What is Inventory?
· Inventory is an unused asset, which lies in stock without participating in value adding process.
· Unused equipment, raw material, WIP and Finished goods, consumables, spare parts, bought out parts, tools and tackles, gauge and fixtures etc.
· In India 9 to 12 months of sales quantity lies in the form of Inventory [R/M, WIP, Bought out parts and Finished goods] as against a few days in Japan and a month in the US and Europe
· Huge amount of NPAs in our country, Banks, PSUs
· If look around in our facilities we find stocks lying unused for years catching dust and rust in the form of plant and equipment, raw material, WIP and Finished goods.
· In our country inventory is always viewed as asset [working capital], in fact, though it is called an asset, it is a big liability
· Reluctance to scrap useless inventory on time is one of the reasons why we carry huge stocks
· Inventory is biggest source of waste
· Japanese companies focused their attention on Inventory through now well known concept of 5S. Symptoms of Poor Inventory Management
1. An increase in the number of backorders, indicating too many stock outs
2. Rising inventory investment
3. High customer turnover
4. An increasing number of cancelled orders
5. Insufficient storage space – too much inventory on hand
6. An increase in the volume and value of obsolete products
7. Low Inventory Turn Over Ratio [about 50 is a good ratio]
8. working capital problems
· TYPES OF INVENTORY
· Manufacturing: R/M, components, WIP, F/G. manufacturer’s commitment to inventory is deep and duration is long.
· MRO: Maintenance, repairs and operating supplies.
· Location inventory: inventory at a fixed location
· In transit inventory also known as pipeline inventory: inventory in the process of transfer or under going transportation and waiting to be transported.
· Wholesale inventory: Wholesalers stock large quantities and sell in small quantities to retailers. Products with seasonal demand, products to satisfy assorted, small and urgent needs of retailers are stocked. As the product line expands risk of retailers increases and the risk becomes wider and deeper.
· Retail inventory: retailers stock variety of products to satisfy demand. But they push the volume backwards to wholesalers and reduce the depth of risk although the risk is wide
Functions of inventory
· Inventory overcomes geographical separation to integrates components into assembly. Inventories also make market assortments possible when manufacturing is separated by geography. Geographical separation has made manufacturing economical.
· De coupling from uncertainties of market, poor infrastructure
· Balancing supply and demand: seasonal production and year round consumption [agricultural products], seasonal consumption non seasonal production [woolen garments].
· Buffer uncertainties of lead time and demand
· Technical requirement of batch production
Costs of carrying inventories
· Capital cost
· Taxes, insurance
· Obsolescence
· Storage: handling, space, maintenance, security
· Opportunity cost
· Cost of bad quality
Economic order quantity
Assumptions of Wilson’s lot size formula or Classical EOQ model
1. Demand is at a constant rate and continuous
2. Process is continuous
3. No constraints are imposed on quantities ordered, storage capacity, budget etc.
4. Replenishment is instantaneous
5. All costs are time invariant
6. No shortages are allowed
7. Quantity discounts are not considered
Salient features of EOQ model
Ø Replenishment Cycle – is the time between two replenishments
Ø Concept of average inventory – the amount of inventory that remains in stock on an average during replenishment cycle
Ø Inventory related total costs
Ø Ordering Cost and Carrying Costs – their relationship, when are they equal to each other?
Ø Follow the classroom discussion, refer to the graphics used
EOQ = Ö 2AD/H……….when all the assumptions are valid
EOQ = Ö 2AD/H(1-D/P)……….when instantaneous replenishment is not assumed
Total Inventory related costs at EOQ = Ö2ADH……….when all the assumptions are valid
Total Inventory related costs at EOQ = Ö 2ADH(1-D/P)……….when instantaneous replenishment is not assumed
Ø Sensitivity Analysis: from the classroom analysis you may have noticed that when total costs are minimum, the Total Cost curve is nearly horizontal, indicating that for small changes may be made to the EOQ without upsetting the Total Cost. In short, inventory related total costs are not sensitive to changes in ordering quantity at EOQ level
Probabilistic Inventory Control Models – Impact of uncertainties of lead-time and demand on Re Order Level [ROL]
Determination of ROL:
Condition 1. when standard deviations of demand and or lead-time are expressed
R = Expected Demand during Lead-time + Buffer [Safety Stock]
R = D L + K sdl
sdl =ÖSquare of the sd X L + Square of the sl X square of D
1. `D `L is the lead-time demand
2. K sdl is the buffer or safety stock
3. R is the re order level
4. `D is the average demand rate
5. `L is the average lead time
6. K is a factor obtainable from the normal distribution tables for the percentage of risk we are willing to take
7. sdl is standard deviation of lead-time demand
8. sd is standard deviation of demand
9. sl is standard deviation of lead-time
Condition 2.
a. When the average lead-time, maximum lead-time and its probability of being maximum are given
b. When average demand, maximum demand and its probability of being maximum are given
Calculate the lead-time consumption based on average values and find out the buffer based on probability calculations. Follow sums done in the class.
Limitations of Classical EOQ model
We have seen that Classical EOQ model made assumptions that are really not realistic. When the model is put to practical use we find that so many adjustments are needed to be made. Hence EOQ model is formulated under some limitations. If we are not conversant with these limitations, managerial application of this concept can be counter productive.
