Logistics Exercises Textbook

„ZPR PWr – Zintegrowany Program Rozwoju Politechniki Wrocławskiej”
Logistics
Exercises
Roman Pietroń
Wrocław 2019
© Material to use only at WUST (PWr.) on the NCBiR license
© Materiał do wykorzystania w PWr. na licencji NCBiR
Contents
Contents ...................................................................................................................................... 2
Introduction ................................................................................................................................ 3
1. Logistics and supply chain strategies ..................................................................................... 5
1.1. Logistics and supply chain management ......................................................................... 5
1.2. Logistics strategy............................................................................................................. 8
1.2.1. Logistics strategy classifications .............................................................................. 8
1.2.2. Logistics strategy success and effectiveness – examples and case studies .............. 9
1.3. Logistics strategy design and implementation .............................................................. 12
1.3.1. Logistics strategy elements .................................................................................... 12
1.3.2. Logistics strategy design ........................................................................................ 12
1.4. Questions and exercises ................................................................................................ 14
1.3.1. Challenge questions................................................................................................ 14
1.3.2. Exercises................................................................................................................. 14
2. Basic problems and general methods of logistics ................................................................ 16
2.1. General approaches in logistics ..................................................................................... 16
2.2. Selected problems of logistics and their basic solutions ............................................... 16
2.2.1. ABC/XYZ classifications ....................................................................................... 16
2.2.2. Trade-off and trade-up models in logistics ............................................................ 18
2.2.3. Location problem solving....................................................................................... 19
2.2.4. Supplier selection and evaluation ........................................................................... 21
2.3.2. Exercises................................................................................................................. 27
3. Inventory control and planning in logistics .......................................................................... 30
3.1. Inventory in logistics – general approaches .................................................................. 30
3.2. Inventory control and management models .................................................................. 31
3.2.1. Economic order quantity in inventory control – EOQ model ................................ 31
3.2.2. Purchasing in logistics – Wagner-Within dynamic model ..................................... 33
3.2.3. Reorder point calculation in inventory control ...................................................... 34
3.2.4. Material requirements planning (MRP) in inventory control................................. 35
3.2.5. Distribution requirements planning (DRP) in inventory control ........................... 37
3.3.2. Exercises................................................................................................................. 39
4. Transportation in logistics .................................................................................................... 44
4.1. Transportation problems – general approaches ............................................................. 44
4.2. Selection of transportation branches and scheduling in logistics .................................. 45
4.2.1. Transportation branches and its selection .............................................................. 45
4.2.2. Transportation optimisation modelling and scheduling ......................................... 46
4.3.2. Exercises................................................................................................................. 49
Summary and concluding remarks ........................................................................................... 52
Bibliography ............................................................................................................................. 53
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Introduction
This is a textbook for Computer Science & Management (CSM) faculty studies on
Organizational Management (OM) specialisation, particularly on logistics and supply chain
strategies, and on applications of quantitative management approaches to support decision
making in logistics problem solving. The aim of the textbook is to support the “Logistics”, 15-
hour lecture and exercises courses by presentation of basic approaches and methods in logistics
problems’ solving.
Over the last decades, the logistics, as a rather practical science discipline, has advanced
from the only warehouse and transportation operational management areas to the strategic level
management area. Increasing market requirements and competition, enhanced by globalisation
strategy, lead to an implementation of better logistics management strategies, methods, tools
and technologies. Logistics management research, teaching needs, and new application of
information and communication technologies (ICT) result in constant need to change the
university lecture content, but still there is a possibility to identify some basic methodological
foundations to help logistics managers in modelling, designing, planning, decision making,
analysing, and diagnosing logistics management dysfunctionalities. Also some logistics
modelling (particularly logistics process modelling) reference approaches and standards (e.g.
SCOR reference model) are recommended for practical logistics management systems
implementation. Logistics includes all the activities to move product and information between
members of logistics supply chains or networks.
The “Logistics” course enables students to learn the basic concepts of logistics and logistics
management with the applications in management of business systems. The course aim is to
deliver basic knowledge and to allow understanding a strategic role of the logistics operations
and supply chains, also understanding of logistic systems and management problems, and more
practically, to develop ability to devise workable solutions (by simple models) in business
logistics situations. The course introduces the idea, origins and concepts of logistics
management implementation in organizations. During the lecture the logistics and supply chain
management by integrated functions, processes and operations in organizations will be
presented, as well as concepts, methods and techniques of logistics systems management and
design. The application part of the course includes also a survey of some classical modelling
and optimisation methods and software tools for logistics functions (purchasing, warehousing,
distribution planning, locations).
The propaedeutic concept for “Logistics” course in 15-hour exercises class, presented in
this textbook, is based on six parts related to class time framework. Basic idea of each exercise
class agenda is to introduce briefly theoretical background (10-minute introduction made by the
teacher, 30-minute presentation made by thematically set students’ groups), and then to discuss
cases or to solve calculation exercises, (students’ homework results). During the first 2-hour
exercise class students are instructed about basic organisational matters, e.g. rules, assessment
grade policy, class schedule. Also it is to focus on the first (introductory) discussions on
fundamentals of logistics (e.g.” What is a logistics?, What is a supply chain?, What trends and
tendencies are in contemporary logistics? What areas and activities are in logistics
management?, What are basic principles, rules, and strategies in modern and efficient logistics
systems?) and first workshop on logistics strategy design. Student also learn and discuss a role
of logistics strategies in modern enterprises and some proposals to classify logistics strategies.
The next two 2-hour exercise classes are focused on learning basic methods to manage
complexity of logistics systems, particularly to solve classification and location problems, e.g.
inventory control and purchasing with an application of ABC (Pareto) and XYZ (demand
variation) classifications, logistics centre location with an application of gravity, modal and
break-even point analysis. Also students have opportunity to discuss some industrial and
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commercial cases (e.g. Würth Group (distribution system) and Wal-Mart (cross-docking
strategy). In the next two 2-hour exercise, the inventory control problem solving methods are
considered, particularly optimisation methods for making decisions in purchasing, inventory
reorder point and safety stock calculation, e.g. EOQ basic model application, EOQ
modifications of basic model applications, Wagner-Whitin (W-W) dynamic model
applications, and rolling-horizon algorithms for production (MRP) and distribution (DRP)
inventory planning systems. Last two 2-hour exercise classes are focused on transportation
problem solving methods and models to be applied in logistics. Students learn some selected
issues of transport management in logistics (fleet management, routing and scheduling),
international transport systems and regulations, modal and intermodal transport systems, and
basic transportation decisions in logistics. Some selected optimisation and heuristics
approaches are also considered in examples and cases.
The textbook for “Logistics” exercises class consists of four chapters. In the first chapter
logistics and supply chain strategies are described. Particularly, elements of strategies,
definitions, classifications and some useful practical guidelines for strategy design and its
effective implementation with some business examples and cases are presented. In the second
chapter, some selected logistics main issues are considered, particularly ABC/XYZ
classifications applied to inventory management, trade-off vs. trade-up modelling, location
problem solving in logistics, and selection of supplier’s problem solving with multi-criteria
MCA and AHP analysis. The third chapter focuses on inventory control approaches in logistics
with an application of some selected quantitative optimisation methods, e.g. EOQ, some
modifications of EOQ model, dynamic Wagner-Whitin model, and reorder-point with safety
stock calculation approaches, In the fourth chapter transportation issue and some selected
quantitative optimisation and heuristics models are presented. Particularly, break-even point
analysis, linear programming models, and network modelling approaches are discussed. The
structure of each chapter consists of three parts - theoretical basic knowledge, practical
examples to learn particular problem defining, modelling and solving, and finally a part
concerning challenge issues (problems and test questions) and examples of exercises to be
solved individually by a student. To develop more advanced skills, students can use the other
materials with examples of exercises tasks, particularly it is recommended to find some
additional logistics issues descriptions with practical heuristics, analytical, and numerical
exercises in: [2], [3], [4], [5], [7], [8], [9], [10], [11], [12], [13], [14], [16].
The textbook is prepared with a support of UE Operational Programme “PO WER” at
Wrocław University of Science and Technology „ZPR PWr – Zintegrowany Program Rozwoju
Politechniki Wrocławskiej” in 2019 year.
Roman Pietroń, November 2019.
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1. Logistics and supply chain strategies
1.1. Logistics and supply chain management
Logistics today is defined in various ways, particularly it is defined in three aspects. In an
activity (subject) aspect, logistics is usually defined as “an organisation of goods and information
flow between supply chain partners (participants)”. In management aspect, it is comprehended as
a “new philosophy of management (orientation on: integration, time, flow, market)”. And finally,
from a scientific point of view, in science aspect, logistics is classified and labelled as a
“knowledge domain” (but as far, because of basically practical knowledge contribution, only at an
early stage of a mature science discipline). Logistics today has “9R” missions: to get the right
goods or services to the right place, at the right time, and in the desired condition and quantity in
relation to customer’s order, at right cost, having right suppliers, right customers, and delivering
goods or services in the right way (mode).
Logistics originally was a military term as a process to supply combat and troop support. In the
last 3 decades many definitions and synonyms have tried to capture the management of flows of
‘products’, services and information from place of production to place of consumption, some of
these synonyms include: business logistics, distribution, industrial distribution, physical
distribution, supply chain management. Logistics is the process of strategically managing the
procurement, movement and storage of materials, parts and finishing inventory (and the related
flows of information) through the organisation and its marketing channel in such a way that current
and future profitability are maximised through the cost-effective fulfilment of orders. (Christopher
M. 1998). Council of Supply Chain Management Professionals (CSCMP), as a logistics
international organization, defines logistics as “part of supply chain management, which effectively
and efficiently plans, runs (manages) and controls flows and supplies of products and services,
and connected information between start production and final consumption points, with the
purpose of satisfying consumer requirements”. Another organization, the Council of Logistics
Management (CLM), defines logistics as “the process of planning, implementing and controlling
the efficient, cost-effective flow and storage of raw materials, in-process inventory, finished goods
and related information from point of origin to point of consumption for the purpose of conforming
to customer requirements”.
The basic differences between traditional logistics and supply chain logistics are in inventory
management, organization of flows, cost orientations, information channels, and risk management
(Tab. 1.1.1).
Table 1.1.1. Differences between traditional (internal) logistics and supply chain logistics
Factor Traditional logistics Supply chain logistics
Inventory management Internal Pipeline coordination
Flows Discrete and interrupted Continuous and visible in supply

chain
Cost Internal and local optimisation Total chain cost, product price
Information Internal system Supply chain system
Risk Local risk management Supply chain risk management
Planning Local planning Supply chain planning
Relations between Internal strategies and local Supply chain strategies and
organisations optimisation optimisation, partnership
The development of logistics advantage today is basically possible by a shift toward processes.
Logistics process is the „end-to-end” (e2e) series of linked, continuous, and managed activities
that contribute to an overall desired organisation’s outcome or result (e.g. marketing, production,
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procurement, logistics, and services). To be effective, organisations need to work together to
identify core processes in the demand and supply chains. Generic core processes of the value chain
include design and development, production, procurement, marketing and service. And logistics
is the support process that provides the infrastructure to manage the ‘stocks and flows’ of goods
and information throughout the value chain.
In internal or supply chain forms of logistics today, managers use many qualitative and
quantitative approaches to support all the classical management functions (e.g. planning, decision
making, enactment, controlling, motivating) with a support of new technologies (e.g. ICT).
Particularly, trade-off and trade-up optimisation models, process and quality management
approaches, outsourcing models and integrated planning systems are implemented (Tab. 1.1.2).
Table 1.1.2. Examples of approaches applied in logistics management
Logistics issue Approaches
Distribution network configuration Network flow optimisation
Inventory management and flow control Forecasting and inventory control policies, VMI/SMI, JIT,
Kanban
Supply contracts Global optimisation
Distribution strategies Warehousing and transportation cost management
Supply chain integration and strategic Collaborative Planning, Forecasting and Replenishment (CPFR),
partnership CRM, quality management (TQM, ISO), SCM, eSCM, SCOR
Outsourcing and procurement strategies Managing risk, payoff trade-off, outsourcing vs. buying
ICT and DSS implementation MRP, MRP II, ERP, DSS, and Big Data system implementations
Diagnosis, Planning, and Problem solving Process activity map, VAD, Supply chain response matrix,
Production variety funnel, Quality filter map, Demand
amplification map, Decision point analysis, Physical structure
map, Matrix diagram, Brainstorming, Cause and effect diagram,
Gantt chart, PERT schedule, Schedule contingency analysis,
Pareto (ABC/XYZ), Benchmarking, Risk analysis
(FMEA/PFMEA), Operations Research (OR) optimisation,
simulation
Design, Monitoring, and Process Process activity map (BPR), Process capability analysis,
improvement Statistics Process Control (SPC), Schedule contingency analysis,
Poka-yoke, Pareto (ABC/XYZ), Benchmarking, Risk analysis
(FMEA/PFMEA)
Logistics cooperation in supply chains have the following basic forms of strategic alliances:
 Hierarchical relations: through acquisition or merger, one firm takes full control of another’s
assets and coordinates actions by the ownership rights mechanism.
 Joint ventures: two or more firms create a jointly owned legal organization that serves a
limited purpose for its parents, such as R&D or marketing.
 Equity investments: a majority or minority equity holding by one firm through a direct stock
purchase of shares in another firm.
 Cooperatives: a coalition of small enterprises that combine, coordinate, and manage their
collective resources.
 R&D consortia: inter-firm agreements for research and development collaboration, typically
formed in fast-changing technological fields.
 Strategic cooperative agreements: contractual business networks based on joint multi-party
strategic control, with the partners collaborating over key strategic decisions and sharing
responsibilities for performance outcomes.
 Cartels: large corporations collude to constrain competition by cooperatively controlling
production and/or prices within a specific industry.
 Franchising: a franchiser grants a franchisee the use of a brand-name identity within a
geographic area, but retains control over pricing, marketing, and standardized service norms.
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 Licensing: one company grants another the right to use patented technologies or production
processes in return for royalties and fees.
 Subcontractor networks: inter-linked firms where a subcontractor negotiates its suppliers’
long-term prices, production runs, and delivery schedules.
 Industry standards groups: committees that seek the member organizations’ agreements on
the adoption of technical standards for manufacturing and trade.
 Action sets: short-lived organizational coalitions whose members coordinate their lobbying
efforts to influence public policy making.
 Market relations: arm’s-length transactions between organizations coordinated only through
the price mechanism.
There are the following motivations, intentions, and choices in logistics cooperation within
supply chains in forms of strategic alliances:
 Market seeking and complementarity of goods and services to markets;
 Diversifying into new businesses;
 Co-specialisation;
 Legitimation, bandwagon effect, following industry trends;
 Restructuring, improving performance;
 Acquiring means of distribution;
 Gaining access to new technology, and converging technology;
 Learning and internalisation of tacit, collective and embedded skills;
 Obtaining economies of scale, co-ordination in planning, and gaining mutual benefits;
 Achieving vertical integration, recreating and extending supply links in order to adjust to
environmental changes;
 Cost sharing, pooling of resources;
 Developing products, technologies, resources;
 Risk sharing, risk reduction and risk diversification;
 Developing technical standards and compatibility;
 Achieving competitive advantage and goals sharing;
 Cooperation of potential rivals, or pre-emptying competitors, developing trust and openness,
information sharing;
 Overcoming legal/regulatory barriers.
From the organisational structure point of view, logistics as a function or process oriented
management approach, can be located in the overall structure of an organization in many ways.
The evolution process of logistics location in organizational structures created the following types
of logistics organizational structure:
 Type 0, as an early stage of logistics approach (), when some classical logistics activities
and operations were dispersed within functional departments (approx. time period: until 60th
years of XX c.);
 Type I, as a first step to integrate usually dispersed logistics activities in some sub-function
groups (approx. time period: 1960-1970);
 Type II, as the next step to integrate the other usually dispersed logistics activities in function
groups (approx. time period: 1970-1980) to form logistics functional departments;
 Type III, as a step to create formal (institutional) variety of logistics organizational structures
to form centralized, decentralized, divisional, linear, matrix, and process-oriented structures
(approx. time period: 1980-1990);
 Type IV, as a step to create supply chains, outsourcing (3PL), and network organizational
structures, particularly to implement supply chain management (approx. time period: 1990-
2000);
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 Type V, as a step to create more dynamic and integrated supply chains, coordinated
outsourcing (4PL, 5PL), virtual and polycentric networks, logistics or regional logistics
centre organizational structures with a support of e-business forms, ICT technologies, and
distributed manufacturing models (approx. time period: 2000-).
1.2. Logistics strategy

