Inventory masterclass

Framework & inventory types

Ieke le Blanc
Michiel Jansen
Different business characteristics require different supply chain models (model Hau Lee)

Demand uncertainty

Functional products (low) Innovative products (high)

Efficient supply chains Responsive supply chains

Eliminate non value added activities, Build-to-order, mass customization,
Stable process (Low) economies of scale, optimization postponement. Supplier hubs near
techniques, productivity FAS site. Modular design. Supplier
Supply uncertainty

improvements , lean, direct shipments collaboration.

Risk hedging supply chains

Agile supply chains
Inventory pools to decouple supply
Combine risk hedging and responsive
chain from uncertainties in supply
strategies. Decoupling point strategy.
Evolving process (High) (piles of inexpensive but key
Fast information flow and
components), multiple supply basis,
collaboration with suppliers and
Contingency plans and crisis
customers.
management teams.

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Different business characteristics require different supply chain models (model Hau Lee)

Demand uncertainty

Functional products (low) Innovative products (high)

Efficient supply chains Responsive supply chains

Lean S&OP process focussed on cost Demand management process
Stable process (Low)
control. Heavy use of statistics / strongly developed, quicly pick-up
Supply uncertainty

systems. demand changes and communicate

throughout the organization.

Agile supply chains

Risk hedging supply chains
Responsive S&OP à Estimate risks,
Strong focus on resource planning
Evolving process (High) strong focus on cross functional
(allocation, scenarios, ‘sales push’)
decisionmaking. Potentially increase
frequency.

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Agenda – Day 1

9:00 – 10:00 Introduction: why do you need inventory

10:00 – 10:45 Inventory management self-assessment

11:00 – 12:00 Inventory management framework

12:00 – 13:00 Lunch break

13:00 – 13:45 Inventory game - part 1

14:00 – 15:00 Inventory metrics

15:00 – 17:00 Optimal inventory settings

17:00 Closing

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Inventory framework

Raw materials
WIP & intermediates Finished Goods
Packaging

Maintenance & Operating Rework &

Repairs Returns
supplies

6
Lead times vs stock

– Situation one:
Replenishment lead-time = required time to have new stock
Replenishment time
available again

Requested Customer Lead-time

Make-to-Order: We have sufficient time available to produce the material and deliver the customer within the requested lead-time

– Situation two:

Replenishment time

Requested Customer Lead-time

Make-to-Stock/Forecast: We don’t have sufficient time available to produce the material and deliver the customer within the
requested lead-time. And as a result stock is required to meet the requested lead-time

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 Customer order decoupling point versus product characteristics

ASSEMBLE
MANU-
SUPPLY & DISTRIBUTE
FACTURE
PACKAGE

make-to-order
item-location complexity
High volatile demand,
slow moving

assemble/pack-to-order

make-to-stock
stable demand,
runners

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Discussion

What drives the positioning of the customer

order decoupling point?

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Typical drivers for MTO / MTS trade-off

Hard to acquire Special ingredients Easy to acquire

High Common ingredients Low

Chase / follow Capacity planning strategy Level /

smoothening
Flexible Capacity Rigid

Low Drive for Operation efficiency High

High Operational capabilities for many small orders: SMED / Low
staging / material handling
Drivers

MTS
Drivers
MTO

Low MPQ High

MSQ = MPQ Minimal Sales Order Quantity Open

Long Customer lead times Short

Medium Requires forecast accuracy High

Often Changes in product portfolio Seldom

Customer specific Commonality in customer product portfolio Standard
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Types of inventory

Cycle stock: stock produced in lots or batches that

fulfills demand over replenishment cycle (time between
two production starts)

Safety stock: required stock to buffer for uncertainty in

demand (order quantity) or supply (lead-time)

Anticipation stock: required stock to anticipate on

future capacity limitation (e.g, building up stock to
deliver the market during preventive maintenance)

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 Re-order point

Re-Order Point =
+
Safety stock Cycle stock

Cycle Stock

Safety Stock Repl. lt

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Cycle stock: stock produced in lots or batches that fulfills demand
over replenishment cycle (time between two production starts)

Cycle stock
Minimum order quantities that
are consumed over the
replenishment cycle result in
an average stock level that is
called cycle stock.

