Chapter 3

Network Planning

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 3.1 Why Network Planning?
 Find the right balance between inventory,
transportation and manufacturing costs,
 Match supply and demand under
uncertainty by positioning and managing
inventory effectively,
 Utilize resources effectively by sourcing
products from the most appropriate
manufacturing facility

3-2
 Three Hierarchical Steps
 Network design
 Number, locations and size of manufacturing plants and
warehouses
 Assignment of retail outlets to warehouses
 Major sourcing decisions
 Typical planning horizon is a few years.
 Inventory positioning:
 Identifying stocking points
 Selecting facilities that will produce to stock and thus keep
inventory
 Facilities that will produce to order and hence keep no inventory
 Related to the inventory management strategies
 Resource allocation:
 Determine whether production and packaging of different
products is done at the right facility
 What should be the plants sourcing strategies?
 How much capacity each plant should have to meet seasonal
demand?
3-3
 3.2 Network Design
 Physical configuration and infrastructure of
the supply chain.
 A strategic decision with long-lasting
effects on the firm.
 Decisions relating to plant and warehouse
location as well as distribution and
sourcing

3-4
 Reevaluation of Infrastructure
 Changes in:
 demand patterns
 product mix
 production processes
 sourcing strategies
 cost of running facilities.

 Mergers and acquisitions may mandate

the integration of different logistics
networks

3-5
 Key Strategic Decisions
 Determining the appropriate number of
facilities such as plants and warehouses.
 Determining the location of each facility.
 Determining the size of each facility.
 Allocating space for products in each
facility.
 Determining sourcing requirements.
 Determining distribution strategies, i.e., the
allocation of customers to warehouse
3-6
 Objective and Trade-Offs
 Objective: Design or reconfigure the logistics network in
order to minimize annual system-wide cost subject to a
variety of service level requirements

 Increasing the number of warehouses typically yields:

 An improvement in service level due to the reduction in average
travel time to the customers
 An increase in inventory costs due to increased safety stocks
required to protect each warehouse against uncertainties in
customer demands.
 An increase in overhead and setup costs
 A reduction in outbound transportation costs: transportation
costs from the warehouses to the customers
 An increase in inbound transportation costs: transportation costs
from the suppliers and/or manufacturers to the warehouses.

3-7
 Data Collection
 Locations of customers, retailers, existing warehouses
and distribution centers, manufacturing facilities, and
suppliers.
 All products, including volumes, and special transport
modes (e.g., refrigerated).
 Annual demand for each product by customer location.
 Transportation rates by mode.
 Warehousing costs, including labor, inventory carrying
charges, and fixed operating costs.
 Shipment sizes and frequencies for customer delivery.
 Order processing costs.
 Customer service requirements and goals.
 Production and sourcing costs and capacities

3-8
 Data Aggregation
 Customer Zone
 Aggregate using a grid network or other clustering technique for
those in close proximity.
 Replace all customers within a single cluster by a single
customer located at the center of the cluster
 Five-digit or three-digit zip code based clustering.

 Product Groups
 Distribution pattern
 Products picked up at the same source and destined to the same
customers
 Logistics characteristics like weight and volume.
 Product type
 product models or style differing only in the type of packaging.

3-9
 Replacing Original Detailed Data
with Aggregated Data
 Technology exists to solve the logistics
network design problem with the original
data
 Data aggregation still useful because
forecast demand is significantly more
accurate at the aggregated level
 Aggregating customers into about 150-200
zones usually results in no more than a 1
percent error in the estimation of total
transportation costs
3-10
 General Rules for Aggregation
 Aggregate demand points into at least 200
zones
 Holds for cases where customers are classified into
classes according to their service levels or frequency
of delivery
 Make sure each zone has approximately an
equal amount of total demand
 Zones may be of different geographic sizes.
 Place aggregated points at the center of the
zone
 Aggregate products into 20 to 50 product groups

3-11
 Customer Aggregation
Based on 3-Digit Zip Codes
Total Cost:$5,796,000 Total Cost:$5,793,000
Total Customers: 18,000 Total Customers: 800

Cost Difference < 0.05%

3-12
 Product Aggregation
Total Cost:$104,564,000 Total Cost:$104,599,000
Total Products: 46 Total Products: 4

Cost Difference: 0.03%

3-13
 Transportation Rates
 Rates are almost linear with distance but
not with volume
 Differences between internal rate and
external rate

3-14
 Internal Transportation Rate
 For company-owned trucks
 Data Required:
 Annual costs per truck
 Annual mileage per truck
 Annual amount delivered
 Truck’s effective capacity

 Calculate cost per mile per SKU.

3-15
 External Transportation Rate
Two Modes of Transportation
 Truckload, TL
 Country sub-divided into zones. One zone/state
except for:
 Big states, such as Florida or New York (two zones)
 Zone-to-zone costs provides cost per mile per
truckload between any two zones.

