SCM300 EXAM 1 MODULE #1—Introduction to Supply Chain Management Procter & Gamble Example: They address challenges by building a set of capabilities that create value for retail customers & consumers as well as driving business growth: 1. Reliable Service: ∙ Right product at the right place – on the shelf at the right time. ∙ Understanding quality of the products on the shelf. ∙ Products are priced to represent a good value 2. Agile Demand Driven Supply: ∙ Focus on reducing end to end supply network time by producing what is actually selling, not what is forecasted. (saves money for P&G customers) ∙ Speed to shelf for promotion events and new product line initiatives 3. Affordable Differentiations: ∙ Product, packaging, or supply chain solutions that help retail consumers better serve their shoppers Vertically Integrated Firm: A firm whose business boundaries include one-time suppliers and or customers Supply Chain: 1. Start with firms extracting raw materials from the ground. EX: Wood, Iron 2. Sell these raw material suppliers EX: Lumber companies 3. Turn the raw materials into materials that are used by these customers EX: sheet steel, Lumber 4. The component manufactures make and sell intermediated components EX: Fabrics, processed food 5. The Final product manufacturers assemble finished products and sell them to wholesalers or distributors 6. Wholesalers/ Distributors sell finished products to retailers as their product orders are received 7. Retailers sell products to end product consumers Generic Supply Chain: Product & Service Flow Recycling & Returns Transportation & Storage Raw material suppliers Intermediated component End Point Manufacturer Wholesalers/Distributors Retailers End Product Consumer (second tier suppliers) (1st tier suppliers) (Focal Firm) (1st tier Customers) (2nd tier customers) Info/Planning/Activity/Integration Reverse Logistics Activities: Return products, obtain warranty repairs, throw away/ recycle products First Tier Suppliers/Customers: Internal suppliers and customers Second Tier Suppliers/Customers: Suppliers’ suppliers and the customers’ customers. As well as non domestic suppliers and customersGREBSON Example: Pearson doesn’t know Grebson’s roller bearing demand for the upcoming quarter. (They have to incur the cost of holding the extra 5,000 units in stock) Fawcett steels faces same problem. Extra materials, labor cost, & warehouse space for safety stock Business Process Reengineering: Radical rethinking and redesigning of business processes to reduce waste and increase performance. Introduced in 1990’s was result for need of cost reduction and emphasis on the key competencies of the firm to enhance long term competitive advantage 3rd Part Logistics Providers (3PLS): Firms use them to ensure continuous, uninterrupted supply of goods WALMART Example: ∙ No WIP or finished goods inventory—all purchases ∙ Made vendors replenish inventory electronically ∙ Producers ship directly to Walmart stores, eliminating middlemen ∙ Cross Docking; truckloads of incoming items for transfer to retail store as opposed to storing them ∙ Collaboration & IT Systems allow manufacturers to see how their merchandise is selling ∙ Develops IT in house rather than using off the shelf Supplier Management: Encouraging or helping the firm’s suppliers to perform in some desired fashion. Involves assessing suppliers’ current capabilities and then figuring out how to improve them Supplier Evaluation: Determining suppliers current capabilities Supplier Certification: Potential suppliers are being evaluated for a future existing purchase performance - Allow buyers to assume suppliers will meet certain product quality and service requirements covered by certification Demand Management: Strategies and systems with the objective of matching demand to available capacity, wither by improving production scheduling, curtailing demand, using a back order system, or increasing capacity Materials Requirement Planning (MRP): Software application for managing their inventory – can be linked throughout the organization and its supply partners using ERP systems Inventory Visibility: Using the MRP software it allows distribution centers to be alerted after a certain number of the products has been sold, so they can re-order. Just In Time Production System: Results in faster delivery time, less inventory, and better quality DISTRIBUTION DECISION TRADE OFFS: -Typically involve a trade-off between cost and delivery time or customer service EX: Motor carriers (trucks) are more expensive than rail carriers but offer more flexibility EX: Air carriers are even more expensive, but much faster than any other EX: Water carriers are the slowest by far but least expensive GLOBAL PERSPECTIVE EXAMPLE: -Financial supply chain management is a means of also eliminating paper from the world of international trade -Covers the payments side of trade, from the moment the purchase order is cut to the time of settlement and everything between -Costs decrease when paper is cut out of processes Supply Chain Integration: Integrated when members of the supply chain work together when making delivery inventory, production, quality, and purchasing decisions that impact profits of the supply chain -Occurs when participants realize that supply chain management must become part of the firms’ strategic planning processes where objectives and policies are jointly determined based on the end consumers’ needs and what the supply chain as a whole can do well 4 TRENDS IN SUPPLY CHAIN MANAGEMENT 1. Expanding the Supply Chain: As markets grow, so too must the supply chain (foreign production) 2. Increasing Supply Chain Responsiveness: Agile manufacturing, JIT, Lean production, mass customization, efficient consumer response, quick response – all make the firm more flexible and responsive to customer requirements and changes 3. Greening of Supply Chains: Producing, packaging, moving, storing, repackaging, delivering, and returning/recycling products pose a threat to the environment in terms of discarded packaging materials, toxic products, carbon monoxide emission, noise traffic, and pollution 4. Reducing Supply Chain Costs: Objective of SCM: Cost Reduction!! Achieved in supply chain by reducing waste, reducing purchasing and product distribution costs, and reducing excess inventory and non value adding activities. Transportation and logistics function also contribute to cut costs POWER POINT INFORMATION- MODULE #1: Supply Chain Management: The efficient integration of suppliers, transporters, manufacturers, warehouses, retailers and all other parties associated with the delivery of the final product. ∙ Achieve Goals—Reducing cost, Increasing speed, Increasing quality ∙ Efficient Execution—Get things done right with minimal effort and resources ∙ Manage Resources—People, Materials, & Machines Simple Supply Chain Diagram: Purchasing (Supplier Network) Production (Assembly/Manufacturing): Raw Materials & Components, Manufacturing and Assembly, Finished Goods Packing Distribution (Warehousing/Distributing) Retail Stores (Retailers) COMPETITIVE PRIORITIES-1. Cost- Control costs through the entire supply chain! ∙ Materials Cost, production costs, packaging, transportation, storage ∙ Quality costs: Returns, warranties, repairs, rework, errors, time, customer service ∙ Other: Marketing, finance, technology, waste disposal, rent, insurance, legal, & human resources 2. Quality- Everyone has a different view of quality ∙ Design quality: product or service EX: Apple ∙ Material and Production quality: Requires well designed production system, good materials, labor, high performance, & durability. EX: Toyota 3. Speed/Time: ∙ Delivery Time- Lead Time (Pizza delivery) From order placement to order fulfillment ∙ Supplier, manufacturing, & transport delivery time ∙ Good inventory management, forecasting ∙ On Time Delivery- (Airline Industry) Percentage of timed delivery as promised ∙ Developing schedules ∙ Who dictates promised dates and times 4. Flexibility: Large quantities OR large range of customizable features ∙ Product Customization Flexibility: Options offered, Built to your specification ∙ Volume Flexibility: Demand changes, large or small timely orders ∙ Mass Customization: BOTH customization and volume Value: Customer Perspective -What do I get? (Quantity, Quality, Size) -What is the price? (Money, waiting time, warrant Productivity: Organizational Perspective -What did I make? (Outputs) –What was the cost? (Inputs) PRIMARY GOALS OF A BUSINESS -Sustainable Long-term profit -Maximize return on investment ∙ Achieve this by: -Increasing Revenue- Provide customers VALUE -Control