Logistics Management

Ministry of Foreign Affairs, Singapore
Chartered Institute of Logistics & Transport Singapore

Executive Programme in Logistics and Distribution Management
Business Logistics Management

9 October 2008, 9am~5pm
Business Logistics Management
Trends and Strategies in Business Logistics

Strategic Supply Chain and Inventory Positioning
Supply Chain Network Design
Best Practices in Supply Chain Management
Resource Planning and Optimisation
Forecasting and Just-in-Time (JIT)
Topic 1 Trends and Strategies in Business Logistics

Understand the importance on business logistics and its impact
on the supply chain
- define business logistics
- know the key activities in logistics management
- understand the importance of logistics/supply chain
- the value added role of logistics
1.1 Defining Business Logistics

Logistics is the part of the supply chain process that plans,
implements and controls the efficient, effective flows and storage
of goods, services and related information from the point of origin
to the point of consumption in order to meet customers
requirements.
The 3 key points to note are:
- Product flows are to be managed from the point where they exist as raw
materials to the point where they are finally discarded.
- Logistics is also concerned with the flow of services as well as physical
goods, an area of growing opportunity for improvement.
- Logistics is a process that includes all the activities that have an impact on
making goods and services available to customers as and when they wish to
acquire them.
1.2 Key Activities of Logistics Management
The key activities of a typical logistics system are:
Alliance between Customer Service and Marketing

Transportation
Inventory Management
Information flows and order processing
Alliance between Customer Service and Marketing:
To determine customer needs and wants for logistics services

To determine customer responses to service
To set customer service levels
Transportation:
Mode and transport service selection

Freight consolidation
Carrier routing
Vehicle scheduling
Equipment selection
Claims processing
Rate auditing
Inventory Management:
Raw materials and finished goods stocking policies

Short-term sales forecasting
Product mix at stocking points
Number, size and location of stocking points
Just-in-time, push and pull strategies
Information flows and order processing:
Sales order-inventory interface procedures

Order information transmittal methods
Order rules (e.g. EOQ, Lot for Lot etc)
1.3 The Importance of Logistics/Supply Chain

The emphasis of logistics in organisations has
changed over time:
Then (1980s and 1990s)
Improving customer service in supply chain management was important
because:
Customer service contributed directly to revenue increase and market share
Business logistics management was considered to be equally important with
sales and marketing to produce development
There was therefore a continued need for firms to reduce supply chain costs
and assets as well as improve customer service for long term growth

changed over time:
Now
The emerging view of the new century is that supply chain

management can both drive and enable the business strategy of many
firms.
Aligning supply chain strategy with business strategy will enable value
enhancement throughout the firm.

changed over time:
Now
Example:
Dell Computers Retail Direct involves processing orders direct from their
customers, building the system to the customers order and delivering then within 5
days. To support this logistical approach, Dell requires its suppliers to maintain
inventories within 15 minutes of its manufacturing plants. By unleashing the
strategic power of the supply chain, Dell Computer easily outperformed its
competitors in terms of shareholder value growth by over 3000 percent (taken from
Stern Stewart EVA 1000 database)

Value
According to studies conducted for the US economy, logistics costs rank second only to the
cost of goods sold.
Value is added by minimising these costs and passing the benefits to the customer and the
firms shareholders.
Impact on cash earnings

Shareholder Value is represented by Profitability (which is a relation of Revenue and Cost) and
Invested Capital (represented by Working Capital and Fixed Capital).
Revenue Greater customer service
Greater product availability
Cost
Lower cost of goods sold, transportation, warehousing, material handling, and
distribution management costs

Working Capital Lower raw materials and finished goods inventory
Shorter order to cash cycles
Fixed Capital Fewer physical assets (e.g. trucks, warehouses, material handling equipment)
Worked Example
J. Mitchell currently has sales of $10 million a year, with a
stock level of 25% of sales.
Annual holding cost for the stock is 20% of value.
Operating costs (excluding the cost of stocks) are $7.5 million
a year and other assets are valued at $20 million.
What is the current return on assets?
How does this change if stock levels are reduced to 20% of
sales?
Worked Example - Solution

Taking costs over a year, the current position is:
Cost of stock
= amount of stock x holding cost

= 10 million x 0.25 x 0.2
= $0.5 million a year
Total costs
= operating cost + cost of stock

= 7.5 million + 0.5 million
= $8 million a year
Profit
= sales - total costs

= 10 million - 8 million
= $2 million a year
Total assets
= other assets + stock

= 20 million + (10 million x 0.25)= $22.5 million
Return on assets
= profit / total assets

