• Lean inventory by the numbers - Tools provide the answers!
  
  

In a July, 2006 article in this space we used the example of a home refrigerator as a metaphor to illustrate the complexity of SKU management in pursuit of a lean distribution center (DC) operation. Given the number of variables that characterize a DC and its constituent SKU’s, this can be a daunting task without the creative use of software tools. This article will apply a tools-based approach to examine lean solutions for a single SKU. Sounds simple, but you might be surprised at how changes in operational assumptions and SKU variables can have a dramatic impact on the resources and costs associated with managing a SKU on an annual basis.

The DC: Our sample DC specializes in the distribution of several thousand SKU’s to a large number of retail stores. Their classic material flow through the DC is from receiving to reserve storage and then replenishment to forward pick modules. The Operations Team has a reasonable view of the demand, lead time, and cube for their SKU’s. They also understand high-level details of their cost structure, but have been frustrated by the inability to integrate their data to optimize operational processes and reduce costs.The Tool:The analytical tool used to support the Operations Team, i-Lean, will recommend the storage and replenishment strategies for this SKU based on a “PULL” Kanban model. Using dozens of variables including demand, lead time, safety stock, product volumetrics, storage media definition, multiple cost factors, and other DC reference data, i-Lean will calculate storage utilization, bin quantities, reorder points, and slotting priority to best satisfy the requirements and constraints. Design solutions will include extensive cost data to help drive decisions. (See www.chitechinc.com for more information on i-Lean.)
This Example: The SKU we’ll focus on is a 3”X4.75”X2”, $4.95 computer mouse. There are 50 in a carton and 32 cartons on a pallet (1600 mice). Average Daily demand is 1000 which are case and broken case picked about 15 times a day. Lead time from the vendor is seven days. There are four flow rack slots in the pick module allocated to accommodate demand and two replenishments from reserve storage per day are permitted. Product receivals from the vendor are put away to reserve storage. This and other reference data will be initialized in i-lean to support analysis scenarios.Let’s explore three SKU management scenarios:

1. The Classic – Receive the SKU, put it away to reserve storage, and replenish the forward pick module as inventory is depleted. This includes two operational components – putaway and replenishment

2. Replenishment Directly from Receiving – Receive the SKU and replenish the pick module immediately, eliminating the putaway to reserve component.

3. Reduced Lead Time for Scenario 2 – Reduce the inventory on hand by receiving less quantity more frequently. (Looks a little like Vendor Managed Inventory.)

In the first scenario, costs are incurred for both putaway and replenishment steps along with other overheads, e.g. carrying costs. The following screen image summarizes the i-Lean analysis results for the first component, satisfying customer demand at the pick module.



Given the parameters specified for this design, our mouse occupies 16% of one pick module flow rack. It will be replenished in the pick module from reserves over 565 times per year, yielding 178 turns. The total DC operational cost to support this SKU is over $3242 per year (based on several cost components). The following screen provides analysis results that reflect the putaway to reserve component required to complete the material flow.

In the design for reserve storage, our mouse uses 57%, or five slots, of one pallet rack. It will be putaway from receiving about 32 times per year. The total DC operational cost to support this SKU in reserve storage alone is over $4067 per year.



So, the total cost of the Classic, two step process for managing our mouse is $3242 + $4067. A total of $7309! (Largely a function of material handling and inventory carrying costs.)

An alternative strategy, Scenario 2, eliminates reserve storage by assuming that our mouse pick module slots can be replenished directly from the receiving dock. To handle the 1000/day demand, this strategy will no doubt exceed the four slots allocated – but by how much? Will costs be reduced? The following screen provides the answers.



In this example, Current Run costs drop dramatically: $3692 for the single step approach versus $7309 for the two step process in Scenario 1. 35 replenishments from receiving (implying 35 vendor deliveries annually) are required to supply the pick module. Great! But there is a catch … the number of slots required to supply average daily demand has gone from 4 to 42! Unless there is an abundance of flow rack in the pick module, this reduced cost option may not be practical. Is there a compromise?Scenario 3 probes the effect of reducing vendor lead time from seven days to two. This approach resembles Vendor Managed Inventory. The following screen illustrates the impact of reduced lead time.



Note that the number of slots used has been reduced from 42 to 19 and the cost has dropped to $1886.92, 49% lower than Scenario 2, and a whopping 74% less than Scenario 1, the receiving-to-putaway-to-pick module approach! While the reduction in lead time and the number of pick slots may push the envelope, the opportunities to manage DC costs is clear.The following screen profiles how the Scenario costs were distributed. (Note that the costs of the FWD PICK MODULE and RESERVES runs must be added together for comparison to the other two analysis runs. Material handling and carrying costs account for the lion’s share of the differences.



Conclusion:This set of examples focused on a single SKU. Adjusting just the material flow path and lead time variables identified major potential cost reduction opportunities over standard operating procedures. Many, many other variables at the warehouse, subzone, and SKU levels can also be systematically manipulated as “what if” exercises to drive toward a lean operation, exposing even more dramatic savings possibilities for virtually any size DC or manufacturing facility. Getting lean is not a simple one-step task; it requires an aggressive iterative approach to examine complex tradeoffs. Without tools like i-lean, this kind of investigation is at best tedious, if not impossible.In a future article, we’ll model a much larger domain of SKU’s competing for attention, space, and material handling resources – all of which generate expense to be managed while satisfying Customer demand.

Click the link below to see Chiron featured online in the Supply Chain Optimization Showcase:

www.vendor-showcase.com/browse/237/Supply-Chain-Optimization.html