module 7 (ch. 9 & 10)

Distribution Requirements Planning (DRP):

"Push" approach; System wide solution Associated with independent demand DRP is usually coupled with MRP in an attempt to manage flow and timing of both inbound materials (MRP) and outbound finished goods (DRP) DRP minimized outbound (finished goods) inventory

The Just-in-Time (JIT) Approach

"Pull" approach Associated with items having dependent demand Single-facility solution Four major elements ○zero inventories- ideally the product arrives right when the organization needs it. ○short, consistent lead times: length of lead time is not as important as reliability ○small, frequent replenishment quantities: short production runs results in higher changeover costs ○high quality, or zero defects

Order Cost

○Cost of placing order which may have both fixed and variable components. Does not include the cost of the product itself. ○Fixed costs are associated with the information system, facilities, and technology. ○Activities responsible for these costs: reviewing inventory levels, preparing and processing requisitions or purchase orders, preparing and processing receiving reports, processing payment

Inventory Carrying Costs

○Four major components of Carrying Costs: Capital Cost, Storage Space Cost, Inventory Service Cost, and Inventory Risk Cost

Setup Costs

○expenses incurred each time an organization modifies a production or assembly line to produce a different item for inventory

Transportation Planning and Strategy

●Functional Control of Transportation•Which department will be responsible for transportation?○logistics○procurement○Marketing ●Terms of Sale •Free-on-board (FOB) Origin •FOB destination ●Decision to Outsource Transportation •Firms choose between "make" or "buy" ○Commercial carriers "buy" ○Private fleets "make" ○External experts move the freight and/or manage the transportation process "buy" ○Third-party logistics (3PL) "buy" ●Modal Selection •Accessibility ○Accessibility advantage: Motor carriage ○Accessibility disadvantage: Air, rail, and water•Transit Time ○Transit time advantage: Air and motor carriage ○Transit time disadvantage: Rail, water, and pipeline •Reliability ○Reliability advantage: Motor carriers and air carriers ○Reliability disadvantage: Water carriers and rail carriers •Product Safety ○Safety advantage: Air transportation and motor carriage ○Safety disadvantage: Rail and water •Cost ○Cost advantage: The cost of transportation service varies greatly between and within the modes ○Cost disadvantage: Motor carriage and air transportation ●Carrier Selection •Selecting the individual transportation service providers within the mode. •Major difference between modal and carrier selection is the number of options and decision frequency. •Type of service provided within a mode impacts carrier selection. •Most carriers have the capabilities to provide a similar level of service. •Core carrier ○limited number of carriers○leverage its purchasing dollars ●Rate Negotiations •Centralized freight rate negotiations. •Developing contracts with carriers for a tailored set of transportation services at a specific price .•Leveraging volume with a small set of carriers

Modes of transportation

●Motor Carriers •Widely used mode of transportation in the domestic supply chain •Economic structure of the motor carrier industry contributes to the vast number of carriers in the industry•Comprised of for-hire and private fleet operations Truckload carriers. Less-than-truckload (LTL) Small package carriers •Low fixed cost, high variable ●Railroads •7 Class I railroads revenues in excess of $379 million. •Activity levels have been achieved despite a lack of direct accessibility to all parts of the supply chain. •Railroads are "natural monopolies". •Two carrier types: ○Linehaul ○Shortline carriers •High fixed, low variable ●Air Carriers ●Water Carriers •88 air cargo carriers ○Combination carriers ○Air cargo carriers ○Integrated carriers ○Nonintegrated carriers •High variable and low fixed cost •Major facilitator of international trade •81% international freight movement •19% coastal, inland, and Great Lakes traffic •High variable and low fixed cost •Two primary carrier types ○Liner ○Charter •Options include ○Container ships ○Bulk carriers ○Tankers ○General cargo ships ○Roll-on, roll-off (RO-RO) vessels ●Pipelines •Unique mode of transportation as the equipment is fixed in place and the product moves through it in high volume Three primary types ○Gathering lines ○Trunk lines ○Refined product pipelines •High fixed versus low variable ●Intermodal •Use of two or more different modes in movement •Greater accessibility •Overall cost efficiency •Facilitates global trade •Development of standardized containers that are compatible with multiple modes. •Product-handling characteristics ○Containerized freight ○Transload freight

Anticipatory Stocks

A fifth reason to hold inventory arises when an organization anticipates that an unusual event might occur that will negatively impact its source of supply.

