1. American Lighting Products
What drives inventory in this system?
Safety stock at the MDC’s
Shipping quantities to the MDC’s (Truckload)
Production lot sizes
Number of products
...

2. Inventory for a product
What is average system inventory for a product?

3. Net System Inventory Objective
“Set for each product item at each MDC based on historical sales levels”
“The NSO is the reorder point for the factory to produce another lot of product”
“the Average system inventory for a product is the NSO + 1/2 a lot size”

4. Is this Consistent?
“The NSO is the reorder point for the factory to produce another lot of product”
“the Average system inventory for a product is the NSO + 1/2 a lot size”

5. System Inventory
Inventory
NSO
Production
Time

6. At an MDC
Truckload
Inventory
Base
Stock
Level
Production begins
Time

7. What is Base stock level at MDC?
Expected “Lead Time” Demand
Demand from time MDC hits base stock level to time first truck load arrives
Production times
delivery lead times
time till system inventory hits NSO
Safety stock to cover for variability

8. What can distribution do?
Lot sizes?
Expected lead time demand?
Can consolidation affect this? How?
Safety stock?

9. Safety Stock Customer Service level Variance in lead time demand
Estimating effect of consolidation
Square root law
Poisson Demand
Forecast Error

10. Square Root Law (For Safety Stock!)
Two independent random variables
X with mean  and variance 2
Y with mean  and variance 2
What about X+Y?
2 
2 2
Standard Deviation of “Consolidated MDC”
2 

11. Poisson Demand If we don’t know variance… Assume Poisson demand
variance = mean
Std Deviation of Lead Time Demand = square root of Average Lead Time Demand

12. Forecast Error Forecast errors due to variability of demand
Forecast Accuracy
Product at MDC <50%
Product 50-70%
Product Family 70-90%
Market %

13. What is the Safety Stock?
Poisson Model
At the very worst all 700 products have the same volume
Safety stock < 2*700*sqrt(Volume/700)
That gives total safety stock of <2 million
That’s less than 8% of inventory!

14. Production Lead Time (Again)
Inventory
To MDC 1
To MDC 3
Truck load
Time

15. Reducing Average Lead Time Demand
Base Stock at MDC depends on how many MDCs carry the same product
With 8 MDCs
Expect to wait till the fourth truck
With 4 MDCs
Expect to wait till the 2nd truck

16. What is Base Stock Level?
Safety Stock
Expected Lead Time Demand
Inbound lead time < 7 days
Guess at time to load a truck
Total Volume = nearly 5,000 truckloads
2,500 truckload per plant
50 truckloads per week per plant
7 truckloads per day
Difference between 2nd truck and 4th is a matter of hours.

17. Conclusions Safety Stock < 8% of inventory
Expected lead time demand insensitive to consolidation
Distribution cannot get close to 20% inventory reduction without affecting customer service levels

18. How to Reduce Inventory
Smaller lot sizes at the factory
Spread out 3 weeks maintenance and vacations
Trim product line

19. Critique What did we ignore?
Where else can Distribution look for inventory reductions?

20. NSO vs Base Stock
Time till System reaches NSO after MDC reaches base stock
Interested in the
Mean?
std. Deviation?

21. Guesses
Mean is zero
Std. Dev. grows with the number of MDCs (simple simulation supports this)

22. NSO effects How big is the effect?
Can we change replenishment policy to eliminate effect?
Can we reduce effect with consolidation?

23. What is NSO? Estimate NSO due to this delay
Probably significant because we have such poor service levels (as low as 78%) with such high inventory levels.
How to get better numbers?
Ask (not an option here)
Analysis
Simulation