1.2.1. Logistics strategy classifications
Basically, strategy is a plan of organisation’s activity, related to its present and future situation in
environment and relatively constant and coherent type of activity. Typical elements of a strategy
are: strategic goals, activity domain, ways to develop advantage, functional strategies (activity
programmes).
The aim of logistics strategy classification is to focus and refine logistics efforts to manage
logistics objects or entities (e.g. materials, final products, processes) leading to business success.
Therefore, this approach has strategic, business model, economic, statistical, and procedural bases
(as a focus on the most important business aspects). Classifications can be based on a variety of
criteria and measures. The most common are: a business role of logistics in supply chain, a range
of logistics operations, logistics product characteristics, demand features, and a time-based
planning horizon.
Basically, from the business goal setting perspective, it is possible to point four kinds of
strategies:
 Effective strategy, which provides appropriate balance between achievement of strategic
goals, the organization and its environment;
 Deliberate strategy defined as a ‘plan of action’ that is chosen and implemented by the
organization in order to help to achieve specific goals. It is worth to mention that in deliberate
strategy the process of formulation and implementation of strategy is usually systematic,
planned and rational;
 Emergent strategy as the strategy used in the situation, where mission and goals are not set
up and it helps to develop ‘pattern of action’ in the process of time;
 Expansion strategy as considered to be most aggressive strategy, it aims at increasing the
scope, number, extend, or to enlarge. It is possible to distinguish four different expansion
strategies presented below:
– Market penetration means developing rapidly by selling more existing products in
existing markets;
– Market development or market extension is about putting existing products into new
market segments or new markets;
– Product development – creating or developing products and selling it in existing markets;
– Diversification – ‘branching out into new products for new markets; diversification
suggests an expansion outside the firm’s current core businesses.
From the geographical and national perspective of logistics cooperation and local requirements,
and cost orientations’ criteria, basically five logistics strategies can be distinguished: glocal
strategy, global strategy, multinational strategy, transnational strategy, and international strategy
(Tab. 1.2.1).
Table 1.2.1. International cooperation context in logistics strategies
Strategy Global Glocal Multi- Trans- Inter-national
Focus on (a new trend) national national
Local requirements Weak Locally strong Strong Strong Weak
Cost Strong Locally weak Weak Strong Weak
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Another classification of logistics strategies’ proposal takes cost importance, response, and
logistics product differentiation level issues into account, as the main criteria for classification
(Tab. 1.2.2).
Table 1.2.2. Logistics strategy classification by cost, responsiveness, and differentiation
Low cost strategy Response strategy Differentiation strategy
Primary supplier  Cost  Capacity  Product development
selection criteria  Speed skills
 Flexibility  Willing to share
information
 Joint and rapid product
development
Supply chain inventory  Minimise inventory  Use buffer stocks to ensure  Minimise inventory to
to reduce costs speedy supply avoid product
obsolescence
Distribution network  Inexpensive  Fast transportation  Gather and communicate
transportation  Provide premium customer market research data
 Sell through discount service  Knowledgeable sales
distributors/retailers staff
Product design  Maximise  Low set-up time  Modular design to aid
characteristics performance  Rapid production ramp-up product differentiation
 Minimise cost
Some classifications are taxonomies, based on survey researches, as empirical cluster analysis
of the most important logistics issues and features to be identified in business organizations. For
example, D.J. Bowersox and P.J. Daugherty (1987) developed the first known business logistics
strategy classification [6]. They identified three distinct organizational orientations, with
corresponding operating patterns and “strategic thrusts” utilized for gaining competitive strategic
advantage through logistics. Included in their original typology are process-based, market-based,
and information-based strategic logistics orientations. They are summarized as follows:
 Process Strategy: Traditional logistics activities are managed as a value-added system.
Emphasis is on achieving maximum efficiency, the primary goal is to control costs, and the
focus is on rationalizing complex activities into an efficient value-added system;
 Market Strategy: A limited number of traditional logistics activities are managed across
business units. Emphasis is on achieving synergy from coordinated physical distribution, the
primary goal is to serve common customers from various business units, and the focus is on
reducing the complexity faced by customers;
 Information Strategy (also called Channel Strategy): A diverse group of traditional logistics
activities, together with other activities, are managed as a channel system. Emphasis is on
the coordination and control of dealer and distributor networks and the focus is on achieving
inter-organizational coordination and collaboration through logistics and information
management.
The other empirical logistics strategy classification was made by C.W. Autry, Z.G. Zacharia,
C.W. Lamb (2008), who developed classification by identification of logistics operational
activities allowing to reach strategic advantage [1]. They identified only two basic types of
logistics strategies:
 FL (functional and internal logistics);
 EOL (externally oriented logistics with integration, cooperation, and coordination).
1.2.2. Logistics strategy success and effectiveness – examples and case studies
Ford Motor Company Case - Ford T ("Tin Lizzy") production case
The logistics innovation: logistics of production and supply (Fordism).
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In 1913, the Ford Motor Company in Detroit (U.S.) introduced a complete "assembly line of the
car in motion", from the chassis to the finished car. Instead of work brigades and tools, the product
moves. This reduced the total time of assembly. The product itself was characterized by a
simplification of the design of the well-known Renault car model.
Toyota Motor Corporation Case
The logistics innovation: logistics of supply, production and distribution (TPS, JIT system).
Managers at Toyota Motor Company have adapted logistics solutions used on U.S. retail networks
while varying product (Chevrolet, GM strategies). Deliveries are run by customers who, when
submitting their desire to purchase the final product (goods), trigger delivery flows between
system cells (suppliers, manufacturers, trade). The most important element of the logistics strategy
used is its time orientation (JIT method), which enables the use of many effective supply chain
management solutions (partnership, outsourcing) and inventory management (production without
inventory).
Honda Motor Corporation case ("H-Y War")
The logistics innovation: new logistics strategies and rules (differentiation and rapid response).
In 1981, Yamaha was the dominant manufacturer on the motorcycle market, which opened a new
factory with market leadership. Honda, which has so far focused on the automotive market, decides
to fight for the market and changes its strategy to: diversify the motorcycle offer, lower prices,
expand distribution, increase advertising spending. Honda increases the number of models offered
from 60 to 113 in 18 months (at the same time Yamaha makes only 37 changes to the offer).
Similar strategies have begun to apply to other companies in Japan, Europe and the USA (e.g.
Sony, Sharp, Toyota, Hitachi, NEC, Toshiba, Benetton, Federal Express, Domino's Pizza, Wilson
Art, McDonald's).
SKF case
The logistics innovation: logistics strategies and rules (substitution rule).
In the early 1980s, a Swedish company SKF – a large scale bearings’ manufacturer with factories
in Sweden, Germany, England, France and Italy, is facing competition from Japanese companies
and is starting to lose European markets in price competition. The diagnosis of the situation
showed that Japanese manufacturers focused on fewer bearing types - those for which there was
constant and high demand (SKF produced about 50,000 bearing types). SKF did not benefit from
scale and experience while introducing a "price umbrella" over Japanese companies. SKF decided
to concentrate the production of individual types in individual factories after identifying and
analysing the relationship between distribution and bearing production costs. A system of planning
and information flow has been developed to control production, stocks and transport. Despite the
increase in transport costs, the reduction in production costs (economies of scale and experience),
inventory costs (better planning and concentration of stocks) allowed to reduce total logistics costs.
Wal-Mart case
The logistics innovation: flows without inventory by synchronisation (cross-docking).
In 1979, Wal-Mart - a small retailer in the South of the U.S. with 229 discount stores introduced a
new replenishment system solution. The source of success is to focus on meeting the customer's
needs, with the mission to provide customers with access to quality goods when customers need
it, while obtaining a structure of logistics costs that allows for competition and the reputation of a
reliable company. The most important elements of the logistics strategy were the way stocks were
replenished and a fast and efficient transport system. In the first stage, the location of the
distribution centre was determined, then the location of the stores. Then the Cross-docking
technique was used. In this system, goods are constantly delivered to distribution points, where
they are selected, repacked and sent to stores, without inventory creation. Goods pass from dock
to dock in a short period of time (48 hours or less) - the company obtains the benefits of full use
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of transport (the batch of goods corresponds to the load capacity) and reduce the cost of stock and
storage. In Wal-Mart, 85% of goods flow through wholesalers without storage. In the commercial
rival, Kmart (with 1,891 discount stores and twice the average sales revenue in one store), the rate
was 50%. Today, Wal-Mart is the world's largest and most profitable retailer (ROE=32%, the
company's market value is 10 times the accounting value).
DHL case (similar to Federal Express)
The logistics innovation: logistics strategies and rules (concentration and complexity).
DHL company (founded in 1969 in California, U.S.) employs 34,000 people, having more than 1
million customers worldwide. It supplies shipments to 220 countries, using 10,000 own couriers’
vehicles and 140 own and leased aircrafts. DHL has created a distribution network like "hubs and
spokes" with approx. 20 central points ("hubs"). Using its own base, the company ensures fast
delivery of small shipments. The company develops a strategy for creating a new market: it strives
to meet the needs of the customer using an innovative combination of resources and skills. For
example, DHL supports Toyota Motor Corporation in JIT (jointly with Japan Airlines). As a carrier
operates in the system: order before the evening, delivery before noon the next day. The base in
Europe is the Toyota Parts Centre near Brussels and 6 sub-centres across Europe, linked by a
network of airlines and cars.
Domino's Pizza case
The logistics innovation: logistics strategies and rules (complementarity).
Domino Pizza - Pizza Hut's main competitor in the U.S. market, significantly increases its sales
share thanks to a strategy to offer a high discount in case the delivery to the customer's home lasts
more than 30 minutes.
Benetton case
The logistics innovation: logistics strategy and rules used in distribution (shortening cycles and
information integration).
Benetton - an Italian clothing manufacturer from Ponzano, manufactures and sells 50 million
pieces of clothing per year. The distribution system in Benetton is based on an integrated IT system
for logistics management of sale, production in factories, and warehousing. Orders from around
the world (from 127 countries) are collected by phone by 80 company agents. These orders are
sent by a computer network to Italy to the manufacturer, where the relevant textile machinery
program is launched. The manufactured clothing is marked as a commodity for a particular
customer. It shall then be part of a collective consignment to the country concerned. Benetton can
thus replenish shelves in stores, e.g. in stores. stores in the USA within 15 days.
7-Eleven case
The logistics innovation: logistics strategies and rules (replacing the concentration strategy with a
strategy to meet consumer expectations).
In 1991, 7-Eleven, an American chain of 24-hour stores, was taken by Ito-Yokado, Japan's largest
retail company. More than 7,000 U.S. and Canadian retail outlets have faced bankruptcy. The
Japanese owner's prescription for poor management and the financial crisis was to replace the
strategy of focusing on increasing sales with a strategy to fully meet customer expectations. The
most important elements of the new style of organisation and logistics management concerned
pricing policy, advertising but also the distribution and inventory management system. The
"Accelerated Inventory Management" project was introduced (inventory turnover per year in the
U.S. equal to 12 while in Japan equal to 30). Regional distribution centres have been introduced
that replaced the traditional system of supply of goods directly from manufacturers to wholesalers.
An interesting fact of this case is also the deliberate delay of the electronic installations of POS in
the USA (time for training and implementation).
Foremost-McKesson case
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The logistics innovation: logistics strategy and rules (strategy of differentiation).
Foremost-McKesson, a North American chemical wholesaler company, in the early 1980s fell into
the so-called "intermediary trap", whereby retailers began to increasingly supply themselves
directly from manufacturers. As a response, Foremost-McKesson expands logistics services: it
develops a system for removing production waste of manufacturers, developing a system for
reviewing manufacturers' warehouses with a service in inventory management and renting retailers
equipment and provide staff training. It therefore uses strategies: supply chain management, co-
operation, cycle shortening, inventory reduction and logistics differentiation strategy.
1.3. Logistics strategy design and implementation

1.3.1. Logistics strategy elements
Logistics principles, rules and heuristics, as synthetic ideas, are based on rational, experience
oriented, or economic models. In logistics practice these concepts create a base for more complex
logistics strategy formulation. For example, on an enterprise level substitution and complementary
rules are being applied to link some usually contradictory general strategies (e.g. differentiation
and low cost strategies) in a complex “trade-up” models. The other logistics rules, e.g. distribution
differentiation rule, multi-option combination rule, rationalisation and standardisation rule,
consolidation rule, postponement rule, parallel processing rule, and synchronization rule are used
on departmental level of organisations.
The logistics strategy definition consists of the following basic elements:
 Offer, as the logistics product or service internal or external (market) offer specification;
 Markets and customers, as specification of supply chain stakeholders to accept the offer;
 Strategic advantage factors, as a specification of key reasons to customers’ interests;
 Priorities in Logistics process, as a specification of key factors to concentrate on;
 Systems and structures, as means and processes to fulfil customer requirements.
1.3.2. Logistics strategy design
The basic requirements for a logistics strategy design is that the logistics strategy should be
coherent with the other functional strategies of the organisation in order to create an optimal
combination of activities to allow realisation of the overall organisation business strategy.
Additionally, the logistics strategy must cover all the areas of activities in organisation by their
integration and harmonization in the logistics aspects.
In a logistics strategy design process, the following basic approaches, methods, and models are
usually used:
 SWOT/TOWS analysis method;
 Logistics product life cycle model;
 BCG matrix model;
 Supply chain value concept;
 Pareto (ABC/XYZ) classification method;
 4M (Ishikawa) method;
 Firm’s profile method;
 Sector Porter’s model;
 Market strategy Ohmae’s model (Tab. 1.3.1, 1.3.2).
Table 1.3.1. Logistics product strategy model (based on Kenichi Ohmae strategy model)
Old products New products
Frontal competition Development of functional diversity Aggressive initiative (e.g. Polaroid,
(e.g. Caterpillar) white chocolate)
Avoiding competition Relative advantage Maximisation of economic outcomes
(e.g. McDonald's, "fast food") and customer satisfaction
12
Table 1.3.2. Logistics distribution strategy model
Old distribution New distribution
Competition Maximisation of effects (e.g. Finding new customers and sales
elimination of intermediaries) channels
Mitigation Change of distribution forms (e.g. Maximisation of market service level
Family Frost, Timex) (e.g. Amway, Oriflame, Avon)
In logistics strategy design, particularly the following, basic issues (questions) must be
considered [15]:
1. What values and standards are important in the organisation?
2. What is the time perspective for the strategy?
3. What are the environmental assumptions for the strategy (legal regulations, economic
processes, resources, technology, competition, markets)?
4. What is the current and new product and service offer?
5. What are the criteria for evaluating the offer of new products and services?
6. What are current and new customer groups?
7. What are the criteria for evaluating new customer groups?
8. What factors of the offer are relevant to customers?
9. What are the factors of strategic advantage?
10. What products and services will be relevant (offer priorities)?
11. What new actions will be the highest priority (priority actions)?
12. What financial and non-financial measures will be used to assess the implementation of
the strategy?
13. How will the strategy implementation plan ensure success (by functions, processes, and
participants)?
To implement modern production and logistics strategies (e.g. Lean, Agile, Mass
Customisation), some necessary demand, product, and supply constraints must be considered (Tab.
1.3.3, 1.3.4, 1.3.5, 1.3.6).
Table 1.3.3. Types of strategic scope to logistics strategy design based on product and demand issues
Demand Varied Stable
Product
Diverse (innovative) Agile -------
Standard (functional) ------- Lean
Table 1.3.4. Types of strategic scope to logistics strategy design based on time and demand issues
Demand Foreseeable Unforeseeable
Time of supply
Long time Lean Leagile
Short time Lean Agile
Table 1.3.5. Types of strategic scope to logistics strategy based on supply and demand uncertainty issues
Demand uncertainty Low High
Supply uncertainty (functional products) (innovative products)
Low (stable process) Efficient Supply Chain Responsive Supply Chain
(e.g. grocery, gas markets) (e.g. fashion markets)
High (evolving process) Risk-Hedging Supply Chain Agile Supply Chain
(e.g. utilities markets) (e.g. telecommunication markets)
Table 1.3.6. Types of strategic scope to logistics strategy based on product type and demand issues
Demand dynamics Dynamic Stable
Product structure
To assemble (collection process) Speed Supply Chain Lean Supply Chain
To produce (physical, chemical, Agile Supply Chain Connected Supply Chain

biological process)
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To integrate logistics strategies in particular supply chain or network, an analysis of all
strategies implemented by the chain or network participants can be suggested (Tab. 1.3.7).
Table 1.3.7. Types of strategic scope to logistics strategy design in supply chain or network
Suppliers Manufacturer Distributor Wholesaler Retailer Customer
Business strategy
Competitive strategy
Product development
strategy
Supply chain strategy
Marketing strategy
1.4. Questions and exercises

