Transcript Chapter 3: Network Planning

ElecComp Case
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Large contract manufacturer of circuit boards and other
high tech parts.
About 27,000 high value products with short life cycles
Fierce competition => Low customer promise times
< Manufacturing Lead Times
High inventory of SKUs based on long-term forecasts =>
Classic PUSH STRATEGY
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High shortages
Huge risk
PULL STRATEGY not feasible because of long lead
times
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New Supply Chain Strategy
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OBJECTIVES:
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ACHIEVE THE FOLLOWING:
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Push Stages produce to stock where the company keeps safety stock
Pull stages keep no stock at all.
Challenge:
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Determining the optimal location of inventory across the various
stages
Calculating the optimal quantity of safety stock for each component at
each stage
Hybrid strategy of Push and Pull
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Reduce inventory and financial risks
Provide customers with competitive response times.
Identify the location where the strategy switched from Push-based to
Pull-based
Identify the Push-Pull boundary
Benefits:
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For same lead times, safety stock reduced by 40 to 60%
Company could cut lead times to customers by 50% and still reduce
safety stocks by 30%
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Notations Used
FIGURE 3-11: How to read the diagrams
3-3
Trade-Offs
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If Montgomery facility reduces committed lead time to 13
days
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assembly facility does not need any inventory of finished goods
Any customer order will trigger an order for parts 2 and 3.
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Part 2 will be available immediately, since it is held in inventory
Part 3 will be available in 15 days
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13 days committed response time by the manufacturing facility
2 days transportation lead time.
Another 15 days to process the order at the assembly facility
Order is delivered within the committed service time.
Assembly facility produces to order, i.e., a Pull based
strategy
Montgomery facility keeps inventory and hence is
managed with a Push or Make-to-Stock strategy.
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Current Safety Stock Location
FIGURE 3-12: Current safety stock location
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Optimized Safety Stock
Location
FIGURE 3-13: Optimized safety stock
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Current Safety Stock with Lesser
Lead Time
FIGURE 3-14: Optimized safety stock with reduced lead time
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Supply Chain with
More Complex Product Structure
FIGURE 3-15: Current supply chain
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Optimized Supply Chain with
More Complex Product Structure
FIGURE 3-16: Optimized supply chain
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Key Points
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Identifying the Push-Pull boundary
Taking advantage of the risk pooling concept
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Demand for components used by a number of
finished products has smaller variability and
uncertainty than that of the finished goods.
Replacing traditional supply chain strategies
that are typically referred to as sequential, or
local, optimization by a globally optimized
supply chain strategy.
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Local vs. Global Optimization
FIGURE 3-17: Trade-off between quoted lead time and safety stock
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Global Optimization
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For the same lead time, cost is reduced
significantly
For the same cost, lead time is reduced
significantly
Trade-off curve has jumps in various
places
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Represents situations in which the location of
the Push-Pull boundary changes
Significant cost savings are achieved.
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Problems with Local Optimization
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Prevalent strategy for many companies:
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try to keep as much inventory close to the customers
hold some inventory at every location
hold as much raw material as possible.
This typically yields leads to:
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Low inventory turns
Inconsistent service levels across locations and
products, and
The need to expedite shipments, with resulting
increased transportation costs
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Integrating Inventory Positioning
and Network Design
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Consider a two-tier supply chain
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Items shipped from manufacturing facilities to primary
warehouses
From there, they are shipped to secondary
warehouses and finally to retail outlets
How to optimally position inventory in the supply
chain?
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Should every SKU be positioned both at the primary
and secondary warehouses?, OR
Some SKU be positioned only at the primary while
others only at the secondary?
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Integrating Inventory Positioning
and Network Design
FIGURE 3-18: Sample plot of each SKU by volume and demand
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Three Different Product
Categories
High variability - low volume products
 Low variability - high volume products, and
 Low variability - low volume products.
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Supply Chain Strategy Different for
the Different Categories
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High variability low volume products
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Inventory risk the main challenge for
Position them mainly at the primary warehouses
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Low variability high volume products
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demand from many retail outlets can be aggregated
reducing inventory costs.
Position close to the retail outlets at the secondary
warehouses
Ship fully loaded tracks as close as possible to the
customers reducing transportation costs.
Low variability low volume products
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Require more analysis since other characteristics are
important, such as profit margins, etc.
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