Uncertainty/Safety Stocks

All organizations are faced with uncertainty. On the demand side, there is usually uncertainty in how much customers will buy and when they will buy it. On the supply side, there might be uncertainty about obtaining what is needed from suppliers and how long it will take for the fulfillment of the order

ABC Analysis:

Assigns inventory items to one of three groups according to the relative impact or value of the items ○A items are considered to be the most important ○B items being of lesser importance ○C items being the least important Pareto's Law, or the "80-20 Rule" ○many situations were dominated by a relatively few vital elements

Fundamental Approaches to Managing Inventory

Choosing the appropriate inventory model or technique (e.g. MRP, JIT, DRP) should include an analysis of key differences that affect the inventory decision. Ask the following questions: 1. Is the demand for the item independent or dependent? 2. Is the distribution system based upon a push or pull approach? 3. Do the inventory decisions apply to one facility or to multiple facilities? Dependent versus Independent Demand "independent" when such demand is unrelated to the demand for other items "dependent" when it is directly related, or derives from, the demand for another inventory item or productPull versus Push The "pull" approach relies on customer orders to move product through a logistics system, while the "push" approach uses inventory replenishment techniques in anticipation of demand to move products. System wide vs. Single-Facility Solutions- system-wide approach plans and executes inventory decisions at multiple nodes

Principle Approaches -Techniques for Inventory Management

Fixed order quantity model involves ordering a fixed amount of product each time reordering takes place Also called Economic Order Quantity (EOQ) Organizations using this approach need to develop a reorder point- minimum stock level to determine when to reorder the fixed quantity. Tells you WHEN to order. Reorder point is based on lead time & demand during lead time. Have elements of push & pull system; single facility solution. Simple EOQ Model (condition of certainty) ○The following are the basic assumptions of the simple EOQ model: 1. A continuous, constant, and known rate of demand 2. A constant and known replenishment or lead time 3. All demand is satisfied (no stockouts) 4. A constant price or cost that is independent of the order quantity (i.e., no quantity discounts) 5. No inventory in transit 6. One item of inventory or no interaction between items 7. Infinite planning horizon (no time constraints) 8. Unlimited capital (no financial restraints)Only two costs considered: carrying costs & order costs Fixed order quantity (conditions of uncertainty) Also called Economic Order Quantity (EOQ) Demand is NOT constant Organizations using this approach need to develop a reorder point- minimum stock level to determine when to reorder the fixed quantity. Tells you WHEN to order. Reorder point is based on lead time & demand during lead time. Since demand is not constant, reorder point has to be adjusted for safety stock. Reorder point for uncertainty model becomes the average daily demand during lead time plus safety stock. Fixed order quantity (conditions of uncertainty) Uncertainty of Demand ○Assumptions:- 1. A constant and known replenishment or lead time- 2. A constant price or cost that is independent of order quantity or time- 3. No inventory in transit- 4. One item of inventory or no interaction between items- 5. Infinite planning horizon- 6. No limit on capital availability

Inventory Costs

Inventory Carrying Costs- ○Four major components of Carrying Costs: Capital Cost, Storage Space Cost, Inventory Service Cost, and Inventory Risk Cost ○Capital Cost (interest or opportunity cost) cost of capital tied up in inventory and the resulting lost opportunity from investing that capital elsewhere The often the largest component on inventory carrying cost and is expressed as a percentage of the dollar value of inventory hurdle rate- minimum rate of return on new investment weighted average cost of capital (WACC)- return on asset that the firm must achieve to satisfy creditors, stockholders, etc.

