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Optimize the supply chain of a major office equipment / automation company

By: Zhimin Mao, School of Business


Introduction:
The object of this study is to optimize the supply chain of a major office equipment / automation company. Supply chain encompasses all activities associated with the flow and transformation of goods from the raw materials stage, through to the end user, as well as associated information flows (Handfield and Nichols, 1999). One of the major drivers of supply chain performance is considered to be inventory management. Changing inventory policies can dramatically alter the supply chains efficiency and responsiveness (Chopra and Meindl, 2001). However, managing inventories in supply chains is typically difficult, and may have a significant impact on customer service level and system-wide costs (SimchiLevi, Kaminsky and Simchi-Levi, 2003). Currently, the company considered in this study is holding extra inventory, resulting in a significant inventory carrying costs. This project will focus on developing different inventory management models to optimize this companys supply chain performance. The supply chain network considered consists of: Three manufacturing facilities in Rochester (NY), Oklahoma City, and Oakville (Ontario). Seven major supply distribution centers (SDCs) in New York, San Francisco, Los Angeles, Atlanta, Chicago, Dallas, and Washington D.C.

Thirteen smaller regional distribution centers (XSCs) in Salt Lake City, Seattle, St Louis, Indianapolis, Detroit, Tampa, Denver, Kansas City, Houston, Phoenix, Puerto Rico, Minneapolis, and Hawaii.

Methodology:
The following notation is used to describe the inventory management models utilized: AVG: Average demand L: Lead time Z: Desired customer service level STD: Standard deviation of demand STDL: Standard deviation of lead time Mod Pack: Lot size

Year of 2007, E- business Supply Chain Management, Mentor: Farzad Mahmoodi, Presentation

Three inventory management models were utilized to conduct the analysis depending on the variation in demand and lead times at various manufacturing and distribution facilities: Model 1: Demand Variable, Lead Time constant Safety Stock = Z x STD x (L)0.5 Average Inventory= Safety Stock +(L x AVG)/2 + (Mod Pack-1)/2 Model 2: Demand Variable, Lead Time Variable Safety Stock = Z x L x ( STD)2+ (AVG)2(STDL)2)0.5 Average Inventory= Safety Stock +(L x AVG)/2 + (Mod Pack-1)/2 Model 3: Demand Variable, Lead Time Variable- Multi Echelon Safety Stock= Z x ((AVGLe)STD2+AVG2 x (STDLe)2)0.5 Average Inventory= Safety Stock +(L x AVG)/2 + (Mod Pack-1)/2

Results:
The models were used to determine each distribution centers optimal levels of safety stock and average inventory. The results indicated that safety stocks were being held at wrong locations. For example, the distribution center at San Francisco was holding too much safety stock while New York and Cerritos were holding too little. Also, most of the XSCs need to carry more safety stocks due to the excessive transportation time variance, indicating an important area for improvement. The models also showed that wrong amount of average inventories were being carried at the wrong location, at different times of the year. For instance, the distribution center at Chicago was holding too much inventory at the end of the year while too little during the rest of the months. This may be caused by the push strategy used by the manufacturing facilities at the end of each year. In summary, the models resulted in recommending optimal levels of safety stock, average inventory, and reorder points at all 20 distribution centers for various products. Furthermore, the models optimized the

Year of 2007, E- business Supply Chain Management, Mentor: Farzad Mahmoodi, Presentation

location and the amount of safety stocks in the manufacturing facilities by utilizing process improvement techniques, as well as push-pull strategies. The recommendations are being implemented since they result in significantly lower inventory costs while maintaining customer service levels (by having the right mix of inventory at the right location, and at the right time).

References:
William, S. (2005) Operations Management (8th Ed). McGraw- Hill/Irwin David, S; Philip, K; Edith, S. (2003) Designing & Managing The Supply Chain: concepts, strategies & case studies. (2nd Ed) McGraw- Hill/Irwin Sunil, C; Peter, M.(2001) Supply Chain Management: strategy, planning and operation. Prentice Hall

Year of 2007, E- business Supply Chain Management, Mentor: Farzad Mahmoodi, Presentation

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