ElecComp Case

 Large contract manufacturer of circuit boards and other

high tech parts.
 About 27,000 high value products with short life cycles
 Fierce competition => Low customer promise times <
Manufacturing Lead Times
 High inventory of SKUs based on long-term forecasts =>
Classic PUSH STRATEGY
 High shortages
 Huge risk
 PULL STRATEGY not feasible because of long lead
times

3-1
 New Supply Chain Strategy
 OBJECTIVES:
 Reduce inventory and financial risks
 Provide customers with competitive response times.
 ACHIEVE THE FOLLOWING:
 Determining the optimal location of inventory across the various
stages
 Calculating the optimal quantity of safety stock for each component at
each stage
 Hybrid strategy of Push and Pull
 Push Stages produce to stock where the company keeps safety stock
 Pull stages keep no stock at all.
 Challenge:
 Identify the location where the strategy switched from Push-based to
Pull-based
 Identify the Push-Pull boundary
 Benefits:
 For same lead times, safety stock reduced by 40 to 60%
 Company could cut lead times to customers by 50% and still reduce
safety stocks by 30%

3-2
 Notations Used

FIGURE 3-11: How to read the diagrams

3-3
 Trade-Offs
 If Montgomery facility reduces committed lead time to 13
days
 assembly facility does not need any inventory of finished goods
 Any customer order will trigger an order for parts 2 and 3.
 Part 2 will be available immediately, since it is held in inventory
 Part 3 will be available in 15 days
 13 days committed response time by the manufacturing facility
 2 days transportation lead time.
 Another 15 days to process the order at the assembly facility
 Order is delivered within the committed service time.
 Assembly facility produces to order, i.e., a Pull based
strategy
 Montgomery facility keeps inventory and hence is
managed with a Push or Make-to-Stock strategy.

3-4
 Current Safety Stock Location

FIGURE 3-12: Current safety stock location

3-5
 Optimized Safety Stock
Location

FIGURE 3-13: Optimized safety stock

3-6
 Current Safety Stock with Lesser
Lead Time

FIGURE 3-14: Optimized safety stock with reduced lead time

3-7
 Supply Chain with
More Complex Product Structure

FIGURE 3-15: Current supply chain 3-8

 Optimized Supply Chain with
More Complex Product Structure

FIGURE 3-16: Optimized supply chain

3-9
 Key Points
 Identifying the Push-Pull boundary
 Taking advantage of the risk pooling concept
 Demand for components used by a number of
finished products has smaller variability and
uncertainty than that of the finished goods.
 Replacing traditional supply chain strategies
that are typically referred to as sequential, or
local, optimization by a globally optimized
supply chain strategy.

3-10
Local vs. Global Optimization

FIGURE 3-17: Trade-off between quoted lead time and safety stock
3-11
 Global Optimization
 For the same lead time, cost is reduced
significantly
 For the same cost, lead time is reduced
significantly
 Trade-off curve has jumps in various places
 Represents situations in which the location of
the Push-Pull boundary changes
 Significant cost savings are achieved.

3-12
 Problems with Local Optimization
 Prevalent strategy for many companies:
 try to keep as much inventory close to the customers
 hold some inventory at every location
 hold as much raw material as possible.
 This typically yields leads to:
 Low inventory turns
 Inconsistent service levels across locations and
products, and
 The need to expedite shipments, with resulting
increased transportation costs

3-13
 Integrating Inventory Positioning
and Network Design
 Consider a two-tier supply chain
 Items shipped from manufacturing facilities to primary
warehouses
 From there, they are shipped to secondary
warehouses and finally to retail outlets
 How to optimally position inventory in the supply
chain?
 Should every SKU be positioned both at the primary
and secondary warehouses?, OR
 Some SKU be positioned only at the primary while
others only at the secondary?

3-14
Integrating Inventory Positioning
and Network Design

FIGURE 3-18: Sample plot of each SKU by volume and demand

3-15
 Three Different Product
Categories
 High variability - low volume products
 Low variability - high volume products, and
 Low variability - low volume products.

3-16
Supply Chain Strategy Different for
the Different Categories
 High variability low volume products
 Inventory risk the main challenge for
 Position them mainly at the primary warehouses
 demand from many retail outlets can be aggregated
reducing inventory costs.
 Low variability high volume products
 Position close to the retail outlets at the secondary
warehouses
 Ship fully loaded tracks as close as possible to the
customers reducing transportation costs.
 Low variability low volume products
 Require more analysis since other characteristics are
important, such as profit margins, etc.

3-17