 TL cost from Chicago to Boston =

Illinois-Massachusetts cost per mile X Chicago-
Boston distance
 TL cost structure is not symmetric

3-16
 External Transportation Rate
Two Modes of Transportation
 Less-Than-Truckload, LTL
 Class rates
 standard rates for almost all products or commodities shipped.
 Classification tariff system that gives each shipment a rating or a
class.
 Factors involved in determining a product’s specific class
include:
 product density, ease or difficulty of handling and transporting, and liability
for damage.
 After establishing rating, identify rate basis number.
 Approximate distance between the load’s origin and destination.
 With the two, determine the specific rate per hundred pounds
(hundred weight, or cwt) from a carrier tariff table (i.e., a freight
rate table).
 Exception rates provides less expensive rates
 Commodity rates are specialized commodity-specific
rates

3-17
 SMC3’s CzarLite
 Engine to find rates in fragmented LTL industry
 Nationwide LTL zip code-based rate system.
 Offers a market-based price list derived from
studies of LTL pricing on a regional,
interregional, and national basis.
 A fair pricing system
 Often used as a base for negotiating LTL
contracts between shippers, carriers, and third-
party logistics providers

3-18
Transportation Rate for Shipping
4,000 lbs.

FIGURE 3-7: Transportation rates for shipping 4,000 lb

3-19
 Mileage Estimation
 Estimate lona and lata, the longitude and
latitude of point a (and similarly for point b)
 Distance between a and b
 For short distances
Dab  69 (lona  lonb ) 2  (lata  latb) 2
 For large distances
lata  latb 2 lona  lonb 2
Dab  2(69) sin 1 (sin( ))  cos(lata ) X cos(latb ) X (sin( ))
2 2

3-20
 Circuity Factor, ρ
 Equations underestimate the actual road
distance.
 Multiply Dab by ρ.
 Typical values:
 ρ = 1.3 in metropolitan areas
 ρ = 1.14 for the continental United States

3-21
 Chicago-Boston Distance
 lonChicago = -87.65
 latChicago = 41.85
 lonBoston = -71.06
 lonBoston = 42.36
 DChicago, Boston = 855 miles
 Multiply by circuity factor = 1.14
 Estimated road distance = 974 miles
 Actual road distance = 965 miles

 GIS systems provide more accuracy

 Slows down systems
 Above approximation good enough!

3-22
 Warehouse Costs
 Handling costs
 Labor and utility costs
 Proportional to annual flow through the warehouse.
 Fixed costs
 All cost components not proportional to the amount of
flow
 Typically proportional to warehouse size (capacity)
but in a nonlinear way.
 Storage costs
 Inventory holding costs
 Proportional to average positive inventory levels.

3-23
 Determining Fixed Costs

FIGURE 3-8: Warehouse fixed costs as a function of the

warehouse capacity
3-24
 Determining Storage Costs
 Multiply inventory turnover by holding cost
 Inventory Turnover =

Annual Sales / Average Inventory Level

3-25
 Warehouse Capacity
 Estimation of actual space required
 Average inventory level =
Annual flow through warehouse/Inventory turnover ratio
 Space requirement for item = 2*Average Inventory Level
 Multiply by factor to account for
 access and handling
 aisles,
 picking, sorting and processing facilities
 AGVs
 Typical factor value = 3

3-26
 Warehouse Capacity Example
 Annual flow = 1,000 units
 Inventory turnover ratio = 10.0
 Average inventory level = 100 units
 Assume each unit takes 10 sqft. of space
 Required space for products = 2,000 sqft.
 Total space required for the warehouse is
about 6,000 square feet

3-27
 Potential Locations
 Geographical and infrastructure
conditions.
 Natural resources and labor availability.
 Local industry and tax regulations.
 Public interest.

 Not many will qualify based on all the

above conditions

3-28
 Service Level Requirements
 Specify a maximum distance between each
customer and the warehouse serving it
 Proportion of customers whose distance to
their assigned warehouse is no more than
a given distance
 95% of customers be situated within 200 miles
of the warehouses serving them
 Appropriate for rural or isolated areas

3-29
 Future Demand
 Strategic decisions have to be valid for 3-5
years
 Consider scenario approach and net
present values to factor in expected future
demand over planning horizon

3-30
 Number of Warehouses
$90 Optimal
$80
Number
of Warehouses
$70
Cost (millions $)

$60
Total Cost
$50 Transportation Cost
$40 Fixed Cost
Inventory Cost
$30

$20

$10

$-

0 2 4 6 8 10
Number of Warehouses

3-31
 Industry Benchmarks:
Number of Distribution Centers

Pharmaceuticals Food Companies Chemicals

Avg.
# of
WH 3 14 25
- High margin product - Low margin product
- Service not important (or - Service very important
easy to ship express) - Outbound transportation
- Inventory expensive expensive relative to inbound
relative to transportation

3-32
 Model Validation
 Reconstruct the existing network configuration using the
model and collected data
 Compare the output of the model to existing data
 Compare to the company’s accounting information
 Often the best way to identify errors in the data, problematic
assumptions, modeling flaws.
 Make local or small changes in the network configuration
to see how the system estimates impact on costs and
service levels.
 Positing a variety of what-if questions.
 Answer the following questions:
 Does the model make sense?
 Are the data consistent?
 Can the model results be fully explained?
 Did you perform sensitivity analysis?

