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Supply Chain Management
Lecturer:
Ctlin AFRSINEI
Introduction
Almost every organization faces a problem:
getting the right materials
to the right place
at the right time
Which is the key? Logistics
Because:
Logistics is responsible for the physical movement of materials and,
sometimes, people.
Logistics deals with the planning and control of material flows and
related information in organizations, both in the public and private sectors.
Manufacturers now compete less on product and quality which are
often comparable and more on inventory turns and speed to market.
John Kasarda, Forbes,October 18, 1999
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Introduction
Its mission:
What
How
Get the right materials to the right place at the right time
By optimizing a given performance measure and satisfying a given
set of constraints
Importance of logistics:
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Introduction
Logistics system:
Facilities
Transportation services
Supply chains:
Question: It is another term for Logistics?
Answer: No, they are different
Q: They are related?
A: Yes
Q: Which one is more complex?
A: Supply chain
Q: Why?
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Origins and definitions
Remarks:
Anarmymarchesonitsstomach(Napoleon)
Amateurstalkstrategyandprofessionalstalklogistics
Evolution of terms:
logistics
operationsmanagement
1. Supply chain is just another term for logistics.
2. Supply chain includes other functions: purchasing, engineering, production,
finance, marketing, and related control activities in the single company.
3. The supply chain is all the functions in definition #2 plus those in a companys
suppliers suppliers and a companys customers customers as well
extending far outside the traditional enterprise.
supplychain(1980s)
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Origins and definitions
Accepted definitions of supply chain:
A supply chain is the alignment of firms that bring products or services
to market.
A supply chain consists of all stages involved, directly or indirectly, in
fulfilling a customer request. The supply chain not only includes the
manufacturer and suppliers, but also transporters, warehouses,
retailers, and customers themselves.
A supply chain is a network of facilities and distribution options that
performs the functions of procurement of materials, transformation
of these materials into intermediate and finished products, and the
distribution of these finished products to customers.
Supply chain : Life cycle processes comprising physical, information,
financial, and knowledge flows whose purpose is to satisfy end-user
requirements with products and services from multiple linked suppliers
Origins and definitions
Accepted definitions of supply chain management:
Supply chain management is the things we do to influence the
behavior of the supply chain and get the results we want based on
responsiveness and efficiency.
Supply chain management is the coordination of production,
inventory, location, and transportation among the participants in a
supply chain to achieve the best mix of responsiveness and
efficiency for the market being served.
Logistics typically refers to activities that occur within the boundaries of a
single organization
Differences between supply chain management and logistics:
Supply chains refer to networks of companies that work together and
coordinate their actions to deliver a product to market
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Origins and definitions
Concluding:
A SUPPLY CHAIN consists of the series of activities and organizations that move
materials through on their journey from initial suppliers to final customers
LOGISTICS is the function responsible for the flow of materials from suppliers into
an organization, through operations within the organization, and then out to
customers
Origins and definitions
Related terms:
PRODUCTS: every organization delivers products to its customers.
Products = combination of goods or services with different weights.
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Origins and definitions
Related terms:
OPERATIONS: Is the core of any organization. They create and deliver the
products. Operations take a variety of inputs and convert them into desired
outputs.
Origins and definitions
Related terms:
OPERATIONS: takes a precise place in the cycle of supply and demand.
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Origins and definitions
Related terms:
MATERIALS: are all the things that an organisation moves to create its products.
- tangible
- intangible
Logistics are responsible for materials movement both inside and outside an
organization and between organizations.
Inbound or inward logistics: moving materials into the organisation from suppliers
Outbound or outward logistics: moving materials out to customers
Materials management : moving materials within the organisation
People use different names for these chains of activities and organisations:
- process: when they emphasise the operations
- logistics channel: when they emphasise marketing
- value chain: when they look at the value added
- demand chain: when they see how customer demands are satisfied
- supply chain: when they emphasise the movement of materials
Origins and definitions
Every product has its own
unique supply chain.
Examples:
the supply chain of
chocolate starts with cocoa
beans growing on farms
and ends with the delivery
of bars of chocolate to
hungry customers
the supply chain of jeans
starts with cotton growing
in a field and ends when
you buy the jeans in a
shop.
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Structure of supply chain
A supply chain moves materials through a series of organisations.
Each one adds value to the final product.
From organisations point of view:
-Upstream: activities in front of it tiers of suppliers
-Downstream: ; activities after the organisation tiers of customers
Structure of supply chain
A supply chain could be much more complicated in the real life as seen
in the following image:
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Supply chain is made up of:
Production system
Distribution system
Types of supply chains:
Pull supply chain (MTO):
products are manufactured only
when customers require them
no inventories are needed at the
manufacturer
Push supply chain (MTS):
production and distribution
decisions are based on forecasts
production anticipates effective
demand, and inventories are held in
warehouses and at the retailers
Mixed approach (MTA):
components and semi-finished products
are manufactured in MTS system
final assembly stage is made in MTO
system
Product and information flows in a supply chain
Downstream:
products flow
direction: from raw material
sources to customers
Upstream:
information flow + obsolete,
damaged and nonfunctioning
products
direction: from customers to raw
material suppliers
Both flows are time consuming
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Performance drivers of supply chain
Companies in any supply chain have to take decisions individually and
collectively regarding their roles.
There are 5 areas where companies can make decisions that will define their
supply chain performance: Production, Inventory, Location, Transportation and
Information.
They are also called performance drivers and they should be taken into consideration
into the companies effort to solve the trade-off between responsiveness and
efficiency.
Production:
- subject of decision making: dimension of production capacity
Excess capacity vs. Restricted capacity
Responsiveness vs. Efficiency
Inventory:
-subject of decision making: level of storage
-is spread throughout the supply chain and includes: raw materials, semi-finished
goods, finished goods
-large amounts of inventories cope with fluctuations in customer demand
responsiveness
-small amounts of inventories low inventory costs efficiency
Performance drivers of supply chain - continued
Location:
-subject of decision making: geographical siting of supply chain facilities
-centralize activities in fewer locations economies of scale
-decentralize activities in many locations close to customers and suppliers
Transportation:
-refers to the movement of materials between facilities
-subject of decision making: choice of transport mode
Fast modes of transport vs. Slower modes of transport
Responsiveness vs. Efficiency
-six basic modes of transport: ship, rail, pipelines, truck, air, and
Information:
-is the basis of decision making process:
-Coordinating daily activity
-Forecasting and planning
......?............. vs. ?.
