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ERP Transportation Inventory Textbook For Students
ERP Transportation Inventory Textbook For Students
Learning Objectives
• Understand the overview of ERP
• Recognize common problems in SCM
• Understand theoretical supply chains and common types of problems
• Know how to use Excel Solver and QM for Windows software
applications to solve transportation and inventory problems in SCM
3
COURSE INTRODUCTION
4
COURSE INTRODUCTION
WEEK LEARNING OBJECTIVES AND TOPICS
Week 1 Course introduction
Grouping
INTRODUCTION TO ERP (Group discussion and presentation)
Software applications for transportation and inventory problems in SCM
SOFTWARE APPLICATIONS IN TRANSPORTATION
Transportation problems (P&T Co. case study)
Homework (Texago)
Week 2 Transportation problem (Cont.)
VARIATION OF TRANSPORTATION PROBLEMS
• Supply ≠ Demand (Metro Water, Better Products Co.)
• Combination cannot be used for distributing units (Case study
Energetic)
Homework
5
COURSE INTRODUCTION
WEEK LEARNING OBJECTIVES AND TOPICS
7
WEEK 1: INTRODUCTION TO ERP
Agenda
01 Introduction to ERP
11
Common ERP problems
• Purchasing
• Production planning
• Sales – Distribution
• Inventory management
• Warehousing management
• HRM
• Finance
12
Supply Chain Management
13
14
Transportation problems
15
Inventory problems
• The inventory control problems are problems faced by a firm that must
decide how much to order in each time period to meet demand for its
products.
• Typical questions include:
oHow much to store/order?
oWhen to place order?
oSize of each order?
oHow to classify inventory?
16
Software applications for transportation and inventory
problems in SCM
17
Software Applications in This Course
• Excel Solver is a Microsoft Excel add-in program you can use for
what-if analysis. (Microsoft, 2020).
• POM-QM for Windows (also known as POM for Windows and QM
for Windows) is a Decision Science software package developed by
Prentice Hall (Howard J. Weiss, 2010).
• Free download at:
• https://qm-for-windows.software.informer.com
• https://wps.prenhall.com/bp_weiss_software_1/1/358/91664.cw/index.html
18
Software Application in Transportation
Learning Objectives:
• Understand transportation problem characteristics
• Apply Solver and QM for Windows to solve transportation problems
• Understand the variation of transportation problems
19
Characteristics of Transportation Problems
20
Characteristics of Transportation Problems
21
Characteristics of Transportation Problems
22
Characteristics of Transportation Problems
23
Characteristics of Transportation Problems
24
Transportation problems (P&T case study)
25
Transportation problems (P&T case study)
• The company’s current approach for many years, the company has used the following
strategy for determining how much output should be shipped from each of the canneries
to meet the needs of each of the warehouses. Current shipping strategy are:
• Since the cannery in Bellingham is furthest from the warehouses, ship its output to its nearest warehouse, namely,
the one in Sacramento, with any surplus going to the warehouse in Salt Lake City.
• Since the warehouse in Albuquerque is furthest from the canneries, have its nearest cannery (the one in Albert
Lea) ship its output to Albuquerque, with any surplus going to the warehouse in Rapid City.
• Use the cannery in Eugene to supply the remaining needs of the warehouses. For the
upcoming harvest season, an estimate has been made of the output from each cannery,
and each warehouse has been allocated a certain amount from the total supply of peas.
This information is given in Table 2.1.
26
P&T current approach
27
P&T Current Approach
Table 2.1 – Shipping data for the P&T Co.
From \ To Warehouse
30
P&T case study
The Requirements Assumption
• Each source has a fixed supply of units, where this entire supply must
be distributed to the destinations. Similarly, each destination has a fixed
demand for units, where this entire demand must be received from the
sources.
• This assumption that there is no leeway in the amounts to be sent or
received means that there needs to be a balance between the total supply
from all sources and the total demand at all destinations.
P&T case study
The Model
• Any problem (whether involving transportation or not) fits the model
for a transportation problem if it
(a) can be described completely in terms of a table like Table 2.4
that identifies all the sources, destinations, supplies, demands, and unit
costs, and
(b) satisfies both the requirements assumption and the cost
assumption. The objective is to minimize the total cost of distributing
the units.
