Management of Uncertainty in

the Supply Chain

management
Submitted by :
VIPIN VP
MBA(IB)
ROLL NO :58

Outline of the Presentation

Introduction

Push-Pull Systems

Case Studies
High Tech
Automotive
Electrical Components

Copyright 2003 D. Simchi-Levi

Todays Supply Chain Pitfalls

Long Lead Times
Uncertain Demand
Complex Product Offering
Component Availability
System Variation Over Time

Copyright 2003 D. Simchi-Levi

Order Size

The Dynamics of the Supply Chain

Customer
Customer
Demand
Demand
Distributor
Distributor Orders
Orders

Retailer
RetailerOrders
Orders

Production
ProductionPlan
Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
Copyright 2003 D. Simchi-Levi

Order Size

The Dynamics of the Supply Chain

Customer
Customer
Demand
Demand

Production
ProductionPlan
Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
Copyright 2003 D. Simchi-Levi

What are the Causes.

Promotional sales
Volume and Transportation
Discounts
Inflated orders
Demand Forecast
Long cycle times
Lack of Information
Copyright 2003 D. Simchi-Levi

Example: Automotive Supply Chain

Custom order takes 60-70 days
Many different products
High level of demand uncertainty

Dealers inventory does not

capture demand accurately
GM estimates: Research shows we lose 10%
to 11% of sales because the car is not available

Copyright 2003 D. Simchi-Levi

Supply Chain Strategies

Achieving Global Optimization
Managing Uncertainty
Risk Pooling
Risk Sharing

Copyright 2003 D. Simchi-Levi

From Sequential Optimization to

Global Optimization
Sequential Optimization
Procurement
Planning

Manufacturing
Planning

Distribution
Planning

Demand
Planning

Global Optimization
Supply Contracts/Collaboration/Integration/DSS

Procurement
Planning

Manufacturing
Planning

Distribution
Planning

Demand
Planning

Source: Duncan McFarlane

Copyright 2003 D. Simchi-Levi

A new Supply Chain Paradigm

A shift from a Push System...
Production decisions are based on
forecast

to a Push-Pull System

Copyright 2003 D. Simchi-Levi

From Make-to-Stock Model.

Suppliers

Assembly

Configuration

Copyright 2003 D. Simchi-Levi

Demand Forecast
The three principles of all forecasting
techniques:
Forecasts are always wrong
The longer the forecast horizon the worst is
the forecast
Aggregate forecasts are more accurate
Risk Pooling

Copyright 2003 D. Simchi-Levi

A new Supply Chain Paradigm

A shift from a Push System...
Production decisions are based on
forecast

to a Push-Pull System

Copyright 2003 D. Simchi-Levi

Push-Pull Supply Chains

The Supply Chain Time Line

Suppliers

PUSH STRATEGY
Low Uncertainty

PULL STRATEGY
High Uncertainty

Push-Pull Boundary
Copyright 2003 D. Simchi-Levi

Customers

A new Supply Chain Paradigm

A shift from a Push System...
Production decisions are based on
forecast

to a Push-Pull System
Parts inventory is replenished based
on forecasts
Assembly is based on accurate
customer demand
Copyright 2003 D. Simchi-Levi

.to Assemble-to-Order Model

Suppliers

Assembly

Configuration

Copyright 2003 D. Simchi-Levi

Outline of the Presentation

Introduction

Push-Pull Systems

Case Studies
High Tech
Automotive
Electrical Components

Copyright 2003 D. Simchi-Levi

Shifting the Push-Pull Boundary:

A Case Study
Manufacturer of circuit boards and other hightech products
Sells customized products with high value and
short life cycles
Multi-stage BOM
e.g., copper & fiberglass circuit board
enclosure processor

Case study concerns a number of 27,000 SKUs

The case study employed
InventoryAnalystTM from LogicTools
(www.logic-tools.com)
Copyright 2003 D. Simchi-Levi

How to Read the Diagrams

A Gray Box is a processing stage

PART 2
DALLAS ($0.50)

