Lecture Notes DL MGT 5100 - Distribution Management Spring 2017 1.0. Day one, Monday, Monday, 9 Jan 17 1.1. Reading Assignments: Chapters 1 and 2 1.1.1. I intend to follow the book so as to provide a broad background of distribution logistics; recommend that students read the entire book as quickly as possible and as a unit to achieve a broad overview of the course 1.1.2. I reserve the right to deviate from the book where I think that it will help promote the achievement of course objectives 1.1.2.1. Coyle has omitted issues in this edition that I believe are fundamental to understanding basic principles of logistics and I have included them in my notes 1.1.2.2. Therefore, careful attention to the notes is a must as they are an important supplement to the text; specifically, all questions will come from the lecture notes. 1.2. Class Objectives 1.2.1. Establish chat session time/day 1.2.2. Introduce book 1.2.3. Review class learning goals, objectives, strategies described. 1.2.4. Introduce basic issues of supply chain management (chapter one) 1.2.5. Explain Peer Review (Attachment One - Syllabus) 1.2.6. Overview of Supply Chain Management 1.2.7. Review of Global Supply Chains 1.3. Training Materials: 1.3.1. Student syllabus - Found in Angel Course Materials 1.3.2. SimChip Distribution Game - Found in Canvas Files 1.3.3. MGT 5100 Notes - Found in Canvas Files 1.3.4. MGT 5100 Spreadsheet - Found in Canvas Files 1.3.5. MGT 5100 Course Related Course Illustrations - Found in Canvas Files 1.3.6. MGT 5100 Supplemental Material - Found in Canvas Files 1.3.7. MGT 5100 video clips including Supply Chain Management - Found on mailed cd-ROM disk 1.3.8. Course Related Illustrations - Found in Canvas Files 1.4. Administration: 1.4.1. Direct students to review materials found in Canvas Files 1.4.2. Confirm everyone got cd-ROM disk with video lectures 1.4.3. Suggest students get calculator that can do standard deviation calculations 1.4.4. Establish chat session time/day 1.5. Introduction) - See Course Introduction video clips 1.5.1. Self: 30 years military service mostly in transportation and Mediterranean Region, Ed D Administration, previously taught at LaVern University of California, University of Maryland, METU and ERAU. Emphasize participation and questions. Call me at home early on problems. 1 1.5.2. Coyle, John J., et.al. Supply Chain Management: A Logistics Perspective: Tenth Edition. Boston, MA: Cengage, 2015. ISBN: 978-1-305-85997. 1.5.2.1. It talks principally from an integrated, or systems oriented, supply chain perspective with logistics being presented as simply one component of all aspects of business so be prepared for an encompassing course. 1.5.2.2. A key point to understand about Coyle is his drive towards metrics and measurability; this subject will be receiving a lot of attention through the various chapters 1.5.3. Review/explain class objectives 1.5.3.1. Learn about supply chain logistics as an integrated system of support for any enterprise that will be dissected and reviewed 1.5.3.2. The Simchip reports will be a team effort summarizing how the physical distribution lessons are being applied to the Simchip game 1.5.3.3. Write a paper 1.5.3.2.1. Must meet higher academic standards for format and content. 1.5.3.2.2. Must review some problem about current problem in logistics so that student can make a personal conclusion about the issue. 1.5.3.2.3. See Syllabus in Canvas Files for paper's format 1.5.3.4. Learn how to give concise, problem/solution oriented extemporaneous reports: both formal and informal through chat sessions. 1.5.4. Complete review/explain Student Syllabus with emphasis that following it with high quality research and writing will get students an A. No surprises. 1.5.5. Lecture notes are basis of course to include being the source of all exam questions 1.5.6. Students introduce themselves 1.7. Global business: Wave of future business which involves complex logistics as discussed at length by Coyle, Chapter 2 1.7.1. Facilitated by: 1.7.1.1. Cheap labor moves business into new countries: Mexico, SEA, etc. 1.7.1.2. Computers can control movements and logistics to attain cost competitive products 1.7.1.3. Transportation - big issue as it has permitted global off-shore manufacturing 1.7.1.4. Deregulation in world trade policies 1.7.1.5. Rise of intermodalism - allows products to be managed as single units of cargo as opposed to slow, break bulk 1.7.1.6. Intermodalism allows landbridging that was not feasible before thereby speeding cargo from origin to destination - describe 1.7.1.7. Population growth: text, Table 2.1. shows relative growth of nations. High population growth indicates regions of cheap labor as shown in text, page 33, Table 2.3 1.7.2. International environment 1.7.2.1. Text gives good discussion of many elements of international trade, so I want to concentrate on international politics that permeate international trade agreements 1.7.2.2. Rate making 1.7.2.2.1. Air rates becoming less standardized with advent of international regulation 2 1.7.2.2.2. Previously worked out through IATA (International Air Transport Association) which acted much like a rate bureau working out prices for various classes of passenger/cargo and services 1.7.2.2.2. US and KLM of Netherlands about 20 years ago broke this cycle 1.7.2.2.3. Sea movements 1.7.2.2.3.1. Liners work through conferences that establish rates for cargo to be moved on a continuous, scheduled basis between established pairs of ports 1.7.2.2.3.2. Tramp ships have to work out rates on one way or time basis wherein each contract is a standalone profit making venture 1.7.2.2.4. International transportation diplomacy 1.7.2.2.4.1. Have students review video clip on international environment 1.7.2.2.4.2. Currently changes are altering some of the statements that will be made below, but still they are valid enough to warrant detailed discussion 1.7.2.2.4.3. European integration through the EU has continually broken down old nationalistic barriers to international transportation; foreign air carriers provide 7th freedom, lift and passenger customs no longer required for most EU passengers entering Italy 1.7.2.2.4.4. Deregulation has loosened the pricing procedures that international conventions and negotiations strictly implemented through IATA (International Air Transportation Association) 1.7.2.2.4.5. International transportation diplomacy provides international conduits for construction and administration of tariffs and agreement making which are the glue of trade 1.7.2.2.4.6. Of particular interest are the international agreements for air transport known as "freedoms" which specify the conditions by which airplanes can enter and use the air resources of a sovereign nation (keep working on confirming these freedoms) 1.7.2.2.4.6.1. Freedom One: right to land in an emergency 1.7.2.2.4.6.2. Freedom Two: right to cross territory and gas and go on scheduled basis 1.7.2.2.4.6.3. Freedom Three: right to bring trade into the nation 1.7.2.2.4.6.4. Freedom Four: right to bring trade into and through a nation 1.7.2.2.4.6.5. Freedom Five: right to bring trade into and through a nation from a third, outside nation 1.7.2.2.4.6.6. Freedom Seven: right to serve internal markets of another nation 1.7.2.2.4.6.7. Each of these freedoms must be negotiated on bilateral basis between each set of nations under guide lines worked 3 out in various treaties created during the 1930s and 1940s and 1950s 1.7.2.2.4.6.8. Nations can and do abrogate these freedoms when in their national interest: France refused to allow F-111s to cross national territory during the bombing raid against Khadafi which was a denial of Freedom Two 1.7.2.2.4.6.9. Similar freedoms must be negotiated for other modes of transportation; New Zealand =prohibited US warships into her ports unless she declare which were or were not armed with nuclear weapons 1.7.2.3. Hazardous Materials - See Course Related Illustrations in Canvas Files 1.7.2.3.1. Another example of international work is the UN program to reduce global pollution through regulation of packaging - using PHS&T notes and slides, describe the international marking systems and their significance to transportation; also cite the Value Jet crash being due to improper marking and subsequent handling on board the airplane 1.7.2.3.2. Ask students what they consider to be hazardous material and why 1.7.2.3.3. Navy officials estimate $3.5B costs to clean up 1500 sites at 240 installations - It's a mess; for example, the expended 30mm bullets shot in Desert Storm are radioactive and must eventually be cleaned up 1.7.2.3.4. PHS&T Fig 6.1.A Government tracking of HAZMAT - walk students through it and use for reference 1.7.2.3.5. Cite documents on PHS&T NAVSUP, page 6-6, paragraph 6.1.1. 