Calculating the Cost of Carrying Inventory

Inventory carrying costs are calculated on an annual basis (assumes the item will be held in storage for one year) Calculating the cost to carry (or hold) a particular item in inventory involves three steps. ○First, determine the value of the item stored in inventory. ○Second, determine the cost of each individual carrying cost component to determine the total direct costs consumed by the item while being held in inventory. ○Third, divide the total costs calculated in Step 2 by the value of the item determined in Step 1 Two types of costs to consider: ○Variable-based costs- out of pocket expenditures. E.g. freight expense to the distribution center. ○Value-based costs- costs that use the total value of the item at the location where carrying costs are being determined. E.g. interest, taxes, loss and damage.

introduction

Inventory is an asset on the balance sheet and a variable expense on the income statement. Inventories also have an impact on return on investment (ROI) for the firm. Inventories also have an impact on return on asset (ROA) for the firm ch. 10: ●Transportation involves the physical movement of goods between origin and destination points. ●The transportation system links geographically separated partners and facilities in a company's supply. ●Transportation facilitates the creation of time and place utility in the supply chain. ●Transportation also has a major economic impact on the financial performance of businesses.

Order/Setup Cost

Order Cost ○Cost of placing order which may have both fixed and variable components. Does not include the cost of the product itself. ○Fixed costs are associated with the information system, facilities, and technology. ○Activities responsible for these costs: reviewing inventory levels, preparing and processing requisitions or purchase orders, preparing and processing receiving reports, processing payment Setup Costs ○expenses incurred each time an organization modifies a production or assembly line to produce a different item for inventory

In-Transit Inventory Carrying Cost

Owner of product while it is in transit will incur resulting carrying costs. In-transit inventory carrying cost becomes especially important on global moves since both distance and time from the shipping location both increase. Owner should consider its delivery time part of its inventory carrying cost.

Seasonal Stocks

Seasonality can occur in the supply of raw materials, in the demand for finished product, or in both. Those faced with seasonality issues are constantly challenged when determining how much inventory to accumulate. Seasonality can impact transportation. E.g. rivers can freeze, ice on the roads.

Vendor-Managed Inventory

The basic principles: ○The supplier and its customer agree on which products are to be managed using in the customer's distribution centers. ○An agreement is made on reorder points and economic order quantities for each of these products. ○As these products are shipped from the customer's distribution center, the customer notifies the supplier, by SKU, of the volumes shipped on a real-time basis. Notification is called "pull" data. ○"Push" system: through real time information sharing, the supplier has knowledge of product demand and pushes inventory to customer's location. System wide or Single Facility

Determining the Cost of In-Transit Inventories

The capital cost of carrying inventory in transit generally equals carrying inventory in a warehouse. storage space cost not relevant to inventory in transit. Transportation service provider usually includes space. insurance needs requires special analysis if transportation provider offers limited liability obsolescence or deterioration costs are lesser risks for inventory in transit since transportation takes relatively short time. Plus, items are on their way to the next node in the supply chain which assumes demand for the inventory

Time/In-Transit and Work-in-Process Stocks

The time associated with transportation means that even while goods are in motion, an inventory cost is associated with the time period. The longer the time, the higher the cost. Mode of transportation vs. higher in-transit cost Faster mode of transportation vs. lower inventory costs WIP inventories, associated with manufacturing, can be significant while the length of time the inventory sits in a manufacturing facility waiting and should be carefully evaluated in relationship to scheduling techniques and the actual manufacturing/assembly technology.

batching economies or cycle stocks

arises from three sources○Procurement- price savings vs. additional inventory costs ○Production- long productions runs vs. additional inventory costs ○Transportation- discount rate for shipping larger quantities vs. additional inventory costs. Scale economies are often associated with all three, which can result in the accumulation of inventory that will not be used or sold immediately

Master production schedule (MPS)

based on orders & demand forecasts. Details what to produce & when.

Inventory status file (ISF)

contains current inventory on-hand amounts

Capital Cost (interest or opportunity cost)

cost of capital tied up in inventory and the resulting lost opportunity from investing that capital elsewhere The often the largest component on inventory carrying cost and is expressed as a percentage of the dollar value of inventory

Value-based costs

costs that use the total value of the item at the location where carrying costs are being determined. E.g. interest, taxes, loss and damage.