Major limitations are some of the assumptions made
1. The demand or usage is predictable
2. The demand or usage is constant
3. The price of the item remains constant through out the procurement cycle
4. Materials in many processes are flow controlled i.e., materials move in pipe lines starting and stopping depending on operational requirements
If the concept of EOQ is applied without taking into account the limitations results can be disastrous.
Adjustments to EOQ
Volume transportation rates: EOQ model does not consider cost of transportation of goods from vendor’s place to the purchaser. Transportation costs are sensitive to weight of consignment. If the quantity suggested by EOQ model does not get favorable transportation cost, summation of inventory cost and transportation cost may be detrimental to the interests of the organization. Hence we should always evaluate batch sizes from total cost perspective. In the traditional approach when inbound logistics are totally vendor’s responsibility, the company never used to worry about this aspect. But as the concept is now enlightened and minimization of the costs in the supply chain is the focus, this aspect is very significantWarehousing
Warehousing was a customer’s function conventionally anywhere in the world. Customer to protect himself from shortages at the time of inclement weather always used to store provisions and other utilities in his house. Consumer’s own stores were underground cellars, smoke houses to store variety of items. Poor communication infrastructure was mainly the cause for this storage by customer. Producers and tradesmen conveniently shrugged off their responsibility for storage and passed it on to the customer who was left with no option.
Traditional concept of warehouse as store or godown has undergone major change now. Warehouse is considered a value adding facility now, playing a remarkable role as a function of logistical management.
As the times changed, manufacturer started applying modern scientific management techniques to improve productivity in his factories. Manufacturer visualized the need of a buffer between factory and market, now the warehouse became storehouse to stock production. This role of the warehouse supported production.
The store did not receive any engineering attention to handling and storage activities. All activities were manual as the labor was cheap. Items getting lost, damage in handling and accidents were rampant in those warehouses. Storing as much as possible was the main function of warehouses.
Post war thinking made inventory shrink and production became streamlined to demand
as the market started changing and retailers encountered a new breed of customers. Warehouse now became a support for marketing rather than for production as was the case earlier. Demand for variety in every product increased and retailers experienced the need for a facility to hold the stock and provide the product mix demanded by the market.
Production units started using the concept of warehouse as a facility to optimize production [minimize cost].
Decades of 1960 & 70 saw engineering focus on material handling, storage & information.
Concept of JIT production system needs dependable delivery system of which warehouses are by now an integral part.
As we have discussed earlier, decade of 1980 was a decade of TQM which put the focus on improvement of all activities carried out in an organization. Now the attention traveled to warehouses.
Concept of strategic storage: We have discussed earlier that warehouse is not a store but a facility that yields economic and service benefits. But we cannot forget that storage also can be a value adding activity under special situations like stock piling and spot stocking.
Warehouse Costs: cost of handling and holding the materials in warehouse and costs of Order Processing, Inventory, and Lot Quantity are components of warehouse costs.
Functions of warehouse [warehousing operations] …[physical distribution management: logistical approach by K.K.Khanna – page # 57]
1. Receiving goods – receive and accept responsibility
2. Identifying goods – place, label, color code
3. Sorting goods- sort out the received goods for appropriate storage area
4. Dispatching goods to storage- for temporary storage with easy accessibility
5. Holding goods- security against pilferage and deterioration
6. Selecting, retrieving, packing- items are retrieved and grouped according to customer order for dispatch
7. Marshaling goods- check the items of a single order for completeness and order records are updated
8. Dispatching goods- consolidated order is packaged and directed to right transport
9. Preparing records and advices- of stocks and replenishment requirements
Principles of Warehouse design
Design criteria: following are the factors to be kept in mind while designing the warehouses.
Product flow: warehouse should be designed round material handling flow. Movement of material should be kept minimum
No of stories: one is ideal as against limitations of space. Cost of land prohibits having only one story as this would need large area.
Height utilization: principle of cubic space, principle of ‘go vertical’, e.g.-car parking in Japan. Limitation on this concept is posed by limitation of handling equipment, fire safety rules, insurance regulations and rules and regulations imposed by the state.
Handling Technology
1. Movement continuity and movement scale economics: movement continuity is ensuring less number of long movements rather than large number of short movements.
Movement scale economies depend on movement in large bulk. Moving material in cases strapped on pallets or containers yields large benefits in handling. Handling becomes standardized and simplified. Moving material in small packages is expensive and complex. Handling technology should address these issues
2. Storage Plan: storage plan depends on characteristics of product. Some of the examples are
- open air storage for bulky products
- heavy items closer to floor
- light items on higher rungs of the shelf or rack
- fast moving items in large bulk closer to aisles
- hazardous items stored at safe distances to limit damage in dangerous situations.
Warehousing alternatives
Private Warehouses
Owned or leased by the product owner. Ownership is not the criterion.
Control is fully with the product owner. Product owner exercises overall control on management.
Changes can be made to integrate the warehouse with rest of the logistical system
Provides market presence to the product owner
Considered to be cheaper as there is no profit to be added to the cost.
Public Warehouses
Available to companies on hire.
Overheads get distributed over a large customer base. This makes the usage cheaper.
As warehousing is their core business public warehouses offer expertise in management.
