Inventory control at Swedwood group

- A study mapping the current inventory control models and suggesting

on a model that is to be the company standard

Karl Kallin

Department of Industrial Management and Logistics,

Lund University, Faculty of Engineering
SE‐221 00 Lund, Sweden

This article is based upon the master thesis with the same name, written autumn 2008 – spring 2009.
The purpose of the study was to review the current inventory control models as well as suggest on a
setup that would enhance inventory performance. In the thesis, a strong emphasis was put on safety
stock calculation models and their impact on customer service.

INTRODUCTION concerning volume is derived from the fact

Swedwood is a member of the industrial
group within IKEA and also one of IKEA’s main
suppliers. Swedwood is often used by IKEA as
an example of how a good supplier should act.
It is therefore important for Swedwood to be
well performing in its commitments towards
IKEA. The finished goods stock has a very
important role to play in order for Swedwood
to manage its obligations towards IKEA.
PROBLEM DISCUSSION
Swedwood has setup its manufacturing units
to be consisting of two parts, one is the
production unit, and the other is the logistics
centre. The logistics centre is responsible for
all aspects inventory control and is the
working in the interface between Swedwood
and IKEA. The logistics centre has two major
inputs from IKEA, long and short term
forecasts, and orders. The short term forecast
is somewhat inaccurate on article level but on
the contrary fairly good in terms of estimated
total sales value. Forecasts have the tendency
to fluctuate quite a lot from week to week.
The other input, orders, is less fluctuating in
weekly volume but it is not to be considered
as stable either. Much of the irregularities
that logistics centre is supplying both regional
warehouses and stores with goods. The
current inventory control model used to
manage stocks is a hybrid of a time-phased
order point system and a periodic ordering
system. The inventory control model does not
use any classification model but all products
are treated equally. However, sometimes
products with higher requested service level
are prioritized but it is more a rule of thumb
applied in some manufacturing units rather
than the company standard. The company has
not adopted its safety stock policy yet but
Swedwood is going to use a safety stock
calculation model based on normal
distribution and the Serv1 definition.
METHODOLOGY
To be able to evaluate to current setup and
possibilities to enhance inventory control, an
inductive normative study was conducted. The
data was gathered from interviews for the
primary data and from statistics originating
from the company enterprise resource
planning system (ERP) for the secondary data.
The study used a mix of qualitative and
quantitative methods in order to highlight the
problem from both several perspectives. There are, however, more shortcomings in the
Many interviews were conducted and a lot of interaction between logistics centres and the
statistical data constituted the base for the production units. As previously mentioned the
analysis in order to obtain a high level of production units sometimes alter the
credibility. production plans generated in the logistics
centres. This does not just only apply
FINDINGS prioritization but also quantities. If service
During the study, several areas with problems
levels are to be held at the, by customer,
in need of improvement were identified.
requested levels, the plans generated in
Some of these problems could be educed to a
logistics centres need to be followed as much
lack of a company common policy on
as possible. Today the production units
prioritization. As the setup is at present the
change generated plans in order to keep the
logistics centres and the production units have
flow and capacity utilisation at a more or less
different prioritize even though they are
constant high level. Since fix production
supposed to be working towards a common
intervals are used the quantity produce should
goal; well maintained service levels versus
just be the quantity required by customers
IKEA. The production units today sometimes
between production cycles. The production
alter the production plans generated in the
plan generated from logistics centres is likely
logistics centres due to a lack of
to represent this need better than what could
understanding for the actual customer need.
be accomplished in the production unit.
Since no joint company policy on production
planning exists, the importance of producing a The trouble a logistics centre face when
certain product at a certain time may be lost generating production plans is to master its
in the communication between logistics two inputs, forecasts and orders.
centres and production units. This setup risks
having a negative impact on customer service
since the production unit will fail to
understand the importance of producing the
right products at the right quantity and time.

