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Kulwant S Pawar, 12.2.2010, C:/Kul/Teach/SCM/.ppt, No. 1 Prof. K S Pawar
Managing Inventory and Uncertainty
in Supply Chains
University of Nottingham Business School (South) Professor Kulwant S Pawar Kul.Pawar@nottingham.ac.uk Kulwant S Pawar, 12.2.2010, C:/Kul/Teach/SCM/.ppt, No. 2
Agenda
• Introduction
• Why managing Inventory is a problem?
• Inventory management systems
• Understanding and managing uncertainty in
supply chains
• Developments in e-based transactions in SC
• Summary
Kulwant S Pawar, 12.2.2010, C:/Kul/Teach/SCM/.ppt, No. 3 Prof. K S Pawar
Competing in Global Markets
In a more integrated global market, the competition is not among companies but among global supply chains & business networks. In a world where your competitor is but one mouse click away, On the desktop of your customer’s computer!! Competition based on customer success - what is needed to get the job done? Differentiators
- Cost - Quality - Service
- Customization - Flexibility - Time Kulwant S Pawar, 12.2.2010, C:/Kul/Teach/SCM/.ppt, No. 4 Relationship between Supply & Demand Supply of products & service The operation’s resources Demand for products & services The operation’s customers Planning & Control The activities which reconcile supply & demand
Kulwant S Pawar, 12.2.2010, C:/Kul/Teach/SCM/.ppt, No. 7 Prof. K S Pawar E(1)
Independent vs. Dependent Demand
Independent Demand (Demand for the final end-product or demand not related to other items) Dependent Demand (Derived demand items for component parts, subassemblies, raw materials, etc) Finished product Component parts Kulwant S Pawar, 12.2.2010, C:/Kul/Teach/SCM/.ppt, No. 8
Dependent: e.g. Product Structure for chair
Chair Frame
- Back Cushion
- Seat Cushion
- Wood End Cross-piece (Chair)
- Tube * Webbing^ * Fabric (^) * Foam * Wood * Fastener (^3 )
0.6 0. 0.55 2.
Level 0: Finished Product Level 1: Sub- assembly Level 2: Raw Material Notes: * Indicates common item with settee. The number to the left of each link shows the number/quantity of the lower - level item needed in the manufacture of the higher-level item. 1 1 1 4 2 2
Kulwant S Pawar, 12.2.2010, C:/Kul/Teach/SCM/.ppt, No. 9 Prof. K S Pawar
MRP Structure
MRP Analysis Stock Status Reports Master Production Schedule Bill of Materials Kulwant S Pawar, 12.2.2010, C:/Kul/Teach/SCM/.ppt, No. 10
Inventory Costs
Holding (or carrying) costs
– Costs for storage, handling, insurance, etc
Setup (or production change) costs
– Costs for arranging specific equipment
setups, etc
Ordering costs
– Costs of someone placing an order, etc
Shortage costs
– Costs of canceling an order, etc
Kulwant S Pawar, 12.2.2010, C:/Kul/Teach/SCM/.ppt, No. 13 Prof. K S Pawar
Cost Minimization Goal
Ordering Costs Holding Costs Order Quantity (Q) C O S T Annual Cost of Items (DC) Total Cost QOPT By adding the item, holding, and ordering costs together, we determine the total cost curve, which in turn is used to find the Qopt inventory order point that minimizes total costs By adding the item, holding, and ordering costs together, we determine the total cost curve, which in turn is used to find the Qopt inventory order point that minimizes total costs Kulwant S Pawar, 12.2.2010, C:/Kul/Teach/SCM/.ppt, No. 14
Inventory profile of the Automotive Supply Chain
0 20 40 60 80 100 120 Rawm aterial Bou ght-ou tPa rts In-housebu iltP arts Pre -As sem byW IP Assem blyW IP Fin ish edC om ponen ts Inb oundTra nsit On -siteP art(V M) Vehic leP rodu ctionW IP Load ing&D espatch Ou tbo undTran sit Marketp lace Custom er Maxim um Average Minim um Days of Inventory First Tier Supplier Inbound Logistics Vehicle Manufacturers Outbound Logistics Distribution & Retail (UK 1999 Figures, Volume Car Stock Levels Source: Holweg (2002)
Kulwant S Pawar, 12.2.2010, C:/Kul/Teach/SCM/.ppt, No. 15 Prof. K S Pawar Uncertainty in inventory management: Recent events Fuel crisis of 2000 11 th^ September 2001 USA West Coast dock strike 2002 SARS 2003 Madrid Train Bombing (2004) Tsunami disaster (2004) London Bombing (2005) Hurricane Katrina, USA (2005) Earthquake, Kashmir (2005) Terrorist attack, Mumbai (2008) Haiti Earthquake (2010) Such events are unpredictable and outside of our control. However …………….. Kulwant S Pawar, 12.2.2010, C:/Kul/Teach/SCM/.ppt, No. 16
Many risks are contained within the supply chain
Land Rover Business failure of sole supplier of chassis (Thomson) put the production of the Land Rover Discovery at risk. Ericsson Forced to exit mobile phone production as a result of fire at Philips semi-conductor factory. (Nokia realised immediately, went around the world and secured an alternative supplier within 2 weeks whereas Ericsson were too late to react) Cisco Announced a $2.2billion write-down on obsolete inventory in 2001 as a result of failure to react to a downturn in demand quickly enough.
