Operation Methods in Value Chain Mgmt
CHAPTER 7 Managing Inventories
MGMT 400 Operations Methods in Value Chain Management
Learning Objectives
1. Define the different types and roles of inventory
2. Explain the financial impact of inventory
3. Explain and compute measures of inventory performance
4. Describe practical techniques for inventory planning and management
5. Explain how inventory impacts and must be managed across the entire supply chain
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Chapter 7: Lists and Groupings
Types of Inventory
1. Raw Materials
2. Component Parts
3. Work in Process (WIP)
4. Finished Goods
5. Maintenance, Repair and Operating
Supplies (MRO)
6. Transit
Roles of Inventory
1. Balancing Supply and Demand
2. Buffering Uncertainty in Demand or
Supply
3. Enabling Economies of Buying
4. Enabling Geographic Specialization
Costs Relayed to Inventory 1. Product Costs 2. Holding (Carrying) Costs 3. Order and Setup Costs 4. Stockout Costs (Shortage)
Measures of Inventory Performance 1. Inventory Turnover 2. Days of Supply 3. Service Level
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Definitions
• Inventory is the supply of items held by a firm to meet demand
• Inventory specific to manufacturing (items contributing or becoming a firm’s output) :
– Raw materials – Component parts – Work-in-Process – Finished products
• Inventory in all types of organizations: – MRO inventory (maintenance, repair, operating
supplies) –Transit Inventory
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Types of Inventory
• Inventory: supply of items held to meet demand
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Suppliers |
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Raw Material
Components Work in
Process (WIP)
Transportation
MRO Maintenance, repair & operating supplies
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Finished Goods (FGI) |
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: Transit Inventory
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Distribution |
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Customers |
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Types of Inventory
Which type of inventory could the following products be? Examples?
– Oranges • Finished product (orchards)
• Raw material inventory (orange juice manufacturer)
• Work-in-process (company that sells ready-make fruit salads for grocery stores)
• Maybe MRO in an office environment as part of “office supplies”?
– Computer Processor • Component part (Dell, Playstation production, etc.)
• Finished products (Intel, AMD) • MRO at a school
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Roles of Inventory
1. Balancing Supply and Demand
2. Buffering Uncertainty in Demand of Supply
3. Enabling Economies of Buying
4. Enabling Geographic Specialization
Roles of Inventory
• Balancing (timing of) supply and demand: decouples differences in supply and demand requirements
• Buffers against uncertainties: variation in supply and demand are managed with safety (buffer) stock
• Economies of Buying: price discounts or reduced shipping costs
• Geographic Specialization: supply and demand locations vary
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Roles of Inventory
1. Balancing Supply and Demand
2. Buffering Uncertainty in Demand of Supply
3. Enabling Economies of Buying
4. Enabling Geographic Specialization
Roles of Inventory
• Balancing (Timing of) Supply and Demand
–In most cases, it is beneficial to produce batches of products before demand realizes. (Exception?)
–Customers expect many products to be available at the time they decide to purchaseavailability of product
–Seasonality of demand or supply:
• Customers may be interested in products only at certain time of year, but production runs all year.
• Some products can only be produced at certain times of year, but are demand all year long (agriculture).
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Roles of Inventory
1. Balancing Supply and Demand
2. Buffering Uncertainty in Demand of Supply
3. Enabling Economies of Buying
4. Enabling Geographic Specialization
Roles of Inventory
• Buffers against uncertainties: variation in supply and demand are managed with safety (buffer) stock
Demand:
–Typically, it is impossible to know exact future demand. –If demand is higher than inventory, customers cannot make
the purchase.shortage costs (explained later)
Supply:
–Uncertainty concerning how long until replenishments arrive
–Without safety stock, your operations might have to be stopped if replenishment is delayed.
safety (or buffer) stock is extra inventory held to guard against uncertainty in supply or demand
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Roles of Inventory
1. Balancing Supply and Demand
2. Buffering Uncertainty in Demand of Supply
3. Enabling Economies of Buying
4. Enabling Geographic Specialization
Roles of Inventory
• Economies of buying: price discounts or reduced shipping costs
–Economies of Scale at the supplier lead to a decreasing price per unit as purchase volume increases.
–Economies of Scale lead to lower unit transportation costs as shipment size increases.
