Fundamentals of Logistics Management

1. Raw materials 2. Finished goods

2 types of inventory

1. Movement 2. Storage 3. Information transfer

3 functions of warehousing operations

1. Competition: no relations 2. Certification: supplier <-> sub-supplier, no relation with management 3. Delegation: management <-> supplier, no relation with sub-supplier 4. Commitment: sub-supplier <-> supplier, supplier <-> management (most followed in reality) 5. Cooperation: relations between all 6. Parallel: management <-> supplier and sub-supplier, no relation between supplier and sub-supplier 7. Bypass: management <-> sub-supplier only 8. Back-door: sub-supplier <-> supplier and management, no relation between management and supplier

8 interaction types in multinational multi-tier supply chains

- Constant rate of demand - Constant lead-time - Constant purchase price independent of order Q or T - Constant transportation cost independent of order Q or T - No stock outs - No inventory in transit - Only 1product in inventory or no interaction - Infinite planning horizon - No limit on capital

Assumptions for the EOQ Model

Benefits: - Improved inventory turns - Better customer service - Decreased warehouse space - Improved response time Problems: - Production scheduling - Supplier production schedules - Supplier locations

Benefits and problems of JiT

It is a list of materials (raw materials, components, etc.) that identifies the many parts and quantities of each needed to manufacture an end product. -> Ingredients list.

Bill of Material

The bullwhip effect describes a phenomenon observed in multi-tier distribution chains with uncertain demand patterns and limited information about status in the different supply chain elements. It describes an effect that inventory amplitudes increase as you move down the supply chain.

Bullwhip effect

Order quantity = units x days Average cycle stock = order quantity/2 Safety stock = units per day x cycle variability (delay) Average inventory = average cycle stock + safety stock

Calculations for order quantity, average cycle stock, safety stock and average inventory

Organisational level: - Supply deficit (défaut d'approvisionnement) - Quality deficiencies - Information losses - Resource allocations Force major: - Catastrophes - Weather conditions - Regulations - Trade embargo

Causes for customer service level failures

1. Processing information locally: problem of forecasting expected demand and determining order size separately for each stage in the supply chain. 2. Order policy: economic order quantity decreases with rising value added in the supply chain. 3. Batches: bundling orders and batch production lead to distorted & inflated demand. 4. Price variations: for example discounts. Customers buy in excess, turnover breaks down after the promotion. Demand then is not correlate with demand forecasts. 5. Order allocation and bottleneck poker: the supplier has a bottleneck and deliveries are assigned to customers according to order size, so we will place a larger order due to the bottleneck poker.

Causes of bullwhip effect

Supply side: - Quality deficiencies; - Accidents (supplied goods destroyed); - Transit time variability; - Supply monopoly; - Supplier opportunism; - Legal provisions; - Outdated technology. Demand side: - Demand variability; - Estimation errors.

Causes of material deficit

- Responsibilities transferred to the supplier: today's supply chains are highly segmented and responsibilities for goods produced are many times transferred entirely to the supplier. - Different strategies and objectives: the coordination of supply chains is challenging due to individual and different strategies and objectives of all actors involved. - Influence on sub-suppliers: to enforce guidelines throughout (durante toda) supply chains, it is necessary to actively exercise influence on sub-suppliers. - Contracts: they provide the possibility to define and communicate common objectives but they are only binding between contractual partners.

Challenges in multi-tier supply chains

- Outsourcing of intensive labor jobs: cost pressures in developed countries caused a big outsourcing of production needing an intensive labor to wage-competitive countries during globalization. - More actors in supply chains: the number of a brand manufacturer's direct suppliers is reduced while the complexity and internationality is increased resulting in a growing amount of total actors in supply chains. - Growing focus on social and environmental responsibilities in supply chains: concern particular in developing countries. - Increased distance between brand manufacturers and their suppliers and sub-suppliers: it impedes effective control.

Challenges in multinational supply chains

The ability to deliver something on time once it is ordered by somebody. It is a process between the buyer, the seller and a third party. The result of this process will be a value added to the product or service exchange. It's a process for providing significant value-added benefits to the supply chain in a cost-effective way.

