Kari Knarecom Location Decisions Country Selection Several fectors guide the selection of which counties a business locates and operates within, Te Gobel Competveness Report (GOR) sa yearly report Dubisned byte Wora Econom Forum winch ranks counires based on the Global Competitiveness Index (Wikipedia). Labor factors are often a driving force in country selection. The International Labor Comgarsons Program (/L©) of the U.S. Bureau of Labor Statistics (BLS) adjusts economic statstics (th an emphasis on labor statistics) to a common conceptual framework in order fo make data comparable across counts. Is data can be used to evaluate the economic performance of one county relative ta that of other counties and to assess intemational compeitveness (Wikipedia), Location intligence to's tools leverage a variety of data sources including aerial maps, geographic information systems (GIS), consumer demographics as well as a user's oun customer records (Wikipedia) Exchange rate risks ae inherent in these decisions (Wikivedia) “The total cost of operations must include all business costs for operations ina country (tangible and intangible). Political sk, valves and culture are common intangibe factors The level of corruption is also @ factor. Transparency Intemational (TI) publishes the Corruption Perceotons Index (CP!) annually ranking countries "by their perceived levels of corruption, as determined by expert assessments and opinion surveys * The CPI generally defines coruston as "the misuse of public ower for private benefit” As of 2070, the CPl ranks 178 counties "on a scale from 10 (very clean) oO (highly corrupt)" (Wikipedia) usa’ Taiwan South ke Malaysia Chine 8 ea cornpt 146 Russia Principles of Supply Chain Management Page 47 of 76Kari Karecom Region Selection ‘Once country location has been identified, the specifi region for operations is selected Site Selection Site selection indicates the practice of new fcilty locaton, both for business ‘and govemment. Site selection involves measuring the needs of a new project ‘against the ments of potential locations (Wikipedia). ‘The process includes the following step: 41. Define project erteria Evaluate communities 2 3. Create short ist of communities based upon proecteiteria 4, Identty eal estate sites within each fnalst community 5. Realestate analysis 6. Negotiate tax incentives 7. Site acquiston Evaluation can be performed with ‘A weighted ranking of the key factors “Total cost andior break-even analysis ‘Cluster analysis tools such asthe centroid (center of gravity) method (Wikipedia) ‘¢ Linear programming transportation & location models (Wikipedia) Logistics Decision Models Weighted Center of Gravity Method ‘The weighted central of gravity method is a logistics decision modeling technique that attempts fo identily the ‘bes’ location fora single warehouse, ‘store or plant, given multiple demand points that differ in lacaton and importance, Weighted X coord Weighted ¥ coord um (Wi * Yi) / Sum (Yi) {see example page 355-356) Optimization models are a cless of mathematical mode's used to seek the ‘optimal point of some objective function subject fo some constraints. Principles of Supply Chain Management Page 48 of 76Layout Decision Models Office Layout Office layouts are arranged so thet staff can work together in departmental ‘and team groupings, providing the best opportunity for efcent work flow, ‘ommunicalion and supervision (kbedia) ‘An activity relationship chart (ARC) isa tabular means of espaying the closeness rating among all pars of actives or departments (W/kivei) Retall Layout Sales per unit areas @ standard and usualy the primary measurement of store success (Wikipedia) Firms sometimes oay a slotting fee to have their product placed on the retalle’s shelves (Wikisedia) Warehouse Layout ‘A warehouse is a commercial building for storage of goods (Wikivedia). For more detail on warehouses and warehouse layaut click on the hyperinks for each tie Warehouse layout must accomodate material handing equioment. Fixed Position Layout {A fixed position layout is used when the product isso large or located off ste. In this case, the materials, tools and workers come to where they are needed ‘onthe product Process Oriented Layout ‘A process oriented layout is used winen the number and types of products being produced are highy variable. Because of this variably, the lke machines and functions are grouped together and the product travels to each function in the order of ts need ‘When creating a process oriented (or functional) layout, the designer wants to minimize the toll disvance traveled between functons This toll cet isa function of the distance (or cost) between functions and the number of trips: made beeen eacn function nthe business. Work Cell Layout In Cellar Manufacturing systems machines are grouped together according to the families of parts produced. The major advantage is that material fiow is Sanifcenty mprovec, uhich reduces the distance traveled by materal, inventory and curva