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Raw Material Inventory Strategy for Make-to-Order Manufacturing
MIT SCM Research FEST May 19, 2016
Authors: Vikash Chandra, Michael Tully Advisor: Fredrik Eng Larsson
Agenda
˃ Context˃ CurrentStructure˃ Approach˃ Results˃ Ques5ons
2
Context
3
Point4Make-to-Ordermanufacturer
Shortlead5mesHighservicelevel
HighgrowthratesustainedforthelastdecadeThefocuswasmarketshare
Point2Highvalueoffinishedgoodsincomparisontorawmaterials
LegacyinventorypoliciesuntouchedHaveworkedreasonablywell
FMCGmanufacturer
Contextcontd.
4
Supplierservicelevelsarevariable
Costinforma?onnotavailable
˃ Supplierservicelevels(SSL)arevariableandcangreatlyimpactproduc5on˃ Theactualqualityoftherawmaterialistheproblem˃ Switchingtoanothersuppliernotalwaysprac5calCanInventorypolicychangesmi4gatetheeffectofSSLdecline?
˃ Tradi5onalinventorypolicydetermina5onrequirescostand/orservicelevelinforma5on
˃ Trade-offinforma5onisneededinordertodevisestrategies˃ Anevalua5ontoolismoreappropriatetohelpunderstandpolicychangeeffectsCanamodelfortes4ngtheeffectsofinventorypolicychangesbebuiltwithoutcostinforma4on?
Sowhychangeinventorypoliciesandwhynotdoittheconven?onalway?
CurrentStructure
5
Twoechelon,centralizedinventorymanagement
Consignment
Plant1 Plant2
Expedited Regular
Transshipment
CurrentStructurecontd.
6
Demand˃ Make-to-Orderandforecast
errorslimitdemandvisibility˃ Suddenspikesindemand
cantriggertheorderingcycle
Replenishment˃ Decisionbasedon
daysonhand(DOH)˃ Differentshipments
havedifferentDOHlevels
QA&Backorders˃ Packagingallows
limitedinspec5on˃ Realcheckjustbefore
produc5on˃ Backorderscompleted
assoonaspossible
Transporta?on˃ Regularshipments
preferred˃ Regularshipment
costisincludedinmaterialcosts
7
Understandcurrentprocess
Understandcurrentprocess˃ Thecurrentprocessesaredeeplyembeddedinorganiza5on˃ Improvetheprocessforprac5calapplica5on
Iden?fykeymetrics
Findcostsubs?tutes
Iden?fykeymetrics˃ Keycriteriaistomeetproduc5onplan˃ Produc5onFillRate(PFR)isthemeasureofadherencetoproduc5onplanning˃ Inconjunc5onwithshipmentsandinventorylevels
Decidemathema?calformula?on
Findcostsubs?tutes˃ Hardtoputacosttodifferentshipments,inventoryholdingcosts,etc.˃ NumberofeventsgiveabeXerunderstandingtomanagement
Decidemathema?calformula?on˃ Numericalmodelorsimula5onmodel?˃ Flexibilityandeaseoffutureusagebysponsormainconcerns
Approach
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˃ Shipmentmodedependsonrequirementurgencyandavailability
˃ Everyeffortismadetoensurefulltruckloadshipment
˃ Theconsignmentmusthaveenoughtoship
˃ Totransship,thesendingplantmustholdbackcertainamounttocoveritsownrequirements.Thislevelistheholdbacklevel.
˃ DOHsufficiencyismeasured˃ Re-orderpointis15DOHinventory˃ Orderquan5tyisforfurther15days˃ DOHcanfluctuatesuddenlybecauseofqualityfailures
Checkinventoryadequacy
Checkavailability
Decideshipmentmode
Currentprocess
Approachcontd.
9
Production Fill Rate = Production quantity fulfilled on time / Total production quantity
Regular shipments = Number of regular shipments in a year
Expedited shipments = Number of expedited shipments in a year
Transshipments = Number of transshipments in a year
1
2
3
4
Average inventory = Sum of daily starting inventory / 365 5
Keymetricsandcostfactors
Approachcontd.
