Professional Documents
Culture Documents
Jaewoo Chung
Operational Management School
of Business Administration
Kyungpook National University
Daegu, South Kroea
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Education
BS Sungkyunkwan Univ. (1995)
MS University of Wisconsin – Milwaukee (2004)
Ph.D. Purdue University – West Lafayette (2008)
Career
Kyungpook National University
(Since June 2009)
Samsung Electronics (1995-2008)
•Production Systems Design
•Material Handling Systems
Montana State University-Bozeman (2008-2009)
Helsinki Metropolia University of Applied Sciences
(International SCM, August 2012)
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Questions?
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CHAPTER 1:
21st-Century Supply Chains
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Main Topics of SCM
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Overview of 21st-century supply
chains
• Supply chain applications (table 1.2 in pp. 7)
• Product supply chain: traditionally applied to a manufacturing
firm as a focal firm with support of suppliers, distributors,
retailers, and supply chain service providers.
• But there are number of nontraditional supply chain applications
• Promotional supply chain: for heavily promoted items (timing is very
important)
• Bulk material supply chain: for bulk products such as grains, metals, and
chemicals (economies of scale)
• B2C supply chain: for online sales, directly from manufacturers or distributors
to customers
• Humanitarian supply chain: for supporting disaster recovering (equipment,
foods, medical care items, and commodities to support reconstructions
• Global supply chain: for multiple sources of demand and supply over the
world (demand variations, distance, and documentation)
• Agricultural commodity supply chain: for agricultural commodities from farm
to markets or processing plants (distance, economic factors)
• Military supply chain: for military operations (a wide rage of items with
demanding environment)
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Value
Sustainability Creation Efficiency
Relevancy
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Responsiveness
• Supply chain integration provides firms with more
responsive business models through IT.
• Anticipatory business model vs responsive business
model
• Anticipatory business model
• Uses push based system (make-to-stock, build-to-stock)
Sell
Manufacturing
• Forecast is initiated from
Buy components forecasting customer
Manufacturer Warehouse demands Deliver
and materials
• Responsive business model
• Uses pull based system (make-to-order, build-to-order)
• Manufacturing is initiated from customer orders
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Responsiveness
• Anticipatory business model vs responsive business model
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Responsiveness
• Barriers to implementing responsive systems
• The need for publicly held corporations to maintain
planned quarterly profits
• Inventory is required to this achievement (sales promotions)
• The need for establish and maintain collaborative
relationships with suppliers and buyers
• Often difficult to implement when lead times are long
• impractical to react to demand information.
• More difficult to take advantage of economies of scale
• Today’s best supply chain practices takes the best of
both.
• Push–pull supply chain strategy
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Globalization
• Provides both supplying(purchasing) and market
opportunities in developing countries
• Market opportunities
• Population increases sharply in developing countries
• Basic commodities foods, clothing, and consumer durables
• Purchasing opportunities
• Raw materials and components
• Labor advantages
• Favorable tax laws
• Differences of logistics in globalization
• Distance
• Documentation
• Diversities in work practices and local environments
• Cultural diversities in customer demands
• Risks related to terrorism, disasters, epidemics
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Industry Disruptors
• Main disruptors: changes in
customer requirements and
technologies
• Consumer requirements
• “want it now” mentality
• Refers to the consumer’s desire to have quick access to the
desired product at their desired location. (delivery time)
• Personalization
• Refers to the increasing trend for consumers to request
for customization (larger variety of products)
• Millennial preferences
• Refers to the need for more variations in package sizes
• Omni-channel shopping
• Refers to the desire to purchase products from multiple distribution
channels such as retailers, manufacturers, wholesale clubs, or online
• Aging consumer needs
• Aged customers demands creates extra variations (health
care products)
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Industry Disruptors
• Main disruptors: changes in
customer requirements and
technologies
• Technology adoption
• Autonomous vehicles and IoT
• Artificial intelligence
• 3D printing
• Big data
• Alternative fuels
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Study Objectives
• Define the supply chain management and logistics
management and clearly explain the differences.
• Explain main topics of supply chain management.
• Explain why SCM becomes more important these days.
• Explain what the supply chain value proposition is and
how to obtain.
• Explain the difference between the anticipatory business
model and responsive business model.
• Explain about the main industry disruptors in supply
chain.
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Information System
Functionality
• Crucial roles of Information System on SCM
• Enhancing speed, accessibility, accuracy, relevancy, and simple access
• Information System became a major tool
• Initiating activities, tracking processes, facilitating information sharing, and
assisting manager’s decision making
• Major roles of information systems
• Transactions, communication components, decision supports
• Five critical roles
• Real-time customer support: order status, product availability, delivery
tracking, and invoice transactions
• Reducing inventory and human resource requirements
• Increasing resources flexibility (used for right time and places)
• Facilitating collaborations and redefining SC relationships
• Reducing uncertainties and variations
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Information System
Functionality
• Logistics activities and decisions at each level of
functionality
Strategic
formation and
evaluation
Long-term
performance
improvements
Performance
measurement
and reporting
Day-to-day
operations
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Information System
Functionality
• Transaction system
functionality consists of
formalized rules and
procedures
• Standardized communications
focus on tracking and
regulating day-to day
logistical transactions
• For example,
• Order entry
• Order fulfillment
• Inventory adjustment
• Invoicing
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Information System
Functionality
• Management control
functionality focuses on
performance management and
reporting
• Provides real time feedback on
supply chain performance and
resource utilization
• Common performance
dimensions include
• Cost
• Customer service
• Productivity
• Quality
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Information System
Functionality
• Decision analysis functionality
focuses on software tools
assist managers
to• Software tools help to identify,
evaluate and compare alternatives
to improve effectiveness
• E.g., Excel solver
• Types of analysis include
• Supply chain design
• Inventory management
• Resource allocation
• Routing
• Segmental profitability
• Also called decision support
software in MIS departments
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Information System
Functionality
• Strategic planning
functionality transforms
transactional data to assist
in strategy evaluation
• Organizes transaction and
performance data into a
relational database to assist in
evaluating alternative business
strategies
• Examples include
• Strategic alliance decisions
• Development of manufacturing
capabilities
• Customer responsiveness opportunities
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Information System
Functionality
• More opportunities exist for improvements at higher levels
of functionality
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Supply chain information
system modules
• ERP as a SC major system
ERP Modules
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Enterprise resource management (ERP)
• Enterprise operations modules support day-to-day sup
ply chain operations
Enterprise Operations
Customer Inventory
relationship Logistics Manufacturing Purchasing
management Deployment
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Study Objectives
• Explain the roles of the information technology.
• Explain the four levels of information systems
functionalities.
• Explain ERP and its modules in the SCIS.
• Explain Logistics operations modules in the SCIS.
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CHAPTER 3: Logistics
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Importance of Logistics
• Logistics
• Involves the management of order processing, inventory,
transportation, and packaging.
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Logistics Value Proposition
• Logistics should be managed as an integrated effort to
achieve customer satisfaction at the lowest total cost
• Elements of the logistical value proposition include Service
and Cost Minimization
• Service benefits
• Logistics adds value to the supply chain process when
inventory is strategically positioned to achieve sales.
• The profit impact of logistical failure can be significant such
as increasing costs, lost sales, and loss of major customer’s
business.
• The more significant the service failure impact upon a
customers business, the greater priority placed on error-free
logistical performance.
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The Work of Logistics
• Functional areas in logistics are closely related
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The Work of Logistics
• Transportation
• Three ways meeting transportation requirements
• Private fleet owned by the firm
• Short-term contract arrangement with dedicated transportation specialists
• Long-term engagement with a transportation service provider
• Transportation performance
• Cost: total system wide cost should be considered
• Speed: balance between cost and speed is necessary
• Consistency: avoid unexpected variance causes higher safety stock
• Speed and consistency together create quality of transportation
• Warehousing, material handling, and packaging
• Warehousing
• Sorting, sequencing, order selection, transportation consolidation
• Consolidation center – product modification and assembly
postponement
for
• Reverse logistics: receiving, processing, and disposing returns and damaged
products
• Material handling
• Receiving, moving, storing, sorting, assembling
• Packaging
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Logistical Operations
• Scope of Logistical Operations
• The internal operational scope of integrated logistics operations
is illustrated by the shaded area of Figure 3.2.
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Logistical Operations
• Inventory flow
• The operational management of logistics is concerned
with movement and storage of inventory in the form of
materials, work-in-process, and finished products.
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Logistical Operations
• Information flow
• Identifying specific locations of products and orders within a
logistics system produce, send, and receive information thus
enabling the integration of this information across all operating
areas.
• Information type
• Size of order, status of given work process, availability of
inventory, urgency of the order, etc.
• Primary objective – reconcile and streamline information
connectivity to improve overall supply chain performance
• Important Observation: Occurs in parallel to physical product flow
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Logistical Integration Objectives
• Six operational objectives
• Shipment Consolidation
• Transportation cost is the most significant logistical expenditure
• Transportation cost is directly related to product type, size of
and distance traveled
• shipment,
System object to achieve consolidation, where possible, to reduce
the transportation cost of each individual shipment
• Quality
• Focus on continuous quality improvement
• Total Quality Management (TQM)
• Sunk logistics cost of quality defects
• Emphasis on zero-defect order-to-delivery performance
• Life Cycle Support
• Few products sold without some guarantee the product will perform
as advertised
• Reverse Logistics capabilities, both government required (recycling)
and disaster recovery (product recalls) are critical
• Cost recovery through reverse flow / secondary markets
• Cradle-to Cradle logistics and opportunities for margin enhancement
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Logistical Operating Arrangements
• Use of different logistical operating arrangements
• Commonly observed logistical operating arrangements (cont)
• Combined
• The ideal logistical arrangement is a situation wherein the inherent benefits of
echeloned and direct logistics structures are combined.
• Use of different strategy (Echelon vs. Direct) depending on customer value,
inventory value, and goals specific to unique business channels
• Example:
• Automobile Replacement Parts
• Machine Parts to Industrial Firm
Arrangement Cases
Echelon For items with high turn over rate (fast moving materials), Low
demand variance, Important service level, Low unit price
Direct For items with low turn over rate (slow moving materials), High
demand variance, Service level not critical, High unit price
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Flexible Structure
• Preplanned contingency strategies to prevent logistical
failures in delivering products to customers on time
• Back-order: A back order is the status of an order that the
product is out of stock and cannot be shipped immediately.
