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

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New Supply Chain Strategy

OBJECTIVES:

Reduce inventory and financial risks Provide customers with competitive response times. Determining the optimal location of inventory across the various stages Calculating the optimal quantity of safety stock for each component at each stage Push Stages produce to stock where the company keeps safety stock Pull stages keep no stock at all. Identify the location where the strategy switched from Push-based to Pull-based Identify the Push-Pull boundary 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%
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ACHIEVE THE FOLLOWING:

Hybrid strategy of Push and Pull

Challenge:

Benefits:

Notations Used

FIGURE 3-11: How to read the diagrams

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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.

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Current Safety Stock Location

FIGURE 3-12: Current safety stock location

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Optimized Safety Stock Location

FIGURE 3-13: Optimized safety stock

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Current Safety Stock with Lesser Lead Time

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

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Supply Chain with More Complex Product Structure

FIGURE 3-15: Current supply chain

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Optimized Supply Chain with More Complex Product Structure

FIGURE 3-16: Optimized supply chain

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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.

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Local vs. Global Optimization

FIGURE 3-17: Trade-off between quoted lead time and safety stock

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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.
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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. Low inventory turns Inconsistent service levels across locations and products, and The need to expedite shipments, with resulting increased transportation costs
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This typically yields leads to:

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?

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Integrating Inventory Positioning and Network Design

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

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Three Different Product Categories

High variability - low volume products Low variability - high volume products, and Low variability - low volume products.

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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. Require more analysis since other characteristics are important, such as profit margins, etc.
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Low variability low volume products