MIM 544Global Cases in Supply LogisticsClass Four Inventory

AgendaCurrent EventsCisco & Altera Inventory BubbleInventory & VariancesScientific Glass Case AnalysisStudent Analysis

Three ArticlesChina feel global-market painLabor forces Foxconn to shut ShenzhenIP challenge Contest of the CenturyChina India trade has increased 230X since 1990; $60BWind energy - NIMB

INVENTORY COSTSIs inventory an asset?Costs to acquireOrdering costsSetup costsCarrying costsStock-out costsOpportunity Cost of CapitalLO 1

Inventory Carry CostsInventory 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 Time0ENLI009Inventory days + Days sales outstanding Average payment of supply period for materialsInventory0OPPLAN012Forecast Accuracy0OPPLAN008Production Lead Times0OPMAKE017Perfect Order Fulfillment0OPDEL061Faultless Invoices 0OPDEL023Scheduled Achievement0OPMAKE022Delivery Performance to Scheduled Commit Date0OPDEL019Returns0OPDEL067Scrap0OPMAKE023Fill Rates0OPDEL025Order Fulfillment Lead Time0OPPLAN030Machine wait time0OPMAKE007Yield0OPMAKE033Number of Supply Sources0OPSO012Total Source Lead Time0OPSO0410ENLI015Sales0ENPR0260ENLI0030OPPLAN017

Variances PPV & Standardsunfavorable variance = is reduced from the budgeted expectationfavorable variance = is increased from budgeted expectationWhen 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 / AlteraYr. 2000 Cisco wrote off $2.25BAlteras answer? A new PostponementCapacity utilization 2000 (97%) 2001 (66.2%) What should it be?What is happening now in component lead-times? Is it real?Is VMI the real answer?Value drops 1.3% per month

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

Scientific Glass Inventory CaseWhat do we know?Dedicated Sales force Trunk stock 32*$10K93% fill-rate, 2 week lead-timeOverage cost .6%. BO 10% GM.Incentive is on fill-rate to 99%8 DCs * $750K + 2 new ones plannedSales forecasted to grow 20%; Capacity requested to support = $10M

Scientific Glass Inventory CaseWhat do we know?Warehouse Inventory DC is $.4 / IlbsInventory accuracy was declining what happens?

Scientific Glass Inventory CaseWhat do we know?Policy changes proposedCapex is low 14% ($1.4M..)Turns were 625% is Raw + WIP; rest is FGI (good?)Balance sheet Inventory growth > SalesCash 6%

Scientific GlassCase 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 GlassAssessment alternatives: 5 questionsImplement proposed policy changes?Consolidate warehouses?Outsource warehousing?Reduce the target total order fill-rate?Other considerations?

Scientific GlassHelpful Hints:What are the Options & savings with each?Fill rate lowered & trunk stock eliminatedOne Warehouse vs. logistics costsOutsource Combination of the above?What about Cash????

Thoughts20% increase in orders = .46 cogs * %increase in sales * typical months of inventory = $1.75MExpanding DCs *2 = $2M inventoryIn transit inventory adds $$$95% Fill-rate because only 10% of orders are BO is really rather small pending the SKUTrunk stock is negligible ($320K)Warehouse consolidation = 40%1 DC=15% cost = 15% value of inventory