3-33
 Solution Techniques
 Mathematical optimization techniques:

1. Exact algorithms: find optimal solutions

2. Heuristics: find “good” solutions, not

necessarily optimal

 Simulation models: provide a mechanism to

evaluate specified design alternatives created by
the designer.

3-34
 Example
 Single product
 Two plants p1 and p2
 Plant p2 has an annual capacity of 60,000 units.
 The two plants have the same production costs.
 There are two warehouses w1 and w2 with
identical warehouse handling costs.
 There are three markets areas c1,c2 and c3 with
demands of 50,000, 100,000 and 50,000,
respectively.

3-35
 Unit Distribution Costs

Facility p1 p2 c1 c2 c3
warehouse

w1 0 4 3 4 5
w2 5 2 2 1 2

3-36
 Heuristic #1:
Choose the Cheapest Warehouse to Source
Demand

D = 50,000
$2 x 50,000

$5 x 140,000 D = 100,000
$1 x 100,000
$2 x 60,000
Cap = 60,000
$2 x 50,000 D = 50,000

Total Costs = $1,120,000

3-37
 Heuristic #2:
Choose the warehouse where the total delivery
costs to and from the warehouse are the lowest
[Consider inbound and outbound distribution costs]

$0
$3 D = 50,000
P1 to WH1 $3
P1 to WH2 $7
P2 to WH1 $7
$4 $2 P2 to WH 2 $4
$5
$5 D = 100,000
P1 to WH1 $4
$4 P1 to WH2 $6
$1 P2 to WH1 $8
$2 P2 to WH 2 $3
Cap = 60,000
$2 D = 50,000
P1 to WH1 $5
P1 to WH2 $7
P2 to WH1 $9
P2 to WH 2 $4

Market #1 is served by WH1, Markets 2 and 3

are served by WH2
3-38
 Heuristic #2:
Choose the warehouse where the total delivery
costs to and from the warehouse are the lowest
[Consider inbound and outbound distribution
costs]
$0 x 50,000
$3 x 50,000 D = 50,000
Cap = 200,000 P1 to WH1
P1 to WH2
$3
$7
P2 to WH1 $7
P2 to WH 2 $4

$5 x 90,000 D = 100,000
P1 to WH1 $4
P1 to WH2 $6
$1 x 100,000 P2 to WH1 $8
$2 x 60,000 P2 to WH 2 $3
Cap = 60,000
$2 x 50,000 D = 50,000
P1 to WH1 $5
P1 to WH2 $7
P2 to WH1 $9
P2 to WH 2 $4

Total Cost = $920,000

3-39
 The Optimization Model

The problem described earlier can be framed as the

following linear programming problem.
Let
 x(p1,w1), x(p1,w2), x(p2,w1) and x(p2,w2) be the flows
from the plants to the warehouses.
 x(w1,c1), x(w1,c2), x(w1,c3) be the flows from the
warehouse w1 to customer zones c1, c2 and c3.
 x(w2,c1), x(w2,c2), x(w2,c3) be the flows from
warehouse w2 to customer zones c1, c2 and c3

3-40
 The Optimization Model
The problem we want to solve is:
min 0x(p1,w1) + 5x(p1,w2) + 4x(p2,w1)
+ 2x(p2,w2) + 3x(w1,c1) + 4x(w1,c2)
+ 5x(w1,c3) + 2x(w2,c1) + 2x(w2,c3)

subject to the following constraints:

x(p2,w1) + x(p2,w2)  60000
x(p1,w1) + x(p2,w1) = x(w1,c1) + x(w1,c2) + x(w1,c3)
x(p1,w2) + x(p2,w2) = x(w2,c1) + x(w2,c2) + x(w2,c3)
x(w1,c1) + x(w2,c1) = 50000
x(w1,c2) + x(w2,c2) = 100000
x(w1,c3) + x(w2,c3) = 50000

all flows greater than or equal to zero.

3-41
 Optimal Solution
Facility p1 p2 c1 c2 c3
warehouse

w1 140,000 0 50,000 40,000 50,000

w2 0 60,000 0 60,000 0

Total cost for the optimal strategy is $740,000

3-42
 Simulation Models
 Useful for a given design and a micro-level
analysis. Examine:
 Individual ordering pattern.
 Specific inventory policies.
 Inventory movements inside the warehouse.

 Not an optimization model

 Can only consider very few alternate
models

3-43
 Which One to Use?
 Use mathematical optimization for static
analysis
 Use a 2-step approach when dynamics in
system has to be analyzed:
 Use an optimization model to generate a
number of least-cost solutions at the macro
level, taking into account the most important
cost components.
 Use a simulation model to evaluate the
solutions generated in the first phase.

