Summary

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Supply change planning

Objectives:
Presentation of the main tools and concept’s that we need to optimize the supply chain in order
to ensure good conditions of the current activities of the company (production and sales) and
#1 maintaining under control, in the same time, cost of logistic. p. 1

Introduction:
Today, the logistic and execution speed becomes a critical differential factor, and they are an
important weapon in obtaining advantages in front of competitors.
The companies objectives regarding grow up of logistic and fast delivery, lead to an important
Supply change planning

Objectives:
Presentation of the main tools and concept’s that we need to optimize the supply chain in order
to ensure good conditions of the current activities of the company (production and sales) and
maintaining under control, in the same time, cost of logistic.

Introduction:
Today, the logistic and execution speed becomes a critical differential factor, and they are an
important weapon in obtaining advantages in front of competitors.
The companies objectives regarding grow up of logistic and fast delivery, lead to an important
volume of stock and because of this there are risks regarding excess of stock or out date stock.
The balance between logistic and operational costs, represent a factor of company success.
An important number of companies understand the impact which is given by optimization and
automation of planning the logistic chain in the performance and profitability of the business.

Stock Decision:

Logistic offer (sales order lead time OLT) and Purchase Lead time (PLT)

PLT OLT

OLT – The period of time between the moment when the customer give us the order and the date of
the delivery
PLT – the period of time between the date when the supplier receive the order and the date when the
goods are received in our stock. We need to take in consideration the fabrication time, transportation,
custom and enter to stock time.
 Stock decision:

OLT > PLT => we don’t need to keep the goods on stock
OLT < PLT => we need to keep the goods on stock

Date of Date of delivery Date of Date of delivery

customer order to customer customer order to customer

The stock decision depends of:

 Transportation costs
 Cost of products (ABC)
 Sales frequency (FMR)
 Minimum sales quantities
 Life cycle of the product
 Strategic marketing decisions
 uncertainties relating to the delivery of suppliers

Stock decision (ABC/FMR):

How do we decide if we keep on stock or not?

ABC/FMR is a classification method of the storable or non-storable items which is based on Pareto

Principle (20% of causes provide 80% of effects):

For example:
20% of items provide 80% of turnover
20% of customers provide 80% of turnover
20% storable items, represent 80% of stock
20% of efforts provide 80% of the results
ABC method is the classification of items, based on Turnover
FMR method is the classification of items, based on the
frequency of sales
ABC Classification:

This classification, divide the items in 3 categories:

A – Items which represent 80% of sales

B – Items which represent 15% of sales
C – Items which represent 5% of sales

The methodology for obtaining the classification is based

on the descending sorting of the items in function of total
turnover of the item reporting to the total company
turnover.
Cumulated Turnover/Total Turnover * 100

FMR Classification:

This classification, divide the items in 3 categories similar

to ABC method:

“F” for frequent movement, items with more

than 1 line in orders (invoices) lines per week.

‘M’ for medium movement, items with at least 1 line in

orders (invoices) lines per month or with at least 1 line
per week

‘R’ for rare movement, less than 1 line in invoices lines

per month.

Ex: in the last 12 months we had 60 lines in invoices for

a product, which mean more than 1 line per week.
That’s mean the item is class ‘F’
Stock decision (ABC/FMR matrix):

It is very important to notice that only the items which have the purchase lead time (PLT) > order
lead time (OLT) are storable and are calculated in to the stock decision

F M R
Fast moving Medium moving Slow moving items
items items
A
Sales with higher value Stockable Stockable Non-stockable
higher inventory cost Items Items items
Very high opportunity cost
B
Medium sales values Stockable Stockable Non-stockable
Medium inventory cost Items Items items
High Opportunity cost
C
Lower sales values Stockable Non-stockable Non-stockable
Lower inventory cost Items items items
Medium opportunity costs
Safety stock (SS)
 What is the role of Safety Stock
 Which are the most important stock parameters?
 How we will calculate the safety stock?

The safety stock is the necessary stock quantity for covering unexpected events. Those events
can be classified in 2 types of risk:

 Delays (from supplier, from production or from logistic)

 Market requests (Real consume>foresight)

When we calculate the safety stock, we need to take in consideration the following:

 ABC/FMR category of the product

 Purchase delivery time (PLT)
 Supply frequency
 Daily average of sales (ADU) – historical daily consume (average of the last 3-6 months)
 Daily consume foresight (anticipation)

Calculation of safety stock (SS)

SS = v * sqrt (PLT) * ADU

V = coefficient established according with ABC/FMR category

Ex 1: ADU = 40; PLT = 10; cat = AF

Solution: v = 2  SS = 2 x 3.16 x 40 = 253

Ex 2: ADU = 50; PLT = 35; cat = AM

Solution: v = 3  SS = 3 x 5.92 x 50 = 890

Ex 3: ADU = 30; PLT = 15; cat = CM

Solution: v = 5  SS = 5 x 3.87 x 30 = 580
Acquisition Formula/Supply -> How much do we need to order

After we understand and set up the safety stock, we need to know:

 When to supply (make the order to our suppliers)
 How much do we need to supply

Balance needs/resources

 When we make the calculation of supply we need to compare the needs with our
available resources for each item in part

Needs Resources

Safety stock Received stock (entered in Stock)

Open customer orders Open supplier orders
Foresight

If the needs > resources then we need to make order to supplier

How much do we need to order?

Acquisitions methods:

There are 3 main methods for determination of stock supply parameters:

1. Fix point of supply

2. Inventory management by the supplier
3. Inventory management based on Safety stock and Foresight
Supply Methods

Fix point

 IT implementation process is relatively easy

 The inventory is maintained at an pre-determined level
 Flexibility and low reactivity

Inventory management by the supplier

 Reduce the excess inventory

 Reduce of order errors
 Improve packaging rate
 Complicated process

Supply method: Fix Point

Fix Point (ROP) = SS + (ADU x PLT)

ROP
Quantity to order = AMU (monthly average consumption)

m = coefficient which depends of the ABC category of the item

m = 0.25 if item is type A
m = 0.5 if item is type B
m = 1 if item is type C

Quantity to order = 20 x 0.5 = 10pcs

Inventory management by the supplier (VMI)

 The supplier receive from customer sales and level of stock by internet
 Supplier has the visibility on each item that is in stock and on the sales volume of the
customer
 Supplier propose to customer the items and necessary quantities
 The customer place the order to supplier

Foresight (why we need foresights)

 To be able to offer the products in short time compared with usual delivery terms
 To be able to determine the correct level of stock
 To be able to anticipate trends, promotions and business cycles.
 To decrease the logistic costs

The main advantages are:

 better logistic
 Costs optimization

Without make foresights like promotions, new customers, big orders or projects, the
consequences are:

Without make foresights like promotions,
new customers, big orders or projects, the
consequences are: Suppliers will not be
able to plan the raw material acquisition
and production, the delivery time will be
increased. We will have stock outs and
will lose our customers satisfaction.
If we make foresights, then the suppliers
are able to plan their raw material,
production and they can respect the
delivery terms. We will gain satisfaction
of our customers and we can negotiate
better prices.
Recapitulation

 Delivery time:

 If OLT > PLT then we don’t need stock

 If OLT < PLT then we need stock

 ABC/FMR

 ABC method is the classification of items, based on Turnover

 FMR method is the classification of items, based on the frequency of sales
 ABC/FMR matrix – classification of what we need to keep on stock and what we don’t
need to keep n stock

 Safety stock

 Need to decide the necessary stock quantities for covering unexpected events

 Supply methods:

 Fix point vs VMI