LOGISTICS AND SUPPLY CHAIN MANAGEMENT

Khalid Bichou
Khalid.bichou@imperial.ac.uk

Structure of the Course

Part 1: Logistics Management

Part 2: Supply Chain Management (SCM)

Part 3: Information Technology in Logistics and SCM

1. Introduction to logistics 7.Introduction to SCM 2. Transport Logistics 3. Warehousing and Inventory Management 4. Costs and Logistics 5. Logistics Outsourcing 6. Global Logistics 10.Demand Amplification (Bullwhip Effect) 8.Lean and Agile Supply Chains 9.Supply Chain Risk 11. EDI and Automatic Identification 12. RFID 13. Course Revision

PART 1: LOGISTICS MANAGEMENT

Week 1: Introduction to Logistics

Introduction to logistics- Contents

Business logistics definition Logistics components and attributes Logistics costs Total costs and trade-off analysis Logistics costing Logistics outsourcing Transport outsourcing

Logistics management: Definitions

Logistics is the process which seeks to provide for the management and coordination of all activities within the supply chain from sourcing and acquisition, through production where appropriate, and through distribution channels to the customer. (Quayle & Jones, 1999)

the set of activities whose objective is to move items between origins and destinations (usually from production to consumption) in a timely fashion. (Daganzo, 1999)

Logistics management

Logistics seeks to deliver:

the right product in the right quantity in the right condition to the right place at the right time for the right customer at the right cost

Logistics management: The logistics flow

Suppliers of raw materials, intermediate parts, etc.

Inbound transport

Raw material parts, etc.

Customers

Finished goods storage

Outboud transport

Production

Logistics management: Logistics concepts

Customer service Value-added Process approach Integration Total Cost and Cost Trade-off analysis

Logistics concepts: value added

Primary Support activities activities

Firm infrastructure Human resource management Technology development Procurement Inbound logistics Operations Outbound logistics Sales and marketing Service

The value chain (Porter, 1985)

Logistics concepts: total costs

Product
Transport Costs Warehousing Costs

Inventory Costs

Processing and Information costs Packaging Costs

Total Cost in a Logistics System

Logistics concepts: Cost trade-off

T cost otal Inventorycost

Total cost

W arehousingcost T ransport cost

Illustration of trade-off and total-cost analysis

Logistics management: Five inter-connected systems

Management Systems Strategic
Decisions Product Design Decisions Process Design Decisions Measurement Decisions

Reward Decisions

Product Decisions Price Decisions Place (How, where, how much) Inventory Decisions

}
Promotion Decisions Production Capacity Decisions Production Scheduling Decisions Shop Floor Decisions

Engineering Systems

Marketing Systems

Logistics Systems

Transportation Decisions

Manufacturing Systems

Sourcing Decisions

Logistics management: Interlinked logistics issues Where is value added? Outsource logistics? Where to locate depots? Efficient routing and scheduling? Importance of customer service? Use of forward haul capacity? Loading restrictions? Environmental considerations?

Logistics management: Services and activities

Service provision

Information services

Core services

Additional services

Additional information services

Logistics information services

Transport services

Transshipment services

Storage services

Logistics additional services

Complem. additional services

Logistics services
(Adapted from Isermann 1994, p. 25)

Logistics management: Hierarchy of logistics services

Customer Service Maximisation Total Cost Minimization

Target

Transportation Warehouse Management Transshipment Order Processing

Primary Activities

Storage Materials Handling Protective Packaging Acquisition Product Scheduling Information Management Supporting Activities

(Adapted from Wegner 1993, p. 41)

Logistics management: Functions and decisions Transportation rate and contract negotiation mode and service selection routing and scheduling Inventories finished goods policies supply scheduling short term forecasting Warehousing private vs. public space determination warehouse configuration Stock layout and dock design stock placement Cross-docking Facility Location determining location number & size of facilities allocating demand to facilities

Customer Service determining customer wants determining customer response to service changes Materials Handling equipment selection equipment replacement order picking procedures Packaging design Order Processing order procedure determination Production Scheduling aggregate production quantities sequencing and timing of production runs

Logistics management: Functions and values

Logistics functions Transport, delivery. Storage, warehousing Materials handling, order processing, consolidation and break bulk, sequencing, picking/packing, etc Market intelligence, promotion, facilitating contacts and procedures, etc Buying / selling, credit, financing, passing title

Corresponding utility or value Place utility Period utility

Pattern utility

Management/coordination utility

Possession utility

Logistics management: Examples of Value-added logistics

Postponement Reverse logistics Consolidation and break bulk Cross-docking Packaging Information Technology

Logistics management: Time horizon for planning tasks

Operational

Tactical Network planning Production planning

Strategic

Detailed planning Stock planning Distribution planning Transport planning Material requirements planning hours days weeks months

Strategic planning

years

Week 2: Transport Logistics

Transport- as a derived demand

If there is no demand for trade, there is no need for transport! Transport is treated as an afterthought, something to be accomplished after the main activities of the company, such as production and selling have been completed.

based on the false premise that freight transport is somehow separate from other activities of the firm.

