PowerPoint Presentation
Problem StatementMethodologyScenario detail Local DC with
Periodic review Regional DC with Periodic review Local DC with
Continuous review Regional DC with Periodic reviewAssumptions
Simulation Logic Scenario selectionResult tabulationResult Analysis
Conclusions Outline
1
Problem StatementAbout Company : Company has operations in
Central America, South America and Caribbean. Central America Costa
Rica , Guatemala , El SalvadorSouth America Uruguay ,
ParaguayCaribbean Jamaica
Key DeliverablesDetermine which Inventory policy should be
selected for Scenario 1 &2 :Scenario 1 is whether to have a
local distribution center in retailing countries Scenario 2 is
whether to have a regional distribution center at Miami or Panama
for expansion strategyAnalyze the service level for both Scenario 1
and Scenario 2
Inputs Available :Forecasted Demand, various required costs,
lead time , Unloading time, ships departure and capacity Key
Performance Indicators to evaluate Profit Service level Safety
Stock levelManufacturing/Logistic cost Sales Revenue
Methodology
This is a warehouse distribution problem and the theoretical
concepts needed stem out of inventory control.There are two
inventory models discussed in the problem statement:Periodic
review-The inventory on hand is counted at specific time intervals;
for example, every week or at the end of each month. If the
inventory in stock is determined to below a certain level ( reorder
point) , an order is placed for an amount that will bring inventory
back up to a desired level.Continuous review -A continuous record
of the inventory level for every item is maintained. A positive
feature of a continuous system is that the inventory level is
continuously monitored, so management always knows the inventory
status. As soon as the level falls below reorder point , an order
is placed for order up to level or of an economic order quantity
(EOQ).EOQ is one of the two main values needed in inventory
control, the other being reorder point. Reorder points are
calculated using product lead time and safety stock desired to
achieve desired service level. Service levelis the probability of
not having stock outs. It is a KPI that is verified in simulation
results. It is calculated using the formula Where ,A= Setup
Cost/per orderiC = Holding cost/unit timeS= Demand/Unit time
Example of Inventory Models
Below shown models are a good depiction of how inventory control
can be done for this problem.
Fig 1. shows that an order is placed as soon as inventory
reaches r and is how our continuous model also operates.
In Fig 2. an order is placed to order upto level at start of
each review period. Our periodic review inventory graph is similar
to this.
Figure 1 Figure 2
Methodology Cont...
Going into operation detail , the manufacturing base is in Asia
and end product is shipped to respective companies. The order can
be shipped on a weekly basis if necessary and there is no wait time
as the inventory at Asia is more than demand .
The model needs to incorporate country specific ordering pattern
and cost pattern. Analysis can be done on regional basis
subsequently.
The reorder point and order quantity for each country needs to
be determined. These values will also be subject to optimization
using SIMIOs Opt quest capabilities.
Transport cost is a major factor that is not incorporated into
EOQ calculation and is used during simulation runs to maximize
profit.
As far as operations are concerned , the data is not available s
supposed to be assumed in a realistic manner and these assumptions
are stated clearly is subsequent slides.
ScenariosAs mentioned before , there are four initial scenarios
that were created and analyzed.Data is available for these in form
of transport time , transport Cost form Asia to specific region ,
daily demand/country , operating cost , manufacturing cost , sale
cost and inventory delays/damages . 1 & 2 .) Local Distribution
Channel with Periodic review /Continuous review
The Supply for this has Local DC in each country and flow of
material is directly from Asia to respective country.Separate
Inventory model have to be created w.r.t Review period , order
quantity and reorder point.For the continuous model , review period
is not an inventory control and is replaced by an event based
decider which is triggered by inventory status
Central AmericaManufacturing Setup in AsiaSouth
AmericaCaribbean
Central AmericaManufacturing Setup in AsiaSouth
AmericaCaribbean3 & 4.) Regional Distribution Channel with
Periodic review/Continuous reviewRegional DCThe Regional DC which
can either be in Miami/Panama is the supplier for all three regions
, it has a separate supply chain with Asia and thus has its own
inventory model that needs to be defined. The transport cost and
transport time are consequently changed depending on route
selection.
Major difference between this scenario and earlier scenario is
the addition of inventory variation at Regional DC i.e. unique
reorder point , order quantity and review period.
As only one option , Miami or Panama can be selected , the model
had the capability of selecting one of them prior to the run.
