CUSTOMER ORIENTED APPROACH TO SCM · 1 CUSTOMER ORIENTED APPROACH TO SCM Prof. Dr. Em. Yvo M.I....

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CUSTOMER ORIENTED APPROACH TO SCM

Prof. Dr. Em. Yvo M.I. Dirickx

Faculty of Business and Economics

K.U.Leuven

Summer University ASB 2011

Yvo M.I. Dirickx

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CUSTOMER ORIENTED APPROACH TO SCM:

COURSE OUTLINE (1)

#1

(4/7)

INTRODUCTION TO SCM #6

(5/7)

DEVELOPMENT OF A CS-

STRATEGY – case TUBES (2)

#2

(4/7)

CUSTOMER SERVICE

SURVEY: EXERCISE

#7

(6/7)

CS AND INVENTORY

THEORY: REVIEW OF

TECHNIQUES (1)

#3

(4/7)


STRATEGY (1)

#8

(6/7)

CS AND INVENTORY

THEORY:

REVIEW OF TECHNIQUES (2)

#4

(5/7)


STRATEGY (2)

#9

(6/7)

CS- SERVICE CRITERIA IN

INVENTORY THEORY

#5

(5/7)


STRATEGY – case TUBES (1)

#10

(7/7)

CS-SERVICE CRITERIA:

exercises


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COURSE OUTLINE (2)

#11

(7/7)

PRESENTATIONS CASE

STUDY TUBES

#16

(11/7)

DESIGN OF DISTRIBUTION

NETWORKS: exercises (2)

#12

(7/7)

CHANNEL DESIGN ISSUES

IN DISTRIBUTION SYSTEMS

#17

(11/7)

SUPPLY CHAIN ANALYSIS

exercise ESPANA (1)

#13

(8/7)


NETWORKS: case BBC (1)

#18

(11/7)

SUPPLY CHAIN ANALYSIS

exercise ESPANA (2)

#14

(8/7)


NETWORKS: case BBC (2)

#19

(12/7)

SUPPLY CHAIN ANALYSIS:

case IBERICO (1)

#15

(8/7)


NETWORKS: exercises (1)

#20

(12/7)


case IBERICO (2)


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COURSE OUTLINE (3)

#21

(12/7)


case IBERICO (3)

#26

(14/7)

SCM: NEW

DEVELOPMENTS

#22

(13/7)

PRESENTATIONS CASE

STUDY IBERICO

#27

(14/7)

FINAL: THE FUTURE STORE

“END”

#23

(13/7)

INTEGRATION: case

AVIATION LUBRICANTS (1)

#24

(13/7)

INTEGRATION: case


#25

(14/7)

INTEGRATION: case



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INTRODUCTION (lecture #1)


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“SUPPLY CHAIN MANAGEMENT is a set of

approaches utilized to efficiently integrate suppliers,

manufacturers, warehouses, and stores, so that

merchandise is produced and distributed at the right

quantities, to the right location, and at the right time, in

order to minimize systemwide costs while satisfying

service level requirements.”

D. Simchi-Levi, P. Kaminksy, E. Simchi-

Levi (2008)


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KEY ISSUES IN SUPPLY CHAIN MANAGEMENT:

DESIGN OF DISTRIBUTION NETWORKS

INVENTORY CONTROL

PRODUCTION SOURCING

SUPPLY CONTRACTS

SUPPLY CHAIN INTEGRATION

OUTSOURCING/OFF-SHORING

CREATING CUSTOMER VALUE

IT and DSS


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CUSTOMER SERVICE SURVEY (lecture #2)

BACKGROUND: TUBES Inc is active in the US-

market, its main line of business is PVC plumbing

products. These products are used in both

residential and commercial construction. PVC

products account for roughly 95 % of the yearly

turnover of 750 million $.

It is one of the four largest

manufacturers/suppliers op plastic pipes and

fittings in the USA. Its headquarters and

manufacturing facilities are located in Cleveland

(OHIO Mid-West) with a staff of 1050 employees.

Beyond this it operates the following DC‟s:

DC

(# staff)

Throughput in

KM*1000

Atlanta GA

(18)

3 100

Cincinatti OH

(32)

12 100

Cleveland OH

(24)

4 360

Kansas City

(22)

3 930

Miami FL

(15)

2 750

Cliffwood NJ

(20)

4 040

Torrance CA

(15)

2 520

Seattle WA

(41)

20 465


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Import activities take place in Seattle and have mainly to do with the export

of faucets and other metal products that are produced in Taiwan.

Transport from the factory in Cleveland to the DC‟s is by train (except

shipments to the DC Cleveland, these are done by truck). Customers (DIY)

are served from the DC‟s by truck and usually ask for delivery within 5 days.

In the DC‟s certain added-value activities take place (re-packaging,

customization).


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THE CUSTOMER SERVICE SURVEY:TUBES has decided to ask a sample of customers in the Do-It-Yourself

supermarkets to take part in a customer service survey. The average sales volume of a DIY-supermarket is 30 000 000 US$. As a supplier TUBES accounts on the average for 25% of the sales volume of these DIY-supermarkets. The DIY-supermarket account for roughly 50% of Tubes‟ sales volume. Construction companies constitute the other half of Tubes‟ sales volumebut are not considered here.

In the survey 25 DIY customers of Tubes were asked to rank each specific item on a scale from 1 to 7 ( a “1” being completely unimportant, a “7” being of utmost importance). The 25 D-I-Y chains make up 80% of Tubes‟ sales in the D-I-Y market.


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EXERCISE:

EACH STUDENT GROUP (group size 3-4 persons) WILL ACT AS A D-I-Y CUSTOMER

OF TUBES AND WILL CARRY OUT THE CUSTOMER SERVICE (use a “Delphi”-like

approach).

THE RESULT OF THIS EXERCISE WILL BE USED AS INPUT FOR THE

DEVELOPMENTS IN THIS CHAPTER. (Despite of the “statistical” problem of having a

sample size – in practice one would need a sample size of +/- 25.)


