Supply chain management

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Supply Chain Management

Lecturer:Cătălin AFRĂSINEI

Introduction

Almost every organization faces a problem:

• getting the right materials

• to the right place

• at the right time

Which is the key? Logistics

Because:Logistics is responsible for the physical movement of materials and, sometimes, people.

Logistics deals with the planning and control of material flows and related information in organizations, both in the public and private sectors.

Manufacturers now compete less on product and quality — which are often comparable – and more on inventory turns and speed to market.

John Kasarda, Forbes,October 18, 1999

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Introduction

Its mission:

What

How

Get the right materials to the right place at the right time

By optimizing a given performance measure and satisfying a given set of constraints

Importance of logistics:

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Introduction

Logistics system:Facilities

Transportation services

Supply chains:

Question: It is another term for Logistics?Answer: No, they are differentQ: They are related?A: YesQ: Which one is more complex?A: Supply chainQ: Why?

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Origins and definitions

Remarks:

“An army marches on its stomach” (Napoleon)

„Amateurs talk strategy and professionals talk logistics”

Evolution of terms:

“logistics”

“operations management”

1. Supply chain is just another term for “logistics.”2. Supply chain includes other functions: purchasing, engineering, production,

finance, marketing, and related control activities in the single company.3. The supply chain is all the functions in definition #2 plus those in a company’s

suppliers’ suppliers and a company’s customers’ customers as well —extending far outside the traditional enterprise.

„supply chain” (1980s)

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Accepted definitions of supply chain:

“A supply chain is the alignment of firms that bring products or servicesto market.”

“A supply chain consists of all stages involved, directly or indirectly, infulfilling a customer request. The supply chain not only includes themanufacturer and suppliers, but also transporters, warehouses,retailers, and customers themselves.”

“A supply chain is a network of facilities and distribution options thatperforms the functions of procurement of materials, transformationof these materials into intermediate and finished products, and thedistribution of these finished products to customers.”

Supply chain : Life cycle processes comprising physical, information,financial, and knowledge flows whose purpose is to satisfy end-userrequirements with products and services from multiple linked suppliers


Accepted definitions of supply chain management:

Supply chain management is the things we do to influence thebehavior of the supply chain and get the results we want based onresponsiveness and efficiency.

“Supply chain management is the coordination of production,inventory, location, and transportation among the participants in asupply chain to achieve the best mix of responsiveness andefficiency for the market being served.”

Logistics typically refers to activities that occur within the boundaries of asingle organization

Differences between supply chain management and logistics:

Supply chains refer to networks of companies that work together andcoordinate their actions to deliver a product to market

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Origins and definitionsConcluding:

A SUPPLY CHAIN consists of the series of activities and organizations that move materials through on their journey from initial suppliers to final customers

LOGISTICS is the function responsible for the flow of materials from suppliers into an organization, through operations within the organization, and then out to customers

Origins and definitionsRelated terms:

PRODUCTS: every organization delivers products to its customers. Products = combination of goods or services with different weights.

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OPERATIONS: Is the core of any organization. They create and deliver the products. Operations take a variety of inputs and convert them into desired outputs.


OPERATIONS: takes a precise place in the cycle of supply and demand.

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MATERIALS: are all the things that an organisation moves to create its products.- tangible- intangible

Logistics are responsible for materials movement both inside and outside an organization and between organizations.

Inbound or inward logistics: moving materials into the organisation from suppliers

Outbound or outward logistics: moving materials out to customers

Materials management : moving materials within the organisation

People use different names for these chains of activities and organisations:- process: when they emphasise the operations- logistics channel: when they emphasise marketing- value chain: when they look at the value added- demand chain: when they see how customer demands are satisfied- supply chain: when they emphasise the movement of materials


Every product has its own unique supply chain.Examples:the supply chain of chocolate starts with cocoa beans growing on farms and ends with the delivery of bars of chocolate to hungry customers

the supply chain of jeans starts with cotton growing in a field and ends when you buy the jeans in a shop.

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Structure of supply chain

A supply chain moves materials through a series of organisations.Each one adds value to the final product.

From organisation’s point of view:-Upstream: activities in front of it tiers of suppliers-Downstream: ; activities after the organisation tiers of customers

Structure of supply chain

A supply chain could be much more complicated in the real life as seen in the following image:

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Supply chain is made up of:

• Production system

• Distribution system

Types of supply chains:Pull supply chain (MTO):

products are manufactured only when customers require them

no inventories are needed at the manufacturer

Push supply chain (MTS):

production and distribution decisions are based on forecasts

production anticipates effective demand, and inventories are held in warehouses and at the retailers

Mixed approach (MTA):

components and semi-finished products are manufactured in MTS system

final assembly stage is made in MTO system

Product and information flows in a supply chain

Downstream:

products flow

direction: from raw material sources to customers

Upstream:

information flow + obsolete, damaged and nonfunctioning products

direction: from customers to raw material suppliers

Both flows are time consuming

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Performance drivers of supply chain

Companies in any supply chain have to take decisions individually and collectively regarding their roles.

There are 5 areas where companies can make decisions that will define their supply chain performance: Production, Inventory, Location, Transportation and Information.

They are also called performance drivers and they should be taken into consideration into the companies effort to solve the trade-off between responsiveness and efficiency.