lead tes (ine) Processes are arranged in a U-shape so that the beginning and end of the material fo hin te cal are ear eachother. This alls quick ebeencng of tasks without redesigning stations, because workers can cross the aisle (Wikiceda) Staffing and Balancing Work Cals Principles of Supply Chain Management Page 50 of 76Kari Karecom “The TAKT time (cycle tine) fora work cells the pace of production thatis required to meet customer demand TAKT time = total worktime available / units required To calculate the number of operators needed in a work cell: +# workers = total operation time for al steps TAKT time. Product Oriented Layout In 2 product layout, te workstations and are located along the line of ow ofthe work units ). This is commeniy understood as an assembly line, which is a process (most ofthe time called a progressive assembly in which parts (usually ‘are added toa produc in a sequential manner using optimally planned logistics to create a finished product much fester than with handcratng-type methods Line Balancing Line balancing sa technique used in develning product based layouts (production lines, group technology work cells). The technique works by assigning tasks toa series of inked workstations n a manner tht minimizes ‘the number of workstations and minimizes the total amount of idle time at all stations fora given output vel When the amount of work assigned to each workstation is identical we say the line is perfecty balanced. In realty, most ines are unbalanced, a the actual ‘amount of work varies from one workstation tothe next. ‘The Six Steps of Line Balancing 1. Identfy all the process steps required, including the time for each task (The immesiate predecessor foreach task, and the total time for alltasks (ET). Draw a precedence diagram based on the information gathered in ‘step 1. This lagram is used when assigning individual tasks to workstations, 3. Determine the takt ime for the line. Tat time isthe maximum allowable time between completions of successive unts on te ine. “Tait time is comauted as the avaliable production tme (e.g. minutes, inthe shift or day) divided by the required output rate ‘Takt time = available production time | required output rate {cycle time isthe actual time between completion of units) 4. Compute the theoretical minimum numberof workstations needed. ‘The shorter the tak time, the more workstations that are requted. This is because the tasks wil need tobe divided across more workstations to ensure that cycle time, which is determined by the {otal amount of work in the largest workstation, remains below the takt time. Wa = total time forall tasks (e.g. ZT) /takt time Working on one workstation ata time, use @ decision rule fo assign tasks to the workstation. Start withthe frst workstation, and add tasks until you reach the point hat no more asks can be assigned without ‘exceeding the tkt time. If you reach tis point and all the tasks have not been assigned yet. close the workstation to any more tasks and Principles of Supply Chain Management Page si of76‘open upa new workstation, Repeat the process unbl all tasks have been assigned. Be sure not to asign a task o a workstation unless al drect predecessos (f any) have been asigned. Common decison rues, fordetemining which tsk to assign net ee to (1) assign the largest eligible task that wil sti ft within the ‘workstation without exceeding the takt time, (2) assign the eligible task with the most tasks directly dependent on itor ()assign some combination of the tuo. Evaluate the performance ofthe proposed line by calculating some basic performance measures Cycle time (CT) = maximum amount of te spent in any ‘one worksition lee time (7) = [actual number of workstations (eg. Wr) * CT] total time for all tasks (eg. ET) Percent idle time (I) = 100%” [IT / total time for al tasks (eg. ST) Efficiency delay (ED) = 100%- Pl In general, solutions with low idle times and high effciency delay values are cons dered superor. Assembly-Line Balancing Objective is to minimize the imbalance between machines or personnel while meeting required output Starts with the precedence relationships © Determine cycle time # Calculate theoretical minimum number of ‘workstations: © Balance the line by assigning specific tasks to workstations. Principles of Supply Chain Management Page 52 of 76Wing Component Example Performance Task Must Follow Time. “Teak Listed Task (minutes) Below * 5 oH a c 3 é D ‘ e e 2 A F 3 co 6 7 - Hoof E " 3 oH Total tine Wing Component Example Performance Task Must Follow ‘Sime “Tk Listed Tesk_ (minutes) a 10 8 " c 5 ° 4 -e 2 F 3 6 ? 4 " Hi 3 “Total ime os Wing Component Example Principles of Supply Chain Management Page 53 of 76Performance Task Must Follow ‘Time “Task Listed, Task _ (minutes) Below 70 Assigning Department Locations ‘The objective iso arrange the different functional areas (departments) such {2 vay tnt departmens tat shouldbe close io one anther (such as packaging ‘and shipoing) ae, while departments that doit need tobe near one another are ‘You can use queltative (undesiebe’,"destabe’,ertce) or quanttatve methods ‘A quantttive method commonly used is to locate departments in such a vay 1s fo minimize the fotal stance traveled, given a certain number of interdeparimental trips per time period Steps for departmental location: 1. Identfy the potential department locations and distances between the various locations. 