33
P&T case study
The Unit cost Data for the P&T Co. Problem Formulated as a
Transportation Problem
From \ To Warehouse
36
Minimize cost = 464x11 + 513x12 + 654x13 + 867x14 + 352x21 + 416x22 + 690x23 + 791x24 +
995x31 + 682x32 + 388x33 + 685x34,
subject to the constraints
x11 + x12 + x13 + x14 = 75
38
Applying Excel Solver and QM for Windows for the
P&T Co. problem
• Applying Excel Solver
39
Applying Excel Solver and QM for Windows for the
P&T Co. problem
40
• Figure 2.2 – Excel Solver illustration for P&T
41
• Figure 2.2 – Excel Solver illustration for P&T
42
Applying Excel Solver and QM for Windows for the
P&T Co. problem
Applying QM for Windows
• Practice directly in QM for Windows
Step 1: Open QM → Modules → Transportation
Step 2: Define all sources and destinations
Step 3: Input data
Step 4: Click Solve
43
Figure 2.3 – Create data set for the P&T Co. Transportation problem
44
Figure 2.4 – Input data for the P&T Co. Transportation problem
45
A LESSON FROM P&T CASE STUDY
46
WEEK 2: SOFTWARE APPLICATIONS IN TRANSPORTATION
(Part 2)
Agenda
01 VARIATION OF TRANSPORTATION PROBLEMS
Learning objectives:
• Understand variation of transportation problems
• Enable to solve the transportation problems in Solver and QM for
windows
Variation of transportation problems
• Supply ≠ Demand
• Combination cannot be used for distributing units
• Unstable Demand between Min and Max Range
• The Objective is to maximize profit
50
VARIATION OF TRANSPORTATION PROBLEMS
51
Variant 1: Supply ≠ Demand
Metro Water
• It is possible to supply any of these cities with water brought in from any of
the three rivers, with the exception that no provision has been made to
supply Hollyglass with Calorie River water. However, because of the
geographic layouts of the aqueducts and the cities in the region, the cost to
the district of supplying water depends upon both the source of the water
and the city being supplied.
• The variable cost per acre foot of water for each combination of river and
city is given in Table 3.1 Using units of 1 million-acre feet, the bottom row
of the table shows the amount of water needed by each city in the coming
year (a total of 12.5). The rightmost column shows the amount available
from each river (a total of 16).
52
Variant 1: Supply ≠ Demand
53
Variant 1: Supply ≠ Demand
Supply ≠ Demand (Metro Water)
• Table 3.1 – Water Resources Data for Metro Water District
Cost Per Acre Foot
To
From Berdoo Los Devils San Go Hollyglass Available
Energetic
• The Energetic Company needs to make plans for the energy systems for a
new building.
• The energy needs in the building fall into three categories: (1) electricity, (2)
heating water, and (3) heating space in the building. The daily requirements
for these three categories (all measured in the same units) are 20 units, 10
units, and 30 units, respectively.
• The three possible sources of energy to meet these needs are electricity,
natural gas, and a solar heating unit that can be installed on the roof. The
size of the roof limits the largest possible solar heater to providing 30 units
per day. However, there is no limit to the amount of electricity and natural
gas available.
55
Variant 2: Combination cannot be used for distributing units
Energetic (cont.)
• Electricity needs can be met only by purchasing electricity. Both other
energy needs (water heating and space heating) can be met by any of the
three sources of energy or a combination thereof.
• The unit costs for meeting these energy needs from these sources of
energy are shown in Table 3.2 below. The objectives of management are
to minimize the total cost of meeting all the energy needs.
56
Variant 2: Combination cannot be used for distributing units
Energetic (cont.)
• Table 3.2 – Cost data for the Energetic Co. Problem
Unit Cost
Need
Electricity Water Heating Space heating
Source
Electricity $400 $500 $600
Natural Gas ⁃ $600 $500
Solar Heater ⁃ $300 $400
57
WEEK 3: SOFTWARE APPLICATIONS IN TRANSPORTATION
(PART 3)
Agenda
01 VARIATION OF TRANSPORTATION PROBLEMS (cont.)
1.1. Unstable Demand between Min and Max Range (Case Study
Middletown)
1.2. The objective is to maximize profit (Case Study Nifty Co.)
02 Quiz 1
Different variation of transportation problems
61
Variant 3: Unstable Demand between Min and Max Range
Middletown
• The Middletown School District is opening a third high school and
thus needs to redraw the boundaries for the areas of the city that will
be assigned to the respective schools.
• For the preliminary planning, the city has been divided into nine tracts
with approximately equal populations. (Subsequent detailed planning
will divide the city further into over 100 smaller tracts.)
62
Variant 3: Unstable Demand between Min and Max Range
Middletown (cont.)
• The school district management has decided that the appropriate
objective in setting school attendance zone boundaries is to minimize
the average distance that students must travel to school.
• The unit costs for meeting these energy needs from these sources of
energy are shown in Table 3.3. The objective of management is to
minimize the total cost of meeting all the energy needs.