It is generally cancelled or delivered after the desired due
date.
• Approaches
• More than one facility to serve a customer order
• Increased utilization and improved service level
• With different order size, using an alternative channel
arrangement
• Retailer or wholesaler depending on the order size.
• Toilets for a house or for an apartment complex
• Selective inventory stocking strategy
• Use of the combined echelon or direct stocking method
• The echelon arrangement can reduce inventory risk due to
multiple facilities used.
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Flexible Structure
• Approaches (cont)
• Introduction of Integrated Service Providers (ISP), Cross Dock or Flow
Through Operations, and/or consolidation centers
• Cross-dock: directly from supplier to buyer at the warehouse, no
storage is used.
• ISP: used a consolidation center
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Performance Cycle Uncertainty
• A major objective of logistics in all operating areas is to reduce
performance cycle uncertainty.
• The inherent dilemma is that the structure of the performance
cycle itself, operating conditions, and the quality of the logistical
operations all randomly introduce operational variance.
Example
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Study Objectives
• Explain the importance of logistics.
• Explain what are the sources of logistics value
proposition.
• Explain the functional areas of logistics and their main
issues.
• Explain the scope of the logistics operation in relation
to inventory flow and information flow.
• Explain the six operational objectives of logistics.
• Explain three types of commonly observed logistical
operation arrangements.
• Explain what the performance cycle structure and
performance cycle uncertainty are.
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CHAPTER 4:
Customer Accommodation
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Customer-Focused Marketing
• Who are the customers of the SCM?
• From perspective of the total supply chain
• Individual or households: end user of product or service in
consumer market
• Organizational end use: company is customer in business market
• From perspective of specific firm within a supply chain
• Intermediate customer organizations exist between the firm and
end users
• manufacturers, suppliers, wholesalers and retailers, etc.
• From perspective of a logistics manager
• Any delivery location
• For example, consumer home’s, retail / wholesale businesses,
receiving docks of manufacturing plants and warehouses
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Transactional vs.
Relationship Marketing
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Transactional vs.
Relationship Marketing
• Micromarketing or one-to-one relationship
• Micromarketing is a marketing strategy in which marketing and/or
advertising efforts are focused on a small group of tightly
targeted consumers.
• Significantly reduce transaction costs.
• Better accommodate customer requirements.
• Move individual customer transactions into a matter of routine.
• Types of micromarketing
• Local: in a particular city or location.
• Relationship: people who you know.
• Job title: specific type of job title (doctors, professors, university students)
• Industry: specific industry (agricultural industry, audio industry)
• Size: targeting a particular size (very large or small, food wholesale, mini table
saw)
• Customer needs
• Brand loyalty
• Customer recovery
• Price sensitivity
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Omnichannel Marketing
• Describes an approach by which firms market to customers
through a variety of channels (online, bricks and mortar
facilities, telephone, etc.)
• It is different from multi-channel marketing.
• It uses more than one channel to serve a customer order.
• Different channels offer different mixes of the generic
supply chain service outputs
• Online shopping does not have any limitation on spatial and
time convenience for orders but waiting time is a significant
issue.
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Customer Service
• Three levels of customer accommodation
• Supply chains provide a mix of services in order to accommodate
a range of customer requirements.
• Each service mix can be configured to achieve one of the
following levels of customer accommodation.
• Customer service
• Customer satisfaction
• Customer success
• Customer service
• The customer service of logistics provides customers with
• With the right amount
• Of the right product
• At the right time
• And the right place
• In the right condition
• At the right price
• With the right information
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Customer Service
• Three fundamental elements of customer service (chap 3)
• Availability • Service Reliability
• Fill rates • Damage free
• Stockout frequency • Error-free invoices
• Orders shipped complete • Shipment matches order
• Operational Performance • Shipped to correct location
• Speed • Etc.
• Consistency
• Flexibility
• Malfunction recovery
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Customer Service
• Availability is the capacity to have inventory when
desired by a customer.
• Stockout frequency (rate, level)
• Stockout occurs when a firm has no product available to meet a customer
order. (For each order, the stockout rate is either 0 or 1, i.e. occurred or
not occurred.)
• When a customer orders an item, the stockout occurs when the firm has not
enough inventory in stock, otherwise the service is met.
• Stockout rate (probability of stockout)
= orders unable to shipped on time / total number of orders
• Ex. 8% stockout average for retail business (by an empirical study)
• Fill rate
• It measures the magnitude or impact of stockouts over time for a specific
order.
• A customer orders 100 units, but only 97 units are immediately available,
then the fill rate is 97%. (at this time, the stockout rate is 0)
• Fill rate = order quantity shipped on time/total order quantity
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Customer Service
• Availability (cont)
• Order shipped complete
• The most exact measure of product availability and delivery.
• It is calculated by shipments including many orders.
• 1 if all the orders shipped is completed on time, otherwise 0 (nothing)
• Order shipped complete = probability a shipment complete on time.
• Operational performance
• Speed
• Speed of the performance cycle is the elapsed time from when a customer
established a need to order until the product is delivered.
• Faster speed can reduce customer inventory level.
• Consistency
• Consistency of the order cycle is measured by the number of times that
actual order cycles meet the time planned for completion.
• Logistics order requirements often include specific time and date for
inventory replenishment. (on time is better than faster)
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Customer Service
• Operational performance (cont)
• Flexibility
• is a firm’s ability to accommodate special situations and unusual or
unexpected customer requests.
• Typical unexpected cases: changes in ship-to locations, support of unique
promotion programs, new product introduction, product recall, disruption in
supply, one time customization, product modifications, delivery time change)
• Malfunction recovery
• is a firm’s ability to quickly implement contingency plans when a failure
occurs in the supply chain.
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Customer Service
• Service reliability
• Is a firm’s ability to perform all order-related activities and
provide critical information.
• Involves a combination of logistics attributes beyond
simply availability and operational performance.
• Examples
• Damage free measures how many shipments arrive without damaged
products.
• Error-free invoices measures what percentage of invoices contain no errors.
• Shipment matches order measures how many shipments contain the exact
amount of product ordered.
• Shipped to correct location measures how many shipments are made to the
customer’s selected location
• Plus a capability and willingness to provide customers with
accurate information regarding operations and order status.
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Customer Service
• Perfect order
• Is an order that is
• Delivered complete.
• Delivered on time.
• Delivered at the right location.
• Delivered in perfect condition.
• Delivered with complete and accurate documentation.
• This requires the total order cycle performance to be executed
with zero defects.
• Table 4.1 Typical perfect order failures
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Customer Service
• Perfect order
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Customer Service
• Logistics service platform
• is a commitment (or promise, target) to customers in terms of
availability, operational performance, and reliability.
Basic
Service
Platform
Service
Availability Reliability
Level Level
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Customer Service
• Logistics service platform
• How much basic service should the supply chain
provide?
• Many firms establish their basic service platforms
using two factors.
• Competitor or industry acceptable practice
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Customer Satisfaction
• What is customer satisfaction?
• Expectancy disconfirmation states if a customer’s
expectations of a supplier’s performance are met
or exceeded, the customer will be satisfied.
• If Perceived Performance > = Expectations, then Satisfaction
• If Perceived Performance < Expectations, then Dissatisfaction
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Customer Satisfaction
• Table 4.2, customer expectations related
to logistical performance
• Reliability
• Security
• performance as promised • Feelings of risk and doubt
• Responsiveness • Courtesy
• Willingness and ability • Politeness
• Access • Competency
• The ease of contact and • Judged by every interaction with
accessibility a supplier.
• Communication • Tangibles
• Pro-activeness of information • Physical appearance of facilities,
provided equipment, and personnel
• Credibility • Knowing the customer
• How much believable • Supplier’s understanding
and honest customer’s uniqueness
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Customer Satisfaction
Figure 4.1 Satisfaction
and Quality Model
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Customer Satisfaction
• The model identifies gaps managers must fill
to help satisfy their customers.
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Customer Satisfaction
• Increasing customer
expectations
• Performance that meets
customer expectations one
year may result in extreme
dissatisfaction next year
• Competition in an industry
will often raise the
minimum standards that
customer expect
• For example, Federal
Express introduced real-
time tracking of
shipment status
• In response UPS
and other parcel
delivery
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Customer Satisfaction
• Limitations of Customer Satisfaction
• Satisfied customers may not be happy with the supplier’s
performance.
• Customer satisfaction focuses on expectations - not customer’s
real requirements
• Considerable research suggests that “satisfied” customers still are
likely to defect (leave).
• What satisfies one customer may not satisfy other, much less all,
customers.
• There is a tendency by companies to treat all customers as
being equal and identical
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Customer Success
• 3 levels of customer focus
Level
Assess3 customer
Focus requirements
• Extend supply chain to include our
customer’s customer
• Provide value-added services for select
• customers
Manage performance cycles and levels
Customer to address needs of each customer
Success segment in the extended supply chain
Level 2 Focus
• Assess customer perceptions of
• satisfaction
Manage performance cycle levels to
Customer keep customers satisfied
Satisfaction
Level 1 Focus
• Assess industry and competitor practices
• Achieve internal standards for performance
cycles
Customer Service
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Customer Success
Table 4.3 Evolution of Management Thought
Philosophy Focus
Customer service Meet internal standards
Customer satisfaction Meet expectations
Customer success Meet customer requirements
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Customer Success
• Achieving Customer Success
• Requires to work intensively with customers to understand requirements,
internal processes, competitive environment, and so on.
• Also requires the logistics firm to understand how it can utilize its ability to
enhance customer success.
• Logistics firms should understand their customer’s customers and further the
entire supply chain participants for customer success.
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Customer Success
• Value-added services are a first step in achieving customer success.
• Value-added services refer to unique or specific activities that firms can jointly
develop to enhance their efficiency, effectiveness and relevancy.
• Transportation carriers, warehouse firms and other specialists may become
intimately involved to make value-adding activities a reality.
• For example, a retail customer may desire a unique palletization alternative to
support its cross-dock activities for its individual stores.
• Each store requires different quantities of specific product to maintain in-stock performance
with minimum inventory.
• Proper sorting and sequencing of products to meet specific customer
requirements
• For example, an auto assembly plant may require that components not only
be received on time but also sorted and sequenced in a particular manner for
convenience of assembly works.