1.3.1. Challenge questions
1. What is a logistics and what are ways to define logistics?
2. Logistics is a new knowledge domain or as a science discipline?
3. What operations and activities are performed within modern logistics?
4. What are stages of logistics concept evolution?
5. What are contemporary trends in logistics?
6. What are basic orientations and forms of organisational structures in modern logistics?
7. What are basic principles and rules in logistics?
8. What is a difference between logistics and supply chain management (SCM)?
9. What are barriers in developing supply chain management?
10. What are 9R principle requirements for logistics and supply chain management?
11. What are forms of outsourcing strategy in logistics?
12. What is a difference between third (3PL) and fourth party logistics (4PL)?
13. What is a logistics strategy and what elements does it have?
14. What logistics strategies are used in modern enterprises?
15. Describe six sourcing strategies in logistics and supply chain management.
16. Explain the concept of SCOR model for logistics and supply chains.
17. How to improve competitiveness and effectiveness in logistics today?
18. What are types of logistics strategies in international cooperation?
19. Explain relations between logistics and marketing, quality management and controlling.
20. Explain ECR and CRM systems in the supply chains to meet consumer demand.
21. What are the benefits and the ways of integration in the supply chains?
22. What are advantages and disadvantages of partnership and alliances in supply chains?
23. What are logistics principles, strategies and law regulations in environmental protection?
24. What are assumptions, methods, perspectives and barriers for city logistics?
25. What are education, certification systems, and job requirements for logistics as a profession?
1.3.2. Exercises
Exercise 1
Formulate a mission, goals, and logistics strategy for an enterprise in the furniture production and
distribution branch. Make some detailed assumptions regarding production scale, technology
constrains, and market requirements. Identify elements of supply chain in furniture production.
Exercise 2
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Formulate a mission, goals, and logistics strategy for an enterprise in the agro-food production and
distribution branch. Make assumptions regarding production scale, technology constrains, and
market requirements. Identify elements of supply chain in agro-food production.
Exercise 3
Formulate a mission, goals, and logistics strategy for an enterprise in the transportation branch.
Make assumptions regarding production scale, technology constrains, and market requirements.
Identify elements of supply chain in transportation services.
Exercise 4
Formulate a mission, goals, and logistics strategy for an ICT company in the telecommunication
branch. Make assumptions regarding production scale, technology constrains, and market
requirements. Identify elements of supply chain in telecommunication services sector.
Exercise 5
Formulate a mission, goals, and logistics strategy for an enterprise in the business application
software development branch. Make assumptions regarding production scale, technology
constrains, and market requirements. Identify elements of supply chain in business application
software development.
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2. Basic problems and general methods of logistics
2.1. General approaches in logistics
The main groups of problem solving approaches to solve logistics problems, together with the
semantics contained in them as an instrument to generate approaches, are as follows:
 Passive approach and lack of changes in the system (no response to the problem);
 Active approach through the combination of many existing methods and techniques;
 Active approach by activating new methods and techniques;
 Active approach by deactivating or suspending selected methods and techniques;
 Active approach by increasing the intensity (amplification) of the effects of selected
methods and techniques;
 Active approach by reducing (weaknesses) the intensity of the impact of selected methods
and techniques;
 Active approach through the selection (division) and segmentation of system elements in
the use of selected methods and techniques;
 Active approach through the integration and generalisation of system elements in the
interaction of selected methods and techniques.
2.2. Selected problems of logistics and their basic solutions

2.2.1. ABC/XYZ classifications
The aim of logistics classification is to focus and refine logistics efforts to manage logistics objects
or entities (e.g. materials, final products, processes). Therefore, this approach has economic,
statistical, and procedural bases (as a focus on the most important aspects). Classifications can be
based on a variety of criteria and measures. The most common are inventory value, usage rate,
sales, profit, and nature (attributes) of the classified items.
In logistics management, particularly Pareto 80/20 rule (as ABC classification) and dispersion
rule (as XYZ classification) are to be applied. ABC classification is based on Lorenz curve (Fig.
2.2.1).
Value share [%]
100
95
80
A B C
20 50 100
Quantity share [%]
Figure. 2.2.1. ABC classification – Lorenz curve

The XYZ classification relates to a quality of knowledge about inventory usage data – the basic
formula takes usage deviation of the average usage: X class – deviation up to 20%, Y – usage
deviation from 20% to 50%, Z – usage deviation above 50%.
Implementation of ABC and XYZ classifications is a better approach (as ABC/XYZ
classification) than implementation them separately. This mixed approach allows rationalisation
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of logistics complexity management (material management, inventory management). Particularly,
classes A and X are to be taken first in any logistics rationalisation (Tab. 2.2.1).
Table 2.2.1. ABC/XYZ interpretation
Forecast accuracy Value
A B C
X High value and high Medium value and high Low value and high
forecast accuracy forecast accuracy forecast accuracy
Y High value and medium Medium value and Low value and medium
forecast accuracy medium forecast accuracy forecast accuracy
Z High value and low Medium value and low Low value and low
forecast accuracy forecast accuracy forecast accuracy
Logistics products (e.g. goods’ assortments) from XA cell should be managed with a particular
care (with relatively low levels of safety stock). On the other hand, the logistics products from ZC
cell must be managed by a routine (because of rather low value), but with rather high levels of
inventory (because of low forecast accuracy).
Example
There are 10 materials in a stock of warehouse of different quantity in [ton] and of different
economic value [zł/ton] (Tab.2.2.2). Make ABC classification. Suggestion: Apply the following
classification structure of ABC using cumulated quantity share and cumulated value share of
materials on inventory (stock): A class – 20%/80%, B class – 50%/95%, C class – 100%/100%
(Tab. 2.2.3). To verify statistical concentration of distribution, the following ratio coefficients can
be calculated: V(A)=CVA/CQA, V(B)=(CVB-CVA)/(CQB-CQA), and V(C)=(CVC-CVB)/(CQC-
CQB). According to a recommendation: V(A)>3, 0.7≤V(B)≤3, V(C)<0.7.
Solution:
Table 2.2.2. ABC classification example inventory list
Material Inventory [ton] Price [thousand zł/ton] Value [thousand zł] Order in ABC
1 8 1.00 8.00=8*1.00 3
2 10 0.30 3.00 7
3 5 8.00 40.00 1
4 5 0.20 1.00 9
5 10 0.10 1.00 10
6 15 2.00 30.00 2
7 12 0.50 6.00 4
8 20 0.20 4.00 6
9 5 0.40 2.00 8
10 10 0.50 5.00 5
 100  100.00
Table 2.2.3. ABC classification example results

Material CQ - cumulated quantity CV - cumulated value A, B, C class
share [%] share [%] and its value share
3 5=(5/100)*100% 40=(40.00/100.00)*100% A
6 20=5+15 70=40+30 (70%)
1 28 78
7 40 84 B
10 50 89 (19%)
8 70 93
2 80 96 C
9 85 98 (11%)
4 90 99
5 100 100
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2.2.2. Trade-off and trade-up models in logistics
To solve theoretical or practical logistics problems, trade-off or trade-up models can be used. The
trade-off models relate to situations, when some logistics factors are having a contradictory
influence to the problem solution (or resolution). This happens particularly, when a solutions must
be found in multi-criteria “compromising” or “optimising” ways. Generally, most of the logistics
problems, as complex problems, have trade-up nature (see Fig. 2.2.2). The second type of the
models is a trade-up type of models, when the solution can be found by an application of some
additional, supporting methods or techniques, to change initial problem definition and
assumptions. This type of modelling, particularly initiates new ways of thinking and can result in
some logistics innovations.
Income
Total cost Total cost
Profit
Total cost
Production cost Ordering cost

Inventory cost Inventory cost
Service level Quantity Service level 100%
a) Trade-off model in production b) Trade-off model in procurement c) trade-off model in service level
Figure. 2.2.2. Examples of trade-off models in logistics management.
Example
You, as a logistics manager in a company, are responsible for purchase and supply of 10
assortments (items) of materials. Ordered materials are delivered to company warehouse with an
annual inventory value of 100,00 [thousand zł] (Tab. 2.2.4). All the materials are ordered in
suppliers in economic batches with 3-month frequency. But because of economic reasons, an
executive company manager gives you a task to reduce inventory levels (and inventory cost) by
10%. Additionally, at least there is a requirement not to decrease customer service levels, and, if
it possible, to increase customer service levels. How can you complete this task and fulfil the
requirement?
Table 2.2.4. Result of the ABC classification (see example above)
Class CV range in % Items % of CQ Value [thousand zł] % of CV
A [30,40] 2 20 70 70
B [5,29] 3 30 19 19
C [0,4] 5 50 11 11
Total 10 100 100 100
Solution:
The idea of an application of „trade-up” model in this example is based on application of “trade-
off” EOQ model supported by ABC classification heuristics. In this way logistics manager can
decrease total logistics cost and increase at the same time customer service level by minimization
of stock out risk. Initially, each material is purchased at a supplier every 3 months, i.e. with a
frequency of 4 times within a year (Fig. 2.2.3). It means, that for each material (10 items) there are
4 risk stock-out situations within a year. By changing purchase order policies to increase ordering
frequency in A class (2 items) for more than 4 times a year, and decreasing purchase order
frequencies in C class (5 items) for less than 4 times a year, it is possible to decrease total logistics
cost and to increase customers service level (Tab. 2.2.5).
18
Inventory I(t)
Q I(t)=Q-D·t
Average
inventory
Q/2
0
T=Q/D Time t
Figure. 2.2.3. Inventory usage over time in EOQ model.
Let’s make the following assumptions:
a) Cost of ordering is proportional for the number of administrative activities, necessary to
determine demand for purchase, to send a question to potential supplier, to calculate the
ordering quantity, to send the order, to process delivery with invoice, and to pay to
suppliers (approx. 20 administrative activities;
b) Customer service level is in an opposite proportion to a number of stock out inventory
cases (number of customer orders), and represents a risk of inventory stock out (inventory
is less or equal 0).
Table 2.2.5. Trade-up model as ABC classification support to trade-off model (see example in Tab. 2.2.1.3)
Basic option: Option with ABC: Option with ABC:
4 orders / year 12 (A), 2 (B), 1 (C) / year 12 (A), 2 (B), 2 (C) / year
Ordering cost [1] 10 x 4 x 20 = 40 x 20 = 800 (2 x 12 x 20) + (3 x 2 x 20) (2 x 12 x 20) + (3 x 2 x 20)
+ (5 x 1 x 20) = 35 x 20 = + (5 x 2 x 20) = 40 x 20 =
700 800
Ordering cost change [%] Decrease by 12.5% 0%
Inventory cost [thous. zł] 100/(4 x 2) = 12.50 [thous. [70/(12 x 2)] + [19/(2 x 2)] [70/(12 x 2)] + [19/(2 x 2)]
zł] + [11/(1 x 2)] = 13.17 zł + [11/(2 x 2)] = 10.42 zł
Inventory cost change [%] Increase by5.36% Decrease by16.64%
Service level [1] 10 x 4 = 40 stock outs (2 x 12) + (3 x 2) + (5 x 1) (2 x 12) + (3 x 4) + (5 x 1)
= 35 stock outs = 40 stock outs
Reduction of inventory stock out cases [%] Decrease by 12.5% 0%
2.2.3. Location problem solving

Method 1: Changing number of stores (stocks)
In modern logistics there are tendencies to reduce intermediate elements of supply chains. As an
example, to reduce logistics cost by reducing number of stocks it can be applied to inventory
systems in distribution of products. While the transport cost is increasing the overall logistics cost
is decreasing. Decreasing the total inventory in logistics system by decreasing number of stocks is
described by the "square root principle":
Z2 L2

Z1 L1
where: Z1 – inventory prior the change of number of stocks, Z2 - inventory after the change of
number of stocks, L1 – number of stocks prior the change of number of stocks, L2 - number of
stocks after the change of number of stocks Therefore changing the number of stocks the following
relative inventory change can be observed:
Z1  Z 2 L2
1 .
Z1 L1
19
As an example, decreasing the number of stocks from L1=16 to L2=9, the inventory reduction is:
Z1  Z 2 L2 9 3
1 1  1   0.25 .
Z1 L1 16 4
It means that decreasing number of stocks from 16 to 9 (by 43.75%) a reduction of inventory by
25% is observed.
Method 2: Equilibrium of market gravitation in distribution
Let’s assume two points: A with MA population, B with MB population, and a distance between
equal to LAB. Customers demand is straight proportional to customers’ population and opposite
proportional to a distance square between customers and supply location (Fig. 2.2.4).
A C B
MA MB
LCA LCB
LAB
Figure. 2.2.4. The idea of gravity principle in distribution function in marketing and logistics
Equilibrium point of market gravitation in product distribution between two points can be
calculated by the “gravitation principle”. Equilibrium of demand (neutral area) as an influence of
city A to city B is OAB, where ZCA – demand in A point by customers from C point, ZCB - demand
in B point by customers from C point, MA – population in A point, MB – population in B point, LCA
– distance from C point to A point, LCB – distance from C point to B point.
2
Z CA M A  LCB  O AB 
L AB
    .
Z CB M B  LCA  M
1 B
MA
Method 3: Break-even point analysis