Production:- subject of decision making: dimension of production capacity

Excess capacity vs. Restricted capacityResponsiveness vs. Efficiency

Inventory: -subject of decision making: level of storage-is spread throughout the supply chain and includes: raw materials, semi-finished goods, finished goods-large amounts of inventories cope with fluctuations in customer demand responsiveness

-small amounts of inventories low inventory costs efficiency

Performance drivers of supply chain - continued

Location:-subject of decision making: geographical siting of supply chain facilities-centralize activities in fewer locations economies of scale -decentralize activities in many locations close to customers and suppliers

Transportation:-refers to the movement of materials between facilities-subject of decision making: choice of transport mode

Fast modes of transport vs. Slower modes of transportResponsiveness vs. Efficiency

-six basic modes of transport: ship, rail, pipelines, truck, air, and …

Information:-is the basis of decision making process:

-Coordinating daily activity-Forecasting and planning

....……..?............. vs. ……?…….Responsiveness vs. Efficiency

efficiency

responsiveness

Electronic transport

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Performance drivers of supply chain - continued

Benefits of supply chain

Supply chains are so complicated that you might wonder if there is some way of avoiding them.Sometimes this is possible, when we move products directly from initial producers to final customers

Benefits of supply chain:Overcome the gaps created when suppliers are some distance away from customers.Allow for operations that are best done – or can only be done – at locations that are distant from customers or sources of materialsProducers locate operations in the best locations, regardless of the locations of their customers.Producers can get economies of scale, by concentrating operations in large facilities.Producers do not keep large stocks of finished goods, as these are held further down the supply chain nearer to customers.Wholesalers place large orders, and producers pass on lower unit costs in price discounts.Wholesalers keep stocks from many suppliers, giving retailers a choice of goods.Wholesalers are near to retailers and have short lead times.

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Benefits of supply chain

Retailers carry less stock as wholesalers provide reliable deliveries.Retailers can have small operations, giving a responsive service near to customers.Transport is simpler, with fewer, larger deliveries reducing costs.Organisations can develop expertise in specific types of operation.Supply chains can also make movements a lot simpler:

Organizing logistics in a company

Logistics takes place in almost every organization taking many different forms

• Logistics in a classical view: the image with forklift trucks unloading pallets from lorries and moving them around warehouses

• Logistics in a bank: what kind of branch network to have, where to locate offices, who to buy telephone and other services from, how to deliver information to customers

Logistics can be arranged in many ways within an organization:

• Small organization: might have one person looking after everything

• Medium sized organization: might have one department with different sections for purchasing, transport, stock control, distribution etc

• Large organization: might have a logistics division employing thousands of people and running huge transport fleets.

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Organizing logistics in a company

integrated function product based organizing

Aims of logistics

Overall AIM OF LOGISTICS is to achieve high customer satisfaction. It must provide a high quality service with low – or acceptable – costs

Logistics adds value by making products available in the right place (place utility) and at the right time (time utility).

Aims of logistics: ‘the right materials, to the right place, at the right time, from the right source, with the right quality, at the right price’. What is ‘right’?

Logistics has to be flexible enough to satisfy a variety of needs. There are two concerns here:

- design the best possible supply chain - materials should move through this chain as efficiently as possible

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Effects on financial performance

Logistics involves expenses (costs). So, it has impact on an organisation’s overall financial performance

Assets:• current (cash, accounts receivable, stocks, and so on) or • fixed (property, plant, equipment, and so on).


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Current assetsLogistics reduces the current assets through lower stock levels. Reducing the investment in stock can also free up cash and reduce the need for borrowing.Fixed assetsFixed assets include property, plant and equipment. Warehouses, transport fleets, materials handling equipment and other facilities needed to move materials through the supply chain form a major part of fixed assets.SalesBy making a more attractive product, or making it more readily available, logistics can increase sales and give higher market share.Profit marginMore efficient logistics gives lower operating costs, and this in turn leads to higher profit margins.PriceLogistics can improve the perceived value of products – making them more easily available, giving faster delivery or shortening lead times. More attractive products can get premium prices.

How supply chains work: participantsProducers

Distributors

- organizations that make a product- two types:

- producers of raw materialsproducers of finished products:

-tangible products-intangible products

- producers of tangible products are moving to areas of the world where labor is less costly- producers in the developed world are increasingly producers of intangible products (at least a part of them)

- companies that take inventory in bulk from producers and deliver a bundle of related product lines to customers- are also known as wholesalers- typically sell to other businesses and they sell products in larger quantities than an individual consumer would usually buy- buffer the producers from fluctuations in product demand- fulfill the “Time and Place” function- most common activities carried out: promotion, sales, inventory management, warehouse operations, product transportation, customer support and post-sales service

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How supply chains work: participants

Retailers

Customers

Service providers

- stock inventory and sell in smaller quantities to the general public- tracks the preferences and demands of the customers- attract customers using some combination of advertising, price (discounts), product selection, service, and convenience

- any organization that purchases and uses a product- may purchase a product in order to incorporate it into another product- customer may be the final end user of a product who buys the product in order to consume it

- provide services to producers, distributors, retailers, and customers- have expertise and skills that focus on a particular activity needed by a supply chain- transportation services (trucking companies), warehousing services (public warehouse companies), financial services, market research, advertising,

How supply chains work: activities

Activities normally included in logistics:

Procurement or purchasing. The flow of materials through an organization is usually initiated when procurement sends a purchase order to a supplier

Main operations:

• finds suitable suppliers

• negotiates terms and conditions

• organises delivery

• arranges insurance and payment

• does everything needed to get materials into the organization

Inward transport or traffic: actually moves materials from suppliers to the organization's receiving area

Main operations:

• choose the type of transport (road, rail, air, and so on),

• find the best transport operator

• design a route

• make sure that all safety and legal requirements are met

• get deliveries on time and at reasonable cost, and so on

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Activities normally included:

Receiving makes sure that:

• materials delivered correspond to the order

• acknowledges receipt

• unloads delivery vehicles

• inspects materials for damage

• sorts materials

Warehousing or stores : moves materials into storage, and takes care of them until they are needed

Aims:

• makes sure that materials can be available quickly when needed

• makes sure that they have the right conditions, treatment and packaging

• special care for special materials (frozen food, drugs, chemicals, animals, and dangerous goods)

Stock control : sets the policies for inventory

It deals with:

• materials to store, overall investment, customer service, stock levels, order sizes, order timing etc



Order picking finds and removes materials from stores. Typically materials for a customer order are:

• located,

• identified,

• checked,

• removed from racks,

• consolidated into a single load,

• wrapped and moved to a departure area for loading onto delivery vehicles

Materials handling: moves materials through the operations within an organization

The aim of materials handling is to give :

• efficient movements,

• with short journeys,

• using appropriate equipment,

• with little damage, and

• using special packaging and handling where needed


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Outward transport takes materials from the departure area and delivers them to customers (with concerns that are similar to inward transport).