2, For each department, identi the expected numberof tips between the department and all oer depertments (interdepartmental tips) 3. Altemot to assign department locations in such a way as to minimize the total distance traveled a. Ifa particular department can be assigned to only one locetion, do ths frst. b. Rank order department pairings by number of interdepertmenta! tps, and attempt io locate deperiments withthe most interdepartmental tips next to one anther. ‘G. Centrally locate departments that have significant interactions with multple departments. d._ See ifthe solution can be improved by swapping pairs of departments ‘Tota Distance Traveled per day = aw (# tips between depts * distance) Principles of Supply Chain Management Page 54 of76Kari Knarecom Introduction ‘Sourcing decisions are high-level, often strategic decisions regarding which products or services wil be provided by extemal supply chain partners. Purchasing re the acvites associated with identiying needs, locating and selecting suppie's, negotiating terms, and folowing upto ensure supplier performance, A Supply Chain for Beer Why Purchasing Is Critical The Changing Global Competitive Landscape Fis compete not ony against global competitors, but aso ages their competitor’ suply chains Financial Impact * Cost of goods sold (0 outside suppliers 1GS) ~ the cost of goods purchased from © Merchandise inventory isa balance sheet item that shows t ‘amount a company pad forthe inventory it has on hand ata particular point in time + Profit margins the rato of eeenings to sales for a given time period © Retum on assets (ROA) is a measure of financial performance, generally defined as earningsiotal assets. Higher ROA values are preferred, as they indicate that the fim is able to generate higher ‘earings form the same asset base © Profit leverage effect isa term used to describe that a dolar cost savings increases pretax profs by one dollar. wile @ dollar increase Principles of Supply Chain Managementin sales increases pretax profits by only the doi malted by he pretax proft margin The Sourcing Decision Insourcingis the use of resources within te frm to provide products or senices ‘Outsourcing is the use of supaly chain partners o provide precucts or services Make-or-buy deetsion is aso refered to asthe sourcing decision, Advantages and Disadvantages of Insourcing and Outsourcing Insouring ives a company a high agree of contol overt operations. This is particularly desirable if the company owns proprietary designs or processes. Insouring can loner manufacturing cost, but ony the business eno the volume necessary to achieve economies of scale. Finally, insourcing encourages the development of core competencies - organizational strengths or abies, developed overlong period, tat customers fd valuable and competitors find difficult or even impossible to copy. Insouring canbe risky because it decreases a fis stretegic exit Outsourcing typically increases a firm's flexibility and access to state of the art products and processes hs makes or echnoogies change, many fms fd changing supply chain partners easier than changing intemal processes. With outsourcing, es investment required utont Cutsouring ha its sks ~ suppliers may mite theiccapebites,Contol and cecrdinaton ae also isvesinousoucing. Coordinating fu of materials across separate organizations can be a major challenge. Total Cost Analysis Total cost analysis is a process by which a frm seeks to identity and quantity allof the major costs associated with the varous sourcing options. Direct costs are those costs that are ted directly tothe level of operations or supply chain activities, such asthe procurement of a good or service, or transportation, Indirect costs are costs that are not ted directly tothe level of operations or supply chain activity (lease payments or staff salanes) Sourcing Strategies In single sourcing the buying fm depends on a single company forall or neatly all of a partculr item or service. In multiple sourcing, the buying fim shares tits business across multiple suppliers. Cross sourcings a sourcing strategy in which the company uses a single supple fora certain part or servceinone prt ofthe business and ancther supplier wth the same capablites for a similar partin another area ofthe business. Each suppleris then awarded new business based on its performance, creating incentive for both to improve Principles of Supply Chain Management Page 56 0876‘same purchased product or service. The Purchasing Process 1. Needs identfication - a purchase requisition is an internal document completed by a user that informs purchasing of a specific reed. A reorder point system is another method used to inate the purchase of routine items. 