CHAPTER 3: DEMAND FORECAST

You should be able to:

■Explain the role of demand forecasting in a supply chain
■Identify the components of a forecast
■Compare & contrast qualitative & quantitative forecasting
techniques
■ Calculate and Assess the accuracy of forecasts
■Explain collaborative planning, forecasting, & replenishment

1
The Importance of Demand Forecasting
▪ A forecast is an estimate of future demand & provides the basis for
planning decisions
▪ The goal is to minimize deviation between actual demand and forecast
▪ Buyers and sellers should share all relevant information to generate a
single consensus forecast
▪ Good forecasting provides reduced inventories, costs, & stockouts, &
improved production plans & customer service

2
Forecasting Techniques
▪ Qualitative forecasting - based on opinion & intuition

▪ Quantitative forecasting - uses mathematical models &

historical data to make forecasts

▪ Time series models - most frequently used among all the

forecasting models

3
Forecasting Techniques (Continued)

Qualitative Forecasting Methods

■ Used when data are limited, unavailable, or not currently relevant
■ Forecast depends on skill & experience of forecaster & available
information

Four qualitative models used are –

1. Jury of executive opinion
2. Delphi method
3. Sales force composite
4. Consumer survey
4
Forecasting Techniques (Continued)

Jury of executive opinion

■ Group of senior management executives collectively develop the
forecast
■ Good for long-range planning and new product introductions
Delphi method
■ Internal and external experts are surveyed during several rounds
■ summary of responses is sent out to all the experts & they can modify
their responses in next round
■ Good for high-risk technology forecasting; large, expensive projects;
or major new product introductions
5
Forecasting Techniques (Continued)

Sales force composite

■ Based on sales force’s knowledge of the market & estimates of
customer needs
■ Tendency for sales force to under-forecast
Consumer survey
■ Questionnaire uses inputs from customers on future purchasing
needs, new product ideas, & opinions about existing or new
products

6
Forecasting Techniques (Continued)

Quantitative Methods
▪ Time series forecasting – assumes the future is an extension of the
past
▪ Historical data is used to predict future demand
For long-time horizon forecasts, use a combination of quantitative &
qualitative techniques

7
Forecasting Techniques (Continued)

Components of Time Series

Data should be plotted to detect for the following components –

▪ Trend variations: increasing or decreasing over many years

▪ Cyclical variations: wavelike movements that are longer than a
year (e.g., business cycle)
▪ Seasonal variations: show peaks & valleys that repeat over
consistent interval (ie. hours, days, weeks, months, seasons, or
years)
▪ Random variations: due to unexpected or unpredictable events
such as natural disasters
8
Forecasting Techniques (Continued)

Time Series Forecasting Models

Naïve Forecast – the estimate of the next period is equal to the

demand in the past period.

Ft+1 = At

Where Ft+1 = forecast for period t+1

At = actual demand for period t

9
Forecasting Techniques (Continued)

Time Series Forecasting Models

Simple Moving Average Forecast – uses historical data to generate a

forecast. Works well when demand is stable over time.

Where Ft+1 = forecast for period t+1

At = actual demand for period t
n = number of periods to calculate
moving average
10
Forecasting Techniques (Continued)
Simple Moving Average

11
Forecasting Techniques (Continued)

Time Series Forecasting Models

Weighted Moving Average Forecast – based on an n-

period weighted moving average

Where Ft+1 = forecast for period t+1

Ai = actual demand for period i
n = number of periods to calculate
moving average
wi = weight assigned to period i (Σwi = 1)

12
Forecasting Techniques (Continued)

Weighted Moving Average

13
Exercise
The owner of the Chocolate Outlet Store wants to forecast chocolate demand. Demand for
the preceding four years is known in the following table:

Year Demand (pounds)

1 68,800
2 71,000
3 75,500
4 71,200

Forecast demand for year 5 using the following approaches:

1. A three-year moving average
2. A three-year weighted moving average using 0.4 for year 4; 0.2 for year 3 and 0.4 for
year 2
 Collaborative Planning, Forecasting, & Replenishment
(CPFR)
What is CPFR?
It is a business practice that combines the intelligence of multiple trading
partners in the planning & fulfillment of customer demands.

It links sales & marketing best practices, such as category management,

to supply chain planning processes to increase availability while
reducing inventory, transportation & logistics costs.

15
Collaborative Planning, Forecasting, & Replenishment
(Continued)

■ Real value of CPFR comes from sharing of forecasts among firms

■ Eliminates shifting of inventories among trading partners that
suboptimizes the supply chain
■ Provides the supply chain with a plethora of benefits but requires a
fundamental change in the way that buyers & sellers work together.