Number on the lane is

the transit time

0
PART 1
DALLAS ($260)
2

30

15

PART 3
88
MONTGOMERY ($220)

15

Number under the box

is the processing time

Number in the white

box is the commitment
time to the next stage

Cost in the box is the

value of the product

Bins indicate safety

stock levels- more Red
means more safety
stock, empty means no
safety stock

x2
PART 2
DALLAS ($0.50)

Safety Stock Cost = $74,100/yr

0
0

PART 4
MALAYSIA ($180)

PART 5
37
CHARLESTON ($12)

PART 1
DALLAS ($260)
28
3
3

PART 7
DENVER ($2.50)

58

PART 6
RALEIGH ($3)

30

15

PART 3
88
MONTGOMERY ($220)

15

70

8
x2

Safety Stock Cost = $45,400/yr

(39% savings)

PART 2
DALLAS ($0.50)

PART 4
MALAYSIA ($180)

PART 5
37
CHARLESTON ($12)

PART 1
DALLAS ($260)
28
3
3

PART 7
DENVER ($2.50)

58

PART 6
RALEIGH ($3)

32

2
PART 3
13
MONTGOMERY ($220)

15

15

30

Safety Stock Cost = $53,700/yr

(28% savings, 50% reduction in LT)

PART 2
DALLAS ($0.50)

PART 4
MALAYSIA ($180)

PART 5
37
CHARLESTON ($12)

PART 1
DALLAS ($260)
28
3
3

PART 7
DENVER ($2.50)

58

PART 6
RALEIGH ($3)

32

2
PART 3
50
MONTGOMERY ($220)

15

15

15

Comparison of Performance Measures

Scenario
1: Baseline
2: Optimization
3: Shorten Lead Time

Safety Stock
Holding Cost
($/yr)
$74,100
$45,400
$53,700

Lead Time
to Customer
(days)
30
30
15

Cycle
Time
(days)
105
105
105

Copyright 2003 D. Simchi-Levi

Inventory
Turns
(turns/yr)
1.2
1.4
1.3

PART 31
40
SEA ($20)

PART 23
50
DAL ($30)

PART 18
51
DAL ($35)

4
PART 38
NJ ($8)

PART 32
10
NJ ($22)

PART 39
TAI ($15)

28

PART 35
NJ ($35)

2
3

3
PART 41
PHI ($32)

PART 36
20
NJ ($40)
13

PART 42
PHI ($2)

PART 37
10
DAL ($8)
4

50
PART 19
61
DAL ($210)

PART 12
62
DAL ($260)

PART 4
65
DAL ($285)

3
PART 5
DAL ($3)

PART 26
25
DAL ($80)
2

PART 34
49
WAS ($25)
2

PART 25
3
52
WAS ($75)

PART 33
42
WAS ($30)

PART 2
55
DAL ($55)

PART 3
50
DAL ($6)

9
35
PART 40
12
NZ ($22)

PART 24
16
NJ ($30)

PART 11
54
DAL ($40)

3
PART 27
NJ ($4)

PART 13
24
MEX ($11)

PART 6
46
DAL ($18)
14

1
PART 14
10
MEX ($4)

PART 28
17
DAL ($12)

PART 7
21
DAL ($9)
3

7
PART 20
18
WAS ($42)

PART 29
12
WAS ($40)
12

6
PART 21
35
41
NZ ($18)

Safety Stock Cost = $95,000/yr

PART 15
26
DAL ($60)
5
PART 16
81
DAL ($21)
5

PART 30
PHI ($6)

PART 22
23
DAL ($28)
16

PART 17
26
DAL ($30)
3

PART 8
56
DAL ($65)
30
PART 9
82
DAL ($30)
1
PART 10
38
DAL ($35)
12

PART 1
30
DAL ($535)
4

PART 31
40
SEA ($20)

PART 23
21
DAL ($30)

PART 18
22
DAL ($35)

4
PART 38
NJ ($8)

PART 32
NJ ($22)

8
PART 39
TAI ($15)

28

PART 35
NJ ($35)

2
3

PART 36
11
NJ ($40)