= 2 million / 22.5 million
= 0.089 or 8.9%
Worked Example - Solution

The new position with stock reduced to 20% of sales is:
Cost of stock
= amount of stock x holding cost

= 10 million x 0.20 x 0.2
Total costs
= operating cost + cost of stock

= 7.5 million + 0.4 million
Profit
= sales - total costs

= 10 million 7.9 million
Total assets
= other assets + stock

= 20 million + (10 million x 0.20)= $22 million
Return on assets
= profit / total assets

= 2.1 million / 22 million
= 0.095 or 9.5%
Reducing stocks gives lower operating costs, higher profit and a significant increase in
ROA.

Key Capabilities
In the 1996 study (by Morash, Drage and Vickery) on the highly
competitive US furniture industry, they identified and quantified the impact
of the supply chain in profitability and growth.
Analysis of the survey results identified 4 key supply chain capabilities

that contribute directly to financial performance.
They are:
1. Delivery speed
2. Reliability
3. Responsiveness to target markets
4. Low cost total distribution
1.4 Value-Added Role of Logistics

There are 4 principal types of economic utility that add value to a product
or service, i.e. form utility, possession utility, place utility and time utility
1.4 Value-Added Role of Logistics

Remember the What, Where, When and Why of the economic utilities
What Form Utility
Refers to the value added to goods through a manufacturing , production or assembly process.
For example, breaking bulk and product mixing changes a products form by changing its
shipment size packaging characteristics
Where Place Utility
Logistics extends the physical boundaries of the market area, thus adding economic value to
the goods. This addition is known as place utility
When Time Utility
Goods and services must be available when customers demand them. By having goods and
services available when it is needed creates time utility
Why Possession Utility
Possession Utility is primarily created by the marketing activities related to the promotion of
goods and services. It increases the desire in a customer to possess a good or to benefit from
a service
Topic 2 Strategic Supply Chain and Inventory Positioning

Understand the key concepts in supply chain inventory modelling
and its components
- understand the Economic Order Quantity (EOQ)

- know how to determine the Reorder Point (ROP)
- explain the use of the Newsboy Model in inventory replenishment
- understand Pipeline Inventory and its components
2.1 Economic Order Quantity

EOQ is an accounting formula that determines the point at which
the combination of order costs and inventory carrying costs are
the least. The result is the most cost effective quantity to order.
Assumptions used for Economic Order Quantity:
- Demand occurs at a known and reasonably constant rate
- The item has a sufficiently long shelf life
- The item is monitored under a continuous review system
- All the cost parameters remain constant forever (over an infinite time horizon
- A complete order is received in one batch

Cost Equation for the Economic Order Quantity (EOQ) Model:
Q* =
2DCo
Ch
where Q* = Optimal order size

Ch = Annual holding cost per unit
D = Annual usage in units
Co = Order cost

A graphical representation

Sensitivity

Worked Example
1) Economic Order Quantity (EOQ)
2DCo
Q* =
Ch
where
Q* = Optimal order size

D = Annual usage in units
Ch = Annual holding cost per unit

Co = Order cost
2) Total Annual Inventory Costs = Total Annual Holding Costs + Total Annual Ordering
Costs + Total Annual Procurement Costs
or TC(Q) = (Q/2)Ch + (D/Q)Co + DC
With Safety Stock, the Total Annual Inventory Costs changes to:
TC(Q) =(Q/2)Ch + (D/Q)Co + DC + ChSS
With ChSS being the Safety Stock Holding Costs.

Worked Example
3) Cycle Time (T)
The cycle time, T, represents the time that elapses between the placement of orders.
Note, if the cycle time is greater than the shelf life, items will go bad, and the model
must be modified.
T = Q/D
4) Number of Orders per Year (N)

To find the number of orders per years take the reciprocal of the cycle time
N = D/Q