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Developing Customer
Accommodation Strategy
• Basic principle of supply chain logistics is that customers should be
segmented based on their service needs.
• Different focuses for different firms
• Customer service, customer satisfaction, customer success
• Logistics firms need
• A framework for choosing the appropriate customer specific strategies.
• Programs for customer relationship management.
A
B
C
D
Product
variety
Product category
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Developing Customer
Accommodation Strategy
• Customer Relationship Technology
• Customer relationship management has grown rapidly in recent years.
• Customer relationship management (CRM) is a process for improving the
overall performance of a business by better understanding and anticipating
the wants and needs of customers.
• In practice, companies and vendors use the term CRM to mean different things.
• CRM is often used to describe technology and software that is used for analyzing customer
requirements.
• CRM technology generally expands the functionality of ERP. (Figure 4.4)
• Sales history, shipment history, order status, promotional summaries, shipment
information
• Amazon
• Initially developed customer profiles giving individual customer’s interests and
purchasing habits
• Tips for purchasing preferences or promotions
• CRM’s relevance to Logistics
• The need for cross functional transparency
• Chapter 12
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Developing Customer
Accommodation Strategy
Figure 4.4 Typical CRM Extension System
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Study Objectives
• Explain the difference between transactional marketing and
relationship marketing.
• Explain about micromarketing or one-to-one relationship with types
of it.
• Explain the difference between omnichannel marketing and
multichannel marketing.
• Explain the three levels of customer accommodation and their focuses.
• Explain the three fundamental elements of customer service and what
each of them consists of and be measured.
• Explain about the logistics service platform.
• Explain about customer expectations related to logistical performance.
• Explain about the customer satisfaction model and related 6 gaps.
• Explain about the philosophy of customer success with some
examples.
• Explain about developing customer accommodation strategy.
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CHAPTER 5:
Integrated Operations
Planning
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Supply Chain Planning
• is coordinating various processes between
SC participants.
• Sales <-> Manufacturing, Manufacturing <-> Procurement
• Supplier <-> Manufacturer, Manufacturer <-> Wholesalers
• Etc
• Generally more important for Anticipatory SC process
• MTS, Push based SC
• Three drivers of SC planning
• Supply chain visibility
• Visibility regarding location and status of inventory
• Identify inventory status exceptions
• Reduce risk and uncertainty
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Supplier Distribution
and and
Operations Customer
Collaboration Collaboration
Why Not One Forecast and One Plan and One Metric Framework?
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Supply Chain Planning
• Why Is Balance So Hard To Achieve?
• Supply and demand “sides” have different objectives
Operations-Focused Customer-Facing
Efficiency Effectiveness
Cost-to-Provide Cost-to-Serve
Predictable demand patterns is Tailored service and product
assumed/desired offerings – flexibility
Cost reduction/containment Maximize service options
Operational plans/order forecasts Sales forecasts/sales targets
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• SC planning terms
• General form of supply chain
planning
• Planning horizon: 5 weeks
• Planning frequency: one week
Week Week 15 Week 16 Week 17 Week 18 Week 19
Product
A1 100 100 100 0 0
A2 200 0 0 0 100
B1 0 0 100 300 300
B2 0 200 100 0 0
April 12th
Week Week 16 Week 17 Week 18 Week 19 Week 20
Product
A1 100 0 0 100 100
A2 0 0 100 200 0
B1 100 300 300 0 0
B2 100 0 0 0 200
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• SC planning example
• Production planning for a simplest desk
• Notation
• Q: minimum batch – once produced, the Desk
quantity must be a multiple of Q. 4
• LT: lead time – periods from order to delivery
• SS: safety stock – the inventory level must Leg
be greater than SS at the end of each 2
period.
• To produce a desk, 4 legs are required. Bolt & nut
• To produce a leg, 2 bots and nuts
are required.
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Supply Chain Planning Applications
• SC planning example
• Production planning for a simplest desk
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• Production planning
• Uses demand planning as an input or target
• Developing workable manufacturing plan
• Considerations: manufacturing resources and constraints
• Matching demand requirements with production constraints
• Resource capacities (machine, labor, material handling)
• Material availabilities
• Objectives
• Satisfying demand requirements at the minimum total cost
without violating constraints
• Effective production planning
• Increases the utilization of resources
• Reduces uncertainties related to production
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Supply Chain Planning Applications
• Logistics planning
• Coordinates transportation, warehousing and inventory within
the firms and between supply chain partners
• Integrates overall movement demand, vehicle availability, and
relevant movement cost
• Seeking opportunities of economies of scale by consolidating
freight transportation requirements
• Facilitating information sharing with carriers and other
service providers
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Sales and Operations Planning
(S&OP)
• S&OP process
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c c
c c
c :S&OP components
process
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Sales and Operations Planning
(S&OP)
• Figure 5.3
• Business plan
• Used to guide activity levels and determine aggregate volume
resource requirements.
and
• Unconstrained marketing plan
• Calculates the maximum sales and profitability if no constraints exist.
• Information regarding orders on hand, current customers, new
competition, selling margins, new produced potential, pricing, and overall
customers,
economy
• Sales plan
• Developed from unconstrained marketing plan
• Determining the most profitable and realistically achievable plan
on the unconstrained marketing plan
based
• Resource plan
• Is internal and supplier’s resource constraints
• Operations plan
• Making a trade-off between demand requirements and resource
constraints
1-106
106
1-107
107
1-108
108
36
Sales and Operations Planning
(S&OP)
• Making S&OP Work
• Benefits from S&OP
• Improved forecast accuracy
• Increases customer service and perfect order percent
• Reduces cast-to-cash cycle time
• Enhances gross profit margin
1-109
109
1-110
110
111
37
APS System Overview
• APS System Overview
Table 5.2 - Sample APS Planning Situation
Time Period 1 2 3 4 5
Requirement 200 200 200 600 200
Production Capacity 300 300 300 300 300
Alternative 1 (overtime):
Production 200 200 200 600* 200
Inventory Carryover - - - - -
Alternative 2 (build ahead):
Production 30 0 300 300 300 200
Inventory Carryover 100 200 300 - -
1-112
112
1-113
113
Weeks 15 16 17 18 19 20
Item
Demand (order received) 500 300 200 50 0 0
Inventory in stock at the 700 200 300 100 50 450
beginning of period
Production capacity 400 400 400 400 400 400
1-114
114
38
APS System Overview
• APS System Components
• ATP
• ATP calculation cycle is determined by a production plan to the next.
• Week 15, Weeks 16, 17, and 18, Weeks 19 and 20
• ATP for a week = available inventory – orders received(from the
week after and before the next production plan)
Weeks 15 16 17 18 19 20
Item
Demand (order received) 500 300 200 50 0 0
Inventory in stock at the 700 200 300 100 50 450
beginning of period
Production capacity 400 400 400 400 400 400
15
115
Weeks 15 16 17 18 19 20
Item
Demand (order received) 500 300 200 50 0 0
Inventory in stock at the 700 200 300 100 50 450
beginning of period
Production capacity 400 400 400 400 400 400
1-116
116
Weeks 15 16 17 18 19 20
Item
Demand (order received) 500 300 200 50 0 0
Inventory in stock at the 700 200 300 100 50 450
beginning of period
Production capacity 400 400 400 400 400 400
1-117
117
39
Collaborative Planning, Forecasting
and Replenishment
• CPFR overview
• Coordinates the requirements planning process between
supply chain partners for demand creation and demand
fulfillment activities.
• Steps
• Create a joint business plan where a customer and supplier share,
discuss, coordinate, and rationalize their own individual strategies to
create a joint plan
• Create a joint calendar for planning activities
• Create a common sales forecast
• Develop production, replenishment, and shipment plans
1-118
118
119
Forecasting
• Overview
• Forecast is the specific definition of what is projected to be sold,
when and where.
• Forecasting is a critical capability.
• Many logistics and supply chain activities must be completed in
anticipation of a sale.
• Forecasting approaches to achieve enhanced service or reduced
inventory.
• Improve forecast accuracy
• Forecast at a higher level of aggregation
• Forecasting requirements
• Collaborative planning
• Requirements planning
• Inventory projections, replenishment or production requirements
• Resource management
• Trade-offs
1-120
120
40
Forecasting
• Forecasting Components
• For each SKU(stock keeping unit)
• Base
• Seasonal 𝐹𝑡 = 𝐵𝑡×𝑆𝑡×𝑇×𝐶𝑡×𝑃𝑡 + 𝐼
• Trend
𝐹𝑡: 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡𝑖𝑛𝑔 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡
• Cyclical
• Promotional 𝐵𝑡: 𝑏𝑎𝑠𝑒 𝑙𝑒𝑣𝑒𝑙 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡
• Irregular
𝑆𝑡: 𝑠𝑒𝑎𝑠𝑜𝑛𝑎𝑙𝑖𝑡𝑦 𝑓𝑎𝑐𝑡𝑜𝑟 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡
𝑇:trend component index reflecting increase
or decrease per time period
𝐶𝑡: 𝑐𝑦𝑐𝑙𝑖𝑐 𝑙𝑒𝑣𝑒𝑙 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡
𝑃𝑡: 𝑝𝑟𝑜𝑚𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑓𝑎𝑐𝑡𝑜𝑟 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡
𝐼:irregular or random quantity
1-121
121
Forecasting
• Forecasting Process
1-122
122
Forecasting
• Forecasting Techniques
• Qualitative: personal or group opinions
• Time series
• Only one factor affecting to the demand is time.
• Moving average
• Exponential smoothing
• Extended exponential smoothing Adaptive smoothing
• Casual
• Factor or factors affecting to demand is or are various including time.
