LSCM-ppt's (1)

Logistics

&

Supply Chain

Management

Basics of Logistics

Business Elements in a Globalised

Environment

GLOBAL ISSUES

Demand and Supply

Consumer Taste & Preferences

Powerful Economic Alliances

European Union & Eastern block

Energy Crisis

Global Warming & Ecology Concern

ROLE OF GOVERNMENT

Deregulation

Tax and Duty Structure

Exemptions for MSME Sector

Environmental protection laws

MACRO-ECONOMIC FACTORS

Rate of Interest.

Exchange Rates.

Rate of Inflation.

Trade deficit / surplus.

Market Sentiment.

TECHNOLOGICAL INNOVATIONS

Rapidity of product Innovation.

Super – conductivity & IT revolution.

Communications at the speed of thought

Classification of Industries

Supply Chain Management - Stages of

Evolution

A view of business logistics in a company

Raw materials supply points

Raw materials supply

Manufacturing Finished goods storage

Markets

M/T M/T M/T*

LOGISTICSPLANT

1

WAREHOUSE

LOGISTICSPLANT

2

WAREHOUSE

LOGISTICS PLANT

3

WAREHOUSE

A

B

C

PHYSICAL SUPPLYMATERIALS MGNT

INBOUND LOGISTICS

PHYSICAL DISTRIBUTIONOUTBOUND LOGISTICS

M/T* = Movement / Transportation

Inbound Logistics System

Supplier

Supplier

Supplier

Supplier

Warehouse

Volume Shipment

Plant

Plant

Outbound Logistics System

Plant

Plant

Warehouse

Warehouse

Market

Market

Volume Shipment

Basics of Logistics

Is basically an integrative process that optimises the

flow of materials and supplies through the

organisation and it‘s operation to the customer.

Is essentially a planning process and an information

based activity.

Supports corporate goals by delivering products to

the customer at a time and place of his / her choice.

Spans three functional areas of a business enterprise –

Procurement / Manufacturing / Distribution

Objectives of Logistics

Management

The primary objective of logistics system is to

effectively and efficiently move the inventory

in the supply chain so as to extend the

desired level of customer service at the least

cost

Reduction in Inventories

Freight Economy

Reliable and consistent delivery performance

Minimum Product damages

Quick Response

Elements of Logistics Management

o Logistics Management deals with the Handling ,

Movement and Storage activities within the supply

chain – beginning with Suppliers and ending with the

Customers.

Customer order Processing

• Filling up the order form

• Deciding the product specification

• Delivery schedule / location of Delivery

• Cost of order Processing

• EDI / ERP / CPFR Techniques

Traffic and Transportation

• Mode of Transportation

• Speed of Transportation

• Cost of Transportation

• Containerised service

• Multi – modal system

• Milk Runs / Cross – Docking

• 3PL / 4PL

Warehousing and storage

• Location of the warehouse

• Inventory levels

• Centralised Vs. decentralised systems

• Cold chains

• Packing and repacking facilities

• Storage requirement of the product.(Nature / Size /

Volume)

• Third Party Logistics

Industrial Packaging

• Primary Packaging

• Secondary Packaging

• Cost of Packaging

• Customer requirement for packaging

• Transportation requirement for packaging

• Reverse logistics for packaging

• Recyclability of packaging material

Site location Analysis

• Availability and type of land

• Government Regulations & Statutory provisions

• Cost of transportation

• Availability of skilled labour

• Infrastructural facilities

Materials Handling

• Type of materials to be handled

• Handling requirements (fragile / inflammable etc.)

• Requisite Handling Equipments

• Cost of materials handling

• Pilferage / Breakage

• Safety of materials & personnel

Inventory Control

• Inventory Analysis

• Leadtime Analysis

• Communication with the supply points

• Proper / appropriate inventory control system

• Cycle Counting / Stock Taking

• Obsolescence Factor

• Inventory Carrying cost

Customer service

• Parts and service support

• Field Service and Maintenance

• Value – added Services

Reverse Logistics

• Returned goods handling

• Clear policy with Customers / Transporters

Salvage & Scrap Disposal

• Clearcut policy

• Periodic Review

• Socially responsible Disposal systems

For Forecasting

Demand Forecast

The three principles of all forecasting

techniques:

Forecasting is not always accurate

The longer the forecast horizon the worst is

the forecast

Aggregate forecasts are more accurate

11-20

A Forecasting Framework

Focus of the chapter is on the forecasting of

demand for output from the operations function.

Demand may differ from sales

Difference between forecasting and planning

Forecasting: what we think will happen

Planning: what we think should happen

Forecasting application in various decision areas

of operations (capacity planning, inventory

management, others)

Demand Management

The purpose of Demand Management is to coordinate

and control all sources of demand so that the productive

system can be used efficiently and the product delivered

on time.

Two Basic Sources of Demand –

• Independent Demand - generally finished goods

• Dependant or Derived Demand – Components / Sub-

Assemblies etc.

Role of Organisation – in respect of Independent

Demand

• Take an active role to influence demand

• Take a passive role and simply respond to demand

Demand Management

Types of demand

• Independent

• Dependant/Derived

• Active

• Passive

Components of Demand

- Demand for products or services can be broken into six

components

• Average Demand for the period

• A Trend

• Seasonal Elements

• Cyclical Elements

• Random variation

• Autocorrelation

Forecasting Techniques

Forecasting the future behaviour of Demand / Price /

Consumption etc.