1.7.2.3.6. PHST&T Fig 6.1.2. Hazardous items - Note not only ecology concerns, but safety as well; for example, charging batteries emit explosive hydrogen, lead pipes contaminate water, electricity comingled with ammo on aircraft 1.7.2.3.7. PHS&T Fig 6.2.A Performance Oriented Packaging: Must meet title 49 of CFRs, ICAO, UN Pub ST/SG/AC.10/Rev 7 - Orange Book; note international cooperation on common hazard 1.7.2.3.7. PHS&T Fig 6.2B UN Packaging - Response to shrinking globe through increased transportation 1.7.2.3.8. Why POP? 1.7.2.3.8.1, PHS&T Fig 6.2.1. - Segue from PHS&T Fig 6.2B 1.7.2.3.8.2. Packages older than 1 Jan 88 grandfathered for CONUS destined overseas and AMC movements 1.7.2.3.8.3. PHS&T FIG 6.2.4.A 1.7.2.3.8.4. Cite PHS&T page 6.14, paragraph 6.2.3. for major features of POP criteria 1.7.2.3.8.5. PHS&T Fig 6.2.4.B - Segue from PHS&T Fig 6.2.4A 1.7.2.3.8.6. PHS&T Fig 6.2.4.C - Segue from 6.2.4.B and cite PHS&T page 6-19, paragraph 6.3 forward for more guidance while noting that the penalties are $25K/offense and/or 5 years in jail 4 1.7.2.3.8.7. Emphasize to students that more of packaging will be forthcoming later, but this section was included here to show another example of international cooperation 2.0. Day Two, Monday, 30 Jan 17 2.1. Reading assignment: Coyle, Chap 3 and 14 2.2. Class objectives 2.2.1. Discuss Aligning Supply Chains - Definition and integral parts 2.2.2. Discuss Role of Logistics in Supply Chains 2.3. Training materials: Canvas Files, DL MGT Spreadsheet 2.4. Administration 2.5. Supply Chain Management overview 2.5.1. Definitions and elements of Supply Chain Management (Mentzner) See Supply Chain Management video clip to show how the logistics as defined above fits into an enterprise's overall management scheme; as such, it expands on what Coyle has to say in his textbook. 2.5.2. Mentzer, Page 2 and Coyle, Figure 1-7, page 19: A supply chain is defined as a set of three or more companies directly linked by one or more of the upstream and downstream flows of products, services, finances, and information from a source to a customer; Coyle has a good illustration on page 20, Figure 1.7, which illustrates this principle well. 2.5.3. A supply chain orientation is the recognition by a company of the systemic, strategic implications of the activities and processes involved in managing the various flows in a supply chain. 2.5.4. Supply chain management is the systemic, strategic coordination of the traditional business functions with a particular company and across businesses with the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole. 2.5.5. Mentzer, page 15: \"In other words, a supply chain orientation is a management philosophy, and supply chain management is the sum total of all the overt management actions taken to realize that philosophy. 2.5.6. Charles Poirer (Advanced Supply Chain Management, page 1) says that this integration of activities among the giant companies has created a competition between supply chains rather than among individual firms. 2.5.7. Trust is the key element of any successful supply chain; this issue will be discussed at length in text, chapter 4. 2.5.7.1. Mentzer, page 86: \"Trust is a willingness to rely on an exchange partner in whom one has confidence....through (a) voluntary information and advantage sharing with the distributor, (b) favorable motives and intentions passed on to the distributor, and (c) open communications and responsiveness to customer needs. 2.5.7.2. This means partners have to be willing to open their innermost corporate secrets for the benefit of all. 5 2.5.7.3. For second tier providers, joining a supply chain may involve such a commitment of resources to meet the principal's demands that they can't afford to join other chains; thus, they are betting the farm on the overall success of the team and these decisions must be made carefully. 2.5.8. Backdrop of logistics against other team players (These issues will be detailed throughout the text and course): 2.5.8.1. Sales/Marketing function 2.5.8.1.1. Marketing and Logistics are flip sides of the same coin 2.5.8.1.1.1. Marketing is an economic distribution involving attraction to a product and its purchase; see text: page 58, called possession utility; see also text, pages 66-68 for further discussion of these concepts 2.5.8.1.1.2. Logistics is the physical distribution from vendor to customer iaw marketing decisions, See Day Two Lecture notes for further discussion 2.5.8.1.2. Marketing drives logistics as it develops price, product, promotion and place strategies which create demand that starts material movements; see supply chain diagram, para 1.8. 2.5.8.1.3. Must coordinate with logistics in order to prevent impossible promises 2.5.8.1.4. IBM sales reps coordinate all production promises with downline suppliers before making a promised delivery date while on line with the customer; They claim a 95% on time delivery rate 2.5.8.2. Research and Development - Must meet market demands and all R&D expenditures must focus on overall business goals and objectives 2.5.8.3. Sales forecasting 2.5.8.3.1. Long has been very inaccurate because of lack of precise nearterm information; this will be discussed in detail during forecasting chapter 7. 2.5.8.3.2. DRP will be covered later to show how it is designed to relieve this process 2.5.8.3.3. Caution: DRP cannot work effectively when future requirements are not well known such as what faces a dress merchant who must buy stock six months in advance of sales requirements. 2.5.8.4. Manufacturing (form utility) 2.5.8.4.1. Must work closely with sales and logistics to ensure smooth arrival of raw goods for production into finished products 2.5.8.4.2. Recall IBM information chain to ensure delivery success 2.5.8.5. Purchasing 6 2.5.8.5.1. Must have proactive procurement policies that ensure lowest overall purchasing costs 2.5.8.5.2. Transportation vs. inventory management costs: EOQ paradigm that will be covered later 2.5.5.3. Information systems must support colossal need for information on a real time basis 2.5.8.6. Financial issues (See pages 53 - 62) 2.5.8.6.1.Growth of activity based accounting, Return on Investment, and Return on Assets, and Return on Equity 2.5.8.6.2. These financial concerns transcend single interests of individual partners, but affect all partners 2.5.8.6.3. Financial transactions now very complex 2.5.8.6.4 Important point: financial analysis is the ultimate measurement of a management policies success; later exercises will illustrate the point; see Preface, bottom paragraph, page xxv 2.5.8.7. Customer satisfaction is the focus of all these activities: to provide what is needed in the desired quality at the lowest possible cost 2.5.8.7.1. Requires excellent quality control procedures 2.5.8.7.2. Requires effective inter-organization coordination of activities 2.5.8.8. Logistics must operate as an important cog in this welter of diverse activities 2.5.9 Typical supply chain process - important for understanding the remaining course Information Flow Management $ - Mkt $$$ Procurement Production Sales Inventory Supplier I/B Trans O/B Trans 7 Customer Supplier to Customer Supply Chain 2.6. Logistics overview 2.6.1. Open by promoting a comparative five/ten minute discussion of logistics among students as to what it is vis-??-vis business logistics and logistics engineering. 