Supply chain

Supply Chain Tune Up: Fine-Tuning Inventory Through Demand Planning
A Tompkins Associates Webcast April 23, 2002 www.tompkinsinc.com

Webcast Panel

Jim Tompkins President Tompkins Associates

John Spain Partner Tompkins Associates

Jim Lane Principal Tompkins Associates

Ralph Cox Principal Tompkins Associates
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Six Levels of Supply Chain

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Polling Question
Where doesyour company fall on the Six Levels of Supply Chain Excellence scale? 1. Business As Usual 2. Link Excellence 3. Visibility 4. Collaboration 5. Synthesis 6. Velocity

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Technology View of Supply Chain Excellence
ORDER MANAGEMENT INVENTORY & REPLENISHMENT PLANNING DEMAND MANAGEMENT DISTRIBUTION

WEB INTERFACE – CUSTOMER COLLABORATION

PROCUREMENT

PRODUCT SPECIFICATIONS

QUOTATIONS &SUPPLIER MANAGEMENT

MANUFACTURING

MES

WEB INTERFACE – SUPPLIER COLLABORATION

PURCHASING

WMS

TMS

WEB INTERFACE - CARRIER COLLABORATION

INVENTORY/ REPLENISHMENT PLANNING

MULTI-CHANNEL, MULTILOCATION ORDER RELEASE

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Objectives
§ Past demand planning and inventory management practices § Current realities and competitive needs § Inadequacies of certain practices § Thesolution—Supply Chain Synthesis § Results for you and your partners

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Demand Planning and Inventory Management
Characteristics
§ The set of processes and systems that support determination of the quantity and timing of inventory levels to meet anticipated customer demand § Requires an estimate of future demand
– Estimate of demand based upon simple math to advanced statistics over aperiod of time

§ While minimizing
– Inventory holding cost – Transactional cost

§ And maximizing
– Product availability – Customer satisfaction
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Characteristics of Inventory
§ A financial investment and asset that should be minimized § Made to serve customer’s needs
– Ultimate customer – Intermediate customer—manufacturing, distributors, etc.

§ Serves as a “buffer” betweenmanufacturing/vendor and customers § Consists of cycle stock and safety stock § Requires storage facilities (owned, leased, etc.) § Subject to risk (damage, loss, obsolescence, theft and deterioration)

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Components of Inventory
§ Cycle stock
– Inventory for routine consumption – Level dictated by average demand, lead-times, transaction costs and inventory carrying cost – Goal is to minimize costwhile providing adequate inventory between re-supply points

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Components of Inventory
HIGH

ANNUAL COST

TOTAL

INVENTORY HOLDING COST

TRANSACTION COST LOW

SMALL

THEORETICAL

OPTIMUM

LARGE

ECONOMIC ORDER QUANTITY

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Components of Inventory
§ Safety stock
– Result of variability in demand and lead times – Intended to provide inventory coverage during lead-timeif demand is above average or lead-time is greater than average – Level dictated by extent of variability and established customer service levels – Goal is to ensure customer satisfaction and reduce chance of stock-outs

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Components of Inventory
NO DEMAND

ON-HAND INVENTORY (units)

RE-ORDER POINT LOWER SHORT -TERM DEMAND RATES THAN ANTICIPATED UNIFORM DEMAND RATE ON WHICH RE-ORDERPOINT IS BASED HIGHER SHORT -TERM DEMAND RATE THAN ANTICIPATED INFINITE DEMAND "OUT OF STOCK" ZERO CONDITION

SAFETY STOCK

ACQUISITION LEAD TIME (periods)

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“Ideal” Fixed OQ Inventory Levels
140

120

100

On-Hand Inventory

80

60

40

20

0

Time

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Cycle and Safety Stock
Calculation of cycle and safety stock is adequate in predictable environments
§Accurate knowledge of transaction and inventory holding cost § Historical demand data is a good proxy for future demand § Historical product acquisition performance is a good estimate of future performance § Demand and acquisition lead-times are relatively consistent § Longer product life cycles § Limited or predictable promotional activity

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Demand and Lead Time Predictability
Keys to...