Note:Allmetricsareaveragedovertwoplants
10
NumericalModel
˃ Providestheop5malsolu5on˃ Hardertoformulate˃ Withoutcostinfo,certainvalues
cannotbededuced˃ Lessflexible˃ Futurechangescanbedifficulttoadd
Simula?onModel
˃ Doesnotprovideop5malsolu5onbutcanbeagoodevalua?ontool
˃ Easiertoimplement˃ Canworkwithnumberofevents
insteadofcosts˃ Flexible,modifica5onseasierto
implement˃ Easytousewithinsponsor
organiza5on
Whichmodeltouse?
Approachcontd.
11
˃ Withtheassignedholdbacklevel,simulatefordifferentcombina5onsofthere-orderpointandre-orderquan5ty(R,Q)(s,S)
˃ Recordtheresultsintermsofevents˃ Checkthesensi5vityofthedifferentpoliciesforvariousSSLand
standarddevia5onsofdemand
Phase-1
Phase-2
˃ Decidethetransshipmentholdbacklevel˃ TestthisholdbacklevelatdifferentSSLandstandarddevia5ons
ofdemand˃ Fixthechosenvaluefortheuseinnextphase
˃ Thepossiblecombina5onsofparametersundervariousinventorypoliciesisextremelyhigh
˃ Needtoreducethenumberofcombina5ons
Approachcontd.Solu?onapproach
12
InventoryCosts
ShipmentCostsProduc?onFillRate
ManagementDecision
Intheabsenceofcostinforma5on,acomparisoncanbemadebetweenimprovementinproduc5onplanadherenceandthecostsincurredintermsofeventstoachievethatperformance
Cost:Benefit
Results
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Holdbacklevel˃ Currentvalueof15canbeimproved
˃ Lowerholdbacklevelsenablemoretransshipments,especiallywithlowSSL
˃ BeXerdistribu5onofrawmaterials
˃ ImprovesthePFRslightlyandgenerallygivesbeXerresults
Resultscontd.Phase-1Fixholdbacklevel
SSL=97%
14
Resultscontd.
SSL=91%
15
Resultscontd.Phase-2Varyinventorypolicyspecificsandrecordevents
SSL=97%
16
Sensi?vitytoSSLchanges˃ PFRishighlysensi5vetoSSL
˃ A2percentagepointsreduc5oninSSLcanhaveupto5percentagepointsreduc5oninPFR
˃ ThenumberofshipmentswillneedtobemuchhighertomeettheoldPFRrequirements
Resultscontd.Sensi?vityChecks-SSL
17
Sensi?vitytostandarddevia?onchanges˃ PFRiscompara5velystabletostandarddevia5onchanges
˃ SamepolicycanbeapplicableoverawiderangeofSKUs
Resultscontd.Sensi?vityChecks–standarddevia?on
SSL=97%
18
CaninventorypoliciesoffsetSSLdecline?No,butitcanhelpmi5gatethedamage.Toacertainextent,PFRcanberecovered.
Thecurrentsystemnotgoodenough?Thecurrentsystemplaceslargeorderconstraintsontheconsignmentwhichthenneedstobereplenisheditself.
Whattodoimmediately?Reducetheholdbacklevelfortransshipment.ThiswillhelpthePFRimproveslightly.
Results- Increasereorder
point- Reducereorder
quan5ty- Increasefrequency
ofshipments- Analyzeevent-
basedtradeoffs
Changethesupplier?ToovercomethedropinPFRduetolowSSL,theul5matesolu5onistofindabeXersupplier
Longtermrecommenda?ons?Increasethere-orderpointanddecreasetheorderquan5ty.ThiswillimprovePFRbutwillincreasecostselsewhere.
Can’tchangesupplier?Incen5vizethesuppliertoincreasetheSSL.Itwillprobablybemoneywellspent.
Resultscontd.
19
ThankYou!