Definition of customer service

Sustainability standards, certificates or labels are used by companies to demonstrate their sustainability commitment.

Commitment to Sustainability

- Delayed reaction on changes in customer demand, low flexibility and unsatisfactory ability to respond in the supply chain; - Large inventories and excess capacities on all stages of supply chain in order to cushion uncertainty in planning process; - Overcharged capacities or excess capacities because of fluctuating demand along supply chain.

Consequences of bullwhip effect

- Planning on the basis of true demand data; - Incentives to order "realistically"; - Cross docking; - Periodical ordering and order batching; - Avoiding price variations; - Installing an inter-company-wide entity for demand planning and demand control.

Countermeasures for the bullwhip effect

Strategic aspects: - Strategic goals of company - Companies' core competencies - Market price - Market competition Knowledge: - Intelectual property rights - Experience necessary for production - Workforce capable to do additional work - Hiring new employees - Demand for specific training Performance of potential supplier: - Fulfillment of contract (target date, volume, quality) - Supplier's economic situation - Degree of dependence on supplier Costs: - Lower of procurement costs + transaction costs or production costs + internal transaction costs - Economies of scale

Criteria for making the make-or-buy decision

It's the unsuccessfulness to meet customer expectations. Different types: - Out-of-stock - Delay - Functional error, defects Consequences: - Penalties - Loss of reputation - Declining revenues

Customer service failure and consequences

The part of supply chain management that plans and controls an effective forward and reverse flow (flux allé-retour efficace) and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customer's requirements.

Definition of Logistics

Review period: - Information delay - Fixed cost of ordering - Fixed cost of transport - Large truck requirements Lead time: - Information delay - Shipping time - Handling (manutention) time Demand variability: - Forecast accuracy (précision prévisions) - Risk pooling (regroupement du risque)

Factors impacting inventory

Primary packaging: - Protect the product inside, safety, hygiene - Information for the customer - Brand, look Secondary packaging: - Groups primary packaging together - For good handling for customers - Organize it easily on the shelves Tertiary packaging: - For storage and transportation - Protect stuff against humidity, chocks, etc. - Requirent need to be adopted to diverse products (fragile, irregular, etc.)

Different roles of different packaging

- Business customers: B2B, buy goods and services for their OWN creation of goods and services that they will market to other consumers - Institutional and government agencies: buy goods and services for the constituents they serve - Traders, wholesalers and retailers: buy physical goods and resell them again without any reprocessing - End consumers: individuals who buy goods and services for their own personal use

Different types of customers

- Manufacturing support: firms order raw materials, parts, components or supplies from various suppliers who ship it to a warehouse located in proximity to the plant - Product-mixing: multiple plant locations ship different parts of a product to a central warehouse that mix them for different orders - Breakbulk: several customer orders are combined into a single shipment from the plants to the breakbulk warehouse, where it is broken down into smaller shipments sent to the different customers. - Consolidation: a warehouse combines products from various plants into a single shipment to different customers.

Different types of warehousing

2 x (ordering cost per order) x (annual demand or usage of product) __________________________________ (annual inventory carrying cost) x (average cost of one unit of inventory) SQUARE ROOT

EOQ formula

- Inventory orders made at regular intervals - Q variable - Orders placed at the end of a fixed period - Inventory counted only at end of period - Target quantity - Only relevant costs = ordering and holding costs - Lead time constant - Items independent on on another

Fixed-period model

Adjust the divergence between the assortment held by producer and the one demanded by customers.

Function of channel intermediaries?

- Procurement is responsible to identify suitable suppliers and negotiate best commercial deals - Supplier development is focused on direct suppliers - Quality gets involved reactively when product quality issues occur - Logistics gets involved reactively when product availability issues occur - Top management gets involved reactively when major problems occur (VW case)

How does the management of multinational multi-tier supply chains work?

- Size of warehouses - Number of warehouses (deciding the number: cost of lost sales, inventory costs, warehousing costs, transportation costs) - Location of warehouses (production-positioned strategy, intermediately-positioned strategy, market-positioned strategy) - Layout and design (think of equipment, labour, space and information to organize)

How to develop an optimal warehouse network?

