sc physics 2 12 9 09 webinar final web
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Supply Chain Physics Part 2: The Very Real Decision Space of Supply Chain PhysicsTRANSCRIPT
The Very Real Decision Space of
Supply Chain Physics 2
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®
Mark Gavoor
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E-Mail: [email protected]
Web-Site: www.demandcaster.com
The Very Real Decision Space of
Supply Chain Physics
December 9, 2009
Welcome
Part I: The Concept of Supply Chain Physics
Part II: December 9, 2009
The Very Real Decision Space of Supply
Physics
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Physics
Part III: January 20, 2010 – 12 p.m. CST
Strategies for Communication &
Improvement
Agenda
Re-Cap from Part 1
Four Examples
Supply Chain Optimization
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Supply Chain Optimization
Two Categories of Violations
Conclusion
Why Supply Chain Physics?
Supply Chain Physics is a concept
Based on science, engineering, and
business
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It is language and set of principles to foster
Accountabilities across functions
Improvement across the enterprise
���� Information Flow
PurchasingMfg
PlanningOrder
ProcessingPlaces
Order
Forecasting
Order Taking
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Inventory
Allocation
Manufacturing
Suppliers Trade
Distribution
Warehouse
Order Taking
& FulfillmentManufacturing
Material/Product flow ����
The Three Laws of SC Physics
1. Law of Interdependency
2. Law of Constraints
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3. Law of Information
The Three Laws of SC Physics
1. Law of Interdependency
Inventory, Service, Quality, Costs are interdependent
In business improvement, silo-ed functional
improvement can only take you so far. All further
improvements require cross-functional efforts.
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improvements require cross-functional efforts.
2. Law of Constraints
3. Law of Information
The Three Laws of SC Physics
1. Law of Interdependency
2. Law of Constraints
How much of any item can be produced in a finite
amount of time?
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amount of time?
How far, fast, & in what quantities can goods be
shipped from Point A to Point B?
Yes … very related to the Theory of Constraints
3. Law of Information
The Three Laws of SC Physics
1. Law of Interdependency
2. Law of Constraints
3. Law of Information
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3. Law of Information
Information moves at the speed of light, er… the
internet
Independent of accuracy of the information
Speed of information >> Lead times
Speed of information >> Production rates
Supply Chain Whack-a-Mole
• Quality
• Cost
• Service
• Inventory
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Optimize all to a point
Then trade-off
optimization
Need structural
change to optimize all
further
http://www.mmt-inst.com/End_of_management_whack_a_mole.html
Agenda
Re-Cap from Part 1
Four Examples
Supply Chain Optimization
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Supply Chain Optimization
Two Categories of Violations
Conclusion
Three Examples
Cadent Resources is a company dedicated
to helping companies
Reduce Inventory
Improve Service
Generate Cash
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Generate Cash
So, let’s look at three Supply Chain Physics
examples in terms of inventory
Example I: Simple Inventory Model – Single SKU
Re-Order
Point
Order Quantity
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Point
Safety Stock
Simple Inventory Model – Single SKU
Re-Order
Point
OQ
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Safety
Stock
Point
Due to Manufacturing and
Transit time Variation…
Simple Inventory Model – Single SKU
Re-Order
Point
OQ
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Safety
Stock
Point
Due to Manufacturing LT and
Transit time Variations…
and Demand Volatility
Simple Inventory Model – Single SKU
Re-Order
Point
OQ
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Safety
Stock
Point Supply Chain
LT & Variations
Demand Chain
Variations
Simple Inventory Model – Single SKU
Re-Order
Point
OQ
We in the Supply Chain
are responsible for these
parts?
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Safety
Stock
Point Supply Chain
LT & Variations
Demand Chain
Variations
Simple Inventory Model – Single SKU
Re-Order
Point
OQ
Is the Supply Chain
responsible for this part?