The problem of supply chain point location by break-even analysis can be solved by comparison
of the data about operation costs, product prices and expected logistics product volumes. The aim
is to determine the fixed and variable cost for each location and select the location that has the
lowest total cost for the expected logistics product volume.
Method 4: Modal approaches for distribution centre location
Modal approach is based on geometric supply chain structure, particularly on supply and demand
points’ coordinates on a geometric map (e.g. geography map), and data on volumes of supply and
demand points. Additionally, the transportation aggregated cost factors are also considered to
represent transportation workload in geometric structure.
The problem of logistics centre location can be solved with an application of the following
approaches:
Approach 1:
Logistics central point is located in a place, in which a sum of distances between this point and
related cooperating points (e.g. customers) is minimised. The sum of all distances and additional
workload factors to be considered (e.g. demand of customers) is modelled in a distance function
formula:
n
Q  m  x  x    y  y 
i 1
i i
2
i
2
,
20
where: Q – distance function, mi– number of customers in particular area, xi – first coordinate of
the area location, yi – second coordinate of the area location, x, y - coordinates of the centre point
location. The problem solution can be found by differentiation of Q function for x, y variables and
setting differentiation result to 0.
Approach 2:
Instead of minimisation of linear distance function it is possible to formulate a quadratic
minimisation function. Additionally, in this approach all distances in supply chain can be
considered with a transportation fee tariff system. The centre location coordinates can be found in
a following way (Fig. 2.2.5). Necessary input data for this method algorithm are: (xi, yi) – supply
points coordinates, (ui, vi) - customer points coordinates, pi – supply from i supplier, qi – demand
from i customer, ri – transport cost from i supplier to the centre, Ri – transport cost from centre to
j customer (ri=1, Ri=1).
Suppliers Customers
Centre
(xi,yi) (uj, vj)
(x,y)
(pi,ri) (qj,Rj)
Figure. 2.2.5. The idea of modal method to determine logistics centre location
Distribution centre location coordinates (x, y) are calculated by formulas:
i ri  pi  xi  j R j  q j  u j i ri  pi  yi  j R j  q j  v j
x , y .
 ri  pi   R j  q j
i j
 ri  pi   R j  q j
i j
The modal method can have an analogue, physical interpretation as a process to find centre
coordinates (x, y) by simple system of linked weights allowing to find an equilibrium state (Fig.
2.2.6).
Figure. 2.2.6. The analogue model for modal method to determine logistics centre location
2.2.4. Supplier selection and evaluation
In logistics practice, the purchasing processes are key elements of logistics systems’ development.
These processes must be running due to logistics 9R principle. Supplier evaluation is one of the
main elements of purchasing system functioning.
The logistics literature shows different factors in deciding on the choice of purchase sources of.
This basis sets the criteria for selecting suppliers. These are:
 Quality of materials, raw materials, WIPs (compliance with established standards);
 Price levels and stability;
 Reliability, speed, on time and flexibility of delivery;
 Distance from the source of delivery (transport cost, price, delivery time);
 Offered scale, supply structure, and technical consistency of the assortment;
21
 Compliance with the customer's demand or order structure;
 Payment terms, payment deadlines;
 Available delivery time limits (schedules) to reduce inventory (e.g. JIT);
 Offered conditions for qualitative and quantitative complaints.
In addition, support criteria can also be taken into account, such as: supplier opinion (image), the
supplier loyalty, the possibility of joint ventures or interests, the possibility to participate in
strategic business alliances, willingness to cooperate closely and on the long term with the buyer
for technical improvements and employees’ training, commitment to continuous improvement,
commitment to cost reduction, reactivity, ability to reduce lead times and compliance of standards,
quality systems, certificates.
Method 1: Multifactor Evaluation Process (MFEP)
In multifactor evaluation process (MFEP) individuals subjectively and intuitively consider the
various factors in making their selection and decision making by quantitative approach. All of the
important factors can then be given appropriate weights and each alternative can be evaluated in
terms of these factors.
In business practice, the supplier selection MFEP algorithm can consist of the following steps:
1. Creating a set of potential suppliers of a material, raw material, WIP, or good concerned;
2. Setting the assessment criteria (quality, unit price, timeliness of supply, completeness of
deliveries, order size, level of service);
3. Setting the scoring rules for each criteria with 0-100 point scale (Tab. 2.2.6);
4. Setting the weights for each criteria internal system (Tab. 2.2.7);
5. Assessment of suppliers by criteria and weights and calculation of assessment indicators
(based on delivery control card);
6. Analysis of calculation results and supplier selection;
7. Creating a supplier card.
Table 2.2.6. Data set for MFEP method criteria to evaluate and select suppliers
No Criterion Benchmarking points Evaluation
1 Quality - ISO 9001 or ISO 9002 certificate 100 pts - Quality without qualifications
- Audit result in at supplier location 50 pts - Small incompatibility
- Experience 0 pts - Serious incompatibility (to reject)
2 Unit price - The best price offer of suppliers (CN) 90 pts - The best price offer of suppliers
- Supplier’s price offer (CD) CD>CN X = 90 - [(CD-CN)/CN] x 100
CD<CN X = 90 - [(CD-CN)/CN] x 100
3 On time delivery - Delivery time due to an order 100 pts - Delivery on time
- Delivery time due to bill of lading 100 - a[5number of delaying days ]
- Additional information (a=1) Delivery delayed
100 - a[3 number of early delivery days -4]
(a=1) Early delivery
(a=0.75) Early delivery but noticed
4 Delivery completeness - Quantity due to purchasing order 100 pts - Deviation up to 10%
80 pts - Deviation in 11-20% range
0 pts - Deviation more than 80%
5 Order quantity - Supplier delivers any quantity 100 pts - Any quantity
- Delivery batch constraint 50 pts - Delivery batch constraint
6 Service level - Covering transportation cost 100 pts - High level
- Complaints 80 pts - Good level
- Delivery documentation 50 pts - Acceptable level
- SMI ability to hold inventories
- Problem solving support
7 Payment conditions - Payment postponement ability 100 pts - After delivery up to 60 days
- Payment on delivery 90 pts - After delivery up to 30 days
80 pts - After delivery up to 14 days
50 pts - On delivery
0 pts - Prior delivery to pay 100%
22
Table 2.2.7. The table of criteria weights options example to evaluate and select suppliers
No Criterion Criteria weights (1) Criteria weights (2)
1 Quality 0.30 0.30 0.30 0.20 0.9
2 Unit price 0.15 0.15 0.30 0.50 0.8
3 On time delivery 0.12 0.12 0.15 0.15 1.0
4 Delivery completeness 0.12 0.12 - 0.15 -
5 Order quantity 0.03 - - - -
6 Service level 0.20 0.12 - - 0.9
7 Payment conditions 0.08 0.08 - 0.25 -
8 Other 0.00 0.11 0.25 - 0.3 (SMI ability)
9 Total 1.00 1.00 1.00 1.00
Example:
Let’s assume, that there are four criteria, that are being used to evaluate suppliers: quality, price,
service and delivery. These attributes were weighted with the relative importance considered by
the buyer on a 0 (less important) to 1(most important) scale. Further, let’s assume that proposals
from four suppliers are being considered (Supplier 1, Supplier 2, Supplier 3 and Supplier 4) – a
matrix with weighted attributes (Tab. 2.2.8).
Table 2.2.8. Data set for weights to evaluate and select suppliers
Criteria Weights Supplier 1 Supplier 2 Supplier 3 Supplier 4
Quality 0.46 0.48 0.55 0.47 0.33
Price 0.30 0.24 0.27 0.35 0.33
Service 0.14 0.12 0.09 0.12 0.22
Delivery 0.11 0.16 0.09 0.06 0.11
Solution:
The following equation presents an example, how the result for Supplier 1 is calculated:
Supplier 1= (0.46*0.48) + (0.30*0.24) + (0.14*0.12) + (0.11*0.16) = 0.32.
According to the other results (Tab. 2.2.9), the higher weight belongs to Supplier 2, and is judged
to be the best.
Table 2.2.9. The summary results in MFEP method example
Supplier 1 Supplier 2 Supplier 3 Supplier 4
Final results 0.32 0.35 0.34 0.29
Method 2: Analytic Hierarchy Process (AHP)

The Analytical Hierarchical Process (AHP) is a decision-making method developed by Saaty
(1980) for prioritizing alternatives when multiple criteria must be considered and allows the
decision maker to structure complex problems in the form of a hierarchy, or a set of integrated
levels. Generally, the hierarchy has at least three levels: the goal, the criteria, and the alternatives.
For the supplier selection problem, the goal is to select the best overall supplier and the criteria
can be quality, price, service, delivery, etc. But individuals cannot be able to quantify preferences
for various factors and alternatives. The process of the selection and decision making uses pairwise
comparisons and then computes the weighting factors and evaluations for use.
The AHP offers a methodology to rank alternative courses of action based on the decision
maker’s judgments concerning the importance of the criteria and the extent to which they are met
by each alternative. For this reason, AHP is ideally suited for the supplier selection problem. The
problem hierarchy is based on an analysis based on the impact of a given level on the next higher
level. The process begins by determining the relative importance of the criteria in meeting the
goals. Next, the focus shifts to measuring the extent to which the alternatives achieve each of the
criteria. Finally, the results of the two analyses are synthesized to compute the relative importance
of the alternative in meeting the goal.
23
Managerial judgments are used to drive the AHP approach. These judgments are expressed in
terms of pairwise comparisons of items on a given level of the hierarchy with respect to their
impact on the next higher level. Pairwise comparisons express the relative importance of one item
versus another in meeting a goal or a criterion. Each of the pairwise comparisons represents an
estimate of the ratio of the weights of the two criteria being compared. Because AHP utilizes a
ratio scale for human judgments, the alternatives weights reflect the relative importance of the
criteria in achieving the goal of the hierarchy. The use of the AHP approach offers a number of
benefits. One important advantage is its simplicity. The AHP can also accommodate uncertain and
subjective information, and allows the application of experience, insight, and intuition in a logical
manner.
The AHP approach, as applied to the supplier selection problem, consists of the following five
steps:
1. Specify the set of criteria for evaluating the supplier’s proposals;
2. Obtain the pairwise comparisons of the relative importance of the criteria in achieving
the goal, and compute the priorities or weights of the criteria based on this information;
3. Obtain measures that describe the extent to which each supplier achieves the criteria;
4. Using the information in step 3, obtain the pairwise comparisons of the relative
importance of the suppliers with respect to the criteria, and compute the priorities;
5. Using the results of steps 2 and 4, compute the priorities of each supplier in achieving the
goal of the hierarchy.
Example:
Assume that there are three criteria to evaluate suppliers: quality (Q), price (P), delivery (D).
Further, assume that proposals from three suppliers are being considered: supplier 1 (S1), supplier
2 (S2), supplier 3 (S3). The decision making hierarchy is: Q(S1/S2/S3), P(S1/S2/S3), D(S1/S2/S3).
The key to using AHP is pairwise comparisons and to compare two different alternatives a scale
that ranges from equally preferred to extremely preferred is to be set (1 – Equally Preferred, 2 -
Equally to Moderately Preferred, 3 – Moderately Preferred, 4 – Moderately to Strongly Preferred,
5 – Strongly Preferred, 6 – Strongly to Very Strongly Preferred, 7 – Strongly Preferred, 8 – Very
to Extremely Strongly Preferred, 9 – Extremely Preferred). Once the column totals is determined,
the numbers are divided by the respective column totals (Tab. 2.2.10, 2.2.11).
Table 2.2.10. Data set for quality criterion in AHP example – step 1a
Quality S1 S2 S3 Quality S1 S2 S3
S1 3 9 S1 1 3 9
S2 6 S2 1/3 1 6
S3 S3 1/9 1/6 1
Table 2.2.11. Data set for quality criterion in AHP example –step 1b
Quality S1 S2 S3 Quality S1 S2 S3
S1 1 3 9 S1 0.692 0.720 0.563
S2 0.333 1 6 S2 0.230 0.240 0.375
S3 0.111 0.167 1 S3 0.077 0.040 0.063
Total 1.444 4.167 16
Solution:
To determine the priorities for quality criterion for the three suppliers, the average of the various
rows in matrix must be calculated (Tab. 2.2.12).
Table 2.2.12. Data set for quality criterion in AHP example –step 2a
Quality
Row averages (0.692 + 0.720 + 0.563) / 3 = 0.6583
(0.230 + 0.240 + 0.375) / 3 = 0.2817
(0.077 + 0.040 + 0.063) / 3 = 0.0599
24
Next step of the AHP algorithm is to calculate a consistency ratio. First is to determine the
weighted sum vector by multiplying the factor evaluation number for all alternatives (suppliers)
times the relevant column of the original pairwise comparison matrix. Then the consistency vector
is calculated by dividing the weighted sum vector by the factor evaluation values determined
previously (Tab. 2.2.13, 2.2.14).
Table 2.2.13. Data set for quality criterion in AHP example –step 2b
Quality
Weighted sum vector (0.6583 ∙ 1) + (0.2819 ∙ 3) + (0.0598 ∙ 9) = 2.0423
(0.6583 ∙ 0.3333) + (0.2819 ∙ 1) + (0.0598 ∙ 6) = 0.8602
(0.6583 ∙ 0,1111) + (0.2819 ∙ 0.1677) + (0.0598 ∙ 1) = 0.1799
Table 2.2.14. Data set for quality criterion in AHP example –step 2c
Quality
Consistency vector 2.0423 / 0.6583 = 3.1025
0.8602 / 0.2819 = 3.0512
0.1799 / 0.0598 = 3.0086
Next step of the AHP algorithm is to compute values for consistency vector average (λ) and
consistency index (CI) with the formula CI = (λ-n) / (n-1), where n is the number of items to be
compared. In the example is: λ = (3.1025 + 3.0512 + 3.0086) / 3 = 3.0541; CI = (3.0541 – 3) / (3
-1) = 0.0270. Finally, the consistency ratio (CR) must be calculated as consistency index divided
by the random index (RI). RI is a direct function of the number of alternatives being considered.
CR = CI / RI = 0.0270 / 0.58 = 0.0466. For CR greater than 0.10, the decision maker must consider
re-evaluating comparisons (Tab. 2.2.15).
Table 2.2.15. Data set for quality criterion in AHP example –step 3
n 2 3 4 5 6 7 8
RI 0 0.58 0.90 1.12 1.24 1.32 1.41
Next step of the AHP algorithm is to make the same calculations for the other factors, namely
price (P) and delivery (D) and to calculate a consistency ratio. As it was for quality factor it starts
with the matrix of pairwise comparisons. Then the same calculations must be done and it ends up
with factor evaluations. Assume that pairwise comparisons matrices for price and delivery factors
are as follow (Tab. 2.2.16, 2.2.17):
Table 2.2.16. Data set for price and delivery criteria in AHP example –step 4
Price S1 S2 S3 Delivery S1 S2 S3
S1 S1 1 6
S2 2 S2 3
S3 8 5 S3
Table 2.2.17. Data set for all criteria in AHP example –step 5
Quality Price Delivery
Quality
Price 8 3
Delivery 3
Finally, the factor evaluation matrix, factor weights and the total weighted evaluations are to be
calculated (Tab. 2.2.18).
Table 2.2.18. Final data set for all criteria and suppliers in AHP example – step 6
Criteria S1 S2 S3 Criteria Factor Supplier Total Weighted
Weight Evaluation
Quality (Q) 0.6583 0.2819 0.0598 Quality (Q) 0.0820 S1 0.2310
Price (P) 0.0874 0.1622 0.7504 Price (P) 0.6816 S2 0.2275
Delivery (D) 0.4967 0.3967 0.1066 Delivery (D) 0.2364 S3 0.5416
Final decision for this multi-criteria analysis by AHP algorithm: S3 supplier is the best supplier.
25
Method 3: Total Cost Analysis (TCA)
Total cost analysis as a method to be applied in supplier evaluation and selection is based on an
assumption, that it is the most important criteria factor. The objective consists in reducing the total
cost that is made of two types of components: the variable costs that depend on the delivered
quantities; and the fixed costs, also called setup costs that reflect the costs for maintaining the
commercial connection between buyer and supplier. This approach can be also combined with a
delivered product quality loss criterion.
Example:
The desired value of a product to be supplied is 350 with a tolerance ±250 and there are two
supplier candidates to deliver the product. Supplier S1 can deliver this product with an average
value of 250 and standard deviation equal to 50. Supplier S2 can deliver this product with an
average value of 350 and standard deviation equal to 83.3. The product price offered by both
suppliers is equal. Which supplier is the best one to order this product?
Solution:
To solve the supplier selection problem described in the situation above, an average quality loss
function (AQL) must be formulated (Fig. 2.2.7). The product purchase should be made with
minimal total cost:
TC = PC + AQL,
where: TC is a total cost, PC is a purchase (buying) cost, and AQL is an average quality loss.
Average quality loss function can be calculated as:

AQL  c   2  VA  VD 
2

where: c - constant, 2 - value variance, VA - average product value, VD - desired (nominal) product
value. For the example above, desired value is VD = 350, with lower value VL = 100, and upper
value VU = 600.
Average
quality loss
100 250 350 500 600Product

value
Figure. 2.2.7. Average quality function of product value for suppliers S1, S2.
For the S1 supplier: VA = 250,  = 50, average quality loss function is:
   
AQL S1  c   2  V A  VD   c  50 2  250  350  c 12500 .
2 2
For the S2 supplier: VA = 350,  = 83.3, average quality loss function is:
  