Costs- Increase PRODUCTIVITY, eliminate waste -Developing Core Competencies: Primary skill or knowledge that is difficult to copy, learn, or acquire (intangible) 7 TYPES OF ORGANIZATIONAL WASTE - SHIGEO SHINGOS 1. Defects 2. Overproduction – Production used to mask shortcomings 3. Transportation – No value added 4. Motion – Employee and machine 5. Waiting – Wasted resources during wait 6. Inventory – Not providing a return 7. Over Processing – Best workers doing most basic tasks EX: President Crow checking people in at the SRCSupply Chain Visibility: Can you count on your supply chain tomorrow, next week, next year? EX: San Francisco Bridge—can you see the bread trucks? Business Models: ∙ B2C- Business to Consumer: Amazon, Best Buy, Burger King, Dillards ∙ B2B- Business to Business: DHL, Cargo, Boeing, Consulting/marketing agencies ∙ BOTH B2B & B2C: IBM, Ford Motors, Sprint PCS ∙ BRICK & MORTAR- Land based commerce only EX: Circle K, Burger King ∙ INTERNET RETAILER ONLY- Net commerce only EX: Amazon, Overstock ∙ CLICK & MORTAR- Land based and Internet commerce EX: Best Buy (Buy online, able to return in store) Procurement: The process of obtaining services, suppliers, and equipment in conformance with corporate regulations. EX of Duties: Supplier selection, purchasing negotiations, managing supplier relationships, materials and inventory management -Tires for Toyota—who do you buy from? Logistics: The COORDINATED planning and execution of: - Preparation of packaged product - Movement Itinerary (Transport) - Storage itinerary (Warehousing) - Product distribution throughout the supply chain (Who gets what, when, how) EX of Duties: Distribution, warehousing, infrastructure management, Packaging, containerization, transportation, documentation, 3rd party management and coordination (Flight from NYAZ – all the little steps) Operations Management: Design, operation, and improvement of the production systems that efficiently transform INPUTS into finished goods maximizing productivity EX of Duties: Process/Plant Management, Capacity planning (Resources, speed— How much, how fast), Scheduling people, Waiting line management, Process improvement project (How can we make more cars? How should we schedule staff? Increase quality?) DIAGRAM Explanation: SUPPLIER NETWORK 1.) PROCUREMENT (materials inventory mgt resource) Good Materials 2.) OPERATIONS & LOGISTICS (add value) 3.)A-PRODUCTS/SERVICES (cost, quality, speed flexibility (sales, support, return)) 3.)B-WASTE (non value added outputs, defects, garbage, emissions, resource waste) EX: Meat Grinder: 1.) Quality meat 2.) Make burger 3.)Want quality at a low cost, try to control inputs and outputs DIAGRAM Explanation: 1. Marketing/Design/Strategy 2. BUY IT- Purchasing3. MAKE IT- Operations 4. MOVE IT- Logistics 5. SELL IT- Sales, Retail Operations, Support 6. SERVICE IT- Support, Returns, Maintenance/Repairs *Deals with IT, Marketing, Accounting, & Finance* GOALS OF DIAGRAM= Profits Increase revenue, Low Cost Maximize Profits Increase Productivity Quality, Speed, Flexibility Eliminate waste, Minimize Inventory CORPORATE STRATEGY & MANAGEMENT: ∙ Research and Planning- Who? What? How? How Much? -Marketing – Identify market(s) and needs/desires ∙ Design- Develop products/services to fill need(s) ∙ Develop the appropriate business model ∙ SCM- Getting the product or service to customer: -Plan, build and organize the supply chain -Schedule, measure, improve, and adapt in pursuit of perfection. Assess impacts of supply chain failures and defects -Buy, Make, and Move materials toward customer -Assist in selling the product -Service, support, repairs, maintenance, and returns *Maximize value beyond the date of sale SUPPLY CHAIN STRATEGY AND MANAGEMNT: 1. GOALS: A.) Satisfy Customer: create value by creating desired completive priority mix B.)Satisfy Company: Maximize productivity, Eliminate waste, Contribute to profits C.) Consider the Future: Be responsive to chance 2. STRATEGY: A.)Plan for the customer B.)Business Model C.)Buy, Make, Move, Sell, Service, Adapt and Improve 3. MANAGEMENT NEEDS: A.)Performance needs (efficient) B.)Supply Chain Visibility C.)Relationship Management D.)Support/Cooperation: Marketing, Accounting, HR, IT E.) Finance MODULE #2—BUY IT HARRAH’S Example -Harrah’s entertainment inc. (HET) largest gaming company. Own properties and operate multiple restaurants on each property -Use a centralized – decentralized (hybrid) purchasing structure to enable buyers to purchase foods, beverage, and operating supplies efficiently and effectively ∙ Mutually beneficial buyer/supplier relationships∙ Trust ∙ Single sourcing ∙ Short term, sub optimizing performance such as unit price, not contracts -Centralized Structure: Blanket orders at the nation and regional level as opposed to decentralized which releases orders by buyers at each property -Blanket orders are then available to the buyers at each property; they just purchase quantity and don’t have to negotiate prices PRESERVES THE 4 FUNDAMENTAL PURCHASING RIGHTS: 1. Select the supplier 2. Using the pricing method that; appropriate 3. Question specifications 4. Monitor contacts with potential suppliers Supply Management: Describes the expanded set of responsibility of the purchasing professions -Identification, acquisition, access, positioning, and management of resources an organization needs or potentially needs in the attainment of its strategic objective -Negotiation, logistics, contract development, and administration, inventory control and management and supplier management -Purchasing is the core activity in supply management Procurement: Used in place of “purchasing: typically includes the added activities of specification deviations, expediting, supplier quality control, and some logistics activities GOALS OF PURCHASING: -Ensure uninterrupted flow of raw materials at the lowest total cost to improve quality of the finished goods produced, and to optimize customer satisfaction FINANCIAL SIGNIFICANCE OF SUPPLY MANAGEMENT: ∙ Profit-Leverage Effect: Purchasing measure the impact of a change in purchase spend on a firm’s profit before taxes, assuming gross sales and other expenses remain unchanged. -Demonstrates that a dollar decreases in purchase spend directly increase profits before taxes by the same amount ∙ Return on Asset (ROA): Financial ratio of a firm’s net income in relation to its total assets. “ROI” -How efficient management is using its total assets to generate profit. HIGH #= Big profit, Low investment ∙ Inventory Turnover Effect: How many times a firm’s inventory is utilized and replaced over and accounting period -Indicates poor sales, overstocking, and obsolesce Purchase Orders: Pre numbered, issued in duplicate, and buyers should not be authorized to pay invoices -Information transmitted to appropriate suppliers, suppliers ensure the efficient flow of goods to usersMaterial Requisition: Product, quantity, and delivery due date Request for Quotation (RFQ): No current supplier for the item Identify a pool of qualified suppliers and issue a RFQ Request for Proposal (RFP): May be issued for a complicated and highly technological component part -Allows suppliers to propose new materials and technology thus enabling the firm to exploit the expertise of suppliers ADVANTAGES OF E-PROCUREMENT SYSTEM: 1. Time Savings 2. Cost savings 3. Accuracy 4. Real time 9. 5. Mobility 6. Track ability 7. Management 8. Benefits to suppliers 10. Forward (Vertical) Integration: Refers to acquitting downstream customers. An end product manufacturer acquiring downstream customers. 11. EX: Acquiring a distributor or other outbound logistics providers 12. 13. Backward (Vertical) Integration: Acquiring upstream suppliers 14. EX: An end product manufacturer acquiring a supplier’s operations that supplied component parts 15. 16. REASONS FOR OUTSOURCING 1. Cost advantage 2. Insufficient capacity 5. REASONS FOR MAKING 1. Protect proprietary technology 2. No competent supplier 5. Control of lead time, transportation, and warehousing cost 3. Lack of expertise 4. Quality 3. Better quality control 4. Using existing idle capacity 6. 7. 8. Lower cost 9. Supplier Base: List of suppliers that a firm uses to acquire its materials, services, supplies, and equipment 10. 11. FACTORS OF CHOOSING A SUPPLIER: 1. Product and process technologies 2. Willingness to share technology and information 3. Quality 4. Cost 5. Reliability 6. Order system and cycle time 7. Capacity 8. Communication capability 9. Location 10. Service 12. Total Cost of Ownership: Unit price of material payment terms, cash discount ordering cost, carrying cost, logistical cost, maintenance costs, and other more qualitative costs that may not be easy to assess 13. 