LSCM-ppt's (1)
Transcript of LSCM-ppt's (1)
Logistics
&
Supply Chain
Management
Basics of Logistics
Business Elements in a Globalised
Environment
GLOBAL ISSUES
Demand and Supply
Consumer Taste & Preferences
Powerful Economic Alliances
European Union & Eastern block
Energy Crisis
Global Warming & Ecology Concern
ROLE OF GOVERNMENT
Deregulation
Tax and Duty Structure
Exemptions for MSME Sector
Environmental protection laws
MACRO-ECONOMIC FACTORS
Rate of Interest.
Exchange Rates.
Rate of Inflation.
Trade deficit / surplus.
Market Sentiment.
TECHNOLOGICAL INNOVATIONS
Rapidity of product Innovation.
Super – conductivity & IT revolution.
Communications at the speed of thought
Classification of Industries
Supply Chain Management - Stages of
Evolution
A view of business logistics in a company
Raw materials supply points
Raw materials supply
Manufacturing Finished goods storage
Markets
M/T M/T M/T*
LOGISTICSPLANT
1
WAREHOUSE
LOGISTICSPLANT
2
WAREHOUSE
LOGISTICS PLANT
3
WAREHOUSE
A
B
C
PHYSICAL SUPPLYMATERIALS MGNT
INBOUND LOGISTICS
PHYSICAL DISTRIBUTIONOUTBOUND LOGISTICS
M/T* = Movement / Transportation
Inbound Logistics System
Supplier
Supplier
Supplier
Supplier
Warehouse
Volume Shipment
Plant
Plant
Outbound Logistics System
Plant
Plant
Warehouse
Warehouse
Market
Market
Volume Shipment
Basics of Logistics
Is basically an integrative process that optimises the
flow of materials and supplies through the
organisation and it‘s operation to the customer.
Is essentially a planning process and an information
based activity.
Supports corporate goals by delivering products to
the customer at a time and place of his / her choice.
Spans three functional areas of a business enterprise –
Procurement / Manufacturing / Distribution
Objectives of Logistics
Management
The primary objective of logistics system is to
effectively and efficiently move the inventory
in the supply chain so as to extend the
desired level of customer service at the least
cost
Reduction in Inventories
Freight Economy
Reliable and consistent delivery performance
Minimum Product damages
Quick Response
Elements of Logistics Management
o Logistics Management deals with the Handling ,
Movement and Storage activities within the supply
chain – beginning with Suppliers and ending with the
Customers.
Customer order Processing
• Filling up the order form
• Deciding the product specification
• Delivery schedule / location of Delivery
• Cost of order Processing
• EDI / ERP / CPFR Techniques
Traffic and Transportation
• Mode of Transportation
• Speed of Transportation
• Cost of Transportation
• Containerised service
• Multi – modal system
• Milk Runs / Cross – Docking
• 3PL / 4PL
Warehousing and storage
• Location of the warehouse
• Inventory levels
• Centralised Vs. decentralised systems
• Cold chains
• Packing and repacking facilities
• Storage requirement of the product.(Nature / Size /
Volume)
• Third Party Logistics
Industrial Packaging
• Primary Packaging
• Secondary Packaging
• Cost of Packaging
• Customer requirement for packaging
• Transportation requirement for packaging
• Reverse logistics for packaging
• Recyclability of packaging material
Site location Analysis
• Availability and type of land
• Government Regulations & Statutory provisions
• Cost of transportation
• Availability of skilled labour
• Infrastructural facilities
Materials Handling
• Type of materials to be handled
• Handling requirements (fragile / inflammable etc.)
• Requisite Handling Equipments
• Cost of materials handling
• Pilferage / Breakage
• Safety of materials & personnel
Inventory Control
• Inventory Analysis
• Leadtime Analysis
• Communication with the supply points
• Proper / appropriate inventory control system
• Cycle Counting / Stock Taking
• Obsolescence Factor
• Inventory Carrying cost
Customer service
• Parts and service support
• Field Service and Maintenance
• Value – added Services
Reverse Logistics
• Returned goods handling
• Clear policy with Customers / Transporters
Salvage & Scrap Disposal
• Clearcut policy
• Periodic Review
• Socially responsible Disposal systems
For Forecasting
Demand Forecast
The three principles of all forecasting
techniques:
Forecasting is not always accurate
The longer the forecast horizon the worst is
the forecast
Aggregate forecasts are more accurate
11-20
A Forecasting Framework
Focus of the chapter is on the forecasting of
demand for output from the operations function.
Demand may differ from sales
Difference between forecasting and planning
Forecasting: what we think will happen
Planning: what we think should happen
Forecasting application in various decision areas
of operations (capacity planning, inventory
management, others)
Demand Management
The purpose of Demand Management is to coordinate
and control all sources of demand so that the productive
system can be used efficiently and the product delivered
on time.
Two Basic Sources of Demand –
• Independent Demand - generally finished goods
• Dependant or Derived Demand – Components / Sub-
Assemblies etc.
Role of Organisation – in respect of Independent
Demand
• Take an active role to influence demand
• Take a passive role and simply respond to demand
Demand Management
Types of demand
• Independent
• Dependant/Derived
• Active
• Passive
Components of Demand
- Demand for products or services can be broken into six
components
• Average Demand for the period
• A Trend
• Seasonal Elements
• Cyclical Elements
• Random variation
• Autocorrelation
Forecasting Techniques
Forecasting the future behaviour of Demand / Price /
Consumption etc.