Physical distribution management is a general term for the activities that deliver finished goods to customers, including outward transport. It is often aligned with marketing and forms an important link with downstream activities.

Recycling, returns and waste disposal

Possible situations:

- A part of delivered materials were faulty, or too many were delivered, or they were the wrong type

- Pallets, delivery boxes, cable reels and containers which are returned to suppliers for reuse

- Some materials are brought back for recycling, such as metals, glass, paper, plastics and oils

Location

Some of the logistics activities can be done in different locations. Logistics has to:

- find the best locations for these activities a significant role in decisions

- calculate the size and number of facilities



Communication Logistics is also responsible for the information flow ASSOCIATED to materials flow:

- it links all parts of the supply chain

- passing information about products

- customer demand

- materials to be moved

- timing

- stock levels

- availability

- problems

- service levels


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Activities included in any logistics system (supply chain) could be grouped into three main activities:

•order processing

•inventory management

•freight transportation

Order processing, main operations:

• fill out and transmit the order form

• check the availability of requested items

• check the credit status of the customer

• items are retrieved from the stock or produced

• items are packed and delivered

• shipping documentation is emitted

• customer is kept informed about the order status

How supply chains work: main activities

How supply chains work

Inventory management:Inventories are stockpiles of goods waiting to be manufactured, transported or sold.

Advantages of holding inventories in a supply chain:

A good inventory management policy should take into account 5 issues: importance of customers, economic relevance of different products, transportation policies, production process flexibility, competitors’ policies

•Improving service level shorter lead time•Reducing overall logistics cost•Coping with randomness in customer demand and lead times•Making seasonal items available all over the year•Speculating on price variations•Overcoming inefficiencies in managing the logistics system

Main disadvantage of holding inventories: could be very expensive

The aim of inventory management is to determine stock levels in order to minimize total operating cost while satisfying customer service requirements

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Inventory and transportation strategies


Inventory and transportation strategies:

direct shipment

Definition:

goods are shipped directly from the manufacturer to the end-user (the retailers in the case of retail goods)

• eliminate the expenses of operating a DC

• reduce lead times

Advantage :

Disadvantage :

• A large fleet of small truck if shipments size are small and customers dispersed over a wide geographic area

Proper when :

• Fully loaded trucks are required by customers

• Perishable goods have to be delivered timely

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warehousing

Description:

Goods are received by warehouses and stored in tanks, pallet racks or on shelves. When an order arrives, items are retrieved, packed and shipped to the customer.

• reception of the incoming goods

• storage

• order picking

• shipping

Major functions :

Question:

Which of the four functions are most expensive and why?

Answer:

Storage and order picking are the most expensive because of inventory holding costs and labor costs, respectively



Crossdocking (just-in-time distribution)

Types of crossdocking :

• Predistribution crossdocking: goods are assigned to a retail outlet before the shipment leaves the vendor

• Postdistribution crossdocking: the crossdock itself allocates goods to the retail outlets

Definition:

Crossdocking uses a “crossdock”, which is a transshipment facility in which incoming shipments (possibly coming from several manufacturers) are sorted, consolidated with other products and transferred directly to outgoing trailers without intermediate storage or order picking

• sort• consolidate• No storage• No order picking

Major functions :Proper when :

High volumeLow variability of demandEasy-to-handle products

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Centralized vs. decentralized warehousing

Centralized:

a single warehouse serves the whole market

lower facility costs (economies of scale)

inbound transportation costs are lower

Decentralized:

several warehouses serve the zones the market is divided into

reduced lead times

outbound transportation costs are lower

Inbound transportation costs: the costs of shipping the goods from manufacturing plants to warehouses

Outbound transportation costs: the costs of delivering the goods from the warehouses to the customers

Centralized vs. decentralized warehousing

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How supply chains workfreight transportation

Importance:

• allows production and consumption to take place at locations that are several hundreds or thousands of kilometers away from each other

• stimulate direct competition among manufacturers from different countries

• companies take advantage of lower manufacturing wages in developing countries

• perishable goods can be made available in the worldwide market

• often accounts for even two-thirds of the total logistics cost

Transportation alternatives from manufacturer’s or distributor’s perspective:

1. Private transportation: the company operates a private fleet of owned or rented vehicles

2. Contract transportation: a carrier is in charge of transporting materials through direct shipments regulated by a contract

3. Common transportation: the company resorts to a carrier that uses common resources (vehicles, crews, terminals) to fulfill several client transportation needs


Distribution channels:

Is a path followed by a product from the manufacturer to the end-user. Bringing products to end-users may be a complex process .