Worked Example
ALLEN APPLIANCE COMPANY (AAC)
AAC wholesales small appliances.
AAC currently orders 600 units of the Citron brand juicer each time inventory
drops to 205 units.
Management wishes to determine an optimal ordering policy for the Citron
brand juicer
Available Data
Co = $12 ($8 for placing an order) + (20 min. to check)($12 per hr)
Ch = $1.40 [HC = (14%)($10)]
C = $10.
H = 14% (10% ann. interest rate) + (4% miscellaneous)
D = demand information of the last 10 weeks was collected:
The constant demand rate seems to be a good assumption.
Annual demand = (120/week) x (52weeks) = 6240 juicers.
Calculate the EOQ and Total Variable Cost.
Solution:
EOQ and Total Variable Cost:
Current ordering policy calls for Q = 600 juicers.
TV( 600) = (600/ 2)($1.40) + (6240 / 600)($12) = $544.80
The EOQ policy calls for orders of size
Q* =
= 327.065 = 327
TV(327) = (327 / 2)($1.40) + (6240 / 327) ( $12) = $457.89
Under the current ordering policy AAC holds 13 units safety stock.
AAC is open 5 day a week.
The average daily demand = 120/week)/5 = 24 juicers.
Lead time is 8 days. Lead time demand is (8)(24) = 192 juicers.
Reorder point without Safety stock = LD = 192.
Current policy: R = 205.
Safety stock = 205 192 = 13.

For safety stock of 13 juicers the total cost is
TC(327) = 457.89 + 6240($10) + (13)($1.40) = $62,876.09

Worked Example
Sensitivity of the EOQ Results:
Changing the order size
Suppose juicers must be ordered in increments of 100 (order 300 or 400)

AAC will order Q = 300 juicers in each order.
There will be a total variable cost increase of $1.71.
This is less than 0.5% increase in variable costs.
Changes in input parameters
Suppose there is a 20% increase in demand. D=7500 juicers.

The new optimal order quantity is Q* = 359.
The new variable total cost = TV(359) = $502
If AAC still orders Q = 327, its total variable costs becomes $504

Worked Example
Cycle Time
For an order size of 327 juicers we have:
T = (327/ 6240) = 0.0524 year.
= 0.0524(52)(5) = 14 days.
This is useful information because:
Shelf life may be a problem.
Coordinating orders with other items might be desirable.
2.2 Determining the Reorder Point (ROP)

The following scenarios will be modelled:
Continuous Review Constant Demand and constant Lead Time

Continuous Review Variable Demand and constant Lead Time
Fixed Period Review

Continuous Review Constant Demand and constant Lead Time
In reality lead time (LT) always exists, and must be accounted for when deciding at which point in time
to place an order
The reorder point, ROP, is the inventory position when placing an order
The formula to calculate the Reorder point when there is a Constant daily demand (D) and lead-time
(LT) is:
ROP = LT x D
Note: LT and D must be expressed in the same time unit (e.g. per month)

Continuous Review Variable Demand and constant Lead Time
The formula to calculate the Reorder point when there is a Variable daily demand with mean and
standard deviation d and lead-time (LT) is:
ROP = x LT + z x d x L
Note: z represents the service level. It is assumed that the variability in Lead Time follows a
Normal Distribution.
The second term on the right represents the Safety Stock. Safety Stock acts as a buffer to
handle higher than average lead time demand and longer than expected lead times.

Fixed Period Review
Definition of Order up-to-level point (Imax)
Imax = Expected demand during (OI + LT) + safety stock
i.e.
Imax = x (OI + LT) + z x d x
The Order Quantity is simply the difference between Imax and the quantity on hand
during the review
i.e. Order Quantity = Imax Quantity on Hand
Reorder Point (ROP) Worked Example:

1) Continuous Review (Constant Demand, Constant Lead Time)
Reorder Point R = D x LT
2) Continuous Review (Variable Demand, Constant Lead Time)

Reorder Point R = x LT + z x d x L
3) Periodic Review (Order up to level or Imax)

Imax is defined as expected demand during order interval (OI) , lead time (LT) and safety
stock
i.e. Imax = x (OI + LT) + z x d x
Order Quantity = Imax Quantity on Hand
1) Continuous Review (Constant Demand, Constant Lead Time)

A Carpet manufacturer has the following:
Daily usage D = 30 yards/day
Lead Time LT = 10 days
Reorder Point R = D x LT
= 30 x 10 = 300 yards
2) Continuous Review (Variable Demand, Constant Lead Time)
Additionally, the following is known:
Mean of daily usage = 30 yards/day
Variance in demand d = 5 yards/day
Service Level of reordering, z = 95% (corresponding to normal variate of 1.65)
Reorder Point R = x LT + z x d x
= 30 x 10 + 1.65 x 5 x 10 = 326.1 yards