AQL S2  c   2  V A  VD   c  83.32  350  350  c  6889 .
2 2

Therefore, the purchase must be made in S2 supplier, because the price is the same in both suppliers
and the average quality loss AQL of this supplier is a lowest one in comparison to the S1 supplier.
26
1. What are basic problems of logistics today on microeconomic and macroeconomic levels?
2. What are approaches for logistics system and process analysis?
3. What are approaches for logistics system and process modelling?
4. What are approaches for logistics system and process design?
5. What basic modelling and optimisation methodologies are used in logistics?
6. What are challenges and barriers for an optimisation in integrated and global logistics?
7. What are basics heuristics to solve logistics problems?
8. Explain the meaning and possible applications of ABC/XYZ classifications in logistics.
9. What is a practice of ABC and XYZ classification implementations in logistics?
10. How to verify statistical relevance of ABC classification in practice?
11. Explain the “square root” law of warehousing and discuss its relevance to logistics reality.
12. What is an influence of JIT inventory control method to warehousing policy design?
13. Explain the concepts of „trade off” and „trade up” models in logistics.
14. Explain the “break-even point” approach and discuss possible applications of it in logistics.
15. What are approaches and methods of logistics warehousing and distribution centres’ design?
16. What are main factors of warehouse and distribution centres’ location?
17. Explain modal method for warehouse and distribution centres’ location design.
18. What are methods and criteria of suppliers’ evaluation in logistics?
19. Explain the difference between MFEP and AHP methods of suppliers’ evaluation in logistics?
20. What is a role and possible application of benchmarking in logistics management?
21. What are elements of logistics costs?
22. How can logistics costs be better represented?
23. Discuss direct product profitability (DPP), total cost of ownership (TCO), supply chain
costing (SCC), and activity based costing (ABC) methods in logistics.
24. What are methods of logistics demand forecasting?
25. Explain operation research (OR) methods of logistics problem solving for flow routing
through a logistics network and for resource allocation.
2.3.2. Exercises
Exercise 1
There are 10 material items in a stock of warehouse (Table 2.3.1) in different quantity and value
(monthly usage). Make ABC/XYZ classifications (table 2) and determine (select) materials for
pilot JIT (Just in Time) programme. Suggestion: Apply the following classification structure of
ABC using cumulated quantity share and cumulated value share of materials on inventory (stock):
A class – 20%/80%, B class – 50%/95%, C class – 100%/100%. Apply the following classification
structure of XYZ with usage deviation around average usage: X class – deviation up to 20%, Y –
usage deviation from 20% to 50%, Z – usage deviation above 50% (Tab. 2.3.2).
Table 2.3.1. ABC/XYZ exercise data set Table 2.3.2. ABC/XYZ exercise framework
Material Monthly Usage Quantity Material Value Cumulated Cumulated ABC/
usage deviation share share value share quantity share XYZ
[zł] [zł] [%] [%] [%] [%]
M1 60 ± 20 12.0
M2 55 ± 10 10.0
M3 300 ± 40 7.0
M4 150 ± 30 6.0
M5 70 ± 10 7.0
M6 45 ± 30 15.0
M7 250 ± 110 5.0
27
M8 20 ± 5 13.0
M9 10 ± 10 15.0
M10 40 ± 35 10.0
 1000  100
Exercise 2
Determine equilibrium of market gravitation in distribution of goods in 2 cities: Wrocław and
Jelenia Góra. Population of the cities is: Wrocław – 750.000, Jelenia Góra – 250.000, and the
distance between Wrocław and Jelenia Góra is: 125 km. Customers’ demand is straight
proportional to customers’ population and opposite proportional to a distance square between
customers and supply location.
Exercise 3
In modern logistics there are tendencies to reduce intermediate elements of supply chains. As an
example, to reduce logistics cost by reducing number of stocks it can be applied to inventory
systems in distribution of products. While the transport cost is increasing the overall logistics cost
is decreasing. Calculate and explain effects of changing the number of stocks (Tab. 2.3.3).
Table 2.3.3. Square root principle exercise framework
L2 (after change)
1 2 3 4 5 6
1
2
L1 3
4
5
6
Exercise 4
Solve the problem of automobile clutch factory location by break-even analysis for the following
data about manufacturing costs, product prices and expected production volumes (Tab. 2.3.4).
What location is to be preferred when production volume is: a) less than 2000 units, b) greater
than 2000 units? Determine the fixed and variable cost for each location and select the location
that has the lowest total cost for the expected production volume.
Table 2.3.4. Location of production factory exercise data set
Factory Fixed cost in € Variable cost in € Selling price in € Expected volume
location per year per year/unit per unit in units/year
Location A 30.000 75 120 2000
Location B 60.000 45 120 2000
Location C 110.000 25 120 2000
Exercise 5
Solve the problem of distribution centre location for the following data about suppliers and
customers’ (demand) locations (Tab. 2.3.5).
Table 2.3.5. Distribution centre location exercise data set
Supplier/Customer Location coordinates Distributed quantity [units]
Supplier 1 (5, 2) 5000
Supplier 2 (4, 7) 3500
Customer 1 (2, 4) 1900
Customer 2 (7, 1) 1400
Customer 3 (0, 0) 2700
Customer 4 (3, 9) 2500
Exercise 6
28
Determine location of a distribution centre for the following data (Tab. 2.3.6). Data on supply
points: Białystok - 15000 [units], Suwałki - 10000 [units], Ostrów Mazowiecki - 5000 [units]. Data
on demand points: Suwałki - 5000 [units], Augustów - 2300 [units], Ełk - 1200 [units], Grajewo -
1000 [units], Łomża - 3400 [units], Białystok - 12000 [units], Zambrów - 1000 [units], Bielsk
Podlaski - 2500 [units]. Assume that transportation cost for all deliveries is equal.
Table 2.3.6. Distribution centre location exercise data set
Supply/Demand Delivery [items] Coordinates Calculations:
points (coordinate ∙ delivery)
horizontal vertical horizontal vertical
Białystok 15000 280 530
Suwałki 10000 840 430
Ostrów Mazowiecki 5000 60 100
Suwałki 5000 840 430
Augustów 2300 700 450
Ełk 1200 670 230
Grajewo 1000 580 280
Łomża 3400 290 150
Białystok 12000 280 530
Zambrów 1000 180 220
Bielsk Podlaski 2500 60 560
Total 58400
Centre coordinates
29
3. Inventory control and planning in logistics
3.1. Inventory in logistics – general approaches
Inventory is one of the most important logistics issues to many organisations, particularly to
business organisations. The goods held in storage to satisfy a future demand are called inventory.
The location where the inventory is held is most of the time stationary and is called a warehouse.
The basic function of inventory is to act as a buffer between two subsequent processes. Often these
processes are the production process and the demand process or different stages in the supply
chain.
In the context of historical evolution of inventory meaning in business and economy, in the past
inventory was considered as a sign of wealth. Before the 20th century, a large warehouse filled
with goods was a desirable characteristic of a manufacturer or merchant. Transportation and
information systems were not very reliable and the goal was to have large inventories on hand as
a buffer against unforeseen events. During the 20th century this opinion of inventory changed.
Systems to deliver goods became more reliable and alternative sources of goods became available.
The goal was to minimize inventory. In the last few decades of the 20th century, the image of
inventory changed again. Inventory was seen as an expensive but necessary evil. The decision
whether to hold inventory and how much inventory to hold was based on a balance between several
costs such as production or purchasing, transportation costs, holding costs, and customer service
requirements. Therefore, inventory is any stored resource, that is used to satisfy a current or a
future, expected need. It can have a form of raw materials, work in-process, or finished goods.
Considering a role and function of inventories in business and economy, the following types of
inventories can be identified: cycle inventory, seasonal inventory, pipeline inventory, work-in-
process inventory, speculative inventory, safety inventory, and emergency inventory. Cycle
inventory is a result of economy of scale (to organise a logistics flow in large quantities), and forms
a buffer between procurement, production, transportation and distribution processes. Cycle
inventory also is created when the production or supply process generates smaller quantities that
are then transported in larger quantities. Seasonal inventory is a result of natural seasons in
logistics processes, particularly a result of seasonal logistics demand. Pipeline inventory is the
inventory of goods currently being transported from the supplier to the customer. The costs
associated with pipeline inventory become only relevant for large transit times and transportation
volume. Work-in-process inventory (WIP) is a result of a necessary aging step before the product
is ready for the next step, e.g. it is an inventory created by delays between the different processes
and machines inside a manufacturing plant. Speculative inventory is created when goods are
purchased early at a lower price because it is anticipated that prices will be higher when the demand
has to be satisfied. Therefore, the goods are stored until the demand occurs. Safety inventory is the
inventory held because the future conditions are not known with certainty. The main sources of
uncertainty are future demand, replenishment lead time, and future supply. Emergency inventory
is a result of logistics service level constraints, which make it mandatory to store inventory close
to the customer or demand process, so that the demand can be satisfied within the allowable
response time. Also it covers necessity to store reserves for some critical situations.
Logistics manager for inventory management must identify the following inventory cost
elements:
• Inventory holding costs, as space costs, capital costs, inventory risk and services costs;
• Procurement costs, as acquisition costs, ordering costs, transportation costs, manufacturing
and handling costs);
• Out -of– stock costs (or stock-out costs), as lost sales and back order costs.
30
Inventory control policies are based on the following decision making variables: ordering time
and ordering quantity (Tab. 3.1.1). Additionally, the policy specifies the inventory level review
way: continuous or periodic (discrete) one.
Table 3.1.1. Inventory control policies in logistics
Inventory Description
control policy
(s,q) / (r,q) Model with continuous inventory level review, reorder point s (r), and constant ordering quantity q
(inventory replenishment batch).
(s,t,q) Model with t periodic inventory level review, reorder point s, and constant ordering quantity q
(inventory replenishment batch).
(s,S) Model with continuous inventory level review, reorder point s, and varying ordering quantity
(inventory replenishment up to S level).
(s,t,S) Model with t periodic inventory level review, reorder point s, and varying ordering quantity
(inventory replenishment up to S level).
(s,T,S) Model with continuous inventory level review, reorder point s or constant ordering cycle time T and
varying ordering quantity (inventory replenishment up to S level).
(T,q) Model with continuous inventory level review, constant ordering cycle time T, and constant ordering
quantity q (inventory replenishment batch).
(T,S) Model with continuous inventory level review, constant ordering cycle time T, and varying ordering
quantity (inventory replenishment up to S level).
There are the following symptoms of poor inventory management in SCM:

 Increasing back-order status;
 Increasing dollar investments in inventory with back-orders remaining constant;
 High customer turnover rate;
 Increasing number of orders being cancelled;
 Periodic lack of sufficient storage space;
 Wide variance in inventory turnover among distribution centres and among major
inventory items;
 Deteriorating relationships with middlemen as typified by dealer cancellations and
declining orders;
 Inventories rising faster than sales;
 Customers not satisfied;
 Inventory turnover too low.
3.2. Inventory control and management models

3.2.1. Economic order quantity in inventory control – EOQ model
The “economic order quantity” (EOQ) is one of the oldest inventory control models, formulated
in 1915 by Ford W. Harris. This model and a technique is relatively easy to use, but it is based on
several rather not realistic assumptions. The fundamental assumptions of EOQ model are:
1. Demand (D) is known and constant, thus the consumption rate of the good is constant;
2. Inventory from an order arrives in one batch (Q) at one point of time as a result of
inventory control purchasing decision;
3. The lead time (LT) as a time between the placement of an order and the delivery (receipt
of the order) is known and constant;
4. If orders are placed at the right time, there will be no stock outs (no shortages);
5. The only costs of inventory system are cost of batch purchasing (purchasing cost), cost
of placing an order (ordering cost co), and the cost of holding (storing) inventory (holding
or carrying cost ch) over time. Also batch quantity discounts are not possible, batch is
purchased with a constant unit price (P).
With these assumptions, inventory usage has a “saw tooth” shape (Fig. 3.2.1).
31
Inventory I(t)=Q-D·t
I(t)
Average
inventory
Q/2
0
T=Q/D Time t
Figure. 3.2.1. Inventory usage over time in EOQ model.

Total cost of the system during one ordering cycle (T) is a sum of inventory holding cost,
purchasing cost, and ordering cost (Fig. 3.2.2).
T

TCT (Q)  c h  I (t )dt  P  Q  co  c h  (Q  T  D  T 2 / 2)  P  Q  c o
0
Total cost of the system is a cost of all cycles (D/Q). Therefore:
TC (Q) 
D
Q
   
c Q
 c h  Q  T  D  T 2 / 2  P  Q  co  h
2
c D
 PD  o
Q
.
Cost
Total cost
EOQ Q
Figure. 3.2.2. Inventory cost in EOQ model.

Optimal order quantity (EOQ) can be determined by solving the following differential equation:
dTC (Q) ch co  D
   0.
dQ 2 Q2
Optimal economic order quantity and total cost for optimal EOQ order TC(EOQ) are:
2  co  D
EOQ  TC EOQ   2  D  c o  c h  P  D .
ch
Let’s consider a modification of EOQ model to include also a production rate (Fig. 3,2.3). It
means that inventories are to be replenished with a known and constant rate as a production rate
M. In the production system, instead of having an ordering cost, there will be a set up cost cs as a
cost of setting up the facility to produce the desired product. It includes the salaries of employees
who are responsible for setting up the production equipment, and the engineering and design cost.
32
Inventory x(t)
M∙t M D
T Time t
Figure. 3.2.3. Inventory usage over time in EOQ model with manufacturing.
Cost-making analysis, very similar to an analysis in EOQ model (the difference is only to consider
the cost of maintaining the stock during the two periods of the ordering cycle - the period when
the stock is growing and the period when the stock is decreasing), leads to the following formula
for calculating the optimal batch size:
2  cs  D
Q*  .
 D
c h  1  
 M
Example
Novak Manufacturing produces commercial refrigeration units in batches. The firm’s estimated
demand for the year is 10000 units. It costs about €100 to set up the manufacturing process, and
the carrying (holding) cost is about €0.50 per unit per year. Once the production process has been
set up, 80 refrigeration units can be manufactured daily. The demand during the production period
has traditionally been 60 units each day. How many refrigeration units should be produced in each
batch?
Solution:
2  cs  D 2  100  10000
Q*    4000 units.
 D  60 
c h  1   0.5  1  
 M  80 
If Q* = 4000 units and 80 units can be produced daily, the length of the production cycle will be
Q/M = 4000/80 = 50 days.
3.2.2. Purchasing in logistics – Wagner-Within dynamic model
To avoid weaknesses of the EOQ “square root formula” to find the economic lot size under the
assumption of steady-state (constant) demand, Wagner and Whitin (in 1958) developed an
algorithm to find the optimal lot size for each period when net requirements are known for several
periods into the future, based on dynamic programming principles to make optimal lot size
decisions. The problem considered by Wagner and Whitin is the N periods problem with no
backorders when the assumption of constant demand is eliminated i.e. when the amounts
demanded in each period are known but are different and when inventory costs vary from period
to period. Generally, the algorithm minimizes the cost of ordering by optimally combining the net
requirements for one or more periods (weeks). Their model formulation permits the determination
of optimal lot sizes for a single item when demand, inventory holding charges and setup costs vary
over N periods of time. The solution provided by the Wagner and Whitin algorithm (WW) is
considered the benchmark or standard against which other lot-sizing rules or heuristics are judged.
Notwithstanding the fact of providing an optimal solution to the discrete lot-sizing problem, the
WW has been considered by many as an impractical approach. For practitioners in general, the
WW is considered more as a philosophy of problem solving than as a technique for lot-sizing
decisions.
33
The procedure for solving the above-mentioned problem proposed by Wagner and Whithin is
based on dynamic programming, and therefore finding the shortest way in a one-way network.
Let's define ckn as the cost of production in the k+1 period to replenish the stock in periods k+1,
k+2, ..., n, where n>k. The cost of ckn is equal to
 n  n 1  n 
c kn  c k 1  
 j 
  h     , 0  k  n  N .
j i
 j k 1  j  k 1 i  j 1 
The optimal strategy can be obtained by solving the following dynamic programming equation:
f n  min c kn  f k  , 1  n  N , f 0  0 .
0 k  n 1
The fn function can be interpreted here as the minimum cost of the inventory system over exactly
n periods. Once the equation is resolved above, we will receive a vector (k1, k2, ..., kn) indicating
the periods during which the order should be placed.
Example
You must make a decision about an article purchasing in your supplier. Demand in your firm for
this article changes in periods (months), but is known (Tab. 3.2.1). Data on costs are as follows:
ordering cost is co = 54,- zł, price per unit is P = 20,- zł, monthly inventory (stock) holding cost
rate is r = 2% of price. According to the order the supply increases inventory immediately (without
a delay at the beginning of the month) and it should allow fulfilling a demand of this period. Initial
inventory (stock) is 0. Determine plan of monthly orders in your supplier (Table 3.2.2).
Suggestion: Use Wagner-Within dynamic model for purchases. Possible two solutions are:
a) For i month the minimum cost for possible options must be determined - example: TC(1)
= co = 54,0 zł; TC(2) = min{TC(1)+co = 108; 54+62·20·0.02=78.8}=78.8 zł; TC(3)=
min{TC(1)+co+12·0.40=112.8; TC(2)+co=132.8; ko +62·0.40+12·0.40·2=88.4}=88.4 zł;
…; TC(12)=... ;
b) For cost elements a critical point for ordering can be determined when cost of ordering is
equal to inventory (stock) holding cost. Example: 20 · 0.02 · Qcp = 54; i.e. Qcp = 54/0.4 =
135, which means that inventory exceeding 135 items is not optimal in purchasing – it is
better to order and organize supply during next period (month).
Table 3.2.1. W-W model example data set Table 3.2.2. W-W model example solution framework
Month Period Demand Period Initial stock Demand Order Final stock Total cost
January 1 10 1 0 10 84 74 83.6
February 2 62 2 74 62 0 12 4.8
March 3 12 3 12 12 0 0 0
April 4 130 4 0 130 130 0 54
May 5 154 5 0 154 283 129 105.6
June 6 129 6 129 129 0 0 0
July 7 88 7 0 88 140 52 74.8
August 8 52 8 52 52 0 0 0
September 9 124 9 0 124 124 0 54
October 10 160 10 0 160 160 0 54
November 11 238 11 0 238 279 41 70.4
December 12 41 12 41 41 0 0 0
Total 1200 1200 1200 308 501.2
3.2.3. Reorder point calculation in inventory control

