ASR and Strategic Inventory Positioning

An ASR Recap:

There are 4 major elements to Actively Synchronized Replenishment (ASR):

1. This page’s focus: Strategic Inventory Positioning - literally, where in the Bill of Material structure, or where in the supply chain, should we hold inventory to provide the maximum benefit to performance?

2. Dynamic Buffer Level Profiling - establishing the “profiles” for the Buffer Stock, such that parts with high variability and high volume (for example) will have a different profile than parts with high volume and low variability, or parts with low volume and high variability, etc.
3. Pull-based Demand Generation - stock buffer levels are replenished as actual Demand Pull moves Buffers into their Rebuild Zones. Every order generated is assigned a due date, based on a quoted lead time or a cumulative lead time for the part.
4. Highly Visible and Collaborative Execution - Execution is one of the Achilles heels of the ERP/MRP world; MRP was never intended to be an execution tool.

“Where” replaces “How much” as the crucial inventory question

Many companies invest a great deal of time and energy on the topic of how much inventory to carry.

With Actively Synchronized Replenishment (ASR) , there are elegant mechanisms to answer the “how much inventory” questions, and to reflect the dynamic nature of the answers; the focus instead becomes WHERE to position the inventory. 

The answer to this question is not trivial.

Choosing the most appropriate locations offers opportunities to solve problems of shortages and unsatisfactory inventory performance and delivery performance, with implications for expediting expenses and for plant productivity as well as for service levels; and, opportunities to improve or gain a competitive advantage in terms of lead time and responsiveness to customer needs.

In practice, there is an extensive process that should be followed in order to answer the “where” question, and several factors should be considered:

• Customer Tolerance Time (CTT) – exactly how long is a customer prepared to wait for their product?
• The variable rate of demand, and the variable rate of key sources of supply
• Inventory flexibility, and product structure
• Minimizing the bull-whip effect
• The presence and location of resource constraints in ther work flow

Our webinars (private and public) address these issues in detail, with clear examples that take advantage of, and illustrate, the whole ASR approach.

A VERY simple example of one impact of Strategic Inventory Positioning with ASR

Strategic Inventory Positioning provides multiple benefits – reduced shortages, improved support for schedules, improved service levels, reduced expediting costs, reduced lead times, and reduced system inventories, for example.

For many ASR users the inventory reduction is essentially a beneficial side effect, when compared to the value of eliminating the material and component shortages that block production. And we don’t promote the inventory reduction aggressively as a primary benefit; but the leverage of ASR is such that the inventory impact can still be major.

To illustrate how the decision impacts inventory levels, we’ll review a simple example of what can be a VERY complex situation from a manual perspective. Of course, ASR thoughtware offers a structure for the analysis.

We have to make a few starting assumptions here.

Setting the scene

First of all, we’re going to use the traditional “Re-Order Point” technique as a basis, simply to illustrate the impact on inventory value. To be clear: ASR does NOT use traditional ROP, it uses a simple but sophisticated replenishment model derived from the Theory of Constraints (TOC) basic model and substantially enhanced by Constraints Management Group  … but the ROP model is widely understood and avoids the need to explain the Replenishment model first.

Assume we have a part we call “Parent,” which has an average daily usage of 2, a value for Inventory valuation of $1000, and is made from 3 components: Component #1, Component #2, Component #3.

Each component is purchased and has an inventory value of $150. (So, material cost forms 45% of the inventory valuation of the Parent part.)

(Note: in real applications ASR can be applied to materials and purchased parts, fabricated or assembled componetts, and finished goods, throughout all levels of s deep Bill of Meterial … I’m just keeping it simple here).

The traditional Re-Order Point model is that the Re-Order Point is set to the usage over the replenishment lead time, plus a safety stock. And the Re-Order quantity can be set based on a variety of techniques, one being to set a “maximum” inventory and replenish to aim for that level.

We actually don’t need to know the Re-Order Point for our example; we’re more interested in the “Maximum” stock level. So let’s do this: our ROP model is that the safety stock target is average daily usage over the replenishment lead time; and the Re-Order quantity aims to top the inventory up to a maximum level that is 3 times the safety stock. This is good enough to illustrate the point.

