bly3q3 logistics management lm1-im1

8/8/2019 BLY3Q3 Logistics Management LM1-IM1

http://slidepdf.com/reader/full/bly3q3-logistics-management-lm1-im1 1/32

Logistics ManagementLogistics Management

Inventory managementInventory managementOptimising stockOptimising stock



Learning goals :Learning goals :

What is Logistics Management?What is Logistics Management?What does inventory management imply?What does inventory management imply?What are different reasons for holding stock?What are different reasons for holding stock?

What is an order point system and which kindsWhat is an order point system and which kindsare there?are there?(reorder level system, cyclical review system).(reorder level system, cyclical review system).What is the EOQ formula? How is it applied?What is the EOQ formula? How is it applied?

On which assumptions is the EOQ formulaOn which assumptions is the EOQ formulabased? Why is this often questionable inbased? Why is this often questionable inpractice?!practice?!What do ERP, SCM, and MRP1&2 mean?What do ERP, SCM, and MRP1&2 mean?



What isWhat is "Logistics Management?""Logistics Management?"

A ccording to the definition adopted by the A ccording to the definition adopted by the Council of SupplyCouncil of SupplyChain Management ProfessionalsChain Management Professionals ::

"Logistics Management is that part of "Logistics Management is that part of

Supply Chain Management that plans,Supply Chain Management that plans,implements, and controls the efficient,implements, and controls the efficient,effectiveeffective f orward and reverse flow andf orward and reverse flow andstorage o f goods, services and re latedstorage o f goods, services and re latedin f ormationin f ormation between the point of originbetween the point of originand the point of consumptionand the point of consumption in order toin order tomeet customers' requirementsmeet customers' requirements ."."



Logistics ManagementLogistics Management

KEY POINTSKEY POINTS1.1. A ll activities A ll activities

2.2. Raw materials, inRaw materials, in- -process inventory,process inventory,services, and finished goods.services, and finished goods.

3.3. Flow =Flow = movementmovement and storageand storage

4. Source of supply to point of 4. Source of supply to point of consumptionconsumption

5.5. Systems approachSystems approach



Logistics Management is aLogistics Management is a

Planning processPlanning processAnalysisAnalysis

C ompany situation, internal analysis, ..C ompany situation, internal analysis, ..

P lanningP lanningD ecisions regarding «D ecisions regarding «

Imp le m entationImp le m entationPlans turned into actionPlans turned into action

C ontrolC ontrolMeasurement and evaluation of plans andMeasurement and evaluation of plans andactivities.activities.C orrective action where necessary.C orrective action where necessary.



LogisticsLogisticsR IGHTS OF LOGISTICSR IGHTS OF LOGISTICS

G et theG et the rightright product in theproduct in the rightright quantity to thequantity to therightright place for theplace for the rightright customer at thecustomer at the rightrighttime in thetime in the rightright condition at thecondition at the rightright cost.cost.

PU R POS E AND SCOP E OF LOGISTICS UTILITI E SPU R POS E AND SCOP E OF LOGISTICS UTILITI E ST IMET IMEPL A CEPL A CEFORMFORMA SSOR T MENT/ QU A NT ITY A SSOR T MENT/ QU A NT ITY

INFORM AT IONINFORM AT ION



What isWhat is "Supp ly Chain"Supp ly Chain

Management?"Management?"Supply Chain Management isSupply Chain Management isthe integration of key business processesthe integration of key business processesf rom end user through origina l supp liers,f rom end user through origina l supp liers,that provides products, services, andthat provides products, services, andinformation thatinformation that add va lueadd va lue for customersfor customersand other stakeholders.and other stakeholders.

[[G lobal Supply Chain ForumG lobal Supply Chain Forum , 1998], 1998]



Inventory management & controlInventory management & control

1. WH Y INVENT ORIES A RE NEEDED1. WH Y INVENT ORIES A RE NEEDEDT o maintain independence of operationsT o maintain independence of operations

T o meet variations in demandT o meet variations in demandT o allow production schedule flexibilityT o allow production schedule flexibilityT o provide a safeguard for variations inT o provide a safeguard for variations in

raw materials deliveriesraw materials deliveriesT o take advantage of economic purchaseT o take advantage of economic purchaseorder sizeorder size



Inventory management & controlInventory management & control

INVENT OR Y COS T S Y OU:INVENT OR Y COS T S Y OU:Holding or carrying costsHolding or carrying costsOrdering costsOrdering costsShortage and /or wrong inventory costsShortage and /or wrong inventory costs

Inventory controlInventory control.. for independent demand items is normally.. for independent demand items is normallyundertaken through an order point system, suchundertaken through an order point system, suchas the reas the re- -order level or the cyclical revieworder level or the cyclical review

systems.systems.



