3.2 Planning and Managing Inventories in a Supply Chain PDF

3.2 Planning and Managing Inventories in a Supply Chain  Learning Objectives  Describe supply chain coordination and the bullwhip effect, and their impact on supply chain performance  Identify obstacles to coordination in a supply chain ...

3.2 Planning and Managing Inventories in a Supply Chain  Learning Objectives  Describe supply chain coordination and the bullwhip effect, and their impact on supply chain performance  Identify obstacles to coordination in a supply chain  Discuss managerial levers that help achieve coordination in a supply chain  Understand the different forms of collaborative planning, forecasting, and replenishment that are possible in a supply chain  Define the term ‘inventory’ and explain its functions  Determine the factors affecting inventory classification  Conduct ABC analysis for a company’s inventory Copyright © 2016 Pearson Education, Inc. 1–2 7  Lack of Supply Chain Coordination and the Bullwhip Effect  Supply chain coordination – all stages of the chain take actions that are aligned and increase total supply chain surplus  Requires that each stage share information and take into account the effects of its actions on the other stages  Lack of coordination results when:  Objectives of different stages conflict  Information moving between stages is delayed or distorted Copyright © 2016 Pearson Education, Inc. 1–3 7  Bullwhip Effect  Fluctuations in orders increase as they move up the supply chain from retailers to wholesalers to manufacturers to suppliers  Distorts demand information within the supply chain  Results from a loss of supply chain coordination Copyright © 2016 Pearson Education, Inc. 1–4 7  Demand at Different Stages FIGURE 10-1 Copyright © 2016 Pearson Education, Inc. 1–5 7  The Effect on Performance  Lack of coordination increases variability and hurts supply chain surplus  Impact on costs  Manufacturing cost  Inventory cost  Replenishment lead time  Transportation cost  Labor cost for shipping and receiving  Level of product availability  Relationships across the supply chain Copyright © 2016 Pearson Education, Inc. 1–6 7  The Effect on Performance Performance Measure Impact of the Lack of Coordination Manufacturing cost Increases Inventory cost Increases Replenishment lead time Increases Transportation cost Increases Shipping and receiving cost Increases Level of product availability Decreases Profitability Decreases TABLE 10-1 Copyright © 2016 Pearson Education, Inc. 1–7 7  Key Point The lack of coordination hurts both responsiveness and cost in a supply chain by making it more expensive to provide a given level of product availability. Copyright © 2016 Pearson Education, Inc. 1–8 7  Obstacles to Coordination in a Supply Chain  Incentive Obstacles  Information Processing Obstacles  Operational Obstacles  Pricing Obstacles  Behavioral Obstacles Copyright © 2016 Pearson Education, Inc. 1–9 7  Incentive Obstacles  Occur when incentives offered to different stages or participants in a supply chain lead to actions that increase variability and reduce total supply chain profits  Local optimization within functions or stages of a supply chain  Sales force incentives Copyright © 2016 Pearson Education, Inc. 1 – 10 7  Information Processing Obstacles  When demand information is distorted as it moves between different stages of the supply chain, leading to increased variability in orders within the supply chain  Forecasting based on orders and not customer demand  Lack of information sharing Copyright © 2016 Pearson Education, Inc. 1 – 11 7  Operational Obstacles  Occur when placing and filling orders lead to an increase in variability  Ordering in large lots  Large replenishment lead times  Rationing and shortage gaming Copyright © 2016 Pearson Education, Inc. 1 – 12 7  Operational Obstacles FIGURE 10-2 Copyright © 2016 Pearson Education, Inc. 1 – 13 7  Pricing Obstacles  When pricing policies for a product lead to an increase in variability of orders placed  Lot-size based quantity decisions  Price fluctuations Copyright © 2016 Pearson Education, Inc. 1 – 14 7  Pricing Obstacles FIGURE 10-3 Copyright © 2016 Pearson Education, Inc. 1 – 15 7  Behavioral Obstacles  Problems in learning within organizations that contribute to information distortion 1. Each stage of the supply chain views its actions locally and is unable to see the impact of its actions on other stages 2. Different stages of the supply chain react to the current local situation rather than trying to identify the root causes 3. Different stages of the supply chain blame one another for the fluctuations 4. No stage of the supply chain learns from its actions over time 5. A lack of trust among supply chain partners causes them to be opportunistic at the expense of overall supply chain performance Copyright © 2016 Pearson Education, Inc. 1 – 16 7  Managerial Levers to Achieve Coordination  Aligning goals and incentives  Improving information accuracy  Improving operational performance  Designing pricing strategies to stabilize orders  Building strategic partnerships and trust Copyright © 2016 Pearson Education, Inc. 1 – 17 7  Aligning Goals and Incentives  Align goals and incentives so that every participant in supply chain activities works to maximize total supply chain profits  Align goals across the supply chain  Align incentives across functions  Pricing for coordination  Alter sales force incentives from sell-in (to the retailer) to sell-through (by the retailer) Copyright © 2016 Pearson Education, Inc. 1 – 18 7  Improving Information Visibility and Accuracy  Sharing customer demand data  Implementing collaborative forecasting and planning  Designing single-stage control of replenishment  Continuous replenishment programs (CRP)  Vendor managed inventory (VMI) Copyright © 2016 Pearson Education, Inc. 1 – 19 7  Key Point Demand planning at each stage in a supply chain based on the stream of orders received from its down- stream stage results in a magnification of fluctuation in orders as