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Inventory Management Case Study: Steel Works Inc. Presented by: Waqas Iqbal & Ci Chao

Inventory

Management

Case Study: Steel Works Inc.

Presented by: Waqas Iqbal & Ci Chao

Company Background

Founded in 1980, USA, by 3 material scientists from MIT

A manufacturer of

Custom Use Steels Custom Products Division Specialty Use Steels Specialty Products Division

Currently employs more than 2,500 people at 5 different locations

• • • Company Background Founded in 1980, USA, by 3 material scientists from MIT A

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Current Issues

Inventory levels are extremely high !!! Customer service level is the worst !!!

Customers are going to competitors losing market share

Sales are dropped 30% !!! Expenses are up 25% !!!

CEO CEO wants wants to to know know how how to to fix fix all all
CEO CEO wants wants to to know know how how to to
fix fix all all these these problems problems in in 1- 1-
week week
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• • • • • Current Issues Inventory levels are extremely high !!! Customer service level

Data Collection & Analysis :

Custom Product Division:

General Strategy :

Operates in 3 manufacturing plants, located near R&D

centers and several warehouses, to serve West, Midwest,

and Eastern regions of the U.S. Customers

Develops under contract for a single customer, and sale exclusively to that particular customer

Data Collection & Analysis : Custom Product Division: • General Strategy : – Operates in 3

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Data Collection & Analysis :

Custom Product Division:

Negotiates with that customer to allow to sell the product to anyone by the time the product is no longer leading-edge, with premium added

Data Collection & Analysis : Custom Product Division: Negotiates with that customer to allow to sell

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Data Collection & Analysis

Custom Product Division:

Custom Products

10% 90%
10%
90%
  • Sold to only one customer

  • Sold to more than one customer

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Data Collection & Analysis

Custom Product Division:

Response to the question “Why the inventory levels are so high?” as follows;

“We’ve got to keep our customers happy. Customers aren’t satisfied when you tell them

that they to wait 3 weeks for delivery! We

listened to that corporate

inventory reduction

mandate in 1991 and cut our inventories back 20

percent and we were running out of product every week!”

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Data Collection & Analysis

Specialty Product Division:

General Strategy :

Operates in 3 plants with 6 different product lines

Exploit economies of scale in production

Rely on the logistics network to distribute products

Mainly manufactures product families in the same plant

to minimize manufacturing costs

Generates 67% of the company’s total revenue

Specialty Division’s largest customer brings 10% of the company’s total revenue

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Data Collection & Analysis

Specialty Product Division:

Profile of Specialty Products Customers (approx. 130 customers)

5 18 107
5
18
107
  • Big Customers (> $25mm) : 15% of total revenue

  • Small Customers (< $1mm)

  • All Others

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Data Collection & Analysis

Specialty Product Division:

Demand Variation in Specialty Product (approx. 120 products)

20% 80%
20%
80%
  • C.V. > 0.5

  • C.V. < 0.5

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Data Collection & Analysis

Specialty Product Division:

Suggests that the manufacturing is to be blamed for not having any steel in the warehouse to ship

MF G
MF
G

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Data Collection & Analysis

Customer Service Level:

Customer Service Level

30% 70%
30%
70%
  • Scheduled to be shipped from stock within 48 hours

  • Canceled by the customer at the time of entry / Placed in a backorder file

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Consulting

Feasible solution(s) recommended by logistics consultant

Discontinue all slow-moving products that are either

rarely sold of never sold at all, and focus on high margin

& volume products

Use least squares regression to predict demand

Consolidate warehouses : fewer warehouse = less

inventory

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Reality Sets In

Conflicts to the consultant’s solutions:

Discontinue all slow-moving products that are either rarely sold of never sold at all, and focus on high margin & volume products

“Most important customers buy those products”

Use least squares regression to predict demand

80% of specialty products fall in “High

Volatile Category” (C.V. > 0.50)

Reduce warehouses

Longer leadtime, maybe cost more by added

transportation costs

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Other Provided Data of Specialty Products