Benefits from Accurate Forecasting

• Provide accurate information for making better decisions

• Increase sales opportunities for maximizing profits

• Optimise the Business for reducing costs of operations

Functional and Strategic Decisions involving –

• Production – Scheduling/ Inventory Control / aggregate planning

• Marketing – Sales force allocation / promotion / new product

introduction

• Finance – Plant & Equipment Investments / Budgetary Planning /

Funds Requirement

• Personnel – Workforce Planning / Hiring / Layoff / Training

Needs

Factors for Evaluation while

Forecasting Past Demand

State of the Economy

General Business conditions ( Boom period or

Recession)

Predicted changes in the major Sectors of the Economy

Estimated changes in supply status

Cost Trends in the Industry

Planned Advertising and Marketing Efforts

Likely Competitors‟ Strategy

Political situation

Forecasting Methods

QUALITATIVE

• Highly subjective – thro‟ salesmen – rely on human judgement &

opinion

• Thumb Rule for Forecasting

• Delphi Technique – for long term Forecasts.

TIME SERIES

• Method uses Historical Data to make a forecast

• Simple Moving Average Method

• Exponential Smoothing Techniques (Extrapolation of the same

price series) – we consider the Trend, Seasonal Factors

separately and integrate the figures to obtain the overall forecast

CAUSAL METHOD

• Correlation and Regression Analysis

• Involves assuming that the demand forecast is highly correlated

with certain factors in the environment like the state of Economy

• We relate the behaviour of a dependant variable to that of

independent variable

• Examples –

1. Price and demand for a commodity

2. Monsoon and Agriculture Output

3. Commodities & It‟s derivatives

SIMULATION

• Imitate the consumer choices that give rise to demand to arrive

at a forecast

• Using this method, a company can combine Time series and

Causal methods to find out the likely impact of Price Escalation

on Sales

Demand Forecasting-Basic Approach

Understand the Objective of Forecasting

Integrate Demand Planning and Forecasting

• Capacity Planning

• Production Planning

• Purchasing

Identify the major factors that influence the demand

forecast

• Demand side – the company must ascertain that the demand is

growing / decling / has a seasonal pattern

• Supply side – Monopoly Suppliers Vs Multiple Sources

• Product side – companies must know the number of variants of

a product being sold and whether these variants substitute for or

compliment each other

Understand and identify customer segments

• Companies generally use different forecasting methods for

different customers

• Customers may be grouped under similarities in service

requirements, demand volumes, order frequency, demand

volatility and seasonality

Determine the appropriate forecasting Technique

• Companies must use the most suitable dimension or a

combination of two dimensions for forecasting

Establish performance and error measures for the

forecast

• The measures must correlate with the objectives of the business

decisions based on these forecasts

11-29

Selecting a Forecasting Method

User and system sophistication

– People reluctant to use what they don‘t understand

Time and resources available

– When is forecast needed?

– What is value of forecast?

Use or decision characteristics, e.g. horizon

Data availability and quality

Data pattern

Don‘t force the data to fit the model!

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2007, All Rights Reserved

TRANSPORTATION

Supplier Transportation Stores Transportation

Manufacturing –

Process 2

Transportation Management

Role of Transportation in Supply Chain Process

TransportationManufacturing –

Process 1

TransportationManufacturing –

Process 2Warehouse Transportation

DealersCustomer


Importance – is one of the most visible elements of Logistics Operations

Functionality – provides two basic functions

Product movement

Product storage

Cost of storage Cost of Cost of Cost of

In vehicle unloading Reloading Warehouse

Factors affecting the transportation Decisions

n Cost Factors – Distance / Volume / Product Density / Shape / Product

Type – Perishability / fragility / market dynamics

n Speed Factor

n Reliability / Consistency (reflection of dependability)

n Frequency of Operations

n Availability of Transport

[ [


Modes Of Transportation

Roadways – Adv./ Disadv.

Railways – Adv. / Disadv.

Airways – Adv. / Disadv.

Waterways - Adv. / Disadv.

(Ocean & Inland Water Tr.)

Pipelines

Ropeways

Package Carriers (Fed Ex, UPS)

Intermodal (most common – truck / Rail)

© 2007 Pearson Education 14-35

Pipeline

High fixed cost

Primarily for crude petroleum, refined petroleum

products, natural gas

Best for large and predictable demand

Would be used for getting crude oil to a port or

refinery, but not for getting refined gasoline to a

gasoline station (why?)


Package Carriers

Companies like FedEx, UPS, USPS, that carry small

packages ranging from letters to shipments of about 150

pounds

Expensive

Rapid and reliable delivery

Small and time-sensitive shipments

Preferred mode for e-businesses (e.g., Amazon, Dell,

McMaster-Carr)

Consolidation of shipments (especially important for

package carriers that use air as a primary method of

transport)


Intermodal

Use of more than one mode of transportation to move a shipment to its destination

Most common example: rail/truck

Also water/rail/truck or water/truck

Grown considerably with increased use of containers

Increased global trade has also increased use of intermodal transportation

More convenient for shippers (one entity provides the complete service)

Key issue involves the exchange of information to facilitate transfer between different transport modes

Operating Cost of Truck

Assumptions

a) TATA Truck price – Rs 10,00,000

b) Operator‘s finance – 25 percent of truck price (cost of fund 10

percent p.a.)

c) Bank loan – 75 percent of truck price ( interest rate at 15

percent p.a.)

d) Depreciation at 40 percent written down value, as per income

tax rules

A. Fixed cost

Rupees

1. Interest on a + b above (25,000 + 1,12,500) = 1,37,500

2. Depreciation 0.4 ×(truck price – tyre price)

0.4 × (10,00,000 – 90,000) = 3,64,000

3. Taxes and Insurance = 30,000

4. Crew salary (Driver Rs 8000 pm + = 1,20,000

Cleaner Rs 2000pm)

Total = 6,31,500

Fixed cost per km basis (6,31,500 / 1,00,000) = Rs 6.32 (I)

Note : Tyre price = Six tyre tubes (each Rs 15,000)

Hence, total = Rs 90,000

Average run of a new truck / year = 1,00,000 kilometers

B. Variable Cost (Per Km)

1. Fuel (HSD – Rs 28 for 4 kilometer run) =7.00

2. Tyre * = 1.52

3. Spares = 0.15

4. Lubricants = 0.25

Total variable cost per km = Rs 8.92 (II)