3) Periodic Review (Order up to level or Imax)
Using the following information:
Lead Time LT = 10 days
Mean of daily usage = 30 yards/day
Variance in demand d = 5 yards/day
Service Level of reordering, z = 95%
Fixed time between orders OI = 60 days
First compute Imax (defined as expected demand during order interval (OI) , lead time (LT) and
safety stock)
i.e. Imax = x (OI + LT) + z x d x
= 30 x (60 + 10) + 1.65 x 5 x (60+10) = 2169 yards

Based on that value of Imax, and at the point of placing the order, the quantity to be
ordered will be the difference of Imax and the quantity on hand i.e.
If Quantity on hand = 450 units,
Order Quantity = Imax Quantity on Hand
= 2169 450 = 1719 yards
2.3 Newsboy Model

The Newsboy Model mimics a person who buys newspapers at
the beginning of the day, sells a random amount and discards any
leftovers.
Here the 2 main issues are:
- Single Replenishment
- The need to determine the appropriate order quantity in the face of uncertain
demand
2.3 Newsboy Model

Insights to the Newsboy Model
In an environment of uncertain demand, the appropriate production/order
quantity depends on both the distribution of demand and the relative costs of
overproducing versus underproducing.
In general, increasing the variability (i.e. standard deviation) of demand will
increase the production/order quantity and will therefore increase the likelihood
that the actual demand is far from what is produced/ordered. This implies that
mean and variance of total cost will increase with variability of demand.
2.3 Newsboy Model
Cs
G (Q * )
Co Cs
G(Q*) The probability function of the optimum quantity Q*

Co - The unit overage cost is the amount lost per excess set
Cs - The unit shortage cost is the lost profit from a sale
Newsboy Model Worked Example:

Consider the following:
A manufacturer of Christmas lights faces a problem each year. Demand is

somewhat unpredictable and occurs in such a short burst just prior to Christmas
that if the inventory is not on the shelves, the demand will be lost.
Therefore the decision of how many sets of lights to produce must be made prior
to the holiday season. Additionally, the cost of collecting unsold inventory and
holding it until next year is too high to make year-to-year storage an attractive
option. Instead, any unsold sets of lights are sold after Christmas at a steep
discount.
Suppose that a set of lights costs $1 to make and distribute and is selling for $2.
Any sets not sold by Christmas will be discounted to $0.50. Suppose further that
demand has been forecast to be 10,000 units with a standard deviation of 1,000
units and that the normal distribution is a reasonable representation of demand.
How many sets should the manufacturer produce?

Preliminary Analysis:
A set of lights costs $1 to make and distribute and is selling for $2.
Any sets not sold by Christmas will be discounted to $0.50.
In terms of the above modeling notation, this means that the unit overage cost is the
amount lost per excess set or Co = $(1 - 0.50) = $0.50.
The unit shortage cost is the lost profit from a sale or Cs = $(2 - 1) = $1.00
The firm could choose to produce 10,000 sets of lights. But, the symmetry (i.e., bell
shape) of the normal distribution implies that it is equally likely for demand to be above
or below 10,000 units.
If demand is below 10,000 units, the firm will lose Co = $0.5 per unit of overproduction.
If demand is above 10,000 units, the firm will lose Cs = $1 per unit of underproduction.
Clearly, shortages are worse than overages.
This suggests that perhaps the firm should produce more than 10,000 units. But, how
much more?

Original Selling Price,
Cost of Production,
Discounted Selling Price,
OP = $2.00
C = $1.00
DP = $0.50
Assuming the firm could choose to produce 10,000 sets of lights,

The unit overage cost is the amount lost per excess set or Co = $(1.00 - 0.50) = $0.50
This means that if demand is below 10,000 units, the firm will lose $0.5 per unit of
overproduction
The unit shortage cost is the lost profit from a sale or Cs = $(2.00 1.00) = $1.00
This implies that if demand is above 10,000 units, the firm will lose $1.00 per unit of
underproduction. Clearly, shortages are worse than overages
Solving for the Probability function, we have:
Cs
G (Q )
C
o
C
s
0.67
1 0.5
*
Answer: (contd)
As its demand is normally distributed,
Q* 10,000
G (Q )
1,000
1
0.67
1 0.5
*
Where represents the cumulative distribution function of the standard normal

distribution.
From a standard normal table, we find that (0.44) = 0.67.
Hence, we have:
G (0.44) 0.67
Q * 10,000
0.44
1,000
or Q* 10,440
Note: The Newsboy analysis is only applicable when the goods are time-perishable i.e.
OP > C > DP