• Regression
• Simple regression
• Multiple regression
1-123
123
41
Forecasting
• Forecasting Techniques
• Moving average 𝐹15 = (𝑆14 + 𝑆13 + 𝑆12 )/3
∑𝑛 𝑆
𝐹𝑡 = 𝑖=1 𝑡−𝑖
𝑛
𝐹𝑡: 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡𝑖𝑛𝑔 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡
1-124
124
Forecasting
• Forecasting Techniques
• Moving average
Moving
Actual Demand Moving Average Average
Month (Sales) (n=3) (n=5)
Jan 100- -
Feb 110- -
Mar 90- -
Apr 130 100.0-
May 70 110.0-
Jun 110 96.7 100.0
Jul 120 103.3 102.0
Aug 90 100.0 104.0
Sep 120 106.7 104.0
Oct 90 110.0 102.0
Nov 80 100.0 106.0
Dec 90 96.7 100.0
Forecast 86.7 94.0
1-125
125
Forecasting
• Forecasting Techniques
• Exponential smoothing
𝐹𝑡 = 𝛼𝐷𝑡−1 + (1 − 𝛼)𝐹𝑡−1
1-126
126
42
Forecasting
• Forecasting Techniques
• Exponential smoothing 𝛼 = 0.5
𝐹𝑡 = 𝛼𝐷𝑡−1 + (1 − 𝛼)𝐹𝑡−1
Exponential
Month Actual Demand Smoothing
127
Forecasting
• Forecasting Accuracy
• Measures
• MAD(mean absolute deviation)
𝑛
∑𝑖=1 𝐸𝑖
𝑀𝐴𝐷 =
𝑛
𝐸𝑖 = 𝐷𝑖 − 𝐹𝑖
𝐷𝑖 − 𝐹𝑖
∑𝑛 ×100
𝑀𝐴𝑃𝐸 =
𝑖=1 𝐷𝑖
𝑛
1-128
128
Forecasting
• Forecasting Accuracy A: 100
B: 100,000
• Measures
• MAD(mean absolute deviation)
• MAPE(mean absolute percentage error)
Exponential
Month Actual Demand Smoothing Error MAD MAPE(%)
1-129
129
43
Forecasting
• Forecasting Accuracy
• Forecasting aggregation
• Dimensions of aggregation
• Time: day, week, month, year
• Product: SKU, group, family
• Location: city, state, country
• Forecasting accuracy increases when aggregated.
100
80
60
Percent Error
40
20
130
Study Objectives
• Explain about the three drivers of SCM.
• Explain the objectives of SC planning.
• Explain the SC applications.
• Explain the conflicts of S&OP
• Explain S&OP process.
• Explain about key factors for successful implementation of S&OP.
• Explain the role of APS in SC planning.
• Explain components and procedure of the APS system.
• Explain what ATP and CTP are.
• Explain what the CPFR is.
• Understand forecasting techniques and accuracy measures.
1-131
131
CHAPTER 6:
Procurement and
Manufacturing
132
44
Overview of Chapter 6
• The quality imperative
• Procurement importance
• Procurement objectives
• Procurement strategy
• Logistical interfaces with procurement
• Manufacturing processes
• Matching manufacturing strategy
to market requirements
• Manufacturing strategies
1-133
133
Quality Imperative
• Quality is an overriding concern of
all organizations
• Dimensions of product quality
• Performance
134
Quality Imperative
• Dimensions of product quality (cont)
• Features
• What different functions or tasks can the product perform.
• Ex) TV-internet connection, premium sound etc.
• Aesthetics
• Is the styling, color, workmanship pleasing to the
customer
• Appealing design
• Serviceability
• What is the ease of fixing or repairing the product if it
fails
•• Without
Based ontime and costexperience
customer’s losses before, during and after
purchase a product
they
• Reputation on a product
1-135
135
45
Quality Imperative
• Dimensions of service quality
• Convenience
• Accessibility and availability (location and time)
• Reliability
• Consistency of good services
• Responsiveness
• How actively help customers (time and attitude)
• Time
• Speed of a service
• Assurance
• Enough knowledge, skill, and confidence
• Courtesy
• How friendly employees are (attitude)
• Tangibles
• Facility, equipment, tools and appearance
1-136
136
Quality Imperative
• Total quality management (TQM)
• Total quality management (TQM) is a philosophy focused on
meeting customer expectations with respect to all needs, across
company functions, and recognizing all customers, both
all external.
and
internal
• TQM’s basic conceptual elements are:
• Top Management commitment and support
• Maintaining a customer focus in product, service and process
performance
• Integrated operations within and between organizations
• A commitment to continuous improvement
• Cost of quality
• Appraisal cost
• Inspection and test costs
• Failure cost
• internal and external failure costs
• Prevention cost
• Training, maintenance, and quality control procedures
1-137
137
Procurement Importance
• Purchasing was historically perceived as just a buying
function for manufacturing and repair materials and
supplies. (a clerical task)
• Purchasing agent tried to get lowest price possible for acceptable
quality.
• Transactional focus led to getting the best possible “deal” today.
• Did not focus on future transactions
• No concept of Supply Chain
• Purchasing seldom looked beyond the first-tier supplier.
• Purchasing simply responded to demands of production group.
• Procurement is now a strategic activity of the firm.
• Procurement looks up and down the entire supply chain for
impacts and opportunities.
• Focuses on building relationships with suppliers and
downstream customers.
1-138
138
46
Procurement Importance
• Several factors have elevated the importance of
procurement to the firm.
• Purchased goods and services are among the largest
cost elements for most firms.
• Goods and service account for 55 cents of every sales
dollars.
• While direct labor accounts for only 10 cents of every sales
dollars
1-139
139
Procurement Objectives
• Procurement objectives focus on several issues related
to the firms’ supply base.
• Ensuring continuous supply
• Stockout impacts greatly to business
• Minimizing inventory investment
• Quality improvement of supply
• Accessing to technology and innovation
• Lowest total cost of ownership (TCO)
• Minimizing purchasing price as well as quality, labor,
logistics, inventory, and after-usage costs.
• The purchasing price is only one part of the total cost.
• Looking at the cost of owning an asset in the long-term base.
1-140
140
Procurement Objectives
• Total cost of ownership (TCO)
1-141
141
47
Procurement Strategy
• Two main decisions
• Insourcing vs. outsourcing
• make vs. buy decision (make-buy decision)
• Alternative procurement strategies
• User buy, volume consolidation, supplier operational
integration, value management
• Insourcing vs. outsourcing
• Outsourcing benefits
• Reduce capital investment
• Reduce risks of investments
• Capital investment risks transferred to suppliers.
• Focus on core competency
• Can use financial resources for more important activities
• Increased flexibility
• The ability to use the supplier’s technical knowledge to accelerate
product development cycle time
• The ability to gain access to new technologies and innovation.
1-142
142
Procurement Strategy
• Insourcing vs. outsourcing (cont)
• Outsourcing risks
• Loss of competitive knowledge
• Outsourcing critical components to suppliers may open
up opportunities for competitors.
• Outsourcing implies that companies lose their ability to
introduce new designs based on their own agenda rather
than the supplier’s agenda.
• Outsourcing the manufacturing of various components to
different suppliers may prevent the development of new
insights, innovations, and solutions that typically require cross-
functional teamwork.
• Loss of control over suppliers
• Loss of control over product quality
• Loss of control over demand and delivery
• Loss of control over price
1-143
143
Procurement Strategy
• Insourcing vs. outsourcing decision procedure
• Make-buy analysis
• Evaluation of a product or service relationship to firm’s core
competencies
• Analyzing financial benefits
• Various costs (TCO analysis for both)
• Analyzing qualitative factors
• Loss of control over quality
• Supply risk (loss of control over demand and delivery)
• Product shortages and delays
• Loss of product intellectual property
• Potential price increase
• Product safety problem
• Harms on firm’s reputation
1-144
144
48
Procurement Strategy
• Alternative procurement strategies
• User buy
• The end users in the firm purchase needs
• For low cost items
• Volume consolidation
• Reducing total number of suppliers while minimizing supply
risk
• Increases buyer’s negotiation power in relation to supplier.
• Reduced cost due to supplier’s economies of scale
and economies of scope.
• Higher service level (lowering stockout risk) due to
supplier’s higher capacity.
• Higher supply risk
• Rigorous supplier selection and certification programs required.
• Not necessarily a single supplier but a few suppliers
1-145
145
Procurement Strategy
• Alternative procurement strategies (cont)
• Supplier operational integration
• Building partnerships
• Sharing information and knowledge
• Identifying linked processes and shared opportunities for
improvement.
• Different levels of supplier operational integration
• Buyer shares sales and orders information with suppliers.
• Buyers and suppliers working together to redesign linked
processes for reducing order time and communication
errors.
• Eliminating redundant tasks performed by both the buyer
and supplier.
• Continuous replenishment program
• Vendor managed inventory
• Can provide incremental savings of 5% to 25% over the
benefits of volume consolidation
1-146
146
Procurement Strategy
• Alternative procurement strategies (cont)
• Value management
• Early supplier involvement (ESI) in product design
• Reducing complexity
• Value engineering
Figure 6.2 Flexibility
and Cost of Design
Changes
1-147
147
49
Procurement Strategy
• Procurement Strategy Portfolio
• Through spend analysis
• Volume consolidation
or Supplier
operational
integration
• User buy
1-148
148
149
Manufacturing
• The four basic manufacturing processes
• Job shop creates a custom product for each customer.
• Batch process manufactures a small quantity of an item
in a single production run.
• Line flow process has standard products with a limited
number of variations moving on an assembly line
through stages of production.
• Continuous process is used to manufacture such items
as gasoline, laundry detergent and chemicals.
• Modifications of the above can create new options.
• Mass customization produces a unique product quickly and
at a low cost using a high volume production process.
1-150
150
50
Manufacturing Strategies
• Manufacturing strategies should match market requirements.
• Market requirements
• Mass marketing or one-to-one marketing
• Engineer to Order (ETO)
• is used when products are unique and extensively customized for
specific needs of individual customers.
the
• Nothing done until a customer order arrives
• Make to Order (MTO)
• Customer order based on a standardized design.
• Supplier prepare raw materials in advance.
• relies on relatively small quantities, but more complexity
• R e q u ir e s m u ch interaction with customer to work out design
s p e c if ic a ti on .
and
• Usually shipped direct to customer.
• Assemble to Order (ATO)
• i s w h en
ab rea sn eo ct o m p o e nt s a r e m a d e , s t o c ke d to
a s s e m b le d u nt il c us t o m e r o r d e r i s re ce
fo recast, but products
ive d
• features economies of scale, large volumes, long production runs, low
variety, and distribution channels.
