Lantul de Aprovizionare (Chain Supply)

5/15/2015
Supply Chain Management
Associate professor:
Ctlin AFRSINEI
Introduction
Manufacturers now compete less on product and quality which are
often comparable and more on inventory turns and speed to market.
John Kasarda, Forbes,October 18, 1999
Almost every organization faces a problem:

getting the right materials
to the right place
at the right time
Which is the key? Logistics

Because:
Logistics is responsible for the physical movement of materials and,
sometimes, people.
Logistics deals with the planning and control of material flows and
related information in organizations, both in the public and private sectors.
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Introduction
Its mission:
What Get the right materials to the right place at the right time
How By optimizing a given performance measure and satisfying a given

set of constraints
Importance of logistics:
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Introduction
Logistics system:
Facilities
Transportation services
Supply chains:
Question: It is another term for Logistics?
Answer: No, they are different
Q: They are related?
A: Yes
Q: Which one is more complex?
A: Supply chain
Q: Why?
Every business fits into one or more supply chains and has a role to play in each
of them.
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Origins and definitions
Remarks:
An army marches on its stomach (Napoleon)
Amateurs talk strategy and professionals talk logistics
Evolution of terms:
logistics
supply chain (1980s)
operations management
1. Supply chain is just another term for logistics.
2. Supply chain includes other functions: purchasing, engineering, production,
finance, marketing, and related control activities in the single company.
3. The supply chain is all the functions in definition #2 plus those in a companys
suppliers suppliers and a companys customers customers as well
extending far outside the traditional enterprise.
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Accepted definitions of supply chain:
A supply chain is the alignment of firms that bring products or services

to market.
A supply chain consists of all stages involved, directly or indirectly, in
fulfilling a customer request. The supply chain not only includes the
manufacturer and suppliers, but also transporters, warehouses,
retailers, and customers themselves.
A supply chain is a network of facilities and distribution options that
performs the functions of procurement of materials, transformation
of these materials into intermediate and finished products, and the
distribution of these finished products to customers.
Supply chain : Life cycle processes comprising physical, information,
financial, and knowledge flows whose purpose is to satisfy end-user
requirements with products and services from multiple linked suppliers
Accepted definitions of supply chain management:

Supply chain management is the things we do to influence the
behavior of the supply chain and get the results we want based on
responsiveness and efficiency.
Supply chain management is the coordination of production,

inventory, location, and transportation among the participants in a
supply chain to achieve the best mix of responsiveness and
efficiency for the market being served.
Differences between supply chain management and logistics:
Logistics typically refers to activities that occur within the boundaries of a
single organization
Supply chains refer to networks of companies that work together and

coordinate their actions to deliver a product to market
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Concluding:
A SUPPLY CHAIN consists of the series of activities and organizations that move
materials through on their journey from initial suppliers to final customers
LOGISTICS is the function responsible for the flow of materials from suppliers into
an organization, through operations within the organization, and then out to
customers

Related terms:
PRODUCTS: every organization delivers products to its customers.
Products = combination of goods or services with different weights.
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Related terms:
OPERATIONS: Is the core of any organization. They create and deliver the
products. Operations take a variety of inputs and convert them into desired
outputs.

Related terms:
OPERATIONS: takes a precise place in the cycle of supply and demand.
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Related terms:
MATERIALS: are all the things that an organisation moves to create its products.
- tangible (raw materials)
- intangible (information)
Logistics are responsible for materials movement both inside and outside an
organization and between organizations.
Inbound or inward logistics: moving materials into the organisation from suppliers
Outbound or outward logistics: moving materials out to customers
Materials management : moving materials within the organisation

People use different names for these chains of activities and organisations:
- process: when they emphasise the operations
- logistics channel: when they emphasise marketing
- value chain: when they look at the value added
- demand chain: when they see how customer demands are satisfied
- supply chain: when they emphasise the movement of materials
Every product has its

own unique supply chain.
Examples:
the supply chain of
chocolate starts with cocoa
beans growing on farms
and ends with the delivery
of bars of chocolate to
hungry customers
the supply chain of jeans

starts with cotton growing
in a field and ends when
you buy the jeans in a
shop.
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Structure of supply chain

A supply chain moves materials through a series of organisations.
Each one adds value to the final product.
From organisations point of view:
-Upstream: activities in front of it tiers of suppliers
-Downstream: ; activities after the organisation tiers of customers
Structure of supply chain

A supply chain could be much more complicated in the real life as seen
in the following image:
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Supply chain is made up of:

Production system
Distribution system
Types of supply chains:
Pull supply chain (MTO): Push supply chain (MTS):
products are manufactured only production and distribution
when customers require them decisions are based on forecasts
no inventories are needed at the production anticipates effective
manufacturer demand, and inventories are held in
warehouses and at the retailers
Mixed approach (MTA):

components and semi-finished products
are manufactured in MTS system
final assembly stage is made in MTO
system
Product and information flows in a supply chain
Downstream: Upstream:
products flow information flow + obsolete,
damaged and nonfunctioning
direction: from raw material
products
sources to customers
direction: from customers to raw
material suppliers
Both flows are time consuming
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Performance drivers of supply chain

Companies in any supply chain have to take decisions individually and
collectively regarding their roles.
There are 5 areas where companies can make decisions that will define their
supply chain performance: Production, Inventory, Location, Transportation and
Information.
They are also called performance drivers and they should be taken into consideration
into the companies effort to solve the trade-off between responsiveness and
efficiency.
Production:
- subject of decision making: dimension of production capacity
Excess capacity vs. Restricted capacity
Responsiveness vs. Efficiency
Inventory:
-subject of decision making: level of storage
-is spread throughout the supply chain and includes: raw materials, semi-finished
goods, finished goods
-large amounts of inventories cope with fluctuations in customer demand
responsiveness
-small amounts of inventories low inventory costs efficiency
Performance drivers of supply chain - continued