2.6.2. Compare definitions 2.6.2.1. Cite Coyle: Text, page 55 That part of the supply chain that plans, implements, and controls the efficient, effective, flow and storage of goods, services, and related information from point of origin to point of consumption in order to meet customer requirements. 2.6.2.2. Cite Blanchard's definition of logistics (Blanchard, Logistics Engineering and Management: 6th Edition. Page 8.) ...A multi-functional technical management discipline associated with the design, development, test, production, fielding, sustainment, and improvement modifications of cost-effective systems that achieve the user's peacetime and wartime readiness requirements. The principle objectives of acquisition logistics are to ensure that support considerations are an integral part of the system's design requirements, that the system can be cost-effectively supported throughout its life cycle, and that the infrastructure elements necessary to the initial fielding and operational support of the system are identified and developed and acquired. 2.6.2.3. Frankly, I tend to prefer Blanchard's definition because it is more encompassing in terms of supply chain development which involves a teamwork of logistics, marketing, R&D and finance. 2.6.2.3.1. It has a life cycle orientation from need recognition to disposal to include all of the elements inherent in Coyle's definition. 2.6.2.3.2. It recognizes that all products developed for any usage, commercial or military, must have logistics designed into them, their manufacturing processes, distribution factors and follow-on support elements. 2.6.2.3.2. If you read Coyle carefully, you will see that his writings actually suggest the need for this encompassing outlook on logistics 2.6.2.3.2.1 When I contacted Coyle with my thoughts, he concurred with them. 2.6.2.3.2.2. On pages 14 - 16, Coyle talks about management of systems as a process of integration - This is an important development in modern logistics as it relates to SCM 8 2.6.2.3.2.2.1. Note how analysis of systems on pages 18-19 Management can cause logistics efficiencies to improve 2.6.2.3.2.2.2. Such improvements are known as Value Chain Management 2.6.2.3.2.2.3. Pages 53 - 62 takes this systemic approach further by showing how they can affect the finances of a issue will be discussed at length further along in the corporation; this course. 2.6.3. Logistics is a practice that involves the elements shown below through all the issues mentioned in the text from pages 55-58: BLANCHARD PHYSICAL DISTRIBUTION, (Blanchard, Logistics Engineering and Management: 6th Edition. Page 11.) Maintenance Planning Operations or Production (See Coyle, page 49, and form utility note) Supply Support Test and Support Equipment PHS&T Manpower and Personnel Training and Training Support Facilities Data Technical Information Computer Resources Support Design Interface 2.6.3.1. While one or several elements can be emphasized more than others at any particular time, these elements are integrated into a system commonly known as Integrated Logistics Support - regardless of whether they are for engineering purposes or commercial distribution purposes 2.6.3.2. Key ILS task: affect production or operations early to improve supportability and lower costs through value enhancing planning; the latter is the emphasis is on the latter in this course 2.6.4. Emphasize a key difference in the two: logistics engineering is a design support process while commercial logistics is a distribution support process with an objective of final customer delivery or good or service as the desired end; this delivery provides a real value additive or \"utility\" to any product and general economy 2.6.4.1. Has place utility: Getting an item where it belongs gives it value. Not in place = no value to receiver. 2.6.4.2. Has time utility: Getting an item on time gives it value. Example: rotten vegetables delivered at the right place but late have no value. 2.6.4.3 Has place utility: Moves an item to place where demand exists 9 2.6.4.4. Quantity utility: Ensures the right quantity is available where needed 2.6.4.5. Possession utility: Fulfills marketing possession utility by getting it to the customer 2.6.4.6. Form utility: The value added to a product by turning an raw material into something usable by the customer 2.6.5. Coyle will be talking a lot through the course about finance and expand on the ROA concept discussed in Chapter 13; Also see Preface, bottom paragraph, page xxv. 2.6.6. Note the figures on pages 70 and 71 as they present concepts of competitive or contradictory elements of logistics that must be individually sub-optimized to achieve overall cost effectiveness; this is a key concept of logistics 2.7. Tying it all with overall enterprise goals 2.7.1. Source: Ross, Distribution Planning and Control, Chapters 2 and 3 2.7.2. All activities have to support broad business/service strategies and goals 10 2.7.3. Three views: Enterprise Goals O P P O R T U N I T I E S Corporate Strategies Business Unit Functional Business Area Strategies Risks and Uncertainties Ross, page 92, fig. 3.2. 11 C O N S T R A I N T S Dynamic Marketplace Customers Value Strategy Marketing Product Service s Delivery Systems Logistics Production and Operations Management Ross, page 88, fig. 3.1. 12 Tactics and Operations TOP Business Planning MANAGEMENT PLANNING Marketing & Sales Planning Logistics Planning LOGISTICS OPERATIONS PLANNING Inventory Planning Sales & Manufacturing Logistics Capacity Planning Demand Management LOGISTICS OPERATIONS Inventory Acquisition PLANNING Manufacturing & Procurement Warehousing/Transportati on Ross, page 84, fig U2.1 2.7.4. Logistics costs vs. product costs 2.7.4.1. Comparison of Product Value Costs to Relative Transportation Costs; this chart shows the percentage cost of transportation to final landed costs Commodity Percentage of transportation cost to final landed cost 13 Fluxing stone and raw dolomite Gravel and sand, n.o.s 57.25% Hay Bituminous coal Cabbage Watermelons Common brick Potatoes Lettuce Oranges and grapefruit Lumber, shingles and lath 45.14% 41.96% 38.12% 37.53% 27.72% 27.45% 27.18% 23.59% 20.74% Iron ore Corm Gasoline Pig iron Flour, wheat Eggs Sugar Automobiles, passenger Meats, fresh, n.o.s. 19.67% 12.18% 10.76% 8.29% 7.48% 6.38% 6.32% 5.35% 4.17 54.92% Butter Cigarettes Copper ore and concentrates 1.70 1.04 .65% Business and office machines .60% Airplanes, aircraft, and parts .17% S Source: Bureau of Transport, Economics and Statistics, ICC, Freight Revenue and Wholesale Value at Destination of Commodities Transported by Class I Line-Haul Railroads, 1959, Washington, DC; 1961. 2.7.5 Generally materiel comes in two categories: high value and low value with each having their own management consequences 2.7.5.1.High value materiel (high cost per pound or unit of volume) generates costly inventories such as electronics which need to be minimized 2.7.5.2. Consequently, it's usually held in centralized distribution center for wide area movement; High cost, fast transportation become alternative because in relationship to materiel cost, it is relatively cheap 2.7.5.4. Low value materiel (low cost per pound or unit of volume) involving inventories such as gravel, lumber, clothing apparel etc. which is often fast moving can be distributed widely or even held 14 in slow transportation pipelines as moving inventories such as transportation for $5.00/ton gravel cannot support high transportation costs 2.7.5.5.. It was these concepts that were explored during the early days of the USAF that lead to the establishment of their centralized depots and decentralized base level supply shops around the world (unfortunately, the study is lost) 2.7.6. Manufacturer - starts the process by fabricating something for resale (See text, page 65) 2.7.6.1.The article can be either for business related intermediate purpose or for end use retail customer 2.7.6.2. Manufacturers can integrate distribution into their business or hire that task out to a variety of third parties which will also be defined 2.7.5.3. Wholesale resalers are middlemen between manufacturers and end users who might not be retailers but businesses in their own rights 2.1.1.1. Functions: defined in Ross on page 42 and 43 2.1.1.1.1. P Product Acquisition - Generally finished state for immediate re-sale as is 2.1.1.1.2. P Product Movement - Product movement through supply chain 2.1.1.1.3. P Product Transaction - A purchase/resale operation through supply chain usually in broken lots to smaller resellers 2.1.2. D Distributor - Distributors are often wholesalers with broader marketing responsibilities 2.1.2.1. Note these definitions encompass more than mere physical movement which is a key in understanding this book 2.1.2.2. 