Module 4 The Integrated Logistics Activities Sulbha Nigam

Integrated Logistics activities • • Information Forecasting Inventory Management Transportation management Warehouse management Material Handling Packaging

Information • The connection between the various stages in the supply chain – allows coordination between stages • Crucial to daily operation of each stage in a supply chain – e. g. , production scheduling, inventory levels

Forecasting

Basic Approach to Demand Forecasting • Understand the objectives of forecasting • Integrate demand planning and forecasting • Identify major factors that influence the demand forecast • Understand identify customer segments • Determine the appropriate forecasting technique • Establish performance and error measures for the forecast

Forecasting Methods • Qualitative: primarily subjective; rely on judgment and opinion • Time Series: use historical demand only • Causal: use the relationship between demand some other factor to develop forecast • Simulation – Imitate consumer choices that give rise to demand – Can combine time series and causal methods

Inventory Management

Inventory Management Fundamental Approaches to Managing Inventory • Basic issues are simple…how much to order and when to order. • Additional issues are…where to store inventory and what items to order. • Traditionally, conflicts were usually present…as customer service levels increased, investment in inventory also increased. • Recent emphasis is on increasing customer service and reducing inventory investment.

Key Differences among Approaches to Managing Inventory • Dependent versus Independent Demand – Dependent demand is directly related to the demand for another product. – Independent demand is unrelated to the demand for another product. – For many manufacturing processes, demand is dependent. – For many end-use items, demand is independent.

Key Differences among Approaches to Managing Inventory – Of the inventory management processes in, JIT, MRP and MRPII are generally associated with items having dependent demand. – Alternatively, DRP and the EOQ models are generally associated with items exhibiting independent demand.

Key Differences among Approaches to Managing Inventory – Pull Vs Push S PULL No. PUSH 1 Pull approach is a “reactive” system, relying on customer demand to “pull” product through a logistics system. Mac. Donald’s is an example Push approach is a “proactive” system, and uses inventory replenishment to anticipate future demand. Catering businesses are examples of push systems 2 Pull systems respond quickly to sudden or abrupt changes in demand, involve one-way communications, and apply more to independent demand situations. Push systems use an orderly and disciplined master plan for inventory management, and apply more to dependent demand situations

Fixed Order Quantity Approach (Condition of Certainty): Simple EOQ Model • Simple EOQ Model Assumptions – Continuous, constant, known and infinite rate of demand on one item of inventory. – A constant and known replenishment time. – Satisfaction of all demand. – Constant cost, independent of order quantity or time. – No inventory in transit costs. – No limits on capital availability

Inventory Costs

Fixed Order Quantity Approach (Condition of Certainty) • Summary and Evaluation of the Fixed Order Quantity Approach: – EOQ is a popular inventory model. – EOQ doesn’t handle multiple locations as well as a single location. – EOQ doesn’t do well when demand is not constant. – Minor adjustments can be made to the basic model. – Newer techniques will ultimately take the place of EOQ

Fixed Order Quantity Model under the Condition of Certainty

Fixed Order Quantity Model under Conditions of Uncertainty

Fixed Order Interval Approach • A second basic approach • Involves ordering at fixed intervals and varying Q depending upon the remaining stock at the time the order is placed. • Less monitoring than the basic model • Amount ordered over each five weeks in the example varies each week

Fixed Order Interval Model (with Safety Stock )

Summary and Evaluation of EOQ Approaches to Inventory Management • Four basic inventory models: – – Fixed quantity/fixed interval Fixed quantity/irregular interval Irregular quantity/fixed interval Irregular quantity/irregular interval • Where demand lead time are known, basic EOQ or fixed order interval model best. • If demand or lead time varies, then safety stock model should be used

Classifying Inventory: ABC Analysis • Ranking system – Developed in 1951 by H. Ford Dicky of General Electric 3. – Suggested that GE classify items according to relative sales volume, cash flows, lead time, or stockout cost. – Most important inventory put in Group A. – Lesser impact goods put in Groups B and C respectively.