Monthly Sales of DURABEND R12 (SKU # S0121958):

Other Provided Data of Specialty Products Monthly Sales of DURABEND R12 (SKU # S0121958): 15
Other Provided Data of Specialty Products Monthly Sales of DURABEND R12 (SKU # S0121958): 15

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Other Provided Data of Specialty Products Monthly Sales of DURABEND R12 (SKU # S0121958): 1,600 1,400
Other Provided Data of Specialty Products
Monthly Sales of DURABEND R12 (SKU # S0121958):
1,600
1,400
1,200
1,000
800
Demand (thousands units)
600
400
Customer ID 445
Customer ID 444
Customer ID 195
Customer ID 147
Customer ID 223
Customer ID 194
200
-
Other Provided Data of Specialty Products Monthly Sales of DURABEND R12 (SKU # S0121958): 1,600 1,400

Month

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,

Other Provided Data of Specialty Products

, Other Provided Data of Specialty Products 17

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Other Provided Data of Specialty Products , DURABEND R10 DURABEND R12 90.00 1,800.00 80.00 1,600.00 70.00
Other Provided Data of Specialty Products
,
DURABEND R10
DURABEND R12
90.00
1,800.00
80.00
1,600.00
70.00
1,400.00
60.00
1,200.00
50.00
1,000.00
40.00
800.00
30.00
600.00
20.00
400.00
10.00
200.00
-
-
1
2
3
4
5
6
7
8
9
10
11
12
1
2
3
4
5
6
7
8
9
10
11
12
Demand
Avg. Inventory
Demand
Avg. Inventory
DURABEND R15
3,500.00 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 500.00 - 1 2 3 4 5 6 7 8
3,500.00
3,000.00
2,500.00
2,000.00
1,500.00
1,000.00
500.00
-
1
2
3
4
5
6
7
8
9
10
11
12
Demand
Avg. Inventory

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Our Recommended Solution(s)

Solutions for Customer Division:

Since most of the custom products sell exclusively to only one particular customer, to reduce the high inventory level, yet service level is maintained,, the company should negotiate with each customer to use “Demand Pull Ordering” which its production lead time matches with the customer’s required date of delivery.

WIN – WIN SITUATION
WIN – WIN
SITUATION

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Our Recommended Solution(s)

Solutions for Specialty Division:

Customers’ Forecast and Forecast’s Follow-Up (to manage products in a high volatile category)

Centralized Computer-Based System

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Discussion Questions

a) Based on the spreadsheet data, characterize Steel Works’

products?. About Steel Works’ customers? Give your answer and

the information in the case what does this suggest?

Ans: Steel works has two types of products; Custom Products

and Specialty Products. It contains following range;

Durabend R12

Durabend R10

Durabend R15

Durabend R23

Customers: Steel works has 130 customers and 120 products in

specialty division.

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Discussion Q uestions

b) What does the coefficient of variation tell us? Can you

determine the coefficient of variation for Durabend and DuraFlex

product lines?

Ans: In probability theory and statistics, the coefficient of

variation (CV) is a standardized measure of dispersion of a

probability distribution or frequency distribution. It is defined as

the ratio of the standard deviation to the mean.

CV for Durabend: 5.25

CV for DuraFlex: 5.62

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Discussion Questions

c) How much inventory has steel works been holding? How

much would they have been holding?

Ans:

Discussion Questions c) How much inventory has steel works been holding? How much would they have

demand demand

monthly monthly

maximum maximum

equal equal to to

base base stock stock

so so might might set set

very very lumpy, lumpy,

DF DF R23 R23 are are

DF DF R15 R15 and and

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Discussion Questions

d) Although no data is given for custom products division, are

there any obvious opportunities that are suggested by the

information in the case?

Ans:

Discussion Questions d) Although no data is given for custom products division, are there any obvious

Why Why is is actual actual

service service so so

bad? bad?

Not Not enough enough

Item Item Available Available

Discussion Questions d) Although no data is given for custom products division, are there any obvious

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