for Fresh Produce Authors: Saran Limvorasak and Zhiheng Xu Advisor: - - PowerPoint PPT Presentation

Multi-Echelon Inventory Optimization for Fresh Produce

Authors: Saran Limvorasak and Zhiheng Xu Advisor: Dr. Francisco Jauffred Sponsor: A Mass Discount Retailer MIT SCM ResearchFest May 22-23, 2013

Fresh Produce for Retail Business

• Product Freshness and Availability are key attributes for a

company competing in grocery segment in retail business.

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Introduction

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Should a mass discount retailer add upstream produce facilities into its current network?

• What are key benefits from an additional node?
• What are the impacts to supply chain networks?
• Analyze Top 21 fresh produce categories
• Develop a Predictive Model to compare a network with and

without an additional facility Thesis Questions: Scope and Expected Outcomes:

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Supply Chain Network Under Two Scenarios for Comparison

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Supplier Grocery Distribution Center Retail Store Supplier Grocery Distribution Center Retail Store Fulfillment Center

Hold Inventory Replenishment Frequency Hold Inventory Replenishment Frequency

Average 7 times/week Average 3 times/week Average 3 times/week Average 7 times/week

Scenario 1: Existing Supply Chain Network Scenario 2: Supply Chain Network with Fulfillment Center

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Risk Pooling

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Key benefit from moving inventory upstream is from Risk Pooling

• The concept of Risk Pooling is a powerful tool to address variability in the

supply chain

• Benefit from having central warehouse is greater in a system in which

demand has higher volatility

Supplier Regional Warehouse Regional Warehouse Supplier Regional Warehouse Regional Warehouse

Central Warehouse

Network 1: No Central Warehouse Network 2: With Central Warehouse

Network 2 with Central warehouse has less Safety Stock and Average Inventory because

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Methodology

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Supplier Fulfillment Center Grocery Distribution Center Retail Store

TrGDC TrFFC TrGDC TrStore TGDC TStore TFFC

Total supply chain cycle time “A total time which a product spends in the supply chain from supplier until it is sold” Inventory Dwell Time (T) : Average time which product is stored at facility Transit Time (Tr) : Average transportation time between facilities Safety Time (TSf ) : Safety Time in the supply chain captures the effect of demand volatility at Retail Store

STEP I: A Predictive Model

Scenario 1 Scenario 2

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Methodology

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STEP I: A Predictive Model

May 22-23, 2013

Methodology

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STEP II: Simulations of the inventory levels in supply chain:

DOSFFC DOSGDC DOSStore

• Focus on the inventory level at each inventory facility
• Relax assumptions on Inventory Policy by using current periodic inventory

policy (R, s, S)

• Average Inventory Level and Days of Supply (DOS) are supply chain

performance metrics

Supplier Fulfillment Center Grocery Distribution Center Retail Store

Scenario 1 Scenario 2

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Methodology

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STEP II: Simulations of the inventory levels in supply chain:

May 22-23, 2013

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Average Demand (lbs) Standard Deviation Enhanced Coefficient

• f Variation

Safety Time (days) Transit Time (days) Total Supply Chain Cycle Time (days)

1 Berries 15 30 1.97 (0.97) 0.3 (0.47) 2 Watermelons 57 62 1.10 (0.54) 0.3 (0.24) 3 Cherries 64 60 0.93 (0.38) 0.3 (0.08) 4 Mixed Melons 57 49 0.86 (0.34) 0.3 (0.04) 5 Stone Fruit 165 133 0.80 (0.32) 0.3 (0.02) 6 Strawberries 176 11 0.64 (0.31) 0.3 (0.01) 7 Citrus 195 88 0.45 (0.22) 0.3 0.08 8 Nuts-Snacks- 35 15 0.44 (0.21) 0.3 0.09 9 Grapes 317 117 0.37 (0.18) 0.3 0.12 10 Avocadoes 340 125 0.37 (0.18) 0.3 0.12 11 Potatoes 107 35 0.32 (0.16) 0.3 0.14 12 Cut Fruit 109 35 0.32 (0.16) 0.3 0.14 13 Apples 331 105 0.32 (0.13) 0.3 0.17 14 Mushroom 44 11 0.26 (0.13) 0.3 0.17 15 Mixed 151 47 0.31 (0.12) 0.3 0.18 16 Carrots 104 26 0.25 (0.10) 0.3 0.20 17 Onions 297 74 0.25 (0.10) 0.3 0.20 18 Lettuce 203 49 0.24 (0.10) 0.3 0.20 19 Tomato 434 86 0.20 (0.07) 0.3 0.23 20 Pkg Salads 292 57 0.19 (0.07) 0.3 0.23 21 Bananas 1,427 238 0.17 (0.06) 0.3 0.24