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FACTOR SCORE

1. DISCOUNTS FOR EARLY PAYMENT

2. ADVANCED INFORMATION ON ORDER DELAYS

3. FAST CORRECTION OF BILLING ERRORS

4. SUPPLY CHAIN INTEGRATION

5. AUTOMATIC REPLACEMENT OF FAULTY DELIVERIES

6. CONSISTENCY OF DELIVERED TECHNICAL QUALITY


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FACTOR SCORE

7. FLEXIBLE RESPONSE TO EMERGENCY ORDERS

8. COMPUTER-TO-COMPUTER ENTRY

9. POSSIBILITIES FOR E-COMMERCE

10. ADVANCED NOTICE FOR SHIPPING DELAYS

11. INFORMATION ON INVENTORY POSITION

12. INFORMATION ON SHIPPING DATES


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13. INFORMATION ON DELIVERY DATES

14. INFORMATION ON SUBSTITUTE PRODUCTS

15. QUICK REACTION TO PRICE CHANGES

16. ADEQUATE/PROTECTIVE PACKAGING

17. QUICK REACTION TO COMPLAINTS

18. NO RESTRICTION ON ORDER SIZES

19. TECHNICAL EXPERTISE OF SALESPERSONS


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20. EXISTENCE OF REVERSE LOGISTICS PROGRAMMES

21. EHS-REPUTATION

22. POSSIBILITY FOR LONG-TERM CONTRACTS

23. PROXIMITY OF DC/WAREHOUSE

24. HIGH FREQUENCY OF DELIVERIES

25. POSSIBILITIES FOR DELIVERY IN FIXED TIME SLOTS

MEAN/

STANDARD DEVIATION


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THE DEVELOPMENT OF A CS-STRATEGY

(lectures #3-#4)

These two lectures contain three subjects:

1. The definition of customer service

2. The major elements of customer service

(based on work of LALONDE and ZINSZER)

3. A framework for developing a customer service strategy

(based on word of CHRISTOPHER)


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(lectures #3-#4)

ECONOMICS: Each consumer chooses a bundle of products and services that is “prefered” to all other possible bundles, given a specific budget. A preference structure ranks all possible consumption bundles. The “best” bundle is said to yield the maximal (budgetary feasible) possible utility level. So, products and services create utility to the consumer.

MANAGEMENT THEORY: In the literature four types of utility creation are identified (“management” –”customers”; “economics” – “consumers”):

1°. DESIGN UTILITY (manufacturing)

2°. PLACE UTILITY (logistics)

3°. TIME UTILITY (logistics)

4°. POSSESSION UTILITY (marketing)


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(lectures #3-#4)

DEFINITION OF CUSTOMER SERVICE: ALL ACTIVITIES OF A COMPANY TO

INCREASE THE UTILITY OF ITS PRODUCTS/SERVICES TO THE TARGETED

(SEGMENTATION) CUSTOMERS IS CALLED CUSTOMER SERVICE


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(lectures #3-#4)

KEY ASPECTS ARE ALWAYS:

- dependability: “do as you promise”

- flexibility: “do what the customer (really) wants”

- communication: “give precise information about everything relating to a customer

order”

A landmark study (1976!) of Lalonde and Zinszer distinguished three types of elements of

customer service:

1° pre-transaction elements (strategic level)

2° transaction elements (operational level)

3° post-transaction elementrs (reverse logistics)


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(lectures #3-#4)

CUSTOMER SERVICE ELEMENTS AT A STRATEGIC LEVEL - PRE-TRANSACTION

ELEMENTS

1. OPEN AND TRANSPARENT STATEMENT OF POLICY

2. INFORMATION STRATEGY ON THE CS-POLICY STATEMENT

3. ORGANISATIONAL STRUCTURE

4. CORPORATE GOVERNANCE RELATING TO CUSTOMER SERVICE


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(lectures #3-#4)

CUSTOMER SERVICE ELEMENTS AT AN OPERATIONAL LEVEL – TRANSACTION LEVEL

1. PROTECTION LEVELS IN INVENTORY MANAGEMENT (RULES FOR SAFETY

STOCKS – LECTURES (#7- #10)

2. ORDER INFORMATION

3. ORDER CYCLE ANALYSIS (REDUCTION OF ORDER CYCLE LENGTH AND

VARIABILITY – “QUALITY MANAGEMENT TECHNIQUES”)

4. EXPEDITION OF SHIPMENTS

5. TRANSSHIPMENTS BETWEEN INVENTORY LOCATIONS (WAREHOUSES)

6. PRODUCT SUBSTITUTION POLICIES


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(lectures #3-#4)

ELEMENTS OF CUSTOMER SERVICE – REVERSE LOGISTICS

1. RULES FOR INSTALLATION AND REPAIRS

2. SPARE PARTS MANAGEMENT

3. PRODUCT TRACING POLICIES

4. REACTION TO CLAIMS AND COMPLAINTS FROM CUSTOMERS

5. TEMPORARY REPLACEMENT OF PRODUCTS

6. GREEN LOGISTICS AND ECOLOGY


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(lectures #3-#4)

THE SIX STEPS OF

CHRISTOPHER:

1. IDENTIFY KEY COMPONENTS OF THE CS (these are the

items of the customer service survey- see lecture #1))

2. ESTABLISH THE RELATIVE IMPORTANCE OF THE

SERVICE COMPONENTS (simple statistical analysis of the CS-

survey, see lecture #1)


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(lectures #3-#4)

3. IDENTIFY COMPANY POSITION ON THE

SERVICE COMPONENTS IDENTIFIED IN

THE CS-SURVEY RELATIVE TO THE BEST

PRACTICE IN THE SECTOR

For each factor the company (in this case

TUBES) evaluates its performance and the

performance of the best competitor on a

scale from 1 to 7.

NOTE: in tables T= “Tubes” and

C= “Competitor”

T C T C

1.DISC 3 6 7.FLEX 5 3

2.ADV INFO 6 4 8.COMP 3 6

3.CORR 2 5 9.E-COMM 3 5

4.SCI 3 5 10.SHIPDEL 2 4

5.REPLAC 6 4 11.INF INV 3 5

6.QUAL 6 4 12.SHIPDAT 4 4


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(lectures #3-#4)

13.INFODELIVERY 5 4 22.LONG-TERM CONTRACTS 6 3

14.SUBST PROD 3 5 23.PROXIMITY DC 5 2

15.PRICE CHANGE 5 3 24.HIGH FREQ DEL 2 5

16.PACKAGING 5 7 25.TIME SLOTS 2 6

17.COMPLAINTS 3 5

18.ORDER SIZES 5 3

19.EXPERTISE SALES STAFF 6 3

20.REVERSE LOGISTICS 3 5

21.EHS 4 2


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(lectures #3-#4)

VARIANCE REDUCTION OF THE ORDER CYCLE:

IF IN SOME PART OF THE ORDER CYCLE ( order placement, order processing, order

preparation, order shipment) VARIABILITY INCREASES, ONE HAS TO CHECK THE

SOURCE OF VARIATION; THIS CAN BE DUE TO:

- ENVIRONMENTAL REASONS ( no control possible, hence no possibility for

improvement, e.g., external strikes, weather conditions, political turmoil,…)

- THE DESIGN OF THE SUPPLY CHAIN ( change and improve)

- CUSTOMER ATTITUDES (difficult!)