Classifying Inventory: ABC Analysis • 80 -20 Rule( Pareto principal ) – 80% of sales will come from 20% of the inventory SKUs. – 20% of sales will come from 80% of the inventory SKUs. • The 80 -20 Rule has been found to explain many phenomena that interest managers. – For example, 80% of sales come from 20% of customers; and vice versa.

ABC Inventory Analysis

Classifying Inventory Classification Basis ABC [Always Better Control ] Value of items consumed XYZ X=High value Y=Medium Z=Low Value of items in storage VED [ Vital, Essential, Desirable ] FSN [ Fast-moving, Slow-moving, Nonmoving ] HML [ High, Medium, Low ] The importance or criticality The pace at which the material moves Unit price of materials SDE [ Scarce, Difficult, Easy ] Procurement Difficulties SOS [ Seasonal, Off seasonal ] Seasonality GOLF [ Govt, Open Market, Local, Foreign] Source of Supply of material

Additional Approaches to Inventory Management • Three approaches to inventory management that have special relevance to supply chain management: – JIT (Just in Time) – MRP (Materials Requirements into Planning) – DRP (Distribution Resource Planning)

Time-Based Approaches to Replenishment Logistics: JIT • Definition and Components of JIT Systems - designed to manage lead times and eliminate waste. – Goal is zero inventory, and zero defects. – Similarity to the two-bin system - one bin fills demand for part, the other is used when the first is empty. – Reduces lead times through requiring small and frequent replenishment.

Time-Based Approaches to Replenishment Logistics: JIT • JIT is a widely used and effective strategy for managing the movement of parts, materials, semi-finished products from points of supply to production facilities. • Product should arrive exactly when a firm needs it, with no tolerance for early or late deliveries. • JIT systems place a high priority on short, consistent lead times.

EOQ versus JIT Attitudes and Behaviors

Time-Based Approaches to Replenishment Logistics: MRP • A Materials Requirements Planning (MRP) system consists of a set of logically related procedures, decision rules, and records designed to translate a master production schedule into time-phased net inventory requirements for each component item needed to implement this schedule. • MRPs re-plan net requirements based on changes in schedule, demand, etc.

Time-Based Approaches to Replenishment Logistics: MRP • Goals of an MRP: – Ensure the availability of materials, components, and products for planned production. – Maintain lowest possible inventory – Plan manufacturing activities, delivery schedules, and purchasing activities. level.

Time-Based Approaches to Replenishment Logistics: MRP • Key elements of an MRP: • Master production schedule • Bill of materials file • Inventory status file • MRP program • Outputs and reports

Time-Based Approaches to Replenishment Logistics: MRP • Principal advantages of MRP: – Maintain reasonable safety stock. – Minimize or eliminate inventories. – Identification of process problems. – Production schedules based on actual demand. – Coordination of materials ordering. – Most suitable for batch or intermittent production schedules.

Time-Based Approaches to Replenishment Logistics: MRP • Principal shortcomings of MRP: – Computer intensive. – Difficult to make changes once operating. – Ordering and transportation costs may rise. – Not usually as sensitive to short-term fluctuations in demand. – Frequently become quite complex. – May not work exactly as intended.

Time-Based Approaches to Replenishment Logistics: Distribution Resource Planning • MRP sets a master production schedule and “explodes” into gross and net requirements. • DRP starts with customer demand works backwards toward establishing a realistic system -wide plan for ordering the necessary finished products. • Then DRP works to develop a time-phased plan for distributing product from plants and warehouses to the consumer.

Time-Based Approaches to Replenishment Logistics: Distribution Resource Planning • DRP develops a projection for each SKU and requires: – Forecast of demand for each SKU. – Current inventory level for each SKU. – Target safety stock. – Recommended replenishment quantity. – Lead time for replenishment.