Benefits from Accurate Forecasting
• Provide accurate information for making better decisions
• Increase sales opportunities for maximizing profits
• Optimise the Business for reducing costs of operations
Functional and Strategic Decisions involving –
• Production – Scheduling/ Inventory Control / aggregate planning
• Marketing – Sales force allocation / promotion / new product
introduction
• Finance – Plant & Equipment Investments / Budgetary Planning /
Funds Requirement
• Personnel – Workforce Planning / Hiring / Layoff / Training
Needs
Factors for Evaluation while
Forecasting Past Demand
State of the Economy
General Business conditions ( Boom period or
Recession)
Predicted changes in the major Sectors of the Economy
Estimated changes in supply status
Cost Trends in the Industry
Planned Advertising and Marketing Efforts
Likely Competitors‟ Strategy
Political situation
Forecasting Methods
QUALITATIVE
• Highly subjective – thro‟ salesmen – rely on human judgement &
opinion
• Thumb Rule for Forecasting
• Delphi Technique – for long term Forecasts.
TIME SERIES
• Method uses Historical Data to make a forecast
• Simple Moving Average Method
• Exponential Smoothing Techniques (Extrapolation of the same
price series) – we consider the Trend, Seasonal Factors
separately and integrate the figures to obtain the overall forecast
CAUSAL METHOD
• Correlation and Regression Analysis
• Involves assuming that the demand forecast is highly correlated
with certain factors in the environment like the state of Economy
• We relate the behaviour of a dependant variable to that of
independent variable
• Examples –
1. Price and demand for a commodity
2. Monsoon and Agriculture Output
3. Commodities & It‟s derivatives
SIMULATION
• Imitate the consumer choices that give rise to demand to arrive
at a forecast
• Using this method, a company can combine Time series and
Causal methods to find out the likely impact of Price Escalation
on Sales
Demand Forecasting-Basic Approach
Understand the Objective of Forecasting
Integrate Demand Planning and Forecasting
• Capacity Planning
• Production Planning
• Purchasing
Identify the major factors that influence the demand
forecast
• Demand side – the company must ascertain that the demand is
growing / decling / has a seasonal pattern
• Supply side – Monopoly Suppliers Vs Multiple Sources
• Product side – companies must know the number of variants of
a product being sold and whether these variants substitute for or
compliment each other
Understand and identify customer segments
• Companies generally use different forecasting methods for
different customers
• Customers may be grouped under similarities in service
requirements, demand volumes, order frequency, demand
volatility and seasonality
Determine the appropriate forecasting Technique
• Companies must use the most suitable dimension or a
combination of two dimensions for forecasting
Establish performance and error measures for the
forecast
• The measures must correlate with the objectives of the business
decisions based on these forecasts
11-29
Selecting a Forecasting Method
User and system sophistication
– People reluctant to use what they don‘t understand
Time and resources available
– When is forecast needed?
– What is value of forecast?
Use or decision characteristics, e.g. horizon
Data availability and quality
Data pattern
Don‘t force the data to fit the model!
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2007, All Rights Reserved
TRANSPORTATION
Supplier Transportation Stores Transportation
Manufacturing –
Process 2
Transportation Management
Role of Transportation in Supply Chain Process
TransportationManufacturing –
Process 1
TransportationManufacturing –
Process 2Warehouse Transportation
DealersCustomer
Transportation Management
Importance – is one of the most visible elements of Logistics Operations
Functionality – provides two basic functions
Product movement
Product storage
Cost of storage Cost of Cost of Cost of
In vehicle unloading Reloading Warehouse
Factors affecting the transportation Decisions
n Cost Factors – Distance / Volume / Product Density / Shape / Product
Type – Perishability / fragility / market dynamics
n Speed Factor
n Reliability / Consistency (reflection of dependability)
n Frequency of Operations
n Availability of Transport
[ [
Transportation Management
Modes Of Transportation
Roadways – Adv./ Disadv.
Railways – Adv. / Disadv.
Airways – Adv. / Disadv.
Waterways - Adv. / Disadv.
(Ocean & Inland Water Tr.)
Pipelines
Ropeways
Package Carriers (Fed Ex, UPS)
Intermodal (most common – truck / Rail)
© 2007 Pearson Education 14-35
Pipeline
High fixed cost
Primarily for crude petroleum, refined petroleum
products, natural gas
Best for large and predictable demand
Would be used for getting crude oil to a port or
refinery, but not for getting refined gasoline to a
gasoline station (why?)
© 2007 Pearson Education 14-36
Package Carriers
Companies like FedEx, UPS, USPS, that carry small
packages ranging from letters to shipments of about 150
pounds
Expensive
Rapid and reliable delivery
Small and time-sensitive shipments
Preferred mode for e-businesses (e.g., Amazon, Dell,
McMaster-Carr)
Consolidation of shipments (especially important for
package carriers that use air as a primary method of
transport)
© 2007 Pearson Education 14-37
Intermodal
Use of more than one mode of transportation to move a shipment to its destination
Most common example: rail/truck
Also water/rail/truck or water/truck
Grown considerably with increased use of containers
Increased global trade has also increased use of intermodal transportation
More convenient for shippers (one entity provides the complete service)
Key issue involves the exchange of information to facilitate transfer between different transport modes
Operating Cost of Truck
Assumptions
a) TATA Truck price – Rs 10,00,000
b) Operator‘s finance – 25 percent of truck price (cost of fund 10
percent p.a.)
c) Bank loan – 75 percent of truck price ( interest rate at 15
percent p.a.)