15 2.1.2.3. Relationships to supply chain management - Ross, Page 72 Distribution Supply Channel INPUT Materials Flow OUTPUT Supplie r Materials Mgmt & Mfg Customer Physical Distribution Wholesalers & Distributors can intersect anywhere Information Flow 2.7.7.1. Note how one supplier can be the customer of another supplier 2.7.7.2. Supply chain management says that this relationship is the norm before a final retail customer is served 2.7.7.3. These links must be integrated into a smooth flow of communications and operations for goods to be delivered quickly, accurately, and cheaply 2.7.7.4. This supply chain management (SCM) concept is a principle idea of this book 2.7.7.5. The SCM concept allows commitment to be delayed until the last moment in order to ensure tailored orders iaw customer desire rather than the old method of mass produced \"take it or leave it\" philosophy; cite Jim Cotton's report on Dell computers 2.7.7.5.1. Directly meeting customer requirements with high quality products 16 2.7.7.5.2. Follow-up support is customer driven 2.7.7.5.3 Supported by three concepts: Velocity of components from vendors to assembly to customers, Information transfer throughout supply chain and Postponement of inventory decisions to 72 hours after customer requirements 2.7.8. Short/Run and Long Run analysis (Appendix 3A) 2.7.8.1. Short Run emphasizes whatever the current lowest cost is and follows it; See Table 3A.1 2.7.8.2. Long-Run, Dynamic Analysis involves forecasting requirements using linear regression (See Canvas Files, DL MGT Spreadsheet for further explanation of the concept) 3.0. Day three, Monday, 30 Jan 17 3.1. Reading assignments: Coyle, Chap 4 and Appendix 4A 3.2. Class Objectives: Discuss Distribution and Omni-Channel Network Design Training 3.3. Materials: Course Spreadsheet - Location Grid Theory 3.4. Administration: 3.5. Location Theory 3.5.1. Recall text,Appendix 3b, page 84, that logistics is a system of nodes and links 3.5.2. Important consideration in this system is locating manufacturing plants and warehouses for reducing transportation costs, inventory costs, and accessibility to markets 3.5.3. Planning for future locations is a complex process as indicated in the text, pages 96 - 104; grid theory calculations are only the first step to locate possible candidates 3.4.3.1. See also text, page 111 for further discussion on these complexities; not all systems are suitable for every type of enterprise requirements 3.4.3.2. Note how transportation routes can be affected by location selections; see Customer Fulfillment Models, page 121 3.4.3.3. Note how any changes in the decision factors can affect bottom line costs, see Text, Appendix 4A 3.4.4. Many of these concepts were more fully discussed in earlier text editions but omitted in this edition; however, they are still important as basic concepts upon which modern ones are built and are included in these notes 17 3.4.5. Von Thunen theory 3.4.5.1. The place utility value of agriculture goods diminishes as their distance from a market increases 3.4.5.2. Landed costs increase with distance 3.4.5.3. Therefore farms close to a city have an inherently more lucrative market for their goods than those further away Market Value = $1.00 Landed Cost A = .10 Landed Cost B = . 25 Landed Cost C = . 50 Thus, it can be seen that the market value of crops decline for farmers 3.4.6. Town A B C Weber's Material Orientation 3.4.6.1. Developed concept that markets attract goods toward it in accordance to cost of transportation which tips Von Thunen theory on its head 3.4.6.2. Terms: 3.4.6.2.1. Ubiquities: materials universally available: air, water, etc. 3.4.6.2.2. Localized: materials available in limited locations: ores, coal, oil etc. 3.4.6.2.3. Pure materials: materials that are used in products but which do not lose volume: water in sodas, oil products 3.4.6.2.4. Weight losing materials: materials that are used producing products but which lose volume: iron ore to iron, coal that is burned, etc. 3.4.6.2.5. Simple industry location: industry is centered iaw relative costs of movement for raw materials (RM) and finished products (FP) RM .25 per pound 18 FP .75 per pound 3.4.6.2.6. Factory located ?? Weber's Material Index:: Thealong proportion of the weight of localized materials to the weight of the finished product; if greater than one, place facility at deposits and if less than one, place at market 3.4.6.2.7. General thrust of terms: place plants in accordance with predominance of materials used in products: ubiquitous and pure: market; localized and weight losing: near sources Multiple Sources and Markets showing differing weight costs, availabilities and losses during manufacturing 3.4.6.2.8. Show calculations of Solution A, Glaskowsky, page 486 as example from notes 3.4.6.2.9. Using the Material Index: (2+1.5)/.25 = 14: place at origin Situation A Situation B Mkt A Mkt C (1/4 lb) Situation C Mkt B (2 ?? lb) (6 ?? lb; U = 3 lb) Pa R1a R2a (2lbs) (1 ?? lbs) (2 lbs) Pb R1b Pc R2b R1c R2c (1 ?? lbs) (2 lbs) (1 ?? lbs) Arisams Blockets Punch R1 and R2 = Locations of raw material sources. The weight of raw material to be used in each unit of finished product is indicated parenthesis 19 Crocker M = Location of the market for the finished product. The weight of raw material to be used in each unit of finished product is indicated in parenthesis U = Ubiquitous raw material added during the production process, per unit of finished product P = Starting point for location analysis. Note how it starts from a mid-point as implied in the simple industry location example above Arrow = Direction of \"pull\" toward the optimum plant location 3.4.7. 4. Isopanes are merely a way of illustrating market boundaries of equal cost distances in a manner similar to weather equal pressure zones or terrain equal altitude zones 3.4.8. Hoover tried to improve on Von Thunen's and Weber's theory by accounting for tapering transportation costs; otherwise, it is the same principle; explain tapering principle to show how longer routes and heavier weights on railroads and other fixed cost modes actually can get cheaper and thereby extend market boundaries 3.4.9. Grid Technique: explain using drawn grid and text, Table 12.2, page 535 and have students review Excel Spreadsheet, Location Grid Theory, for example 3.4.10. Warnings: These techniques are only a start 3.4.10.1. For example, the Grid Technique may take you to the middle of a swamp 3.4.10.2. Other issues to consider are local taxes, worker skills, local politics, etc.; Coyle discusses these issues at length starting from page 100, 4.4.1 - Key Factors for Consideration. 