–Speculative buying
• Buy large amounts when prices are low in anticipation of price increases (jet fuel, heating oil, silicon,...)
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Roles of Inventory
1. Balancing Supply and Demand
2. Buffering Uncertainty in Demand of Supply
3. Enabling Economies of Buying
4. Enabling Geographic Specialization
Roles of Inventory
• Geographic Specialization: supply and demand locations vary
–Demand for most products exists virtually everywhere.
–Production locations are typically few, so larger quantities have to be produced, shipped, and stored.
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Costs Related to Inventory
1. Product Costs 2. Holding Costs 3. Order and Setup 4. Stockout Costs
Financial Impact of Inventory
• Product Costs: amount paid to suppliers for the products that are purchased
• Holding (Carrying) Costs – Usually stated as a percentage of the value of the inventory
– Capital costs
• Cost of the capital or opportunity cost
– Storage costs
• Storage and warehouse management, cost of space, workers, and equipment
– Risk costs
• Obsolescence, deterioration, spoilage, shrinkage • Taxes and insurance • Material handling, tracking, damage, and management
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Costs Related to Inventory 1. Product Costs 2. Holding Costs 3. Order and Setup
4. Stockout Costs
Holding (Carrying) Costs
Annual inventory holding costs can be estimated as a percentage of inventory value:
–Cost of Money 6% - 12% –Taxes 2% - 6% –Insurance 1% - 3% –Warehouse & Handling Expenses 2% - 5% –Clerical & Inventory Control 3% - 6% –Obsolescence 6% - 12%
–Deterioration & Pilferage 3% - 6%
Annual holding costs can easily be 25% of the total value of inventory
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Costs Related to Inventory 1. Product Costs 2. Holding Costs 3. Order and Setup
4. Stockout Costs
Financial Impact of Inventory
• Ordering and Set-up Costs –Purchased items: placing and receiving orders –Make items: set-up or change-over between items
Cheetos Snack Production
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Costs Related to Inventory 1. Product Costs 2. Holding Costs 3. Order and Setup
4. Stockout Costs
Financial Impact of Inventory
• Stockout (Shortage) Costs –Lost sales or customer loyalty –Schedule disruptions for downstream partners –Expediting/backorder costs
Japan Tsunami 2011
Empty Store Shelves
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Measures of Inventory Performance
• Inventory turnover: ratio between average inventory on-hand and level of sales
Three definitions = Cost of goods sold / Average inventory at cost
= Net sales / Average inventory at selling price = Unit sales / Average inventory in units
With an annual cost of goods sold of $500M and average inventory of $80M.
Inventory turns = $500/$80 = 6.25 turns per year
The number of times average inventory is sold and replaced annually
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Measures of Inventory Performance
• Advantages of high inventory turnover – “Fresh” inventory from high sales – Less risk of obsolescence or need to mark down – Reduced total inventory holding costs – Lower asset investment and higher productivity
• Dangers of high inventory turnover – Lower sales if desired inventory is not available
(stockouts)
– Increased costs from missing quantity requirements (loss of economies of scale)
– Increased ordering costs 7
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Measures of Inventory Performance
• Days of Supply: length of time operations can be supported with inventory on-hand
– Based on demand forecasts or input requirement forecasts (depending on type of operations)
– More meaningful for specific items than overall inventory holdings
Days of Supply = Current Inventory / Daily demand
Average Days of Supply = Average Inventory / Daily Demand
If current inventory is 2,000 and daily demand is 25/day:
Days of Supply = 2,000/25 = 80 days
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Measures of Inventory Performance
• Service level measures the ability to meet customer demand without a stockout.
– Different ways to measure service level
• 1: Percentage of customers whose order you can satisfy without delay using your inventory
• 2: Percentage of demand volume you can deliver without delay using your inventory
• Example:
– Assume you have 100 bottles of beer in stock. 99 customers arrive and order 1 bottle each. Then the 100th customer arrives and orders 101 bottles of beer, but you only have 1 left.
• Service level (type 1): 99/100 = 99% • Service level (type 2): 100/200 = 50%
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Managing Inventory
• Basic decisions involve:
– How much to order
• How much inventory should be held? • Too much inventory very high holding costs • Too little inventory very high stockout costs
– When to order
– Where in the organization / supply chain should inventory be held?