Alternatives of distribution:

• Direct distribution: producer brings products to the end-users directly

• Intermediate distribution: intermediaries participate in product distribution

Few cases

Most used

Types of intermediaries:•Brokers or sales agents: are acting for the manufacturer•Wholesalers: purchase from manufacturers and resell to retailers•Retailers: sell to the end-users

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Freight consolidation:

-Generates logistics cost savings because of the scale economies

-Consolidates small shipments into larger ones

Types of freight consolidation:1. Facility consolidation: small shipments are consolidated (grouped) into

large shipments over long distances2. Multi-stop consolidation: small deliveries associated with different locations

are grouped in the same vehicle which has a multi-stop route 3. Temporal consolidation: scheduled shipments may be adjusted forward or

backward so as to make a single large shipment rather than several small ones

Modes of transportation: there are 5 classical modes

Ship

Rail

Truck

Air

Pipeline

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Tranportation modes can be combined so as to obtain a door-to-door services: intermodal carriers or small shipment carriers.

Intermodal transportation becomes efficient and effective when the materials (merchandise) are consolidated into pallets or containers. They have:

• standard dimensions: 80x100, 90x110, 100x120, 120x120 cm2 for pallets

• protect merchandise: containers may be refrigerated, ventilated, can transport liquids etc.

• facilitate handling at terminals

Modes of transportation

ShipRailTruckAir Pipeline

There are two fundamental parametres when selecting a carrier:

1. Price (cost)

The hierarchy of the most expensive transportation modes considering their costs:

2. Transit time

It is the time a shipment takes between its origin and its destination. It is influenced by the weather, traffic conditions etc.

Some transportation modes (air, ship) must be used jointly with other modes (truck) to provide door-to-door transportation service

How supply chains workModes of transportation

Rail

Characteristics:

• inexpensive (for long-distance movements)

• slow

• quite unreliable

• is commonly used for raw materials and low-value finished goods

Reasons of being a slow mover:

• convoys have low priority compared to passenger trains;

• direct train connections are quite rare;

• a convoy must include tens of cars in order to be worth operating

Truck

Characteristics:

• used for moving semi-finished and finished products

• has two variants:

• truckload (TL): the truck is fully loaded and moves materials directly from origin to destination

• less-than-truckload (LTL): shipments are much less than vehicle capacity and they have to be jointly loaded in consolidation terminals to reach the truck capacity

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TL

LTL

How supply chains workModes of transportation

Air

Characteristics:

• very fast

• it is slowed down by freight handling at airports

• is not competitive for short or medium haul shipments

• used for high-value products over very long distances

• it is used in conjuction with road transportation to provide door-to-door service

Improves the level of transportation services to clients.

Offers a reasonable trade-off between cost and transit time.

Intermodal transportation

There are several most used combinations of the five basic modes:

• air–truck (birdyback)

• train–truck (piggyback)

• ship–truck (fishyback)

Most common used load unit is container, which can be moved in two ways:

• containers are loaded on a truck and the truck is loaded onto a train, ship or airplane

• containers are loaded directly on a train, ship or airplane

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Supply chain integration

Integration within an organization

Integration along the supply chain

Arguments for integrationIn the past, organisations put all their effort into making products and gave little importance to the associated movement of materialsManagers recognised that transport and storage were neededThey were simply the unavoidable costs of doing business1962 Drucker:

Logistics: „the economy’s dark continent”Logistics: „The most sadly neglected, most promising area of … business”

Main reason for change: recognition that logistics was expensive logistics had been identified as a high cost function organisations should make significant savings

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These activities have traditionally been managed separately, so that anorganisation might have a distinct purchasing department, transport department,warehouse, distribution fleet, and so on



Being not correlated, logistics activities have different purposes:Purchasing might look for the most reliable suppliersInventory control might look for low unit costsWarehousing might look for fast stock turnoverMaterials management might look for easy handlingTransport might look for full vehicle loads

Problems will appear when the aims come into conflict:- Purchasing can reduce its administrative costs by sending fewer, larger orders to suppliers – but this increases stock levels and raises the amount of money tied up in the warehouse- Using sea transport rather than airfreight reduces transport costs – but increases the amount of stock held in the supply chain

If logistics is divided into separate functions, each part will move in a different direction, and there is duplicated effort and wasted resources.


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A fragmented supply chain has the disadvantages of:

giving different, often conflicting, objectives within an organisation

duplicating effort and reducing productivity

giving worse communications and information flows between the parts

reducing co-ordination between the parts – leading to lower efficiency, higher costs and worse customer service

increasing uncertainty and delays along the supply chain

making planning more difficult

introducing unnecessary buffers between the parts, such as stocks of work in progress, additional transport and administrative procedures

obscuring important information, such as the total cost of logistics

giving logistics a low status within an organisation.



Some organisations are tempted to stop when they reach an intermediary stage, and they work with two functions: materials management, aligned with production and looking after the inwards flow of raw materials and their movement through operations; and physical distribution, aligned with marketing and looking at the outward flow of finished goods.

Another factor that encourages internal integration is the analysis of total logistics cost

Total logistics cost = transport cost + warehouse cost + stock holding cost + packaging cost + information processing cost + other logistics overheads


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Stages of integration

•Stage 1: Separate logistics activities are not given much attention or considered important.

•Stage 2: Recognising that the separate activities of logistics are important for the success of the organisation.

•Stage 3: Making improvements in the separate functions, making sure that each is as efficient as possible.

•Stage 4: Internal integration – recognising the benefits of internal co‐operation and combining the separate functions into one.

•Stage 5: Developing a logistics strategy, to set the long‐term direction of logistics.

•Stage 6: Benchmarking – comparing logistics’ performance with other organisations, learning from their experiences, identifying areas that need improvement and finding ways of achieving this.

Stage 7: Continuous improvement – accepting that further changes are inevitable and always searching for better ways of organising logistics.