It is hard because we have to manage something we don't really see. For ensuring sub-/suppliers compliance with voluntary sustainability standards, we have to follow the following phases: 1. Definition of sustainability objectives in the supply chain (sustainability criteria catalogue) 2. Identification of critical supply chain paths -> visualization of supply chain and mapping of critical paths 3. Risk analysis of critical supply chains paths -> evaluate and prioritize sustainability risks 4. Derivation of measures -> concrete measures to minimize the sustainability risks in the supply chain, like stakeholder communication, supplier selection, supplier management, etc. 5. Integration in procurement process (acquisition)

How to ensure sustainability compliance all along the supply chain?

- Linking objectives for sustainability with key performance indicators - Objectives shall be measurable/verifiable - Achieving "change" within the internal organization by: - Integrating sustainability factors in corporate vision and strategy - Establishing rules, defining and adapting processes according to sustainability requirements - Aligning investment decisions with sustainability standards, - Treating all organizational units equally - Ensuring top management support for the crafted sustainability strategy.

How to ensure sustainability internally?

Upstream value chain (supplier): - Reliable quantity - Timely delivery - Product innovations Internal value chain: - Consistent integration of suppliers in product developments - Planning activities - Forecasts (prévisions) - Measure of supplier performances - Improve internal communication and exchange of info - Determining customer needs and reach them - Adjust service levels for realistic trade-off between revenues and expenses - Value-added services Downstream value chain (customer): - Clearly defined point of contact - Response time - Order cycle consistency - Complete order satisfaction - Complaint management

How to improve customer service

It is measured at the end of the transaction. - Internal auditing: identify and measure key performance indicators which reflect how well you're responding to your customer's expectations - Customer satisfaction surveys and customer feedbacks - "Mystery shopping": conducted by "secret shoppers" pretending they are customers

How to measure customer service

- Backward integration (intégration en amont); - Long-term contracts; - Multiple sourcing; - Maintenance of a safety-stock; - Substitution; - Avoidance, prevention.

How to reduce material deficit risk?

- Inventory transfer, carrying cost - Documentation - Receiving - Handling (manutention) - Obsolescence - Damage

Inventory costs

1. Basic economic order quantity (EOQ) model 2. Production order quantity model 3. Fixed periods model 4. Probabilistic model

Inventory models for independent demand

Just in Sequence: allows workers to get the right item quickly but it's exhausting doing the same thing repeatedly. Problems: inventory costs, problem of volatile demand

JiS

Just in Time: avoid inventory costs, when we need it we delivery it. More heterogeneity. Problems: if a supplier does not deliver in time this impact the production process, natural disaster (no stocks!)

JiT

Material grouped in 3 groups: A: High value; B: Medium value; C: Low value. A = 20% of material are responsible for 80% of sourcing volume. This analysis highlights where a company has potential to reduce its spends. Higher valued material are reviewed more frequently.

Pareto analysis

Supply of materials when they are needed in the production process. Getting the right materials to the right place at the right time.

Main idea of Kanban

Decision on whether it is more advantageous to make a good/service in-house, or to buy it from a supplier. The decision involves both qualitative and quantitative factors.

Make-or-buy decision

Forecast technique that assumes demand in the next period is equal to demand in the most recent period

Naive approach

- Receiving - Placing in storage - Transmitting - Processing invoice (traitement factures)

Ordering costs

- Demand known but can be specified by means of a probability - Concerns: maintaining an adequate service level in the face of uncertain demand - Service level: complement of the probability of a stock out - Uncertain demand raises the possibility of stock out - Use safety stock to achieve a desired service level and avoid stock outs

Probabilistic model

- Firms receive its inventory over a period of time - Model suitable for production environment - Applicable in 2 situations: 1. When inventory continuously flows 2. When units are produces and sold simultaneously

Production order quantity model

Different categories of products: - Raw material (iron, metal, plastic); - Parts: something that is not assembled, a single unit thing (revetment , membrane); - Components: already assembled, combination of parts (door lock, window); - Modules: much more complicated assemblies (closing module, window module); - System: something that have all together (door, car brakes)

Purchase categories

Help costumers to create value. To do so, the values must be created collectively. Things must come together in the right way.

