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Adel Abou Heneidy

Global Scm

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Page 1: Global Scm

Adel Abou Heneidy

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Course objectivesUpon completion of this course, students will be able to: 1. Discuss issues on the role of global supply chain

management 2. Understand the supply chain concepts from different aspects

of theories; 3. Recognize the building blocks of global supply chain

strategy; 4. Understand how to design the global supply chain and; 5. Discuss the importance of collaboration across the supply

chain.

Global SCM‐ Adel Abou Heneidy

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Overview• Introduction• Globalization & International Trade• Supply Chain Strategies• Logistics service providers• Procurement & Outsourcing• Inventory Management• Particulars of Bill of Lading & Letter of Credit• Optimizing transport cost in Supply Chains by using spreadsheet • Supply Chain Risk Management• Measuring & Managing Logistics Performance• Aggregate planning in supply chain

References:

“ Global Logistics & Supply Chain Management”- John Mangan, Chandra Lalwani“Supply Chain Management” Sunil Chopra & Peter Meindl

References:

“ Global Logistics & Supply Chain Management”- John Mangan, Chandra Lalwani“Supply Chain Management” Sunil Chopra & Peter Meindl

Global SCM‐ Adel Abou Heneidy

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INTRODUCTION

Global SCM‐ Adel Abou Heneidy

1

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What is Logistics?• “ Getting the right product to the right place, in the right quantity, at

the right time, in the best condition, and at an acceptable cost”The Chartered Institute of Logistics & Transport (CILT-UK): www.ciltuk.org.uk

Logistics involves getting, in the Right way, the Right product, in the Right quantity, in the Right place, at the Right time, for the Right customer at the Right cost. [7Rs]

Global SCM‐ Adel Abou Heneidy

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What is a Supply Chain?• “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.”

Ganeshan and Harrison, 1995

The supply chain is the network of organizations that involved that are involved. Through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hand of the ultimate consumer.

Global SCM‐ Adel Abou Heneidy

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What is Supply Chain Management?“Supply chain management is the coordination of production, inventory

location, transportation, and information among the participants in a supply chain to achieve the best mix of responsiveness and efficiency for the market being served.”

Hugos, 2002

Supply Chain’ Management (SCM) is the management across a network of upstream and downstream organizations of material, information, and resources (finance, people, equipment) flows that lead to the creation of value in the form of products and/or services.

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Key SCM Issues• Distribution network design

– Determine plant and warehouse locations, capacities, and production/storage levels

• Inventory Control– The purpose of inventory is to avoid interrupting a supply

process, be it production or end customer demand– How can we avoid such disruptions at the minimum total

cost?– Must rely on forecasts

Global SCM‐ Adel Abou Heneidy

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Key SCM Issues

• Distribution strategy– Where to hold inventory and how to efficiently

transport it to customers?• Ship directly from plant to customers in full truckloads?• Maintain stocks in regional warehouses and distribute

locally?

• Integration and strategic partnerships– How involved should a firm be with suppliers of

both materials and services?– What level of information sharing is appropriate?

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Key SCM Issues• Product design issues

– Tradeoffs between design changes and logistics savings?

– Can design strategies buffer against demand uncertainties?

• Information technology– What significant data is critical for sharing with partners?– What is the role of the Internet/e-Commerce in all of this?

• Customer value (CVP)*– How does SCM contribute to customer value?

* a customer value proposition (CVP) consists of the sum total of benefits which a vendor promises a customer will receive in return for the customer's associated payment

Global SCM‐ Adel Abou Heneidy

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Supply Chain Management Problems

Supply chain management must address the following problems:

• Distribution Network Configuration • Distribution Strategy • Information • Inventory Management • Trade-Offs in Logistical Activities• Cash-Flow

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What is a Global Supply Chain ?

• The global supply chain is made up of the interrelated organizations, resources, and processes that create and deliver products and services to end consumers.

• In the instance of global supply, the chain is extended to many different countries around the world.

Global SCM‐ Adel Abou Heneidy

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Global Logistics

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Components of a GSC

• StructuresStructuring the supply chain requires an understanding of the demand patterns, service level requirements (SLA), distance considerations, cost elements and other related factors.

• Processes Different processes are demand and supply planning, sourcing, forecasting, purchasing, service operations, logistics, etc.

• Linkages (shared information or continuous communications)

Global SCM‐ Adel Abou Heneidy

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Information Sharing (example)

• Chrysler makes the cars

• Leer makes the seats

• Third party cuts & sews fabric

• Milliken makes the fabric

• Dupont makes raw material• …

Shared schedule information

Global SCM‐ Adel Abou Heneidy

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Issues / considerations when designing a GSC• Strategic plan or Goals• Objectives• Uncertainty: discuss !• Communication and information flow• Types and numbers of facilities and location

Global SCM‐ Adel Abou Heneidy

Before an effective supply chain can be established, certain things must be considered. First a strategic plan with clear objectives and goals must be made. For this to occur it is necessary to understand current performance and what is possible after improvement or reengineering. First, a company must understand and identify causes of uncertainty and determining how it affects other activities throughout the supply chain. Next, ways to eliminate or reduce uncertainty need to be formulated. Communication and information flow is also important when designing a global supply chain. Reliable and instantaneous information can enhance the ability to coordinate different supply chain processes. Types and numbers of facilities and location help dictate many decisions regarding modes of transportation, which suppliers to use, customer markets, etc. They also help determine transportation and distribution costs, making them careful considerations.

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• How Toyota & Honda use facilities decisions to be more responsive to their customers?

1) By opening manufacturing facilities in every major market thatthey enter to be near of the customers.

2) Also, by opening local facilities they protect themselves fromcurrency fluctuation and trade barriers.

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Practicality and Usefulness• Help companies compete all over the world• Expand business operations• Offer new services and applications to meet global customers needs• Give company a competitive advantage

Global SCM‐ Adel Abou Heneidy

Implicating a global supply chain will allow companies to compete all over the world, in many different countries. By expanding current business operations internationally, companies can over new products and services that many have never seen before. New markets allow for more sales and more recognition. Expanding globally with an effective supply chain will give companies a comparative and competitive advantage over others.

Implicating a global supply chain will allow companies to compete all over the world, in many different countries. By expanding current business operations internationally, companies can over new products and services that many have never seen before. New markets allow for more sales and more recognition. Expanding globally with an effective supply chain will give companies a comparative and competitive advantage over others.

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Goal of the Global Supply Chain

• Prompt and reliable delivery of high-quality products and services at the least cost

• To effectively meet rising customer expectations

Global SCM‐ Adel Abou Heneidy

In order for a global supply chain to be effective, is must be reliable and fast. The goal is to deliver a companies products and services quickly and at the least cost possible. Customer expectations are hugely important in today’s business world and companies must strive their needs, wants, and desires.

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• Elements of customer service:– Response time– Product variety– Product availability– Customer experience– Order visibility: access to up-to-the-minute information about the

orders. – Return ability

• Supply chain costs:– Inventories– Transportation– Facilities and handling– Information

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Recent changes effecting the GSC

• Internet and technological change• Proliferation of trade agreements• Falling Trade Barriers• Increase in international trade groups• New Markets

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Advantages of GSC• Diversified business and trading• Lower supply chain costs• Reduced cycle time• Competitive advantage (USP)• Untapped markets*• Enhance speed (responsiveness) and efficiency: discuss !

Global SCM‐ Adel Abou Heneidy

A successful global supply chain will help your company accomplish many useful things. Once the global supply chain is in place, it will only continue to aid your company in its success and help you become more profitable.

•For example, the personal hygiene market was an untapped market for the makers of baking soda, until they developed a baking soda toothpaste

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Disadvantages and problems• Member nations VS. Non member nations• Inefficient and undersized transportation and distribution systems• Market instability

Global SCM‐ Adel Abou Heneidy

Doing business globally is not fool proof, and still can have some disadvantages. Many trade agreements only benefit member nations, which creates obstacle for non member nations. Non members end up paying large tariffs which can greatly increase supply chain costs and cycle times.Another disadvantage with conducting business globally is the inefficient and undersized transportation and distribution systems in new markets. Many countries don’t have the capacity or equipment to transport or handle the large supplies needed to engage in business. This causes for uncertainty with high transportation costs and delay.Market instability is also an issue in dealing with the global supply chain. Many times, foreign markets are fragmented which forces companies to customize their operations for each country. Different countries speak different languages, with different customs, believs,and cultures. All of these obstacles make it very difficult for an effective global supply chain.

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Solutions• Duty specialists and trade specialists• Vertically integrating• Banding together• Infrastructure improvements• Flexibility

Global SCM‐ Adel Abou Heneidy

Despite the different problems, opportunities for global business activities are great. Many common problems can be creatively overcome and solved. In order to avoid tariffs or duties, duty specialists are hired by companies. These specialists advise how taxes effect the supply chain and how to avoid them. Trade specialists help manage transportation and distribution operations in the foreign countries. Many companies vertically integrate different portions of their supply chain. An example would be: investing in their own trucking fleets and distribution systems in order to control their own product delivery. Many companies have also banded together in order to consolidate shipping, warehousing, distribution, and many others. Improvements in infrastructure help to sustain and accelerate market growth. Paving public roads, privatizing railroads, establishing transport systems and others are examples. Perhaps most importantly, in order for your global supply chain to be effective, it must be flexible. Markets are constantly changing and to remain competitive, a company’s global supply chain must innovative, creative, and strategically designed.

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Brainstorming Discussion

• What are some reasons for extending your business and supply chain globally?

Global SCM‐ Adel Abou Heneidy

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Brainstorming Discussion• Increase sales• Satisfy shareholders• Falling tariffs• Increase in International Trade• Increase in internet use throughout the world.

Global SCM‐ Adel Abou Heneidy

The main objective of expanding a business globally is to increase sales and make more money. If a company can effectively do this at the least cost possible, profits will increase. A company with established global sales and activity is far more valuable than a domestic company operating in only one company. This increases market share and satisfies shareholders. Tariffs have fallen from almost 48 percent to 6 percent by 1980. Tariffs are expected to continually fall to around 3 percent. International trade is expected to grow 6 percent annually for the next 10 years. It has already grown exponentially since World War II. The Internet currently has 50 million active users. This number is doubling every year. That is an enormous amount of people able to be reached all over the world, almost instantaneously.

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Globalization & International Trade

Supply Chain Strategies

Global SCM‐ Adel Abou Heneidy

2

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Comparative advantage

• Economic theory first advanced by Robert Torrens and David Ricardo that analyzes international trade in terms of differences in relative opportunity costs. The theory suggests that countries should specialize in the goods they can produce most efficiently rather than trying for self-sufficiency and argues strongly in favor of free international trade.

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Production and consumption before trade

Country Food Clothes

Northland 50 50

Southland 200 100

TOTAL 250 150Consumption after trade

Country Food Clothes

Northland 75 50

Southland 225 100

TOTAL 300 150

Production after trade

Country Food Clothes

Northland 0 100

Southland 300 50

TOTAL 300 150

Northland requires a price of at least one ton of food in exchange for one ton of clothes; and Southland requires at least one ton of clothes for two tons of food. If the international trading price of one ton of food for 2/3 ton of clothes.

If both specialize in the goods in which they have comparative advantage, their outputs will be:

World production of food increased. clothes production remained the same. Using the exchange rate of one ton of food for 2/3 ton of clothes, Northland and Southland are able to trade to yield the above level of consumption:

Example

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Globalization• Globalization describes the process by which regional economies,

societies, and cultures have become integrated through a global network of communication, transportation, and trade. In other words, it is growth to a global or worldwide scale.

• People around the globe are more connected to each other than ever before. Information and money flow more quickly than ever. Goodsand services produced in one part of the world are increasingly available in all parts of the world. International travel is more frequent. International communication is commonplace. This phenomenon has been titled "globalization."

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Defining globalization

• An open economic system

• Non-discrimination

• Global brands

• Global structures

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GlobalizationIn general, it is the shift toward a more integrated and interdependentworld economy

• Negative integration: is the breaking down of trade barriers or protective barriers such as tariffs and quotas.

• Positive integration: aims at standardizing internationaleconomic laws and policies.

• Two components:– The globalization of markets– The globalization of production

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Impact of globalization

• Improvement of International Trade• Technological Progress: governments have upgraded their level of technology

• Increasing Influence of Multinational Companies

•. Power of the WTO, IMF, and WB : discuss the role of each!• Greater Mobility of Human Resources across Countries

• .Greater Outsourcing of Business Processes to Other Countries

• Civil Society: an important trend in globalization is the increasing influence and broadening

scope of the global civil society.

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Please comment!

• Proponents of globalization argue that it allows developing countries to continue and hasten their levels of development, and that it protects consumers in developed countries.

• Opponents believe that globalization serves the interests of multinational corporations at the expense of small businesses, which sends jobs to other countries needlessly.

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Drivers of GlobalizationDrivers of Globalization

• Two factors underlie globalization– “Decline in barriers to the free flow of

goods, services, and capital” that has occurred since the end of World War II

– Technological change

• Two factors underlie globalization– “Decline in barriers to the free flow of

goods, services, and capital” that has occurred since the end of World War II

– Technological change

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• Cheap travel

• Trade liberalization

• Information technology

• High technology

Drivers of GlobalizationDrivers of Globalization

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Globalization Forces

• Political forces– Reduction of barriers to trade and foreign investment by

governments– Privatization of former communist nations

• Technological forces– Advances in computers and communications technology– Internet and network computing

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Globalization Forces, cont’d.

• Market forces– Globalizing companies become global customers

• Cost forces– Goal for economies of scale to reduce unit costs

• Competitive forces– Increase in intensity due to explosive growth in

international business

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Environments of International Business

• Environment– All the forces influencing the life and development

of the firm• Forces

– External Forces (Uncontrollable) – Forces over which management has no direct control

– Internal Forces (Controllable) – Forces that management can use to adapt to external forces

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External Forces• Competitive

– Kind, number, location• Distributive

– For distributing goods and services• Economic

– GNP*, unit labor cost, personal consumption expenditure• Socioeconomic

– Characteristics of human population• Financial

– Interest rates, inflation rates, taxation

Global SCM‐ Adel Abou Heneidy

* Gross National Product (GNP) is the market value of all goods and services produced in one year by labor and property supplied by the residents of a country.