3.5. Fulfillment definitions - See text, page 120, Customer Fulfillment Models 3.5.4. Integrated Fulfillment: Integrated traditional store and internet systems 3.5.5. Pooled fulfillment: Where a number of smaller (mom and pop) stores pool their replenishment requirements and draw from a supplier distribution center 3.5.6. Direct store delivery: Factory to retailer direct delivery: this is often the method used in DoD supply channels where the retail user sends a requirement to either their service supplier or Defense Logistics Agency who, in-turn, forward it to the vendor for direct delivery 3.5.7. Store fulfillment: A retail order is placed on line for delivery to a local retail outlet 3.5.8. Flow-through-fulfillment: The traditional delivery system from vendor to distribution center to retail store for customer purchase Day four, Monday, 6 Feb 17 4.1. Reading assignments: Coyle, Chapters 5 and 6 4.2. Class Objectives: 4.2.1. Discuss Sourcing Goods and Products 4.2.2. Discuss Producing Goods and Products 4.3. Training Materials: 4.3.1. Vocabulary: 4.3.1.1. Note important definitions in text, page 551 on purchasing, procurement and strategic sourcing 20 4.3.1.2. It differentiates between the bureaucratic processing of purchase orders (purchasing) and the management actions taken in acquiring a new material or service 4.3.1.3. A procurement officer must interact with all other SCM enterprise divisions to develop policies that will be followed during acquisition efforts 4.3.1.4. Strategic sourcing has essentially the same meaning DoD gives to \"acquisition\" of new systems and services in that it implies all actions taken by all enterprise divisions to acquire something 4.3.2. Buy or produce is the eternal question: is something cheaper when produced in-house or obtained from outside sources; DoD has five evaluation steps before decision is made because the later choices are always more expensive: 4.3.2.1. Change doctrine 4.3.2.2. Modify existing equipment 4.3.2.3. Buy COTS equipment 4.3.2.4. Develop with other services 4.3.2.5. Develop as single service program 4.3.3. Strategic Sourcing Methodology (page 555 - 560): These are critical to any acquisition effort and they cannot be minimized in importance so study and know them well 4.3.4. Managing Sourcing and Procurement Processes (page 560) 4.3.4.1. Determine the type of purchase: one of a kind, reoccurring: these will dictate type of contract; transportation, for example, is a repetitive requirement which generally generates an open ended contract where multiple orders can be placed as needed 4.3.4.2. Necessary levels of investment: if the contract involves acquiring complex equipment, then a lot of front-end test and evaluation money must be spent before selection; otherwise, purchasing pencils can be much simpler 4.3.4.3. An important issue here is to determine what the market can provide and what vendors are reliable; this latter issue is most important in an SCM concept 4.3.5. Total Landed Cost (Total Cost of Ownership) (page 153) 4.3.5.1. This is a critical issue for consideration when acquiring complex, longlived equipment: what will the equipment cost from date of purchase to retirement 4.3.5.2. Such equipment will invariably involve maintenance and support which can generate more costs than the original purchase price of the equipment 4.3.5.3. MGT 5061 course focuses on this issue at great length 4.4. Production 21 4.4.1. This material is expanded at length in MGT 5024, Production and Operations Management 4.4.2. It is important because it creates demand for inbound inventory that was studied earlier as depicted in notes, para 1.9, above and as suggested in the text, page 587, Figure 14-1 4.4.3. Consequently, SCM demands logisticians and production managers work closely together 4.4.4. Production Trade-offs (text, page 175) 4.4.4.1. Essentially, like pure logistics, production is a constant balancing of trade-offs 4.4.4.1.1. Production managers like long runs on producing goods because it provides economies of scale similar to procurement officers do when making EOQ purchases 4.4.4.1.2. Conversely, outbound inventory managers run up large costs when produced inventory piles up in their warehouse 4.4.4.1.3. Sales, of course, through DRP processes need to keep both production and inventory managers advised of requirements to minimize the total costs of production and inventory management as suggested in the text, page 588, Figure 14-2 4.4.4.2. Text, page 175, Figure 6.2, shows how production has had to become leaner and more agile to accommodate real world requirements of shorter production runs of more customized products to meet the demands of the informed consumer who constantly uses the internet to find exactly what is desired 4.4.5. Vocabulary 4.4.5.1. Push based supply systems: Products are mass produced in accordance with a master schedule and then delivered to the market; this was the existing situation after WW II when the market would take anything after so many years of denial during the Great Depression and the war years rationing 4.4.5.2. Pull based supply systems: This system demand products to be built only after they are demanded by the customer; 4.4.5.2.1. Dell computers uses this technique well as does McDonald Hamburgers 4.4.5.2.2. This system tends to reduce waste that is inherent in the push system; McDonald hamburgers used to be push produced with a lot of them going to waste if they weren't consumed within a specified time period 4.4.5.3. Lean production: 4.4.5.3.1. Essentially, it abhors waste as suggested in the text, page 592, Table 14-1 22 4.4.5.3.2. But, Lean goes even further in reviewing all enterprise processes to eliminate everything that does not produce value to the customer as suggested by the quote below: Assuming that this is exactly what you are striving for, how do you start creating brilliant processes in your organization? The first thing to do is to learn from the experiences of the lean movement over the last decade. Many companies began their lean journey by recognizing that only a small fraction of the steps we carry out actually create the value the customer is paying for, the rest is muda (the Japanese word for waste). So they went on muda hunts and initiated 5S programmes to clear everything unnecessary out of the way. What they achieved was lots of easy improvements that yielded a quick benefit. Lean Enterprise Institute, http://www.lean.org/Community/Registered/Article.cfm?ArticleId=379. 24 November 2008 4.4.6. Machine Flexibility: 4.4.6.1. Essentially, an outgrowth of Lean Manufacturing 4.4.6.2. Production lines can now be reorganized in hours or days as opposed to the weeks previously needed by the American auto industry when I was growing up 4.4.7. Routing Flexibility: Being able to route manufacturing processes through machines not being used in other tasks 4.4.8. Manpower Flexibility: (Not mentioned in text) but it essentially eliminates \"featherbedding\" that once permeated union labor contracts with restrictive work directives as to who could do what job; now, workers are being hired and taught to handle a wider variety of jobs for more production flexibility and lower costs 4.4.9. Adaptive manufacturing: 4.4.9.1. Essentially involves information technology to control manufacturing processes to optimize them for immediate requirements 4.4.9.2. SAP is a leader in this field and here is a quote from their website: And adaptive manufacturing allows companies to set goals and milestones based on an accurate, real-time and comprehensive view of the plant floor and its interactions with the supply chain, and then execute, modify and rework those goals and milestones in response to rapidly changing market dynamics. http://www.nrx.com/content/news_events/Adaptive_Manufacturing_Man aging_Automation_1pgVer_11_17_05.pdf. 24 November 2008 4.4.10. Production Planning (text, page 178) 23 4.4.10.1. Note how production planning resembles the inventory and procurement planning of short, medium and long-range stages 4.4.10.2. The planning described in the text, page 596, take up where DRP and MRP discussed earlier leave off to create more detailed overviews of what needs to be done by the production managers 4.4.10.3. Vocabulary 4.4.10.3.1. Make to Stock: Traditional push based mass production methods used for making Model T Fords where Mr. Ford said, \"You can have any color car you want so long as it's black.