Strategic Inventory Management of Externally Sourced Medical Supplies

Transcription

1 Strategic Inventory Management of Externally Sourced Medical Supplies Authors: Renato Malabanan & Nichole Hillstrom Advisor: Bruce Arntzen

2 Agenda Project Background & Scope Research Questions Methodology Analysis Results & Conclusion 2

3 Project Background & Scope World s largest, most diverse medical products company Customer service focused due to critical nature of products Product inventory levels are currently determined through the use of a sophisticated inventory model Scope: Inventory management strategies for 137 externally sourced medical supply products 3

4 Research Questions Which modeling approach is best for various parts of MedCo s product line? Improvements to which parameters provide the largest opportunities for MedCo to optimize inventory levels? Do any gaps exist in the current inventory entitlement model? 4

5 Methodology Assess Current Inventory Management Process Understand current inventory management policies, procedures, and models Understand product characteristics Analyze Key Inventory Drivers Determine which inventory drivers have the largest impact on inventory levels Create SKU classification based on selected drivers Determine Appropriate Inventory Strategies Adjust inventory levels based on analysis results Identify opportunities for additional inventory reductions 5

6 Substitutes Synergies Inventory Drivers Drivers Considerations Strategies Demand (D) Supplier Held Lead Time (L) Safety Factor (k) Limited Stock Cost Safety Stock Formula Average Inventory = ½* D L + R + k* L + R σ D 2 + ( D 2 σ L 2 ) 6

7 Product Segmentation 7

8 Topic Finding $ Estimate 1 Current Inventory Position Exceeds recommended inventory levels for many parts $1.4 M 2 Inventory Target Overstates cycle stock $1 M 3 Safety Stock Formula 4 Safety Stock Buffers 5 Safety Factor (k) Include/modify: Lead time variability Review period Demand variability 2 week minimum added Standard deviation of forecasted demand Cycle service level verse item fill rate 6 7 Fast Moving Products: Inventory Drivers (Recommended safety stock value for these 58 SKUs = $481 K) Slow Moving Products: Simulation (15 parts, 45% SS Reduction) Reduction leads to safety stock savings: Customer service level Lead Time Lead time impacts inventory levels for slow moving products 8

9 Fast Moving Products: Cycle Stock Lowest point of inventory on hand is the moment just before an order is received Safety Stock level Base-stock Inventory Model Highest point of inventory on hand is the moment just after an order is received Safety Stock level plus the order quantity Expected Inventory Average, E I ave = E I+ + E I 2 9

10 Topic Finding $ Estimate 1 Current Inventory Position Exceeds recommended inventory levels for many parts 2 Inventory Target Overstates cycle stock 3 Safety Stock Formula 4 Safety Stock Buffers 5 Safety Factor (k) Include/modify: Lead time variability Review period Demand variability 2 week minimum added Standard deviation of forecasted demand Cycle service level verse item fill rate - $230 K 6 7 Fast Moving Products: Inventory Drivers (Recommended safety stock value for these 58 SKUs = $481 K) Slow Moving Products: Simulation (15 parts, 45% SS Reduction) Reduction leads to safety stock savings: Customer service level Lead Time Lead time impacts inventory levels for slow moving products 10

11 Fast Moving Products: Safety Stock The inventory entitlement model calculates safety stock through the use of: Safety factor based on desired cycle service level (Ex: 95%, k = 1.64) Quoted lead time Standard deviation of demand or forecast A two week minimum safety stock is required for each product We recommend: Removing two week minimum Accounting for review period SS = k σ L Adding lead time variability and using RMSE for demand variability SS = k σ Leadtime σ Leadtime = L + R σ D 2 + ( D 2 σ L 2 ) 11

12 Topic Finding $ Estimate 1 Current Inventory Position Exceeds recommended inventory levels for many parts 2 Inventory Target Overstates cycle stock 3 Safety Stock Formula 4 Safety Stock Buffers 5 Safety Factor (k) Include/modify: Lead time variability Review period Demand variability 2 week minimum added Standard deviation of forecasted demand Cycle service level verse item fill rate $7 K 6 7 Fast Moving Products: Inventory Drivers (Recommended safety stock value for these 58 SKUs = $481 K) Slow Moving Products: Simulation (15 parts, 45% SS Reduction) Reduction leads to safety stock savings: Customer service level Lead Time Lead time impacts inventory levels for slow moving products