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External Forces, cont’d.

• Legal– Laws governing how international firms must operate

• Physical– Topography, climate, and natural resources

• Political– Forms of government, and international organizations

• Sociocultural– Attitudes, beliefs, and opinions

• Labor– Skills, attitudes of labor

• Technological– Equipment and skills that affect how resources are converted to

productsGlobal SCM‐ Adel Abou Heneidy

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Internal Environmental Forces

• Factors of Production– Capital, raw materials, and people

• Activities of the organization– Personnel, finance, production, and marketing

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Why Is International Business Different?

• Domestic Environment– All the uncontrollable forces in the home country that

surround and influence the firm’s life and development

• Foreign Environment– All the uncontrollable forces originating outside the home

country that surround and influence the firm:• different values• difficult to assess• interrelated

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Why Is International Business Different? cont’d.

• International Environment– Interaction between domestic and foreign

environmental forces or between sets of foreign environmental forces

– Increased complexity for decision-making

• Decision making more complex

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The negative effects of globalization• Developed nations have outsourced manufacturing and white collar jobs. That

means less jobs for their people.• Globalization has led to exploitation of labor • Local industries are being taken over by foreign multinationals • Job insecurity • Companies have set up industries causing pollution in countries with poor

regulation of pollution • Fast food chains like McDonalds and KFC are spreading in the developing

world. People are consuming more junk food • The rich are getting richer and the poor are becoming poorer • Bad aspects of foreign cultures• Deadly diseases like HIV/AIDS are being spread by travelers • The increase in prices has reduced the governments ability to sustain social

welfare schemes in developed countries • Multinational Companies and corporations which were previously restricted to

commercial activities are increasingly influencing political decisions.

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Anti‐Globalization Movement

• The anti-globalization movement developed in the late 20th century to fight the globalization of corporate economic activity and the free trade with developing nations that might result from such activity.

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The positive effects of globalization• Globalization has created the concept of outsourcing • Increased competition forces companies to lower prices • Increased media coverage draws the attention of the world to

human right violations • Countries move to market sectors that they are better at. • Everyone grows more prosperous. Just look at China and India.

Before globalization they were very poor countries. The standards of living were extremely bad. Now these people are becoming more prosperous.

Please have a look on the following paper:

http://www.cluteinstitute-onlinejournals.com/PDFs/200786.pdf

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Key terms

• An international business: any business with international sales, sourcing, or investment.

• A multinational business: any business with productive activities in 2 or more countries.

• A global business: a business that takes a global approach to production and sourcing (Coca-Cola, Intel)

Global SCM‐ Adel Abou Heneidy

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International Business

• Exporting– Local products are sold abroad

• Importing– The process of acquiring products abroad and selling them in domestic

markets. • Licensing

– one firm pays a fee for rights to make or sell another company’s products. • Franchising

– a firm pays a fee for rights to use another company’s name and operating methods.

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International Business

• Joint Venture – A firm operates in a foreign country through co-ownership with local

parties.

• Strategic Alliance– each partner hopes to achieve through cooperation things they couldn’t

do alone.

• Foreign Subsidiary– a local operation completely owned by a foreign firm.

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Multinational Corporations

• Multinational Corporation (MNC)– A business with extensive foreign operations in more than one county.

• Transnational Corporation– A MNC that operates worldwide on a borderless basis.

“Fortune’s” Top 10 Multinational Corporations

1. Wal-Mart Stores 6. DaimlerChrysler2. BP 7. Toyota Motor 3. Exxon Mobil 8. General Electric 4. Royal Dutch Shell Group 9. Total 5. General Motors 10. Chevron

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Multinational Corporations

• Multinational corporations do substantial business in several countries.

• Multinational corporations can be controversial at home and abroad.

• Multinational corporations face a variety of ethical challenges.• Planning and Controlling are complicated in multinational

corporations. • Organizing is complicated in multinational corporations. • Leading is complicated in multinational corporations.

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MNC Issues

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MNC Organizations

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International Trade

• International trade is the exchange of goods and services across international boundaries and/or territories.

• One guiding force behind international trade is competitive advantage (countries find goods/services that they can produce more competitively than another country)

• The importance of international trade has been increasing throughout the past centuries because of Industrialization, Globalization and the introduction of Multi-national corporations

• The recent growth in international trade has been the result of both major technological advances and concerted efforts to reduce global trade barriers.

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International Trade and World Economy

• Over the past 20 years, the growth of international trade has averaged 6 percent per year, increasing twice as fast as world output.

• Since 1947, when the General Agreement on Tariffs and Trade (GATT) was created, the world trading system has benefited from eight rounds of multilateral trade liberalization, as well as from unilateral and regional liberalization.

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Impacts of World Trade

• The resulting integration of the world economy has raised the standard of living around the world.

• Many developing countries have substantially increased their exports of manufactured goods.

• Compared with traditional commodity exports, manufactured goods have risen to 80 percent of developing country exports.

• Trade between developing countries has grown rapidly, with nearly 40 percent of their exports now going to other developing countries.

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Trade Agreements

• International trade is a major source of economic revenue for any nation which is involved.

• Without international trade, nations would be limited to the goods found within their own borders.

• New developments in international trade include the integration of countries into trade agreements or blocks:– European Union - APEC– NAFTA - AFTA– EFTA– CEFTA

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Globalization & Int’l Trade• World trade increased about 20x since 1950, while

global production has increased about 6.5x • Between ’90 and ’00 FDI increased 5x & trade by 2x • By 2000:

– 60,000 parent companies operated away from home markets through 820,000 subsidiaries/affiliates

– Produced US$14 trillion in global sales, twice the value of global exports

– US, Japanese, Western European companies are the major investors in Europe, Asia, and North America

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Implications for Globalization of Production

New markets opened through WWW.Jet aircrafts move people and goods.Global media such as CNN, MTV…are creating a worldwide culture

Production dispersed to economical locations due to transportation and communication advances.

It has allowed firms to create and manage a globally dispersed production system, further facilitating globalization of production

Implications for Globalization of Markets

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Exports % share of world production

0

5

1 0

1 5

2 0

2 5

1 9 1 3 1 9 5 0 2 0 0 0

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Globalization from a Regional PerspectiveGlobalization from a Regional Perspective• Developed Economies

• U.S. the European Union and Japan account for one-half of world trade

• Emerging and Transition Economies• Economies in Latin America and Asia are increasingly

important global players–BRIC, economic powers with large internal markets–Eastward expansion of the EU

• Less Developed Countries (LDCs)• Some fast growing and increasingly open to the global system• Others, notably in Africa, struggle to compete globally

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US investment now more global

Percentage of foreign stocks held by US investors

Cum ula t ive U S dire c t fore ign inve st m e nt

% of GDP

05

1 01 52 0

1 9 8 0 1 9 9 5

1975 1996

One percent

Ten percent

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Brainstorming Discussion

• Discuss the effect of globalization on:- Business- Work

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Effects of globalization on business

• Cheap offshore production

• Reduced transport costs

• Virtual communication

• Standardization of logistics

• Global marketing

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Bigger and smaller

• Greater scale in manufacturing

- commodities are globally priced

• Specialization in manufacturing

• Globalization of specialist manufacturing

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Globalized business

• Greater specialization of production - Hewlett Packard

• More outsourcing – Soap and medicines

• Greater increase in brand values- LG

• New technology niches – steel mini mills

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Effects of globalization on work

• Jobs in services rather than manufacturing

• Workers provide services rather than “do a job”

• End of “lifetime” employment

• Individuals manage more of their own affairs

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Types of production approaches• Make-to-Stock: we will manufacture finished products by considering

future expected demand [Push]

• Assemble –to- order: is a production method that occurs when an item is assembled after receipt of a customer's order. The key items used in the assembly or finishing process are planned and usually stocked inanticipation of a customer order. Receipt of an order initiates assembly of the customized product [Push-Pull]

• Build –to- order, often abbreviated as BTO and sometimes referred to as make to order (MTO), is a production approach where once a confirmed order for products is received, products are built. BTO is the oldest style of order fulfillment and is the most appropriate approach used for highly customized or low-volume products. [Pull]

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SCM – definition by APICS*

• SCM is the "design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally."

Global SCM‐ Adel Abou Heneidy

• APICS: association for operations management www.apics.org

Advancing Productivity, Innovation, and Competitive success

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SCM- Strategic level• Strategic network optimization, including the number, location, and size of

warehousing, distribution centers, and facilities. • Strategic partnerships with suppliers, distributors, and customers, creating

communication channels for critical information and operational improvements such as cross docking, direct shipping, and third-party logistics.

• Product life cycle management, so that new and existing products can be optimally integrated into the supply chain and capacity management activities.

• Information technology chain operations. • Where-to-make and make-buy decisions.

• Aligning overall organizational strategy with supply strategy. • It is for long term and needs resource commitment.

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Supply Chain Management            Adel Abou Heneidy

Framework for Supply Chain Strategy

Business Objectives

Management Processes

Focus of Top Management

Supply Chain Objectives

Supply Chain Processes

Importance to Top Management

Business Strategy

Supply Chain Strategy

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Aligning Supply Chain Strategy with Aligning Supply Chain Strategy with Business StrategyBusiness Strategy

Business Objectives

Management Processes

Focus of Top Management

Supply Chain Objectives

Supply Chain ProcessesImportance to Top

Management

Business Strategy

Supply Chain Strategy

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What it is meant by “Strategic Fit in SC, and how you can achieve it?

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Predictable demand Unpredictable demand

Long lead time

Short lead time

Supply & Demand uncertainties

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Lean manufacturing• Is a production practice that considers the

expenditure of resources for any goal other than the creation of value for the end customer to be wasteful, and thus a target for elimination.

• The lean manufacturing process is a comprehensive way to reduce waste of all types. It could be a waste of time or material, it is still waste.

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What is “Lean Production?”

• Lean production is aimed at elimination of waste

• Organize processes to add value to the customer

• Deliver goods “just-in-time”• Service organizations also using lean

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Just-In Time Manufacturing

• JIT- A philosophy of continuous improvement that puts emphasis on prevention rather than correction, and demands a company wide focus on quality.

• JIT- operational management approach to achieve world class manufacturing.

• JIT- production is based on demand

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81

JIT Objectives

Ultimate objectives:• Zero Inventory.• Zero lead time.• Zero failures.• Flow process.• Flexible manufacture.• Eliminate waste.

Just-In-Time philosophy is:Continuous Improvement

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Just-In-Time Techniques• Inventory Reduction as a Tool for Improvement• Supplier Relationships• Inventory “Pull”• Uniform Plant Loading• Reduced Setup Times• Shop-Floor Layout and Production Cells• Total Quality Assurance • Preventive Maintenance

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7 Principles of Toyota Production System (TPS)

• Reduced Setup Times• Small-Lot Production• Employee Involvement and Empowerment• Quality at the Source• Equipment Maintenance• Pull Production• Supplier Involvement

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Agile ManufacturingIs a term applied to an organization that has created the processes, tools, and training to enable it to respond quickly to customer needs and market changes while still controlling costs and quality.

The agile systems focus is on flexible, efficient response to unique customer demand. It uses a make-to-order (MTO)process for manufacturing and order fulfillment. Instead of relying on speculative notions of what might be demanded, the quantity of demand, and the location of that demand, agility employs a “wait-and-see” approach to demand, not committing to products until demand becomes known.

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• “Leagile” is a hybrid of lean and agile systemsHowever, this can take one of several approaches:

1. Using make-to-stock/lean strategies for high volume, stable demand products, and make-to-order/agile for everything else

2. Have flexible production capacity to meet surges in demand or unexpected requirements [Chase / Time flexible strategies]

3. Use of postponement strategies, where “platform” products are made to forecast, and then final assembly and configuration done upon final customer order

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Leagile Manufacturing

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Processing /PostponementWarehouses

• Warehouses can also be used to postpone, or delay, production by performing processing and light manufacturing activities.

• A warehouse with packaging or labeling capability allows postponement of final production until actual demand is known.

• For example, vegetables can be processed and canned in "brights*" at the manufacturer.

* Brights are cans with no pre-attached labels.

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Mass customization• Mass production of goods with differing

individual specification through the use of components that may be assembled in a number of different configurations.

• Mass customization is a cost-efficient way of offering some of the benefits of customization.

• After the core product has been mass produced, the manufacturer can make small changes to create a customized finished product.

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Lean Supply ChainA set of organizations directly linked by upstream and downstream flows of products, services, finances and information that collaboratively work to reduce cost and waste by efficiently andeffectively pulling what is needed to meet the needs of the individual customer.

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The ability is to respond rapidly to unpredictable changes in demand.Agility is not a single company concept, it extends from one end of the supply chain to the other.

Agile Supply Chain

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Principles Of JIT Manufacturing• Total Quality Management

• Production Management

• Supplier Management- Delivery of Parts = 100% Defect Free– Where they are needed– When they are needed– The exact quantity - Work Together

• Inventory Management- Eliminate Safety Stock = Zero Inventory- Reduce WIP "Work In Process "- JIT is not an inventory control system- Reduction in inventory opens up space

• Human Resource Management

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Brainstorming Discussion

Discuss:• Cycle Time vs. Lead Time• If one of your SC strategies is to reduce lead times,

how you are going to manage it?

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Logistics service providers

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What are the major reasons foroutsourcing of supply chain activities?

Process Effectiveness24%

Lower Cost27%Lack of Internal

Capability11%

Investment Reasons12%

Strategic Reasons26%

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Logistics service providers• A third-party logistics provider (abbreviated 3PL, or

sometimes TPL) is a firm that provides a one stop shop service to its customers of outsourced (or "third party") logistics services for part, or all of their supply chain management functions.