2. Description - description isthe communication of a user's needs to Potential suppliers in the most efficient and accurate way possible, There are various ways to describe what is needed (by industry standard, brand, by specification, by performance characteristics...) 3. Supplier identification and evaluation - this process is mare expensive as the: «© Complsity of the product or sence increases +The amount of money thats committed increases ‘+The length of the buyer-supplier relationship increases Firs may evaluation ther supplies: management capability, ‘inencial condition, slaning & contol system, environmental regulaton compliance, relationship potential 4. Supplier selection ~ a preferred suppliers one that has demonstrated ts performance capabilites through previous purchase contracts and therefore receives preference during the supplier selection process. You may also have a request for quotation (RFO), which is a formal request for suppliers to prepare bids, 5. Purchase onder preparation ~ A purchase order (PO) is a document that authorizes a supple to deliver a product or service and that often, inludes key terms and conditions, suc as pie, delivery and quality requirements (this may be electronic through the use of electronic data interchange) 6. Follow up and expediting - moniter the status ofthe purchase Receipt and inspection ~ ensure the service is being performed according tothe terms and conditions inthe statement of work (sow. 8. Invoice clearance and payment gayment is made trough accounts payable (commonly paid electronically through electronic funds transfer) 9. Records maintenance — accumulation of supplier performance deta {for usein future supplier decisions Multi-criteria Decision Models in Sourcing and Purchasing -Muttkcritoria decision models a decision makers to evaluate various altematves across multiple decision cera (eg, delivery reliability, qualty, financial stabi, price). Principles of Supply Chain Management Page 57 of76Trends ‘+ Asteady increase in longer-term contracts (gartnering) ‘¢ Increase in number of purchase consoldation efforts (pooling of purchasing requirements by mutiple areas in a company or even across companies) ‘* Decline of suppliers managed per company by 63% from 1980 to 2000 ‘© Global purchasing (14% of U.S. purchasing in late 1990s) ‘* Formal supplier performance measurement Business to business (825) technology Profession of supply chain management Logistics Logistics isthe par of the supply chain process tat plans, implements and contol the effcient effective ow and storage of goods, services, and related information from the point f consumption to meet customers requirements, Logistes covers: Transportation ‘= Werehousing © Material handling 8 Packaging Inventory management Logistics information systems Why Logistics is Critical Logistics expenditures represent one of the largest costs in ineratonal commerce. In North Ameria, ogists accounted fora staggering 10.7% of toa gross domestic produc. Logistics Decision Areas Transportation Teanegrtation Node Highway Water Rail Air Pipeline Principles of Supply Chain Management Page 58 of 76Other 50% Highway transportation dominates the US. logistes infrastructure. The greatest grouth in highway transportation has been in parcel, postal, and courier Services. This growth has been driven by consumers who are buying smal high-value items directly from manufacturers, skipping traditional retailer. \Water based transport includes farm produce, timber and petroleum products. Ar ransport is deal for materials with alow weight to-alue rato Rail trenspotis somewhat more flexible than water because the physical configurations ofthe trans is easly modified Selecting a Transportation Mode A direct truck shipment is a shipment made directly, with no additional stops, changing ef treks, ot leaing of addtional cargo, A less than truckload shipment (LTL) is @ smaler shipment, offen combined ‘wth other loads to reduce costs and improve tuck efficiencies. Multimodal Solutions ‘Multimodal solutions are transportation solutons that seek to exploit the strengths of multisle transgortation modes through physical, information and monetary fows that are as seamless as possible. Roadrailers are specialized rail cars the size of standard truck trailers that can be quickly switched ftom rai to ground transport by changing the wheels Warehousing Warehousing is any operation that stores, repackages, stages, sorts, or centralizes gooes or materls. ganizations use warencusng io reduce transportation cost, move operational exbity, shorten customer eed times, and lower inventory costs. Consolidation warehousing isa form of warehousing that pulls together shipments from a number of sources (often piants) inthe same geographical area and combines them int larger ~ and hence more economical - shipping loads Cross-docking is a form of warehousing in which large