d) Depreciation at 40 percent written down value, as per income
tax rules
A. Fixed cost
Rupees
1. Interest on a + b above (25,000 + 1,12,500) = 1,37,500
2. Depreciation 0.4 ×(truck price – tyre price)
0.4 × (10,00,000 – 90,000) = 3,64,000
3. Taxes and Insurance = 30,000
4. Crew salary (Driver Rs 8000 pm + = 1,20,000
Cleaner Rs 2000pm)
Total = 6,31,500
Fixed cost per km basis (6,31,500 / 1,00,000) = Rs 6.32 (I)
Note : Tyre price = Six tyre tubes (each Rs 15,000)
Hence, total = Rs 90,000
Average run of a new truck / year = 1,00,000 kilometers
B. Variable Cost (Per Km)
1. Fuel (HSD – Rs 28 for 4 kilometer run) =7.00
2. Tyre * = 1.52
3. Spares = 0.15
4. Lubricants = 0.25
Total variable cost per km = Rs 8.92 (II)
Note : * Cost of six tyres = Rs 90,000
New tyres run for = 50,000 kms
Retreading cost = Rs 24,000
After retreading tyres run for = 25,000 kms
Hence cost of tyre / km = (90,000 + 24,000)/(50,000 +
25,000)=Rs1.52
C. Trip Related Cost
Rupees
1. Commission to agent =750
2. Loading and unloading charges = 500
3. Line expenses = 500
Total =1750
Note: Average run of new truck is 1000km / trip
Trip related charges/kilometer = Rs 1.75 (III)
Total Operating Cost of Truck (I + II + III) = Rs 16.99/km
Note: With the aging of the truck, the fixed cost component
drastically reduces, resulting in lower total operating cost/km.
Common Shipment / Delivery Terms
used in Transportation
INCOTERMS 2000 – developed by the International chamber
of commerce – France
These Contract Terms clearly describe the Key obligations and
responsiblities of the Seller and Buyer with regard to :-
• Delivery of Goods
• Transfer of Risks
• Transfer of Costs
INCOTERMS
Consignor
Consignee
Door – to – door
EXW : Ex – works
FAS : Free Alongside Ship
FOB : Free on Board
FOR : Free on Road
CFR : Cost and Freight
CIF : Cost, Insurance and Freight
Demurrage
© 2007 Pearson Education 14-45
Choice of Transportation Mode
A manager must account for inventory costs when
selecting a mode of transportation
A mode with higher transportation costs can be
justified if it results in significantly lower inventories
Transportation Management
Design Options for a Transportation Network
Direct Shipment Network (Point-to-point Network)
Direct Shipping with Milk Runs
All Shipments Via Central Distribution Centre.
Hub and Spoke Network
Tailored Network (Combination of above Networks)
Trade – Offs in Transportation Design
Transportation cost and Inventory cost Trade off - involves choice of
Transportation mode & Inventory Aggregation.
Transportation cost and customer responsiveness trade –off – Tr. Cost a
supply chain incurs is closely linked to the degree of responsiveness the
supply chain aims to provide (Temporal Aggregation is the Answer)
Transportation Networks
Point to point network
Point of
Origin
Point of
Destination
Multiple delivery points
Delivery
point 1
Delivery
point 2
Origin Destination
Trans–shipment points
Origin Destination
Trans–shipment
Point
Local Area
Distribution
Long distance
Haulage
Nodal network
Rail
Terminal
Road
Terminal
Road
Terminal
Road
Terminal
Port
Terminal
Air
Terminal
Multiple
pickup & distribution
Multiple
pickup & distribution
pickup & distribution
Multiple
Hub and spoke network
Mother
Hub
DC*
DC*
DC*
DC*- Distribution
Centre
DC*
© 2007 Pearson Education 14-53
Role of IT in Transportation
The complexity of transportation decisions demand use
of IT systems
IT software can assist in:
– Identification of optimal routes by minimizing costs subject
to delivery constraints
– Optimal fleet utilization
– GPS applications
© 2007 Pearson Education 14-54
Making Transportation
Decisions in Practice
Align transportation strategy with competitive
strategy
Consider both in-house and outsourced transportation
Design a transportation network that can handle
e-commerce
Use technology to improve transportation
performance
Design flexibility into the transportation network
WAREHOUSING
WAREHOUSING – A Role Beyond
Storage
Modern warehousing is in the process of evolutionary
change
From an emphasis on storage to emphasis on flow
through
From Inventories at rest to Inventories in motion
In logistical systems, warehouse are viewed as
switching facilities rather than storage facilities
What is Happening in our Warehousing / Stores
Environment ?
Attributes/Aspects 1960's & 70’s 1980's & 90's Current
The Age of Backyard
Awareness on
Housekeeping 6S Technique
Period Characterised by Acute Space Shortage
Planned Storage
Area High Occupancy Rate
People Skills Any body with a Head
on his Shoulders Technical
TechnoCommercial
Acumen (Team-
Player)
Inventory Approach Just – in – Case
Min-Max System
(Computer) ERP / JIT – I / II / III
Customer Focus –
Internal Adversarial
Somewhat
Co-operative
Totally
Focussed
Problem – Stance Reactive Reactive Proactive
General
Perception
A place to Keep
Materials – till needed
(Cost Centre)
Major Awareness
on Space
Utilisation & cost
Aspects
Critical link in the
Supply Chain
- A Profit Centre
Types of Warehouses
Broad classification
• Private warehouses
• Public warehouses
Types
• Bonded warehouses – under customs / Excise Act
• Field warehouse
• Cold storage – for perishable goods
• Agriculture warehouse – used for storing Agriculture produce
• Distribution warehouse – located close to the manufacturing
concerns
• Buffer storage warehouse – Government owned
• Export / Import warehouse – located normally near ports
Warehousing – Basic Objectives
• Maximum utilisation of storage space (floor and cubic space)
• Higher labour productivity
• Maximum Asset utilisation
• Reduction in Materials Handling
• Increased Inventory turnover
• Reduced order filling time
• Reduction in operating cost
Warehousing - Functions
Materials storage function
• Holding Materials
• Consolidation
• Breaking Bulk
• Cross – Docking
• Mixing
• Postponement
• Packing
Materials Handling Function
• Loading and unloading
• Materials Movement (to and from the Storage area)
• Order filling
Information Handling Function
• Goods Inwards
• Inspection and auditing
• Goods outwards
• Stockouts
• Excess Stocks
• Invoicing
• Warehouse expenses
• Consignment Tracking
• Transit damage and breakage
Warehouse Layout Designs
Basic considerations are –
Principle of Popularity
Principle of Similarity
Item Turnover
Space utilisation
Product configuration
Product characteristics
Good Housekeeping
