Supply Chain

A
study of the effects of supply chain

performance through inventory policy
improvements and information sharing
Master thesis in Logistics and Supply Chain Management
Aarhus School of Business and Social Sciences, Aarhus University

Author: Maren Aareskjold
Supervisor: Hartanto Wijaya Wong

August 2012
Abstract
Background: In extended periods at the end of 2011 Lrdal experienced increasing
stock-out situations at the inventory facility in the Netherlands, for subsequent periods
they struggled to maintain the inventory at a desirable level. The unexpected increase
in demand was due to health workers in Switzerland changed the training procedures
to apply the CPR doll Little Junior in favour of the previous used CPR doll. The
focus of this thesis is to investigate whether a change in Lrdals inventory policies
and improved information sharing will have a positive effect on decreasing these
stock-outs periods in the future, while the costs are kept at a minimum level in order
to try to improve Lrdal performance.
The results: Quantitative results are obtained based on five Excel models where each
is created to show Lrdal with different settings and strategies. An attempt was made
to change Lrdals current inventory policies in such a way as to improve control of
the inventory, in addition to investigating the information shared between Lrdal and
customers/suppliers. Both of these areas have been in focus to be able to reduce
potential uncertainty in the supply chain and future stock-outs for Lrdal. It was
shown that Lrdal could save a total of 7.8 % in total cost and improve the fill rate by
5% if they altered the inventory policies used today. On the other hand it showed that
information sharing between Lrdal and the customer would not improve the service
level, however holding cost and variability decreased.
Main conclusions and recommendations: Based on the results of the created models,
the main conclusion in this thesis is to recommend Lrdal to change the inventory
policies currently used to potentially reduce the costs and improve the customer
service level and create better relationships in the supply chain where information is
shared, in order to reduce the existing variability.
Table of Contents
Chapter 1 Introduction............................................................................................. 3
1.1 Introduction and problem statement ............................................................... 3
1.2 Motivation behind the thesis ............................................................................. 5
1.3 Assumptions and Delimitations ........................................................................ 6
1.4 The structure of the thesis ................................................................................. 7
Chapter 2 Description of Lrdal............................................................................. 8
2.1 About the company ............................................................................................ 8
2.1.1 The initial story ............................................................................................. 8
2.1.2 Product development .................................................................................... 8
2.1.3 Acquisitions .................................................................................................. 9
2.1.4 Product range .............................................................................................. 10
2.2 Current situation .............................................................................................. 10
2.2.1 Material flow Lrdal .................................................................................. 10
2.2.2 Information Flow ........................................................................................ 14
2.2.3 Lrdals Inventory Policy........................................................................... 15
2.2.4 Little Junior .............................................................................................. 17
2.3 The problem ..................................................................................................... 19
Chapter 3 - Literature Review .................................................................................. 24
3.1 Supply Chain Management ............................................................................. 24
3.2 Potential problems in a supply chain ............................................................. 25
3.2.1 Inventory management................................................................................ 25
3.2.2 Bullwhip effect............................................................................................ 26
3.3 Possible solutions to supply chain problems .................................................. 27
3.3.1 Information sharing ..................................................................................... 27
3.3.2 Collaborative strategies ............................................................................... 28
3.3.2.1 Vendor-managed inventory (VMI) ...................................................... 29
3.3.2.2 Collaborative Planning, Forecasting and Replenishment (CPFR)
system .............................................................................................................. 30
3.3.2.3 Periodic flexibility (PF) ....................................................................... 31
3.4 Concerns about information sharing and collaboration in a supply chain 31
Chapter 4 Methodology .......................................................................................... 33
4.1 Step 2: Identify major issues and problems .................................................. 33
4.2 Step 3: Generation and evaluation of alternative solutions ......................... 35
Chapter 5 - Model descriptions and Results............................................................ 38
5.1 Assumptions in the models .............................................................................. 38
5.2 Distribution fitting ........................................................................................... 39

5.3 Performance measurements ............................................................................ 40

5.4 Model 1 - Lrdals current situation with normal demand ........................ 42
5.4.1 Brief model summary ................................................................................. 42
5.4.2 Inventory strategy used ............................................................................... 42
5.4.3 Expressions ................................................................................................. 42
5.4.4 Model description ....................................................................................... 43
5.4.5 Results ......................................................................................................... 44
5.5 Model 2 - Lrdals current situation with periods of increased demand .. 46
5.5.1 Expressions ................................................................................................. 46
5.5.3 Results ......................................................................................................... 46
5.6 Model 3 Changes to Lrdals inventory policies ....................................... 49
5.6.3 Expressions ................................................................................................. 51
5.6.5 Results ......................................................................................................... 53
5.7 Model 4 Decentralized supply chain ........................................................... 55
5.7.3 Expressions ................................................................................................. 56
5.7.4.1 Lrdals side ........................................................................................ 57
5.7.4.2 Customers side .................................................................................... 58
5.7.5 Results ......................................................................................................... 58
5.8 Model 5 Coordinated Control where demand information is shared ...... 59
5.8.3 Expressions ................................................................................................. 59
5.8.4.1 Lrdals description............................................................................. 59
5.8.4.2 Customers description ........................................................................ 60
5.8.5 Results ......................................................................................................... 60
Chapter 6 Conclusion ............................................................................................. 64
6.1 Conclusion ........................................................................................................ 64
6.2 Criticism of this thesis ..................................................................................... 66
References ................................................................................................................... 67
Appendix ..................................................................................................................... 71
Chapter 1 Introduction
1.1 Introduction and problem statement
During the last couple of decades there has been a rapid increase of globalization in
business environments due to constant development of technology within
manufacturing and information, increased cost pressure, and more aggressive demand
from customers. To be able to compete in the market with others offering similar
products companies are increasingly working on integrating the supply chain with
suppliers and retailers, the aims being to offer products with improved quality and
lower price while improving the customer service. This can be achieved by
developing long-term contracts that assure cooperation and information sharing
among the supply chain participants, which optimally will create a win-win situation
for all participants. Benjamin and Wigand (1995) said that understanding the supply
chain cooperation helps position the entire chain as a source of competitive advantage.
However, it can be problematic for companies to be optimal and excel within every
aspect of the supply chain, because the efforts and expenses that need to be made
could be unjustifiable. The focus could then rather be on identifying and optimizing
the inventory strategies where the objectives are to maximize the efficiency, growth
and profitability by reducing the inventory level, which can lead to many of the same
improvements as mentioned in an integrated supply chain. According to Mulanis
(2002) research a company can then improve the cash flow with 30%, the customer
service with 10%, and in addition the company could experience an improved and
more efficient supplier relationship.
Investigating these areas in a companys setting is the object of this thesis. The
company studied is the Norwegian based company Lrdal Medical ASA (in the
following called Lrdal), one of the largest and most important medical equipment
companies in the world, with a market share of around 45%. Because of Lrdals
high and important market position and loyal customers, Lrdals representatives
have explained that even though there are short periods of stock-outs and delivery
delays they dont believe this affects the customer and supplier relationship much,
especially not on the cheaper and less important products where they have
experienced that most customers are willing to wait until the order is available.
However, at the end of 2011 the stock-outs periods became longer and more frequent,
and Lrdal struggled to a larger degree to stabilize the inventory at a desirable level.
Even though they did not experience any subsequent financial problems, there was a
natural increase in costs since they increasingly used transhipments and rush orders to
be able to fulfil the demand. If the same problems were to happen to more critical
products it is not safe to say that the customers would be as understanding and willing
to wait for the order as they are for the cheaper products.
Lrdals customers range from large and important actors supplying a whole country
or government directives to single individuals purchasing for private use. Because of
the large customer variations it can lead to high fluctuation in customer demands,
which increases the risk of the bullwhip effect; in addition it can be difficult to find
the optimal trade-off between inventory size and cost. Many production companies
have solved this by introducing a just-in-time strategy where the lead-time is
minimized and the goal is to reduce inventory waste, but this strategy would currently
be impossible for Lrdal to implement because the cost of reducing the lead-time to
what is optimal for a just-in-time strategy would exceed the income from the product.
A study of Lrdals current implemented inventory and supply chain strategies have
only been possible to conduct because of the full disclosure of information and data
Lrdal has provided, from this it has been possible to locate the problematic areas and
come up with the problem questions below that seem reasonable when locating the
causes and potentially solve them.
How can Lrdal reduce the possibility of long stock-out periods in the future?

How to ensure this, while keeping the inventory related costs at a minimum
level?
Examine whether Lrdal is at the risk of experiencing bullwhip effect, and
how to initiate the correct actions to potentially reduce the impact?
Little Junior is used in the thesis as an example of a product that experienced the
problems covered by the problem questions presented above.
1.2 Motivation behind the thesis

The education in logistics and supply chain management has been a major influence
when finding inspiration for this thesis and deciding on the research area. During the
time at Aarhus School of Business and Social Science a lot of different and interesting
topics in the area of logistics and supply chain management have been presented and
this thesis has been conducted with this knowledge. It is inspiring to get the feeling of
familiarity when a companys context is analysed such as to connect it to the theory
learned from these courses, which shows that this knowledge can be used in real
contexts in the business environment. Another important factor that have been
motivational are the possibilities this process has given to be more or less selfdetermined, both when it comes to deciding on the research area studied as well as
shaping the thesis to focus on the most interesting aspects of it.
Lrdal was chosen as the company to conduct the research on because of its
reputation to have a well-controlled and optimized logistics, where it could be
possible to learn how things are done in practice and benefit from their knowledge
while doing this thesis. It was interesting to see that even though the overall company
performance measurements were well above the targeted level they were still
struggling in some areas, which often can be neglected because of the companys
general good performance, time and resources to investigate this further are then often
not prioritized. It was motivational to look into one of these issues since they are real
problems in a real company - if executed properly this thesis could come up with
solutions that Lrdal might not have considered and the results could then be
important and really make a difference for the company. When deciding on the
problem area I wanted to focus the thesis on inventory and supply chain management,
due to its relation to my studies and increase in focus towards this topic in the
business sector.
1.3 Assumptions and Delimitations

The thesis has been designed based on a number of assumptions and delimitations;
some of these concerning the construction of the models and are presented in Chapter
5 Model description and results, while the more general assumptions and
delimitations and the reasons behind these are explained in this section.
In this thesis Lrdal is investigated and analysed based on data and information
collected and received from the companys representatives and the introduced
changes and final conclusions are based on these and must be interpreted in context
where the information and data used are correct and reliable.
Many of the delimitations in the problem formulation phase were established to
reduce the size of the thesis as well as to meet Lrdals requests of focusing on the
stock-out issues they experienced in 2011 with Chinese products on the European
market. Additional delimitation made was to focus on one product only, Little
Junior, which was chosen as an example, as it would be possible to implement the
suggested changes to other products experiencing similar issues.
The focus in this thesis is on supply chain improvements, any potential advances in
regard to Lrdals forecasting techniques have not be fully investigated, but rather a
suggestion of an area that could be focused on with regards to improving the
companys inventory control.
The area investigated is supply chain management, which means that even though
Lrdal is the company investigated, other participants would also have to be included
to be able to fully explore Lrdals benefits when there exist a profound cooperation
in the supply chain. Since information from customers was impossible to acquire,
assumptions are made about how the customers act and their settings, as described in
more detail in Chapter 5.
In the modelling phase the goal is to show how information, in general, can improve
Lrdals performance. Optimally different collaboration techniques should have been
simulated, but in such strategies there are a lot of basic decisions about type of
cooperation and contract details that need to be evaluated by all participants in order
to find what best suits them in such a way that all participants can optimize the
performance.

1.4 The structure of the thesis

The thesis is made up of 6 chapters, where the first chapter, presented above, is an
introduction to the problem questions and the areas described later in the thesis. In
addition, general delimitations and assumptions are defined.
In Chapter 2 an overview is given of the company, the material and information flow,
and Little Junior is presented, in addition to the problem Lrdal experienced, which
is the background of this thesis.
Chapter 3 presents the relevant literature that is related to the subject of this thesis.
In Chapter 4 Taylors 5-step process is used to present the methodology of how
Lrdals problems were identified, and the work done to try to solve them.
Chapter 5 gives detailed descriptions of the five models created, in addition the
empirical findings are presented and analysed
In Chapter 6 the problem questions are answered and a summary of what has been
conducted in the thesis is presented.
Chapter 2 Description of Lrdal

2.1 About the company
The average response time for an ambulance is approximately ten minutes and for
each minute a human being is without breath the survival rate drops by 7-10%, which
illustrates how life saving a basic knowledge of CPR can be.
2.1.1 The initial story
smund S. Lrdal founded Lrdal in the 1940s; in the first couple of decades the
company focused on toy production and under the name Tomte Lrdal they became
world known for their rubber toys. When the production stopped in 1978 over 100
million toy cars were sold in more than 110 different countries1.
It was Lrdals reputation as a producer of good quality rubber that made an
American medical supply producer request rubber samples, which marked the start of
Lrdals exploration with first aid and emergency medicine products.
Lrdal has continuously developed more practical and easy-to-use products, both for
hospital treatment and medical training, and is today a world leading company in
medical equipment and medical training articles.
2.1.2 Product development
The change of the business focus is symbolized by a girl who drowned in the river
Seine in the late 1890s. smund Lrdal was so moved by this story that he wanted
everyone to know basic CPR, which resulted in Lrdal developing a life-like
resuscitation-training manikin based on the death mask of her face. This Resusci
Anne doll is still one of Lrdals most popular products and is sold around the world.
More complicated human-like training dolls with integrated software have been
developed in recent years to train users in a more virtual setting that increases the
understanding of reality; these are often used in medical training and education.
However, simpler and less expensive versions of CPR training articles, such as Little
Junior, have also been developed to make it easier and more available for everyone
to learn basic CPR.

