MIM 544

Global Cases in Supply Logistics

Class Four Inventory

Agenda
Current Events
Cisco & Altera Inventory Bubble
Inventory & Variances
Scientific Glass Case Analysis
Student Analysis

Three Articles
China feel global-market pain
Labor forces Foxconn to shut Shenzhen
IP challenge Contest of the Century
China India trade has increased 230X
since 1990; $60B
Wind energy - NIMB

LO 1

INVENTORY COSTS
Is inventory an asset?
Costs to acquire
Ordering costs
Setup costs
Carrying costs
Stock-out costs
Opportunity Cost of Capital

Inventory Carry Costs

Inventory Carrying rate example: total inventory = $34,400
$800K Storage
$400K Handling
$600K Obsolescence
$800K Damage
$600K Administrative
$200K Loss
$3,400 Total
Divide costs by Avg Inventory $3,400 / $34,400 = 10%
Add: Opportunity costs of Capital 9%, Insurance 4%, Taxes 6%
=19%

Total Inventory carrying rate is 29%

Cash-to-Cash Cycle Time

0ENLI009

Inventory days
of supply

Days sales outstanding

0ENLI015

Average payment
period for materials
0ENLI003

0OPPLAN017

Sales
0ENPR026

Faultless
Invoices

Returns

Inventory

0OPDEL067

0OPPLAN012

Perfect Order
Fulfillment
Fill Rates 0OPDEL061
0OPDEL025

Forecast
Accuracy

Scheduled
Achievement

0OPPLAN008

0OPMAKE022

Production
Lead Times
0OPMAKE017

Machine wait time

0OPMAKE007

Yield
0OPMAKE033

Scrap
0OPMAKE023

Order 0OPDEL023
Fulfillment
Total Source
Lead Time
0OPPLAN030
Lead Time
0OPSO041

Delivery
Performance
to Scheduled
Commit Date
0OPDEL019

Number of
Supply
Sources
0OPSO012

Variances PPV & Standards

unfavorable variance = is reduced from
the budgeted expectation
favorable variance = is increased from
budgeted expectation
When is cost reduction a bad thing?
Note: Do not interpret directly as bad or
good behavior on the part of
management; the goal is to be on target.

Cisco / Altera
Yr. 2000 Cisco wrote off $2.25B
Alteras answer? A new Postponement
Capacity utilization 2000 (97%) 2001
(66.2%) What should it be?
What is happening now in component leadtimes? Is it real?
Is VMI the real answer?
Value drops 1.3% per month

Scientific Glass Inventory Case

What we know:
- Exceeded their target debt/capital of 40%
- $2B market; 5% share
- High volume / low mix? 3000SKUs
- Niche player, custom SKUs, competitive
pressure.
- Does the 3-6 month sales cycle matter to
SCM?
- Inventory growing faster than sales
- Emphasis on short lead-times & customer
satisfaction

Scientific Glass Inventory Case

What do we know?
- Dedicated Sales force Trunk stock 32*$10K
- 93% fill-rate, 2 week lead-time
- Overage cost .6%. BO 10% GM.
- Incentive is on fill-rate to 99%
- 8 DCs * $750K + 2 new ones planned
- Sales forecasted to grow 20%; Capacity
requested to support = $10M

Scientific Glass Inventory Case

What do we know?
- Warehouse Inventory <60days; 120K
orders processed
- Used Min-Max system for each SKU
- Period expenses of 1% of cogs Too much?
- Freight Factory -> DC is $.4 / Ilbs
- Inventory accuracy was declining what
happens?

Scientific Glass Inventory Case

What do we know?
- Policy changes proposed
- Capex is low 14% ($1.4M..)
- Turns were 6
- 25% is Raw + WIP; rest is FGI (good?)
- Balance sheet Inventory growth > Sales
- Cash 6%

Scientific Glass
Case Questions:
What are the problems facing SG in January 2010?
How much external funding will have to be raised in
2010 to finance ops?
How so SGs problems illustrate the relationship
between the number of warehouses and inventory
levels?
What are the alternatives & how do you evaluate
those?
What actions should Ava propose?

Scientific Glass
Assessment alternatives: 5 questions
1. Implement proposed policy changes?
2. Consolidate warehouses?
3. Outsource warehousing?
4. Reduce the target total order fill-rate?
5. Other considerations?

Scientific Glass
Helpful Hints:
1. What are the Options & savings with
each?
1. Fill rate lowered & trunk stock
eliminated
2. One Warehouse vs. logistics costs
3. Outsource
4. Combination of the above?
5. What about Cash????

Thoughts
-20% increase in orders = .46 cogs *
%increase in sales * typical months of
inventory = $1.75M
-Expanding DCs *2 = $2M inventory
-In transit inventory adds $$$
-95% Fill-rate because only 10% of orders
are BO is really rather small pending the SKU
-Trunk stock is negligible ($320K)
-Warehouse consolidation = 40%
-1 DC=15% cost = 15% value of inventory