Safety and Security
Retail Warehouse - Layout
Finished Goods Warehouse
Warehouse
(Finished
Goods))
Manufacturing
PlantCustomer
Consolidation Warehouse
Consolidation
Warehouse
Source 1
Source 2
Source 3
Buyer 1
Buyer 2
Buyer 3
Bulk–break Warehouse
Manufacturing
PlantBreak-bulk
Warehouse
Customer 1
Customer 1
Customer 1
Mixing Warehouse
Consolidation
Warehouse
Plant A
(Item 1)
Plant A
(Item 2)
Plant A
(Item 3)
Customer 1
Customer 2
Customer 3
Warehouse Site Selection
Prime consideration• Customer service
• Cost
Other factors affecting site selection are –• Infrastructure – approach roads, power, water, communication etc
• Market – proximity
• Access – influence Transportation cost
• Primary transportation cost
• Availability – of space in urban areas
• Product – type like Perishables
• Government Regulations
• Local Statutory Levies
Quantitative Technique for warehouse site
selection
Single Depot Location
• Centre of Gravity of Area Model – A point expected to be at a
minimum average distance from all locations in the Area
• Centre of Gravity of Local Model – A weight, in propotion to the
demand load is hung at each hole
• Centre of Gravity of Tonnes – Kilometres Model – takes into
consideration both load and distance to arrive at the optimum
transportation cost
Multiple Depot Network
• Warehousing cost is directly proportional to the number of warehouses,
while transportation cost goes down with an increase in warehouse
numbers
• The factors influencing an optimum numbers of warehouses are –
• Market size
• Area coverage by each warehouse
• Product Type
• Demand Pattern – continuous or seasonal
• Customer service level
• Competition
• Overall operating costs
Warehouse Layout Designs
Basic considerations are –
Principle of Popularity
Principle of Similarity
Item Turnover
Space utilisation
Product configuration
Product characteristics
Good Housekeeping
Safety and Security
Warehousing – Performance Parameters
Warehousing is an integral part of the Supply Chain
Objectives should align with that of the Objectives of overall
Supply Chain
Most common parameters indicating Efficiency &
Effectiveness of warehouse operations are –
• Stock turnover ratio
• Warehouse cost to sales ratio
• Warehouse cost per unit handled
• Occupancy rate of warehouse space
Number of Warehouses
Vs
Cost of Operations
Total Cost
Warehousing Cost
Transportation Cost
Number of Warehouses
C
o
s
t
Inventory
Management
•Sales history
•Sales forecast
•Forecasting techniquesFORECASTING
Finished goods forecast
Finished goods inventory on hand
Materials Requirements
Bill of materials
Materials to be purchased
Inventory of materials on hand
•Purchase orders
•Delivery schedules
•Follow up
•Supplier history
•Lead time
•Quality rating
•Delivery rating
•Price etc.
Inventory control
MATERIALS
PLANNING
PURCHASING
INVENTORY
MANAGEMENT
•Reorder points
•Max Inventory
•Min Levels
•EOQ,
•Scrap/Obsolete
•Receipt & issue,
•ABC Analysis
Materials Flow Chart
15-76
A Material-Flow Process
Work in
process
Work in
process
Work in
process
Finished
goods
Raw
MaterialsVendors Customer
Productive Process
15-77
A Water Tank Analogy for Inventory
Supply Rate
Inventory Level
Demand Rate
Inventory Level
Minimizing Waste: Inventory
Hides Problems
Work in
process
queues
(banks)
Change
orders
Engineering design
redundancies
Vendor
delinquencies
Scrap
Design
backlogs
Machine
downtime
Decision
backlogs
Inspection
backlogs
Paperwork
backlog
Example: By
identifying defective
items from a vendor
early in the
production process
the downstream work
is saved
Example: By
identifying defective
work by employees
upstream, the
downstream work is
saved
Inventory Control Definition of Inventory : An idle resource of any kind having an economic value
Types of Inventory :
Production Inventories (R.M/ Spares/ Components)
MRO Inventories (Maintenance Items)
Work-in-Process Items
Finished Goods
Purpose of Inventory: Transaction purpose/ Precaution purpose (Increase in lead
time/consumption)/ Speculative purpose (Rising prices/ Material scarcity)
Basic problem in inventory : How much to buy at one time ?/ when to buy this
quantity ?
Indian inventory problems : Financial management of inventories in India/ Tandon
Committee Report/ Control of bank finance
Costs related to Inventory
Mechanisms of inventory control: Ideal inventory pattern/ Actual inventory pattern
Methods of inventory control : Two Bin System/ Min-Max System/ Replenishment
systems („P‟ & „Q‟ systems)/ Zero stock system (Just-in Time inventory)
E(1
)
Independent Vs. Dependent Demand
Independent Demand (Demand for the final end-
product or demand not related to other items)
Dependent
Demand
(Derived demand
items for
component
parts,
subassemblies,
raw materials,
etc)
Finished
product
Component parts
Inventory Model no. 1
Time (months)
Q
0 1 2 3 4
Qu
an
tity
Inventory Model no. 2
Time (months)
Q
0 1 2 3 4
Qu
an
tity
A B
Note :- A & B denote stock-out situations
Inventory Model no. 3
Time (months)
Q
0 1 2 3 4
Qu
an
tity
Safety Stock
Selective Inventory Control System Methods of classification:-
Title Basis Main Use
A-B-C Value of Consumption To control- raw material/ w.i.p/
components
H-M-L (High-Med-
Low)
Unit price of the material Mainly to control purchase
X-Y-Z Value of items in storage To review the inventories & their
uses at scheduled intervals
V-E-D (vital/essen/
desirable
Criticality of the component To determine stock levels of spare
parts
F-S-N (fast/slow/non-
moving)
Consumption pattern of the
component
To control obsolescence
S-D-E
(scarce/diff/easy)
Problems faced in procurement Lead-time analysis & purchasing
strategy
G-O-L-F
(govt/open/local/forei
gn)
Source of materials Procurement strategies
S-0-S (seasonal/ off
seasonal)
Nature of supplies Procurement stocking strategies for
seasonal items like agricultural
V-E-I-N (vital/ essen/
imp/normal)
Plant &machinery Production Machinery
& Services
A-B-C Analysis
Class
‘A’
Class
‘B’
Class ‘C’
0
65
90
100
15 40 100
Cumulative % of Total number of items
Cu
mu
lati
ve
% o
f A
nn
ua
l c
on
su
mp
tio
n v
alu
e
Miscellaneous Systems:
Bin Systems
Two-Bin System
Full Empty
Order One Bin of
Inventory
One-Bin System
Periodic Check
Order Enough to
Refill Bin
15-87
Economic Order Quantity (EOQ)
Developed in 1915 by F.W. Harris
Answers the question ‗How much do I order?‘
Used for independent demand items.