1 http://en.wikipedia.org/wiki/Laerdal
Lrdal closely follows medical advances and constantly work on creating and
improving products in line with this development. This can be recognized when
Lrdal in the 1960s started developing easy to carry and handle equipment for
ventilation and airway control, which was done on the basis of new research that
showed how vital pre-hospital emergency treatment was for saving lives. Lrdal also
started developing heart start-semi-automatic defibrillator in the 1980s when new
medical research showed that early defibrillation increased the survival rate of prehospital cardiac arrest.
2.1.3 Acquisitions
During the early years of 2000 Lrdal expanded in multiple areas within medicine
equipment that strengthened their position as a world leading company in the area of
medical training. Lrdal started off by buying the innovative Texas-based company
Medical Plastics Laboratories Inc, now called Lrdal Texas, which in addition to
Lrdals organization in New York, expanded Lrdal into new channels for sale and
distribution, and strengthened their position on the US market.
Another strategic acquisition made two years later was the Danish-based Sophus
Medicals, now called Lrdal Sophus - a leading company within inter-active medical
training products, which are software used in the education of pre-hospital, in-hospital
and military segments. This introduced Lrdal to new areas of technology, software
simulations, and in 2004 they bought SimQuest, which produces virtual reality
software. These acquisitions made Lrdal a leader and a pioneer in the micro
simulation program market.
The final step Lrdal made in this period was to open a new factory in China to
manufacture a simple range of low-cost products where software is not implemented.
A factory in China would, according to Lrdal, enable the company to be better
prepared for the future by providing a quality factory in the Far East, but also access
the rapid growth in the Chinese market2.
Lrdal.com: http://www.laerdal.com/dk/doc/367/Vores-Historie-Kort
2.1.4 Product range

Because of the acquisitions and partnerships, and a policy to improve the market,
Lrdal is able to offer customers a great range of products. This range can be divided
into seven main categories, which can be seen below, and includes everything from
simulation software that gives a more realistic training, to simple mouth-to-mouth
protection.
First aid Training/ Airway Management
Medical education
Course and Scenario Packages
Simulation
Simple airway management
Immobilization
Heart starter
Their goal of these products is to help educate people in all areas of first aid and
medical training.
2.2 Current situation

In this section Lrdals current situation is in focus, firstly describing Lrdals
general material and information flow, then Lrdals inventory policy is specified and
at the end there is a short description of the product Little Junior.
2.2.1 Material flow Lrdal
The outline of Lrdals general supply chain shows how raw materials, parts and
finished products are transported between suppliers and production facilities,
production facilities and distribution centres (DC), and between DC and customers,
which is outlined in figure 2.1. Since the material flow is the same regardless of
whether the customer is an end-user or a retailer, they are all classified as customer.
Lrdals products are produced and assembled at a range of different factories around
the world, but only three of these (LM-Norway, LM-Texas and LM-China) are owned
and controlled by Lrdal. When the production process is completed the products are
sent and stored in one of Lrdals eight distribution centres (DC) around the world.
10
However, this thesis focuses on DC in the Netherlands and for this reason figure 2.1
below is mainly outlined based on the material flow affecting this facility.
The Norwegian factory, LM-Norway, produces many of Lrdals most technological
and innovative products in the area of medical training, where complicated software
programmes are often included. Other products produced at this location are in the
airway management category such as suction pumps and ventilations, additionally
LM-Norway produces parts used in articles produced at Lrdals factory in China.
The main products manufactured at Lrdals factory in Texas, LM-Texas, are
simulated CPR dolls, but these are less innovative than what is produced at LMNorway. LM-Texas also produces most of Lrdals patient care, vein/artery, and
anatomical model-products, which are also categorised as medical training products,
but in a very simple degree, only studying a limited area of medical practice
concentrated on a small part of the human body.
Articles produced at the Chinese factory, LM- China, are classified in the simpler
category of Lrdals portfolio where no software is incorporated and the production
processes are less complicated compared to what is done in LM-Norway and LMTexas. The products are assembled with parts supplied from a variety of different
suppliers, mainly in China, but some more important strategic parts are produced at
other Lrdal factories and shipped to China.
The flow of materials is more or less the same for all three of Lrdals factories (LMNorway, LM-Texas and LM-China)- they receive components or raw materials from
a range of different suppliers around the world, many of these are strategically located
close to the factories but, as mentioned above, there are also examples where parts are
sent halfway around the world to be used in the production process. The lead-time
from suppliers to the factories varies from anywhere between 10 to 58 days,
depending on the location of supplier and factory. From the production process starts
it takes approximately 10-12 days until the products are completed and ready to be
shipped to Lrdals DCs where the products are stored until requested by a customer.
The exception is shipments from factories outside Europe - these are sent to the DC in
the Netherlands, which also serves as a cross-docking centre, where the shipments are
consolidated with other shipments and sent to DC in UK and Norway.
11
Phillips factory in Seattle is the fourth factory in the figure below, and supplies
Lrdal with heart starters (AED - automated external defibrillator). This partnership
is about more than just production of AEDs, Phillips and Lrdal cooperate on
developing and improving the technology of the AEDs and in this they are keeping up
with the market development. Incorporated in the agreement, Lrdal is distributing
Phillips AEDs, while Phillips is selling Lrdals training products together with their
own products. But as illustrated in figure 2.1 below, Phillips controls the material
flow of the AED until the product is finished and stored at one of Phillips own
facilities, which means that Lrdal is not involved in Phillips material flow until they
can buy the finished product from them.
In addition to the strategic partnership with Phillips, Lrdal has outsourced
production to approximately twenty various factories of finished goods, for
convenience these are merged into one facility in the figure below. Products produced
at these factories are immobilising products i.e. head stabilizer, and the product
Chester Chest. Although these factories are located around the world, the finished
products are transported from the different factories to the Norwegian DC and from
this location transhipped to the remaining Lrdals DCs.
There currently exists no formal contract between Lrdal and their customers which
guarantees that the order be received within a certain time frame, but Lrdal
internally measures their service degree on fulfilled orders and have a goal that
customers shall receive the order within 4-6 days, depending on the distance from the
inventory location.
12

Figure 2.1: Lrdals Material flow (source: Lrdal Medical)
13
2.2.2 Information Flow

Information and data goes back and forth between Lrdals customers, company
departments, DCs and factories, and supports Lrdal in controlling the material flow.
As can be seen from the figure 2.2, customers can either use Lrdals web page to
make an order or they can place the order at one of Lrdals sales offices, but no
matter which procedure is used, the information is eventually added to Lrdals ERP
system MFG/pro and can be used as a source of information for all internal logistics.
Three times a day EDI messages are sent from MFG/pro to the respective DC
regarding shipping instructions of customer orders and when a shipment has been
completed and shipped to the customer, the DC creates a verification message also
sent as an EDI message to Lrdal, and these are automatically uploaded to the
MFG/pro once a day. This means that Lrdal always has updated and available
information concerning product status and can issue an invoice when they know the
order is on its way to the customer.
From MFG/pro Lrdals procurement department has access to all information
needed about i.e. inventory, planning data, purchase order and receiving, sales
order/withdrawal and billing orders, and this information is used to control the
production at the factories and the inventory level at the DCs. The procurement
department checks the inventory level regularly and if it is close to or below the
reorder point an order is created and sent to the factory by an EDI message, which
inform the factory how much to produce of a specific product. The factory then
notifies the DC, also with an EDI message, when the order should be completed and
ready to be dispatched. In the same way as above, these messages are uploaded and
stored in the MFG/pro once a day.
Should delivery problems occur, customers are notified automatically if they have a
web account, but if the customer does not have an account, Lrdals customer service
inform them either by e-mail or phone. Customers can always contact the customer
service department with any questions, as this department is the connection between
Lrdal and the customers.
Today there is limited contact and information shared between Lrdal and customers,
and Lrdal and suppliers. Customer contact is very basic and the information shared

14
only concerns product tracking information. The same applies for the suppliers where
only a few of them share any information with Lrdal, those who do, irregularly
shares their quarterly or annual forecasted sales reports.

Figure 2.2: Lrdals Information Flow (source: Lrdal Medical)
2.2.3 Lrdals Inventory Policy

Each of Lrdals eight DC facilities has a strategically centralized location, which
makes it easier to reach and support a large market. The DC in the Netherlands,
located in Tilburg, supplies most of the European continent with all Lrdals products,
and is the largest of the eight distribution centres sending out approximately 40.000
shipments a year. Since the Netherlands is a part of the European Union the
transportation is quick and smooth and custom declarations are avoided.
If any problems occur with satisfying customers demand, the demand will be
backlogged and fulfilled as soon as there are available units. In such stock-out
15
situations Lrdal has two alternatives of how they can fulfil the unsatisfied demand
besides making normal orders to the manufacturer:
Transhipments
Rush orders
The first alternative, transhipment, means that the procurement department checks
whether the DC in either Norway or the UK have a positive inventory level for the
specific product, the backlogged orders can then be fulfilled from these. Because
there is no need to do any physical changes to the product when transferred between
markets, transhipment is a cheap alternative; the only additional cost incurred is the
transportation. In situations where transhipment is not an alternative, Lrdal can
make rush orders to the factory, which only takes 22 days but is nine times more
expensive than making a regular order.
Not all products are worth the costs associated with rush orders or transhipments
when a stock-out occurs. To improve product control and inventory level Lrdal uses
an ABC analysis that classifies all products in 5 different categories ranging from A
to E, which is based on the number of transactions and the unit value. This
classification can be found in table 2.1 where the A and B products are the most
important and therefore the most important to control.
The classification of products is additionally important when Lrdal calculates the
products reorder point where the different categories are calculated with different
formulas.
Classification
A
B
C
D
E
Criteria
Non B items with value of more than 1500 NOK
All items with more than 50 transactions
Non B items with a value of less than 1500 NOK
All items with manual follow up
All items with 0 transactions
Table 2.1: Lrdals ABC classification (Source: Lrdal Medical)
16
2.2.4 Little Junior

Little Junior, which is the product focused on in this thesis, is a medical training doll
where the goal is to provide users with a better understanding of how it is to do CPR
on a child.
The training doll is produced at
Lrdals factory in China (LMChina), and as can be seen from
figure 2.3, is a simplified model of
a childs upper body where the
focus is on teaching people how to
do correct back bending of head,
and chin and jaw lift to open and
Figure 2.3: Little Junior (source: Lrdal Medical)
ease the airway. Little Junior is a simple product without implemented software or
other sophisticated features, it weighs 3.4 kg and most components are made of
plastic.
Little Junior receives parts from suppliers in China in addition to Lrdals
Norwegian factory; the reason why this product is supplied with parts from Norway is
because of previous experienced cases of leaks at the Chinese factory. The parts
received from Chinese suppliers are transported by truck to the factory and have a
total lead-time of approximately 10 days, while the parts from Norway are shipped by
sea and have a lead-time of 58 days. The manufacturing process is a make-to-order,
which means that the production does not start until an order is made from the
procurement department in Norway. The processing time is 2 days, from this point it
takes 10 days to complete Little Junior and make it ready to be dispatch and 46 days
until the order is stored at Lrdals DC in the Netherlands.
17
Figure 2.4: Material flow Little Junior in the European market (source: Lrdal Medical)
The procurement department in Norway periodically reviews the DC in the

Netherlands once a week to see how the inventory level of Little Junior is compared
to the reorder point. The calculation of the reorder point is based on historical demand
and is recalculated and adjusted every other month. Little Junior is classified as a B
product, which means that the reorder point is calculated by:
Reorder point = Average demand * lead- time + 1,96* STD + 15%* average demand
The average demand is calculated based on the last 52 weeks where the 10 most
recent weeks are emphasized by 20%, while the remaining 42 weeks are emphasized
with 80%. 1.96 is the set safety factor, referred as z in the literature, multiplied with
the standard deviation of the forecasted weekly demand, which make up the buffer for
variation in demand. The last part of the formula above (15%*average demand) is a
buffer level that Lrdal uses because of the variations in the products lead-time.
With this formula it is possible for Lrdal to use different percentages and buffers
according to how reliable the supplier is. For example, it can be enough to use
10%*average demand for a dependable supplier, while for another Lrdal needs to
use 20%*average demand to assure satisfying performance. Lrdal uses an additional
buffer for products with lead-time longer than 5 weeks, which is the case of Little
18
Junior, this was introduced because Lrdal experienced that the formula for
calculating the reorder point was often to low for products with long lead-time.
Additional buffer = Average demand * 2
Lrdal uses an ordering rule where a minimum of 42 units are ordered each time; the
reason this is applied is because Little Junior is packed in cases of 6 units and 7
cases can be placed on one pallet. In situations where orders are greater than the
minimum level, it can be adjusted in multiples of 6. The ordered quantity is based on
how many units have been sold since the procurement department previously made an
order, but the data received from Lrdal shows that most orders made are 42, units
even though the demand since the last order made was higher than this.
2.3 The problem

