Supply Chain Management: Inventory and Network Design

Posted on Dec 17, 2024 in Economy

Chapter 1: Supply Chain Fundamentals

Supply chain definition: Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize systemwide costs while satisfying service level requirements.

What makes the management of supply chains difficult? Supply chain strategies cannot be determined in isolation. They are directly affected by another chain that most organizations have, the development chain. It is challenging to design and operate a supply chain so that total systemwide costs are minimized, and systemwide service levels are maintained. The process of finding the best systemwide strategy is known as global optimization. Uncertainty and risk are inherent in every supply chain.

The development chain includes plan/design, source, supply, produce, distribute, and sell.

Why is a globally optimal solution so challenging?

  • The supply chain is a complex network.
  • Different facilities in the supply chain frequently have different, conflicting objectives.
  • The supply chain is a dynamic system.
  • System variations over time.

Global optimization is challenging due to supply chain uncertainties, which increase organizational risks.

Matching supply and demand:

  • Inventory and back-order levels fluctuate considerably across the supply chain.
  • Forecasting doesn’t solve the problem.
  • Demand is not the only source of uncertainty.
  • Recent trends such as lean manufacturing, outsourcing, and offshoring that focus on cost reduction increase risks significantly.

Key issues in SCM:

  1. Supply: Distribution network configuration, Inventory control, Production sourcing, Distribution strategies, Information technology, Smart pricing
  2. Development: Strategic partnering, Outsourcing & offshoring, Product design
  3. Both: Supply contracts, Customer value

Chapter 2: Inventory Management

Types of inventory: raw materials, work-in-process goods, finished goods, resale goods.

Reasons for holding inventory: supplier uncertainty, delivery lead times, uncertainty in customer demand, incentives for larger shipments.

Inventory policy: estimation of customer demand, replenishment lead time, product variety, planning horizon length, service level requirements, order costs, inventory holding costs.

The effect of demand uncertainty?

  • The forecast is always wrong.
  • The longer the forecast horizon, the worse the forecast.
  • Aggregate forecasts are more accurate.

Forecasting Techniques

Judgement methods:

  • Sales-force composite
  • Experts panel
  • Delphi method

Market research/survey

  1. Time series:
    • Moving Averages
    • Exponential Smoothing
  2. Trends:
    • Regression
    • Holt’s method
  3. Seasonal patterns – Seasonal decomposition
  4. Trend + Seasonality – Holt-Winter’s Method
  5. Causal Methods

Single period models: Short lifecycle products (1 ordering opportunity only)

  • Order quantity to be decided before demand occurs.
  • Order Quantity > Demand => Dispose excess inventory.
  • Order Quantity < Demand => Lose sales/profits.

Observations:

  • The optimal order quantity is not necessarily equal to forecast, or average, demand.
  • As the order quantity increases, average profit typically increases until the production quantity reaches a certain value, after which the average profit starts decreasing.
  • Risk/Reward trade-off: As we increase the production quantity, both risk & reward increases.

Reasons to hold inventory:

  • To balance annual inventory holding costs & annual fixed order costs.
  • To satisfy demand occurring during lead time.
  • To protect against uncertainty in demand.

Inventory Policies:

  1. Continuous review policy:
    • Inventory is reviewed continuously.
    • An order is placed when the inventory reaches a particular level or reorder point.
    • Inventory can be continuously reviewed (computerized inventory systems are used).
  2. Periodic review policy:
    • Inventory is reviewed at regular intervals.
    • Appropriate quantity is ordered after each review.
    • It is impossible or inconvenient to frequently review inventory and place orders if necessary.

Service Level Optimization

Optimal inventory policy assumes a specific service level target.

What is the appropriate level of service?

  • May be determined by the downstream customer.
  • Retailer may require the supplier to maintain a specific service level.
  • Supplier will use that target to manage its own inventory.
  • Facility may have the flexibility to choose the appropriate level of service.

Trade-offs (Everything else being equal):

  • The higher the service level, the higher the inventory level.
  • For the same inventory level, the longer the lead time to the facility, the lower the level of service provided by the facility.
  • The lower the inventory level, the higher the impact of a unit of inventory on service level and hence on expected profit.

Profit optimization & service level: Target inventory level = 95% across all products. Service level > 99% for many products with high profit margin, high volume & low variability. Service level < 95% for products with low profit margin, low volume & high variability.

Risk Pooling

Demand variability is reduced if one aggregates demand across locations or customers. More likely that high demand from one customer will be offset by low demand from another. Reduction in variability allows a decrease in safety stock and therefore reduces average inventory.

Managing Inventory in the Supply Chain

  • Inventory decisions are given by a single decision maker whose objective is to minimize the systemwide cost.
  • The decision maker has access to inventory information at each of the retailers and at the warehouse.
  • Echelons & echelon inventory {Echelon inventory at any stage or level of the system equals the inventory on hand at the echelon, plus all downstream inventory (downstream means closer to the customer)}.

Inventory Reduction Strategies

  1. Periodic inventory review
  2. Tight management of usage rates, lead times, & safety stock
  3. Reduce safety stock levels
  4. Introduce or enhance cycle counting practice.
  5. ABC approach
  6. Shift more inventory or inventory ownership to suppliers
  7. Quantitative approaches to determine optimum.

Chapter 3: Network Design

3 steps in network design: Network design, inventory positioning, resource allocation.