Lect17 PDF

Inventory Management
Multi-Items and Multi-Echelon

Chris Caplice
ESD.260/15.770/1.260 Logistics Systems
Nov 2006
Advanced Topics
So far, we have studied single-item single
location inventory policies.
What about . . .
Multiple Items
How do I set aggregate policies?

What if I have to meet a system wide objective?
Multiple Locations Multi-echelon

Deterministic demand
Stochastic demand
MIT Center for Transportation & Logistics ESD.260
Chris Caplice, MIT
Inventory Planning Hierarchy

Annual/Quarterly
Quarterly/Monthly
Weekly/Daily/Hourly
Operational Tactical
Strategic
Inputs
Plan
Transportation costs
Facility fixed and
variable costs
Inventory costs
Service levels
Network
Design
Inventory flow
Network
configuration
Capacity
Deployment
Item-level flow
Item classifications
Inventory locations
Target Service levels
Target Reorder points
Target Safety stock
Replenishment
How much and when

to replenish
Reorder Points
Reorder Quantities
Review Periods
Forecast
Lead times
Variable and
inventory costs
Business policies
Forecasts/Orders
Lead times
Handling costs
Vendor/volume
discounts
Results
Customer orders
On-hand and
in-routeinventories
Real transit costs
Production
schedules
Allocation
Demand prioritization
Assign inventory to
orders
Jeff Metersky, Vice President Chainalytics, LLC

Rosa Birjandi, Asst. Professor Air Force Institute of Technology
Chris Caplice, MIT
Inventory Policies for Multiple Items

Aggregate constraints are placed on total inventory
Avg total inventory cannot exceed a certain budget ($ or Volume)

Total number of replenishments per unit time must be less than a certain
number
Inventory as a portfolio of stocks which ones will yield the highest

return?
Cost parameters can be treated as management policy variables
There is no single correct value for holding cost, r.

Best r results in a system where inventory investment and service level
are in agreement with overall strategy.
Cost per order, A, is also not typically known with any precision.
Safety factor, k, is set by management.
Exchange Curves
Cycle Stock - Trade-off between total cycle stock and number of

replenishments for different A/r values
Safety Stock Trade-off between total safety stock and some
performance metric for different k values
Chris Caplice, MIT
Exchange Curves
Set notation for each item:
A = Order cost common for all items

r = Carrying cost common for all items
Di = Demand for item i
vi = Purchase cost of item i
Qi = Order quantity for item i
Need to find:
Total average cycle stock (TACS) and Number of replenishments (N)

2 ADi
v i
rv i
n Qv
n
TACS = i =1 i i = i =1
2
2
ADi v i
A 1
n
n
=
TACS = i =1
Di v i
r 2 i =1
2r
N = i =1
n
N = i =1
n
Di
Di
n
= i =1
Qi
2 ADi
rv i
rDi v i
=
2A
r 1
n
Di v i
A 2 i =1
Chris Caplice, MIT
Exchange Curves
Exchange Curve
Total Average Cycle Stock Value
$160,000
A/r = 10000
$140,000
$120,000
Current Operations
$100,000
$80,000
A/r = 10
$60,000
$40,000
$20,000
$-
100
200
300
400
500
Number of Replenishments
Exchange curve for 65 items from a hospital ward.

Current operations calculated from actual orders.
Allows for management to set A/r to meet goals or budget,
Suppose TACS set to $20,000 we would set A/r to be ~100
Chris Caplice, MIT
Exchange Curves
Now consider safety stock, where we are trading off SS
inventory with some service metric
Different k values dictate where we are on the curve
Suppose that we only have budget for $2000 in SS what is our
CSL?
Single Item Exchange Curve
7000
6000
Safety Stock ($)
5000
4000
3000
2000
1000
0
-1000
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
-2000
-3000
Cycle Service Level
Chris Caplice, MIT
Exchange Curves
Set notation for each item:
Li = RMSE for item i

ki = Safety factor for item i
Di = Demand for item i
vi = Purchase cost of item i
Qi = Order quantity for item i
Need to find:
Total safety stock (TSS) and