C ustomer demandC ustomer demandpushpush ± ± pullpull

T here are in essence two ways in which an T here are in essence two ways in which anoperation can respond to customer operation can respond to customer demand: producedemand: produce- -toto--stock or producestock or produce- -toto--order.order.

T here are two basic philosophies of control T here are two basic philosophies of controlin operations: supplyin operations: supply- -push and demandpush and demand- -pull.pull.

Which belongs to what?!Which belongs to what?!



Inventor y Management f or the

Supp ly Chain

Managing inventory :critical to ensure high customer service levels.However: very costly.Having the right amount of inventory to meet customer requirements is critical.

Challenge : Find out what inventory best practicesreduce inventory costs across the supply chain.



Introduction to Basic InventoryIntroduction to Basic InventoryModelsModels

The purpose of inventory theory is to determine rules that The purpose of inventory theory is to determine rules that management can use tomanagement can use tominimize the costs associated with maintaining inventory and minimize the costs associated with maintaining inventory and meeting customer demand.meeting customer demand.

Inventory models answer the followingInventory models answer the followingquestionsquestions

1.1. When should an order be placed for aWhen should an order be placed for aproduct?product?2.2. How large should each order be?How large should each order be?



Costs Involved in Inventory ModelsCosts Involved in Inventory Models

T he inventory models that we will discuss involve someT he inventory models that we will discuss involve someor all of the following costs:or all of the following costs:

* Ordering and Setup Cost* Ordering and Setup CostT hey include things like paperwork and billing,T hey include things like paperwork and billing,or machine setup time if the product is madeor machine setup time if the product is madeinternally.internally.Do not depend on the size of the order.Do not depend on the size of the order.

* Unit Purchasing Cost* Unit Purchasing CostT he variable cost associated with purchasing aT he variable cost associated with purchasing asingle unit. It includessingle unit. It includes the cost of raw material the cost of raw material ,,as well as some variable labor cost, variableas well as some variable labor cost, variableoverhead cost.overhead cost.



* Holding or Carrying Cost* Holding or Carrying Cost

T his is the cost of carrying one unit of inventory for T his is the cost of carrying one unit of inventory for one time period.one time period.T he holding costs usually includes storage cost,T he holding costs usually includes storage cost,insurance cost, taxes on inventory and others.insurance cost, taxes on inventory and others.T he most significant components of holding costT he most significant components of holding costare the opportunity cost incurred by tying upare the opportunity cost incurred by tying upcapital in inventory.capital in inventory.are estimated to be approximately 15 are estimated to be approximately 15- -35% of 35% of the material's actual value per year the material's actual value per year ..



Stockout or Shortage CostStockout or Shortage Cost

When a customer demands a product andWhen a customer demands a product andthe demand is not met on time, a stockout,the demand is not met on time, a stockout,

or shortage, is said to occur.or shortage, is said to occur.If they will accept delivery at a later date,If they will accept delivery at a later date,we say the demands arewe say the demands are b ackb ack--orderedordered ..(or:(or: b ack logged demandb ack logged demand case).case).If they will not accept late delivery, we areIf they will not accept late delivery, we arein thein the lost sa leslost sa les case.case.T hese costs are often harder to measure than other costs.T hese costs are often harder to measure than other costs.



A ssumptions of EOQ Models A ssumptions of EOQ ModelsRepetitive OrderingRepetitive Ordering

T he ordering decision is repetitive in theT he ordering decision is repetitive in thesense that it is repeated in a regular fashion.sense that it is repeated in a regular fashion.

Constant DemandConstant DemandDemand is assumed to occur at a known,Demand is assumed to occur at a known,constant rate.constant rate.

Constant Lead T imeConstant Lead T imeT he lead time for each order is a knownT he lead time for each order is a knownconstant,constant, L.L.