Transport- as a component of an integrated logistics system

Freight transportation is part of an integrated logistics system

Transport as an integrated part of an overall planned system which links purchasing, production, inventory management, and marketing.

Transport can be inbound, outbound or in-house

Logistics management: Transport attributes

Inland transportation Road Speed Cost saving Safety Reliability Flexibility Availability Environment friendly Infrastructure cost Maintenance costs Vehicle size Door-to-door Cargo value Cargo volume Suitable packing Economic distance 5 3 4 5 5 5 3 5 4 <3000 t 5 High Low All Short
Rail

Intermodal

Water transportation Sea Inland waterways 1 4

4
3

5 2 5 5 3 2 1 4 5 No restriction 2 Various Large All Short/average

4 3 4 4 4 2 3 Various Various <3000t 4 High Low / moderate General cargo Various

2 5 4 3 3 Various 5 3 2 >300 t 1 Various Very large All Very long

2 Various 5 Various Various <500 t 1 Low Low / moderate All Long

Legend: very low (poor): 1, low: 2, fair: 3, high/good: 4, very high (very good): 5

Logistics management: Shippers attributes

Consignment attributes
order frequency, order size, product mix Etc.

Ownership features
Terms of sale, Supply chain relationships Etc.

Logistics management: Product attributes

Attributes Value Features Absolute value Value to density Strategies Modal choice and freight estimates are based on the products selling price and its value-to-density ratio. Using a faster, but expensive, transport mode, may reduce stock levels. Achieve savings on both freight transport and storage costs by minimise the volume-to-weight ratio, through e.g. redesign and processing of products (self assembly, knocked-down form, bulk form, unitisation, liquefied and reefer transport, etc.)

Weight/ volume

Density, stowability, ease of handling

Risk

Perishability Pilferability Danger-related

Speed up transport process, slow-down rate of goods perishability. Increase protection and security against theft and robbery. Safely pack, stow, label and transport hazardous/dangerous cargo. Optimise transport taking into consideration the time to market, product life cycle and inventory location. Make the product available when there is little product differentiation or price advantage.

Market

Time sensitivity Level of competition

Logistics management: Transport decisions

Modal choice Vehicle selection Routing Scheduling

Logistics management: Transport size and mode choice

Mode 1 Transport cost per shipment Mode 2 Mode 3

Shipment size

Logistics management: Transport combinations

E vo lutio n o f D o m e s tic / Inte rna tio na l T ra de & L o gis tic s M a rke ts

D ev e lo pm en t in T ra nsp o rt In fras tructu re

S tan d a rdis atio n

Info rm ation T ec h n olog y O rg anis ation al C o o rdin atio n

R eg ulato ry fra m e w ork

IN T E R M O D A L IS M

M o d e of tran s p ort C arrie rs p a rtn e rs hip

L og is tics S a vin g s for S hipp er

In te rc h a n ge P o in ts : In te rm o d a l T e rmin a ls & L o g is tic s C en tre s

(S c o p e fo r P o rts )

Requirements for a successful intermodal transport

Logistics management: transport

Most important component of logistics cost. Usually 1/3 - 2/3 of total cost.
Transport involves equipment (trucks, planes, trains, boats, pipeline), people (drivers, loaders & un-loaders), and decisions (routing, timing, quantities, equipment size, transport mode). When deciding the transport mode for a given product there are several things to consider: Mode price Transit time and variability (reliability) Potential for loss or damage.

Week 3: Warehousing and Inventory Management

Logistics Management: taxonomy

Materials management Physical distribution Storage and stock management Inventory management Materials handling Logistics centres Value added services

Logistics Management: warehousing

Private warehouse Receiving goods inwards (purchasing & procurement) Putting away goods into reserve stock or bulk storage Replenishing: transfer of goods from the reserve to the picking stock Picking or order selection from the picking stock Order assembly or consolidation of separate order items Despatch of goods by transport

Public Warehouse Storage Handling Consolidation of orders for despatch Specialised services

Logistics Management: value-added warehousing

Postponement Packaging Consolidation and break bulk Reverse logistics Information management services

Logistics Management: value-added warehousing

Factory A Factory B Factory C

Consolidation warehouse or terminal

Customer A

Volume shipments

Break bulk warehouse or terminal

Customer B

Customer C Factory C

consolidation and break-bulk

Logistics Management: Why holding inventory?