• Third party logistics providers typically specialize in integrated operation, warehousing and transportation services that can be scaled and customized to customer’s needs based on market conditions and the demands and delivery service requirements for their products and materials.

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Remember:

1PL : shipper 2PL: carrier

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Why Use 3PL?•To Save Time: Outsourcing the Logistics function can free up resources to focus on core competencies.

•Because Someone Else Can do it Better: Even if you have resources available, another organization within the supply chain may be able to do it better, simply because its relative position in the supply chain, supply chain expertise and economies of scale.

•To Share Responsibility: 3PL companies can share responsibility for managing global supply chains, keeping customers and stores properly stocked, and delivering the perfect order every time.

•To Re-Engineer Distribution Networks: Logistics outsourcing can be a quick way to re-engineer distribution networks to meet global market demands and gain a competitive edge.

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Implementing a Successful 3PL Project• Outsourcing Strategy• Document the Processes (SOP)• Analyze SWOT • Conducting a Comprehensive Study • Create a Robust Selection Process • Document the Expectations • Use a Request for Information (RFI)• Do Your Homework • Create Good Legal Documentation • Define Targets (KPIs)• Measure and Review Performance • Develop an Efficient Costing System • Create a Project Implementation Strategy• Nurture the Relationship

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Metrics to evaluate a 3PL relationship

Warehousing metrics• Orders processed• Order accuracy• On-time receiving• On-time departure• Inventory accuracy• Cycle counts• Quantity picked/handled

per man-hour• Rush shipments handled• 3PL cost per unit vs.

historic cost per unit

Inventory-related metrics• Measure inventory on hand• Inventory in transit• Obsolete inventory• Supplier routing compliance percentage• Supplier on-time order shipping percentage• Consigned inventory/ATP (Available To Promise)

Transportation-based metrics• On-time delivery• On-time pickup• Claims ratio• Rating and billing accuracy percentage• 3PL cost per shipment vs. historic cost per

shipment• Monthly optimized cost savings from mode

shifting and end-to-end matching

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3PL relationship – Remember !

• Contracts do not manage relationships - people do!• Trust is enhanced when quality information is exchanged• Each side must understand the other’s situation on risk and

margin• Enhanced understanding improves mutual performance• SLA is central to the Relationship• KPIs must be accurate and unbiased• Positive Quarterly Reviews• Partnership means “what can I do to help you”?

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Please read the following paper

Global Logistics outsourcing trends:Challenges in managing 3PL relationship

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General liability of freight forwarder

A) The freight forwarder shall not be liable for any loss or damage whatsoever arising from :* The act of omission by the customer.* Compliance with the instructions given by the customer.* Insufficiency of packing or labeling of goods provided by the customer.* Handling, loading , stowage or unloading of goods by the customer.* Inherent vice of the goods.* Force Majored, strikes,…..* Any cause which the freight forwarder could not avoid.

B) Howsoever caused , the freight forwarder shall not be liable for loss, damage to theproperty other than the goods themselves ; not to indirect or consequential loss , ordamage , loss of profit , delay ,…….

Amount of compensation : THE LEAST OF :1) The value of lost or damaged goods , or2) 2 SDR / Kg

*** SDR :Special Drawing RightDaily, the international bank issues its applicable value. Now, one SDR equalsapproximately $ 2

**Compensation shall be affected provided that the freight charges are paid.Global SCM‐ Adel Abou Heneidy

“ALL BUSINESS IS TRANSACTED AS PER COMPANY's STANDARD TRADING CONDITIONS –

COPY AVAILABLE UPON REQUEST “

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Choosing International Freight Forwarder• Does the forwarder have experience in shipping your type of products ?• Does the forwarder have good contacts with shipping lines & airlines?• Does the forwarder have experience in shipping to your particular market ?• Is the forwarder is well represented in your particular markets?• What are the value added services , the forwarder can offer?• Are the forwarder’s current customers are satisfied with the service?• Is the forwarder financially sound?

How to find an international freight forwarder ?• Other business people in your area or industry. • Egyptian International Freight Forwarders Association EIFFA• Internet & yellow pages.• The international banking department of your bank.

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Cubic evaluation of 3PL

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1 to 5 1 to 5 1 to 5

Rating Importance Competitor Evaluation

Pre-sales approach 4 3 2 0.19

staff experience 4 4 5 0.64

Responsiveness & follow up 3 4 2 0.19

Timing 3 5 5 0.60

Pricing 3 4 3 0.29

Financial issues 3.5 4 3 0.34

Value added services 3 3 4 0.29

AVG. 0.36

Evaluation Criteria

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Outsourcing of Logistics Services (Source: 13th Annual Third Party Logistics Report, Dr. John Langley, Georgia Institute of Technology)

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The 3PL Market Slump Is OverAs the market for third-party logistics improves, manufacturers will see costs begin to rise.

Global SCM‐ Adel Abou Heneidy

http://www.industryweek.com/articles/the_3pl_market_slump_is_over_22559.aspx

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Logistics service providers• A Fourth-party logistics provider (abbreviated 4PL ; LLP),

lead logistics provider, or 4th Party Logistics provider, is a consulting firm specialized in logistics, transportation, and supply chain management.

• A 4PL is sometimes described as non-asset-owning service provider, their role is to provide broader scope managing of the entire supply chain.

• A 4PL is neutral and will manage the logistics process, regardless of what carriers, forwarders, or warehouses are used.

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• The international logistics industry has been researching on thedevelopment of the fifth-party logistics. A key function of the 5PL is to aggregate the demands of the 3PL into a bulky volume for negotiating more favorable rates with airlines and shipping companies regardless of which generation of logistics solution belongs to all.

• The 5PL firm attributed to logistics service providers who plan, organize and implement logistics solutions on behalf of a contracting party (mainly information systems) by exploiting the appropriate technologies (conceptual level).

Logistics service providers

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• Outsourcing is often taking a set of work, tasks, responsibilities or functions and transferring them to an outside service provider.

• Business Processing Outsourcing (BPO) involves that and more. A BPO service provider (6 PL) brings a different perspective, knowledge, experience and technology to the existing function and can and will work with the firm to re- engineer it into an improved or new process. It is an outcome-based result, not just a pure cost reduction issue.

Logistics service providers

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Case Study

Ontex chooses the 4PL model“Based on revenue-sharing and trust”

BettR&Ontex Presentation-Case study.pdf

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Procurement & Outsourcing

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What is Procurement?

• Procurement includes sourcing, purchasing,and cover all of the activities from identifying potential suppliers through to delivery from supplier to customer.

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Purchasing vs. Procurement• In the traditional sense, there is a significant difference in that purchasing

merely reflects the act of acquisition, while procurement encompasses more elements such as development of the procurement strategy, preparation of contracts, sourcing, qualifying, negotiating, etc, as well as some logistics activities like customs clearance, transportation,…

• In other words, purchasing has evolved into a subset (part) of procurement, with purchasing becoming an acquisition activity, whilst procurement addresses the functions from identifying the need through to themanagement of the end result.

•In general use, the word purchasing means buying things with money, but procurement is more broad; it can include buying, renting / leasing, trading things, --getting the necessary items by whatever means".

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• Purchasing is the “ process of buying”.• All departments in the company are involved in purchasing.• The procurement department has the major responsibility for locating

suitable sources of supply and for negotiating prices._________________________________________________________

The objectives of purchasing:• Obtaining goods and services of the required quantity and quality.• Obtaining goods and services at the lowest cost.• Ensuring the best possible service and prompt delivery by the

supplier.

• Evaluating vendors, managing, and developing of relationships with vendors.

Purchasing & its objectives

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Purchasing Interfaces

Purchasing

Legal

AccountingOperations

Dataprocessing

Design

ReceivingSuppliers

1. Requisition received

2. Supplier selected

3. Order is placed

4. Monitor orders

5. Receive orders

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Procurement methods

• Procurement method is the way of ordering material.

• Some of the new developments in this area include:

1) Electronic Ordering2) Stockless Purchasing3) Standardization, and4) Just in Time Purchasing.

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Electronic Ordering• Electronic Ordering Reduce Paper Transactions.

• Paper Transactions Include Purchase Order, Receiving Document, Authorization To Pay, Etc.

• Transactions Between Firms Are Increasingly Done Via Electronic Data Interchange (EDI).

• EDI Is A Standardized Data Transmittal Format For Computerized Communications Between Organizations.

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• It Provides Data Transfer For Any Business Application, Including Purchasing.

• For Example, Data For A Purchase Order (Such As Order Date, Due Date, Quantity, Part Number, Order Number, Address, Etc.) Are Fitted Into Standard EDI Format.

• Electronic Ordering Also Speeds Up The Traditionally Long Procurement Time

Electronic Ordering

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Stockless Purchasing• This Means That The Supplier Maintains The Inventory For

The Purchaser.

• Here, The Cost Of Stocking Inventory Has Been Temporarily Transferred From The Purchaser To The Supplier.

• If The Supplier Can Maintain The Stocks For A Variety Of Customers Who Use Same Products, Then There May Be Net Savings In This Option. Otherwise, Purchasing Costs May Go up.

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Standardization

• Rather Than Obtaining A Variety Of Components Similar In Labeling, Coloring, Packaging, Etc. The Purchasing Agent Should Try To Have Those Components Standardized.

• There Is One Less Invoice, One Less Item To Be Inventoried, Etc.

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Just In Time Purchasing• Just In Time (Jit) Purchasing Is Directed Toward The

Reduction of Waste.

• Elimination Of In-Plant Inventory.

• Elimination Of In-Transit Inventory.

• Quality And Reliability Improvement.

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Purchasing cycle

• Receiving and analyzing purchase requisition• Selecting suppliers, issuing RFQs, receiving and analyzing

quotations, and selecting the right supplier.• Determine the right price.• Issuing PO.• Following up to assure delivery dates are met.• Receiving and accepting goods.• Approving supplier’s invoice for payment.

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Establishing specifications

• In purchasing an item or a service from a supplier, several factors are included in the package bought: (Best Buy)* quality requirements* price requirements* functional requirements

Functional specification description:- by brand.- by physical and chemical characteristics, material, and

method of manufactures, and performance.- by engineering drawings.- miscellaneous.

Sources of specifications: Buyers / Standard

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Total Cost of Ownership (TCO) instead of purchase price

Total Cost of Ownership

Pre-transaction components1.Identifying need2. Investigating sources3. Qualifying sources4. Adding supplier to internal system5. Educating:

a) supplier in firm’s operationsb) firm in supplier’s operation

Transaction components1.Price2. Order placement / preparation3. Delivery (transportation)4. Tariffs / duties5. Billing / payment6. Inspection7. Return of parts8. Follow-up & correction

Post-transaction components1.Line fallout2. Defective finished goods3. Field failure4. Repair / replacement in field5. Reputation of firm6. Cost of repair parts7. Cost of maintenance & repair

Major categories for the components of Total Cost of Ownership

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Procurement Strategies1) Volume consolidation:

• The first step in developing an effective procurement strategy is volume consolidation through reduction in number of suppliers.

• By applying this strategy, procurement is able to leverage its share of a supplier’s business, and rises the buyer’s negotiating strength. Also, the supplier can gain greater economics of scale in its internal processes, partially by being able to spread its fixed costs over a larger volume of output.

• Clearly, when a single source of supply is used risk increases. For this reason supply base reduction programs are almost always accompanied by rigorous supplier screening, selection, and certification programs

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Procurement Strategies2) Supplier operational integration:

– It means that buyers and sellers integrate their processes and activities in an attempt to achieve substantial operational performance improvement in the supply chain.

– The primary objective of operational integration is to cut waste, reduce cost, and develop a relationship that allows both buyer and seller to achieve mutual improvements. Such integration can take many specific forms such as:

1. the buyer may allow the seller to have access to its sales or orderinginformation system, giving the seller early warning of which products are being sold and what future purchases to expect.

2. establishing EDI (Electronic Data Interchange) linkage to reduce order time3. eliminating counting and inspection of incoming deliveries as greater

reliance is placed on supplier’s capabilities.

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Procurement Strategies3) Value management:

• Value Management is a powerful management tool for use in an overall strategic management framework.

• Value engineering, reduced complexity , and early supplier involvement in product design represent some of the ways procurement can work with suppliers to reduce further the TCO.

• If we approach the issue from supplier management perspective, we shall have the following possible procurement strategies to pursue:(1) Purchasing management,(2) Materials management,(3) Sourcing management, and(4) Supply management.

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Strategic sourcing• Strategic sourcing is a process where several

purchasing activities are streamlined to support a total supply chain vision focusing on the ultimate customer.

• It is an institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company.

• In a production environment, it is often considered one component of supply chain management.

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Strategic sourcing

The steps in a strategic sourcing process:

1. Assessment of a company’s current spends (what is bought where?).2. Assessment of the supply market (who offers what?).3. Total cost analyses (how much does it cost to provide those goods or services?).4. Identification of suitable suppliers.5. Development of a sourcing strategy (where to buy, what considering demand and

supply situation, while minimizing risk and costs).6. Negotiation with suppliers (products, service levels, prices, geographical

coverage, etc.).7. Implementation of new supply structure.8. Track results and restart assessment (continuous cycle).

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Selecting suppliers

• There are three types of sourcing:Sole sourcingMultiple sourcingSingle sourcing

• Factors in selecting suppliers:Technical abilityManufacturing capabilityReliabilityAfter-sales servicesSupplier locationPriceothers ( credit terms, …)

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Supplier selection check list

1. Are they a significant "player" as an outsource organization?2. What experiences do have they in managing contracts of a similar size / type?3. Can they demonstrate high levels of performance in current contracts? (third

party references)4. Can they manage your contract within their current resources?5. If yes to (4) how do they intend to structure their resources to manage the

additional workload?6. If no to (4) what additional resources do they intend to put in place?7. How do they recruit and train new staff?8. What level of staff turnover do they experience?9. If they were awarded the contract what percentage of their business would this

represent?10. What experience do they have in your market sector?