13 Fast Moving Products: Safety Stock Safety stock is set using cycle service level Customer service is measured using fill rate CSL to IFR Conversion: In Months Product Cycle Service Level (CSL) Lead Time Average Demand Standard Deviation of Demand Item Fill Rate (IFR) A 90% % B 90% % Customer service metrics should be aligned with the safety factor used in the safety stock formula 13

14 Topic Finding $ Estimate 1 Current Inventory Position Exceeds recommended inventory levels for many parts 2 Inventory Target Overstates cycle stock 3 Safety Stock Formula 4 Safety Stock Buffers 5 Safety Factor (k) Include/modify: Lead time variability Review period Demand variability 2 week minimum added Standard deviation of forecasted demand Cycle service level verse item fill rate 6 Fast Moving Products: Inventory Drivers (Recommended safety stock value for these 58 SKUs = $481 K) Reduction leads to safety stock savings: Customer service level (SL) Lead Time (LT) SL: $100 K LT: $164 K 7 Slow Moving Products: Simulation (15 parts, 45% SS Reduction) Lead time impacts inventory levels for slow moving products 14

15 Safety Stock, $ Safety Stock, $ Fast Moving Products: Inventory Drivers Lead Time Reduction of 58 Products Customer Service Reduction for 58 Products $500,000 $500,000 $400,000 $400,000 $300,000 $300,000 $200,000 $200,000 $100,000 $100,000 $0 0% 10% 20% 30% 40% 50% 60% 70% $ % Lead Time Reduction % Reduction in CSL (Min = 90% CSL) 50% lead time reduction of ten parts will result in a $100 K inventory reduction (~20% reduction) Lowering the cycle service level of ten parts to 90% will result in a $164 K inventory reduction (~35% reduction) 15

16 Topic Finding $ Estimate 1 Current Inventory Position Exceeds recommended inventory levels for many parts 2 Inventory Target Overstates cycle stock 3 Safety Stock Formula 4 Safety Stock Buffers 5 Safety Factor (k) Include/modify: Lead time variability Review period Demand variability 2 week minimum added Standard deviation of forecasted demand Cycle service level verse item fill rate 6 Fast Moving Products: Inventory Drivers (Recommended safety stock value for these 58 SKUs = $481 K) Reduction leads to safety stock savings: Customer service level (SL) Lead Time (LT) 7 Slow Moving Products: Simulation (15 parts, 45% SS Reduction) Lead time impacts inventory levels for slow moving products $33 K 16

17 Demand Slow Moving Products: Simulation Current Grid: Forecast Output Results MEAN (Daily) 0.16 STD.DEV (Daily): CV: % 8% 8% 6% Variance (Daily): BACKORDER QTY: TOTAL DEMAND: 175 NO. OF CYCLES: 30 BO CYCLE EVENTS: 3 UNIT FILL RATE: 97.7% CYCLE SERVICE LEVEL 90.0% AVERAGE DEMAND (per month) Std. Deviation (For Normal Dist) Coefficient of Variation 25.0% REVIEW PERIOD: 7 RE-ORDER POINT (CYCLE + SS) 8 CYCLE STOCK(D*(R+L)): 6 SAFETY STOCK: 2 MIN ORDER QTY 0 ORDER QTY 6 LEAD TIME 30 Input Variables Sensitivity May 23-24,

18 Conclusion & Next Steps Topic Finding $ Estimate 1 Current Inventory Position Exceeds recommended inventory levels for many parts $1.4 M 2 Inventory Target Overstates cycle stock $ 1 M 3 Safety Stock Formula 4 Safety Stock Buffers 5 Safety Factor (k) 6 7 Fast Moving Products: Inventory Drivers (Recommended safety stock value for these 58 SKUs = $481 K) Slow Moving Products: Simulation (15 parts, 45% SS Reduction) Include/modify: Lead time variability Review period Demand variability 2 week minimum added Standard deviation of forecasted demand - $230 K Cycle service level verse item fill rate $7 K Reduction leads to safety stock savings: Customer service level (SL) Lead Time (LT) Lead time impacts inventory levels for slow moving products SL: $100 K LT: $164 K $33 K #1 #2 #4 #5 #3 #6 #

19 Questions 19