Benefits of integrating logistics within an organization can be extended for integrating logistics along the supply chain (external integration)

Concluding, we can talk about 3 levels of integration:

•Level 0: logistics seen as separate activities within an organization

•Level 1: internal integration to bring logistics activities together into a single function

•Level 2: external integration, where organizations look ahead of their own operations and integrate more inside the supply chain

Organizations within the same supply chain should CO-OPERATE to get final customer satisfaction. They should not compete with each other, but with organizations in other supply chains.

A fragmented supply chain generates an interesting multiplying effect: the bullwhip effect


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Some benefits from external integration could be:

•genuine co‐operation between all parts of the supply chain, with shared information and resources

•lower costs – due to balanced operations, lower stocks, less expediting, economies of scale, elimination of activities that waste time or do not add value, and so on

•improved performance – due to more accurate forecasts, better planning, higher productivity of resources, rational priorities, and so on

•improved material flow, with co‐ordination giving faster and more reliable movements

•better customer service, with shorter lead times, faster deliveries and more customisation

•more flexibility, with organisations reacting faster to changing conditions

•standardised procedures, becoming routine and well‐practiced with less duplication of effort, information, planning, and so on

•reliable quality and fewer inspections, with integrated quality management programmes

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Co-operation vs. Conflict

How supply chains workLogistics managerial issues

There are examples when logistics costs are 50-60% of total costs of a product

Capital reduction

Means to reduce as much as possible the level of investment in the logistics system (owned equipment and inventories).

It’s important to plan a logistics strategy

A reasonable compromise between Capital reductionCost reductionService level improvement

Possible ways:

• public warehouses instead of privately owned warehouses

• using common carriers instead of privately owned vehicles

!! Capital reduction determines higher operating costs

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Cost reduction

Means to minimize the total cost associated with transportation and storage.

!! Logistics service is expressed through order-cycle time

Order cycle time: the period of time between the moment a purchase order is issued and the moment the goods are received by the customer.

Service level improvement

Logistics service greatly influence the level of customer satisfaction. A satisfied customer has major impact on revenues.

The impact is greater in markets with homogeneous low-price products.

Service request Service providedOrder-cycle time

When a retailer outlet issues an order, the following events may occur:

(a) if the goods are available at the associated RDC, they will be delivered shortly;

(b) the RDC has to resupply its stocks by placing an order to the CDC; the shipment to the retailer will be further delayed

(c) goods are not available even at the CDC, the plants will be requested to produce them.


Let pa, pb and pc the probabilities of events a, b, c

Let fa(t), fb(t), fc(t) be the functions of the order-cycle time in case of events a, b and c

Function of the order-cycle time is then:

f(t) = pa*fa(t) + pb*fb(t) + pc*fc(t)

Emerging trends in logistics

Globalization

More companies operate at the world level to take advantage of lower manufacturing costs or cheap raw materials available in some countries.

Consequences on logistics:•As a result of globalization, transportation needs have increased. •Parts and semi-finished products have to be moved between production sites.•The increase in multimodal container transportation •More efficient design and management of supply chains, sometimes at the world level.

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How supply chains workEmerging trends in logistics

Information technologies

Consequences on logistics:•Suppliers and manufacturers make use of EDI share information about:

• stock levels,• timing of deliveries, • positioning of intransit goods in the supply chain

• At the operational level:• geographic information systems (GISs) • global positioning systems (GPSs) • on-board computers

keep track of the current position of vehicles and communicate with drivers

E-commerce

Means to make commercial transactions through the Internet: B2B or B2C transactions

E-commerce

Increase of direct deliveries between manufacturers and end-users

Decrease of volume of goods between producers and retailers

E-commerce E-logistics:•able to manage small/medium size shipments•to a large number of customers•scattered around the world

How supply chains workEmerging trends in logistics

E-commerce (continued)

The return flow of defective (or rejected) goods becomes a major issue (reverse logistics) in the context of e-commerce

E-logistics system has different approaches for operating warehouses and distribution. It operates with virtual warehouse and Points Of Presence In The Territory (POPITT)

Virtual warehouse: virtual facility where suppliers and distributors keep the stock of goods so as the e-commerce company ca fulfill its orders.

POPITT: a facility which stores already sold goods waiting to be picked up by customers and defective products waiting to be returned.

!! POPITT simplifies distribution management but reduces customer service level.

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How supply chains workLogistics decisions

When designing and operating a logistics system (supply chain), a lot of answers has to be found:• Should new facilities be opened?• What are their best configuration, size and location?• Where should materials and components be acquired and stored? • Where should manufacturing and assembly take place?• Should warehouses be company-owned or leased? • How should warehouses operate?• When and how should each stocking point be resupplied?• What mode of transportation should be used to transport products?• Should vehicles be company-owned or leased? • What is the best fleet size?• How should vehicles be routed?• Should some transportation be carried out by common carriers?

So, it’s time to take decisions …

According to the planning horizon, we have:

Strategic decisions

Strategic decisions have long-term effects (usually over many years). They include logistics systems design and the acquisition of costly resources (facility location, capacity sizing, plant and warehouse layout, fleet sizing).

How supply chains workLogistics decisions

Tactical decisions

Tactical decisions are made on a medium-term basis (e.g. monthly or quarterly) and include production and distribution planning, as well as resource allocation(storage allocation, order picking strategies, transportation mode selection, consolidation strategy).

Operational decisions

Operational decisions are made on a daily basis or in realtime and have a narrow scope. They include warehouse order picking as well as shipment and vehicle dispatching.

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Operations: Inventory management and strategy Importance of inventory decisions

The significance of inventory as percent of assets:

Because inventory is a significant cost center, the reduction of a firm's inventory commitment by a few percentage points can result in dramatic profit improvement.

Operations: Inventory management and strategy Inventory types and characteristics

Generally, inventory is risky and this depends on the firm’s position in the distribution channel.

