Operation Management Case

Reading:

Norton company that distribute a broad range of automobile parts: nearly 20000 items.

Norton sourced parts from external suppliers also from company owned plants.

Manufacturing division: also make equipment such as engines and transmissions, that was sold to automobile manufacturers.

Norton succeeded in achieving a significant improvement in manufacturing division’s responsiveness to request from the parts division.

Lead times had not decreased as dramatically, but the uncertainty associated with those lead times had dropped a great deal.

Norton’s external suupliers improved their on time delivery performance.

$100: cost of placing an order with internal or external supplier, transporting the goods to CDC and storing them in CDC+ 300$: fixed fee for each out of production part number contained in an order.

Central distribution center and 20 RDC, serve exclusive geographic region, similar demand.

RDC essentially filled daily orders for end-user demand

One day of week is RDC’s order day. RDC order on weekday. When order is made, the CDC picked and packed the order and sent it via common carrier to the RDC. It takes one week from the order date.

CDC- Parts categorized into high volume A (order once a month), medium B (once every 2 months) ,C low (every 6months).

CDC order for a part when the part’s order lead time plus 4 weeks of average CDC demand for the part remained in CDC inventory.

• CDC carried safety stock equal to 4weeks demand for each part.
• RDC place weekely replenishment order to replace the inventory, have safety stock target for each part equal to twice that RDC’s average weekly demand for that part.
• Norton assessed inventory carrying costs at 26% of the value of the goods in inventory.

If stockout scours at RDC

• RDC would typically ordoer the needed part when it placed its next regular replenishment order.
• Depending on the day of the week in which stockout occurred relative to that designated order day, it could take 13 days before arrival.
• Avoid stockouts by stocking sufficient RDC inventory to cover its need.
• Objective: to meet from stock 98% of all dealr part request.

Excessive amount of inventory in both CDC/RDC.

1. Emergency overnight shipments to help RDC give their dealer 24hours service.
2. Inventory stocking decisions?

1. Did it make sense to hold 2 weeks of demand as safety stock for every  part number
2. Impact in chance?

Case: Norton Auto Supply

Stocks 20000 different auto parts

1. Central distribution center (CDC)

1. Continuous Review (ROP,Q) systems: Fixed order quantity (start with full inventory, inventory deplete, and it hit reorder point and you submit reorder, during arrival of new recievement…

1. 20 regional distribution centers (RDC)

1. each RDC has a designated order day in a week
2. periodic order policy (once a week): fixed period model ( you place order quantity every period
3. each RDC responsible for each cities
4. ordering frequency is given, you can’t modify.

1. customers are auto dealers
2. problems: too much inventory (CDC holds too much inventory, RDC holds too much as well? )/ if holds too much inventory, what type of products do they have the most, and how much do they cost more.

1.  unsophisticiated inventory control that ignores the impact of demand uncertainty

1. A level’s frequency: once a month (fixed frequency) is it optimal?
2. C level’s frequency: once every six month < is it optimal?
3. B level’s frequency:  

Choose between consolidating safety stock in CDC or distribute to RDC

If allocate stafety stock to each RDC, if your satisfaction to customer is 90%, supply chain says you can achieve same satisfaction by consolidating to CDC, by using significantly less safety stock.

In general, consolidation benefit by reducing safety stock, helps to achieve same customer satisfaction

Limitation: if you have long lead time between CDC and RDC

Calculating safety stock

CDC: use fixed order quantity model

Safety stock= z * leadtime (4weeks) ( calculate standard deviation of 4 week demand)

Squareroot(4) *sigma

RDC: fized period model

Z* standard deviation of 2 week demand ( leadtime (1week)+  ordering interval (1week)

Type of inventory

1. Safety stock: minimum amount of stocks, because of uncertainty of customers, to accommodate demand uncertainty.

1. This company: auto dealers : not predictable, in order to accommodate their demand in case, they have some stocks.
2. Calculate which products they hold more and which products hold less
3. CDC/RDC calculate if they have sufficient stocks

1. Cycle inventory: full unit < 0 unit < full unit < 0 unit… cycle between max and 0 units, take midpoint and you get average cycle inventory (order quantity / .

1. Reason: economies of scale: inventory is fixed cost, variable cost, we can know optimal ordering quantity, to balance fixed cost and variable cost.
2. Calculate Total cost of inventory holding cost for CDC and RDC: Q/2 * fixed cost of ordering + safety stock

1. When you realize they are holding too much…we should reduce total inventory holding cost

1. Set a fill rate at CDC (99%)and RDC(97.5%) and calculate new safety stock, cycle inventory…

1. Higher rate: consolidate more safety stock in CDC

1. Reduce fill rate even further/ and guarantee auto dealers of 3% overnight shipments  (it reduce inventory cost, but it will cost more to transport )

1. Which products makes sense to use overnight shipment?

Proposed Policy @ RDC (FR=97.5%))