Purpose of Supply Chain Management

- Describes the logistic processes within an industry - Ensures that each machine is being fed with the right product, in the right quantity & quality, at the right time - Control flow through value-adding processes and eliminate non-value-adding ones - Managing dependent demand - Harmonizing production planning

Purpose of production logistics

- Acquisition of goods and services; - Meet the needs of internal functions (e.g. manufacturing): right product, right place, right time, right quantity, right quality, right supplier, right price; - Activities that get goods, services and other materials from suppliers, and get them into the company; - It includes rental, leasing, contracting, exchange, etc.

Purpose of purchasing

Sustainability secures: - Legitimacy: implies that the social contract between firms and society can be destroyed and if this happens the company in question will cease to exist. - Supply: deficiency of resources -> objectives to secure their availability for the production of goods and services. The world population is growing exponential, but resources are finite. - Demand: trend of "sustainable consumption" -> consumers increasingly ask for products that were produced according to legitimized environmental and social standards.

Purpose of sustainability

The part of the firm's logistics system that stores products at and between point of origin and point of consumption and provides information to management on the status, condition and disposition of items being stored. -> Warehousing = important link between the producer and the customer.

Purpose of warehousing

- Lost margin - Customer goodwill - Lost customer

Shortage (pénurie) costs

1. Economies of scale: the larger the quantities, the lower the costs. 2. Balancing supply and demand: demand can be variable so we will produce in a stable way during the year to save costs. Raw materials can vary too, so make provisions. 3. Specialization: each of firm's plant specialize in the products it manufactures. Finished products then shipped to warehouses where they are mixed to fill customer orders. 4. Protection from uncertainties: to prevent a stockout in case of variability in demand or in the replenishment cycle. 5. Buffer: inventory held throughout the supply chain to act as a buffer. Like this, we can achieve successfully time and place utility.

Purposes for holding inventory

- Non compliance: if for example you have to report to the authorities all quantities and origins of any type of products. - Supply bottlenecks: if you don't have a direct relation to the 3rd supplier for example. - Stakeholder-protests: if you have media that report about bad working conditions for example, you might be forced to disclose (révéler) your suppliers and known sub-suppliers.

Risks behind suppliers and sub-suppliers

Adds value by creating utility: - Form utility: creating the good or service, or putting it in proper form for the customer; - Possession utility: value added to a product or service because the customer can take actual possession; - Time utility: value added by having an item or service available when it is needed; - Place utility: value added by having an item or service available where it is needed.

Role of Logistics

Tool used to analyse a supply chain and identify how to improve the work and the information flows. It links business process, metrics, best practices and technology

SCOR Model

1. N-supplier: produces raw materials 2. 1-supplier: Buys raw materials, produces parts and components 3. Original Equipment Manufacturer: assembles/produces the final product 4. Logistics Service Provider: does the transportation to the distribution centers, stores the products in warehouses 5. Wholesaler (grossiste): stores the products in distribution centers 6. Logistics Service Provider: does the transportation to retailers 7. Retailer: stores the products in retail stores 8. Consumers: buy the products

Standard supply chain elements for Physical Goods

1. Codifying: corporate values -> mission, vision, values, code of ethics, corporate philosophy, governance principles 2. Implementing: detailed regulations -> guidelines, instructions, processes, code of ethics, purchasing policies 3. Systematizing: instruments (intranet platform, documentation of value and compliance management), communication (brochures, training), review (audit, monitoring, surveillance) 4. Organizing: organization -> ethics, compliance task force, supervisory board, executive board, compliance committee, functional integration.

Steps to implement something that will allow you to go further in sustainability promisses you are making - Compliance management

Network of organizations that are involved, through upstream (suppliers) and downstream (consumers) connections, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate consumer.

Supply chain definition

It is the key to increase transparency along supply chains for which it is necessary to collect information about suppliers and sub-suppliers. 3 levels to do this: 1. Available information: bill-of-material (lista técnica) 2. Information sharing in industries: business talks, databases 3. (Sub-)suppliers providing information: visiting suppliers, talks with them, supplier audits, financial information about suppliers, annual reports

Supply chain mapping for what?

