SESSION 8

Supply Chain Planning &

Inventory Management
Source: Tibbett and Britten

Slide: 1
 What is planning?
• Definition:

“Planning is a systematic, rational process for solving a decision

problem led by the decision maker(s) objectives.”

• Planning supports decision-making by identifying options for future activities and

selecting a good option.
• Planning phases:
– Recognition and analysis of the decision problem
– Definition of objectives
– Forecasting of future developments
– Identification and evaluation of feasible activities (solutions)
– Selection of good solutions
(Domschke / Scholl, 2003)

Slide: 2
 Dealing with uncertainty
• Planning anticipates future activities and is based on data about future
developments.
• The data may be estimated by forecast models, but there will be a more
or less important forecast error.
• This error reduces the availability of products and therefore reduces the
customer service a company offers.
• For improvement of the customer service safety stocks can be utilized
which buffer against demands differing from the forecast.
• Method to tackle uncertainty:
– Regularly, control the deviation of reality from the plan and update the plan
 Rolling planning
 Event-driven planning
– Create and simulate worst-case scenarios

Slide: 3
 Rolling planning vs. periodic planning vs. event-
driven planning
• Example: planning horizon of one year, structured into 12 time buckets
representing months planning horizon
• Rolling (horizon) planning: of plan December
– Each month, the plan is updated for the next 12 months.
Plan December J F M A M J J A S O N D
Plan January F M A M J J A S O N D J
Plan February M A M J J A S O N D J F

frozen period of plan December

• Periodic (successive) planning:
– The plan is updated at the end of the planning horizon, i.e. once per year.
Year 2001
Plan 2001 J F M A M J J A S O N D

Year 2002
Plan 2002 J F M A M J J A S O N D

• Event-driven planning:
– Update the plan if new information is available that might impact the planning
results
Slide: 4
 Coordination of planning modules:
Hierarchical Planning

Disaggregation
Disaggregation
long-term,

Aggregation
Aggregation
aggregate,
comprehensive

mid-term

short-term,
detailed

information flows

Slide: 5
 Aggregation
• aim of aggregation:
– reduce model size
– reduce uncertainty
• objects of aggregation:
– time: periods aggregated into longer ones (e.g. 4 weeks  1 month)
– resources: aggregation into capacity groups
(e.g. 4 drilling machines  drilling shop with a total capacity)
– products: aggregations into groups of products sharing a common
characteristic (e.g. bulb of different brightness but sharing the same
color)
– place: aggregation into regions
(e.g. all customers with a common Zip-code 10.. build a customer
region)

Slide: 6
 The Supply Chain Planning (SCP) matrix
(and subseq. slides: Fleischmann et al. (2002) )

procurement production distribution sales

long-term • materials • plant location • physical distribution • product program

program • production system structure • strategic sales
• supplier planning
selection
• cooperations

mid-term • personnel planning • master production

• material scheduling • mid-term
• distribution planning
requirements • capacity planning sales plannin
planning
• contracts

short-term •
• lotsizing • warehouse
•
personnel planning • short-term
• machine replenishment
ordering materials • sales planning
scheduling transport planning
• shop floor control
flow of goods information flows

Slide: 7
suppliers of manufacturer‘s manufacturer‘s retailers‘ department
raw material factories & regional warehouses warehouses stores
distribution & transshipment (consumers)
centers points

...
...
consumer goods

Slide: 8
 Example for different types of Supply Chains (SC)

consumer goods computer assembly

category attributes ( z.B.: Nutella )
procurement supplier lead time short, reliable long, unreliable
type # raw materials few many
materials‘ life cycle years months
production organization parallel flow lines flow shop / cellular
type changeover costs/times high, sequence-depen. irrelevant
bottlenecks tight line capacities low importance
distribution distribution structure 3 transport stages 2 transport stages
sales products standard, diverg. BOM customized, convergent
type life cycle years months
seasonality high low
topography decoupling points deliver-to-order assemble-to-order
of a SC major constraints capacity materials
integ.&coord. balance of power customers: high suppliers & cust.: high