63
Variant 3: Unstable Demand between Min and Max Range
Unstable Demand between Min and Max Range (Case Study Middletown)
• Table 3.3 – Data for the Middletown school district problem
Distance (Miles) to School Number of High
Tract
1 2 3 School students
1 2.2 1.9 2.5 500
2 1.4 1.3 1.7 400
3 0.5 1.8 1.1 450
4 1.2 0.3 2.0 400
5 0.9 0.7 1.0 500
6 1.1 1.6 0.6 450
7 2.7 0.7 1.5 450
8 1.8 1.2 0.8 400
9 1.5 1.7 0.7 500
Minimum enrollment 1,200 1,100 1,000
Maximum enrollment 1,800 1,700 1,500 64
Variant 4: The objective is to maximize profit
Case Study Nifty Co.
• Read the case on LMS
65
Different variation of transportation problems
The objective is to maximize profit (Case Study Nifty Co.)
• Table 3.4 – Data for the Nifty Co. Problem
Unit profit
Customer Production
Plant 1 2 3 4
quantity
1 55 42 46 53 8,000
2 37 18 32 48 5,000
3 29 59 51 35 7,000
Minimum purchase 7,000 3,000 2,000 0
68
Glossary of Transportation
69
Glossary of Transportation
70
WEEK 4: SOFTWARE APPLICATIONS IN INVENTORY MANAGEMENT
(PART 1)
Agenda
01 Introduction to Inventory
73
Introduction to Inventory Management
74
Introduction to Inventory Management
76
Cost Components of Inventory Models
77
Cost Components of Inventory Models
78
Cost Components of Inventory Models
79
The Basic Economic Order Quantity (EOQ) Model
80
The Basic Economic Order Quantity (EOQ) Model
81
The Basic Economic Order Quantity (EOQ) Model
• Figure 4.1 – The pattern of inventory levels over time for a product
82
The Basic Economic Order Quantity (EOQ) Model
83
The Basic Economic Order Quantity (EOQ) Model
• Figure 4.2 – The pattern of inventory levels over time assumed by the basic
EOQ model
84
The Basic Economic Order Quantity (EOQ) Model
• For any inventory system fitting the basic EOQ model, here are some
key formulas.
𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑 𝑟𝑎𝑡𝑒 𝐷
Number of setups per year = = .
𝑜𝑟𝑑𝑒𝑟 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑄
𝑚𝑎𝑥𝑖𝑚𝑢𝑚 𝑙𝑒𝑣𝑒𝑙 + 𝑚𝑖𝑛𝑖𝑚𝑢𝑚 𝑙𝑒𝑣𝑒𝑙
Average inventory level =
2
𝑄 + 0 𝑄
= =
2 2
Total variable cost (TVC) = annual setup cost + annual holding cost =
𝐷 𝑄
𝐾 +ℎ
𝑄 2
86
The Basic Economic Order Quantity (EOQ) Model
• The value of Q which gives the minimum value on the TVC curve is
the optimal order quantity Q*, when annual holding cost is equal to
annual setup cost
Annual holding cost = Annual setup cost.
𝑄 𝐷
ℎ =𝐾
2 𝑄
87
The Basic Economic Order Quantity (EOQ) Model
• This yields the following formula for Q* (The Square Root Formula
for the Optimal Order Quantity)
∗
2𝐾𝐷
𝑄 =
ℎ
Where
D = annual demand rate,
K = setup cost,
h = unit holding cost.
88
Case study: The Atlantic coast tire corp. (ACT)
problem
Figure 4.3 – The pattern of inventory levels over time for the 185/70
R13 Eversafe tire under ACT’s current inventory policy
89
Case study: The Atlantic coast tire corp. (ACT)
problem
Read the case study on LMS
Questions:
• When a wholesaler (like ACT) places an order for goods, what can
cause the cost to exceed the purchase price?
• What are cost components of ACT inventory model?
90
The optimal inventory policy for the basic EOQ model
of ACT
The Square Root Formula for the Optimal Order Quantity
Number of setups per year = annual demand rate / order quantity = D/Q
Average inventory level = (maximum level + minimum level)/2
TVC (Total Variable Cost) = annual setup cost + annual holding cost
2𝐾𝐷
𝑄 ∗=
ℎ
Q*: the optimal order quantity
D = annual demand rate, K = setup cost,
h = unit holding cost.