Responsiveness vs. Efficiency
efficiency
responsiveness
Electronic transport
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Performance drivers of supply chain - continued
Benefits of supply chain
Supply chains are so complicated that you might wonder if there is
some way of avoiding them.
Sometimes this is possible, when we move products directly from
initial producers to final customers
Benefits of supply chain:
Overcome the gaps created when suppliers are some distance away from
customers.
Allow for operations that are best done or can only be done at locations
that are distant from customers or sources of materials
Producers locate operations in the best locations, regardless of the locations of
their customers.
Producers can get economies of scale, by concentrating operations in large
facilities.
Producers do not keep large stocks of finished goods, as these are held further
down the supply chain nearer to customers.
Wholesalers place large orders, and producers pass on lower unit costs in price
discounts.
Wholesalers keep stocks from many suppliers, giving retailers a choice of
goods.
Wholesalers are near to retailers and have short lead times.
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Benefits of supply chain
Retailers carry less stock as wholesalers provide reliable deliveries.
Retailers can have small operations, giving a responsive service near to
customers.
Transport is simpler, with fewer, larger deliveries reducing costs.
Organisations can develop expertise in specific types of operation.
Supply chains can also make movements a lot simpler:
Organizing logistics in a company
Logistics takes place in almost every organization taking many
different forms
Logistics in a classical view: the image with forklift trucks unloading pallets
from lorries and moving them around warehouses
Logistics in a bank: what kind of branch network to have, where to locate
offices, who to buy telephone and other services from, how to deliver information
to customers
Logistics can be arranged in many ways within an organization:
Small organization: might have one person looking after everything
Medium sized organization: might have one department with different sections
for purchasing, transport, stock control, distribution etc
Large organization: might have a logistics division employing thousands of
people and running huge transport fleets.
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Organizing logistics in a company
integrated function product based organizing
Aims of logistics
Overall AIM OF LOGISTICS is to achieve high customer
satisfaction. It must provide a high quality service with low or
acceptable costs
Logistics adds value by making products available in the right place (place
utility) and at the right time (time utility).
Aims of logistics: the right materials, to the right place, at the right time, from the
right source, with the right quality, at the right price. What is right?
Logistics has to be flexible enough to satisfy a variety of needs.
There are two concerns here:
- design the best possible supply chain
- materials should move through this chain as efficiently as possible
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Effects on financial performance
Logistics involves expenses (costs).
So, it has impact on an organisations overall financial performance
Assets:
current (cash, accounts receivable, stocks, and so on) or
fixed (property, plant, equipment, and so on).
Effects on financial performance
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Effects on financial performance
Current assets
Logistics reduces the current assets through lower stock levels. Reducing
the investment in stock can also free up cash and reduce the need for
borrowing.
Fixed assets
Fixed assets include property, plant and equipment. Warehouses, transport
fleets, materials handling equipment and other facilities needed to move
materials through the supply chain form a major part of fixed assets.
Sales
By making a more attractive product, or making it more readily available,
logistics can increase sales and give higher market share.
Profit margin
More efficient logistics gives lower operating costs, and this in turn leads to
higher profit margins.
Price
Logistics can improve the perceived value of products making them more
easily available, giving faster delivery or shortening lead times. More
attractive products can get premium prices.
How supply chains work: participants
Producers
Distributors
- organizations that make a product
- two types:
- producers of raw materials
- producers of finished products:
-tangible products
-intangible products
- producers of tangible products are moving to areas of the world where labor is
less costly
- producers in the developed world are increasingly producers of intangible
products (at least a part of them)
- companies that take inventory in bulk from producers and deliver a bundle of
related product lines to customers
- are also known as wholesalers
- typically sell to other businesses and they sell products in larger quantities than an
individual consumer would usually buy
- buffer the producers from fluctuations in product demand
- fulfill the Time and Place function
- most common activities carried out: promotion, sales, inventory management,
warehouse operations, product transportation, customer support and post-sales
service
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How supply chains work: participants
Retailers
Customers
Service providers
- stock inventory and sell in smaller quantities to the general public
- tracks the preferences and demands of the customers
- attract customers using some combination of advertising, price (discounts),
product selection, service, and convenience
- any organization that purchases and uses a product
- may purchase a product in order to incorporate it into another product
- customer may be the final end user of a product who buys the product in order to
consume it
- provide services to producers, distributors, retailers, and customers
- have expertise and skills that focus on a particular activity needed by a supply
chain
- transportation services (trucking companies), warehousing services (public
warehouse companies), financial services, market research, advertising,
How supply chains work: activities
Activities normally included in logistics:
Procurement or purchasing. The flow of materials through an organization is
usually initiated when procurement sends a purchase order to a supplier
Main operations:
finds suitable suppliers
negotiates terms and conditions
organises delivery
arranges insurance and payment
does everything needed to get materials into the organization
Inward transport or traffic: actually moves materials from suppliers to the
organization's receiving area
Main operations:
choose the type of transport (road, rail, air, and so on),
find the best transport operator
design a route
make sure that all safety and legal requirements are met
get deliveries on time and at reasonable cost, and so on
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Activities normally included:
Receiving makes sure that:
materials delivered correspond to the order
acknowledges receipt
unloads delivery vehicles
inspects materials for damage
sorts materials
Warehousing or stores : moves materials into storage, and takes care of them until
they are needed
Aims:
makes sure that materials can be available quickly when needed
makes sure that they have the right conditions, treatment and packaging
special care for special materials (frozen food, drugs, chemicals, animals, and
dangerous goods)
Stock control : sets the policies for inventory
It deals with:
materials to store, overall investment, customer service, stock levels, order sizes,
order timing etc
How supply chains work: activities
Activities normally included:
Order picking finds and removes materials from stores. Typically materials for a
customer order are:
located,
identified,
checked,
removed from racks,
consolidated into a single load,
wrapped and moved to a departure area for loading onto delivery vehicles
Materials handling: moves materials through the operations within an organization
The aim of materials handling is to give :
efficient movements,
with short journeys,
using appropriate equipment,
with little damage, and
using special packaging and handling where needed
How supply chains work: activities
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Activities normally included:
Outward transport takes materials from the departure area and delivers them to
customers (with concerns that are similar to inward transport).