14. REASONS FOR MULTIPLE SUPPLIERS1. Need capacity 2. Spread the risk of supply interruptions 3. Create competitions 6. 7. REASONS FOR SINGLE SUPPLIERS 1. Establish a good relationship 2. Less quality variability 3. Lower cost 4. Transportation economies 8. 9. ADVANTAGES OF CENTRALIZATION 1. Concentrated volume 2. Avoid duplication 3. Specialization 7. 8. ADVANTAGES OF DECENTRALIZATION 1. Closer knowledge of requirements 2. Local sourcing 4. 5. ADVANTAGES OF GLOBAL SOURCING 4. Information; new market conditions 5. Dealing with special kinds of business 5. Proprietary product or process purchases 6. Volume too small to split 7. 4. Lower transportation costs 5. No competition within units 6. Common supply base 3. Less bureaucracy ∙ Improve quality, cost, and delivery performance 1. Expand supply bases 2. Lower price of materials 3. Better quality/service 6. DISADVANTAGES OF GLOBAL SOURCING ∙ Complexity and costs involved in selecting foreign suppliers and dealing with duties, tariffs, customs clearance, currency exchanges, and political, cultural, labor, and legal problems present sizable challenges in the international buyer 7. 8. PET FOOD Example 9. -A U.S. company imported dog food from China that had the chemical melamine in the wheat/gluten samples and killed 16 cats and 1 dog. When the Chinese supplier was confronted for his fake certificate he bulldozed his factory and was reported in jail. 10. -Make sure to use supplier certificates and lab tests to be sure. 11. 12. CASE STUDY—Building Deep Supplier Relationships 13. 1. American suppliers are threatened by Japanese manufacturers and want to copy their business style. 2. Kieretsu: Close knit networks of vendors that continually learn, improve, and prosper along with their parent company 3. American companies slashed the number of suppliers they did business with, awarded the survivors long term contracts and encouraged top tier vendors to manage low tiers. Also got top tier suppliers to produce subsystems instead of components to take responsibility for quality and cost to deliver just in time. 4. Americans take 2-3 years to design new cars, Honda and Toyota take 12-18 months. 5. Japanese cars are durable but they also reduced their manufacturing costs by 25% 6.14. 1.) Understand how your suppliers work: - Learn about suppliers’’ businesses - Go see how suppliers work - Respect suppliers capabilities - Commit to co-prosperity 15. 2.) Turn supplier rivalry into opportunity: 16. - Source each component from multiple vendors 17. - Create compatible production thoughts and systems 18. - Set up joint ventures with existing suppliers to transfer knowledge and maintain control 19. 3.) Supervise your suppliers: 20. - Send monthly report cards to core suppliers 21. - Provide quick and constant feedback 22. - Senior managers solve problems 23. 4.) Develop suppliers’ technological capabilities: 24. - Build problem solving skills 25. - Common lexicon 26. - Hone suppliers capabilities 27. 5.) Share information intensively but secretly: 28. - Specific place/time 29. - Rigid formats for sharing info 30. - Accurate data collection 31. - Share info in a structured fashion 32. 6.) Conduct joint improvement activities: 33. - Exchange best practices 34. - Supplier study groups 35. - Initiate kaizen projects at suppliers’ facility 36. 7. Honda sent an employee over to their company to study the way they did things and their books 8. Bettered its manufacturing process mad more profits, became competitive 9. Honda sends reports to its suppliers and management every month on 6 sections: quality, delivery, quantity, delivered performance history, incident report, and comments 10. Toyota & Honda still didn’t switch suppliers to Chinese & Indian suppliers because they only offer wage savings because innovations capability are more important 11. They share info carefully while they are developing a new product with their suppliers: 1. Vendors can design by itself 2. Toyota must design them separately 12. Benefits of Honda’s best practices program has increased supplier’s productivity by about 50%, improved quality by 30%, and reduced costs by 7%. Suppliers share half of the cost savings with Honda. 37. 38. POWER POINT INFORMATION- MODULE #2: 39. 40. Independent Demand: Items for which demand is influenced by market conditions. Demand is not related to demand for other items in stock or predicted. EX: CARS41. 42. Dependent Demand: Items that are required as components or inputs to other products or services. EX: TIRES 43. 44. Lead Time: Time elapsed between customer placing and order and receiving it 45. 46. Lot Size: Order Size 47. -Want same size order each week- consistent 48. 49. SKU: Stock keeping unit. Unique identifying number used to track each unique product customer can purchase 50. 51. INVENTORY 52. -Stock of any ITEM or RESOURCE used in an organization 53. -What you need to run the business on a day to day basis 54. -Inventory is your insurance against risk at every stage of the supply chain 55. -Inventory is IT- buy IT, make IT, move IT, sell IT, services IT 56. 57. TYPES OF INVENTORY: ∙ Raw Materials/Components, Work in process, Finished Goods ∙ Spare/Replacement parts- EX: Spare Tire ∙ Capital Equipments EX: (Chairs, Desks) & MRO (Maintenance, Repair, & Operations) EX: (Toilet Paper) 58. 59. RELATIONSHIP BETWEEN RISK AND INVENTORY 60. Risk assessment is important! ∙ Loss, damage, theft, breakdown ∙ Human resources ∙ Fluctuating demand (Elasticity) ∙ PURCHASING CONSIDERATIONS: ∙ Market Changes- Innovation, Growth ∙ Other Environmental, Political, Criminal 1. STORAGE: space, heat/cool environment, energy requirements, labor, handling, buy/lease cost 2. TRANSPORT: vehicle, cool/heat, fuel, labor, packaging cost 3. SHRINKAGE: pilferage, security, lost items, damaged, obsolescence 4. OTHER INVENTORY NEEDS: what else do we hold in inventory? DO we have enough room for everything we typically carry? 5. MONEY: cash, financing terms, taxes, insurance 6. LEGAL CONSIDERATIONS: licenses, certifications, other laws ∙ ∙ INVENTORY CLASSIFICATIONS ∙ SEASONAL: These items must sell quickly. Limited period of demand ∙ EX: Christmas trees, valentine’s candy ∙ LONG TERM: These items can be sold today, next month, next year. Quick sale is preferred but not required ∙ EX: Nails, paper, cleaning supplies ∙ PERISHABLE: Demand for these items is finite. A.)Spoilage: Fruits, veggies, meats, flowersB.)Obsolescence: Clothing, computers C.)Time Perishable: Airline seats, rental cars, hotel rooms, newspapers ∙ SAFETY STOCK: Protects against uncertainty in demand, lead time, and supply. ∙ -Not intended to be used. ∙ -Cushion, Insurance ∙ ANTICIPATION INVENTORY: Used to absorb uneven tares of demand or supply ∙ -Seasonal demand, holidays, quantity discounts, economic production runs ∙ EX: Snow Shovel Company- usually sells 12,000 in winter. Make 1,000 each month ∙ MARKET INVENTORY: Inventory readily available on the shelf ∙ PIPELINE INVENTORY: Orders that have been placed but not yet received nor paid for by customer. “Inventory “on its way” to the customer” o Formula: dL (Periodic Demand*Lead Time) ∙ ∙ COSTS ASSOCIATED WITH INVENTORY 1.) INSURANCE – Manage risk/uncertainty ∙ Something will always go wrong (supplier or company) insurance against your firm’s risk, risk posed by suppliers and customers 2.) CUSTOMER EXPECTATIONS- Support strategic plan ∙ -Some companies make it their business to have large amounts of inventory on hand for your convenience – Walmart, Home Depot ∙ -Low cost may require longer lead time ∙ -Your suppliers lead time may be too long to compete without inventory. Consider perishable and seasonal items. 3.) MANAGING COST – Economies of scale ∙ -Quantity discounts ∙ -Manufacturing: some items are made in batches and are more cost effect making them in batches. “Maximize capabilities, Minimize cost!” ∙ ∙ DEMAND FORECASTING METHODS ∙ Qualitative: ∙ Query executives, experts, salespeople, consumers ∙ Irrelevant current data, lack of current data, incomplete data, ∙ New Products, New markets ∙ When is the group “smarter” than the expert? ∙ ∙ Quantitative: ∙ Value of numbers? Limitation of numbers? ∙ How much do companies value statistics? ∙ Casual methods: Linear regressions ∙ Time Series: Average, trends, seasonal ∙ ∙ (Better Forecast) HOW MUCH WILL YOU SELL? ∙ ∙ Simple Moving Average: Average demand over a certain number of prior periods ∙ -Works well when companies are fairly stable ∙ Looking to forecast for period 6? Add up the 4 previous period’s sales data and average. (2+3+4+5)/4=SMA ∙ ∙ Weighted Moving Average: Average demand over a certain number of prior periods, BUT each period is weighted differently! ∙ P1=.2 P2=.3 P3=.5 P1data*.2+P2data*.3+P3data*.5=WMA ∙ ∙ CONSIDERATIONS FOR INVENTORY LEVELS ∙ COST TOO: 1. Hold inventory 2. Handle inventory 3. Shrinkage/obsolesce 4. Liquidity 5. 