MIM 544 Global Cases in Supply Logistics Class Four Inventory

Agenda
Current Events Cisco & Altera Inventory Bubble Inventory & Variances Scientific Glass Case Analysis Student Analysis

Three Articles
China feel global-market pain Labor forces Foxconn to shut Shenzhen IP challenge Contest of the Century China India trade has increased 230X since 1990; $60B Wind energy - NIMB

LO 1

INVENTORY COSTS
Is inventory an asset? Costs to acquire Ordering costs Setup costs Carrying costs Stock-out costs Opportunity Cost of Capital

Inventory Carry Costs

Inventory Carrying rate example: total inventory = $34,400 $800K Storage $400K Handling $600K Obsolescence $800K Damage $600K Administrative $200K Loss $3,400 Total Divide costs by Avg Inventory $3,400 / $34,400 = 10% Add: Opportunity costs of Capital 9%, Insurance 4%, Taxes 6% =19%

Total Inventory carrying rate is 29%

Cash-to-Cash Cycle Time

0ENLI009

Inventory days of supply

0OPPLAN017

Days sales outstanding

0ENLI015

Average payment period for materials

0ENLI003

Sales
0ENPR026

Inventory
0OPPLAN012

Returns
0OPDEL067

Faultless Invoices Order 0OPDEL023 Fulfillment Total Source Lead Time 0OPPLAN030 Lead Time
0OPSO041

Perfect Order Fulfillment Fill Rates 0OPDEL061

0OPDEL025

Number of Supply Sources

0OPSO012

Forecast Accuracy
0OPPLAN008

Scheduled Achievement
0OPMAKE022

Production Lead Times

0OPMAKE017

Yield
0OPMAKE033

Delivery Performance to Scheduled Commit Date

0OPDEL019

Machine wait time

0OPMAKE007

Scrap
0OPMAKE023

Variances PPV & Standards

unfavorable variance = is reduced from the budgeted expectation favorable variance = is increased from budgeted expectation When is cost reduction a bad thing? Note: Do not interpret directly as bad or good behavior on the part of management; the goal is to be on target.

Cisco / Altera
Yr. 2000 Cisco wrote off $2.25B Alteras answer? A new Postponement Capacity utilization 2000 (97%) 2001 (66.2%) What should it be? What is happening now in component leadtimes? Is it real? Is VMI the real answer? Value drops 1.3% per month

Scientific Glass Inventory Case

What we know: - Exceeded their target debt/capital of 40% - $2B market; 5% share - High volume / low mix? 3000SKUs - Niche player, custom SKUs, competitive pressure. - Does the 3-6 month sales cycle matter to SCM? - Inventory growing faster than sales - Emphasis on short lead-times & customer satisfaction

Scientific Glass Inventory Case

What do we know? - Dedicated Sales force Trunk stock 32*$10K - 93% fill-rate, 2 week lead-time - Overage cost .6%. BO 10% GM. - Incentive is on fill-rate to 99% - 8 DCs * $750K + 2 new ones planned - Sales forecasted to grow 20%; Capacity requested to support = $10M

Scientific Glass Inventory Case

What do we know? - Warehouse Inventory <60days; 120K orders processed - Used Min-Max system for each SKU - Period expenses of 1% of cogs Too much? - Freight Factory -> DC is $.4 / Ilbs - Inventory accuracy was declining what happens?

Scientific Glass Inventory Case

What do we know? - Policy changes proposed - Capex is low 14% ($1.4M..) - Turns were 6 - 25% is Raw + WIP; rest is FGI (good?) - Balance sheet Inventory growth > Sales - Cash 6%

Scientific Glass
Case Questions: What are the problems facing SG in January 2010? How much external funding will have to be raised in 2010 to finance ops? How so SGs problems illustrate the relationship between the number of warehouses and inventory levels? What are the alternatives & how do you evaluate those? What actions should Ava propose?

Scientific Glass
Assessment alternatives: 5 questions 1. Implement proposed policy changes? 2. Consolidate warehouses? 3. Outsource warehousing? 4. Reduce the target total order fill-rate? 5. Other considerations?

Scientific Glass
Helpful Hints: 1. What are the Options & savings with each? 1. Fill rate lowered & trunk stock eliminated 2. One Warehouse vs. logistics costs 3. Outsource 4. Combination of the above? 5. What about Cash????

Thoughts
-20% increase in orders = .46 cogs * %increase in sales * typical months of inventory = $1.75M -Expanding DCs *2 = $2M inventory -In transit inventory adds $$$ -95% Fill-rate because only 10% of orders are BO is really rather small pending the SKU -Trunk stock is negligible ($320K) -Warehouse consolidation = 40% -1 DC=15% cost = 15% value of inventory