Time-Based Approaches to Replenishment Logistics: Quick Response (QR) • Structure of QR – Shorter, compressed time horizons. – Real-time information available by SKU. – Seamless, integrated logistics networks with rapid transportation, cross-docking and effective store receipt and distribution systems.

Time-Based Approaches to Replenishment Logistics: Quick Response (QR) • Structure of QR – Partnership relationships present among supply chain members. – Redesign of manufacturing processes to reduce lot sizes, changeover times and enhanced flexibility. – Commitment to TQM.

Basic Elements of Quick Response (QR)

Transportation Management

The Role of Transportation in Logistics • Transportation is the physical link connecting the firm to its suppliers and customers. • In a nodes and links scenario, transportation is the link between fixed facilities (nodes). • Transportation also adds value to the product by providing time and place utility for the firm’s goods.

The Transport Selection Decision • The Transportation – Supply Chain Relationship – Firms need to recognize that the lowest cost carrier does not necessarily guarantee that this carrier will result in the lowest landed cost. – Therefore, firms need to keep the big picture in mind when attempting to select a carrier. • The Carrier Selection Decision: – Various modes of transportation should be considered. – Choose a carrier or carriers within the selected mode, if there is a choice. – Carefully examine the service capabilities of the carrier as services can vary widely between carriers.

The Transport Selection Decision • Carrier Selection Determinants: – Cost – Transit time and reliability • Can be a competitive advantage • Lowers customers’ inventory costs – Capability – Accessibility – Security • The Pragmatics of Carrier Selection: – – – Transit time reliability Negotiated rates Consolidating shipments among a few carriers Financial stability Sales rep Special equipment

Transportation Management Strategies: Proactive Transportation Management 1. 2. 3. 4. 5. Reducing the number of carriers Negotiating with carriers Contracting with carriers Consolidating shipments Monitoring service quality

The Basic Modes of Transportation

Intermodal Transportation • Refers to use of two or more modes of transportation cooperating on the movement of shipment by publishing a through rate.

Transport Documentation: Domestic • • Bill of Lading Freight Bill Claims F. O. B. Terms of Sale

Bill of Lading

Documentation: Domestic Bills of Lading • Straight Bill – Non-negotiable – Contains terms of the sale including the time/place of title transfer. • Order Bill – Negotiable – Consignor retains original until bill is paid.

Documentation: Domestic Freight Bills • Carrier’s invoice for charges for a given shipment. • Credit terms are stipulated by the carrier and can vary extensively. • Credit may be denied if the charges are worth more than the freight. • Bills may also be either prepaid or collect. • Freight bills are typically audited internally or externally.

Documentation: Domestic Claims • A document filed with the carrier to recover monetary losses due to losses, damage, delay or overcharges by the carrier. • Typically, claims are filed within 9 months, claimant in notified by receipt within 30 days, and settlement or refusal within 120 days. • Claims terms can be stipulated in the contract of carriage agreement and may be atypical.

Documentation: Domestic F. O. B. Terms of Sale • Determines which party is to pay the freight bill, which party has title to the goods, and which party controls the movement of the goods. • F. O. B. origin - buyer pays freight, owns goods once loaded, controls movement of the goods • F. O. B. destination - seller pays freight, owns goods until delivered, controls movement of the goods

Documentation: International • Documentation for international transportation is far more complex than required for domestic transportation. • Types of documents vary widely by country. – Sales Documents – Terms of Sale – Transportation Documents

Documentation: International Sales Documents • Sales contract is the initial document. • Letter of Credit may also accompany shipment (guarantees payment). • May also use cash and other means of demonstrating an ability to pay for the goods.