16
Collaborative Planning, Forecasting, & Replenishment
(Continued)

CPFR Benefits
■ Strengthens partner relationships
■ Provides analysis of sales & order forecasts
■ Uses point-of-sale data, seasonal activity, promotions, to improve
forecast accuracy
■ Manages demand chain & eliminates problems before they appear
■ Allows collaboration on future requirements & plans

17
Collaborative Planning, Forecasting, & Replenishment (Continued)

CPFR Benefits (continued)

■ Uses joint planning & promotions management
■ Integrates planning, forecasting and logistics activities
■ Provides efficient category management & understanding of consumer
purchasing patterns

18
Collaborative Planning, Forecasting, & Replenishment (Continued)

CPFR Benefits (continued)

■ Provides analysis of key performance metrics to:
➢ reduce supply chain inefficiencies
➢ improve customer service
➢ increase revenues and profitability

19
Collaborative Planning, Forecasting, & Replenishment
(Continued)

Top three challenges for CPFR implementation

1. Difficulty of making internal changes

2. Cost
3. Trust

20
Useful Forecasting Websites
▪ Institute for Business Forecasting & Planning
https://ibf.org/
▪ International Institute of Forecasters
www.forecasters.org
▪ Forecasting Principles
www.forecastingprinciples.com
▪ Several forecasting blogs:
Business Forecasting (www.businessforcastingblog.com)
No Hesitations: A Blog by Francis Diebold
(http://fxdiebold.blogspot.com.au)
21
Characteristics of forecasts
1. Forecasts are always inaccurate and should thus include both the
expected value of the forecast and a measure of forecast error
2. Long-term forecasts are usually less accurate than short-term
forecasts
3. Aggregate forecasts are usually more accurate than disaggregate
forecasts
4. In general, the farther up the supply chain a company is, the greater
is the distortion of information it receives
End of Chapter 3

23
Chapter 4: Inventory Management

■ Concepts and Tools of Inventory Management

■ Inventory System Design

■ Dependent and Independent Demand

■ Inventory Models
Introduction
▪ Inventory can be one of the most expensive assets of an organization
▪ Management must reduce inventory levels yet avoid stockouts
▪ Managing perishable inventory presents a unique challenge
▪ Excessive inventory is a sign of poor inventory management
▪ Excessive inventory adversely affects financial performance
Concepts and Tools of Inventory Management
▪ Primary functions of inventory are to –
– Buffer from uncertainty in the marketplace
– Decouple dependencies in the supply chain (e.g., safety stock)

▪ Four broad categories of inventories

– Raw materials- unprocessed purchase inputs
– Work-in-process (WIP)- partially processed materials not yet ready for sales
– Finished goods- completed products ready for shipment
– Maintenance, repair & operating (MRO)- materials & supplies used in producing
products (e.g., cleaners & brooms)
Concepts and Tools of Inventory Management
(Continued)

Inventory Costs
– Direct costs- directly traceable to unit produced (e.g., labor)
– Indirect costs- cannot be traced directly to the unit produced (e.g.,
overhead)
– Fixed costs- independent of the output quantity (e.g, buildings, equipment)
– Variable costs- vary with output level (e.g., materials)
– Order costs- direct variable costs for placing an order
– Holding or carrying costs- incurred for holding inventory in storage
– In mfg, setup costs are related to machine setups
 Holding cost
■ Holding costs are the costs incurred for holding inventory in storage.
■ The holding costs include handling charges, warehousing expenses,
insurance, shrinkage, pilferage, taxes, and the cost of capital.
■ H = kC ( k: holding rate, C: purchase cost per unit)
■ The fluctuations of inventory and the level of inventory turnover ratio will
impact on the holding cost.
■ How to minimize the holding cost?

28
 Ordering cost
■ Order costs are the direct variable costs associated with placing an order
with the suppliers

■ Order costs includes managerial and clerical costs for preparing the
purchase, as well as incidental expenses that can be traced directly to the
purchase.

■ How to decrease the ordering cost???

29
Stockout cost

■ Stock out cost is the cost of losing customer. Those costs may
include lost sales, backorder costs, expediting, and additional
manufacturing and purchasing costs.

■ Measuring the stock out cost is very important, it shows the cost
that the customers have to pay when the inventory is zero

30
Concepts and Tools of Inventory Management
(Continued)

ABC Inventory Control System

Determines which inventories should be counted & managed more
closely than others

▪ Groups inventory as A, B, & C Items

– A items are given the highest priority with larger safety stocks. A items account for
approximately 20% of the total items & about 80% of the total inventory cost
– B items account for the other about 40% of total items & 15% of total inventory
cost.
– C items have the lowest value and hence lowest priority. They account for the
remaining 40% of total items & 5% of total inventory cost.
 ABC classification example
Inventory items Item cost ($) Annual usage Annual volume % of total Class
number (units) ($) volume
A246 1 22000 22.000 35,2 A
N376 0,5 40.000 20.000 32 A
C024 4,25 1468 6239 10 B
R221 12 410 4920 7,8 B
P112 2,25 1600 3600 5,8 B
R166 0,12 25.000 3000 4,8 B
T049 8,5 124 1054 1,7 C
B615 0,25 3500 875 1,4 C
L227 1,25 440 550 0,9 C
T519 26,000 10 260 0,4 C