Note : * Cost of six tyres = Rs 90,000

New tyres run for = 50,000 kms

Retreading cost = Rs 24,000

After retreading tyres run for = 25,000 kms

Hence cost of tyre / km = (90,000 + 24,000)/(50,000 +

25,000)=Rs1.52

C. Trip Related Cost

Rupees

1. Commission to agent =750

2. Loading and unloading charges = 500

3. Line expenses = 500

Total =1750

Note: Average run of new truck is 1000km / trip

Trip related charges/kilometer = Rs 1.75 (III)

Total Operating Cost of Truck (I + II + III) = Rs 16.99/km

Note: With the aging of the truck, the fixed cost component

drastically reduces, resulting in lower total operating cost/km.

Common Shipment / Delivery Terms

used in Transportation

INCOTERMS 2000 – developed by the International chamber

of commerce – France

These Contract Terms clearly describe the Key obligations and

responsiblities of the Seller and Buyer with regard to :-

• Delivery of Goods

• Transfer of Risks

• Transfer of Costs

INCOTERMS

Consignor

Consignee

Door – to – door

EXW : Ex – works

FAS : Free Alongside Ship

FOB : Free on Board

FOR : Free on Road

CFR : Cost and Freight

CIF : Cost, Insurance and Freight

Demurrage


Choice of Transportation Mode

A manager must account for inventory costs when

selecting a mode of transportation

A mode with higher transportation costs can be

justified if it results in significantly lower inventories


Design Options for a Transportation Network

Direct Shipment Network (Point-to-point Network)

Direct Shipping with Milk Runs

All Shipments Via Central Distribution Centre.

Hub and Spoke Network

Tailored Network (Combination of above Networks)

Trade – Offs in Transportation Design

Transportation cost and Inventory cost Trade off - involves choice of

Transportation mode & Inventory Aggregation.

Transportation cost and customer responsiveness trade –off – Tr. Cost a

supply chain incurs is closely linked to the degree of responsiveness the

supply chain aims to provide (Temporal Aggregation is the Answer)

Transportation Networks

Point to point network

Point of

Origin

Point of

Destination

Multiple delivery points

Delivery

point 1

Delivery

point 2

Origin Destination

Trans–shipment points

Origin Destination

Trans–shipment

Point

Local Area

Distribution

Long distance

Haulage

Nodal network

Rail

Terminal

Road

Terminal

Road

Terminal

Road

Terminal

Port

Terminal

Air

Terminal

Multiple

pickup & distribution

Multiple



Multiple

Hub and spoke network

Mother

Hub

DC*

DC*

DC*

DC*- Distribution

Centre

DC*


Role of IT in Transportation

The complexity of transportation decisions demand use

of IT systems

IT software can assist in:

– Identification of optimal routes by minimizing costs subject

to delivery constraints

– Optimal fleet utilization

– GPS applications


Making Transportation

Decisions in Practice

Align transportation strategy with competitive

strategy

Consider both in-house and outsourced transportation

Design a transportation network that can handle

e-commerce

Use technology to improve transportation

performance

Design flexibility into the transportation network

WAREHOUSING

WAREHOUSING – A Role Beyond

Storage

Modern warehousing is in the process of evolutionary

change

From an emphasis on storage to emphasis on flow

through

From Inventories at rest to Inventories in motion

In logistical systems, warehouse are viewed as

switching facilities rather than storage facilities

What is Happening in our Warehousing / Stores

Environment ?

Attributes/Aspects 1960's & 70’s 1980's & 90's Current

The Age of Backyard

Awareness on

Housekeeping 6S Technique

Period Characterised by Acute Space Shortage

Planned Storage

Area High Occupancy Rate

People Skills Any body with a Head

on his Shoulders Technical

TechnoCommercial

Acumen (Team-

Player)

Inventory Approach Just – in – Case

Min-Max System

(Computer) ERP / JIT – I / II / III

Customer Focus –

Internal Adversarial

Somewhat

Co-operative

Totally

Focussed

Problem – Stance Reactive Reactive Proactive

General

Perception

A place to Keep

Materials – till needed

(Cost Centre)

Major Awareness

on Space

Utilisation & cost

Aspects

Critical link in the

Supply Chain

- A Profit Centre

Types of Warehouses

Broad classification

• Private warehouses

• Public warehouses

Types

• Bonded warehouses – under customs / Excise Act

• Field warehouse

• Cold storage – for perishable goods

• Agriculture warehouse – used for storing Agriculture produce

• Distribution warehouse – located close to the manufacturing

concerns

• Buffer storage warehouse – Government owned

• Export / Import warehouse – located normally near ports

Warehousing – Basic Objectives

• Maximum utilisation of storage space (floor and cubic space)

• Higher labour productivity

• Maximum Asset utilisation

• Reduction in Materials Handling

• Increased Inventory turnover

• Reduced order filling time

• Reduction in operating cost

Warehousing - Functions

Materials storage function

• Holding Materials

• Consolidation

• Breaking Bulk

• Cross – Docking

• Mixing

• Postponement

• Packing

Materials Handling Function

• Loading and unloading

• Materials Movement (to and from the Storage area)

• Order filling

Information Handling Function

• Goods Inwards

• Inspection and auditing

• Goods outwards

• Stockouts

• Excess Stocks

• Invoicing

• Warehouse expenses

• Consignment Tracking

• Transit damage and breakage

Warehouse Layout Designs

Basic considerations are –

Principle of Popularity

Principle of Similarity

Item Turnover

Space utilisation

Product configuration

Product characteristics

Good Housekeeping

Safety and Security

Retail Warehouse - Layout

Finished Goods Warehouse

Warehouse

(Finished

Goods))