In this part a short description of the problem Lrdal experiences will be presented,
which is the focus investigated in this thesis.
In the last couple of months in 2011 the distribution centre in the Netherlands (DCNL) experienced delivery problems of Little Junior, in several periods the inventory
level was negative and DC-NL was not able to fulfil customers demand.
Transhipments from the DC in UK and Norway in addition to rush orders to the
factory in China were done in order to try to cover the gap between demand and
product availability in the European market. However, even with these actions it is
possible to see from figure 2.5 that Lrdal struggled to keep the inventory at DC-NL
at a satisfactory level, and from the start of October 2011 there was a large decline in
Lrdals inventory level that ended up negative in November and December.
19
Figure 2.5: Weekly Inventory Level of Little Junior (source of information: Lrdal Medical)
Even though there is no information from the other DCs it is reasonable to assume
that the low inventory level at DC-NL also affected the inventory level at the DC in
UK and Norway, especially when transhipments were done, which in worst case can
cause similar stock-out problems at these facilities as experienced at DC-NL.
To better understand some of the more obvious reasons behind this negative trend that
seems to exist at the end of 2011, figure 2.6 outlines the total unit demand from all of
Lrdals customers delivered by DC-NL in 2010 and 2011. As can be seen from the
red line, there has been a large increase in customers orders in the last quarter of
2011, and in the middle of December the demand was higher than 150 units, which
differs much from the situation in 2010, where at the same time the demand was only
15 units.
Figure 2.6: Lrdals Weekly Demand of Little Junior (source of information: Lrdal Medical)
20
Due to the high demand from customers at the end of 2011, the procurement
department was in this period making larger and more frequent orders than before the
increase in demand occurred, as illustrated in figure 2.7. Because of the long leadtime that exist, orders for Little Junior made in November and December 2011 were
not in stock until February and March 2012, and at that time there is a chance that the
demand reverted to how it was before the increase occurred. If Lrdal is not
observant of such change and continues to order at the same pattern as if the demand
was still high, they are in great danger of the bullwhip effect.
Figure 2.7: Lrdals Order pattern of Little Junior (source of information: Lrdal Medical)
Figure 2.8 shows the total ordered quantity of Little Junior in 2010 and 2011 sorted
by each customer, based on this illustration the reason behind the increase in customer
demand at the end of 2011 seems to be due to a sudden change in the demand pattern
to a customer in Switzerland. If the data of the ordered quantity of the two years are
compared it is possible to see that there has been an extreme increase in how many
units the customer DEMA-CH ordered from 2010 to 2011, which is indicated by the
dark red bar in figure 2.8. In 2010 DEMA-CH ordered approximately 15 units, while
in 2011 the ordered quantity was above 450, which is an extreme increase.
21
Figure 2.8: Quantity of Customer Orders Little Junior (source of information: Lrdal Medical)
Figure 2.9 shows the order frequency in 2010 and 2011 for the same customers as in
figure 2.8, which illustrates how the development of DEMA-CHs demand pattern has
been in this period. As can be seen the total numbers of orders have actually
decreased, this means that each time they made an order the order quantity was high,
which was impossible for DC-NL to prepare for especially since the orders were
unexpected.
Figure 2.9: Customers order frequency for Little Junior (source of information: Lrdal Medical)
22
When a customer changes the demand pattern like DEMA-CH did, a stock-out leads
to delivery delays for the rest of the customers supplied from DC-NLs as well, and
could potentially affect the rest of Lrdals customers in Europe. This could
theoretically become a big problem for Lrdal, since their customers expect to
receive the product at least within a week from order date. Should the delivery periods
became longer and they need to wait more often for Lrdal to fix stock-out situations,
there is always a chance that they will opt out Lrdal in favour of a competitor, even
if the representatives from Lrdal claim they are very loyal.
In the situation experienced in 2011 Lrdal had to spend unforeseen money on
damage control like transhipments and if that does not solve the problem, rush orders
to the factory in China, which negatively affects Lrdals financial results. To stop
this negative trend, Lrdal has discussed increasing the reorder point drastically, but
this will not necessarily solve the fundamental problem and it can be difficult to see
how this action can prevent such incident from happening in the future.
If there had been any kind of advanced communication and sharing of information
between Lrdal and its customers, Lrdal could been informed beforehand that the
medical training personnel in Switzerland were changing the training routines from
using a grown up training doll to a child training doll. With such information Lrdal
could then have been proactive and to some degree reduced the extent of the problem
or entirely avoided it. The customers benefit with such information sharing
agreement would first of all be a promise to receive the delivery within the expected
time, but there are also other potential benefits to be achieved, like lower unit price
and more flexibility.
23
Chapter 3 - Literature Review

The purpose of this chapter is to explain, based on literature, the problems Lrdal
experienced and how these theoretically can be solved. When theoretical justifications
are used as potential explanation, it can be easier to understand how and why the
output of the created models act the way they do, and draw conclusions as to whether
the procedures used are valid or should be rejected.
Literature that seem to describe Lrdals potential problems and solutions best, and
therefore are theoretically described in this chapter, are first of all problems associated
with inventory management and the bullwhip effect as both of these need to be
properly observed in Lrdals setting because of the of the great impact the outcome
could have. Information sharing is a possible solution to avoid the bullwhip effect and
other supply chain problems that Lrdal may experience, and at last some
collaborative strategies are reviewed as an alternative for Lrdal to enter into a more
cooperated environment with suppliers/customers.
3.1 Supply Chain Management

Because of high global competition in dynamic markets and increased customer
expectations, it has become more important to manage the material and information
flow in the supply chain. Simchi-Levi et al. (2009) defines supply chain management
(SCM) as a set of approaches utilized to efficiently integrate suppliers,
manufacturers, warehouses, and stores, so that merchandise is produced and
distributed at the right quantities, to the right locations, and at the right time, in order
to minimize system wide costs while satisfying service level requirements. The
simplest supply chains consist of only a few participants, such as manufacturer and
retailer, but in todays global economy most supply chains involve multiple
participants such as raw material suppliers, manufacturers, distributers, and retailers,
and due to global development it is not longer critical for these contributors to be
situated close to each other, any market has become reachable.
However, supply chain management is about more than just moving physical items
between different segments in the supply chain, it is also about sharing information
and knowledge between the same segments in order to improve the performance. In

24
Hao (2005) research, he comments that effective partnerships and coordination

between the supply chain members, where everyone seeks to maximize the
performance, is the most important factors in order to achieve success in the supply
chain.
3.2 Potential problems in a supply chain

In situations where companies experience uncertainties within forecasting and
production areas, there are possibilities that the environment changes before proper
precautions can be implemented and this increases the chances of losing control of
individual company, which can have great effect in many ways.
3.2.1 Inventory management
Inventory management is an important part of supply chain management; if it is not
controlled properly it could be a huge budget drainer and put an end to the companys
flexibility. In Jaksic and Rusjan (2009) research the average cost of holding and
managing the inventory in the United States is between 30-35% of its value, inventory
represents 1/3 of the current assets and up to 90% of the working capital. These
numbers illustrates that inventory is one of the most significant investments in a
company, and if not organized and controlled properly the company could end up
carrying unnecessary stock, which could increase the cost and reduce the
responsiveness. On the other hand if the inventory level is reduced to avoid the high
carrying costs a stock-out situation, like Lrdal faced, could occur, which might
lower the companys targeted service level.
But there are also other reasons why companies are carrying inventory:
It can be cheaper to buy and produce larger quantity of products than
immediately needed, and achieve economic of scale
In many circumstances the production process and/or transportation may lead
to long lead-time, in Lrdals case this is several months, and in periods with
high demand it can cause stock-outs between deliveries.
When the units are transported over large distances, it would be cost-effective
to take advantage of the economics of scale and reduce the unit transportation
cost.
25
This emphasizes that the most important factor in inventory management is to find the
optimal trade-off between the inventory costs and the service level.
3.2.2 Bullwhip effect
The term bullwhip effect was first introduced by Forrester in 1960 and refers to how
demand variability increases when moving up in the supply chain from customers to
manufacturer, which could be a current phenomenon in Lrdals environment
because of increasing customer demand that occurred at the end in 2011.
When a retailer forecasts based on customers demand it could be very different from
what actually proves to be sold, which is the same problem the rest of the members in
the supply chain encounter when predicting the demand. When it finally reaches the
end of the supply chain, i.e. manufacturer, the variability from end customers actual
demand to what actually is produced could be huge, resulting in both high inventory
level and costs, and reduced service level (Zhang, 2008). Metters (1997) estimated
that the economic consequences of the bullwhip effect could be as much as 30% of a
companys profit.
Multiple reasons for why the bullwhip effect occurs in a supply chain can be found in
several research reports and textbooks. If large and infrequent orders are made from
one segment in the chain, as Lrdal experienced, it could cause distortion in the
ordering pattern in the supply chain. Price fluctuation, longer lead-time that influences
the variability, and inflated orders placed during shortage periods, are other factors
found to trigger the bullwhip effect.
Padmanabhan et al. (1997) are one example of researchers who studied this
phenomenon; they focused on whether and why the flow of demand information in a
supply chain systematically distorts demand information throughout the supply chain.
The conclusion from this study showed that sharing of real demand information
between the supply chain members reduced some of the uncertainty that existed and
as a result the chance of the bullwhip effect decreased. This theory will be tested in
Lrdals setting to see if the existing variability can be reduced.
Simchi-Levi et al. (2009) discovered other theoretical ways to reduce the bullwhip
effect: 1) stabilizing customers demand pattern by reducing the variability by i.e.
26
keeping a constant price strategy, 2) reduce the lead-time by using i.e. EDI systems,
3) engage in strategic partnership, which also makes it easier to share information.
All the suggested solutions to avoid the bullwhip effect mentioned above have one
thing in common: the more information shared, the better performance achieved in
terms of reducing this phenomenon.
3.3 Possible solutions to supply chain problems

Considerable inefficiency in the supply chain may arise from information and data
shortage, and may be a reason for the problems mentioned above occurs. However
sharing of information among the supply chain is increasingly used to overcome
these problems.
3.3.1 Information sharing
Monczaka et al. (1998) define information sharing as the extent to which one party
in the chain communicates critical and proprietary information to another party in
the chain, and when all members have access to the same information the supply
chain can become smoother and more responsive (Huang and Gangopadhyay, 2004).
According to Yu et al. (2001) there are three levels of information sharing, the first
level is called decentralized controland it refers to a situation where no information
is shared in the supply chain and each segment makes all strategic decisions
independently to reach individual optimization. The impacts the decisions will have
on suppliers and customers are not considered, in the worst case this can lead to
situations where the company becomes more exposed to the danger of the bullwhip
effect.
The second level is called coordinated control and refers to when two inventories
are coordinated based on sharing of customers order information. In such a situation
the manufacturer receives information about customers demand along with retailers
ordering information and based on these data the manufacturer makes decisions about
the proper inventory level.
The third and last level is called centralized control, where one single organization
or a small group of executives are the decision-makers for the entire supply chain, and
27
processes all relevant information to execute decisions that, optimally, should assure
better system efficiency and system wide optimization.
To utilize information, information technology systems such as ERP (Enterprise
Research Planning) and EDI (Electronic Data Interchange) should be implemented in
every participating company in order to easily share and store information and data so
that anyone in the supply chain can access it at any time. The chances of the bullwhip
effect and forecasting mistakes can then potentially be reduced, which could lead to a
reduction in system wide costs and increase the chances of total supply chain
optimization (Yu et al., 2001). Benefits from information sharing have been analysed
by other researches as well, Gerard and Marshall (2000) found that when information
sharing is introduced, the cost of holding inventory and backorders can be reduced
with 13.8%, while Lee et al. (2000) research found that if information is shared the
overall cost has potential to decrease with 12-23%.
3.3.2 Collaborative strategies
Even though there are a lot of advantages of operating in a centralized supply chain, it
can sometimes be problematic to obtain because the cooperation is not specifically
tailored to all its members, different companies could have underlying objectives and
goals that do not fit the supply chain as a whole and makes the cooperation difficult
(Walker et al., 2008). Stroh et al. (2002) commented that decision-makers in a
centralized supply chain do not have the necessary information to make a perfect
decision system wide, which can be understood as another reason why an integrated
supply chain partnership might not work.
To overcome some of these problems and other difficulties associated with formal
contracting, independent supply chain companies can agree to use a collaborative
strategy contract where it is possible to achieve some of the same benefits as can be
obtained in an integrated supply chain. A large number of such collaborative
strategies can be found in todays business environment, only a few are described
below, but what they have in common is to identify a strategy where supply chain
participants can still act in a decentralized manner while becoming more efficient,
which can be associated with centralized control (Zhu et al., 2010). Udin et al. (2006)
research concluded that benefits with collaborative strategies are service level
28
improvements, cost reduction, efficient use of resources and business process