Measures of inventory

Duration (time)

Depth

Width

Manufacturer:

-Inventory refers to: raw materials, component parts, work-in-process materials, finished goods- finished goods are stored in warehouses in anticipation of customer demand

There are situations when manufacturers are required to consign inventory to customer facilities => inventory risk is shifted to the manufacturer.

Inventory commitment

Long duration

Deep

Narrow (product range)

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Wholesaler:

-purchases large quantities from manufacturers and sells smaller quantities to retailers- economic justification: provide retail customers with assorted merchandise from different manufacturers in specific quantities

For seasonal products, the wholesaler has to keep inventory in advance of the selling season => increasing depth and duration of risk


Long to very long duration (for seasonal products)

Deep

Wide (product range from several manufacturers)

Retailer:

-inventory management is about buying and selling velocity-purchases a wide variety of products in small quantities having a high level of inventory turnover

inventory Average

sales AnnualvelocityInventory turnoverInventory


Retailer (continued):


Short duration

Not deep

Wide (variety of products)Specialty retailers vs. mass merchandisers: less width but much depth and duration

Inventory main functions:

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Operations: Inventory management and strategy Inventory related concepts

Inventory policy:

Is about what to purchase or manufacture, when to take action, and in what quantity.

Decisions related to inventory policy:1. Geographical inventory positioning

postpone inventory positioning by maintaining stock at the plant regional warehouses to have product closer to the market

2. Inventory management practice independently manage inventory at each stocking facility central inventory management of all stocking locations

Service level:

Measures the inventory performance in terms of:-Performance cycle (order cycle time): elapsed time between the release of a purchase order by a buyer and the receipt of the corresponding shipment-Case fill rate: the percent of cases or units ordered that are shipped as requested(from available stock)-Line fill rate: the percent of order lines filled completely-Order fill rate: the percent of customer orders filled completely


Service level (continued):

Alternative of providing high service level:-Increase inventory -Fast transportation-Collaboration with customers to reduce uncertainty

Average inventory:

Consists of materials, components, work-in-process, and finished product typically stocked in the supply chain.

Inventory levels must be planned for each facility and each product.

Order quantity:$70.000-$30.000= $40.000

Safety stock:$30.000

Performance cycle:From 0 to 1From 1 to 2

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Average inventory (continued):

Replenishment order: is initiated prior to the stock level reaches the minimum, so that inventory will arrive before an out-of-stock occurs.

Safety stock: is maintained in supply chain to protect against demand and performance cycle uncertainty. Safety stock inventory is used only at the end of replenishment cycles when uncertainty has caused higher than expected demandor longer than expected performance cycle times.

Average Inventory Over Multiple Performance Cycles:

Situation 1:-Order qty: 200-Reorder point: 100-Average inventory: 100-Performance cycle: 20


Average Inventory Over Multiple Performance Cycles:

What if replenishments are made more rarely? What if replenishments are made more often?

Smaller replenishment order quantities do result in lower average inventory, but there are also other factors that influence order quantity: performance cycle uncertainty, purchasing discounts, and transportation economies

The figures illustrates that average inventory is a function of the reorder quantity

Order quantity can be determined by balancing the cost of ordering and the cost of maintaining inventory (inventory carrying cost) : Economic Order Quantity (EOQ)

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Inventory carrying cost

Inventory carrying cost is the expense associated with maintaining inventory.

Generally, it is calculated by multiplying annual inventory carrying cost percent by average inventory value (purchase or manufacturing cost rather than selling price)

Relevant elements for inventory carrying cost percent computation:

- Capital costs: are based on expected return on investment for all funds available to an enterprise (hurdle rate). Any funds invested in inventory lose their earning power, restrict capital availability, and limit other investment.

- Taxes: the tax expense is usually a direct levy based on inventory level on a specific day of the year or average inventory level over a period of time

- Insurance: is an expense based upon estimated loss risk over time and depends on the product and the facility storing the product.

- Storage: is an expense related to product holding, allocated on the requirements of specific products .


Inventory carrying cost

The components of annual inventory carrying cost and typical range of component costs:

It should be clear that the final carrying cost percent used by a firm is determined by managerial policy.

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Operations: Inventory management and strategy Planning inventory

When to order

Means to setup the reorder point.

It can be expressed in units:

Or in terms of days: equals “T” (performance cycle in days).


How much to order

Answer: the ordering quantity that minimizes the total inventory carrying and ordering cost.

Economic Order Quantity:

Standard formulation for EOQ:

Co= Cost per order;Ci = Annual inventory

carrying cost;D = Annual sales volume,

units; andU = Cost per unit.

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How much to order (continued)

Example:

Ordering cost$152 (2400/300 x $19.00)Inventory carrying cost$150 [300/2 x (5 x 20%)]

The major assumptions:

(1) all demand is satisfied; (2) rate of demand is continuous,

constant, and known; (3) replenishment performance

cycle time is constant and known; (4) there is a constant price of

product that is independent of order quantity or time;

(5) there is an infinite planning horizon;

(6) there is no interaction between multiple items of inventory;

(7) no inventory is in transit; and (8) no limit is placed on capital

availability.