So:

The manufacturing lead time for “Parent” is 10 days.

One component, Component #1, a purchased part, has a 25-day purchased lead time.  This is the longest lead time of the  3 components.

Component #2 has a purchased lead time of 12 days; component #3 has a purchased lead time of 7 days.

If no component parts are “Buffered” with stock …

If no component parts are buffered with stock, then the cumulative lead time for “Parent” is 35 days (10 days manufacturing lead time for part “parent,” plus 25 days purchasing lead time for Component #1.)

If we aim for the safety stock of “Parent” to be average consumption over lead time, we’d be looking here at 70 units (2 units consumed per day, 35 days to replenish). So our inventory “maximum,” which we’ve chosen to be 3 X the safety stock just to keep things simple, would be (3 X 70 units) = 210 units.  With an inventory value of $210,000 ($210 units at $1000 each).

If we Buffer for Component #1 …

If we decide to hold a stock buffer for component #1, the inventory for component #1 will of course increase from the starting inventory of zero. If we apply the same Re-Order Point model, the safety stock would be 25 days X 2 units consumed per day … 50 units. So with the maximum inventory set at 3 X the safety stock, we’d be carrying 150 units. And with the individual Components assigned an inventory value of $150 each, the value of 150 units of Component #1 will be $22,500.

BUT: the impact of the decision to hold a Buffer Stock of Component #1 is that we can hold less Inventory of “Parent,” while still maintaining or even improving the availability of the part “parent.” The rationale is probably obvious to you: if we’re buffering for Component #1 then the cumulative lead time of “Patent” is now 22 days, (10 days manufacturing lead time plus the 12 days purchased leasd time for Component #2), not 35 days.

And that means that the safety stock for “Parent” would be 44 units (2 consumed per day, 22 days to replenish) instead of 70 when there was no buffering; the target maximum inventory for “parent” is therefore 3 X 44 units, because we chose 3 times safety stock as our target maximum; or 132 units.

This is 78 fewer units of “parent” than when we did not buffer Component #1.

So we have been able to reduce the investment in Finished Goods by $78,000.

For a Net reduction in inventory value of $55,500 (reduction in “Parent” inventory of $78,500, netted against an increased $22,500 inventory of Component #1.).

With NO REDUCTION IN THE AVAILABILITY OF THE “PARENT” PART. This is important. By making a strategic decision to hold inventory of Component #1 we improved the response time to the market from 35 days to 22, we reduced the inventory investment by $55,000, and we maintained the availability of “Parent” to the market. (We may even have increased it … see later).

That’s not a bad combination.

Interesting What-Ifs

Now … what if Component#1 wasn’t just used-on “Parent?” What if it was used on 10 other “Parent” type parts? What would the potential Net reduction in Inventory be?

What if we were looking at 200,000 component and finished goods records, instead of 4? What if we were  looking at finished products built in a 15-layer deep Bill of Materias, instead of 2? What if the value of the finished unit was $100,000 and not $1000?

A little more sophisticated …

In fact,  from a statistical standpoint, the more used-on situations for Component #1, the lower the inventory of Component #1 would need to be to maintain the same degree of availability for the Parent parts. In other words, it wouldn’t need $225,000 of inventory of Component #1 ($22,500 per “parent” times 10 “Parent”-type parts) to provide support for 10 Parent-type parts with identical characteristics to Parent.

And, with reduced cumulative lead times for “Parent,” there would almost certainly be a reduction in the variability of the supply of Component #1, probably justifying a reduction in the safety stocks of the “Parent” products.

So the Net reduction of inventory would improve as a result of both these mechanisms … while availability increases and inventory levels drop.

And this is before we add the impact of the Dynamic Replenishment model of ASR, in contrast to the traditional Re-Order Point technique.

The ASR model enables the ASR user to set and maintain the Buffer Stock levels with a great deal more sophistication than described above, making the impact on Parent part availability and inventory levels even more advantageous.