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(lectures #3-#4)

CONCEPT RELATIVE PERFORMANCE:

RP = P(T) – P(C)

If RP = -6, -5, -4, -3 = “-3-”

If RP = 3, 4, 5, 6 = “3+”


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(lectures #3-#4)

SCATTER DIAGRAM


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(lectures #3-#4)

4. SEGMENT THE CUSTOMERS BASED

ON THE RESULTS OF THE SURVEY (this is

technically completely the same as doing

segmentation in marketing research).

QUITE OFTEN A SIMPLE ABC-ANALYSIS

SUFFICES.

5. DESIGN THE STRATEGY FOR

IMPROVING CUSTOMER SERVICE.

USING THE SEGMENTATION AND THE

KEY FACTORS IDENTIFIED IN STEP 3

STRATEGIC OPTIONS CAN BE DEFINED.

EXAMPLE:

If CONSISTENT LEAD TIME is important to

the A-class customers and the company is

behind competition, the company may decide

to opt for the following:

-Decrease average lead time by 20% in the

coming year

-Decrease variability (range) for A-class

customer by 2.5 days.


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(lectures #3-#4)

6. ESTABLISH CS-MANAGEMENT AND CS-CONTROL PROCEDURES

These procedures should be inspired by creating leadership and commitment by setting goals

based on measurablevariables (success factors).

TQM should help.


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Each student group (size 3-4 persons) will develop a report with as topic:

“How to develop a coherent CS-strategy using the information on Tubes, the results of

the CS-survey while using the six Steps of Christopher”.

PLANNING: two sessions can be used for preparation; the final report is due on 06/07.

DEVELOPMENT OF A CS-STRATEGY FOR TUBES

- CASE STUDY –

(lectures #5 - #6)


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CS AND INVENTORY THEORY – REVIEW

(lectures #7 - #8)

Two topics will be discussed:

1. The EOQ model

2. The order-point/order-quantity system ((s,Q)-model)


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SC AND INVENTORY THEORY – REVIEW - EOQ

(lectures #6 - #7)

If for a single SKU the following assumptions hold:

a. the demand rate is constant and known

b. relevant costs are are constant (e.g., no inflation)

c. no discounts

d. the lead time is constant (or equivalently zero)

e. no backorders and complete deliveries

the standard Economic Order Quantity model (EOQ-model) holds.

Some of the above assumptions can be relaxed and the EOQ-model can be

generalized or the assupltions hold “approximately” and the EOQ-model can be

applied as an “approximation”.


(lectures #7 - #8)


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NOTATION:

Q = order quantity

A = fixed ordering cost

v = value/unit variable cost (depends on where the sku is in the supply chain)

r = carrying charge (€/€/year)

D= demand on a yearly basis (planning horizon is 1 year)

TOTAL COST FUNCTION:

TC(Q) = (A + Qv).(D/Q) + (Q/2).v.r

= A.D/Q + (Q/2).v.r + v.D

the third term is independent of Q, so the relevant cost function to be minimised is

A.D/Q + (Q/2)v.r.


(lectures #6 - #7)


(lectures #7 - #8)


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Slope = -DInitial inventory

Q

Q/D TIME

SC AND INVENTORY THEORY – REVIEW

(lectures #6 - #7)


(lectures #6 - #7)


(lectures #7 - #8)


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(lectures #6 - #7)

vrADEOQ /2

ADvrvDEOQTC 2)(

DvrADEOQmonthsSupplyTime /21212//)(

ADvrEOQDRATIOTURNOVER /22//


(lectures #6 - #7)CS AND INVENTORY THEORY – REVIEW

(lectures #7 - #8)


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EXAMPLE :

Suppose: D = 2 400 units per year

v = 12 €

A = 96 €

r = 0.24 (it takes 0.24€ to keep 1€ in inventory during one year)

Then:

TC(EOQ) = 1 152 + 28 800

Time-supply = 2

Turnover ratio = 12

Now suppose D increases with 15%, then the EOQ value changes with the square root of 1.15, i.e., 7.24%.

In general, the EOQ formula is robust to changes in demand (and other parameters).

40024.0*12/2400*96*2 EOQ


(lectures #6 - #7)



(lectures #7 - #8)


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SC AND INVENTORY THEORY – REVIEW – (s,Q)-model

(lectures #6 - #7)

DEFINTIONS:

ON-HAND STOCK: physical inventory

NET-STOCK: (on-hand- - (backorders)

INVENTORY POSITION: (on-hand) + (on-order) – (backorders) – (committed)

SAFETY STOCK: average level of the net-stock just before a replenishment arrives

Safety stock is a statistical concept!

The other extreme to backordering is lost-sales; this requires a different approach.


(lectures #7 - #8)


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(lectures #6 - #7)

Inventory position

TIMEA BL

The time interval is called

the replenishment cycle

s

Q


(lectures #7 - #8)


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(lectures #6 - #7)

SAFETY STOCK:

SS = E(Net-stock before replenishment)

Or:

where k is to be determined.

are determined from the forecasting system.

)(ˆ Lxs

)(ˆ)(ˆ)(ˆ LkLxSSLxs

)(ˆ)(ˆ LandLx


(lectures #7 - #8)


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(lectures #6 - #7)

ASSUME THAT THE DEVIATIONS FROM THE FORECASTED AVERAGE

DEMAND DURING THE LEAD TIME OBEY APPROXIMATELY A NORMAL

DEVIATION SO:

Now define

Pu(k) = the probability that a standard normal random variable takes on a value >= k.

Let now

THE PROBABILITY THAT A STOCKOUT OCCURS DURING THE LEAD TIME IS

Pu(k)!

))(ˆ),(ˆ()( LLxNormalLx

)(ˆ/))(ˆ)(( LLxLxu


(lectures #7 - #8)


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Normal(0; 1)

0,00

0,05

0,10

0,15

0,20

0,25

0,30

0,35

0,40

-2,5

-2,0

-1,5

-1,0

-0,5 0,0

0,5

1,0

1,5

2,0

2,5

< >2,3% 2,3%95,4%

-2,000 2,000

BestFit Student VersionFor Academic Use Only



(lectures #7 - #8)


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Pu(k=2) = 1 – 0,977 !


(lectures #6 - #7)


(lectures #7 - #8)


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)(2/

2/)(ˆ(2/)(

LkQ

SSQLxSQOHAV

It can be shown that


(lectures #6 - #7)


(lectures #7 - #8)


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THE THREE MAIN CRITERIA:

[P1]: a specified probability of no stockout per replenishment cycle OR a fraction

of the cycles in which no stockout occurs; for instance P1 = 0.95.

[P2]: a specified fraction of demand that is met (not lost or not backordered);

also called “fill rate” of fraction of demand that can be met from “shelves”; for

instance P2 = 0.90.

[TBS]: a specified average time between two consecutive stockouts; for instance

TBS = 3.5 months

Once one of the three criteria is specified,the other two can be determined! (See

later.)