improvements.
3.3.2.1 Vendor-managed inventory (VMI)
If a company wants to reduce the total effort it puts into inventory control, one option
is to leave the whole problem to someone else, a third party. VMI is a business model
where the supplier manages the inventory on behalf of the retailer and is responsible
for controlling the inventory by deciding how much and how often to order, which is
determined based on demand information received from the retailer.
Reasons to implement a VMI strategy with suppliers or customers are to reduce the
lead-time and improve the forecast, which can be accomplished when the supplier can
observe the end-customers demand instead of waiting until the retailer places the
order. For this to be possible the supplier should use tools as EDI or other Internet
technology that makes it easier to monitor the customers inventory level, and plan
production and transportation schedules. The goal of VMI cooperation is to optimize
the information regarding customers demand to improve inventory control and reduce
excess units by, first and foremost, reduction of the supply chains safety stock, which
leads to inventory cost reductions. Fry et al. (2001) research found that a company
could achieve savings between 10 to 15% when changing from a retailer managed
inventory to a VMI strategy.
Cachon and Fisher (2002) studied a VMI strategy in a setting consisting of one
supplier and many homogenous retailers, which can be transferred to Lrdals setting,
disregarding the larger customers, since they operate in a setting with N amount of
smaller customers, whereas Lrdal is much larger and has more influence in the
operating market. It can be considered risky for Lrdal to share sensitive information
with a large number of customers, a VMI strategy provides an opportunity for
suppliers like Lrdal where they instead of sharing their information have access to
each customers demand and inventory information in order to better control Lrdals
and the customers inventory.
However, there are also some criticisms and concerns about an implementation of the
VMI concept, it can especially be problematic in the contract design phase when the
supplier and retailer have to agree on a joint inventory strategy agreement. The
29
supplier has incentive to move as much inventory as possible to the retailers stock in
order to reduce the uncertainty, while the retailer benefits from minimum inventory
level to reduce inventory costs. It can also be difficult for the retailer to rely on a
collaborative partner who has opposite business ambitions, which could reduce the
trust and make the responsibility for the inventory less defined.
3.3.2.2 Collaborative Planning, Forecasting and Replenishment (CPFR) system
CPFR is a strategic agreement between supply chain partners where past sales trends,
planned promotions and separate forecasts are shared electronically to be able to
create a joint forecast which can be effective, since partners can view and correct the
forecast data to avoid errors and optimize the result (Williams, 1999). The CPFR data
will give a description of the periods sale, how it will be promoted, in which market
and during what time. This means that the responsibility concerning inventory control
and order time is shared between all partners in the supply chain (Terwiesh et al.,
2005).
The goal with a CPFR strategy is to achieve system-wide improvements by
coordinating the companys delivery activity together with customers demand, which
will, according to Simchi-Levi and Zhao (2003), improve the efficiency, increase
sales, reduce fixed assets and working capital, and reduce inventory for the whole
supply chain while improving customer service.
The downside with such a system is that it requires support from Internet based
products, which may result in major changes in companies key business processes.
Another problem could occur when the whole supply chain is working together with
many of the decisions; it could cause many discussions and longer negotiations
between the partners, reducing the efficiency (Chen et.al, 2005).
CPFR can be a good strategy for Lrdal since it would improve the communication
with customers/suppliers and in this way potentially solve the problems they
experienced in 2011. However since Lrdal has a large range of customers, the
planning phase of this concept may be too complex and time consuming if
implemented with all partners, instead a possibility could be to only introduce this
strategy with a couple of the most important costumers to reduce the uncertainty.
30
3.3.2.3 Periodic flexibility (PF)

Periodic flexibility is a strategy that offers the retailer options to order any product
quantity from supplier in one period of the cycle, while receiving a fixed,
predetermined quantity during the other periods (Zhu et al., 2010). In this strategy the
retailer has control over its own inventory one period of every cycle, while giving
away the control to the supplier during the other periods, meaning that retailers
inventory costs will potentially increase. It is then critical that the supplier is willing
to transfer a portion of the inventory-related cost saved from knowing endcustomers demand to retailer by i.e. price discounts and in this way both supplier and
retailer could benefit from the strategy. How much they will benefit will only depend
on the total reduction of supply chain cost, which is an incentive for all participants to
increase the performance. The key driver to the effectiveness of this policy is that the
supplier experiences zero demand variance in most of the periods and in the other
periods the uncertainty is only regarding the end customers demand.
Periodic flexibility is a popular strategy for fresh products, such as milk, which was
investigated by Glenn et al. (2001), where a fixed delivery schedule is much more
important for both the supplier and retailer because of the expiration date. Even
though Little Junior does not have an expiration date, it could be a good strategy for
Lrdal because of the long lead-time from the factory. Lrdal could then easily plan
ahead the quantity for the periods they control and take the fixed quantity into account
when deciding the order amount.
3.4 Concerns about information sharing and collaboration in a supply chain

Ellram (1995) identified factors that may be the reasons behind a partnership failure,
such as poor communication, lack of top management support, lack of trust, and lack
of a planned direction. It is important that these issues are mapped out before entering
into a strategic partnership. Malone and Benton (2000) found evidence that strategic
alliances in a supply chain can be driven by issues of power and control rather than
working on achieving a win-win situation.
In a supply chain with centralized tendencies, additonal service pressure for suppliers
and manufacturers could be developed which increases dependence on customers and
obligation to respond to customers requests, than what is expected in a more
31
decentralized supply chain. Other and more important concerns from some supply
chain participants are whether the shared information could be abused by its partners,
which will deprive the company from benefits associated with information sharing
(Lee and Whagn, 1998). Ackerman (1996) research indentifies such negative reasons
like lack of mutual understandings between parties, overpromising, deliberate
sabotage and unprofitable for the supplier as obstacles for information sharing and
integrated supply chain partnership.
When information is shared, some supply chain participants may expect a more or
less automatic system-wide improvement, misunderstanding that it is not the
information itself that is the most important part, but rather how it is used. Another
problem that could set a limitation for the information sharing and supply chain
benefits is if some partners are still looking at themselves as a fully independent
company, where only the specific companys advantages are considered in the
decision-making phase and this can lead them to be reluctant to share the latest
updated information.

32
Chapter 4 Methodology

An analysis of Lrdals setting have been conducted in order to search for reasons
behind the problems, and analyse possible solutions. This analysis process is built up
of five steps, as is illustrated in figure 4.1, the first step is to analyse the existing
situation, in step 2 major issues and problems are identified. After the problems have
been recognized step 3 is to generate ideas and possible solutions, while in step 4 the
best proposed solution found in step 3 should be tested and the best alternative should
be implemented in step 5 (Taylor, 1997), but since an implementation is not relevant
in this thesis, step 5 has been disregarded.
Step 1: Situation
Analysis
Step 2:
IdentiEication of
main issues and
problems
Step 3:
Generation and
evaluation of
alternative
solutions
Step 4:
Recommended
solution and
justiEication
Step 5:
Implementation
Figure 4.1: The five steps in Taylors process (source: Taylor, 1997)
The most important aspects of this methodology description are to explain how
Lrdals current problems were identified and what the correct solutions used in
order to deal with these problems are, which is described in respectively step 2 and
step 3. Step 1 in this mentioned process was described in Chapter 2 Lrdals
current situation, and the recommendation of the best solution, step 4, will be
explained in Chapter 5 Model descriptions and Results and in Chapter 6 Conclusion.
4.1 Step 2: Identify major issues and problems

During a period of four weeks two meetings were arranged with the Global Supply
Chain Manager, and the Logistic Manager responsible for the European, Middle East
and African markets, in order to obtain the information required to create and
investigate the problem questions. In addition to these meetings with Lrdals
representatives, a consistent e-mail correspondence was used as a follow-up method
during the writing process to acquire more detailed information.
33
The first meeting was held with the Global Supply Chain Manager, where she
presented information about Lrdal as a company, both the negative and the positive
aspects, and explained in details about problems Lrdal faced. This was done in order
to give an idea about what the focus area of this thesis could be. With the information
from this meeting the next step in the outline process was to identify potential
underlying causes for the presented problems, to search for possible theoretical
solutions and properly design the research questions. Based on this search, supply
chain management and forecasting management seemed to be the two areas where it
would be possible to find solutions to Lrdals problems. However, since Lrdal has
invested in expensive forecasting software it could be difficult to find significant
improvements within the companys forecasting procedures, while there seemed to be
shortcomings as well as improvement opportunities in Lrdal's current policies in
regards to supply chain management.
Since there currently only exists basic contact and shared information between Lrdal
and their suppliers and customers, which based on the theory about supply chain
management is the key factor to improve in order to become more effective and
flexible; this element is an area that could be an underlying cause of the problems
Lrdal experienced in the investigated period.
Lrdals current procurement procedures and the way the inventory is controlled can
also be a reason why they experience some problems. If Lrdals policies are
compared to the literature, it seems they are using a much more uncontrolled method
when calculating the reorder point and making decisions about the optimal order size,
which in addition can have an effect on the related costs.
In a setting without information sharing and consistent ordering strategies there is a
chance that the bullwhip effect could occur, which happens in situations where the
ratio of order variance between Lrdals demand from its customers, and Lrdals
orders to its supplier is high. From Lrdals historical data, which will be described in
step 3, it was possible to see that there has been a rapid increase in order frequency
and order size to the factory, something that is natural when the demand increased as
it did. However, if Lrdal is not observant about the latest changes in customers
demand pattern and continues to order large quantities when the demand has actually
decreased, there is a chance the bullwhip effect could occur and Lrdal could end up
34
carrying an unnecessarily high inventory, thus increasing the inventory costs. This can
be especially dangerous in Lrdal setting, where the reorder point is calculated based
on the last 52 weeks of demand, which means when or if the demand becomes normal,
the reorder point is calculated based on periods with high demand. Since there
additionally exist a long lead-time for Chinese products, orders made while the
demand is high could be received after the demand has stagnated. For these reasons it
is important that the variability in the supply chain is investigated and if this is high it
is critical that correct actions are implemented to reduce the impact of the effect.
Prior to the second meeting with Lrdal, a range of questions was prepared to be able
to acquire more detailed information relevant to investigating the mentioned topics on
a specific product level. The aim was to create a group conversation where the
representatives could explain Lrdals problems with Little Junior and describe how
the companys current supply chain strategies affect this product. Since the interview
was conducted as a conversation, it was possible to ask follow- up questions other
than those prepared in advance.
Information about the discussed topics, as well as other relevant data required in the
process of formulating the problem questions, were collected directly from Lrdals
representatives through in-depth interviews and e-mails, indicating that primary data3
have been collect with a qualitative research method.
4.2 Step 3: Generation and evaluation of alternative solutions

To try and deal with Lrdals problems, described in Chapter 2, and evaluate the
proposed areas of improvements generated in the previous step, five Excel simulation
models were created. Lrdals current situation in terms of service level, costs and
variability was modelled and analysed, only to be compared to other constructed
models where the suggested solutions mentioned above were tested. The research aim
was to measure these parameters to give an indication of how the introduced
modifications of the models affect the results, in order to answer which strategy show
the most optimal performance and should be considered implemented, or if things
done today would still be the most optimal.

