Cutting Inventory and Operating Costs

Once you do whatever you feel you have to do to make your supply chains simulation run for 30 days the next challenge is to keep your supply chain running but now do it with the lowest cost in inventory and operating expenses. As you strive to reach this goal, you will experience the classic quandaries that all supply chain managers encounter.

There are many tradeoffs to consider; some work and some don’t. You will learn by trial and error, and there will be some frustration along the way to finding out what works. Yet whatever happens, you will start speaking and thinking like real supply chain managers as you describe your problems and discuss possible solutions.

These ideas listed below apply to all of the case studies or to any supply chain you design on your own. If you keep trying different ideas and looking at the simulation data that results, you will see the patterns. It may be frustrating at first, but there will be an “Aha!” moment if you keep at it.Here are some things to consider:

Look at the simulation data and notice where excess inventory builds up. Think of ways to reduce the excess inventory. You can do this by starting out with less on-hand inventory and/or by scheduling product deliveries to better match product demand

Think about ways to use just-in-time delivery of inventory to stores and warehouses to prevent buildup of excess inventory. Try to schedule your delivery vehicles so they deliver inventory to cover demand and replenish safety stock and no more. You can have deliveries to every store every day or you can have deliveries of larger amounts every few days. Experiment with using different size trucks that go at different speeds and carry different volumes of products. You can use the default values or do some research on the Internet to find truck size, speed and cost numbers. Use your best estimates for these numbers.

Experiment with single stop delivery routes versus multi-stop delivery routes and look at the vehicle expenses involved. If several stores are relatively close to each other and a truck can carry enough inventory, then it’s probably better to use multi-stop routes. If stores are spread out and not close to each other then it might be better to do single drop routes. Play simulations of different ideas and see what happens.

Look at the rent costs of the facilities. How much storage space do you really need at each facility? If you reduce on-hand inventory at facilities then you can also reduce the amount of storage space needed and the daily rent paid on that storage space.

When you open new stores or warehouses look for locations that are near good transportation routes such as major highway interssections. This will reduce travel times and transportation costs.

Consider using rail transport when rail connections are available. Rail roads are the least expensive way to move inventory. Do research on the websites of major rail carriers and see where their rail lines go and see if you can locate stores or warehouses nearby. (Notice in the Cincinnati Seasonings case study the factory is located right near a major rail yard in Cincinnati). Consider opening a new DC to support company growth and new stores and locate that DC near a rail yard so you can ship product to the new DC from the factory using rail transport. And the DC can also use rails to ship to stores that are farther away than what a truck could reach in a few hours or less.

Transportation by ship or barge is also much less expensive than by truck or airplane. Are your facilities located near large bodies of water or rivers or canals where you can transport products using ships or barges?

Look at overall demand for products at all the stores and try to synchronize factory production to meet store demand. If you produce more products than stores demand there will be accumulation of excess inventory at different facilities in the supply chain. See the supply chain planning worksheet below designed by a student team in Dennis Duke’s graduate supply chain management class at Florida Institute of Technology.

(click on image for bigger picture)Supply-Chain-Plng-Worksheet2

These are a few ideas to try. As you play with different ideas and simulations you will start to get an intuitive feel for what works. There is no single answer that fits every situation so different techniques work best in different situations. Supply chains are part science and part street smarts, and professionals who learn to combine the science and the street smarts are much in demand.


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