Location:
-subject of decision making: geographical siting of supply chain facilities
-centralize activities in fewer locations economies of scale efficiency
-decentralize activities in many locations close to customers and suppliers
responsiveness
Transportation:
-refers to the movement of materials between facilities
-subject of decision making: choice of transport mode
Fast modes of transport vs. Slower modes of transport
-six basic modes of transport: ship, rail, pipelines, truck, air, and
Electronic transport
Information:
-is the basis of decision making process:
-Coordinating daily activity
-Forecasting and planning
......?............. vs. ?.
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Performance drivers of supply chain - continued
Benefits of supply chain

Supply chains are so complicated that you might wonder if there is
some way of avoiding them.
Sometimes this is possible, when we move products directly from
initial producers to final customers
Benefits of supply chain:

Overcome the gaps created when suppliers are some distance away from
customers.
Allow for operations that are best done or can only be done at locations
that are distant from customers or sources of materials
Producers locate operations in the best locations, regardless of the locations of
their customers.
Producers can get economies of scale, by concentrating operations in large
facilities.
Producers do not keep large stocks of finished goods, as these are held further
down the supply chain nearer to customers.
Wholesalers place large orders, and producers pass on lower unit costs in price
discounts.
Wholesalers keep stocks from many suppliers, giving retailers a choice of
goods.
Wholesalers are near to retailers and have short lead times.
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Benefits of supply chain

Retailers carry less stock as wholesalers provide reliable deliveries.
Retailers can have small operations, giving a responsive service near to
customers.
Transport is simpler, with fewer, larger deliveries reducing costs.
Organisations can develop expertise in specific types of operation.
Supply chains can also make movements a lot simpler:
Organizing logistics in a company
Logistics takes place in almost every organization taking many

different forms
Logistics in a classical view: the image with forklift trucks unloading pallets
from lorries and moving them around warehouses
Logistics in a bank: what kind of branch network to have, where to locate
offices, who to buy telephone and other services from, how to deliver information
to customers
Logistics can be arranged in many ways within an organization:
Small organization: might have one person looking after everything

Medium sized organization: might have one department with different sections
for purchasing, transport, stock control, distribution etc
Large organization: might have a logistics division employing thousands of
people and running huge transport fleets.
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Organizing logistics in a company

integrated function product based organizing
Effects on financial performance
Logistics involves expenses (costs).

So, it has impact on an organisations overall financial performance
Assets:
current (cash, accounts receivable, stocks, and so on) or
fixed (property, plant, equipment, and so on).
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Current assets
Logistics reduces the current assets through lower stock levels. Reducing
the investment in stock can also free up cash and reduce the need for
borrowing.
Fixed assets
Fixed assets include property, plant and equipment. Warehouses, transport
fleets, materials handling equipment and other facilities needed to move
materials through the supply chain form a major part of fixed assets.
Sales
By making a more attractive product, or making it more readily available,
logistics can increase sales and give higher market share.
Profit margin
More efficient logistics gives lower operating costs, and this in turn leads to
higher profit margins.
Price
Logistics can improve the perceived value of products making them more
easily available, giving faster delivery or shortening lead times. More
attractive products can get premium prices.
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How supply chains work: participants

Producers
- organizations that make a product
- two types:
- producers of raw materials
- producers of finished products:
-tangible products
-intangible products
- producers of tangible products are moving to areas of the world where labor is
less costly
- producers in the developed world are increasingly producers of intangible
products (at least a part of them)
Distributors
- companies that take inventory in bulk from producers and deliver a bundle of
related product lines to customers
- are also known as wholesalers
- typically sell to other businesses and they sell products in larger quantities than an
individual consumer would usually buy
- buffer the producers from fluctuations in product demand
- fulfill the Time and Place function
- most common activities carried out: promotion, sales, inventory management,
warehouse operations, product transportation, customer support and post-sales
service
How supply chains work: participants

Retailers
- stock inventory and sell in smaller quantities to the general public
- tracks the preferences and demands of the customers
- attract customers using some combination of advertising, price (discounts),
product selection, service, and convenience
Customers
- any organization that purchases and uses a product

- may purchase a product in order to incorporate it into another product
- customer may be the final end user of a product who buys the product in order to
consume it
Service providers
- provide services to producers, distributors, retailers, and customers
- have expertise and skills that focus on a particular activity needed by a supply
chain
- transportation services (trucking companies), warehousing services (public
warehouse companies), financial services, market research, advertising,
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How supply chains work: activities

Activities normally included in logistics:
Procurement or purchasing. The flow of materials through an organization is
usually initiated when procurement sends a purchase order to a supplier
Main operations:
finds suitable suppliers
negotiates terms and conditions
organises delivery
arranges insurance and payment
does everything needed to get materials into the organization
Inward transport or traffic: actually moves materials from suppliers to the

organization's receiving area
Main operations:
choose the type of transport (road, rail, air, and so on),
find the best transport operator
design a route
make sure that all safety and legal requirements are met
get deliveries on time and at reasonable cost, and so on

Activities normally included:
Receiving makes sure that:
materials delivered correspond to the order
acknowledges receipt
unloads delivery vehicles
inspects materials for damage
sorts materials
Warehousing or stores : moves materials into storage, and takes care of them until
they are needed
Aims:
makes sure that materials can be available quickly when needed
makes sure that they have the right conditions, treatment and packaging
special care for special materials (frozen food, drugs, chemicals, animals, and
dangerous goods)
Stock control : sets the policies for inventory

It deals with:
materials to store, overall investment, customer service, stock levels, order sizes,
order timing etc
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Order picking finds and removes materials from stores. Typically materials for a
customer order are:
located,
identified,
checked,
removed from racks,
consolidated into a single load,
wrapped and moved to a departure area for loading onto delivery vehicles
Materials handling: moves materials through the operations within an organization

The aim of materials handling is to give :
efficient movements,
with short journeys,
using appropriate equipment,
with little damage, and
using special packaging and handling where needed