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Safety
Stock
Point Supply Chain
LT & Variations
Demand Chain
Variations
Simple Inventory Model – Single SKU
Re-Order
Point
OQ
You need to know this
breakdown for your company
We have seen LTs dominate
making it 80-20 & Demand
Volatility making it 20-80
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Safety
Stock
Point Supply Chain
LT & Variations
Demand Chain
Variations
We can actually assign an inventory
objective to Sales?
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If we wanted to…
Example II: E&O Inventory
E&O
Excess & Obsolete Inventory
Some call it SLOB
Slow & Obsolete
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Slow & Obsolete
These inventories are the result of both
Forecasting errors
Historical violations of the Laws of Supply
Chain Physics
Example II: E&O Inventory
You are tasked with reducing the E&O
which is 20% of all inventory.
(We have seen it as high as 60%!!)
Yet…
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Yet…
You are not allowed to write any of it off
And the goal is to sell it at full margin i.e. no
fire sales
This is a very real scenario
Example II: E&O Inventory
No one can has ever been able to explain
How this is tasked to the Supply Chain
Cannot sell it
Cannot dispose of it
Yet we have to reduce it????
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Yet we have to reduce it????
We can
Stack it neatly
Dust it off now and again
Report on the value of it monthly
Example III: Good E&O Example
Not all examples are violations of Supply
Chain Physics
Strategy in all Subsidiaries of a global CPG
company
New GM comes in
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New GM comes in
Is shocked by the level of E&O
Disparages the old GM for letting this happen
Clears the decks: Fire Sale & Write-offs
Then rebuilds E&O to the same level until his
next promotion
Example III: Good E&O Example
Argentina Subsidiary
GM realized that this was not a Supply
Chain problem alone
Sales
Finance
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Finance
Assigned:
An Inventory Czar
A Sales person focused only on E&O
Example III: Good E&O Example
Underselling or
Overproducing promotions
was the largest cause of E&O
10+% in Obsolete alone
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Two pronged attack
Better promotion planning &
performance measures
Selling off the E&O
Example III: Good E&O Example
Better promotion planning & performance
measures
Tracked Demand Plan vs Actual by Account
Manufacturing to begin promotion month with
forecast volume in inventory ready to go
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forecast volume in inventory ready to go
At mid-month checked Account Forecast vs.
Sales
This practice led to co-development of
Promotions Management Module with ERP
provider
Example III: Good E&O Example
Marketing folks are paid to
Look forward
Come up with new news
Old promotions, failed products, is so…
yesterday
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No rearview mirrors in No rearview mirrors in No rearview mirrors in No rearview mirrors in
Marketing CarsMarketing CarsMarketing CarsMarketing Cars
Example III: Good E&O Example
Selling off the E&O
Created a space in DC for Saleable E&O
Showroom
Old promotions considered in new promotions
planning
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planning
Sales person hosted sales managers monthly
Review offerings
Use E&O in trade promotions
Offer cases of E&O as the free goods in BOGOs
Finance needed to sign-off on promotions for
margin purposes
Aggregate Product Category
Demand always goes down year end
This year going up with big spikes
Example IV: Law of Constraints/Information
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2008 Drop
Even larger because of economic downturn
Had to downsize inventory
2009 Increase
Example IV: Law of Constraints/Information
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2009 Increase
Due to coming out of recession?
Returning to pre-recession level of demand?