Slide: 9
 Common structure of Advanced Planning Systems
( Meyr et al., 2002)

procurement production distribution sales

long-term Strategic
Strategic Network
Network Planning
Planning

mid-term Master
Master Planning
Planning
Demand
Demand
Planning
Planning
Purchasing Production
Production Distribution
Distribution
Purchasing
&& Planning
Planning Planning
Planning
Material
Material
Requirements
Requirements Demand
Demand
Planning
Planning Transport
Transport Fulfilment
Fulfilment
short-term Scheduling
Scheduling Planning
Planning &&ATP
ATP
Slide: 10
 procurement production distribution sales

long-term Strategic
Strategic Network
Network Planning
Planning

mid-term Master
Master Planning
Planning
network design: Demand
Planning
Purchasing
Purchasing location / size of
Production
Production Distribution
Distribution
&& suppliers, plants, stocking points Planning
Planning
Planning Planning
Material
Material
Requirements
Requirements Demand
Demand
Planning Transport
Transport Fulfillm.
Fulfillm.
short-term Planning Scheduling
Scheduling Planning
Planning &&ATP
ATP

Slide: 11
 procurement production distribution sales
sales forecasting,
what-if-analyses,
long-term Strategic safety
Strategic Network
Network stocks
Planning
Planning

mid-term Master
Master Planning
Planning
Demand
Planning
Purchasing
Purchasing Production
Production Distribution
Distribution
&& Planning
Planning Planning
Planning
Material
Material
Requirements
Requirements Demand
Demand
Planning Transport
Transport Fulfillm.
Fulfillm.
short-term Planning Scheduling
Scheduling Planning
Planning &&ATP
ATP

Slide: 12
 procurement production distribution sales

long-term Strategic
Strategic Network
Network Planning
Planning

mid-term Master
Master Planning
Planning
Demand
Planning
Purchasing
Purchasing Production
Production Distribution
Distribution
mid-term
&& Planning
Planning Planning
Planning
coordination of material
Material
Material
Requirements
Requirements Demand
Demand
flow of the SC as a whole, Transport
Planning
Planning Scheduling Transport Fulfillm.
Fulfillm.
short-term working time, Scheduling Planning
Planning &&ATP
ATP
seasonal stocks

Slide: 13
 procurement production distribution sales
supplier selection

long-term and ordering of material;

Strategic
Strategic Network
Network Planning
Planning
 seldom supported by APS !

mid-term Master
Master Planning
Planning
Demand
Purchasing Planning
Purchasing Production
Production Distribution
Distribution
&& Planning Planning
Material Planning Planning
Material
Requirements
Requirements Demand
Demand
Planning
Planning Transport
Transport Fulfillm.
short-term Scheduling
Scheduling Fulfillm.
(MRP)
(MRP) Planning
Planning &&ATP
ATP

Slide: 14
 The process of Material Requirments
Planning (MRP)
Explode the master production schedule.

Identify what parts and assemblies are required.

Check whether the required parts and assemblies are available.

For every part or assembly that is required, but not available, identify
when work needs to be started for it to be made available by its due
date.

Generate the appropriate works and purchase orders.

Repeat the process for the next level of the bill of materials.

Slide: 15
 Component structure for a product

Product
On-hand
Part inventory Order
quantity
Part A (2) Part B (2) Part C (1) Part D (1) A 0 600
LT = 1 LT = 2 LT = 1 LT = 1 B 30 600
C 60 500
D 0 600
Part E (2) Part F (1) Part G (1) Part H (4) E 100 600
LT = 2 LT = 2 LT = 2 LT = 1 F 20 500
G 0 500
H 50 500
Part I (2) Part J (1) I 100 600
LT = 2 LT = 1 (X) = quantity J 60 600
LT = lead time

Slide: 16
 procurement production distribution sales

lot sizing,
long-term Strategic Networkmachine
Strategic Network Planning assignment,
Planning
sequencing and scheduling;
® depends on organisation of
mid-term Master
Master Planning
Planning production system !
Demand
Planning
Purchasing
Purchasing Production
Production Distribution
Distribution
&& Planning
Planning Planning
Planning
Material
Material
Requirements
Requirements Demand
Demand
Planning Transport
Transport Fulfillm.
Fulfillm.
short-term Planning Scheduling
Scheduling Planning
Planning &&ATP
ATP

