NHSCM Material 3

Ngẫu hứng Supply Chain Management
Serendipitous Adventures in Supply Chain Studies
Fundamentals of
Supply Chain Management
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Fundamentals of Supply Chain Management
Supply Chain Overview • Definition
1
• 4 parties and 3 flows in a supply chain
• 5W1H decisions to design a supply chain
•
•
Pillars for excellent supply chain
Attributes of a supply chain Objective
• Governing principles of KPI reporting
2 Supply Chain Strategy • Business strategy • Understanding

• Organizational strategy fundamentals
• Supply chain strategy
• Sharing experience &
Inventory Management • Inventory types
3 concerns
• Problems
• ABCN Classification
• Be able to handle the
• Inventory Carrying Cost
• KPIs
tasks
S&OP Planning • S&OP Process
4
• Principles
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3
Inventory Management
Overview of inventory management
Ordering principles
Deep dive in Safety stock
Ordering principles
How many forms of inventory is your company holding?
Example: Different forms of inventory for a footwear manufacturer
Raw material (RM) Work-in-progress Finished goods (FG) MRO
❑ Within a supply chain, a party’s FG could be another party’s RM

❑ Within a company, a department’s FG could be another department’s RM, and they are all WIP from
the overall company’s perspective
Example: Inventory KPIs measured in one actual consulting project
KPI Definition Calculation
Total
inventory
Total value of inventory based on COGS Total inventory value = Inventory quantity * COGS
value
% inventory % value of inventory with forecast compared to Total % value of inventory with forecast = Value of inventory
with forecast inventory value with forecast/ Total inventory value
Weeks of
How long the current on hand will last based on sales Weeks of Supply (WOS) = Total inventory value/ Average
supply
forecast weekly sales revenue
In-stock
% Number of SKUs with stock on hand compared to In-stock rate = Number of SKUs with stock on hand
rate
Number of SKUs in Assortment list
Question?
Why do we need to keep

inventory?
What form of inventory

should we keep?
Hints: SC management is to deal with lead time and limited resources
Payment flow
Supplier Manufacturer Distributor Retailer
L1
L2
L3
L4
Product flow
Information flow
Question?
How to manage inventory

effectively when we have so
many SKUs but my planning
team is limited in capacity?
ABCN approach helps to prioritize and focus effort on the highest value-
creating items
Assortment planning
Class A Class N Class B Class C
❑ 20% - 30% SKUs ❑ 5% - 10% SKUs ❑ 20% - 30% SKUs ❑ 40% - 60% SKUs
❑ 50% - 70% Sales ❑ Innovative or Renovative ❑ 20% - 30% Sales ❑ 10% - 30% Sales
products
Planning effort, review frequency, partnership with supplier
Priority in production and inventory storage
High Low
How to segment products into ABCN – apply Pareto principle into
the 4 steps process
Items of high
• Annual quantity
20%
contribution Calculate annual

(~20% of items) value • Unit value
80% value, 20% items
Pareto principle of 80/20
Items of mid
Rank from • Rank according to annual value
contribution
largest to for item
80%
(~30% of items) ~80% of total
smallest
value
• Accumulate the value % from

80%
Cumulate value
top item
%
Items of low
contribution
(~50% of items) • Apply the criteria to define
~15% of total Apply ABC
segment for each item
criteria
20%
value
~5% of ttl value
The decision making mechanism of inventory can impact overall planning
efficiency of the supply chain
Factors Centralized Decentralized
Decision is made here
Decisions are made here

❑ Alignment of priority among locations
Pros ❑ Consider factory’s capacity ❑ Consider local insight about demand

❑ Lower risk of bullwhip effect
❑ Lack of alignment of priority among locations

Cons ❑ Lack of local insight ❑ Risk of bullwhip effect
❑ Lack of consideration for factory’s capacity
How to build a hybrid solutions that can combine the advantages of both approaches?
Inventory location impacts the cost and lead time of the supply chain
Factors Centralized location Decentralized location
Inventory is kept here
Cost Inventory is kept here
❑ Inbound transport
❑ Outbound transport
❑ Inventory holding
Lead time
❑ Order fulfillment
Companies usually need to do simulation to make decision about inventory locations and policy (Centralized, Decentralized,
Hybrid)
Question?
Inventory holding cost vs COGS