3
Information and data collected by the researcher directly from the research object.
35
By using a simulation method it is possible to see how the models react to proposed
changes without spending much time and resources on a physical implementation. It
is also possible with this modelling method to acquire important and detailed
information that makes it possible to locate where the potential problems may lie, in
order to be better prepared when or if the created model is implemented. On the other
hand, if any mistakes have been made during either the data collection phase or when
constructing the models, it could mean that the model was created under false
pretences and leading to the wrong model interpreted as the best alternative.
There are multiple ways of performing a simulation analysis, Monte Carlo in Excel is
the method chosen in this thesis, but Arena Simulation Software could also have
been used. The reason why Monte Carlo was chosen is because the simulation process
is more transparent than it is in Arena, which makes it easier to monitor the model
throughout the analysis. In addition, it is easier to do the necessary and proper
changes in the models where problems occur to eliminate modelling errors, which
increases the chance of achieving an optimized model result. On the other hand, the
output received from Arena simulation is more detailed, which makes it easier to
interpret and use in further analysis.
Real data concerning historical demand, ordering dates and quantities from the period
01.01.2010 to 31.12.2011, including the starting point of the period where Lrdal
experienced the sudden change in customers demand, was received from Lrdal and
is the basis for the data and information used to create the simulation models.
The first model is created based on Lrdals current normal situation where Lrdal
exclusively experiences stable demand from customer.
The second model also simulates Lrdals current situation, however in this model
customers demand changes after some periods, similar to what actually happened to
Lrdal. Since this model presents Lrdals real setting in periods where problems
occurred, the simulated output is the basis for comparison to the output of the other
models, which will give an indication of how well the other scenarios work in
Lrdals situation.
36
In the remaining models the focus is on investigating the proposed improvements

described in the previous section and whether these suggestions actually have a
positive effect for Lrdal.
In model 3 changes are done to improve Lrdals inventory policies to make it more
similar to the literature of inventory control, this is done to try to optimize the
operations in order to make it smoother. There is a potential that Lrdal can achieve a
more optimal performance and inventory control by simply conducting a proper
analysis and from this locating the policies that best fit the company, which can
reduce unnecessary costs. This was shown in Cachon and Fisher (1998) research
where a supply chain could become more efficient by improving the coordination of,
for example, orders and order sizes. In these situations they found that batch size
could be reduced with 50% and costs can be reduced by up to 21-22 %.
Model 4 is created as a two-level supply chain where customers are added to show
how a decentralized supply chain works when both participants are making
independent decisions to optimize their individual performance. This model is used as
the basis for the last model, model 5, where the models criteria is expanded to
include cooperation between Lrdal and customer where the end-customers demand
information is shared between them to make the setting similar to the coordinated
control, described in the literature review in Chapter 3, which is a more centralized
situation than model 4. When information is shared among the participants, the
demand pattern is more or less known, which reduces the uncertainty and the chance
that the bullwhip effect.
To be able to conduct a proper evaluation of these models in a way that secures
validation, the collected numerical output is transformed to useable and comparable
statistics in a way that makes it possible to draw justifying conclusions in order to find
the optimal model. This technique is known to be a quantitative method, which means
that a mixed-model research have been used in this thesis to conduct the research,
where qualitative methods has been used in the data collection process, while
quantitative methods have been used in the analysing process.
37
Chapter 5 - Model descriptions and Results

The five models described in this section are developed in order to study the
following:
Lrdals setting, where the focus is on reducing total costs to ensure better
performance, while improving or maintaining the service level.
The variance between the demand and orders, which is calculated and
analysed in order to reduce the risk of the bullwhip effect.
Crystal Ball is applied to make use of the output from the Monte Carlo simulation, the
goal being to compare results and effects the changes have on the different models.
5.1 Assumptions in the models

Some assumptions have been made to ensure that the models were successfully
created and the validity of the analysis conducted is sufficient.
For simplicity, Lrdals customers are merged into one customer in the simulation
models, since its possible to assume that Lrdals demand equals the total demand of
the end customer, if not the customer would have unnecessary inventory stored,
something that seem unlikely.
1,000 periods are simulated in each model, where one period represents one week in
real time. Even though Lrdals goal is that customers receive the order in a time
period of 4-6 days, for simplistic reasons this is rounded up to 1 period in the models,
meaning that orders made during period t are assumed received at start the of period
t+1. The lead-time in Lrdals current setting is 58 days, however for convenience a
lead-time of 8 weeks is used in the modelling.
In real life unsatisfied demand will, as far as possible, be fulfilled firstly by
transhipments from nearby DCs and secondly by rush-orders from the manufacturer.
However, these have been neglected in the modelling phase since the objective is to
investigate the best resistance strategy for Lrdal towards potential stock-outs due to
increase in demand and how they optimally can adapt to such changes in order to
quickly restore a satisfying inventory level.

38
5.2 Distribution fitting

Real historical demand data of the investigated periods received from Lrdal were
grouped in two different demand distributions. In demand distribution 1 Lrdal
experiences normal demand, while in the second demand distribution there has
been an increase in demand. It was found by using the programme Easy fit
distribution software that the gamma distribution was the best statistical expression to
describe the actual demand in both distributions, the charts can be seen in figure 5.1
and 5.2, where y-axis describes the probability and the x-axis is the count.

Figure 5.1: Demand Distribution 1 Gamma Distribution fitting (Source: EasyFit Distribution software)

Figure 5.2: Demand Distribution 2 Gamma Distribution fitting (Source: EasyFit Distribution software)
This gamma distribution fitting is only used as an approximation, since normal

distribution will be used to calculate the inventory level.
In distribution 1, ! and ! were found to be 20.2 and 12.25 with a scale parameter beta
(!) of 6.4593 and the shape parameter alpha (!) 3.2315, while in distribution 2 ! and
! were 68.16 and 51.47 where the scale parameter ! and shape parameter ! were
respectively 38.878 and 1.1734. These parameters are used to simulate the customers
39
demand in the models, which will be described in more detail in the model description
in section 5.4.4.
Model 1 is the only model where distribution 1 is used exclusively to simulate
customers demand, while the remaining models, model 2 to 5 both distributions are
used. In these models the change from distribution 1 to distribution 2 is done when
the calculated ! and ! are close to the same values found in the real data received
from Lrdal, which means that distribution 1 is used between period 1 and period 889
and distribution 2 is used from 890 until 1000. However it is taken into account that
the models manage to stabilize the inventory level before the simulation ends, which
is important to be able to secure model validity. The goal with implementing
distribution 2 in the respective models is to investigate how well they manage to
restore the inventory level and how large the consequences are when facing a demand
shock close to what Lrdal experienced.
5.3 Performance measurements

Throughout the simulation process, standard measurements are calculated to make
sure that all models are created based on the same principles in order to make valid
comparisons. The model measurements are divided into three main categories:
Total cost
Service level
Variance
These measurements are computed to investigate how good the models perform with
regards to the research questions in this thesis.
Total cost is made up of two cost measurements; both numbers were received from
Lrdal:
Ordering cost
Holding cost
Ideally the stock-out cost should also be measured to get an idea of cost when unable
to satisfy customer demand, but this cost has never been investigated by Lrdal and
for that reason it is not taken into account when analysing the results. Neither is order
40
cost really measured at Lrdal, but from the information received from the
procurement department, they spend approximately 5 hours on each order and the
estimated hourly wage is 35.64, which means it costs Lrdal 178 each time they
make an order, and each week one unit of 'Little Junior' is stored there is a holding
cost of 0.0357.
The second main category mentioned above, Lrdals service level, is measured
based on:
Amount backordered
Fill rate
The amount backordered is collected as an alternative measurement to stock-out costs,

and is recorded to give an overview of how many units are backordered during each
period and in total at the end of the 1000 periods. The second measurement in the
service level category is the fill rate, which is defined by Silver et al. (1998) as the
fraction of customer demand that is met routinely; that is, without backorders and lost
sale, and is calculated in this thesis by 1-
! !"#$ !"#$" !"#$%

! !"#$%!
In addition the variance measures the supply chain variability at the end of the
simulation to see if the supply chain is at risk of experiencing the bullwhip effect. The
variance of customer demand and end-customer demand in model 4 and 5, (VarC) is
compared to the variance of Lrdals orders to the manufacturer (VarL), and if
VarL/VarC>1 there is a chance that the bullwhip effect is occurring in the supply
chain.
All these measurements are calculated based on 300 simulation runs, and the most
interesting and important results from the different models are mentioned in the text
below, the rest of the measured statistical output and histograms from all models and
each measurement can be found in the appendix.
Estimated annual income/average annual working hours in Norway: 59116/1659
41
5.4 Model 1 - Lrdals current situation with normal demand

This first model is created to simulate Lrdals setting where distribution 1 is used.
The goal is to investigate how Lrdals current strategies work when the customers
demand is stable and more predictable.
5.4.1 Brief model summary
In this model two things happen; the first section deals with customer demand and
fulfilment of this, which is satisfied from the current inventory level and as long as
Lrdal has an inventory level larger than the demand, the customer will always
receive the ordered amount. The second section of the model is about Lrdals orders
to the manufacturer, which is what binds the two sections together - when the
inventory position drops below the reorder point an order is made to increase the
inventory level.
5.4.2 Inventory strategy used
Lrdal currently uses periodic reviews with an inventory strategy similar to the
(R,s,S) policy found in the literature, where the inventory position is checked every
(R) period and if it is below the reorder level (s) an order is made to increase the
inventory position to the base stock level (S), if the inventory level is above (s)
nothing will be done until next period (R) (Silver et al., 1998). However in Lrdals
policy the ordered quantity is not made to meet the base-stock level (S), instead it is
the periods demand in addition to the ordering rules that determines the ordered
quantity. As previously mentioned the reorder point is calculated and changed every
eighth period.
5.4.3 Expressions
Below are the different expressions used in the model described:
NetInv period
What actually is in stock at the start of the period, this can become negative
start
when the demand is higher than the current inventory level, and these are then
backordered. The formula is: !"#$"%&'( !" !"#$ !"#$%&'(&)
Demand
The periods customer demand
42
InvPos
In the inventory position orders made are taken into account right away, which
means that lead-time is neglected. Backordered and committed orders are
subtracted from this, which means that it can become negative. The formula is:
!"#$"%&'( !" !"#$ + !"#$% !"#$"$# !"#$%&'(&)
!"##$%&' !"#$%
NetInv period end
The same as NetInv period start, but after the customer has receives what was
ordered.
Reorder Point
When the inventory position is below this point an order is made to the
manufacturer. Lrdal calculates it by:
AVG * L + z * STD + 2 * 15%* AVG
L = Lead-time
AVG = average weekly (forecasted) demand
STD = standard deviation of the weekly (forecasted) demand
z = safety factor
Order size
Amount ordered to the manufacturer, calculated based on the periods

demand, with changes according to Lrdals ordering rule
Table 5.1: Expressions used in Model 1 and 2 (Source: Silver et al., (1998) and Lrdal)
5.4.4 Model description

The model is initiated by NetInv period start, and the 320 units in period 1 were
Lrdals inventory level 01.01.2010; however because of the high numbers of periods
simulated in the model, the start amount will not affect the performance and the final
results.
The inverse function of the gamma distribution described earlier in this chapter is
used to simulate the models periodical demand, where in addition to alpha and beta a
RAND Excel function is used, which creates random numbers to make the model
dynamic. Since distribution 1 is used to simulate the customers demand, alpha and
beta are respectively 3.2315 and 6.459, and the formula used in the demand cells are:
INT(GAMMAINV(RAND();3,2315;6,4593))
where the INT is added to secure that the demand appears in whole units. The NetInv
period end is calculated by subtracting NetInv period start from the periods
simulated demand. In situations where the inventory level is higher than the periods
demand, the demand is simply withdrawn, but if the demand is higher than units left
in stock, remaining units are shipped to the customers, the rest is backlogged and
fulfilled when possible, thus making the NetInv period end negative. The NetInv
43
period end is together with any orders received, which was ordered eight periods
earlier, used as the next periods NetInv period start.
InvPos gets updated without any order- and shipment lead-time, and is used to decide
if an order should be made to the manufacturer or not, which is done when InvPos <
ROP. Lrdals formula for calculating the ROP, which was presented in Chapter 2
Description of Lrdal, is used and is based on 52 periods of customer demand.
Because there is not sufficient data to calculate the reorder point in periods between 1
and 52 a warm-up period of 51 demand periods are applied before the models
simulation starts.
The order size depends on the current periods demand, even though Lrdals
representatives mentioned that demand from periods where no orders are made is
added to the demand that occurs next period. But this is a practice that is not pursued
by Lrdals procurement department according to the received data; instead it is the
minimum order size that is most often ordered. This practice has been adopted in this
model, where the minimum rule of 42 units are ordered if the periods demand is
below 50 - on the other hand, if it is above 50 the multiple rule of 6 is used.
5.4.5 Results
In this first model there is no other model to compare the achieved results to, and for
that reason it can be difficult to argue for any of the output being satisfactory,
especially regarding costs.
But if the results concerning the service measurements are investigate more closely, it
can be interpreted that under a steady demand Lrdals current inventory policies
work close to perfect, both in terms of backordered units and fill rate. The average
backorder after the simulation run was 82.29, and shown from the red area in figure
5.3 there is a 60.25% chance that Lrdal would experience backordered amounts that
are below the measured average. There is a 13% chance that the highest frequency
occurs, which is positive, since this is well below the calculated average. Additionally,
since the fill rate is related to the amount backordered; this measurement is also
satisfying, the average of all simulations are rounded up to 100% since the Crystal
Ball statistical output only shows two decimals.
44
Figure 5.3: Backorders Model 1 (source: Crystal Ball)
However since the results achieved in this model are close to 100%, this could mean
that Lrdals calculation of reorder point is not optimal and forces them to carry too
much inventory, which means that the current holding costs could be unnecessarily
high and depriving them of the possibility of improved flexibility.
As discussed in section 5.3 the company can be in danger of a bullwhip situation if
the measured variance is higher than 1, which is a reality in model 1. As can bee seen
in figure 5.4 below, the average variance between customers demand and Lrdals
orders to the manufacturer are 3.44, which means that the variance is higher than the
desirable rate. However, as indicated by the red area, there is a 49.7% chance that the
achieved variance is below the average, but as shown in the figure, Lrdal cannot
reach a stable level since the variance is only once lower than 3. A reason for this
high variability existing in this model can be because of Lrdals ordering rules,
where the orders vary from 0 when they do not make an order to minimum 42 units
when they do, which means that ordered quantity can be far from the calculated mean
and this creates a higher variability.