In which of the following situations, can the Newsboy Model be used?
Scenario 1:
Croissants are sold at $1.60 each.
Cost of production is $1.20 each
Unsold units are discounted to $0.80 each
Scenario 2:
Newspapers are sold at $0.80 each.
Cost of production is $0.40 each
Unsold units are discarded i.e. $0 value
Scenario 3:
Cookies are sold at $2.80 per packet.
Cost of production is $1.20
Unsold units are discounted to $2.20
2.4 Pipeline Inventory

The formula below describes the formula to calculate the average
demand during the lead time.
L = x LT
Where L is the average demand during the lead time
Example:
= 20 units per week
LT = 3 weeks
L = 20 x 3 = 60 units in the pipeline
Topic 3 Supply Chain Network Design

Appreciate the importance of supply chain network design and its
impact on managing demand
- learn how to cope with Demand Uncertainty
- learn the different types of inventory management:
Centralisation vs Decentralisation
- understand the use of Risk Pooling
3.1 Coping with Demand Uncertainty

The effect of Demand Uncertainty
Most companies treat the world as if it were predictable:
1. Production and inventory planning are based on forecasts of

demand made far in advance of the selling season
2. Companies are aware of demand uncertainty when they create a
forecast, but they design their planning process as if the forecast
truly represents reality

Unfortunately for these companies, there are three principles that
hold true for all forecasting techniques.
Principle 1 :
Forecasting is always wrong
Principle 2 :
The longer the forecast horizon, the worse the forecast
Principle 3 :
Aggregate forecasts are more accurate

Key Insights are:
1.
The optimal order quantity is not necessarily equal to average forecast

demand.
2.
The optimal order depends on the relationship between marginal profit and
marginal cost
3.
As order quantity increases, average profit first increases then decreases
4.
As production quantity increases, risk increases. In other words, the

probability of large gains and of large losses increases.
3.2 Inventory Centralisation/Decentralisation

A Centralised Distribution System is an inventory model that has a single
warehouse serving all customers

A Decentralised Distribution System is an inventory model that has a several
warehouse serving customers with different needs (e.g.
location/product/market)

Whether to centralise or decentralise, depends on the following factors:
Safety Stock
Generally the amount of safety stock decreases when a firm moves from a decentralised to a
centralised system
Service Level
When both centralised and decentralised systems contain the same level of safety stock, the service
level provided by the centralised system is higher
Overhead Costs
These costs are typically higher in a decentralised system because these system enjoys fewer
economies of scale
Customer Lead Time
In decentralised distribution systems, the response time to retailers is shorter because the warehouses
are located much closer to the retailers
Transportation Costs
The net impact of this point is unclear due to the fact that the cost of the outbound deliveries to
retailers decreases for decentralised systems, but at the same time, the costs of delivering the
products to said warehouses increase.

Inventory Management: Best Practices
After a company has decided on which distribution system to adopt, it will need to
continually reevaluate its inventory levels due to changing demands
Some of the best practices used by most companies include:
Periodic inventory reviews
Tight management of usage rates, lead times and safety stock
ABC approach
Reduced safety stock levels
Shift more inventory or inventory ownership, to suppliers
Quantitative approaches

Changes in Inventory Turnover
With recent developments in information and communication technologies, the
trend in most companies is to increase inventory turnover
This allows companies to increase service levels while keeping inventory costs low
Inventory turnover ratio = annual sales / average inventory level
The following is an indication of Inventory Turnover Ratios used by major players in the
industry:
3.3 Risk Pooling

Understanding the concept of Risk Pooling
Risk Pooling is an important concept in supply chain management
It suggests that demand variability is reduced if one aggregates demand across
locations
This means that generally, high demand from one customer will be offset by low
demand from another
This reduction in variability allows a decrease in safety stock and therefore
reduces average inventory
3.3 Risk Pooling

Consider the 2 different systems shown below:
3.3 Risk Pooling

Scenario 1
The primary advantage of using
this system is that each of the
warehouses are located close to
a particular subset of customers,
decreasing delivery time
3.3 Risk Pooling

Scenario 2
The advantages of this system
over system 1 are as follows:
With the same inventory level,
system 2 can achieve a much
higher service level.
With a lower inventory level,
system 2 can achieve the same
service level.
3.3 Risk Pooling