Within LT, cannot react fast enough
Seeing and hearing
Example IV: Law of Constraints/Information
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Actual Sales and Demand Plans can be communicated at the speed of the internet
Given our global Supply Chains, that is good
But we still have to move the camera from Point A to the store near you and me
Example IV: Law of Constraints/Information
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While Information was almost instantaneous
Lean is not JIT
Cannot react to demand spikes or changes within LT
Different product category
Same issue
Example IV: Law of Constraints/Information
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In one SKU, 2 big spikes within lead time
Overseas vendor
Vendor Stated lead time 75 days
Planned lead time 120 days
Actual lead time 133 days
Example IV: Law of Constraints/Information
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Actual lead time 133 days
120 Day LT 133 Day LT 75 Day LT No Spikes
Unit Cost $2.50 $2.50 $2.50 $2.50
Service Level 98% 98% 98% 98%
Projected Demand 100,754 104,291 83,512 90,606
Safety Stock 49,900 51,267 39,008 25,741
Target Inv. Level 150,654 155,558 122,520 116,347
Change 0 4904 -28134 -34307
% Change 0 3% -19% -23%
Example IV: Law of Constraints/Information
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% Change 0 3% -19% -23%
$ Impact $0.00 $12,260.00 -$70,335.00 -$85,767.50
Summary of Examples
We believe that Inventory and Service are
the final arbiter of Supply Chain
Performance
It is the indicator of a company’s
Operating Practices & Processes
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Operating Practices & Processes
Good & bad
Silo improvements only go so far
Cross-Functional effort is required when
the Interdependent Level is reached
Agenda
Re-Cap from Part 1
Four Examples
Supply Chain Optimization
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Supply Chain Optimization
Two Categories of Violations
Conclusion
Isn’t there a lot of Math in Physics???
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When we VIOLATE THE LAWS VIOLATE THE LAWS VIOLATE THE LAWS VIOLATE THE LAWS
We compromise
Inventory
Service
Quality
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Quality
Cost
When we VIOLATE THE LAWSVIOLATE THE LAWSVIOLATE THE LAWSVIOLATE THE LAWS
We compromise
Inventory � Cash, Profit
Service � Customer Loyalty, Revenue
Quality � Customer Loyalty, Profit
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Quality � Customer Loyalty, Profit
Cost � Profit
We Compromise Performance!
When we VIOLATE THE LAWSVIOLATE THE LAWSVIOLATE THE LAWSVIOLATE THE LAWS
• Inventory
• Service
Quality
• Manufacturing Lead Times• Transit Times
• Production rates
• Production capacities
Not Accounting for Realities of
Supply Chain Physics
Compromise & Cause
Trade-offs in Performance
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• Quality• Cost
• Production capacities• Warehouse utilization
• Transportation equipment
availability
• Demand Volatility
It is a complex Multi-Criteria Problem
Optimize all i Cost i, Inventory i, Service i, Quality i
Subject to:
Manufacturing Lead Times > MLTij
Transit Times > TTijk
Production rates < PRij
Production capacities < PC
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Production capacities < PCij
Warehouse utilization < Wik
Transportation equipment availability < Eijk
Demand Volatility = σi
i = SKU number
j = Plant or Supplier (how many plants/suppliers?)
k = DC number
It is a Multi-Criteria Problem
Optimize Cost i, Inventory i, Service i, Quality i
Subject to:
Manufacturing Lead Times > MLTij
Transit Times > TTijk
Production rates < PRij
Production capacities < PC
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Production capacities < PCij
Warehouse utilization < Wik
Transportation equipment availability < Eijk
Demand Volatility = σi
i = SKU number
j = Plant or Supplier (how many plants/suppliers)
k = DC number
Multi-Criteria Optimization?
This is the Whack-a-Moley stuff
We can optimize in one dimension
When you have two or more dimensions, it
is more complicated
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is more complicated
Are the criteria independent or dependent?
Multi-Criteria Optimization?
How is this done mathematically?