Objective is to find order quantity (Q) that minimizes the total cost (TC) of managing inventory.
Must be calculated separately for each SKU.
Widely used and very robust (i.e. works well in a lot of situations, even when its assumptions don‘t hold exactly).
15-88
Economic Order Quantity (EOQ)
Basic Model Assumptions
Demand rate is constant, recurring, and known.
Lead time is constant and known.
No stockouts allowed.
Material is ordered or produced in a lot or batch and the lot is received all at once
Costs are constant
– Unit cost is constant (no quantity discounts)
– Carrying cost is a constant per unit (SKU)
– Ordering (setup) cost per order is fixed
The item is a single product or SKU.
15-89
EOQ Lot Size Choice
There is a trade-off between frequency of
ordering (or the size of the order) and the
inventory level.
– Frequent orders (small lot size) lead to a lower
average inventory size, i.e. higher ordering cost
and lower holding cost.
– Fewer orders (large lot size) lead to a larger
average inventory size, i.e. lower ordering cost and
higher holding cost.
15-90
Total Cost of Inventory
Basic Fixed-Order Quantity Model and Reorder
Point Behavior
R = Reorder point
Q = Economic order quantity
L = Lead time
L L
Q QQ
R
Time
Number
of units
on hand
1. You receive an order quantity Q.
2. You start using
them up over time. 3. When you reach down to
a level of inventory of R,
you place your next Q
sized order.
4. The cycle then repeats.
15-92
Continuous Review System
Relax assumption of constant demand. Demand is assumed to be random.
Check inventory position each time there is a demand (i.e continuously).
If inventory position drops below the reorder point, place an order for the EOQ.
Also called fixed-order-quantity or Q system (the fixed order size is EOQ).
15-93
Continuous Review (Q) System
R = Reorder Point
Q = Order Quantity
L = Lead time
Periodic Review System
Instead of reviewing continuously, we review
the inventory position at fixed intervals. For
example, the bread truck visits the grocery
store on the same days every week.
Also known as ―P system‖, ―Fixed-order-
interval system‖ or ―Fixed-order-period
system‖
Periodic Review System
(contd.)
Each time we review the inventory, we either
order or don‘t. The decision depends upon our
reorder point.
The amount we order may be fixed, or may be
the amount needed to bring us up to a target
(T).
15-96
Periodic Review (P) System
Comparison of Fixed –Order Quantity and Fixed-Time Period
reordering Inventory Systems
Q
Fixed-Order Quantity System
P
Fixed-Time Period Reordering Systems
IDLE STATE
Waiting for demand
DEMAND OCCURS
Units withdrawn from
inventory or back
ordered
COMPLETE
INVENTORY POSITION
Position=On hand +On
order –Back order
Issue an order for
exactly Q units
Is position <
Reorder
point?
Yes
No
IDLE STATE
Waiting for demand
Has Review
time arrived ?
Compute Inventory
Position
Position = On hand +
On order – Back Order
Compute order quantity
to bring inventory up to
required level
Issue an order for the
number of units needed
Demand Occurs
Unit withdrawn from
inventory or back
orderedYes
No
Inventory Management
MUSIC – 3D Approach
Multi Unit Selective Inventory Control – 3 Dimensional
The Entire classification is based broadly on 3 parameters –
• Annual Consumption Value
• Lead time Analysis
• Degree of criticality
High ConsumptiOn Value Items Low Consumption Value Items
Long Lead time Short Lead time Long Lead time Short Lead time
CriticalNon-
CriticalCritical
Non-
CriticalCritical
Non-
CriticalCritical
Non-
Critical
17-100
Philosophy of JIT
Modern Roots of JIT (Toyota Production
System, Taiichi Ohno. d. 1990)
Elements of JIT
Root of JIT in ―repetitive‖ manufacturing
JIT as a technique: to reduce inventory
JIT as a philosophy: a comprehensive
management system
17-101
Elements of JIT
Small lot sizes (lot size one)
Use of Kanban system
Quick changeover (set-ups)
Multifunction workers
Efficient layout (linear flow)
Close relationships with suppliers
Frequent deliveries from vendors
Elimination of Waste
17-102
The Seven WastesOverproduction: Producing more than the demand for customers resulting in unnecessary
inventory, handling, paperwork, and warehouse space.
Waiting Time: Operators and machines waiting for parts or work to arrive from suppliers
or other operations.
Transportation: Double or triple movement of materials due to poor layouts, lack of
coordination and workplace organization.
Processing: Poor design or inadequate maintenance or processes requiring additional labor
or machine time.
Inventory: Excess inventory due to large lot sizes, obsolete items, poor forecasts or
improper production planning.
Motion: Wasted movements of people or extra walking to get materials.
Defects: Use of materials, labor and capacity for production of defects, sorting out bad
parts or warranty costs with customers.