Slide: 17
 procurement production distribution sales
delivery areas,
deployment
long-term Strategic Network Planning
vehicleStrategic
loadingNetwork Planning
vehicle routing
mid-term Master
Master Planning
Planning
Demand
Planning
Purchasing
Purchasing Production
Production Distribution
Distribution
&& Planning
Planning Planning
Planning
Material
Material
Requirements
Requirements Demand
Demand
Planning Transport
Transport Fulfillm.
Fulfillm.
short-term Planning Scheduling
Scheduling Planning
Planning &&ATP
ATP

Slide: 18
 procurement production distribution sales

long-term Strategic links

Strategic Network
Network Planning
Planning
(anonymous) inventory and
supply (= ATP) with customer orders;
mid-term Master
Master Planning
Planning
order promising
(material check, Demand
due date setting) Planning
Purchasing
Purchasing Production
Production Distribution
Distribution
&& Planning
Planning Planning
Planning
Material
Material
Requirements
Requirements Demand
Demand
Planning Transport
Transport Fulfillm.
Fulfillm.
short-term Planning Scheduling
Scheduling Planning
Planning &&ATP
ATP

Slide: 19
 Collaboration between APS

sales procurement production distribution sales procurement

Strategic
StrategicNetwork
NetworkPlanning
Planning St
S

Master
MasterPlanning
Planning Ma
Ma
Demand Demand
Planning Purchasing Production Distribution Planning
Purchasing Production Distribution Purchasing
Purchasing
&& Planning
Planning Planning
Planning &&
Material
Material Material
Material
Demand
Demand Requirements Demand
Demand Requirements
Requirements Transport Requirements
Fulfilment
Fulfilment Planning Scheduling Transport Fulfilment
Fulfilment Planning
Planning Scheduling Planning Planning
&&ATP
ATP Planning &&ATP
ATP

Collaboration Collaboration

Slide: 20
Capacity Management

Slide: 21
 Objective

To provide an ‘appropriate’ amount of capacity

at any point in time

The ‘appropriateness’ of capacity planning in any part

of the operation can be judged by its effect on …

Costs
Revenue
Working capital
Service level
Source: British Airways London Eye

Slide: 22
 Objectives of capacity planning and control

Measure aggregate
capacity and demand
Identify the alternative
capacity plans
Choose the most
appropriate capacity Forecast demand
Aggregated output

plan

Estimate of current capacity

Time

Slide: 23
Demand fluctuations in four operations

Slide: 24
 Good forecasts are essential for effective capacity planning …

… but so is an understanding of demand uncertainty, because it allows

you to judge the risks to service level
Only 5% chance of demand
Distribution of demand being higher than this
DEMAND

DEMAND
Only 5% chance of demand
being lower than this
TIME TIME

When demand uncertainty is high, the risks to service level of under-

provision of capacity are high

Slide: 25
 How capacity and demand are measured

Actual output
Efficiency =
Effective capacity

Planned loss
Design of 59 hours
capacity

Avoidable loss –
Effective
58 hours per
capacity
week

168 hours 109 hours Actual output –

per week per week 51 hours per
week

Actual output
Utilization=
Design capacity

Slide: 26
 Ways of reconciling capacity and demand

Demand Demand Demand

Capacity Capacity Capacity

Demand
Level capacity: Chase demand:
management:
To absorb Adjust output to
Change Demand
demand match demand

Slide: 27
 Adjust output to
match demand

Source: Corbis/Photocuisine
Hire Fire

Temporary labour Lay-off

Overtime Short time

Subcontract Third-party work

Slide: 28
Moving a peak in demand can make capacity planning easier

Slide: 29
 Capacity planning and control as a dynamic sequence
of decisions

Period t – 1 Period t Period t + 1

Current
Current
capacity Updated capacity Updated
estimates forecasts estimates forecasts

Outcome Shortages Decision Capacity Outcome Shortages Decision

Queues Actual Queues How much
Actual Inventory How much level Inventory
demand capacity demand capacity
and actual next and actual next
capacity period? capacity period?

Costs Costs
Revenues Revenues
Working capital Working capital
Customer satisfaction Customer satisfaction
etc. etc.

Slide: 30
Inventory Management

Slide: 31
Inventory is created to compensate for the differences in
timing between supply and demand
Rate of supply from
input process

Source: Alamy/Van Hilversum

Rate of demand from

Inventory output process

Input Output
process process

Inventory

Slide: 32
 Purposes of inventory

 To maintain independence of supply activities.

