You are on page 1of 8

Sony Canada launches new high velocity supply chain

Information replaces inventory

Sonys consumer electronics marketing, sales and distribution division in Canada had a clear mission: improve its supply chain management capabilities to reduce inventory and increase product velocity, in a cost-effective way. It also had a vision of how to achieve this: use its existing SAP software system, data and processes to bring in a new and sophisticated supply chain management approach. What it needed was help to make it happen quickly and successfully. So Sony turned to Deloittes experienced consulting practice for technical expertise in supply chain management, SAP software and its skill in managing complex projects. The team was led by consulting partners Ron Factor and Marcus Hill. Excess inventory is a significant issue for Sony, explains Stephen Brown, a Toronto-based senior manager, because inventory is so expensive in consumer electronics. Inventory ties up a lot of working capital, if that inventory is older it tends to move more slowly and block the introduction of newer, hotter items. Just-in-time inventory Sony wanted to replace inventory with information, says Brown. The traditional approach is to load inventory into the retail channel to minimize the chance of lost sales. In the new model, information and statistics are leveraged to accurately forecast demand prior to placing the inventory into the retail channel. By scientifically forecasting what products are going to sell in what locations at what point in time, a company like Sony can move to more of a just-in-time inventory approach instead of a just-in-case inventory one. It means less inventory overall and higher velocity inventory throughout the supply chain. Technical, business and practical support Sony required comprehensive support to implement this project. Deloitte provided its technical know-how to configure the SAP APO system, integrate it, test it, and roll it out. From a business perspective, the Deloitte team provided process design, training, change management and communication support to Sony. And it worked with staff at Sony and its retailers to answer practical questions about the business process:

How will we work together on these new processes? What benefits are we expecting to achieve and what do you expect from my people? What training and support will be available?

Throughout the project the Deloitte team leveraged the combined capabilities of the firm to bring services and expertise to Sony in a number of areas, including enterprise risk services, EDI technology, vendor managed inventory strategy and executive alignment. Better forecasts, less inventory, major savings Sony conducted a manual pilot test of the new concepts while helping to implement the project. The test results exceeded expectations in all areas including inventory levels and turns, revenue and margin improvements and customer service level improvements. Sony is now implementing the new system throughout Canada and expects the pilot results to be replicated across the country. Said Brown: It was a leading edge project for a leading edge company using leading edge technology.

McDonald's, a guide to the benefits of JIT

Just-in-Time (JIT) inventory is the big thing right now in operations. This, along with lean operations and six-sigma are the buzz words being talked most about. But what exactly is the deal with JIT operations? First of all, JIT is a form of providing supplies for customers, as the name suggests, just in time. For example, Dell, whom I wrote about, has become famous for its JIT model which involves not even being in possession of the raw materials needed to fulfill an order until that order is placed and yet they are still capable of filling orders in a short period of time. McDonald's is another example of a JIT system wherein McDonald's doesn't begin to cook (well, I should probably say reheat and assemble what may or may not be actual food) its orders until a customer has placed a specific order. What used to be the case was McDonald's would pre-cook a batch of hamburgers and let them sit under heat lamps. They would keep them for as long as possible and eventually discard what couldn't be sold. The only way to get a fresh hamburger under the old system was to make a special order. Now, due to more sophisticated burger-making technology (including a record-breaking bun toaster), McDonald's is able to make food fast enough to wait until it's been ordered. What both of these firms do is they provide a customer with their order as fast as possible while having the finished product sitting in inventory for as short as possible. What are the benefits for McDonald's? The major benefits for McDonald's are better food at a lower cost. Let's stop here for a second to drive home a very important point: Whenever you can implement something that allows you to raise quality AND lower costs, you should definitely look into implementing that practice. Unless illegal, immoral, socially irresponsible, or likely to drive down demand (which is unlikely considering quality is