(lectures #6 - #7)CS CRITERIA IN INVENTORY THEORY

(lectures #9 - #10)


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DEMAND IS STOCHASTIC BUT STATIONARY (i.e., average demand is constant).

THE REPLENISHMENT ORDER IS PLACED EXACTLY AT INVENTORY POSITION “s” (i.e., it is as if demand accours in sizes of one unit).

NO “CROSSING” OF OUTSTANDING ORDERS (i.e., lead time is constant).

THE AVERAGE LEVEL OF BACKORDERS IS SMALL COMPARED TO THE AVERAGE LEVEL OF ON-HAND STOCK.

DEVIATION OF DEMAND AROUND THE MEAN FORECAST HAS A NORMAL DISTRIBUTION:

s AND Q ARE DETERMINED INDEPENDENTLY (this is sub-optimal).

CS CRITERIA IN INVENTORY THEORY

(lectures #9 - #10)


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Fix P1.

Choose k such that Pu(k) = 1 – P1 (see Tables or Excel NORMSINV(P1)) so that:

Note that SS and s are independent of Q!

EXAMPLE A:

SSLxs

lkSS

)(ˆ

)(̂

761.751.13*28.13.58

178.16

28.110.0)(

1.13)(ˆ;3.58)(ˆ;90.01

ss

SSSS

kkPu

then

LLxP


(lectures #9 - #10)


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ASSUMPTION: backordering

ESRC = Expected number of Shortages per Replenishment Cycle

Q = order size

FRACTION OF UNITS BACKORDERED: ESRC/Q

P2 = 1 – ESRC/Q

In (s,Q)-system:

s

dxxfsxESCR

densityxf

LkLxs

)()(

)(

)(ˆ)(ˆ


(lectures #9 - #10)


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In fact

METHOD:

1) FIX P2

2) Select safety factor k such that:

3) 3. Set:

)0,1,0,()(ˆ)(1)((ˆ kNORMDISTLkNORMSDISTLkESCR

Q

kESCRP

)(12

)(ˆ)(ˆ LkLxs


(lectures #9 - #10)


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57750

761.64.11*58.0

58.0200

199.0

:

4.11)(ˆ

50)(ˆ

200

99.02

s

SSSS

ESRC

so

L

Lx

Q

P

EXAMPLE B:


(lectures #9 - #10)


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Let D(TBS) be the expected demand during TBS

IF Q/D(TBS) > 1: set k at the lowest permitted value (set by management)

IF Q/D(TBS) <=1: choose k such that

Pu(k) = Q/D(TBS)

EXAMPLE C:

2.779.183.58

19

9.181.13*44.1

44.1

075.02*200

30)(

1.13)(ˆ,3.58)(ˆ

30,200,2

s

SS

or

SS

k

kPu

LLx

QDyearsTBS


(lectures #9 - #10)


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EXAMPLE C (continued):

• EXAMPLE D:

985.030/1.13*03356.0130

1.13*)44.1(12

92.007493.011

)44.1(11

GuP

P

PuP

75.020.0*200/30)84.0(*/

95.00485.0130/13*)84.0(12

84.02.0)(

13)(ˆ,58)(ˆ

30

200

8.01

PuDQTBS

GuP

kkPu

LLx

Q

D

P


(lectures #9 - #10)


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(lectures #9 - #10) – exercises (delivered by the beginning of the

session)


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PRESENTATIONS OF

CASE STUDY TUBES (lecture #11)

Each student group will have 15 minutes to present its report on “A CS-strategy for

Tubes”.


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SUPPLY CHAIN DESIGN ISSUES

(lecture #12)

A CHANNEL OF DISTRIBUTION IS DEFINED AS THE COLLECTION OF

ORGANISATIONAL UNITS (INTERNAL AND EXTERNAL) WHICH PERFORMS THE

FUNCTIONS INVOLVED IN PRODUCT MARKETING (buying, selling, transporting,

storing,providing informatin).

THE CHANNEL OF DISTRIBUTION IS, IN FACT, THE “INSTITUTIONAL” DESCRIPTION

OF THE OUTBOUND SUPPLY CHAIN.

CHANNEL DESIGN DEPENDS ON: market characteristics and product characteristics.

OFTEN CERTAIN FUNCTIONS ARE OUTSOURCED TO INDEPENDENT

INTERMEDIARIES FOR THEIR EFFICIENCY AND SPECIALISATION


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(lecture #12)

S. = SUPPLIER; W.= WAREHOUSE. DC.= DISTRIBUTION CENTER. C.= CUSTOMER “ZONE”

S1 S2 S3 S4

W1 W2

DC1 DC2

C1 C2 C3 C4 C5


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“FROM 5 * 5 TO 5 + 5”


(lecture #12)

S1 S2 S3 S4

C1 C2 C3

S5

C4 C5

DC


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(lecture #12)

INTENSIVE DISTRIBUTION (USUALLY MULTI-LEVEL) : common lager beer (Stella Artois

- Belgium, Carlsberg - Denmark, Kronenbourg - France, …..

EXCLUSIVE DISTRIBUTION: ROLEX watches, PORSCHE cars, ...

SELECTIVE DISRIBUTION (in between the previous extreme forms):

Stella Artois – UK, CARLSBERG - Belgium, Bordeaux wines - global, …

OTHER EXAMPLES: gasoline, travel agencies (e-commerce), Coca-Cola,…


Yvo M.I. Dirickx

63


(lecture #12)

TYPE OF BUYING BEHAVIOR: SUPER-

MARKETS

CON-

VENIENCE

STORES

SPECIALTY

STORES

MOST READILY AVAILABLE BRAND AT

MOST ACCESSIBLE STORE

SELECTION FROM ASSORTMENT AT MOST

ACCESSIBLE STORE

FAVORITE BRAND FROM CLOSEST STORE

HAVING ITAM IN STOCK

COMPARISON (price/service) ACROSS/

STORES/BRANDS or BOTH

PREFERENCE FOR ONE STORE (CHAIN)

INDIFFERENT OF BRANDS


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64


(lecture #12)

PRODUCT TYPES: bottles/cans/barrels/taps/gasoline … (carrier choice, POS, type of WH-DC)

1. Value/volume: low/medium/high

2. Technicality:low/high

3. Market acceptance: low/high

4. Substitute products: own/competitors/both

5. Possibility for bulk transport: yes/no

6. Perishability: low/medium/high

7. Seasonalities and special events:

high/low and few/many

8. Regional distribution of demand: little/a lot


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65

DESIGN OF DISTRIBUTION NETWORKS:

case BBC

(lectures #13 - #16)

BBC brews beer at three plants: in Los Angeles, in New

York and in Saint-Louis. The annual production capacity

(in multiples of 1 000 000 hectoliter) of each brewery is

as follows:

The variable cost of producing one liter of beer at any

plant is 0.30$.