Manufacturing

PlantCustomer

Consolidation Warehouse

Consolidation

Warehouse

Source 1

Source 2

Source 3

Buyer 1

Buyer 2

Buyer 3

Bulk–break Warehouse

Manufacturing

PlantBreak-bulk

Warehouse

Customer 1

Customer 1

Customer 1

Mixing Warehouse

Consolidation

Warehouse

Plant A

(Item 1)

Plant A

(Item 2)

Plant A

(Item 3)

Customer 1

Customer 2

Customer 3

Warehouse Site Selection

Prime consideration• Customer service

• Cost

Other factors affecting site selection are –• Infrastructure – approach roads, power, water, communication etc

• Market – proximity

• Access – influence Transportation cost

• Primary transportation cost

• Availability – of space in urban areas

• Product – type like Perishables

• Government Regulations

• Local Statutory Levies

Quantitative Technique for warehouse site

selection

Single Depot Location

• Centre of Gravity of Area Model – A point expected to be at a

minimum average distance from all locations in the Area

• Centre of Gravity of Local Model – A weight, in propotion to the

demand load is hung at each hole

• Centre of Gravity of Tonnes – Kilometres Model – takes into

consideration both load and distance to arrive at the optimum

transportation cost

Multiple Depot Network

• Warehousing cost is directly proportional to the number of warehouses,

while transportation cost goes down with an increase in warehouse

numbers

• The factors influencing an optimum numbers of warehouses are –

• Market size

• Area coverage by each warehouse

• Product Type

• Demand Pattern – continuous or seasonal

• Customer service level

• Competition

• Overall operating costs

Warehouse Layout Designs

Basic considerations are –

Principle of Popularity

Principle of Similarity

Item Turnover

Space utilisation

Product configuration

Product characteristics

Good Housekeeping

Safety and Security

Warehousing – Performance Parameters

Warehousing is an integral part of the Supply Chain

Objectives should align with that of the Objectives of overall

Supply Chain

Most common parameters indicating Efficiency &

Effectiveness of warehouse operations are –

• Stock turnover ratio

• Warehouse cost to sales ratio

• Warehouse cost per unit handled

• Occupancy rate of warehouse space

Number of Warehouses

Vs

Cost of Operations

Total Cost

Warehousing Cost

Transportation Cost

Number of Warehouses

C

o

s

t

Inventory

Management

•Sales history

•Sales forecast

•Forecasting techniquesFORECASTING

Finished goods forecast

Finished goods inventory on hand

Materials Requirements

Bill of materials

Materials to be purchased

Inventory of materials on hand

•Purchase orders

•Delivery schedules

•Follow up

•Supplier history

•Lead time

•Quality rating

•Delivery rating

•Price etc.

Inventory control

MATERIALS

PLANNING

PURCHASING

INVENTORY

MANAGEMENT

•Reorder points

•Max Inventory

•Min Levels

•EOQ,

•Scrap/Obsolete

•Receipt & issue,

•ABC Analysis

Materials Flow Chart

15-76

A Material-Flow Process

Work in

process

Work in

process

Work in

process

Finished

goods

Raw

MaterialsVendors Customer

Productive Process

15-77

A Water Tank Analogy for Inventory

Supply Rate

Inventory Level

Demand Rate

Inventory Level

Minimizing Waste: Inventory

Hides Problems

Work in

process

queues

(banks)

Change

orders

Engineering design

redundancies

Vendor

delinquencies

Scrap

Design

backlogs

Machine

downtime

Decision

backlogs

Inspection

backlogs

Paperwork

backlog

Example: By

identifying defective

items from a vendor

early in the

production process

the downstream work

is saved

Example: By

identifying defective

work by employees

upstream, the

downstream work is

saved

Inventory Control Definition of Inventory : An idle resource of any kind having an economic value

Types of Inventory :

Production Inventories (R.M/ Spares/ Components)

MRO Inventories (Maintenance Items)

Work-in-Process Items

Finished Goods

Purpose of Inventory: Transaction purpose/ Precaution purpose (Increase in lead

time/consumption)/ Speculative purpose (Rising prices/ Material scarcity)

Basic problem in inventory : How much to buy at one time ?/ when to buy this

quantity ?

Indian inventory problems : Financial management of inventories in India/ Tandon

Committee Report/ Control of bank finance

Costs related to Inventory

Mechanisms of inventory control: Ideal inventory pattern/ Actual inventory pattern

Methods of inventory control : Two Bin System/ Min-Max System/ Replenishment

systems („P‟ & „Q‟ systems)/ Zero stock system (Just-in Time inventory)

E(1

)

Independent Vs. Dependent Demand

Independent Demand (Demand for the final end-

product or demand not related to other items)

Dependent

Demand

(Derived demand

items for

component

parts,

subassemblies,

raw materials,

etc)

Finished

product

Component parts

Inventory Model no. 1

Time (months)

Q

0 1 2 3 4

Qu

an

tity


Time (months)

Q

0 1 2 3 4

Qu

an

tity

A B

Note :- A & B denote stock-out situations


Time (months)

Q

0 1 2 3 4

Qu

an

tity

Safety Stock

Selective Inventory Control System Methods of classification:-

Title Basis Main Use

A-B-C Value of Consumption To control- raw material/ w.i.p/

components

H-M-L (High-Med-

Low)

Unit price of the material Mainly to control purchase

X-Y-Z Value of items in storage To review the inventories & their

uses at scheduled intervals

V-E-D (vital/essen/

desirable

Criticality of the component To determine stock levels of spare

parts

F-S-N (fast/slow/non-

moving)

Consumption pattern of the

component

To control obsolescence

S-D-E

(scarce/diff/easy)

Problems faced in procurement Lead-time analysis & purchasing

strategy

G-O-L-F

(govt/open/local/forei

gn)

Source of materials Procurement strategies

S-0-S (seasonal/ off

seasonal)

Nature of supplies Procurement stocking strategies for

seasonal items like agricultural

V-E-I-N (vital/ essen/

imp/normal)

Plant &machinery Production Machinery

& Services

A-B-C Analysis

Class

‘A’

Class

‘B’

Class ‘C’

0

65

90

100

15 40 100

Cumulative % of Total number of items

Cu

mu

lati

ve

% o

f A

nn

ua

l c

on

su

mp

tio

n v

alu

e

Miscellaneous Systems:

Bin Systems

Two-Bin System

Full Empty

Order One Bin of

Inventory

One-Bin System

Periodic Check

Order Enough to

Refill Bin

15-87

Economic Order Quantity (EOQ)

Developed in 1915 by F.W. Harris

Answers the question ‗How much do I order?‘

Used for independent demand items.