The continuous model employs the same logic as the earlier
discussed one and is more complex due to the addition of an extra
object in the form of a regional DC.
AssumptionsThe critical assumptions that are taken for this
problem are :
No delay in processing daily demand orders i.e. fulfilled the
same day.
Asia manufacturing plant has sufficient inventory to not have
any backorder.
Infinite number of ships available at Asia dock , we have
restricted the number to 2 per route as it is a sufficient number
to not have order waiting at a dock.
Order processing and loading time at a dock is one day.
Order processing time at Asia is half a day.
An order is sent to lost sale if it cannot be met fully.
Regional DC have initial stock level as a sum of initial
inventory at each country.
Backorders are not considered.
TEU are rounded up for calculating transport cost.
Assumptions not listed here would be minor in terms of
functionality and would be mentioned at appropriate place in the
model .
Simulation Logic- Demand Fulfillment Demand arrives daily and
order get processed if initial inventory is higher than arrived
country demand
In a periodic review , Inventory level is checked every review
period and order up to quantity can be only order at review period
only.
In a continuous review , when Inventory on hand reaches to
reorder point then fixed and optimal order quantity is processed to
meet country uncertain demand.Sufficient Inventory on hand result
demand met for market and sometimes long lead times results stock
out conditions and company lose the sales which can be generate to
revenue
Daily DemandInventory level > Demand Update Inventory ,
Update Sale CostYes Demand metFalse Sales LostUpdate lost sale Cost
, Update service levelDemand LogicOrder processing
Simulation logic Demand fulfillment
Simulation Logic- Replenishment Order Placement Processed at
AsiaUpdate InventoryFor Local DCOrder Placement Processed at
Regional DCUpdate Local DC InventoryRDC Inventory controlFrom
Demand outputFrom Demand outputProcessed at ASIAUpdate Regional DC
InventoryReplenishment Timer is triggered if Status Inventory is
lower than Reorder point. Triggering event is review period in
periodic review and for continuous , it is a real time check of
inventory every day.For Regional DC
Simulation logic Replenishment
The above shown logic is how a replenishment order is placed at
a regional DC. It has two branches for the two regional DC options
and one of them can be selected from facility window prior to
running the program.
Status of order This command is used to measure total inventory
on hand so that over order is not done while inventory is in
transit. It is used in the triggering event condition for this
process
Simulation logic Cost LogicThree major costs which play pivot
role in evaluating which Inventory model is beneficial for the
company : Sales RevenueManufacturing Cost Ordering cost, Operating
cost, Transportation CostHolding Cost or Inventory Carrying
Cost
Define Number of shipments made TEU_CR= TEU_CR +
ModelEntity.DemandCR / 1000Manufacturing cost is function of
Ordering Cost, transportation Cost, operating cost at Asia and
Local Retailers Holding Cost is a function of average inventory on
hand and unit cost for holding it.
Model Verification - IThe model was developed in three sections
demand fulfillment , replenishment and cost for manufacturing which
includes, transportation and operating cost and holding cost to
maintain the inventory on hand.Number of cases expected from each
country are verified as below
Color coding, animation used to observe the Inventory on Hand
update once order is arrived to the country. Ships are used as a
vehicle in order to load and unload the product from Asia
manufacturing to the market or Asia to Regional Distribution
channel.
CountryAverage Demand/DayRun Length ( Days)Expected
DemandObserved DemandError (%)Costa
Rica7153362402402331072.97Guatemala11433363840483863460.60El
Salvador10713363598563572860.71Uruguay7153362402402352382.08Paraguay5363361800961766161.93Jamaica7153362402402449031.94
Model Verification - IIThe model was developed in three sections
demand fulfillment , replenishment and cost for manufacturing which
includes, transportation and operating cost and holding cost to
maintain the inventory on hand.Number of cases expected from each
country are verified as below
Inventory Dashboard verifies that Inventory on Hand is updated
once arrived from Asia manufacturing or Regional DC to Local
Retailers Sales Dashboard helps to observe the number of sales have
been made to meet customer demand and how many sales are lost due
to unavailability of product in stockCost Dashboard provides
overall view to cost aspects. This dashboard explains which cost is
playing major role in the profit.
Scenario selection
Opt quest was used to run experiments which had KPI as responses
. There were a lot of controls defined and specific controls were
selected for each run.