being improved), you are probably going to want to implement this practice. Back to McDonald's. McDonald's has found something that allows them to improve quality and lower costs. Let's take a look at how it does both. Improved Quality I think benefits of a better tasting burger should be fairly apparent. Unless of course you prefer aged burgers, the fresher burger is going to be higher quality if made fresh just for you. The less obvious benefit is the higher quality customer service that arises from the JIT burger assembly. When McDonald's waits for you to order the burger, they do a few things to improve customer service. First of all, when you place a special order, it doesn't send McDonald's into a panic that causes huge delays. Now that McDonald's is in the practice of waiting until you order a burger until they make it, they don't freak out when they have to make a special order fresh just for you. This higher quality customer service is subject to McDonald's ability to actually produce faster. Without this ability, McDonald's ordering costs would be sky-high because the costs associated with ordering would be the loss of customers tired of ordering fast food that really isn't fast. Second, JIT allows McDonald's to adapt to demand a little bit better. Seemingly, lower inventory levels would cause McDonald's bigger problems in a higher demand because they wouldn't have their safety stock. However, because they can produce burgers in a record time, they don't have to worry about their pre-made burger inventories running out in the middle of an exceptionally busy shift. Lower Costs The holding costs for burger parts (beef, cheese, buns, whatever other garbage they put on their burgers) are fairly high because of their spoilage costs. Frozen ground beef that's good today might not be so good in a few months. Once cooked, the same ground beef's spoilage rate shoots through the roof. Instead of having a shelf life of months or weeks, the burger needs to be sold within 15 minutes or so. The holding costs go from roughly 20% per week to 100% per hour. In other words, under McDonald's old system, they produced at a level that gave them high inventories so that food would be available fast, which is the main benefit of fast food. Unfortunately, food that was unsold after a short period of time was scrapped. Food that was sold was forced to be sold at a higher price in order to absorb the scrap costs of unsold food. Ultimately this meant higher costs for McDonald's. For McDonald's, the benefits of JIT are fairly clear. For Dell, it was the same way. So what is it that both of these firms have in common, and ultimately, when is JIT a good system to implement?

Why JIT Economic Order Quantity Savings A large benefit of JIT is that it reduces the total cost of ordering and holding inventory. Let's quickly recap three firms that have achieved this and how they did so. Dell and McDonald's High holding costs are the nature of the computer and fast food industries. JIT system allowed them to exploit the savings that were realized by holding less inventory. Wal-Mart Instead of having particularly large holding costs, Wal-Mart recognized that they were in a position to make ordering costs very small. Because of their importance to their suppliers, along with their software made affordable through economies of scale, Wal-Mart has made ordering a very small percent of their overall costs. By lowering ordering costs, Wal-Mart has made ordering small batches with greater frequency a profitable reality. High holding costs and low ordering costs are the factors that drive JIT. Generally, it's the ability to lower ordering costs that make it a feasible solution. McDonald's and Dell were both slaves to the high holding costs. It was just the nature of their industry. The solution for them was that while they couldn't lower holding costs, they could lower ordering costs. Wal-Mart didn't even have particularly high holding costs, but they realized it would be profitable to lower ordering costs which led to high holding costs as a ratio of holding costs to ordering costs. What McDonald's, Wal-Mart, and Dell have in common is very high holding costs in comparison to their ordering costs. Ultimately, this, coupled with the ability to lower safety stock, is when JIT is effective. EOQ determines how much you should order and there are two factors that drive economic order quantities down: low ordering costs and high holding costs. Depending on the product and the industry, one or both of these qualities may exist in your operations. If they do, JIT may be right for you. Without the ability to make ordering costs low as a percentage of holding costs then there is no need for JIT. In fact, the increased frequency in ordering will result in cost increases. Safety Stock Reductions The other aspect of JIT is the drastic reduction in safety stock. My previous article on safety stock discussed the two reasons safety stock exists: variability in demand and variability in lead times from suppliers (in McDonald's case, the supplier is the internal production process). It is because of this variability that safety stock exists in the first place. What JIT does is tries to reduce the lead times and variation in lead times in order to help reduce safety stock. Let's revisit the safety stock formula to figure out why this is: Safety Stock: {Z*SQRT(Avg. Lead Time*Standard Deviation of Demand^2 + Avg. Demand*Standard Deviation of Lead Time^2}

