Slide 1Order CycleFulfillment DecisionsAnticipatory FulfillmentEconomic Order Quantity Model (EOQ)“Naïve” Reorder Point or Sawtooth Inventory ModelImpact of VariabilityEOQ Inventory Model with VarianceAnticipatory Order Fulfillment OperationsLean Fulfillment – “Containing little fat”Reducing Cycle StockReduced Cycle Stock Model with Safety StockBeating the safety stock monsterLean Order Fulfillment OperationsAgile Fulfillment – “Nimble”Major Shift in MentalityAgile Order Fulfillment OperationsLean OR Agile OR ??Flexibility in Order FulfillmentKey Product & Demand CharacteristicsMatching a Supply Chain with ProductsBA331-Supply Chain ManagementChapter 5Shay Scott, Ph.D.Department of Marketing and SCMManaging Director, Global Supply Chain InstituteUniversity of [email protected] Chain Management“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 DecisionsDemand is supported by deploying inventory in anticipation of projected sales levels and locationOrderAnticipatory ForecastActual DemandInventory DeploymentInventory 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 or Sawtooth Inventory ModelImpact 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!!!!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 varianceOrderCollaborative PlanActual DemandSmall Inventory DeploymentFlexible, 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”10Annual 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 StockManufacturingWarehousing/Kitting Supply Base ManagementInbound LogisticsOutbound LogisticsDistribution / Product SupportWe 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 stockLean Order Fulfillment OperationsEliminate uncertainty by postponing form and/or time and place utility untilorder received and then rapidly respond when order is received.CapacityCollaborative PlanActual DemandFlexible, Rapid ResponseAgile Fulfillment – “Nimble”15•Customer Focus vs. Product Focus•Cross-functional and cross-organizational process integration•Leveraging relationships•Information visibilityMajor Shift in MentalityThe move to lean and then agile operations requires a paradigm shift from a push demand management philosophy to collaborative pull managementFrom Product-focused push… To Customer-focused pull… Mfr. RetailerDistribution ConsumerFinancial/market driven forecastPre-set safety stock levelOrder point based upon DC inventory and past forecastsForward buyingMfr. RetailerDistribution ConsumerOrder point based upon shelf inventory and forecastingDeals, promotionsPurchase merchandise / serviceDemand driven forecastShort cyclesUPC ticketingAuto replenishmentAuto reorderingShipping container markingCross-dock receivingPOS data collectionContract purchasingPerpetual inventory tracked at SKU levelPurchase merchandise / service16ManufacturingWarehousing/Kitting Supply Base
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