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Supplier selection check list

11. What evidence was there that they had researched your company prior to the initial meeting?

12. How responsive were they to requests during the selection / bidding process?13. Has their tender response addressed all of the key issues?14. To what extent did they "push back" and question the brief as given?15. What creativity / innovation did they demonstrate that adds additional value?16. Does their response clearly define how they will report on performance against

the key measures?17. Have they clearly described how they will internally respond to performance

issues?18. How competitive is their bid price compared to your budget, and to other bid

prices?19. In which areas are they demonstrating added value over their competitors?20. To what extent is there a culture fit between you and their organization?

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Certification

Partnership

Traditional

Price emphasisMultiple sourcesInspectionsMany transactions

QualityOn-time deliveryTechnology transfersTrading agreements

Supplier assessment programsSupplier development programsLong-term contractsNo inspection

Time

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Supplier PositioningHigh

Risk

LowLow Value High

Security[Bottleneck]

Manage Process

[Non critical]

Strategic[partner]

Leverage

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BUYER DOMINANCE

INTER-

DEPENDENCE

INDPENDENCESUPPLIER

DOMINANCE

Low HighSupplier Resource

Buyer Resource

Low

High

Supplier Positioning

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SUPPLIER RELATIONSHIP MANAGEMENT

• The case for SRM• Supply chains more integrated• Focus on core competencies• Supplier technical capability & geographic coverage increasing• Globalisation requires more security of sources of supply

• When SRM is absent, the risks• Cost over runs• Persistent delays• Constant specification changes• Deficient product

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SRM – AN AGENDA

• Establish ground rules, review cycle & define the relationship

• Supplier/buyer development transparent exchange• Regular & consistent appraisal of KPIs• Development programmes, forums & workshops• Shared vision & values• Reward & recognition systems

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SRM- Case study: d:\Work Data\aheneidy\Desktop\SRM -Case study.ppt

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• Ideas from suppliers could lead to improved competitiveness

1. Reduce cost of making the purchase2. Reduce transportation costs3. Reduce production costs4. Improve product quality5. Improve product design6. Reduce time to market7. Improve customer satisfaction8. Reduce inventory costs9. Introduce new products or services

Supplier Partnerships

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Procurement & Supplier Management KPIs

• Number of suppliers managed / purchasing FTE • Supplier in full • Supplier on time • Supplier rejections • Average variable cost of placing order with supplier • Cost of purchasing as % of gross sales • Total procured spend as % total business costs • Account payable days

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Global Sourcing• Global sourcing is a strategic sourcing strategy that effectively broadens the

scope of the procurement process to include companies that operate in other countries.

• The use of global sourcing has been the driving force behind thedevelopment and expansion of the global economy.

• Including suppliers from around the world in the bidding process for large contracts reduces prices and increases competition.

• The creation of this type of infrastructure allows firms to create subsidiary offices in locations around the world. There are three main industries that are ideal for global souring: manufacturing, skilled services and telephone call centers.

Global SCM‐ Adel Abou Heneidy

_______________________________________________________________

What is the distinction between outsourcing and off-shoring?

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Example of DELL’s Global (sourcing) Supply Chain

Customers order computers on-line

Dell Assembly Plant

Monitors by SONY (Mexico)

Keyboards by Acer (Taiwan)

CPU by Intel (USA)

Other components

SupplierSupplier FactoryFactory ClientClient

Source: INSEAD Supply Chain Management Programme 2004

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Global Sourcing

• Considerations– Costs– Control– Expertise – Distance– Languages– Laws and regulations

• Begin simple– Then move to complex

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Global Sourcing

• The Lure of Global Sourcing– Suppliers with improved competitiveness

• Cost• Quality• Timeliness

– Suppliers in less developed countries with low-cost labor• Attractive for labor-intensive products with low skill requirements

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Global Sourcing Arrangements

• Arrangement that provide a firm with foreign products– Wholly owned subsidiary– Overseas joint venture– In-bond plant contractor– Overseas independent contractor– Independent overseas manufacturer

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Use of ElectronicPurchasing for Global Sourcing

• Growth of electronic procurement exchanges– Identify potential suppliers or customers

– Facilitate efficient and dynamic interactions among prospective buyers and suppliers

– Recognize strategic function of purchasing

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Global Electronic Procurement• Electronic Exchange Options

– Catalog purchases– Permits buyers and suppliers to interact through a standard

bid/quote system– Facilitates obtaining letters of credit, contracting for logistics

and distribution, and monitoring daily• Benefits

– Cut costs and invoice and ordering errors– Improve productivity and internal purchasing processes– Reduce trading cycle time, paper– Compare bids

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Global Sourcing• Problems

– Unanticipated added costs• Currency fluctuations• Transportation cost increases

– E-procurement exposes business systems to wide range of potential security issues

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Added Costs

• International freight, insurance and packing• Import duties• Customhouse broker’s fees• Transit or pipeline inventory• Cost of letter of credit• International travel and communication costs• Company import specialists• Reworking of products out of specification

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Outsourcer & outsourcee relationship development

• Master- Servant Stage• Consultative Stage• Peer- to- Peer Relationship Stage• Competitive Stage

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Global SCM‐ Adel Abou Heneidy

• Take Effect January 1st, 2011• Consist of 11 terms• Organized into two distinct categories:

a) for all mode of transportb) for sea and waterway transport

Terms of sale

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Group E – Departure • EXW – Ex Works (named place) The seller makes the goods

available at his premises. The buyer is responsible for all charges. This trade term places the greatest responsibility on the buyer and minimum obligations on the seller.

• The Ex Works term is often used when making an initial quotation for the sale of goods without any costs included.

• EXW means that a seller has the goods ready for collection at his premises (Works, factory, warehouse, plant) on the date agreed upon.

• The buyer pays all transportation costs and also bears the risksfor bringing the goods to their final destination

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Group F – Main carriage unpaid• FCA – Free Carrier (named places). The seller hands over

the goods, cleared for export, into the custody of the first carrier (named by the buyer) at the named place.

• FAS – Free Alongside Ship (named loading port). The seller must place the goods alongside the ship at the named port. The seller must clear the goods for export. [Bulk]

• FOB – Free on board (named loading port). The seller must load the goods on board the ship nominated by the buyer, cost and risk being divided at ship's rail.

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Group C – Main carriage paid• CFR or CNF – Cost and Freight (named destination port) .Seller must pay

the costs and freight to bring the goods to the port of destination. However, risk is transferred to the buyer once the goods have delivered to the first carrier.

• CIF – Cost, Insurance and Freight (named destination port) . Exactly the same as CFR except that the seller must in addition procure and pay for insurance for the buyer.

• CPT – Carriage Paid To (named place of destination) .It is equivalent of CFR.. The seller pays for carriage to the named point of destination, but risk passes when the goods are handed over to the first carrier.

• CIP – Carriage and Insurance Paid (To) (named place of destination) equivalent of CIF. Seller pays for carriage and insurance to the named destination point, but risk passes when the goods are handed over to the first carrier.

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Group D – Arrival

• DAT : delivered at terminal – NEW!

• DAP : delivered at place – NEW!

• DDP – Delivered Duty Paid (named destination place) .This term means that the seller pays for all transportation costs and bears all risk until the goods have been delivered and pays the duty. Also used interchangeably with the term "Free Domicile".

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Incoterms 2010 applicable for all modes of transport

EXW : ex worksFCA : free carrierCPT : carriage paid toCIP : carriage and insurance paid toDAT : delivered at terminal DAP : delivered at place DDP : delivered duty paid

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Incoterms 2010 only applicable for sea and inland waterway transport

FAS : free alongside shipFOB : free on boardCFR : cost and freightCIF : cost, insurance and freight

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Brainstorming Discussion

Discuss:• The factors would typically be considered in

contingency planning in outsourcing arrangement

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Inventory Management

Global SCM‐ Adel Abou Heneidy

5

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Two Forms of Demand

DependentDependent Items used to produce final productsItems used to produce final products

IndependentIndependent Items demanded by external customersItems demanded by external customers

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Inventories

• Materials and supplies that a firm carries for sale or inputs.

• Inventories are used their value is converted to cash.

• Represent 20 to 60 % of total assets.

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Reasons to Hold Inventory

Meet unexpected demandMeet unexpected demand Smooth seasonal or cyclical demandSmooth seasonal or cyclical demandMeet variations in customer demandMeet variations in customer demand Take advantage of price discountsTake advantage of price discountsHedge against price increasesHedge against price increasesQuantity discountsQuantity discounts

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Functions of Inventories• One purpose of inventory in batch

manufacturing is to buffer :

– Supply and demand – Customer demand and finished goods – Finished goods and component availability – Parts and materials needed to production

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Types of inventory based on the flow of materials

• Raw materials - Items purchased that have not entered the process. I.e. components , subassemblies etc

• WIP (work in process) – RM that have entered the process and not yet complete.

• Finished goods – Finished products that are ready to be sold.

• Distribution Inventories – Finished Goods in distribution system.

• MRO ( Maintenance, repair, operational) – Items used in production that do not become part of the product.

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General kinds of inventory

• Cycle stock(demand and lead time are constant)

• In-transit stock(ordered but still not available in warehouse)

• Safety or buffer stock(due to uncertainty of demand and lead time)

• Speculative stock(acquired to reach economies of scale )

• Seasonal stock(acquired to meet seasonal demand)

• Dead stock(no demand has been registered and may become obsolete)

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Classification of inventories according to their function

• Anticipation Inventory – for peak season, promotion or threat of strike. (Milk and bread)

• Fluctuation Inventory – protects against random fluctuations in demand , supply or lead-time.

• Lot-size inventory – these take advantage of lot pricing. (Wal-Mart) • Transportation Inventory (pipeline) – in transit inventory:

Example: Delivery of goods from supplier is in transit for 10 days. If the annual demand is5200 units, what is the average annual inventory in transit?Solution:

I = 10 x 5200 = 142.5 units365

• Hedge inventory – Protects against price fluctuations

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Inventory Management

• The prime objective for all supply chains is to provide customers with what they want, when they want it. Inventory management plays a central role in every supply chain’s need to satisfy its customers.

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Objectives of inventory management

• Maximize customer service – correct materials in stock, % of orders filled:

Order cycle time:Elapsed time between the release of purchasing order bythe buyer and the receipt of the corresponding goods.

* Case fill rate: % of delivered quantity to ordered one.* Order fill rate: % of customer orders filled completely.

• Low cost plant operation• Minimum inventory investment

• Don’t Control Inventories – Control Processes• Inventories are Symptoms of Processes

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Why Do Goals Conflict?

• Forces for keeping low inventory– inventory expensive– low salvage values

• Forces for keeping high inventory– long lead times – customer service is important– demand is hard to predict– reduction in transportation quantity

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Inventory Costs• Order costs: are those associated with placing an order. It does not

depend upon the quantity ordered.

• Carrying costs* Capital (opportunity) costs* Inventory risk costs* Space costs* Inventory service costs (capacity –associated costs)

• Out-of-stock costs* Lost sales cost* Back-order cost

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Financial inventory performance measures

• Inventory turns = annual cost of goods sold average inventory in dollars

COGS = $1MAVG Inv = $ 0.5M

$1M/0.5 = 2 turns per year

What will be the inventory turns ratio if the cost of goods sold is 24 million a year and the average inventory is 6 million. 24M / 6M = 4 turns per year

• Days of supply = inventory on hand

average daily usage

A company has 9000 units on hand and the annual usage is 48,000 units. There are 240 working days in the year. What is the days of supply.

Average daily usage= 48000/240 = 200 nits

Days of supply = 9000 / 200 = 45 days

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Methods of evaluating inventory• First In First Out (FIFO):

in case of rising prices replacement is at higher price.

• Last In First Out (LIFO)in case of rising prices replacement is at current price.

• Average costin case of changing prices (+/-), the av. Cost is not related to actual one.

• Standard costpre-determined cost. Any difference between the std. cost and actual one is stated as a variance.

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ABC inventory control(Pareto Principle)

• A way to categorize/group your products. There are a few different ways to set up an ABC Ranking, such as Velocity (times sold), Quantity sold/Consumed or by Margin. But the most common method is the Annual Sales Volume ranking. This method will allow you to identify the small amount of products that usually account for most of your sales dollars (think 80/20 rule):1. Calculate the 12 month dollar usage for all of your products (volume X cost).2. Rank the items in descending order by the dollar usage.3. The "A" items are the top 80% of the total annual usage dollars.4. The "B" items make up the next 15% of total annual usage.5 The "C" items are the remaining items are the remaining 5% with >0 usage in the past 12

months.

• A Items: very tight control, complete and accurate records, frequent review • B Items: less tightly controlled, good records, regular review• C Items: simplest controls possible, minimal records, large inventories, periodic

review and reorder

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“Information Replaces Inventory”

• This saying emphasizes the fact that more accurate and timely information reduces the need to hold inventories as a hedge against uncertain product demand or supply.

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The Bullwhip Effect describes the phenomenon in which ordervariability is amplified as it moves up the supply chain fromend-consumers through distribution and manufacturing to rawmaterial suppliers.

The Bullwhip Effect

Example: Procter & Gamble: Pampers• Smooth consumer demand• Fluctuating sales at retail stores• Highly variable demand on distributors• Wild swings in demand on manufacturing• Greatest swings in demand on suppliers

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Bullwhip Effect

Tier 2Suppliers

Tier 1Suppliers Producer Distributor Retailer FinalFinal

CustomerCustomer

Amount ofAmount ofinventoryinventory=

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The Dynamics of the Supply ChainO

rder

Siz

e

Time

Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

CustomerDemand

CustomerDemand

Retailer OrdersRetailer OrdersDistributor OrdersDistributor Orders

Production PlanProduction Plan

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Bullwhip Effect:Variability-Contributing Factors

1. Demand forecasting2. Lead time3. Batch ordering4. Price fluctuation5. Inflated Orders – supply shortage is suspected.

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How to Cop with Bullwhip Effect?• Reducing uncertainty

• Make information at each stage available to others.• Reducing demand variability

• Regular low price; no promotion ?!• Reducing lead time.• Strategic partnerships

• Vender Managed Inventory / Information sharing• Incentive to make customer’s demand data available.