Objective is to find order quantity (Q) that minimizes the total cost (TC) of managing inventory.

Must be calculated separately for each SKU.

Widely used and very robust (i.e. works well in a lot of situations, even when its assumptions don‘t hold exactly).

15-88

Economic Order Quantity (EOQ)

Basic Model Assumptions

Demand rate is constant, recurring, and known.

Lead time is constant and known.

No stockouts allowed.

Material is ordered or produced in a lot or batch and the lot is received all at once

Costs are constant

– Unit cost is constant (no quantity discounts)

– Carrying cost is a constant per unit (SKU)

– Ordering (setup) cost per order is fixed

The item is a single product or SKU.

15-89

EOQ Lot Size Choice

There is a trade-off between frequency of

ordering (or the size of the order) and the

inventory level.

– Frequent orders (small lot size) lead to a lower

average inventory size, i.e. higher ordering cost

and lower holding cost.

– Fewer orders (large lot size) lead to a larger

average inventory size, i.e. lower ordering cost and

higher holding cost.

15-90

Total Cost of Inventory

Basic Fixed-Order Quantity Model and Reorder

Point Behavior

R = Reorder point

Q = Economic order quantity

L = Lead time

L L

Q QQ

R

Time

Number

of units

on hand

1. You receive an order quantity Q.

2. You start using

them up over time. 3. When you reach down to

a level of inventory of R,

you place your next Q

sized order.

4. The cycle then repeats.

15-92

Continuous Review System

Relax assumption of constant demand. Demand is assumed to be random.

Check inventory position each time there is a demand (i.e continuously).

If inventory position drops below the reorder point, place an order for the EOQ.

Also called fixed-order-quantity or Q system (the fixed order size is EOQ).

15-93

Continuous Review (Q) System

R = Reorder Point

Q = Order Quantity

L = Lead time

Periodic Review System

Instead of reviewing continuously, we review

the inventory position at fixed intervals. For

example, the bread truck visits the grocery

store on the same days every week.

Also known as ―P system‖, ―Fixed-order-

interval system‖ or ―Fixed-order-period

system‖

Periodic Review System

(contd.)

Each time we review the inventory, we either

order or don‘t. The decision depends upon our

reorder point.

The amount we order may be fixed, or may be

the amount needed to bring us up to a target

(T).

15-96

Periodic Review (P) System

Comparison of Fixed –Order Quantity and Fixed-Time Period

reordering Inventory Systems

Q

Fixed-Order Quantity System

P

Fixed-Time Period Reordering Systems

IDLE STATE

Waiting for demand

DEMAND OCCURS

Units withdrawn from

inventory or back

ordered

COMPLETE

INVENTORY POSITION

Position=On hand +On

order –Back order

Issue an order for

exactly Q units

Is position <

Reorder

point?

Yes

No

IDLE STATE

Waiting for demand

Has Review

time arrived ?

Compute Inventory

Position

Position = On hand +

On order – Back Order

Compute order quantity

to bring inventory up to

required level

Issue an order for the

number of units needed

Demand Occurs

Unit withdrawn from

inventory or back

orderedYes

No

Inventory Management

MUSIC – 3D Approach

Multi Unit Selective Inventory Control – 3 Dimensional

The Entire classification is based broadly on 3 parameters –

• Annual Consumption Value

• Lead time Analysis

• Degree of criticality

High ConsumptiOn Value Items Low Consumption Value Items

Long Lead time Short Lead time Long Lead time Short Lead time

CriticalNon-

CriticalCritical

Non-

CriticalCritical

Non-

CriticalCritical

Non-

Critical

17-100

Philosophy of JIT

Modern Roots of JIT (Toyota Production

System, Taiichi Ohno. d. 1990)

Elements of JIT

Root of JIT in ―repetitive‖ manufacturing

JIT as a technique: to reduce inventory

JIT as a philosophy: a comprehensive

management system

17-101

Elements of JIT

Small lot sizes (lot size one)

Use of Kanban system

Quick changeover (set-ups)

Multifunction workers

Efficient layout (linear flow)

Close relationships with suppliers

Frequent deliveries from vendors

Elimination of Waste

17-102

The Seven WastesOverproduction: Producing more than the demand for customers resulting in unnecessary

inventory, handling, paperwork, and warehouse space.

Waiting Time: Operators and machines waiting for parts or work to arrive from suppliers

or other operations.

Transportation: Double or triple movement of materials due to poor layouts, lack of

coordination and workplace organization.

Processing: Poor design or inadequate maintenance or processes requiring additional labor

or machine time.

Inventory: Excess inventory due to large lot sizes, obsolete items, poor forecasts or

improper production planning.

Motion: Wasted movements of people or extra walking to get materials.

Defects: Use of materials, labor and capacity for production of defects, sorting out bad

parts or warranty costs with customers.

