Transportation Logistics for Purchasing Supply Managers

1. Transportation& Logisticsfor Purchasing& Supply Managers Bill Christensen, Ph.D.

2. Logistics Info Systems, Order Processing & Communications

3. Review Logistics Info Systems & Communications Information needs are approaching real-time With suppliers With customers Between the various logistics activities With and between other participants in the supply chain (e.g., intermediaries)

4. Review Order Processing Receive orders from customers Check and communicate order status Fill orders and make available to customers Includes Checking inventories, customer credit, invoicing, accounts receivable Highly automated and critical to good customer satisfaction balance between costs of order processing (software, systems, processes) and real & perceived customer value

5. Logistics MIS Monogatari Logistics systems involve complex networks of inter-related variables Decisions must be made that avoid sub-optimization and that can be executed within established resource constraints How do you do that?

6. Logistics Info Systems Key to effective logistics is an the ability to monitor & adjust logistics performance in real time Monitor inventory and demand in real time Information transparency up and down the supply chain Eliminate info discrepancies & errors within the organization

7. The Order Cycle It all starts with a customer order Order cycle: from preparation of order thru placement into buyer�s inventory

8. Opportunity for Improvement

9. Order Processing Flow Chart

10. Benefits of Effective Order Processing Systems Primary purpose is to link buyer and seller Provides info on daily sales that can be used to forecast future sales Info can also be used by finance for cash flow management Info can also be used by logistics and production for scheduling and inventory management

11. The Spectrum of Order Processing Manual Order Processing Systems Slow, low cost, high variability, low accuracy Partially Automated Systems Faster, more costly, less variability, moderate accuracy Fully automated (direct electronic linkage) Systems Real-time, most costly (can outsource � coming down), lowest variability, most accurate

12. Logistics Mgmt Info Systems The order processing system is the first step in the logistics MIS The info generated should be coordinated and integrated with marketing, purchasing, production, and finance information systems This is the ERP model http://www.oracle.com/applications/supply-chain-management.html

13. Logistics Mgmt Info Systems Objective is to monitor logistics performance and understand how management decisions will affect that performance (answers the what if?) Effect Logistics MIS design starts with understanding the needs of customers then determining the performance standards for meeting those needs Gaps between needs and capabilities are found and closed

14. Logistics MIS

15. Trends & Technologiesin Logistics MIS Bar coding http://www.barcodesinc.com/free-barcode-font/?gclid=CPCNgYWl6YQCFSBLSQodqCU24A Point-of-Sale (POS) data gathering Often transmitted same-day or real-time to supplier for inventory monitoring and replenishment EFT (electronic funds transfer) Six Sigma / TQM / JIT

16. Trends & Technologiesin Logistics MIS Linear Programming http://www.i2.com Simulation We need a hero Decision Support Systems May include AI tools (e.g., expert systems), forecasting models, simulation models, linear programming models, to assist in making logistics decisions that take all pertinent info into account � not widespread

17. Inventory Management

18. Review Inventory Management Inventories represent the largest single asset for most manufacturers (20%), wholesalers (50%), and retailers (50%) Logistics managers trade off increased customer service levels for reduced inventory costs to achieve least total cost logistics Also balance order costs (better prices and lower setup costs) with inventory carrying costs trend is towards smaller more frequent orders/deliveries (e.g., JIT)

19. Inventory Cost Trade-offs The goal is profitability and inventory levels are only one piece in a total logistics puzzle

20. Inventory Monogatari Why do we have inventories? Why do many companies seem to do poorly at managing their inventories? What is the optimal amount of inventory to have? How do you find that level? If perfect information were available, what information would you want in order to plan your inventory levels?

21. What Inventory? Raw Materials Work-in-process (WIP) Finished goods MRO ? � in a pure service industry is there inventory? If so, what is it?

22. Why Inventory? Economies of scale Allows larger (economic) production runs and transportation throughout supply chain Balancing Supply and Demand Demand is not constant 24x7 or during every day, week, season, or year Production (supply) cannot always match up perfectly with demand Transportation is not instantaneous

23. Why Inventory? Specialization If every component of a product could be made instantly and simultaneously at the same location, then no WIP would be necessary (cellular & lean production) Because many specialized suppliers are required to produce all the materials & components that go into a typical product, the time lags and process gaps in the supply chain links create inventory

24. Why Inventory? Buffer against Variability / Uncertainty Unless future demand is known with certainty, and unless there is never any loss in the replenishment cycle, then inventory is necessary to protect from these sources of supply chain variance What are some of the sources of supply chain system variance?