1-151
151
Manufacturing Strategies
1-152
152
Manufacturing Strategies
1-153
153
51
Mass Customization
• Takes advantages of MTO and MTS
Postponement
or ATO
• Product/Process Characteristics:
• Modular or adjustable product building blocks
• Predictable components/functions interactions
• Standardized process/skill building blocks
• Reasonable lead times, steps, work content
1-154
154
• Six Sigma
• Focused on finding CTQ (critical to quality)
• CTQ has the highest impact on financial performance
• Quality improvement through elimination of defects and variation
1-155
155
Design-for-Logistics
• Design for logistics includes the requirements and framework for
logistical support in the early phases of product development.
• Considers
• What we are going to make.
• How we are going to make it.
• What logistics capabilities do we need.
• How we are going to integrate our suppliers into the process.
• Any subassembly manufacture by suppliers.
• The need for outsourcing of some parts or assemblies.
1-156
156
52
Design-for-Logistics
1-157
157
Study Objectives
• Explain the dimensions of product and service quality.
• Explain the basic conceptual elements of TQM.
• Explain three costs of quality.
• Explain why the procurement became a strategic activity of a firm.
• Explain the objectives of the procurement.
• Explain the benefits and risks of outsourcing.
• Explain about make-buy analysis.
• Explain about four alternative procurement strategies and the portfolio.
• Explain three ways of logistics to implement procurement.
• Explain the characteristics of four manufacturing strategies with their
performance cycles.
158
CHAPTER 6:
Procurement and
Manufacturing
159
53
Overview of Chapter 6
• The quality imperative
• Procurement importance
• Procurement objectives
• Procurement strategy
• Logistical interfaces with procurement
• Manufacturing processes
• Matching manufacturing strategy
to market requirements
• Manufacturing strategies
1-160
160
Quality Imperative
• Quality is an overriding concern of
all organizations
• Dimensions of product quality
• Performance
161
Quality Imperative
• Dimensions of product quality (cont)
• Features
• What different functions or tasks can the product perform.
• Ex) TV-internet connection, premium sound etc.
• Aesthetics
• Is the styling, color, workmanship pleasing to the
customer
• Appealing design
• Serviceability
• What is the ease of fixing or repairing the product if it
fails
•• Without
Based ontime and costexperience
customer’s losses before, during and after
purchase a product
they
• Reputation on a product
1-162
162
54
Quality Imperative
• Dimensions of service quality
• Convenience
• Accessibility and availability (location and time)
• Reliability
• Consistency of good services
• Responsiveness
• How actively help customers (time and attitude)
• Time
• Speed of a service
• Assurance
• Enough knowledge, skill, and confidence
• Courtesy
• How friendly employees are (attitude)
• Tangibles
• Facility, equipment, tools and appearance
1-163
163
Quality Imperative
• Total quality management (TQM)
• Total quality management (TQM) is a philosophy focused on
meeting customer expectations with respect to all needs, across
company functions, and recognizing all customers, both
all external.
and
internal
• TQM’s basic conceptual elements are:
• Top Management commitment and support
• Maintaining a customer focus in product, service and process
performance
• Integrated operations within and between organizations
• A commitment to continuous improvement
• Cost of quality
• Appraisal cost
• Inspection and test costs
• Failure cost
• internal and external failure costs
• Prevention cost
• Training, maintenance, and quality control procedures
1-164
164
Procurement Importance
• Purchasing was historically perceived as just a buying
function for manufacturing and repair materials and
supplies. (a clerical task)
• Purchasing agent tried to get lowest price possible for acceptable
quality.
• Transactional focus led to getting the best possible “deal” today.
• Did not focus on future transactions
• No concept of Supply Chain
• Purchasing seldom looked beyond the first-tier supplier.
• Purchasing simply responded to demands of production group.
• Procurement is now a strategic activity of the firm.
• Procurement looks up and down the entire supply chain for
impacts and opportunities.
• Focuses on building relationships with suppliers and
downstream customers.
1-165
165
55
Procurement Importance
• Several factors have elevated the importance of
procurement to the firm.
• Purchased goods and services are among the largest
cost elements for most firms.
• Goods and service account for 55 cents of every sales
dollars.
• While direct labor accounts for only 10 cents of every sales
dollars
1-166
166
Procurement Objectives
• Procurement objectives focus on several issues related
to the firms’ supply base.
• Ensuring continuous supply
• Stockout impacts greatly to business
• Minimizing inventory investment
• Quality improvement of supply
• Accessing to technology and innovation
• Lowest total cost of ownership (TCO)
• Minimizing purchasing price as well as quality, labor,
logistics, inventory, and after-usage costs.
• The purchasing price is only one part of the total cost.
• Looking at the cost of owning an asset in the long-term base.
1-167
167
Procurement Objectives
• Total cost of ownership (TCO)
1-168
168
56
Procurement Strategy
• Two main decisions
• Insourcing vs. outsourcing
• make vs. buy decision (make-buy decision)
• Alternative procurement strategies
• User buy, volume consolidation, supplier operational
integration, value management
• Insourcing vs. outsourcing
• Outsourcing benefits
• Reduce capital investment
• Reduce risks of investments
• Capital investment risks transferred to suppliers.
• Focus on core competency
• Can use financial resources for more important activities
• Increased flexibility
• The ability to use the supplier’s technical knowledge to accelerate
product development cycle time
• The ability to gain access to new technologies and innovation.
1-169
169
Procurement Strategy
• Insourcing vs. outsourcing (cont)
• Outsourcing risks
• Loss of competitive knowledge
• Outsourcing critical components to suppliers may open
up opportunities for competitors.
• Outsourcing implies that companies lose their ability to
introduce new designs based on their own agenda rather
than the supplier’s agenda.
• Outsourcing the manufacturing of various components to
different suppliers may prevent the development of new
insights, innovations, and solutions that typically require cross-
functional teamwork.
• Loss of control over suppliers
• Loss of control over product quality
• Loss of control over demand and delivery
• Loss of control over price
1-170
170
Procurement Strategy
• Insourcing vs. outsourcing decision procedure
• Make-buy analysis
• Evaluation of a product or service relationship to firm’s core
competencies
• Analyzing financial benefits
• Various costs (TCO analysis for both)
• Analyzing qualitative factors
• Loss of control over quality
• Supply risk (loss of control over demand and delivery)
• Product shortages and delays
• Loss of product intellectual property
• Potential price increase
• Product safety problem
• Harms on firm’s reputation
1-171
171
57
Procurement Strategy
• Alternative procurement strategies
• User buy
• The end users in the firm purchase needs
• For low cost items
• Volume consolidation
• Reducing total number of suppliers while minimizing supply
risk
• Increases buyer’s negotiation power in relation to supplier.
• Reduced cost due to supplier’s economies of scale
and economies of scope.
• Higher service level (lowering stockout risk) due to
supplier’s higher capacity.
• Higher supply risk
• Rigorous supplier selection and certification programs required.
• Not necessarily a single supplier but a few suppliers
1-172
172
Procurement Strategy
• Alternative procurement strategies (cont)
• Supplier operational integration
• Building partnerships
• Sharing information and knowledge
• Identifying linked processes and shared opportunities for
improvement.
• Different levels of supplier operational integration
• Buyer shares sales and orders information with suppliers.
• Buyers and suppliers working together to redesign linked
processes for reducing order time and communication
errors.
• Eliminating redundant tasks performed by both the buyer
and supplier.
• Continuous replenishment program
• Vendor managed inventory
• Can provide incremental savings of 5% to 25% over the
benefits of volume consolidation
1-173
173
Procurement Strategy
• Alternative procurement strategies (cont)
• Value management
• Early supplier involvement (ESI) in product design
• Reducing complexity
• Value engineering
Figure 6.2 Flexibility
and Cost of Design
Changes
1-174
174
58
Procurement Strategy
• Procurement Strategy Portfolio
• Through spend analysis
• Volume consolidation
or Supplier
operational
integration
• User buy
1-175
175
176
Manufacturing
• The four basic manufacturing processes
• Job shop creates a custom product for each customer.
• Batch process manufactures a small quantity of an item
in a single production run.
• Line flow process has standard products with a limited
number of variations moving on an assembly line
through stages of production.
• Continuous process is used to manufacture such items
as gasoline, laundry detergent and chemicals.
• Modifications of the above can create new options.
• Mass customization produces a unique product quickly and
at a low cost using a high volume production process.
1-177
177
59
Manufacturing Strategies
• Manufacturing strategies should match market requirements.
• Market requirements
• Mass marketing or one-to-one marketing
• Engineer to Order (ETO)
• is used when products are unique and extensively customized for
specific needs of individual customers.
the
• Nothing done until a customer order arrives
• Make to Order (MTO)
• Customer order based on a standardized design.
• Supplier prepare raw materials in advance.
• relies on relatively small quantities, but more complexity
• R e q u ir e s m u ch interaction with customer to work out design
s p e c if ic a ti on .
and
• Usually shipped direct to customer.
• Assemble to Order (ATO)
• i s w h en
ab rea sn eo ct o m p o e nt s a r e m a d e , s t o c ke d to
a s s e m b le d u nt il c us t o m e r o r d e r i s re ce
fo recast, but products
ive d
• features economies of scale, large volumes, long production runs, low
variety, and distribution channels.
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Manufacturing Strategies
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Manufacturing Strategies
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60
Mass Customization
• Takes advantages of MTO and MTS
Postponement
or ATO
• Product/Process Characteristics:
• Modular or adjustable product building blocks
• Predictable components/functions interactions
• Standardized process/skill building blocks
• Reasonable lead times, steps, work content
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• Six Sigma
• Focused on finding CTQ (critical to quality)
• CTQ has the highest impact on financial performance
• Quality improvement through elimination of defects and variation
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Design-for-Logistics
• Design for logistics includes the requirements and framework for
logistical support in the early phases of product development.
• Considers
• What we are going to make.
• How we are going to make it.
• What logistics capabilities do we need.
• How we are going to integrate our suppliers into the process.
• Any subassembly manufacture by suppliers.
• The need for outsourcing of some parts or assemblies.
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61
Design-for-Logistics
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Study Objectives
• Explain the dimensions of product and service quality.
• Explain the basic conceptual elements of TQM.
• Explain three costs of quality.
• Explain why the procurement became a strategic activity of a firm.
• Explain the objectives of the procurement.
• Explain the benefits and risks of outsourcing.
• Explain about make-buy analysis.
• Explain about four alternative procurement strategies and the portfolio.
• Explain three ways of logistics to implement procurement.