6. Transportation 7. Customer service levels 8. Purchasing costs 9. Quantity discounts 10. 11. INVENTORY LEVELS – PROS & CONS PROS FOR HIGH (CONS FOR LOW): ∙ Customer Service levels ∙ Costs to order inventory – Purchasing ∙ Costs to purchase – Quantity discounts ∙ Transportation- Ease? Cost? 12. CONS FOR HIGH (PROS FOR LOW): ∙ Cost to hold inventory ∙ Materials handling – Cost to handle inventory ∙ Shrinkage/Obsolescence ∙ Liquidity-Capital investment options 13. 14. Cycle Stock: Inventory used to accommodate normal demand or inventory that varies directly with lot size 15. Cycle Stock= Q (Order Size)/2 16. 17. COSTS OF INVENTORY: 18. Cost of the item/purchase cost ∙ Holding or Carrying Cost: 19. -Warehouse Rent, Security systems, Depreciation 20. -Obsolesces/Shrinkage, Materials Handling 21. -Insurance, Opportunity Costs ∙ Ordering Costs 22. -Order clerk salary, E-Procurement system, Delivery fees ∙ Customer Service Costs 23. -Stock-outs, Backorders, Lost Profits, Late fees 24. -“ill-will” (Difficult to calculate) 25. 26. TOTAL INVENTORY COST EQUATION 27. TC = DC + (Q/2)H + (D/Q)S 28. 29. DC= Purchase Costs (BUY IT) 30. (Q/2)H = Holding Cost (Hold IT)31. (D/Q)S = Ordering Cost (Order IT) 32. TC = Total Annual Cost of Inventory 33. D = Annual Demand for Item 37. 34. C = Cost per Unit 35. H = Annual holding cost per unit 36. S = Cost to place a single order 38. ***SEE GRAPHS on slides 28-31 MODULE 2*** 39. 40. TIME BETWEEN ORDERS: 41. Ideally companies want consistency in purchasing – same order size every X weeks. 42. T.B.O. = [(Q/D) * 52] weeks 43. Q= Order Size 44. D= Demand 45. 46. 47. ECONOMIC ORDER QUANTITY (EOQ) 48. EOQ: Optimal order size 49. -Using EOQ you will get the lowest TC for the give cost structure and demand forecast 50. Q = EOQ = √2DSH 51. D = Demand 52. S = Cost to place a single order 53. H = Holding cost per unit 54. 55. PURCHASING PROCESS 1. Requisition: (Using a material requisition) 56. -Communicate with purchasing. What is needed? Common? New item, Custom item? 2. Supplier Selection: (May submit an RFQ) 57. -Is it in stock? Has it been bought before? New/old supplier? Present supplier, new product? 3. Place Order: (Using a purchase order) 58. -Easy reorder? 59. -Brand new purchase? – Analyze competitive priorities, Take bids, negotiate contract, Establish re order system. 4. Track Order: 60. -Communicate with supplier. Early/Late/On time? Shelf space? 5. Receive Order: 61. -Inspect, Record, Shelve 62. 63. MAKE OR BUY DECISIONS 64. MAKE: Making your own pizza ∙ Proprietary technology (moms recipe) ∙ No competent supplier (no one makes it like me) ∙ Better quality control (Crispy, Extra cheese) ∙ Idle Capacity (nothing else to do) ∙ Control – lead times, costs) 65. BUY: hiring your neighbor to make the pizza∙ Insufficient capacity (don’t know how to cook) ∙ ∙ Lack of expertise (don’t know the ingredients) ∙ Quality (spit or gourmet) ∙ CENTRALIZED VS. DECENTRALIZED PURCHASING ∙ Centralized Purchasing: Ordering together, 1 truck delivers everything ∙ (Room of stocked office supplies for everyone) ∙ Volume ∙ Avoid Duplication ∙ Specialization ∙ Consolidation Shipping ∙ Common Supply Base ∙ Decentralized Purchasing: Ordering separately ∙ (Going to staples to buy one set of staples) ∙ Closer knowledge of requirements ∙ Local sourcing – Relationships, lead times, flexibility ∙ Less bureaucracy ∙ ∙ CHOOSING A SUPPLIER ∙ BASICS: ∙ -Core Competencies ∙ -Competitive Priorities: Quality, Speed, Flexibility, Supply chain cost management ∙ LOGISTICS: ∙ -Plant/Warehouse location: ∙ -Low material costs with high transport costs many not be optimal ∙ -Longer distances increase damage, theft, and lead time risks ∙ -Distant suppliers don’t allow for JIT systems ∙ -Consider customer response expectations ∙ -Technology Requirements: ∙ -Do they allow you to maximize the benefits offered by your technology system? ∙ -Consider shared hardware, software, bar codes, & databases ∙ LONG TERM ISSUES ∙ -Changing market demands - Supplier flexibility (products/services) ∙ -Demands for product improvements – Requires better supplies, are they committed to continuous improvement? ∙ -Growth Management, Capacity Potential: Can they match your growth rates? Are they aware of your organizations aspirations? ∙ -2nd and 3rd tier suppliers: Costs, complications. What level of supply chain visibility do you have? ∙ ∙ VALUE OF SUPPLIER EVALUATION & CERTIFICATION ∙ A supplier’s effort to get certified prove that they are committed to proving their true worth and open to evaluation ∙ Allows procurement to concentrate on smaller circle of supplier in each category ∙ Establishes present and future expectations∙ Fair and equitable evaluation benefits buyers and suppliers ∙ Suppliers score cards are focused to quantify your desires ∙ Evaluations help you to make better decisions ∙ Clearly communicate your actual desires and needs ∙ Concrete systems help suppliers grow to better serve your supply chain ∙ ∙ INTEGRATION ∙ Vertical Integration: Should I buy my supplier or produce them myself? ∙ ∙ Foreword Integration: Taking over the role of companies closer to the customer ∙ EX: We will no longer sell Coca-Cola through our distributors; from now on we’ll only sell Coke out of Coca-Cola stores ∙ ∙ Backward Integration: Taking over the role of you supplier ∙ EX: We’re not going to buy bread for our sandwiches, we will make it ourselves ∙ ∙ Relationship management is important between buyers and suppliers because you need to be able to trust each other, improve together, and understand how each other work. ∙ ∙ MODLULE 3: MAKE IT ∙ Example - RiverTown Crossings ∙ RiverTown Crossings is a mall in Michigan that designed its layout where it clustered competing stores together in order to compete with online shopping. Makes it more convenient to shop in malls. Cuts down on walking ∙ ∙ ∙ Layout Planning: ∙ -Involves decision about the physical arrangement of economic activity centers needed by a facility’s various processes ∙ 1. What centers should the layout include? ∙ 2. How much space and capacity does each center need? ∙ 3. How should each center’s space be configured? ∙ 4. Where should each center be located? ∙ ∙ Flexible Flow Layout: A layout that organizes resources (employees and equipment) by function rather than service or product ∙ Line Flow Layout: A layout in which workstations or departments are arranged in a linear path ∙ Hybrid Layout: An arrangement in which some portions of the facility have a flexible-flow layout and others have a line flow layout ∙ Fixed Position Layout: An arrangement in which the service or manufacturing site is fixed in place; employees, along with their equipment, come to the site to do their work∙ Layout Flexibility: The property of a facility to remain desirable after significant changes occur or to be easily and inexpensively adapted in response to changes ∙ One-Worker, Multiple Machines (OWMM) Cell: A one person cell in which a worker operates several different machines on simultaneously to achieve a line flow ∙ Group Technology: An option for achieving line flow layouts with low volume processes; this technique creates cells not limited to just one worker and has a unique way of selecting work to be done by the cell ∙ ∙ Performance Criteria: ∙ -Other fundamental choices facing the layout planner concerning performance criteria which includes: 1. Customer satisfaction 2. Level of capital investment 3. Requirements for materials handling 4. Ease of stock picking 5. Work environment and “atmosphere” 6. Ease of equipment maintenance 7. Employee and internal customer attitudes 8. Amount of flexibility needed 9. Customer convenience and level of sales ∙ ∙ Warehouse Layouts: - Central process is storage; ∙ Receives items at the dock and moves them to a storage area, then stock pickers withdraw inventory to fill individual customer orders ∙ High stock piling ∙ Assigns all incoming materials to the nearest available space, rather than to a predetermined area where all like items are clustered ∙ Out and Back Pattern: Items are picked one at a time where the stock picker traveling back and forth from the dock to the storage area ∙ Route Collection System: The stock picker gathers the quantity of an item required to satisfy a group of customer orders to be shipped in the same truck or rail car ∙ Zone System: The stock picker