incoming shipments {are received and then broken down ino smaller ougoing shipmiens to demand Points ina geographic area. Cross-docking combines the eccnomies of large incoming shipments withthe fexblty of smaller local shipments. Break-bulk warehousing isa specialized form of cross-decking in hich the incoming shipments are froma single source or manufacturer, Hub-and-spoke systems are a form of warehousing in which sttegicaly placed “hubs are used as sorting or transfer facilities. The hubs are typically located at convenient, high-ratic locations. The spokes" refer to the routes sefving the destinations associated wih the hubs Improving Operational Flexibility Postponement warehousing i form of warehousing thatcombines classe varus pon ih it maracng ardaiogg dts acu firms to put off final assembly or | {5 until the last, ible, Principles of Supply Chain Management Page 59 of 76moment, Assortment warehousing isa form of warehousing in which a wide aay of, {gods is held close tothe source of demand in order to assure short customer lead times, Spot stock warehousing attempts to position seasonal goods close tothe marketplace. At the end of each season, the goods are either liquidated or moved back to a more centralized location. Material Handling and Packaging ‘Material handling systems are the equipment and procedures necessary to rove goo within a act, between a faci anda ranspotation mode, and between different transportation modes (@.g., ship to track transfers) Packaging the way goods and materials are packed in order to facitate physical, informational and monetary flows through the supply chain. Logistics Strategy Logistics strategy is @ functional strategy that ensures that an organization's logistics choices - transportation, warehousing, information systems, and even form of ownership — are consistent with its overall business strategy and ‘support the performance dimensions that targeted customers most value. Performance Transporation Node | Warehousing System Dimension Deiveryreiabity | Fighvay Ar None (Greet sip), assortment, spot stock Deilvery speed ‘Ar Fighway None (Grek sip, assortment, spot stock Mix text Fighvay Air Ral | Assortment spt stock Design fexbity Fighway Air Postponement Volume flexibility | Fighvay Ar None (rec ship), assortment, spo stock Cost eid, waier, pipeline, | Consolidation, cross highway ‘docking, hub & spoke Owning Versus Outsourcing Does the fomhave the vlume needed to justly a ovate logistics system? © — Would owning the logistics system limit the firm's ability to respond to changes in re marketplace or suply chan? Islogsties a core competency forthe fm? ‘Common carers ae ais known a8 publ carr: transprtation sence providers who handle shipments on a case-by-case basis, without the need for long-term agreements or contacts. Contract carriers ae transportation sence providers who handle shipments for other firms based on long-term agreements or contracts, Principles of Supply Chain Management Page 60 of 76Third party logisties providers are service frms that handle al ofthe logisics requirements fr other comparies. Measuring Logistics Performance A perfect orde’ is ater vse to rete tothe tiny, erortee provision of product or service in good condition. Perfomance can be measured as the percentage of cde that meet the ‘perfect order’ criteria. Percent of perfect orders = (total orders orders with >1 defect) / total orders Landed Costs Landed costs the cost of a product pus all costs driven by logistic activites, such as transportation, warehousing, handing, customs fees, and the ike, Freight forwarder s an agent who serves as an intermediary between the corgenizaton shipping the product and the actual carer, typically on international shipments. Customs broker's an agent wo handles customs requirements on behatf of ‘nother fm. Inthe United States, customer brokers must be licensed by the Customs Services Principles of Supply Chain Management Page 61 of 76Introduction Inventory ere those stocks or items used to support production (raw materials) and worin-process items), supporting activites (maintenance, repair, and operating supplies) and customer service (fnished goods and spare part). The Role of Inventory Inventory Drivers Inventory Drivers: Impact Uncertainty suply or emand | Safty stock, hedge inventory IWismatch between downstream | Cycle stock partner's demand and most efcient production or shipment volumes from upstream partner TWismeich between downstream | Smoothing inventory demand levels and upstream production capacity Tiismaich between timing of “Transportation inventory customer demand and supply chain lead times ‘Supply uncertainty s the tsk of interruptions in the flow of components from Upstream supple, Demand uncertainty isthe risk of significant and unpredictable fluctuations in downstream demand, Inventory Types Cycle stock are components or products that are received in bulk by a downstream partner, gradually used up, and then replenished again in bulk by. the upstream