Continuous OrderingContinuous Ordering



Basic Economic Order QuantityBasic Economic Order QuantityModelModel

For the basic EOQ model to hold,For the basic EOQ model to hold,certain assumptions are required:certain assumptions are required:

1.1.Demand is deterministic and occurs at a constantDemand is deterministic and occurs at a constantrate.rate.

2.2. In an order of any size (sayIn an order of any size (say qq units is placed, anunits is placed, anordering and setup costordering and setup cost K K is incurred (alsois incurred (alsoindicated as:indicated as: CC0,0, or P or S).or P or S).

3.3. T he lead time for each order is zero.T he lead time for each order is zero.4.4. No shortages are allowed.No shortages are allowed.5.5. T he cost per unitT he cost per unit- -year of holding inventory isyear of holding inventory is hh ..

(or for instance: C(or for instance: C cc ).).



A ssumptions of the Basic EOQ Model A ssumptions of the Basic EOQ Model

D : the number of units demanded per year.D : the number of units demanded per year.A ll demand is met on time. A ll demand is met on time.K K : T he setup cost of purchasing or producing the: T he setup cost of purchasing or producing the qqunites ordered. (or e.g.: Cunites ordered. (or e.g.: C 00).).

We assumeWe assume p p (the purchasing cost) does not depend on(the purchasing cost) does not depend onthe size of the order. [ K in addition to product costthe size of the order. [ K in addition to product cost p q p q ]]Each order arrives on time.Each order arrives on time.Holding cost of Holding cost of hh per period is usually calculated by:per period is usually calculated by:thethe average cost or value of one unit of inventory * aaverage cost or value of one unit of inventory * apercentagepercentage

G iven these assumptions, the EOQ model determines anG iven these assumptions, the EOQ model determines anordering policy that minimizes the yearly sum of orderingordering policy that minimizes the yearly sum of orderingcost, purchasing cost, and holding cost.cost, purchasing cost, and holding cost.



T heT he economic order quantit yeconomic order quantit y, or EOQ,, or EOQ,

or:or:

the ³Camp formula´the ³Camp formula´

minimizesminimizes TC( q) .TC( q) .T hus,T hus, q* q* minimizes total annual cost.minimizes total annual cost.

2

1

2* ¹

º

¸©ª

¨!h

KDq Q opt = 2C

oD

C c



Example 1Example 1

Schenker Schenker Logistics uses 500 backlights per year.Logistics uses 500 backlights per year.Each time an order for backlights is placed, anEach time an order for backlights is placed, an

ordering cost of $5 is incurred.ordering cost of $5 is incurred.Each light cost 40Each light cost 40¢, and the holding cost is¢, and the holding cost is

8¢ /light/year.8¢ /light/year. A ssume that demand occurs at a constant rate A ssume that demand occurs at a constant rate

and shortages are not allowed.and shortages are not allowed.What is the EOQ? How many orders will be placedWhat is the EOQ? How many orders will be placed

each year? How much time will elapse betweeneach year? How much time will elapse betweenthe placement of orders?the placement of orders?



Example 1 SolutionExample 1 SolutionWe are given thatWe are given that K K = $5,= $5, hh = $0.08 /light/year,= $0.08 /light/year,andand DD = 500 lights /year.= 500 lights /year.T he EOQ isT he EOQ is

Hence, the forwarder should place an order Hence, the forwarder should place an order

for 250 lights each time that inventory reachesfor 250 lights each time that inventory reacheszero.zero.

2

1

2* ¹ º ¸©

ª¨

hq



The time between placement (or

The time between placement (or arrival) of orders is simply the length of arrival) of orders is simply the length of

a cycle.a cycle.

Since the length of each cycle is ,Since the length of each cycle is , q*/ Dq*/ D,,the time between orders will bethe time between orders will be

year Dq

2

1

500

250*!!



SlowSlow--Moving Inventory: A ll DressedMoving Inventory: A ll DressedUp and Nowhere to G oUp and Nowhere to G o

Some companies that think the y do a goodSome companies that think the y do a good jo b speeding inventor y have it on ly ha lf right. jo b speeding inventor y have it on ly ha lf right.

Man y f ocus on ly on f astMan y f ocus on ly on f ast- -moving items,moving items,ignoring the savings potentia l o f managingignoring the savings potentia l o f managing

s lows low--movers.movers.

