SCM B371F
SCM B371F
Logistics
SCM B371F
SCM B371 Logistics
Unit 1 Introduction to logistics
Unit 2 Logistics performance and customer service
Unit 3 Inbound logistics
Unit 4 Outbound logistics
Unit 5 Logistics network and strategy
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Scope of Logistics
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Unit 3 Inbound logistics
Module 1
Procurement
• Procurement Objectives
• Supplier Selection and Evaluation
• Global Procurement (sourcing)
• Sustainable Procurement
Module 2
Inventory Management
• Inventory Trade-offs
• Types of Inventory
• Inventory Reduction Tactics
• ABC Analysis
• Economic Order Quantity
• Continuous Review System (Q system)
• Periodic Review System (P system)
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Procurement
Module 1
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Discussion Questions:
1. What kind of risk assessments involved in procurement?
2. Are supplier risk assessments the same for all SKUs?
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Procurement
• WHAT
– Refers to the raw materials, component parts,
and supplies bought from outside
organizations to support a company’s
operations
• WHY
– Procurement costs often range between 60
and 80 percent of an organization’s revenues
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Procurement Objectives
• Supporting organizational goals and
objectives (e.g. profitable growth)
• Managing the purchasing process
effectively and efficiently (e.g. JIT/VMI)
• Managing the supply base (sourcing)
• Developing strong relationships with other
functional groups
• Supporting operational requirements
(satisfying internal customer)
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Supplier Selection/Evaluation Process
• One of procurement’s most
important responsibilities
• Involves stating an organization’s
needs and determining how well
various potential suppliers can fulfill
these needs
Figure 6.1 Supplier Selection Framework
e.g. what, when & qty
e.g. quality/price/service
EDI capabilities
e.g. single/multiple sourcing/ just-
in-time/green purchase
Process/performance based
e.g. supplier audit & scorecard
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Procurement Portfolio Approach
• Situation analysis
• Kraljic’s Portfolio Matrix2
– Used to classify corporate purchases in terms
of their financial importance and supply
risk/complexity
– Goal is to minimize supply vulnerability and
getting the most out of the firm’s purchasing
power
• 4 categories: different procurement strategies
2Peter Kraljic, “Purchasing Must Become Supply Management,” Harvard Business Review
61, no. 5 (1983): 109–117.
Local
suppliers
Reverse
auctions/
multiple
suppliers
Global, new
suppliers
with new
technology
Long-term,
cost-based
contracts with
key suppliers
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Global Procurement (Sourcing)
• Refers to buying components and inputs anywhere in the world
• Driven by:
– Factor-input strategy (organization is seeking low-cost or high-quality
sources of supply)
– Market access strategy (organization is sourcing in markets where it plans
to do significant business)
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Global Procurement (Sourcing)
• Challenges in establishing a successful global sourcing strategy include
understanding hidden costs as supply bases are expanded
• Examples of hidden costs:
– Increased costs of dealing with suppliers outside the domestic market
– Duty and tariff changes that occur over supply agreement life
– Increased inventory-related costs associated with global supply chains
– Rising levels of logistics cost volatility (e.g., ocean freight rates)
• Total cost of ownership
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Sustainable Procurement
• Refers to the integration of social and environmental considerations into all
stages of the purchasing process
• Goal is to minimize the impact of procurement activities on human health and
the environment
• Social responsibility
– The environment
– Safety
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Lenovo
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Activity 3.1
As organizations continue to expand their supply bases, many are realizing
hidden cost factors are affecting the level of benefits that were projected to be
achieved through this approach.
What is total cost of ownership and why is it important to consider?
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Case study 3.1
Please read the case ‘TEMPO LTD’ on page 89 in your custom textbook and attempt the
questions below.
1. Should Terim let somebody else complete the transaction because he knows that if he
doesn’t sell to the North Koreans, somebody else will?
2. What other costs and risks are involved in these proposed transactions via Romania
or Syria, including some not mentioned in the case?
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Inventory management
Module 2
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Discussion Question:
1. If safety stock recommendations generated by inventory management technology solutions are ignored, what policy
could be implemented to reduce safety stock or dated inventory items at a company like L.L. Bean?
2. How would better collaboration with key suppliers reduce the stock-out concerns by Sales and Marketing?
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What is a Inventory Management?
• Inventory Management
– The planning and controlling of
inventories to meet the competitive
priorities of the organization.
• Inventory
– A stock of materials used to satisfy
customer demand or to support the
production of services or goods.
What is Inventory?
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Inventory Costs
• Assets cost money, which means that inventory costs money
• Inventory costs between 2010 and 2014 represent approximately
one-third of total logistics costs
• Logistics manager must understand nature of each cost as well as
trade-offs
• Inventory costs include:
– Carrying cost
– Ordering cost
– Stockout cost
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Inventory Trade-Offs
Figure 9.1 Creation of Inventory
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Types of Inventory
Figure 9.2 Inventory of Successive Stocking Points
• Accounting Inventories
– Raw materials
– Work-in-process
– Finished goods
• Operational Inventories
– Cycle Inventory
– Safety Stock Inventory
– Anticipation Inventory
– Pipeline Inventory
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Cycle Inventory
• Refers to inventory that is needed to satisfy normal demand during
the course of an order cycle
1. The lot size, Q, varies directly with
the elapsed time (or cycle) between
orders.
