The supply chain approach to planning and procurement management

Hewlett-Packard Journal, Feb, 1997 by Gregory A. Kruger

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Theory versus Practice

Ultimately, the actual performance the factory experiences in the key metrics of service level to the SRT objectives and average on-hand inventory will depend upon whether the supply chain performs according to the inputs provided to the statistical model. All of the estimates are predicated upon the future supply chain parameters fluctuating within the estimated boundaries. As depicted in Fig. 6, we have built up a set of assumptions about the nature of the various uncertainties within our supply chain. If one or more of these building blocks proves to be inaccurate, the factory will realize neither the service level nor the inventory projected.

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Acknowledgments

Special thanks to Rob Hall of the HP strategic planning and modeling group and Greg Larsen of the Loveland Manufcturing Center for assistance in the development of this theory and helpful suggestions for this paper. Not only thanks but also congratulations to the process engineering, planning, and procurement organizations of the Colorado Springs Division for reengineering division processes to put supply chain theory into practice.

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(*) In standard terminology, SRT stands for "supplier response time." In this case, a better term would be "shipment response time," because the supplier being referred to is HP and not one of HP's suppliers. In this paper, we use the standard terminology for SRT, but the word "supplier" in all other contexts means one of HP's suppliers.

References

[1.] H.L. Lee, C. Billington, and B. Carter, "Hewlett-Packard Gains Control of Inventory and Service through Design for Localization," Interfaces, Vol. 23, no. 4, July-August 1993, p. 10.

[2.] S. Nahmias, Production and Operations Analysis, Richard Irwin, 1989, p. 653.

[3.] M.E. Johnson and T. Davis, Improving Supply Chain Performance Using Order Fulfillment Metrics, Hewlett-Packard Strategic Planning and Modeling Group Technical Document (Internal Use Only), 1995, p. 14.

Appendix I: Derivation of the Standard Deviation of Demand Given and R-Week Review Period

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Appendix II: The Expected Value and Variance of On-Hand Inventory when there Are no Restrictions on Minimum Buy Quantities

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Appendix III: The Expected Value and Variance of On-Hand Inventory when there Are Restrictions on Minimum Buy Quantities

Here we assume that restrictions on the size of orders placed to the supplier prevent procurement from ordering exactly the difference between the order-up-to level and the inventory position. The restriction in order size might be the result of a minimum buy size constraint placed by the supplier, a constraint that the order must be an integer multiple of a specified quantity, or the purchaser's desire that deliveries come at some delivery interval greater than weekly.

Let: Min = minimum order size constraint

Mult = multiple order size constraint