What Are the Opportunities atCustom?Combineproductionandinventoryforcommon items, e. g. DF R23Producemonthly:reducesetupsbyhalfandpoolsafetystocksProducetwice a month:samenumberofsetupsbut cutcycle stockandreviewperiodinhalf2-11
2-11 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
Wrap UpRealisticdiagnosticexerciseIn real life:not as clean, more data andmoreconsiderationsYetsimplemodelsandprinciplescanprovidevaluableguidance2-12
2-12 Wrap Up ⚫ Realistic diagnostic exercise ⚫ In real life: not as clean, more data and more considerations ⚫ Yet simple models and principles can provide valuable guidance
2.1 IntroductionWhy Is Inventory Important?Distributionand inventory(logistics)costsare quite substantialTotal U.S. Manufacturing Inventories ($m):1992-01-31:$m808,7731996-08-31:$m1.000.7742006-05-31:$m1.324.108Inventory-SalesRatio(U.S.Manufacturers):1992-01-01:1.562006-05-01:1.252-13
2-13 2.1 Introduction Why Is Inventory Important? Distribution and inventory (logistics) costs are quite substantial Total U.S. Manufacturing Inventories ($m): ⚫ 1992-01-31: $m 808,773 ⚫ 1996-08-31: $m 1,000,774 ⚫ 2006-05-31: $m 1,324,108 Inventory-Sales Ratio (U.S. Manufacturers): ⚫ 1992-01-01: 1.56 ⚫ 2006-05-01: 1.25
Why Is Inventory Important?GM'sproduction anddistributionnetwork20,000supplierplants133partsplants31assemblyplants11000dealersFreighttransportation costs:$4.1billion (60%formaterialshipments)GMinventoryvaluedat$7.4billion(70%WiP;RestFinishedVehicles)Decision tool to reduce:combinedcorporatecostofinventoryandtransportation26% annual cost reduction by adjustingShipmentsizes(inventorypolicy)Routes(transportationstrategy)2-14
2-14 ⚫ GM’s production and distribution network ⚫ 20,000 supplier plants ⚫ 133 parts plants ⚫ 31 assembly plants ⚫ 11,000 dealers ⚫ Freight transportation costs: $4.1 billion (60% for material shipments) ⚫ GM inventory valued at $7.4 billion (70%WIP; Rest Finished Vehicles) ⚫ Decision tool to reduce: ⚫ combined corporate cost of inventory and transportation. ⚫ 26% annual cost reduction by adjusting: ⚫ Shipment sizes (inventory policy) ⚫ Routes (transportation strategy) Why Is Inventory Important?
Why Is Inventory Required?UncertaintyincustomerdemandShorterproduct lifecyclesMore competing productsUncertaintyinsupplies·QualitylQuantitylCosts/DeliveryTimesDeliveryleadtimesIncentivesforlargershipments2-15
2-15 Why Is Inventory Required? ⚫ Uncertainty in customer demand ⚫ Shorter product lifecycles ⚫ More competing products ⚫ Uncertainty in supplies ⚫ Quality/Quantity/Costs/Delivery Times ⚫ Delivery lead times ⚫ Incentives for larger shipments