Kulwant S Pawar, 12.2.2010, C:/Kul/Teach/SCM/.ppt, No. 19 Prof. K S Pawar
Co-managed or vendor managed inventory?
- In a Vendor Managed Inventory (VMI) relationship, the
supplier is responsible for replenishing the customer’s
inventory
- The supplier can make use of information on
− End user demand
− Customer inventory levels
− Volume of goods in transit
- VMI can also be known as Co-Managed Inventory
- (similar to Wal-Mart’s Retail Link) Kulwant S Pawar, 12.2.2010, C:/Kul/Teach/SCM/.ppt, No. 20
Supply Contracts: Key Insights
- .. they allow supply chain partners to replace sequential optimisation by global optimisation
- Buy Back and Revenue Sharing contracts achieve this objective through risk sharing Other types of contracts include:
- Quantity Flexibility Contracts
- Supplier provides full refund for returned items as long as the number of returns is no larger than a certain quantity
- Sales Rebate Contracts
- Supplier provides direct incentive for the retailer to increase sales by means of a rebate paid by the supplier for any item sold above a certain quantity
Kulwant S Pawar, 12.2.2010, C:/Kul/Teach/SCM/.ppt, No. 21 Prof. K S Pawar
Supply Contracts
• To address the issues that arise between buyers
and suppliers of goods and to ensure an
adequate supply of materials
• Contracts may include:
- Pricing and volume discounts
- Minimum and maximum purchase quantities
- Delivery lead times
- Product or material quality
- Product return policies Kulwant S Pawar, 12.2.2010, C:/Kul/Teach/SCM/.ppt, No. 22
The most common business transactions
Purchase Orders Amendments Acknowledgement Despatch Advice Invoice
CUSTOMER
SUPPLIER
Kulwant S Pawar, 12.2.2010, C:/Kul/Teach/SCM/.ppt, No. 25 Prof. K S Pawar
Internet versus intranet
- the Internet is open to anyone
- the intranet is private & protected from public visits by firewalls (security systems with specialised software to prevent outsiders from invading private networks)
- The firewall consists of hardware and software placed between an organisation’s internal network and an external network, including the Internet.
- The firewall is programmed to intercept each message packet passing between two networks, examine its characteristics, and reject unauthorised messages or access attempts. Kulwant S Pawar, 12.2.2010, C:/Kul/Teach/SCM/.ppt, No. 26
Typical architecture of Extranet
Kulwant S Pawar, 12.2.2010, C:/Kul/Teach/SCM/.ppt, No. 27 Prof. K S Pawar Radio Frequency Identification (RFID)
- RFID tags are tiny microchip and antenna units that are capable of storing and transmitting information.
- RFID - An alternative to Automated Identification and Data Collection (AIDC) technologies such as Barcodes.
- Wal-Mart’s requirement: Top 100 suppliers had RFID tags on pallets and cases (Jan 2005). This practice extended to all suppliers (2006).
- 2 types of RFID: Passive (Read only tags) & Active (Write/Read) Kulwant S Pawar, 12.2.2010, C:/Kul/Teach/SCM/.ppt, No. 28
Online Bidding
- Online bidding is dynamic, where multiple bids from the same firm are possible
- Online bidding speeds up the bidding process
- It also encourages suppliers to reduce profit margins
- When does an online bidding process become a negotiation? - If the buying firm changes the criterion for awarding the contract during the bidding process - Engaging in this type of buying can create a poor reputation for the buying firm
