steel works
TRANSCRIPT
Inventory ManagementInventory Managementand Risk Poolingand Risk Pooling
Group: 3Group: 3
Steel Works, Inc.Steel Works, Inc.
Gary Lemming
Head of Steel Works, Inc.New Centralized logistics group
“Our inventory levels are ridiculous!”
“Our customer service is the worst in the
industry”
“Sales are down 30% and expense are up 25%”
“Our best customer telling me they’re going
to competitors”
Steel Works, Inc.
What is the objective?• Stay in business!
– Grow business?– Improve customer satisfaction? How?
• Minimize inventory cost– What are components of cost?– How measured?
• Provide high level of customer service– How high?– How measured?
Background• Annual sales of $400 Million
• Employs 2,500 people at 5 locations
• Its two divisions Custom division
Develop products for single customer Specialty division
Sell custom products to other at higher price
Steel Works Inc.
Steel Works Inc.
• Rapid growth $ 133 MM• A customer per product• Very high margins• High service level• 3 plants, co-located with R&D center• Each product produced at a single plant
Why the inventory levels were so high?
We’ve got to keep our customers happy
Steel Works Inc.
• Rapid growth $267 MM• 6 product families• 3 plants, each producing 2 pro.
families (economies of scale)• 130 customers, 120 products• Few big customers• Highly volatile demand• High service level
Steel Works Inc.Senior logistics analyst
Maria “ It’s mess, 80% of product
fall in highly volatile
category”
Maria “ It’s mess, 80% of product
fall in highly volatile
category”
Forecasting expert
custom has a lot of products Specialty has 130 customers for some 120 product
I can’t even keep track!!
custom has a lot of products Specialty has 130 customers for some 120 product
I can’t even keep track!!
Consultant Recommendation• Drop low volume
products (low sales)• Improve statistical
forecasting • Consolidate warehouses
Staff Reaction:
Won’t work! Why?
What Does Data Tell You? cv
DB R10 15.5 13.2 0.85
DB R12 1008 256 0.25
DB R15 2464 494 0.20
DF R10 97 92.5 0.95
DF R12 18.5 11.4 0.62
DF R15 55 80 1.46
DF R23 35.5 45.9 1.29
Total demand for each month
What Does Data Tell You?
• Durabend R12: One customer accounts for 97% of demand
• 7 products: High volume (2) is not very volatile Low volume (5) is very volatile
How Much Inventory Should You Expect?
• Assume base stock model with periodic review
• Review period = r = ?• Lead time = L = ?
Cycle stock
Saf. stock
E[I] Act. Inv.
DB R10 15.5 13.2 8 26 34 72
DB R12 1008 256 504 510 1014 740
DB R15 2464 494 1232 990 2222 1875
DF R10 97 92.5 49 185 234 604
DF R12 18.5 11.4 9 23 32 55
DF R15 55 80 28 160 188 388
DF R23 35.5 45.9 18 92 110 190
1848 1986 3834 3824
Assumes r = 1; L=0.25; and z = 1.8
Cycle stock = r /2 Safety stock = z r+L
What are the Opportunities at Custom?
• Combine production and inventory for common items, e. g. DF R23
• Produce monthly: reduce setups by half and pool safety stocks
• Produce twice a month: same number of setups but cut cycle stock and review period in half
Note!• How firm cope with huge variability in customer
demand.• Relationship between service & inventory level• Impact lead time (variability) on inventory level• Effective inventory management policy• Suppliers contracts (improve supply chain
performance)