Group: 3

Inventory Management and Risk Pooling

Steel Works, Inc.

Gary Lemming
Head of Steel Works, Inc.
New Centralized logistics group

Steel Works, Inc.

Our inventory levels are ridiculous! Our customer service is the worst in the industry

Sales are down 30% and expense are up 25%

Our best customer telling me theyre going to competitors

What is the objective?

Stay in business!
Grow business? Improve customer satisfaction? How?

Minimize inventory cost

What are components of cost? How measured?

Provide high level of customer service

How high? How measured?

Background
Annual sales of $400 Million

Employs 2,500 people at 5 locations Its two divisions

Custom division
Develop products for single customer

Specialty division
Sell custom products to other at higher price

Steel Works Inc.

Custom products 33% Specialty Products 67%

Custom products Specialty Products

Steel Works Inc.

Rapid growth $ 133 MM A customer per product Very high margins High service level 3 plants, co-located with R&D center Each product produced at a single plant Why the inventory levels were so high?
Weve got to keep our customers happy

Steel Works Inc.

Rapid growth $267 MM 6 product families 3 plants, each producing 2 pro. families (economies of scale) 130 customers, 120 products Few big customers Highly volatile demand High service level

Steel Works Inc.

Senior logistics analyst
custom has a lot of products Specialty has 130 customers for some 120 product

I cant even keep track!!

Forecasting expert
product C.V. < 0.5 20% Sales product C.V. >0.5 80%

Maria Its mess, 80% of product fall in highly volatile category

Consultant Recommendation
Drop low volume products (low sales) Improve statistical forecasting Consolidate warehouses
Staff Reaction:
Wont work! Why?

What Does Data Tell You?

m DB R10 DB R12 DB R15 DF R10 DF R12 15.5 1008 2464 97 18.5 s 13.2 256 494 92.5 11.4 cv 0.85 0.25 0.20 0.95 0.62

DF R15
DF R23

55
35.5

80
45.9

1.46
1.29

Total demand for each month

What Does Data Tell You?

Durabend R12:
One customer accounts for 97% of demand

7 products:
High volume (2) is not very volatile Low volume (5) is very volatile

How Much Inventory Should You Expect?

Assume base stock model with periodic review Review period = r = ? Lead time = L = ?

m
DB R10 DB R12 DB R15 DF R10 DF R12 DF R15 DF R23 15.5 1008 2464 97 18.5 55 35.5

s
13.2 256 494 92.5 11.4 80 45.9

Cycle stock
8 504 1232 49 9 28 18 1848

Saf. stock
26 510 990 185 23 160 92 1986

E[I]
34 1014 2222 234 32 188 110 3834

Act. Inv.
72 740 1875 604 55 388 190 3824

S
Assumes r = 1; L=0.25; and z = 1.8 Cycle stock = r m/2

Safety stock = z s r+L

What are the Opportunities at Custom?

Combine production and inventory for common items, e. g. DF R23 Produce monthly: reduce setups by half and pool safety stocks Produce twice a month: same number of setups but cut cycle stock and review period in half

Note!
How firm cope with huge variability in customer demand. Relationship between service & inventory level Impact lead time (variability) on inventory level Effective inventory management policy Suppliers contracts (improve supply chain performance)