1. Prioritize and Optimize – one by one
2. Find the efficient set
3. Map the Criteria into one dimension
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4. Change some of the criteria into
constraints
Money is a Good Unifying Dimension
Money is additive
My money, your
money becomes our
money
We add up revenues
and cost
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and cost
We minimize costs in
the Supply Chain
We subtract costs
from revenues & try
to maximize profits
Make some of the Criteria Constraints
This is done in inventory management
We want to maximize Service & minimize
Inventory
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They are different units of measure
Service is % Case or Unit Fill
Inventory is in units or dollars
Make some of the Criteria Constraints
Ideally: Want 100% Service but cannot
afford that level of inventory
So we prioritize using by ABC classification
of SKUs or items
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of SKUs or items
We set minimum service target levels
Service: From Objective Criteria to
Constraint
SKU/Item
Classification
Top Down of
Sales or Margin
Minimum
Service Level
A 80% 99%
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B 15% 97%
C 5% 95%
3 dimensional product segmentation
Set demand plan policy based on:
Importance
Order Frequency
Forecastability
Segmentation
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Forecastability
ImportanceA B C
Frequency
H
M
L
H
ML
Multi-Criteria Optimization
Hard to do as pure mathematics
Close to impossible to get all the equations
Things are constantly changing
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The Supply Chain Physical World
Is a world of constant change
New Supply Sources
Material and Commodity Pricing
Competition
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Competition
Economic factors
Technology
Make for a world of constant flux
Multi-Criteria
Hard to do as pure mathematics
Close to impossible to get all the equations
Things are constantly changing
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So we use a combination of Math, Physics,
and Heuristics as we do with our
DemandCaster software tool
Agenda
Re-Cap from Part 1
Four Examples
Supply Chain Optimization
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Supply Chain Optimization
Two Categories of Violations
Conclusion
Two categories of VIOLATIONSVIOLATIONSVIOLATIONSVIOLATIONS
1. That which maybe can be done
2. Impossible to get there from here
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Two categories of VIOLATIONSVIOLATIONSVIOLATIONSVIOLATIONS
1. That which maybe can be done
2. Impossible to get there from here
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• These are violations of the:
• Law of Constraints
• Law of Information
Two kinds of VIOLATIONSVIOLATIONSVIOLATIONSVIOLATIONS
1. That which maybe can be done
Not necessarily impossible
But will require efforts of epic proportions
And will most likely have a Whack-a-Moley
effect on performance
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effect on performance
2. Impossible to get there from here
Two kinds of VIOLATIONSVIOLATIONSVIOLATIONSVIOLATIONS
1. That which maybe can be done
2. Impossible to get there from here
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Are you freaking kidding me?
How did you ever get into your position?
And remarkably you have kept the job
Two kinds of VIOLATIONSVIOLATIONSVIOLATIONSVIOLATIONS
1. That which maybe can be done
2. Impossible to get there from here
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Are you freaking kidding me?
How did you ever get into your position?
And remarkably you have kept the job
On the inside
Two kinds of VIOLATIONSVIOLATIONSVIOLATIONSVIOLATIONS
1. That which maybe can be done
2. Impossible to get there from here
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We calmly, clearly, and politely explain
Why no how, no way
We can get there from here
Two kinds of VIOLATIONSVIOLATIONSVIOLATIONSVIOLATIONS
1. That which maybe can be done
2. Impossible to get there from here
Why can we communicate #2 when we
have to?
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have to?
But never communicate #1 with any
force?
Two kinds of VIOLATIONSVIOLATIONSVIOLATIONSVIOLATIONS
In the Supply Chain
We are good corporate citizens
We are businessmen
We are paid to get things done & have a can
do attitude
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do attitude
That is why when thing are just “iffy” we
say we can do it.
We will explore these categories a bit more
in Supply Chain Physics 3.
Agenda
Re-Cap from Part 1
Four Examples
Supply Chain Optimization
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Supply Chain Optimization
Two Categories of Violations
Conclusion
Conclusion
Reviewed the concepts
Presented a mathematical optimization model
Concept
Strategies for Multi-Criteria Optimization
Looked at Five Examples
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Looked at Five Examples
Set the stage for Supply Chain Physics 3
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Thank You!
Please join us for the final part of Supply
Chain Physics
Part III: January 20, 2010 – 12 p.m. CST
Strategies for Communication &
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Strategies for Communication &
Improvement
Software + Expertise
The Cadent Resources Group, LLC Difference
Your path to a smarter and healthier company
with lower costs and satisfied customers is only a
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