9/21/2023
 Inventory system design

■ Two normal models:

- VMI (Vendor managed inventory)
- Supplier hub
33
Vendor Managed Inventory (VMI)
■ “Transferring responsibility for retail store replenishment from the retailer to
the wholesaler or manufacturer” (Ackerman 1995)
■ “VMI is an example of how it is impossible to improve the efficiency of
material flows in a vendor/buyer partnership.
■ The supplier is given the task of keeping the warehouse of the wholesaler
stocked with the supplier’s products. Now the supplier can align his
operations with the needs of the retail trade” (Holmstrom, 1998)
■ Variations:
- VMI with consignment: supplier owns inventory
- VMI without consignment: buyer owns inventory
Benefits of VMI
■ Reduction in administration costs

■ Reduction in inventory levels

■ Increase in inventory turns

■ Shorter cycle times

■ Fewer out-of-stock situations, and better service level

■ Customer-partner’s preferred status in shortage situations

Supplier Hub
 “Inventory management involves balancing product
availability, or customer service, on the other hand,….

…….with the costs of providing a given level of

product availability on the other”
Dependent & Independent Demand
Inventory management models –
Generally classified as dependent demand and independent
demand models

▪ Dependent Demand – internal demand for parts based on demand of the

final product in which parts are used
▪ Examples include; Subassemblies, components, & raw materials
▪ Independent Demand – demand for end products & has demand pattern
affected by trends, seasonal patterns, & general market conditions
Replenishment for independent demand:
“when to order” decision
▪ When stocks are at a level that is able to satisfy demand, and until the
replenishment order is available.

▪ There are two methods:

- At a specific time period (ROP): the periodic review or the periodic inventory
time-based method; e.g. weekly at the time trigger

- At a specific remaining level of stock (ROL): continuous review or the perpetual

inventory action level method and the fixed order quantity method
Replenishment for independent demand:
“How much to order” decision

▪ The Economic Order Quantity Model

▪ The Quantity Discount Model
▪ The Economic Manufacturing Quantity Model
The Economic Order Quantity Model

Economic Order Quantity (EOQ) Model – quantitative decision model

based on the trade-off between annual inventory holding costs
& annual order costs

■ Seeks to determine optimal order quantity

■ Order Cost is direct variable cost associated with
placing an order. (Sometimes called setup cost)

■ Holding Cost is cost incurred for holding inventory in

storage. (Sometimes called carrying cost)
The Economic Order Quantity Model

▪ Assumptions of the EOQ Model

1. Demand must be known & constant
2. Order lead time is known & constant
3. Replenishment is instantaneous
4. Price is constant
5. Holding cost is known & constant
6. Ordering cost is known & constant
7. Stock-outs are not allowed
The Economic Order Quantity Model
Total Annual Inventory Cost (TAIC) formula
– TAIC = Annual purchase cost + Annual holding cost + Annual
order cost
– TAIC = APC + AHC + AOC = (R x C) + (Q/2 x (k x C)) + (R/Q x S)
Where
TAIC = total annual inventory cost C = purchase cost per unit
APC = annual purchase cost S = cost of placing one order
AHC = annual holding cost R = annual demand
AOC = annual order cost Q = order quantity
k = holding rate, where annual holding cost per unit = k x C
The Economic Order Quantity Model
■ Economic order quantity (EOQ):

Where:

2RS R: Annual Requirements

EOQ= -------- S: Setup cost

kC k: Holding rate

C: Unit cost
Exercise
■ The Las Vegas Corporation purchase a critical component from one
of its key suppliers. The operation manager wants to determine the
economics order quantity, along with when to reorder, to ensure the
annual inventory cost is minimized. The following information was
obtained from historical data:
Annual requirements (R) = 7,200 units
Setup cost ( ordering cost) (S) = $100 per order
Holding rate (k) = 20%
Unit cost (C) = $20 per unit
Order lead time (LT) = 6 days
Number of days per year = 360 days
 The Quantity Discount Model
■ The quantity discount model must consider the trade – off between
purchasing in larger quantities to take advantage of the price discount
and the higher costs of holding inventory.