• Important Tools
– Inventory item classification – Information systems and accurate inventory records
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Managing Inventory
Managing inventory involves managing: • Cycle stocks
– Average inventory needed to meet demand between the times the firm orders more inventory
• Safety (or buffer) stocks • Inventory locations • Inventory information systems
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Managing Inventory: Cycle Stocks
• Primary driver of cycle stock size is the order quantity
• Lower optimal order quantity is achieved with:
–Lower ordering or setup costs –Reducing quantity discounts with always lowest price
• How can ordering or setup costs be reduced?
–Online ordering –Automated payments –Decreasing setup time
• Lowering order costs will lower the order quantity, which will lead to decline in cycle stock
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Managing Inventory: Safety Stocks
• Safety stock is required because of uncertainty and variability, so reducing variability would reduce required safety stock levels
• Variability and uncertainty can be reduced through:
– Better forecasting (Chapter 12) – Reduced lead (shipping) times – Better supplier relationships – Changes in transportation method
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Item Classification
• ABC analysis: ranking of inventory by importance allows firms to focus on critical inventory items.
–Determine the percentage of the total usage or sales (or other criteria of importance) by each item and rank the items from highest to lowest percentage
• Different policies for different items:
–Safety stock policy
• A items have higher safety stock levels than B items • Little or even no safety stock for C items
–Purchasing policy
• More purchasing effort warranted for A items than B or C items
–Inventory audits
• More frequent inventory check for A items than B or C items
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Managing Inventory: Locations
Where a firm locates inventory impacts the cost and amount of required inventory
• Distribution centers can reduce the total inventory level
– While providing fast reliable service to stores and downstream locations
– Also allows for offering of more products without accumulating too much inventory
• Transshipment and inventory sharing policies can reduce overall inventory
– Can quickly get parts from other locations
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Inventory Information Systems and Accuracy
• Inventory information systems provide data for inventory analysis and require unique product identifiers.
• Finished Products:
–Use the UPC (Universal Product Code) barcode in North America
• Raw Materials and Components:
–No standardized systems developed yet, part number vary between companies
–Part Number: unique identifier used by a specific firm
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Inventory Information Systems and Accuracy
• Inventory Record Accuracy
· – Human errors or accidents can lead to costly inaccuracies of inventory levels
· – Cycle Counting: inventory is physically counted (audited) on a routine schedule
• ABC analysis used to determine audit cycles • Cycle through products so that “a little is checked every day”
· – Point-of-sale scanning (UPC barcodes) and RFID tags can increase accuracy
Any system is only as good as the data that it contains!!
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Managing Inventory Across the Supply Chain
• Inventory Value:
–As an item moves in the supply chain, value is constantly being added to it
• Finished good has a value that is much greater than the sum of its individual parts
–Items are more expensive to stock further downstream in the supply chain (or conversely, less expensive to stock upstream)
• Bullwhip Effect:
–Variation increases upstream in the supply chain (from consumer to manufacturers)
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Bullwhip Effect
Increasing Variability of Orders up the Supply Chain
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Managing Inventory Across the Supply Chain
• Vendor-managed Inventory (VMI) : the vendor is responsible for managing inventory for the customer
–Vendor monitors and replenishes inventory balances –Customer saves holding costs –Vendor has higher visibility of inventory usage
• Collaborative planning, forecasting and replenishment (CPFR)
–Supply chain partners sharing information to jointly develop their production, distribution, and replenishment plans
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Managing Inventories Summary
1. Multiple types and roles of inventory
2. Inventory is an asset, and has multiple costs
3. Multiple performance metrics such as inventory turns, days of supply, and service level
4. An inventory policy determines how much and when to order
5. Lowering order costs will reduce cycle stock
6. Reducing variability/uncertainty will reduce safety stock
7. Bullwhip effect describes increasing upstream variation for supply chain partners
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CHAPTER 11 Logistics Management
MGMT 400 Operations Methods in Value Chain Management
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Learning Objectives
1. Explain logistics and major managerial decisions made by logistics managers
2. Describe impact of consolidation on cost
3. Describe carrier mode selection process
4. Explain roles and activities of warehousing and distribution
5. Explain importance of packaging and materials handling
6. Explain network design decisions
7. Describe benefits of integrated service providers