Replenishment cycle

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 Safety stock: required stock to buffer for uncertainty in demand
(order quantity) or supply (lead-time)

Effect of demand variation and lead time variation

k
k

σL σD Higher variation = more safety stock

k determined to meet service level

Replenishment leadtime ss= k* σL

IN OTHER WORDS
Safety stock is there to still deliver customers in case of unexpected sales orders or delays in production

The standard safety stock models assume a ‘normal distribution’ of demand and (production) lead-time. Often fluctuations in demand can be
assumed to be normal distributed. However, deviations in (production) lead-time are often not normal distributed and therefore not considered
in the current safety stock models.
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Forecasting reduces the needs for safety stocks

Safety stocks margin of

uncertainty
based on historic
sales

Safety stocks
margin of
based on sales uncertainty
forecast

Forecasting reduces the need for safety stocks (normally)

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Anticipation stock: required stock to anticipate on future capacity
limitation (e.g. building up stock to deliver the market during
preventive maintenance)

Maximum Capacity
Volume

Constraint Demand Plan

Supply Plan

Time
Volume

Replenishment & Safety stock

Anticipation stock

Time

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Examples anticipation stock

– Holiday closures
– Promotions / new product introduction
– Seasonality (beverages, ice cream, Christmas /Easter articles)
– Anticipation on strikes
– Anticipation on availability and prices of feedstock
(e.g. steel and chemical industry)
– Chinese new year
– Transport availability
• Transport via river (water depth depending)
• Frozen canals during winter

Practical lessons:
• Anticipation stock is always forecast driven
> (ideally management decision embedded in S&OP cycle)
• Plan and report separately (accountability)

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Discussion

Are you already using segmentation in your inventory

control policy?

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Why segmentation?

Segmentation is a key building block in Supply Chain planning processes to support

optimization of cash and working capital:
• get grip on product/market complexity
• increase effectiveness & efficiency in forecasting and demand management
• enable focused cross-functional collaboration
• differentiate supply & inventory management policies

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Why segmentation?

Regular Events Type of sales

NPI Mature EOL Life cycle

A B C Importance of the product

X Y Z X Y Z XYZ Forecastability / stability

A Demand B C
NPI AX AY AZ BX BY BZ CX CY CZ EOL EVENTS

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Differentiated approach for inventory management

NPI Mature products EOL

Runners AX AY AZ
(A)

Medium
movers BX BY BZ
(B)

Slow-
movers CX CY CZ
(C)

Medium volatile
Stable demand

Unpredictable
demand

demand
(X)

(Y)

(Z)
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Attention for A items pays off!

Example 1:
€ per day inventory cost are €2.000
Based on a real life case
5 days incorrect inventory will cost €10.000

Example 2:
€ per day inventory cost are €50
1 5 days incorrect inventory will cost €250
(apart from a possible higher obsolescence risk)

> The value of one day inventory for A items is high, meaning one day change of target inventory will have a big
impact on the average amount of working capital.

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Differentiated approach for inventory management

NPI Mature products EOL

Runners LSP LSP LSP

(A) Dynamic SS Dynamic SS Static SS
New product: Phase out:
CSP CSP
Static SS Static SS
Medium
LSP CSP CSP
1:1 successor: movers 1:1 phase over:
Dynamic SS Dynamic SS Static SS
Copy from (B) Copy to
Predecessor Successor

Other: manual Slow- Other: manual

CSP CSP Prune or
movers
Dynamic SS Static SS switch to MTO
(C)

Unpredictable
demand

demand

Medium

demand
volatile
Stable
(X)

(Y)

(Z)
Anticipation stock:
Plan separatly for events based on forecasted impact
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Discussion

Can this framework be used for service level

differentiation?

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Differentiated approach for inventory management

NPI Mature products EOL

Runners 98% 98% 95%

New product: (A) Phase out:
CSP CSP
Static SS Static SS
Medium
1:1 successor: movers 98% 95% 80% 1:1 phase over:
Copy from (B) Copy to
Predecessor Successor

Other: manual Slow- Other: manual

movers 95% 80% MTO
(C)
Stable demand

Unpredictable
demand

Medium

demand
volatile
(X)

(Y)

(Z)
Anticipation stock:
Plan separatly for events based on forecasted impact
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Be careful

Classifications are a tool to harmonize policy, not the settings!

Naive example:
A: 1 week
B: 2 weeks
C: 4 weeks

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 Ieke le Blanc Michiel Jansen
+31 6 22 30 55 54 +31 6 22 70 28 13
ieke.leblanc@eyeon.nl michiel.jansen@eyeon.nl

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