\" 4.4.10.3.2. Assemble to Order and Delayed Differentiation: Today's car manufacturing now allows more owner discretion; the same is true with pre-fab homes; 4.4.10.3.3. Build to Order: Dell pull based computer manufacturing involving Lean, JIT, and Six-Sigma quality control 4.4.10.3.4. Engineer to Order: DoD products are often of this type of processing 4.4.11. Production Process Layout 4.4.11.1. The key here is avoiding bottlenecks 4.4.11.2. A good book to read on this subject is The Goal by by Goldratt and his Theory of Constraints 4.4.12. Packaging: 4.4.12.1. See slides on Packaging Technology 4.4.12.2. Purpose is more than marketing appeal; they must protect the product while being delivered to user and as such requires a lot of engineering 4.4.12.3. This issue is covered at length in MGT 5061, Systems and Logistics Support Analysis 4.4.13. Production Metrics: Important issue as discussed above in other lectures 5. Day five, Monday, 13 Feb 17 5.1. Reading assignments: Coyle, Chapter 7, Demand Management 5.2. Class Objectives: Discuss issues involved with demand management 5.3. Training Materials: Excel Spreadsheet 24 5.4. Class Administration: This chapter presumes some knowledge about statistics; if a student doesn't have this, please let me know ASAP 5.5. Introduction 5.5.1. APICS Dictionary: \"the business function that attempts to predict sales and use of products so they can be purchased or manufactured in appropriate quantities in advance.\" 5.5.2. First rule of forecasting: all forecasts will be wrong; the question is, by how much? 5.5.3. This chapter will discuss forecasting errors at length as well as the Excel spreadsheet 5.5.4. This chapter will focus on outbound forecasting and chapter nine will discuss inbound requirements forecasting (Material Requirements Planning) 5.5.5. The ultimate purpose of forecasting is to rationalize the discrepancies seen in text, page 210, Figure 7-1 5.5.5.1. These estimates use objective data to project past information onto probable future events 5.5.5.2. These forecasts tend to look forward over shorter time periods as data become less reliable further out than a year 5.5.5.3. Forecasting uses statistical sampling to a great extent and the larger the samples, the better their match to actual market requirements 5.5.6. Predicting: \"A subjective estimate of what events will be happening in the future, based on extrapolating or interpreting data that occurred in the past. 5.5.6.1. Used in longer range estimates (over a year) where judgment and experience must prevail where objective data becomes less accurate as historical forecasters 5.5.6.2. Senior/Executive decision making done at this level using such techniques as \"gut instinct,\" \"brain-storming,\" \"Delphi Analysis,\" etc. 5.5.7. Traditional Forecasting 5.5.7.1. This will be chat room topic; also many of the concepts presented here in the text, spreadsheets and video clips will be applied in future lessons so do not fail to review them as they could be exam topics 5.5.7.2. (Note: the Spreadsheet video lecture on Exponential Smoothing cites an author \"Ross.\" Don't worry about not having this text available but just listen to the lecture and study the examples given in the Exponential spreadsheet.) 5.5.7.2.1. Newer systems: DRP/MRP relies on controllable short term forecasts that are sales driven and managed by component parts control that is dependent on good communications, reliable and fast transportation, and ability to cope with limited ranges of change; these issues will be discussed in detail during later chapters 5.5.7.2.2. Older systems are percentage based on long term historical data that must deal with situations where detailed forecast data and 25 conditions cannot be controlled; dress industry that is based on fickle style trends must use this method - See Day Six Lecture Notes for more information on this issue. 5.5.7.3. Definitions 5.5.7.3.1. Independent demand - Those stand alone items such as complete engines being ordered for assembly into car bodies 5.5.7.3.2. Dependent demand - Items such as sparkplugs that are needed for assembly into engines; 50 six cylinder engines generate a dependent demand for three hundred plugs 5.5.7.3.3. On-hand inventory - Inventory physically on hand 5.5.7.3.4. Available inventory - On-hand inventory less reserved stock for customers with submitted orders or preferred A customers for whom some stock is always made available 5.5.7.3.5. Inventory Position (IP) 5.5.7.3.5.1. Inventory requirements (IR) = customer demands + transfer orders between branches + allocations to favored customers + backorders 5.5.7.3.5.2. IP = IR - On-hand Inventory 5.5.7.3.5.3. Answer tells manager if available supply can handle total present and future demand 5.5.7.3.6. Safety Stock - Stock held as insurance against unforeseen high demand and stockout or slow supplier response time and stockout 5.5.7.3.7. Usage 5.5.7.3.7.1. Average rate of consumption over a given period of time 5.5.7.3.7.2. Usage is only 50% right as average and hence need for safety stock 5.5.7.3.7.3. However, safety stock is an expensive insurance 5.5.7.3.7.4. How much can be afforded against the cost of a stockout? 5.5.7.3.7.5. When facing bankruptcy during the 1980's, Chrysler said \"zero inventory\" and went to JIT with all of its risks 5.5.8. Collaborative Planning methods 5.5.8.1. Coyle is absolutely right when he talks about Sales and Operations Planning on page 222 5.5.8.1.1. Forecasting and planning must be integrated with all players in an enterprise to include sales, logistics, production, finances 5.5.8.1.2. See text, page 223, Figure 7-2 for steps needed to create integrated forecasts 5.5.8.2. Collaborative Planning, Forecasting and Replenishment (CPFR) - Page 224 5.5.8.2.1. Relatively new step in the integration process: bringing suppliers and customers into the forecasting process 26 5.5.8.2.2. 5.5.9. Now a standard information transaction process at Wal-Mart wherein details of every sale is sent to its vendors to improve forecasting abilities 5.5.8.2.3. Text, page 226, Figure 7-4 shows the iterative nature of CPFR 5.5.8.2.4. Text, page 226, Figure 7-4 shows how CPFR, like SCM itself, is an ongoing developmental process of trust, information sharing, and collaborative planning for achievement of commonly held goals 5.5.8.2.5. CPFR, in a broad sense, has the same goals as Customer Service, text, page 252 in that both work collaboratively to reduce costs and improve service Fulfillment Models (As discussed in Day 3, Para 3-5): Essentially, forecasting has done its work and now the product must be delivered to the customer on time, as ordered without loss or damage, and at the specified cost 6. Day six, Monday, 27 Feb 17 6.1. Reading assignments: Coyle, Chapters 1,3,4,5,6,7 6.2. Class objectives: Take mid-term exam 6.3. Training materials: Mid-term exam 6.4. Administration: Take mid-term exam 7. Day seven, Monday, 6 Mar 17 7.1. Reading assignments: Coyle, Chapter 8 7.2. Class Objectives: Discuss Order Management and Customer Service 7.3. Training materials: 7.4. Administration: 7.5. Vocabulary: 7.5.1. Internal metrics: metrics measuring how well a firm met customer demands 7.5.2. External metrics: How good was the customer's satisfaction with the \"fill order\" transaction 7.5.3. Item: A specific product; its fill rate is % of items in stock available to fill orders 7.5.4. Line: A listing of similar items grouped together; its fill rate is the % of total lines filled complete on a multiple line order 7.5.5. Order: A demand placed by a customer for items from one or more lines; its fill rate is the % of orders completely filled 7.6. Introduction: 7.6.1. Order management is concerned about the logistics effecting the order 7.6.2. Customer service is concerned about anything that affects the customer from placement of order to ultimate delivery satisfaction; customer service is a philosophy that should permeate an enterprise towards the goal of customer satisfaction. 7.7. Elements of customer service 7.7.1. Defining customer bases by profitability 27 7.7.1.1. Pareto's curve: to be studied in Chapter Nine, but essentially, it divides customers into categories of profitability (high through low) and thus, identifies those few customers that deserve top management attention, middle customers that deserve rapid, smooth computerized attention, and low end customers that get exception treatment 7.7.1.2. Identifying service for each customer category: remember, even a low end customer should get what is promised; 7.7.1.3. Low end customers should have a defined process that delivers what's promised just as the high end customer should have a defined process; they can be different, but they both must be delivered 7.7.2. Develop appropriate packages of product or service for each customer segment 7.7.3. Deliver the goods as promised; this is the promise kept by Order Managers 7.7.4. Review performance for improvements; metrics will be discussed in detail starting on para 7..... 