Outward transport takes materials from the departure area and delivers them to
customers (with concerns that are similar to inward transport).
Physical distribution management is a general term for the activities that deliver
finished goods to customers, including outward transport. It is often aligned with
marketing and forms an important link with downstream activities.
Recycling, returns and waste disposal

Possible situations:
- A part of delivered materials were faulty, or too many were delivered, or they were
the wrong type
- Pallets, delivery boxes, cable reels and containers which are returned to suppliers
for reuse
- Some materials are brought back for recycling, such as metals, glass, paper,
plastics and oils
Location
Some of the logistics activities can be done in different locations. Logistics has to:
- find the best locations for these activities a significant role in decisions
- calculate the size and number of facilities
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Communication Logistics is also responsible for the information flow
ASSOCIATED to materials flow:
- it links all parts of the supply chain
- passing information about products
- customer demand
- materials to be moved
- timing
- stock levels
- availability
- problems
- service levels
How supply chains work: main activities

Activities included in any logistics system (supply chain) could be
grouped into three main activities:
order processing
inventory management
freight transportation
Order processing, main operations:

fill out and transmit the order form
check the availability of requested items
check the credit status of the customer
items are retrieved from the stock or produced
items are packed and delivered
shipping documentation is emitted
customer is kept informed about the order status
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How supply chains work

Inventory management:
Inventories are stockpiles of goods waiting to be manufactured, transported or
sold.
Advantages of holding inventories in a supply chain:

Improving service level shorter lead time
Reducing overall logistics cost
Coping with randomness in customer demand and lead times
Making seasonal items available all over the year
Speculating on price variations
Overcoming inefficiencies in managing the logistics system
Main disadvantage of holding inventories: could be very expensive
The aim of inventory management is to determine stock levels in order to

minimize total operating cost while satisfying customer service requirements
A good inventory management policy should take into account 5 issues:

importance of customers, economic relevance of different products,
transportation policies, production process flexibility, competitors policies
Inventory and transportation strategies
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Inventory and transportation strategies:
direct shipment
Definition:
goods are shipped directly from the manufacturer to the end-user
(the retailers in the case of retail goods)
Advantage :
eliminate the expenses of operating a DC
reduce lead times
Disadvantage :
A large fleet of small truck if shipments size are small and

customers dispersed over a wide geographic area
Proper when :
Fully loaded trucks are required by customers

Perishable goods have to be delivered timely

warehousing
Description:
Goods are received by warehouses and stored in tanks, pallet racks or on
shelves. When an order arrives, items are retrieved, packed and shipped to
the customer.
Major functions :
reception of the incoming goods
storage
order picking
shipping
Question:
Which of the four functions are most expensive and why?
Answer:
Storage and order picking are the most expensive because of
inventory holding costs and labor costs, respectively
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Crossdocking (just-in-time distribution)
Definition:
Crossdocking uses a crossdock, which is a transshipment facility in which
incoming shipments (possibly coming from several manufacturers) are
sorted, consolidated with other products and transferred directly to outgoing
trailers without intermediate storage or order picking
Proper when : Major functions :

High volume sort
Low variability of demand consolidate
Easy-to-handle products No storage
No order picking
Types of crossdocking :
Predistribution crossdocking: goods are assigned to

a retail outlet before the shipment leaves the vendor
Postdistribution crossdocking: the crossdock itself
allocates goods to the retail outlets
Centralized vs. decentralized warehousing
Centralized: Decentralized:
a single warehouse serves the several warehouses serve the
whole market zones the market is divided into
lower facility costs (economies of reduced lead times
scale)
outbound transportation costs
inbound transportation costs are are lower
lower
Inbound transportation costs: the costs of shipping the goods from

manufacturing plants to warehouses
Outbound transportation costs: the costs of delivering the goods from the
warehouses to the customers
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Centralized vs. decentralized warehousing

Importance:
allows production and consumption to take place at locations that are several
hundreds or thousands of kilometers away from each other
stimulate direct competition among manufacturers from different countries
companies take advantage of lower manufacturing wages in developing
countries
perishable goods can be made available in the worldwide market
often accounts for even two-thirds of the total logistics cost
Transportation alternatives from manufacturers or distributors perspective:

1. Private transportation: the company operates a private fleet of owned or
rented vehicles
2. Contract transportation: a carrier is in charge of transporting materials
through direct shipments regulated by a contract
3. Common transportation: the company resorts to a carrier that uses
common resources (vehicles, crews, terminals) to fulfill several client
transportation needs
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Distribution channels:
Is a path followed by a product from the manufacturer to the end-user.
Bringing products to end-users may be a complex process .
Alternatives of distribution: Few cases
Direct distribution: producer brings products to the end-users directly
Intermediate distribution: intermediaries participate in product distribution
Most used
Types of intermediaries:
Brokers or sales agents: are acting for the manufacturer
Wholesalers: purchase from manufacturers and resell to retailers
Retailers: sell to the end-users
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Freight consolidation:
-Generates logistics cost savings because of the scale economies
-Consolidates small shipments into larger ones
Types of freight consolidation:

1. Facility consolidation: small shipments are consolidated (grouped) into
large shipments over long distances
2. Multi-stop consolidation: small deliveries associated with different locations
are grouped in the same vehicle which has a multi-stop route
3. Temporal consolidation: scheduled shipments may be adjusted forward or
backward so as to make a single large shipment rather than several small
ones
Modes of transportation: there are 5 classical modes