Total annual inventory cost = annual purchase cost + annual holding cost
+ annual order cost

TAIC = APC + AHC + AOC = (R x C) + [(Q/2) x (k x C)] + [(R/Q) x S]

Steps

❖ Define the EOQ for each price level

❖ If the EOQ is not associated with the particular price level because the order
quantity may not lie in the given quantity range for that unit price change
the EOQ to the minimum quantity required to get a price discount

❖ Define total annual inventory cost for each EOQ

❖ The order quantity that yields the lowest total annual inventory cost is the
optimal order quantity
Example: Finding the optimal order quantity with
quantity discounts at Kuantan Corporation
■ The Kuantan corporation purchase a component from a supplier who offers
quantity discounts to encourage larger order quantities. The supply chain
manager of the company, Dr. Hadilan Wijaya Ibrahim, wants to determine the
optimal order quantity to minimize the total annual inventory cost. The
company’s annual demand forecast for the item is 15,000 units, its order cost is
$40 per order, and its annual holding rate is 25%. The price schedule is:
Order quantity Price per unit
< 1000 $ 5.00
1001 – 2000 $ 4.50
2001 and above $ 4.00
■ 1. What is the optimal order quantity?
■ 2. What is the minimum total annual inventory cost?
The economic Manufacturing Quantity Model (
EMQ) or production order quantity (POQ)
■ The EMQ relaxes the instantaneous replenishment assumption by allowing
usage or partial delivery during production.
■ Assumptions:
■ - The demand is known and constant
■ - order leadtime is known and constant
■ - Partial delivery
■ - Price is constant
■ - The holding cost is known and constant
■ - Order cost is known and constant
■ - Stockouts are not allowed.
The Economic Manufacturing Quantity Model (
EMQ) or Production Order Quantity (POQ)
▪ EMQ : Q
▪ Demand rate (demand per day) : D
▪ The production rate ( manufacturer’s production per day): P
▪ The inventory builds up at the rate of (P – D ) during the production period (Tp), and the
maximum inventory Q, so:
P = Q/ Tp, QM = (P – D) x Tp
Therefore:
QM = (P – D) x Q/P = PQ/P x DQ/P = Q (1 – D/P)
Hence, the average inventory, QM /2 = Q/2 (1 – D/P)
Total annual inventory cost = annual product cost + annual holding cost + annual setup cost
TAIC = APC + AHC + ASC = [RxC] + [Q/2 (1 – D/P) x k x C] + [R/Q x S]
■ TAIC = APC + AHC + ASC = [RxC] + [Q/2 (1 – D/P) x k x C] + [R/Q x
S]
■ TAIC min when [Q/2 (1 – D/P) x k x C] = [R/Q x S]

■ 2RS P
■ and the EMQ = x
■ kC P-D
 Example: calculating the EMQ at the
Lone Wild Boar Corporation
■ The Lone Wild Boar Corporation manufacturers a crucial component internally
using the most advanced technology. The operations manager wants to
determine the economic manufacturing quantity to ensure that the total annual
inventory cost is minimized. The daily production rate (P) for the component is
200 units, annual demand ( R) is 18,000 units, setup cost (S) is $ 100 per setup,
and the annual holding rate (k) is 25%. The manager estimates that the total
cost ( C) of a finish component is $ 120. It is assumed that the plant operates
year-round and there are 360 days per year.
▪ The daily demand rate, D = 18,000 / 360 = 50 units per day
▪ (2 x 18,000 x 100) x (200)
▪ EMQ = = 400 units
▪ (0.25 x 120 ) x (200 – 50)
▪ The highest inventory level: QM = Q (1 – D/P) = 300 units
▪ The annual product cost = R x C = 18,000 x 120 = $ 2,160,000
▪ The annual holding cost = QM /2 x k x C = 300/2 x 0.25 x 120 = $ 4,500
▪ The annual setup cost = R/Q x S = (18,000/400) x 100 = $ 4,500
▪ The TAIC = $ 2,160,000 + $ 4,500 + $ 4,500 = $ 2,169,000
▪ The length of the a product period Tp = EMQ/P = 400/200 = 2 days
▪ The length of each inventory cycle Tc = EMQ/D = 400/50 = 8 days
▪ The rate of inventory builds up during production = P – D = 200 – 50 = 150 units
▪ The number of inventory cycles per year: 360/8 = 45 cycles
■ Inventory On-hand

■
Inventory builds
up at 150 unit per
■ EMQ = 400 day

■ QM = 300
Inventory depletes
at 50 units per day
45 production
lots per year
■ Production
& Demand
Demand only
■ Tp = 2 days Tc = 8 days
Times
Replenishment for dependent demand:
Material planning (MRP/MRP II)
▪ Material requirements planning (MRP) is a software-based production planning
and inventory control system that has been used widely by manufacturing firms for
computing dependent demand and timing requirements.

▪ It further involved into manufacturing resource planning ( MRP – II) by including

other aspects of materials and resource planning.