3-44
 DSS for Network Design
 Flexibility to incorporate a large set of preexisting
network characteristics
 Other Factors:
 Customer-specific service level requirements.
 Existing warehouses kept open
 Expansion of existing warehouses.
 Specific flow patterns maintained
 Warehouse-to-warehouse flow possible
 Production and Bill of materials details may be important
 Robustness
 Relative quality of the solution independent of specific
environment, data variability or specific settings

3-45
 3.3 Inventory Positioning and
Logistics Coordination
 Multi-facility supply chain that belongs to a single firm
 Manage inventory so as to reduce system wide cost
 Consider the interaction of the various facilities and the
impact of this interaction on the inventory policy of each
facility
 Ways to manage:
 Wait for specific orders to arrive before starting to manufacture
them [make-to-order facility]
 Otherwise, decide on where to keep safety stock?
 Which facilities should produce to stock and which should
produce to order?

3-46
 Single Product, Single Facility
Periodic Review Inventory Model
 Assume -
 SI: amount of time between when an order is placed
until the facility receives a shipment (Incoming
Service Time)
 S: Committed Service Time made by the facility to its
own customers.
 T: Processing Time at the facility.
 SI  T  S
 Net Lead Time = SI + T - S
 Safety stock at the facility: zh SI  T  S
3-47
 2-Stage System

 Reducing committed service time from facility 2

to facility 1 impacts required inventory at both
facilities
 Inventory at facility 1 is reduced
 Inventory at facility 2 is increased
 Overall objective is to choose:
 the committed service time at each facility
 the location and amount of inventory
 minimize total or system wide safety stock cost.

3-48
 ElecComp Case
 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
 High shortages
 Huge risk
 PULL STRATEGY not feasible because of long lead
times

3-49
 New Supply Chain Strategy
 OBJECTIVES:
 Reduce inventory and financial risks
 Provide customers with competitive response times.
 ACHIEVE THE FOLLOWING:
 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
 Push Stages produce to stock where the company keeps safety stock
 Pull stages keep no stock at all.
 Challenge:
 Identify the location where the strategy switched from Push-based to
Pull-based
 Identify the Push-Pull boundary
 Benefits:
 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%

3-50
 Notations Used

FIGURE 3-11: How to read the diagrams

3-51
 Trade-Offs
 If Montgomery facility reduces committed lead time to 13
days
 assembly facility does not need any inventory of finished goods
 Any customer order will trigger an order for parts 2 and 3.
 Part 2 will be available immediately, since it is held in inventory
 Part 3 will be available in 15 days
 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.

3-52
 Current Safety Stock Location

FIGURE 3-12: Current safety stock location

3-53
 Optimized Safety Stock
Location

FIGURE 3-13: Optimized safety stock

3-54
 Current Safety Stock with Lesser
Lead Time

FIGURE 3-14: Optimized safety stock with reduced lead time

3-55
 Supply Chain with
More Complex Product Structure

FIGURE 3-15: Current supply chain 3-56

 Optimized Supply Chain with
More Complex Product Structure

FIGURE 3-16: Optimized supply chain

3-57
 Key Points
 Identifying the Push-Pull boundary
 Taking advantage of the risk pooling concept
 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.

3-58
Local vs. Global Optimization

FIGURE 3-17: Trade-off between quoted lead time and safety stock
3-59
 Global Optimization
 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
 Represents situations in which the location of
the Push-Pull boundary changes
 Significant cost savings are achieved.
3-60
 Problems with Local Optimization
 Prevalent strategy for many companies:
 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:
 Low inventory turns
 Inconsistent service levels across locations and
products, and
 The need to expedite shipments, with resulting
increased transportation costs

3-61
 Integrating Inventory Positioning
and Network Design
 Consider a two-tier supply chain
 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?
 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?

3-62
Integrating Inventory Positioning
and Network Design

FIGURE 3-18: Sample plot of each SKU by volume and demand

3-63
 Three Different Product
Categories
 High variability - low volume products
 Low variability - high volume products, and
 Low variability - low volume products.

3-64
Supply Chain Strategy Different for
the Different Categories
 High variability low volume products
 Inventory risk the main challenge for
 Position them mainly at the primary warehouses
 demand from many retail outlets can be aggregated
reducing inventory costs.
 Low variability high volume products
 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
 Require more analysis since other characteristics are
important, such as profit margins, etc.

3-65
 3.4 Resource Allocation
 Supply chain master planning
The process of coordinating and allocating
production, and distribution strategies and
resources to maximize profit or minimize
system-wide cost

 Process takes into account:

 interaction between the various levels of the supply
chain
 identifies a strategy that maximizes supply chain
performance

3-66
 Global Optimization and DSS
FACTORS TO CONSIDER
 Facility locations: plants, distribution centers and
demand points
 Transportation resources including internal fleet and
common carriers
 Products and product information
 Production line information such as min lot size,
capacity, costs, etc.
 Warehouse capacities and other information such as
certain technology (refrigerators) that a specific
warehouse has and hence can store certain products
 Demand forecast by location, product and time.