Common controls are reorder point , safety stock level to both
scenarios and specific ones like order upto quantity for periodic
review
It was programmed to create upto 50 different scenarios and 95 %
confidence interval for the results
OptQuest gave the capability of selecting the best scenario
based on a multi objective response
As Profit was the primary response , results were tabulated
according to it and other KPI analyzed subsequently
Model Video
Scenario 1 & 2 Result Discussion Opt quest provided best
Service level by optimizing Initial Inventory , Reorder point ,
review period and Order up to quantityReviewContinuousScenario1Asia
Direct To MarketHighly competitive Service levels in Central
America and CaribbeanLoss of sale in South America due to long lead
time Best Scenario among all 4 in terms of Demand
fulfillmentScenario2Asia To Regional Distribution To MarketDemand
not satisfied because of less inventory on hand and delay in
replenishments Highly competitive Service levels in all regions
Slight Loss of sale in Central America and Carribbean
Scenario 2 with review policy is rejected due low service
levels. All others will be analyzed further.Inventory Policy
Scenario
ReviewContinuousScenario1Asia Direct To MarketProfit Margins are
the highest in this Case for all regionsOptimized review period
indicates less loss of SalesProfit Margins are competitive w.r.t to
Period Inventory modelPolicy can be implemented only for South
AmericaScenario2Asia To Regional Distribution To MarketHigh loss
due to increased operating cost and transportation cost due to
addition of Regional DCLow sales observed compared to other
Inventory Models
Inventory Policy Scenario
Details are added in Next SlidesScenario 1 & 2 Result
Discussion
ReviewContinuousScenario1Asia Direct To Market6% more demand has
been fulfilled resulting higher transportation cost and ordering
costLow sales due to less stock on hand as no safety stock at Local
RetailScenario2Asia To Regional Distribution To MarketAdditional
operating costs and transportation cost resulting almost 50 % less
sales than other models
Inventory Policy ScenarioScenario 2 with Continuous policy is
rejected due to high manufacturing cost and high overheads .
Scenario 1 & 2 Result Discussion
ReviewContinuousScenario1Asia Direct To MarketHolding cost are
low due to optimal order quantity and high service levels, optimal
review period resulting on time replenishments arrivalHigher
Inventory Carrying Cost resulting lesser profit margins
Scenario2Asia To Regional Distribution To Market
Inventory Policy Scenario
Scenario 1 with Review policy is best Inventory model w.r.t to
all key parameters for further evaluation Scenario 1 & 2 Result
Discussion
Best Scenario Result and DiscussionBest Scenario is Scenario 1
which represents direct flow of products from Asia manufacturing to
Local Retailers and it should follow the review periodic
model.Results below are discussed in detail only for the best
scenario :Initial Setup for Reorder point, Initial Inventory and
Order upto quantity has been calculated by using EOQ , Base stock
(r,R) modelPerform QptQuest with theoretical values of reorder
point, initial inventory and order up to quantity as lower bound
and upper bound +10,000 to lower boundSafety stock Level has been
varied in order to perform an assessment on sales revenue
Country Demand/DayA M BMean demand per daySetup Cost Holding
Cost per day EOQReview Periodsafety stockOptimal Solution with
0.15% safety stockReorderOrderUpToQInitial InventoryCosta
Rica0715143071554500002019740283450227554249519550Guatemala011432286114354500002024959225520363816134031280El
Salvador010712142107154500002024160235175340925825229325Uruguay0715143071554500002019740286900545677430739100Paraguay0536107253654500002017092325175409085800029325Jamaica0715143071554500002019740283450227554249519550
Optimal order quantity has been identified in the best scenario
and company should order upto this quantity to reduce loss sales
and maximize profit
CountryManufacturing cost ( *10^9)Mean Holding( *10^6)Total Cost
per Year (10^9)Profit (*10^9)Costa