▪ MRP is used to calculate the exact quantities, need dates, and planned order
released for components and subassemblies needs to manufacture the final products
Example: MRP
Inventory at the start of week 1 800 units

Safety stock 100 units

Leadtime 2 week
Order units 600 units

Period 0 1 2 3 4 5 6 7 8

Gross requirement 210 250 300 300 300 250 200 180

Scheduled receipts

Projected on-hand 800

inventory

Planned order 0
release
End of Chapter 4

58
 Chapter 5: Designing distribution
network and warehouse management
■ Identify the key factors to be considered when designing a
distribution network
■ Discuss the strengths and weaknesses of various distribution
options.
■ Warehouse management
 Logistics, transportation and distribution

What is Logistics?

According to the Council of Supply Chain Management Professionals (2016)

Logistics is that part of supply chain management that plans, implements, and controls the
efficient, effective forward and reverse flows and storage of goods, services and related
information between the point of origin and the point of consumption in order to meet
customers’ requirements.
Logistics
What is Logistics?

According to the Association of Supply Chain Management (2019)

Logistics is:
1. In a supply chain management context, it is the subset of supply chain
management that controls the forward and reverse movement, handling,
and storage of goods between origin and distribution points.
2. In an industrial context, the art and science of obtaining, producing, and
distributing material and product in the proper place and in proper
quantities.
3. In a military sense (where it has greater usage), its meaning can also include
the movement of personnel.
 Distribution
The activities associated with the movement of material, usually
finished goods or service parts, from the manufacturer to the customer.
These activities encompass the functions of transportation,
warehousing, inventory control, material handling, order administration, site
and location analysis, industrial packaging, data processing, and the
communications network necessary for effective management.
It includes all activities related to physical distribution, as well as the
return of goods to the manufacturer.
In many cases, this movement is made through one or more levels of field
warehouses.

Association of Supply Chain Management (2019)

 Transportation

The function of planning, scheduling, and controlling

activities related to mode, vendor, and movement
of inventories into and out of an organization.
Association of Supply Chain Management (2019)
 SUMMARY TERMINOLOGY DIFFERENTIATION
■ Logistics
o Kế hoạch tổng quan, tổ chức,… liên quan tới vận chuyển, lưu trữ và kiểm soát hàng hóa
o Chiến lược tổng quan nhằm tối ưu hóa dòng hàng vào và ra
o Bắt đầu từ điểm đầu, từ nguyên vật liệu cho đến sản phẩm hoàn thiện
■ Distribution
o Là một thành phần của logistics
o Liên quan tới dòng chảy vật lý của hàng hóa, chủ yếu liên quan tới sản phẩm hoàn thiện
o Nội dung chủ yếu liên quan tới thiết kế vị trí các trung tâm phân phối, kho hàng, mạng lưới phân
phối sp tới người tiêu dùng
■ Transportation
o Là một thành phần của logistics/distribution
o Liên quan tới dòng chảy vật lý của hàng hóa, từ nguyên vật liệu tới thành phẩm cuối cùng
o Nội dung nghiên cứu chủ yếu liên quan tới phương tiện, phương thức vận tải, chi phí vận tải liên
quan,…và các nọi dung liên quan đến kế hoạch và điều phối vận tải
5.2 Distribution Network

1. Factors effecting distribution network design

A manager must consider:
the customer needs to be met and
the cost of meeting these needs
when designing the distribution network
 FACTORS AFFECTING DISTRIBUTION NETWORK DESIGN

Level of service (LoS) Cost

Mức độ đáp ứng nhu cầu của khách hàng Chi phí cần để đáp ứng nhu cầu của
khách hàng

Response time
Inventories
Product variety

Product availability Transportation

Trade-off
Customer experience
Facilities and handling
Time to market

Order visibility Information

Returnability
Desired Response Time and Number of Facilities

Figure 4-1 Relationship Between Desired Response Time and Number of

Facilities
Inventory Costs and Number of Facilities

Figure 4-2 Relationship Between Number of Facilities and Inventory Costs

Transportation Costs and Number of Facilities

Figure 4-3 Relationship Between Number of Facilities and Transportation

Cost
 Facility Costs and Number of Facilities

Figure 4-4 Relationship Between Number of Facilities and Facility Costs

 Logistics Cost, Response Time, and Number of Facilities

Figure 4-5 Variation in Logistics Cost and Response Time with Number of Facilities
Summary
A manager must consider:
■ the customer needs to be met and
■ the cost of meeting these needs
when designing the distribution network.