PART 37
DAL ($8)
4

PART 19
22
DAL ($210)

PART 4
26
DAL ($285)

PART 12
23
DAL ($260)
1

3
PART 5
DAL ($3)

PART 27
NJ ($4)

PART 13
24
MEX ($11)

PART 6
26
DAL ($18)
14

PART 14
10
MEX ($4)

PART 28
16
DAL ($12)

PART 7
21
DAL ($9)
3

PART 20
18
WAS ($42)

PART 29
12
WAS ($40)
12

Safety Stock Cost = $36,600/yr

(62% savings)
PART 30
PHI ($6)

13
PART 42
PHI ($2)

50

3
PART 41
PHI ($32)

PART 26
16
DAL ($80)
2

PART 34
10
WAS ($25)
2

PART 25
13
WAS ($75)
3

PART 33
10
WAS ($30)

PART 2
26
DAL ($55)

PART 3
26
DAL ($6)

9
35
PART 40
12
NZ ($22)

PART 24
14
NJ ($30)

PART 11
25
DAL ($40)

PART 21
35
41
NZ ($18)

PART 15
26
DAL ($60)
5
PART 16
25
DAL ($21)
5

PART 22
11
DAL ($28)
16

PART 17
14
DAL ($30)
3

PART 8
26
DAL ($65)
30
PART 9
26
DAL ($30)
1
PART 10
26
DAL ($35)
12

PART 1
30
DAL ($535)
4

Comparison of Performance Measures

Scenario
1: Baseline
2: Optimization

Safety Stock
Holding Cost
($/yr)
$95,000
$36,600

Lead Time
to Customer
(days)
30
30

Cycle
Time
(days)
86
86

Copyright 2003 D. Simchi-Levi

Inventory
Turns
(turns/yr)
1.5
1.8

Safety Stock vs. Quoted Lead Time

Safety Stock Cost vs. Quoted Lead Time
$100,000

For a given lead-time, the

optimized supply chain
provides reduced costs

$90,000

Safety Stock Cost ($/year)

$80,000
$70,000

For a given cost, the

optimized supply chain
provides better lead-times

$60,000
$50,000

Baseline Cost
Optimized Cost

$40,000
$30,000
$20,000
$10,000
$0
0

20

40

60

80

100

Copyright 2003 D. Simchi-Levi

Lead Time Quoted to Customer (days)

Outline of the Presentation

Introduction

Push-Pull Systems

Case Studies
High Tech
Automotive
Electrical Components

Copyright 2003 D. Simchi-Levi

Case Study: Spare Part Inventory

Optimization
INVENTORY STRATEGY

Optimal Safety Stock and Base Stock level at each location

Optimal Committed Service Time

NETWORK DYNAMICS

Understanding Inventory Drivers

Sensitivity Analysis
What-if analysis/Prioritizing Opportunities

SOURCING & PRICING

Cost implications with different suppliers

Supplier Contract Negotiations
Differential Pricing

Source: Analysis is done using InventoryAnalyst

from LogicTools (www.logic-tools.com)
Copyright 2003 D. Simchi-Levi

Spare Part Network with Plant &

PDC CST = 0
D

PDC 1

PDC 2

PDC 3

D
D

Supplier 1
Supplier 2
Supplier 3
Supplier 4/ Part 1
Supplier 4/ Part 2
Supplier 4/ Part 3

PDC 4

1.92

D
PDC 5

0.96

1.92
1.92

Water Pump Kit

Plant

PDC 6

D
PDC 7

0.96
PDC 8

0.96

D
D

PDC 9

Committed Service Time

(months)

PDC 10

D
PDC 13

PDC 12

PDC 11

Raw Materials
D

Water Pump Kit FG

Inventory Drivers
Inventory by Location

Root Cause Analysis

$ 2,500 .0 0

$5,000.00
$4,000.00

$ 2,00 0.00

$3,000.00

$ 1,500 .00

$2,000.00

$1 ,0 00 .0 0

Item

Holding Cost

Part 1

$1.37

Part 2

$0.02

Part 3

$0.09

Part 4

$0.47

Part 5

$0.02

P art 2
P art 1
W
hse

Intransit to W
hse

P art 4
P art 4
P art 3
P
lant FG

P art 5

$0.00

P
lant R
M

P art 4

In transit S
tock

SS(UpstreamSF)

