MULTI-ECHELON INVENTORY MANAGEMENT. Stijn Rutjes & Martijn Cornelissen

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1 MULTI-ECHELON INVENTORY MANAGEMENT Stijn Rutjes & Martijn Cornelissen 1 dinsdag 15 november 2011

2 AGENDA Inventory Management Multi-Echelon environment Problem definition Risk pooling Safety stock determination Summary Questions/Discussion 2

3 Questions How to reduce our inventory levels? We have high inventory, low service level. What to do? How can we have differentiated stock control? What is the $ profit of 1% better forecast performance? What is the $ costs of 1% better service level? 3

4 Inventory management solutions Showing relation service level versus inventory Comparing scenarios o E.g. Gains of reducing lead times Assess the current capabilities of the stock Choosing the best stock control model To determine thebest location to keep stock 4

5 AGENDA Inventory Management Multi-Echelon environment Problem definition Risk pooling Safety stock determination Summary Questions/Discussion 5

6 A Multi-Echelon environment Echelons o (Grouped) stages in a supply chain Characteristics o Multiple lead times o Multiple stocking positions o Often possibility to cross-dock Common situation o 1 st stage: products are distributed from the supplier to a central warehouse first o 2 nd stage: products are re-distributed to different local DC s (clusters) 6

Common situation o 1 st stage: products are distributed from the supplier to a central

7 7 Example: Multi-Echelon environment

8 Multi-Echelon Problem definition What kind of questions arise in a multi-echelon situation? o How to optimally make use of the central DC capacity? o Can we have stock of all the products in the central DC? If not, which products do we stock centrally? o Has the central DC the correct capacity? If not, what benefits are created against what costs? o Can we create significant value by changing the givens? E.g. reduce lead-times 8

o Can we have stock of all the products in the central DC? If not, which products do we stock centrally?

9 Approach Determine stocking strategies Determine stock levels Fill Central warehouse Implement & reduce overall stock Which products have highest benefit when stocked centrally? How much stock is required? Fill central warehouse until maximum capacity Move from current to optimal situation 9

highest benefit when stocked centrally? How much stock is required?

10 Approach Determine stocking strategies Determine stock levels Fill Central warehouse Implement & reduce overall stock Which products have highest benefit when stocked centrally? How much stock is required? Fill central warehouse until maximum capacity Move from current to optimal situation 10

11 Step one -Risk Pooling What products should we stock at the central echelon of our supply chain? We can determine this with the help of Risk Pooling Combining individual demand variations (risks) to achieve safety stock reduction 11

We can determine this with the help of Risk Pooling

12 Step one -Risk Pooling Risk pooling effect: 1 Safety stockcombined Safety stock + Safety stock A B o Safety stock combined uses combined demand variations! o If demand variations are high: SS combined relatively low High risk pooling effect Large benefits created by putting the stock central 12

13 Risk pooling Source: Philips - Ieke Le Blanc 13 Pooling stock potentially reduces safety stock with %

14 Approach Determine stocking strategies Determine stock levels Fill Central warehouse Implement & reduce overall stock Which products have highest benefit when stocked centrally? How much stock is required? Fill central warehouse until maximum capacity Move from current to optimal situation 14

15 Step two Safety Stock settings Common used safety stock depend on the following inputs o If Service Factor (Z) o If Lead Time (L) o If Demand (D) o If Variation (σ) Then Safety Stock 15

16 Step two Safety Stock settings Golden rule safety stock determination in a multi-echelon situation: o Connect the local and central safety stocks! Lead time at local echelon is dependent on service level of central echelon o The higher the central service level the shorter the local lead time and the smaller the safety stock So.. interpretation local service level totally different than central service level! o Central service level = internal service, can be used to optimize supply chain! o Local service level = customer service = predetermined by management 16

Lead time at local echelon is dependent on service level of central echelon o The higher the central service level the shorter the local lead

17 Step two Safety Stock settings So What service levels should we use central? o Categorize products in moving categories by looking at Demand instants Demand volume o Many instants + high demand = fast moving o Few instants + low demand = slow moving Differentiate central service levels based on moving categorization! 17

volume o Many instants + high demand = fast moving o Few instants + low demand =

18 Step two Safety Stock settings Why central service level differentiation on moving categories? o Lead time optimization! o Distribution depends on slow/fast moving characteristic Slow moving not many in pipeline long waiting time Fast moving many in pipeline short waiting time o The slower the item the more stock we want to have centrally and.. o The faster the item the less stock we want to have centrally o Example & rule of thumb 18

o Distribution depends on slow/fast moving characteristic Slow moving not many in pipeline long waiting time

19 Step two Safety Stock settings Fast Moving Products Production location Lead Time A Goods in transit Central DC Central Service level: 60% Lead Time B Local DC Leadtime calculation used for local stock: - 60% of times in Lead Time B time units - 40% of times in Lead Time B + portion of Lead Time A time units 19

Local DC Leadtime calculation used for local stock: - 60% of times in Lead

20 Step two Safety Stock settings Slow Moving Products Production location Lead Time A Goods in transit Central DC Central Service level: 95% Lead Time B Local DC Leadtime calculation used for local stock: - 95% of times in Lead Time B time units - 5% of times in Lead Time B + portion of Lead Time A time units 20

Local DC Leadtime calculation used for local stock: - 95% of times in Lead

21 Approach Determine stocking strategies Determine stock levels Fill Central warehouse Implement & reduce overall stock Which products have highest benefit when stocked centrally? How much stock is required? Fill central warehouse until maximum capacity Move from current to optimal situation 21

22 Fill Warehouse Ranked Products against Risk Pooling Effect: 1. Product X 2. Product Y 3. Product Z 4. Product T 5. Product S 6. Product Warehouse Capacity Local Strategy Product S Product T Product Z Product Y Product X 22

23 AGENDA Inventory Management Multi-Echelon environment Problem definition Risk pooling Safety stock determination Summary Questions/Discussion 23

24 Approach Determine stocking strategies Determine stock levels Fill Central warehouse Implement & reduce overall stock Risk Pooling Internal lead-time analysis Up to 20 % -30 % stock reduction Service level differentiation 24

25 AGENDA Inventory Management Multi-Echelon environment Problem definition Risk pooling Safety stock determination Summary Questions/Discussion 25

講師 : 周世玉 Shihyu Chou

講師 : 周世玉 Shihyu Chou 講師 : 周世玉 Shihyu Chou Logistics involves the following activities: sourcing and purchasing inputs, managing inventory, maintaining warehouses, and arranging transportation and delivery. There are three