Some service level metric
Expected total stockout occasions per year (ETSOPY)
Expected total value short per year (ETVSPY)
TSS = i =1 k i Li v i
n
ETSOPY = i =1
Di
P [SOi ]
Qi
ETVSPY = i =1
n
Di
Li v i G(ki )
Qi
Chris Caplice, MIT
Exchange Curves
$3,500
k=3
Total Safety Stock ($)
$3,000
$2,500
k=1.6
$2,000
$1,500
$1,000
$500
$-
100
200
300
400
500
600
700
800
Expected Total Stockout Occasions per Year
Exchange curve for same 65 items from a hospital ward.

Allows for management to set aggregate k to meet goals or budget,
Suppose TSS set to $1,500 we would expect ~100 stockout events per
year and would set k= 1.6
Chris Caplice, MIT
Replenishment in a Multi-Echelon System

Plant
RDC1
RDC2
LDC1
R1
LDC2
R2
R3
LDC3
R4
R5
10
LDC4
R6
R7
R8
Chris Caplice, MIT
What if I Use Traditional Techniques?

In multi-echelon inventory systems with
decentralized control, lot size / reorder
point logic will:
Create and amplify "lumpy" demand

Lead to the mal-distribution of available stock,
hoarding of stock, and unnecessary stock outs
Force reliance on large safety stocks,
expediting, and re-distribution.
11
Chris Caplice, MIT
Impact of Multi-Echelons
CDC
Demand
Pattern
RDC
Ordering
Patterns
RDC
Inventory
Cycles
Customer
Demand
Patterns
Layers of Inventory Create Lumpy Demand

12
Chris Caplice, MIT
What does a DRP do?

Premises
Inventory control in a distribution environment

Many products, many stockage locations
Multi-echelon distribution network
Layers of inventory create "lumpy" demand
Concepts
Dependent demand versus independent demand

Requirements calculation versus demand forecasting
Schedule flow versus stockpile assets
Information replaces inventory
"DRP is simply the application

of the MRP principles and techniques
to distribution inventories
Andre Martin
13
Chris Caplice, MIT
DRP Requirements
Information Requirements:
Base Level Usage Forecasts

Distribution Network Design
Inventory Status
Ordering Data
DRP Process:
Requirements Implosion
Net from Gross Requirements
Requirements Time Phasing
Planned Order Release
14
Chris Caplice, MIT
A Distribution Network Example

Plant
Central Warehouse
Regional Warehouse 1
Retailer A
Retailer B
Retailer C
Retailer D
Retailer E
Retailer E
15
Retailer G
Retailer H
Retailer I
Chris Caplice, MIT
The DRP Plan
Central Warehouse Facility

Q=200, SS=0, LT=2
NOW
Period Usage
100
20
50
30
100
100
Gross Rqmt
100
20
50
30
100
100
Begin Inv
150
50
30
180
150
50
50
150
Sched Recpt
Net Rqmt
20
50
Planned Recpt
200
200
180
150
50
50
150
150
End Inv
150
Planned Order
50
30
200
200
Regional Warehouse One
Q=50, SS=15, LT=1
Plant
Central Warehouse
NOW
Period Usage
25
25
25
25
25
25
25
25
Gross Rqmt
40
40
40
40
40
40
40
40
Begin Inv
50
25
50
25
50
25
50
25
Sched Recpt
Net Rqmt
15
15
15
15
50
50
50
50
25
50
25
50
25
50
25
50
Planned Recpt
End Inv
50
Planned Order
Retailer D
Retailer E
Retailer E
Retailer G
Retailer H
Retailer I
50
50
50
Regional Warehouse Two
Q=30, SS=10, LT=1
Retailer A
Retailer B
Retailer C
50
NOW
Period Usage
10
10
10
10
20
20
20
20
Gross Rqmt
20
20
20
20
30
30
30
30
Begin Inv
20
10
30
20
10
20
30
10
Sched Recpt
Net Rqmt
10
20
10
20
Planned Recpt
End Inv
20
Planned Order
10
30
30
30
30
30
20
10
20
30
10
20
30
30
30
30
Regional Warehouse Three