Beer can be stored in five potential warehouse sites:

Philadelphia, Chicago, Atlanta, Indianapolis and Kansas

City. The handling capacity is between 4.8 and 10 per

year.

9NEW YORK

8SAINT LOUIS

7LOS ANGELES


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66


case BBC


The annual operating cost (AOC) is identical for each warehouse and, as a function of throughput or the total amount of beer shipped (SHIP) is:

AOC = 0.899 + 0.512 SHIP

0.899 is the fixed cost (in millions of $)

0.512 $/hl is the variable cost

BBC ships its beer to six distributors. For administrative reasons, each distributor must receive all its beer from a single warehouse. The annual amount of beer required by each distributor is given in the table.

Assume that monthly demand is relatively constant.

6. SAN FRANCISCO: 55. DALLAS: 3.5

4. DENVER: 23. DETROIT: 4

2. MEMPHIS: 2.51. BOSTON : 2


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The cost per liter of transporting beer (COST/LITER) depends on the distance (MILES).

Cost analysis reveals that: COST/LITER = 0.0202 SQRT(MILES)

The road distance between each plant and potential warehouse site is as follows:

257235541289868StL

15892073218220542706LA

1198712841802100NY

KANINDATLCHICPHIL


case BBC



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The road distance between each potential warehouse site and distributor is as follows:

18354896007434511391KAN

22568651058278435906IND

249679513986993711037ATL

2142917996266530 963CHIC

2866145216915761000296PHIL

SAN FRAN

DALLAS DENVERDETROITMEMPHISBOSTON


case BBC



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A POSSIBLE NETWORK ….

NY-1 LA-2 StL-3

PHIL-1 CHI-2 ATL-3 IND-4

BO-1 MEM-2 DETR-3 DENV-4 DAL-5 SF-6

KAN-5


case BBC



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FLOW VARIABLES FROM PLANTS TO POTENTIAL WAREHOUSE SITES:

x11 = AMOUNT SHIPPED FROM PLANT NY-1 TO WAREHOUSE SITE PHIL-1,

x24 = AMOUNT SHIPPED FROM PLANT LA-2 TO WAREHOUSE SITE IND-4,

etc.

If there are no shipments on a link, for instance SL-3 to KAN-5, then x35 = 0.

If a warehouse site remains closed, say ATL-3, then x13 = x23 =x33 = 0.

FLOW VARIABLES FROM POTENTIAL WAREHOUSE SITES TO THE DISTRIBUTORS:

y24 = AMOUNT SHIPPED FROM WH CHI-2 TO DISTRIBUTOR DENV-4,

etc.

If, for instance, IND-4 remains closed then x41 = x42 = x43 = x44 = x45 = x46 = 0.


case BBC



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71

DESIGN VARIABLES RELATING TO WAREHOUSES:

V1 = 0 MEANS WAREHOUSE PHIL-1 REMAINS CLOSED.

Otherwise,

V1 = 1 MEANS WAREHOUSE PHIL-1 IS OPENED.

V2 AND V3 ARE DEFINED SIMILARLY.

LINKS BETWEEN WAREHOUSE AND DISTRIBUTORS:

W34 = 1 MEANS THAT WH ATL-3 SERVES DISTRIBUTOR DENV-4 THUS

W14 = W24 = W44 = W54 = 0 !

W34 = 0 MEANS THERE IS NO TRANSPORT BETWEEN ATL-3 and DEN-4

ALL THESE VARIABLES DRIVE THE OPTIMIZATION OF THE NETWORK.

JUST FOR THE PURPOSE OF INFORMATION THE MODEL IS SHOWN IN THE NEXT SLIDES.


