As described in Chapter 2, in the postponement section in the INerature review, a total cost analysis might indicate a aifferent least cost option at the different ohases of the life-cycle of a product. LTOs are not different in this regard. Cost trade-offs are different at different phases of the life cycle of a LTO. Specifically, the single most imporiant cost component that could be reduced is obsolescence.
During the early phases, obsolescence is not a matter of concern. Management 165
100%
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Proportion of Restaurants
30%
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Phase of LTO 6 7 8
--@--DC #12 —m—DC #13 --ô--DC #14 — >< -DC#15 —X— DC #16
--@--DC #17 —+— DC#18 ——-DCH9 —-<—DC #20
Figure 4.11
Proportion of Restaurants that Disengaged Early from LTO-11
may develop a wide forecast confidence interval, rather than a point-forecast, and plan for the lower bound of this confidence interval. Doing so virtually guarantees that all manufactured product will be sold. However, as the LTO gets closer to the end, obsolescence becomes a key element of the total logistics cost trade-off analysis by increasing inventory holding costs.
In this research setting, there were two feasible ways to identify when the total logistics cost had to be revaluated. One was to trigger the need to reevaluate total cost when the number of days of supply in stock, both cycle and safety stocks, was close to the number of days left in the LTO. The other way to determine when to reassess the total logistics cost trade-off was based on data availability about
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disengagement. Thatis, when there are new data sufficient to update the forecast for the last time before the end of the LTO.
It was assumed that there were lead-time options, such as using premium transportation, that were more expensive than the standard option, but that wouid orovide shorter lead times. Shorter lead times imply iower inventory levels, both cycle and safety stocks. Lower inventory levels imply less capital at risk of opsolescence. Therefore, the cost trade-off that needed to be made was beiween the additional cost of premium lead times, premium transportation costs and “rush”
manufacturing orders, and less obsolescence. if the amount of capital freed by reducing lead times multiplied by the expected rate of obsolescence was larger than the additional cost of using shorter lead times, then ihe supply chain would be better off by using the more expensive lead times for the last ohases of the LTO.
In the context of supply chain managemen?, “rush manufacturing orders”
does not seem to be the right term to call manufacturing runs with shorter lead times. Demand managemen?, the supply chain management process, implemented across the members of the supply chain requires the behavior of the end-customer demand and inventory deployment tactics to be visible to manufacturers. Therefore, manufacturers should be able to plan for these manufacturing runs without bullding four or five days of planning into the replenishment cycle time quoted io the nexi- tier customers.
I manufacturing managers are provided with updated data regularly, they will be able to plan internally as they receive uodated information. Furthermore, shortening the replenisnment cycie time quoted to the nexi-tier customers is most likely going to allow the next-tier customer to make a more informed decision because the decision is made closer to when end-customers place orders. Therefore, the order placed to the manufacturer will be more accurate. A more accurate order transiates, on the one hand, fo avoid ordering jess than needed, which might result in an emergency order in the future. On the other hand, a more accurate
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order translates to avoid ordering more than needed. If a distribution center orders more than needed, then inventory is pushed closer jo the end-customer and inventory is geographically differentiated.
Figure 4.12 shows the total logistics cost trade-offs and indicates with dork gray arrows the cost components that willbe affected when reassessing the trade- offs in this research. Since inventory holding costs increased markedly as obsolescence increased, additional inventory holding costs had to be traded-oif with the higher cost of using premium manufacturing and transportation lead times ana the lowered warehousing (throughput) cast. When premium lead times are used, fewer products will flow through the supply chain and, therefore, less warehousing costs will be incurred. Note that warehousing costs are throughput-related, and should not be confused with the fixed cost of warehouses which does not vary with the level of activity.
Figure 4.12 also indicates with light gray arrows other costs that, in general, might be affected. In this research setting, however, the focus was on transportation and lot quantity costs which were related to production setups and order acquisition cosis, and on customer service which was considered constant throughout the duration of the LTO.