Physical distribution management is a general term for the activities that deliver
finished goods to customers, including outward transport. It is often aligned with
marketing and forms an important link with downstream activities.
Recycling, returns and waste disposal
Possible situations:
- A part of delivered materials were faulty, or too many were delivered, or they were
the wrong type
- Pallets, delivery boxes, cable reels and containers which are returned to suppliers
for reuse
- Some materials are brought back for recycling, such as metals, glass, paper,
plastics and oils
Location
Some of the logistics activities can be done in different locations. Logistics has to:
- find the best locations for these activities a significant role in decisions
- calculate the size and number of facilities
How supply chains work: activities
Activities normally included:
Communication Logistics is also responsible for the information flow
ASSOCIATED to materials flow:
- it links all parts of the supply chain
- passing information about products
- customer demand
- materials to be moved
- timing
- stock levels
- availability
- problems
- service levels
How supply chains work: activities
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Activities included in any logistics system (supply chain) could be
grouped into three main activities:
order processing
inventory management
freight transportation
Order processing, main operations:
fill out and transmit the order form
check the availability of requested items
check the credit status of the customer
items are retrieved from the stock or produced
items are packed and delivered
shipping documentation is emitted
customer is kept informed about the order status
How supply chains work: main activities
How supply chains work
Inventory management:
Inventories are stockpiles of goods waiting to be manufactured, transported or
sold.
Advantages of holding inventories in a supply chain:
A good inventory management policy should take into account 5 issues:
importance of customers, economic relevance of different products,
transportation policies, production process flexibility, competitors policies
Improving service level shorter lead time
Reducing overall logistics cost
Coping with randomness in customer demand and lead times
Making seasonal items available all over the year
Speculating on price variations
Overcoming inefficiencies in managing the logistics system
Main disadvantage of holding inventories: could be very expensive
The aim of inventory management is to determine stock levels in order to
minimize total operating cost while satisfying customer service requirements
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How supply chains work
Inventory and transportation strategies
How supply chains work
Inventory and transportation strategies:
direct shipment
Definition:
goods are shipped directly from the manufacturer to the end-user
(the retailers in the case of retail goods)
eliminate the expenses of operating a DC
reduce lead times
Advantage :
Disadvantage :
A large fleet of small truck if shipments size are small and
customers dispersed over a wide geographic area
Proper when :
Fully loaded trucks are required by customers
Perishable goods have to be delivered timely
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How supply chains work
Inventory and transportation strategies:
warehousing
Description:
Goods are received by warehouses and stored in tanks, pallet racks or on
shelves. When an order arrives, items are retrieved, packed and shipped to
the customer.
reception of the incoming goods
storage
order picking
shipping
Major functions :
Question:
Which of the four functions are most expensive and why?
Answer:
Storage and order picking are the most expensive because of
inventory holding costs and labor costs, respectively
How supply chains work
Inventory and transportation strategies:
Crossdocking (just-in-time distribution)
Types of crossdocking :
Predistribution crossdocking: goods are assigned to
a retail outlet before the shipment leaves the vendor
Postdistribution crossdocking: the crossdock itself
allocates goods to the retail outlets
Definition:
Crossdocking uses a crossdock, which is a transshipment facility in which
incoming shipments (possibly coming from several manufacturers) are
sorted, consolidated with other products and transferred directly to outgoing
trailers without intermediate storage or order picking
sort
consolidate
No storage
No order picking
Major functions : Proper when :
High volume
Low variability of demand
Easy-to-handle products
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Centralized vs. decentralized warehousing
Centralized:
a single warehouse serves the
whole market
lower facility costs (economies of
scale)
inbound transportation costs are
lower
Decentralized:
several warehouses serve the
zones the market is divided into
reduced lead times
outbound transportation costs
are lower
Inbound transportation costs: the costs of shipping the goods from
manufacturing plants to warehouses
Outbound transportation costs: the costs of delivering the goods from the
warehouses to the customers
Centralized vs. decentralized warehousing
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How supply chains work
freight transportation
Importance:
allows production and consumption to take place at locations that are several
hundreds or thousands of kilometers away from each other
stimulate direct competition among manufacturers from different countries
companies take advantage of lower manufacturing wages in developing
countries
perishable goods can be made available in the worldwide market
often accounts for even two-thirds of the total logistics cost
Transportation alternatives from manufacturers or distributors perspective:
1. Private transportation: the company operates a private fleet of owned or
rented vehicles
2. Contract transportation: a carrier is in charge of transporting materials
through direct shipments regulated by a contract
3. Common transportation: the company resorts to a carrier that uses
common resources (vehicles, crews, terminals) to fulfill several client
transportation needs
How supply chains work
freight transportation
Distribution channels:
Is a path followed by a product from the manufacturer to the end-user.
Bringing products to end-users may be a complex process .
Alternatives of distribution:
Direct distribution: producer brings products to the end-users directly
Intermediate distribution: intermediaries participate in product distribution
Few cases
Most used
Types of intermediaries:
Brokers or sales agents: are acting for the manufacturer
Wholesalers: purchase from manufacturers and resell to retailers
Retailers: sell to the end-users
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How supply chains work
freight transportation
Freight consolidation:
-Generates logistics cost savings because of the scale economies
-Consolidates small shipments into larger ones
Types of freight consolidation:
1. Facility consolidation: small shipments are consolidated (grouped) into
large shipments over long distances
2. Multi-stop consolidation: small deliveries associated with different locations
are grouped in the same vehicle which has a multi-stop route
3. Temporal consolidation: scheduled shipments may be adjusted forward or
backward so as to make a single large shipment rather than several small
ones
Modes of transportation: there are 5 classical modes
Ship
Rail
Truck
Air
Pipeline
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How supply chains work
Tranportation modes can be combined so as to obtain a door-to-door services:
intermodal carriers or small shipment carriers.