SS(NLT &Var)

Cycle S
tock

$0.00

$5 0 0 .0 0
In transit to P
lants

P art 1
P art 2
P art 3

$1,000.00

IA Impact of relaxing PDC

CST
T otal Holding Cost

10000
9000
8000
7000
6000

CST from Plants

is fixed

5000
4000
3000
2000

P la n t T o W a reho u s e Ho ld in g C o s t
P la n t T o P lan t Ho lding C o s t
W a reh ous e H o ld in g C os t
P la n t O u tb o und H old in g C o s t
P la n t Inb ound H o ld in g C o s t

Plant 0, PD C 4
w eek s

Plant 0, PD C 2
W eek s

Plant 0, PD C 1
W eek

Plant 0, PD C 3
day s

Plant 0, PD C 2
day s

Plant 0, PD C 1
day

Plant 0, PD C 0

1000

As the CST to
dealers
increases more
inventory is held
at the Plants and
less at the RDCs

IA Impact of changes in
CST to Dealers

IA Impact of Supplier CST

Prioritizing Savings
Opportunities

14000

$26.5M

12000

$17.2M

$34.5M

$36.5M

$38.3M

Free Cash Flow

10000
8000

12000
10000

6000

13.9

18.4

16.2

20.2

20.7

21.2

8000

4000

6000

2000

4000

2000

Current
0

Baseline (Plant Only PDCs

0, PDC 0 CST) hold Inventory
Baseline

Only PDCs hold

Inventory

Reduced
Supplier LT

Reduced
Variability

Increased PDC
CST

Reduced Supplier Reduced Variability

LT

Increased
Customer CST

Plant Inbound Holding Cost

Plant Outbound Holding Cost

Warehouse Holding Cost

Plant To Plant Holding Cost

Plant To Warehouse Holding Cost

Inventory Turns

Fewer Stock-outs & Improved

Inventory
Turns
Safety Stock
$35.17

$63.25

$35.01

Savings: 33%

CANADA
$34.68

$90.45

MICHIGAN
$66.89
BOSTON
$48.62

Optimal Holding Cost

ILLINOIS
$94.92

Current Holding Cost

$118.57
$476.14

SUPPLIER

$530.09

$33.45

PLANT
DENVER
$30.76

$35.83

Optimized Inventory Positioning leads to better

Service Levels with lower Inventory Levels

NEVADA
$43.87

$136.17

$43.31

W VIRGINA
$159.04

$50.21

Raw Materials
Finished Goods

MINNESOTA
$53.19
LOS ANGELES
$63.14

All numbers in 000,000s

IA Supplier Choice

Supplier 1:
4 week CST
95% Service Level
Lead Time to Proc.
Plant: Day

Supplier 2:
2.5 week CST
98% Service Level
Lead Time to Proc.
Plant: 1 week

Supplier Comparison

$14,000
$12,000

Plant To Warehouse Holding Cost

$10,000

Plant To Plant Holding Cost

$8,000

Warehouse Holding Cost

$6,000

Plant Outbound Holding Cost

$4,000

Plant Inbound Holding Cost

$2,000
$0
Supplier 1

Supplier 2

Outline of the Presentation

Introduction

Push-Pull Systems

Case Studies
High Tech
Automotive
Electrical Components

Copyright 2003 D. Simchi-Levi

Supply Chain Structure

ASIAN
PLANTS

(35,4)

CA DC

CA PORT

(4,1)

EUROPEAN
PLANTS

(15,3)

(4,1)

PHIL PORT

(4,1)

(3,1)

GA DC

(1,0)

LATIN AMERICAN
PLANTS

(10,2)
(4,1)

MIAMI PORT
(2,0)

(3,1)