3-67
 Focus of the Output
 Sourcing Strategies:
 where should each product be produced
during the planning horizon, OR
 Supply Chain Master Plan:
 production quantities, shipment size and
storage requirements by product, location and
time period.

3-68
 The Extended Supply Chain: From
Manufacturing to Order Fulfillment

FIGURE 3-19: The extended supply chain: from manufacturing to order fulfillment

3-69
 Questions to Ask During the
Planning Process
 Will leased warehouse space alleviate capacity problems?
 When and where should the inventory for seasonal or
promotional demand be built and stored?
 Can capacity problems be alleviated by re-arranging
warehouse territories?
 What impact do changes in the forecast have on the supply
chain?
 What will be the impact of running overtime at the plants or
out-sourcing production?
 What plant should replenish each warehouse?
 Should the firm ship by sea or by air. Shipping by sea implies
long lead times and therefore requires high inventory levels.
On the other hand, using air carriers reduces lead times and
hence inventory levels but significantly increases
transportation cost.
 Should we rebalance inventory between warehouses or
replenish from the plants to meet unexpected regional
changes in demand? 3-70
 SUMMARY
Network Planning Characteristics
Network Design Inventory Positioning Resource Allocation
and Management

Decision focus Infrastructure Safety stock Production Distribution

Planning Horizon Years Months Months

Aggregation Level Family Item Classes

Frequency Yearly Monthly/Weekly Monthly/Weekly

ROI High Medium Medium

Implementation Very Short Short Short

Users Very Few Few Few

3-71
 SUMMARY
 Optimizing supply chain performance is difficult
 conflicting objectives
 demand and supply uncertainties
 supply chain dynamics.
 Through network planning, firms can globally
optimize supply chain performance
 Combines network design, inventory positioning and
resource allocation
 Consider the entire network
 account production
 Warehousing
 transportation inventory costs
 service level requirements.

3-72
 SUMMARY
 Demonstrate applicability of risk pooling
and postponement, EOQ modeling, and
inventory sizing to improve customer
service in make-to-order job shop setting
 Demonstrates value from getting and
looking at data

3-73
 Case: H. C. Starck, Inc.
 Background and context
 Why are lead times long?
 How might they be reduced?
 What are the costs? benefits?

Stephen C. Graves Copyright 2003

All Rights Reserved
3-74
 Metallurgical Products
 Make-to-order job shop operation
 600 SKU’s made from 4” sheet bar (4 alloys)
 Goal to reduce 7-week customer lead times
 Expediting is ad hoc scheduling rule
 Six months of inventory
 Manufacturing cycle time is 2 – 3 weeks
 Limited data

Stephen C. Graves Copyright 2003

All Rights Reserved
3-75
 Sheet Bar Finish
Roll Clean Anneal
(forged ingot) (cut, weld, etc.)

Repeat
0n3

4” Bar 1/4” Plate 1/8” Plate 0.015” Sheet Tubing

Production Order #1 Production Order #2 Production Order #3

Production Orders
Stephen C. Graves Copyright 2003
All Rights Reserved
3-76
 Why Is Customer Lead Time 7
Weeks?
 From sales order to process order takes 2
weeks
 Typical order requires multiple process
orders, each 2 – 3 weeks
 Expediting as scheduling rule
 Self fulfilling prophecy?

Stephen C. Graves Copyright 2003

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 What Are Benefits From
Reducing Lead Time?
 New accounts and new business
 Protect current business from switching to
substitutes or Chinese competitor
 Possibly less inventory
 Better planning and better customer
service
 Savings captured by customers?

Stephen C. Graves Copyright 2003

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 How Might Starck Reduce
Customer Lead Times?
 Hold intermediate inventory
 How would this help?
 How much? Where?

 Eliminate paper-work delays

 Reduce cycle time for each process order
 How? What cost?

Stephen C. Graves Copyright 2003

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Two-Product Optimal Cycle Time

KB  KF  hB DB hF DF 
Cost T   T   
T  2 2 
* 2  KB  KF 
T 
hB DB  hF DF

* 2  400  400 
T   0.02 years
.06 100  526000  .06 125 183000

Stephen C. Graves Copyright 2003

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 Intermediate Inventory
 Characterize demand by possible
intermediate for each of two alloys
 Pick stocking points based on risk pooling
benefits, lead time reduction, volume
 Determine inventory requirements based
on inventory model, e. g. base stock