Q=20, SS=10, LT=1
Note:
Gross Rqmt = Period Usage + SS
Period Usage
15
10
10
15
15
Gross Rqmt
15
25
20
20
10
25
10
25
Begin Inv
15
10
15
25
15
15
20
20
Sched Recpt
Net Rqmt
15
10
Planned Recpt
20
20
20
20
10
15
25
15
15
20
20
25
End Inv
NOW
16
15
Chris Caplice, MIT
Example: The DRP Plan

Regional Warehouse One
Q=50 , SS=15 , LT=1
NOW
Forecast
Period Usage
25
25
25
25
25
25
25
25
Gross Rqmt
40
40
40
40
40
40
40
40
Begin Inv
50
25
50
25
50
25
50
25
Sched Rcpt
Net Rqmt
15
Plan Rcpt
End Inv
50
POR
15
15
15
50
50
50
50
25
50
25
50
25
50
25
50
50
50
17
50
50
Chris Caplice, MIT

Regional Warehouse Two
Q=30 , SS=10 , LT=1
NOW
Period Usage
10
10
10
10
20
20
20
20
Gross Rqmt
20
20
20
20
30
30
30
30
Begin Inv
20
10
30
20
10
20
30
10
20
10
Sched Rcpt
Net Rqmt
10
Plan Rcpt
End Inv
20
POR
20
30
30
30
30
10
30
20
10
20
30
10
20
30
30
30
18
30
Chris Caplice, MIT

Regional Warehouse Three
Q=20 , SS=10 , LT=1
NOW
15
10
10
15
15
Gross Rqmt
15
25
20
20
10
25
10
25
Begin Inv
15
10
15
25
15
15
20
20
15
20
20
20
20
10
15
25
15
15
20
20
25
20
20
Period Usage
Sched Rcpt
Net Rqmt
Plan Rcpt
End Inv
15
POR
19
10
20
20
Chris Caplice, MIT
The DRP Plan for All Locations

Rolling Up Orders
NOW
Period Usage
100
20
50
30
100
POR
200
CENTRAL
0
100
25
25
25
200
REGION ONE
Period Usage
25
POR
50
25
25
25
50
25
50
50
REGION TWO
Period Usage
10
POR
30
10
10
10
20
30
30
10
20
20
20
30
REGION THREE
Period Usage
POR
15
20
20
20
10
20
15
15
20
Chris Caplice, MIT

Central Warehouse
Q=200 , SS=0 , LT=2
NOW
Period Usage
100
20
50
30
100
100
Gross Rqmt
100
20
50
30
100
100
Begin Inv
150
50
30
180
150
50
50
150
Sched Rcpt
Net Rqmt
20
Plan Rcpt
End Inv
POR
150
50
200
200
50
30
180
150
50
50
150
150
200
200
21
Chris Caplice, MIT
Results and Insights

DRP is a scheduling and stockage algorithm
-- it replaces the forecasting mechanism above the
base inventory level
DRP does not determine lot size or safety stock
-- but these decisions must be made as inputs to the
process
DRP does not explicitly consider any costs
-- but these costs are still relevant and the user must
evaluate trade-offs
DRP systems can deal with uncertainty somewhat
-- using "safety time" and "safety stock"
22
Chris Caplice, MIT
MRP / DRP Integration

Purchase Orders
C
MRP
SA
SA
SA
SA
MPS
Product
CDC
RDC
DRP
Retail
RDC
Retail
Retail
Retail
Sales/Marketing Plan
23
Chris Caplice, MIT
Evolution of Inventory Management

Traditional Replenishment Inventory:
Lot Size/ Order Point Logic

Single item focus
Emphasis on cost optimization
Long run, steady state approach
The MRP / DRP Approach:
Scheduling emphasis
Focus on quantities and times, not cost
Multiple, inter-related items and locations
Simple heuristic rules
24
Chris Caplice, MIT
Evolution of Inventory Management