Figure 5.4: Variance Model 1 (source: Crystal Ball)
45
5.5 Model 2 - Lrdals current situation with periods of increased demand

Model 2 is identical to model 1, where Lrdals current situation is simulated,
however in this model both demand distributions are used to simulate the customers
demand, which is done in order to make the model similar to what Lrdal actually
experienced during the period mentioned. The goal of this model is to investigate how
Lrdals current strategies work when the demand undergoes a sudden increase.
5.5.1 Expressions
The expressions used when describing the model are the same as used when
describing model 1, and can be found in table 5.1
The only difference between model 2 and model 1 is that both demand distributions
described at the start of this chapter are used to simulate customers demand.
5.5.3 Results
Due to the demand shock model 2 was exposed to, model 1 and model 2 are not based
on the same demand principles, for which reason the outputs are not very comparable,
since it is reasonable to assume that the increase in demand affects Lrdals
performance, both in terms of achieved costs and service performance. The
comparisons below are done to show how the demand shock affects Lrdals results
when the current strategies are used, where the object is to illustrate why it is
important to have an incorporated strategy that makes it easier to reduce the outcome
if such a situation were to happen.
When Lrdal experiences the sudden change in demand in period 890, the calculated
reorder point will after some time adjust in order to reduce the chance for the
inventory not being able to satisfy the demand. The inventory level in model 2 will
then increase and so will the inventory holding costs, which is illustrated in figure 5.5.
46
Figure 5.5: Comparison of Holding cost Model 1 and Model 2 (source: Crystal Ball)
To
satisfy the growth in demand Lrdal makes higher and more frequent orders to the
manufacturer, which increases the ordering costs. This, together with the higher
holding cost previously described, increases the total costs in model 2, which can be
seen in figure 5.6, and this can have a negative effect on the companys long-term
financial performance.
Figure 5.6: Comparison of Total cost Model 1 and Model 2 (source: Crystal Ball)
The shock in demand can especially be recognized in the attained service level where
both the amount of backordered units and the fill rate has deteriorated. If the average
unsatisfied demand of the two models is compared, model 2 experienced a total of
3145 units backordered, while in model 1 only 82.29 units were backordered, which
means fewer customers orders were fulfilled from stock in model 2. This also means
that the fill rate has been reduced with 12%, which can be seen in figure 5.7. In
addition to achieving a worse result, model 2 is much more difficult to predict, which
is illustrated by the wide scatter and low frequency in the red columns.
47
Figure 5.7: Comparison of fill rate Model 1 and Model 2 (source: Crystal Ball)
The variance in this figure is as in model 1 measured based on the variability between
customers demand to Lrdal and the orders made from Lrdal to the manufacturer.
Normally such change in demand as experienced by Lrdal would mean that the
supply chain variability would increase, but in figure 5.8 it is possible to see that the
variance actually has decreased in model 2, and is now closer to the acceptable level
discussed in section 5.3. Since neither the lead-time nor the forecasted periods have
changed, a reason for the reduction in variability can be because the increase in
demand model 2 faced tripled the variance in the orders made to Lrdal, while the
variance in the orders from Lrdal to the manufacturer were already high and did not
have the same significant increase, which makes the ratio between the variables
smaller.

Figure 5.8: Comparison of variance Model 1 and Model 2 (source: Crystal Ball)

48
5.6 Model 3 Changes to Lrdals inventory policies

Model 3 is created based on experiments done to model 2 in order to find a more
optimal inventory strategy for Lrdal, the goal is to see if an ideal theoretical
inventory policy has a positive effect on Lrdals performance.
This model also consists of the same two sections as in the models above, where the
customers demand is fulfilled from units in stock in the first section, while in the
second section the inventory position is checked to see if it is below the reorder point.
If this is true, an order should be made to the manufacturer to bring the inventory
position up to the calculated optimal level, which is new in this model, but if the
inventory level is above the reorder point nothing will happen until the next time the
inventory is reviewed.
When finding the optimal inventory strategy for Lrdal it is an advantage that the
proposed changes fit the company and can be implemented without too many major
alterations. For example, Lrdal has limited human capacity working in the
procurement department, which makes it problematic to suggest an inventory policy
that needs to be continuously controlled to make the orders exactly when needed, for
that reason it is assumed that Lrdal still uses a periodically review policy. According
to Silver et al. (1998) the optimal inventory policies for this review strategy is a (R,S)
or a (R,s,S) policy, where in the (R,S) policy orders are made every (R) period in
order to raise the inventory to the base-stock level (S) (Disney and Lambrecht, 2008),
but in this policy the reorder point is not calculated and used as it is in the (R,s,S).
Also a mix policy (R,s,Q) was tested where the difference is that this policy calculates
an order quantity (Q) based on the EOQ formula
!!"#$%!!"#$" !"#$
!""#$% !"#$ !!"#!"# !"#$
and this
amount is ordered when the inventory position drops below the reorder point.
Since Lrdal experiences a long production and transportation lead-time for Little
Junior in addition to relative high ordering costs, it is not beneficial for them to order
every period to meet the base-stock level, which is done in a (R,S) policy. With a
(R,s,S) and (R,s,Q) policy it is possible to make higher orders each time, which suits
49
Lrdal better. The results from (R,s,S) and (R,s,Q) were compared in order to find the
most optimal policy, where the simulation showed that (R,s,S) performed best in
terms of service level and costs. Furthermore, since this policy is a continuation of the
inventory policy already implemented in the company today, it means that less
reorganization is needed to implement the necessary changes.
Lrdals present strategy, where the reorder point is recalculated every eighth period,
is used in this model as it showed better result than if the recalculation was done
every period. However, the calculations of reorder point and base-stock level is now
calculated based on 8 periods of moving average, which was found to be superior
compared to 6, 10 or 12 periods, instead of 52 periods as used in model 2. A table of
the conducted experimentation of the different moving average periods can be found
in table 5.2 (the figures comparing the periods can be found in the appendix), and
from this it can be seen there are little variations in the performance between
alternative of 8, 10 or 12 periods. The main difference is found in the ordering cost
where 8 periods perform 5.24 % better than 10 periods, and 10 periods perform 4.33%
better than 12 periods. Even though the holding costs and backordered units are a bit
higher in the 8 periods model, the total annual costs in this model are the lowest of the
three and the percentage of improvement in this is larger than the percentage of
increase in backordered units.
Statistics
6 periods
8 periods
10 periods
12 periods
Backordered
2,008.16
1,787.31
1,740.88
1,751.78
Fill Rate
0.92
0.93
0.93
0.93
Ordering Cost
60,063.73
62,142.77
65,400.76
68,233.33
Holding Cost
5,237.77
5,203.11
5,042.38
4,933.71
Total annual costs5
3395
3501
3662
3804
Table 5.2: Statistics of the tested periods of moving average (source: output from Crystal Ball)
This means that different estimates done are calculated based on the 8 previous
demand periods. The moving average strategy is also applied when calculating the
base-stock level in this model, which is also recalculated every eighth period since it

5 Annual total cost: (Ordering cost + Holding cost)/ 1000 simulated periods * 52 weeks

50
would be illogical to keep the reorder point fixed while changing the base-stock level
every period.
Because it is assumed that the packaging of Little Junior done in Lrdal today is
optimized according to cargo space, the ordering rules about minimum order size of
42 and in multiples of 6 are still used. In addition nothing has been done to the 1.96 as
Lrdal uses as the safety factor, since this is assumed to be company standard.
5.6.3 Expressions
NetInv period
start
when the demand is higher than the current inventory level, and these are then
backordered. The formula is: !"#$"%&'( !" !"#$ !"#$%&'(&)
Demand
InvPos
Inventory position orders made are taken into account right away, which means
that lead-time is neglected. Backordered and committed orders are subtracted
from this, which means that this can also become negative. The formula is:
!"#$"%&'( !" !"#$ + !"#$% !"#$"$# !"#$%&'(&)
!"##$%&' !"#$%
NetInv period
The same as NetInv period start, but after the customer has received what was
end
ordered.
! - Estimate
Average demand during the forecasting period
! - Estimate
Standard deviation during the forecasting period

Since a fixed known lead-time exist, it is calculated by:
ROP
AVG * L + z * STD* !
Base-stock level
L = Lead-time
AVG = average (forecasted) weekly demand
z = safety factor
Minimum inventory level necessary to maintain an effective inventory control,
since there is a fixed known lead-time it is calculated by:
( ! + ! !"#) + ! !"# ( ! + !)
R = Time between replenishments
Order Size
The periods amount ordered to the manufacturer, calculated by:

Base-stock level InvPos
Table 5.3: Expressions used in Model 3 (Source: Silver et al., 1998)
51

The changes done to the inventory strategy altered some parts in the model
construction that will be described in this section, but there are also some similarities
with the previous mentioned models, which can be seen by the expressions in table
5.3, such as the calculations of NetInv period start, InvPos and NetInv period end are
done in the same way as the two previous models, and both distributions as in model
2 are used to simulate the demand.
! and ! estimated calculations are new in this model and is used to calculate ROP and
the base-stock level, which will be described in more detail later in this section. As
mentioned, 8 periods of moving average is used as a forecasting strategy, which
means that ! is calculated by summarizing the 8 previously periods of demand
divided by 8 to find the average demand in this period, while the variation from the
mean, the standard deviation (!), is calculated by using the Excel function STDEV
based on the same 8 periods of demand. To be able to calculate ! and ! from period 1,
7 periods of demand have been used as a warm-up before the modulation starts.
As mentioned, the ROP is calculated with the periods ! and ! estimates multiplied
with 8 weeks of lead-time and 1.96 as the safety factor, according to the ROP formula
in table 5.3, this calculation is used to initiate an order, which is done in periods
where the InvPos< ROP. The base stock-level is used as an order-up-to point, which
is calculated with the same variables as ROP with an additional one-week lead-time
that exists between the inventory reviews. To make sure that the base stock-level
never becomes negative or zero, the maximum of this level and the InvPos is used:
!"# !"#! ! + ! + !!"#! (! + !), !"#$%&
During these periods the order will be made to increase InvPos to the calculated basestock level, which is done by subtracting the periods base-stock level from the
periods InvPos, adjusted according to Lrdals ordering rules. In periods where
InvPos is higher than the calculated base-stock level, no order will be made since the
difference between the base-stock level and InvPos will equal to zero.
52
5.6.5 Results
Since the same demand distributions are used in model 2 and model 3, these are much
more comparable than they are to model 1, and for that reason the results will be
presented based on comparisons of these two models.
If Lrdal were to change the current inventory policies to the suggested strategies
introduced in model 3, they can achieve a sufficient decrease in total costs, which is
shown in figure 5.9. After 300 runs the average total cost in model 3 was 67,404,
which is a 30.5% reduction compared to model 2.

Figure 5.9: Comparison of Total Cost Model 2 and Model 3 (source: Crystal Ball)

If
the specific costs are further analysed the main difference between the two models
can be found in the ordering costs. The ordered quantity in model 3 was at least equal
and often higher than orders made in model 2, which means that fewer orders were
required in model 3 to keep the inventory at a satisfactory level. Figure 5.10 compares
the two models ordering costs, and as illustrated from the different bars there have
been a great decrease of this costs in model 3.

Figure 5.10: Comparison of Ordering Cost Model 2 and Model 3 (source: Crystal Ball)

53
The backordered amount, which can be seen in figure 5.11, improved on the average
with 43.5%, and since model 3 is also much more stable around the mean there is a
higher chance that Lrdal would achieve this amount of backordered units. This
decrease in backorders have lead to a fill rate improvement of average 5%, from 88%
to 93%, which shows a positive impact on the service performance when changing the
forecasting strategy used to control the inventory.
Figure 5.11: Comparison of Backorders Model 2 and Model 3 (source: Crystal Ball)
This improvement in backordered units is first of all because model 3 performs better
in terms of reacting to the demand shock; the reason for this is that the reorder point
and base-stock level are based on 8 periods of moving average, the calculations then
more quickly adopts to the sudden change in the customers demand compared to
model 2, where the calculations are based on 52 weeks of demand. Figure 5.12 below
compares a random simulation of the two models inventory levels, in both examples
the models service level were close to the achieved average, this figure illustrates how
quickly model 3 manages to restore the inventory after the shock in demand compared
to model 2.
Figure 5.12: Comparison of inventory level model 2 and model 3 (source: Monte Carlo Simulation)
54
The variance of all three models mentioned so far are compared in figure 5.13, also in
this figure the variance from customer to Lrdal and from Lrdal to manufacturer is
measured. The figure below illustrates that the variance in model 3 is higher, in
addition are the attained results spread over a large range in the figure compared to
both model 1 and 2, which shows how much more stable especially model 2 is in this
area. One reason for this high increase in variability could be that model 3 orders a
higher amount of units each time to reach the calculated base-stock level and this leads
to longer periods between orders, which increases the variability.
Figure 5.13: Comparison of the variance Model 1, 2 and 3 (source: Crystal Ball)
5.7 Model 4 Decentralized supply chain

The fourth model is created as a two-level supply chain, consisting of customer in
addition to Lrdal; the goal with this model is to investigate the interaction within a
decentralized supply chain where both customer and Lrdal are trying to optimize
their performance independently, which will be compared to the following model.
This model is made up of four sections, in the first the customer receives the demand
from the end-customer, which is fulfilled from the inventory, in the second section the
customer makes an order to Lrdal to increase the inventory position to the basestock level. In the third section, as previously described, Lrdal fulfils the demand if
their inventory level is positive, and in the last section Lrdal makes an order if the
inventory position is below the reorder point, if not they wait until next period.
55