Ship
Truck
Pipeline
Rail
Air

Modes of transportation
Tranportation modes can be combined so as to obtain a door-to-door services:

intermodal carriers or small shipment carriers.
Intermodal transportation becomes efficient and effective when the materials
(merchandise) are consolidated into pallets or containers. They have:
standard dimensions: 80x100, 90x110, 100x120, 120x120 cm 2 for pallets
protect merchandise: containers may be refrigerated, ventilated, can transport
liquids etc.
facilitate handling at terminals
There are two fundamental parametres when selecting a carrier:
1. Price (cost)
The hierarchy of the most expensive transportation modes considering their costs:
Air Truck Rail Pipeline Ship
2. Transit time
It is the time a shipment takes between its origin and its destination. It is influenced by
the weather, traffic conditions etc.
Some transportation modes (air, ship) must be used jointly with other modes (truck) to
provide door-to-door transportation service
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Rail
Characteristics:
inexpensive (for long-distance movements)
slow
quite unreliable
is commonly used for raw materials and low-value finished goods
Reasons of being a slow mover:
convoys have low priority compared to passenger trains;
direct train connections are quite rare;
a convoy must include tens of cars in order to be worth operating
Truck
Characteristics:
used for moving semi-finished and finished products
has two variants:
truckload (TL): the truck is fully loaded and moves materials directly from
origin to destination
less-than-truckload (LTL): shipments are much less than vehicle capacity
and they have to be jointly loaded in consolidation terminals to reach the truck
capacity
TL
LTL
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Air
Characteristics:
very fast
it is slowed down by freight handling at airports
is not competitive for short or medium haul shipments
used for high-value products over very long distances
it is used in conjuction with road transportation to provide door-to-door service
Intermodal transportation
Improves the level of transportation services to clients.
Offers a reasonable trade-off between cost and transit time.
There are several most used combinations of the five basic modes:
airtruck (birdyback)
traintruck (piggyback)
shiptruck (fishyback)
Most common used load unit is container, which can be moved in two ways:
containers are loaded on a truck and the truck is loaded onto a train, ship or
airplane
containers are loaded directly on a train, ship or airplane
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Supply chain integration
Integration within an organization
Integration along the supply chain
Arguments for integration

In the past, organisations put all their effort into making products and gave little
importance to the associated movement of materials
Managers recognised that transport and storage were needed
They were simply the unavoidable costs of doing business
1962 Drucker:
Logistics: the economys dark continent
Logistics: The most sadly neglected, most promising area of business
Main reason for change: recognition that logistics was expensive logistics
had been identified as a high cost function organisations should make
significant savings

These activities have traditionally been managed separately, so that an

organisation might have a distinct purchasing department, transport department,
warehouse, distribution fleet, and so on
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Being not correlated, logistics activities have different purposes:

Purchasing might look for the most reliable suppliers
Inventory control might look for low unit costs
Warehousing might look for fast stock turnover
Materials management might look for easy handling
Transport might look for full vehicle loads
Problems will appear when the aims come into conflict:

- Purchasing can reduce its administrative costs by sending fewer, larger orders to
suppliers but this increases stock levels and raises the amount of money tied up
in the warehouse
- Using sea transport rather than airfreight reduces transport costs but increases
the amount of stock held in the supply chain
If logistics is divided into separate functions, each part will move in a different
direction, and there is duplicated effort and wasted resources.

A fragmented supply chain has the disadvantages of:
giving different, often conflicting, objectives within an organisation

duplicating effort and reducing productivity
giving worse communications and information flows between the parts
reducing co-ordination between the parts leading to lower efficiency, higher
costs and worse customer service
increasing uncertainty and delays along the supply chain
making planning more difficult
introducing unnecessary buffers between the parts, such as stocks of work in
progress, additional transport and administrative procedures
obscuring important information, such as the total cost of logistics
giving logistics a low status within an organisation.
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Some organisations are tempted to stop when they reach an intermediary stage,
and they work with two functions:
materials management, aligned with production and looking after the inwards
flow of raw materials and their movement through operations; and
physical distribution, aligned with marketing and looking at the outward flow of
finished goods.
Another factor that encourages internal integration is the analysis of total

logistics cost
Total logistics cost = transport cost +

warehouse cost + stock holding cost +
packaging cost + information
processing cost + other logistics
overheads

Stages of integration
Stage 1: Separate logistics activities are not given much attention or considered important.
Stage 2: Recognising that the separate activities of logistics are important for the success of
the organisation.
Stage 3: Making improvements in the separate functions, making sure that each is as efficient
as possible.
Stage 4: Internal integration recognising the benefits of internal co-operation and
combining the separate functions into one.
Stage 5: Developing a logistics strategy, to set the long-term direction of logistics.
Stage 6: Benchmarking comparing logistics performance with other organisations, learning
from their experiences, identifying areas that need improvement and finding ways of achieving
this.
Stage 7: Continuous improvement accepting that further changes are inevitable and always
searching for better ways of organising logistics.
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Benefits of integrating logistics within an organization can be extended for

integrating logistics along the supply chain (external integration)
Concluding, we can talk about 3 levels of integration:

Level 0: logistics seen as separate activities within an organization
Level 1: internal integration to bring logistics activities together into a single
function
Level 2: external integration, where organizations look ahead of their own
operations and integrate more inside the supply chain
Organizations within the same supply chain should CO-OPERATE to get final
customer satisfaction. They should not compete with each other, but with
organizations in other supply chains.
A fragmented supply chain generates an interesting multiplying effect:

the bullwhip effect
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Some benefits from external integration could be:

genuine co-operation between all parts of the supply chain, with shared information
and resources
lower costs due to balanced operations, lower stocks, less expediting, economies of
scale, elimination of activities that waste time or do not add value, and so on
improved performance due to more accurate forecasts, better planning, higher
productivity of resources, rational priorities, and so on
improved material flow, with co-ordination giving faster and more reliable
movements
better customer service, with shorter lead times, faster deliveries and more
customisation
more flexibility, with organisations reacting faster to changing conditions
standardised procedures, becoming routine and well-practiced with less duplication
of effort, information, planning, and so on
reliable quality and fewer inspections, with integrated quality management
programmes

Co-operation vs. Conflict
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Logistics managerial issues
There are examples when logistics costs are 50-60% of total costs of a product
Its important to plan a logistics strategy

