LM1 (1)

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Logistics Management

Overall Industrial/ business

context

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Manufacturer

Distribution centre Distribution centre

Customer Customer Customer Customer

Suppliers

of

materialsand

services

Tier 1

Tier 2

Supply chain for a manufacturing firm

.

.

.

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Following terms are used almost

interchangeably:

Purchasing

Procurement

Materials management Logistics

Supply management

SCM

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Broadly defined, physical

distribution includes:

Transportation

Warehousing

Packaging Order processing

Inventory control

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N

A

B

C

D

E

F

G

H

I23 Km

15

15

22

Stage I Stage II Stage III

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Stage III analysis

Location Alternatives Remaining distance Optimal distance Optimal decision

D Go to G 16+21 37 Go to G

E Go to G 13+21 34 Go to G

H 17+19

F Go to G 23+21 32 Go to H

H 13+19

Stage II analysis

Location Alternatives Remaining distance Optimal distance Optimal decision

A Go to D 15+37 52 Go to D

E 25+34

B Go to D 17+37 49 Go to E

E 15+34

F 18+32

C Go to E 20+34 54 Go to E or F

F 22+32

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Stage I analysis

Location Alternatives Remaining distance Optimal distance Optimal decision

Factory N Go to A 18+52 70 Go to AB 23+49

C 17+54

----------------------------------------------------------------------------------------------------------------

Back tracking through the Tables of stage results, optimal route is:

Factory N-A-D-G-I with the total distance 70 Km.

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Key questions that must be

answered in the design of a

physical distribution system are: The number, location, and size of warehouses

The items to be stocked in each warehouse

Which plants or vendors are to supply which itemsto each warehouse

The customers to be served by each warehouse

The mode of transportation

The degree to which the company will carry out itsown distribution activities

The routing of vehicles

The selection of an inventory control system

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Distribution Requirements Planning

(DRP)

An approach that is characterized by the

planning of shipments out through a

planning horizon. DRP has been extended to DRP II, which

includes the planning of warehouse space,

personnel, and transportation equipment.

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Multi-echelon Distribution Systems

One or more stocking points between the plantand customer

A branch warehouse is frequently called adistribution centre (DC).

A warehouse that serves a group of satellitewarehouses is called a Regional DistributionCentre.

A company may choose this mode of operations

for the following reasons:(i) Faster service in filling customer orders

(ii) Transportation cost may be saved

(iii) Customers tend to feel more confident

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Two-echelon distribution system

Manufacturers plant

Central supply

DCA

DCB

DCN

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Three-echelon distribution system

Manufacturers plant

Central supply

DCA

DCB

DCN

Company

ownedretail

stores

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Design of the distribution system will

be affected by a number of factors:

The bulk, weight, and value of the product

The degree to which it is subject to

obsolescence and physical deterioration

Quantity of the product being distributed

The distances involved

Transportation tariffs The need for rapid delivery to customers

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Order point systems

A pull system can be based on any of theindependent demand inventory system. The DCwould periodically review the inventory of anitem and send an order to central supply if the

inventory were at or below an order point. Central supply supports two DCs A and B. A has

a forecast demand of 15 units of an item. Theinventory is reviewed at the beginning of eachweek. The safety stock is set at 10 units. Leadtime is two weeks, so the order point is(2x15)+10= 40. The order quantity based onEOQ considerations is 50.

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Ordering policy: OP/EOQ LT: 2 weeks Order point: 40

Forecast per period: 15 Safety stock: 10 Order quantity: 50

-----------------------------------------------------------------------------------------------------------------

Week: 1 2 3 4 5 6 7 8 9 10 11 12

Demand: 11 8 17 12 16 15 10 19 11 14 12 18

Receipts: 50 50 50

Available balance: 40 29 71 54 42 26 11 1 32 21 7 45 27

Order release: 50 50

-----------------------------------------------------------------------------------------------------------------

DC B has a forecast of 30 units per Wk., LT of 1 Wk. and a safety stock of 20 units.

The order quantity is 100. Initial available balance is 75.

