide 32Slide 33Slide 34Business Administration 331Supply Chain ManagementChapter 5Dr. John E. BellAssociate Professor of Supply Chain Management 343 Stokely Management [email protected] Shipping (South Korea) goes bankrupt…(WSJ article,1 Sept)- Represents 7% of Asia to US capacity-- Rates are up: $1700 to $2300 - Ships seized in foreign ports--540,000 TEU Containers - US inventory delayed before holidays-- Target, Walmart, JC Penney2Discussion…Disrupting FulfillmentHanjin Ordered to Cut its Fleet…(WSJ article, 20 Sept)- Must return 60 chartered ships - Plans to sell 22 of 37 owned ships - Use to deliver 25,000 containers/day- Losing $2Million per day- 1/3rd of delayed ships have unloaded- Doesn’t have cash to pay to unload3Discussion…Disrupting Fulfillment“It took me 10 weeks to receive my last new Apple MacBook, yet Apple is consistently ranked as having one of the top Supply Chains in the world. How can this be?4Discussion Question“Elapsed time from recognition of need until product is available for use or resale.”Order completeRecognize needOrder preparationOrder transmittalOrder Receipt/ProcessingOrder shipmentInvoice and billingOrder fulfillmentBuyerService and supportOrder CycleSellerInventory BOHService Level PolicyQuantities & Lead TimesDecision Rules1.What should we produce or purchase?2. How much should we produce or purchase?3. Where should we position the product?Decision Rules1.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 customersFulfillment DecisionsWhy is there not one Supply Chain strategy that fits every product?What does it mean to be Lean vs. Agile?What kind of products fit the the Agile strategy?7Discussion QuestionsBusiness Administration 331Supply Chain ManagementChapter 5Dr. John E. BellAssociate Professor of Supply Chain Management 343 Stokely Management [email protected] is supported by deploying inventory in anticipation of projected sales levels and locationOrderOrderAnticipatory ForecastAnticipatory ForecastActual DemandActual DemandInventory DeploymentInventory DeploymentInventory Replenishment or ReclamationInventory Replenishment or ReclamationWhen 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 VARIANCEAnnual CostSize of Order QuantityInventoryCarryingCostsOrder or Set-upCostsTotalCostsEconomic Order Quantity Model (EOQ)60Average Inventory0.5 month12EOQ = 1 monthDaily inventory levelEOQROP = Average Lead Time * Average Daily DemandReplenishment Lead Time“Naïve” Reorder Point orSawtooth Inventory Model60 masksAssume avg daily demand of 3 masks per day, 20 days per month;5 day average Lead Time for existing customersImpact of VariabilityEOQ = 1 monthDaily inventory levelEOQROP = LT * DD + SSReplenishment Lead Time12Average Inventory = 1.5 monthIn transit, Obsolete/Damaged, Speculative, and Safety StockComplete Cycle1 monthEOQ Inventory Model with VarianceManufacturingWarehousing/Kitting Supply Base ManagementInbound LogisticsOutbound LogisticsDistribution / Product SupportWe need: 3 product A, 2 product B, 6 product C….NOW!!!!Anticipatory Order Fulfillment OperationsDemand 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.ToastKaizenReduce uncertainty by managing demand and order cycle time varianceOrderOrderCollaborative PlanCollaborative PlanActual DemandActual DemandSmall Inventory DeploymentSmall Inventory DeploymentFlexible, Rapid ResponseFlexible, 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 metricsLean Fulfillment – “Containing little fat”15Annual CostSize of Order QuantityInventoryCarryingCostsOrder or Set-upCostsTotalCostsAverage Inventory = 0.25 month0.5 monthReducing Cycle StockReduction in ordering or setup costs drives lower total cost at lower order quantity12Average Inventory = 1.25 monthIn transit, Obsolete/Damaged, Speculative, and Safety Stock.5 monthReplenishment Lead Time0.5Complete Cycle1 monthReduced Cycle Stock Model with Safety Stock1Average Inventory = 0.75 monthSafety Stock (In-transit, Obsolete, Damaged, and Speculative)0.5 month0.5 monthReplenishment Lead Time0.5To 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 monsterCycle StockBusiness Administration 331Supply Chain ManagementChapter 5Dr. John E. BellAssociate Professor of Supply Chain Management 343 Stokely Management


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UT Knoxville BUAD 331 - BA 331 Chapter 5

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