To achieve economies of scale through: Quantity purchase discount Reduction of volume transport per unit-price Reductions of production runs and cycles for single products To protection against supply and demand uncertainties by holding buffer or safety stock. To speculate in order to make profit at favourable market conditions. To link supply with demand such in seasonal situations (Christmas toys) or for product ageing (wine)

Logistics Management: Types of inventory

Stock in the pipeline Speculative stock Cycle stock Safety or buffer stock Promotional stock Dead stock (obsolete) Shrinkage stock (lost or stolen)

Logistics Management: Inventory management

Re-order Level Approach

Level of inventory

Reorder quantity Consumption at faster rate

Quantity of inventory

Reorder level

Safety stock Stock out Time

Lead-time

Inventory management

The Saw-Tooth Diagram

y or d nt e ve um In ns co

Inventory purchased & delivered

Week 1

Week 2

Week 3

Inventory management

Economic Order Approach

Cost per unit (C) = order cost (O) / Order quantity (Q) I: V: D:
O: Inventory carrying cost per unit (as % of product value) Average value of one unit of inventory Annual demand of product (divided by Eoq then multiplied by the). Order cost per order

Expected average quantity of inventory in stock is half the order quantity (Q/2). The total inventory carrying costs per economic order quantity (Eoq) are the inventory carrying cost per unit multiplied by the Eoq then divided by 2.
EoqIV 2OD OD = , Then Eoq = 2 IV Eoq

Eoq = 2OD/IV

Inventory management: Economic order approach

Inventory management: Modern approaches

JIT Just-in-time MRP Materials Requirements Planning (MRP I) MRP II Manufacturing Resources Planning DRP Distribution Requirements Planning

Inventory management: MRP

Master scheduling

Timetable for orders

Change to orders Bill of materials (BOM)

Plans update MRP procedures Lead times Time of operations order

Other order information

Performance & exception reports

Inventory methods

Inventory transactions

Figure 13: Outline of MRP systems (source Walters, 2001)

Time horizons for planning tasks

Operational Tactical Network planning Production planning Detailed planning Stock planning Distribution planning Transport planning Material requirements planning hours days weeks months years Strategic

Strategic planning

(Source: Logistik Heute, September 1998)

Week 4: Costs and Logistics

Cost structure: Logistics cost breakdown

Cost of motion Handling (packaging, loading) Transportation (in vehicle) Cost of holding Rent (space, machinery, maintenance) Waiting (opportunity cost of capital tied up in stock, loss of value caused by delay)

Logistics costs: holding costs

Production Shipments Arrivals

Cumulative number of items

Number being transported Waiting for transport Waiting for consumption Wait Travel time Consumption Wait = Travel time + Max headway Time

Logistics costs: Rent costs

Max accumulation = Demand x Max headway Rent Max accumulation Rent/Item Max headway

Logistics costs: waiting costs

Penalty for holding 1 item for 1 time unit Waiting cost p.a. = Penalty x Wait p.a. = Penalty x Demand x (Max headway + Travel time) Penalty depends on value, interest rate, and depreciation (particularly for perishables) Value is difficult to determine (cost of production? selling price?)

Logistics costs: Transport cost and distance

Transport cost increases linearly with distance and shipment size, leading to 4 components Cost of stopping (not dependent on shipment size or distance) Cost of distance Marginal cost per shipment Marginal cost per shipment-km (small)

Logistics costs: Vehicle capacity and motion cost

Transport Motion cost per shipment

Handling

Shipment size

Logistics costs: Motion and holding cost Motion cost per item

Holding cost per item

Shipment size

Total costs and trade-off analysis

Total Cost in Logistics System

Product
M R E IN A KT G

Price

Promotion Place
Customer service

Transportation costs
L G T S O IS IC

Warehousing costs

Inventory costs

Processing and information costs

Lot quantity costs

Total costs and trade-off analysis

Total cost Inventory cost

T o ta l c o s t

Warehousing cost Transport cost

Illustration of trade-off and total-cost analysis

Trade-off analysis: Example of transport versus inventory cost

Retailers Factories A: Screens Warehouse B: PC boxes C: TV receivers Strategy (ii) n Strategy (i) 1 2 3

Logistics costing

Distribution mission A Distribution mission B Distribution mission C

Purchasing Sales Transportation Production Marketing Etc

Logistics missions that cut across functional boundaries (Christopher 1998, p.75)

Logistics costing: ABC and DPP

U tilities

S et up

M a ter ial and c ar go handling

Labour and s uper vis ion

E tc .