EOQ extensions:

3 typical situations determine a company to make adjustments on EOQ:• volume transportation rates• quantity discounts• other EOQ adjustments

Volume transportation rates:

• greater weight of order => lower the cost of transportation per unit• transportation-rate discount for larger shipments is common for both truck and rail• a firm naturally wants to purchase in quantities that offer maximum transportation economies • such quantities may be larger than EOQ

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Example:

Resulting EOQ from calculations: 300 unitsDesirable transportation rate is obtained when order quantity is 480 units

At EOQ = 480 units:• inventory carrying cost higher

• ordering cost lower

• transportation cost decreases because of the lower rate

• results a $570 savings on Total cost



EOQ extensions:

Quantity discounts

Some discounts on purchasing price could be acquired according to the volume of orders

Example of quantity discounts:

If the discount at any associated quantity is sufficient to make a tradeoff between increased inventory carrying cost and the reduced cost of ordering, then the quantity discount offers a viable alternative

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EOQ extensions:

Other EOQ adjustments:

1) production lot size: refers to the most economical quantities from a manufacturing perspective

2) multiple-item purchase: situations when more than one product is bought concurrently, so quantity and transportation discounts must consider the impact of product combinations

3) limited capital: budget limitations for total inventory investment

4) private trucking: the enterprise interest is to fully load the truck regardless of the EOQ

5) unitization: may be significant diseconomies when the EOQ is not a standard unit, such as pallets or cases. From a handling or transportation utilization perspective, it is probably more effective to order integer number of standard units

Operations: Inventory management and strategy Managing uncertainty

Demand uncertainty:

Forecasting estimates unit demand during the inventory replenishment cycle. Demand during replenishment cycle often exceeds or doesn’t reach what is anticipated

Formulation of inventory policy must realistically consider the impact of uncertainty. It could generate out-of-stock (stockout)

One of the main functions of inventory management is to plan safety stock to protect against out-of-stocks.

2 types of uncertainty, having direct impact on inventory:• demand uncertainty: variable daily sales• performance cycle uncertainty: variations on performance cycle time

When demand exceeds the forecast, safety stock is necessary to protect against stockout.

If demand doesn’t reach the forecast the stock is not consumed at the end of performance cycle => reorder quantity has to be lower or performance cycle longer

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Demand uncertainty:

Inventory performance cycle under conditions of demand uncertainty:

Cycle 1: although daily demand experienced variation, the average of 5 units per day was maintained Cycle 2: demand totaled 50 units in the first 8 days, resulting in a stockout; thus, no sales were possible on days 9 and 10 Cycle 3: demand was lower than the planned one; the performance cycle ended with remaining units in stock.

Performance cycle: 10 daysOrder quantity: 50 unitsDaily sales (forecasted): 5 units/day


Demand uncertainty:

1) stockouts occurred on 2 of 30 total days

Other aspects observed: 2) Since sales never exceed 10 units per day, no possibility of stockout exists on the first 5 days of the replenishment cycle

3) during the three performance cycles 10 units were sold on only one occasion

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Managing uncertainty

Safety stock calculation for demand uncertainty:We can create a table with demand values and their corresponding frequency:

A chart is possible to be created based on frequency of demand:

Given an expected average of 5 units per day, - demand exceeded average on 11 days - was less than average on 12 days


Safety stock calculation for demand uncertainty:

While a number of frequency distributions can be used in inventory control, the most basic is the normal distribution:

Essential characteristic of a normal distribution: mean (average), median (middle), and mode (most frequently observed) values are all the same

The basis for predicting demand in the case of normal distribution: standard deviation of observations around the central tendency.

Standard deviation has 3 levels of dispersion:• + 1 standard deviation: includes 68.27% of events• + 2 standard deviation: includes 95.45% of events• + 3 standard deviation: includes 99.73% of events

Standard deviation can be calculated as following:

Fi – frequencyDi – deviation from mean

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Safety stock calculation for demand uncertainty:

Example of standard deviation calculus:

The standard deviation of the data in table is rounded to 3 units

2 standard deviations of protection means 6 units, this is the necessary safety stock to have a 95.45 % protection of stockout.

σ = 2.54 units


Performance cycle uncertainty:

Performance cycle uncertainty appears when the company cannot assure constant delivery. It doesn’t have a constant value over multiple consequent cycles

In this situation the events considered are the performance cycle times and dispersions are calculated, as following:

Then, the standard deviation is:

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Performance cycle uncertainty:

The corresponding values for 1st standard deviation is + 2 days below and above the mean which is 10 days. For 2nd standard deviation the range is + 4 days around the average performance cycle.

1st standard deviation: in 68.27% of the time performance cycles fall between 8 and 12 days2nd standard deviation: in 95.45% of the time performance cycles fall between 6 and 14 days

For + 2 standard deviation the necessary safety stock amounts 20 units in the case of constant daily sales of 5 units (4 days above the average 10 performance days, which amounts 4x5=20 units of constant sales)

From a practical viewpoint, when cycle days drop below 10, no immediate problem exists with safety stock. If the performance cycle were consistently below the planned performance cycle over a period of time, then adjustment of performance cycle days is necessary.


Combined demand and performance cycle uncertainty

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Combined demand and performance cycle uncertaintyTreating both demand and performance cycle uncertainty requires combining two independent variables

First, it is necessary to determine the standard deviation of both daily demand and performance cycle uncertainty and then to approximate the combined standard deviation using the convolution formula


Combined demand and performance cycle uncertainty

Thus, given a frequency distribution of daily sales from 0 to 10 units per day and a range in replenishment cycle duration of 6 to 14 days, 13 units (1 standard deviation multiplied by 13 units) of safety stock is required to protect 84.14 percent of all performance cycles (68.27 plus the percentage of situations below 1st standard deviation)

To protect at the 97.72 percent level, a 26-unit safety stock is necessary. These percentages reflect the probability of a stockout during a given order cycle.