Product Category Incremental / (Saving) Demand Characteristics

Total Supply Chain Cycle Time

• From 21 Product

Categories, Total Supply Chain Cycle of 6 Product Categories in Supply Chain Network with Fulfillment Center is Less than existing network

• All Product Categories

have reduction in safety stock

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Enhanced Coefficient of Variation

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• Enhanced Coefficient of Variation (ECV) is created to

measure the relative demand volatility

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Enhanced Coefficient of Variation Break-Event Point

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Vendor replenishment frequency ECV Break-Event Point 1 time a week 0.45 2 times a week 0.63 3 times a week 0.76 4 times a week 0.88 5 times a week 0.99 6 times a week 1.08 7 times a week 1.18

• Sensitivity Analysis on Vendor replenishment frequency is tested to

determine the break-event point for Enhanced Coefficient of Variation

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Average Inventory in Supply Chain

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Scenario 1 Scenario 2 Incremental / (saving)

1 Bananas 1,305,661 1,237,040 (68,622) 2 Avocadoes 301,327 280,422 (20,905) 3 Citrus 179,321 164,461 (14,860) 4 Apples 286,792 272,313 (14,479) 5 Stone Fruit 166,995 152,759 (14,236) 6 Grapes 277,742 264,727 (13,015) 7 Strawberries 167,591 154,646 (12,945) 8 Mixed 133,407 126,201 (7,206) 9 Cherries 71,453 65,699 (5,754) 10 Cut Fruit 97,094 92,149 (4,945) 11 Watermelons 65,781 60,959 (4,822) 12 Potatoes 94,608 90,232 (4,375) 13 Mixed Melons 61,672 57,376 (4,297) 14 Carrots 90,730 87,941 (2,789) 15 Berries 24,770 22,265 (2,504) 16 Pkg Salads 247,322 245,231 (2,092) 17 Nuts-Snacks- 34,900 32,954 (1,947) 18 Onions 254,099 252,711 (1,388) 19 Mushroom 41,782 40,873 (908) 20 Lettuce 173,904 173,469 (436) 21 Tomato 366,371 370,612 4,242

Product Category Total Inventory in Supply Chain (lbs)

• All 21 product categories,

except Tomato, have less total inventory in supply chain of scenario 2

• Net saving in total inventory in

supply chain results from

• Inventory at retail stores will

increase due to longer lead time

• Inventory at FFC will

decrease in a larger amount due to risk pooling effect

May 22-23, 2013

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• 1. A Fulfillment Center provides benefits to Some Product Categories

The decision to add upstream produce facilities significantly depends on Product Categories and Locations which indicates Demand Volatility and Supplier Replenishment Schedule

Supplier Fulfillment Center Grocery Distribution Center Retail Store Channel 1 Channel 2

Product Category Average demand Standard deviation ECV BANANAS 1,423 238 0.17 MUSHROOM 44 11 0.26 BERRIES 15 30 1.97 WATERMELONS 57 62 1.10

Products for Channel 1: Low Demand Volatility Products for Channel 2: High Demand Volatility

Conclusion

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Channel Decision

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• 2. A Fulfillment Center adds Agility to the system
• Safety Time of supply chain and Total safety stock in the supply are reduced

from Risk Pooling.

• However, a Fulfillment Center adds another “touch” to the system and may

increase total time for all product categories

Conclusion

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Q&A

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