The Supply Chain Approach to Planning and Procurement Management

This paper describes the processes and equations behind a reengineering effort begun in 1995 in the planning and procurement organizations of the Hewlett-Packard Colorado Springs Division. The project was known as the supply chain project. Its objectives were to provide the planning and procurement organizations with a methodology for setting the best possible plans, procuring the appropriate amount of material to support those plans, and making up-front business decisions on the costs of inventory versus supplier response time (SRT),* service level to SRT objectives, future demand uncertainty, part lead times, and part delivery uncertainty. The statistical modeling assumptions, equations, and equation derivations are documented here. Basic Situation Consider a factory building some arbitrary product to meet anticipated customer demand. Since future demand is always an uncertainty, planning and procurement must wrestle with the task of setting plans at the right level and procuring the appropriate material. The organization strives to run the factory between two equally unattractive scenarios: not enough inventory and long SRTs, or excessive inventory but meeting SRT goals. In fact, more than one organization has found itself with the worst of both worlds—huge inventories and poor SRTs. The supply chain project focused on characterizing the various stochastic events influencing a manufacturing organization’s shipment and inventory performance, modeling them analogously to the way a mechanical engineer would model a tolerance buildup in a new product design.