The importance of a joint platform for

The quality of forecasts sent by IKEA is not
planning is hence obvious. An excellent
good enough to single handed without any
starting point for the mutual platform is the
modifications constitute the production plan.
use of a dual criterions ABC-classification
This in turn has lead Swedwood to change the
model. The classification model would make
inventory control principals into a hybrid of
both parties to see what products to prioritize
two systems. Sadly, this hybrid combines the
and this in turn is likely to enhance customer
downside from each of the two systems. To
service. The classification model should be
have a setup combining two downsides is
used to guarantee products of high
never positive and therefore it would be
importance to have a high share of production
beneficial to refine the current setup into one
capacity at its disposal and in contrast,
of these systems. The time-phased order point
products with lower importance should have a
system would be the most suitable due to its
smaller share of production capacity at its
abilities to keep capital employed at a low
disposal.
level. However, in order to practise the time-
phased order point system fully the quality of
forecasts need to be improved. Both
Swedwood and IKEA are influencing
parameters affecting forecast quality,
Swedwood with their delivery performance
and IKEA with their calculation models. With
good quality forecast and a time-phased order
point system both customer service and
capacity utilization could be improved.
Improved forecast quality is only one part that
needs to be dealt with to fully practise a time-
phased order point system, the other part is
to review current planning routines. At
present Swedwood uses a fix planning point
when planning its production and this point is
set to be on Fridays two weeks before
production is due. At the point of planning,
capacity utilization is planned to 100% and the
production plan is not to be changed.
However, in practise Swedwood is
occasionally forced to re-plan because of rush
orders or material shortages. With a more
dynamic planning process Swedwood would
not face the current problems with re-
planning. A fix planning point two weeks
ahead of production ensures capacity
utilization to be kept high but the entire
dynamic is lost wherefore the original
production plan may be obsolete and not
represent customer demand. With a more
dynamic planning process capacity utilization
could be kept high without the loss of agility.
An example of such an approach could be to
gradually plan production instead of all at
once. The production plan would then allow
planners to make adjustments along time to
better be able to meet customer
requirements.
SAFETY STOCKS
Swedwood has grown rapidly the last years
and the demand has been steadily increasing
making production capacity limited. Safety
stocks have never really been an issue with
continuously increasing demand which the
current company standard illustrates.
However, demand can not be increasing
forever and when it is no longer does
managing safety stocks becomes important.
The company standard of keeping two weeks
demand as safety stock will not serve its
purpose well. There are problems with having
safety stocks at prearranged levels, firstly it
does not consider the demand structure
which often has a noticeable impact on stocks,
secondly safety stocks risk being too big which
has a negative effect on capital deployment.
With the introduction of safety stock
calculations according to Serv1 based on
normal distribution Swedwood has addressed
an important issue. The question is whether or
not this is the most suitable solution for
Swedwood. Of course, to use the Serv1
calculation is far better than keeping the
equivalent of two weeks demand in stock
there is no doubt about that but is it really the
most eligible solution?
To be able to use the common Serv1
calculation model the assumption of a normal
distributed demand has to be fulfilled. The
type of distribution a demand follows is
largely affected by the lead time. In the
Swedwood case the lead times are fairly short
which makes the gamma distribution more
corresponding to the demand structure.
However, it has to be stressed that for some
products the normal distribution works alright
but the gamma distribution works for all
products. It would therefore be wise to base
safety stock calculations upon gamma
distribution instead of normal distribution.
Another aspect to consider is what
requirements IKEA has on service. The IKEA
definition service does not fully comply with
either the definitions of Serv1 or Serv2 but it is
most compatible with the Serv2 definition.
The Swedwood introduction of a Serv1 based
calculation there is an obvious risk of
mismatching calculated safety stock with
required safety stock. To base safety stock
calculations on Serv2 instead of Serv1 is
consequently the best alternative. The
combination of gamma distribution and Serv2
would be the best solution for Swedwood.
However, safety stock calculations based on
gamma distribution is quite complex and
Swedwood is not likely manage these
calculations successfully just yet. The
transition to a safety stock calculation based
on gamma distribution is probably best
executed as a step-by-step transition. A
suitable first step is to adopt the calculation
based on normal distributed and Serv1, the
second step is calculations based on normal
distributions and Serv2, and the final step is a
calculation based on gamma distribution
based on Serv2.