Distribution Inventory Management

Semester-IV IBS, Ahmedabad

Bharat Kantharia

Distribution Inventory Management

Inventory/Storage/Distribution Locations Factory Warehouse Regional Distribution Center Local Service Center/ Retailer Customer Arborescent (Spreading out) systems / Coalescent (Converging) Systems/ Series systems

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Logistics Network

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Process Views of Cycles

Customer Order Cycle : Customer / retailer interface
Customer Order Dispatch Goods Receive Payment

Replenishment Cycle : Retailer /Distributor Interface

Distribution/Replenishment Order Generate Order Receive Goods at Warehouse

Manufacturing Cycle : Distributor/ Manufacturer Interface

Generate W.O/M.O Manufacturing OperationsReceive Finished Goods @ Factory W/H

Procurement Cycle : Manufacturer / Supplier Interface

Factory Order or Purchase Order Manufacturing Operations@ Suppliers Receive raw materials/Semi-finished/ Sub-assembly at In-coming Stores

Echelon Inventory Model

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 Echelon inventory (Distributor) = Inventory on Hand (Distributor) + all the inventory in transit to + in stock at the retailers Echelon Inventory (Manufacturing) : For a low level inventory item, the quantity that exists under its own identity, as well as any quantities existing as consumed components of parent items, parents of parent items must be accounted for Echelon inventory position = echelon inventory at the warehouse + qty ordered by the warehouse which is not received qty backordered

Echelon Inventory & Echelon Position

Echelon Inventory Model

For each retailer, Reorder point s & order-up-to level S are calculated. Similarly reorder point s & order-up-to level S are calculated for the warehouse. Distributor/Warehouse controls echelon inventory position; i.e. whenever inventory position at distributor/warehouse is below s, order is placed to raise echelon inventory position to S.
Reorder point s = Le * AVG + z * STD * SQRT( Le) Where Le = echelon lead time ( between retailers & warehouse plus between warehouse & supplier) , AVG = average (aggregate) demand across all STD = std. deviation of aggregate demand across all retailers
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Bullwhip or Whiplash Effect

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Factors contributing to increase in Variability in the Distribution

Demand Forecasting : Traditional Inventory Management technique ( Reorder point [ Safety Stock + Avg. Lead Time Demand] & Order-upto level [ Reorder point + Economic Order Quantity ] or min-max policy) leads to stocking basis demand variability. Lead Time : Increase in variability gets magnified with increasing lead times. All calculations of Average Demand or Standard Deviation of demand include the Lead Time as a factor. Hence any change in Lead time leads to change in Safety Stock & Average Demand & Order Quantity calculations. It leads to increase in variability.
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Factors contributing to increase in Variability in Distribution

Batch Ordering : In Min-Max policy due to batching (EOQ), there would be an order for EOQ followed by no order & then again EOQ. Due to this reason supplier finds distortions / high variations in orders. Batch ordering may include Inventory Transportation (FTL) tradeoff. Quarterly or Annual Target sales also may lead to large or clubbing of batch quantities. Price Fluctuations : Retailers or Distributors create artificial stocks to take advantage of price fluctuations. This may be due to promotions or discounts.
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Factors contributing to increase in Variability in Distribution

Inflated Orders : Inflated or panic ordering due to shortages tend to magnify the variability. After the period of shortages; normal or standard orders are placed. This leads to variability or distortions in demand estimates. Lack of Information availability/sharing Rationing or Shortage Gaming : Rationing schemes to allocate limited production in proportion to retail orders or some other criteria lead to magnification of bullwhip effect Each stage taking own local decisions (fragmentation of SC Ownership) & unable to view impact on other stages or lack of trust on SCM partners
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Insights on Value of Centralized Information In Centralized Supply Chain , variance of orders grows additively in the total lead time, while for decentralized supply chain , variability of orders increase in multiplicative manner Centralized demand information can significantly reduce the Bullwhip effect but will not eliminate it.

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 Quantify the increase in variability that occurs at every stage Consider a two stage supply chain with retailer who observes direct customer demand & places an order on the manufacturer. For periodic review policy , retailer follows: Order Point & Order-up to policy for every period Order-up-to point = L*AVG + z* STD * SQRT(L) For period t & moving average forecast technique orderup-to point yt = t L + z * SQRT(L) * St Where t & St are estimated average & standard deviation of daily customer demand at time t.