gather all needed items in her assigned zone an places them on a powered conveyor line ∙ (+): Pickers don’t need to travel throughout the warehouse to fill orders; only responsible for their own zones ∙ ∙ Line Balancing: ∙ Line Balancing: The assignment of work to stations in a line so as to achieve the desire output rate with the smallest number of workstations. ∙ -Evenly balanced workloads as possible ∙ -Creates workstations where capacity utilization for the bottleneck is not much higher than for the other work stations ∙ -Applies only to line processes that do assembly work ∙ ∙ Work Elements: The smallest units of work that can be performed independently ∙∙ Immediate Predecessors: Work elements that must be done before the next element can begin ∙ ∙ Precedence Diagram: A diagram that allows one to visualize immediate predecessors better; work elements are denoted by circles, with the time required to perform the work show below each circle ∙ ∙ Cycle Time: (CT or C) The maximum time allowed for work on a unit at each station ∙ C = 1/R ∙ ∙ Theoretical Minimum: A benchmark or goal for the smallest number of stations possible, where the total time required to assemble each unit (The sum of all work element standard times) is divided by the cycle time ∙ TM = Σt/C ∙ ∙ Idle Time: Total unproductive time for all stations in the assembly of each unit ∙ IDLE TIME= NC-Σt ∙ N= number of stations ∙ C= Cycle time ∙ Σt= total standard time required to assemble each unit ∙ ∙ OTHER CONSIDERATIONS ∙ Pacing: The movement of product from one station to the next as soon as the cycle time has elapsed ∙ ∙ Mixed Model Line: A production line that produces several items belonging to the same family ∙ ∙ Behavioral Factors: Absenteeism, turnover, and responsiveness ∙ ∙ Cycle Times: Depends on the desired output rate or number or workstations allowed ∙ ∙ POWER POINT INFORMATION- MODULE #3: ∙ ∙ ORAGNIZATIONAL DECISIONS ∙ Strategic Choices: Long Range goals/focus “who’s the customer?” ∙ -Business strategy ∙ -Marketing strategy ∙ ∙ -Operations strategy ∙ -Manufacturing strategy ∙ Design Decisions: Plan to achieve goal “what should the product be?” ∙ -Product/service design ∙ -Process design ∙ -Supply chain network design∙ ∙ Operating Decisions: Day to day decisions “How many employees do I need?” ∙ -Operational efficiency is largely depend on strategic and design decision ∙ -Managing labor, capital, facilities, supply chain partners ∙ -Developing and managing forecasts and schedules ∙ ∙ Design decisions impact management and the effectiveness of the supply chain because you need to know: ∙ Supplier requirements ∙ Manufacturing strategy ∙ Facilities location ∙ Facilities design ∙ Logistical requirements ∙ ∙ Choosing a Manufacturing Location: ∙ Service systems ∙ Making a profit ∙ Keeping track of money/data ∙ Competitive priorities ∙ NEED TO CONSIDER THE WHOLE SUPPLY CHAIN ∙ Competitive Priorities: - Cost: everything, changeovers, productivity - Quality, speed, flexibility ∙ Product Characteristics: ∙ -Vulnerabilities ∙ -Weight, size, shape, value ∙ Resource Availabilities: ∙ -Labor, Facilities, machines, technology, ∙ -Raw materials, components ∙ -Fuel/Energy ∙ ∙ Established Channels of Distribution: Outsourcing ∙ ∙ Established Supplier Base: “Plumbing” when you get a new supplier, you have to up root all the old pipes, and lay down new ones (new suppliers/distributors) ∙ ∙ Hyper Competitive Market: A market where multiple companies make the same thing. You have all the best resources around you in one location to make you better. ∙ EX: Detroit-Cars, Silicon Valley-Software, Hollywood-Movies ∙ ∙ MANUFACTURING AND LAYOUT STRATEGIES: ∙ A. LINE FLOW: ∙ AKA: Product Focused System - Fast production rates - Standardized product - Make to stock system - Highly automated ∙- Large amount of FG inventory - Low per unit cost - Consistent quality - High volume ∙ Assembly Lines: Can be interrupted ∙ EX: Honda auto assembly ∙ Continuous Flow: Must be ran to completion ∙ EX: Bakery ∙ ∙ (+): Fast consistent production, relatively cheap, inventory available to customers ∙ ( -): Little variability, High start up costs, high inventories ∙ INDUSTRY: Cost competitive, high volume ∙ B. FLEXIBLE FLOW: ∙ AKA: Process Focused System - Slow production rates - Customized jobs - Make to order system - High performance and design quality - High cost per unit ∙ ∙ - Customization opportunities - Low start up costs - Labor intensive - Large amounts of raw materials and WIP ∙ (+): Customization, can quickly and cheaply adjust to changing market ∙ (- ): Long lead times, next order unknown ∙ INDUSTRY: Niche/luxury, high quality, customization ∙ C. Hybrid Systems: - Batch - Assemble to order - Mass Customization ∙ ∙ - GT Cellular - Moderate speed - Moderate customization ∙ CREATING AN EFFECTIVE ASSEMBLY LINE 1. List the basic tasks/work elements of the process and combine them into individual jobs ∙ -Break the process down to its most basic steps. EX: Make & wrap candy 2. Preserve the required Precedence relationships ∙ -EX: wash the clothes before you dry them 3. Meet the desired output rate ∙ -What is the expected demand? ∙ ∙ Bottleneck: Slowest part of your flow ∙ ∙ Cycle Time (C): Maximum time allowed for work on one unit at each station. Time it takes for one unit to come off the assembly line ∙ ∙ Effective Cycle Time: Slowest workstations cycle time. “Only as strong as your weakest link” ∙∙ Theoretical number of work stations (TM): Smallest number of work stations ∙ ∙ Actual number of workstations (N): Actual number of work stations required ∙ ∙ Precedence Rule: “are you washing before your drying?” ∙ ∙ Cycle Time Rule: Is each workstation at or below the prescribe C? ∙ ∙ LINE BALANCING TRADE OFFS: ∙ Higher number of workstations (Less efficient) ∙ BAD- More workers required, higher wages, more slack time ∙ GOOD- Usually a lower effective cycle time, Greater possibility to increase speed of the line, therefore production levels could be ramped up ∙ ∙ More Efficient Workstations (Fewer) ∙ GOOD- Fewer workstations required, lower wages, less slack time ∙ BAD- Usually a higher effective cycle time. Greater possibility to increase speed of the line decreased, therefore, production levels NOT easily ramped up ∙ ∙ MODULE 4 – MOVE IT ∙ KRAFT FOODS Example ∙ -Redesigned the logistics system to deliver products to various grocery chains and distributors based on 3 customer requirements: 1. Receiving shipments the next day after ordering – Greater flexibility and holding fewer inventories 2. Place bulk orders – Receive price discounts 3. Order from one price list and obtain volume discounts based on their entire network of business relationships with Kraft ∙ Logistics system that satisfied the customers and increased profits for Kraft: ∙ ∙ 2 Plants that deliver high volume direct shipments with steep price discounts to the customer and the Regional Mixing Center; which overnight ship a wide variety of goods and stores products. ∙ ∙ Logistics Management: That part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers’ requirements. ∙ ∙ Logistics covers: Transportation, warehousing, material handling, packaging, inventory management and logistics information systems ∙ ∙ WHY LOGISTICS IS CRITICAL ∙ - Logistics has evolved into a long term strategic imperative for many firms ∙ - Logistics accounts for between 5%-35% of total sales costs depending on the business, geographic area, and type of product being sold∙ - Has a profound impact on other performance dimensions, such as delivery ∙ - Interface directly with the customer, they can have a considerable impact on overall customer satisfaction ∙ -Advanced logistics capabilities are able to track deliveries and their exact location ∙ ∙ 5 Modes of Transportation ∙ Highway: Parcel, postal, and courier services as well as trucking. Dominates the logistics infrastructure ∙ (+) ♦ Accessibility & Flexibility to deliver where and when needed ♦ Reliable (on time) ♦ Vital for intermodal ♦ Best Balance among cost, flexibility, and reliability/speed of delivery ∙ (-) ♦ Neither the fastest nor cheapest option ♦ Long trips = excessive regulations ♦ Vulnerable to increase in fuel prices, taxes, tolls and fees ♦ LTL & LCL will make many stops ♦ One driver, one truck, insurance ∙ ∙ GROWTH: High-growth because most flexible. If the destination can be reached by road, then goods can be shipped by highway. Few goods are moved without highway transportation in some point in transit. More cost effective. Better scheduling and vehicle capacity, more efficient and reliable vehicles. ∙ Geographic extension of supply chains: as more companies developed supply