The simple inventory control models assume, that receipt of the order is instantaneous. It means,
that the order is placed when the inventory level for particular inventory item reaches zero level,
and the item will be received immediately. However, in practical business situations the time
between placement and receipt of an order, called “lead time” or delivery time, usually is greater
34
than zero. Therefore, the when-to-order decision is usually made on a base of a “reorder point”
(ROP), which is the inventory level at which an order should be placed.
Reorder point is given as:
ROP = (Demand per time unit) ˙(Lead time for a new order in time units).
The equation for ROP assumes that demand during lead time and lead time itself are constant.
Because usually it is not the case, an extra inventory stock, called “safety stock” should be added.
To determine the safety stock, the two situations can be identified: the stock out costs are already
known, or the stock out costs are unknown or are extremely difficult to determine. In the second
situation, to determine safety stock levels it is to apply a “service level” concept. In general,
service level is the percent of the time in which there will not be out of stock of particular
inventory item. The chance of probability of having stock out on inventory is one minus the
service level:
Service level = 1 – Probability of a stock out.
In order to determine the safety stock level, it is only necessary to know the probability of demand
during the lead time and the desired service level.
Example:
The “Sigma” company carries an inventory item that has a normally distributed demand during
the reorder period. The mean (average) demand is 350 units and the standard deviation δ is 10.
The company is going to follow an inventory policy that results in stock outs occurring only 5%
of the time. How much safety stock (SS) should be maintained?
Solution:
In this example it is to use the properties of standardized normal distribution curve to get a Z value
for an area under the normal curve of 0.95 = 1 – 0.05. Using a normal table, the Z value to be
found is equal to 1.65. This parameter is also equal to:
X  SS
Z 
 
Solving for safety stock gives the following (since stock is usually in integer amounts):
SS = (1.65) ∙ (10 = 16.5 units, or 17 units.
3.2.4. Material requirements planning (MRP) in inventory control
MRP (Material Requirements Planning) is a set of logically related procedures, decision making
rules and design stages to transform the production plan to time-phased net needs and to a plan of
material supply for each inventory item necessary for production plan completion.
MRP is a tool for production planning and inventory control. This approach is used periodically,
on a rolling-horizon basis. Applying MRP requires data on the components (raw material, semi-
finished products) of each end item, quantity of each component, sequence in which the
components are required and operations are performed, as well as the operation times. The bill-of-
material (BOM) is the key structure used to introduce these data. The BOM is the key input for
the MRP system. It shows all of the components (both purchased and manufactured) at every level
of the manufacturing process and the quantity of each component required. In the supply chain
environment, the levels of the manufacturing process may take place in different companies. This
requires comparing the demand for a given material with existing stocks and determining which
materials must be ordered and at what time to be stored in the production process for a shorter
period (usually a week). The MRP method is used in industry (production logistics) in both
continuous and discredited processes. In continuous processes, a relatively small number of
assortments of materials are used and it is much simpler to determine material needs and stock
states. In the case of discrete processes, mostly products consisting of assemblies, components,
details (design structure of the product) are produced. The MRP provides the possibility to
35
accurately determine the moment of the item's demand and to determine the size of that demand.
Other advantages include increasing inventory turnover, improving service levels by reducing
times and reducing shortages. The MRP uses the following concepts:
 Independent needs (primary demand) - resulting from the demand of external customers
(customers) for final products (and spare parts for them). This demand, related to the
market, can be a forecast. The original demand may also consist of orders of recipients -
it will then also be determined;
 Dependent needs (secondary demand) - resulting from primary demand, the design
structure of the product and the technology and production organisation used. This is the
demand for raw materials, materials, assemblies, components and elements needed to
produce final products or spare parts;
 Gross needs for materials and components of the product - resulting from an operational
production plan and various norms. It determines the type and quantity of materials and
the elements needed for the production process;
 Net needs - materials and components actually processed during a given period. It is
calculated as: Net needs = Gross needs - Stock owned - Planned delivery.
 Order size - the quantity of materials and components of the product once ordered. The
order size may be equal to the net or economic needs of the production lot (order).
 Needs synchronization - determine gross and net material needs by fixed time sections
(usually weeks) while agreeing on the dates of the request and deadlines for placing the
order. Knowing the production or order cycle it is to determine the date of placing the
order for the material or components of the product. Increasing the effectiveness of the
MRP method can be achieved by introducing safety stocks (or safety tolerance for the
ordering period). Planning in MRP is made with a “rolling-horizon method”.
Example:
Manufacturer produces 2 types of products: A and B. For this production 2 types of materials M1
and M2 are necessary. BOM (bill of materials) norms are as follow: M1: for product A – 26.4
kg/item; for product B – 53.3 kg/item, M2: for product A – 1.7 kg/item; for product B – 2.8
kg/item. For production requirements plan of material supply use master production schedule
based on products’ sale forecast (tab. 1) and information about initial inventory, safety stock,
expected deliveries (scheduled delivery/receipts), and supply system constraints (Tab. 3.2.3,
3,2.4). Calculate the MRP plan for 10 weeks (Tab. 3.2.5, 3,2,6, 3.2.7). Suggestion: Use rolling
horizons method and the following formulas:
a) Net needs = Gross needs – (Inventory on hand + Scheduled delivery) + Safety stock
b) Planned orders = Round up (Net needs/Min order) · Min order
Table 3.2.3. MRP example master production schedule data set
No Products Master Production Schedule [items]
1 2 3 4 5 6 7 8 9 10
1 Product A 200 300 100 220
2 Product B 10 20 10 20 20
Table 3.2.4. MRP example initial inventory and supply system constraints report data set
Materials On hand Safety stock Min. order Delivery time Expected delivery
[kg] [kg] [kg] [weeks] Quantity Week
Material M1 1000 0 5000 1 - -
Material M2 50 10 25 2 400 1
36
Table 3.2.5. MRP example gross needs for material M1
No Products Gross needs for M1 [kg/week]
1 2 3 4 5 6 7 8 9 10
1 Product A 5280 7920 2640 5808
2 Product B 533 1066 533 1066 1066
3 Sum 533 5280 1066 7920 533 3706 6874
Table 3.2.6. MRP example gross needs for material M2
No Products Gross needs for M2 [kg/week]
1 2 3 4 5 6 7 8 9 10
1 Product A 340 510 170 374
2 Product B 28 56 28 56 56
3 Sum 28 340 56 510 28 226 440
Table 3.2.7. MRP example solution
No Materials Week no
1 2 3 4 5 6 7 8 9 10
Gross needs 533 5280 1066 7920 533 3706 6874
Scheduled delivery 5000 5000 5000 5000 5000
M1 Inventory 467 187 187 4121 1201 1201 668 1962 88 88
Net needs 4813 879 3799 3038 4912
Planned orders 5000 5000 5000 5000 5000
Gross needs 28 340 56 510 28 226 440
Scheduled delivery 400 500 25 225 450
M2 Inventory 422 82 82 26 16 16 13 12 22 22
Net needs 494 22 223 438
Planned orders 500 25 225 450
3.2.5. Distribution requirements planning (DRP) in inventory control

DRP (Distribution Requirements Planning) is the basis for organising and improving the flow of
goods in the distribution system. This is a schedule that determines the demand for inventory over
a given period based on customer-generated purchase plans. The DRP operates in logistics points
involved in the movement of goods. Each point in the distribution system evaluates its own product
demand in subsequent periods in the future. These demands are then consolidated into one forecast,
and in the next step transmitted to the central shopping point (warehouse) and further to the
production link. These forecasts are then associated with the expected production plan. There are
two parallel processes to adapt plans to market needs and taking into account production
constraints. Then an operational production plan is generated.
The DRP is developing an inventory plan by identifying future time-phased delivery of a
particular product to individual cells (central and regional warehouses), particularly to meet
customers’ needs. Demand forecasts are an important element in the DRP. However, their
estimation is possible with some error, which is why they are developed only for rather short
periods (days, weeks), updated and verified on an ongoing basis. The second important element
of DRP method is the on-time delivery (timeliness) to individual cells. The DRP method is “a
mirrored reflection” of the MRP and uses the same operational principles.
Example:
The ALFA company is a producer of a product X. The distribution system is based on a 3-level
structure (Fig. 3.2.4): customers (C1, C2, C3, C4), regional company’s warehouses (RW1, RW2),
and main company’s warehouse (PW). For the given system input data develop a DRP plan.
Customers forecast their expected demands with high probability for 8-week period (Tab. 3.2.8).
The ALFA company, as a producer, produces and delivers products to RW1 warehouse in 2 weeks,
and in 1 week to RW2 warehouse (Tab. 3.2.9). Minimum batch size is 54 product units. The RW1
warehouse has an initial inventory equal to 120 units, and it is expected to get a delivery of 108
37
units in the 2nd week. The shortages in RW1 inventory level are not allowed, and safety stock
(minimal level) must be equal to 10 units. The RW2 warehouse has an initial inventory equal to
70 units. The shortages in RW1 inventory level are not allowed, and safety stock must be equal to
8 units. There is an initial stock of 54 units in PW warehouse, and on the 1st week 108 units will
be added to the stock. The production lead time is equal to 1 week (as a time to set-up production).
C1 C2 C3 C4
RW1 RW2
PW
Figure. 3.2.4. Example of distribution system for X product

Table 3.2.8. DRP example data set of weekly demand for product X
Customer Demand in [units] for week no.
2 3 4 5 6 7 8 9
C1 55 50 40 45 40 40 45 50
C2 55 55 55 50 50 50 55 50
C3 30 25 40 30 30 63 35 60
C4 30 30 40 30 30 50 30 50
 (1 + 2) 110 105 95 95 90 90 100 100
 (3 + 4) 60 55 80 60 60 113 65 110
Table 3.2.9. DRP example data set on inventories, deliveries, lead times, and minimal batches.
Initial inventory Safety stock Min. batch size Time to Expected Expected time
[units] [units] [units] complete delivery of delivery
[weeks] [units] [week]
RW1 120 10 54 2 108 2
RW2 70 8 54 1 - -
PW 54 - 54 1 108 1
Solution:
Table 3.2.10. DRP example plan for RW1 warehouse
Distribution in [units] for week no.
1 2 3 4 5 6 7 8
Gross needs 110 105 95 95 90 90 100 100
Scheduled delivery - 108 108 108 108 54 108 108
Inventory initial | final 120 | 10 10 | 13 13 | 26 26 |39 39 | 57 57 | 21 21 | 29 29 | 37
Safety stock 10 10 10 10 10 10 10 10
Net needs 92 79 61 43 89 81
Planned orders 108 108 108 54 108 108
Table 3.2.11. DRP example plan for RW2 warehouse
Distribution in [units] for week no
1 2 3 4 5 6 7 8
Gross needs 60 55 80 60 60 113 65 110
Scheduled delivery - 54 108 54 54 108 54 108
Inventory initial | final 70 | 10 10 | 9 9 | 37 37 | 31 31 | 25 25 | 20 20 | 9 9|7
Safety stock 8 8 8 8 8 8 8 8
Net needs 53 79 31 37 96 53 109
Planned orders 54 108 54 54 108 54 108
38
Table 3.2.10. DRP example plan for PW warehouse
Production in [units] for week no
1 2 3 4 5 6 7 8
Gross needs 162 216 162 108 216 162 108 -
Scheduled delivery 108 216 162 108 216 162 108 -
Inventory initial | final 54 | 0 0|0 0|0 0|0 0|0 0|0 0|0 0|0
Safety stock 0 0 0 0 0 0 0 0
Net needs 216 162 108 216 162 108 - -
Planned production 216 162 108 216 162 108 - -