Documentation: International Terms of Sale • AKA “Incoterms”--international credit terms • Terms may include: http: //en. wikipedia. org/wiki/Incoterm – – – – Export packing costs Inland transportation Export clearance Vehicle loading Transportation costs Insurance Duties Insurances

Incoterms • Group E – Departure – EXW – Ex Works (named place) • the seller makes the goods available at his premises. • Group F – Main carriage unpaid – FCA – Free Carrier (named place) • the seller hands over the goods, cleared for export, into the custody of the first carrier (named by the buyer) at the named place. This term is suitable for all modes of transport, including carriage by air, rail, road, and containerised / multi-modal transport. – FAS – Free Alongside Ship (named loading port) • the seller must place the goods alongside the ship at the named port. The seller must clear the goods for export; this changed in the 2000 version of the Incoterms. Suitable for maritime transport only. – FOB – Free On Board (named loading port) • the classic maritime trade term, Free On Board: seller must load the goods on board the ship nominated by the buyer, cost and risk being divided at ship's rail. The seller must clear the goods for export. Maritime transport only.

Incoterms • Group C – Main carriage paid – CFR – Cost and Freight (named destination port) • seller must pay the costs and freight to bring the goods to the port of destination. However, risk is transferred to the buyer once the goods have crossed the ship's rail. Maritime transport only. – CIF – Cost, Insurance and Freight (named destination port) • exactly the same as CFR except that the seller must in addition procure and pay for insurance for the buyer. Maritime transport only. – CPT – Carriage Paid To (named place of destination) • the general/containerised/multimodal equivalent of CFR. The seller pays for carriage to the named point of destination, but risk passes when the goods are handed over to the first carrier. – CIP – Carriage and Insurance Paid to (named place of destination) • the containerised transport/multimodal equivalent of CIF. Seller pays for carriage and insurance to the named destination point, but risk passes when the goods are handed over to the first carrier.

Incoterms • Group D – Arrival – DAF – Delivered At Frontier (named place) • It can be used when the goods are transported by rail and road. The seller pays for transportation to the named place of delivery at the frontier. The buyer arranges for customs clearance and pays for transportation from the frontier to his factory. The passing of risk occurs at the frontier. – DES – Delivered Ex Ship (named port) • Where goods are delivered ex ship, the passing of risk does not occur until the ship has arrived at the named port of destination and the goods made available for unloading to the buyer. The seller pays the same freight and insurance costs as he would under a CIF arrangement. Unlike CFR and CIF terms, the seller has agreed to bear not just cost, but also Risk and Title up to the arrival of the vessel at the named port. Costs for unloading the goods and any duties, taxes, etc… are for the Buyer. A commonly used term in shipping bulk commodities, such as coal, grain, dry chemicals - - - and where the seller either owns or has chartered, their own vessel. – DEQ – Delivered Ex Quay (named port) • It means the same as DES, but the passing of risk does not occur until the goods have been unloaded at the port of destination. – DDU – Delivered Duty Unpaid (named destination place) • It means that the seller delivers the goods to the buyer to the named place of destination in the contract of sale. The goods are not cleared for import or unloaded from any form of transport at the place of destination. The buyer is responsible for the costs and risks for the unloading, duty and any subsequent delivery beyond the place of destination. However, if the buyer wishes the seller to bear cost and risks associated with the import clearance, duty, unloading and subsequent delivery beyond the place of destination, then this all needs to be explicitly agreed upon in the contract of sale. – DDP – Delivered Duty Paid (named destination place) • It means that the seller pays for all transportation costs and bears all risk until the goods have been delivered and pays the duty. Also used interchangeably with the term "Free Domicile"

Documentation: International Transportation Documents • Export Declaration - describes the goods • Export License - allows export of goods – General license allows export of most goods w/out any special requirements – Validation export license for export of controlled items • Commercial invoice - determines value • Carnet - seals shipment at origin

Documentation: International Transportation Documents • Bill of Lading - initiating document for all shipments – Export B. O. L. - can govern foreign domestic, intercountry, and domestic movements of the goods. – Ocean B. O. L. - sets terms, lists origin and destination ports, quantities and weight, rates, special handling needs for the ocean movement.