Flexibility of location: if the product owner needs to change the location of warehouse, it is easier if the current warehouse is public. It is only a question of terminating the contract and starting a new one. But if the warehouse is owned, one has to dispose off the current facility and procure a new one.
Significant scale economies, several users and resultant volume, benefits in transportation costs can be gained by utilizing these facilities.
Contract warehouses
Contract warehouse operators take over logistics responsibility from manufacturing company. Warehouse owner offers long term relationship and customized service. Product owner gets the benefit of management expertise of the warehouse owner.
As the warehouse owner centrally controls several warehouses, product owners get the benefit of shared resources with several clients. This bring down the cost.
General classification of Public warehouses
1. General merchandise
2. Refrigerated
3. Special commodity
4. Bonded
5. Household goods & furniture
Warehousing strategy
What is a strategy? Strategy in this context is finding answers some fundamental questions about warehouses keeping long term business in mind. These questions are product owner should have how many warehouses in the logistical network? Where these warehouses must be located? And what type of warehouses is suitable for the business we are in?
How many? Total logistical cost must be calculated keeping various number of warehouses in the logistical warehouses. If a graph is plotted with total logistical cost on Y axis and number of warehouses on X axis, shape of the curve would indicate number of warehouses required for minimum total logistical cost.
Where?
Location considerations: While deciding the location following factors are to be considered keeping potential locations in mind.
1. Cost of distribution to market area.
2. Transport requirement and facilities.
3. Cost of transportation.
4. Presence of Competition.
5. Availability and cost of utilities [power, water, gas, sewerage disposal] and cost
6. Availability and cost of labour supply.
7. I - R climate, labour productivity. Whether conditions are conducive to operations.
8. Customer’s expectation of ‘D’ for our product.
9. Any specific commitments made by the company to any ‘A’ category customer.
10. Local taxation levied by the local authority in the area.
11. Community attitude towards business from outside.
12. Restrictions associated with warehouses. In some areas some type of products are not permitted to be stored.
13. Future expansion. Whether the location is able to accommodate organizations plan to expand in future as per their strategy.
14. Cost of land.
15. Topography and soil condition: if the warehouse needs special and heavy equipment for material handling and if the incoming loads are heavy then firm soil and flat topography are ideal. If these conditions are not available, substantial amount of money is required to be invested.
16. Possibility of title change to the land: Are the title change formalities straight forward? In some situations this is complex, like title to MIDC land.
Ideal warehouse location
1. Protects of stock against moisture, insects, dust, fumes, pests, thieves, fire etc.
2. Provides facilities for ware housing activities like plenty of water for drinking and fire fighting.
3. Facilitates economics of operation.
4. Away from sources of detrimental conditions.
5. Easy access from highway, railhead and waterfront. No geographic barriers. There are no natural barriers like river or steep hills
6. Proximity to ‘A’ category customers.
Packaging
Packaging is done to make handling and transporting cost effective. It protects the product in transit and handling. Packing is expected to facilitate lifting and moving by providing easy access to forks or hooks. Packing is also expected to display universal symbols and other instructions for handling. Eg. pallets and containers, wooden boxes, wrapping etc.
Types of packaging: consumer packaging and industrial packaging
Consumer packaging - There is no focus on logistics. Importance is given to marketing appeal and packaging the finished product.
Industrial packaging importance is given to logistics considerations handling and moving. Individual parts are packed in cartons or bags and grouped together as master cartons. Master cartons are grouped into units for handling. This concept leads to unitization and subsequently to containerization.
a. Packaging in unit loads: standardizes all equipment and operations
b. Load securing: ropes, corner posts, anti skids, steel strapping
c. unit load platforms: pallets
Functions of packaging [how packaging helps reducing overall costs and value addition]
1. Protection: Protection from environment, pilferage, shocks of handling and moving. Fried chips in tennis ball boxes
2. Cube minimization: The truck is cubed out, that means the truck is full space wise, but not fully utilized weight wise. E.g. Round containers, round bottles. Cube minimization is reducing the space occupied by the product to cut the freight charge. Square shaped bottles and oval shaped containers
3. Weight minimization: The truck is full, weight wise, but not fully utilized space wise. Liquids in glass bottles. Weight minimization is reducing the weight of the consignment to fully utilize the capacity of the truck. Liquids are packed in plastic bottles reducing the weight.
4. Facilitating handling & using: fruit juices in tetra packs, handling and consumption by users
5. Facilitating storage & reuse: ink cartridges for printers, floppies, CDs, reusable corrugated boxes, bottles and refill packs
6. Grouping goods into convenient unit for distribution: mangos in boxes, milk bags in crates, cola bottles in crates.
7. Reducing pilfering opportunities: pilfer proof caps, pilfer proof seals
8. Communication:
a] Content identification - what does this contain? Product, manufacturer, universal code etc. with high visibility
b] Tracking: bar codes and scanners
c] Handling instructions: fragile, which side up? Temperature restrictions, environment concerns, potential dangers etc
Palletization and Unitization
Importance of containerization and intermodal transportation is obvious from our class discussions.
Unitization, unit loads:
Unitization is a concept where size shape, weight, volume of the items is considered and a collection of such items is decided in terms of these factors. And always in this unit inventory is moved whenever required.