Capital reduction
A reasonable compromise between Cost reduction
Service level improvement
Capital reduction
Means to reduce as much as possible the level of investment in the logistics system
(owned equipment and inventories).
Possible ways:
public warehouses instead of privately owned warehouses
using common carriers instead of privately owned vehicles
!! Capital reduction determines higher operating costs

Cost reduction
Means to minimize the total cost associated with transportation and storage.
Service level improvement
Logistics service greatly influence the level of customer satisfaction. A satisfied

customer has major impact on revenues.
The impact is greater in markets with homogeneous low-price products.
!! Logistics service is expressed through order-cycle time
Order cycle time: the period of time between the moment a purchase order is
issued and the moment the goods are received by the customer.
Service request Service provided

Order-cycle time
When a retailer outlet issues an order, the following events may occur:
(a) if the goods are available at the associated RDC, they will be delivered shortly;
(b) the RDC has to resupply its stocks by placing an order to the CDC; the shipment
to the retailer will be further delayed
(c) goods are not available even at the CDC, the plants will be requested to produce
them.
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Let pa, pb and pc the probabilities of events a, b, c
Let fa(t), fb(t), fc(t) be the functions of the order-cycle time in case of
events a, b and c
Function of the order-cycle time is then:

f(t) = pa*fa(t) + pb*fb(t) + pc*fc(t)
Emerging trends in logistics
Globalization
More companies operate at the world level to take advantage of lower manufacturing
costs or cheap raw materials available in some countries.
Consequences on logistics:
As a result of globalization, transportation needs have increased.
Parts and semi-finished products have to be moved between production sites.
The increase in multimodal container transportation
More efficient design and management of supply chains, sometimes at the world level.

Information technologies
Consequences on logistics:
Suppliers and manufacturers make use of EDI share information about:
stock levels,
timing of deliveries,
positioning of intransit goods in the supply chain
At the operational level:
geographic information systems (GISs) keep track of the current position of
global positioning systems (GPSs) vehicles and
on-board computers communicate with drivers
E-commerce
Means to make commercial transactions through the Internet: B2B or B2C transactions
Increase of direct deliveries between manufacturers and end-
E-commerce users
Decrease of volume of goods between producers and retailers
able to manage small/medium size shipments
E-commerce E-logistics: to a large number of customers
scattered around the world
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E-commerce (continued)
The return flow of defective (or rejected) goods becomes a major issue (reverse
logistics) in the context of e-commerce
E-logistics system has different approaches for operating warehouses and distribution.
It operates with virtual warehouse and Points Of Presence In The Territory (POPITT)
Virtual warehouse: virtual facility where suppliers and distributors keep the stock of
goods so as the e-commerce company ca fulfill its orders.
POPITT: a facility which stores already sold goods waiting to be picked up by
customers and defective products waiting to be returned.
!! POPITT simplifies distribution management but reduces customer service level.

Logistics decisions
When designing and operating a logistics system (supply chain), a lot of answers has to
be found:
Should new facilities be opened?
What are their best configuration, size and location?
Where should materials and components be acquired and stored?
Where should manufacturing and assembly take place?
Should warehouses be company-owned or leased?
How should warehouses operate?
When and how should each stocking point be resupplied?
What mode of transportation should be used to transport products?
Should vehicles be company-owned or leased?
What is the best fleet size?
How should vehicles be routed?
Should some transportation be carried out by common carriers?
So, its time to take decisions
According to the planning horizon, we have:
Strategic decisions
Strategic decisions have long-term effects (usually over many years). They include
logistics systems design and the acquisition of costly resources (facility
location, capacity sizing, plant and warehouse layout, fleet sizing).
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Logistics decisions
Tactical decisions
Tactical decisions are made on a medium-term basis (e.g. monthly or quarterly) and
include production and distribution planning, as well as resource allocation
(storage allocation, order picking strategies, transportation mode selection,
consolidation strategy).
Operational decisions
Operational decisions are made on a daily basis or in realtime and have a narrow
scope. They include warehouse order picking as well as shipment and vehicle
dispatching.
Operations: Inventory management and strategy

Importance of inventory decisions
The significance of inventory as percent of assets:
Because inventory is a significant cost center, the reduction of a firm's inventory

commitment by a few percentage points can result in dramatic profit improvement.
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Inventory types and characteristics
Generally, inventory is risky and this depends on the firms position in the
distribution channel.
Duration (time)
Measures of inventory Depth
Width
Manufacturer:
-Inventory refers to: raw materials, component parts, work-in-process materials,
finished goods
- finished goods are stored in warehouses in anticipation of customer demand
There are situations when manufacturers are required to consign inventory to
customer facilities => inventory risk is shifted to the manufacturer.
Long duration
Inventory commitment Deep
Narrow (product range)

Wholesaler:
-purchases large quantities from manufacturers and sells smaller quantities to
retailers
- economic justification: provide retail customers with assorted merchandise from
different manufacturers in specific quantities
For seasonal products, the wholesaler has to keep inventory in advance of the
selling season => increasing depth and duration of risk
Long to very long duration (for seasonal products)
Inventory commitment Deep
Wide (product range from several manufacturers)
Retailer:
-inventory management is about buying and selling velocity
-purchases a wide variety of products in small quantities having a high level of
inventory turnover
Annual sales
Inventory turnover Inventory velocity
Average inventory
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Retailer (continued):
Short duration
Inventory commitment Not deep
Wide (variety of products)

Specialty retailers vs. mass merchandisers: less width but much depth and duration
Inventory main functions:

Inventory related concepts
Inventory policy:
Is about what to purchase or manufacture, when to take action, and in what
quantity.
Decisions related to inventory policy:
1. Geographical inventory positioning
postpone inventory positioning by maintaining stock at the plant
regional warehouses to have product closer to the market
2. Inventory management practice
independently manage inventory at each stocking facility
central inventory management of all stocking locations
Service level:
Measures the inventory performance in terms of:

-Performance cycle (order cycle time): elapsed time between the release of a
purchase order by a buyer and the receipt of the corresponding shipment
-Case fill rate: the percent of cases or units ordered that are shipped as requested
(from available stock)
-Line fill rate: the percent of order lines filled completely
-Order fill rate: the percent of customer orders filled completely
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Service level (continued):
Alternative of providing high service level:
-Increase inventory
-Fast transportation
-Collaboration with customers to reduce uncertainty
Average inventory:
Consists of materials, components, work-in-process, and finished product typically
stocked in the supply chain.
Inventory levels must be planned for each facility and each product.
Order quantity:
$70.000-$30.000= $40.000
Safety stock:
$30.000
Performance cycle:
From 0 to 1
From 1 to 2

Average inventory (continued):

Replenishment order: is initiated prior to the stock level reaches the minimum, so
that inventory will arrive before an out-of-stock occurs.
Safety stock: is maintained in supply chain to protect against demand and
performance cycle uncertainty. Safety stock inventory is used only at the end of
replenishment cycles when uncertainty has caused higher than expected demand
or longer than expected performance cycle times.
Average Inventory Over Multiple Performance Cycles:
Situation 1:
-Order qty: 200
-Reorder point: 100
-Average inventory: 100
-Performance cycle: 20
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Average Inventory Over Multiple Performance Cycles:

What if replenishments are made more rarely? What if replenishments are made
more often?
The figures illustrates that average inventory is a function of the reorder quantity
Smaller replenishment order quantities do result in lower average inventory, but there
are also other factors that influence order quantity: performance cycle uncertainty,
purchasing discounts, and transportation economies
Order quantity can be determined by balancing the cost of ordering and the cost of
maintaining inventory (inventory carrying cost) : Economic Order Quantity (EOQ)

Inventory carrying cost

Inventory carrying cost is the expense associated with maintaining inventory.
Generally, it is calculated by multiplying annual inventory carrying cost percent by
average inventory value (purchase or manufacturing cost rather than selling price)
Relevant elements for inventory carrying cost percent computation:
- Capital costs: are based on expected return on investment for all funds available to
an enterprise (hurdle rate). Any funds invested in inventory lose their earning power,
restrict capital availability, and limit other investment.
- Taxes: the tax expense is usually a direct levy based on inventory level on a
specific day of the year or average inventory level over a period of time
- Insurance: is an expense based upon estimated loss risk over time and depends
on the product and the facility storing the product.
- Storage: is an expense related to product holding, allocated on the requirements of
specific products .
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Inventory carrying cost

The components of annual inventory carrying cost and typical range of component
costs:
It should be clear that the final carrying cost percent used by a firm is determined
by managerial policy.

Planning inventory
When to order
Means to setup the reorder point.
It can be expressed in units:
Or in terms of days: equals T (performance cycle in days).
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Planning inventory
How much to order

Answer: the ordering quantity that minimizes the total inventory carrying and
ordering cost.
Economic Order Quantity:
Standard formulation for

EOQ:
Co= Cost per order;

Ci = Annual inventory
carrying cost;
D = Annual sales volume,
units; and
U = Cost per unit.

Planning inventory
How much to order (continued)

Example:
The major assumptions:
(1) all demand is satisfied;
(2) rate of demand is continuous,
constant, and known;
(3) replenishment performance
cycle time is constant and known;
(4) there is a constant price of
product that is independent of order
quantity or time;
(5) there is an infinite planning
horizon;
Ordering cost (6) there is no interaction
$152 (2400/300 x $19.00) between multiple items of inventory;
Inventory carrying cost (7) no inventory is in transit; and
$150 [300/2 x (5 x 20%)] (8) no limit is placed on capital
availability.
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Planning inventory

EOQ extensions:
3 typical situations determine a company to make adjustments on EOQ:

volume transportation rates
quantity discounts
other EOQ adjustments
Volume transportation rates:
greater weight of order => lower the cost of transportation per unit
transportation-rate discount for larger shipments is common for both truck and rail
a firm naturally wants to purchase in quantities that offer maximum transportation
economies
such quantities may be larger than EOQ

Planning inventory

Example:
Resulting EOQ from calculations: 300 units
Desirable transportation rate is obtained when order quantity is 480 units
At EOQ = 480 units:

inventory carrying cost higher
ordering cost lower
transportation cost decreases

because of the lower rate
results a $570 savings on Total

cost
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Planning inventory

EOQ extensions:
Quantity discounts
Some discounts on purchasing price could be acquired according to the volume of
orders
Example of quantity discounts:
If the discount at any associated quantity is

sufficient to make a tradeoff between increased
inventory carrying cost and the reduced cost
of ordering, then the quantity discount offers a
viable alternative

Planning inventory

EOQ extensions:
Other EOQ adjustments:
1) production lot size: refers to the most economical quantities from a
manufacturing perspective
2) multiple-item purchase: situations when more than one product is bought

concurrently, so quantity and transportation discounts must consider the impact of
product combinations
3) limited capital: budget limitations for total inventory investment
4) private trucking: the enterprise interest is to fully load the truck regardless of the
EOQ
5) unitization: may be significant diseconomies when the EOQ is not a standard

unit, such as pallets or cases. From a handling or transportation utilization
perspective, it is probably more effective to order integer number of standard
units
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Managing uncertainty
Formulation of inventory policy must realistically consider the impact of

uncertainty. It could generate out-of-stock (stockout)
One of the main functions of inventory management is to plan safety stock to
protect against out-of-stocks.
2 types of uncertainty, having direct impact on inventory:
demand uncertainty: variable daily sales
performance cycle uncertainty: variations on performance cycle time
Demand uncertainty:
Forecasting estimates unit demand during the inventory replenishment cycle.