17-103

A ―pull‖ production system

A physical (normally visual) control system

Normally composed of cards and containers

(production card and withdrawal card), but

can be any type of signal

Number of containers

Kanban System

C

DTn

The Kanban System

The Kanban system uses simple cards or signals to

strictly control production

The basic idea is that no station is permitted to

produce more than is immediately required by the

succeeding station

This simple idea prevents the buildup of inventory

No computer is required!

17-104

The Origin Of Kanban

Q - R

In the 1950s, Ohno visited Detroit to learn

about auto making from the U.S. manufacturers.

He was not impressed.

He visited a supermarket, which they did not

have in Japan, and observed the way they

restocked the shelves.

He used that method as the basis for Kanban.

17-105

Minimizing Waste: Kanban Production Control

Systems

Storage

Part A

Storage

Part AMachine

CenterAssembly

Line

Material Flow

Card (signal) Flow

Withdrawal

kanban

Once the Production kanban is

received, the Machine Center

produces a unit to replace the

one taken by the Assembly Line

people in the first place

This puts the

system back

where it was

before the item

was pulled

The process begins by the Assembly Line

people pulling Part A from Storage

Production kanban

17-107

Effect of JIT on Workers

Multifunction workers

Cross-training

New pay system to reflect skills variety

Teamwork

Suggestion system

17-108

Suppliers

Very close relationship with suppliers

Frequent deliveries demanded from suppliers

Sole-sourcing

Integrated supplier programs

Deliveries to production line

No inspection—high quality

17-109

Implementation of JIT

Obtain commitment from top management

Gain the cooperation of workforce

Start with final assembly line

Reduce setup times and lot sizes working backward from

the final assembly line

Balance fabrication rates with final assembly production

rates

Extend JIT to the suppliers

Benefits Of JIT

1. Reduced inventory

2. Improved quality

3. Lower costs

4. Reduced space

requirements

5. Shorter lead times

6. Increased productivity

7. Greater flexibility

8. Better relations with suppliers

9. Simplified scheduling and control activities

10. Increased capacity

11. Better use of human resources

12. More product variety

17-110

Materials Requirement Planning

&

Distribution Requirement Planning

( MRP / DRP )

MATERIALS REQUIREMENT PLANNING (MRP)

Fundamental Questions in Manufacturing are –

What are we going to make?

What does it take to make it?

What do we have?

What do we have to get?

E(1

)

Independent Vs. Dependent Demand

Independent Demand (Demand for the final end-

product or demand not related to other items)

Dependent

Demand

(Derived demand

items for

component

parts,

subassemblies,

raw materials,

etc)

Finished

product

Component parts

Product Hierarchy

End Product

Assembly 1

Subassembly 1 Subassembly 2

Component A Component B

Assembly 2

Component E

Component C Component D

Raw Material X Raw material Y

Component F

16-115

2. MRP Example of BOM

Top

Leg

Long Rail

Short Rail

16-116

BOM (Product Structure)

Short Rails (2)

1 week

Table (End Item)

1 week

Long Rails (2)

1 week

Legs (4)

1 week

Top (1)

2 weeks

Leg Assembly (1)

1 week

Example of MRP Logic and Product

Structure Tree

B(4)

E(1)D(2)

C(2)

F(2)D(3)

A

Product Structure Tree for Assembly ALead Times

A 1 day

B 2 days

C 1 day

D 3 days

E 4 days

F 1 day

Total Unit Demand

Day 10 50 A

Day 8 20 B (Spares)

Day 6 15 D (Spares)

Given the product structure tree for “A” and the lead time and

demand information below, provide a materials requirements

plan that defines the number of units of each component and

when they will be needed

LT = 1 day

Day: 1 2 3 4 5 6 7 8 9 10

A Required 50

Order Placement 50

First, the number of units of “A” are scheduled

backwards to allow for their lead time. So, in the

materials requirement plan below, we have to place

an order for 50 units of “A” on the 9th day to receive

them on day 10.

Next, we need to start scheduling the components that make up

“A”. In the case of component “B” we need 4 B’s for each A.

Since we need 50 A’s, that means 200 B’s. And again, we back

the schedule up for the necessary 2 days of lead time.

D a y : 1 2 3 4 5 6 7 8 9 1 0

A R e q u ire d 5 0

O rd e r P la c e m e n t 5 0

B R e q u ire d 2 0 2 0 0

O rd e r P la c e m e n t 2 0 2 0 0

B(4)

E(1)D(2)

C(2)

F(2)D(3)

A

SparesLT = 2

4x50=200

Day: 1 2 3 4 5 6 7 8 9 10

A Required 50

LT=1 Order Placement 50

B Required 20 200

LT=2 Order Placement 20 200

C Required 100


D Required 55 400 300

LT=3 Order Placement 55 400 300

E Required 20 200

LT=4 Order Placement 20 200

F Required 200


B(4)

E(1)D(2)

C(2)

F(2)D(3)

A

40 + 15 spares

Part D: Day 6

Finally, repeating the process for all components, we have the

final materials requirements plan:

©The McGraw-Hill Companies, Inc., 2001

120

Objectives of MRP

Improved customer service

Reduced Investment in Industry

Improved operating efficiency

MRP System Inputs

Master Production Schedule file

Bill of Materials file

Inventory Record file

MRP System Processing

“Explode” the end product into an Assembly chart

Develop a Materials Requirement Plan (net items requirements)

Planned order releases/ production schedules

Consolidation of Materials Requirements

MATERIALS REQUIREMENT PLANNING (MRP)…

MATERIALS REQUIREMENT PLANNING (MRP)…

MRP System Outputs

1. Schedule of Planned order releases

2. Authorized order releases

3. Change reports (Amendments etc)

4. Control Reports – Status of inventory levels, etc

5. Planning reports – Inventory forecasts, long-range materials requirement planning, etc

Merits of MRP

Low inventory levels - especially for WIP

Better response to Market demands

Better customer service

Reduced set-up costs

Good material tracking & production scheduling

EVOLUTION OF MRP - II

MRP - Materials Requirement Planning

MPS - Master Production Schedule

PPC - Production Planning and Control

IC - Inventory Control

ENG - Engineering Data

CC - Cost Control

Distribution Resource Planning

Is a widely used and potentially powerful technique for outbound logistics

systems to help determine the appropriate levels of inventory

Is a logical extension of MRP-II concept

Usually applied with an MRP/MRP-II system

DRP Replenishment system is based on –

Current inventory level of the Stock Keeping Unit (SKU)