1. This leads to standardization of handling equipment, methods and training
2. Now, the standardization reduces the time for handling and cost of handling
3. Inbound shipment checking is simplified
4. When transport vehicles are standardized to unit loads, product protection is improved
Examples: bottles in crates, steel sheets in coils, steel ropes in coils etc. container also is an example of unit load.
Palletisation:
Unit load platforms [ i had drawn the sketch in the class, pallets can be wooden, steel or combination in standardized shapes]- unit load is secured on a pallet to facilitate handling and protect the product which is unitized. One can say container is a self contained, ie., unitized and palletized, shipping unit.
Pallet facilitates use of standardized handling equipment like a forklift or a crane. Without the use of pallet it would almost impractical to use this equipment.
1. Palletized unit loads bring down time of handling and cost of handling
2. Safe handling
3. Product is well protected
Types of pallets:
1. Wooden pallets very commonly used, but break and disintegrate, wood is a rare natural resource
2. Plastic pallets, light, recyclable - being researched
3. Pressed wood fiber pallet
4. Solid molded plastic pallets
5. Corrugated fiber board pallet
6. Corrugated fiberboard slip-sheet - slip-sheet is to provide cushion effect to the unit load
7. Refrigerated pallets: self-contained shipping units for refrigerated materials
Pallet pools - central pools to collect pallets and issue pallets to global business
LOGISTICAL INFORMATION SYSTEM
MIS [Management Information System] is a structure of machines and management technology that enables management to receive, collect, store, transmit and analyze information. Transmission of information involves its movement to and from processing center. Order transmitted from customer to the order-processing unit in a firm is an example of transmission activities.
Logistics management is concerned with the functions of storage, handling, moving of materials and information. So MIS performs logistics of information in an organization.
Logistical Information System [LIS] handles information related to Logistics Management. Hence it is a structure of machines and management technology that enables management to receive, collect, store, transmit and analyze information which has an immensely important role in achieving business goals.
Importance of logistical information system
1. Key element to develop logistical competence
2. Integrates various activities of logistics
3. One of the three pipelines managed by logistical management
4. Important to customer service
5. Underwent revolutionary change due to changes in technology
Primary activities of LIS
a. Data flow from external sources
b. Processing and storage of information within the firm
c. Communication to the decision maker in the form of reports
d. Communication to customers and suppliers and their feedback
Logistical information functionality
[ref. Bowersox page#185 onwards]
Logistical information functionality is enabling appropriate decision-making at different levels of hierarchy. Information is required in different form and shape at different levels adequate to the requirements of decision-making. Importance of information cannot be over emphasized.
Information integrates logistical functions to deliver customer expectations. Logistical information links logistical activities into an integrated process
Four levels of information functionality are transaction, management control, decision analysis and strategic planning systems
Transaction level: The most basic level of information. Customer order triggers a series of transactions from order entry to invoicing. These grass root level logistical activities are called transactions. Information needed for operational decisions is gathered at this level called Transaction level.
• Information about all these transactions that take place during a customer order performance cycle facilitate decision-making.
• Information of this level is needed to satisfy some of the customer queries.
• Main features of transactions are formalized rules inter functional communications, large volume of transactions exist and decision-making focus is on day-to-day efficiency.
• Rest of the information pyramid with respect to management hierarchy is built on the base of transaction level. Information gathered at this level is processed and analyzed to make it friendly to other higher levels in the hierarchy.
Management control level
• At this level logistical performance measurement and reporting.
• Customer service level and resource utilization is the information for facilitating evaluation of necessary action.
Decision level
Information at this level
• Helps managers identify logistical strategic alternatives
• Focus is on effectiveness, choosing right alternative
• Decision-making is less structured and flexible. Managerial judgment is the focus
Strategic planning level
Information at this level should satisfy decision-making needs of this level in the hierarchy.
• Decision making focus is on developing refinement to logistical strategy
• More unstructured, focus is in long term. Hence more judgmental.
Principles of logistical information system:
A logistical information system should include some principles to make it competitive. Incorporating these principles is a cost. But these principles when incorporated provide cutting edge to logistics. These principles are availability, accuracy, timeliness, exception based LIS, flexibility, appropriate format.
Availability:
• Rapid availability is vital for responding to customer needs and management decisions.
• Quick access to information even in decentralized system from anywhere
Accuracy:
Principle of accuracy is ensuring that there is no gap between information available and reality. Eg. Inventory levels as per LIS Vs. Physical stock levels.
Timeliness:
• Time gap between event taking place and information appearing in LIS is a problem. Principle of timeliness says that this gap should be minimum.
• An item moving from WIP status to finished goods status has major significance
• If LIS is not updated in real time, information leads to wrong decisions
Exception-based LIS:
• Highlighting problems and opportunities for management action
• Raising questions on actions on exception
• Handling exceptions, LIS should take structured decisions where managerial discretion is not warranted, making manager free for judgmental decision-making
Flexibility:
• Informational needs are diverse depending on the perspective of the user of the system. A good LIS should be able to provide information as per user’s need.
• Perspective of organization is operational improvement and perspective of customer is availability of a particular product.
• Different customers can have different perspectives.
Appropriate format:
• LIS should structure information in right sequence.
• Decisions like locating the inventory for order processing or inventory planning is possible when information is structured adequately in right sequence.
