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MIM 514 Global Sourcing Class seven

MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

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Page 1: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

MIM 514Global Sourcing

Class seven

Page 2: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

AgendaInventory & Variances

BasicsIs it good & why / why not

Cisco & Altera Inventory BubbleScientific Glass Case AnalysisStudent Analysis

Page 3: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Costs Associated withGoods for Sale1. Purchasing costs include NPI thru transportation costs.

2. Ordering costs include receiving,inspecting the items in the orders, as well as well as RMAs for defects .

3. Carrying costs include the opportunity costof the investment tied up in inventory andthe costs associated with storage. Amplified by return privileges.

Page 4: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Costs Associated withGoods for Sale4. Stock-out costs occur when an organization

runs out of a particular item for whichthere is a customer demand, far higherthan inventory costs.

5. Quality costs of a product or service is its lackof conformance with a pre-specified standard.Again, far higher than inventory carry costs.

Page 5: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Inventory Carry Costs – Is inventory an asset?Inventory Carrying rate example: total inventory = $34,400$800K – Storage$400K – Handling$600K – Obsolescence$800K – Damage$600K – Administrative$200K – Loss$3,400 – Total

Divide costs by Avg Inventory $3,400 / $34,400 = 10%Add: Opportunity costs of Capital 9%, Insurance 4%, Taxes 6%

=19%

Total Inventory carrying rate is 29%

Page 6: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Cash-to-Cash Cycle Time0ENLI009

Inventory days + Days sales outstanding – Average payment of supply period for materials

Inventory0OPPLAN012

Forecast Accuracy

0OPPLAN008

Production Lead Times

0OPMAKE017

Perfect Order Fulfillment

0OPDEL061

Faultless Invoices

0OPDEL023

Scheduled Achievement

0OPMAKE022Delivery

Performance to Scheduled Commit Date

0OPDEL019

Returns0OPDEL067

Scrap0OPMAKE023

Fill Rates0OPDEL025

Order Fulfillment Lead Time

0OPPLAN030

Machine wait time0OPMAKE007

Yield0OPMAKE033

Number of Supply

Sources0OPSO012Total Source

Lead Time0OPSO041

0ENLI015

Sales0ENPR026

0ENLI0030OPPLAN017

Page 7: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Reasons for Inventories• Improve customer service• Economies of purchasing• Economies of production• Transportation savings• Hedge against future• Unplanned shocks (labor strikes, natural

disasters, surges in demand, etc.)• To maintain independence of supply

chain

Page 8: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Adding Value through Inventory

• Quality - inventory can be a “buffer” against poor quality; conversely, low inventory levels may force high quality

• Speed - location of inventory has gigantic effect on speed

• Flexibility - location, level of anticipatory inventory both have effects

• Cost - direct: purchasing, delivery, manufacturingindirect: holding, stock-out.

Page 9: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Which begs the question “who is liable?” :

• Need for Finished Goods Inventories• Is the need to satisfy internal or external

customers?• Can someone else in the value chain carry the

inventory?

• Ownership of Inventories• Specific Contents of Inventories• Locations of Inventories• Tracking

Page 10: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

10

Supply Chain Management – Key Issues

• Forecasts are never right• Very unlikely that actual demand will exactly equal

forecast demand

• The longer the forecast horizon, the worse the forecast• A forecast for a year from now will never be as accurate

as a forecast for 3 months from now

• Aggregate forecasts are more accurate• A demand forecast for all “related products” will be

more accurate than a forecast for a specific product / SKUNevertheless, forecasts (or plans, if you prefer) are important

management tools when some methods are applied to reduce uncertainty

Page 11: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Supply Chain Management – Key Issues

Overcoming functional silos with conflicting goals

PurchasingManufacturingDistributionCustomer Service/Sales

Few change- overs

Stable schedules

Long run lengths

High inventories

High service levels

Regional stocks

SOURCE MAKE DELIVER SELL

Low pur-chase price

Multiple vendors

Low invent-ories

Low trans-portation

Page 12: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Economic-Order-Quantity Decision Model: One of many metrics to balance Inv.

EOQ =2DP

C

D = Demand in units for a specified time period

P = Relevant ordering costs per purchase order

C = Relevant carrying costs of one unit in stock for the time period used for D

Page 13: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

13

Supply Chain Integration – Pull StrategiesProduction and distribution are demand-driven

Coordinated with true customer demandNone or little inventory held

Only in response to specific ordersFast information flow mechanisms

POS dataDecreased lead timesDecreased retailer inventoryDecreased variability in the supply chain and

especially at manufacturersDecreased manufacturer inventoryMore efficient use of resourcesMore difficult to take advantage of scale opportunitiesExamples:

Page 14: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Supply Chain Integration – Push/Pull Postponement

Hybrid of “push” and “pull” strategies to overcome disadvantages of each

Early stages of product assembly are done in a “push” manner

Final product assembly is done based on customer demand for specific product configurations

Supply chain timeline determines “postponement boundary”

Supply Chain TimelineRaw

Materials Endconsumer

Push Strategy Pull Strategy

Post-ponementBoundary“Generic” Product “Customized” Product

Page 15: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Inventory Measures - Examples

Weeks of SupplyFord: 3.51 weeksSears: 9.2 weeks

Inventory Turnover (Turns)Ford: 14.8 turnsSears: 5.7 turnsGM: 8 turnsToyota: 35 turns

Page 16: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Variances are bad – PPV & Standards

“unfavorable variance” = is reduced from the budgeted expectation

“favorable variance” = is increased from budgeted expectation

When is cost reduction a bad thing?Note: Do not interpret directly as “bad” or

“good” behavior on the part of management; the goal is to be on target.