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Activities of Integrated Logistics Management 1.Inventory Management 2.Order Processing 3.Transportation Management 4.Warehouse Management
5.Material Handling and Packaging
6.Network Design Consolidation Strategies
1.Market Area 2.Pooled Delivery 3.Scheduled Delivery
Modes of Transportation 1.Truck 2.Rail 3.Pipeline
4.Water
5.Air Characteristics of Transportation Modes
1.Speed 2.Availability 3.Dependability 4.Capability 5.Frequency
Carrier Types 1.Common 2.Contract 3.Private
Warehouse Operations 1.Stockpiling 2.Production Support 3.Transshipment Points
1. Break-Bulk 2. Consolidation 3. Cross-Docking
4.Reverse Logistics
5.Value Added Services Warehouse Facilities
1.Private 2.Public 3.Contract
Chapter 11: Lists and Groupings
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Logistics Management
• Logistics Management : movement and storage of materials to meet customer needs and organizational objectives
- Includes forward and reverse flow - Includes flow of materials and information - Load, offload, move, sort and select material
• Two dimensions
- Providing service to customers - Efficiently managing its costs
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Logistics is an integrating activity
• Inbound flows
–Work with suppliers and procurement managers
• Flows within the organization
–Information, products, and materials among different plants and facilities
• Outbound flows
–Work with marketing, sales, and customers –Ensure customer requirements are satisfied
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Logistics Impacts Customer Service
• Logistics plays a critical role in customer service • Availability
–Locations for storing inventories
• Lead-time performance
–Transportation to customers –Packaged and loaded quickly
• Service reliability
–Without damage –To exact location –All items ordered
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Activities of Integrated Logistics Management
Figure 11-1 1
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Logistics management is challenging
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Logistics Cost Minimization & Trade-offs
• Logistics involves significant expense
–As much as 25-30% of each dollar of sales revenue –The total cost of U.S. logistics was $1.4 trillion in 2014
• 8.3% of U.S. GDP
• Tradeoffs between service levels and cost
–Cost-to-Service:
• Better product availability Higher inventory Higher carrying cost
–Cost-to-Cost:
• Lower transportation expenses More warehouse locations Higher warehousing expenses
• Logistics seeks to minimize the total landed costs, not just one cost element
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Logistics Cost Minimization & Trade-offs
• Total Landed Cost : sum of all product and logistics related costs
- Costs within country of manufacture
• Raw materials, storage, labor... - Cost in transit to country of sale
• Fuel, insurance, port charges...
- Cost within country of sale
• Local handling, taxes, maintenance...
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Logistics Management
1. Inventory Management
2. Order Processing
3. Transportation Management
4. Warehouse Management
5. Material Handling and Packaging
6. Network Design
Inventory Management / Order Processing
• Inventory management
–Considers such questions as:
• Where to hold, in what form, how often to replenish
–Level of inventory is dependent on:
• Mode of transportation • Location and number of warehouses
• Order processing
–Competitive advantage by improving the speed –Importance of accuracy of service
Today’s business mantra: “information replaces inventory”
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Logistics Management
1. Inventory Management
2. Order Processing
3. Transportation Management
4. Warehouse Management
5. Material Handling and Packaging
6. Network Design
Transportation Management
• The most visible part of logistics
–Transportation costs 40-60% of logistics costs
• More important as companies have increased their global reach
• Government’s Role:
– Economic Regulation (decreasing): entry of new carriers, rates and services provided
– Safety (and Social) Regulation (increasing): safe for carriers and public, including increased emphasis on security from terrorist activity and transparency on travel locations
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Transportation Economics
- Economy of Scale : cost per unit of weight decreases as shipment size increases (“the larger the load, the lower the cost per pound”)
- Economy of Distance : cost per unit traveled decreases as distance moved increases (“the longer the haul, the lower the cost per mile”)
Cost Per Unit of Weight
Cost Per Unit of Distance
Weight of Shipment
Distance
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Consolidation
• Consolidation : combining many smaller shipments into one large shipment
– Market Area : combine small shipments from one shipper going to the same area
– Pooled Delivery : combine small shipments from different shippers going to the same area
• Handled by independent transportation companies (UPS or FedEx)
– Scheduled Delivery : delivery at specific times • Only possible within the constraints of customers’
requirements • Represents a cost-to-service tradeoff
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Consolidation Example: In-Class Exercise
A firm has 3 customer orders, each for 12,000lbs of coal. It is $15.75 per 100 lbs to ship directly to each customer, or $10.50 per 100 lbs for consolidated shipments with a $300 fee for each stop. Should the firm consolidate shipments?