Logistical information system functionality
• Logistical information system integrates the logistical operating system to provide the organization competitive edge.
§ Logistical information system keeps the necessary information at the fingertips of the manager.
• LIS functionality areas should be reviewed to identify and eliminate bottlenecks.
Logistical information system functionality areas are mentioned below.
Order management:
• Entry of the order into the system
• Edit for acceptable orders, find out acceptability of the orders checking against quantity, lead times and quality conformance standard.
• Check inventory availability, delivery dates
• Based on the above checks confirmation of customer’s requirements is done.
• Primary interface between customer service representative and logistical operating system
Order processing:
• Allocation of inventory on real time or in batch mode is a policy decision. Order processing is done based on this policy.
• Back-order creation: at this stage backlogging of orders is done keeping the benefits of backlogging and cost of customer dissatisfaction in mind.
• Conflict resolution to match customer requirement by doing necessary modification to the order.
• Order selection [direct distribution function to draw the inventory from which DC]
Distribution operation
• Directing all activities in a distribution center to meet customer order requirement. This includes receiving, handling, storing, order selecting etc.
Transportation and shipping:
• Plan execute and manage all transportation activities like shipment planning, scheduling, shipment consolidation, shipment notification, document generation and carrier management.
• LIS for transportation and shipping involves shipper, consignee and carrier.
Procurement:
• Purchase order preparation, modification and release
• Track and coordinate shipping and receiving activities for consolidationBest practice bench marking
This is a tool to calibrate logistical operations of the firm. Bench marking review focuses on measures, practices and processes of a comparable organization. Review committee identifies key performance measures to improve in the firm and tracks historical and current performance levels
Benchmarking methods
1. Sources of information for performance measures are published logistical data, published by periodicals and university research. This information being public knowledge lacks in competitive advantage.
2. Bench marking a non-competitive company. This leads to a comprehensive study, and being bilateral, proprietary knowledge adds value mutually. As one organization is studied the information lacks broadness of perspective.
3. Alliances of organizations: share each others bench-mark data. This yields comparatively better data. But it is difficult to maintain such alliances.
Examples of bench marking: asset management cost, customer service, productivity, quality, strategy, technology, transportation, warehousing, order processing
Comprehensive supply chain measurement:
Four types of metrics developed for outcome and process in a supply chain are customer satisfaction, time, cost and assets.
Characteristics of an ideal measurement system
Cost/Service Reconciliation: as cost and service [eg. freight bill and shipment] are separated by time, cause/effect relationship between them is not established. These get apportioned to different heads of cost and benefit. An ideal measurement system should reconcile them.
Dynamic Knowledge Based Reporting: performance reports generally report performance characteristics for a particular time period. They do not reveal current situation. They do not reveal data in the extended past nor do they reveal the trend in future. An ideal system should do all these to enable appropriate action proactively.
Exception based reporting: logistical management desires a report on exception from anticipated results. This is like a deviation from standard that is an indicator of process deviating from desired course. An ideal report enables manager to act proactively.
Levels of measurement and information flow
Measurement is expected to yield information at various levels to facilitate proactive decisions rather than reactive. This is achieved by signaling a process deviation or break down for action to prevent recurrence. Information should be reported in different levels for hierarchy as per the decision-making needs of that level.
Various levels of measurement and information flow are direction, variation, decision and policy
Direction level: this level is concerned with execution of operational plan. The focus is on day to day transactions to implement predetermined program. Measurement is concerned with detection of trends and exceptions. Exception is a change from desired result of a micro level plan in the process. Measurement covers broad area and information provided serves as data-base for subsequent levels. Managerial utility is limited.
Variation level: accumulated deviations from plan are measured. At direction level these variations appear to be exceptions. Variation measurement is identification of trends that may result into problems. Concerned manager is expected to interpret the trend, identify appropriate action at his/her level and issue instructions or seek help from higher in the hierarchy. Decisions at this level are generally on specific transactions.
Decision Level: at this level measures help decision -maker make modifications to operational plan after appraisal of exceptions and deviations of previous levels. Information is more selective and manager friendly. Modifications to plan need additional resources. At this levels system objectives are not changed if the operational plan is unable to meet them. But existing plan is reinforced to meet these objectives by additional resource allocation.
Policy Level: policy level measurement focuses on change in system objectives. Need for change in policy may be triggered by any level in the logistical management. It may be done by functions outside the department. Marketing department may initiate a change in the service levels in view of competition. The information at this level is much less in volume but high in importance. Ref. To fig.15 in logistical visuals
Report Structures
Reports are an important part of any measurement system. They are generated from management information system. These reports are expected to give rapid and accurate information or else decision making becomes ineffective. Three types of reports used in logistical system are status, trend and ad hoc.
Status Reports: give information about status of a particular logistical aspect. The report is in detail and enables line manager to ascertain current situation. The report may cover several locations with respect to the aspect under measurement. If the aspect selected is inventory, in detail information about inventory levels at all locations is given. This type of report is relevant to the direction level in the earlier discussion. Trend Reports: are required at a higher level as compared to the last and more manager friendly, in the sense they help in decision making. They indicate the trend in future with respect to the chosen logistical aspect
Ad hoc Reports: ad hoc reports are ordered at some time to make available information in detain on specific areas of performance for some decision making need. There are two types of Ad hoc Reports. They are diagnostic report, position paper and policy report.