25. Why Inventory? Buffers non-synchronous Processes The rates and timing of supply, production, transportation, warehousing, distribution, and customer demand (etc.) do not all coincide Inventory provides a buffer so that the various links in the supply chain can be forged � so that materials and products can flow down the supply chain Unfortunately, inventory is usually optimized at each link in the supply chain, rather than for the overall supply chain

26. Basic Inventory Models Cycle stock � the average inventory level when demand and lead times are certain

27. Basic Inventory Models

28. Basic Inventory Models

29. Basic Inventory Models

30. Probabilistic Inventory Models Review: standard deviation is the average amount of observed variance from the mean/average. Excel function =stdev(array or number list) z is the number of standard deviations of variance from the mean (norm is 2 or 3) with the chance of error =1-normsdist(z) A z of 2 means a 4.55% chance of stockout, and a z of 3 means a 0.27% chance of stockout Or, to find z given a service level, use Excel function =normsinv(service level, e.g. 99%) = 2.326 = z

31. Probabilistic Inventory Models Variable demand and constant lead time ROP = (average daily demand x lead time in days) + zsdLT, where sdLT = sd*sqrt(lead time in days) and sd = standard deviation of demand per day Example: average daily demand = 10, lead time = 5 days, standard deviation of demand per day = 2, using z�s of 2 and 3, we get ROP=

32. Probabilistic Inventory Models Constant demand and variable lead time ROP = (daily demand * average lead time in days) + z*(daily demand)*sLT, where sLT = standard deviation of lead time in days Example: daily demand = 10, avg. lead time = 5 days, standard deviation of lead time = 1 day, using service level of 99%, we get z = 2.326, and ROP =

33. Probabilistic Inventory Models Variable demand and variable lead time ROP = (avg. daily demand * avg. lead time in days) + z*sdLT, where sdLT = sqrt((avg. lead time * sd2)+((avg. daily demand)2*sLT2)) Example: daily demand = 10 units, avg. lead time = 5 days, std. dev. of lead time = 1 day, std. dev. of demand = 2/day, and service levels of 98% and 99.9% (=normsinv(.98)=z= 2.054, and =normsinv(.999)=z=3.090), then ROP =

34. Basic EOQ Model

35. Basic EOQ Model Order and Setup Costs Since order & setup costs typically do not vary proportionate to quantity, their per unit cost diminishes rapidly with increases in quantity Composed of any setup or order charges and the costs associated with processing and receiving an order (e.g., $50-$300+)

36. Basic EOQ Model Inventory Carrying Costs

37. Basic EOQ Model

38. Basic EOQ Model

39. Basic EOQ Model

40. EOQ with Qty Discounts Situation You have an annual demand of 500 units A supplier is offering you prices as follows $100 each with no minimum order $90 each with a minimum order of 500 units $75 each with a minimum order of 2000 units Which should you choose? You have done a SWAG and figure inventory carrying costs are about 22%, and order costs are around $250/order

41. EOQ with Qty Discounts Step 1, find the EOQ Step 2 � calculate TC associated with EOQ Step 3 � calculate TC at the min. qty for each price break, TIC = (DS/Q)+(QH/2) Step 4 � choose the lowest total cost

42. ABC Analysis & Cycle Counting ABC Inventory Analysis list all inventory items and their respective unit costs and annual usage Multiply unit cost by annual usage and list in descending order Apply the 80/20 rule (Pareto Analysis) Consider different service levels for A, B, and C items

43. ABC Analysis & Cycle Counting Cycle Counting Count A items more often than B items, etc. Count a few items everyday Eliminate annual inventory count Eliminate untrained counters Count every item with an inventory record of 0 Modern inventory systems often allow ABC breakdown of inventories and generate cycle counting checklists

44. Inventory Effectiveness Since inventory is not only a cost, but also effects sales, the ultimate measure of inventory effectiveness is the impact it has on profitability This represents an optimal balance between reduced inventory costs and increased sales If sales can be maintained or further increased while still reducing inventory costs, then you�re really cooking

45. Measures of Inventory Effectiveness Inventory Turnover = Annual sales (at cost) / Average inventory in dollars Industry averages and highs are often obtainable to use as benchmarks From published financial statements, Inventory Turnover = CGS / Inventories Fill rate � the % of units available when ordered by the customer (same as service level)