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 1999 Invoiced Sales - Pounds per month
Popularity Material Gauge - Description Jan Feb Mar Apr May Jun Jul Aug Sep Total Cum %
1 1011 0.002 Foil 618 1,079 1,215 1,188 1,020 290 1,590 849 1,017 8,866 22%
2 1004 0.015 Sheet 68 611 1,263 167 1,917 803 321 377 404 5,931 37%
3 1003 0.005 Sheet 263 576 584 812 617 969 572 359 909 5,661 50%
4 1029 0.500 Disk - 10" dia 275 0 353 0 581 0 530 414 1,017 3,170 58%
5 1009 0.030 Sheet 0 122 614 275 422 360 686 246 177 2,902 65%
6 1008 0.040 Sheet 321 101 191 486 8 98 263 176 690 2,334 71%
7 1002 0.010 Sheet 20 56 287 179 41 204 560 143 276 1,766 76%
8 1014 0.250 Plate 6 12 0 770 0 752 0 0 174 1,714 80%
9 1007 0.060 Plate 0 146 32 117 129 414 581 26 191 1,636 84%
10 1012 0.125 Plate 228 8 32 90 432 17 8 0 450 1,265 87%
11 1013 0.150 Plate 1,100 0 0 0 0 35 0 0 0 1,135 90%
12 1028 0.500 Ring - 10" OD x 8.5" ID 0 189 0 48 293 93 0 0 174 797 92%
13 1010 0.020 Sheet 0 54 102 183 45 54 126 92 119 775 94%
14 1017 0.750 Tube - 3/4" 0 0 0 8 12 558 0 0 12 590 95%
15 1015 0.375 Plate 0 0 0 0 0 0 375 0 0 375 96%
16 1018 0.015 Tube - 1.0" OD 8 0 0 0 0 230 0 41 0 279 97%
17 1001 0.005 Sheet - 1.0" x 23.75" 171 0 0 20 0 0 0 17 0 208 97%
18 1016 0.500 Tube - 0.50" OD 3 0 0 51 6 54 33 27 33 207 98%
19 1023 0.010 Sheet - 1.0" x 23.75" 0 99 14 18 0 0 0 0 0 131 98%
20 1027 0.015 Sputter Target - 2.0" x 5.0" 0 105 0 0 0 0 0 0 0 105 98%
Other - - 17 Other Items 217 36 57 86 100 40 52 43 35 666 100%

40,513

Alloy 1
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Sales 1999 Invoiced Sales - Pounds per Month
Rank Material Gauge - Description Jan Feb Mar Apr May Jun Jul Aug Sep Total Cum %
1 2040 0.015 Welded Tube .75" OD 296 936 2,989 1,366 2,468 989 657 528 1,392 11,623 27%
2 2031 0.020 Sheet Annealed 761 521 826 671 889 1,004 3,975 27 7 8,681 48%
3 2035 0.030 Sheet Annealed 1,638 116 1,138 634 524 579 1,672 703 517 7,520 65%
4 2041 0.020 Welded Tube .75" OD 0 50 316 3 379 0 2,856 0 0 3,604 74%
5 2043 0.015 Welded Tube 1.0" OD 0 0 480 444 0 77 118 343 0 1,462 77%
6 2027 0.060 Plate Annealed 0 0 277 323 60 0 504 12 205 1,382 80%
7 2050 0.015 Welded Tube 1" OD With Cap 0 0 0 1,003 0 0 176 0 0 1,179 83%
8 2029 0.045 Sheet Annealed 137 122 430 18 37 16 0 368 5 1,133 86%
9 2026 0.010 Sheet Annealed 0 0 435 0 251 412 0 0 0 1,098 88%
10 2051 0.022 Welded Tube 1.25" OD 0 0 0 1,014 0 0 0 0 0 1,014 91%
11 2025 0.002 Foil Annealed 551 0 0 0 0 0 0 0 0 551 92%
12 2034 0.125 Plate Annealed 0 35 78 63 34 0 0 208 0 418 93%
13 2045 0.030 Welded Tube 1.0" OD 0 0 370 0 0 1 0 0 41 412 94%
14 2044 0.020 Welded Tube 1.0" OD 0 0 0 32 241 108 4 0 0 386 95%
15 2047 0.030 Welded Tube 1.5O" OD 0 255 100 0 0 0 0 0 0 355 96%
16 2039 0.020 Welded Tube .50" OD 0 0 181 142 0 0 0 0 0 323 96%
17 2052 0.035 Tube 1.25" OD 0 0 302 0 0 0 0 0 0 302 97%
18 2036 0.015 Sheet Annealed 108 0 13 56 0 27 0 0 1 205 98%
19 2046 0.015 Welded Tube 1.5" OD 0 0 0 0 40 0 133 0 0 173 98%
20 2012 0.045 4" Repair Disk 0 8 6 15 0 84 7 9 8 137 98%
Other - - 35 Other Items 77 118 64 67 113 133 44 24 112 753 100%

42,709

Alloy 2
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 Alloy #1 Product Heirarchy
(Top 20 Items - 98% of Sales)

4" Bar
6,817 lbs/mo
25% RSD

4 1/4" Plate
8 5,463 lbs/mo
12 23% RSD
15

10 1/8" Plate
11
4,104 lbs/mo
30% RSD

2
0.030" Sheet
5 2,053 lbs/mo
6 28% RSD
9
13
14 1
16 3
18 7
20 17
19

Stephen C. Graves Copyright 2003

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3-84
 Alloy #2 Product Heirarchy
(Top 20 Items - 98% of Sales)