case BBC



Yvo M.I. Dirickx

72

min

0.20x11 + 0.57x12 + 0.58x13 + 0.53x14 + 0.69x15

+ 1.04x21 + 0.91x22 + 0.93x23 + 0.91x24 + 0.80x25

+ 0.59x31 + 0.34x32 + 0.47x33 + 0.31x34 + 0.32x35

+ 0.34y11 + 0.63y12 + 0.48y13 + 0.82y14 + 0.76y15 + 1.07y16

+ 0.62y21 + 0.46y22 + 0.33y23 + 0.63y24 + 0.61y25 + 0.92y26

+ 0.64y31 + 0.39y32 + 0.53y33 + 0.75y34 + 0.56y35 + 1.00y36

+ 0.60y41 + 0.42y42 + 0.34y43 + 0.65y44 + 0.59y45 + 0.95y46

+ 0.75y51 + 0.43y52 + 0.55y53 + 0.49y54 + 0.44y55 + 0.86y56

+ 0.90v1 + 0.90v2 + 0.90v3 + 0.90v4 + 0.90v5

subject to

x11 + x12 + x13 + x14 + x15 < 9

x21 + x22 + x23 + x24 + x25 < 7

x31 + x32 + x33 + x34 + x35 < 8

x11 + x21 + x31 - y11 - y12 - y13 - y14 - y15 - y16 = 0

x12 + x22 + x32 - y21 - y22 - y23 - y24 - y25 - y26 = 0

x13 + x23 + x33 - y31 - y32 - y33 - y34 - y35 - y36 = 0

x14 + x24 + x34 - y41 - y42 - y43 - y44 - y45 - y46 = 0

x15 + x25 + x35 - y51 - y52 - y53 - y54 - y55 - y56 = 0

w11 + w21 + w31 + w41 + w51 = 1

w12 + w22 + w32 + w42 + w52 = 1

w13 + w23 + w33 + w43 + w53 = 1


case BBC



Yvo M.I. Dirickx

73

w14 + w24 + w34 + w44 + w54 = 1

w15 + w25 + w35 + w45 + w55 = 1

w16 + w26 + w36 + w46 + w56 = 1

2w11 + 2.5w12 + 4w13 + 2w14 + 3.5w15 + 5w16 - 4.8v1 > 0

2w21 + 2.5w22 + 4w23 + 2w24 + 3.5w25 + 5w26 - 4.8v2 > 0

2w31 + 2.5w32 + 4w33 + 2w34 + 3.5w35 + 5w36 - 4.8v3 > 0

2w41 + 2.5w42 + 4w43 + 2w44 + 3.5w45 + 5w46 - 4.8v4 > 0

2w51 + 2.5w52 + 4w53 + 2w54 + 3.5w55 + 5w56 - 4.8v5 > 0

2w11 + 2.5w12 + 4w13 + 2w14 + 3.5w15 + 5w16 - 10v1 < 0

2w21 + 2.5w22 + 4w23 + 2w24 + 3.5w25 + 5w26 - 10v2 < 0

2w31 + 2.5w32 + 4w33 + 2w34 + 3.5w35 + 5w36 - 10v3 < 0

2w41 + 2.5w42 + 4w43 + 2w44 + 3.5w45 + 5w46 - 10v4 < 0

2w51 + 2.5w52 + 4w53 + 2w54 + 3.5w55 + 5w56 - 10v5 < 0

y11 - 2w11 = 0

y21 - 2w21 = 0

y31 - 2w31 = 0

y41 - 2w41 = 0

y51 - 2w51 = 0

y12 - 2.5w12 = 0

y22 - 2.5w22 = 0

y32 - 2.5w32 = 0

y42 - 2.5w42 = 0


case BBC



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74

y52 - 2.5w52 = 0

y13 - 4w13 = 0

y23 - 4w23 = 0

y33 - 4w33 = 0

y43 - 4w43 = 0

y53 - 4w53 = 0

y14 - 2w14 = 0

y24 - 2w24 = 0

y34 - 2w34 = 0

y44 - 2w44 = 0

y54 - 2w54 = 0

y15 - 3.5w15 = 0

y25 - 3.5w25 = 0

y35 - 3.5w35 = 0

y45 - 3.5w45 = 0

y55 - 3.5w55 = 0

y16 - 5w16 = 0

y26 - 5w26 = 0

y36 - 5w36 = 0

y46 - 5w46 = 0

y56 - 5w56 = 0

End

! All wij and vi were declared as (0,1)-variables.


case BBC



Yvo M.I. Dirickx

75

OBJECTIVE FUNCTION VALUE

1) 19.49500

VARIABLE VALUE REDUCED COST

W11 1.000000 3.690000

W12 0.000000 4.175000

W13 1.000000 6.080000

W14 0.000000 -1.910000

W15 1.000000 7.680000

W16 0.000000 -2.800000

W21 0.000000 3.810000

W22 0.000000 -4.175000

W23 0.000000 4.600000

W24 0.000000 0.790000

W25 0.000000 1.380000

W26 0.000000 4.100000

W31 0.000000 0.930000

W32 0.000000 0.000000

W33 0.000000 0.000000

W34 0.000000 0.790000

W35 0.000000 6.595000


case BBC



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76

W36 0.000000 13.750000

W41 0.000000 3.710000

W42 0.000000 3.025000

W43 0.000000 4.520000

W44 0.000000 -2.810000

W45 0.000000 6.210000

W46 0.000000 0.000000

W52 1.000000 3.075000

W53 0.000000 5.400000

W54 1.000000 3.370000

W51 0.000000 0.930000

W55 0.000000 5.720000

W56 1.000000 12.400000

V1 1.000000 0.900000

V2 0.000000 0.900000

V3 0.000000 0.900000

V4 0.000000 0.900000

V5 1.000000 0.900000

X11 9.000000 0.000000

X12 0.000000 0.590000

X13 0.000000 0.490000

X14 0.000000 0.580000

X15 0.000000 0.730000


case BBC



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77

X21 0.500000 0.000000

X22 0.000000 0.090000

X23 0.000000 0.000000

X24 0.000000 0.120000

X25 1.500000 0.000000

X31 0.000000 0.030000

X32 0.000000 0.000000

X33 0.000000 0.020000

X34 0.000000 0.000000

X35 8.000000 0.000000

Y11 2.000000 0.000000

Y12 0.000000 0.000000

Y13 4.000000 0.000000

Y14 0.000000 3.210000

Y15 3.500000 0.000000

Y16 0.000000 3.490000

Y21 0.000000 0.000000

Y22 0.000000 2.950000

Y23 0.000000 0.000000

Y24 0.000000 1.450000

Y25 0.000000 1.430000

Y26 0.000000 1.740000


case BBC



Yvo M.I. Dirickx

78

Y31 0.000000 1.570000

Y32 0.000000 1.320000

Y33 0.000000 1.460000

Y34 0.000000 1.680000

Y35 0.000000 0.000000

Y36 0.000000 0.000000

Y42 0.000000 0.000000

Y43 0.000000 0.000000

Y44 0.000000 3.240000

Y41 0.000000 0.000000

Y45 0.000000 0.000000

Y46 0.000000 2.560000

Y51 0.000000 1.550000

Y52 2.500000 0.000000

Y53 0.000000 0.000000

Y54 2.000000 0.000000

Y55 0.000000 0.000000

Y56 5.000000 0.000000


case BBC



Yvo M.I. Dirickx

79

The brewery in Los Angeles is “marginal”.

The distribution centers in Chicago, Atlanta and Indianapolis remain closed.

PHIL serves Boston, Detroit and Dallas; KAN Memphis, Denver and San Francisco

The level of the flow variables: NY-1 TO PHIL-1: 9; LA-2 TO PHIL-1: 0.5; LA-2 TO KAN-5: 1.5;

StL-3 TO KAN-5: 8;

PHIL-1TO BO-1: 2; PHIL-1 TO DET-3: 4;PHIL-1 TO DA-5: 3.5; KAN-5 TO ME-2: 2.5; KAN-5 TO

DEN-4: 2; KAN-5 TO SF-6: 5.

NY-1(cap9) LA-2(cap7) StL-3(cap8)

PHIL-1 CHI-2 ATL-3 IND-4 KAN-5

BO-1(dem2) ME-2(dem2.5) DET-3(dem4) Den-4(dem2) DA-5(dem3.5) SF-6(dem5)


case BBC



Yvo M.I. Dirickx

80

EXERCISE 1: Suppose the transportation costs from the brewery in Los Angeles to

all warehouses decrease with 25%. Use EXCEL to determine the optimal network

structure. Compare it to optimal solution of the base case.

EXERCISE 2: What happens to the model of the base case if the transportation costs

on the leg LA –CHIC drop from 0.91 to 0.45? (Use the EXCEL model of exercise 1.)


case BBC

(lectures #13 - #16) -EXERCISES


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81

SUPPLY CHAIN ANALYSIS : LA CASA CATALUNYA


La Casa Catalunya - located in Dusseldorf (Germany) - is a well-known German-Spanish company specialised in selling speciality food products in Belgium, in the Southern part of the Netherlands and in the Western part of Germany. The total population in its area of activity is roughly 45 million.

Since the start of its operations in the late 1980's, the key success factor of the company was the clever use of the gastronomical reputation of the Catalunya region.

Casa Catalunya deliveres its products directly to 350 retail outlets spread (assume evenly) over the region.

Its product line covers specialty sausages, ham, dried fruits, liquors and so on.

A great part of its competitive strength can be found in two products: SALAMI "CATALAN" and SALAMI "IBERICO" with a sales volume of, respectively, 6 775 000 € and 4 350 000 €during last year. During the present year figures indicate a 25 % and a 15 % growth over last year‟s level for the two brands, respectively.