The first term is Lead Time*Standard Deviation of Demand^2. This is the inventory needed to account for fluctuations in demand during the lead time. If lead time is shorter, which JIT tries to accomplish, then this part of the safety stock is smaller, this lowering safety stock inventory. Wal-Mart and Dell accomplished this by using better software and communication with their suppliers. McDonald's accomplished this by creating a system that allowed a faster burger production (remember, McDonald's lead times are internal). The second term is Avg. Demand*Standard Deviation of Lead Time^2. This is the inventory needed to fill demand because of lead time variance. If lead time has no variance or is reduced then this term can be eliminated or at least reduced. Again, this is what JIT try to accomplish. Wal-Mart accomplishes this by demanding it, Dell by working with suppliers, and McDonald's by standardizing production. In order to accomplish the tasks of shortening lead times and reducing their variances, a considerable amount of work needs to be done with suppliers/internal operations. For some firms this is worth the trouble, for others, it is not. Conclusively, there are two major parts to JIT inventory operations: lowering the ratio between ordering costs and holding costs and shortening lead times. What results is a firm with such high holding costs that ordering very small batches very frequently is the most profitable solution. This eliminates average inventory above the safety stock level. Then, if lead times and lead time variability can be decreased, safety stock can be decreased. The result is inventory coming in as it needs to come in. In other words, it comes in just-intime

A Simplified Look at the Pros and Cons of Inventory

I'm selling it sooner or later anyway, aren't I? I spend so much time working with inventory that I often forget how confusing it can be to beginners. The most common mistake, and the one I made when I first started learning about inventory, is that it shouldn't matter how much you have because you're going to sell it sooner or later anyway. In a sense, this is true. Even if you turn your inventory over once every 3 years, you are selling all of it and the inventory helps to prevent stock outs and backorders. However, there are some serious costs to holding inventory. Anytime inventory is held, there are holding costs. Holding costs are simply the costs that are incurred just by holding onto inventory. These costs can come from a variety of sources. Here are just a few common costs associated with high levels of inventory: Higher rent from increased need for extra warehouse space to hold extra inventory.

Higher premiums needed to insure extra inventory. Potentially, the inventory could spoil, expire, or become outdated and lose value. Oppurtunity costs. What else could you have invested the money and warehouse space in had you not been spending it on inventory? Remember, companies have a limited amount of assets available to them. These assets are aquired from money raised through equity and debt. Excessive inventory is a misuse of these assets because it essentially an investment in something that is just going to sit around. So why hold inventory? The simple answer is that inventory is held in order to fill unexpected changes in demand and deliveries from suppliers. If there were never any changes in demand and if suppliers could constantly deliver supplies in the quantities needed, then there would be no need for inventories (excluding work in process inventories and negligible day's end inventories waiting for outbound shipping). However, demand does fluctuate, as do lead times from suppliers. Because demand fluctuates companies are not sure how much of a certain good to produce on a given day. Companies can make predictions, but the fact of the matter is, predictions typically only give a rough estimate of what will be needed on any particular day. One solution to this problem is to maintain a workforce with a very high unutilized capacity and to simply not use it most of the time, but to have it available in the event of a day with high demand. The other solution is to carry inventory. Inventory is a way or preserving excess capacity. On the days when demand was light, the workforce overproduced. Their work was stored as inventory and now if there is a day with very high demand that is beyond the capacity of the workforce, the inventory is there as a safety net against backorders. So why not hold loads and loads of inventory? Well, don't forget about those damn holding costs. So why not maintain a workforce with a ton of slack capacity? As much as the work staff would enjoy this, you can imagine this would be very expensive to maintain. (On a side note, this is essentially what service sectors of the economy have to do. I remember I worked as a hotel valet when I was younger and there would be plenty of times when it would be so dead I wouldn't park a car for hours. But when it got busy, boy would it get busy. You can't inventory services and the ramifications of a stock out (in this case that would mean that there is no one to get your car) are too costly to deal with in many service positions.) So how much inventory should I hold?