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Information Sharing• Chrysler makes the cars

• Leer makes the seats

• Third party cuts & sews fabric

• Milliken makes the fabric

• Dupont makes raw material• …

Shared schedule information

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• The objective of inventory management are :1) to provide the required level of customer service.2) to reduce the sum of all costs involved.

To achieve these objectives, two basic questions must be answered:a) How much should be ordered at one time?b) When should an order be placed?

Definitions:

• Stock-keeping Unit (SKU)

• Lot-Size decision rules:

- Lot-for-lot: to order the exactly needed quantity. Used for “A” items & in JIT.

- Fixed-order quantity.

- Order “n” periods supply (Periodic).

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Main types of inventory control systems

Time between orders Order quantity

Re-order system (Saw-tooth) Variable fixed

Periodic review fixed variable

Material Requirements Planning ( MRP)

Dependant demand items

Dependant demand items

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• Answers how much to order• Orders placed at fixed intervals

– Inventory brought up to target amount– Amount ordered varies

• No continuous inventory count– Possibility of stockout between intervals

• Useful when vendors visit routinely– Example: P&G representative calls every 2

weeks

Fixed Period Model

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The Inventory Order Cycle: Saw-tooth Model

QTY / month

Time

500

0

Aver. inventory

one monthone month

Monthly demand = 500 Pcs

Lead Time (LT) = 7 days

Safety stock (SS) = 5 pcs

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Saw-tooth ModelQTY / month

TimeLT

ROP

500

0

Aver. inventory

one monthone month

LT = 7 days

Monthly demand = 500 Pcs

Lead Time (LT) = 7 days

Safety stock (SS) = 5 pcs

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Re-order Point

• Quantity to which inventory is allowed to drop before replenishment order is made.

ROP = D X LT = 500 x 0.25 = 125 Pcs

D = Demand rate per periodLT = lead time in periods** When safety stock is necessary to accommodate

uncertainty, the reorder point is: ROP = D X LT + SS= 500 x 0.25 = 125 Pcs + 5 = 130 pcs

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Four ways to reduce safety inventory

1. Reduce demand uncertainty2. Reduce order lead time3. Reduce lead time variability4. Reduce availability uncertainty

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Economic Ordering quantity (EOQ)• EOQ = mathematical device for arriving at the

purchase quantity of an item that will minimize the cost equation below:

Total cost = holding costs + ordering costs

Demand (Usage) per period D (constant)Order cost Co (fixed)Inventory carrying (holding cost) per unit per period h:

Cc= I + WI = Opportunity cost of money used for purchasing

W = Warehousing cost per unit per period.* Lead time is zero* Initial inventory is zero

Wilson Formula

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How large should your orders be?

• If your orders are too large, you’ll have excess inventory and high holding costs

• If your orders are too small, you will have to place more orders to meet demand, leading to high ordering costs

Order Size Holding Costs Ordering Costs

Too LARGE High Low

Too SMALL Low High

• EOQ helps you find the balance!!!

• EOQ is a tool, not a simple solution.

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Assumptions Of Basic EOQ Model• The ordering cost is constant. • The rate of demand is constant • The lead time is fixed • The purchase price of the item is constant (i.e no

discount is available) • The replenishment is made instantaneously, the whole

batch is delivered at once.

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188

EOQ Decision Model Example 1R

elev

ant T

otal

Cos

ts (D

olla

rs)

2,000

4,000

6,000

8,000

5,434

600 1,200 1,800 2,400988EOQ

Annual relevant carrying costs

Annual relevant total costs

Annual relevant ordering costs

Order Quantity (Units)

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Logistics Ops Mgt ‐ Adel Abou Heneidy189

EOQ Example Carrying cost = $0.75 per piece Order cost = $150 per orderAnnual demand = 10,000 PcsFind EOQ, number of order per year, and cycle time* NOTE: store working days = 311

= SQRT [2 (10,000 x 150) / 0.75 ] = 2,000 pcs

days store 62.25

311D/Q

311= timecyclerder

5000,2000,10

QD=yearper orders of

opt

opt

O

Number

Solution:

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• In the previous example calculate the total cost of purchasing if the unit price is $8 /unit.

1) In case of ordering EOQ (2000 pcs per order):(10000 x 8) + ( 5 x 150) + ( 2000 x 0.5 x 0.75) = $81,500

2) In case of ordering 5000 pcs per order:(10000 x 8) + ( 2 x 150) + ( 5000 x 0.5 x 0.75) = $82,175

3) In case of ordering 1000 pcs per order:(10000 x 8) + ( 10 x 150) + ( 1000 x 0.5 x 0.75) = $81,875

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Introducing Quantity Discounts

What are quantity discounts?Example:

Order Size 1 - 100 101 - 200 201 - 300

Price per unit $20 $18 $16

• EOQ with Quantity Discounts

Minimize the following equation:

Total cost = holding costs + ordering costs + item costs

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EOQ with Quantity Discounts• This is done in 2 steps:1. Calculate EOQ. If this amount can be purchased at the lowest price, you have

found the quantity that minimizes the equation. If not, proceed to step 2.2. Compare total cost at the EOQ quantity with total costs at each price break

above the EOQ.

• Example: Suppose you are responsible for ordering inventory. You have the following information:

• It costs $5 to hold one unit of a product in inventory for a year.• It costs $100 to place an order for this product, regardless of size.• Customers demand 2,500 units every year. • The following quantity discounts are available:

Order Size 1 - 200 201 - 350 351 - 500Price per unit $20 $18 $16

What amount should be purchased?

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• Step 1 = compute

Can 316 be ordered at the lowest purchase price? No. Proceed to step 2

• Step 2 = compare total cost at EOQ and total cost at price steps above EOQ• Total cost = (Q/2)H + (D/Q)S + DP

• Total cost at EOQ = [(316/2) x 5] + [(2,500/316) x 100] + (2,500 x 18)• Total cost at EOQ = 790 + 791 + 45,000 = $46,581

• Total cost at 351 units = [(351/2) x 5] + [(2,500/351) x 100] + (2,500 x 16)• Total cost at 351 units = 878 + 712 + 40,000 = $41,590

• In this case we should purchase (351 units) , which is more than EOQ to take advantage of the quantity discount.

Solution:

= SQR [2 (2500 x 100) / 5 ] = 316 pcs

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Period-Order Quantity (POQ)• It uses EOQ formula to calculate an economic time between orders.

EOQAverage weekly usage

Period-order quantity =

Example:

The EOQ for an item is 2800 units, and the annual usage is 52,000 units.

What is the POQ?

Solution:

Average weekly usage = 52000 / 52 = 1000 units per week

POQ = 2800/ 1000 = 2.8 weeks 3 weeks

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Case study: Nick's Camera Shop

• EOQ with Quantity Discounts ModelNick's Camera Shop carries Zodiac instant print

film. The film normally costs Nick $3.20 per roll, and he sells it for $5.25. Zodiac film has a shelf life of 18 months. Nick's average sales are 21 rolls per week. His annual inventory holding cost rate is 25% and it costs Nick $20 to place an order with Zodiac.

If Zodiac offers a 7% discount on orders of 400 rolls or more, a 10% discount for 900 rolls or more, and a 15% discount for 2000 rolls or more, determine Nick's optimal order quantity.

Solution:Annual demand (D) = 21(52) = 1092; Cc = .25(Ci); Co = 20

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• Unit-Prices’ Economical, Feasible Order Quantities– For C4 = .85(3.20) = $2.72

To receive a 15% discount Nick must order at least 2,000 rolls. Unfortunately, the film's shelf life is 18 months. The demand in 18 months (72 weeks) is 72 X 21 = 1512 rolls. If he ordered 2,000 rolls he would have to scrap 488 of them.

This would cost more than the 15% discount would save.

Case study: Nick's Camera Shop

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• Unit-Prices’ Economical, Feasible Order Quantities– For C3 = .90(3.20) = $2.88

Q3* = 2DCo/Cc = 2(1092)(20)/[.25(2.88)] = 246.31 (not feasible)The most economical, feasible quantity for C3 is 900.

– For C2 = .93(3.20) = $2.976

Q2* = 2DCo/Cc = 2(1092)(20)/[.25(2.976)] = 242.30 (not feasible)The most economical, feasible quantity for C2 is 400.

Case study: Nick's Camera Shop

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• Unit-Prices’ Economical, Feasible Order Quantities– For C1 = 1.00(3.20) = $3.20

Q1* = 2DCo/Ch = 2(1092)(20)/.25(3.20) = 233.67 (feasible)

When we reach a computed Q that is feasible we stop computing Q's. (In this problem we have no more to compute anyway.)

Case study: Nick's Camera Shop

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• Total Cost ComparisonCompute the total cost for the most economical, feasible order quantity in each price category for which a Q * was computed.

Total cost = (Q/2)H + (D/Q)S + DPTC3 = (1/2)(900)(.72) +((1092)(20)/900)+(1092)(2.88) = $3493TC2 = (1/2)(400)(.744)+((1092)(20)/400)+(1092)(2.976) = $3453TC1 = (1/2)(234)(.80) +((1092)(20)/234)+(1092)(3.20) = $3681

Comparing the total costs for 234, 400 and 900, the lowest total annual cost is $3453. Nick should order 400 rolls at a time.

Case study: Nick's Camera Shop

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Decisions in Inventory Management

How much to order?

When to order? Re-Order Point (ROP)

• Fixed demand & lead time

• Variable demand & lead time

• Basic Q*

• Q* with quantity discount

• Q* with Qty discount and limited shelf life.

Economic Order Quantity (EOQ): Q*

Safety Stock (SS)

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Safety Stock (SS)QTY / month

TimeLT

ROP

500

0

Aver. inventory

one monthone month

LT = 7 days

Monthly demand = 500 Pcs

Lead Time (LT) = 7 days

Safety stock (SS) = 5 pcs

ROPSS

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How Much Inventory Is Too Much?

• There is no perfect safety stock calculation applicable to all situations.

• According to the book "Purchasing and the Management of Materials" by Gary Zenz,

"The size of [safety stock] depends on the importance of the particular item to the process, the value of the investment, andthe availability of substitutes on short notice."

SS = z x STD x LTTo get value of Z:

www.inventoryops.com/safety_stock.htm

Z: Service FactorGlobal SCM‐ Adel Abou Heneidy

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Calculating ROP in case of variable demand & lead time

• Safety Stock={Z*SQRT (Avg. Lead Time * STD of Demand^2 + Avg. Demand^2 * STD of Lead Time^2)}

• Re-Order Point (level of inventory for re-ordering) =Average demand X Average lead time + Safety Stock

Remark: Demand during same unit of time as that of Lead TimeRemark: Demand during same unit of time as that of Lead Time

Global SCM‐ Adel Abou Heneidy

* Solve the distributed problem # 1

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“INVENTORY” Risk Pooling• Risk pooling is an important concept in supply chain

management. • Risk pooling suggests that demand variability is

reduced if one aggregates demand across locations because, as we aggregate demand across different locations, it becomes more likely that high demand from one customer will be offset by low demand from another. This reduction in variability allows a decrease in safety stock and therefore reduces average inventory.

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Inventory Consolidation(“Risk Pooling”) {example}

Suppose there is a product stocked in two warehouses.

The replenishment quantities are determined by the economic order quantity formula.

The replenishment lead-time is 0.5 months, the cost for a replenishment order (S) is $50, the inventory carrying cost (IC) is 2% per month, and the item value is $75 per unit.

The probability of an out of stock during the lead-time period is 5%.

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Estimate the average inventory levels for two-warehouses and one-warehouse supply channels.

Risk Pooling (Cont’d)

Month

Demandin Whse

A

Demandin Whse

B

CombinedDemand in a

CentralWhse

1 35 67 1022 62 83 1453 46 71 1174 25 62 875 37 55 926 43 66 109

Avg. (D) 41.33 67.33 108.66Std. Dev. (sd) 11.38 8.58 19.07

6

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Risk Pooling (Cont’d)

units 50.33200.67

2)75(02.0

)50)(33.67(2

units 25.26249.52

2)75(02.0

)50)(33.41(22

2

2

B

A

RS

RS

ICDS

QRS

Regular stock (RS) in the system is:

units75.5950.3325.26 BA RSRSsRS

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Risk Pooling (Cont’d)

Regular stock if item is entirely in one warehouse

units 56.42211.85

2)75(02.0

)50)(66.108(2

CRS

Safety stock

System safety stock in two warehouses

SS = z x STD x LT

SSA= 1.64 (11.38) 0.5 = 13.20 units

SSB= 1.64 (8.58) 0.5 = 10.26 units

SSA + SSB = 13.20 + 10.26 = 23.46 unitsGlobal SCM‐ Adel Abou Heneidy

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Risk Pooling (Cont’d)

Safety stock in one warehouse

Total inventory

= Regular stock + Safety stock

= 59.75 + 27.66 = 87.41 units

In a one-warehouse channel

= 42.56 + 22.11 = 64.67 units

Two warehouses

Conclusion There is a reduction in the average inventory level of an item as the number of stocking points in the supply channel is decreased. In this example, both regular stock and safety stock decline.

Conclusion There is a reduction in the average inventory level of an item as the number of stocking points in the supply channel is decreased. In this example, both regular stock and safety stock decline.

SSc = 1.64 (19.07) 0.5 = 22.11 units

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To Centralize or not to Centralize

• What is the effect on:– Safety stock?– Service level?– Overhead?– Lead time?– Transportation Costs?