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Warehousing

Historical aspects and evolution

Warehouse functionality

Warehouse planning

Warehouse operations

Warehousing

Storage was performed by individual households

Historical aspects and evolution

Preindustrial era

As transportation capability developed

• storage shifted from households to retailers, wholesalers, and manufacturers • they didn’t care about strategic storage• little consideration to efficiency in space utilization, work methods, or materials handling

World War II

• attention toward strategic storage • reduction in warehousing was obtained as a result of manufacturing improvements (JIT concept)• strategically located warehouses • central warehouse => advantage of consolidated transportation• an important change in warehousing: maximum flexibility

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Warehousing

Warehousing functionality

5 basic economic benefits are:

Warehouses are efficient when they improve transportation efficiency and reduce overall logistics costs

Economic benefits

1) Consolidation and break-bulk2) Assortment3) Postponement4) Stockpiling5) Reverse logistics

Consolidation and break-bulk

The aim is to reduce transportation cost by using the warehouse capability tomake consolidation or break-bulk and consequently to profit from increasedshipment economies of scale.

Warehousing


Economic benefits Consolidation and break-bulk

Warehouse receives materials from a number of sources, which are combined into a large single shipment to a specific destination

Benefits could be:

Quicker delivery

Lower transportation charges

Lower products purchasing price

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Warehousing


Economic benefits Consolidation and break-bulk

A single large shipment and arranges for delivery to multiple destinations.

Assortment

Means freight reconfiguration

3 types: cross-dockingmixingassembly

Warehousing


Economic benefits Assortment

Combines inventory from multiple origins into an assortment for a specific customer.

The assortment is formed by different products combination, in different volumes accommodated to each customer requirements

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Warehousing



The end result similar to cross-docking.

During the mixing process, inbound products can be combined with those regularly stored at the warehouse.

Warehousing



Supports manufacturing operations.

Components are assembled by a warehouse located in close proximity to the manufacturing plant.

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Warehousing


Economic benefits Processing/Postponement

Final product configuration can be committed by warehouses once a specific customer order is received:

Packaging

Labeling

Light manufacturing

Economic benefits of postponement:

1) risk is minimized because customized packaging is not performed in anticipation

2) total inventory can be reduced by using inventory of the base product

Stockpiling

Economic benefit: accommodate seasonal production or demand

Examples:- Lawn furniture and toys: produced all year long, consumed during a short marketing period- Agricultural products: harvested at specific times, consumed throughout the year

Warehousing


Economic benefits Reverse logistics

It’s about:Product recall

Reclamation

Disposal of overstock

Difficulties:

- non-uniform individual packages and cartons- packages are often broken- product is not packaged correctly - significant manual sorting and inspection

Damaged inventory

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Movement continuity: - better longer moves than numerous short handlings- goods, once in motion, should be continuously moved until arrival at their final destination- exchange of the product between handlers wastes time and increases the potential for product damage

Warehousing

Warehouse operations: Handling & Storage

Handling

Strategic approaches:

Movement continuity Scale economies

Scale economies: - the idea is to move the largest quantities or loads possible instead of moving individual cases- procedures should be designed to move pallets and containers

Warehousing


Handling Main operations:

Receiving In-Storage Handling Shipping

Merchandise arrives (generally, large quantities) and:

1. The merchandise is floor stacked on the vehicle:

- products are manually placed on pallets or- placed on a conveyor

2. The merchandise is unitized on pallets or containers:

- lift trucks can be used to facilitate receiving

Receiving:

In-Storage handling:

Consists of movements within the warehouse for:- storage- order selection (order picking)- movement to the shipping area Two activity types:

- transfer movements- selection

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Warehousing


Handling

In-Storage handling (continued):

Transfer movements:

- from the receiving area to a storage location

- from storage to an order selection or picking area

- from the selection area to the shipping staging area

Selection:

- requires materials, parts, and products to be grouped to facilitate order assembly

- a special area of the warehouse has to be designed as selection or picking area to assemble orders

- for each order, the combination of products has to be created and packaged to meet specific customer requirements

Warehousing


Handling

Shipping:

Order verification Materials loadingConsists of:

Order verification: - is typically required when product changes ownership- verification may be:

- carton count - piece-by-piece check - serial number

Materials loading: -lift trucks or conveyors move products from the staging area into the transportation vehicle- shipping palletized products became popular because of considerable time saving- to facilitate this loading and subsequent unloading upon delivery, many customers are requesting that suppliers provide mixed combinations of product within a unit.

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Warehousing


Storage

The products should be positioned within a warehouse based upon:

product volume weight storage requirements.

Product volume:- major factor driving warehouse layout- high volume product should be positioned in the warehouse to minimize

movement distance: near doors, primary aisles, at lower levels in storage racks - position so as to minimize lifting operations

Product weight and special characteristics:- heavy items should be stored to the ground to minimize lifting - bulky or low-density product requires cubic space (along outside walls)- smaller items may require storage shelves, bins, or drawers

Warehousing


Storage

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Warehousing


Storage

Alternatives of storage: active vs. extended storage

Active storage:- when warehouses directly serve customers - provides sufficient inventory to meet the periodic demands- is usually related to the capability to achieve transportation or handling

economies of scale- require products to be quickly unloaded, de-unitized, grouped and sequenced into

customer assortments, and reloaded into transportation equipment

Extended storage:- means inventory in excess of that required for normal demand- for speculative, seasonal, or obsolete inventory- in some special situations, storage may be required for several months prior to

customer shipment: speculative purchases, discounts, product conditioning (ripen bananas, reach peak quality)

Warehousing

Warehouse planning

1) Site selection2) Design

Site selection

Typical areas in a community for locating warehouses:- commercial zone,- outlying areas served primarily by motor truck only,- central or downtown area.

Drivers in site selection:- land cost- among industrial plants and light or heavy industry areas- rail sidings- utility hookups- taxes- insurance rates- highway access- adequate room for expansion- necessary utilities available- soil must support the structure

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Warehousing

Warehouse planning

1) Site selection2) Design

Design

Relevant elements:- number of floors,- cubic utilization,- product flow- product-mix analysis- future expansion- materials handling system- layout or storage plan- sizing

Documents

Supply chain management