– Which is bigger?
It is costly to hold inventory, that is why we need to minimize
inventory holding
There are many elements contributing to Inventory Carrying Cost Illustration of the elements
Cost (% of
Cost type
COGS)
Insurance Cost of capital 16%
Warehouse storage 2.89%
Tax 1.17%
Obsolescence Tax Insurance 0.06%
Obsolescence 0.8%
Scrap 1.29%
Inventory carrying Relocation 1.43%
Scrap Relocation
cost Total inventory carrying cost 23.64%
Understand the potential
Warehouse Walmart holds total inventory of $43.8 bn.

ADM & … AS-IS
storage Carrying costs: 23.64% → $10.35 bn.
WHAT-IF Imagine Walmart cuts just 5% inventory

Cost of Capital
Saving will be as big as $518 mil, and go
RESULT
straight to bottom line
Ordering principles
Question?
How to calculate buffer to

address variability in supply
and demand?
How to calculate
buffer to address
variability in supply
and demand?
To address variability in demand and supply, we can have buffer in TIME or QUANTITY
Time buffer Quantity buffer
Add buffer time to normal lead time to protect

Add buffer inventory to normal stock to avoid
against fluctuation in supply lead time so that an
stockout in case of late shipment
order can be completed before its real need date
6 common models of inventory ordering policies
Order based on cycle stock and safety stock through Order N Ordering quantity is equal to net requirement for a
Safety stock periodic review
periods of given number of periods
supply
(Deep dive in next section) (Example: Order to cover demand of next 1 month)
Actual order quantity is always equal to a pre- Order based on the quantity that optimized the total
Fixed quantity determined fixed quantity cost of inventory holding and ordering cost
order EOQ
The fixed order quantity will be ordered whenever (EOQ: = sqrt(2SA/ci) (*)
inventory falls below reorder point
Minimum quantity is the reorder point and maximum Order quantity is equal to the net requirement of the
is the “order up to” inventory level period
Min-max Lot-for-lot
An order is suggested if sum of available inventory an (Example: Small hardware store chain use L4L to replenish
scheduled receipt is below the min each retail store with just what was sold
• (*): S: Order cost, A: Annual demand, c: Cost per unit, i: Carrying cost
Ordering principles
The cycle stock and safety stock come as a result of daily business pursuing
satisfactory service at optimized cost
QTY
Definition of Cycle stock Order 1 Order 2 Order 3
arrive arrive arrive
It is the stock formed by items arriving infrequently but 200
in large quantities to meet frequent but small-quantity

demands. Also called working stock or lot size stock Average cycle stock
• Each order 200 pcs

• Daily consumption 20pcs
• Next order arrive when all stock consumed
• Order 1 arrive at Day 0 0 10 20 30 Days
QTY
300 Order 1 arrive Order 2 arrive
Definition of Safety stock Order 3 arrive
200
It is the level of extra stock that is maintained to

100
mitigate risk of stock outs due to uncertainties in supply Supply
Demand Safety stock
and demand. Also called buffer stock variance variance
0 10 20 30 Days
The estimated average level of inventory can be calculated from
average cycle stock plus safety stock
The formula to calculate Average Stock if Cycle Stock consumes smoothly each time
QTY
300
Average Stock
Average cycle stock
RECEIPT
CS
100
CS / 2 SS
SS Safety stock
0 10 20 30 Days
Example
What can average stock help?
Order 200 units each time, Safety stock is constant at Average stock quantity
arrives when finishes 100 units • Estimate the average stock level for target
setting, e.g. stock turn
200 / 2 100 200 • Estimate stock carrying cost
4 steps define our approach to safety stock
QTY
Step 1:
300 Order 1 arrive Order 2 arrive
Establish service
level Order 3 arrive
200
Step 2:
Map out service 100
factor Demand Supply Safety stock
variance variance
0 10 20 30 Days
Step 3:
Study the supply
and demand
variance Demand variance
Avg Leadtime x SD Demand^2