46. Inventory Effectiveness There is an important relationship between inventory turnover and carrying costs Increased turnover reduces average inventory levels and thereby reduces total carrying costs

47. Pull vs. Push Systems A Pull system uses customer orders to �pull� or signal the system to produce A typical Pull system does final assembly only as customer orders are received Although a pure Pull supply chain is not practical, most leading firms are adopting partial pull systems A Push system plans production based on forecasts of customer demand and makes products to be placed in inventory in anticipation of customer orders

48. Independent vs. Dependent Demand Independent Demand items are products and services demanded by end-users E.g., consumer products, finished goods, MRO items, office supplies Quantity and timing of orders is determined by the market and typically forecasted by producers

49. Independent vs. Dependent Demand Dependent Demand items are materials and components whose demand is driven by the planned production of an independent demand item The quantity and timing of orders is determined by the production schedule (i.e, exploding the bill of materials), current inventory levels, order lead times, and planned receipts MRP systems do the calculations and provide reports and order scheduling

50. You May Have a Problem if - The number of back-orders is increasing There is a high or rising customer turnover rate The number of cancelled orders is increasing Inventory levels are rising without a proportionate increase in sales Storage space requirements fluctuate widely Fill rates / service rates fluctuate widely

51. Towards Better Inventory Management Not all inventory is created equal Use ABC Analysis & cycle counting Monitor and analyze lead times (e.g., s) Monitor and analyze transit times (s) Get rid of obsolete and low turnover items Analyze EOQ, safety stock, package size Review inventory carrying costs Have a process for substitutes

52. Towards Better Inventory Management Use postponement strategies Measure and monitor fill / service rates Analyze customer demand patterns Establish better demand forecasts Work towards lowest total logistics costs Monitor and reduce variances, NOT just averages Measure inventory effectiveness by overall profitability

54. Review Materials Handling Involves moving raw materials, WIP, and finished goods within plant or warehouse These movements ADD NO VALUE but reduce value through damage, pilferage, movement, bottlenecks, inventory costs, etc. Minimize, minimize, minimize The less material handling the better � tools include WMS (warehouse management systems) and good process development

55. Material Handling Monogatari World class operations include Scan items on receipt Accelerate handling via cross-docking or placing directly into storage Use RF technology WMS alerts forklift operator where to place/pick item Conveyors also used Receive customer orders electronically Computer assignment of pick lists and storage locations Automate packaging and labeling

56. Materials Handling Equipment Requirements for reduced order cycle times, reduced inventory levels, reduced order sizes, shorter lead times, etc., have boosted the materials handling equipment industry to over $50 billion annually (USA) Information is at least as important as the physical handling of materials Even small and mid-sized companies benefit from better and faster information

57. Storage & Order-Picking Storage Racks The mainstay of storage Found in almost any warehouse Easily accessible with materials handling equipment such as forklift trucks

58. Storage & Order-Picking Gravity Flow Storage Racks Suitable for high-flow items of uniform size Items loaded from back and roll to front

59. Storage & Order-Picking Bin Shelving Used for small parts that are normally hand-picked Height of system must be within reach of person without equipment

60. Storage & Order-Picking Modular Storage Drawers and Cabinets Used for small parts that are normally hand-picked Require little physical space and allow items to be concentrated near employees Typical kitchen is good example

61. Transporting & Sorting Warehouse personnel and order pickers can use a wide variety of equipment for sorting and moving items going in or out of storage

62. Shipping Involves preparing and packing items for shipment and loading onto the transport vehicle Equipment may include pallets, palletizers, strapping machines, shrink-wrap machines Loading and unloading docks and other easy access to transport vehicles is also important E.g., side-load trailers

63. Automated Materials Handling Systems AS/RS (automated storage and retrieval systems may include Carousels, case-picking or item-picking equipment, conveyors, robots, scanners (vision) Advantages include: Reduced labor costs, increased output, better accuracy, faster speed Disadvantages include: high initial cost, downtime interruptions, capacity problems, lack of flexibility, maintenance costs, training, obsolescence

64. Automated Materials Handling Systems AS/RS (automated storage and retrieval systems) http://www.asrs.net/contact-aft.asp Carousels (horizontal & vertical)

65. AGV�s Automatic guided vehicles

66. Shipment Tracking Systems Automation and electronic transfer of shipping documents and information has greatly improved customer service

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