partner. Safety stock's ex inventor that companies hod to protec themes against uncertainties in either demand or replenishment time. Anticipation inventory s inventory that's held in anticipation of customer emend. Hedge inventory isa form of inventory buldup to bufer against some event that may net happen, Hedge inventory Planning involves speculation related to potential labor stikes, price increases, unseted governments, and events that could severely impair the company's strategic intiatives Transportation inventory is moving from one link in the supply chein to Principles of Supply Chain Management Page 62 of 76production levels and dounsteam demand Continuous Review Systems Continuous review systemis used to menage independent demand inventory, The inventory level for an item is constantly monitored, and when the reorder points reached, an order is released, iis the desired inventory level at fll stock + Ris the reorder point '* dis the constant demand per period (assumption) ‘+ isthe lead tne (constant) ‘* His the cost of holding a single unit in inventor for a year ‘* Sis the cost of placing an order, regardless of quantity ‘© Plsthe price of each unit (fixed) Re=dL is the simplest form Because the inventory level goes from Q to 0 in the model, Average inventory = Q°2 The Economic Order Quantity (EOQ) Total holding and ordering costs = (Q/2)*H + (DIQ)*S ‘The lowest point for the total cost curve is where holding costs = ordering costs. (Q2)"H=(DIQ)"S = (2DS)/H Q= Sart ((2DS\1H) = EOQ Where, Q= order quantity = ennvalhldng cot per unit D=annual demand $= ordering cost Reorder Points and Safety Stock 00 tals managers HOW MUCH to order, not when to order. ROF You can also use average demand and average lead tme in this formula, with safety stock to determine the reorder point ROP =avg(s) “avgll) + SS Where SS =safety stock Fixed-Order Quantity Models Fivedrorder quant Principles of Supply Chain Management Page 63 of 76Kari Karecom ‘an order wil be placed and the size ofthat order, ©, The order point RS always a specified number of unis. An order of size Qi placed when the inventory avaiable (curent in stock and on order) reaches the point R. Inventory position is defined as the on-hand plus on-order minus backordered quantities. Economic Order Quantity Model (EOQ) Demand forthe product is constant and uniform throughout the period Lead tie (ime from ordering to receipt is constant ‘© Price per unit of products constant ‘+ Inventory holding costs based on average inventory (Ordering or setup costs are constant [All demands forthe product will be satisfied (no backorders allowed) Basie cost model for EOQ Total annual cost = annual purchase cost + annual ordering cost + annual holding cost 10 + (DIC)'S + (012)"H, where: TC= Total annual cost D = Demand (annul) Cost per unit = Quantty to be ordered Setup cost or cost of placing an order (often holding cost i taken as a percentage ofthe cost of the item, such as HEIC, where |is the percent carrying cost), Principles of Supply Chain Management Page 61 of76Teaoualcox a) ama co ost Bs osingco adr quant size (0) Solving forthe minimum total annual cost: EOC pt = Square Root of ((2"D*SVH) Redbar*L where, bar isthe average dally demand (constant), L=lead time (in days) Example, Annual demand (0) = 1,000 units Average daily demand (d-bar = 1,000°265 per order 25 per unit per year Lead time (1) = 5 days: Cost per unit(C)= $1250 ‘Solution EOQ= Copt = Sar(2DSIH) = Sqrt(2"1000°S)1.25) = Sqr{G000) = 88.4 units R=dbar'L = (10001386)'5 = 137 units Rounding to the nearest un, the inventory polcy is as follows: When the inventory poston drops to 14, place an order for 89 more, The total annual cost wil be: TO=DC + (DIQ)'S + (C12)"H = 1000(12.50) + 1000/89)'S + 88/2)"1.25) 2,611.81 Fixed-Order Quantity Model w/Safety Stock During lead time L a range of demands is possible. Ths range is determined either rom an analysis of past demand dataor fm an estimate | ° 1 > Range of domind Softy stock TS) Siskout ‘The amount of safety stock depends on the service level desired. The quantiy {0-be ordered, , is calculated in the usual way considering the demand, Principles of Supply Chain Management Page 65 0876‘shortage Cost, ordering cost, holding cost and so forth The reorder point R, is set to cover the expected demand during the lead time plus a safety stock determined by the desired senice level The key diferent between a fixeo-order quantity mode! where demand is known ‘and one where demand is uncertain fs in computing the reorder point The order ‘quantity isthe same in both cases. The reorder point, R, is: Redbar*L+zo. Where, R= Reorder pointin units ber = Average daily demand L= Lead time in days (ime between placing an order and receiving) 2 = Number of standard deviations fora specifed sence probability c= Standard deviation of usage during ead time The term zo is the amount of safety stock. The greater the safety stoc, the sooner the order is placed, Computing d-bar, ou andz -bar can be estimated using any ofthe forecasting methods studied earlier (even as simple as the monthly demandi30). 