chain relationships with nonlocal suppliers and customers, highway traffic increased ∙ Greater emphasis on delivery speed and flexibility: Stolen market share from slower rail and water systems ∙ Changing supply chain linkages among manufacturers, wholesalers, and consumers: Greatest growth has been in parcel, postal, and courier services—driven by customers who are buying small high-value items directly from manufacturers or wholesalers, skipping retailers. ∙ ∙ Water: Ideal for materials with a high weight-to-value ratio, especially if delivery speed is not critical. EX: Timber, farm produce, and petroleum-based products ∙ (+) ♦ Highly cost effective for bulky items ♦ High cube cargo (savings on money per mile) ♦ High weight cargo ∙ ∙ (-) ♦ Limited locations ♦ Slower than air – increase in time, damage, and theft ♦ Port capabilities – safety, handling, warehousing ♦ Channel depth challenges – summer vs. winter∙ ∙ Air: Ideal for materials with a low weight to value ratio especially if speed is crucial. An extension of supply chains, greater emphasis on delivery spend and flexibility, and changes in the supply chain linkages between manufacturers and consumers ∙ (+) ♦ Quickest, Flexible when linked to the highway mode ♦ Fastest growing transport mode – becoming more affordable ∙ (-) ♦ Most expensive mode on a per pound basis ♦ Incompatible containers – intermodal containers ∙ ∙ GROWTH: Grew explosively between 1993 and 2002 in terms of the value of goods shipped. Similar to highway growth -- for geographic extension of supply chains, emphasis on delivery speed and flexibility, and changes in the supply chain linkages between manufacturers and consumers. ∙ ∙ Rail: Cost characteristics similar to those of water transport but more flexible. ∙ (+) ♦ Highly cost effective for bulky items. Can be most effective when liked to a multimodal system ♦ Carry heavier loads than trucks ♦ Better for long distances – fewer stops ♦ Not as susceptible to fuel cost ♦ More capable in poor weather ∙ ∙ (-) ♦ Limited locations, although less so than water. ♦ Susceptible to loss/damage due to in transit vibrations ♦ Poor on time reliability ♦ Trip’s average speed is less than 30 MPH ♦ Access to infrastructure required – tracks, loading equipment ∙ ∙ FORD & UPS Example ∙ In 2000, Ford struck a deal with UPS. UPS used its advanced logistics capabilities to track Ford’s vehicle shipments so that dealers could find the exact location of a particular vehicle by logging onto the UPS website. This system was a major improvement in the way Ford did business. ∙ ∙ Less than Truckload (LTL): A smaller shipment, often combined with other loads to reduce costs and improve truck efficiencies. ∙ ∙ SEMINOLE GLASSWORKS Example ∙ They need to ship 3,500 pounds of custom-built office windows from Florida to Ohio. They have 3 transportation options: (chart below) ∙ ∙ -Direct truck: no stops, no changing of trucks, or loading of additional cargo ∙ -LTL Truck: Combine windows with other loads going to Ohio, going to switch trucks at a centralized sorting hub—which could result in delays and additional handling ∙ -Air: Get the windows to the customer 19 hours earlier. If it is critical to replace the glass, this may be a good option. ∙
∙ DELIVERY SPEED
∙ VEHI CLES
∙ EXTRA HANDLINGS
∙ CO ST
∙ 8.75 hours
∙ $1 2,1 00
∙ Direct Truck
∙ 27.75 hours
∙ $2, 68 0
∙ LTL Truck
∙ 3 days
∙ $4 45
-Tires for Toyota—who do you buy from?
(Outputs) –What was the cost?
(Quantity, Quality, Size) -What is the price?
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∙ ∙ Best option? – The answer depends on the firm’s business requirements. LTL has a cost advantage; direct trucking is quicker and requires fewer handlings. And Air would get it there much faster if the situation was critical. ∙ ∙ WAREHOUSING ∙ ∙ Warehousing: Any operation that stores, repackages, stages, sorts, or centralizes goods or materials. Organizations use warehousing to reduce transportation costs, improve operational flexibility, shorten customer lead times, and lower inventory costs ∙ ∙ Consolidation Warehousing; A form of warehousing that pulls together shipments from a number of sources (often plants) in the same geographical area and combines them into larger -and hence more economical- shipping loads. ∙ (A FEW LITTLE TRUCKS) (ONE LARGE TRUCK/BOAT) ∙ Small, flexible shipments in WAREHOUSE Large, economical, shipments out ∙ ∙ Cross Docking: A form of warehousing in which large incoming shipments are received and then broken down into smaller outgoing shipments to demand points in a geographic area. Cross docking combines the economies of large incoming shipments with the flexibility of smaller local shipments. ∙ (ONE LARGE TRUCK/BOAT) (A FEW LITTLE TRUCKS) ∙ Large, economical, shipments in WAREHOUSE Small, flexible shipments out ∙ ∙ LOWE’S Example ∙ Their distribution centers are classic examples of cross docking warehouses. They receive large shipments from suppliers. Then remix the incoming goods and deliver them to individual store multiple times per day. Computer based info systems closely coordinate incoming shipments from suppliers with outgoing shipments to individual sore so that more than half the goods that come off suppliers’ trucks are immediately loaded onto trucks bound for individual stores. RESULT DCs and the retail stores hold minimal amounts of inventory, yet Lowe’s receives the cost breaks from large shipments from suppliers. Also, materials handling can be integrated with logistics information systems and how a firm’s material handling system can affect the performance of the overall logistics system. ∙ Break Bulk Warehousing: A specialized from of cross docking in which the incoming shipments are from a single source or manufacturer. ∙ ∙ Hub and Spoke System: A form of warehousing in which strategically placed “hubs” are used as sorting or transfer facilities. The hubs are typically located at convenient, high-traffic locations. The “spokes” refer to the routes serving the destinations associated with the hubs. ∙ (MANY LARGE TRUCKS) (REGIONAL DISTRIBUTION CENTER) (MANY LARGE TRUCKS) ∙ Large shipments in some to inventory and the rest immediately shipped (“cross decked”) to stores ∙ ∙ PRAKSTON CARRIERS Example ∙ They are a trucking firm with 15 hubs throughout the United States. They have 2 customers with shipments coming out of the Northeast. Each shipment is packed in a pup trailer to LA and the other to El Paso. Most economical join them in the hub in NY and use a single truck to haul them to the other hub in AZ. In AZ the 2 pup trailers will be separated and combined with different pup trailers for transport to their final destinations. ∙ ∙ Pup Trailer: A type of truck trailer that is half the size of a regular truck trailer ∙ ∙ Postponement Warehousing: A form of warehousing that combines classic warehouse operations with light manufacturing and packaging duties to allow firms to put off final assembly or packaging until the last possible moment. ∙ EX: Painting the chairs their different colors ∙ Improves operational flexibility ∙ ∙ SHORTENING CUSTOMER LEAD TIMES: ∙ Reducing the realized lead time to customers is achieved by braking the total transportation time into 2 parts: (1.) Time to the warehouse –“off line” – no concern to customer (2.) Time to the customer – “on line” – concern of customer ∙ In theory, goods arrive at the warehouse prior to the customer’s order ∙ ∙ Assortment Warehousing: A form of warehousing in which a wide array of goods is held close to the source of demand in order to assure short customer lead times ∙ ∙ Spot Stock Warehousing: A form of warehousing that attempts to position seasonal goods close to the marketplace. At the end of each season, the good are either liquidated or moved back to a more centralized location ∙ ∙ BOTH are attractive options when distances between the originating source and the customer are long and when customer emphasize high availability or quick delivery. ∙∙ Materials Handling and Packaging: The equipment and procedures needed to move goods within a facility, between a facility, and a transportation mode, and between different transportation modes ∙ EX: Ship to truck transfers ∙ PACKAGING WINE Example ∙ Many wine producers now ship wine in reinforces, vacuum-sealed plastic bags. They cost less to ship and handle than glass bottles. They also keep the wine fresher. Finally the bags give the wine producers greater product flexibility. At postponement warehouse, wine that has been packaged in bags can be repackaged into bottles, wine boxes, or casks, as demand dictates. ∙ ∙ CONSIDERATIONS IN OUTSOURCING LOGISTICS ∙ Should the