It is important to ensure that the strengths of the

distribution network fit with the strategic position of the
firm.
DESIGN OPTIONS FOR A DISTRIBUTION NETWORK

Two key decisions:

1. Where is the stock?

2. Are intermediaries used in inventory/delivery? Will product flow
through an intermediary (or intermediate location)?
3. Will product be delivered directly to the customers’ location, or
will customer pick up product from a prearranged site?
 DESIGN OPTIONS FOR A DISTRIBUTION NETWORK

1. Manufacturer storage with direct shipping

2. Manufacturer storage with direct shipping and in-transit merge
3. Distributor storage with carrier delivery
4. Distributor storage with last-mile delivery
5. Manufacturer/distributor storage with customer pickup
6. Retail storage with customer pickup
 DESIGN OPTIONS FOR A DISTRIBUTION NETWORK

1. Giao hàng trực tiếp từ nhà máy sản xuất → Dropshipping

(Manufacturer storage with direct shipping);
2. Giao hàng trực tiếp từ nhà máy sản xuất thông qua trung gian kết hợp
(Manufacturer storage with direct shipping and in-transit merge);
3. Giao hàng từ kho nhà phân phối
(Distributor storage with carrier delivery);
4. Giao hàng từ kho nhà phân phối kết hợp giao hàng chặng cuối
(Distributor storage with last-mile delivery);
5. Nhận hàng từ nơi lưu trữ của nhà sản xuất/nhà phân phối
(Manufacturer/distributor storage with customer pickup);
6. Nhận hàng từ nơi lưu trữ của nhà bán lẻ
(Retail storage with customer pickup).
1. Manufacturer storage with direct shipping
Drop-shipping network
 T1. Performance Characteristics of Drop-shipping Network

Cost Factor Performance

Inventory Lower costs because of aggregation. Benefits of aggregation are
highest for low-demand, high-value items. Benefits are large if
product customization can be postponed at the manufacturer.

Transportation Higher transportation costs because of increased distance and

disaggregate shipping.
Facilities and Lower facility costs because of aggregation. Some saving on
handling handling costs if manufacturer can manage small shipments or
ship from production line.
Information Significant investment in information infrastructure to integrate
manufacturer and retailer.
 T1. Performance Characteristics of Drop-shipping Network
Service Factor Performance
Response time Long response time of one to two weeks because of increased
distance and two stages for order processing. Response time
may vary by product, thus complicating receiving.
Product variety Easy to provide a high level of variety.
Product availability Easy to provide a high level of product availability because of
aggregation at manufacturer.
Customer Good in terms of home delivery but can suffer if order from
experience several manufacturers is sent as partial shipments.
Time to market Fast, with the product available as soon as the first unit is
produced.
Order visibility More difficult but also more important from a customer service
perspective.
Returnability Expensive and difficult to implement.
 2. Manufacturer storage with direct shipping
In-transit merge network

Ex: Dell & Sony through in-transit

merge carrier
 T2. Performance Characteristics of In-transit merge Network

Cost Factor Performance

Inventory Similar to drop-shipping.
Transportation Somewhat lower transportation costs than drop-shipping.

Facilities and handling Handling costs higher than drop-shipping at carrier;

receiving costs lower at customer.

Information Investment is somewhat higher than for drop-shipping.

 T2. Performance Characteristics of In-transit merge Network

Service Factor Performance

Response time Similar to drop-shipping; may be marginally higher.
Product variety Similar to drop-shipping.
Product availability Similar to drop-shipping.
Customer Better than drop-shipping because only a single delivery is
experience received.

Time to market Similar to drop-shipping.

Order visibility Similar to drop-shipping.
Returnability Similar to drop-shipping.
3. Distributor storage with carrier delivery

Carrier
 T3. Performance Characteristics of Distributor storage with Carrier delivery

Cost Factor Performance

Inventory Higher than manufacturer storage. Difference is not
large for faster-moving items but can be large for very
slow-moving items.

Transportation Lower than manufacturer storage. Reduction is highest

for faster-moving items.

Facilities and handling Somewhat higher than manufacturer storage. The

difference can be large for very-slow-moving items.

Information Simpler infrastructure compared to manufacturer

storage.
 T3. Performance Characteristics of Distributor storage with Carrier delivery

Service Factor Performance

Response time Faster than manufacturer storage.
Product variety Lower than manufacturer storage.
Product availability Higher cost to provide the same level of availability as
manufacturer storage.
Customer experience Better than manufacturer storage with drop-shipping.

Time to market Higher than manufacturer storage.

Order visibility Easier than manufacturer storage.
Returnability Easier than manufacturer storage.
 4. Distributor storage with last-mile delivery

Carrier

Distributor
/Retailer
 T4. Performance Characteristics of Distributor storage with Last-mile
delivery

Cost Factor Performance

Inventory Higher than distributor storage with package carrier
delivery.

Transportation Very high cost given minimal scale economies. Higher

than any other distribution option.

Facilities and handling Facility costs higher than manufacturer storage or

distributor storage with package carrier delivery, but
lower than a chain of retail stores.