4" Bar
7,474 lbs/mo
59% RSD

1/4" Plate
6,726 lbs/mo
59% RSD

6 1/8" Plate
12 5,181 lbs/mo
59% RSD

2 0.030" Sheet
0.015" Sheet
3 1,808 lbs/mo 204 lbs/mo
4 65% RSD 126% RSD
8
10
13 1 11
14 5 9
15 7
16 18
17 19
20

Stephen C. Graves Copyright 2003

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 Sales Total Monthly Standard
Rank Material Gauge - Description Jan Feb Mar Apr May Jun Jul Aug Sep (Pounds) Average Deviation % RSD
From 0.030" Sheet
1 1011 0.002 Foil 618 1,079 1,215 1,188 1,020 290 1,590 849 1,017 8,866 985 372 38%
3 1003 0.005 Sheet 263 576 584 812 617 969 572 359 909 5,661 629 235 37%
7 1002 0.010 Sheet 20 56 287 179 41 204 560 143 276 1,766 196 168 85%
19 1023 0.010 Sheet - 1.0" x 23.75" 0 99 14 18 0 0 0 0 0 131 15 32 223%
17 1001 0.005 Sheet - 1.0" x 23.75" 171 0 0 20 0 0 0 17 0 208 23 56 242%
Monthly Subtotal 1,072 1,810 2,100 2,217 1,678 1,463 2,722 1,368 2,202
90% Input required at yield 1,191 2,011 2,333 2,463 1,864 1,626 3,024 1,520 2,447 18,480 2,053 569 28%

From 0.125" Plate

0.030" Sheet to Supply Above 1,191 2,011 2,333 2,463 1,864 1,626 3,024 1,520 2,447 18,480 2,053 569 28%
2 1004 0.015 Sheet 68 611 1,263 167 1,917 803 321 377 404 5,931 659 594 90%
16 1018 0.015 Tube - 1.0" OD 8 0 0 0 0 230 0 41 0 279 31 76 245%
20 1027 0.015 Sputter Target - 2.0" x 5.0" 0 105 0 0 0 0 0 0 0 105 12 35 300%
18 1016 0.015 Tube - 0.50" OD 3 0 0 51 6 54 33 27 33 207 23 22 94%
14 1017 0.015 Tube - 3/4" 0 0 0 8 12 558 0 0 12 590 66 185 282%
13 1010 0.020 Sheet 0 54 102 183 45 54 126 92 119 775 86 54 63%
5 1009 0.030 Sheet 0 122 614 275 422 360 686 246 177 2,902 322 224 70%
6 1008 0.040 Sheet 321 101 191 486 8 98 263 176 690 2,334 259 214 83%
9 1007 0.060 Plate 0 146 32 117 129 414 581 26 191 1,636 182 194 107%
Monthly Subtotal 1,591 3,150 4,535 3,750 4,403 4,197 5,034 2,505 4,073
90% Input Required at Yield 1,768 3,500 5,039 4,167 4,893 4,663 5,594 2,783 4,525 36,932 4,104 1213 30%

From 0.250" Plate

0.125" Plate to Supply Above 1,768 3,500 5,039 4,167 4,893 4,663 5,594 2,783 4,525 36,932 4,104 1213 30%
10 1012 0.125 Plate 228 8 32 90 432 17 8 0 450 1,265 141 185 131%
11 1013 0.150 Plate 1,100 0 0 0 0 35 0 0 0 1,135 126 365 290%
Monthly Subtotal 3,096 3,508 5,071 4,257 5,325 4,715 5,602 2,783 4,975
80% Input Required at Yield 3,870 4,385 6,339 5,321 6,656 5,894 7,002 3,479 6,219 49,165 5,463 1273 23%

From 4.0" Sheet Bar

0.250" Plate to Supply Above 3,870 4,385 6,339 5,321 6,656 5,894 7,002 3,479 6,219 49,165 5,463 1273 23%
8 1014 0.250 Plate 6 12 0 770 0 752 0 0 174 1,714 190 328 172%
15 1015 0.375 Plate 0 0 0 0 0 0 375 0 0 375 42 125 300%
4 1029 0.500 Disk - 10" dia 275 0 353 0 581 0 530 414 1,017 3,170 352 337 96%
12 1028 0.500 Ring - 10" OD x 8.5" ID 0 189 0 48 293 93 0 0 174 797 89 107 121%
Monthly Subtotal 4,151 4,586 6,692 6,139 7,530 6,739 7,907 3,893 7,584
90% Input Required at Yield 4,612 5,096 7,436 6,821 8,367 7,487 8,786 4,326 8,427 61,357 6,817 1722 25%