91
The current inventory policy of ACT
Figure 4.4 – A spreadsheet formulation of the basic EOQ model for the ACT problem when using the
current order quantity of Q = 1,000
92
Applying Excel Solver to formulate and solve the basic
EOQ model
94
Applying QM for Windows to formulate and solve the
basic EOQ model
96
Figure 4.7 – Input data in QM for Windows
WEEK 5: SOFTWARE APPLICATIONS IN INVENTORY MANAGEMENT
(PART 2)
Agenda
01 VARIATION OF EOQ MODEL IN INVENTORY MANAGEMENT
100
Different variants of Inventory problems
101
Variant 1: The EOQ model with Planned Shortages
This model is a variation of the basic EOQ model described in the preceding
two sections. The difference arises in the third of its key assumptions
(Planned shortages are allowed):
Assumptions
• A constant demand rate.
• The order quantity to replenish inventory arrives all at once just when
desired.
• Planned shortages are allowed. When a shortage occurs, the affected
customers will wait for the product to become available again. Their
backorders are filled immediately when the order quantity arrives to
replenish inventory.
102
The EOQ model with Planned Shortages
Figure 5.1 – The pattern of inventory levels over time assumed by the EOQ model with planned
shortages, where both the order quantity Q and the maximum shortage S are the decision variables.
103
Variant 1: The EOQ model with Planned Shortages
The Objective of the Model
• This model has two decision variables — the order quantity Q and the
maximum shortage S. The objective in choosing Q and S is to
• This TVC needs to include the same kinds of costs as for the basic
EOQ model plus the cost of incurring the shortages. Thus,
TVC = annual setup cost + annual holding cost + annual shortage cost.
104
Variant 1: The EOQ model with Planned Shortages
As for the basic EOQ model,
105
Variant 1: The EOQ model with Planned Shortages
where the symbol p is used to indicate that this is the penalty for
incurring the shortage of a unit. Since this unit shortage cost only is
incurred during the fraction of the year when a shortage is occurring,
106
Variant 1: The EOQ model with Planned Shortages
Since this unit shortage cost only is incurred during the fraction of the
year when a shortage is occurring,
Annual shortage cost = p times (average shortage level when a shortage
occurs) times (fraction of time shortage is
occurring)
𝑆 𝑆 𝑆2
=𝑝 =𝑝
2 𝑄 2𝑄
110
Variant 1: The EOQ model with Planned Shortages
Application to the ACT Case Study
D= 6000 (demand/year)
K= $115 (setup cost)
h= $4.20 (unit holding cost)
p= $7.50 (unit shortage cost)
111
Variant 1: The EOQ model with Planned Shortages
Application to the ACT Case Study
Table 5.1 –Data of the ACT problem
D= 6000 (demand/year)
K= $115 (setup cost)
h= $4.20 (unit holding cost)
p= $7.50 (unit shortage cost)
112
Variant 1: The EOQ model with Planned Shortages
Applying Excel Solver to formulate and solve ACT’s planned shortage
problem.
Figure 5.2 – The results obtained for the ACT problem by applying either of the Excel
templates (Solver version or analytical version) for the EOQ model with planned
shortages 113
Variant 1: The EOQ model with Planned Shortages
Applying QM for Windows to formulate and solve ACT’s planned
shortage problem.
Step 1: Data settings for ACT – EOQ model with planned shortage
(Figure 5.3)
Step 2: Input data in QM for ACT – EOQ model with planned shortage
(Figure 5.4)
Step 3: Solution for ACT –– EOQ model with planned shortage in QM
for Windows (Figure 5.5)
114
Variant 1: The EOQ model with Planned Shortages
Figure 5.3 – Data settings in QM for ACT problem with planned shortage 115
Variant 1: The EOQ model with Planned Shortages
117
Variant 2: The EOQ Model with Quantity Discounts
Assumptions
• Annual acquisition cost becomes a variable cost.
• Holding cost varies upon purchasing price.
• TVC = annual acquisition cost + annual setup cost + annual holding
cost.
118
Variant 2: The EOQ Model with Quantity Discounts
119
Variant 2: The EOQ Model with Quantity Discounts
TVC = annual acquisition cost + annual setup cost + annual holding cost.
where
c = unit acquisition cost (as given in Table 5.3)
D = annual demand rate
K = setup cost
Q = order quantity (the decision variable),
h = unit holding cost.
I = inventory holding cost rate
h = Ic
120
Variant 2: The EOQ Model with Quantity Discounts
121
Variant 2: The EOQ Model with Quantity Discounts
122
Variant 2: The EOQ Model with Quantity Discounts
Cost Analysis
• Even though ACT will continue to purchase a fixed total of 6,000 tires
of the 185/70 R13 size per year, the annual acquisition cost now
depends on the size of the individual order quantities. Therefore, to
adapt the basic EOQ model to incorporate quantity discounts, the total
variable cost is calculated as shown in the following Figure 5.6.
