5 session 5_lean supply chain design cfvg 2012
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Strategies for Inventory Reduction in a
Supply Chain
Prof. Ravi Shankar
Dr. RAVI SHANKARProfessorDepartment of Management Studies
Indian Institute of Technology DelhiHauz Khas, New Delhi 110 016, India
Phone: +91-11-26596421 (O); 2659-1991(H); (0)-+91-9811033937 (m)Fax: (+91)-(11) 26862620
Email: [email protected]://web.iitd.ac.in/~ravi1
SESSION#5: Design of Lean Supply Chains (CFVG: 2012)
Design of Lean Supply Chain:
Strategies for Inventory Reduction in
a Supply Chain
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What is an Inventory System
� Inventory is defined as the stock of any item or resource used in an organization.
� An Inventory System is made up of a set of policies and controls designed to monitor the levels of inventory and designed to answer the following questions:� What levels should be
maintained?� When stock should be
replenished? and� How large orders
should be? i.e. what is the optimal size of the order?
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Inventories: Why and “Why not”
CONS
� Large inventories hide operational problems;
� Financial costs to carrying excess inventory;
� Risk of damage;
� Tracking and accounting costs;
� Risk of obsolescence and depreciation;
PROS
� Allows managers to decouple operations;
� Protects one system part from disruptions in others;
� Reduces number of times orders are placed;
� Provides a hedge against inflation;
� Allows quantity discounts from suppliers;
� Allows firms to meet unexpected demand.
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Creating a Lean Supply Chain
� What is lean?� “A philosophy that seeks to shorten the time
between the customer order and the shipment to customer by eliminating waste” John Shook
� We can reduce lean to three elements (Womack and Jones)--
� Flow
� Pull
� Striving for excellence
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Elements of a Lean Supply Chain
� Lean (JIT) Purchasing
� Lean Logistics or JIT Transportation
� Lean (JIT) Operations: Toyota Production
System
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[A] For Fast Moving Items
� Buffer Stock = α [Lm σD2 + Dm
2 σL2 ]0.5
� Where,
� Lm = Mean Lead Time
� Dm = Mean Demand
� σD = Standard Deviation of demand
� σL = Standard Deviation of lead time
� α = Factor for a given level of service
Reduction in Buffer stock by reducing uncertainty in
demand and supply
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[A] For Fast Moving Items
� Buffer Stock = α [Lm σD2 + Dm
2 σL2 ]0.5
� If better demand forecasting is done, σDwill be less
�=== Leading to lesser Buffer stock
� If Lead time (L) monitoring is done, Lm and σL
will be less
�=== Leading to lesser Buffer stock
Reduction in Buffer stock by reducing uncertainty in
demand and supply
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STRATEGY 1: Avoid 99% syndrome
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STRATEGY-1: Avoid 99% syndrome for all items
because for every 1% increase in Service level Buffer
Stock increases substantially after 90% level of service
Buffer Stock
Service Level
50%
99%
100%
90%
Increase in Buffer Stock for over 99% of service level
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STRATEGY 2: Standardization,Variety Reduction &
Codification
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STRATEGY-2: Standardization,Variety Reduction
& Codification
� If n varieties can be standardized into 1,
� then required inventory is (1/ root of n) and system cost is (1/ root of n).
� If 2 parts can be standardized into 1 then nearly 30% reduction in inventory.
� If 4 parts can be standardized into 1 then 50 % reduction & so on.
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STRATEGY 3: vendor development
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STRATEGY 3: Better vendor development to reduce
the lead time and increased quality level.
� Develop long term partnership with vendor
� Develop vendors by providing
� Training
� Quality and Inspection capability
� Technology transfer
� Assured long term contract
� Reliable vendors:
� Limited in number
� But trusted ones
� Located near by
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STRATEGY 4: Vendor
Managed Inventory (VMI)
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Vendor Managed Inventory
� VMI transfers inventory management (and
possibly ownership) from the customer to
the supplier
� VMI synchronizes the supply chain
through the process of collaborative
order fulfillment
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VMI in use today
� In the Factory
� At customer sites
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Advantages of VMI
� Customer
� less resources for inventory
management
� assurance that product will be available when required
� Vendor
� more freedom in when & how to
manufacture product and make
deliveries
� better coordination of inventory levels
at different customers
� better coordination of deliveries to
decrease transportation cost
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VMI Essentials
� TRUST
� Accurate information provided on a timely basis
� Inventory levels that meet demands
� Confidential information kept confidential
� TECHNOLOGY
� Automated electronic messaging systems to
exchange sales and demand data, shipping schedules, and invoicing
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STRATEGY 5: JIT Purchasing
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JIT Purchasing
� Characteristics of JIT Purchasing--
� Purchase in small lots with frequent deliveries
� Mutual, consistent improvement by the buyer and supplier
� Collaborative efforts between buyer and supplier
� Efficient point-to-point communication linkages
� The “rights”--
� right quantity
� right time
� right quality
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JIT Purchasing
What kind of items are best suited
for a just-in-time purchasing system?