Cost of individual shipments:
$15.75 x (12,000/100) = $15.75 x 120 = $1,890 total for all three shipments = 3 x $1,890 = $5,670
Consolidated shipments:
$10.50 x (36000/100) = $10.50 x 360 = $3,780 including stop charge = 3 x $300 + $3780 = $4,680
Saving with consolidation = $5,670 - $4,680 = $990
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Consolidation Example: In-Class Exercise
You have three shipments to make. The weights are 3,000 lbs, 7,000 lbs, and 14,000 lbs. The transportation rates are as follows:
Shipment Weight
1,000 – 5,000 lbs. 5,000 – 10,000 lbs. Over 10,000 lbs.
Cost per 100 pounds
$18 $16 $14
For consolidated shipments, there is a charge of $200 per stop.
Cost of individual shipments:
(3,000/100)($18) + (7,000/100)($16) + (14,000/100)($14) =
$540 +$1,120 + $1,960 = $3,620
Consolidated shipments:
(24,000/100)($14) + 3($200) = $3,360 + $600 = $3,960
$3,620 - $3,960 = $340 Consolidation costs $340 more
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Transportation Modes
• Five basic transportation modes
–Rail, Truck, Water, Air, Pipeline
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Transportation Modes
• When deciding which mode of transportation should be used for each order, consider:
–Cost of each mode
–Service characteristics
• Speed • Availability • Dependability • Capability • Frequency
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Transport Modes
1. Truck
2. Rail 3. Water 4. Pipeline 5. Air
Truck
• Major transportation mode in U.S.
• Can offer door-to-door service anywhere
• Low fixed costs, high variable costs
• Three segments
–Truckload (TL): Non-stop loads over 15,000 lbs
• Price competitive • Many small operators
–Less-than-truckload (LTL): Less than 15,000 lbs
• Consolidation required • Few national carriers: Yellow Freight, Conway, Roadway
–Specialty carriers: Package haulers
• FedEx, UPS, USPS
Who has the strength of the last mile?
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Transport Modes 1. Truck 2. Rail 3. Water
4. Pipeline 5. Air
Rail
• Best suited to moving large shipments over long distances
• High fixed costs, low variable costs
• Slow, low flexibility
• Recent increase in freight moved by rail as fuel becomes more expensive and railroad companies form alliances with other modes
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Rail Cars
Tank cars are designed to carry petroleum products, liquid chemicals and gases. Tank car options can be insulated, pressurized, and designed for single or multiple loads.
Hopper cars are used to transport commodities that are in a loose bulk form, such as coal, iron ore, and grain.
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Auto Racks
•Each rail car can carry up-to 22 light trucks or minivans
•Rail cars can be reconfigured to have 2 or 3 levels
•Enclosed rail cars prevent the autos from getting damaged via weather or vandalism. They also stopped the theft of autos and parts off of autos and kept hobos from living in the automobiles.
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Transport Modes 1. Truck 2. Rail 3. Water
4. Pipeline 5. Air
Water
• Advantage: Move extremely large shipments economically
• Limited port availability • Fairly Slow • Oldest mode
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Container Ships
• Cargo ships carrying everything in 20’, 40’, or 45’ containers, with 40’ being the most common
• 90% non-bulk cargo is transported by container
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Pure Car Carrier / Pure Truck Carrier
• Roll-on/Roll-off (RoRo) completely enclosed ship • 12-Decks with Adjustable Ceilings • Extensive Fire Control Systems • 6500 vehicle capacity
• Loading from rear and side
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A river barge hauling coal
Barges
· Flat-bottomed boat can carry 800 truckloads of freight!
· Built mainly for river and canal transport
· Most barges are not self-propelled and need to be moved by tugboats towing or pushing them.
· Barges are still used today for low value bulk items (Weight and Size)
· Cost of hauling goods by barge is very low.