Stephen C. Graves Copyright 2003 Alloy 1 3-86

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 Sales Total Monthly Standard
Rank Material Gauge - Description Jan Feb Mar Apr May Jun Jul Aug Sep (Pounds) Average Deviation % RSD
From 0.030" Sheet
11 2025 0.002 Foil Annealed 551 0 0 0 0 0 0 0 0 551 61 184 300%
9 2026 0.010 Sheet Annealed 0 0 435 0 251 412 0 0 0 1,098 122 190 156%
Monthly Subtotal 551 0 435 0 251 412 0 0 0
90% Input required at yield 612 0 484 0 279 458 0 0 0 1,833 204 256 126%

From 0.015" Sheet

1 2040 0.015 Welded Tube .75" OD 296 936 2,989 1,366 2,468 989 657 528 1,392 11,623 1291 900 70%
5 2043 0.015 Welded Tube 1" OD 0 0 480 444 0 77 118 343 0 1,462 162 202 125%
7 2050 0.015 Welded Tube 1" OD With Cap 0 0 0 1,003 0 0 176 0 0 1,179 131 332 254%
18 2036 0.015 Sheet Annealed 108 0 13 56 0 27 0 0 1 205 23 37 163%
19 2046 0.015 Welded Tube 1.5" OD 0 0 0 0 40 0 133 0 0 173 19 45 232%
Monthly Subtotal 404 936 3,483 2,869 2,508 1,093 1,084 871 1,393
90% Input required at yield 449 1,040 3,870 3,188 2,787 1,215 1,205 967 1,548 16,269 1,808 1175 65%

From 0.125" Sheet

0.030" Sheet to Supply Above 612 0 484 0 279 458 0 0 0 1,833 204 256 126%
0.015" Sheet to Supply Above 449 1,040 3,870 3,188 2,787 1,215 1,205 967 1,548 16,269 1808 1175 65%
2 2031 0.020 Sheet Annealed 761 521 826 671 889 1,004 3,975 27 7 8,681 965 1184 123%
4 2041 0.020 Welded Tube .75" OD 0 50 316 3 379 0 2,856 0 0 3,604 400 933 233%
14 2044 0.020 Welded Tube 1.0" OD 0 0 0 32 241 108 4 0 0 386 43 83 193%
16 2039 0.020 Welded Tube .50" OD 0 0 181 142 0 0 0 0 0 323 36 72 200%
10 2051 0.022 Welded Tube 1.25" OD 0 0 0 1,014 0 0 0 0 0 1,014 113 338 300%
3 2035 0.030 Sheet Annealed 1,638 116 1,138 634 524 579 1,672 703 517 7,520 836 533 64%
13 2045 0.030 Welded Tube 1.0" OD 0 0 370 0 0 1 0 0 41 412 46 122 268%
15 2047 0.030 WELDED TUBE 1.5O" OD 0 255 100 0 0 0 0 0 0 355 39 87 221%
17 2052 0.035 Tube 1.25" OD 0 0 302 0 0 0 0 0 0 302 34 101 300%
8 2029 0.045 Sheet Annealed 137 122 430 18 37 16 0 368 5 1,133 126 163 130%
20 2012 0.045 4" Repair Disk 0 8 6 15 0 84 7 9 8 137 15 26 171%
Monthly Subtotal 3,597 2,113 8,022 5,717 5,136 3,464 9,718 2,074 2,127
90% Input required at yield 3,997 2,347 8,913 6,352 5,706 3,849 10,798 2,305 2,363 46,630 5,181 3053 59%

From 0.250" Plate

0.125" Sheet to Supply Above 3,997 2,347 8,913 6,352 5,706 3,849 10,798 2,305 2,363 46,630 5181 3053 59%
6 2027 0.060 Plate Annealed 0 0 277 323 60 0 504 12 205 1,382 154 183 119%
12 2034 0.125 Plate Annealed 0 35 78 63 34 0 0 208 0 418 46 67 145%
Monthly Subtotal 3,997 2,382 9,268 6,738 5,801 3,849 11,302 2,524 2,568
80% Input required at yield 4,996 2,978 11,585 8,423 7,251 4,811 14,128 3,156 3,210 60,538 6,726 3990 59%

From 4.0" Sheet Bar

0.250" Plate to Supply Above 4,996 2,978 11,585 8,423 7,251 4,811 14,128 3,156 3,210
90% Input Required at Yield 5,551 3,309 12,872 9,359 8,057 5,346 15,698 3,506 3,567 67,264 7,474 4433 59%

Stephen C. Graves Copyright 2003 Alloy 2

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 Monthly Monthly Period Average Period Service Reliability
Material Demand Sigma (Weeks) (Pipeline) Sigma Level Factor Buffer Safety Total
Alloy #1
0.125" Plate 4,104 1,213 1 947 583 95% 90% 958 191 2,100
0.030" Sheet 2,053 569 1 474 273 95% 90% 450 92 1,020

Alloy #2
0.125" Plate 5,181 3,053 1 1,196 1,467 95% 90% 2,412 361 3,970
0.015" Sheet 1,808 1,175 1 417 564 95% 90% 928 135 1,480

Estimated Inventory Requirements

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