Week: 1 2 3 4 5 6 7 8 9 10 11 12

Demand: 28 31 24 31 39 22 36 19 40 28 35 31

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DC B

Ordering policy: OP/EOQ LT: 1 week Order point: 50

Forecast per period: 30 Safety stock: 20 Order quantity: 100

-----------------------------------------------------------------------------------------------------------------

Week: 1 2 3 4 5 6 7 8 9 10 11 12Demand: 28 31 24 31 39 22 36 19 40 28 35 31

Receipts: 100 100 100

Available balance: 75 47 16 92 61 22 0 64 45 5 77 42 11

Order release: 100 100 100 100

-----------------------------------------------------------------------------------------------------------------

At central supply, average demand per Wk. is 15+30=45.

LT is 2 weeks. and the safety stock is 30. So the OP is (2X45)+30 = 120.

The order quantity = 200

Initial available balance = 30

Central supply

-----------------------------------------------------------------------------------------------------------------Week: 1 2 3 4 5 6 7 8 9 10 11 12

Demand: 100 150 150 100

Receipts: 200 200 200

Available balance: 30 230 130 130 130 130 -20 -20 -20 30 30 30 130

Order release: 200 200

-----------------------------------------------------------------------------------------------------------------

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In week 6, in spite of the substantial inventory of 130, a shortage of 20 units resulted.

Suppose that only 30 units are sent to DC A immediately and backorder remaining 20.

DC A receives 30 units in Wk. 8 and a shortage of 13 units would have occurred in

Wk. 10.

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Base-stock system

The principal advantage is that the replenishment of centralsupply is based on customer demand at the DCs rather thanon the replenishment orders from the DCs.

The principal features:

(a) Demand and inventory information is sent at frequentintervals from down-stream stocking points to all upstreamstocking points.

(b) A base stock is calculated for each item for each stockingpoint which is based on the inventory to be maintained at thatlocation and all downstream stocking points.

(c) At periodic intervals each stocking point places areplenishment order for a quantity equal to its base stockminus the sum of its own inventory position and the inventorypositions of all downstream locations.

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Consider the previous example.

The base stocks for DC A and B are calculated as the expected demand during an

Order cycle and a lead time, plus the safety stock.

All order quantities must be rounded up to multiples of 10, the number of units which

fit on a pallet.

DC A:

EOQ 50

Weeks in cycle = = = 3.3 ~ 3

Forecast/ period 15

L.T. in weeks = 2Total weeks = 5

Base stock = (5X15)+10 = 85

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DC B:

EOQ 100

Weeks in cycle = = = 3.3 ~ 3

Forecast/ period 30

L.T. in weeks = 1

Total weeks = 4

Base stock = (4X30)+20 = 140

--------------------------------------------------------------------------------

Central supply:

Weeks in cycle = 200/45 = 4.44 ~ 4

L.T. in weeks = 2

Total weeks = 6

Calculation for the base stock:

(6X45) + 30 = 300

Base stock for DC A = 85

Base stock for DC B = 140

Central supply base stock = 525

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DC A:

Ordering policy: Base stock LT: 2 weeks Order cycle: 3 weeks

Base stock: 85

-----------------------------------------------------------------------------------------------------------------

Week: 1 2 3 4 5 6 7 8 9 10 11 12

Demand: 11 8 17 12 16 15 10 19 11 14 12 18Receipts: 50 20 40 50

Available balance: 40 29 71 54 42 46 31 21 42 31 17 55 37

Order release: 20 40 50

Inventory position: 79 71 74 62 46 71 61 42 81 67 55 37

-----------------------------------------------------------------------------------------------------------------

An additional row of inventory position is added. It is the sum of available balance

and on order. As the order cycle is 3 weeks, an order should be released in Wk.3.

Order release = Base stockInv. Position

= 8571

= 14~ 20

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DC B

Ordering policy: Base stock LT: 1 week Order cycle: 3 weeks

Base stock: 140

-----------------------------------------------------------------------------------------------------------------Week: 1 2 3 4 5 6 7 8 9 10 11 12

Demand: 28 31 24 31 39 22 36 19 40 28 35 31

Receipts: 100 80 100 90

Available balance: 75 47 16 92 61 22 80 44 25 85 57 22 81

Order release: 100 80 100 90

Inventory position: 47 116 92 61 102 80 44 125 85 57 112 81

-----------------------------------------------------------------------------------------------------------------

