Supply Chain Management For Dummies. Daniel Stanton

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for errors in a forecast is by increasing their inventory. So the better the forecast is — the more confidence that you have in it — the less extra inventory you need to keep to meet your desired customer service levels. But if you don’t trust your forecast, and you want to make sure that you have products to sell when customers want them, you need to invest in extra inventory. Inventory that you buy because of uncertainty about the future is called safety stock.

      Inventory versus downtime

      Manufacturing operations focus on maximizing the amount of product that they’re able to make in a given period. Sometimes, manufacturing processes need to be shut down. Planned shutdown times typically are based on the shifts that people work. Planned shutdowns may also occur so that the company can perform maintenance or change over equipment to make different products.

      Unplanned shutdowns also happen for a variety of reasons, all of which are bad. An unplanned shutdown could be caused by a power outage, a broken piece of equipment, a strike, or a new government regulation. An unplanned shutdown also can be the result of running out of raw materials. You can’t make a product unless you have the components that go into it.

      The other kinds of unplanned shutdowns are hard to predict and control, but you can easily prevent shutdowns due to a lack of raw materials by maintaining inventory. As a result, many manufacturing operations managers prefer to have extra inventory as an insurance policy — to make sure that they never run out of materials that would cause an unplanned shutdown. That extra inventory, of course, ties up working capital and eats up space.

      Lean Manufacturing techniques help minimize the number of unplanned shutdowns caused by inventory stockouts while minimizing the amount of inventory in a supply chain.

      

Toyota developed a unique approach to managing the flow of products through its manufacturing process, allowing the company to minimize inventory costs and unplanned shutdowns. This approach involves tools and techniques that are collectively known as the Toyota Production System. As other companies adopted this approach, it became known as the Lean Manufacturing technique because it reduces the inventory fat in a supply chain. Chapter 4 includes more information about Lean.

      Procurement versus logistics

      Procurement teams look for ways to get the same materials at lower cost. Two common ways reduce costs are to buy in larger quantities and to buy from a supplier in a low-cost region. Both of these options are likely to provide a lower cost per item, but they also can have the unintended result of increasing logistics costs.

      Ordering in larger quantities also means that you need to have extra space to store inventory and more people to manage it. Although increasing the lot sizes may get you a lower cost per unit, it could end up increasing your inventory costs even more.

      A similar problem comes up when you consider suppliers located farther away. The price per unit may be lower, but the increased transportation costs can eat up all those savings and then some. Shipping items a longer distance can also force you to buy in larger quantities. The farther you have to move something, the more things can go wrong along the way. To compensate for this risk, you’ll probably need to — yep, you guessed it — increase inventory.

Graph depicting the geometry of an average inventory level — the average amount of working capital that had been tied up in inventory.

      FIGURE 3-4: Average inventory level.

      Optimizing Your Supply Chain

      IN THIS CHAPTER

      

Mapping your supply network

      

Driving process improvements

      

Managing supply chain projects

      Depending on the product or service that you’re selling, you probably have many alternatives to choose among when designing your supply chain. You may have choices of how and where to buy your materials or make your products. Perhaps you can even choose different ways to deliver your products to your customers. This chapter discusses techniques to optimize your supply chain to ensure that you’re creating the most value, in the most sustainable way, for you and your customers. It also talks about how to implement improvements to your supply chain through cross-functional projects.

Illustration of networks made up of nodes and links in a supply chain. A factory is a node; so are a warehouse, a distribution center, and a retail store that are connected by links.

      FIGURE 4-1: Nodes and

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