2s the zvalue associated with the percent probability that we wish for not stocking out. You can use the Excel function NORMSINV to calculate the 2 value, The z value associated with @ 95% percent probabil is 1.64, the standard deviation of the daly demand Root (Sum(d-¢-bar?in) Since the standard deviations ofa series of independent occurances is equal the square root of he sum of the variables, we cen calculate o.. ‘SqRootor" + 02 + 02 +...» ox’) If the standard deviation of dally demands assumed tobe the same over the lead time period, we can calcuate the standard deviation of demand over the eed time (Lin days) as \qRoot(L* ou") Example Daily demand fr a certain products normaly distributed with a mean of 80 and a standard deviation of 7. The source of supply i reliable and maintains @ constant lead time of six days, The cost of placing the orderis $10 and annual holdint costs are $0.50 per unt. There are no stockout costs, and unfiled orders are files as son as the order arrives, Assume sales occur over the entire 365 ays ofthe year. Find the order quantity and reorder point to satisfy a 95, percent probabilty of not stocking out during the lead time ‘Solution as Principles of Supply Chain Management Page 66 of76we? D=60°385 = 21,900 EOQ=Qopi=Sqr20SIH) = Sqr(2"21,900°10)/5) = Sqr(676,000) = 996 units aL = SqRoct(L * 2) = SqRool(6"7") = SqRoot(6"49) = 17.15 84 R= d-bar * L + zor = (60 * 6) + (1.64 * 17.15) = 388 units E0Q with Demand & Delivery Uncertainty Ityou have both demand and delivery (lead time) uncertainty, you must use @ convolution formula (Bowersox 2010) to calculate the safety stock level Standard Deviation of Combined Probabil (3c = Square Root of” od"2) + "2" ot"2)}, where Lead time (in days) the average daily demand (od = the standard deviation of dally demand (demand variation) od = STDEV(daily demand times) when using Excel ‘Standard Deviation of ead time = STDEV\lead tes) Reorder Point = R = (4* L) + (NORMSINV(p) "c) Reorder Pot (4 L) + (NORMSINV(p) * Square Reet of[(L * o'2) + (@2" 2p Principles of Supply Chain Management Page 67 of76Inventory Management - Covid Example [Sonam Fretond Smet wba] |20‘cnaner shippedtrom Chew olA(s) $4800 $7500 ara [Time to ship tom Cv to Canal US (ys) 7 » “704 Jorer Quay its) nas ag asl rt Reorder Pit with (uns) 131857 223200 os] [rt veray cst soa 9a es] recold Summer21 ——_caent ‘Anal Demand (nits) (0) 11000000 1.000000 1,000,000 Ordering Cot pr Order (3) $ "100 $ 17500 $ 9500 Wolang Cost forone unt forereyear(W) $20 $0 $2 Optima Oder any wae aaa aaa ‘Assumed ruber of ays per yarn operation os as as ‘average ely demand () a0 Laadtime in) o ” ” tase Reorder Pont ayy” nism aigsoe esd Service Level) a ‘Standard deviation of ily derand sim) mom om ‘Standard deviation of demand durglendtime—«48TR 24S 2a Sater Soc som gost gone “ett Render Pi was) mae ms ‘Anal Ordering Cot (0/05) $ tsea6e § augsso § morse ‘anual Base Hol Cost (/2)*H) S tsea6e $ angss0 § 2o1se8 Safer Stock ling Cost (SSH Sees § anee § ansea “etl mentor Cost $_wa17_§ a2 _§ Percentage Cost Oerene vex 10" PrePandemie Summer Gaent {40 Cartan Gost to Ship from ina $1800 $ 17500 $ as00 Wait for berth space na (és). 10 a0 ano “rch container alltime (5) 10 0 ae al continer del ime (39) wo ass ‘Warehouse ell time (63) 10 70 a “raspot to Local aU (7) 10 30 30 ‘etal end Time (093) r wor ms" me ‘arable Difereneas Precoud Summer 21 cent ‘dering cot ference (shiping cout) rem Laae ime otterene (ieademe) KK compined eters Precoud Summer 21 cent ‘rae Quay (inwentoryns) 2k safey sto (invertor) aoe “Total Reorder Pie (invertor) oxo r cost oa x oi Quantity Discounts Cac the tel cost of inventory and purchase fr both EOC andthe discount quantities. Choose the cheapest. Principles of Supply Chain Management Page 68 of 76aad Kane 2com Echelon Inventory (EOQ) Models Ita supply chains ether owned by one frm or the supplier partnership in the supply chain are such thet information is immediately shared and al members of the chain operate as one, you can use an Echelon inventory model ‘The echelon inventory at any stage of the system is equal tothe inventory on hand atthat echelon, plus all downstream inventory (Simech-Levy 2008), In the case ofan echelon inventory system, the Reorder Point} uses the Echelon Lead Time (Le) instead ofthe standard lead time in ts calculation. The Echelon Lead Time (Le) isthe lead time between the enfty doing is inventory calculation PLUS the lead times between all downstream supply chain partners. For example, fr a distributor toa retailer, the echelon lead time (Le is the lead time between the retaler and cistributor PLUS the lead time between the istibutor and their supplier. The average demand and standard devitions of demand are those ofall the retall customers inthis model, even when calculating reorder point forthe cstibutor. For systems with stable, constant ead times, use te following formula Reorder Point = R = (d" Le) + (NORMSINV(a) * [SqReot(Le * od'2})) Periodic Review Systems Periodic review systems are an inventory system used to manage indegendent demand inventory. The inventory level for an emis checked at regulr intervals and restocked to some predetermined level (order quantity) = R (predetermined inventory level) ~| (curent inventory) Restocking Levels In genera, R should be high enough to meet nearly all but the most extreme demand levels during the reorder penod (RP) and the time i takes fr the order tocome in (L). Seecifclly, Re pres + zone Where, lcs. isthe average demand during the reorder point and lead time 220. [s the standard deviation above the average demand (higher 2 values lower the probability of a stockout) ‘Service Levels - indicates the amount of demand to be met under conditions cof demand and supply uncertainty. ‘Service Level ZValue 90% 12 5% 18 96% 23 388% 308 Fixed Time Period Models Principles of Supply Chain Management Page 69 of 76Tn a fixved‘ime period sysiem, inventory is counted only af particular times, such as every week or every month, This is desirable in situations when vendors ‘make routine visto Customers and take orders for ther complete line of produets, or when buyers want to combine orders to save transportaton costs. Fixed time period made's generate order quanttes that vary from period to period, depending onthe usage rates. These generally require a higher level of safety tock than a fixed-order quantity system, ies salty Stock Fixed-Time Period Model w/Safety Stock Ina flxedttime period system (o-rnedel), reorders are placed atthe time of review (T), andthe safety stack that must be rearderedis: Safety Stock = zor. (Order quantity = average demand over the vunerable period + safety stock — inventory curenty on hand (plus on order, f any) = deban(TeL) + zor-u=1 here, = Quantity tobe ordered T= the number of days between reviews LL the lea time in days the time between placing an order and receiving it) G-bar = Forecast average daly demand = numberof stendard deviations fora specified service probabilty cov. = Standard deviation of demand over review and lead time ort = SqRoot{(T+L)" or) | = Current inventory level (includes items on ort) ‘Example Daily demand for a products 10 units witha standard deviation of 3 units. The review period is 30 days and lead time s 14 days. Management has seta o0icy of satisfying 28 percent of demand from items instock. At the beginning ofthis review period, there are 150 units in inventory. How many should be ordered? ‘Solution ‘Because each days is independent and opis constant, fRoot((T+L)" oa) = SqRoot{(30+14)"3!) = SqRoot(44"9) The 2 value for P= Bis 2.05. The quantity to order, then is: = d-ban(T+L) + zor —1= 10(30+14) + (2.05°18.9) - 150 = 331 units Principles of Supply Chain Management Page 70 of 763._ Generale altemative production plans ~in this step, management determines the feasibility and costs for various production plans, We will describe the three paricular approaches - level production, chase production, and mixed producton —in more detail ater. Level, Chase and Mixed Production Plans ‘A level production plan s where production is held constant and inventory is used fo absorb differences between production and the sales forecast. ‘A chase production plan is where production is changed in each time period tarmatch the sales forecast. A mixed production plan varies both production and inventory levels in an eff to develop the most effective plan, Organizing For and Implementing S&OP In choosing a sales and operations plan, managers must consider all aspects of ‘plan, not just costs: ‘© What impact wil the plan have on supply chain partners such as key ‘suppliers and transportation providers? This could be particularly important i production levels vary considerably from one period tothe next. ‘+ What are cash flows lke? Some plans my be oroftable at the end of the planning cycle, but stil include periods of time where cash ‘expenses exceed revenues, We discussed above how cash flow ‘analysis can be used to evaluate such plans. ‘+ Do our supply chain partners and our own fim have the space, needed to hold any planned inventories? ‘© Does the plan contin significant changes in the workforce? If so, \what would be the impact on workforce satisfaction and productivity? ‘Could the HR department handle it? ‘© How flexible isthe plant? That is, hw easy or eiffeult would it be to modi the plan as conditions warrant? Rolling Planning Horizons rolling planning horizon requires the organization to update the sales and ‘operations plan on a monthly or quartery bass Services Considerations Making Sales Match Capacity Yield managementis en agprozch common used by services vith highiy perishable ‘products’ in which prices are regulary adjusted to maximize total prot Making Capacity Match Sales A tered workforce is a stetegy used to vary workforce lve, uhere additional full-time or part-time emg are hired durir sak demand Principles of Supply Chain Management Page 73 of 76