Intermodal transportation becomes efficient and effective when the materials
(merchandise) are consolidated into pallets or containers. They have:
standard dimensions: 80x100, 90x110, 100x120, 120x120 cm
2
for pallets
protect merchandise: containers may be refrigerated, ventilated, can transport
liquids etc.
facilitate handling at terminals
Modes of transportation
Ship Rail Truck Air Pipeline
There are two fundamental parametres when selecting a carrier:
1. Price (cost)
The hierarchy of the most expensive transportation modes considering their costs:
2. Transit time
It is the time a shipment takes between its origin and its destination. It is influenced by
the weather, traffic conditions etc.
Some transportation modes (air, ship) must be used jointly with other modes (truck) to
provide door-to-door transportation service
How supply chains work
Modes of transportation
Rail
Characteristics:
inexpensive (for long-distance movements)
slow
quite unreliable
is commonly used for raw materials and low-value finished goods
Reasons of being a slow mover:
convoys have low priority compared to passenger trains;
direct train connections are quite rare;
a convoy must include tens of cars in order to be worth operating
Truck
Characteristics:
used for moving semi-finished and finished products
has two variants:
truckload (TL): the truck is fully loaded and moves materials directly from
origin to destination
less-than-truckload (LTL): shipments are much less than vehicle capacity
and they have to be jointly loaded in consolidation terminals to reach the truck
capacity
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TL
LTL
How supply chains work
Modes of transportation
Air
Characteristics:
very fast
it is slowed down by freight handling at airports
is not competitive for short or medium haul shipments
used for high-value products over very long distances
it is used in conjuction with road transportation to provide door-to-door service
Improves the level of transportation services to clients.
Offers a reasonable trade-off between cost and transit time.
Intermodal transportation
There are several most used combinations of the five basic modes:
airtruck (birdyback)
traintruck (piggyback)
shiptruck (fishyback)
Most common used load unit is container, which can be moved in two ways:
containers are loaded on a truck and the truck is loaded onto a train, ship or
airplane
containers are loaded directly on a train, ship or airplane
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Supply chain integration
Integration within an organization
Integration along the supply chain
Arguments for integration
In the past, organisations put all their effort into making products and gave little
importance to the associated movement of materials
Managers recognised that transport and storage were needed
They were simply the unavoidable costs of doing business
1962 Drucker:
Logistics: the economys dark continent
Logistics: The most sadly neglected, most promising area of business
Main reason for change: recognition that logistics was expensive logistics
had been identified as a high cost function organisations should make
significant savings
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Integration within an organization
These activities have traditionally been managed separately, so that an
organisation might have a distinct purchasing department, transport department,
warehouse, distribution fleet, and so on
Supply chain integration
Integration within an organization
Being not correlated, logistics activities have different purposes:
Purchasing might look for the most reliable suppliers
Inventory control might look for low unit costs
Warehousing might look for fast stock turnover
Materials management might look for easy handling
Transport might look for full vehicle loads
Problems will appear when the aims come into conflict:
- Purchasing can reduce its administrative costs by sending fewer, larger orders to
suppliers but this increases stock levels and raises the amount of money tied up
in the warehouse
- Using sea transport rather than airfreight reduces transport costs but increases
the amount of stock held in the supply chain
If logistics is divided into separate functions, each part will move in a different
direction, and there is duplicated effort and wasted resources.
Supply chain integration
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Integration within an organization
A fragmented supply chain has the disadvantages of:
giving different, often conflicting, objectives within an organisation
duplicating effort and reducing productivity
giving worse communications and information flows between the parts
reducing co-ordination between the parts leading to lower efficiency, higher
costs and worse customer service
increasing uncertainty and delays along the supply chain
making planning more difficult
introducing unnecessary buffers between the parts, such as stocks of work in
progress, additional transport and administrative procedures
obscuring important information, such as the total cost of logistics
giving logistics a low status within an organisation.
Supply chain integration
Integration within an organization
Some organisations are tempted to stop when they reach an intermediary stage,
and they work with two functions:
materials management, aligned with production and looking after the inwards
flow of raw materials and their movement through operations; and
physical distribution, aligned with marketing and looking at the outward flow of
finished goods.
Another factor that encourages internal integration is the analysis of total
logistics cost
Total logistics cost = transport cost +
warehouse cost + stock holding cost +
packaging cost + information
processing cost + other logistics
overheads
Supply chain integration
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Integration within an organization
Stagesofintegration
Stage1:Separatelogisticsactivitiesarenotgivenmuchattentionorconsideredimportant.
Stage2:Recognising thattheseparateactivitiesoflogisticsareimportantforthesuccessof
theorganisation.
Stage3:Makingimprovementsintheseparatefunctions,makingsurethateachisasefficient
aspossible.
Stage4:Internalintegration recognisingthebenefitsofinternalcooperationand
combiningtheseparatefunctionsintoone.
Stage5:Developingalogisticsstrategy,tosetthelongtermdirectionoflogistics.
Stage6:Benchmarking comparinglogisticsperformancewithotherorganisations,learning
fromtheirexperiences,identifyingareasthatneedimprovementandfindingwaysofachieving
this.
Stage7:Continuousimprovement acceptingthatfurtherchangesareinevitableandalways
searchingforbetterwaysoforganisinglogistics.
Supply chain integration
Integration along the supply chain
Benefits of integrating logistics within an organization can be extended for
integrating logistics along the supply chain (external integration)
Concluding, we can talk about 3 levels of integration:
Level 0: logistics seen as separate activities within an organization
Level 1: internal integration to bring logistics activities together into a single
function
Level 2: external integration, where organizations look ahead of their own
operations and integrate more inside the supply chain
Organizations within the same supply chain should CO-OPERATE to get final
customer satisfaction. They should not compete with each other, but with
organizations in other supply chains.
