DAO2703 OTM / DSC2006 OM

Week 9
.
MA NAGI NG I NV ENTORI ES
I N S U PPLY C H A I NS
Why is inventory management important?
In addition to panic buying, we have seen all kinds of supply chain disruptions

How to ensure supply chain resilience

For example, how to ensure food security in Singapore?

◦ Stockpile (e.g., Fairprice in Singapore) – what to stock and how many to

stock? (That's inventory management!)
◦ Understanding uncertainty &supply chain characteristics are the keys
◦ Understanding the basics – no uncertainty cases
◦ Understanding how to manage uncertainty

The importance of knowing the supply chain characteristics

Global Manufacturer with a Factory in SG
Let’s take a look at the data set sample on LumiNUS…
re-order point Jan 13 _Report_Sample.xls

• Can you save S$2.7-2.8 Million of inventory cost out of a S$4

million system in 9 months?
→ Yes, you can! That’s one learning objective for this course!
Global Manufacturer with a Factory in SG
Let’s take a look at the data set sample on LumiNUS…
re-order point Jan 13 _Report_Sample.xls

Key Concepts to Learn in this Case Study:

(1) Importance of understanding the data you have and data quality
(2) Importance of knowing the supply chain characteristics
(3) Importance of knowing when to apply what Replenishment Policy
(single or multiple period? is there demand uncertainty? How
frequently the system can review the inventory position?), and what
parameters to use considering (1) and (2) above
 Key Concepts to Learn in this Case Study:
re-order point Jan 13 _Report_Sample.xls

(1) Importance of understanding the data you have and data quality
Does the lead time "data" include transportation of two months? (Yes!)

(2) Importance of knowing the supply chain characteristics

How to estimate demand? Any issues if we simply use the bill of materials from the
production line as "demand" in our inventory replenishment policy formulation?
(Yes, because the supply chain in this case study has supply sources not only from
direct orders from the company's suppliers in the USA, but also from their customers'
returned components!)

(3) Importance of knowing when to apply what Replenishment Policy

(single or multiple period? is there demand uncertainty? How frequently the system
can review the inventory position?), what parameters to use considering (1) and (2)
 The Multi-Period Inventory Model
We consider a single product inventory model (In Week 9 we
will introduce models which can handle multiple products)
We assume that the demand is random and follows a normal distribution
Ordering cost has two components: (1) Fixed ordering cost K per order + (2) a variable
ordering cost C which is proportional to the amount ordered.
Inventory holding cost is charged per item per unit time → use h to denote
We assume that if an order arrives and there is no inventory, the order is lost
The distributor has a required service level. This is expressed as the likelihood that the
distributor will not stock out during lead time.
Intuitively, how will this affect our policy?
When there are multiple products in
a supply chain, how to Make Good
Use of Limited Information?
How to Make Good Use of Limited Information?

Better Forecasting Techniques (Analytics)

Recall the three principles of all forecasting techniques:
◦ Forecasting is always wrong
◦ The longer the forecast horizon, the worse is the forecast
◦ Aggregate forecasts are more accurate
How to Make Good Use of Limited Information?

Since forecasting is always wrong, what else can we do?

1. Flexibility (A Key concept in Operations Management)
◦ Supply Chain Example: What to do when your supply and demand
do not match? Build capability in:
◦ Demand shaping: NUS juice stall surprise, etc..
◦ Supply shaping: flexible product, etc..
Flexible Product Example
 Process Flexibility Defined
Process Flexibility - A firm's ability to provide varying goods or services,
using different facilities or resources
Example:
◦ A firm with 2 facilities to make 2 products for the market
◦ Compare dedicated and flexible systems to understand the
value of process flexibility
 Small Systems
Dedicated System Flexible System

Facilities Products Facilities Products

100 1 1 50 100 1 1 50

100 2 2 150 100 2 2 150

⚫ Extra demand for ⚫ Can use extra

Product 2 is lost. capacity from Facility
⚫ Extra capacity from 1 to meet the extra
Facility 1 is wasted. demand for Product 2

This gain constitutes the Value of Process Flexibility.

 What to do with larger systems?
Challenge and benefits of sparse process structure
10 links:
16 links 20 links 100 links:
No flexibility
Total flexibility
Plant Vehicle Plant Vehicle Plant Vehicle Plant Vehicle

1 A 1 A 1 A 1 A

2 B 2 B 2 B 2 B

3 C 3 C 3 C 3 C

4 D 4 D 4 D 4 D

5 E 5 E 5 E 5 E

6 F 6 F 6 F 6 F

7 G 7 G 7 G 7 G

8 H 8 H 8 H 8 H

9 I 9 I 9 I 9 I

10 J 10 J 10 J 10 J
 What to do with larger systems?
Challenge and benefits of sparse process structure

Challenges
◦ When the system is LARGE, that is, when M and N are
large
◦ When there are M plants and N products
 Process Flexibility
Consider a 10-product, 10-plant example.
Each plant has capacity of 100 units.
Demand for each product follows a truncated normal
distribution with mean 100 and SD 40, and minimum and
maximum of 20 and 180 units.
Product demands are independent.
Simulation is used to determine expected capacity utilization
for each product assignment configuration.
 Process Flexibility
Consider first the cases of no
flexibility and total flexibility.
Then, observe the incremental
benefits of adding one link at a
time.
Adding 10 links achieves most
of the benefits of total
flexibility
Process Flexibility

Total Flexibility System

Process Flexibility

Chaining System
When M=N and N approached infinity
With commonly seen demand variability, the ratio of the expected
sales from chaining system to the total flexibility system is
◦ 89% for uniform distribution
◦ 96% for normal distribution
Note that the set-up cost for Chaining system is almost ZERO
compared with the total flexibility system!
◦ Chaining system has 2N links, and
◦ total flexibility system has N*N links
→ Ratio of set up cost of chaining system to the total
flexibility system = 2/N (~ 0 when N is big)
Robust Structure that works for most demand scenarios
Robust Structure that works for most demand scenarios

22
Extensions – When Number of Plants
is Different from Number of Products
Expansion Ratio Heuristics (Example)
3
9
5

8
6

6
Reference Readings:
Chapter 4
Process flexibility: design, evaluation and applications, M. C.
Chou, C. P. Teo and H. Zheng (2008), Flexible Services and
Manufacturing Journal, 20(1-2), 59-94,
Design for Process Flexibility: Efficiency of the Long Chains
and Sparse Structure, M. C. Chou, C. P. Teo, G. Chua and H.
Zheng (2010),Operations Research, 58(1), 43-58
Process Flexibility Revisited: the Graph Expander and its
Applications, M.C. Chou, G. Chua, C. P. Teo and H. Zheng
(2011),Operations Research