• Explain the characteristics of four manufacturing strategies with their
performance cycles.
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CHAPTER 7:
Inventory
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62
Overview of Chapter 7
• Inventory functionality and definitions
• Inventory carrying cost
• Planning inventory
• Managing uncertainty
• Inventory management policies
• Inventory management practices
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63
Inventory Functionality and Definitions
• Dimensions of inventory risk
• Time duration or depth: long or short
• Breadth of commitment: number of products
• Manufacturers or wholesalers
• Inventory risk is long but not broad.
• From raw materials to sales (consignment inventory)
• Retailers
• Inventory risk is short but broad.
• Dealing with many different types of products.
• Inventory turnover ratio is a main issue.
• Turnover ratio = (total revenue)/(average inventory)
• Retail markets deal with 50,000 SKUs to 70,000 SKUs
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• Inventory functionality
• Economies of scale
– Purchasing advantages
– Transportation advantages
– Manufacturing advantages
• Balancing supply and demand
– Seasonality/Speculative
– Maintaining supply sources
• Buffering against uncertainty
– Uncertainty in demand
– Uncertainty in supply
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64
Inventory Functionality and Definitions
• Inventory definitions
• Service level
• Performance target
• Measurements
• Case fill rate, line fill rate, order fill rate, or any
combination of this.
• An Order example
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Average
inventory
Order cycle
Reorder
point
Time
Receive Place Receive Place Receive
order order order order order
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65
Inventory Functionality and Definitions
• Inventory definitions
• Average inventory across multiple performance cycles
• Usage rate: 10 units per day
• Order quantity, average inventory, and reorder point in days?
• How many purchases in a year if 240 working days a year is
assumed?
• Lead-time? 5 days
• Inventory turnover? 2400units/100=24
200
Order
10 per day, Usage rate
quantity
100
Average
inventory Order cycle
50
Reorder
Point
Time
Lead time
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• Independent demand
• Final good’s demand that will be delivered to customers.
• Dependent demand
• Demand that will be used for producing independent demand.
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Inventory Insurance
service
costs Taxes
Obsolescence
Inventory Damage
risk costs
Pilferage
Relocation costs
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66
Inventory Carrying Cost
• Capital cost
• Prime (loan) interest rate – lower bound
• Return on investment (ROI)
• Taxes
• Sales tax = (Sales revenue – Purchase cost – Operational cost)*Tax rate
• Purchase cost = (Purchase quantity – Average inventory)*unit price
• Insurance
• risks over losses (natural disaster or stolen loss)
• Depending on product characteristics and facility characteristics
• Obsolescence
• Decreases of product value through decays, or changes in
customer preference
• Storage (holding or carrying)
• Facility expenses
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Planning Inventory
• When to order
• Determining reorder point
𝑅 = 𝐷×𝑇 where 𝑅: Reorder points in units
D: Average daily demand in units
T: Average performance cycle length in days
if D = 20 unit/day and T=10
days R = 20 x 10 = 200
units
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Planning Inventory
• How much to order
• EOQ (economic order quantity) model
• Total cost = Inventory carrying cost + Ordering cost
• EOQ is the quantity that makes the same ordering cost as the inventory
holding cost.
2𝐶𝑜𝐷
𝐸𝑂𝑄 =
𝐶𝑖𝑈
Holding
cost
𝐷: 𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑 (𝑣𝑜𝑙𝑢𝑚𝑒)
𝑈: 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝐶𝑜: 𝑜𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑜𝑟𝑑𝑒𝑟
𝐶𝑖: 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑟𝑎𝑡𝑒 𝑜𝑛 𝑈
Q Holding
cost
Ordering
cost
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Planning Inventory
• How much to order
• EOQ (economic order quantity) model
2𝐶𝑜𝐷 2(19)(2,400)
𝐸𝑂𝑄 = 𝐶𝑖𝑈 = 0.20(5.00) = 302 ≅ 300
300 2,400
𝐷: 2,400 𝑇𝐶 = 2 0.2 5.00 + 300 19.00
𝑈: $5.00
= $152 + $150 = $302
𝐶𝑜: $19.00 𝑝𝑒𝑟 𝑜𝑟𝑑𝑒𝑟
𝐶𝑖: 20%
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Planning Inventory
• How much to order
• Assumptions of EOQ model
• All demand is satisfied.
• Rate of demand is continuous, constant, and known.
• Replenishment performance cycle time is constant and known.
• There is a constant price of product that is independent of order quantity
or time.
• There is an infinite planning horizon.
• There is no interaction between multiple items of inventory.
• No inventory is in-transit.
• No limit is placed on capital availability.
• Relationships
• EOQ is obtained at the point that the ordering cost is the same as the
holding cost.
• Average inventory is one-half of order quantity.
• The value of inventory unit will have a direct relationship with
replenishment order frequency. Higher the value, more frequent order.
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68
Planning Inventory
• How much to order (EOQ)
• Volume transportation rate
• Transportation cost is considered as the ordering cost in EOQ.
• However in practice, the greater the order quantity, the lower ordering
cost due to lower transportation cost per unit.
• If transportation cost is separated from ordering cost just like the
example the below
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Planning Inventory
• How much to order (EOQ)
• Quantity discount
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69
Inventory Management Policies
• Inventory control
• Periodic review
• FOI(fixed order interval) model
• 𝑅𝑂𝑃 = 𝐷 𝑇 + 2𝑃 + 𝑆𝑆
• 𝑃: Review period in days
• Example) 𝐷 = 20, 𝑇 = 10, 𝑃 = 7, 𝑆𝑆 = 0,
• 𝑅𝑂𝑃 = 20 10 + 3.5 = 270 𝑢𝑛𝑖𝑡𝑠
• Inventory level with FOI
0Q 𝑃×𝐷
• 𝐼𝑎𝑣g = + +
2 2
• Example)
𝑆𝑆 OQ = 300, 𝐷 = 10, 𝑃 = 7, 𝑆𝑆 = 0,
300 7×10
• 𝐼
𝑎𝑣g = 2
+ + 0 = 185 𝑢𝑛𝑖𝑡𝑠
2
• Generally requires higher inventory level than perpetual review due to the
time interval.
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Available capacity
(Plant warehouse requires 100,
and the rest 500 can be allocated.
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Inventory Management Policies
• Planning methods
Figure 7.12
• Requirement planning Conceptual design
of Integrated
MRP/DRP system
MRP
DRP
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71
Inventory Management Policies
• Collaborative Inventory Replenishment
• Focuses on streamlining the flow of goods within the supply
chain mainly between retailers and wholesales (or manufacturers).
• Depending on collaboration level different techniques are used.
• QR(quick response)
• Sharing retail sales information in realtime.
• Reducing the time from order to delivery
• VMI (vendor managed inventory)
• Elimination of order placements in addition to QR.
• Redundant tasks of buy’s are eliminated.
• Warehouses of buyers are often eliminated.
• Inventory ownership at buy’s places is taken by suppliers.
• PR(profile replenishment)
• More rights are given to suppliers
• The responsibility for forecasting future demands is given to supply.
• A category profile includes sizes, colors, and associated products that
usually sell in a particular type of retail outlets.
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72
Inventory Management Policies
• Postponement
• Reduces inventory risks of anticipatory supply chain.
• Enabled through information technology.
• Two types of postponement strategies
• Manufacturing, or form postponement
• Geographic, or logistic postponement
• Manufacturing postponement
• Manufacturing up to a certain stage and stock up WIP, and waiting
customer order specifications are known (customer
until
commitments).
• Up to the manufacturing stage that can utilize the benefits of the
economies of scale
• Finalizing manufacturing at the warehouse (consolidation).
• Example) mixing colors of paints at retail stores, HP power cable
• Geographic postponement
• mass-produced products in a warehouse and distribute them when
customer's needs are known.
the
• Facilitated by increased logistical system capability.
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73
Inventory Management Practices
• Segment strategy definition
• Uses a different strategy for different classification.
• The strategy includes service objectives, forecasting
methods, management technique, and inventory review
cycle.
• Product segments have different importance.
Table 7.20 Integrated strategy
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Study Objectives
• Explain the definitions used for inventory management.
• Explain main functionalities of inventory.
• Explain the principles of the EOQ model.
• Explain how to determine the ROP.
• Explain the elements of inventory carrying cost.
• Explain the principles of management uncertainties.
• Explain the difference between periodic review and perpetual
review.
• Explain the inventory planning methods with DRP and MRP.
• Explain the methods of collaborative inventory replenishment.
• Explain two postponement strategies.
• Explain inventory classification methods and different strategies
with different classifications.
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CHAPTER 8:
Transportation
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74
Overview of Chapter 8
• Transportation functionality and participants
• From regulation to a free market system
• Transportation modal structure
• Specialized transportation services
• Transportation economics and pricing
• Transportation operations management
• Documentation
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75
Transportation Functionality and
Participants
• Participants
• Shipper and consignee (receiver)
• have a common interest in moving goods from origin to
destination within a given time at the lowest cost.
• Key elements: pickup and delivery, transit time, product damages
or losses, accurate invoicing, accurate and timely information
exchange (ASN-advanced shipment notification).
• Carriers
• desire to maximize their revenue for movement while
minimizing associated costs.
• Agents (brokers and freight forwarders)
• facilitate carrier and customer matching.
• Government
• desires a stable and efficient transportation environment to support
economic growth.
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76
Transportation Modal Structure
• Freight transportation structure consists of the rights-of-way, vehicles,
and carriers that operate within five basic transportation modes.
• Rail
• Highway
• Water
• Pipeline
• Air
• Relative importance of each transportation varies across countries.
Table 8.1 The nations freight bill (billions) - USA
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• Vietnam in 2021
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77
Transportation Modal Structure
• Rail
• Rail-road once ranked first in the number of miles in service but significantly
reduced recent years.
• Appropriate for transporting large tonnage over long distances.
• High fixed cost but low variable cost
• Main products in the US – automobiles, Farm equipment, Machinery (bulk or
heavy industry )
• Intermodal service – combining rail with road transportation services
• Truck
• Dominating mode in manufacturing and distributive trades.
• Highest flexibility in size, maneuverability, and roadways
• Relatively lower fixed cost but higher variable cost
• Appropriate for small shipments moving short distances.
• Obstacles – high replacement and maintenance costs, safety, increased
regulations, fuel cost, and driver shortages.