A fragmented supply chain generates an interesting multiplying effect:
the bullwhip effect
Supply chain integration
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Supply chain integration
Supply chain integration
Integration along the supply chain
Somebenefits fromexternalintegrationcouldbe:
genuinecooperation betweenallpartsofthesupplychain,withsharedinformation
andresources
lowercosts duetobalancedoperations,lowerstocks,lessexpediting,economiesof
scale,eliminationofactivitiesthatwastetimeordonotaddvalue,andsoon
improvedperformance duetomoreaccurateforecasts,betterplanning,higher
productivityofresources,rationalpriorities,andsoon
improvedmaterialflow,withcoordinationgivingfasterandmorereliable
movements
bettercustomerservice,withshorterleadtimes,fasterdeliveriesandmore
customisation
moreflexibility,withorganisationsreactingfastertochangingconditions
standardisedprocedures,becomingroutineandwellpracticedwithlessduplication
ofeffort,information,planning,andsoon
reliablequalityandfewerinspections,withintegratedqualitymanagement
programmes
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Supply chain integration
Co-operation vs. Conflict
How supply chains work
Logistics managerial issues
There are examples when logistics costs are 50-60% of total costs of a product
Capital reduction
Means to reduce as much as possible the level of investment in the logistics system
(owned equipment and inventories).
Its important to plan a logistics strategy
A reasonable compromise between
Capital reduction
Cost reduction
Service level improvement
Possible ways:
public warehouses instead of privately owned warehouses
using common carriers instead of privately owned vehicles
!! Capital reduction determines higher operating costs
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How supply chains work
Logistics managerial issues
Cost reduction
Means to minimize the total cost associated with transportation and storage.
!! Logistics service is expressed through order-cycle time
Order cycle time: the period of time between the moment a purchase order is
issued and the moment the goods are received by the customer.
Service level improvement
Logistics service greatly influence the level of customer satisfaction. A satisfied
customer has major impact on revenues.
The impact is greater in markets with homogeneous low-price products.
Service request Service provided
Order-cycle time
When a retailer outlet issues an order, the following events may occur:
(a) if the goods are available at the associated RDC, they will be delivered shortly;
(b) the RDC has to resupply its stocks by placing an order to the CDC; the shipment
to the retailer will be further delayed
(c) goods are not available even at the CDC, the plants will be requested to produce
them.
How supply chains work
Logistics managerial issues
Let p
a
, p
b
and p
c
the probabilities of events a, b, c
Let f
a
(t), f
b
(t), f
c
(t) be the functions of the order-cycle time in case of
events a, b and c
Function of the order-cycle time is then:
f(t) = p
a
*f
a
(t) + p
b
*f
b
(t) + p
c
*f
c
(t)
Emerging trends in logistics
Globalization
More companies operate at the world level to take advantage of lower manufacturing
costs or cheap raw materials available in some countries.
Consequences on logistics:
As a result of globalization, transportation needs have increased.
Parts and semi-finished products have to be moved between production sites.
The increase in multimodal container transportation
More efficient design and management of supply chains, sometimes at the world level.
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How supply chains work
Emerging trends in logistics
Information technologies
Consequences on logistics:
Suppliers and manufacturers make use of EDI share information about:
stock levels,
timing of deliveries,
positioning of intransit goods in the supply chain
At the operational level:
geographic information systems (GISs)
global positioning systems (GPSs)
on-board computers
keep track of the current position of
vehicles and
communicate with drivers
E-commerce
Means to make commercial transactions through the Internet: B2B or B2C transactions
E-commerce
Increase of direct deliveries between manufacturers and end-
users
Decrease of volume of goods between producers and retailers
E-commerce
E-logistics:
able to manage small/medium size shipments
to a large number of customers
scattered around the world
How supply chains work
Emerging trends in logistics
E-commerce (continued)
The return flow of defective (or rejected) goods becomes a major issue (reverse
logistics) in the context of e-commerce
E-logistics system has different approaches for operating warehouses and distribution.
It operates with virtual warehouse and Points Of Presence In The Territory (POPITT)
Virtual warehouse: virtual facility where suppliers and distributors keep the stock of
goods so as the e-commerce company ca fulfill its orders.
POPITT: a facility which stores already sold goods waiting to be picked up by
customers and defective products waiting to be returned.
!! POPITT simplifies distribution management but reduces customer service level.
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How supply chains work
Logistics decisions
When designing and operating a logistics system (supply chain), a lot of answers has to
be found:
Should new facilities be opened?
What are their best configuration, size and location?
Where should materials and components be acquired and stored?
Where should manufacturing and assembly take place?
Should warehouses be company-owned or leased?
How should warehouses operate?
When and how should each stocking point be resupplied?
What mode of transportation should be used to transport products?
Should vehicles be company-owned or leased?
What is the best fleet size?
How should vehicles be routed?
Should some transportation be carried out by common carriers?
So, its time to take decisions
According to the planning horizon, we have:
Strategic decisions
Strategic decisions have long-term effects (usually over many years). They include
logistics systems design and the acquisition of costly resources (facility
location, capacity sizing, plant and warehouse layout, fleet sizing).
How supply chains work
Logistics decisions
Tactical decisions
Tactical decisions are made on a medium-term basis (e.g. monthly or quarterly) and
include production and distribution planning, as well as resource allocation
(storage allocation, order picking strategies, transportation mode selection,
consolidation strategy).
Operational decisions
Operational decisions are made on a daily basis or in realtime and have a narrow
scope. They include warehouse order picking as well as shipment and vehicle
dispatching.
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Operations: Inventory management and strategy
Importance of inventory decisions
The significance of inventory as percent of assets:
Because inventory is a significant cost center, the reduction of a firm's inventory
commitment by a few percentage points can result in dramatic profit improvement.
Operations: Inventory management and strategy
Inventory types and characteristics
Generally, inventory is risky and this depends on the firms position in the
distribution channel.
Measures of inventory
Duration (time)
Depth
Width
Manufacturer:
-Inventory refers to: raw materials, component parts, work-in-process materials,
finished goods
- finished goods are stored in warehouses in anticipation of customer demand
There are situations when manufacturers are required to consign inventory to
customer facilities => inventory risk is shifted to the manufacturer.