Barge traffic increasing since using short sea or river shipping to relieve roadway congestion and pollution
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A barge carrying the Space Shuttle external tank is towed to Port Canaveral, Florida.
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Transport Modes 1. Truck 2. Rail 3. Water
4. Pipeline
5. Air
Pipeline
• Appropriate for products in a gaseous, liquid, or slurry form
• Advantages: Never stops, not affected by the weather
• Highest fixed costs, lowest variable costs
• Lowest environmental impact
–What about oil spills?
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Transport Modes 1. Truck 2. Rail 3. Water
4. Pipeline
5. Air
Air
• Newest and the least utilized mode
• Major advantage is speed
• Limited in size, shape, and weight of freight
• Appropriate for very high value, low-bulk items
• Low dependability and high variability
• High variable costs
–Fuel, user fees, labor, maintenance
• Low fixed costs
–Airports are publicly funded
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Future Transport Methods
Individual Amazon Drone Delivery
3D Printing Consumer Products
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Intermodal Methods
• TOFC: Trailer on Flatcar (Piggyback) • COFC: Container on Flatcar • Fishyback: Truck Trailer to Ship • Trainship: Rail Car to Ship
• Land Bridge: Containers by Sea and Rail
–Pacific Rim to West Coast by Sea –West Coast to East Coast by Rail –East Coast to Europe by Sea
Most Common
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Piggyback
An intermodal train carrying both shipping containers and highway semi-trailers in "piggyback" service, on flatcars
· - TOFC: Trailer on Flatcar
· - COFC: Container on Flatcar
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Intermodal: FishyBack & Trainship
· Special Roll-on/Roll-off (RO-RO): Ships designed to carry wheeled cargo such as automobiles, railcars, and trailers.
· ConRo: vessel is a hybrid between a RORO and a container ship. This type of vessel has a below-decks area used for vehicle storage while stacking containerized freight on the top decks.
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Transport Modes 1. Truck 2. Rail 3. Water
4. Pipeline 5. Air
Transportation Modes
Cost, speed and flexibility comparison
ShipOmpeentrsaatrienogften Intermodal Ti
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Characteristics Operating Characteristics Speed |
ruck Truck 2 |
Rail W 3 Rail |
ater P 4 Water |
pe A 5 Pipe |
ir Air |
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Speed Availability |
12 |
2 3 |
4 4 |
5 5 |
1 |
||
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Availability |
1 |
2 |
4 |
5 |
3 |
||
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Dependability |
2 |
3 |
4 |
1 |
5 |
||
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Capability Capability |
33 |
2 2 |
1 1 |
5 5 |
4 |
||
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FFrereqquueennccyy |
22 |
44 |
55 |
11 |
3 |
||
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Variable Cost Cost |
22 |
3 3 |
4 4 |
5 5 |
|
1 |
|
Dependability
2 3 4
1
3
1 5
4
3
1
Figure 11-2
1=best, highest; 5=worst, lowest
Highest Cost
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Activity
Which mode of transportation would you use for the following products? Why?
· Steel
· Oil from Alaska
· Roses from Texas bound for New York
· Medicine for an out-of-stock pharmacy across the country
· A contract that must be signed within 24 hours
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Activity
Assume you need to relocate to New York from Los Angeles when you graduate:
• What type of item needs to be transported by:
–Truck? –Rail? –Water? –Air?
• Why?
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Transportation Service Selection
• Carrier Types
· - Common : provide service to the public with published rates
· - Contract : provide service only to select, contracted customers
· - Private : firm owns its own equipment
• Value Density: ratio of value to weight, often determines the mode of transportation and type of carrier used
- Product value drives inventory (holding) costs - Product weight drives transportation (shipping) costs
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Transportation Service Selection
A firm must ship a box of 30 items (each item’s value = $500) a distance of 1,000 miles. Transportation options are 8-day ground for $50 or 2-day air for $90. Holding cost is 20% of product value annually. How should the firm ship their product?