Information Similar to distributor storage with package carrier

delivery.
 T4. Performance Characteristics of Distributor storage with Last-mile
delivery
Service Factor Performance
Response time Very quick. Same day to next-day delivery.
Product variety Somewhat less than distributor storage with package carrier
delivery but larger than retail stores.
Product availability More expensive to provide availability than any other option
except retail stores.
Customer experience Very good, particularly for bulky items.
Time to market Slightly longer than distributor storage with package carrier
delivery.
Order visibility Less of an issue and easier to implement than manufacturer
storage or distributor storage with package carrier delivery.
Returnability Easier to implement than other previous options. Harder and
more expensive than a retail network.
 5. Manufacturer/distributor storage with customer
pickup

Ex: Metro, thương

mại điện tử kết hợp
cửa hàng bán lẻ -
New Look, iLogic
box,….
 T5. Performance Characteristics of Distributor storage with Last-mile delivery

Cost Factor Performance

Inventory Can match any other option, depending on the location of
inventory.
Transportation Lower than the use of package carriers, especially if using
an existing delivery network.

Facilities and Facility costs can be high if new facilities have to be built.
handling Costs are lower if existing facilities are used. The increase in
handling cost at the pickup site can be significant.

Information Significant investment in infrastructure required.

 T5. Performance Characteristics of Distributor storage with Last-mile delivery

Service Factor Performance

Response time Similar to package carrier delivery with manufacturer or
distributor storage. Same-day pickup is possible for items
stored at regional DC.
Product variety Similar to other manufacturer or distributor storage options.
Product availability Similar to other manufacturer or distributor storage options.
Customer experience Lower than other options because of the lack of home
delivery. Experience is sensitive to capability of pickup
location.
Time to market Similar to manufacturer or distributor storage options.
Order visibility Difficult but essential.
Returnability Somewhat easier, given that pickup location can handle
returns.
6. Retail storage with customer pickup
 T6. Performance Characteristics of Retailer storage with customer
pick-up

Cost Factor Performance

Inventory Higher than all other options.

Transportation Lower than all other options.

Facilities and handling Higher than other options. The increase in handling
cost at the pickup site can be significant for online and
phone orders.

Information Some investment in infrastructure required for online

and phone orders.
 T6. Performance Characteristics of Retailer storage with customer pick-up

Service Factor Performance

Response time Same-day (immediate) pickup possible for items stored
locally at pickup site.
Product variety Lower than all other options.
Product availability More expensive to provide than all other options.
Customer experience Related to whether shopping is viewed as a positive or
negative experience by customer.
Time to market Highest among distribution options.
Order visibility Trivial for in-store orders. Difficult, but essential, for online
and phone orders.
Returnability Easier than other options because retail store can provide a
substitute.
 DESIGN OPTIONS FOR A DISTRIBUTION NETWORK

1. Manufacturer storage with direct shipping

2. Manufacturer storage with direct shipping and in-transit merge
3. Distributor storage with carrier delivery
4. Distributor storage with last-mile delivery
5. Manufacturer/distributor storage with customer pickup
6. Retail storage with customer pickup

How can we choose the most appropriate designs?

 DESIGN OPTIONS FOR A DISTRIBUTION NETWORK

How can we choose the most appropriate designs?

1. Identify the strengths and weaknesses of different distribution networks –

comparative performance analysis

2. Product, Market and Competitive characteristics (Firm’s strategic position)

 Warehouse management
What is a warehouse?

Warehousing is a critical component of logistics and supply chains.

It has been link between the producer and the customer and evolved
from a relatively minor facet of a firm’s logistics system to one of
its most important functions, performing two critical utilities of time
and place. It plays a vital role in providing a desired level of
customer service at the lowest possible total cost.
 What is a warehouse?

■ A warehouse should be viewed as a temporary place to store

inventory and as a buffer in supply chains. It serves, as a static unit –
in the main – matching product availability to consumer demand and
as such as primary aim which is to facilitate the movement of goods
from suppliers to customers, meeting demand in a timely and cost –
effective manner
Importance of Warehouse

■ Warehouses are used to support purchasing, production, and

distribution activities:

- Temporary storage before usages

- Inventory

- Function warehouse activity

■ Consolidation warehouses are used to collect large numbers of LTL shipments, and the
consolidate and transport in TL shipments.

- Cross-dock centres: . Efficient consumer response and quick response within retail
require operations to be able to move goods quickly through the supply chain

- Sortation centres: Goods are collected from all parts of the country, delivered into hubs
or sortation centres, sorted by zip or post code, consolidated and delivered overnight to
their respective distribution areas for onward delivery.
- Fulfilment centres: The growth of e-retailing has seen an increase
in the number of customer fulfilment centres, fulfil the customer
order for ecommerce retailers
- Reverse logistics centres: Reverse logistics centres have been set
up to deal with return items. Other reverse logistics processes
include the return of reusable transit packaging equipment such as
roll cages, barrels, kegs, pallets, tote boxes and trays
Types of warehouses
■ Private warehouses: refer to warehouses that are privately owned and used by an
organization

■ Features:

- Reduce costs

- Firms are free to decide what to process, what to store, what types of security to
provide, and the types of equipment to use, among other operational aspects.