17-103
A ―pull‖ production system
A physical (normally visual) control system
Normally composed of cards and containers
(production card and withdrawal card), but
can be any type of signal
Number of containers
Kanban System
C
DTn
The Kanban System
The Kanban system uses simple cards or signals to
strictly control production
The basic idea is that no station is permitted to
produce more than is immediately required by the
succeeding station
This simple idea prevents the buildup of inventory
No computer is required!
17-104
The Origin Of Kanban
Q - R
In the 1950s, Ohno visited Detroit to learn
about auto making from the U.S. manufacturers.
He was not impressed.
He visited a supermarket, which they did not
have in Japan, and observed the way they
restocked the shelves.
He used that method as the basis for Kanban.
17-105
Minimizing Waste: Kanban Production Control
Systems
Storage
Part A
Storage
Part AMachine
CenterAssembly
Line
Material Flow
Card (signal) Flow
Withdrawal
kanban
Once the Production kanban is
received, the Machine Center
produces a unit to replace the
one taken by the Assembly Line
people in the first place
This puts the
system back
where it was
before the item
was pulled
The process begins by the Assembly Line
people pulling Part A from Storage
Production kanban
17-107
Effect of JIT on Workers
Multifunction workers
Cross-training
New pay system to reflect skills variety
Teamwork
Suggestion system
17-108
Suppliers
Very close relationship with suppliers
Frequent deliveries demanded from suppliers
Sole-sourcing
Integrated supplier programs
Deliveries to production line
No inspection—high quality
17-109
Implementation of JIT
Obtain commitment from top management
Gain the cooperation of workforce
Start with final assembly line
Reduce setup times and lot sizes working backward from
the final assembly line
Balance fabrication rates with final assembly production
rates
Extend JIT to the suppliers
Benefits Of JIT
1. Reduced inventory
2. Improved quality
3. Lower costs
4. Reduced space
requirements
5. Shorter lead times
6. Increased productivity
7. Greater flexibility
8. Better relations with suppliers
9. Simplified scheduling and control activities
10. Increased capacity
11. Better use of human resources
12. More product variety
17-110
Materials Requirement Planning
&
Distribution Requirement Planning
( MRP / DRP )
MATERIALS REQUIREMENT PLANNING (MRP)
Fundamental Questions in Manufacturing are –
What are we going to make?
What does it take to make it?
What do we have?
What do we have to get?
E(1
)
Independent Vs. Dependent Demand
Independent Demand (Demand for the final end-
product or demand not related to other items)
Dependent
Demand
(Derived demand
items for
component
parts,
subassemblies,
raw materials,
etc)
Finished
product
Component parts
Product Hierarchy
End Product
Assembly 1
Subassembly 1 Subassembly 2
Component A Component B
Assembly 2
Component E
Component C Component D
Raw Material X Raw material Y
Component F
16-115
2. MRP Example of BOM
Top
Leg
Long Rail
Short Rail
16-116
BOM (Product Structure)
Short Rails (2)
1 week
Table (End Item)
1 week
Long Rails (2)
1 week
Legs (4)
1 week
Top (1)
2 weeks
Leg Assembly (1)
1 week
Example of MRP Logic and Product
Structure Tree
B(4)
E(1)D(2)
C(2)
F(2)D(3)
A
Product Structure Tree for Assembly ALead Times
A 1 day
B 2 days
C 1 day
D 3 days
E 4 days
F 1 day
Total Unit Demand
Day 10 50 A
Day 8 20 B (Spares)
Day 6 15 D (Spares)
Given the product structure tree for “A” and the lead time and
demand information below, provide a materials requirements
plan that defines the number of units of each component and
when they will be needed
LT = 1 day
Day: 1 2 3 4 5 6 7 8 9 10
A Required 50
Order Placement 50
First, the number of units of “A” are scheduled
backwards to allow for their lead time. So, in the
materials requirement plan below, we have to place
an order for 50 units of “A” on the 9th day to receive
them on day 10.
Next, we need to start scheduling the components that make up
“A”. In the case of component “B” we need 4 B’s for each A.
Since we need 50 A’s, that means 200 B’s. And again, we back
the schedule up for the necessary 2 days of lead time.
D a y : 1 2 3 4 5 6 7 8 9 1 0
A R e q u ire d 5 0
O rd e r P la c e m e n t 5 0
B R e q u ire d 2 0 2 0 0
O rd e r P la c e m e n t 2 0 2 0 0
B(4)
E(1)D(2)
C(2)
F(2)D(3)
A
SparesLT = 2
4x50=200
Day: 1 2 3 4 5 6 7 8 9 10
A Required 50
LT=1 Order Placement 50
B Required 20 200
LT=2 Order Placement 20 200
C Required 100
LT=1 Order Placement 100
D Required 55 400 300
LT=3 Order Placement 55 400 300
E Required 20 200
LT=4 Order Placement 20 200
F Required 200
LT=1 Order Placement 200
B(4)
E(1)D(2)
C(2)
F(2)D(3)
A
40 + 15 spares
Part D: Day 6
Finally, repeating the process for all components, we have the
final materials requirements plan:
©The McGraw-Hill Companies, Inc., 2001
120
Objectives of MRP
Improved customer service
Reduced Investment in Industry
Improved operating efficiency
MRP System Inputs
Master Production Schedule file
Bill of Materials file
Inventory Record file
MRP System Processing
“Explode” the end product into an Assembly chart
Develop a Materials Requirement Plan (net items requirements)
Planned order releases/ production schedules
Consolidation of Materials Requirements
MATERIALS REQUIREMENT PLANNING (MRP)…
MATERIALS REQUIREMENT PLANNING (MRP)…
MRP System Outputs
1. Schedule of Planned order releases
2. Authorized order releases
3. Change reports (Amendments etc)
4. Control Reports – Status of inventory levels, etc
5. Planning reports – Inventory forecasts, long-range materials requirement planning, etc
Merits of MRP
Low inventory levels - especially for WIP
Better response to Market demands
Better customer service
Reduced set-up costs
Good material tracking & production scheduling
EVOLUTION OF MRP - II
MRP - Materials Requirement Planning
MPS - Master Production Schedule
PPC - Production Planning and Control
IC - Inventory Control
ENG - Engineering Data
CC - Cost Control
Distribution Resource Planning
Is a widely used and potentially powerful technique for outbound logistics
systems to help determine the appropriate levels of inventory
Is a logical extension of MRP-II concept
Usually applied with an MRP/MRP-II system
DRP Replenishment system is based on –
Current inventory level of the Stock Keeping Unit (SKU)
