RightChain Turns | Inventory Turn and Fill Rate Optimization

RightChain™ Turns How to Simultaneously Optimize Inventory Turns and Fill Rates

RightChain™ Incorporated

1

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• Customer and Supply Chain Service Policy • Safety Stock Inventory Computations • RightChain™ Turns Turn and Fill Rate Optimization • RightChain™ Turns Case Examples

Contents RightChain™ Turns Outline

• The highest fill rate that allows us to satisfy our ROA objective? • The fill rate that customers state they want with turns managed to that? • The combination that minimizes the cost of lost sales and inventory carrying? • The combination that maximizes the return on inventory investment? • The appropriate fill rate and inventory turnover combination based on industry benchmarking?

Contents Fill Rate Perspectives

Contents RightChain™ Service Analysis

Contents RightChain™ Service Insights

Business • Sales Value & Volume • Margin/Profit

Contents CUSTOMER VALUATION and SEGMENTATION RightChain™ Service assigns a value to each customer taking into account the business, strategic, and cost-to-serve valuation of the customer.

Cost-to-Serve • Forecastability • Service Requirements

Strategic • Marketplace Position • Future Growth

Contents RightChain™ Service Example

Major Chemicals Company

RightChain™ Service Optimization Example Major Semiconductor Spares Operation

Response Time (Hours)

Value Added Services

Minimum Order Quantity Consolidation

Service Segment

Customer Item Class Fill Rate

Returns Policy

Custom Custom Custom

100% Custom None 100% Custom None 100% Custom None 50% Limited 1000+ 50% Limited 500+ 0% None 100+ 50% None 5000+ 0% None 1000+ 0% None 500+

I

A - A 99.0% 24 A - B 95% 24 A - C 85% 48 B - A 97% 24 B - B 90% 48 B - C 80% 72 C - A 90% 48 C - B 75% 72 C - C 50% 96

II

III IV

Partial Partial Partial Partial Partial Partial

V

VI

VII VIII

IX

Segmented Logistics Strategy Model

Channel 1

Channel 2

Channel 3

Channel n

A

B

C

A

B

C

A

B

C

nA

nB

nC

Commodity 1 A B C Commodity 2 A B C Commodity 3 A B C Commodity n

The logistics strategy addressing customer service policy, inventory strategy, supply strategy, transportation strategy, and warehousing strategy should be segmented by channel and customer class within channel and by commodity and item class within a commodity.

nA nB nC

RightChain™ Incorporated

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Page 9

Contents Turn Rate Fill Rate Tradeoffs

Contents Supply Chain Service Optimization

Optimization Optimization is an analytical approach to develop solutions to complex problems. The “optimal” solution minimizes or maximizes the objective function while satisfying the stated constraints.

• SS = SSF x SLD • SLD = Standard Deviation of Leadtime Demand • SSF = Safety Stock Factor = f(desired customer service level) • Implies higher safety stock levels for higher customer service levels and higher demand variability

Contents The Science of Safety Stock

Contents The Science of Safety Stock

Contents The Science of Safety Stock Part II

Contents The Science of Safety Stock Part III

Contents Customer Item Segmentation

Contents Inventory Policy Cost

• consequences of shortage are severe (ex. hearts for heart transplants.) • customer represents a large portion or priority for our business • item is very popular • item has no or very limited substitutes or like items

Contents Shortage Factoring

RightChain™ Inventory Model

RightChain™ Incorporated

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RightChain™ Turns Fill Rate and Turn Rate Optimization

Inventory Carrying Rate Forecasted Demands Lead Times Unit Inventory Values Unit Selling Prices Purchase Order Cost Setup Costs Shortage Factors

Optimal Fill Rates Optimal Safety Stocks Optimal Order Quantities Optimal Run Quantities Optimal Turn Rates Optimal Reorder Points

RightChain™ Incorporated

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RightChain™ Turns Example Food and Beverage Example

RightChain™ Incorporated

Page 21

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Contents RightChain™ Turns Health and Beauty Aids

Contents RightChain™ Turns High Tech Repair Parts

Contents Empirical Service Analysis

RightFill ™ Exercises

What are the costs affected by an out of stock condition? Try to estimate those costs for a company in your group. What organization(s) are the world’s best in customer response? What do they do differently that allows them to offer such a high level of customer response? What could we do in a similar fashion? Name the channels that we serve and the ways logistics performance and practice should be differentiated in each channel. Suggest an alternate means of computing lost sales cost.

Inventory Tradeoffs

?

?

?