firm maintain its own trucks, warehouses, and information systems or outsource those services? ∙ ∙ Does the firm have the volume needed to justify a private logistics system? ∙ -Low volumes contracting for those services ∙ Would owning the logistics system limit the firm’s ability to respond to changes in the marketplace or supply chain? ∙ -Investing in trucks or warehouses ties up capital and commits the firm to that system. ∙ -Someone who wants flexibility to change quickly from domestic to foreign suppliers or change markets or supply chain should not own. ∙ Is logistics a core competent for the firm? ∙ -Core competencies are organizational strengths developed over a long time that customers find valuable and competitors want to copy. ∙ -If logistics is not a core competency they outsource the logistics functions to common carriers, which handle the shipments on a case-by-case basis, or to contract carriers, which enter into long term agreements with firms. ∙ ∙ Common Carriers (Public Carriers): Transportation service providers who handle shipments on a case-by-case basis, without the need for long term agreements or contracts ∙ ∙ Contract Carriers: Transportation service providers who handle shipments for other firms based on long term agreements or contracts ∙ ∙ Third Party Logistics Providers (3PLs): Service firms that handle all of the logistics requirements for other companies ∙ Allows a company to focus on their core competencies while still enjoying state of the art logistics capabilities ∙ ∙ KELLOGG Example ∙ For logistics purposes, Kellogg’s products can be divided into two major types: a) Frozen foods b) Dry products (everything else)∙ -To handle distribution, they depend on 7 regional distribution centers (managed by outside firms) and multiple carriers. ∙ -Attempted to lower warehousing and transportation costs. ∙ -Reduced transportation by 15% by increasing the number of contact carrier by 5. ∙ -Ended up having to pay carriers more because the volume was less. ∙ -When ordering the customer service representatives encourage customers to increase the size of their orders to take advantage of full-truckload shipment rates ∙ -If and order is for a full truckload and the lead time is long enough, it will be filled and shipped directly from a plant. Kellogg personnel will take responsibility for arranging transportation. ∙ -If an order is for a mix of products or if lead times are short, it will be filled form one of Kellogg’s distribution centers. In that case, the outside firm responsible for managing the distribution center will arrange for transportation. ∙ ∙ ∙ POWER POINT INFORMATION- MODULE #4: ∙ ∙ Logistics: Part of supply chain that plans, implements, and controls the efficient, effective foreword and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption ∙ ∙ Transportation: MOVEMENT of goods and services from one location to another ∙ ∙ CARGO CLASSIFICATIONS 1. Bulk Cargo: EX: Rice, Sugar, Oil, Coal, Grain ∙ -Free flowing ∙ -Loaded by a shovel/scoop/pump ∙ -Stored loose] ∙ WATER TRANSPORT: Bulk Carriers- Oil Tankers, Ore carriers, LNG Carriers 2. Break Bulk Cargo: ∙ -General or packaged cargo ∙ -Containerized and measured in TEU’s ∙ -CL, LCL, TL, LTL ∙ WATER TRANSPORT: Container Ship- Container vessels, general cargo vessels, Barges-(no engine) –pushed or pulled 3. Neo-Bulk Cargo: EX: Cows, Cars, Logs, Steel ∙ - Characteristics of both Bulk and Break Bulk ∙ WATER TRANSPORT: Neo Bulk Ships- RORO (Roll on, Roll off) carriers (cars, trailers) Log carriers, livestock, cars and logs (full both ways) ∙ Cube Out: When all of the space in the contain had been filled ∙ ∙ Weigh Out: When the container or package has been filled with product such that additional cargo will exceed the container’s weight ∙ ∙ Intermodal: Seamless Multimodal shipment. No need to unload container, repackage, products. One container for an entire trip. (BEST)∙ ∙ Multimodal: Use of more than one mode of transport during a single shipment ∙ ∙ Planograrms: A schematic drawing that illustrates product placement ∙ Considerations: ∙ Shelf space – height, weight, depth ∙ Product variety – beverages, canned goods, hanger items ∙ Product location – Top/lowest shelf ∙ ∙ PACKAGING ∙ Reasons for Packaging: ∙ Marketing and promotion ∙ Store variety ∙ Sore demographics ∙ Manufacturer and retail store preferences ∙ Provide product information – weight, volume ∙ Legal considerations – warning labels nutrition labels, safety seals, language ∙ Protection – light, thieves, dust, moisture, impact ∙ Support – other products of boxes ∙ Preservation of perishables ∙ Facilitates movement/handling – boxes, creates, pallets, shrink wrap, ∙ ∙ Packaging Considerations: ∙ Product characteristics ∙ Packaging trade-offs – protection, weight, cost, consumer safety, marketing ∙ Destination (where?): a. Retail store- sized to display on store shelves b. Warehouse- shelf size VS box size c. Location- climate, security, crime rates, language d. Inventory turnover- replenish needs, time on shelf ∙ Logistics Itinerary (when and how it is getting there?) a. Mode of transportation- time, vibration, climate, handling b. Moving equipment- fork-lifts, hand carts, lift truck c. Warehousing, containerization, assembly, manufacturing d. Sized to travel- will it fit in a vehicle box, shelf, on pallet e. Security- insurance, logos, easy to detect ∙ Legal Considerations: a. Waste related issue b. International product markings – languages, laws ∙ Economic (how much costs across supply chain?): a. Cost of packaging b. Cost of shipping c. Size of packaging- cubing out d. Fitness for use – amount of total packing required e. Expected losses- pilferage damage f. Expected gains- (simple handling, marketing opportunity) ∙ ∙ TYPES OF PACKAGING ♦ Industrial: Pallets, slip sheets, supplier to manufacturer, inter-plant handling♦ Consumer: Cans, bottles, shrink wrap, boxes ♦ Reusable (Industrial and consumer variations): Pallets, bottles, fast food cups, commercial or industrial packaging ♦ Dunage: Used to fill the empty space inside boxes or tubes ∙ EX: Popcorn packaging, bubble wrap, inflatable plastic bags ♦ PRIMARY PACKAGING: In contact with the end item ∙ EX: Plastic bag, can, bottle, shrink wrap (Aspirin bottle) ♦ SECONDARY PACKAGING: Contains the end item and primary packaging ∙ EX: Paper/Cardboard box, shrink wrap, tape (box full of bottles) ♦ TERTIARY PACKAGING: Contains several items which are in secondary packaging ∙ EX: Crate, pallet, metal straps, shrink wrap (many boxes on a pallet) ∙ ∙ LABELING ∙ Info on label: ∙ -Names of companies/people ∙ -Products enclosed – names, prices ∙ -Tracking numbers – written or code based ∙ ∙ Security Issues: ∙ -Easy to tell what package contains – thieves ∙ -Hazardous contents – Facilitates smuggling ∙ ∙ Technology Requirements/Investments ∙ -Types of labels – written, bar codes, RFID tags ∙ -Value added – inventory management, automatic reordering, packaging sorting software, faster register service at checkout ∙ -Scanning Equipment: bar code equipment, or RFID readers ∙ Software Data Storage Units: systems to handle software and required hardware. ∙ Labels need to be compatible with systems of all supply chain partners ∙ ∙ CONTAINERIZATION: ∙ TL: Full truck load ∙ LTL: Less than truck load ∙ CL: Full container load ∙ LCL: Less than container load ∙ TEU: Twenty-foot equivalent unit ∙ Each 20 footer = 1 TEU ∙ EACH 40 footer = 2 TEU’s ∙ ∙ ∙ ADVANTAGES FOR STANDARD CONTAINERS ♦ Loading equipment can be standardized ♦ Easier to plan pallet arrangement inside container ∙ DIMENSIONS: ∙ -External: 8’ x 8.5’ x 20 (or 40’) ∙ -Internal: 7.7’ x 8.3’ x 19.35 (or 39.4’)∙ ∙ Reefers: Controlled Atmosphere (CA) Containers ∙ -Temperature controlled ∙ -Air/Water tight ∙ -Controls gas composition ∙ -Powered by outlets/generator ∙ -Micropressor monitor and record conditions throughout shipment just in case (insurance) ∙ ∙ ADVANTAGES FOR USING CONTROLLED ATMOSPHERE CONTAINERS: 1. Longer transit times possible 2. Delay aging / ripening process 3. Reduce water loss and weight shrinkage 4. Eliminates insects 5. Harmful gases removed ∙ ∙ PRIMARY REASON TO SHIP BY AIR: ♦ HIGH value ($) to weight ratio ∙ EX: Diamonds, art, paintings, fine wines, cigars ♦ High insurance costs ♦ Overnight preference or emergencies ♦ Short shelf life ∙ EX: Food, flowers, computers, clothes ∙ ∙ LOGISTICS INFASTRUCTURE: ♦ Roads ♦ Ocean ports ♦ ∙ Intermodal capacities – handling devices ∙ Warehouses and distribution centers ∙ Communication and technology network ∙ Natural resource distribution ∙ Utility and fuel network ∙ Labor – skill and or education level ∙ Legal landscape – legal