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In-Transit Inventory

• In general, the key strategy is to reduce the amount of inventory that they hold. • To use transport as “a mobile warehouse” .• Speeding up and slowing down the flow of inventory through the SC by using

alternative transport mode.• When inventory moves across SC, it is in –transit.• Regardless of whether the upstream or the downstream stage owns this inventory,

holding cost are incurred and has to be considered.• Annual transit inventory cost = D x L x H

where: D is annual demandL is delivery lead time (duration when the order is in transit)H is inventory holding cost per item per year

Global SCM‐ Adel Abou Heneidy

* Solve the distributed problem # 2

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Particulars of:

Bill of Lading & Letter of Credit

Global SCM‐ Adel Abou Heneidy

6

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Bill of Lading (B.L)• BILL OF LADING - The document issued on behalf of the carrier describing

the kind and quantity of goods being shipped, the shipper, the consignee, the ports of loading and discharge and the carrying vessel.

A memorandum or acknowledgment in writing, signed by the captain or master of a ship or other vessel, that he has received in good order, on board of his ship or vessel, therein named, at the place therein mentioned, certain goods therein specified, which he promises to deliver in like good order, (the dangers of the seas excepted,) at the place therein appointed for the delivery of the same, to the consignee therein named or to his assigns, he or they paying freight for the same. Or it is the written evidence of a contract for the carriage and delivery of goods sent by sea for a certain freight.

A bill of lading ought to contain the name of the consignor; the name of the consignee the name of the master of the vessel; the name of the vessel; the place of departure and destination; the price of the freight; and in the margin, the marks and numbers of the things shipped.

It is usually made in three original's, or parts. One of them is commonly sent to the consignee on board with the goods; another is sent to him by mail or some other conveyance; and the third is retained by the merchant or shipper. The master should also take care to have another part for his own use.

The bill of lading is assignable, and the assignee is entitled to the goods, subject, however, to the shipper's right, in some cases, of stoppage in transit .

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OCEAN BILL OF LADING ( BL)

* It is a negotiable document* Issued in three originals* In case of FOB terms it will

on collect basis (payable at destination)* In case of C&F or CIF basis it will

prepaid

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The significance of BL:

Negotiable

Contract of carriage

Proof of receipt of cargo

Represents title to the goods. Ownership can be transferred by endorsing it

Consignee must present original to get delivery of the goods

Forwarder must ensure:Has taken charge of the consignment

Goods are in good order and condition

Details correspond to instructions

Responsibility for insurance has been agreed with shipper

Number of originals has been specified

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Forms of Bill of Ladings

• Clean BLBears an indication that the goods were received without damages, irregularities, or short shipment:

“ clean on board”“ apparent good order and condition”

• Foul BL [ Unclean / dirty / claused BL ]

Bears an indication that the goods were received with damage, irregularities, or short shipment:

“ unclean on board”“ insufficient packing”“ missing safety seal ”“ one carton short”

The bank will reject a foul BL, unless stipulated otherwise in LC.

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• Short Form BL [ blank back BL]The terms and conditions of carriage on the reverse (back)of BL are omitted, instead they are listed on a documentother than BL.The bank accepts a short form BL, unless stipulated otherwise in LC.

• Long Form BLThe terms and conditions of carriage are printed on the reverse ( back)of BL.It is commonly used in international shipping

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• Received BLDoes not prove that the goods have been shipped.It only acknowledges that the goods have been receivedby carrier for shipping. Therefore, the goods could be in the dock or warehouse.

• On Board BLProves that the goods have been shipped:“ on board”“ laden on board”“ shipped on board”

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• Order BL [ negotiable BL ]The title to the goods is conferred to the order of shipper, or bankin case of LC.Thus, a shipper's order (negotiable) B/L can be bought, sold, or traded while goods are in transit.The title to the goods is transferable to another party by endorsementby the holder of BL.

• Bearer BLThis bill states that delivery shall be made to whosoever holds the bill. Such bill may be created explicitly or it is an order bill that fails to nominate theconsignee whether in its original form or through an endorsement in blankA bearer bill can be negotiated by physical delivery.

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• Straight BL [ non – negotiable ]

The title of goods is conferred directly to the name of importer in LC, as such the title to the goods is not transferable to another part by endorsement.

* LC calls for a straight BL usually by using such words as : “ consigned to…..” / “ issued in the name of……”.

* By straight BL the consignee can obtain the goods directly from the carrier at destination. Therefore, unlessthe cash payment is received by the exporter, or the buyer’s integrityis unquestionable, the use of straight BL is risky.

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• House BLA BL issued by a freight forwarder for consolidated shipments, by which the forwarder assumes the risk and obligations of being "the carrier."

Unless otherwise authorized in LC, the freight forwarder {house} B L is not acceptable in LC negotiations.

• Through Bill of Lading

A single bill of lading covering receipt of cargo at a point of origin for delivery to an ultimate consignee, usually involving multiple carriers and multiple modes of transport.

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Letter of Credit particulars

• L/C is a binding document that a buyer can request from his bank in order to guarantee that the payment for goods will be transferred to the seller.

• Basically, a letter of credit gives the seller reassurance that he will receive the payment for the goods.

• In order for the payment to occur, the seller has to present the bank with the necessary shipping documents confirming the delivery of goods within a given time frame.

• It is often used in international trade to eliminate risks such as unfamiliarity with the foreign country, customs, or political instability.

In summary, an L/C is:- A formal document of payment - Opened by a party wishing to import - Communicated through banking channels - Paid by the opening bank within a specified timeframe upon presentation of stipulated

documentation

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• Sight DraftThat is payable as soon as the required documents have been presented.

• A time DraftIs not payable until the lapse of a particular time period stated on the draft.

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• Confirmed Letter of CreditA letter of credit, issued by a foreign bank, which has been verified and guaranteed by a domestic bank in the event of default by the foreign bank or buyer.

• Commercial Letter of CreditA commercial letter of credit assures the seller that the bank will provide payment for any goods or merchandise shipped to the bank's customer, assuming the seller provides any required documentation of the transaction and its shipment of the purchased goods.Typically the documents requested in a Letter of Credit are the following:

• Commercial invoice • Transport document such as a Bill of lading or Airway bill, • Insurance document; • Inspection Certificate • Certificate of Origin

But there could be others too.

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• Irrevocable Letter of CreditAn irrevocable letter of credit includes a guarantee by the issuing bank that if all of the terms and conditions set forth in the letter are satisfied by the beneficiary, the letter of credit will be honored.

• Revocable Letter of CreditAn revocable letter of credit may be cancelled or modified after its date of issue, by the issuing bank.

• Standby Letter of CreditIn the event that the bank's customer defaults on a payment to the beneficiary, and the beneficiary documents proof of its loss consistent with any terms set forth in the letter, a standby letter of credit may be used by the beneficiary to secure payment from the issuing bank.

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• Transferable Letter of Credit

In transferable L/C, the first beneficiary (exporter) may requestpaying the whole or part of the credit to one or more beneficiaries.

This L/C is expressly designated “ Transferable” by the issuing bankon instructions of the applicant.** If the words, “ transmissible” , “ assignable” , “ divisible” ,

or “fractionable” are used, L/C is not transferable.

• Non - Transferable Letter of CreditIn which, the beneficiary can not transfer the credit to other beneficiary.

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• A letter of credit is used for one transaction, but a revolving L /C canbe used for many transactions.For exampleIf the bank approves L/C limit for $100,000 and the client wants to issue L/C for $20,000 revolving for 3 times.The bank will book the facility for $80,000, or the bank will book only for the $20,000 than after utilization of the first revolving will book for the second revolving until the last revolving.

Revolving line of credit

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Back-to-Back Credit• It is a new credit opened on the basis of an already existing,

non transferable credit.

• It is used by traders to make payment to the ultimate supplier.A trader receives a documentary credit from the buyer and thenopens another documentary credit in favour of the ultimate supplier.

• The first documentary credit is used as collateral for the second credit. The second credit makes price adjustments fromwhich comes the trader's profit.

TraderSupplier Buyer1st L /C of $ 500002nd L /C of $ 45000

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Red Clause Credit

A red clause credit has a special clause (red clause) that authorizes the confirming bank to make advances to the beneficiary (seller) prior to the presentation of the shipping documents.

In this credit the buyer, in essence, extends financing to the seller and incurs ultimate risk for all sums advanced under the credit.

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• Latest Negotiation dateIs the last day of the period of time allowed by L / C for the presentation of documents to the bank.

** In case the L/C does not stipulate the latest negotiation date, it iswithin 21 days after date of issuance the transport documents, but on or before L/C expiry date.

** B/L which is presented to the bank later than the agreed time limit or 21 days later than the date of issuance of B/L is called Stale B/L.

• Expiry dateIs the last day of validity of the L/C for payment.

** In case the validity of a L/C is stated in a period of time, for example(this L/C is valid for three months) without specifying the date from which the time is to run, its validity starts from issuance date of L/C.

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• Latest date of shipmentIs the last day of the period of time allowed by L/C for shipment, or

dispatching.

Remark:In case the expiry date and/or latest negotiation date fallson a day on which the bank is closed for reason not beyondthe bank’s control these two dates ( if any) are extendedto the succeeding first day on which the bank is opened.Such extension, whoever, does not extend the latest dateof shipment.

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Can a Letter of Credit be amendedor revoked without your consent?

• Some Letters of Credit can be amended or revoked without the Exporter's consent. It depends on whether the credit is Revocable or Irrevocable. A Revocable Letter of Credit can be revoked without the consent of the Exporter, meaning that it may be canceled or changed up to the timethe documents are presented. As a Revocable Letter of Credit affords the Exporter little protection, it is rarely used. On the other hand, an Irrevocable Letter of Credit cannot be canceled or changed without the consent of all parties, including the Exporter.

Unless otherwise stipulated, all Letters of Credit are Irrevocable.

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How to get a Letter of Credit Confirmed ?

• An Exporter who decides to have a Letter of Credit confirmed should inform the Importer to instruct the Issuing Bank to issue an Irrevocable Letter of Credit requesting a confirmation. For a bank to add its confirmation, the Letter of Credit must state that aconfirmation be added.

• It is recommended that you check with your own bank prior to theissuance of the Letter of Credit as to whether it is prepared to add its confirmation, should it be requested to do so by the Issuing Bank.

• To make this decision, the bank will need preliminary information about the Letter of Credit such as the name of the Issuing Bank,country of issuance, expiry date and amount.

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Does a Letter of Credit protect you from country risks (e.g. war, embargo) and / or Issuing Bank

risks (e.g. bank failure, bank fraud)?

• When a Letter of Credit is issued, the risk of payment has shifted from the Importer to the Issuing Bank. However, you still assume bothIssuing Bank and country risks.

In the case where the Issuing Bank is not considered an acceptable risk and/or the country where it is located has high political or economic uncertainty, you should consider requesting a Confirmed Letter ofCredit. With a Confirmed Letter of Credit, another bank, known as the Confirming Bank, usually located in your country, will add its "confirmation" to the Letter of Credit. By adding its confirmation, the Confirming Bank undertakes to honor your claim under the Letter of Credit, assuming all terms and conditions of the Letter of Credit are met.

The risk of payment is now assumed by the Confirming Bank, as well as the Issuing Bank, thereby providing you more protection.

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Are there agreed-upon, international standards for transactions involving

Letters of Credit ?

• The International Chamber of Commerce (ICC) publishes internationally agreed-upon rules, definitions and practices governing Letters of Credit, called :

"Uniform Customs and Practice for Documentary Credits“(UCP)

The UCP facilitates standardization of Letters of Credit among all banks in the world that subscribe to it. These rules are updated from time to time; the last revision is UCP 600.

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What an Exporter Should Look for when Reviewing a Letter of Credit ?

1. Which Bank issued the Letter of Credit?. Is this bank a reputable one that can be relied on for payment? .Does the country in which the Issuing Bank is located have a stable economic and political environment? If not, does the Letter of Credit allow for confirmation by another bank in another country?

2. Is the L/C irrevocable? If it is not stated, the Letter of Credit is irrevocable.

3. Are the Importer's (Applicant's) name and address spelled correctly? 4. Are your name and address spelled correctly? 5. Are the dollar amount and currency of the Letter of Credit correct? 6. Does the payment term agree with the sales contract? 7. If necessary, are partial shipments / transhipment allowed? 8. Are the points of shipment and destination as agreed? 9. Is forwarder [House] B/L ( or AWB) is allowed? If it is not stated, it is

not allowed.10. Is charter B/L (AWB) is allowed? If it is not stated, it is not allowed.

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11. Is it possible for you to meet the latest shipping date? Are enough days allowed to present documents? You may need to check with the Freight Forwarder handling the shipment and preparing the documents for you.

12. Is the merchandise description correct and if needed, does it include unit price, weight and quantities? If necessary, does the Letter of Credit allow for any leeway on the quantity and/or dollar amount?

13. Can all documents listed in the Letter of Credit be obtained? 14. Which party is responsible for the Letter of Credit banking charges? 15. Where is the Letter of Credit payable? Note, this will affect the

length of time required to receive your funds.16. Is the Letter of Credit confirmed?

What an Exporter Should Look for when Reviewing a Letter of Credit ?

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Sample L/C

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3 Most Common Reasonswhy Letters of Credit Fail

1) Time Lines:

The letter of credit should have an expiration date that gives sufficient time to the seller to get all the tasks specified and the documents required in the LC. If the letter of credit expires, the seller is left with no protection.

Most LC s fail because Sellers/Exporters/Beneficiaries were unable to perform within the specified time frame in the LC.

Three dates are of importance in an LC:a) The date by when shipment should have occurred. The date on B/L.b) The date by when documents have to be presented to the Bank.c) The expiry date of the LC itself.

• A good source to give you an idea of the timelines would be your freight forwarding agent. As a seller check with your freight forwarding agent to see if you would be in a position to comply.

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2) Discrepancy within the Letter of Credit:Letters of credit could also have discrepancies. Even a discrepancy as small as a missing period or comma can render the document invalid. Thus, the earlier in the process the letter of credit is examined, the more time is available toidentify and fix the problem. This is another common reason why LCs fail.