R e s o u rc e C a te g o rie s

F irst S ta ge

R eso u rce D rivers Act iv it y C en t re 2

(e .g . W a r e h o u s in g )

Act iv it y C en t re 1
(e .g . tr a n s p o r ta tio n )

Act iv it y C en t res S eco n d S ta ge

A ctiv it y D rivers

C o st p o o ls

Week 5: Logistics Outsourcing

Logistics outsourcing

Make or Buy

Logistics outsourcing: Why? - Cost reduction - Concentration on core competence - Avoidance of heavy investment - Personnel reduction - Service improvement - Use of spare resources - Use of specific competence - Higher flexibility

Logistics outsourcing: Parties involved

1st Party 2nd Party 3rd Party (3PL) 4th Party (4PL)

Logistics Service Providers (LSP)

Logistics outsourcing: Opportunities for logistics providers

- Take over of management functions - Control of information flow - Improvement of load factor - Contracted volume on time - High client affinity - Increasing potential for synergies

Logistics outsourcing: Risks for logistics providers

- Personnel transfer - Need for know-how - Different company cultures - Dependence on client - Problem of delegation of responsibility

Logistics outsourcing: Transport Transport on own account (private) Direct influence on service level Flexibility for specific requirements (i.e. direct access to transport capacity) Company-specific profile of vehicle fleet But problem with back loads High load factor necessary Operational risk

Logistics outsourcing: Transport

Transport on hire and reward (for hire) Variable transport cost Professional know-how Synergetic effects (i.e. back loads) Varying demand possible Concentration on core competence But know-how lost

Logistics outsourcing: Transport

Differences in cost structure between own account and hire & reward
Criteria Cost Elasticity TRANSPORT ON OWN ACCOUNT Mainly set-up cost, which depends on size and structure of vehicle fleet TRANSPORT ON HIRE & REWARD Variable cost depending on type and volume of transport orders; contract logistics depending on sales values or volumes Small Fixed tariffs/volumes Individual offers Defined contracts

Cost risk (Control)

Strong Random influence (traffic situation, weather, driving behaviour) Multi-dimensional because of many different alternatives Complex optimisation Complicated and cumbersome Mainly derived cost categories coming from internal assignment Recording problems (i.e. depreciation) Assignment problems Large organisational effort General cost related to Consignments Clients Tours Vehicles Vehicle fleet Considerable problems

Cost calculation

Simple

Correct assignment

Direct cost related to Consignments Clients Tours Delivery regions

Accessability of cost information

Easy to access Relatively certain and accurate

Week 6: Global Logistics

Global Logistics

Global versus Domestic Logistics

Complexity Uncertainty

Global Logistics International nature of markets, International procurement and sourcing, International trade, Involvement of different nation states or trading blocks, Involvement of multinational, trans-national or global corporations, Multiple choice of production, inventory location and management, Common use of multimodal and intermodal transport, Use of 3rd party and 4th party logistics and transport operators, Use of transport intermediaries.

Global Logistics

Raw

WIP

Final assembly

Distribution

Customers

Component Subassembly Component

Option N. America Hong Kong Europe

Finished goods Raw Subassembly Component Peripheral

Chicago Amsterdam

Asia/Pacific

Nairobi S. America

Raw material Subassembly Component Accessory Africa/ M.East

Global Logistics

Extended supply lead times

Provide intermediate inventory options

Increase in systems overall inventory level

Lengthy and unreliable transit times

Inventory at sea Postponement difficult Reordering (Buffer)

Identify true supply chain costs

Complex consolidation options

Ship direct to market Regional consolidation Regional break bulk

Trade off: Inventory Customer service Freight Warehousing

Complex freight options

Review INCOTERMS in context of buyerseller interaction

Government reaction

Shipping intermediate components

Lower cost of transport Inventory greater Productive flexibility

Government reaction

Problems of Global Logistics, (Adapted from Christopher, 1992)

GLOBAL LOGISTICS

Importing and exporting

Licensing

Joint-venture

Ownership

PART 2: SUPPLY CHAIN MANAGEMENT

Week 7: Introduction to SCM

Logistics and Supply Chain (Institute of Logistics, 1997)

The supply chain is a sequence of events intended to satisfy a customer. It can include procurement, manufacture, distribution, and waste disposal, together with associated transport, storage and information technology Logistics is the time-related positioning of resource or the strategic management of the total supply chain. Goods, people, manufacturing capacity, information should be in the RIGHT time, in the RIGHT quantity, at the RIGHT quality, at the RIGHT price (Hines, 1998)