Inventory commitment
Long duration
Deep
Narrow (product range)
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Operations: Inventory management and strategy
Inventory types and characteristics
Wholesaler:
-purchases large quantities from manufacturers and sells smaller quantities to
retailers
- economic justification: provide retail customers with assorted merchandise from
different manufacturers in specific quantities
For seasonal products, the wholesaler has to keep inventory in advance of the
selling season => increasing depth and duration of risk
Inventory commitment
Long to very long duration (for seasonal products)
Deep
Wide (product range from several manufacturers)
Retailer:
-inventory management is about buying and selling velocity
-purchases a wide variety of products in small quantities having a high level of
inventory turnover
inventory Average
sales Annual
velocity Inventory turnover Inventory
Operations: Inventory management and strategy
Inventory types and characteristics
Retailer (continued):
Inventory commitment
Short duration
Not deep
Wide (variety of products)
Specialty retailers vs. mass merchandisers: less width but much depth and duration
Inventory main functions:
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Operations: Inventory management and strategy
Inventory related concepts
Inventory policy:
Is about what to purchase or manufacture, when to take action, and in what
quantity.
Decisions related to inventory policy:
1. Geographical inventory positioning
postpone inventory positioning by maintaining stock at the plant
regional warehouses to have product closer to the market
2. Inventory management practice
independently manage inventory at each stocking facility
central inventory management of all stocking locations
Service level:
Measures the inventory performance in terms of:
-Performance cycle (order cycle time): elapsed time between the release of a
purchase order by a buyer and the receipt of the corresponding shipment
-Case fill rate: the percent of cases or units ordered that are shipped as requested
(from available stock)
-Line fill rate: the percent of order lines filled completely
-Order fill rate: the percent of customer orders filled completely
Operations: Inventory management and strategy
Inventory related concepts
Service level (continued):
Alternative of providing high service level:
-Increase inventory
-Fast transportation
-Collaboration with customers to reduce uncertainty
Average inventory:
Consists of materials, components, work-in-process, and finished product typically
stocked in the supply chain.
Inventory levels must be planned for each facility and each product.
Order quantity:
$70.000-$30.000= $40.000
Safety stock:
$30.000
Performance cycle:
From 0 to 1
From 1 to 2
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Operations: Inventory management and strategy
Inventory related concepts
Average inventory (continued):
Replenishment order: is initiated prior to the stock level reaches the minimum, so
that inventory will arrive before an out-of-stock occurs.
Safety stock: is maintained in supply chain to protect against demand and
performance cycle uncertainty. Safety stock inventory is used only at the end of
replenishment cycles when uncertainty has caused higher than expected demand
or longer than expected performance cycle times.
Average Inventory Over Multiple Performance Cycles:
Situation 1:
-Order qty: 200
-Reorder point: 100
-Average inventory: 100
-Performance cycle: 20
Operations: Inventory management and strategy
Inventory related concepts
Average Inventory Over Multiple Performance Cycles:
What if replenishments are made more rarely?
What if replenishments are made
more often?
Smaller replenishment order quantities do result in lower average inventory, but there
are also other factors that influence order quantity: performance cycle uncertainty,
purchasing discounts, and transportation economies
The figures illustrates that average inventory is a function of the reorder quantity
Order quantity can be determined by balancing the cost of ordering and the cost of
maintaining inventory (inventory carrying cost) : Economic Order Quantity (EOQ)
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Operations: Inventory management and strategy
Inventory related concepts
Inventory carrying cost
Inventory carrying cost is the expense associated with maintaining inventory.
Generally, it is calculated by multiplying annual inventory carrying cost percent by
average inventory value (purchase or manufacturing cost rather than selling price)
Relevant elements for inventory carrying cost percent computation:
- Capital costs: are based on expected return on investment for all funds available to
an enterprise (hurdle rate). Any funds invested in inventory lose their earning power,
restrict capital availability, and limit other investment.
- Taxes: the tax expense is usually a direct levy based on inventory level on a
specific day of the year or average inventory level over a period of time
- Insurance: is an expense based upon estimated loss risk over time and depends
on the product and the facility storing the product.
- Storage: is an expense related to product holding, allocated on the requirements of
specific products .
Operations: Inventory management and strategy
Inventory related concepts
Inventory carrying cost
The components of annual inventory carrying cost and typical range of component
costs:
It should be clear that the final carrying cost percent used by a firm is determined
by managerial policy.
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Operations: Inventory management and strategy
Planning inventory
When to order
Means to setup the reorder point.
It can be expressed in units:
Or in terms of days: equals T (performance cycle in days).
Operations: Inventory management and strategy
Planning inventory
How much to order
Answer: the ordering quantity that minimizes the total inventory carrying and
ordering cost.
Economic Order Quantity:
Standard formulation for
EOQ:
Co= Cost per order;
Ci = Annual inventory
carrying cost;
D = Annual sales volume,
units; and
U = Cost per unit.
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Operations: Inventory management and strategy
Planning inventory
How much to order (continued)
Example:
Ordering cost
$152 (2400/300 x $19.00)
Inventory carrying cost
$150 [300/2 x (5 x 20%)]
The major assumptions:
(1) all demand is satisfied;
(2) rate of demand is continuous,
constant, and known;
(3) replenishment performance
cycle time is constant and known;
(4) there is a constant price of
product that is independent of order
quantity or time;
(5) there is an infinite planning
horizon;
(6) there is no interaction
between multiple items of inventory;
(7) no inventory is in transit; and
(8) no limit is placed on capital
availability.
Operations: Inventory management and strategy
Planning inventory
How much to order (continued)
EOQ extensions:
3typical situations determine a company to make adjustments on EOQ:
volume transportation rates
quantity discounts
other EOQ adjustments
Volume transportation rates:
greater weight of order => lower the cost of transportation per unit
transportation-rate discount for larger shipments is common for both truck and rail
a firm naturally wants to purchase in quantities that offer maximum transportation
economies
such quantities may be larger than EOQ
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Operations: Inventory management and strategy
Planning inventory
How much to order (continued)
Example:
Resulting EOQ from calculations: 300 units
Desirable transportation rate is obtained when order quantity is 480 units
At EOQ = 480 units:
inventory carrying cost higher
ordering cost lower
transportation cost decreases
because of the lower rate
results a $570 savings on Total
cost
Operations: Inventory management and strategy
Planning inventory
How much to order (continued)
EOQ extensions:
Quantity discounts
Some discounts on purchasing price could be acquired according to the volume of
orders
Example of quantity discounts:
If the discount at any associated quantity is
sufficient to make a tradeoff between increased
inventory carrying cost and the reduced cost
of ordering, then the quantity discount offers a
viable alternative
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Operations: Inventory management and strategy
Planning inventory
How much to order (continued)
EOQ extensions:
Other EOQ adjustments:
1) production lot size: refers to the most economical quantities from a
manufacturing perspective
2) multiple-item purchase: situations when more than one product is bought
concurrently, so quantity and transportation discounts must consider the impact of
product combinations
3) limited capital: budget limitations for total inventory investment
4) private trucking: the enterprise interest is to fully load the truck regardless of the
EOQ
5) unitization: may be significant diseconomies when the EOQ is not a standard
unit, such as pallets or cases. From a handling or transportation utilization
perspective, it is probably more effective to order integer number of standard
units
Operations: Inventory management and strategy
Managing uncertainty
Demand uncertainty:
Forecasting estimates unit demand during the inventory replenishment cycle.