3) Compliance with the Documents and Conditions within the Letter of Credit:Letters of credit are about documents and not facts; the inability to produce a given document at the right time will nullify the letter of credit. As a Seller/Exporter/Beneficiary you should try and run the compliance issues with the various department or individuals involved within your organization to see if compliance would be a problem. And if so, have the LC amended before shipping the goods.

3 Most Common Reasonswhy Letters of Credit Fail

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Optimizing transport cost in SC by using spreadsheet

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7

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Linear Programming (LP)• The manager of a distribution

system between factories (A, B and C) and distributors

(W, X, Y and Z) wishes to minimizethe global transport costs between a

set of origins (factories) anddestinations (distributors).

Consider the cost of transportationbetween factories and distributorsare as shown in the table ($/ unit).

W X Y Z Capacity

A 20  40  70  50 400 

B 100 60 90  80 1500 

C 10 110  30  200 900 

D 700 600 1000 500 2800 

BTP: Balanced Transport Problem

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Linear Programming (LP)

W X Y Z Capacity

A 20 

0

40 

400

70 

0

50

0400 

B 100

0

60

200

90

800

80

5001500 

C 10

700

110 

0

30 

200

200

0900 

D 700 600 1000 500 2800 

The cost =

(700 x 10) + (400 x 40) + (200 x 60) +

(800 x 90) + (200 x 30) + (500 x 80) =

$ 153000

Is it the optimum cost ?

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Network optimization models

SunOil – The capacitated plant location model

The capacitated plant location model

• Two different plant sizes with different capacities & fixed costs.

• The model focuses on minimizing the cost of meeting global demand.

Demand region

HighFixed LowFixed Production & transportation cost per 1,000,000 units

capacitycost ) $(capacitycost ) $(AfricaAsiaEuropeS.AmericaN.AmericaSupply region

209,000106,0001151301019281N.America

206,750104,5001009810877117S.America

209,750106,50011111995105102Europe

206,150104,100745990125115Asia

206,000104,10071105103100142Africa

71614812Demand

SCM- Spread sheet.xlsm

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The Distance Formula• Given the two points (x1, y1) and (x2, y2), the

distance between these points is given by the formula:

http://www.mathopenref.com/coorddist.html

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Grid technique:Locations of Sources and Markets

x

y

d = (X-xi) + (Y-yi)2 2

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Supply Chain Risk Management

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Management of risk includes the development of continuous strategies designed to control, mitigate, reduce, or eliminate risk.

Potential disruptions can either occur within the supply chain (e.g. insufficient quality, unreliable suppliers, machine break-down, uncertain demand etc.) or outside the supply chain (e.g. flooding, terrorism, labor strikes, natural disasters, large variability in demand etc.).

Supply chain risk management is the systematic identification, assessment, and quantification of potential supply chain disruptions with the objective to control exposure to risk or reduce its negative impact on supply chain performance.

Defining Supply Chain Risk Management

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CustomersSuppliers(And outsourceManufacturing)

Suppliers’Environment

Customers’Environment

Organization

Organization’s Environment

Customer Facing

Supplier Facing

Internal Facing

Global Environment

Supply Chain Risk Perspectives

Relationship RiskSupplier Performance Risk

Human Resource Risk Supply chain disruption risk Supplier Environment Risk

Market Dynamics RiskDisaster Risk

Political / Country RiskSupplier Financial Risk

Regulatory Risk

Financial Risk Distribution RiskRelationship Risk

Market RiskBrand / Reputation Risk

Product Liability RiskEnvironmental Risk

Political/ Country Risk

Operational RiskTechnical RiskFinancial Risk

Legal / Regulatory RiskEnvironmental Risk

HR / Health and Safety Risk

Political/ Country Risk

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Supply Chain Risk Management• Supply chain risk refers to an uncertainty or unpredictable event affecting on or

more of the parties within the supply chain or its business setting, which can negatively influence the achievement of your own business objectives.

• Within the SC we have two types of risks:

1) External risks: can be driven by events either upstream or downstream in the supply chain:

- Demand risks related to unpredictable or misunderstood customer or end-customer demand.

- Supply risks related to any disturbances to the flow of product within your supply chain.

- Environment risks that originate from shocks outside the supply chain. - Business risks related to factors such as suppliers’ financial or management

stability. - Physical risks related to the condition of a supplier’s physical facilities

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Supply Chain Risk Management

2) Internal risks: are driven by events within company control:

- Manufacturing risks caused by disruptions of internal operations or processes. - Business risks caused by changes in key personnel, management, reporting

structures, or business processes. - Planning and control risks caused by inadequate assessment and planning, and

ineffective management. - Mitigation and contingency risks caused by not putting in place contingencies.

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RiskRisk Result Result

Market Risk Price risk , Demand risk, Payment risk ,Access risk

Operational Risk Quality risk, Quantity risk

Performance Risk Documentary risk , Security risk

Credit Risk Interest risk, Access risk, Cost riskPolicy Risk Policy risk

Example of SC risks

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Risk Management for the SC

Risk Analysis

Risk Assessment

Risk Management

• Provides an objective assessment of the Supply Chain and process weaknesses

• Provides an actionable list of improvements to be implemented

• Provides the foundation for a successful and sustainable security program

• Diagnostics of physical assets

• Mapping of Supply Chain flows

• Gap analyses

• Quantitative models and assessments

• Regulatory reviews

• Sustainable business continuity plans

• Documentation of exposures to Sarbanes-Oxley compliance

• Integrated and holistic Supply Chain strategies

• Broaden cooperation and collaboration between Supply Chain links

• Consider the tradeoffs between costs to implement the program versus potential losses

• Pay equal attention to non-quantifiable risk

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1. Fraud and/or Theft2. Product Delivery Interruptions3. Cost Control and Predictability4. Pricing Control and Predictability5. Supplier Relationship Sensitivity6. Customer Relationship Sensitivity7. Political & Legislative Effects8. Legal Effects9. Quality Control Issues 10. Lack of Safeguarding Company Assets11. Speed to Market Issues12. Inadequate Market Intelligence

Prime Supply Chain Risk Elements

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PerformancePerformance

CAUSES (Categories of

Predictive Measures)DISRUPTION

EVENTSCONSEQUENCES

(Impacts)

Human ResourcesHuman Resources

Supply Chain Disruption

Supply Chain Disruption

Financial HealthFinancial Health

EnvironmentalEnvironmental

RelationshipRelationship

Quality, Delivery, Service ProblemsQuality, Delivery, Service Problems

Supplier Union Strike,Ownership Change, Workforce Disruption

Supplier Union Strike,Ownership Change, Workforce Disruption

Supplier LockedTier II StoppageSupplier LockedTier II Stoppage

Supplier Bankruptcy (or financial distress)Supplier Bankruptcy (or financial distress)

Market Dynamics,Merger/Acquisition

Disasters (Weather, Earthquake, Terrorists)

Transportation

Market Dynamics,Merger/Acquisition

Disasters (Weather, Earthquake, Terrorists)

Transportation

Misalignment of Interests

Misalignment of Interests

Finished Goods Shipments Stopped

Finished Goods Shipments Stopped

Locate and Ramp Up Back up Supplier

Locate and Ramp Up Back up Supplier

Emergency Buy and Shipments

Emergency Buy and Shipments

ReputationReputation

Market Share LossMarket Share Loss

EFFECTSRevenueLosses

and Recovery Expenses

OTHERIMPACTSForegoneIncome

Emergency Rework and

Rushed FG Shipments

Emergency Rework and

Rushed FG Shipments

Recall for Quality Issues

Recall for Quality Issues

Sudden Loss of Supplier

Sudden Loss of Supplier

Supp

lier A

ttrib

utes

Situ

atio

nal

Fact

ors

The Supply Risk Model

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Main impacts of SC risks• Operational impact: on distribution planning & scheduling

• Customer impact: on reputation and future revenues

• Legal impact: of contractual obligations

• Risk transfer (e.g insurance)• Risk sharing (e.g supplier chargeback)• Risk avoidance

Mitigation of SC Risks

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Assessment -> Prioritization

Moderate risk; medium priority for

mitigation

Critical risk; high priority for mitigation

Low risk; low priority for mitigation

Moderate risk; medium priority for

mitigation

HighLow

Low

HighRisk Prioritization

PotentialImpact

Likelihood of Occurrence

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1 2 3 4 5Severity Max. 1 a year 2-4 a year Monthly Weekly Daily

5. Catastrophic 5 10 15 20 25

4. Severe 4 8 12 16 20

3. Critical 3 6 9 12 15

2. Marginal 2 4 6 8 10

1. Negligible 1 2 3 4 5

Risk Assessment Matrix

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Risk/Impact = Frequency x SeverityRisk Priority Number (RPN)

R / I greater than 10: High risk / impact

Action must be taken immediately to reduce the risk / impact

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Risk/Impact = Frequency x Severity

R / I greater than 3 and less than or equal 10 : Medium risk / impact

Action must be taken to reduce the frequency and/or the severity of the events.

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Risk/Impact = Frequency x Severity

R / I less than or equal 3: Low risk / impact

Acceptable without required further action

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Effective Risk Management• For risk management to be effective, it must be fully integrated

into the company’s business processes. • The process of identifying risks, analyzing them, and planning

mitigation strategies must be documented and reported throughout the organization.

• To effectively evaluate risk strategy, management must balance the cost of mitigation with available resources and optimum cost management objectives [cost & benefit]

• The risk management strategy should apply to everyone at all levels in the organization and focus on achieving the company’s business objectives.

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The Impact of Uncertainty on Network Design

• Supply chain design decisions include investments in number and size of plants, number of trucks, number of warehouses

• These decisions cannot be easily changed in the short- term

• There will be a good deal of uncertainty in demand, prices, exchange rates, and the competitive market over the lifetime of a supply chain network

• Therefore, building flexibility into supply chain operations allows the supply chain to deal with uncertainty in a manner that will maximize profits

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Net Present Value (NPV)• The difference between the present value of cash inflows and the present value of

cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project .

• NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield .

• NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.

• For example, if a retail clothing business wants to purchase an existing store, it would first estimate the future cash flows that store would generate, and then discount those cash flows into one lump-sum present value amount, say $565,000. If the owner of the store was willing to sell his business for less than $565,000, the purchasing company would likely accept the offer as it presents a positive NPV investment. Conversely, if the owner would not sell for less than $565,000, the purchaser would not buy the store, as the investment would present a negative NPV at that time and would, therefore, reduce the overall value of the clothing company

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Discounted Cash Flow Analysis• Supply chain decisions are in place for a long time, so they

should be evaluated as a sequence of cash flows over that period

• Discounted cash flow (DCF) analysis evaluates the present value of any stream of future cash flows and allows managers to compare different cash flow streams in terms of their financial value

• Based on the time value of money – a dollar today is worth more than a dollar tomorrow

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Discounted Cash Flow Analysis

returnof rate flowscash of stream thisof luepresent vanet the

periods Tover flowscash of stream a is ,...,,where

11

11factor Discount

10

10

kNPV

CCC

Ck

CNPV

k

T

T

tt

t

• Compare NPV of different supply chain design options

• The option with the highest NPV will provide the greatest financial return

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Solved example

• Draw the decision tree and calculate the NPV of the expected revenue after 4 years given that:

Current demand: 100 tonsUncertainty in demand : (±) 10% Probability of uncertainty (+) in the demand: 60%Selling price will stay the same: USD 800/ ton Discounted rate ( K ) : 12 %

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D= 100

P= 0.6

Year 0Year 0 Year 2Year 2Year 1Year 1

D= 110

D= 90

D= 81

D= 133.1

D= 99

D= 99

D= 121

P= 0.4

P= 0.6

P= 0.4

P= 0.6

P= 0.4

Year 3Year 3

D=89.1

D=89.1

D=89.1

D= 108.9

D= 72.9

P= 0.6

P= 0.6

P= 0.6

P= 0.6

P= 0.4

P= 0.4

P= 0.4

P= 0.4

D= 108.9

D= 108.9

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Solved exampleSolution:

Revenue at year 0 = (800 x 100) = $ 80,000

Revenue at the end of year 1 = (110 x 800x 0.6) + (90 x 800x 0.4) = $ 81.600

Revenue at the end of year 2 = (121x 800 x 0.6 x 0.6) + ( 99 x 800 x 0.4 x 0.6) + (99x 800 x 0.6x 0.4) + (81x 800 x 0.4 x 0.4) = $ 83,232

Revenue at the end of year 3 = (133.1 x 800 x 0.6 x 0.6 x 0.6) + (108.9 x 800 x 0.4 x 0.6 x 0.6) + (108.9 x 800 x 0.6 x 0.4 x 0.6) + (89.1x 800x 0.4 x 0.4 x 0.6) + (108.9 x 800 x 0.6 x 0.6 x 0.4) + (89.1x 800x 0.4 x 0.6 x 0.4) + (89.1 x 800 x 0.6 x 0.4 x 0.4) + (72.9 x 800x 0.4 x 0.4 x 0.4) = $ 84,897

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NPV of the total revenue @ year 0 =

80,000 81,600 83,232 84,897 = $ 279,637(1+0.12) (1+0.12) (1+0.12)2 3+

+

+

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Measuring & Managing Logistics Performance

(Creating Usable Supply Chain Metrics)

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Creating Usable Supply Chain Metrics• Measuring the performance of your supply chain has always been difficult to

answer, as there is a lot of metrics identified.

• If you use some metrics that look good one month, they may not the next; while the ones you were not using look great.

• It’s hard to convince senior executives that the supply chain is at its peak performance when the metrics provided to them for decision making change every month.

• Sometimes simple is best, and a small focused set of actionable metrics that are relevant to the decisions that senior

Simplifying Supply Chain Metrics for Improved Decision Making

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Keys to Success with Supply Chain Metrics

• Keep the number of metrics small – approaches involving a large number of metrics can swamp decision makers.

• Ensure metrics are actionable – establish clarity around who is responsible for a metric if it starts moving in the wrong direction.

• Provide relevant, consistent metrics to all levels within the organization and supply chain – a top to bottom relationship between metrics ensures a simple, concise approach to performance improvement.