Important acronyms

MPS Master Production Schedule Bill of materials MRP Materials Requirements Planning MRP II Manufacturing Resources Planning JIT Just-in-time DRP Distribution Requirements Planning ECR Efficient Consumer Response ERP Enterprise Resource Planning APS Advanced Planning and Scheduling

Task model of Supply Chain Management

Supply Chain Planning Supply Chain Execution Controlling Strategic planning Network planning Production planning Detailed planning Mat requirements plg Warehouse manmnt Order management Stock planning Distribution planning Transport planning Stock management Transport manmnt

Supporting functions Database management Communication

Supply Chain Why do we bother?

Fujitsu was having problems delivering laptop computers to their U.S. consumers. FedEx moved Fujitsu warehouse and assembly plant near to their distribution hub in Memphis, reworked Fujitsu processes and took control over final product delivery. Fujitsu cut its delivery time in half, cut its inventory 90%, and increased profit by 25%.

Supply Chain Objectives

Cost Reduction Maintain Quality and Performance Adhere to Agreed Delivery Times

A Supply Chain is: The network of business entities that co-operate in product/service sourcing, manufacturing and distribution processes for the purpose of cost reduction and customer satisfaction The network of organisations that are involved, through upstream and downstream linkages, in the different processes that produce value in the form of products and services for the ultimate customer
(Christopher, 1998)

A network of connected and independent organisations, mutually and cooperatively working together to control, manage and improve flow of material and information from suppliers to end users
(Aitken 1998)

A Supply Chain Orientation is:

The Business Strategy (model) a firm is undertaking when it enters into strategic partnership with other supply chain members in view of achieving overall supply chain objectives

Supply Chain Management is:

The management of the entire flow of information, materials, and services from raw materials suppliers through factories, warehouses, and distribution centres, to the end customer

Supply Chain Management is

Cross-functional (functional boundaries) Multi-institutional (organisational boundaries)

Supply Chain Management is not

Horizontal Integration Vertical Integration Arms Length Arrangements

Supply Chain Concepts

Logistics Concepts (e.g. customer service, process approach, cost reduction, etc.) Partnership Trust Integration

Supply Chain Activities

Design

Processes Adjustments

Fine-tune

Supply Chain Planning

Supply Chain Change Management

Supply Chain Management

Haywood, M. ( 2002)

A firm may

Have several supply chains at the same time Change its supply chain(s) from time to time Be part of another firms supply chain Be added to or removed from another firms supply chain

Supply Chain Simple Model

SUPPLIERS

MANUFACTURER

RETAIL OUTLETS DISTRIBUTORS

REVERSE LOGISTICS (FAULT OR RECYCLE)

CONSUMERS

SCM and Logistics

Stage 1: Operational Fragmentation Material flow

Purchasing Materials Control Production

Customer service
Sales Distribution

Stage 2: Functional Integration Material flow

Materials Management Manufacturing Management

Customer service
Distribution

Stage 3: Internal Integration Material flow

Materials Management Manufacturing Management

Customer service
Distribution

Stage 4: External Integration Material flow Suppliers Internal Supply Chain

Customer service Customers

Supply Chain Integration

Stage 1: Baseline
Purchasing Material control

Material flow
Production Sales Distribution

Stage 2: Functional integration

Materials Management Manufacturing Management Distribution

Stage 3: Internal integration

Materials Management Manufacturing Management Distribution

Stage 4: External integration

Materials Management Manufacturing Management Distribution

Stock

(Stevens, 1990)

A typical Supply Chain

(Lambert, 1998)

Week 8: Lean versus Agile Supply Chains

SCM encompasses

Buyer-supplier relationships: Supply Management Producer-customer relationships: Demand Management

Demand-driven versus Supply-driven strategies

Shifts in supply chains

Supplier

Supply Chain

Customer

Supplier

Demand Chain

Customer

Shifts in supply chains

Supply-driven: Supply trigged from Suppliers Actual or expected material in inventory Capacity constraint levels Demand-driven: Demand triggered from Forecasts Customer orders Distribution and spare parts Safety stock Requirements and new products

Shifts in supply chains

Supply-driven Mass production / consumption Standardisation / Mass-customisation Long-term forecasts Economies of scale Demand-driven Customised products Customer orders Continuous information from market Minimum in-process inventory

Demand Management Strategies

Demand-driven planning process Engineering-to-Order (ETO) Make-to-Stock (MTS) Make-to-Order (MTO) Assemble-to-Order (ATO)

Demand Management Strategies- Factors to Consider

Type of product: e.g. customisable vs. innovative Product design Demand pattern Life cycle of product Volume of Demand Cost Etc.

