Scm 470 Case

Introduction

Dan Johnson had just settled down into his office at Retail Co. when Scott Williams walked into the room.

“Dan,” Scott said, “we have a serious problem. Supplier Co. was late again on one of their shipments into our distribution center. I’ve called our key account manager there and he let me know that they have had a snarl-up with one of their carriers. The driver hauling our shipment just got placed out-of-service by the local authorities for exceeding the legal hours-of-service. We are looking at least a 24 if not 36 hour delay in the shipment. My assistant just got off the phone with some of our top retail locations and they are about to run out of product. We are going to be having stockouts on one of our biggest selling periods of the year.”

“Not again,” sighed Dan. Since taking over as the head of Inventory Control at Retail Co.’s newest distribution center 3 years ago, Dan was having perpetual challenges with Supplier Co. meeting delivery schedules. Despite numerous joint efforts to try and address various operational issues, things always seemed to be coming up that were affecting Supplier Co.’s ability to meet expected delivery dates. Issues ran the gamut from faulty packaging, sending the incorrect shipment of product, truck breakdowns, road closures, and now a driver for the carrier Supplier Co. hired being placed out of service. These issues with lead time reliability were taking their toll on Retail Co. in the form of increased inventory carrying costs due to higher safety stock and dissatisfied customers complaining that the product was not on the shelves. To add insult to injury, Supplier Co.’s products were highly desired by Retail Co.’s customers, so much so that stockouts often resulted in Retail Co.’s customers making trips to competing stores to acquire Supplier Co.’s products.

As if echoing Dan’s thoughts, Scott stated, “The problem we are running into with Supplier Co. is that we are in a poor bargaining position due to the desirability of their brands. With most of our suppliers, we can just go to them and demand that they improve their lead time and lead time reliability or risk losing business. If we do that with Supplier Co., they will just laugh us out of the room.”

“Yeah, if we are going to tackle this issue, we need to be able to present them with a win-win proposition and be able to offer them up a financial incentive if they can improve the reliability of their lead time,” said Dan. “The challenge is that, as of this moment, I’m not sure what their poor service is costing us on each occasion where we have a stockout.”

“Tell you what,” began Scott, “I recall back in my MBA program that one issue one of the issues the supply chain profs were working on was a concept termed “value of reliability.” Broken down at its most basic level, value of reliability puts a dollar value on how expensive the current system is with regard to total inventory costs and then takes a look at how changing certain parameters of the system, and in particular a supplier’s lead time and lead time variability, reduce total inventory costs.”