Total cost = In-transit holding cost + Freight cost In-transit holding = days in transit/365 x value x holding cost
Ground: [(8days/365) x $15,000 x 20%] + $50 = $115.74 Air : [(2days/365) x $15,000 x 20%] + $90 = $106.44
Example 11-2 1
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Logistics Management
1. Inventory Management
2. Order Processing
3. Transportation Management
4. Warehouse Management
5. Material Handling and Packaging
6. Network Design
Warehouse Management
• Warehouse : historically a place to store inventory
• Distribution Centers (DCs): strategically store inventory, package final product configurations and assortments
• Primary Functions:
– For Stockpiling: storage of inventories in warehouses to protect against seasonality either in supply or demand
· – For Production Support: dedicated to storing parts and components needed to support a plant’s operations
· – Increasingly used as Transshipment Points, where products are received, sorted, sequenced, and selected into loads consistent with each customer’s needs
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Primary Functions of Warehousing
Break-Bulk
Consolidation
Cross-Docking
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Cross Docking
Source: people.hofstra.edu/geotrans/eng/ch5en/conc5en/crossdocking.html
· Simplify unloading and reloading
· Allows consolidation
· Information and coordination replacing inventory
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Primary Functions of Warehousing
• Reverse Logistics:
- Material moves upstream in the supply chain
- Especially important in online retail
- Damaged, defective product
- Return, repair, refurbishment
- Warehouses act as collection points
• Send products back to disassembly, reclamation, or disposal sites
• Value Added Services : providing additional value to the customer, such as postponement in packaging, labeling, or even small final assembly
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Warehouse Facilities
• Private warehouse
–Offers more control over the products
–Opportunities to integrate with other activities within the logistics system
–Flexibility in operating policies and procedures –Requires commitment of financial resources
• Public warehouse
–Appropriate for a firm whose needs for warehouse capacity vary substantially throughout the year
• Contract warehouse
–Typically offer expanded services
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Logistics Management
1. Inventory Management
2. Order Processing
3. Transportation Management
4. Warehouse Management
5. Material Handling and Packaging
6. Network Design
Materials Handling and Packaging
· Handling and locating material increases costs and the risk of damage
· Proper packaging and handling can decrease handling costs and risk of damage
- Containerization or Unitization : filling or creating a larger container from smaller ones
- Automated Storage and Retrieval Systems : robots that retrieve, move, and put-away material
- RFID : electronic tracking of material 1
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Why study
OM? OM in the News
· Australian wine shipped in plastic bag
· 24,000L bags hold wine for 32,000 bottles
· Shipping container holds and ships 1-24,000L bag for only 20% higher cost than 13,200 bottles (9,900L)!
· “You lose a third of your volume to bottle and carton.”
· 54% of Australia wine exports are now bagged!
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Logistics Management
1. Inventory Management
2. Order Processing
3. Transportation Management
4. Warehouse Management
5. Material Handling and Packaging
6. Network Design
Network Design
• Determine the number and location of facilities • Most impact on supply chain operations • Multiple factors to consider
– Labor – Proximity to suppliers and customers – Cost of land and construction – Taxes, incentives and regulations – Transportation infrastructure – Quality of life for employees
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Inbound & Outbound Transportation Costs
Manufacturer Warehouse
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Network Design
• Number of locations is determined by balancing inbound and outbound transportation costs
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Number of Facilities
Figure 11-5 1
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Number of Facilities
• Transportation Cost
–Initially decreases with more facilities
• Financial savings from transportation consolidation
–Reaches total cost minimization point then increases as the number of facilities goes up
• Total facility costs increase, smaller inbound shipments
• Inventory Cost
–As the number of warehouse locations increases, total amount of inventory increases
• Each facility needs its own safety stock
• Logistics postponement for high-value density product manufacturer
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Network Design
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Number of Facilities
(Both Inbound and Outbound)
Where total cost is minimized.
Not where inventory, facility, or transportation cost is minimized!!
All while still meeting customer requirements!
Figure 11-6 1
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Integrated Service Providers (ISPs)
• More commonly called third-party logistics service providers (3PLs)
• Major firms: UPS, FedEx, Ryder, DHL
• Provide a range of logistics services
–Intermodal transportation –Warehousing –Order processing, tracking and fulfillment and returns –Inventory management –JIT delivery to assembly line –Sales support
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Logistics Management Summary
1. Flow of material and information between suppliers, producers and customers
2. Meet customer needs at lowest landed cost
3. Includes multiple modes of transportation
4. Economies of scale and distance impact costs
5. Multiple distribution center types to facilitate optimal material storage and flow
6. Network design and facility location are strategic decisions that impact cost and customer service
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