Page 17: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Important points to keep in mind• Segment customers based on service needs.• Modify the supply chain to meet these service

requirements profitably.• Customize the logistics network.• Develop forecasts collaboratively involving every

link of the supply chain.• Locate the leverage point where the product is

unalterably configured to meet a single requirement

• Delay product differentiation till the last possible moment.

Page 18: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

• Assess options such as modularized design or modification of manufacturing processes that can increase flexibility.

• Cultivate strong relationships (guanxi) with suppliers.

• Efficient supply chain management has to be accompanied by a technology strategy.

Page 19: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Cisco / Altera

Yr. 2000 – Cisco wrote off $2.25BAltera’s answer? – A new PostponementCapacity utilization – 2000 (97%) 2001

(66.2%) What should it be?What is happening now in component lead-

times? Is it real?Is VMI the real answer?Value drops 1.3% per month

Page 20: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Scientific Glass

Helpful Hints:1. What are the Options & savings with

each?1. Fill rate lowered & trunk stock

eliminated2. One Warehouse vs. logistics costs3. Outsource 4. Combination of the above?5. What about Cash????

Page 21: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Scientific Glass

Case Questions:What are the problems facing SG in January 2010?How much external funding will have to be raised in

2010 to finance ops?How so SG’s problems illustrate the relationship

between the number of warehouses and inventory levels?

What are the alternatives & how do you evaluate those?

What actions should Ava propose?

Page 22: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Scientific Glass

Assessment alternatives: 5 questions1. Implement proposed policy changes?2. Consolidate warehouses?3. Outsource warehousing?4. Reduce the target total order fill-rate?5. Other considerations?

Page 23: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Scientific Glass – Inventory CaseWhat we know:- Exceeded their target debt/capital of 40%- $2B market; 5% share- High volume / low mix? 3000SKUs- Niche player, custom SKUs, competitive

pressure.- Does the 3-6 month sales cycle matter to

SCM? - Inventory growing faster than sales- Emphasis on short lead-times & customer

satisfaction

Page 24: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Scientific Glass – Inventory CaseWhat do we know?- Dedicated Sales force – Trunk stock 32*$10K- 93% fill-rate, 2 week lead-time- Overage cost .6%. BO 10% GM.- Incentive is on fill-rate to 99%- 8 DCs * $750K + 2 new ones planned- Sales forecasted to grow 20%; Capacity

requested to support = $10M

Page 25: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Scientific Glass – Inventory Case

What do we know?- Warehouse Inventory <60days; 120K orders

processed- Used Min-Max system for each SKU- Period expenses of 1% of cogs – Too much?- Freight Factory -> DC is $.4 / Ilbs- Inventory accuracy was declining – what

happens?

Page 26: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Scientific Glass – Inventory Case

What do we know?- Policy changes proposed- Capex is low – 14% ($1.4M..)- Turns were 6- 25% is Raw + WIP; rest is FGI (good?)- Balance sheet – Inventory growth > Sales- Cash 6%

Page 27: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Scientific GlassOption 1 – Implement proposals- These fail to address the problems of too

high fill-rate target & # of warehouses.- Too enamored with the metric fill-rate;

what do customers really want? Lower it to find the “sweet spot” and change Sales commission to “order” not “shipment”

- Trunk stock is negligible, keep it to make sales happy while changing their commission structure.

Page 28: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Scientific GlassOption 2 – Consolidating Warehouses- By going from 8 warehouses to 2, even

with a 99% fill-rate they can reduce inventory ~25%, 1 then ~40%.

- Warehouse in Waltham is the largest and appears to have capacity to fill all orders.

- Cost of the each warehouse is 15% of the inventory value saving $800K.

- Downside is freight – 145K orders equates to $400K in increased costs.

Page 29: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Scientific GlassOption 3 – Outsource Warehousing- Winged Fleet could operate all distribution

functions.- Save similar to option 2- Higher shipping costs due to region fees of

~$800K- Increase savings if outsourcing packaging

& order fulfillment would save incremental $$.

- Least interesting unless outsourcing is your fundamental strategy

Page 30: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Scientific Glass

Option 4 – Lower target fill-rate- 95% might reduce:

- inventory by ~$1M- Operating expenses by ~$125K- E&O by 15% - 40% pending SKU

analysis

Page 31: MIM 514 Global Sourcing Class seven. Agenda Inventory & Variances Basics Is it good & why / why not Cisco & Altera Inventory Bubble Scientific Glass Case

Scientific Glass

The real savings:- Cash saved by not increasing the capacity

since inventory is not needed.- Saving $10M- Shipments to new regions could be a 3PL

strategy