Demand during replenishment cycle often exceeds or doesnt reach what is anticipated
When demand exceeds the forecast, safety stock is necessary to protect against
stockout.
If demand doesnt reach the forecast the stock is not consumed at the end of
performance cycle => reorder quantity has to be lower or performance cycle
longer

Demand uncertainty:
Inventory performance cycle under conditions of demand uncertainty:
Cycle 1: although daily demand

experienced variation, the
average of 5 units per day was
maintained
Cycle 2: demand totaled 50
units in the first 8 days,
resulting in a stockout; thus, no
sales were possible on days 9
and 10
Cycle 3: demand was lower
than the planned one; the
performance cycle ended with
remaining units in stock.
Performance cycle: 10 days

Order quantity: 50 units
Daily sales (forecasted): 5 units/day
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Demand uncertainty:
Other aspects observed:

2) Since sales never
exceed 10 units per day, 3) during the three
1) stockouts occurred on 2
no possibility of stockout performance cycles 10
of 30 total days
exists on the first 5 days of units were sold on only
the replenishment cycle one occasion
Safety stock calculation for demand uncertainty:
We can create a table with
demand values and their A chart is possible to be created based on
corresponding frequency: frequency of demand:
Given an expected average of 5 units per day,

- demand exceeded average on 11 days
- was less than average on 12 days
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While a number of frequency distributions can be used in inventory control, the most
basic is the normal distribution:
Essential characteristic of a normal
distribution: mean (average), median
(middle), and mode (most frequently
observed) values are all the same
The basis for predicting demand in the case
of normal distribution: standard deviation
of observations around the central tendency.
Standard deviation has 3 levels of dispersion:

+ 1 standard deviation: includes 68.27% of
events
events
events
Standard deviation can be calculated as following:
Fi frequency
Di deviation from mean
Example of standard deviation calculus:
= 2.54 units
The standard deviation of the data in table is rounded to 3 units

2 standard deviations of protection means 6 units, this is the necessary
safety stock to have a 95.45 % protection of stockout.
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Performance cycle uncertainty:
Performance cycle uncertainty appears when the company cannot assure constant
delivery. It doesnt have a constant value over multiple consequent cycles
In this situation the events considered are the performance cycle times and
dispersions are calculated, as following:
Then, the standard deviation is:
Performance cycle uncertainty:
The corresponding values for 1st standard deviation is + 2 days below and above
the mean which is 10 days. For 2nd standard deviation the range is + 4 days around
the average performance cycle.
1st standard deviation: in 68.27% of the time performance cycles fall between 8
and 12 days
2nd standard deviation: in 95.45% of the time performance cycles fall between 6
and 14 days
For + 2 standard deviation the necessary safety stock amounts 20 units in the
case of constant daily sales of 5 units (4 days above the average 10 performance
days, which amounts 4x5=20 units of constant sales)
From a practical viewpoint, when cycle days drop below 10, no immediate problem
exists with safety stock. If the performance cycle were consistently below the
planned performance cycle over a period of time, then adjustment of performance
cycle days is necessary.
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Combined demand and performance cycle uncertainty
Treating both demand and performance cycle uncertainty requires combining two
independent variables
First, it is necessary to determine

the standard deviation of both
daily demand and performance
cycle uncertainty and then to
approximate the combined
standard deviation using the
convolution formula
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Thus, given a frequency distribution of daily sales from 0 to 10 units per day and a
range in replenishment cycle duration of 6 to 14 days, 13 units (1 standard deviation
multiplied by 13 units) of safety stock is required to protect 84.14 percent of all
performance cycles (68.27 plus the percentage of situations below 1st standard
deviation)
To protect at the 97.72 percent level, a 26-unit safety stock is necessary. These
percentages reflect the probability of a stockout during a given order cycle.
Warehousing
Historical aspects and evolution
Warehouse functionality
Warehouse operations
Warehouse planning
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Warehousing
Historical aspects and evolution
Preindustrial era
Storage was performed by individual households
As transportation capability developed
storage shifted from households to retailers, wholesalers, and manufacturers

they didnt care about strategic storage
little consideration to efficiency in space utilization, work methods, or materials
handling
World War II
attention toward strategic storage
reduction in warehousing was obtained as a result of manufacturing improvements
(JIT concept)
strategically located warehouses
central warehouse => advantage of consolidated transportation
an important change in warehousing: maximum flexibility
Warehousing
Warehousing functionality
Economic benefits
Warehouses are efficient when they improve transportation efficiency and reduce
overall logistics costs
5 basic economic benefits are:

1) Consolidation and break-bulk
2) Assortment
3) Postponement
4) Stockpiling
5) Reverse logistics
Consolidation and break-bulk
The aim is to reduce transportation cost by using the warehouse capability to

make consolidation or break-bulk and consequently to profit from increased
shipment economies of scale.
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Warehousing
Economic benefits Consolidation and break-bulk
Warehouse receives materials from a number of sources, which are combined into
a large single shipment to a specific destination
Benefits could be:
Quicker delivery
Lower transportation charges
Lower products purchasing price
Warehousing
Economic benefits Consolidation and break-bulk
A single large shipment and arranges for delivery to multiple destinations.
Assortment
Means freight reconfiguration
cross-docking
3 types: mixing
assembly
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Warehousing
Economic benefits Assortment
Combines inventory from multiple origins into an assortment for a specific customer.
The assortment is formed by different products combination, in different volumes

accommodated to each customer requirements
Warehousing
The end result similar to cross-docking.
During the mixing process, inbound products can be combined with those regularly
stored at the warehouse.
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Warehousing
Supports manufacturing operations.
Components are assembled by a warehouse located in close proximity to the

manufacturing plant.
Warehousing
Economic benefits Processing/Postponement

Final product configuration can be committed by warehouses once a specific
customer order is received:
Packaging
Labeling
Light manufacturing
Economic benefits of postponement:
1) risk is minimized because customized packaging is not performed in
anticipation
2) total inventory can be reduced by using inventory of the base product
Stockpiling
Economic benefit: accommodate seasonal production or demand
Examples:
- Lawn furniture and toys: produced all year long, consumed during a short
marketing period
- Agricultural products: harvested at specific times, consumed throughout the
year
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Warehousing
Economic benefits Reverse logistics
Its about:
Product recall
Reclamation
Disposal of overstock
Damaged inventory
Difficulties:
- non-uniform individual packages and cartons

