RightChain Lots | Lot Size Optimization
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RightChain™ Lots Lot Size Optimization
How to Optimize Production, Procurement, and Shipping Lot Sizes and Frequencies
1. Lot Size Dynamics a. Lot Sizing Tradeoffs b. Lot Sizing in Time c. Lot Size Optimization d. Lot Sizing Constraints 2. Production Lot Sizes a. Economic Run Quantity b. Setup Cost Considerations c. Setup Cost Reduction 3. Purchasing Lot Sizes a. Economic Purchase Quantity b.
CONTENTS
Purchase Order Cost Consideration Purchase Order Cost Reduction
c.
4. Shipping Lot Sizes a.
Economic Shipping Quantity
5. Supply Chain Lot Sizing a. Package Lot Sizes b.
Joint, Coordinated Lot Sizing
Lot Size Dynamics
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LOT SIZE OPTIMIZATION
Purchasing Lot Sizes Production Lot Sizes Shipping Lot Sizes
ECONOMIC RUN QUANTITY
EOQ = [ (2 * SUC * FAD) / (ICR * UIV) ] 1/2
EOQ = Economic Order Quantity SUC = Setup Cost ($/order) FAD = Forecast Annual Demand (units/year) ICR = Inventory Carrying Rate (%/year) UIV = Unit Inventory Value ($/unit) Example Calculation If the purchase order cost for an item is $100, the forecasted annual demand is 900 units per year, the inventory carrying rate is 35% per year, and the unit inventory value is $50 per unit then the economic order quantity is… EOQ = [(2*POC*AD)/(ICR*UIV)] ½ = [(2 x $100 x 900)/(.35 x $50)] 1/2 = 10.14 units
ECONOMIC RUN QUANTITY
RightChain™ Lots Schedule Optimization
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RightChain™ Lots Value Proposition
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RightChain™ Lots Deviation Analysis
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LOT SIZE DEVIATION
Over Sized Lots Pharmaceutical Industry Example
LOT SIZE DEVIATION
Under Sized Lots Beverage Industry Example
LOT SIZE DEVIATION
Under Sized Lots Beverage Industry Example
39 SKUs Overbuilt at 38.5% on Average 249 SKUS Underbuilt at -51.1% on Average
Periodic Order Quantity (POQ) = Optimal Time Between Orders = Economic Order Quantity / Daily Demand Rate
Example If the economic order quantity is 30 units and the daily demand is 3 units then the optimal time between order is 30/3 = 10 days.
ECONOMIC TIME SUPPLY
Economic Time Supply (ETS) = [(2*POC)/(AD*UIV*ICR)] 1/2
Labor Training Lost Production Capacity Material Tools
PRODUCTION CHANGEOVER SETUP CONSIDERATIONS
Computer Hardware Computer Software
SIMPLIFICATION
Setup Elimination (Dedicated Lines) Focused Factories and Lines
OPTIMIZATION
PRODUCTION CHANGEOVER SETUP COST REDUCTION
Sequence Jobs to Minimize Changeover Times Schedule in Off-Peak Periods EXECUTION Minimize Brands of Machinery vs. Low-Cost Bidder Parallel Processing (pit crews)
Everything Ready (Toyota) Point-of-Use, Special Tooling
ORGANIZATION
Dedicated Personnel Practice
Wash Windshield
Point-of-Use Tooling
Re-fuel
NASCAR and PRODUCTION SETUPs
Clean Grille
Change Tires
Adjust Chassis
Purchase Order Activities and Costs • Telecommunications • Authorization • Planning • Entry
• Inspection • Follow-up • Purchasing Management • Office Space • Materials • Purchasing Information Systems • Transportation • Payment • Reconciliation
• Processing • Expediting • Receiving • Putaway • Compliance • Negotiation
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Purchase Order Cost Computation
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Process Efficiency Blanket Orders
Joint, Fixed Cycle Replenishment Scheduled Deliveries
Supplier Collaboration Supplier Rationalization Supplier Integration
PURCHASE ORDER COST REDUCTION
Vendor Managed Inventory (VMI) On-Premise Suppliers (BOSE JIT2)
Digital Purchasing
Procurement Cards E-Procurement Tracking Automation
GPS, EDI, ASNs, RF, RFID
Logistics Automation Receiving Automation Putaway Automation
Economic Order Quantity with Discount = [ (2 x POC x FAD) / (ICR x (1- d ) x UIV) ] 1/2 d = discount rate Example If the purchase order cost for an item is $300; its forecast annual demand is 1,000 units per year; its inventory carrying rate is 35% per year; its unit inventory value is $6,000; and the discount rate is 15%; what is the EOQ and what is the EOQ with the discount rate? EOQ = 16.9 EOQD = 18.3
EOQ WITH QUANTITY DISCOUNTS
EOQs with Breakpoints
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Available Storage Space Number of Orders Purchasing/Receiving can Physically and/or Technologically Process Limitations on the Amount that can be
EFFICIENT LOGISTICS QUANTITY EOQ ADJUSTMENTS
Invested in Inventory Unit Load Increments Batch Sizes Minimum Order Quantities Perishability
MORE OFTEN HIGHER FREQUENCY
LESS OFTEN LOWER FREQUENCY
Freight Costs
↑ Higher
↓ Lower
SHIPPING FREQUENCY AND LOT SIZE TRADEOFFS
Transport Admin Costs
↑ Higher
↓ Lower
TRANSPORT
Lot Size Inventory
↓ Lower
↑ Higher
Safety Stock Inventory In-Transit Inventory Lost Sales Cost Customer Satisfaction
↓ Lower
↑ Higher
↓ Lower
↑ Higher
INVENTORY CARRYING
↓ Lower
↑ Higher
↑ Higher
↓ Lower
SERVICE
RightChain™ Stops Delivery Frequency Optimization
Days
International Cosmetics Manufacturing and Distribution
RightChain™ Stops Delivery Frequency Optimization
International Cosmetics Manufacturing and Distribution
RightChain ™ Stops Delivery Frequency Optimization
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RightChain™ Stops Optimization Solution
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RightChain™ Stops Solution Map
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RightChain™ Lots Package Size Optimization Example
RightChain™ Lots Coordinated Replenishments
Purchase Cost Savings Transportation Cost Savings Ordering Cost Savings Ease of Scheduling
Coordinated Joint Replenishment Analysis for a Major Food Wholesaler
60%
5
50%
4 4 4 4 4 4 4 4 4 4
4
40%
3 3 3 3 3 3 3 3
3
30%
2 2 2 2 2 2 2
2
20%
% of Full Truckload
Truckload Assignment
1 1 1 1 1
1
10%
0%
0
25 29 6 3 2 28 23 18 20 1 4 9 30 15 17 16 14 11 13 5 26 19 21 22 24 7 12 27 10 8 SKU
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1.
What are the fallacies in the EOQ formula and how should they be corrected? How could the EOQ formula be used in determining the issue pack size used to replenish retail stores from a distribution center? What other supply chain decisions can be based on the EOQ formula? What are the business conditions, product characteristics, and vendor qualifications for which vendor managed inventory programs would be appropriate? Suppose an item’s FAD = 14,000 cases/year; SUC = $2,000 per setup; UIV = $28.50; and ICR = 35%/year. a. What is the item’s EOQ? b. If there are 40 cases per pallet, how many pallets worth is the EOQ? c. How many days worth of product does the EOQ represent? d. What is the inventory value of the EOQ? e. If there is an inventory investment cap on the item of $60,000.00, what is the ELQ? f. If there is a 20% discount rate, what is the EOQ with discounts?
2.
3.
RightChain™ Lots Exercises
4.
5.
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