Demand during replenishment cycle often exceeds or doesnt reach what is anticipated
Formulation of inventory policy must realistically consider the impact of
uncertainty. It could generate out-of-stock (stockout)
One of the main functions of inventory management is to plan safety stock to
protect against out-of-stocks.
2 types of uncertainty, having direct impact on inventory:
demand uncertainty: variable daily sales
performance cycle uncertainty: variations on performance cycle time
When demand exceeds the forecast, safety stock is necessary to protect against
stockout.
If demand doesnt reach the forecast the stock is not consumed at the end of
performance cycle => reorder quantity has to be lower or performance cycle
longer
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Operations: Inventory management and strategy
Managing uncertainty
Demand uncertainty:
Inventory performance cycle under conditions of demand uncertainty:
Cycle 1: although daily demand
experienced variation, the
average of 5 units per day was
maintained
Cycle 2: demand totaled 50
units in the first 8 days,
resulting in a stockout; thus, no
sales were possible on days 9
and 10
Cycle 3: demand was lower
than the planned one; the
performance cycle ended with
remaining units in stock.
Performance cycle: 10 days
Order quantity: 50 units
Daily sales (forecasted): 5 units/day
Operations: Inventory management and strategy
Managing uncertainty
Demand uncertainty:
1) stockouts occurred on 2
of 30 total days
Other aspects observed:
2) Since sales never
exceed 10 units per day,
no possibility of stockout
exists on the first 5 days of
the replenishment cycle
3) during the three
performance cycles 10
units were sold on only
one occasion
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Managing uncertainty
Safety stock calculation for demand uncertainty:
We can create a table with
demand values and their
corresponding frequency:
A chart is possible to be created based on
frequency of demand:
Given an expected average of 5 units per day,
- demand exceeded average on 11 days
- was less than average on 12 days
Managing uncertainty
Safety stock calculation for demand uncertainty:
While a number of frequency distributions can be used in inventory control, the most
basic is the normal distribution:
Essential characteristic of a normal
distribution: mean (average), median
(middle), and mode (most frequently
observed) values are all the same
The basis for predicting demand in the case
of normal distribution: standard deviation
of observations around the central tendency.
Standard deviation has 3 levels of dispersion:
+ 1 standard deviation: includes 68.27% of
events
+ 2 standard deviation: includes 95.45% of
events
+ 3 standard deviation: includes 99.73% of
events
Standard deviation can be calculated as following:
F
i
frequency
D
i
deviation from mean
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Managing uncertainty
Safety stock calculation for demand uncertainty:
Example of standard deviation calculus:
The standard deviation of the data in table is rounded to 3 units
2 standard deviations of protection means 6 units, this is the necessary
safety stock to have a 95.45 % protection of stockout.
= 2.54 units
Managing uncertainty
Performance cycle uncertainty:
Performance cycle uncertainty appears when the company cannot assure constant
delivery. It doesnt have a constant value over multiple consequent cycles
In this situation the events considered are the performance cycle times and
dispersions are calculated, as following:
Then, the standard deviation is:
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Managing uncertainty
Performance cycle uncertainty:
The corresponding values for 1st standard deviation is + 2 days below and above
the mean which is 10 days. For 2nd standard deviation the range is + 4 days around
the average performance cycle.
1st standard deviation: in 68.27% of the time performance cycles fall between 8
and 12 days
2nd standard deviation: in 95.45% of the time performance cycles fall between 6
and 14 days
For + 2 standard deviation the necessary safety stock amounts 20 units in the
case of constant daily sales of 5 units (4 days above the average 10 performance
days, which amounts 4x5=20 units of constant sales)
From a practical viewpoint, when cycle days drop below 10, no immediate problem
exists with safety stock. If the performance cycle were consistently below the
planned performance cycle over a period of time, then adjustment of performance
cycle days is necessary.
Managing uncertainty
Combined demand and performance cycle uncertainty
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Managing uncertainty
Combined demand and performance cycle uncertainty
Treating both demand and performance cycle uncertainty requires combining two
independent variables
First, it is necessary to determine
the standard deviation of both
daily demand and performance
cycle uncertainty and then to
approximate the combined
standard deviation using the
convolution formula
Managing uncertainty
Combined demand and performance cycle uncertainty
Thus, given a frequency distribution of daily sales from 0 to 10 units per day and a
range in replenishment cycle duration of 6 to 14 days, 13 units (1 standard deviation
multiplied by 13 units) of safety stock is required to protect 84.14 percent of all
performance cycles (68.27 plus the percentage of situations below 1st standard
deviation)
To protect at the 97.72 percent level, a 26-unit safety stock is necessary. These
percentages reflect the probability of a stockout during a given order cycle.
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Warehousing
Historical aspects and evolution
Warehouse functionality
Warehouse planning
Warehouse operations
Warehousing
Storage was performed by individual households
Historical aspects and evolution
Preindustrial era
As transportation capability developed
storage shifted from households to retailers, wholesalers, and manufacturers
they didnt care about strategic storage
little consideration to efficiency in space utilization, work methods, or materials
handling
World War II
attention toward strategic storage
reduction in warehousing was obtained as a result of manufacturing improvements
(JIT concept)
strategically located warehouses
central warehouse => advantage of consolidated transportation
an important change in warehousing: maximum flexibility
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Warehousing
Warehousing functionality
5basic economic benefits are:
Warehouses are efficient when they improve transportation efficiency and reduce
overall logistics costs
Economic benefits
1) Consolidation and break-bulk
2) Assortment
3) Postponement
4) Stockpiling
5) Reverse logistics
Consolidation and break-bulk
The aim is to reduce transportation cost by using the warehouse capability to
make consolidation or break-bulk and consequently to profit from increased
shipment economies of scale.