• Deliver the relevant metrics broadly – all decision makers should have access to their metrics on an ongoing basis.

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• Freight cost per unit shipped:Calculated by dividing total freight costs by number of units shipped per period. Useful in businesses where units of measure are standard (e.g., Kg). Can also be calculated by mode (barge, rail, ocean, truckload, less-than-truckload, small package, air freight,..)

• Outbound freight costs as percentage of net sales:Calculated by dividing outbound freight costs by net sales. Most accounting systems can separate "freight in" and "freight out." Percentage can vary with sales mix, but is an excellent indicator of the transportation financial performance.

1) Transportation Metrics

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• Inbound freight costs as percentage of purchases:Calculated by dividing inbound freight costs by purchase dollars. It is important to understand the underlying detail.The measurement can vary widely, depending on whether raw materials are purchased on a delivered, prepaid, or collect basis.

• Transit time:Measured by the number of days (or hours) from the time a shipment leaves your facility to the time it arrives at the customer's location. Often measured against a standard transit time quoted by the carrier for each traffic lane. Unless you are integrated into your customers' systems, you will have to rely on freight carriers to report their own performance. This is often an important component of lead time. Transit times can vary substantially, based on freight mode and carrier systems.

( Driver hours used / driver hours available) %[in case that you own the fleet]

.

1) Transportation Metrics

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• Claims as % of freight costs:Calculated by dividing total loss and damage claims by total freight costs. Generally measured in total and for each carrier. A high number generally indicates packaging problems, or process problems at the carrier.

Freight bill accuracy:Calculated by dividing the number of error-free freight bills by the total number of freight bills in the period. Errors can include incorrect pricing, incorrect weights, incomplete information, etc. Generally measured in total and for each carrier.

Accessorial as percent of total freight: Calculated by dividing accessorial and surcharges by total freight expenditures for the period. Many freight carriers will charge extra fees for trailer detention/demurrage, re-delivery, fuel increases, and other expenses or extra services. Often, these are extra costs incurred due to inefficient processes.

.

1) Transportation Metrics

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Percent of truckload capacity utilized:Calculated by dividing the total weight shipped by the theoretical maximum. For example, assume your trucks can hold 40,000 Kg. of product. During the prior month, there were 675 shipments totaling 34,000 Kg. The percentage utilization was 85%. The 15% unused capacity is an opportunity for more efficiency.

Mode selection vs. optimal:This is calculated by dividing the number of shipments sent via the optimal mode by the total number of shipments for the period. To measure this, each traffic lane must have a designated optimal mode, based on freight costs and customer service requirements.

Truck turnaround time:This is calculated by measuring the average time elapsed between a truck's arrival at your facility and its departure. This is an indicator of the efficiency of your lot and dock door space, receiving processes, and shipping processes. This also directly affects freight carrier profits on your business.

1) Transportation Metrics

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Shipment visibility/traceability percent:Calculated by dividing the total number of shipments via carriers with order tracking systems, by the total number of shipments sent during a period. This is an indicator of the relative sophistication of your carrier base, and one measure of the non-price value available from your carrier base.

Number of carriers per mode:Calculated by counting the total number of freight carriers used in a given period, by mode (ocean, barge, rail, intermodal, truckload, LTL, small package, etc.). This is an indication of your volume leverage and control over the transportation function.

On-time pickups:Calculated by dividing the number of pick-ups made on-time (by the freight carrier) by the total number of shipments in a period. This is an indication of freight carrier performance, and carriers' affect on your shipping operations and customer service.

1) Transportation Metrics

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2) Cycle Time MetricsCustomer Order Promised Cycle Time: The anticipated or agreed upon cycle time of a Purchase Order. It is gap between the Purchase Order Creation Date and the RequestedDelivery Date. This tells you the cycle time that you should expect (NOT the actual).

Customer Order Actual Cycle Time:The average time it takes to actually fill a customers purchase order. This measure can be viewed on an Order or an Order Line level.The measure starts when the customers order is sent/received/entered. It is measured along its various steps of the order cycle. Through credit checks, pricing, warehouse picking and shipping.The measure ends at either the time of shipment or at the time of delivery tothe customer. This "actual" cycle time should be compared to the"promised" cycle time.

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2) Cycle Time MetricsManufacturing Cycle Time:Measured from the Firm Planned Order until the final production is reported. It usually takes into account the original planned production quantity versus the actual production quantity.

Example: X% of the planned quantity must be completed on a production run or the cycle time should not be considered.

Purchase Order Cycle Time:Measured from the creation of the PO to the receipt at your location(Distribution Center, Hub etc). One of the keys here is not having your RDD (Requested Delivery Date) exceed the agreed to lead time. If it does, it may artificially inflate your Lead Time. Additionally, any in-between points available will add value to the metric. Example: Creation of the PO, Shipment from the Vendor, Receipt at the DC. This will tell you the manufacturing time vs the transit time.

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2) Cycle Time Metrics

Inventory Replenishment Cycle Time:Measure of the Manufacturing Cycle Time plus the time included to deploy the product to the appropriate distribution center.

Cash to Cash Cycle Time:The number of days between paying for Raw Materials and getting paid for product. Calculated by Inventory Days of Supply plus Days of Sales Outstanding minus Average Payment Period for Material.

Supply Chain Cycle Time:The total time it would take to satisfy a customer order if all inventory levels were zero. It is calculated by adding up the longest lead times in each stage of the cycle.

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3) Inventory Metrics

Inventory Turns (Inventory Turnover):

The number of times that a companies inventory cycles or turns over per year. It is one of the most commonly used Supply Chain Metrics.

Calculation: A frequently used method is to divide the Annual Cost of Sales by the Average Inventory Level.

Example: Cost of Sales = $36,000,000. Average Inventory = $6,000,000. $36,000,000 / $6,000,000 = 6 Inventory Turns

Although results vary by industry, typical manufacturing companies may have 6 inventory turns per year. High volume/low margin companies (like grocery stores) may have 12 inventory turns per year or more

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3) Inventory Metrics

GMROI (Gross Margin Return on Inventory):

GMROI =

(Unit Selling Price of an Item - Unit Inventory Value of an Item) X Annual Demand for the item Average Inventory Value of the product.

Notes:- Unit Inventory Value tells you what it costs you to make the product.- (The Unit Selling Price - Unit Inventory Value) tells you the margin.

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3) Inventory Metrics Inventory Carrying Rate:

Calculate the inventory carrying rate, given the following:$800k = Storage$400k = Handling $600k = Obsolescence$800k = Damage $600k = Administrative $200k = Loss

Average inventory value= $34,000

Solution:

Total inventory cost = $3,400k $3,400k / $34,000k = 10%9% = Opportunity Cost of Capital (the return you could reasonably expect if you used the money

elsewhere)4% = Insurance6% = Taxes

Inventory Carrying Rate = 10% + 19% = 29%

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3) Inventory Metrics Inventory Carrying Costs:Inventory Carrying Cost = Inventory Carrying Rate X Average Inventory Value

Example: 29% X $34,000,000 = $9,860,000

Case Fill Rate:The amount of cases shipped on the initial shipment versus the amount of cases ordered.

Example- ABC Company orders 6 products that total 200 cases, on its Purchase Order #1235. The manufacturer ships out 140 cases on 3/1/01 and the remaining 60 cases on 3/10/01.

Calculation: Number of Cases Shipped on the Initial Order / Total Number of Cases Ordered . (140/200 = 70%)

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3) Inventory Metrics Value Fill Rate:

Same as before, except the order line value is used instead of cases.Calculation: Value of Order Lines Shipped on the Initial Order / Total Value of the Order = ($400/$500 = 80%)

Order fill rate:% of customer orders filled completely.

Inventory Months of Supply:

Inventory On Hand / Avg Monthly Usage(the Avg Monthly Usage is typically the yearly forecast divided by12)

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4) Performance to Promise Dates

When a Distributor places a Purchase Order against a Manufacturer, he has certain expectations on when he will receive the items ordered. His original expectation is the On Time Delivery Metric. However, the manufacturer may give him a revised estimate as to when they expect to fill the order. The manufacturers promise is called the "Performance to Promise Date Metric".

Example: ABC Company Orders 2 Products on Purchase Order #1234, with a Requested Ship Date of June 10.The first item is in-stock and ships on June 10th..

The second item is on backorder. The manufacturer estimates that the 2nd item will be shipped by July 1.The item is manufactured and ships out on June 28.

The Performance to Promise Date is 100% (items ship on time or early).*However, if the 2nd item does not ship till July 2nd, then it's late. The Performance to Promise Date is 50%.

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Setting Goals for your Supply Chain Metrics:

Once you have an understanding of basic Supply Chain Metrics:

1. focus on a limited number of measurements that add value. 2. Choose those metrics that will track your companies true

performance. 3. I would recommend picking 5 - 7 key measures per

functional area. 4. These measures are sometimes referred to as KPI's (Key

Performance Indicators) - SMART goals

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Aggregate planning in the supply chain

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Aggregate planning

• It is an operational activity which does an aggregate plan for the production process, in advance of 3 to 18 months, to give an idea to management as to what quantity of materials and other resources are to be procured and when, so that the total cost of the organization is kept to the minimum over that period .

• It is an operational activity which does an aggregate plan for the production process, in advance of 3 to 18 months, to give an idea to management as to what quantity of materials and other resources are to be procured and when, so that the total cost of the organization is kept to the minimum over that period .

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Information Needed for an Aggregate Plan

• Demand forecast in each period• Production costs

– labor costs, regular time ($/hr) and overtime ($/hr)– subcontracting costs ($/hr or $/unit)– cost of changing capacity: hiring or layoff ($/worker) and cost of adding

or reducing machine capacity ($/machine)• Labor/machine hours required per unit• Inventory holding cost ($/unit/period)• Stockout or backlog cost ($/unit/period)• Constraints: limits on overtime, layoffs, capital available, stockouts and

backlogs

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Outputs of Aggregate Plan• Production quantity from regular time, overtime, and subcontracted time: used

to determine number of workers and supplier purchase levels• Inventory held: used to determine how much warehouse space and working

capital is needed• Backlog/stockout quantity: used to determine what customer service levels will

be• Machine capacity increase/decrease: used to determine if new production

equipment needs to be purchased

A poor aggregate plan can result in lost sales, lost profits, excess inventory, or excess capacity!

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Aggregate Planning Strategies

• Chase strategy – using capacity as the lever• Time flexibility startegy – using workforce or capacity

utilization as the lever• Level strategy – using inventory as the lever• Mixed strategy – a combination of one or more of the

first three strategies

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Chase Strategy• Production rate is synchronized with demand by varying

machine capacity or hiring and laying off workers as the demand rate varies

• However, in practice, it is often difficult to vary capacity andworkforce on short notice

• Expensive if cost of varying capacity is high• Negative effect on workforce morale• Results in low levels of inventory• Should be used when inventory holding costs are high and

costs of changing capacity are low

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Time Flexibility Strategy• Can be used if there is excess machine capacity• Workforce is kept stable, but the number of hours worked is

varied over time to synchronize production and demand• Can use overtime or a flexible work schedule• Requires flexible workforce, but avoids morale problems of

the chase strategy• Low levels of inventory, but lower utilization• Should be used when inventory holding costs are high and

capacity is relatively inexpensive

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Level Strategy• Maintain stable machine capacity and workforce levels

with a constant output rate• No synchronization of demand and supply results in Shortages

and surpluses • Inventories that are built up in anticipation of future demand or

backlogs are carried over from high to low demand periods• Better for worker morale• Large inventories and backlogs may accumulate• Should be used when inventory holding and backlog costs are

relatively low

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Example: Red Tomato Tools• Demand for the gardening tools is highly seasonal.• Handle demand and maximize profits??• Options:

– Hire worker in peak season– Subcontraction of some work– Build up inventory in slow period– Backlogging

• Constraints:– No limit on subcontracting, inventories, stockouts, backlog– All stockouts are backlogged from the following month.– Inventory costs are incurred on the ending inventory in a month.– Inventory level at the end of June is at least 500 units.

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Example: Red Tomato Tools:Demand Forecast

Month Demand ForecastJanuary 1,600February 3,000

March 3,200April 3,800May 2,200June 2,200

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• Unit price=$40/unit• Inventory at the beginning of January= 1000 units• Workforce at the beginning of January= 80 employees• Total of 20 workdays/month are available• Regular work hours=8hrs/day/employee• Overtime work hours can not exceed 10hrs/month/employee• Required labor hours= 4hrs/unit

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Costs:

Item Cost Materials $10/unit Inventory holding cost $2/unit/month Marginal cost of a stockout $5/unit/month Hiring and training costs $300/worker Layoff cost $500/worker Labor hours required 4/unit Regular time cost $4/hour Over time cost $6/hour Cost of subcontracting $30/unit

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Aggregate Planning(Define Objective Function)

Costtion Subcontrac

6

1

Cost Production

6

1

CostStockout

6

1

Cost HoldingInventory

6

1

Layoff ofCost

6

1

Hiring ofCost

6

1

CostLabor Overtime

6

1

CostLabor TimeRegular

6

1

301052

5003006640

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CPSI

LHOWTCMin

* Solve the problem using excel sheet

Item Cost Materials $10/unit Inventory holding cost $2/unit/month Marginal cost of a stockout $5/unit/month Hiring and training costs $300/worker Layoff cost $500/worker Labor hours required 4/unit Regular time cost $4/hour Over time cost $6/hour Cost of subcontracting $30/unit

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Aggregate Planning in Practice• Think beyond the enterprise to the entire supply chain• Make plans flexible because forecasts are always wrong• Rerun the aggregate plan as new information emerges• Use aggregate planning as capacity utilization increases

• The basic trade-offs involve balancing the cost of capacity, inventory, and of stockouts to maximize profitability. Increasing anyone of the three allows the planner to lower the other two.

• The basic trade-offs involve balancing the cost of capacity, inventory, and of stockouts to maximize profitability. Increasing anyone of the three allows the planner to lower the other two.

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