The µtask¶ shows how to tap this opportunit y.The µtask¶ shows how to tap this opportunit y.



The exercise

By making use o f an E xce l worksheet.



A dditional infoA dditional info

See next slides: MRP & ERPSee next slides: MRP & ERP



MR P IMR P I -- manufacturing resources planning.manufacturing resources planning.Process for determining material, labor and machineProcess for determining material, labor and machine

requirements in a manufacturing environment.requirements in a manufacturing environment.

MRPII (manufacturing resources planning) is theMRPII (manufacturing resources planning) is theconsolidation of material requirements planning (MRP),consolidation of material requirements planning (MRP),

capacity requirements planning (CRP), and master capacity requirements planning (CRP), and master production scheduling (MPS).production scheduling (MPS).

MR OMR O ²² maintenance, repair, and operating inventory.maintenance, repair, and operating inventory.

MRP: Materials requirement PlanningMRP: Materials requirement Planning& M& Manufacturing resources planninganufacturing resources planning



MRP2 & JITMRP2 & JIT

MRP2 applies the principles of MRP to theMRP2 applies the principles of MRP to theplanning and control of all manufacturingplanning and control of all manufacturingresources and integrates the computer systemsresources and integrates the computer systemsof all the business¶s functions. ERP makes theof all the business¶s functions. ERP makes theoperation of MRP2 suitable for any kind of operation of MRP2 suitable for any kind of organization.organization.

J ITJ IT is a planning and control system that aimsis a planning and control system that aimsto produce what is required in exactly theto produce what is required in exactly therequired quantities at exactly the time it isrequired quantities at exactly the time it isrequired.required.

Manufacturing resources PlanningManufacturing resources Planning



E nterprise resource p lanningE nterprise resource p lanning

(E R P)(E R P) A A computer computer- -b ased s ystemb ased s ystem

for for resourceresource planning and controlplanning and controlacross an entire organizationacross an entire organization ..

ERP is suitable for any type of business,ERP is suitable for any type of business,services as well as manufacturing,services as well as manufacturing,and not for profit as well as profit seeking organizations.and not for profit as well as profit seeking organizations.



E R PE R P ²² enterprise resourceenterprise resourceplanning.planning.

Software systems designed to manage most or Software systems designed to manage most or all aspects of a manufacturing or distributionall aspects of a manufacturing or distributionenterprise (an expanded version of MRPenterprise (an expanded version of MRPsystems).systems).

ERP systems are usually broken down intoERP systems are usually broken down intomodules such as financials, sales, purchasing,modules such as financials, sales, purchasing,inventory management, manufacturing, MRP,inventory management, manufacturing, MRP,DRP.DRP.

DR PDR P ²² distribution requirements planning.distribution requirements planning.



E nterprise resource p lanningE nterprise resource p lanning

(E R P)(E R P)A ims to plan, monitor and control all activities of A ims to plan, monitor and control all activities of the organisation using a fully integratedthe organisation using a fully integrated

computer systemcomputer system

Integrated database:Integrated database:OperationsOperations

LogisticsLogistics Ex.:Ex.: SAPSAPHRMHRMFinanceFinanceSalesSales



E R P is ho ly?E R P is ho ly?E R PE R P -- WMSWMS -- CPF RCPF R

Companies that had bought ERP systemsCompanies that had bought ERP systems rejected the use o f rejected the use o f the warehouse modu le o f E R P and insta lled a WMSthe warehouse modu le o f E R P and insta lled a WMS(Warehouse Management S ystem) package o f a tota lly (Warehouse Management S ystem) package o f a tota lly specia lized compan y that f ina lly was inter f aced to withspecia lized compan y that f ina lly was inter f aced to withthe E R P.the E R P.

G iant companies such as Levi Strauss, Xerox, Procter &G iant companies such as Levi Strauss, Xerox, Procter &G amble, which started applying the principles of G amble, which started applying the principles of CPF R CPF R (Co lla b orative P lanning Forecasting and R ep lenishment)(Co lla b orative P lanning Forecasting and R ep lenishment)report impressive figures:report impressive figures: cost reduction by 45%, order cost reduction by 45%, order lead time reduced by 50%, and double speed of stock lead time reduced by 50%, and double speed of stock circulation.circulation.

To be continued..To be continued..

bly3q3 logistics management lm1-im1

Documents