Demand Management Strategies- Leanness vs. Agility

Lean supply Chains: Focus on Cost Efficiency Agile supply Chains: Focus on Responsiveness
Hi

A G IL E
Variability Variety/

LEAN
Low Low Hi

V o lu m e

Christopher (2000), p. 39

Demand Management Strategies- Leagile Systems

Leagile supply Chains

Combination between agile and lean systems by introducing a decoupling point
Decoupling point M aterial supp ly Lean Processes Agile Processes Satis fie d cu stom er

Mason-Jones, Naylor & Towill (2000), p. 4065

Week 9: Supply Chain Risk

Sources of Risk

EXTERNAL RISKS

AFFECT BUSINESS

INTERNAL RISKS

DEMAND RISK SUPPLY RISK ENVIRONMENT RISK

PROCESS RISK CONTROL RISK MITIGATION RISK

Sources of Risk - External

EXTERNAL RISKS

DEMAND RISK Demand fluctuation Loss of confidence Short-life products Inventory depreciation due to technological innovations

SUPPLY RISK Supply failure

ENVIRONMENT RISK Natural disasters Political instabilities Terrorism

External Sources of Risk Case I

In 2001, Cisco, one the worlds network equipment leader, announced a 1 billion inventory been written off due to changes in demand caused by change in technology.

External Sources of Risk Case II

In 2000, a thunderstorm caused a fire at Philips Electronics semiconductor plant in New Mexico, damaging stocks of chips, halting Ericssons production line for handsets. Nokia was affected in much lower degree due to better contingency plans.

Sources of Risk Internal

INTERNAL RISKS

PROCESS RISK Under performing operations Equipment fault Loss of link (infrastructure)

CONTROL RISK Failure to control processes Failure to keep safety stocks Output variability (SixSigma)

MITIGATION RISK Lack of contingency plan

Internal Sources of Risk Case I

In 2002, Land Rover Discovery production line was put at risk by the collapse of its sole chassis supplier UPF-Thompson. Land Rover high dependence on a sole supplier highlights the risks of an outsourcing critical component or activity to a sole supplier.

Internal Sources of Risk Case II

In 2006, Dell Computers announced a recall of 4.1 million faulty laptop batteries. Sony batteries within the laptops have reportedly caught on fire, with videos of such incidents been circulated on the Web. Sony and Dell shared the expenses of the recall, but the consequential losses of their brands are unlikely to be offset in the short-term.

Sources of Risk Aggregate

EXTERNAL RISKS

ENVIRONMENT

DEMAND VULNERABILITY

SUPPLY

PROCESS

CONTROL

INTERNAL RISKS

MITIGATION

Centre for Logistics and Supply Chain Management (2003)

Risk Mitigating Strategies

UNDERSTAND SUPPLY CHAIN PROCESSES

Internal and External Risks

IDENTIFY RISKS AND CRITICAL PATHS

Scale versus Duration versus Cost

ASSESS LIKELIHOOD OF OCURRENCE AND LEVEL OF DISRUPTION

MANAGE RISKS

Risk Mitigating Strategies Case I

FedEx maintains a redundant power generating capability for data centres and hubs to ensure business continuity in the event of electrical failure

Risk Mitigating Strategies Case II

The Apple was determined to successfully launch of its iPod nano line of MP3 players. Therefore Apple made forward-buying supply arrangements of flash memory worth more than 500 million, hedging against shortage of this vital component. Apple locked up so much capacity of this part, that no competitor was able to launch a similar product in the same time period.

Week 10: The Bullwhip Effect

The Bullwhip Effect- Demand Amplification

Procter and Gamble first coined the phrase bullwhip effect

Diapers enjoy a fairly constant consumption rate P&G found that wholesale orders tended to fluctuate considerably over time They observed a further amplification of the oscillations of orders placed to their suppliers of raw material.

The bullwhip effect is the amplification of order variability as you move upstream in the supply chain

Why do we want to reduce it?

Excess raw materials due to unplanned purchase of supplies Additional manufacturing expenses created by excess capacity Inefficient utilisation and overtime Additional transportation costs (premiums, inefficient scheduling)

The Beer Game

Players: retailer, wholesaler, distributor and manufacturer Goal: minimize system-wide long-run average cost Information: through orders and shipments Demand: unknown Costs
Inventory holding cost: $1.00/case/week. Backlog cost: $2.00/case/week.