1. Why is inventory an important issue for managers?
2. What are types of inventories in logistics and supply chains?
3. What are symptoms of poor inventory management in logistics?
4. Explain “bull-whip” effect in supply chains.
5. What are methods to reduce negative influence of “bull-whip” effect in supply chains?
6. What is a difference between “push” and “pull” production/manufacturing?
7. What is the purpose of inventory control?
8. What are major decisions that must be made in inventory control?
9. What are measures of customer service and inventory control effectiveness?
10. What are methods of inventory control in logistics?
11. Explain EOQ (saw tooth) model for procurement and production planning in logistics.
12. What are some of the assumptions in the EOQ model and its modifications?
13. Wat is the reorder point and how is it determined?
14. What is the safety stock and in what way it can be determined?
15. Describe basic principles and the algorithm of MRP material planning method in logistics.
16. Describe basic principles and the algorithm of DRP distribution planning methods in logistics.
17. Explain “cross-docking” method in inventory control and distribution logistics.
18. How VMI/SMI methods work in logistics (responsibility, technology, benefits)?
19. What are the elements and implications of just-in-time (JIT) for logistics?
20. What are types of Kanban systems in production management?
21. What types of warehouses are used in logistics systems?
22. What are warehouse value added services?
23. What are elements of logistics costs, and how they can be determined and better represented?
24. Discuss the relationship between service level, uncertainty, safety stock, and order quantity.
How can trade-offs between these elements be made?
25. Describe differences between the following technologies applied in inventory management
EAN bar codes, RFID, EPC.
3.3.2. Exercises
Exercise 1
As a manager of home appliances shop you have to calculate the quantity of an article to order in
your supplier. Data about cost elements and expected demand for this article are as follows:
demand (D) = 4800 units/year, cost of ordering (co) = 40 zł/order, price (P) = 100 zł/unit, interest
rate (i) = 0.25 1/year, inventory holding cost (ch) = P · i = 25 zł/(unit·year).
a) Calculate optimal (economic) order quantity (EOQ);
b) Make a sensitivity analysis of EOQ for co and ch change by ±10% (Tab. 3.3.1, 3.3.2);
c) Make a sensitivity analysis of total cost TC(Q) for Q change by ±50% (Tab. 3.3.3);
d) How to modify the EOQ model to consider an inflation rate (d) in pricing?
39
e) Table 3.3.1.EOQ sensitivity to co Table 3.3.2. EOQ sensitivity to ch Table 3.3.3. TC sensitivity to Q
Ordering cost EOQ Holding cost EOQ Q TC(Q)
0.9 · co 0.9 · ch 0.5 · EOQ
co ch EOQ
1.1 · co 1.1 · ch 1.5 · EOQ
Suggestion: Use EOQ model for economic order (batch) quantity for constant demand. The
assumptions of the model are as follow: demand D is deterministic and constant one, there is no
inventory deficit (shortage), lead time L is constant (and equal zero), cost elements are: P – unit
cost of article purchasing (price), co – cost of ordering, ch - inventory holding cost for unit of
article per unit of time, TC(Q) – total cost of system as a sum of inventory ordering cost, holding
cost, and purchasing cost. Additionally, cost of the system is not discounted, and inflation rate is
not considered.
Exercise 2
Mill enterprise needs yearly supply of 36000 tons of grain with an average price of 500 zł/ton.
How to purchase this mill, when grain inventory holding cost of 1 ton is 0.3 zł/year, and ordering
constant cost is 150 zł. Calculate economic order (and supply) quantity EOQ =Q* and frequency
of supplies by minimising total cost of the system.
Exercise 3
A factory producing furniture needs constant supply of wooden raw materials. The factory orders
oak boards, and the price of this raw material is 200 zł/m3. Yearly demand for boards is 225 m3.
Cost of ordering (preparation and transaction) is 10 zł, cost of inventory holding cost is 20 zł/(m3
· year). Suppliers offer 2% price reduction for order at least 50 m3, 5% reduction for order at least
100 m3, and 10% reduction for order at least 150 m3. Determine optimal quantity for oak boards
purchase (Tab. 3.3.4), ordering cycle time, and cost of the system.
Table 3.3.4. Example framework
Ordering quantity Cost of ordering Inventory holding cost Purchasing cost Total cost
EOQ
50
100
150
Exercise 4
Jan Nowak is the owner of a small company that produces metal chandeliers. The annual demand
is for 800 chandeliers, and Jan produces chandeliers in batches. On the average, Jan can produce
10 chandeliers per day, and during the production process, demand for chandeliers has been about
5 chandeliers per day. The cost to set up the production process is 100 zł, and it costs Jan 5 zł to
carry one chandelier for one year. How many chandeliers should Jan produce in each batch?
Exercise 5
You must make a decision about an article purchasing in your supplier. Demand in your firm for
this supply changes in periods (months), but is known (Tab. 3.3.5). Determine plan of monthly
orders in your supplier (Tab. 3.3.6). There are the following data on cost elements: ordering cost
is co = 125,- zł, unit price in purchasing is P = 30,- zł, monthly inventory holding cost rate is r =
2.5% of price. According to the order the supply increases inventory nearly immediately (without
a delay at the beginning of the month) and it should allow fulfilling a demand of this period. Initial
inventory is 0.
40
Table 3.3.5. W-W model example data set Table 3.3.6. W-W model example framework
Month Period Demand Period Initial stock Demand Order Final stock
January 1 20
February 2 124
March 3 24
April 4 260
May 5 308
June 6 258
July 7 176
August 8 104
September 9 248
October 10 320
November 11 476
December 12 82
Total 2400
Exercise 6
MEC electronics company is a very large manufacturer of printers for computer systems. Each
printer uses an electric motor to drive the roller. It is estimated that the cost of being out of stock
for this particular motor is €50 for each unit MEC is short. This cost represents the inconvenience,
the cost of reprocessing the printers when motors finally arrive, and the extra storage cost of
holding printers without motors. An average usage of motors a day is 50, and the normal lead time
is 6 days. By noting the usage of motors during a number of past reorder periods a probability to
various levels of usage is assigned (Tab. 3.3.7). If procurement manager reorders when the level
of stock falls to 300 units, the company will be safe 81% of the time (0.68+0.06+0.04+0.03), but
it will be out of stock of motors 19% of the time, which means a stock out cost. The EOQ formula
suggests that 5 orders per year is optimum and the cost of carrying one motor in safety stock is
€10. What reorder point should be applied to minimise total annual costs (Tab. 3.3.8).
Table 3.3.7. Probabilities of motor usage during reorder period
Use during reorder period No. times this quantity was used Use probability
150 3 3/100 = 0.03
200 4 0.04
250 6 0.06
300 68 0.68
350 9 0.09
400 7 0.07
450 3 0.03
Total 100 1.00
Table 3.3.8. Costs of being out of stock and costs of safety stock policies
Safety Probability of Number Expected annual cost of Total annual Annual Total cost
stock being out short being short stock out cost carrying cost
0.09 for 350 50 50·0.09·€50·5=€1125
0 0.07 for 400 100 … … €0 …
0.03 for 450 150 …
50 0.07 for 400 50 …
0.03 for 450 100 … … … …
100 0.03 for 450 50 … … … …
150 0 0 … … … …
Exercise 7
Averaged monthly demand forecast for an article is expected to be 10 items with forecast accuracy
(MAD – mean absolute deviation) equal to 2 items. Average lead time (period of ordering and
41
delivery) is equal to 2 weeks (0.5 of the month). For service level equal to 84.1% (k=1), calculate
inventory reorder s point. Suggestion: Inventory ordering (reorder) point (s) is a decision making
parameter of the following inventory control policies: (s,Q), (s,S), (s,t,Q), (s,t,S). It is calculated
according to a formula: Reorder point = Average demand during lead time + Safety stock, i.e.
s  y ave  Lave  k  b yave  Lave , where: s – reorder point, yave – average demand forecast during lead
time, Lave – average lead time, byave – forecasted average demand absolute deviation, k – safety
coefficient according to accepted service level. Safety coefficient represents probability of being
out of stock during lead time. To calculate k safety coefficient (with an assumption of normal
probability) the table of normal distribution is used with an assumed service level (Tab. 3.3.9).
Table 3.3.9. Relation between safety stock k coefficient and inventory service level.
Safety stock k coefficient Service level [%] Risk of shortages [%]
1.0 84.1 15.9
1.5 93.3 6.7
2.0 97.7 2.3
2.5 99.4 0.6
3.0 99.9 0.1
Exercise 8
A Lighting Shop stocks a very popular floor lamp which enjoys an annual demand of about 900
units. The annual holding costs are 26 percent of average inventory value, and the ordering costs
are about €30 per order. The floor lamp costs the shop €60 per unit. The shop logistics manager
would like to use a reorder-point model, but cannot realistically assess stock out costs. Therefore,
the manager has decided to set safety stock levels based upon a service level policy of meeting 90
percent of demand in the reorder lead time. Demand in the reorder lead time has been observed to
be normally distributed with a mean of 10 lamps and a standard deviation of 4 lamps. What should
the manager set as the reorder point? What are the annual inventory costs of the floor lamp?
Exercise 9
To produce A product, a manufacturer needs 2 materials: M1 and M2. BOM (bill of materials)
norms are as follow: 1 item of product A needs 4 items of material M1 and 1 item of material M2.
Master production schedule (MPS) based on product sale forecast is as follows: day 2 – 20 items,
day 4 – 10 items. Initial inventory on hand is: M1 – 50 items, M2 – 5 items. Safety stock is: M1 –
1 item, M2 – 0 items. Minimum order is: M1 – 2 items, M2 – 2 items. Time of delivery is: M1 –
1 day, M2 – 2 days. It is also expected to receive a delivery of 20 items of M2 material in day no
1. Calculate the MRP plan of M1 and M2 materials for 5 days (Tab. 3.3.10, 3.3.11, 3.3.12, 3.3.13,
3.3.14). Formulas: Net needs = Gross needs – (Inventory on hand + Scheduled delivery) + Safety
stock, Planned orders = Round up (Net needs/Min order) · Min order.
Table 3.3.10. Master production schedule
No Product Master Production Schedule
1 2 3 4 5
1 Product A
Table 3.3.11. Initial inventory and supply system constraints report
Materials On hand Safety stock Min. order Delivery time Expected delivery
[item] [item] [item] [days] Quantity Week
Material M1
Material M2
Table 3.3.12. Gross needs for material M1 Table 3.3.13. Gross needs for material M1
M1 gross needs in days M2 gross needs in days
1 2 3 4 5 1 2 3 4 5
M1 M2
42
Table 3.3.14. MRP
Material M1 Days Material M2 Days
1 2 3 4 5 1 2 3 4 5
Gross needs Gross needs
Scheduled delivery Scheduled delivery
Inventory Inventory
Net needs Net needs
Planned orders Planned orders
Exercise 10
An enterprise X is a manufacturer of A chemical product, which is distributed to W1 and W2
enterprise regional warehouses. The warehouses are supplying local customers – warehouse W1
supplies customers C1 and C2, warehouse W2 supplies customers C3 and C4. For the customers’
demands forecasts (Tab. 3.3.15) and data on initial logistics system state with inventory control
and transportation constraints (Tab. 3.3.16), make a DRP schedule (plan) for 1 week of production
and distribution system to produce and distribute the A product from X enterprise to W1 and W2
(Tab. 3.3.16, 3.3.17, 3.3.18, 3.3.19).
Table 3.3.15. Forecasts for customers’ demands (gross needs)
Mon Tue Wed Thu Fri Sat Sun
Customers of W1 warehouse 95 70 55 65 50 50 25
Customers of W2 warehouse 35 25 30 20 35 75 30
Table 3.3.16. Data on initial inventories, deliveries in transit, transportation times, and inventory control method
Initial Safety stock Min. Lead time First expected Expected day of
inventory [items] delivery [days] delivery [items] first delivery [day]
[items] [items]
Warehouse W1 120 15 50 1 - -
Warehouse W2 75 10 50 2 100 Tue
Warehouse X 150 - 50 1 100 Mon
Table 3.3.17. W1 warehouse plan
Gross needs
Scheduled delivery
Initial | Final inventory 120 | | | | | | |
Safety stock 15 15 15 15 15 15 15
Net needs
Planned orders
Table 3.3.18. W2 warehouse plan
Gross needs
Scheduled delivery
Safety stock 10 10 10 10 10 10 10
Net needs
Planned orders
Table 3.3.19. X enterprise production schedule
Gross needs
Scheduled delivery
Safety stock 0 0 0 0 0 0 0
Net needs
Production plan
43
4. Transportation in logistics
4.1. Transportation problems – general approaches
Transportation is a very important and visible part of logistics operations. Transportation operators
provide the two major services: logistics product movement and storage. The basic value provided
by transportation is to move the logistics product inventory to the next stage of the business process
which runs in overall supply chain or network. In transportation processes, there are the following
seven types of business actors:
1. A shipper, who is any person or organization that needs to transport goods or people;
2. A carrier, who is a person or organization that provides transportation services of people
or freight as part of a commercial enterprise. Carriers can range from a single self-
employed driver operating their own truck to large, international trucking, shipping, or
airline companies;
3. Freight forwarders, who consolidate shipments to fill trucks or rail cars;
4. Transportation brokers, who handle transportation requirements of shippers, legally
authorized to act as agents on shippers’ behalf;
5. Shipper’s Associations, who are non-profit organisations that move member’s cargo, and
also consolidate members’ shipments to get volume discounts;
6. Intermodal marketing companies, who act as intermediaries between intermodal carriers
and shippers;
7. Integrated logistics service providers, who provide services for a fee.
Carriers are typically divided into three types depending on the ownership of the transportation
assets and the transported goods: common carrier, contract carrier, private carrier, and exempt
carrier. A common carrier is a corporation or organisation that provides a specific transportation
service to the general public at an established price and must carry everybody or everything
compatible with that service. A common carrier thus has no right to reject particular compatible
passengers or freight from shippers that are willing to pay the price. The doctrine of common
carriage was originally developed with respect to busses, trains, and ships. More recently, it has
been applied to pipelines and aircraft and even to communication networks such as telephone and
internet networks. A contract carrier is an organisation that has entered into a specific legal
agreement with a shipping organisation to provide contractually agreed upon transportation
services for an agreed upon price. This allows the contract carrier to be more selective with respect
to the shippers it serves and more responsive to its customers than a common carrier. If the contract
extends over several months, the transportation assets, such as trucks, may be painted with the
colour scheme and trademarks of the shipper even though they belong to the carrier. A private
carrier is a transportation organisation which transports its own goods using transportation assets
that it owns or leases. For private carriage the shipper and carrier are the same organisation. An
exempt carrier is a transportation organisation who transports certain exempt products like
produce, livestock, coal, or newspapers, and exempts from regulation of services and rates.
The main characteristics of a transportation service are: availability, capacity, price, average
transit time, transit time variability, and loss and damages. To select a service, the trade-off must
be made between the characteristics of the various alternative services. Transportation costs are
traditionally divided into fixed and variable costs:
 Fixed costs are independent of the intensity of the (transportation) activity such as
terminal facilities, administration, roadways and tracks;
 Variable costs are dependent on intensity of the activity, such as labour, fuel,
maintenance, and handling. Variable cost in transportation services may be based on an
either distance or volume or a combination of both. Transportation costs vary
significantly in size and structure from one transportation service to another.
44
4.2. Selection of transportation branches and scheduling in logistics
4.2.1. Transportation branches and its selection
There exist five basic modes of transportation: pipeline, water (inland water, ocean-going), rail,
road, and air. Any permanent presence of humankind in orbit around the earth in the space station
or possible at other locations in the solar system will require some form of space transportation.
To satisfy a transportation service request a single transportation mode may be used exclusively
or several modes may be combined.
A pipeline is a system of connected pipes for the transportation of liquids, gasses, and slurries.
Slurries are fine solid particles suspended in a liquid. Pumps, valves, and other control devices
control the flow. Products may be stored temporarily in storage tanks. Pipelines can be used inside
the facilities, on campus environments such as chemical refineries, or for long-distance
transportation. Pipelines inside the facilities are usually suspended from the ceiling and pipelines
used for long distance transportation are usually laid underground, although some pipelines are
suspended on columns above the ground to avoid damages. Pipelines usually consist of sections
of pipe made of metals, such as steel, cast iron or aluminum, concrete, or plastics.
Rail or rail transport is the transportation of goods and passengers along a system of rails or
tracks. The vehicles traveling on the tracks are arranged in a train, which is a sequence of
individually powered or un-powered vehicles that are linked together and move as a unit. A
locomotive is rail vehicle that has as its single function to push or pull the un-powered vehicles,
which are typically called cars or wagons. For traditional railroads, the tracks consist of two
parallel rails. A unit train consists of cars that all have the same destination, so that no assembly
and disassembly of the train (switching) has to be executed during the trip, which allows for a
significant reduction of the total trip duration. Typically, all the cars in the train contain the same
commodity, such as the trains that supply electrical power plants with coal.
Road freight transportation uses trucks to move goods over the network of roads. Trucks roll
on wheels equipped with rubber tires. The wheels are mounted on a number of axles. Trucks can
be categorized by their load-carrying capacity into light trucks, medium trucks, heavy trucks, and
off-road trucks. Light trucks are roughly the same size as a passenger car and are used by
individuals and commercial enterprises. Medium trucks have a load-carrying capacity between
that of light and heavy trucks. The cabin and cargo space form integral parts of the truck and the
wheel axles are in permanent parallel alignment. A medium truck is typically used for city
delivery. A heavy truck typically consists of a tractor and trailer combination. Heavy trucks are
used primarily in inter-city transportation. Increasing the volume or weight capacity of a truck
reduces shipping costs moderately and is desirable from the carrier and shipper point of view.
There are the following types of marine (water) transportation: bbrown water (inland), green
water (coastal), and blue water (ocean-going). The main type of marine transportation is an ocean-
going cargo transportation. The vast majority of ocean-going cargo vessels carry crude oil and
petroleum products, bulk and ore, or intermodal containers. Transportation by intermodal freight
refers to the transportation of freight in containers by multiple transportation modes, such as ship,
train, and truck, without handling of the freight inside the containers. This containerization reduces
the handling and associated handling cost of the freight, improves security, reduces damage and
loss, and reduces the transit time of the freight. The two main disadvantages of the use of these
standardized and reusable containers are requirement of transportation quantities corresponding to
full containers, and management of empty containers to balance the container flows.
Air transport by air carriers is very expensive transportation mode, relatively to other modes
but it is also very fast. Unfortunately, airlines cannot carry extremely heavy or bulky cargo. Also
for light, high value goods that need to travel long distances quickly, most small cities and towns
do not have airports.
45
Selection of a particular transportation service should be based on the actual charges which
often depend basically on the commodity shipped, the origin and destination, the distance between
the end points, the quantity shipped, and the time of the year. Particularly, the charges depend on
the following economic drivers in transportation:
 Distance (transportation work distance);
 Volume (load volume);
 Density (combination of weight and volume);
 Stowability (how product dimensions fit into transportation equipment);
 Handling (what equipment is required to load and unload);
 Liability (factors resulting in damage or potential claims);
 Market (balance between transportation demand and supply).
Fastest transportation modes are generally the most expensive. The relative ratios may change
over time. The average costs are usually expressed as costs per ton-mile (ton-km). Average costs
can be used for general comparisons. Many freight transportation costs are very asymmetric, i.e.,
the cost for shipping freight from location A to B is significantly different from the cost for
shipping the same quantity of freight from location B to location A. This is usually caused by a
large one-directional flow.
The transportation of goods typically is subject to significant economies of scale, which leads
in turn to large quantity discounts. Quantity discounts can be either incremental or full discount
(discount is only given for the additional freight or for all the freight).
Freight transportation operations often either show a “point-to-point” structure or a “hub-and-
spoke” structure. In the point-to-point structure goods are transported directly from the origin to
the destination point. The total number of transportation legs is large. The advantage of this direct
shipping method is a reduced travel time and travel distance for the goods. The disadvantage is
that the frequency of the service between a pair of points may be lower because of low traffic
volume between the points, which in turn may yield higher transportation costs. In the hub-and-
spoke system, goods are first transported to a local consolidation hub, then shipped by long-haul
freight carrier to a destination hub, and finally delivered from the destination deconsolidation hub
to the final destination. The total number of transportation legs is smaller, since each end point is
only connected to a single hub. The advantage of hub-and-spoke is the higher frequency of service
between a point and its serving hub and between hubs. This consolidation may also reduce the
transportation cost because of the economies of scale in transportation. The disadvantages are the
longer trip time for the goods and the possible congestion at the hubs. To avoid waiting times for
the carriers at a hub, incoming and outgoing carriers are scheduled for peak interchange periods,
which may lead to significant congestion and delays. Hub-and-spoke systems are used in LTL
trucking, international intermodal container transportation, and also for air transportation of
passengers.
Transportation costs represent the single largest cost element in logistics operations. Estimates
range from 50–65% of the total logistics cost is accounted for by transportation. So the
management of transportation services is clearly an important task for logistics and supply chain
managers and engineers.
4.2.2. Transportation optimisation modelling and scheduling
Transportation modelling aims to find the least-cost means of shipping supplies from several
points of origin to several points of destination. Origin points (or sources) can be companies,
factories, logistics centres, warehouses, or any other points from which goods are to be shipped.
Destinations are any points that receive goods.
To use the transportation model, the following data are to be collected:
 Origin points and the capacity or supply per period at each point;
 Destination points and the demand per period at each point;
46
 Cost of shipping one unit from each origin to each destination point.
The transportation model is actually a class of the linear programming (LP) models. The first
step in the modelling process is to set up a transportation matrix, where Xij is amount transported,
cij is transportation cost from i point to j point. The capacities and demands are: ai, bj. The LP basic
model for transportation problem consists of a following objective function, and set of constraints:
Objective function: TC   cij  X ij   Mini .
m n
i 1 j 1
n m
Constraints (subject to):  j 1
X ij  ai , for 1  i  m , and X
i 1
ij  b j , for 1  j  m .
The LP problem can be solved by iterative “northwest corner” algorithm, or by “simplex”

algorithm. The practical approach is to apply Excel software with Solver module as an extension
of the software package.
Example:
Delta Company received a contract to supply grain for three agro-food factories located in the
towns A, B, and C. Production managers have estimated the amount of grain which will be needed
at these three production lines (Tab. 4.2.1). Delta Company has three grain warehouses located in
the towns of W, X, and Y. The grain required for food production can be supplied by these three
warehouses. Delivery costs per truckload between each warehouse and factory site vary directly
with the quantity distributed (Tab. 4.2.2). The company chief dispatcher has calculated the
amounts of grain which can be supplied by each warehouse (Tab. 4.2.3, 4.2.4, 4.2.5). Given the
amounts required at each factory and the amounts available at each warehouse, the company
problem is to schedule shipments from each warehouse to each factory in such a way as to
minimize the total transportation cost within the constraints imposed by warehouse capacities and
factory requirements.
Solution: northwest corner algorithm
Step 1: Set up the transportation tableau (sources of supply, transportation cost, warehouse
capacity constraints, destination points, requirements for each factory, alternative source-to-
destination assignments).
Table 4.2.1. Factory demand and warehouse capacity
From To Factory A Factory B Factory C Warehouse capacity
Warehouse W X11 X12 X13 56
Warehouse X X21 X22 X23 82
Warehouse Y X31 X32 X33 77
Factory requirements 72 102 41 215
Table 4.2.2. Transportation cost
From To Factory A Factory B Factory C
Warehouse W 4 8 8
Warehouse X 26 24 26
Warehouse Y 8 16 24
Step 2: Develop an initial solution (WA – 56, XA – 16, XB – 66, YB – 36, YC – 41)
Procedure: northwest corner
Table 4.2.3. Transportation initial solution
Warehouse W 56 56
Warehouse Y 36 41 77
Step 3: Test the solution for improvement
47
Method: examination of each unused square in the tableau.
Two alternative procedures: stepping-stone, and MODI (modified distribution method).
Question: what would happen if one truckload of gravel were tentatively shipped or assigned to
an unused square?
Table 4.2.3. Transportation initial solution improvements
Warehouse W 56 (-1) (+1) 56
Warehouse X 16 (+1) 66 (-1) 82
Improvement index: Addition to cost: WB: 8, XA: 16 Total: 24
Reduction in cost: WA: 4, XB: 24 Total: 28
Step 4: Develop the improved solution by optimisation
Table 4.2.4. Transportation final solution
Warehouse W 56 56
Total transportation cost: 2.744