7.7.5. Develop financial analysis of results 7.7.5.1. This subject will be covered in more detail in Chapter 13 as financial implications of logistics management actions are becoming increasing recognized as being very good indicators of success 7.7.5.2. Logistics are seen as tremendous cost reduction tools as explained in text, Chapter Nine; but below is a financial correlation between good logistics and cost reduction. Example: Process 1 Process 2 Sales = Revenues $1,000 $1,000 Costs (X% Revenue) 900 800 Profit (Revenue - Costs $100 $200 Profits = Revenue (1-X %) 100 200 Achieving equivalent profit without logistics cost savings requires doubling of sales Sales = Revenues $2,000 Costs (X% Revenue) 1800 Profit (Revenue - Costs $200 Profits = Revenue (1-X %) 200 The logistics costs equaled 11.11% and resulted in a $100 or 100% increase in profits. To achieve the same increase in profits with using the logistics cost savings would have required a 100% increase in sales, or revenue, volume. This concept is developed further in text, pages 158-164, Figures 5-14 - 5-17 28 7.7.5.3. Activity Based Accounting (text, page 239) 7.7.5.3.1. Concept similar to DoD PPBE system wherein costs are accumulated by programs (activity) 7.7.5.3.2. This concept then allows for comparative profit models to be built for each customer 7.7.5.3.3. The concept can be used for almost any discrete activity: see text, pages 261 - 264 where warehouses become an activity as well as a customer 29 7.8. Order Management - Order to Cash Replenishment Cycles (text, page 246) 7.8.1. This concept involves a complete response cycle from initial order receipt through customer management processes to final receipt of payment; the faster the better 7.8.2. Order Cycle Time (text, page 269) 7.8.2.1. This issue will also be discussed in Chapter 9 for receiving raw materials 7.8.2.2. Most customers will want reliability over erratic speed as it permits closer tolerances for safety stock; see effect of tighter tolerance in costs in Excel spreadsheet (Note my simpler formula to derive the same answer in units) 7.8.2.3. For further discussion about the standard deviation concept, go to text, Chapter 9, page 354 7.8.2.4. Definition: z = ?? = standard deviation 7.8.3. This process involves all of the inventory, transportation issues to be studied later so keep this cycle in mind as they are studied 7.8.4. Important point: Keeping schedules tight and reliable is important factor in good order management and customer service 7.8.4.1.1. It's always better to be reliable than fast as mentioned in Notes Para 7.8.2.2. 7.8.4.1.2. See text, page 250, and Figure 8.7 for details of this important concept 7.8.4.1.3. This concept of good order management affecting positive customer service is outlined in text, pages 255 - 258; think of it this way: what order management service would you want for your household goods? 7.8.4.1.4. Note how SCOR metrics are used throughout this entire process to ensure that quality control processes and standards are followed and met 7.9. Metrics 7.9.1. Metrics are intended to provide information for corrective actions and/or continuation of proper actions: 7.9.1.1. Emphasized here as they are an important, but often misunderstood element of business activity 7.9.1.2. OODA Loop is excellent example 7.9.1.2.1. OODA = Observe, Orient, Decide and Act 7.9.1.2.2. For more information: see Source: Wikipedia, OODA Loop. http://en.wikipedia.org/w/index.php? title=File:OODA.Boyd.svg&page=1. 24 October 2012. 7.9.2. Metrics are defined as a definition of activity effectiveness involving a \"calculation or is a combination of measurements, and is often a ratio. 7.9.2.1. Characteristics of good measures - See text, page 141, Figure 5.1 30 7.10. 7.9.3. Developing metrics 7.9.3.1. Key issue (Not directly in the text) - What must be measured or what is the crucial problem to be measured and compared? 7.9.3.1.1. Not stated but important: Metrics must be consistent with corporate strategy.\" See notes and illustrations, Notes, para 2.7.3. above 7.9.3.1.2. Without clear definitions, then measurement data will reflect irrelevant information 7.9.3.2. Important questions: does it encourage appropriate behavior and engender trust? 7.9.4. SCOR Model - Classic metrics model 7.9.4.1. Developed by the Supply Chain Council and described by Coyle on page 259, Figure 8.11. 7.9.4.2. Essentially, separates work efforts from strategic levels down to implementation levels of granularity (essentially a work breakdown concept) that establishes linear relationships among the various levels 7.9.4.3. Allows enterprises to then outline and compare their processes to those recognized as world class 7.9.4.4. Provides basis of quantifying measurements against standards (metric processes) at all levels of granularity 7.9.4.5. For more information: go to http://www.supplychain.org/cs/root/scor_tools_resources/scor_model/scor_model 7.9.5. Keeping it simple 7.9.5.1. Identifying the right distribution metrics can be challenging. One methodology we would recommend is the use of \"SMART\" goals. \"SMART\" criteria are commonly attributed to Peter Drucker's concept of \"Management By Objectives\" in the mid-1950s. The first known use of the acronym SMART occurred in the November 1981 issue of Management Review by George T. Doran: 7.9.5.2. Specific: State exactly what is being measured so that there is complete understanding between the company and distributors about how each metric is calculated. 7.9.5.3. Measurable: metrics must be reliable and repeatable so that they accurately measure supplier performance. 7.9.5.4. Attainable: Distribution targets must provide a reasonable stretch to be reached, and not so lofty as to be unattainable or unrealistic. 7.9.5.5. Realistic: Plan only a few things that can be successful rather than many things (thus being unsuccessful in the effort). Distribution goals should be challenging, but realistic. 7.9.5.6. Timely: There must be a schedule as to when goal percentages must be obtained by, and a final date when 100% of the goal effort is complete or re-evaluated. Expected Cost of Stockouts (text, page 261) 7.10.1. This is a critical inventory management question and is given special attention here 31 7.11. 7.12. 7.10.2. What is the cost of keeping extra stock on hand (safety stock) vs. the cost of a stock-out? 7.10.3. Three categories of reactions/actions 7.10.3.1. Back-order: usually involves use of premium transportation to satisfy customer demand 7.10.3.2. Lost sale: It has a two-fold cost: loss of immediate revenue and probable retention of unsold item left in inventory somewhere 7.10.3.3. Lost customer: This has long term lost revenue consequences 7.10.4. The example calculation (text, page 263 - See Excel worksheet) \"expected value\" consequences 7.10.4.1. It recognizes that not all sales result in a stock-out and of those stock-outs that do occur, not all will fall into one of the three categories cited above but roughly will fall into three percentile groups that add to 100% of all stock-out actions 7.10.4.2. These probabilities are then associated with the three outcome costs to derive an \"expected value\" cost 7.10.4.3. Adding these three \"expected value\" costs then equals the level of safety stock levels that should be kept where the stock-out and safety stock costs are equal 7.10.5. Fill Rates (Not in text) 7.10.5.1. Essentially, the flip side of Stock-Out issues 7.10.5.2. How well should orders be filled promptly as requested is the issue as higher fill rates also generate costs to ensure maintenance levels 7.10.5.3. Financial costs of differing fill rates can vary depending on the standard being demanded; the higher the standard, the higher the cost 7.10.6. Financial Impact (text, page 290-298) 7.10.6.1. See Excel Spreadsheet for detailed presentation of the text's illustration 7.10.6.2. First step was calculating the cost of unfulfilled orders 7.10.6.3. Second step is determining how much extra inventory is needed