- packages are often broken
- product is not packaged correctly
- significant manual sorting and inspection
Warehousing
Warehouse operations: Handling & Storage
Handling
Strategic approaches:
Movement continuity Scale economies
Movement continuity:
- better longer moves than numerous short handlings
- goods, once in motion, should be continuously moved until arrival at their final
destination
- exchange of the product between handlers wastes time and increases the
potential for product damage
Scale economies:
- the idea is to move the largest quantities or loads possible instead of moving
individual cases
- procedures should be designed to move pallets and containers
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Warehousing
Handling Main operations:
Receiving In-Storage Handling Shipping

Receiving:
Merchandise arrives (generally, large quantities) and:
1. The merchandise is floor stacked on the vehicle:
- products are manually placed on pallets or
- placed on a conveyor
2. The merchandise is unitized on pallets or containers:
- lift trucks can be used to facilitate receiving
In-Storage handling:
Consists of movements within the warehouse for:

- storage
- order selection (order picking)
Two activity types:
- movement to the shipping area
- transfer movements
- selection
Warehousing
Handling
In-Storage handling (continued):
Transfer movements:
- from the receiving area to a storage location

- from storage to an order selection or picking area
- from the selection area to the shipping staging area
Selection:
- requires materials, parts, and products to be grouped to facilitate order assembly

- a special area of the warehouse has to be designed as selection or picking area
to assemble orders
- for each order, the combination of products has to be created and packaged to
meet specific customer requirements
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Warehousing
Handling
Shipping:
Consists of:
Order verification Materials loading
Order verification:
- is typically required when product changes ownership
- verification may be:
- carton count
- piece-by-piece check
- serial number
Materials loading:
-lift trucks or conveyors move products from the staging area into the
transportation vehicle
- shipping palletized products became popular because of considerable time
saving
- to facilitate this loading and subsequent unloading upon delivery, many customers
are requesting that suppliers provide mixed combinations of product within a
unit.
Warehousing
Storage
The products should be positioned within a warehouse based upon:
product volume
weight
storage requirements.
Product volume:
- major factor driving warehouse layout
- high volume product should be positioned in the warehouse to minimize
movement distance: near doors, primary aisles, at lower levels in storage racks
- position so as to minimize lifting operations
Product weight and special characteristics:

- heavy items should be stored to the ground to minimize lifting
- bulky or low-density product requires cubic space (along outside walls)
- smaller items may require storage shelves, bins, or drawers
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Warehousing
Storage
Warehousing
Storage
Alternatives of storage: active vs. extended storage
Active storage:
- when warehouses directly serve customers
- provides sufficient inventory to meet the periodic demands
- is usually related to the capability to achieve transportation or handling
economies of scale
- require products to be quickly unloaded, de-unitized, grouped and sequenced into
customer assortments, and reloaded into transportation equipment
Extended storage:
- means inventory in excess of that required for normal demand
- for speculative, seasonal, or obsolete inventory
- in some special situations, storage may be required for several months prior to
customer shipment: speculative purchases, discounts, product conditioning (ripen
bananas, reach peak quality)
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Warehousing
Warehouse planning
1) Site selection
2) Design
Site selection
Typical areas in a community for locating warehouses:
- commercial zone,
- outlying areas served primarily by motor truck only,
- central or downtown area.
Drivers in site selection:

- land cost
- among industrial plants and light or heavy industry areas
- rail sidings
- utility hookups
- taxes
- insurance rates
- highway access
- adequate room for expansion
- necessary utilities available
- soil must support the structure
Warehousing
Warehouse planning
1) Site selection
2) Design
Design
Relevant elements:
- number of floors,
- cubic utilization,
- product flow
- product-mix analysis
- future expansion
- materials handling system
- layout or storage plan
- sizing
59

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5/15/2015

Supply Chain Management

Almost every organization faces a problem:

Which is the key? Logistics

How By optimizing a given performance measure and satisfying a given

Origins and definitions

Origins and definitions

Accepted definitions of supply chain:

A supply chain is the alignment of firms that bring products or services

Origins and definitions

Accepted definitions of supply chain management:

Supply chain management is the coordination of production,

Supply chains refer to networks of companies that work together and

Origins and definitions

Origins and definitions

Origins and definitions

Origins and definitions

Origins and definitions

Materials management : moving materials within the organisation

Origins and definitions

Every product has its

the supply chain of jeans

Structure of supply chain

Structure of supply chain

Supply chain is made up of:

Mixed approach (MTA):

Product and information flows in a supply chain

Both flows are time consuming

Performance drivers of supply chain

Performance drivers of supply chain - continued

Performance drivers of supply chain - continued

Benefits of supply chain

Benefits of supply chain:

Benefits of supply chain

Organizing logistics in a company

Logistics takes place in almost every organization taking many

Logistics can be arranged in many ways within an organization:

Small organization: might have one person looking after everything

Organizing logistics in a company

Effects on financial performance

Logistics involves expenses (costs).

Effects on financial performance

Effects on financial performance

How supply chains work: participants

How supply chains work: participants

- any organization that purchases and uses a product

How supply chains work: activities

Inward transport or traffic: actually moves materials from suppliers to the

How supply chains work: activities

Stock control : sets the policies for inventory

How supply chains work: activities

Materials handling: moves materials through the operations within an organization

How supply chains work: activities

Recycling, returns and waste disposal

How supply chains work: activities

How supply chains work: main activities

Order processing, main operations:

How supply chains work

Advantages of holding inventories in a supply chain:

Main disadvantage of holding inventories: could be very expensive

The aim of inventory management is to determine stock levels in order to

A good inventory management policy should take into account 5 issues:

How supply chains work