Lead-time: 2 weeks physical delay

The Beer Game

Lee et al. (1997), Sloan Management Review

The Bullwhip Effect Distortion between sales and orders and then amplification

Lee et al. (1997), Sloan Management Review

Causes of BE- Demand Signal Processing

Occurs when orders are based on demand information to update forecasts Contributing factors:
No visibility of end demand Multiple forecasts Long lead-times

Causes of BE- Rationing Game

Manufacturers must ration supplies when there is shortage in supply: retailers issue larger orders to cope Contributing factors:
Proportional rationing scheme Ignorance of supply conditions Unrestricted orders and free return policies

Causes of BE- Order Batching

Occurs when transaction cost is non-zero and because of inventory renewal periods Contributing factors:
High order costs Random and correlated ordering

Causes of BE- Price Variations

Strategic buying occurs because prices fluctuate (price wars, market) Contributing factors:
High-low pricing Delivery and purchase asynchronized

Causes of BE- Other Reasons

Misperceptions of feedback by the players Tendency to disregard the inventory in the pipeline and keep on ordering more (panic)

Controlling the BE- Demand Signal Processing

Counter-measures:
Grant access to the demand data at retail level One player to forecast and order for all others Reduce lead-times

Controlling the BE- Rationing Game

Counter-measures:
Allocate based on historical market share If imaginary shortage: share information Restrict flexibility of ordering:
Buyer starts transmitting its initial forecast 18 weeks ahead of delivery Update 4 weeks later but can only change order by 30% Update 4 weeks later but can only change order by 15% Third forecast is binding

Controlling the BE- Order Batching

Counter-measures:
Sell-through data and inventory data at the retail level Lower transaction costs (reduce paperwork and processing requirements) Manufacturers can allow mixed truck loads Regular delivery appointments (balanced ordering) 3PLs can consolidate and deliver to retailers

Controlling the BE- Price Variations

Counter-measures:
Reduce the price promotions in depth and in frequency Special purchase contracts (delivery spread over time)

PART 3: Information Management in Logistics and SCM

Week 11: EDI and Automatic Identification

Logistics Information Categories

Information Product

Examples for the categories Product spec., price/cost, product sales history Customer Customer forecasts, customer sales history, management team Supplier Product line, product lead time, sales terms and conditions Production process Capacities, commitments, production plans Transportation Carriers, lead times, costs

Logistics Information Categories (Cont)

Information Inventory costs,

Examples for the categories Inventory levels, inventory carrying

inventory locations Alliance Key contacts for each organizations, partner roles and responsibilities, meeting schedules Competitors Benchmarking, competitive offerings, market share Sales & marketing Point-of sale information, promotional plans Logistics process Process descriptions, performance & performance measures, costs, quality, delivery time, customer satisfaction

Electronic Data Interchange (EDI)

Computer-to-computer exchange of business documents in a standard format Electronic communications between two organizations Electronically links members in logistics network in: Order processing Production Inventory Accounting Transportation

Electronic Data Interchange

Benefits of EDI

Quicker access to information Better customer services Reduced paperwork Better communications Increased productivity Improved tracing and expediting Higher cost efficiency Improved billing

Cost Reduction by EDI

Labor and material costs associated with printing mailing handling paper-based transactions Telephone and fax transmissions Clerical costs

Tools for EDI

Bar coding and scanning Placement of computer readable codes on items, cartons, containers etc Useful in high-volume tracking where keyboard entry is slow Data Warehouse Collect information from multiple sources Avail information to end users in a consolidated, consistent manner Combine data in one place and make it available to all of the systems Internet, Intranet, Extranet (with suppliers and customers) World Wide Web

Automatic identification

Automatic identification (auto ID) is the broad term given to a host of technologies that are used to help machines identify objects. These include: bar codes smart cards voice recognition some biometric technologies (retinal scans, for instance) radio frequency identification (RFID) Auto ID is often coupled with automatic data capture. That is, companies want to identify items, capture information about them and somehow get the data into a computer without having employees type it in.