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Central supply

Ordering policy: Base stock LT: 2 weeks Order cycle: 4 weeks

Base stock: 525

-----------------------------------------------------------------------------------------------------------------Week: 1 2 3 4 5 6 7 8 9 10 11 12

Demand: 100 20 80 40 100 50 90

Receipts: 200 210 180

Available balance: 30 230 130 110 110 240 200 200 100 230 230 140 140

Order release: 210 180 180

Inventory position:

DC A 79 71 74 62 46 71 61 42 81 67 55 37

DC B 47 116 92 61 102 80 44 125 85 57 112 81

Central supply 230 130 320 320 240 200 380 280 230 230 320 320

Total 356 317 486 443 388 351 485 447 396 354 487 438

-----------------------------------------------------------------------------------------------------------------

Order quantity released at the beginning of period 3 = 525317

= 208

~ 210

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Distribution Requirements Planning

Push system

Decisions on shipments are made at theupstream locations.

Rather than reacting to current conditions,orders are scheduled in advance based ondemand forecasts.

Generally a schedule of orders planned inthis way is frozen through a certainnumber of weeks.

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Planned replenishment of a two-echelon distribution system using DRP:

DC A

Ordering policy: DRP (EOQ/ time-phased O.P.) LT: 2 weeks

Forecast per period: 15 Safety stock: 10 Order quantity: 50-----------------------------------------------------------------------------------------------------------------

Week: 1 2 3 4 5 6 7 8 9 10 11 12

Forecast Demand: 15 15 15 15 15 15 15 15 15 15 15 15

Receipts: 50 50 50

Available balance: 40 25 60 45 30 15 50 35 20 55 40 25 10

Order release: 50 50

-----------------------------------------------------------------------------------------------------------------

DC B has a forecast of 30 units per Wk., LT of 1 Wk. and a safety stock of 20 units.

The order quantity is 100. Initial available balance is 75.

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DC B

LT: 1 week Forecast per period: 30 Safety stock: 20

Order quantity: 100

-----------------------------------------------------------------------------------------------------------------

Week: 1 2 3 4 5 6 7 8 9 10 11 12Forecast: 30 30 30 30 30 30 30 30 30 30 30 30

Receipts: 100 100 100 100

Available balance: 75 45 115 85 55 25 95 65 35 105 75 45 115

Order release: 100 100 100 100

-----------------------------------------------------------------------------------------------------------------

Central supply

Ordering policy: Lot for Lot LT: 2 weeks Safety stock: 0

-----------------------------------------------------------------------------------------------------------------

Week: 1 2 3 4 5 6 7 8 9 10 11 12

Gross Reqmt.: 100 50 100 50 100 100

Receipts: 200 20 50 100 100

Available balance: 30 130 130 130 80 0 0 0 0 0 0 0 0

Order release: 20 50 100 100

-----------------------------------------------------------------------------------------------------------------

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Actual inventory performance at the DCs

DC A

-----------------------------------------------------------------------------------------------------------------

Week: 1 2 3 4 5 6 7 8 9 10 11 12

Demand: 11 8 17 12 16 15 10 19 11 14 12 18Receipts: 50 50 50

Available balance: 40 29 71 54 42 26 61 51 32 71 57 45 27

Order release: 50 50

-----------------------------------------------------------------------------------------------------------------

DC B has a forecast of 30 units per Wk. Following are the actual demands:

Week: 1 2 3 4 5 6 7 8 9 10 11 12

Demand: 28 31 24 31 39 22 36 19 40 28 35 31

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DC B

-----------------------------------------------------------------------------------------------------------------

Week: 1 2 3 4 5 6 7 8 9 10 11 12

Demand: 28 31 24 31 39 22 36 19 40 28 35 31

Receipts: 100 100 100 100Available balance: 75 47 116 92 61 22 100 64 45 105 77 42 111

Order release: 100 100 100 100

-----------------------------------------------------------------------------------------------------------------

As the schedule of orders is frozen for 12 weeks, the actual performance at central

supply will be the same as the planned performance.

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Comparison:

Pull Push

OP Base stock DRP

DC replenishment orders 6 7 6

Central supply replenishment orders 2 3 4

Shortages Yes No No

Inventory in part/Wks. 1818 3168 1918

(Lowest) (78% increase (6% increase

as compared over OP/OQto OP) system)