This is subject to a wide variety of conditions. Simply put, you need to evaluate your holding costs, your backorder costs, and your demand. From there, it gets pretty tricky and I unfortunately already named this article "A Simplified Look at the Pros and Cons of Inventory" so as much as I'd like to help you, my hands are tied...what with the tiltle already being up and all. Luckily some of my previous posts deal with some of the mathematics involved in determining some facets of optimized inventory levels. ***********************************************************************

Dell Computers: A Case Study in Low Inventory

When managers discuss low inventory levels, Dell is invariably discussed. Hell, even I've mentioned Dell on this site. So why all the commotion? Has their low inventory REALLY helped out that much? In short, yes. This article is primarily going to discuss how much it helped. This article will not discuss how they achieved such high inventory turns using a state of the art just in time inventory system. Reasoning behind need for lower inventory The first thing that needs to be discussed is why low inventory has such a great effect on Dell's overall performance. The reason is quite simple: computers depreciate at a very high rate. Sitting in inventory, a computer loses a ton of value. As Dell's CEO, Kevin Rollins, put it in an interview with Fast Company: "The longer you keep it the faster it deteriorates -- you can literally see the stuff rot," he says. "Because of their short product lifecycles, computer components depreciate anywhere from a half to a full point a week. Cutting inventory is not just a nice thing to do. It's a financial imperative." We're going to assume that the depreciation is a full point per week (1%/week) and use that to determine how much money high inventory turns can save Dell. This means that for every 7 days a computer sits in Dell's warehouses, the computer loses 1% of its value. Ok, now that we know how much Dell loses for each day, let's take a look at some of Dell's data over the past 10 years that I pulled from What I got from this was the inventory turns. An inventory turn, as this website successfully describes it, is "cost of goods sold from the income statement divided by value of inventory from the balance sheet". Typically, this is turned into a value showing how many days worth of inventory a firm has by dividing inventory turnover by 365. I divided the inventory turnover by 52 in order to show how many weeks worth of inventory Dell holds. Here are the results:

Dells Inventory Turnover Data Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Inventory Turnover 4.79 5.16 9.4 9.8 24.2 41.7 52.40 52.40 51.4 63.50 Week's Inventory 10.856 10.078 5.532 5.306 2.149 1.247 0.992 0.992 1.012 .819

Key point to notice here is that Dell was carrying over 10 weeks worth of inventory in 1993. By 2001, Dell was carrying less than 1 week's worth of inventory. This essentially means that inventory used to sit around for 11 weeks and now it sits around for less than 1 week. So what does this mean for Dell? Remember, computers lose 1 percent of their value per week. This isn't like the canned food industry where managers can let their supplies sit around for months before anyone bats an eye. Computers arent canned goods, and as Kevin Rollins of Dell put it, computers rot. The longer a computer sits around, the less it is worth. That said, due to depreciation alone, in 1993 Dell was losing roughly 10% per computer just by allowing computers to sit around before they were sold. In 2001, Dell was losing less than a percent. Based on holding costs alone, Dell reduced costs by nearly 9%. Since 2001, Dell has continueed to lower inventory. Looking at their latest annual reports, day's inventory has dropped by approximately a day. Hopefully this article provided you with a practical example that demonstrates the positive effects lower inventory can have on a firm's overall costs. For more information regarding lawyers in the Texas area, check out Dallas Fort Worth trucking accident attorney.