Warehousing
Warehousing functionality
Economic benefits Consolidation and break-bulk
Warehouse receives materials from a number of sources, which are combined into
a large single shipment to a specific destination
Benefits could be:
Quicker delivery
Lower transportation charges
Lower products purchasing price
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Warehousing
Warehousing functionality
Economic benefits Consolidation and break-bulk
A single large shipment and arranges for delivery to multiple destinations.
Assortment
Means freight reconfiguration
3types:
cross-docking
mixing
assembly
Warehousing
Warehousing functionality
Economic benefits
Assortment
Combines inventory from multiple origins into an assortment for a specific customer.
The assortment is formed by different products combination, in different volumes
accommodated to each customer requirements
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Warehousing
Warehousing functionality
Economic benefits
Assortment
The end result similar to cross-docking.
During the mixing process, inbound products can be combined with those regularly
stored at the warehouse.
Warehousing
Warehousing functionality
Economic benefits
Assortment
Supports manufacturing operations.
Components are assembled by a warehouse located in close proximity to the
manufacturing plant.
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Warehousing
Warehousing functionality
Economic benefits
Processing/Postponement
Final product configuration can be committed by warehouses once a specific
customer order is received:
Packaging
Labeling
Light manufacturing
Economic benefits of postponement:
1) risk is minimized because customized packaging is not performed in
anticipation
2) total inventory can be reduced by using inventory of the base product
Stockpiling
Economic benefit: accommodate seasonal production or demand
Examples:
- Lawn furniture and toys: produced all year long, consumed during a short
marketing period
- Agricultural products: harvested at specific times, consumed throughout the
year
Warehousing
Warehousing functionality
Economic benefits
Reverse logistics
Its about:
Product recall
Reclamation
Disposal of overstock
Difficulties:
- non-uniform individual packages and cartons
- packages are often broken
- product is not packaged correctly
- significant manual sorting and inspection
Damaged inventory
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Movement continuity:
- better longer moves than numerous short handlings
- goods, once in motion, should be continuously moved until arrival at their final
destination
- exchange of the product between handlers wastes time and increases the
potential for product damage
Warehousing
Warehouse operations: Handling & Storage
Handling
Strategic approaches:
Movement continuity Scale economies
Scale economies:
- the idea is to move the largest quantities or loads possible instead of moving
individual cases
- procedures should be designed to move pallets and containers
Warehousing
Warehouse operations
Handling
Main operations:
Receiving In-Storage Handling Shipping
Merchandise arrives (generally, large quantities) and:
1. The merchandise is floor stacked on the vehicle:
- products are manually placed on pallets or
- placed on a conveyor
2. The merchandise is unitized on pallets or containers:
- lift trucks can be used to facilitate receiving
Receiving:
In-Storage handling:
Consists of movements within the warehouse for:
- storage
- order selection (order picking)
- movement to the shipping area
Two activity types:
- transfer movements
- selection
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Warehousing
Warehouse operations
Handling
In-Storage handling (continued):
Transfer movements:
- from the receiving area to a storage location
- from storage to an order selection or picking area
- from the selection area to the shipping staging area
Selection:
- requires materials, parts, and products to be grouped to facilitate order assembly
- a special area of the warehouse has to be designed as selection or picking area
to assemble orders
- for each order, the combination of products has to be created and packaged to
meet specific customer requirements
Warehousing
Warehouse operations
Handling
Shipping:
Order verification Materials loading
Consists of:
Order verification:
- is typically required when product changes ownership
- verification may be:
- carton count
- piece-by-piece check
- serial number
Materials loading:
-lift trucks or conveyors move products from the staging area into the
transportation vehicle
- shipping palletized products became popular because of considerable time
saving
- to facilitate this loading and subsequent unloading upon delivery, many customers
are requesting that suppliers provide mixed combinations of product within a
unit.
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Warehousing
Warehouse operations: Handling & Storage
Storage
The products should be positioned within a warehouse based upon:
product volume
weight
storage requirements.
Product volume:
- major factor driving warehouse layout
- high volume product should be positioned in the warehouse to minimize
movement distance: near doors, primary aisles, at lower levels in storage racks
- position so as to minimize lifting operations
Product weight and special characteristics:
- heavy items should be stored to the ground to minimize lifting
- bulky or low-density product requires cubic space (along outside walls)
- smaller items may require storage shelves, bins, or drawers
Warehousing
Warehouse operations: Handling & Storage
Storage
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Warehousing
Warehouse operations: Handling & Storage
Storage
Alternatives of storage: active vs. extended storage
Active storage:
- when warehouses directly serve customers
- provides sufficient inventory to meet the periodic demands
- is usually related to the capability to achieve transportation or handling
economies of scale
- require products to be quickly unloaded, de-unitized, grouped and sequenced into
customer assortments, and reloaded into transportation equipment
Extended storage:
- means inventory in excess of that required for normal demand
- for speculative, seasonal, or obsolete inventory
- in some special situations, storage may be required for several months prior to
customer shipment: speculative purchases, discounts, product conditioning (ripen
bananas, reach peak quality)
Warehousing
Warehouse planning
1) Site selection
2) Design
Site selection
Typical areas in a community for locating warehouses:
- commercial zone,
- outlying areas served primarily by motor truck only,
- central or downtown area.
Drivers in site selection:
- land cost
- among industrial plants and light or heavy industry areas
- rail sidings
- utility hookups
- taxes
- insurance rates
- highway access
- adequate room for expansion
- necessary utilities available
- soil must support the structure
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Warehousing
Warehouse planning
1) Site selection
2) Design
Design
Relevant elements:
- number of floors,
- cubic utilization,
- product flow
- product-mix analysis
- future expansion
- materials handling system
- layout or storage plan
- sizing