Forecast of demand for each SKU

Target safety stock

Recommended Replenishment Quantity

Lead time for Replenishment

Advantages of DRP –

Reduced transportation costs

Overall reduction in F.G Inventories

Improved distribution centre operations

Improved customer service (decrease in stock out situations)

Distribution Resource Planning

Customers

Distribution Center

Distribution Center

Distribution Center

Distribution Center

RegionalWarehouse

Plant Warehouse

RegionalWarehouse

Finished product

Distribution Center Distribution Center

Packing Material

Final Products

Intermediate IV Intermediate V Intermediate IV

Intermediate I Intermediate II Intermediate III

Raw materials

Application of IT

in

LSCM

Information Technology

IT in SCM spans both internal and external systems connecting the firm to its customers and suppliers

Companies employ different systems that support different locationsWarehouse management systems,

Production planning,

Transaction and sales processing

Decision support systems

Communications systems: Email, Intranets


In many businesses, competitive edge in

the market is achieved through the use of


Banking

Retail (Wal Mart)

Airlines (American Airlines)

Trucking and Shipping (FedEx)

Goals of IT in SCM

Collect information on each product from

production to delivery / purchase point and

provide complete visibility for parties

involved.

Tracking

Alerting

Goals of IT in SCM

Access any data in the system from a single point of contact. This is complicated by the fact that one may need information which resides

in various locations within one company

in different companies

Goals of IT in SCM

Analyze and plan activities based on total supply chain information.

Decision Support Systems

Advanced Planning Systems

Goals of IT in SCM

Collaborate with Supply Chain partners.

Alignment of IT systems

Integration of business processes

Supply chain relationship management

CPFR

INFORMATION TECHNOLOGY FOR SUPPLY CHAIN MANAGEMENT

The Role of I T in a Supply Chain

Information is a key supply chain driver.

I T consists of the Hardware, Software and people throughout aSupply Chain that gather, analyse, and execute upon information.

Information must have the following characteristics to be usefulwhen making supply chain decisions –

1. Information must be accurate

1. Information must be available in a timely manner

1. Information must be of the right kind.

Information is used when making a wide variety of

decisions about each of the supply chain drivers -

1. Facility – Stores / Cross – docking arrangements.

2. Inventory – Setting optimal Inventory policies

including Cost Data.

3. Transportation – networks / routings, modes and

service providers.

4. Sourcing – Product quality, pricing, leadtimes etc.

5. Pricing and Revenue Management – Various

customer segment‟s willingness to pay.

Finally, information is crucial to making good supply

chain decisions at all three levels of decision

making (Strategy, Planning and Operations).

Supply Chain IT Framework

The Supply Chain Macro Processes

1. Customer Relationship Management (CRM)

2. Internal Supply Chain Management (ISCM)

3. Supplier Relationship Management (SRM)

Why focus on the Macro Processes? –

Good Supply Chain Management is not a zero – sum game but a positive – sum game in which Supply Chianpartners can increase their overall level of profitability by working together.

Macro Processes applied to the evolution of Software –

ERP Software has been successful in improving Data availability and integrity within the Supply Chain – but the real value from these Data accrues only when the Data can be used to improve decision making.

The software winners in a macro process –

1. Functional Performance (including case of use)

2. Integration with other macro processes

3. Strength of the software company‟s eco system.

Customer Relationship Management (CRM)

Marketing

Selling / Distribution

Order Management

Call / Service centre

Internal Supply Chain Management (ISCM)

Strategic Planning

Demand Planning

Supply Planning

Fulfillment

Field Service

Supplier Relationship Management (SRM)

Design collaboration

Sourcing

Pricing / Negotiations

Procurement

Supply Collaboration

Supply chain I T in practice

1. Select an I T System that addresses the

company‟s key success factors

2. Take incremental steps and measure value

3. Align the level of sophistication with the need for

sophistication

4. Use I T systems to support decision making – not

to make decisions.

5. Think about the future – provision for

expansion

Logistics Organisation

Logistics Management – Traditional

Approach to Organisation

CEO

VP

(Marketing)

VP

(Manufacturing)

VP

(Finance)

VP

(HRD)

• Production

• Purchasing /

Procurement

• Traffic / Tr.

• Warehousing

• Sales / Service

• Channels of

Distribution

• Reverse

Logistics.

• New Product

Development

• Budgeting

• Information

Systems

• Inventory

Management

• Data

Processing

• Recruitment

• Training &

Development

• HR Policies

Logistics Management – Traditional

Approach to Organisation

Historically organisations scattered Logistics functions throughout the company

No single Department or division responsible for managing the entire logistics process

Usually treated as a Cost Centre

Major Responsiblities confined to Transport Management –ocassionally covering warehousing Activities

The function generally reported to the Manufacturing Head

Effective Logistics Organisation -

Importance

Logistics – a vital element of Supply Chain Management

A major Cost Area – A substantial segment Hidden

Traditionally considered a low skilled Function – unable to

attract Best Talent

Hierarchically – lower area of operation resulting in high attrition rate

Vast potential available – for major contribution to Profits

Logistics Organisational Structures

Development of Business Structure

• Functional Specialization

• The ―Hollow Corporation‖ (Outsourcing)

• The ―Virtual Corporation‖ (A no. of Cos. come together to develop, produce, sell / distribute a product / service of limited scope)

• ―E – commerce‖ Era organizations

Logistics in a Functional Organisation

President

Mfrg. R & D Marketing Finance

Personnel Logistics

Logistics in a Matrix Organization

President

Mfrg. Mrktg. Fin. Eng. HRD

• Production

• Purchasing

• Maintenance

• Sales

• CRM

• New

Products

• Budgeting

• M.I.S

•Funds Mgt.