Leadtime variance SS = Z x +
Step
Step 4:
4: Avg Demand^2 x SD Leadtime^2
Setup safety
Setup safety
stock
stock Service expectation
Define 1.1A
an optimal service level by balancing stock out cost and
inventory carrying cost
Definition of service level
The expected probability of not hitting a stock-out during the next replenishment cycle, and thus, it is also the probability
of not losing sales
The more safety stock built, the higher the service However we need to balance the inventory carrying cost
level and stock-out cost
Probability
The higher inventory
Service level Probability of The lower the inventory
The higher carrying
stock-out cost The higher stock-out cost
Carrying cost
Stock-out cost
Mean of SS Demand
demand at LT
A balance of marginal carrying cost and stock-out cost will leads
Inventory to optimal inventory level, i.e. optimal service level
Demand and supply variance is the fundamental cause of the need
of safety stock
Avg Leadtime x SD Demand^2

SS = Z x +
Avg Demand^2 x SD Leadtime^2
If no demand and supply variance, then SS=0
There are many factors that will cause demand and supply variance
Some factors that impact the demand Some factors that impact the supply
• Raw material • Raw material supply delay
• New product launch
• Product proliferation • Power supply blackout
• Marketing plan • New marketing programs • Workers availability during long holiday
• Increased promotions • Manufacturing • Machine breakdown
• Geography expansion • Environment campaign by government
• Transportation delay
• Change of competition
• Market place • Transportation • Customs issue
• Change of customer preferences
• Port congestion
• Others • Severe weather change • Disaster weather, e.g. typhoon
• Others
• Industrial strike
Watch out the pitfalls when calculate optimal service level
Reflect capital element in Markdown is significant Establish an accurate It is difficult to define

holding cost in apparel industry holding cost is key stock-out cost precisely
• Capital cost is the biggest • For apparel business, the • Holding cost is the key • M is more than gross margin,
cost component for holding markdown can be up to 30% parameter to compute optimal but how much more is difficult
cost, can contribute up to of retail sales, with significant service level to define
50% of holding cost contribution to holding cost
• Many companies are not • A proper tracking of the • Differentiate holding cost for • It is important to note that M
aware of or miss out the markdown cost is key to different items, which will help needs to reflect the total
capital cost element when compile a proper holding cost enhance the significance of the margin contribution, not just
compiling the holding cost for apparel business formula unit gross margin

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Ngẫu hứng Supply Chain Management

Serendipitous Adventures in Supply Chain Studies

Santa8 - Sân chơi, chúng ta cùng tám

2 Supply Chain Strategy • Business strategy • Understanding

and Learn to develop

Deep dive in Safety stock

Deep dive in Safety stock

Example: Different forms of inventory for a footwear manufacturer

Raw material (RM) Work-in-progress Finished goods (FG) MRO

❑ Within a supply chain, a party’s FG could be another party’s RM

KPI Definition Calculation

Why do we need to keep

What form of inventory

Supplier Manufacturer Distributor Retailer

How to manage inventory

Class A Class N Class B Class C

Planning effort, review frequency, partnership with supplier

Priority in production and inventory storage

contribution Calculate annual

• Accumulate the value % from

~5% of ttl value

Factors Centralized Decentralized

Decision is made here

Decisions are made here

Pros ❑ Consider factory’s capacity ❑ Consider local insight about demand

❑ Lack of alignment of priority among locations

Factors Centralized location Decentralized location

Inventory is kept here

Cost Inventory is kept here

Inventory holding cost vs COGS

Understand the potential

Warehouse Walmart holds total inventory of $43.8 bn.

WHAT-IF Imagine Walmart cuts just 5% inventory

Deep dive in Safety stock

How to calculate buffer to

Time buffer Quantity buffer

Add buffer time to normal lead time to protect

Deep dive in Safety stock

in large quantities to meet frequent but small-quantity

• Each order 200 pcs

It is the level of extra stock that is maintained to

200 / 2 100 200 • Estimate stock carrying cost

Avg Leadtime x SD Demand^2

Definition of service level

Avg Leadtime x SD Demand^2

If no demand and supply variance, then SS=0

Reflect capital element in Markdown is significant Establish an accurate It is difficult to define

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