- It can enable the firm to better utilize its workforce and expertise in term of
transportation, warehousing and distribution center activities.

- Firms can also represent a significant financial risk and loss of flexibility to the
firms.
Types of warehouses

■ Public warehouses: are for-profit organizations that contract out or lease a wide
range of light manufacturing, warehousing, and distribution services to other
companies.

■ Features:

- Providing specialized services that firms can use to create customized shipments of
goods.

- Providing the short-term flexibility and investment cost savings that private
warehouses cannot offer.

- The lacked of control provided to the goods owners.

Services are providing by public warehouses:

- Breakbulk: Large-quantity shipments are broken down so that items can be

combined into specific customer orders and then shipped out

- Repackaing

- Assembly

- Quality inspections

- Material handling, equipment maintenance, and documentation services

- Short- and long-term storage

Three types of warehousing

■ Bonded warehouse
■ CFS warehouse
■ Tax-suspension warehouse
Bonded warehouse

■ Definition: Bonded warehouse is an area or yard which stored cleared

merchandise & waiting to be exported, or goods imported from overseas
to be re-exported or imported into Vietnam
■ Advantages:

- Unpay import tax

- Goods are easy to arrange

- Reducing costs and time

- Easily follow up the status of goods

■ Disadvantages:

-For inbound, goods owners or their representatives have to do customs procedures

- For outbound, goods owners or their representatives must declare information

goods to customs. In case of importing in Vietnam market, they must go through
customs procedures as applicable to imported goods from abroad in the form of
corresponding

- Goods stored in bounded warehouses subject to re-export under the decision of

the government authorities are not allowed to re-import into Vietnam market.

- The customs supervision is based on operation (in/out) in warehouse.

 CFS warehouse
■ Definition: CFS warehouse is a place to collect LCL shipments, yard used to
perform cargoes collection, separation of various shippers transported into same
containers
■ Advantages:

- In case of enterprise has many retail shipments, wants to sell for many
customers in the same country, the CFS is a place to help businesses collect
retail shipments to combine them become a large plot to full-filled container to
conduct exported procedures, saving costs

- A place for many goods owners operation on same bill of lading of imported
goods will save transportation costs, facilitate imported procedures
■ Disadvantages:

- Exported and imported goods are stored in LCL shipments collection

sites overdue, if the goods cannot be shipped out of the LCL shipments
collection sites, it’ll be processed in accordance the provision of
Customs Law

- Retail consolidation, storage of goods at LCL shipments collection sites

and the activities, services carried out at LCL shipments collection sites
must be subject to inspection and supervision of customs
 Tax-suspension warehouse
■ Definition: tax-suspension warehouses are warehouses used to store imported raw
materials, suppliers have been cleared but not paying taxes yet, to produce
exported goods of warehouse owners.

■ Advantages:

- For enterprises with large volume of exported and imported goods, importing goods
in form of exported goods production the establishment of tax-suspension warehouse
will serve timely material storage needs (but not have to pay tax when importing
export yet) put into service production
■ Disadvantages:
- Tax-suspension warehouse owners quarterly report on the
management and use of goods, goods inputting expected plans into
production in the next period with the customs authorities directly
management set by the Ministry of Finance issued.
- At the end of the plan year, not later than January 31th next year,
enterprise must make reports according to Customs Law and the
form prescribed by the Ministry of Finance
Warehouse Management Systems (WMS)
▪ Warehouse management systems (WMS) is a complex software package that
helps manage inventory, storage location, and the workforce, to ensure that
customer orders are picked quickly, packed, and shipped.

▪ It handles cargo receiving, receipt documentation, activity tickets (put away

documentation), and picking lists.

▪ The scope of WMS is growing, as it acquires new responsibilities, such

introducing newly arrived product and allocating available locations,
coordinating the assembly of customer orders to meet shipping schedules,
tracking productivity of workers, and so on
Features of WMS
Features of most WMS’s include tools to support:
– Appointment scheduling
– Receiving
– Quality assurance
– Put-away
– Location tracking
– Work-order management
– Picking
– Packing and consolidation
– Shipping
WMS functionalities
▪ Receiving and shipping: The most fundamental capability of a WMS
is to record receipt of inventory into the warehouse and to register its
shipment out.

▪ Stock locator system: This is essentially the ability to manage an

inventory of storage locations in addition to an inventory of product.

WMS should also track the inventory of storage locations in the

warehouse
WMS benefits
■ The potential benefits of having a WMS in place include the following:
■ ● real-time stock visibility and traceability;
■ ● improved productivity;
■ ● accurate stock;
■ ● reduction in miss-picks;
■ ● automatic replenishments;
■ ● reductions in returns;
■ ● accurate reporting;
■ ● improved responsiveness;
■ ● remote data visibility;
■ ● improved customer service; and
■ ● minimized paperwork.