 To meet variation in product demand.

 To allow flexibility in production scheduling.

 To provide a safeguard for variation in raw material delivery

time.

 To take advantage of economic purchase-order size.

Source: Chopra / Meindl 2003

Slide: 33
 The value of inventory
 Reduce production costs - set-up cost, unit cost
 Meet variation in demand - product demand characteristics
 Cover supply lead times - uncertainties
 Reduce buying costs
 Gain quantity discounts
 Cover seasonal variations
 Price fluctuations – speculation
 Provide “Immediate Service” to customers

Source: Chopra / Meindl 2003

Slide: 34
 Inventory costs

 Interest or opportunity loss costs

 Storing and handling costs
 Taxes, Insurance, and Shrinkage costs
 Ordering and Setup costs
 Transportation costs

Slide: 35

Stock component
Cycle Stock
Production lot-sizing stock
Transportation lot-sizing
stock
Inventory in transit
Seasonal stock
Work-in-process
Safety stock
Stock types
Determinants
Setup frequency
Shipment quantity
Transportation time
Demand peaks, tight capacity
Lead time, producton planning
and control
Demand and lead time
uncertainty, process uncertainties for emergency shipments and lost
Benefits
Reduced setup time and cost
Reduced transportation costs
Reduced transportation costs
Reduced costs for overtime and for
investments
Increased utilization, reduced
investments in additional capacity
Increased service level, reduced costs
Slide: 36
 Inventory profiles chart the variation in inventory level

Order
quantity Steady and
predictable
=Q demand (D) Slope = demand rate (D)

Average inventory
Inventory level

=Q2

Q Time
D

Instantaneous deliveries at a rate of D

Q per period

Slide: 37
 Economic order quanitity
400

350

300

250 Total costs

Costs

200

150 Holding costs

100
Order costs
50
Economic order
quantity (EOQ)

50 100 150 200 250 300 350 400

Order quantity

Slide: 38
 Inventory planning allowing for shortages
Inventory level

Time

Shortages

Slide: 39
 The re-order point

Demand (D) = 100 items per week

400
Inventory level

Re-order level
300
Re-order point

200

100

0
0 1 2 3 4 5 6 7 8
Order lead time Time

Slide: 40
Safety stock(s) helps to avoid stock-outs when demand
and/or order lead times are uncertain

Re-order level (ROL)

Distribution of
Inventory level

lead-time
Q usage

d1
d2
?
S

t1 t2
Time

Slide: 41
 Safety stock
 Safety inventory is carried for the purpose of satisfying demand that
exceeds the amount forecasted for a given period. It is carried
because demand forecasts are uncertain and a product shortage
may have negative business impact.

 Safety inventory protects in addition from supply uncertainties.

Typical supply uncertainties are machine breakdowns, scrap,
transport, procurement lead times, etc.

 The appropriate level of safety inventory is determined by the

following two factors:
• The uncertainty of demand and supply
• The desired level of product availability

Slide: 42
 A periodic review approach to order timing
with probabilistic demand and lead time

Tar
get
Q1 Q2 Q3
Inventory level

T0 T1 T2 T3 Time
t1 t2 t3

tf tf tf

Slide: 43
 Source: Howard Smith Paper Group

Pareto curve for stocked items

100
Percentage of value of items

90
80
70
60
50
40 Class A Class B Class C
items items items
30
20
10

10 20 30 40 50 60 70 80 90 100

Percentage of types of items

Slide: 44
Inventory classifications and measures

Class B items – the

Class A items – the
20% or so of high-value
items which account for
around 80% of the total
stock value
next 30% or so of
medium-value items
which account for
around 10% of the total
stock value

Class C items – the

remaining 50% or so of
low-value items which
account for around the
last 10% of the total
stock value

Slide: 45
 Stock strategies from ABC Analysis

Characteristics Policy Methods

A Items Few items Tight control Frequent monitoring
Most of turnover Personal supervision Accurate Records
Sophisticated forecasting
Service level policy
B Items Important items Lean stock policy Rely on sophisticated system
Significant turnover Use classic stock control Calculated safety stock
Fast appraisal methods Limit order value
Manage by exceptions Computerized
C Items Many items Minimum supervision Simple system
Low turnover value Supply to order Avoid stockouts and excess
Large orders Infrequent ordering
High safety stock policy Automatic system

Source: Wild, T. (1997)

Slide: 46
 Extension of ABC analysis
 Pareto analysis can be extended by other criteria to form a meaningful
analysis tool.