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Supplier Relationships
� Long-term, steady relationships with a few suppliers.
� Negotiation based on a long term commitment to productivity and quality improvement.
� Interested in supplier capabilities.
� Continuous improvement.
� Product/process technology.
� Design for manufacturability.
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STRATEGY 6: Lean Logistics
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STRATEGY 6: Lean Logistics
ProductionProduction
InspectionInspection
PackingPacking
StorageStorage
ShippingShipping
TransportTransport
ReceivingReceiving
InspectionInspection
StorageStorage
ProductionProduction
Supplier
Trucking
Customer
ProductionProduction
TransportTransport
ProductionProduction
TraditionalJust-in-Time
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Lean Logistics
� Replacement of expendable packaging with
reusable containers
� Frequent deliveries made to the point of use
� Regular and repeatable delivery schedules
(closed loop systems)
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Lean Logistics
� Long-term dedicated contract carriage replaces commercial carriage as the primary mode of
transportation
� Focus on frequent deliveries of small quantities of
many parts versus large quantities of fewer parts
� Modified shipping and handling equipment
� Side loading trucks
� Smaller trucks (similar to beverage trucks)
� Delivery at Point of use
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STRATEGY 7:
CENTRALISATION OF
STOCKING
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Traditional: Decentralized System
Supplier
Warehouses
Retailers
STRATEGY 7: Centralization of stocking in a
multi-echelon distribution system
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Supplier
Warehouse
Retailers
Centralized Systems
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STRATEGY 8: Staggering the
supplies
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STRATEGY 8: Staggering the
supplies
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[B] Slow Moving Items: Expensive
slow moving spares
(1)Specials-required only at predetermined
date in scheduled shut down or project
materials.
Policy: MRP policy.
Do not stock but place an order just in time so
that it arrives on a due date.
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Required date
L
Order Released
Date (ORD)
KσL
ORD
If L is uncertain with (Lm, σL):
then KσL= safety lead time
K is a factor which depends up on acceptable risk of delay
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Adequate Warning Spare
� If lead time is less than the deterioration signal in the item
then do not stock but place an order on warning.
If lead time is reduced by faster mode then inventory can come down substantially
Procurement simplification and expediting is a better strategy than stocking
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Project site#2
[C] STRATEGY: Spare bank or
spare pooling
� Consider these two systems:
Supplier
Decentralized store#1
Decentralized store#2
Project site#1
Project site#2
SupplierCentralized
store
Project site#1
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[C] Spare parts pooling
� If there are n locations then keeping 1/ root n
centrally will meet the demand adequately
� This is particularly useful for slow-moving
expensive spares:
� Turbine rotor
Project site#2
SupplierCentralized
store
Project site#1
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[C] Indadequate Warning Spares
� One for one ordering
� [(s-1), s] policy:
� s is the optimal number of spares to be
stocked which will be typically 1 or 2.
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[D] Non-moving materials: Dead
stock
� Return to vendor
� Redistribute among other locations
� Reuse elsewhere
� Sell at a discount
� Donate to earn goodwill
� Dispose off optimally: Inventory control in
reverse gear
� Disposal Policy: Frequency of disposal and
process
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� Inventory pull systems/visible signals
� Facility layout changes/work cells
� Set up reductions
� Level build schedules
� Uniform loading
� Total quality and continuous improvement
� Standardized material handling/containers
� Product and process simplification
� Total preventive maintenance
� Flexible workforce
� Teamwork
� Right performance measures
Implementing the Lean Supply Chain through focus on Lean Operations
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� Find the best supplier and engage early in the design process
� Partner with key suppliers that have high capability for design and supply
� Suppliers should be located in the country where you build your product
� Shorten the supply chain by having suppliers close, frequent deliveries, and leveled production plans
� Develop pull systems with suppliers
Implementing the Lean Supply Chain