· Diagnostic report: detailed information about some phase of logistical performance. if back orders are the chosen phase then information about current back orders and planned corrective actions on them.
· Position paper: this report contains alternative courses of action for an anticipated or current problem. Lower levels of management prepare these reports for executives at higher levels. An alternative suggested may need additional resources. When these resources are approved the operational plans are modified. Position reports request additional resources but do not suggest change in system objectives.
· Policy Report: Policy reports are ordered by CEOs whenever a policy modification is requested where change in objectives is suggested. These reports contain information outside the realm of logistics. They are highly specific and tailor made to the need of the organization
What is logistical Strategy?
All organizations have to form their logistical strategy to deal with continuously changing market conditions to be able to do business in competitive environment. Logistical strategy is evaluating most cost effective methodology of distributing goods to market while achieving service level objectives
Logistical strategy has at the core logistical decisions that are instrumental in success of business. Formulation of this strategy requires careful assessment of the situation and its analysis.
Logistical planning is arriving at such decisions by using scientific tools.
Following is a representative list of logistical decisions at the core of logistical strategy
1. How many distribution centers are to be used and where should they be located?
2. What are inventory /service trade-off points for each distribution center?
3. What type of transportation equipment should be used and how should vehicles be routed?
4. Should we apply a new material handling technology in our distribution centers?
The above questions are complex and data intensive.
Complexity is due to the fact that large number of factors influence logistics costs and potential alternatives are several. Data intensiveness is due to the large amount of information required to finalize an alternative.
We are trying to establish a general methodology to assess the situation and identify and evaluate alternatives that are strategic in nature. The process of logistical system design and planning according to this methodology is in three parts as follows
Problem definition and planning
Phase I: During this phase of the methodology logistical problems needing strategic decisions are studied in detail and documented along with the plan. This is called the phase of problem definition and planning.
In this phase we have two major steps called Feasibility assessment and project planning.
Feasibility assessment
Feasibility assessment is the study of current logistical situation with the purpose of understanding the environment, process and characteristics for determining any change that is needed. Process of evaluating the need and desirability for change is referred to as Feasibility assessment.
Feasibility assessment consists of situation analysis, supporting logic development, and cost benefit estimate.
1. Situation analysis [appraisal]: during this part of the feasibility assessment performance measures and characteristics that represent logistical environment are collected. This is made up of internal review, market assessment, competitive evaluation and a technology assessment to determine improvement potential.
Internal review [self-appraisal]: this is assessment of current logistical processes. This covers logistical resources like workforce, equipment, facilities, relationships, information and historical performance, data availability, strategies, operations, tactical policies and practices. This review covers logistical processes as well as each logistical function. This self-appraisal should carefully study each internal customer and supplier in logistical chain and evaluate how each internal supplier is meeting the expectation of his/her internal customer. Finally whether the value chain meets the customer service levels. This review identifies the need for a change and thereby need for redesign of logistical system.
Market assessment and competitive evaluation:
This is a review of external suppliers, customers and consumers [end users of product] and also competition.
External suppliers: opportunities for bottleneck removal, value improvement, bench marks in competition
external customers [organizations or entities downstream]: service levels, bottlenecks and cost impact in improving service levels, customers measurement criteria for our performance, bench marks in competition
consumers: purchasing pattern with respect to logistics, our capability to respond to these purchasing pattern and the competition’s response to these pattern.
Technology assessment
Focus is on key logistical technologies like
a. Transportation vehicles, tracking systems
b. Storage systems, development of special storage equipment to utilize vertical space with easy storage and retrieval.
c. Level of computerization.
d. Level of automation in material handling
d. Technology levels in packaging: materials, processes and machines used for packaging represent technology levels in packaging.
2. Supporting logic development
a. Integrate the findings of situation analysis [SWOT analysis] for determining a quantified current situation in logistical operations. This determines the urgency and extent of the change required for reaching the objectives.
b. Determination of cost/benefit for detailed analysis. Based on the above a decision is taken either to continue the analysis or abandon it as unnecessary.
c.Developing necessary means and checks to ensure objectivity in analysis. Analyst’s personal opinions should not cloud the analysis. Care should be taken to avert sub optimization of individual functions.
d. Identifying right avenues for change. Based on the urgency and extent required avenues are identified.
e.Preparing clear statements of potential redesign alternatives as per the avenues identified for change.
f. Definition of current procedures and systems that are currently in use
g.Identification of most likely system change alternatives based on competitive performance. Purpose is to do something that scores an edge over competition in business.
h. Innovative approaches based on new theory and technologies. Chosen approaches should be challenging without being impractical.
i. Development of flow diagrams for alternatives chosen to define and develop clear cut logic. That is logically committing to paper recommended strategy with benefits.
3. Cost benefit analysis
Expected benefits in terms of the following are quantified as result measure for strategy.
a. Service levels improvement to increase the loyalty of existing customers and attracting new business.
b. Logistical cost reduction. Reduction in logistical cost reduction is another benefit which is two folds. One is one time cost reduction that is reduction of capital cost like elimination of a warehouse. The other cost reduction is variable cost reduction which prevents recurring expenditure. Relocation of a warehouse may cause such savings.
c. Logistical cost prevention is proactively eliminating a cost that would have occurred in future. Technology up-gradation in the planned change to prevent labour cost in future.
d. Steering committee nominated to oversee the activities evaluate low hanging fruits of situation analysis and benefits of long term nature to initiate detailed analysis in next sub phase of feasibility assessment.
