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MIM 544 Global Cases in Supply Logistics Class Four – Inventory

MIM 544 Global Cases in Supply Logistics Class Four – Inventory. Agenda. Current Events Cisco & Altera Inventory Bubble Inventory & Variances Scientific Glass Case Analysis Student Analysis. Three Articles. China feel global-market pain Labor forces Foxconn to shut Shenzhen

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MIM 544 Global Cases in Supply Logistics Class Four – Inventory

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  1. MIM 544 Global Cases in Supply Logistics Class Four – Inventory

  2. Agenda • Current Events • Cisco & Altera Inventory Bubble • Inventory & Variances • Scientific Glass Case Analysis • Student Analysis

  3. Three Articles • China feel global-market pain • Labor forces Foxconn to shut Shenzhen • IP challenge – Contest of the Century • China – India trade has increased 230X since 1990; $60B • Wind energy - NIMB

  4. LO 1 INVENTORY COSTS • Is inventory an asset? • Costs to acquire • Ordering costs • Setup costs • Carrying costs • Stock-out costs • Opportunity Cost of Capital

  5. Inventory Carry Costs • Inventory 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%

  6. Cash-to-Cash Cycle Time 0ENLI009 Inventory days + Days sales outstanding – Average payment of supply period for materials 0ENLI015 0ENLI003 0OPPLAN017 Faultless Invoices 0OPDEL023 Returns 0OPDEL067 Sales 0ENPR026 Inventory 0OPPLAN012 Number of Supply Sources 0OPSO012 Order Fulfillment Lead Time 0OPPLAN030 Perfect Order Fulfillment 0OPDEL061 Total Source Lead Time 0OPSO041 Fill Rates 0OPDEL025 Forecast Accuracy 0OPPLAN008 Scheduled Achievement 0OPMAKE022 Delivery Performance to Scheduled Commit Date 0OPDEL019 Production Lead Times 0OPMAKE017 Yield 0OPMAKE033 Scrap 0OPMAKE023 Machine wait time 0OPMAKE007

  7. Variances – PPV & Standards • “unfavorable variance” = is reduced from the budgeted expectation • “favorable variance” = is increased from budgeted expectation • When 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.

  8. Cisco / Altera • Yr. 2000 – Cisco wrote off $2.25B • Altera’s answer? – A new Postponement • Capacity 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

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

  10. Scientific Glass – Inventory Case • What do we know? • Dedicated Sales force – Trunk stock 32*$10K • 93% fill-rate, 2 week lead-time • Overage cost .6%. BO 10% GM. • Incentive is on fill-rate to 99% • 8 DCs * $750K + 2 new ones planned • Sales forecasted to grow 20%; Capacity requested to support = $10M

  11. Scientific Glass – Inventory Case • What do we know? • Warehouse Inventory <60days; 120K orders processed • Used Min-Max system for each SKU • Period expenses of 1% of cogs – Too much? • Freight Factory -> DC is $.4 / Ilbs • Inventory accuracy was declining – what happens?

  12. Scientific Glass – Inventory Case • What do we know? • Policy changes proposed • Capex is low – 14% ($1.4M..) • Turns were 6 • 25% is Raw + WIP; rest is FGI (good?) • Balance sheet – Inventory growth > Sales • Cash 6%

  13. Scientific Glass • Case 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 SG’s 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?

  14. Scientific Glass • Assessment alternatives: 5 questions • Implement proposed policy changes? • Consolidate warehouses? • Outsource warehousing? • Reduce the target total order fill-rate? • Other considerations?

  15. Scientific Glass • Helpful Hints: • What are the Options & savings with each? • Fill rate lowered & trunk stock eliminated • One Warehouse vs. logistics costs • Outsource • Combination of the above? • What about Cash????

  16. Thoughts… 20% increase in orders = .46 cogs * %increase in sales * typical months of inventory = $1.75M Expanding DCs *2 = $2M inventory In transit inventory adds $$$ 95% Fill-rate because only 10% of orders are BO is really rather small pending the SKU Trunk stock is negligible ($320K) Warehouse consolidation = 40% 1 DC=15% cost = 15% value of inventory

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