Lrdals inventory policy used in this model is a (R,s,S) with 8 periods of moving
average, which were found to be most optimal in model 3.
Since no specific information and real data exist describing the customers setting and
strategies, these variables are assumed and experimented with in order to find the
most optimal strategies that best control the inventory and ordering processes to
minimize customers backorders. The experimentation of inventory policies is done
based on theoretical methods found in Silver et al. (1998), since there is no
information about the different costs needed to calculate Q, a continuous review
policy could not be applied. The customer should then use a strategy where the
inventory is checked in intervals; since lead-time is assumed to be one week it would
be natural that customer also checks the inventory once a week. The (R,s,S) policy
used in model 3 proved not to be suitable, since the customer would then order less
frequently and higher quantity each time, which does not reflect how Lrdals
customers operate in real life and the result would not be as valid. It was then the
(R,S) policy that best depicts customers behaviour compared to how customers act in
Lrdals real situation, in this policy the inventory is reviewed regularly every period
(R) and an order is made each time to increase the inventory level to the periods
calculated base stock level (S).
There has also been conducted experiments to find the customers most optimal
forecasting strategy, the different alternatives tested were moving average of 6, 8 and
10 periods, where 6 periods performed the best when focusing on reducing the
customers stock-outs. The last variable that has been assumed regarding customers is
the service level, it has been tested a fixed level of 1.75, 1.9 and 1.96, where the
safety factor of 1.9 showed to best fit the setting.
5.7.3 Expressions
These are expressions used when describing both customer and Lrdal
NetInv period
start
when the demand is higher than the current inventory level, and these are
then backordered. The formula is: !"#$"%&'( !" !"#$ !"#$%&'(&)
Demand
56
To customer
Only used at Lrdal to show the units shipped to customers, as long as

NetInv period start > Demand customer will receive what was ordered.
InvPos
Orders made are taken into account right away, which means that lead-time
is neglected. Backordered and committed orders are subtracted from this,
which means that also this can become negative. The formula is:
!"#$"%&'( !" !"#$ + !"#$% !"#$"$# !"#$%&'(&) !"##$%&' !"#$%
NetInv period end
The same as NetInv period start, but after the customer has received what
was ordered.
! - Estimate
Average demand during the forecasting period
! - Estimate
Standard deviation during the forecasting period
ROP
Since there is a fixed known lead-lead time it is calculated by:

AVG * L + z * STD* !
Base-stock level
L = Lead-time
AVG = average (forecasted) weekly demand
z = safety factor
Minimum inventory level necessary to maintain an effective inventory control,
since there is a fixed known lead-time it is calculated by:
( ! + ! !"#) + ! !"# ( ! + !)
R = Time between replenishments
Order Size
The periods amount ordered to the manufacturer, calculated by:

Base-stock level InvPos
Table 5.4: Expressions used in Model 4 and 5 (Source: Silver et al., 1998)

5.7.4.1 Lrdals side
The same strategies applied in model 3 are used in Lrdals part of this model, only
the new aspects will be presented in this section, the more detailed description can be
found in section 5.6.4.
To customer is a new expression used to track how many units of Little Junior are
shipped from Lrdal to customer, and this can be compared to what was actually
ordered in the demand to get an overview of the delivery performance.
57
5.7.4.2 Customers side

To initiate the simulation 120 units are used in the same way as the models presented
above as NetInv period start in period 1. Other similarities between customers side
and the description of Lrdal in the models presented earlier are:
The NetInv period end is calculated in the same way by taking the difference
between NetInv period start and demand
All unfulfilled demand is backlogged and transferred as soon as customer has
a positive NetInv period start.
The received orders, which are transferred from Lrdals, are added to the
previous period NetInv period end to calculate next periods NetInv period
start.
The demand from end-customer is basically found in the same way as described in
section 5.4.4 with the Gamma inverse function, in the start it was assumed that the
average demand of end-customer is close to the demand Lrdal experienced from
customer. However, since it is not possible to assume that customer experienced the
same variation in the demand as Lrdal, the alpha and beta used when simulating
end-customers demand are changed in a way so orders from customer to Lrdal have
the same ! and ! as found in the demand Lrdal experienced in model 2 and 3, which
was done to assure that Lrdal experiences the same demand.
The base-stock level is calculated and changed every period and is used as the upper
inventory limit for how much customer should order, the calculation of base-stock
level and order size is done in the same way as described in model 3.
5.7.5 Results
Model 3 and 4 are the same but presented in two different ways, model 3 as a onelevel supply chain where Lrdal is the only participant, while model 4 as a two-level,
also showing the customer, but demand to Lrdal should still be the same. Any
dissimilarities between the models measurements are due to differences in the
demands ! and !, which were difficult to match a hundred percent because of the
explained changes done to ! and ! in end-customers demand. For this reason it is not
necessary to conduct an analysis that compares the two models.
58
5.8 Model 5 Coordinated Control where demand information is shared

Model 5 is similar to model 4 where the main difference is that customer shares
information regarding forecasted demand with Lrdal, where the goal is to reduce the
variability in order to decrease the chance of a bullwhip situation in the supply chain.
Model 5 works in the same way as model 4, the four sections are the same, but now
customers are at the start of the period sharing the predicted forecasted demand with
Lrdal.
Customer uses the same inventory and forecasting strategy found to be optimal in
model 4. Since a higher level of cooperation between Lrdal and customer is
assumed, where the customer shares sensitive information, Lrdal changes its
strategies in order to optimize the performance of the supply chain. However the
(R,s,S) policy was still found to be superior to the other policies in terms of
performance, but the recalculation of the reorder point and base-stock level has been
experimented with and it was found that the best situation for Lrdal is to recalculate
them every fourth period instead of eighth.
5.8.3 Expressions
The models expressions are the same as in model 4 and can be found in table 5.4.
5.8.4.1 Lrdals description
Lrdals side of the model is more or less the same as in the models described above;
except as mentioned above, the estimates of ! and ! is calculated based on endcustomers previous demand instead of customers. These estimates are used in the
same way as in the previous models in order to calculate the reorder level and basestock level, which is now calculated every fourth period.
59
5.8.4.2 Customers description

Nothing has been done to the customer in this model, the customers description can
then be found in section 5.7.4.2.
5.8.5 Results
It is the result from the simulation conducted in model 4 and 5 that is analysed in this
section; of the 5 models presented these are the only models that are created as a twolevel supply chain.
As mentioned in the introduction of model 5, the goal is to reduce the achieved
variance compared to the decentralized model 4, which in these models is calculated
based on the variability from end-customers demand and the orders from Lrdal to
the manufacturer. From figure 5.14 it can be seen that there has been a reduction in
the variability when end-customers demand information is shared. This is achieved
since each participant in the supply chain has the actual demand data available and
based on this they can create more precise forecasts, rather than rely on historical
orders, which reduced the danger of the bullwhip effect. But even if demand
information is shared the risk of the bullwhip effect is still present in model 5 as the
variance is larger than 1.

Figure 5.14: Comparison of variance Model 4 and 5 (source: Crystal Ball)

When
Lrdal receives end-customers demand information the forecasting becomes
more effective by reducing the forecasted mistakes, which reduces reorder point and
base-stock level compared to the decentralized model 4. This leads to a reduction in
the inventory and the inventory holding costs of a total of 27% when the backordered
units are taken into account, shown in figure 5.15, Lrdal can then become more
responsive to changes. However this also means that the ordering costs are increased

60
since Lrdal must order more frequently, which can understood as the down side with
information sharing and variability reduction in the supply chain. It can then be
important for Lrdal to try to make the ordering process more efficient in order to
reduce the time spent making orders to reduce the administrated costs.

Figure 5.15: Comparison of Holding Costs model 4 and model 5 (source: Crystal Ball)
Based on figure 5.16 it can be understood that there has been a reduction in achieved
service level in model 5, the fill rate for example decreased with 3%. Based on
research from Simchi-Levi and Zhao (2003) information sharing should improve the
service level as well as variability. Simchi-Levi et al. (2009) recommends sharing of
demand information two to four times a week when retailer orders once a week, since
information is only shared once a week in these models it could be a reason for why
the performance did not improve. Additionally in Gavirneni et al. (1999) research
they concluded that when the variance is high the benefits from information sharing
are reduced, because there still remains significant uncertainty on the total demand
quantity to the supplier, which could be another reason for why the service
performance has not improve.

Figure 5.16: Comparison of Fill Rate Model 4 and Model 5 (source: Crystal Ball)

61
However, if the customers fill rate is measured, it is possible to see from figure 5.17
that the service performance to end-customers is stable at 97% for both models, which
means that even though Lrdal increases in backordered units this will not have a
negative effect on the delivery status in the supply chain.
Figure 5.17: Customers Fill Rate (source: Crystal Ball)
The main reasons that Lrdal could experience the bullwhip effect, is first and
foremost because of the long lead-time from the Chinese factory, in addition to a
constant large batch orders because of the implemented ordering rule.
According to Wang and He (2011) the most important factors to decrease the supply
chain variability is to reduce the lead-time, as it extend the increase in variability due
to demand forecasting. Hypothetically, if Lrdal manages to reduce the lead-time
with 2 weeks, the existing variability between end customers demand and Lrdals
orders to the manufacturer will decrease with 17.7% compared to 8 weeks of leadtime with implementing information sharing, as illustrated in figure 5.18.
Figure 5.18: Comparison of Variance between 6 and 8 weeks of lead-time
62
A reduction in lead-time will maintain Lrdal service performance, but they will face
a decrease in forecasting horizon and this can reduce the inventory in terms of lower
reorder point and base-stock level, because there are fewer units in stock the holding
cost decreases with 9%, which is illustrated in figure 5.19. Additionally because of
the reduction in lead-time Lrdal can more quickly adapt to any sudden changes
occurring in the supply chain, and faster fulfil backorders.
Figure 5.19: Comparison of holding cost between 6 and 8 weeks of lead-time
However in connection with the reduction of reorder point and base-stock level,
Lrdal orders lower quantity of units and for that reason they must order more
frequently, which increases the ordering costs.
Figure 5.20: Comparison of ordering costs between 6 and 8 weeks of lead-time
63
Chapter 6 Conclusion
6.1 Conclusion
This thesis is written based on Lrdal Medicals ASA, a Norwegian manufacturer of
medical equipment and medical training articles. From the manufacturing locations,
Lrdals products are shipped to centralized distribution facilities supplying different
markets, making it possible for Lrdal to export to customers all over the world.
A sudden increase in demand for the CPR doll Little Junior has drastically reduced
the inventory level at Lrdals inventory facility in the Netherlands, causing several
long periods of stock-outs. An investigation of how Lrdal can avoid such problems
occurring in the future was the focus of this thesis, in addition to look into how they
can keep the related cost at a minimum, and whether the increase in demand induce
Lrdal to a bullwhip situation. The areas of improvement were found after the
meetings with Lrdal, described in Chapter 4, and covered: developing a better
cooperation and shared information among the supply chain members, and improving
Lrdals current inventory policies.
Based on data and information from Lrdal it was possible to create a total of five
Excel models and conduct a Monte Carlo simulation. Two of the models, model 1 and
model 2, were created to simulate Lrdals current setting and strategies. In model 1
stable and predictable demand was used, while a sudden increase in demand, similar
to what Lrdal actually experienced, was added in some periods in model 2. In model
3 Lrdals inventory strategies were changed to make them similar to inventory
policies found in literature. While the mentioned models consisted only of Lrdal,
model 4 and 5 was conducted as a two-level supply chain made up of Lrdal and a
customer. Model 4 was created as a decentralized supply chain where both customer
and Lrdal individually optimize its performance, while in the final model, model 5,
information about end-customers demand was shared with Lrdal.
Based on measurements of stock-outs, inventory costs and the variance of demandand order, it has been possible to compare the results in order to come up with
concrete suggestions of improvements that could be implemented in Lrdal. However
it is particularly models 2 and 3, and models 4 and 5, where the demand pattern and
number participants are the same that provided the best comparisons in the analysis.