The reason why system 2 is more efficient is because it fulfills random demand
A higher than average demand at one retailer will usually be offset by a lower
than average demand from another retailer.
As the number of retailers served by a warehouse increases, the likelihood of
offsetting occurrence will also increase
By centralising inventories, a company can ensure a higher service level and
lower the possibility of a stockout.
3.3 Risk Pooling
3.3 Risk Pooling
3.3 Risk Pooling
3.3 Risk Pooling
3.3 Risk Pooling
3.3 Risk Pooling

In conclusion, the 3 critical points of Risk Pooling are:
Centralising inventory reduces both safety stock and average inventory in the
system for the same service level. It also allows the reallocation of inventory
from one market segment to another when the situation requires it.
The higher the coefficient of variation, the greater the benefit obtained from
risk pooling. This is because the need for keeping a higher level of safety stock
is reduced when there is risk pooling.
The benefits of risk pooling depend on the behaviour of demand from one
market relative to another. Demand in two markets is positively correlated if it
is very likely that an increase in demand in one market related in an increase
in demand in the other. In these cases, the benefit of risk poling decreases
when the correlation between two markets become increasingly positive.
Topic 4 Best Practices in Supply Chain Management

Understand the emerging principles of supply chain management
using postponement
- justify the use of Express Logistics

- explain the various types of Postponement methods
- using Cross Docking to minimise storage costs
4.1 The Value of Express Logistics
4.2 The Value of Postponement

In this section, postponement refers specifically to form postponement and
looks into:
Design product and manufacturing processes so that decisions about specific

products can be delayed as late as possible
This process is also known as Delayed Point Differentiation (DPD) or Late

Point Differentiation (LPD)
The primary benefit is to reduce demand uncertainty thereby increasing

service level delay and reducing inventory costs

Compare the 2 supply chain processes below to see how postponement changes the
process of delivering the end product to consumers.
4.3 The Value of Cross-Docking
In this section, we will examine the Cross-Docking process in the following

ways:
Understand the flow of Cross-Docking and how products are delivered from
the manufacturer to the retailer
Examine the challenges associates with using Cross-Docking
Explore the different options in which Cross-Docking can be applied

Cross-Docking is a process where products are moved directly from receiving to the shipping dock with no or very short interim
storage.
The main users of Cross-Docking are mass merchandisers, grocery companies, LTL trucking companies, air cargo carriers.etc
The products usually associated with Cross-Docking include seasonal items, promotional goods, store-specific pallets or high
volume items.

Options available to implementing Cross-Docking
Option 1 Basic Cross-Docking

Options available to implementing Cross-Docking
Option 2 Flow Through Cross-Docking
Examples:
1.
The NUMMI plant in California uses cross-docks in Chicago and Memphis

to collect, consolidate and sort freight from multiple vendors into
containers that are shipped via rail to the plant
2.
Suppliers send parts in bulk to General Motors cross-dock in Memphis.

Parts are sorted for delivery to 15 different production facilities in the
Midwest.
Topic 5 Resource Planning and Optimisation

Evaluate the different modes of matching demand with supply and
their trade-offs
- understand the Theory of Constraints (TOC)

- explain the logic of Materials Requirement Planning (MRP)
- understand Enterprise Resource Planning (ERP) and its components
5.1 Theory of Constraints
Constraints fall into three categories
5.2 Material Requirements Planning

Steps in creating the Materials Requirement Plan
1)
Create a timeline based on the required deadline
2)
First 2 rows consist of the final product Required row, followed by Order placement
3)
Create subsequent rows based on the the order the part appears in the Bill of
Materials (BOM)
4)
Populate the table with the Required quantity of the finished assembly
5)
Note the lead time, and populate the Order Placement of the finished assembly,
remembering to offset by the lead time
6)
From the BOM, trace the relationship with the next level, and populate the Required
quantity from the Order quantity of the parent part (remembering to factor in the
proportions)
7)
Note the lead time, and populate the Order Placement of the part, remembering to
offset by the lead time
8)
Repeat this until you reach individual parts which do not have any sub-parts

Another MRP example
B (2)
C (2)
D (3)
Lead Times
Demand
A 1 day
Day 6 100 units of A
B 3 days
C 2 days
D 1 day
E 2 days
E (4)
Based on the information, work out the Materials Requirement Plan

MRP example - solution
Day
Required
Order
Placement
100
Required
200
Required
Required
Required
100
Order
Placement
200
200
Order
Placement
200
300
Order
Placement
Order
Placement
300
800
800

Time Fences:
Frozen No schedule changes are allowed within this window
Moderately Firm Specific changes are allowed within product groups as

long as parts are available
Flexible Signification variation is allowed as long as overall capacity

requirements remain the same levels
Time Fences:
The graph below illustrates the relationship between demand and time fences.
5.3 Enterprise Requirements Planning

Definition:
An ERP or Enterprise Resource Planning

system integrates information and business
processes to enable information entered once to
be shared throughout the organisation.
ERP (Enterprise Resource Planning) is an

industry term for the broad set of activities
supported by multi-module application software
that helps an organisation to manage the
important part of its business.