Rica20.379.320.436.12Guatemala20.4119.120.569.16El
Salvador14.975.91566.50Uruguay20.892.72129.81Paraguay17149.41717.44Jamaica14122.81440.44
Best Scenario Result and Discussion-Part aBest Scenario is
Scenario 1 which represents direct flow of products from Asia
manufacturing to Local Retailers and it should follow the review
periodic model.From the optimal solution, the total average cost
per year and profits are evaluated as below
Average Total Cost per year to run the distribution is CRC
108.30 *109 which is ~21,60,78,400 USDProfits are estimated to be
around CRC 260 *109 which is ~ 51,89,08,370 USD
Safety Stock levelProfit ( *10^9)Lost Sale cost (
*10^9)15%259.4529.3020%254.6136.7025%253.1837.12
Best Scenario Result and Discussion-Part bProfit lost at 15%
safety stock is CRC 29.30 *109
Best Scenario Result and Discussion-Part c &dCountryReview
periodTotal cost ( *10^9)Mean Total cost( *10^9)Sale Revenue(
*10^9)Lost sale revenue( *10^9)Holding Cost (*10^6)Mean
HoldingProfit (*10^9)Costa Rica2720.3 +/- .420.356.493.4879.3 +/-
3.279.336.12Guatemala2720.4 +/- .420.489.683.44119.1 +/-
4.2119.169.16El Salvador2714.9 +/- .314.981.473.5975.9 +/-
2.975.966.50Uruguay2920.8 +/- .320.850.708.3892.7 +/-
1.792.729.81Paraguay2717 +/- .81734.597.88149.4 +/-
4.6149.417.44Jamaica2714 +/- .21454.572.53122.8 +/- 3.5
122.840.44
CountryReview periodTotal cost ( *10^9)Mean Total cost(
*10^9)Sale Revenue( *10^9)Lost sale revenue( *10^9)Holding Cost
(*10^6)Mean HoldingProfit(*10^9)Costa Rica2719.8 +/
-.419.854.326793.7279.5 +/- 3.279.534.45Guatemala2720.1 +/-
.420.186.2196656.77119.3 +/- 6.3119.366.00El Salvador2714.6 +/ -
.214.678.3051856.9676.3 +/- 3.476.363.63Uruguay2920.7 +/
-.320.749.785968.0692.5 +/- 2.792.528.99Paraguay2716.3 +/-
.9516.335.3449257.76190.4 +/ - 12.5190.418.85Jamaica2713.9 +/ -
.213.956.7035353.43122.1 +/- 3.8122.142.68
Safety Stock 15 %Safety Stock 20 %CountryReview periodTotal
costMean Total cost( *10^9)Sale Revenue( *10^9)Lost sale revenue(
*10^9)Holding Cost (*10^6)Mean HoldingProfit(*10^9)Costa
Rica2720.3+ /- .420.355.874.6886.5 +/- 3.186.535.48Guatemala2720.7
+/ -.420.787.414.97118.5 +/- 4.4118.566.59El Salvador2714.8 +/
-.314.878.099.4677.4 +/- 3.177.463.21Uruguay2920.9 +/
-.420.948.518.3293.8 +/- 293.827.52Paraguay2717.7 +/-
.717.737.437.08147.1 +/- 4.3147.119.59Jamaica2713.9 +/ -
.113.954.822.60122.3 +/- 3.6122.340.80
Safety Stock 25 %Profit lost at 15% safety stock is CRC 29.30
*109
Best Scenario Result and Discussion-Part eDemand
FluctuationDifferenceOriginalSale madeSale lostManufacturing Cost
Sale revenueProfitSale madeSale lostManufacturing Cost Sale
revenueProfitCosta
Rica5505717987381400000013488965000967496500018.35308929025100000000130068050007906805000Guatemala10633798553298000000260525650002275456500021.696426779557800000002362437000017844370000Uruguay392660351400000096201700006106170000-63.15792932074233000000141926050009959605000Paraguay267700385900000065586500002699650000-58.34247206133000000104056400004272640000412353500003.0439983420000
Demand Fluctuation for 8 weeks Costa Rica and Guatemala up by 30
% Uruguay and Paraguay down by 50 %Run length 12 weeks
Profit lost at 15% safety stock is CRC 29.30 *109
Conclusion Company should select scenario 1 of having a local
distribution channel with Periodic review policy.Expansion strategy
at Panama or Miami as regional DC will not be a good strategy as it
will only incur higher loss sale and less customer
satisfaction.Company can define individual review period according
to the forecasted demand for each country.Model indicates that
transportation cost and operating cost are high due large sale
volume and consequently increases manufacturing cost.Recommendation
Company should definitely think about implementing periodic policy
only in Central America and Caribbean and continuous review policy
to South AmericaThere should be higher safety stock at Uruguay and
Paraguay as their lead time to receive replenishment is quite
longTransportation cost for South America should be negotiated or
shipping vendor should be changedRegional DC might be helpful but
other locations should be identified than Panama and Miami