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Evolution of Logistics
TRANSPORTATION &
DISTRIBUTION
• ARC
• JIT
• Information Availability
• Consistency
1 1.0 3885 -
2 1.414 5494 141%
3 1.732 6729 173%
4 2.000 7770 200%
5 2.236 8687 224%
10 3.162 12285 316%
15 3.873 15047 387%
20 4.472 17374 447%
23 4.795 18632 480%
25 5.000 19425 500%
Economic order quantity
The total ordering cost The total units that are The ordered inventory
The inventory costs are
in an EOQ remains to be consumed are is delivered in one
assumed constant
constant certain attempt
Number of orders per year Combined ordering and holding cost at economic order
quantity (EOQ):
= Annual demand/EOQ = Ordering cost + Holding cost
= 2,400 units/400 units = $60 + $60
= 6 orders per year = $120
Ordering cost
Required:
• Compute the economic order quantity.
• Compute the total annual inventory expenses to sell 34,300 dozen of tennis balls if orders
are placed according to economic order quantity computed in part 1.
Cost relationships
Increased inventory
carrying cost for inventory Decreased order or setup costs
in the warehouse
H = $3.00/cwt L = $2.00/cwt tn = 6 days (time A = $200 (cost of placing an order or cost of setup)
(assume each unit with a minimum in transit for
weighs 100 of 40,000 pounds volume
(with each unit movement)
W = 25% (cost of carrying inventory in warehouse)
pounds)
weighing 100
pounds, this V = $100/cwt/unit (value per unit)
would be 400
units, or 400 cwt)
Qb = 240 units (240 cwt, or 240,000 pounds)
1 3600 8
TACb = 𝑋 240 𝑋 100 𝑋 25% + 200 𝑋 + 3 𝑋 3600 + 𝑋 240 𝑋 100 𝑋 10%
2 240 24
= $ 17,600
1 3600 6
TACv = 𝑋 400 𝑋 100 𝑋 25% + 200 𝑋 + 2 𝑋 3600 + 𝑋 400 𝑋 100 𝑋 10%
2 500 40
= $ 14,240
Since TACb exceeds TACv by $ 3360, the most economical solution is to purchase the larger quantity, 400 cwt. Reductions in
Dr. Vijaya Kumar Manupati 33
ordering, transportation, and in-transit inventory carrying costs offset the increased cost of holding the larger quantity.
Adjusting the Simple EOQ for Private Carriage
• Fixed trip charge is comparable to the EOQ =
2𝑅 𝐴+𝑇𝐶
order cost or setup cost. 𝑉𝑊
= 293.94
Tc = Trip charge
2𝑅 𝐴+𝑇𝑐
EOQ = Tc represents trip charge
𝑉𝑊
From the previous example, we can add a charge of $100 per trip
= 293.94
CBL railroad has just published a new in-excess rate on items that XYZ
company ships quite often. CBL’s present rate is $4/cwt with 40, 000
pound minimum (400 CWT). The in-excess rate just published is $3/cwt
on shipment weigh in excess of 40, 000 pounds up to 80, 000 pounds.
The XYZ logistics manager presently ships in 400-cwt lots. The
manager wants to know whether XYZ should use the in-excess rate,
and, if so, what quantity the company should ship per shipment.
XYZ COMPANY SHOULD USE THE IN-EXCESS RATE AND SHOULD SHIP 50, 600 POUNDS IN EACH SHIPMENT