• Product

Design

• V.A / V.E

•Process

. Engg.

• Personn.

Issues

\Logist.

Mgt.

Horizontal

flows of

Project

Authority

Vertical Flows of Functional Authority

• Trg & Dev.

• Lab.Relations

Organizing for Logistics – Decision

Making Strategies

The Logistics Mission Statement • Targeted Customers / Markets

• Principal Products / Services

• Geographic domain

• Core Technologies

• Company Philosophy

Components of an Optimal Logistics Organization• Organizational characteristics (Structure & Technology – relationships

that exist between various functional areas)

• Environmental characteristics (Internal & External)

Employee Characteristics

• Organizational Attachment

• Job Performance

• Available Skill levels

Managerial Policies and Practices

• Strategic Goal setting

• Performance Environment

• Communication Process

• Leadership & decision-making process

• Organizational adaptation and Innovation

Developing an optimal Logistics

Organisation – An Approach

Organizations change over time – A Co. may have to ReEngineerit‘s design/structure to reflect environmental or corporate changes

Research corporate strategy and objectives

Organize functions in a manner compatible with the corporate structure

Define the functions for which they are accountable

Know their Management style

Organize for Flexibility

Know the current support system

Understand and Plan for Human Resource Allocation

Logistics organizations can be structured in several ways – Strategic Vs operational / Centralized Vs decentralized / Line Vs Staff

Final Objective – to become more cost and service efficient

Logistics Performance

Measurement

Logistics Measurements Organizational performance can be measured against many

criteria

Need for Measurement – for efficient and effective

deployment of resources and tracking the health of the Supply

Chain

It is best compared with the control panel on a machine or the

Dashboard of a vehicle

Performance measurement system gives insights into the

financial and non-financial measures taken by the firm

System Performance is judged by it‘s output with respect to

the Input

A higher Output to Input Ratio is a measure of the system‘s

efficiency and effectiveness

Performance measurement system helps in either reducing or

eliminating non-value added activities from the system

Logistical competency has become critical in enhancing the

competitiveness of the business process

Logistics – Performance Measurement

System Objectives

Monitoring • Focusses on reporting the current status of operations

• Monitored on a Daily, Weekly or Monthly basis depending on the volume and criticality

Controlling • Measures & compares the actual performance with the set standard

• Packaging Damages, Productivity Issues, customer set service level

Directing• Motivates people in the system to enhance individual performance

• Incentive schemes for better peformance

Logistics – Criteria for Performance

Measurement

Outbound Freight cost

Order Fill Rate

Inventory Stock Accuracy

Inventory Turnover Ratio

On-time Delivery

Customer Complaints

Stock-out situations

Inbound Freight cost

Back orders

Inventory obsolescence

Inventory carrying cost

Non-moving / Deadstock items – Disposal systems

Logistics cost per unit Vs Budgeted

Overall customer satisfaction

Logistics – Performance Measurement

PerspectivesPerformance

Measurement

Perspective

External

measures

Internal

measures

Innovations

• Speed

• Best

Practices

in Industry

Customer

Perception

• Service

Quality

• Responsiveness

Non-Financial

Productivity

• Order Fill

• Quality

•Asset

Management

Financial

• Operating

cost

• ROI

Logistics Management – Raising the

Performance Bar

Logistics

performance

standards

Logistics

performance

standards

Competition

MRP

Logistics

performance

standards

Customers

Deregulation

Technology

Logistics

performance

standards

Customers

Technology

DRP

Logistics

performance

standards

Customers

Technology

ERP

SRM / CRM

1960‘s 1970‘s Current1990‘s1980‘s

Prodn

costs

Mfg &

Inv costs

Transportation

costs

Distribution &

Logistics costs

SCM & customer

service costs

Key

Performance

Measures

Fair

Acceptable

Good

Excellent

Outstanding

Logistics Costing(Activity Based Costing)

Traditional Costing Vs Activity – Based

Costing

Traditional view of Warehousing Costs

• Storage & Handling 1800/-

• Administration overheads 360/-

• Trucking & Delivery 180/-

• Freight Consolidation 90/-

• Value Added Services 100/-

Total Rs 2530/-

Activity-based view of Warehousing

Costs

• Dry storage 600/-

• Refrigerated Storage 800/-

• Receiving 160/-

• Shipping 200/-

• Billing 80/-

• Delivery 100/-

• Packaging 100/-

• Freight consolidation 90/-

• Materials

Handling Eqpt 400/-

Total Rs 2530/-

Logistics Costing

(Activity Based Costing)

ABC is simply the tracing of Overhead and Direct costs to specific Products, Services or Customers

The tracing of costs follows a 2-stage process

The First Stage assign Resource costs based on the amount of each Resource consumed in performing specific Logistics Activity

The Second Stage assigns Logistics Activity costs to the Products, Services or Customers consuming the activities based on actual consumption

ABC unbundles traditional cost accounts and re-orients costs to show how resources are actually consumed

Activity – based costing seeks to relate all expenses to the

value adding activities performed

The fundamental concept of activity-based costing is that

expenses need to be assigned to the activity that consumes a

resource rather than to an organization or budget unit

Effective costing requires identification of the specific

expenses to include in an analysis framework

Logistical costing system comprises of –

• Cost Identification

• Cost Time Frame

• Cost Formatting

Each of the above areas of activity-based costing is

judgemental

In the Final Analysis – a logistical costing system has to make

sense only to the managers who are using it as a guide to

decision making

Documents

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