• The decision-making process for Inventory policy in Excel
123
Figure 5.6 – The application of the Excel template (analytical) for the EOQ
model with quantity discounts to the ACT problem 124
Variant 2: The EOQ Model with Quantity Discounts
125
Variant 2: The EOQ Model with Quantity Discounts
126
Variant 2: The EOQ Model with Quantity Discounts
127
Variant 3: The EOQ Model with Gradual Replenishment
• One of the assumptions of the basic EOQ model is that the order
quantity to replenish inventory arrives all at once just when desired.
Having the order delivered all at once is common for retailers or
wholesalers (such as ACT), or even for manufacturers receiving raw
materials from their vendors. However, the situation often is different
with manufacturers when they replenish their finished-goods and
intermediate-goods inventories internally by conducting intermittent
production runs. The EOQ model with gradual replenishment is
designed to fit this situation.
• This model assumes that the pattern of inventory levels over time is
the one shown in Figure 5.10.
128
Variant 3: The EOQ Model with Gradual Replenishment
Figure 5.10 – The pattern of inventory levels over time — rising during a production run
and dropping afterward — for the EOQ model with gradual replenishment
129
Variant 3: The EOQ Model with Gradual Replenishment
Assumptions
• A constant demand rate.
• A production run is scheduled to begin each time the inventory level
drops to 0, and this production replenishes inventory at a constant rate
throughout the duration of the run.
• Planned shortages are not allowed.
130
Variant 3: The EOQ Model with Gradual Replenishment
The objective of the model
• The decision variable of this model is the production lot size Q. The
objective is choosing Q to
Minimize TVC = total variable inventory cost per year.
• This TVC needs to include the same kinds of costs as for the basic EOQ
model
TVC = annual setup cost + annual holding cost
• As for the basic EOQ model,
𝐷
Annual Setup cost = 𝐾 𝑄
Annual holding cost = h (average inventory level)
1
Average inventory level = 2 (maximum inventory level)
Maximum inventory level = production lot size – demand during production run
131
Variant 3: The EOQ Model with Gradual Replenishment
132
Variant 3: The EOQ Model with Gradual Replenishment
135
Variant 3: The EOQ Model with Gradual Replenishment
136
Variant 3: The EOQ Model with Gradual Replenishment
Figure 5.11 – The results obtained for the SOCA problem by applying the Excel
Solver for the EOQ model with gradual replenishment 137
Variant 3: The EOQ Model with Gradual Replenishment
138
The EOQ Model with Gradual Replenishment
Figure 5.12 – Data settings for SOCA – EOQ model with gradual replenishment 139
The EOQ Model with Gradual Replenishment
Figure 5.13 – Input data for SOCA – EOQ model with gradual replenishment 140
The EOQ Model with Gradual Replenishment
Figure 5.13 – Input data for SOCA – EOQ model with gradual replenishment 141
Glossary of Inventory management
143
Glossary of Inventory management
144
Glossary of Inventory management
• Inventory system: the set of policies and controls that monitor levels
of inventory.
• Inventory: Goods being stored for future use or sale.
• Inventory policy: A rule that specifies when to replenish inventory
and by how much.
• Just-in-time (JIT) inventory system: A system that places great
emphasis on reducing inventory levels to a bare minimum, as well as
eliminating other forms of waste in the production process.
• Lead time: The amount of time between the placement of an order
and the delivery of the order quantity.
145
Glossary of Inventory management
• Material requirements planning (MRP): A computer-based system for planning, scheduling, and
controlling the production of all the components of a final product.
• Manufacturing inventory: refers to items that contribute to or become part of a firm’s product.
• Opportunity cost: When capital is used in a certain way, its opportunity cost is the lost return
because alternate opportunities for using this capital must be foregone.
• Order quantity: The number of units of a product being acquired, either through purchasing or
manufacturing, to replenish inventory.
• Periodic-review system: An inventory system whose inventory level is only checked periodically.
146
Glossary of Inventory management
147
Glossary of Inventory management
• Setup cost: The fixed cost associated with initiating the replenishment
of inventory, whether the administrative cost of purchasing the product
or the cost of setting up a production run to manufacture the product.
• Shortage cost: The cost incurred when there is a need to withdraw
units from inventory and there are none available.
• Square root formula: The formula for calculating the optimal order
quantity for the basic EOQ model.
• Variable cost: A cost that is affected by the decisions made.
148
WEEK 6: Wrap – up
Final Exam (Group project and presentation)