64
The average results from 300 simulation runs in model 1, 2 and 3 are shown in table
6.1. Based on these measurements Lrdal achieves better performance if changing to
the inventory policies introduced in model 3. In addition to attain a great reduction in
inventory related costs, the service level in terms of reduced stock-outs and increased
fill rate will also improve. However the higher variability in model 3 increases the
chances of a bullwhip effect situation.
!"#$%&!$'()*$+$,-( ."%#/,012"(-12"(-134567 8*#$*/,012"(-134567 9':;8*#$*(
!"#$%1>
!"#$
%#$%&
%&
!"#$%1?
!*$!
$#&%&
&'!"
!"#$%1@
"+%+
*!'*$
'))*
</%%16'-$
='*/',:$
&(!)
'("&
!(%)
'
+(%%
+($&
Table 6.1: Summary of model 1, 2 and 3s average measurements conducted in the simulation
In table 6.2 the average results from model 4 are summarized and compared to model
5. Even though Lrdal achieves a less satisfying performance in terms of service
level in model 5, the supply chain as a whole did not suffer because of it and the
performance is still more satisfying than what Lrdal faced in model 2 where the
current strategies were used. Additionally, when improving the cooperation in a real
business environment other positive aspects can occur, such as sharing of information
regarding promotions and price strategy that has not been included in model 5, but
what in total could improve the performance.
When information is shared the variability and the chance for the bullwhip effect are
reduced, because of the great economic consequences with the bullwhip effect such
reduction of variability can in some situations be seen as more important than
improving the service performance with a small amount. This could be an important
factor for Lrdal to control since the problems they faced with Little Junior occur
with multiple products, the impact of the bullwhip effect could be comprehensive on
the companys performance.
!"#$%&!$'()*$+$,-( ."%#/,012"(-134567 8*#$*/,012"(-134567 9':;8*#$*(
!"#$%1>
!"#"
$!#%$
&$!$
!"#$%1?
#)%#
$)')"
%%")
</%%16'-$
'()"
'()&
='*/',:$
*(++
!()%
Table 6.2: Summary of model 4 and model 5s average measurements conducted in the simulation
To be able to reduce the chance for long stock-out periods in the future Lrdal should
make modification in the way that they control the inventory today. This can be

achieved by changing the methods used to find the optimal inventory where reduction
65
of the periods used to calculate average demand and the existing variation can be seen
as particularly important. This enables Lrdal to quicker adapt to changes in the
market, in addition to improved inventory control and reduced inventory related costs,
the total cost savings could be great, if the suggested changes were to be implemented
on all Lrdals products with similar problems.
However, this increases the chance of the bullwhip effect occurring in the supply
chain; a suggested action to reduce this phenomenon is to increase the communication
and the shared information among the supply chain members, first and foremost in
terms of end-customers demand information. If the collaboration increases even
further, it can be possible to store all supply chains safety stock at one place, which
can additionally improve the performance. Another suggestion to decrease the
variability is to reduce the existing lead-time by, for example, moving the production
facility to an Eastern European country, where the production costs are also relatively
low. If the production were also to be placed within the European Union, it could
reduce some of the paper work such as custom declarations, which might reduce time
spent on the ordering process.
6.2 Criticism of this thesis

In this thesis it has not been possible to fully emphasize how critical and important
information sharing can be when it comes to improving the performance for
individual companies in a supply chain as well as for the supply chain as a whole. In
the real world there would be other benefits with information sharing besides sharing
forecasting data, which has not been specified in model 5, which in fact could
improve the supply chain performance. An example that may be mentioned is as in
the CPFR strategy discussed in Chapter 3, how supply chain partners would create a
supply chain forecast together to make the planning easier for each participant. To be
able to model such collaboration strategy a closer cooperation with Lrdal and more
information about customer would be needed, the information sharing model would
then be more realistic and potentially show what many researchers have concluded,
that there are a lot of potential savings when entering into deeper and more
comprehensive relationships with other supply chain members.
66
References
Articles
1) Bertazzi, L., Paletta, G. and Speranza, M.G. (2005): Minimizing the Total
Cost in an Integrated VendorManaged Inventory System, Journal of
Heuristics, Vol. 11, No 5-6, pp. 393-419
2) Benjamin, R.I. & Wigand, R.T. (1995): Electronic markets and virtual value
chains on information highway, Long Range Planning, Vol. 28, No 3, pp. 118
3) Cachon, G.P. and Fisher, M. (1998): Supply chain inventory management and
the value of shared information, Management Science, Vol. 46, No 8, pp.
1032.1048
4) Chen, H., Han, Y. and Wang, B. (2005): A Study on Inventory Management
Based on System Dynamics, Advanced Material Science, Vol. 433-440, pp.
2730-2736
5) Disney, S.M. and Lambrecht, M.R. (2008): On replenishment rules,
forecasting and the bullwhip effect in supply chains, Information and
Operations Management, Vol. 2, No. 1, pp1-80
6) Ellram, L.M. (1995): Partnering pitfalls and success factors Journal of
Supply Chain Management, Vol. 31, No 2, pp. 35-44
7) Forrester, J. (1961): Industrial Dynamics
8) Fry, M. J., Kapuscinski R. and Olsen, T. L. (2001): Coordinating production
and delivery under a (z,Z)-type vendor managed inventory contract ,
Manufacturer & Service Operation Management, Vol. 3, No 3, pp.151-173
9) Gavirneni, S., Kapuscinski, R., Tayur, S. (1999): Value of Information in
capacitated Supply Chains, Management of Science, Vol. 45, No. 1, pp. 1-32
10) Giannoccaro, I. and Pontrandolfo, P. (2002): Supply chain coordination by
revenue sharing contracts, Management Science, Vol. 51, No 1, pp. 30-44
11) Hao, G. (2005): Supply chain coordination with Asymmetric information
The Business Review, Vol. 3, No 2, pp. 167-171
12) Huang, Z. and Gangopadhyay, A. (2004): A simulation study of supply chain
management to measure the impact of information sharing, Information
Research Management, Vol. 17, No 3, pp. 20-31
67
13) Jaksic, M. and Rusjan, B. (2009): Sharing advanced capacity information

under zero-full supply capacity availability Economic and business review,
vol. 11, No 4, pp. 321-337
14) Kaczmarek, D. (2006): Best practice: optimal inventory levels Healthcare
purchasing news, Nov. 2006, pp. 76
15) Lee and Whang (2000): Information sharing in a supply chain, Int. J.
Technology Management, Vol. 20, No 3, pp. 373-387
16) Lee, H. L., So, K.C. and Tang, C.S. (2000): The value of information sharing
in a two-level supply chain, Management Science, Vol. 46, No 5, pp. 626-643
17) Mangal, D. and Chandna, P.: Inventory control in supply chain through
lateral transhipment a case study in Indian Industry, International Journal
of Engineering (IJE), Vol. 3, No. 5, pp. 443-457
18) Malone, M and Beneton, W.C. (2000): Power influences in the supply
chain, Journal of Business Logistics, Vol. 21, No. 1, pp. 49.73
19) Malone, M. and Beneton, W.C. (1997): Supply chain partnerships:
Opportunities for operation research, European Journal of Operational
Research, Vol. 101, No. 3, pp. 419-429
20) Marcikic, A and Radovanov, B. (2009): Simulation of inventory
management, Perspectives of Innovations, Economics and Business
21) Metters, R., (1997): Quantifying the bullwhip effect in supply chains
Management Science, vol. 46, No. 3 pp. 436-443
22) Monczak, R., Petersen, K.J., Handfield, R.B and Ragatz, G.L.
(2007): Success factors in strategic supplier alliances: The buying company
perspective Decision Sciences, Vol. 29, No 3, pp. 553-557
23) Mulani and Narendra (2002): The case for Inventory optimization,
Logistics Management, Vol. 48, No 2
24)Perard, P.C. and Marshall, F. (2002): Supply Chain management and the
value of shared information, Management Science, Vol. 46, No. 8, pp. 1032
1048
25) Premus, R. and Sanders, N.R. (2008): Information sharing in Global Supply
Alliances Global Business and Finance Review, Vol. 1, pp. 48-59
68
26) Padmanabhan, P. and Whang, S. (1997): Information distortion in a supply

chain: The bullwhip effect, Management Science, Vol. 43, No 43, pp. 546558
27) Schmidt, R. (2009): Information sharing versus order aggregation strategies
in supply chains Journal of Manufacturing Technology Management, Vol. 20
No. 6, pp. 804-816
28) Schouten, M.A. (2006): Improving the supply chain in the health care sector
29) Simchi-Levi, D. and Zhao, Y. (2003): The value of information sharing in a
two-level supply chain with production capacity constraints, Probability in
the Engineering and Informational Sciences, Vol.18, pp. 247274
30) Stroh, K.L., Northcraft, B.G. and Neale, A.M. (2002): Organizational
behaviour: A management Challenge, Lawrence Erlbaum Associate, Inc.,
Publisher, third edition.
31) Terwiesch, C.T., Ren, Z.J., Ho, T.H. and Cohen, M.A. (2005): An empirical
analysis of forecast sharing in the semiconductor equipment supply chain,
Management Science, Vol. 51, No. 2, pp. 208-220
32) Taylor, D.H. (1997): The Analysis of logistics and supply chain
management case Global cases in logistics and supply chain management,
International Thomson Business Press, pp. 1-18.
33) Udin, Z.M., Hkan, M.K., Zairi, M. (2006): A collaborative supply chain
management framework part 1 planning stage Business Process
Management Journal, Vol. 12 No 3, pp. 361 - 376
34) Walker, G.A., Vaart, T.Van der. and Van Donk, D. P. (2008): The influence
of business conditions on supply chain information sharing mechanisms: A
study among supply chain links of SMEs International Journal of Production
Economics, Vol. 113, pp. 706-720.
35) Wang, H. and He, B. (2011): Research on the reducing measures of Bullwhip
effect International Conference on Software and Computer Applications,
Vol. 9
36)Williams, S.H. (1999): Collaborative planning, forecasting and
replenishment, Hospital Materiel management quarterly ProQuest, Vol. 21,
No. 2, pp. 44-51
69
37) Zhang, Q. (2008): Essentials for Information Coordination in Supply Chain

Systems, Asian Social Science, Vol. 10, No. 4, pp. 55-59
38) Zhu, W., Gavirneni, S. and Kapuscinski, R. (2010): Periodic flexibility,
information sharing and supply chain performance IIE Transaction, Vol. 42,
pp. 173-187
Text books
1) Simchi-Levi, Kaminsky, Simchi-Levi (2009): Design and managing the
supply chain: Concepts, strategies, and case studies, McGraw Hill, 3. Edition
2) Silver, E.A., Pyke, F., Peterson, R. (1998): Inventory Management and
Production Planning and Scheduling, John Wiley & Sons, 3. Edition
3) Saunders, M., Lewis, P. and Thornhill, A.: Research Methods for Business
students, Prentice Hall, 4. Edition.
Web Sites
1) Management study guide: http://www.managementstudyguide.com/need-forinventory-management.htm
2) Webopedia: http://www.webopedia.com/TERM/E/ERP.html
3) (http://www.damas.ift.ulaval.ca/~moyaux/bibtex/yu01.pdf)
4) Lrdals web Page: http://www.laerdal.com/no/doc/395/Ways-of-achievingour-mission
70
Appendix

Model 1
71
72
Model 2
73
74
Model 3
75
76
Model 4
77
78
Model 5
79
80
Experimenting with the moving average in model 3
81
82

Supply Chain

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Supply Chain

Uploaded by

Copyright:

Available Formats

A

study of the effects of supply chain

5.3 Performance measurements ............................................................................ 40

1.2 Motivation behind the thesis

1.3 Assumptions and Delimitations

1.4 The structure of the thesis

Chapter 2 Description of Lrdal

2.1.4 Product range

2.2 Current situation

2.2.2 Information Flow

2.2.3 Lrdals Inventory Policy

Table 2.1: Lrdals ABC classification (Source: Lrdal Medical)

2.2.4 Little Junior

Figure 2.3: Little Junior (source: Lrdal Medical)

The procurement department in Norway periodically reviews the DC in the

2.3 The problem

Chapter 3 - Literature Review

3.1 Supply Chain Management

Hao (2005) research, he comments that effective partnerships and coordination

3.2 Potential problems in a supply chain

3.3 Possible solutions to supply chain problems

improvements, cost reduction, efficient use of resources and business process

3.3.2.3 Periodic flexibility (PF)

3.4 Concerns about information sharing and collaboration in a supply chain

4.1 Step 2: Identify major issues and problems

4.2 Step 3: Generation and evaluation of alternative solutions

In the remaining models the focus is on investigating the proposed improvements

Chapter 5 - Model descriptions and Results

5.1 Assumptions in the models

5.2 Distribution fitting

This gamma distribution fitting is only used as an approximation, since normal

5.3 Performance measurements

The amount backordered is collected as an alternative measurement to stock-out costs,

! !"#$ !"#$" !"#$%

Estimated annual income/average annual working hours in Norway: 59116/1659

5.4 Model 1 - Lrdals current situation with normal demand

The periods customer demand

NetInv period end

Amount ordered to the manufacturer, calculated based on the periods

5.4.4 Model description

Figure 5.3: Backorders Model 1 (source: Crystal Ball)

5.5 Model 2 - Lrdals current situation with periods of increased demand

5.6 Model 3 Changes to Lrdals inventory policies

Total annual costs5

The periods customer demand

Average demand during the forecasting period

Standard deviation during the forecasting period

The periods amount ordered to the manufacturer, calculated by:

Table 5.3: Expressions used in Model 3 (Source: Silver et al., 1998)

5.6.4 Model description

5.7 Model 4 Decentralized supply chain

5.7.2 Inventory strategy used

The periods customer demand

Only used at Lrdal to show the units shipped to customers, as long as

NetInv period end

Average demand during the forecasting period

Standard deviation during the forecasting period

Since there is a fixed known lead-lead time it is calculated by:

The periods amount ordered to the manufacturer, calculated by:

5.7.4 Model description

5.7.4.2 Customers side

5.8 Model 5 Coordinated Control where demand information is shared

5.8.4.2 Customers description

Figure 5.14: Comparison of variance Model 4 and 5 (source: Crystal Ball)