Forecast of demand for each SKU
Target safety stock
Recommended Replenishment Quantity
Lead time for Replenishment
Advantages of DRP –
Reduced transportation costs
Overall reduction in F.G Inventories
Improved distribution centre operations
Improved customer service (decrease in stock out situations)
Distribution Resource Planning
Customers
Distribution Center
Distribution Center
Distribution Center
Distribution Center
RegionalWarehouse
Plant Warehouse
RegionalWarehouse
Finished product
Distribution Center Distribution Center
Packing Material
Final Products
Intermediate IV Intermediate V Intermediate IV
Intermediate I Intermediate II Intermediate III
Raw materials
Application of IT
in
LSCM
Information Technology
IT in SCM spans both internal and external systems connecting the firm to its customers and suppliers
Companies employ different systems that support different locationsWarehouse management systems,
Production planning,
Transaction and sales processing
Decision support systems
Communications systems: Email, Intranets
Information Technology
In many businesses, competitive edge in
the market is achieved through the use of
Information Technology
Banking
Retail (Wal Mart)
Airlines (American Airlines)
Trucking and Shipping (FedEx)
Goals of IT in SCM
Collect information on each product from
production to delivery / purchase point and
provide complete visibility for parties
involved.
Tracking
Alerting
Goals of IT in SCM
Access any data in the system from a single point of contact. This is complicated by the fact that one may need information which resides
in various locations within one company
in different companies
Goals of IT in SCM
Analyze and plan activities based on total supply chain information.
Decision Support Systems
Advanced Planning Systems
Goals of IT in SCM
Collaborate with Supply Chain partners.
Alignment of IT systems
Integration of business processes
Supply chain relationship management
CPFR
INFORMATION TECHNOLOGY FOR SUPPLY CHAIN MANAGEMENT
The Role of I T in a Supply Chain
Information is a key supply chain driver.
I T consists of the Hardware, Software and people throughout aSupply Chain that gather, analyse, and execute upon information.
Information must have the following characteristics to be usefulwhen making supply chain decisions –
1. Information must be accurate
1. Information must be available in a timely manner
1. Information must be of the right kind.
Information is used when making a wide variety of
decisions about each of the supply chain drivers -
1. Facility – Stores / Cross – docking arrangements.
2. Inventory – Setting optimal Inventory policies
including Cost Data.
3. Transportation – networks / routings, modes and
service providers.
4. Sourcing – Product quality, pricing, leadtimes etc.
5. Pricing and Revenue Management – Various
customer segment‟s willingness to pay.
Finally, information is crucial to making good supply
chain decisions at all three levels of decision
making (Strategy, Planning and Operations).
Supply Chain IT Framework
The Supply Chain Macro Processes
1. Customer Relationship Management (CRM)
2. Internal Supply Chain Management (ISCM)
3. Supplier Relationship Management (SRM)
Why focus on the Macro Processes? –
Good Supply Chain Management is not a zero – sum game but a positive – sum game in which Supply Chianpartners can increase their overall level of profitability by working together.
Macro Processes applied to the evolution of Software –
ERP Software has been successful in improving Data availability and integrity within the Supply Chain – but the real value from these Data accrues only when the Data can be used to improve decision making.
The software winners in a macro process –
1. Functional Performance (including case of use)
2. Integration with other macro processes
3. Strength of the software company‟s eco system.
Customer Relationship Management (CRM)
Marketing
Selling / Distribution
Order Management
Call / Service centre
Internal Supply Chain Management (ISCM)
Strategic Planning
Demand Planning
Supply Planning
Fulfillment
Field Service
Supplier Relationship Management (SRM)
Design collaboration
Sourcing
Pricing / Negotiations
Procurement
Supply Collaboration
Supply chain I T in practice
1. Select an I T System that addresses the
company‟s key success factors
2. Take incremental steps and measure value
3. Align the level of sophistication with the need for
sophistication
4. Use I T systems to support decision making – not
to make decisions.
5. Think about the future – provision for
expansion
Logistics Organisation
Logistics Management – Traditional
Approach to Organisation
CEO
VP
(Marketing)
VP
(Manufacturing)
VP
(Finance)
VP
(HRD)
• Production
• Purchasing /
Procurement
• Traffic / Tr.
• Warehousing
• Sales / Service
• Channels of
Distribution
• Reverse
Logistics.
• New Product
Development
• Budgeting
• Information
Systems
• Inventory
Management
• Data
Processing
• Recruitment
• Training &
Development
• HR Policies
Logistics Management – Traditional
Approach to Organisation
Historically organisations scattered Logistics functions throughout the company
No single Department or division responsible for managing the entire logistics process
Usually treated as a Cost Centre
Major Responsiblities confined to Transport Management –ocassionally covering warehousing Activities
The function generally reported to the Manufacturing Head
Effective Logistics Organisation -
Importance
Logistics – a vital element of Supply Chain Management
A major Cost Area – A substantial segment Hidden
Traditionally considered a low skilled Function – unable to
attract Best Talent
Hierarchically – lower area of operation resulting in high attrition rate
Vast potential available – for major contribution to Profits
Logistics Organisational Structures
Development of Business Structure
• Functional Specialization
• The ―Hollow Corporation‖ (Outsourcing)
• The ―Virtual Corporation‖ (A no. of Cos. come together to develop, produce, sell / distribute a product / service of limited scope)
• ―E – commerce‖ Era organizations
Logistics in a Functional Organisation
President
Mfrg. R & D Marketing Finance
Personnel Logistics
Logistics in a Matrix Organization
President
Mfrg. Mrktg. Fin. Eng. HRD
• Production
• Purchasing
• Maintenance
• Sales
• CRM
• New
Products
• Budgeting
• M.I.S
•Funds Mgt.