one moves up the supply chain from the retailer to the manufacturer. It is better for the entire supply chain to forecast based on end customer demand. Copyright © 2016 Pearson Education, Inc. 1 – 20 7 Improving Operational Performance  Reducing replenishment lead time  Reducing lot sizes  Rationing based on past sales and sharing information to limit gaming Copyright © 2016 Pearson Education, Inc. 1 – 21 7  Designing Pricing Strategies to Stabilize Orders  Encouraging retailers to order in smaller lots and reduce forward buying  Moving from lot size-based to volume-based quantity discounts  Stabilizing pricing  Building strategic partnerships and trust Copyright © 2016 Pearson Education, Inc. 1 – 22 7  Continuous Replenishment and Vendor-Managed Inventories  A single point of replenishment  CRP – wholesaler or manufacturer replenishes based on POS data  VMI – manufacturer or supplier is responsible for all decisions regarding inventory  Substitutes Copyright © 2016 Pearson Education, Inc. 1 – 23 7  Collaborative Planning, Forecasting, and Replenishment (CPFR)  Sellers and buyers in a supply chain may collaborate along any or all of the following 1. Strategy and planning 2. Demand and supply management 3. Execution 4. Analysis Copyright © 2016 Pearson Education, Inc. 1 – 24 7  Common CPFR Scenarios Where Applied in Industries Where CPFR Scenario Supply Chain Applied Retail event collaboration Highly promoted All industries other than channels or categories those that practice EDLP DC replenishment Retail DC or distributor Drugstores, hardware, collaboration DC grocery Store replenishment Direct store delivery or Mass merchants, club collaboration retail DC-to-store delivery stores Collaborative assortment Apparel and seasonal Department stores, planning goods specialty retail TABLE 10-2 Copyright © 2016 Pearson Education, Inc. 1 – 25 7  Collaborative Planning, Forecasting, and Replenishment (CPFR)  Retail event collaboration  DC replenishment collaboration  Store replenishment collaboration  Collaborative assortment planning  Organizational and technology requirements for successful CPFR  Risks and hurdles for a CPFR implementation Copyright © 2016 Pearson Education, Inc. 1 – 26 7  Collaborative Planning, Forecasting, and Replenishment (CPFR) FIGURE 10-4 Copyright © 2016 Pearson Education, Inc. 1 – 27 7 Achieving Coordination in Practice  Quantify the bullwhip effect  Get top management commitment for coordination  Devote resources to coordination  Focus on communication with other stages  Try to achieve coordination in the entire supply chain network  Use technology to improve connectivity in the supply chain  Share the benefits of coordination equitably Copyright © 2016 Pearson Education, Inc. 1 – 28 7  What Is Inventory?  Stock of products and materials created to satisfy customer demand  Exist in different forms and at many locations  Assets of the Company (30% - 40%)  30% - 40% of total logistics costs  Average inventory held by US wholesalers, retailers and manufacturers > US 1.1 trillion (S$ 2 trillion)  Incurs cost but also generates revenue  Finance: Less is Better  Production: More is Better  Sales: More is Better (Improve customer service) Copyright © 2016 Pearson Education, Inc. 1 – 29 7  Purpose of Inventory Management  “The purpose of inventory management is to smooth the unknown. To take down the walls of information and see through those walls to what’s happening on Macy’s floor the next day. It used to be a secret and the manufacturer used to have to guess what to do. If you guessed poorly you were out of business. We put inventory in place because of speed bumps that naturally exist in the flow of product. Every time there’s a bump meaning we oversell or undersell means a variance.” Richard Weitz, Director of Continuous Replenishment, Johnson & Johnson Copyright © 2016 Pearson Education, Inc. 1 – 30 7  Functions of Inventory  Serve as a buffer (Safety Stock), decoupling successive stages of the supply chain for time and place utilities  Provide a hedge against price increases and fluctuations in demand  Improvement to balance inventory investment against other demands for capital  Economies of scale in manufacturing, purchasing and transportation  Balancing supply and demand to load-level operations as well as cater for seasonal demand e.g. X’mas holidays, perishables  Specialization at each site for longer production runs  Protection from uncertainties in demand, supply shortages (safety stock), price hedging and long shutdowns (anticipatory stock) Copyright © 2016 Pearson Education, Inc. 1 – 31 7  Managing Inventory  Facts about inventory:  A small percentage of inventory items always account for a large percentage of total dollar value  There are a lot of inventories that are classified as trivial many  Uneconomical to manage each item in the inventory  To have an efficient and effective inventory management in order to:  Minimise investment  Maximise service Copyright © 2016 Pearson Education, Inc. 1 – 32 7  ABC Curve 100 % 95 % Percent Of Annual Usage C Low 80% Dollar Usage B Intermediate Dollar Usage A High Dollar Usage 20% 50% 100% Percent Of Items Copyright © 2016 Pearson Education, Inc. 1 – 33 7  Classes of Inventories  Class A  Accounts for 70 – 80 % of total dollar value  Makes up 15 – 20 % of the items  Class B  Accounts for 15 – 20 % of total dollar value  Makes up 30 – 40 % of the items  Class C  Accounts for 5 – 10 % of total dollar value  Makes up 60 – 70 % of the items Copyright © 2016 Pearson Education, Inc. 1 – 34 7  Factors Affecting Classification  Item unit price  Supply source  Replenishment lead time  Shelf life and security requirements  Cost of shortage  Engineering change Copyright © 2016 Pearson Education, Inc. 1 – 35 7  ABC Classification Procedure 1. List all items 2. Calculate annual turnover 3. Rank items in descending order 4. Calculate the cumulative percentage of value of annual usage and percentage range of inventory items 5. Plot graph 6. Divide the items into groups Class with turnover example A