US
PLANTS

IL DC

(4,1)

(4,1)

PA DC

(4,1)
(4,1)

(3,1)

TX DC
(3,1)

(4,1)

(Transit Time, Std Dev of Transit Time)

MFG #1

Inventory Allowed

Customers
(4,1)

Inventory Not Allowed

(3,1)

CR MFG

Supply Chain Size

76 Plants
10 Warehouses
3105 Customers
8297 Products
8297 Plant Warehouse Transit Lanes
20230 Warehouse Warehouse Transit
Lanes

64843 Warehouse Customer Transit

Lanes

Distribution of Inventory
Across the Supply Chain

Large part of
the Inventory
is In Transit

49.0%
50.0%
45.0%
40.0%
35.0%
30.0%

24.6%

25.0%
16.6%

20.0%
9.6%

15.0%
10.0%
0.3%

5.0%
0.0%

Warehouse

Customer

In Transit from Plant

In Transit betw een

Warehouse

In Transit to
Customer

Plant to
Warehouse
Warehouse to
Customer
Warehouse to
Warehouse

Across Warehouses
RDC-IL

MFG #1
MFG #2
RDC-TX

RDC-GA
RDC-CA

RDC-PA

Most of the
Inventory at
the
Warehouses is
in RDC-PA

Safety Stock and Cycle Stock

WAREHOUSES

5000000
4500000
4000000
3500000
3000000
2500000
2000000
1500000
1000000
500000
0
Cycle Stock

Safety Stock

Top 20% SKUs

Bottom 80% SKUs

CUSTOMERS

12000
10000
8000
6000
4000
2000
0
Cycle Stock
Top 20% SKUs

Top 20% of SKUs

account for
more than 97%
of inventory

Safety Stock
Bottom 80% SKUs

More Inventory
is held at
Warehouses
than at
Customer
Locations

Inventory Drivers
Inventory by Location

Inventory by Reason

400
180

350

160

300

140

250

120

200

100

150

80

100

60

50

69-1200
39-2700-1
39-1701
Customer

Whse - Cust In Transit

Whse - Whse In Transit

Warehouse

Plant - Whse In Transit

40
69-1200

20

39-2700-1

0
In Trans it
Inventory

39-1701
Cycle Stock

Safety Stock

Sensitivity Analysis

3,500,000

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000
500,000
0
A

W arehous e To Cus tom er Holding Cos t

W arehous e To W arehous e Holding Cos t
P lant To W arehous e Holding Cos t
Cus tom er Holding Cos t
W arehous e Holding Cos t

A.
B.
C.

Customer Holding Cost is not significant (< 0.01%)

With no Transit Time Variance from the Ports to PA RDC the Cost is reduced by
5%
Reviewing Inventory Daily at warehouses can reduce Inventory Holding Cost
by 14%

Inventory Savings
In v e n to ry (in $ M M )

$120

$100

$100

$19 MM freed cash

flow by globally
optimizing inventory

$95
$81

$80

Could move from the

lower quartile to the
medium quartiles

$70

$60
$40

5.0

5.3

6.2

Current Inv

Proper Levels

Opt
Positioning

7.1

$20
$0
Changing
Policies

5.0 = Inv Turns

Copyright 2003 D. Simchi-Levi

Lessons Learned
Globally optimizing inventory can
have a dramatic impact

Take advantage of risk pooling and inventory

positioning

Identifying inventory drivers is not

easy

Many policies and practices were causing poor

inventory turnover ratio
Can be done with an inventory model
Highlights areas for improvement
Copyright 2003 D. Simchi-Levi

Lessons Learned
Manufacturing company inventory turns
8
7
6
5
4
3
2
1
0

Heuristi
cs
Service Level not always met
Excess Inventory at some
location

Calculation
Safety Stock at each node
calculated independently
Few factors considered
Service Level not always
met

Global Optimization
Safety Stock at each node depends
on attributes of all nodes
Most complete model available
Positions safety stock across the
network

Copyright 2003 D. Simchi-Levi

Copyright 2003 D. Simchi-Levi