environment ♦ Rail networks ♦ Airports ♦ -Customs, laws, taxes, environmental laws, law enforcements ♦ -Requirements: certifications & licenses ♦ ♦ Warehousing: Provides Storage ∙ Inventories- Safety stock, anticipation inventory, large and/or expensive inventories ∙ Location Advantages- Closer to the retailers/customers. Shorter lead time ♦ ♦ Distribution Center: Facilities Movement ∙ Product Mixing: Break up large shipments to create assorted full trucks ∙ LTL to TL – Consolidation, Lower cost♦ ♦ Services Performed by Warehouses & Distribution Centers: 1. Value added services – services beyond storage and consolidation 2. Storage and consolidation/ sorting 3. Picking, Packing, & Labeling (Amazon) 4. Value added labor activities: - Postponement- last minute customization - Assembly and manufacturing ( product manipulation) - Repairs - Quality inspection 5. Reverse Logistics Activities: - Helps recover industrial packaging, containers (reusable items) - Recycling materials - Aid in parts and product salvaging - Repair, recycle, resell, disposal, recovery ♦ ♦ DISTRIBUTION OPTIONS: ♦ ♦ DIRECT DISTRIBUTION: No warehouses (16 trucks8 trucks) ♦ PROUCT MIXING: SLOW mixing centers. Some for the retailers, some for warehouses to provide a buffer against errors and market changes. ♦ CROSS DOCKING: FAST mixing centers. A more modern distribution system that takes advantage of technological advantages of this age. Move inventory quickly. ♦ OUTBOUND CONSOLIDATION: Assembly and or packaging of the end item. Used when end item is made up of multiple components produced at separate locations. ( Video game console, headset, controller) ♦ ♦ Letter of Credit: Document issued by the BUYERS bank and addressed to the SELLER. States that the bank will release payment to the seller after the bank is supplied with documents EXACTLY in accordance with the terms specified in the document. ♦ ♦ PARTIES ASSOCIATED WITH LETTER OF CREDIT- ♦ ♦ Buyer: Applies for LoC. Provides funds for bank to hold until transaction is complete ♦ Seller: Beneficiary of the finds once goods/services have been shipped, inspected, and met all LoC requirements ♦ Issuing Bank: Issues LoC based on “buyers” demands ♦ Paying Bank: Responsible for paying seller with appropriate ♦ Advising Bank: Verifies that issuing and or paying bank are reputable. Not responsible for payment in case of default though ♦ Confirming Bank: In case of default by paying or issuing bank, this bank will pay/reimburse appropriate parties ♦ ♦ WHY DOCUMENTS ARE NEEDED: 1. Transport: Receive cargo (shippers release) 2. Financial: Get paid (banks)3. International Shipment: Clear customs (Customs agency) ♦ ♦ TYPES OF DOCUMENTS: ∙ Commercial Invoice: Summation of entire transaction ♦ -TERMS OF SALE, quantities, prices, CURRENCY, dates, references ♦ -PRECISE description of items, NOT just SKU/part # ♦ -Must conform to all documents – Letter of Credit, Packing list ∙ Packing List: Placed in each CONTAINER of assorted merchandise by packer. Much more detailed than in invoice. Describes contents of each package in one or more containers. ♦ -Indicates type of package; box, crate, drum, ♦ -Location of each individual package in container ♦ -Must conform to invoice ♦ -Detailed info on contents for customs and insurance purposes ∙ Shipper’s LETTER OF INSTRUCTIONS: Provides info on handling, payment, to an intermediary ♦ -Ideal for those looking to utilize intermediaries ♦ -Handling: requirements for shipping and packaging ♦ -Payment/insurance: References, data ∙ CERTIFICATE OF ORIGIN: States origin of cargo, important to customs in controlling tariffs. (Non-NAFTA countries materials and labor are tariff eligible) ♦ -Origins of materials & components ♦ -Labor/assembly sites of each component ♦ -Final labor/assembly sites ∙ Bill of Landing: Fulfills 3 purposes! 1. Contract (of carriage) between seller/shipper and the carrier: Indicates terms of shipment, goods shipped, name of vessel, departure/destinations points, freight cost 2. States ownership of cargo, Acts as Title: Based on terms outlined. When does buyer take ownership? Upon pick up, on ship, when it gets off the ship, upon receipt? * Important for damages, accidents, and theft. 3. Receipt of Goods for Shipper: Shoes carrier receive the goods, and in what shape/quality. * Important to banks – banks make payment based on documentation ∙ Shippers Export Declaration (SED): Used by customs in recording export types and quantities. ♦ Required if cargo is greater than $2,500 in value ♦ OR if validated export license is required ♦ OR if destined for countries prohibited by Export Administration Regulations ∙ Validated Export License (VEL): US Gov Authorization for controlled or Policed items/services ♦ Potential dual purpose technologies ♦ Defense, weapons, ammo, nuclear, watercraft ♦ Drugs, narcotics, processing equipment ♦ Financial assets, patent sensitive items ♦ Agricultural plants and products♦ ♦ EXAMPLES: ♦ - $1000 Riffle: SED & VEL ♦ -PSP: SED & VEL ♦ -$5000 in paper towels ♦ GETTING THROUGH CUSTOMS – RULES: ♦ 3 Rules of Exporting: 1. Assume EVERYTHING is controlled: ♦ Commodities (TV, Stereo) and services (IT Management, consulting) ♦ Technology/Technical data- can be tangible (Device, schematic) or intangible (Directions, ideas). Illegal shipment may be internal transfer to even a local transfer to a foreigner ♦ EX: Motorola- new technology, special ID badges 2. These Rules Apply Everywhere: ♦ Exports and re exports-international customs agencies are responsible for upholding domestics laws as well as the laws of their countries ♦ Mexico should not allow US products to exit Mexico en route to countries on the banned list- Libya, Cuba, Iran, Syria, North Korea 3. Authorization is Required before Export: ♦ License must be in hand, application alone is not sufficient ♦ ♦ CONSEQUENCES:∙ Loss of US export privileges (3-10 years) ∙ Debarment as US government contractor ∙ No transfer of technology to a foreigner. ∙ Fines- $250k/Person, $1M/Co, or 5X export value ∙ Prison sentence for each individual involved – 5-10 years – No corporate shields allowed ∙ ∙ PROCEDURE FOR US EXPORT 1. WHO CONROLS THE PRODUCTS/SERVICES BEIGN EXPORTED ∙ Department of State: ∙ Enforced Rules international traffic in arms regulation (ITAR) ∙ Classification Document: US Munitions List (USML) ∙ Classification Number: Categorize product using appropriate USML # ∙ Department of Commerce: ∙ Enforced Rules: Export Administration Rules (EAR) ∙ Classification Document: Commerce Control List ∙ Classification Number: ECCN Citation (Export Control Classification Number) 2. CLASSIFY YORU ITEM ∙ Sandals- Dress shoes, athletic shoes, casual shoes ∙ Wine- Alcohol VS Fruit juice ∙ ECCN Citations/Categories of Bacteria 3. GET A LICENSE (IF NECESSARY) ∙ New product minimum 12-16 weeks OR as much as a year ∙ Consider request to Dept. of State: Weapons, countries 4. EXPORT UPON RECEIPT OF CUSTOMS’ APPROVAL ∙ ∙ IMPORTANCE OF PRODUCT CLASSIFICATION ∙ Food- FDA requirements, rules, regulations ∙ Apparel/Textile- Tariffs, quotas ∙ Toy- Safety Standards ∙ EX: Edible underwear all 3 possibly ∙ ∙ TRICKS TO EXPORTING/IMPORTING PRODCUTS ∙ -Reconfiguring your product: Ship only required parts (Japanese sports car) ∙ -Domesticating Products: Meet minimum domestic part requirement to make foreign item domestic ∙ -Altering the product in order to reclassify the item: SUVs ∙∙ Duty Drawbacks: Utilized when an items is imported and the re exported ∙ Can you get a full refund of a paid duty? ∙ Why would this happen? Display items.. layovers.. ∙ EX: NASA Telescopic Lens ∙ ∙ Commerce Control List: Categorizes the product and describes the measures taken to export ∙ ∙ US Munitions List: A list of articles, services, and related technology designated as defense-related by the United States federal government ∙ ∙ Free Trade Zones (FTZ): ∙ Area where acceptable items can enter the county duty free for storage, display, manufacturing, transportation, assembly, re packaging ∙ Items are then usually re-exported. Alternative to duty drawbacks. Items can remain in the country permanently if the duties are levied. ∙ ∙ 3PLS (3rd party logistics company): An organization that manages and executes a particular logistics function, using its own assts and resources, on behalf of another company. ∙ -Can’t be the buyer or seller. ∙ -They can include packaging, container companies, and carriers ∙ ∙ Freight Forwarders: -U.S. Side of exports “travel agents” ∙ -Find most efficient and cost effective itinerary ∙ Customs House Brokers: ∙ -Help items clear foreign customs- before arrival ∙ -Foreign side of exports – “arrange local itinerary” ∙ ∙