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82

Cervantes SA, located in Barcelona, supplies both types of salami. The supplier delivers both salami varieties according to the very specific requirements of Casa Catalunya. The vacuum packed products are packaged for safe shipments to the retail outlets

Both products are purchased from Cervantes SA on FOB origin bases and sold to the retail outlets on a FOB destination basis. Approximately 40 % of the sales revenue are attributable to direct variable costs for both products; 60% of the direct variable costs are raw materials (the ingredients). These percentages are expected to hold for the next few years.

SUPPLY CHAIN ANALYSIS : LACA CATALUNYA

(lectures #17 - #21) SUPPLY CHAIN ANALYSIS : LA CASA CATALUNYA



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83

Both products can be refrigerated for up to 3 weeks without spoiling. However, this does

not permit the company to engage in forward buying; also freezing costs are relatively high.

Consequently, Casa Catalunya purchases the salami products in simple economic order

quantities.

IBERICO and CATALAN are sold to retail outlets for 4.00 € and 3.50 € per kilo respectively.

CATALAN‟s next year‟s sales, after several years of growth, are expected to remain at this

year‟s level. However, due to some planned promotions and better positioning in

advertising, a 30% sales increase is expected for the IBERICO product line.




Yvo M.I. Dirickx

84

It takes on the average 8 days for the railroad freezer cars ("door to door" involves partial

transport by trucks) from the Cervantes' factory in Barcelona to Dusseldorf where Casa

Catalunya operates its only centralised distribution center. It takes, on the average, another

two days to deliver the goods to the various retail outlets; transport is carried out by

commercial trucks.

IBERICO is shipped in cases of 25 kilo; CATALAN is shipped in 30 kilo cases.




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85

The inventory carrying costs and the in-transit inventory carrying costs (both expressed as a proportion of the raw materials costs) are 30 % and 25% per year.

The order processing costs are an estimated 20 € per order.

Casa Catalunya pays 8 € per hundred kilos for the refrigerated transport from Barcelona to Dusseldorf ; it pays an average of 12 € per hundred kilos of goods shipped by the commercial trucks (LTL shipments to stores on a daily basis).




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86

MAJOR ISSUES

The management of Casa Catalunya focused on two supply chain issues for the next year.

In the present year the company found itself out of stock of CATALAN on several

occasions while fresh goods were in transit. In view of the sales volume of CATALUNYA,

the company wants to minimise its cost of lost sales by determining the best reorder point

and the best order size. Future losses associated with a stockout position are estimated at

7 € per case in addition to the immediate contribution margin losses.

The accounting department reviewed 50 consecutive working days to estimate the daily

demand distribution from the retailers of the present year, - results are shown in TABLE 1

(fictitious!!)




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87

TABLE 1 : DEMAND FOR CATALAN DURING

THE LEAD TIME

Demand (kilo) Number of cases Frequency of

demand

5 400 180 6

6 060 202 8

6 720 224 22

7 380 246 8

8 040 268 6




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88

The current reordering policy for CATALAN is to reorder as soon as the on-hand inventory drops below 1 200 kilo, i.e., 40 cases. Management wants to use this information to determine: (i) the optimal reorder point and (ii) the optimal order quantity.

For the IBERICO product, management wants to evaluate an alternative mode of transportation, namely, the use of company-owned private trucks.

A company-owned truck is expected to cost 1 450 € per trip with a capacity of holding a maximum of 1 290 cases of IBERICO. (Note that both products are shipped separately.) Each trip ("door to door") is expected to take 4 days, i.e., from Barcelona to Dusseldorf. The empty haul from Dusseldorf to Barcelona takes 2.5 days. Deliveries to the retail outlets are left to the commercial ("third party") trucks.




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ISSUES TO BE RESOLVED

A. CATALAN Brand

Information: Average transit time (Barcelona-Dusseldorf)

= 8 DAYS

Standard Deviation (Barcelona-Dusseldorf) = 2 DAYS

Alternatives: Set [S1] = 0.84, 0.933 or 0.99.

QUESTION: What service level to use?

B. IBERICO Brand

QUESTION: Should Casa Catalunya continue with railroad transport or switch to

company-owned fleet?




Yvo M.I. Dirickx

90

Symbols

r = 0.30/yr

rI= 0.25/yr

A = 20 €

v(ca) = 3.50€/kg * 30 kg/case = 105.0 €/case

v(ib)= 4.00€/kg * 25 kg/case = 100.0 €/case

W = 360 days/yr

C = truck capacity = 1290 cases

CATALAN (1)

Revenue from 1 case: 105.0 €/case. This covers:

(1) Direct variable costs: 42.00€, with 25.20€ raw materials (ingredients);

(2) Fixed costs and indirect variable costs: 63.00€




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91

CATALAN (2)

Forecast for next year:

Annual volume:

6 775 000 €/yr * 1.25 * 1 = 8 469 000 €/yr, hence 2 420 000 kg/yr, or d(ca) = 80 660 cases/yr

Average daily case volume:

µ=d(ca)/w= 225 cases/day

EOQ (in Dusseldorf):

Note: we used v(ca)!!

casesrcavcaAd 321)(/)(2




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92

CATALAN (3)

See table 1:

Average daily sales: µ(s) = 224.0 cases/day

Daily sales standard deviation: σ(s) = 26 cases/day




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93

CATALAN (4)

(1) The lead time is a stochastic variable with average µ(l) = 8 days and a standard deviation σ(l) = 2 days.

The lead time demand is a stochastic variable with average value x(c) and standard deviation σ(c) determined by the following formula:

(2) If S1 = 93.3 % then “k” = 1.5 and SS = k * σ(c) = 681 cases.

caseslsµslµc

casessµlµcµ

6.453)(*)()()()(

1792)(*)()(

222




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94

CATALAN (5)

If S1 = 99%, then SS = 1056 cases.

If S1 = 84%, then SS = 452 cases.

So, for example is S1 = 93.3 %, the reorder point R = µ(c) + SS = 2473 cases.