2. The longer the time between orders
for a given item, the greater the
cycle inventory must be.
+ 0
Average cycle inventory = =
2 2
Q Q
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Safety Inventory
• Refers to inventory that is held in addition to cycle stock to guard
against uncertainty in demand or lead time
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Anticipation (Speculative) stock
• Refers to inventory that is held for several reasons, including
seasonal demand, projected price increases, and potential
shortages of a product
• Inventory that is en route between various fixed facilities in a
logistics system such as a plant, warehouse, or store
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Inventory Reduction Tactics (1 of 2)
• Cycle inventory
– Reduce the lot size
1. Reduce ordering and setup costs and allow Q to
be reduced
2. Increase repeatability to eliminate the need for
changeovers
• Safety stock inventory
– Place orders closer to the time when they
must be received
1. Improve demand forecasts
2. Reduce supply uncertainties
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Inventory Reduction Tactics (2 of 2)
• Anticipation inventory (seasonal)
– Match demand rate with production rates
1. Add new products with different demand cycles
2. Provide off-season promotional campaigns
3. Offer seasonal pricing plans
• Pipeline inventory
– Reduce lead times (air/ocean shipment)
1. Find more responsive suppliers and select new carriers
2. Change Q in those cases where the lead time depends on
the lot size
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Questions to answer in inventory management
• What to order
• How much to order
• When to order
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What is an ABC Analysis?
ABC Analysis
• Inventories are not of equal value to
a firm
• Inventory should not be managed in
the same way
• The process of dividing SKUs into
three classes, according to their
dollar usage, so that managers can
focus on items that have the highest
dollar value.
Figure 9.4 Typical Chart Using ABC Analysis
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Inventory Management
• What to order
• How much to order
• When to order
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Economic Order Quantity (EOQ)
• Trade off between holding and ordering/setup cost
Ordering cost
• Costs of receiving an order (wages)
• Conducting a credit check
• Verifying inventory availability
• Entering orders into the system
• Preparing invoices
• Receiving payment
Inventory holding cost
• Obsolescence costs
• Inventory shrinkage
• Storage costs
• Handling costs
• Insurance costs
• Taxes
• Interest costs
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Calculating EOQ
Figure 9.6 Graphs of Annual Holding, Ordering, and Total Costs
Total cost: Inventory carrying cost + Ordering cost
= ( ) + ( )
2
Q D
C H S
Q
where
C = total annual cycle-inventory cost
Q = lot size (in units)
H = holding cost per unit per year
D = annual demand (in units)
S = ordering or setup costs per lot
=
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Managerial Insights from the EOQ
Table 9.1 Sensitivity Analysis of the EOQ
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EOQ Cost Calculations example
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Economic Order Quantity
• Five assumptions
1. The demand rate is constant and known with certainty.
2. No constraints are placed on the size of each lot.
3. The only two relevant costs are the inventory holding cost
and the fixed cost per lot for ordering or setup.
4. Decisions for one item can be made independently of
decisions for other items.
5. The lead time is constant and known with certainty.
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Inventory status
Reorder
point
Lead time
variation
Demand
variation
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Inventory Management
• What to order
• How much to order
• When to order
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When to Order
• Key issue involves when product should be ordered
– Can order a fixed amount of inventory (Q system)
– Or, orders can be placed at fixed time intervals (P system)
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Continuous Review System (Q system)
• Reorder point system (ROP) and fixed order quantity system
– ROP = Daily Demand x Lead Time under certainty
– ROP = (D x L) + Safety Stock under uncertainty
Both Demand and Lead Time are Constant Demand is Variable and Lead Time is Constant
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Continuous Review System (13 of 13)
• Advantages of the Q System (ROP)
1. The review frequency of each SKU may be individualized.
2. Fixed lot sizes can results in quantity discounts.
3. The system requires low levels of safety stock for the amount
of uncertainty in demands during the lead time.
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Periodic Review System (P system)
Figure 9.13 P System When Demand Is Uncertain
• Fixed interval reorder system or periodic reorder system
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Periodic Review System
• Advantages of the P System
1. It is convenient because replenishments are made at
fixed intervals.
2. Orders for multiple items from the same supplier can be
combined into a single purchase order.
3. The inventory position needs to be known only when a
review is made (not continuously).
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Discussion
We understand that too much inventory creates a lot of problems for an organization. The
material manager always wants to reduce the inventory level as much as possible.
Will organizations ever get to the point when they will no longer need inventories?
Why or why not?
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Activity 3.3
Please read the case ‘Parts Emporium’ on page 135 in your custom textbook and attempt
the questions below.
Put yourself in McCaskey’s position and prepare a detailed report on managing the
inventory of the EG151 exhaust gasket and the DB032 drive belt.
Present a proper inventory system and recognize all relevant costs.
By how much do your recommendations for these two items reduce annual cycle
inventory, stockout and ordering costs?
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Unit 3
Summary
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Unit 3 Inbound logistics
Module 1
Procurement
• Procurement Objectives
• Supplier Selection and Evaluation
• Global Procurement (sourcing)
• Sustainable Procurement
Module 2
Inventory Management
• Inventory Trade-offs
• Types of Inventory
• Inventory Reduction Tactics
• ABC Analysis
• Economic Order Quantity
• Continuous Review System (Q system)
• Periodic Review System (P system)
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END
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