Recommended Economic Order Quantity (EOQ)

Total Policy Cost (TPC) at Optimal Unit Fill Rate (UFR)

How to accomplish? Recommended Unit Fill Rate (UFR)

Inventory Carrying Rate (ICR)



Purchase Order Cost (POC)



Shortage Factor (SF)  Unit Selling Price (USP)  Unit Inventory Value (UIV)  Leadtime (L) 

Forecast Annual Demand (FAD)



Forecast Error % (e) 

Cross-Filling

DC I

DC II

Primary Assignment

Primary Assignment

Secondary Assignment

If an item is stocked in four locations with a fill rate of 80% in each location, then with cross-filling, the effective network fill rate is… 1 – (0.2)(0.2)(0.2)(0.2) = 98%

Demand A

Demand B

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RightSKUs ™ SKU Valuation & Optimization

Item Profitability

$10,000.00

$8,000.00

$6,000.00

$4,000.00

$2,000.00

Profit

$0.00

1

5

9

13

17

21

25

29

33

37

41

45

49

53

57

61

65

69

73

77

81

85

89

93

97

($2,000.00)

($4,000.00)

($6,000.00)

($8,000.00)

RightSKUs™ SKU Optimization for a Major Chemical Company

Inventory Policy Cost Computation

Total Policy Cost TPC = f(ufr) +

Lost Sales Cost LSC = f(ufr)

Inventory Carrying Cost ICC = f(ufr)

x

Annual Demand AD % Demand Unsatisfied (1-ufr) Unit Selling Price USP Shortage Factor SF

Average Inventory Value AIV

Inventory Carrying Rate ICR

x x x

x

Average Inventory Level AIL

Unit Inventory Value UIV

+

Half the Replenishment Quantity EOQ/2

Safety Stock SS

SS = f(e, ufr, L)

Annual Demand AD

Inventory Carrying Rate 1/ICR

Forecast Error e

Purchase Order Cost POC

Unit Inventory Value 1/UIV

Unit Fill Rate ufr

Leadtime L

EOQ = [(2*AD*POC)/(ICR*UIV)] 1/2

Strategic Valuation Factors

Cost to Serve Factors

Business Valuation Factors

Channel-Commodity Segmentation

• Dedicated Inventory (Allocation) • Right of Refusal • Never Short on A Items • FCFS • No Backorders • Protection • Proactive Acknowledgement • On-the-Spot Acknowledgement • Delayed Acknowledgement • Partials

Contents RightChain™ Service Options

Inventory Policy Cost ™ (IPC) = Inventory Carrying Cost (ICC) + Lost Sales Cost (LSC)

• Inventory Carrying Cost = Average Inventory Value (AIV) x Inventory Carrying Rate (ICR) • Average Inventory Value (AIV) = Average Inventory Level (AIL) x Unit Inventory Value (UIV) • Average Inventory Level (AIL) = Safety Stock + Order Quantity/2 + In-Transit Inventory • Safety Stock = f (forecast error, leadtime variablity) • Order Quantity = {[2 x FAD x POC]/[UIV x ICR]} 1/2 • In-Transit Inventory = Lead Time in Days (L) x Daily Demand

• Lost Sales Cost (LSC) = Forecast Annual Demand (FAD) x Unit Selling Price (USP) x

(1 – Unit Fill Rate) x Shortage Factor (SF) • Gross Margin Return on Inventory (GMROI) = FAD x UFR x {[USP – UIV]}/AIV

Inventory Policy Cost ™ vs. Customer Service Level • Inventory Policy Cost (IPC) = Lost Sales Cost + Inventory Carrying Cost = LSC + ICC • Lost Sales Cost (LSC) = Lost Demand x Unit Price x Shortage Factor = FAD x (1-UFR) x USP x SF • Example Calculation

• If the forecast annual demand for an item is 2,400 units, the unit fill rate is 90%, the unit selling price for the item is $2.00, and the shortage factor is 20% then the lost sales cost will be • 2,400 units per year x (1-.9) x $2.00 x .2 = $96.00

• Inventory Carrying Cost (ICC) = Average Inventory Value x Carrying Rate = AIL x UIV x ICR • Example Calculation

• If the average inventory level for an item is 10,000 units, the unit inventory value is $36.00, and the inventory carrying rate is 20% per year then the inventory carrying cost will be • 10,000 units x $36.00 x .2 = $72,000

• Inventory Policy Cost = [FAD x (1-UFR) x USP x SF] + [{SS + EOQ/2 + (L x FAD)/300} x UIV x ICR] EOQ = [(2 x POC x FAD)/(UIV x ICR)] 1/2 SS = f (forecast error, UFR, L)

Leadtime Safety Stock = Average Shipped per Day * (Maximum In-Transit Time - Average In-Transit Time)

Contents Leadtime Safety Stock

Example

• Shipping 200 units per day • Maximum In-Transit Time = 5 days • Average In-Transit Time = 2 days • Leadtime Safety Stock = 200 units/day * (5 days - 2 days) = 600 units