1. What factors are important for transportation performance in logistics?
2. What are modes of transportation and the most significant characteristic of each?
3. What types of transportation actors operate in logistics?
4. What are types of carriers in logistics operations?
5. What types of services provide transportation carriers?
6. Explain the transportation principles of economy of scale and economy of distance.
7. What are economic drivers (factors) in transportation operations?
8. Discuss arguments for economic regulations and deregulations necessity in transportation.
9. Explain basic law regulations for international transportation (e.g. in EU countries).
10. What basic documents are used in transportation operations?
11. What is the role of fright bill and the bill of lading in transportation transactions?
12. What are the international terms of sale (“Incoterms”) in the context of logistics cost?
13. What are differences between intermodal and multimodal transportation systems?
14. What are challenges and barriers for intermodal and multimodal transportation systems’
development?
15. What are basic transportation strategies in modern enterprises?
16. Describe “hub-and-spoke” system in freight transportation operations.
17. Describe “point-to-point” system in freight transportation operations.
18. Describe the system of transportation unit’s standards (in EU and U.S.A).
19. Discuss an application of “Internet of Things” (IoF) concepts in transportation.
20. What types of cost elements are necessary to know to make transportation decisions?
21. What are carrier pricing strategies in setting transportation rates to charge shippers, e.g.
strategies based on service cost, service value, product weight, and distance?
22. What are systems of product classifications and pricing by tariffs in transportation?
23. Explain the concept of “break-even point” analysis in transportation optimisation.
48
24. Describe the simplex “linear programming” (LP) problem solving method application in
optimisation of transportation network.
25. Describe the “shortest path” (SP), “traveling salesman” (TS), and “maximum flow” (MF)
problem solving methods’ application in optimisation of transportation network.
4.3.2. Exercises
Exercise 1
For a given data (Tab. 4.2.5) on transport options select transport branch (by rail or by car – large
truck). Data: transport demand (load) D = 2500 ton, unit price of transported good C = 1000 zł/ton,
interest rate i = 25%, fixed cost of transport by rail delivery ordering Or = 100 zł, fixed cost of
transport by car delivery ordering Oc = 150 zł, unit rail transport rate Rr = 50 zł/ton, unit car
transport rate Rc = 60 zł/ton, lead time of rail transport Tr = 3 days, lead time of car transport Tc =
1 day, rail transport optimal quantity Qr = 40 tons, car transport optimal quantity Qc = 24 tons.
Table 4.2.5. Data set for selection of transportation branch exercise
Cost element Transport by rail Transport by car
Transport cost
Inventory on delivery cost
Yearly ordering cost
Inventory cycle cost
Safety inventory cost
Total cost
Suggestion: Calculate total cost during a year as:
TC = (R · D) + (i · T · C · D) + [O · (D/Q)] + [i · C · (Q/2)].
Exercise 2
For a given data (Tab. 4.2.6) on transport options select transport branch (by rail, by car, or by air)
to an emergency delivery of a production machine spare part from a factory in Spain to a company
in Poland. Assume daily production idleness loss (a standstill) equal to 6000 zł.
Table 4.2.6. Data set for selection of transportation branch exercise
Transportation branch Transportation cost Transportation time
Transport by rail 4000 10
Transport by car 8000 5
Transport by air 40000 2
Exercise 3
In transportation operations, four transportation tasks may be performed on any of four
transportation vehicles. The hours required for each task on each vehicle are different (Tab. 4.2.7).
The transportation manager would like to assign tasks, so total time is minimised. Use the
assignment method to find the best transportation solution.
Table 4.2.7. Data set for time in transportation assignment exercise
Transportation vehicle
Task V1 V2 V3 V4
T1 10 14 16 13
T2 12 13 15 12
T3 9 12 12 11
T4 14 16 18 16
Exercise 4
As a Transportation Manager working in a production enterprise you are negotiating a new
contract with transport service company Alfa Cargo. This company is going to offer a new,
reduced table of transport rates, starting from the beginning of the next month. The current
49
transport rate is Rp = 4 zł for transport of 100 kg with minimum cargo of 25 thousand of kg. The
details of new rating system are as follows: Rp = 3 zł for transport of 100 kg with minimum cargo
of 60 thousand of kg, or Rp = 3 zł for transport of 100 kg with minimum cargo of first 60 thousand
of kg and Rp = 2 zł for transport of 100 kg with cargo of next 65 thousand of kg with minimum
cargo of 100 thousand of kg and maximum cargo of 125 thousand of kg. For example, delivery of
100 thousand of kg will be rated in average as Rp = 2,60 zł. Using an information from your
enterprise departments (Tab. 4.2.8), select the best transport option for your enterprise.
Table 4.2.8. Data set for selection of transportation rating exercise
Information Value Source of information
Total yearly demand for transport (D) 1000 items Purchasing Dept.
Number of deliveries during year (N) 10 Purchasing Dept.
Delivery quantity (Q) 100 items Purchasing Dept.
Weight of 1 item (W) 250 kg Transport Dept.
Transport rate cost (Rt) 4 zł / 100 kg Transport Dept.
Price of purchase (P) 250 zł / item Purchasing Dept.
Cost of ordering (Co) 6 zł Purchasing Dept.
Cost of transport documentation (Cd) 4 zł Transport Dept.
Inventory holding cost (interest rate: 10%, losses:
6%, taxes: 2%, insurance: 2%) (Ci) 20% Accounting Dept.
Cost of unloading delivery to inventory (Cu) 0.10 zł / 100 kg Warehouse Dept.
Maximum inventory capacity 500 items Warehouse Dept.
Suggestion: Calculate total yearly cost of systems as:
Total cost = Transport cost + Ordering cost + Documentation cost + Cost of unloading +
Purchasing cost + Inventory holding cost
D  
TC Q     Rt  Q 
W W Q
 C o  C d  Cu  Q   P  Q  P  Ci  .
Q  100 100  2
Exercise 5
Kowalski Gravel Company received a contract to supply gravel for three new road projects located
in the towns A, B, and C. Construction engineers have estimated the amount of gravel which will
be needed at three road construction projects (Tab. 4.2.9). Kowalski Gravel Company has three
gravel plants located in the towns of W, X, and Y. The gravel required for construction projects
can be supplied by these three plants. The company chief dispatcher has calculated the amounts of
gravel which can be supplied by each plant (Tab. 4.2.10). The company also has computed the
delivery costs from each plant to each project site. Delivery costs per truckload between each plant
and project site vary directly with the quantity distributed (Tab. 4.2.11). Given the amounts
required at each project and the amounts available at each plant, the company problem is to
schedule shipments from each plant to each project in such a way as to minimize the total
transportation cost within the constraints imposed by plant capacities and project requirements.
Table 4.2.9. Projects Table 4.2.10. Plants Table 4.2.11. Cost
Project Weekly requirements, Plant Weekly amount From Cost per truckload
truckloads available, truckloads
A 72 W 56 To A To B To C
B 102 X 82 Plant W 4 8 8
C 41 Y 77 Plant X 16 24 16
Plant Y 8 16 24
Exercise 6
Sigma Company as a distributor of owns production has to solve a problem of product distribution
in the south region of Poland. Main element of the distribution system is a distribution centre (DC)
in Upper Silesia, located 300 km from production plant. Distribution centre must deliver
continuously products to the points of sale. It can be possible by every-day delivery (Monday till
50
Friday) of four truckloads to DC. For detailed information about cost elements and physical
constraints (Tab. 4.2.12) develop a project of product transportation to the distribution centre DC.
Other constraints are: a) truck drivers cannot drive more than 10 hours a day (with nominal time
of 8 hours per day, b) production plant and distribution centre DC work in 2-shift system (from 6
am till 10 pm).
Table 4.2.12. Data set for product distribution system
Number of delivery days during a year 250
Cost of renting a truck (with trailer) 1,50 zł/km
Cost of buying a truck 250.000,- zł
Cost of buying a trailer 100.000,- zł
Amortisation time (linear amortisation) 5 years
Monthly gross salary of driver (with social insurance) 4.500,- zł
Time of transportation from plant to DC 5 hours
Loading and unloading time 1 hour
Truck exploitation cost 0,80 zł/km
Trailer exploitation cost 0,25 zł/km
Suggestion: Calculate the necessary transportation resources, calculate break-even point for “rent
or buy” problem, and develop realistic transportation schedule.
51
Summary and concluding remarks
Nowadays, most of the organisations are seeking the success through searching for opportunities
to improve performance by better internal logistics and supply chain management. Over recent
decades, logistics and supply chain management emerged as an important management approach
in organisations and business management practice. Logistics orientation has over the last twenty
years continuously been identified as a top business management priority and developing logistics
and supply chain management (SCM) capabilities continue to be a major challenge for senior
executives in the coming years. Business organisations like companies are constantly facing
changing business requirements and challenges such as decreasing product life cycles,
international competition and increasing cost pressure, e.g. due to the demand to apply latest state-
of-the-art technology.
In order to achieve corporate overall business objectives, a strong coherence between business
results and logistics strategy has become an important factor of competition on all market places
and in nearly all industries. In this context, logistics is a knowledge domain that allows
organisations a faster organisational adaptation to the continuously changing requirements of the
market and its’ customers. It enables development and continuous improvement of corporate
strategies and allows companies to concentrate on value-generating and supplementary business
processes. Logistics is supporting business processes using methods, techniques, and software to
design, enact, control, and analyse operational processes involving humans, organizations,
applications, documents and other sources of information. Logistics is further characterised by its
orientation on integration, time, flow, and market.
The SCM-oriented system implementation is really a challenge for modern organisations, like
companies, enterprises, organisations and institutions, constantly facing volatile markets. Many
benefits and advantages of this management have encouraged the organisations to start thinking
about a transformation of their classical function and internally oriented structures and
performance into a chain and network effectiveness and efficiency. But, as usually it is, nothing
can be done without a cost. The SCM-oriented management needs a new attitude of logistics
management staff – setting more effective and flexible organisational structures, an
implementation of better business models, an application of new trade-up models and information
systems (ICT).
Logistics strategy design, logistics complexity reduction by classifications, location of logistics
points, selection of suppliers, inventory control, and transportation optimization are the essential
issues in the logistics systems. Supply chain and network analysis, diagnosis, planning and design
are especially complex tasks, and multi-disciplinary competences, knowledge, and skills are
required. And this textbook, dedicated to the beginners of logistics studies, focuses only on some
selected issues, which are recognised as the most important introductory milestones on a way to
develop logistics excellence.
Only the proper application of engineering design methodology and logistics tools can yield
high-quality plans, decision making, and designs in a systematic way in a reasonable amount of
time. In order to apply sufficient logistics and supply chain engineering methodology, it is required
that all three aspects of data collection, modelling, and decision making algorithms are to be
developed for the particular logistics system in question. Most data for logistics and supply chain
modelling and analysis are based on forecasting and this is especially true for tactical and strategic
models applied in logistics. Therefore, also a knowledge on forecasting techniques commonly used
in supply chain planning and design are required, and because it is not included in this textbook,
it must be an another element of the next-step logistics studies.
52
Bibliography
[1] Autry C.W., Zacharia Z.G., Lamb C.W., A Logistics strategy taxonomy, Journal of Business
Logistics, vol. 29, no. 2, 2008, pp. 27-51.)
[2] Baran J., Maciejczak M., Pietrak M., Rokicki T., Wicki L., Logistyka. Wybrane zagadnienia,
Wyd. SGGW Warszawa, 2008.
[3] Baraniecka A., Rodawski B., Skowrońska A., Logistyka. Ćwiczenia, Wyd. AE Wrocław,
2005.
[4] Barry J., Render H., Operations management, Prentice Hall, London 1999.
[5] Bowersox D.J., Closs D.J., Cooper B.C., Supply chain logistics management, McGraw Hill,
Boston 2002.
[6] Bowersox D.J., Daugherty P.J., Emerging Patterns of Logistical Organization, Journal of
Business Logistics, 1987, Vol. 8, No. 1, pp. 46-60.
[7] Ciesielski M. (red.), Logistyka w praktyce. Studia przypadków firm polskich i obcych, Wyd.
AE Poznań, 2002.
[8] Coyle J.J., Bardi E.J., Langley C.J. Jr., Zarzadzanie logistyczne, PWE Warszawa, 2002 (The
Management of Business Logistics, West Publ. Comp, 6th ed, 1996).
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http://www.springerlink.com/openurl.asp?genre=book&isbn=978-1-4419-6511-0).
[11] Pamuła T., Król A., Badania operacyjne w przykładach z rozwiązaniami w Excelu, Wyd.
Politechniki Śląskiej, Gliwice 2013.
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1997, ss. 111-144.
[13] Radziejowska G. (red), Logistyka w przedsiębiorstwie, cz. 2, Wyd. Polit. Śl., Gliwice 2000,
ss. 50-63.
[14] Render B., Stair R.M. Jr., Quantitative analysis for management, Allyn and Bacon, Boston
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[15] Rummler G.A., Brache A.P., Improving Performance, Jossey-Bass Inc. Publ., 1995.
[16] Szymczak M. (red.), Decyzje logistyczne z Excelem, Difin, Warszawa 2011.
53

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„ZPR PWr – Zintegrowany Program Rozwoju Politechniki Wrocławskiej”

Roman Pietroń, November 2019.

Flows Discrete and interrupted Continuous and visible in supply

Information Internal system Supply chain system

Risk Local risk management Supply chain risk management

Planning Local planning Supply chain planning

1.2. Logistics strategy

1.3. Logistics strategy design and implementation

To produce (physical, chemical, Agile Supply Chain Connected Supply Chain

1.4. Questions and exercises

2.2. Selected problems of logistics and their basic solutions

Quantity share [%]

Figure. 2.2.1. ABC classification – Lorenz curve

Table 2.2.3. ABC classification example results

Production cost Ordering cost

Service level Quantity Service level 100%

2.2.3. Location problem solving

Method 3: Break-even point analysis

Method 2: Analytic Hierarchy Process (AHP)

100 250 350 500 600Product

There are the following symptoms of poor inventory management in SCM:

3.2. Inventory control and management models

Figure. 3.2.1. Inventory usage over time in EOQ model.

Figure. 3.2.2. Inventory cost in EOQ model.

3.2.3. Reorder point calculation in inventory control

3.2.5. Distribution requirements planning (DRP) in inventory control

Figure. 3.2.4. Example of distribution system for X product

3.3. Questions and exercises

The LP problem can be solved by iterative “northwest corner” algorithm, or by “simplex”

Step 3: Test the solution for improvement

4.3. Questions and exercises

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