Materials Requirements Planning (MRP):

deals specifically with supplying materials and component parts whose demand depends on the demand for a specific end product 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 and the planned coverage of such requirements for each component item needed to implement this plan "Push" method Associated with items having dependent demand System-wide solution

Transportation

discount rate for shipping larger quantities vs. additional inventory costs.

zero inventories

ideally the product arrives right when the organization needs it.

Storage Space Cost

includes handling costs associated with moving products into and out of inventory, as well as such costs as rent, heat, and light Storage space costs either increase or decrease as inventory levels rise or fall

Inventory Service Cost

includes insurance and taxes

Production

long productions runs vs. additional inventory costs

hurdle rate

minimum rate of return on new investment

Variable-based costs

out of pocket expenditures. E.g. freight expense to the distribution center.

MRP program

program that calculates net requirements

Outputs and reports

quantities to order and when.

Inventory Risk Cost

reflects the possibility that inventory value might decline for reasons beyond firm's control. E.g. obsolete, damage, pilferage

weighted average cost of capital (WACC)

return on asset that the firm must achieve to satisfy creditors, stockholders, etc.

Expected Stockout Cost

several consequences might occur: ○Back order, which results in the vendor incurring incremental variable costs associated with processing and making the extra shipment ○Customer might decide to purchase a competitor's product resulting in a direct loss for the supplier. ○Customer might decide to permanently switch to a competitor's product with loss of income

Bill of materials file (BOM)

specifies exact amount of raw materials, components needed to produce an independent item.

System wide vs. Single-Facility Solutions

system-wide approach plans and executes inventory decisions at multiple nodes

MRP system uses the following elements:

Master production schedule (MPS)- based on orders & demand forecasts. Details what to produce & when. Bill of materials file (BOM)- specifies exact amount of raw materials, components needed to produce an independent item. Inventory status file (ISF)- contains current inventory on-hand amounts MRP program- program that calculates net requirements Outputs and reports- quantities to order and when.

Transportation execution and control

●Shipment Preparation •Corporate transportation routing guide •Last-minute, cost-saving decisions ○consolidate freight○coordinate shipment deliveries ○take full advantage of container capacity ○an accurate freight count should be taken ●Freight Documentation •Bill of lading ○originates the shipment ○provides all the information the carrier needs ○stipulates the contract terms, including carrier's liability for loss and damage ○acts as a receipt for the goods the shipper tenders to the carrier ○in some cases, shows certificate of title to the goods•Freight bill ○carrier's invoice for carrier charges listing: shipment origin and destination consignee items total weight total charges ●Maintain In-Transit Visibility •Manage key events as product moves across the supply chain. •Technology facilitates the ability to monitor product. •Visibility tools must be linked to other capabilities and processes to have an impact on supply chain event management. ●Monitor Service Quality •Analyze the outcome of all their transportation strategy, planning, and decision-making. •Key requirement for service quality monitoring is information ●Transportation Metrics •Key performance indicators (KPIs) ○can be used to evaluate current performance versus historical results internal goals carrier commitments○challenge lies in narrowing down metrics available to monitor performance to a manageable number of KPIs ○primary categories of transportation KPIs include service quality and efficiency ●Transportation Management Systems (TMS) •Critical applications include the following: ○Routing and scheduling proper planning of delivery routes has a major impact on customer satisfaction, supply chain performance, and organizational success○Load planning effective preparation of safe, efficient deliveries ○Load tendering ○Status tracking ○Appointment scheduling

Challenges to Carrying out this Role

●Supply chain complexity ●Competing goals among supply chain partners ●Changing customer requirements ●Limited information availability ●Synchronizing transportation with other supply chain activities ●Transportation capacity constraints pose a challenge. ●Rising transportation rates present another major concern for organizations. ●The transportation industry is impacted by governmental requirements that affect cost structures and service capabilities. ●Regulation is growing in areas where the transportation industry has the potential to impact the quality of life, the safety of citizens, and the growth of commerce.

Role of Transportation in Supply Chain Management

●Transportation provides the critical links between these organizations, permitting goods to flow between their facilities. ●Transportation service availability is critical to demand fulfillment in the supply chain. ●Transportation efficiency promotes the competitiveness of a supply chain