Quantifying the Bullwhip Effect

 SC Element following simple Moving Average Forecasting For p observations of customer demand Di in period i t = ( t-1i=t- p Di) / p & Standard deviation St can be worked out as per following St = SQRT(t-1i=t- p (Di - t ) 2 / (p-1)) Retailer has to calculate new mean & standard deviation for every period based on p latest observations. Hence target inventory also will change every period Var (Q)/ Var(D) >= 1 + 2L/p + 2L2/p2 Where Var(D) is variance of customer demand for retailer & Var(Q) is the variance of orders placed by retailer on the manufacturer

Quantifying the Bullwhip Effect

Impact of Centralized Information on Bullwhip Effect

In centralized demand information supply chain, we provide the mean demand information from retailer (basis the customer demand) to each stage in the supply chain. Each stage follows order-up-to policy based on this mean demand. Var(Qk)/Var (D) >= 1 + 2* ki=1Li / p + 2* (ki=1Li)2 /p2 Where Li is lead time between stage i & i+1 Thus we see that the variance of the orders placed by a given stage of a supply chain is an increasing function of the total lead time between that stage & the retailer. It implies that variance of the orders becomes larger as we move up in the supply chain i.e. orders placed by the second stage of the supply chain are more variable than the orders placed by the retailer.
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Decentralized Demand Information

In this case retailer does not make its forecast demand available to the other stage of the supply chain Var(Qk)/Var (D) >=ki=1 [1+2Li/p + 2L2i/p2]

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Comparison for Variability in Centralized Vs Decentralized Systems

k is the stage in Supply Chain & Li =1 for each i

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Methods to cope with the bullwhip effect

Reducing uncertainty :By centralizing the demand information or sharing demand information at retailers; bullwhip effect can be reduced. Thus uncertainty is reduced. Reducing variability: By reducing the variability inherent in the customer demand process, we can reduce the variability across the supply chain. By offering Every Day Low Pricing (EDLP) or consistent pricing policy instead of Regular Price with periodic price promotions, variability in the Customer Demand can be significantly reduced
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Methods to cope with the bullwhip effect

Lead-time reduction: Lead times have significant impact on the variability at each stage of the supply chain. Lead times include two components : 1) order lead times (time to produce & ship) & information lead times (processing times). Both can be reduced by cross-docking & electronic data interchange (EDI) respectively. Strategic Partnerships: Basis strategic partnerships; customer demand & inventory information may be shared to enable the vendor (manufacturer) managed inventory (VMI) lying with the customer & avoid bullwhip effect entirely.
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Effective Forecasts
Forecasts are normally based on the analysis of the past sales by the retailer. However, future customer demand is affected due to
promotions, pricing innovation in the product.

All these factors are under control of different entities like competitors, retailers, wholesalers & manufacturers. Hence more of the information if collaborated would lead to more accurate forecasts. If all or most participants collaborate & agree upon the forecast & use the same forecasting tool, it would lead to reduced bullwhip effect.
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Multi Origin & Multi Destination Distribution

Assumption : All origins ship to a single consolidation terminal & all items are distributed as demanded from consolidation terminal; total periods/year= 50 Denotations
dijk =qty of demand from origin/source i for destination j for product k pk = cost/price per unit of item k Di,k = demand at source i for item k from all destinations j Sic = freight cost of load from source i to consolidation terminal c Scj = freight cost of load from consolidation terminal c to destination j Wic = capacity of vehicle from source i to consolidation terminal c Wcj = capacity of vehicle from consolidation terminal c to destination j Tic = lead time/travel time from source i to consolidation terminal c Tcj = lead time/ travel time from consolidation terminal c to destination j Bharat Kantharia

Multi Origin & Multi Destination Distribution

Denotations
Fic = total qty of items flowing per period from source i to consolidation terminal c for all products k = i k dijk Fcj = total qty of items flowing per period from consolidation terminal c to destination j for all products k j k dijk I = inventory carrying %

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Multi Origin & Multi Destination Distribution

Calculate Qic & Qcj basis the formula Qic = [Sic ( i k dijk )* 50/ I ( i k pk dijk / i k dijk )] ^ Qcj = [Sck ( j k dijk )* 50/ I ( j k pk dijk / j k dijk )] ^ Shipping qty from source I to consolidation terminal c is found basis : MIN(Qic , Wic ) Shipping qty from consolidation terminal c to destination j is found basis MIN(Qcj , Wcj )

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Multi Origin & Multi Destination Distribution

Example

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