MRP / DRP have limited ability to deal with:
Capacity restrictions in production and distribution

set-up costs
fixed and variable shipping costs
alternative sources of supply
network transshipment alternatives
expediting opportunities
Next Steps in MRP/DRP
Establish a time-phased MRP/MPS/DRP network

Apply optimization tools to the network
Consider cost trade-offs across items, locations, and
time periods
Deal with shortcomings listed above
25
Chris Caplice, MIT
A DRP Network Plan

What happens when actual demand in the short term doesnt follow
the forecast exactly..
How should I re-deploy my inventory to take the maximum advantage
of what I do have?
Plant
RDC1
RDC2
LDC1
R1
LDC2
R2
R3
LDC3
R4
R5
26
LDC4
R6
R7
R8
Chris Caplice, MIT
A DRP Network Reality

Plant
RDC1
RDC2
SHORTAGES
LDC1
R1
EXCESS
LDC2
R2
R3
LDC3
R4
R5
Higher than expected demand
27
LDC4
R6
R7
R8
Lower than expected demand
Chris Caplice, MIT
Optimal Network Utilization

Plant
RDC1
RDC2
SHORTAGES
LDC1
R1
EXCESS
LDC2
R2
R3
LDC3
R4
R5
28
LDC4
R6
R7
R8
Chris Caplice, MIT
Information and Control Impacts

Centralized
Control
Vendor Managed
Global
Information Inventory (VMI)
DRP (some cases)

Extended Base Stock
Control Systems
Local
Information
N/A
29
Decentralized
Control
DRP (most cases)
Base Stock Control
Standard Inventory
Policies:
(R,Q), (s,S) etc.
Chris Caplice, MIT
Questions?

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Inventory Management

Multi-Items and Multi-Echelon

How do I set aggregate policies?

Multiple Locations Multi-echelon

MIT Center for Transportation & Logistics ESD.260

Chris Caplice, MIT

Inventory Planning Hierarchy

How much and when

Jeff Metersky, Vice President Chainalytics, LLC

MIT Center for Transportation & Logistics ESD.260

Chris Caplice, MIT

Inventory Policies for Multiple Items

Avg total inventory cannot exceed a certain budget ($ or Volume)

Inventory as a portfolio of stocks which ones will yield the highest

There is no single correct value for holding cost, r.

Cycle Stock - Trade-off between total cycle stock and number of

MIT Center for Transportation & Logistics ESD.260

Chris Caplice, MIT

A = Order cost common for all items

Total average cycle stock (TACS) and Number of replenishments (N)

Chris Caplice, MIT

Total Average Cycle Stock Value

Exchange curve for 65 items from a hospital ward.

Chris Caplice, MIT

MIT Center for Transportation & Logistics ESD.260

Chris Caplice, MIT

Li = RMSE for item i

Total safety stock (TSS) and

MIT Center for Transportation & Logistics ESD.260

Chris Caplice, MIT

Total Safety Stock ($)

Expected Total Stockout Occasions per Year

Exchange curve for same 65 items from a hospital ward.

Chris Caplice, MIT

Replenishment in a Multi-Echelon System

MIT Center for Transportation & Logistics ESD.260

Chris Caplice, MIT

What if I Use Traditional Techniques?

Create and amplify "lumpy" demand

MIT Center for Transportation & Logistics ESD.260

Chris Caplice, MIT

Layers of Inventory Create Lumpy Demand

Chris Caplice, MIT

What does a DRP do?

Inventory control in a distribution environment

Dependent demand versus independent demand

"DRP is simply the application

MIT Center for Transportation & Logistics ESD.260

Chris Caplice, MIT

Base Level Usage Forecasts

MIT Center for Transportation & Logistics ESD.260

Chris Caplice, MIT

A Distribution Network Example

MIT Center for Transportation & Logistics ESD.260

Chris Caplice, MIT

The DRP Plan

Central Warehouse Facility

Q=50, SS=15, LT=1

Regional Warehouse Two

Regional Warehouse Three

MIT Center for Transportation & Logistics ESD.260

Chris Caplice, MIT

Example: The DRP Plan