Project planning
This is the second phase of Phase I. This consists of statement of objectives, statement of constraints, measurement standards, analysis procedures and project work-plan.
Statement of objectives
a. Quantified levels of service objectives [service levels] with cost levels to be achieved after the service redesign.
b. Time frame for achievement
c. Identification of market and industry segments in which the strategy is going to operate.
d. Fitting the service levels to budget ranges to ascertain viability of redesign.
Statement of constraints
Constraints as imposed by the top management on the planning process. Top management imposes some constraints keeping in mind top management priorities which may not be known to the analyst. Such constraints are made generally keeping in mind capital investment made and ability of the organization to absorb change.
a. No changes in production facilities and their product mix assortment.
b. Some departments are kept outside the scope of redesign.
c. Specific organizational elements to be retained or not to be changed, buildings, systems, procedures, practices.
Measurement standards
a. How cost components like transportation, inventory and order processing are calculated.
b. Customer service measures and their calculations.
Analysis procedures
Techniques used for analysis, computer based or manual. Selection is based on need and availability of data for analysis, software applications and algorithms
Project work-plan
Project work-plan specifies
a. Scope based on alternatives & opportunities offered by feasibility assessment.
b. Resource requirement- financial and time
based on scope
Data collection and analysis
Phase II
Define Assumptions and Collect Data, Analysis of Alternatives
1. Define assumptions and collect data
This part of the II Phase consists of following tasks:
Define analysis approach & technique, define and review assumptions, identify data sources, collect data and collect validation data
Define analysis approach & technique: Analysis approaches are analytical [analytical techniques using numeric], simulation[simulation techniques using computers], optimization[linear programme]
Define and review assumptions
Assumptions define key business characteristics, variables and economics of current and alternative system.
Types of assumptions are: Business assumptions, management assumptions, and analysis assumptions.
Business assumptions define broad environment in which logistical plan must operate, like, market, consumer, product and trends. Business assumptions are outside the scope of the firm.
Management assumptions
Defined by the firm, and include alternative distribution facilities, transport modes, inventory levels and operating policies, fixed and variable costs.
Analysis assumptions
Analysis assumptions define the constraints and limitations to be understood to fit problem to the technique.
Problem size, degree of analysis detail, and solution methodology are such assumptions.
Identify data sources
Sales and customer orders, costs associated with manufacturing and purchasing, number and types of modes utilized for transportation, criteria for mode selection and transportation costs.
Number and location of plants, product mix and production schedules.
Policies and costs associated with inventory transfer and reordering.
Warehouse operating costs, capabilities, product mix, storage levels and service capabilities.
Future market data, data on competitor strategies for benchmarking.
Data collection
Collect the in relevant format for selected tool for analysis.
Sources of error
a. Misrepresentative period. Data picked from wrong span of time.
b. Ignoring data that does not reflect logistical importance [eg. customer pick up volume]. The data apparently does not reflect logistical importance. Hence it get ignored.
Collect Validation Data
Collect historical data to test the fit of analysis technique. If the fit is good management confidence in this analysis is enhanced. This technique can be used for further analysis.
2. Analysis of alternatives
Following are the tasks in this phase
Define Analysis Questions, Complete and Validate Base Line Analysis, Complete Alternative Analysis, Complete Sensitivity Analysis
Define Analysis Questions
Analysis questions are those which address the most likely changes and their impact on logistical performance. These questions represent options within options. Subsets of options for evaluation without carrying out deep analysis at great cost. Eamples are as below.
a. What happens if we remove distribution center I? What is the impact on service levels? Similarly, DC II, DC III?
b. What happens if we change the location of DC I or DC II, DC III?
c. What happens if alter mode of transport?
Complete and Validate Base Line Analysis
Current logistical performance is ascertained by using selected analysis tools. These performance levels are compared with the results obtained from the analysis of historical data that was collected in the sub phase of ‘collect validation data’.
Possible Sources of Error are identified and corrective action planned. If a good fit is found the chosen approach stands validated.
Complete Alternative Analysis
Chosen alternatives are evaluated with validated approach. Evaluate alternative options electronically or manually establish performance characteristics of each alternative. Options should consider necessary changes in management policy.
Complete Sensitivity Analysis
Best option should be subjected to sensitivity analysis. Uncontrollable factors are varied to assess their impact on the logistical situation. Sensitivity analysis investigates appropriateness of the chosen ideal solution for different demand or cost levels. Decision tree analysis is used to further short list alternatives.
Recommendations and Implementation - Phase III
Recommend top alternatives to management and formulate implementation plan.
Identify the best alternatives
alternative that meets desired service levels at minimum cost is the best alternative
identify and short list top two or three options for further analysis
Evaluate Costs and Benefits
Chosen alternatives may be
a. Expand existing facilities, expand existing facilities & add two more.
b. Expand existing facilities & add three more.
Carry out simulation analysis and find out cost additions and service level benefits of each option. Most suitable alternative can easily be identified.