Benefits of Auto ID

Inventory Reduce levels of raw materials, work-in-process & finished goods Trim inventory shrinkage Improve inventory availability when needed Cut time required to find inventory Reduce obsolete inventory Labor Improve worker & supervisor productivity levels Reduce paper handling Cut data entry time Trim time required to take physical inventory Reduce data reentry in other departments Reduce expediting efforts

Benefits of Auto ID

Production
Reduce lead times Trim scrap levels Cut rework Standardize operations Boost machine utilization through improved scheduling Reduce time to fill orders Improve on-time deliveries High quality levels Reduce customer complaints Trim shipping errors Better product tracking after shipment Able to pinpoint order status for customer at any time Greater flexibility and responsiveness to customer requests

Customer service

Benefits of Auto ID

Management decision making Better-organized database Elimination of uncertainty in knowing inventory status and location Access to more timely information Better real-time decision-making Financial Outstanding bills reduced due to higher customer satisfaction Better cash flow position

Global Digital ID The Global Language of Business

At the heart of EDI is the global digital ID or standard, which is managed by the EAN*UCC system The standard enables businesses to efficiently and accurately exchange information among trading partners, to achieve effective product flows.

Global Digital ID Numbering System

Trade Items Global Trade Item Number (GTIN) Shipment Serial Shipping Container Code (SSCC) Location - Global Location Number (GLN)

Global Trade Item Number (GTIN)

Plain language descriptions of products and services are replaced by GTIN. GTIN guarantees unique identification where manufacturers, exporters, importers, wholesalers, retailers, etc. can communicate information regarding the goods or services they trade. GTIN is represented by a bar code and by scanning the bar code, business data entered and retrieved electronically from a computer.

Serial Shipping Container Code - SSCC

SSCCs track the movement of logistics units like pallets, containers or cases between companies Along the supply chain, various trading partners are handling various logistics units, such as pallets, barrel and containers. The function of SSCC is to allow each logistics unit to be clearly identified. SSCCs are extremely important in practices like Cross Docking and Flow through, which relies on the rapid and accurate distribution of different logistics units.

Serial Shipping Container Code - SSCC

Key Areas of SSCC Application

Tracing and tracking Receiving Storage and retrieval Dispatch Information control

Global Location Number

GLN is a number that identifies any legal, functional or physical location within a business or organizational entity such as: legal entities: whole companies, subsidiaries or divisions such as supplier, customer, bank, forwarder,...; functional entities: a specific department within a legal entity, e.g. accounting department; physical entities: a particular room in a building, e.g. warehouse or warehouse gate, delivery point, transmission point. Each location is allocated a unique identification number.

Week 12: RFID

Radio Frequency Identification (1)

RFID is a generic term for technologies that use radio waves to automatically identify individual items. It consists of a tag, which is made up of a microchip with a coiled antenna, and a reader with an antenna. A tag can be active or passive that can send signals or transmit information when queried by a reader

Radio Frequency Identification (2)

Radio-Frequency IDentification (RFID) is a nick name for identifying a group of wireless technologies based on radiofrequency that permit unique identification of the item (and the storage of other information like origin, destination, weight etc.) Tag + Reader Tags: Read-only ; Read-write

Radio Frequency Identification (3)

It enables intra- and interorganizational communication with respect to identifying products, organizations, locations and shipments of goods. Benefits include: No manual input of data, preserving the integrity of the data and keep operating costs low Save time and labor costs by eliminating the need to manually scan the barcodes of goods Solve the problem of goods going out of stock due to confusion in the supply chain and the problem of shrinkage caused by theft

Radio Frequency Identification (categories)

Active RFID

Passive RFID

Battery Wide range (up to 100m) More storage of information (up to 32Kb) HF or UHF (over 100MHz typically 433 MHz, 2.45 GHz, or 5.8 GHz ) Used for tracking

No battery Short range (up to 2 m) Less storage but much more than bar code (2Kb) LF or HF (usually 13.56MHz) Used for identification with proximity card, warehouse management

What is possible to link with RFID?

The Importance of Integration

RFID as a stand alone solution cannot do much It is fundamental the integration of RFID with: Wireless LAN (to communicate data to the servers) A well-built DBMS (usually ORDBMS-to handle data) This arises issues of: Communication standards (frequencies and protocols) Management of huge amounts of data

Will RFID Replace Bar Codes?

Probably not. Bar codes are inexpensive and effective for certain tasks. It is likely that RFID and bar codes will coexist for many years.

Why RFID is not widely used?

Proprietary systems where if company A puts an RFID tag on a product, it cant be read by Company B unless they both use the same RFID system from the same vendor. Another problem is cost. Readers cost US$1,000 (a firm may need thousand of readers to cover all factories, warehouses, and stores) and tags cost US$ 0.5 which is impractical for identifying millions of items that cost only a few dollars

Technological Challenges for RFID

Tag costs Large-scale production Accuracy of sensing Reader costs Interoperability (between different tags and readers produced by different vendors) Privacy Publicity has surrounded potential privacy breaches because of the RFID tags embedded in objects that consumers wear or use.

Week 13: Revision