 In addition to the ABC analysis, the XYZ analysis categorizes products

according to their demand variability.
– “X” items = low demand variability
– “Y” items = normal demand variability
– “Z” items = high demand variability

 Other classification criteria may be according to the environment of

analysis:
• Setup time / Capacity utilization
• Product size / volume
• Marginal contribution
• Etc.

Slide: 47
ABC - XYZ Analysis: Example
Inventory
value
800

700

600

500

400

300

200

100 C

0
B
X Product volume
Variability in %
= s Y A or turnover
m
Z

Slide: 48
 Managing multi-echelon cycle inventory
 Ensures that cycle inventory at different stages of the supply chain is
synchronized and no unnecessary cycle inventory is carried in single
locations.

 Synchronization in a supply chain with multiple locations is achieved if the

local stock policies are nested and stationary.
Distribution center
replenishment order

1st customer
Order cycle

DC
Order cycle

Factory
Production
cycle

Slide: 49
 Vendor managed inventory
 VMI focuses on continuous supply of products in the supply chain by
shifting the trigger for replenishment towards the supplying entity. E.g. A
production center replenishes market warehouses.

 VMI concept synchronizes cycle stocks along the supply chain so that
cycle stock is nested and stationary.

Requirements,
inventory levels Demand, inventory
min/max, days of coverage

Supplier Factory Market

Shipment Plan Forecast, promotion

shipment plan

Supplier-Managed Inventory Vendor-Managed Inventory

Slide: 50
 Postponement
Definition:
Definition: Postponement
Postponement is is the
the latest
latest possible
possible customer
customer specification
specification byby applying
applying
product
product or
or material
material flow
flow specific
specific measures
measures with
with the
the objective
objective to to reach
reach
economies-of-scale
economies-of-scale factors
factors and
and to
to market
market products
products that
that fulfil
fulfil customer
customer
individual
individual requirements
requirements (economies-of-scope).
(economies-of-scope).

Materialflow
Materialflow postponement:
postponement: Product
Product finalization
finalization
Reduction
Reduction ofof safety
safety stock
stock through
through postponement:
postponement:
centralization
centralization of
of locations.
locations. Creation
Creation of
of product
product variants
variants at
at the
the
latest
latest possible
possible stage
stage of
of the
the value
value
chain:
chain:
•• Labelling
Labelling postponement
postponement
•• Packaging
Packaging postponement
postponement
•• Assembly
Assembly postponement
postponement
•• Production
Production postponement
postponement

Source: Kummer, S. (2004)

Slide: 51
 Material flow postponement:
Centralization of warehouses
 Relationship between number of depots and need to hold inventory.

 The “Square Root Law” rule of thumb:

• Total safety stockholding is proportional to the square root of the
number of depots.
• Reducing depots from 10 to 5 leads to a saving of
inventory reduction = 1-(sqr root of 5 / sqr root of 10)
= 1- (2.24 / 3.16) x 100
= 29 %

 This “saving” may be offset by increased transportation costs!

Slide: 52
Product finalization postponement: Dell Computer

Without Postponement:
Customer order

Production Labeling Delivery

Buffer

With Postponement:
Customer order

Production Labeling Delivery

Buffer

Slide: 53
Slide: 54
 Graded Assignment: Case study
Upsmoke Corporation
You are John Deere the new Supply Chain Manager at Upsmoke
Corporation and have been asked by the CEO, John Black to address the
below work items in a written document (MS Word / MS PowerPoint).

1. Prepare a SWOT (Strengths – Weaknesses – Opportunity – Threats) analysis on

the current Supply Chain Management configuration at Upsmoke Corporation.

2. Prepare an improvement concept which describes at least 5 key ideas to boost the
supply chain performance at Upsmoke Corporation.

3. Prepare an implementation roadmap as part of the improvement concept on key

activities and milestones to be followed in order to reach expected performance
results.

4. Prepare a change management plan on the implementation of proposed

improvements: How can the buy-in of the current organization be strengthened to
make the transformation a success?

Slide: 55