- Cooperation vs. Competition - Centralization vs. Decentralization - Global sourcing vs. Local sourcing - Personalization vs. Electronification

Supply strategy options

1. What? 2. Quality? 3. How much? 4. Who? 5. When? 6. What price? 7. Where? 8. How? 9. Why?

Supply strategy questions

Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. -> Triple Bottom Line: economic, environmental and social performance = sustainability

Sustainability

- Develop shared values & visions, integrate strategic stakeholders - Evaluate credibility and consider dependencies - Identify critical paths, establish risk categorization of supply base, include critical sub-suppliers - Communicate audit results transparently - Scale supplier development programs according to the supplier-relationships - Frequency in line with risks

Sustainability Compliance Management Processes

- + back-orders - + investment in inventory with back-orders - High customer turnover rate - + orders cancelled - Periodic lack of sufficient storage space - Large variance in turnover of major inventory items between distribution centers - Deteriorating relationships with intermediaries - + obsolet items

Symptoms for Bad inventory management

- Information: when will we do something, how, etc. - Material: what type of material - Financial: payment in exchange of something

The 3 flows

If we are not holding this commitment we can have: - Loss of legitimacy: violating standards or rules may retire accused company's legitimacy to operate on the market. - Loss of brand equity/reputation: bad image, declining sales, consumer boycotts. - Higher financing costs: companies' sustainability performance is one factor for banks to decide about credit allowances.

Threat of not holding the "Sustainability Commitment"

Pre-transaction costs: identifying need, investigating and qualifying sources, educating supplier in firm's operations, etc. Transaction costs: price, order preparation, delivery, duties, billing, return of parts, follow-up and correction. Post-transaction costs: defective finished goods rejected before sale, customer reputation of firm, repair parts, maintenance and repaires, recycling, etc.

Total cost of ownership

- Focus on core competencies per company reduced the share of value added per tier level - Reduction of supplier base pushed a lot of direct suppliers into upstream tier levels - Procurement (approvisionnement) of systems transferred the responsibility for those systems to suppliers - Procurement in low cost countries at any possible tier level increased the number of nations involved in supply chains

Why have supply chains become so long, multi-tierd and multinational?

Time-series forecasting method that fits a trend line to a series of historical data points and then projects the line into the future for forecasts (seasonalities, influencing factors)

Trend projection

- Cycle stock: items we are actually using for our production. - In-transit inventories: items en route from one location to another. - Safety or buffer stock: items held in excess of cycle stock because of uncertainty in demand or lead-time. - Speculative stock: inventory held for reasons other than satisfying current demand (purchasing a larger volume to obtain discounts e.g.). - Seasonal stock: form of speculative stock, items you have before a seasonal period begins. - Dead stock: obsolete items, expired food e.g.

Types of inventory

Strategic: - Planning of demand - Selection of supplier - Evaluation of supplier - Development of suppliers - Integration of suppliers +... - Identification of sub-suppliers - Enforcement of guidelines at sub-suppliers - Evaluation of sub-suppliers Operational: - Identification of actual needs - Processing of orders - Monitoring of suppliers - Ensuring compliance with guidelines +... - Communication of needs and guidelines along supply chains - Early warning of sub-suppliers in case of estimable delivery

Which strategies can we use to manage multinational multi-tier suppliers as well as possible?

Strategic: - Planning of demand - Selection of supplier - Evaluation of supplier - Development of suppliers - Integration of suppliers Operational: - Identification of actual needs - Processing of orders - Monitoring of suppliers - Ensuring compliance with guidelines

Which strategies can we use to manage suppliers as well as possible?

- Higher efficiency by creating time, place and possession utility (joie de posséder) - Transaction routines - Facilitating the searching process of consumers - Performing the functions of sorting (tri) and assorting (assortiment)

Why do channels of distribution develop?

- Achieve production economies - Maintain a source of supply - Meet changing market conditions - Support the JiT programs of suppliers and customers - Provide customers with a mix of products instead of a single product on each order

Why do companies hold inventories in storage?