Develop a risk appraisal
a. Risk of not matching the assumption.
b. Demand changes taking place beyond assumption.
c. Risk of delays in system change over.
External risks are competitive action. Internal risks include labour and productivity considerations, changes in firm strategy and resource accessibility. Risks associated with the chosen alternative are assessed and quantified using sensitivity analysis. Financial implications are also evaluated.
Develop a Presentation
Identify, rationalize and justify suggested changes and prepare a presentation using graphs, charts and flow diagrams.
Implementation
Define implementation plan at macro level and then in micro level. Schedule implementation. Define acceptance criteria for evaluation of success.
Implement as per schedule with control.
MRP [Materials Requirement Plan]
Popular concept in 1960&1970. Consists of a computer system, a manufacturing information system, building on inventory, production scheduling and administering all inputs to production. And a concept and philosophy of management.
Definition of MRP system: MRP system consists of a set of logically related procedures, decision rules, and records designed to translate a master production schedule into time phased net inventory requirements and the planned coverage of such requirement for each component item needed to implement schedule. An MRP system re plans net requirements and coverage as a result of changes in either the master schedule, demand, and inventory status or product composition. MRP systems meet their objective by computing net requirements for each inventory item, time-phasing them, and determining their proper coverage
Objectives:
1. Ensure the availability of materials components and products for planned production and customer delivery.
2. Maintain the lowest possible inventory level
3. Plan manufacturing activities, delivery schedules and purchasing activities
How? Process: MRP starts with customer’s demand for the quantity of end product and the time when the products are needed.
Then MRP explodes the time and need for components based upon the end product need. MRP System focuses on inbound logistical area
MRP System uses following key elements:
1. Master Production Schedule
2. Bill of Materials
3. Inventory Status Files
4. MRP Program
5. Outputs & Reports
MRP system has developed into its current incarnation in phases. First phase is called MRPI or Materials Requirement Planning and the second phase is called MRPII or Manufacturing Resources Planning
MRP I is a computer based production and inventory control system [soft ware] that attempts to minimize inventories while maintaining adequate materials for production process.
When does it get applied?
MRP I is applied when
1. The process follows an intermittent system.
2. Demand is dependent
3. Purchasing dept., their suppliers and company’s own manufacturing system is flexible enough to handle deliveries on weekly basis
Advantages of MRP I:
1. Improved business results[ROI, profits]
2. improved manufacturing results
3. better manufacturing control
4. more accurate and timely information
5. less inventory
6. time phased ordering of materials
7. less materials obsolescence
8. higher reliability
9. more responsiveness to market demand
10. reduced production costs
Disadvantages of MRP I:
1. Due to small lot purchases high material acquisition costs and high ordering costs
2. Stock out costs are more as safety stock protection is low
3. A limitation of software as adapting to specific situations is difficult. So modification of the software is necessary
MRP II:
MRP I is updated and expanded to include financial and marketing and logistics elements. This newer version is called Manufacturing Resources Planning or MRP II. Includes entire set of activities involved in planning and control of production.
It consists of a variety of functions of modules and includes production planning, resource requirements planning, master production scheduling, materials requirement planning [MRP I], shop floor control and purchasing
Benefits of MRP II:
1. Inventory reductions of one fourth to one third
2. Higher inventory turn over
3. Improved consistency in on-time customer delivery
4. Reduction in purchasing costs due to less urgent purchases
5. Minimization of workforce overtime
Distribution Resource Plan [DRP]: Distribution Resource Plan is a widely used powerful technique applied to outbound logistics to help determine appropriate level of inventory
Distribution requirement planning [DRP I] is defined as “the application of MRP principles to the distribution environment [out bound logistics], integrating the special needs of distribution. It is a dynamic model that looks at the time phased plan of events that effect inventory.
Distribution Resource Planning [DRP II ]is an extension of DRP I. Distribution resources planning applies the time phased logic of DRP I to replenish inventories in multi echelon warehousing systems. Distribution resources planning extends DRP I to include the planning of key resources in a distribution system –ware house space, man power levels, transport capacity [eg. trucks, rail cars] and financial flows.
As an extension of DRP I, DRP II uses the needs of distribution to drive the master schedule, controlling the bill of materials and ultimately materials requirement planning. In essence, DRP I & DRP II are outgrowths of MRP I & MRP II, applied to logistics activities of a firm.
Uses of DRP generated information
¨ Coordinate the replenishment of SKUs coming from the same source[eg. a company owned or vendor’s plant.]
¨ Select transportation modes and carriers and shipment sizes more cost efficiently.
¨ Schedule shipping and receiving labour
¨ Develop a master production schedule for each SKU Accurate forecasts are essential ingredients for successful DRP II system.
Marketing benefits
Increased service levels - improved OTD, reduced Customer Complaints
Effective new product introduction plans
Ability to anticipate shortages
Logistics benefits
Reduced distribution costs
Reduced inventory levels
Decreased warehouse space requirement as inventory is low
Lesser back orders
Improved inventory visibility & coordination between manufacturing and logistics
Constraints
needs accurate forecast
sources of errors in the system
- inaccuracy in forecast quantity
- inaccuracy in forecast time
Variable performance cycles
System nervousness
Uncertainty buffers
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