Components of ERP
The diagram below illustrates the anatomy of an ERP application.

Components of ERP
The diagram below illustrates the anatomy of an ERP application.

ERP Justification

ERP Justification
Topic 6 Forecasting and JIT

Understand the various forecasting methods to increase accuracy
and the JIT techniques to reduce wastages
- explain the various types of forecasting and aggregate planning

- understand Just-in-Time (JIT) production system
6.1 Forecasting and Aggregate Planning

Forecasting Methods are classified according to the following
four types:
1.
Qualitative
Qualitative Forecasting methods are primarily subjective and rely on human judgment. They are
most appropriate when there is little historical data available or when experts have market
intelligence that is critical in making the forecast. Such methods may be necessary to forecast
demand several years into the future in a new industry.
2.
Time Series
Time Series Forecasting methods use historical demand to make a forecast. They are based on the
assumption that past demand history is a indicator of future demand. These methods are most
appropriate when the basic demand pattern does not vary significantly from one year to the next.
These are the simplest methods to implement and can serve as a good starting point for a demand
forecast.

Forecasting Methods (contd)
3.
Causal
Causal Forecasting methods assume that the demand forecast is highly correlated with certain
factors in the environment (e.g. the state of the economy, interest rates etc). Causal forecasting
methods find this correlation between demand and environmental factors and use estimates of
what environmental factors will be to forecast future demand. For example, product pricing is
strongly correlated with demand. Companies can thus use causal methods to determine the
impact of price promotions on demand.
4.
Simulation
Simulation forecasting methods imitate the customer choices that give rise to demand to arrive at a
forecast. Using simulation, a firm can combine time series and causal methods to answer such
questions as: what will the impact of a price promotion be? What will the impact be of a competitor
opening a store nearby? Airlines simulate customer buying behaviour to forecast demand for
higher fare seats when there are no seats available at the lower fares.
Define Objective Function

Denote the demand in Period t by Dt. The objective function is to
minimize the total cost (equivalent to maximizing total profit as all
demand is to be satisfied) incurred during the planning horizon. The cost
incurred has the following components:
Regular time labor cost
Overtime labor cost
Cost of hiring and layoffs
Cost of holding inventory
Cost of stocking out
Cost of subcontracting
Material cost

1. Regular time labor cost.
Workers are paid a regular time wage of $640 ($4/hour x eight hours/day
x twenty days/month) per month. Because Wt is the number of workers
in Period t, the regular time labor cost over the planning horizon is given
by the following:
Regular time labor cost =
2. Overtime labor cost.
Overtime labor cost is $6 per hour and Ot represents the number of
overtime hours worked in Period t, the overtime cost over the
planning horizon is given as follows:
Overtime labor cost =

3. Cost of hiring and layoffs.
The cost of hiring a worker is $300 and the cost of laying off a worker is
$500. Ht and Lt represent the number hired and the number laid off
respectively in Period t. Thus the cost of hiring and layoff is given by the
following:
Cost of hiring and layoffs =
4. Cost of inventory and stockout.
The cost of carrying inventory is $2 per unit per month and the cost of
stocking out is $5 per unit per month. It and St represent the units in
inventory and the units stocked out, respectively, in Period t. Thus, the
cost of holding inventory and stocking out is given as follows:
Cost of holding inventory and stocking out =

5. Cost of materials and subcontracting.

The material cost is $10 per unit and the subcontracting cost is
$30/unit. Pt represents the quantity produced and Ct represents the
quantity subcontracted in Period t. Thus, the material and
subcontracting cost is given by the following:
Cost of materials and subcontracting =

Specify Constraints
1. Workforce, hiring, and layoff constraints.
The workforce size Wt in Period t is related to the workforce size W t -1 in Period t - 1,
the number hired Ht in Period t, and the number laid off Lt in Period t as follows:
W t = W t 1 + H t - Lt
for
t =1,...,6
2. Capacity constraints.
In each period, the amount produced cannot exceed the available capacity.
This set of constraints limits the total production by the total internally available
capacity (which is determined based on the available labor hours, regular or
overtime). Subcontracted production is not included in this constraint as the
constraint is limited to production within the plant. As each worker can produce 40
units per month on regular time (four hours per unit) and one unit for every four
hours of overtime, we have the following:
Pt 40Wt + Ot /4
for
t=1,...,6