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95

CATALAN (6): TOTAL LOGISTICS COSTS

Inventory carrying costs:

CYCLE STOCK: [EOQ,)]/2 * r * v(ca) = 5 055 €/yr

SAFETY STOCK (S1=93.3): SS * r * v(ca) = 21 450 €/yr

IN-TRANSIT:

Barcelona - Dusseldorf: (8/360) * d(ca) * rI * v(ca) = 47 050 €/yr

Dusseldorf - "RETAIL": (2/360) * d(ca) * rI *v(ca) = 11 760 €/yr

Ordering costs:

A * d(ca)/EOQ = 5 025 €/yr




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96

Transportation costs:

Barcelona - Dusseldorf:

0.08€/kg * 30 kg/case * d(ca) = 193 600 €/yr

Dusseldorf - "RETAIL":

0.12€/kg * 30 kg/case * d(ca) = 290 400 €/yr

TOTAL LOGISTICS COSTS: 574 340 €/yr




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CATALAN (7): CHOICE OF THE SERVICE

LEVEL

S1-value S2-value SS-cost Lost sales

+margin

(7€+63€)

84% 88% 452*r*v(ca) =

14 238 €

70*0.12*d(ca)

= 677 544 €

93.3% 96% 681*r*v(ca)

= 21 451 €

70*0.04*d(ca)

= 225 848 €

99% 99.6% 1056*r*v(ca)

= 33 264 €

70*0.004*d(ca)

= 22 584 €




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STUDENT GROUPS WILL CARRY OUT THE ANALYSIS FOR THE PRODUCT

IBERICO ( see MAJOR ISSUES).

THREE SESSIONS WILL BE DEVOTED TO THE ANALYSIS OF THE CASE AND

REPORT WRITING.




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INTEGRATION CASE : AVIATION LUBRICANTS


AVIATION LUBRICANTS INTERNATIONAL

EUROPEAN DIVISION (ALE)

ALE is part of a global company ALI specialized in the production of lubricants for the airline industry with its main offices in New York, in Paris and in Singapore.

The aviation lubricants market is – unlike the fuel market – driven by the superior quality of the product.

ALI is world leader with a market share of close to 50%.

ALI delivers its products and services in 170 airports globally.

THE SUPPLY CHAIN OF ALE (Europe!)

All lubricants delivered by ALE to its customers (airlines) are directly ordered in the NY plant of ALI by the warehouses of ALE. ALE has warehouses in the UK, Germany, France, Austria, Benelux (Rotterdam), Italy, Switzerland, Scandinavia/Russia (Copenhagen) and in Greece.

In ALE there is no structured ordering policy, each country warehouse has its own procedure for customer service, inventory policies, etc.

In all the cases the orders received in NY are (in pallets) loaded into containers and shipped from NY Harbor to the harbor closest to the warehouse from where it is shipped by truck(s) to the specific national warehouse.


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Shipping time from NY to “Europe” is quite variable because of different productivity in the various harbors, the specifics of water transport and the variable times of customs clearance.

On the average it takes 12 days for a shipment with a range from 8 days up to 18 days.

Within Europe the orders of the airline companies at the various airports

by appropriate carriers within a maximum of 5 working days.

Casual inspection revealed quite a lot of safety stocks in the warehouses.




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101

g

Product cost is 25 € a gallon (the analysis is done for the major lubricant, accounting for

close to 90% of the revenue); a carrying charge of 0.12 is considered appropriate by

ALE‟s management.

The product is delivered in cans of 1 gallon.

Relevant information concerning 2009 is given in the following TABLE (next page) and

some remarks follow.

gINTEGRATION CASE : AVIATION LUBRICANTS



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UK GER FRA AUS BNL IT SWI GR SCA

AVERAGE

(gallons/month)

3218 7264 8172 408 2549 2192 568 2369 2420

STANDDEV*

(gallons/month)

1064 2018 945 256 889 565 213 758 643

MIN 1650 290 5900 125 361 790 13 450 460

MAX 6150 10150 10430 1207 6256 2920 1022 4260 3100

AVERAGE INV

(average2009 in

gallons)

13860 18900 5376 1680 4200 3360 2800 7560 3850

LOG COSTS

(€/MONTH)

39250 12412

0

87183 8752 22693 26713 1101

0

15399 1850

0

#(airports) 3 5 4 1 3 2 1 3 4

WAREHOUSE LO FRA PAR WIE ROT MIL ZUR ATH COP




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REMARKS:

1° Greece also serves Cyprus and Turkey.

2° The warehouse in Copenhagen also serves Sweden and Russia (Saint-Petersburg and Moscow).

3° Belgium is served from Rotterdam.

4° The (direct) logistics cost include: (i) the costs between NY and European warehouses, (ii) direct out-of-pocket warehousing costs, (iii) costs between warehouses and the different airports. The relative proportion between these costs is on an aggregate basis: 25%/60%/15%.




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The management of ALE is considering a more important role for the harbor/warehouse of Rotterdam and would even consider making Rotterdam the only European warehouse and, thus, reorganize completely the total supply chain.

Uncertainty comes around the corner because this would be a very centralized option.

The cost components in Rotterdam are as follows:

i. cost of shipping and handling from NY harbor to Rotterdam warehouse: 0.16€/gallon,

ii. direct out-of-pocket warehousing cost in Rotterdam: 1.40€/gallon,

iii. cost of handling and transfer from Rotterdam warehouse to airports 170 000€/year.

Every day a cargo ship leaves from NY to Rotterdam harbor.

In view of the rather strategic importance for the safety and the smoothness of the airline business, service level standards would have to be rather high. ALE‟s management considers a P1-value of 0.97 a minimal requirement but is simultaneously afraid of the costly impact of higher service levels.




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ASSIGNMENT:

i. Compare the present decentralized system with a completely centralized system including a discussion of setting an optimal service level. Of course, one has to take into account the peculiarities of the European geography/diversity in terms of distances/efficiencies and the like.

ii. Develop a more flexible structure using quantitative techniques from inventory theory/supply chain management. Estimate the cost savings that can be achieved by the new structure.

(Use the optimal service level found in part i.)

REMARKS

Note that in general not a single „correct‟ solution exists! So, state assumptions very clearly. Also mention where approximations are used.

The report should contain at most 5 pages, excluding appendices where technical issues can be developed.

The written report should be self-contained and self-explanatory.




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SCM: NEW DEVELOPMENTS

(lecture #26)

COMPLEXITY Management • Number of SKUs• Services• Channels• Size, Regions• Customer/Consumer is King

RELATIONSHIP Management

• Suppliers (ECR)

• Multi site production

• Key Customers

New TECHNOLOGY

• Internet

• e-commerce

•VMI, EDI, ...

• RFID

ENVIRONMENT

Recycling and Return logistics

• Less packaging & Waste

• Total Product Life Cycle

• Environmental Distribution

• Transport emissions

OPERATIONAL EXCELLENCE

• Optimal Customer Service

• Lowest Operational Costs

• Short Lead times

• Information to replace inventory

• Processes

• Costs, Capital & Service

PEOPLE

• Skills & Competencies

• Creativity & Innovation

• Availability

LEAN? RESPONSIVE? AGILE? SAFE?


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FINAL…. (FUTURE STORE)

VIDEO SHOW OF THE FUTURE STORE OF THE METRO GROUP

END!

CUSTOMER ORIENTED APPROACH TO SCM · 1 CUSTOMER ORIENTED APPROACH TO SCM Prof. Dr. Em. Yvo M.I....

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