• Increased driver pay, improved line-haul scheduling, computerized billing systems,
mechanized terminals, tandem operations (hauling two or three trailers by one truck)
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Transportation Modal Structure
• Modal comparative characteristics and capabilities
• Modal comparative characteristics
• Speed is the elapsed movement time from origin to destination
• Availability is ability of a mode to service any given pair of locations
• Dependability is the potential variance from expected delivery schedule
• Capability is the ability to handle any load size or configuration
• Frequency is the quantity of scheduled movements a mode can handle
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79
Specialized Transportation Service
• Increased intermodal or more integrated logistics services
• Transportation services can be improved by combining modes.
Numerous specialized services are now considered
commonplace to today’s consumer.
• Parcel service
• Last mile delivery or small package delivery service
• Significantly increase recent years due to on-line shopping.
• The trend is likely to last for a while (Post COVID 19).
• Main players in parcel service in the US or world.
• FedEx, UPS, USPS
• Main players in ROK.
• CJ Logistics (48.2%), Lotte Logistics (13.1%), HanJin Logistics (12.5),
Korean Postal Service (8.4), Logen (7.3%), others (10.0%) in 2018
• Fees are charged by speed, distance and weight in the US.
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80
Specialized Transportation Service
• Non-operating intermediaries (cont)
• Shipper association
• The roles are similar to freight forwarder but it is nonprofit
business organization.
• Members in a specific industry.
• Purchases from a common vendor in one area.
• Broker
• Intermediaries that coordinate transportation arrangements for
shippers, consignees, and carriers.
• Brokers typically operate on a commission basis.
• Provide extensive services such as shipment matching,
rate negotiation, billing and tracing
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81
Transportation Economics and Pricing
• Other pricing factors
• Stowability
• Refers to how product dimensions fit into transportation equipment.
• Items having a rectangular shape is much easier to stow than a
odd- shape.
• Nest-ability, length, etc.
• Handling
• Extra-cost required for special handling equipment
• Liability
• Insurance fee for product characteristics that can result in damage.
• Hazardous materials
• Market
• Transport lane – movements between origin and destination points.
• A back-haul load or empty return (deadheading)
• Two-way or balanced movement of loads is ideal.
• Depends on demand locations and seasonality
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245
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82
Transportation Economics and Pricing
• Pricing freight
• Freight classification (cont)
• The class rate is a relative index of 100 for each product.
• From 35 to 500. Higher the class rate, the more expansive
transportation rate. The product with 200 is twice more
expansive than that of 100.
• Rating criteria
• Product groups or classifications
• TL or LTL
• Packaging
• Shipment size
• Transport mode
• Significant savings may be realized by obtaining an
improved classification for a product.
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83
Transportation Economics and Pricing
• Pricing freight
• Assessorial service charges (table 8.9)
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Transportation Operations
Management
• Planning, execution, and administrative responsibilities
• Transportation management system (TMS)
• Capabilities and Functionalities
• Select transportation modes, plan loads to travel, consolidate shipments,
route vehicles, and efficiently utilize transportation capacity.
• Creation and facilitation of a transportation plan that increases the
likelihood of an on-time delivery while achieving the most optimal cost
performance.
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Transportation Operations
Management
• Operations
• TMS functionality related to operations
• Equipment scheduling and yard management
• Serious cost and bottleneck can result from waiting to be loaded or
unloaded.
• Load pickup and delivery arrangements.
• YMS – Yard management system is used to reduce waiting times of trucks
• YMS, WMS, and TMS work in collaboration to increase resource utilization.
• Load planning
• TMS optimizes the transport mode selection based on the size and
attributes of a given shipment.
• It determines a truck to maximize cube utilization.
• Shipment routing
• Delivery routing based on delivery appointments, preferred road type, and
projected traffic conditions.
• Static routing and dynamic routing
• Track and trace
• ASN (advanced shipment notice)
• Enhances shipment visibility and information exchange
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84
Transportation Operations
Management
• Operations
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Transportation Operations
Management
• Consolidation
• Traditional approach
• Combines LTL or parcel shipments moving to a general location.
• The number of trips can be reduced.
• New challenges of consolidation
• To reduce inventory, synchronizing replenishment with demand.
• Smaller orders with frequent shipments
• Faster delivery time required
• Reactive consolidation
• Does not attempt to influence the composition and timing of movements.
• Under given shipments, it seeks to combine individual orders into larger
shipments (FedEx and UPS parcel delivery).
• Market area consolidation
• Shipments departing from one location and heading for a similar final destination are
pooled together.
• Scheduled area delivery
• Holds shipments for specific markets for delivery on a selected day.
• Pooled delivery
• A Freight forwarder, public warehouse, or transportation company arranges the
consolidation for multiple shippers servicing the same market area.
• Example) grocery suppliers sending their shipments to an ISP, which then make a
single delivery.
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Transportation Operations
Management
• Consolidation
• Proactive consolidation
• More aggressive approach to increase efficiency
• Preorder planning
• Consolidation is considered from the ordering stage (buy participation).
• Quantity and timing of an order are considered to facilitate consolidation.
• Multivendor consolidation
• Combines two or more vendors to increase efficiency.
• Vendors in the same geographical area serving the same customers
• Considering the characteristics of the products
• Heavy products first and loading the second products on the top of the
first products.
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85
Transportation Operations
Management
• Negotiation
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Documentation
• Three primary type of documentation
• Bill of landing
• Freight bills
• Shipment manifests
• Bill of landing
• The basic document for purchasing transport services
• Serves as a receipt describing products and quantities shipped.
• Also includes all responsibilities related to timing and ownership.
• Is often used for damage claims.
• Specifies terms and conditions or carrier liability and documents responsibility
for all involved.
• Freight bill
• A carrier’s method of charging transportation services.
• Either prepaid (shipper) or collect (receiver)
• Shipment manifest
• Lists individual stops or consignees when multiple shipments are placed on a
single vehicle.
• Includes the stops, bill of landing, weight, and case count for each shipment
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Product Pricing and Transportation
• The terms and conditions of pricing determine which party
has responsibility for performing logistics activities.
• Product pricing is an important aspect of marketing strategy
that directly impacts logistical operations, transportation
costs can play a large part in pricing strategy.
• A major recent trend is to debundle the price of products
and materials so that transportation becomes a separate
visible item (pricing unit).
• The focus of the textbook is on the relationship between
pricing, logistical operations, and transportation decisions.
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Product Pricing and Transportation
• Delivered pricing(cont)
• Phantom freight
• Occurs when buyers pay more than actual logistical expenses.
• Freight absorption
• Occurs when sellers pay more than actual logistical expenses.
• Base-point pricing simplifies the price quotation but has some
negative impact on customers due to phantom freight or freight
absorption.
• Pickup allowances
• Equivalent to purchasing FOB origin, however seller provides a
discount to buyer to account for transportation expense.
• The only difference is the discount.
• Shippers (sellers) don’t need to take care of small shipment.
• Buyers gain control over the products earlier and can achieve a
higher utilization of transportation equipment and drivers.
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Study Objectives
• Explain transportation functionalities.
• Explain participants of transportation and their main issues.
• Explain the main purposes of the transportation regulations.
• Explain the characteristics of transportation modes and the
modal structure.
• Explain about ISP.
• Explain about specialized transportation services.
• Explain the principles of transportation economics and
pricing.
• Explain the main functions of the TMS (transportation
management system).
• Explain the tree documents used for transportation.
• Explain the principles of product pricing and transportation.
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CHAPTER 9:
Warehousing, Material
Handling, and Packaging
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88
Overview of Chapter 9
• Strategic Warehousing
• Warehouse Ownership Arrangement
• Warehouse Decisions
• Warehouse Operations
• Primary Warehouse Operations
• Secondary Warehouse Operations
• Systems
• Packaging Perspectives
• Packaging for Handling Efficiency
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266
Source: Tompkins
et al. 2013
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Strategic Warehousing
• Inventory stored in warehouse serves as a bridge
between production and marketing.
• After World War II, the strategic storage is recognized as
an opportunity to increase sales.
• State-of-art warehouse systems support replenishment of
the retail industry (distribution center).
• Manufacturing uses warehouses to implement JIT or
stockless production strategies (e.g. postponement).
• Marketing side uses warehouses to increase efficiency of
order fulfillment (consolidation and cost reduction).
• An important goal in warehousing is to maximize
flexibility which can be facilitated by information
technology.
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Strategic Warehousing
• Service benefits
• Warehouse can improve service in three ways – spot stocking,
full-line stocking, value-added services.
• Spot stocking
• A spot stocking strategy stores a narrow product assortment in a
large number of warehouses for a limited time period.
• Manufacturers of highly seasonal products often use spot stocking.
• Selected products are positioned or spot-stocked at local
warehouses for a peak season.
• Full-line stocking
• The difference between spot-stocking and full line stocking is
the degree and duration of warehouse utilization.
• The full line stocking is a traditional use of warehouse.
• Warehouses provide one-stop shopping capability for goods
from multiple manufacturers.
• The full line stocking warehouse improve service by reducing
the number of suppliers.
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Strategic Warehousing
• Service benefits
• Value-added services
• Value-added vs Non-value-added
• Postponement – completing packaging, labelling, and light
manufacturing.
• Canned vegetables in a manufacturing plant (brights) are labelled and
packaged based on a customer’s order in a warehouse.
• Benefits of postponements – reducing risks and reducing inventory levels
• Other value-added services (Table 9.1)
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Strategic Warehousing
• Economic benefits
• Reducing transportation cost and operational cost through consolidation
and break-bulk, sortation, seasonal storage, and reverse logistics.
• Consolidation and break-bulk
• Enable to reduce transportation cost through large shipments.
• Unit transportation cost can be reduced through consolidation.
• The break-bulk receives a large shipment and arranges delivery
to multiple destinations.
Figure 9.1
Consolidation
and break-bulk
arrangements
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Strategic Warehousing
• Economic benefits
• Sortation
• Reconfiguring freight as it is being transported from origin
to destination.
• Three types of assortments – crossdocking, mixing, and assembly
• Crossdocking
• Assorting freights from multiple origins into multiple destinations without
storing in shelves.
• Generally used for fast-moving materials.
• Mixing
• An end result is similar to crossdocking but it uses a mixing facility.
• Inbound products are mixed with stored products to assortments.