Documentation: International Transportation Documents – Order B. O. L - negotiable – Clean B. O. L. - issued by carrier when goods arrive in port; damages and other exceptions should be noted • Ocean carrier held liable for losses due to negligence only. • Other losses responsibility of the shipper. • Certificate of insurance may be required. • Dock receipt provided to domestic carrier.

Transportation Services • Terminal Services – – – – Consolidation Dispersion Shipment services Vehicle services Interchange Loading & Unloading Weighing Tracing/Expediting • Line-Haul Services – – – Reconsignment Diversion Pooling Stopping in Transit Privilege

Warehouse Management

The Role of the Warehouse in the Logistics System: A Basic Conceptual Rationale • Functions of • The warehouse is warehousing include: where the supply chain holds or stores – Transportation goods. consolidation – – Product mixing Cross-docking Service Protection against contingencies – Smoothing

Transportation Consolidation

Supply and Product Mixing

Basic Warehouse Decisions: A Cost Trade-off Framework • Ownership – Public versus contract versus private • Centralized or Decentralized Warehousing – How many – Location – Size – Layout – What products where

The Ownership Decision • Public warehousing costs mostly all variable. • Private warehousing costs have a higher fixed cost component. • Thus private warehousing virtually requires a high and constant volume.

The Ownership Decision • Factors to consider – Throughput volume – Stability of demand – Density of market area to be served – Security and control needs – Customer service needs – Multiple use needs of the firm

Public Warehousing • Rationale for Public Warehousing – Limited capital investment – Flexibility • Public Warehousing Services – Bonded warehousing – Field warehouses

Public Warehousing • Public warehousing regulation: rates based upon: – Liability – Receipts • Value • Fragility • Potential damage to other goods • Volume and regularity • Weight density • Services required

Contract Warehousing • • Compensation for seasonality in products. Increased geographical coverage. Ability to test new markets. Managerial expertise and dedicated resources. • Less strain on the balance sheet. • Possible reduction of transportation costs.

The Number of Warehouses • Factors Affecting the Number of Warehouses – – – Inventory costs Warehousing costs Transportation costs Cost of lost sales Maintenance of customer service levels – Service small quantity buyers

Factors Affecting the Number of Warehouses Factor Centralized Decentralized Substitutability Low High Product Value High Low Purchase Size Large Small Special Warehousing Yes No Product Line Diverse Limited Customer Service Low High

Materials Handling • Definition: Efficient short distance movement in or between buildings and a transportation agency. • Four dimensions – Movement – Time – Quantity – Space • Coordination

Utilization of a Warehouse’s Cubic Capacity: Principles of Warehouse Layout Design

Guidelines and Principles for Materials Handling • To effectively plan and control materials handling, the logistics manager should recognize some guidelines and principles. • Table in next slide lists 20 of the most commonly accepted principles of effective materials handling. Asterisks mark those deserving special attention.

Principles of Materials Handling

Some Material Handling Equipments Pallet Movers Fork Lift Trucks Conveyor Belts Cranes

Packaging • Interest in packaging is widespread – Logistics • Warehousing • Transportation • Size – Marketing – Production – Legal

The Role of Packaging • Identify product and provide information • Improve efficiency in handling and distribution • Customer interface • Protect product

What Is Packaging? • Consumer packaging – Marketing managers primarily concerned with how the package fits into the marketing mix. • Industrial packaging – Logistics managers primarily concerned with efficient shipping characteristics including protection, ability to withstand stacking when on a pallet, cube, weight, shape and other relevant factors.

Packaging Materials • Table in next slide presents a comparison of various packing material characteristics. • Basic considerations include: – Soft materials – Plastic – Environmental issues – Recycling (reverse logistics)

Comparison of Cushioning Materials

Bar Coding • Standard markings that can be read by automatic or handheld scanners that allow for labor saving logistical activities for all supply chain members. • Bar Codes contain information regarding: – Vendor – Product type – Place of manufacture – Product price

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