Chapter 2:InventoryManagementand Risk Pooling2-1
2-1 Chapter 2:Inventory Management and Risk Pooling
CASE: Steel WorksBackgroundof caseand intentOverviewofbusinessWhat does data tell you about Specialty?How much inventory might you expect?Whatopportunities are there forCustom?Wrapup2-2
2-2 CASE: Steel Works ⚫ Background of case and intent ⚫ Overview of business ⚫ What does data tell you about Specialty? ⚫ How much inventory might you expect? ⚫ What opportunities are there for Custom? ⚫ Wrap up
Background & IntentAbstractionfromsummerconsultingjobIntentis to examinea realistic,butsimplified inventory context and perform adiagnosisofproblem-poorserviceandtoo much inventory2-3
2-3 Background & Intent ⚫ Abstraction from summer consulting job ⚫ Intent is to examine a realistic, but simplified inventory context and perform a diagnosis of problem – poor service and too much inventory
CustomProductsRapidgrowth,1/3oftotal sales($133MM)OnecustomerperproductVeryhighmarginsHighservicelevel3plants,co-locatedwithR&DcentenEachproductproducedatasingleplant2-4
2-4 Custom Products ⚫ Rapid growth, 1/3 of total sales ($133 MM) ⚫ One customer per product ⚫ Very high margins ⚫ High service level ⚫ 3 plants, co-located with R&D center ⚫ Each product produced at a single plant
Specialty ProductsRapidgrowth,2/3oftotalsales($267MM)6productfamilies3plants,eachproducing2productfamilies130customers,120productsFew big customersHighly volatile demandHighservice level2-5
2-5 Specialty Products ⚫ Rapid growth, 2/3 of total sales ($267 MM) ⚫ 6 product families ⚫ 3 plants, each producing 2 product families ⚫ 130 customers, 120 products ⚫ Few big customers ⚫ Highly volatile demand ⚫ High service level
ConsultantRecommendationDroplowvolumeproductsImproveforecastsConsolidatewarehouses2-6
2-6 Consultant Recommendation ⚫ Drop low volume products ⚫ Improve forecasts ⚫ Consolidate warehouses
What Does Data Tell You?cvaμ15.50.8513.2DB R102560.25DB R1210084940.20DB R1524649792.50.95DF R1011.418.50.62DF R1280551.46DF R1535.545.91.29DF R232-7
2-7 What Does Data Tell You? m s cv DB R10 15.5 13.2 0.85 DB R12 1008 256 0.25 DB R15 2464 494 0.20 DF R10 97 92.5 0.95 DF R12 18.5 11.4 0.62 DF R15 55 80 1.46 DF R23 35.5 45.9 1.29
What Does Data Tell You?DurabendR12:Onecustomeraccountsfor97%ofdemand7products:High volume (2)is notvery volatileLowvolume(5)isveryvolatile2-8
2-8 What Does Data Tell You? ⚫ Durabend R12: ⚫ One customer accounts for 97% of demand ⚫ 7 products: ⚫ High volume (2) is not very volatile ⚫ Low volume (5) is very volatile
HowMuchInventoryShouldYou Expect?AssumebasestockmodelwithperiodicreviewReviewperiod=r=?Leadtime=L=?E[]=r兰+zo/r+L22-9
2-9 How Much Inventory Should You Expect? ⚫ Assume base stock model with periodic review ⚫ Review period = r = ? ⚫ Lead time = L = ? 2 E I r z r L m = + + s
Saf.Act.CycleE[1]aμInv.stockstock8263472DB R1015.513.21008256DB R1250451010147402464494123299022221875DBR15499792.5185234604DF R10918.511.4233255DF R12558028160188388DFR151845.992110190DF R2335.51848198638343824sAssumesr=1;L=0.25;andz=1.8Safety stock = zo Vr+LCycle stock =r μ/22-10
2-10 m s Cycle stock Saf. stock E[I] Act. Inv. DB R10 15.5 13.2 8 26 34 72 DB R12 1008 256 504 510 1014 740 DB R15 2464 494 1232 990 2222 1875 DF R10 97 92.5 49 185 234 604 DF R12 18.5 11.4 9 23 32 55 DF R15 55 80 28 160 188 388 DF R23 35.5 45.9 18 92 110 190 S 1848 1986 3834 3824 Assumes r = 1; L=0.25; and z = 1.8 Cycle stock = r m/2 Safety stock = z s r+L