Specify Constraints
3. Inventory balance constraints.
The third set of constraints balances inventory at the end of each period. Net
demand for Period t is obtained as the sum of the current demand Dt and the
previous backlog S t -1. This demand is either filled from current production
(inhouse production Pt or subcontracted production Ct) and previous inventory It-1
(in which case some inventory It may be left over) or part of it is backlogged St.
This relationship is captured by the following equation:
I t- 1 + Pt+ Ct= Dt +St-1 + It - St
for
t = I, . . , 6
4. Overtime limit constraints.

The fourth set of constraints requires that no employee work more than ten hours
of overtime each month. This requirement limits the total amount of overtime
hours available as follows:
Ot 10Wt
for
t =1,6
6.2 Just-In-Time Production Systems

Definition of Just-In-Time (JIT) Production System




Types of waste in operation
Waste from overproduction

Waste of waiting time
Transportation waste
Inventory waste
Processing waste
Waste due to movement
Waste from product defects

Ways in Minimising Waste

Inventory Hides Problems

Kanban System
Kanban
A Kanban or signboard is attached to specific parts in the production line to signify the delivery of a given quantity. When the
parts have all been used, the same sign is returned to its origin where it becomes an order for more.
Kanban Signal
A method of signaling suppliers or upstream operations when it is time to replenish limited stocks of components or
subassemblies in a just-in-time system. Originally a card system used in Japan, kanban signals now include empty
containers, empty spaces and even electronic messages.

Focused Factory Networks

Group Technology

Quality at Source

Uniform Plant Loading

Methodology

Methodology

Methodology

Methodology

Methodology

Methodology

Methodology

Applying JIT Concepts
Reference Text
The Management of Business Logistics:
A Supply Chain Perspective
7th Edition
COYLE . BARDI . LANGLEY
ISBN 0-324-00751-5

Logistics Management

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What are the key activities of logistics management?

What are the key activities of logistics management?

What are the types of waste in a JIT production system?

What are the types of waste in a JIT production system?

Ministry of Foreign Affairs, Singapore

Chartered Institute of Logistics & Transport Singapore

Business Logistics Management

Business Logistics Management

Trends and Strategies in Business Logistics

Topic 1 Trends and Strategies in Business Logistics

1.1 Defining Business Logistics

1.2 Key Activities of Logistics Management

The key activities of a typical logistics system are:

Alliance between Customer Service and Marketing

1.2 Key Activities of Logistics Management

Alliance between Customer Service and Marketing:

To determine customer needs and wants for logistics services

1.2 Key Activities of Logistics Management

Mode and transport service selection

1.2 Key Activities of Logistics Management

Raw materials and finished goods stocking policies

1.2 Key Activities of Logistics Management

Information flows and order processing:

Sales order-inventory interface procedures

1.3 The Importance of Logistics/Supply Chain

1.3 The Importance of Logistics/Supply Chain

The emerging view of the new century is that supply chain

1.3 The Importance of Logistics/Supply Chain

1.3 The Importance of Logistics/Supply Chain

Impact on cash earnings

Lower cost of goods sold, transportation, warehousing, material handling, and

distribution management costs

Worked Example - Solution

= amount of stock x holding cost

= operating cost + cost of stock

= sales - total costs

= other assets + stock

= profit / total assets

Worked Example - Solution

= amount of stock x holding cost

= operating cost + cost of stock

= sales - total costs

= $2.1 million a year

= other assets + stock

= profit / total assets

1.3 The Importance of Logistics/Supply Chain

Analysis of the survey results identified 4 key supply chain capabilities

1.4 Value-Added Role of Logistics

1.4 Value-Added Role of Logistics

Topic 2 Strategic Supply Chain and Inventory Positioning

- understand the Economic Order Quantity (EOQ)

2.1 Economic Order Quantity

2.1 Economic Order Quantity

where Q* = Optimal order size

2.1 Economic Order Quantity

2.1 Economic Order Quantity

2.1 Economic Order Quantity

Q* = Optimal order size

Ch = Annual holding cost per unit

G(Q) The probability function of the optimum quantity Q