• Product
Design
• V.A / V.E
•Process
. Engg.
• Personn.
Issues
\Logist.
Mgt.
Horizontal
flows of
Project
Authority
Vertical Flows of Functional Authority
• Trg & Dev.
• Lab.Relations
Organizing for Logistics – Decision
Making Strategies
The Logistics Mission Statement • Targeted Customers / Markets
• Principal Products / Services
• Geographic domain
• Core Technologies
• Company Philosophy
Components of an Optimal Logistics Organization• Organizational characteristics (Structure & Technology – relationships
that exist between various functional areas)
• Environmental characteristics (Internal & External)
Employee Characteristics
• Organizational Attachment
• Job Performance
• Available Skill levels
Managerial Policies and Practices
• Strategic Goal setting
• Performance Environment
• Communication Process
• Leadership & decision-making process
• Organizational adaptation and Innovation
Developing an optimal Logistics
Organisation – An Approach
Organizations change over time – A Co. may have to ReEngineerit‘s design/structure to reflect environmental or corporate changes
Research corporate strategy and objectives
Organize functions in a manner compatible with the corporate structure
Define the functions for which they are accountable
Know their Management style
Organize for Flexibility
Know the current support system
Understand and Plan for Human Resource Allocation
Logistics organizations can be structured in several ways – Strategic Vs operational / Centralized Vs decentralized / Line Vs Staff
Final Objective – to become more cost and service efficient
Logistics Performance
Measurement
Logistics Measurements Organizational performance can be measured against many
criteria
Need for Measurement – for efficient and effective
deployment of resources and tracking the health of the Supply
Chain
It is best compared with the control panel on a machine or the
Dashboard of a vehicle
Performance measurement system gives insights into the
financial and non-financial measures taken by the firm
System Performance is judged by it‘s output with respect to
the Input
A higher Output to Input Ratio is a measure of the system‘s
efficiency and effectiveness
Performance measurement system helps in either reducing or
eliminating non-value added activities from the system
Logistical competency has become critical in enhancing the
competitiveness of the business process
Logistics – Performance Measurement
System Objectives
Monitoring • Focusses on reporting the current status of operations
• Monitored on a Daily, Weekly or Monthly basis depending on the volume and criticality
Controlling • Measures & compares the actual performance with the set standard
• Packaging Damages, Productivity Issues, customer set service level
Directing• Motivates people in the system to enhance individual performance
• Incentive schemes for better peformance
Logistics – Criteria for Performance
Measurement
Outbound Freight cost
Order Fill Rate
Inventory Stock Accuracy
Inventory Turnover Ratio
On-time Delivery
Customer Complaints
Stock-out situations
Inbound Freight cost
Back orders
Inventory obsolescence
Inventory carrying cost
Non-moving / Deadstock items – Disposal systems
Logistics cost per unit Vs Budgeted
Overall customer satisfaction
Logistics – Performance Measurement
PerspectivesPerformance
Measurement
Perspective
External
measures
Internal
measures
Innovations
• Speed
• Best
Practices
in Industry
Customer
Perception
• Service
Quality
• Responsiveness
Non-Financial
Productivity
• Order Fill
• Quality
•Asset
Management
Financial
• Operating
cost
• ROI
Logistics Management – Raising the
Performance Bar
Logistics
performance
standards
Logistics
performance
standards
Competition
MRP
Logistics
performance
standards
Customers
Deregulation
Technology
Logistics
performance
standards
Customers
Technology
DRP
Logistics
performance
standards
Customers
Technology
ERP
SRM / CRM
1960‘s 1970‘s Current1990‘s1980‘s
Prodn
costs
Mfg &
Inv costs
Transportation
costs
Distribution &
Logistics costs
SCM & customer
service costs
Key
Performance
Measures
Fair
Acceptable
Good
Excellent
Outstanding
Logistics Costing(Activity Based Costing)
Traditional Costing Vs Activity – Based
Costing
Traditional view of Warehousing Costs
• Storage & Handling 1800/-
• Administration overheads 360/-
• Trucking & Delivery 180/-
• Freight Consolidation 90/-
• Value Added Services 100/-
Total Rs 2530/-
Activity-based view of Warehousing
Costs
• Dry storage 600/-
• Refrigerated Storage 800/-
• Receiving 160/-
• Shipping 200/-
• Billing 80/-
• Delivery 100/-
• Packaging 100/-
• Freight consolidation 90/-
• Materials
Handling Eqpt 400/-
Total Rs 2530/-
Logistics Costing
(Activity Based Costing)
ABC is simply the tracing of Overhead and Direct costs to specific Products, Services or Customers
The tracing of costs follows a 2-stage process
The First Stage assign Resource costs based on the amount of each Resource consumed in performing specific Logistics Activity
The Second Stage assigns Logistics Activity costs to the Products, Services or Customers consuming the activities based on actual consumption
ABC unbundles traditional cost accounts and re-orients costs to show how resources are actually consumed
Activity – based costing seeks to relate all expenses to the
value adding activities performed
The fundamental concept of activity-based costing is that
expenses need to be assigned to the activity that consumes a
resource rather than to an organization or budget unit
Effective costing requires identification of the specific
expenses to include in an analysis framework
Logistical costing system comprises of –
• Cost Identification
• Cost Time Frame
• Cost Formatting
Each of the above areas of activity-based costing is
judgemental
In the Final Analysis – a logistical costing system has to make
sense only to the managers who are using it as a guide to
decision making