Inventory reduction by converting make-to-stock parts into make-to-order
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A company produces over extremely many items and delivers to customer, and while these items are inexpensive, customers cannot be stocked out. If a stock out were to ever occur, the customer account would be lost and the penalty cost will be extremely high. Therefore, the company has to supply the items to customer without stock out. This in turn requires the company to store large amounts of inventory and operate some warehouses (close to customer sites) where this inventory can be located. The high inventory levels cause high carrying and warehouse operating costs. The objective of this project is to help the company reduce inventory levels and optimize their supply chain operations. After careful statistical analysis of historical sales and inventory data, we determine that the demand is stationary for most items; hence the assumptions of the Economic Order Quantity (EOQ) model are satisfied. The novelty of the inventory reduction approach is converting some of the Make to Stock (MTS) items into Make to Order (MTO), and then proving via discrete event simulation that the production system is able to meet the composite MTS and MTO demand within a five day response time. We demonstrate that successful deliveries can be made when 60 major items (which constitute 85% of the demand) are MTS and the remaining 40 major items (which constitute 10% of the demand) and other low volume/frequency items are MTO. This results in a significant 44% reduction in inventory from current levels. This report documents the details on the this paper in the following: (i) analysis of demand distribution for each item, (ii) selection of MTS and MTO items, (iii) III determination of EOQ for each of the MTS items, (iv) stochastic simulation modeling and analysis of the composite MTS and MTO model, (v) comparison of the simulation result with current real situation, (vi) simulation of the case where some additional MTS items could be switched to MTO items.