to balance the unfulfilled orders Logistics System Information 7.11.1. The essence of the argument is to delay decision points as long as possible through good, rapid, and reliable information 7.11.2. Dell uses this technique to delay the ordering of components for as long as possible to avoid paying for materials lingering in a pipeline 7.11.3. Electronics also allows for faster payment cycles as evidenced by Financial Impact, text, page 299 Post Sales Logistic Support 7.12.1. This involves handling returns and maintenance 7.12.2. As cited earlier in Day One's lecture notes, high reliability means fewer post logistics support problems 32 33 8.0. Day Eight, Monday, 13 Mar 17 8.1. Reading assignments: Coyle, Chap 9, Managing Inventory in the Supply Chain 8.2. Class Objectives: Discuss issues involved with managing inbound inventory material 8.3. Training Materials: 8.3.1. Excel Spreadsheet 8.3.2. Video clips 8.3.3. EOQ Video Clip 8.3.4. DRP Video Clip 8.3.5. Pareto Curve Video Clip 8.3.6. Supply Mgt Slide 10-14 as DOD management of ABC principles 8.4. Class Administration: 8.4.1. This chapter assumes some knowledge of statistics; if such isn't the case with a student, please let me know ASAP 8.4.2. This chapter assumes some knowledge of accounting and financial management; if such isn't the case with a student, please let me know ASAP 8.4.3. My notes will include discussions about First-In/First Out concepts as a means of costing inventory that are not included in the text so pay attention to them 8.5. Introduction: 8.5.1. Logistics Requirements Planning 8.5.1.1. Plans must start with inventory as that drives all other support activities such as procurement and transportation 8.5.1.2. Will JIT in time be used with small inventory and fast transport and good information management? 8.5.1.3. Will slow storage in transit be used through a pipeline that ties up money in inventory? 8.5.1.4. Will large inventories be bought occasionally and stored in large storage areas? 8.5.1.5. What effect will inventory have on Return on Assets rates? 8.5.1.6. Depending on type of material being bought will determine answers to these question - Reference: Lecture, Day Two table 8.5.1.7. Have students read \"Micros and More Case,\" Text, page 312 and ask what do the above questions have to do with this case 8.5.1.8. We will be studying how to manage inventory for lowest overall costs in accordance with realities facing an enterprise: probabilities based and numbers based systems 8.5.2. Realities of inventory management 8.5.2.1. Inventory used to be counted as an asset, but except for a balance sheet or bankruptcy sale, it now is seen as money tied up resulting in loss opportunities for profit 8.5.2.2. Hence, turning over inventory is seen as getting your money out of an investment 34 8.5.2.3. Still, inventory is needed: Read text, pages 317-322 for detailed reasons 8.5.2.3.1. Difficulty of forecasting demand or delivery rates: safety stocks for insurance against stock-outs 8.5.2.3.2. Building stock for seasonal sales: accumulating snow shovels in July for winter sales 8.5.2.3.3. Anticipation of price hikes 8.5.2.3.4. Discounts for bulk purchases and concurrent bulk transportation discounts 8.6. Definitions (Some of these issues have been covered earlier, but it's good to repeat them) 8.6.1. Independent demand - Those stand alone items such as complete engines being ordered for assembly into car bodies 8.6.2. Dependent demand - Items such as sparkplugs that are needed for assembly into engines; 50 six cylinder engines generate a dependent demand for three hundred plugs 8.6.3. On-hand inventory - Inventory physically on hand 8.6.4. Available inventory - On-hand inventory less reserved stock for customers with submitted orders or preferred A customers for whom some stock is always made available 8.6.5. Inventory Position (IP) 8.6.5.1. Inventory requirements (IR) = customer demands + transfer orders between branches + allocated to favored customers + backorders 8.6.5.2. IP = IR - On-hand 5.5.4.15.3. Answer tells manager if available supply can handle total present and future demand 8.6.6. Safety Stock - Stock held as insurance against unforeseen high demand and stockout or slow supplier response time and stockout 8.6.7. Usage 8.6.7.1. Average rate of consumption over a given period of time 8.6.7.2. Usage is only 50% right as average and hence need for safety stock 8.6.7.3. However, safety stock is an expensive insurance - See also stock out costs notes above and Excel stockout calculations 8.6.7.4. How much can be afforded against the cost of a stockout? 8.6.7.5. When facing bankruptcy, Chrysler said zero and went to JIT with all of its risks 8.7. Costing inventory 8.7.1. Inventory Carrying Costs Vocabulary 8.7.1.1. Capital Cost: What could have been earned with the money invested in inventory? 8.7.1.2. Storage Space Cost: Cost of warehousing and handling of inventory 8.7.1.3. Inventory Service Cost: Insurance, taxes, etc 8.7.1.4. Inventory Risk Cost: obsolescence, disasters, etc. 8.7.1.5. See text, Tables 9-5 and 9-6, page 303-304, for costing examples 35 8.7.2. Important issue: inventory costs money and it should be reduced wherever possible 8.8. Assignment of costs: an important issue for taxation purposes (This is not discussed in the text book, but any good finance management text discusses it at length) 8.8.1. First in - First Out stock costing: 8.8.1.2. Stock acquired earliest is assumed to be sold first, leaving stock acquired more recently in inventory 8.8.1.3. Intent is preserve the invoiced value of given supplier receipt as long as that receipt is still in stock 8.8.1.4. As new receipts are layered, the cost to the customer is set at the highest price during inflationary times thus creating a profit margin for the earliest stock receipts 8.8.2. Last in - Last Out stock costing: 8.8.2.2. Sales are made from the most recently acquired stock, leaving items acquired in the earliest time period in inventory 8.8.2.3. The effects are the reverse of FIFO in terms that later receipts are lower priced than earlier receipts thus having the earlier higher prices set the profit margins for the later receipts. 8.8.3. Average cost stock costing: This method could a moving average in which each new purchase is averaged with the remaining inventory to obtain a new average price or a weighted average I which the total cost of the opening inventory plus all purchases is divided by the total number of units. 8.9. Actual cost: self-explanatory, but requires a good computer to keep up with complex, large inventories 8.10. Carrying costs of inventory 8.10.1. Includes: opportunity costs (alternative profit options with money); warehousing costs, inventory risk due to spoilage and obsolescence 8.10.2. Generally given as a percentage of the per unit cost of inventory 8.10.3. Administrative costs (Order or Set-Up Cost) associated with obtaining inventory 8.10.3.2. Includes: transportation, purchasing activities as explained in the text, pages 328-329 8.10.3.3. Generally given as a flat dollar cost per transaction 8.10.4. Carrying costs and administrative costs results in total management cost as illustrated in text, Figures 9.6, 9.7, 9.8, pages 318-320; explain to students and tell them it will be applied later to EOQ system 8.11. Safety Stocks (See Excel Spreadsheet for calculations) 8.11.1. Essentially, the same concept as discussed in Day Five lecture except now it is focused on receipt of inbound material needed to support production requirements 8.11.2. The costs of stockouts can also be calculated in a manner similar to Day Five lecture above; see text, page 331 and Excel Spreadsheet 8.11.3. The formula cited on page 332 of the text accounts for variances of delivery schedules and consumption rates 8.11.3.1. It is based on statistical standard deviations around a mean 36 8.11.3.2. The discussion started the analysis with only one standard deviation buffer, but use the Table 9-10, page 333, should requirements for higher levels of protection 8.11.3.3. Remember: safety stock is an insurance policy and it costs in terms of extra inventory; so as suggested above,