• Reducing overall product storage while achieving customer specific
assortments.
• Assembly
• Commonly used to support manufacturing operations.
• One type of value-added activity
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Strategic Warehousing
• Economic benefits
• Seasonal storage
• Supporting marketing efforts and increasing utilization of production
facilities.
• Reverse logistics
• Much more difficult to handling due to variety of sizes and
conditions with small quantities.
• Requires significant manual inspection and sortation
• Types of reverse logistics
• Return management – accommodating unsold products or recalls.
• Remanufacturing and repair – refurbished products
• Remarketing – used equipment
• Recycling – decomposing and distribution for reproduction.
• Disposal
• Hazardous Materials & Government Regulation
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275
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Warehouse Decisions
• Site selection
• Procedural decision
• General area and then specific warehouse location
• General area determines country, state, or region.
• Specific location concerns service ability and cost.
• Criteria
• Land cost, building cost, operating cost (transportation cost, taxes, labor
cost, utility cost, insurance), room for expansion, availability of utilities, etc.
• Design
• Considers product movements
• Ideal design is one floor since vertical move requires
extra equipment such as elevators, conveyors, or
lifters.
• Maximizing cubic utilization.
• Should consider material handling equipment or regulations
• lift trucks or rack design and fire safety
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Warehouse Decisions
• Design (cont)
Figure 9.3 Basic
Warehouse Design
(facilitating a straight
flow of materials)
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Warehouse Decisions
• Product-Mix analysis
• Used to identify total space requirement and capacity
• Annual demands, weights, and packaging of each product type
• Total size, cube, and weight of average order
• Expansion
• Typically 5 to 10 years horizon is considered.
• Three to five times of initial capacity
• Handling system (equipment)
• Basic driver of warehouse
• Handling equipment and technology
• Layout
• Designing the structure of warehouse
• Facilitating continuous flow and shortest travel distances
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Warehouse Decisions
• Layout (cont)
• Difficult to be generalized and usually customized to
specific handling requirements
• Receiving and shipping areas have a key for efficiency.
Figure 9.4
Layout A and B
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Warehouse Decisions
Warehouse
example in
grocery industry
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Warehouse Decisions
• Sizing
• Projection of total volume expected to move through
the warehouse during a given horizon.
• Consider normal or peak inventory
Probability
Volume demand
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Warehouse Operations
• Primary warehouse operations
• Product handling and storage
• Receiving, put-away into storage, move while storage when
necessary, assembly into unique customer orders, and execute
customer shipments
• Secondary warehouse operations
• Make warehouse operations complete and efficient
• Main concerns
• Inventory accuracy
• Facility security
• Safety
• Maintenance
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Source: Tompkins
et al. 2013
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Temporary Storage
(Urgent Items) Bulk Storage
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95
Primary Warehouse Operations
Order picking is the most critical function in distribution
operations.
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Primary Warehouse Operations
• Product handling considerations
• Basic handling considerations
• Handling system classification – mechanized, semi-automated,
automated
Table 9.2 Principles of handling
• Mechanized systems
• Lift trucks
• Towlines
• Tractor trailers
• Conveyors
• Carousel
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Carousel
Tractor trailers
https://people.engr.ncsu.edu/kay/mhetax/index.htm
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Primary Warehouse Operations
• Semi-automated systems
• https://youtu.be/YE_xHrsA0v0
• https://youtu.be/Y-lBvI6u_hw
• Flow racks https://youtu.be/mb2S3UkiWRs
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Primary Warehouse Operations
• Special handling considerations
• E-Fulfillment
• Both on- and off-line retailers have been forced to adopt e-trail for their
order processing procedures to meet the specific needs of this marketplace.
• Should process a large number of very small orders.
• Picking operations are difficult to achieve scale economics.
• Dealing with a wide range of products with high inventory
• Consolidation and shipping require highly intensive tasks.
• Increased customer expectation
• Higher speed and accuracy
• Return processing
• One of the major drivers of on-line shopping growth
• Up to 30% of orders are returned
• Manual handling is unavoidable
• Separated flows of materials by ISP to reduce chance of errors and
contamination
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Secondary Warehouse Operations
• Accuracy and audits
• Matching physical inventories with data (book) in IT system
• Physical inventory counting is not desirable
• Must close the warehouse for inventory counting.
• Significant physical labor cost required
• Cycle counting
• Selective audit of certain number of SKU’s or bin location on
a predetermined schedule.
• Day-to-day operation is not disturbed.
• Security
• Pilferage
• Single gate control, vehicle control, CCTV, RFID etc.
• Damage
• From careless handling
• Stacking height, temperature or humidity control etc.
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Systems
• Warehouse Management System (WMS)
• Transaction management
• All the activities in a warehouse are supported and recorded.
• Product ID, quantity and locations are updated based on a transaction.
• Warehouse monitoring and transaction records
• Coordinating work procedures
• Order picking, receiving, inspection, shipping, put-way etc.
• Oder selection (picking)
• Discrete selection – one customer order is prepared by an employee
• Wave selection (batch selection)
• Multiple orders are picked during one picking trip.
• Administrative and maintenance coordination
• Managing value-added services
• Packaging, labeling, kitting, and setting up displays
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Systems
• Warehouse Management System (WMS)
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Systems
• Warehouse Management System (WMS)
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Systems
• Yard Management System (YMS)
• Managing inbound and outbound transportation equipment
• Managing warehouse yard
• Location of trucks in the yard and their inventory
• Scheduling and dispatching receiving and shipping docks
• Accessing sequence of trucks and time of access
• Scheduling and dispatching trucks
• Accessing dock for loading and unloading
• Terms
• Scheduling
• Tasks or jobs are planed in advance (determining which
employees or machines process which products at what
time.
• Dispatching
• Tasks or jobs are assigned to employees or machines in realtime.
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Systems
• Information Directed Systems
• RF Wireless (Wi-Fi) and RFID
• RF Wireless provides directions in real-time for mechanized
equipment with a driver
• RFID enables to synchronize locations of mechanized material
handling equipment in WMS.
• Two-way communication is available.
• Improving speed and flexibility of operations
• Light directed
• Pick-to-light or pull-to-light
• Guides order pickers to pick upon light signal.
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Packaging Perspective
• Focuses of packaging
• Consumer (B2C) – Marketing point
• Industry (B2B) – Logistics
• Unit load principle
• All cartons or products should be grouped into a handling unit.
• Principle of Unit Load states that, “it is quicker and economical
to move a lot of items at a time rather to move each one of
them individually”.
• Unit load should be large enough to provide economies of scale
but light enough for safe handling.
• One size fit all – modular compatibility (Figure 9.8)
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Packaging Perspective
• Unit load principle
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Packaging for Handling Efficiency
• Package design
• Standard configuration (cubic shape) and order quantities
facilitates logistical efficiency.
• E.g. Cube minimization strategy – IKEA
• Unitization
• Forming unit load (unitization or containerization)
• Handling and transportation efficiency
• Rigid Devices – extra carton for unitization
• Flexible Devices – pallets or slip sheet
• Communication
• Universal product code (UPC) – barcode
• Quick response code (QR) – QR code
• Electronic product code (EPC) - RFID
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Study Objectives
• Explain benefits of strategic warehousing.
• Explain characteristics of warehouse ownership arrangements.
• Explain critical issues related to warehouse decisions.
• Explain typical material flows in a warehouse.
• Explain about product handling in primary warehouse
operations.
• Explain material handling equipment used in primary
warehouse operations.
• Explain product handling considerations with material
handling systems.
• Explain about secondary warehouse operations.
• Explain information systems related to warehouse
management.
• Explain principles of packing to increase efficiency.
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Facilities Planning
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Introduction
Facilities Planning Capacity
Expansion
Facility
Location
is a strategic part
Plan Strategic
Planning
Excellence
Material Flow Pattern
Facilities Planning Facility
Procedure (Left) Block Layout
Layout
Machine Layout
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(1) Material Flow (2) Block Layout (3) Detailed Layout and (4) Material Handling
Pattern or Layout Type Machine Layout Design
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Layout Types
Determination of Layout Types
Layout types include product layout, process layout, cell layout, and product fixed layout
(refer to the picture below).
Most manufacturing processes utilize product layout, process layout, or something in
between.
Product Layout
(Flow shop)
Cell Layout
Process Layout
(Job shop)
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Layout Types
Characteristics of Layout Types
Product Layout
Advantages in WIP/cycle time, Factors Product Layout Process Layout
setup time, material handling, WIP/Cycle Time Low High
space efficiency, throughput,
and ease of general Setup Low High
management and accounting Material Handling Low High
processing. Space Efficiency High Low
Process Layout (Transportation)
Advantages in investment cost Scheduling/Dispatching Simple Complex
(number of machines), Investment Costs High Low
utilization, and flexibility.
Utilization Low High
Cell Type Layout
Has mid-level performance Flexibility Low High
between process and product *Throughput High Low
layout in all evaluation factors Operational Costs Low High
Cell formation possible through Accounting Complexity Easy Difficult
DCA (direct clustering
algorithm) *Throughput: speed of production
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Layout Types
Determination of Layout Types
Factors that affect the decision of layout type include product diversity, product life cycle,
and facility/process stability.
If the Pareto principle is applicable through Pareto analysis of product diversity, the
product layout is appropriate. If not, the process layout is appropriate.
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Block Layout
Determination of Layout Types
Based on the material flow pattern and layout type determined above, a
block layout is developed to determine the arrangement of each process
group.
The purpose of block layout development is to review as many alternatives
as possible in a short period of time, so as many alternatives as possible
are sketched and reviewed.
When developing alternatives, a block layout is developed while maintaining
the input/output location and material flow patterns.
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Importance of Facilities
Planning
Difficult to Change
• Reconstruction Cost
• Opportunity Cost due to Downtime
High Risk High Return
• Large Investment
• Upstream of Operational Efficiency
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Input Data of Facility Planning
Product Design
• Product design creates input data for facility planning
• Drawings and product specifications
Process Design
• For finished product, half-finished, parts, and raw materials
• Designing process steps and sequences
• Obtaining a list of equipment types
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Input Data
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Input Data
Activity relationship
chart
Determine proximities
of processes
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CHAPTER 10:
Global Supply Chain
325
Global Economics
• Globalization became a main business
environment regardless of sizes of firms.
• Drivers of globalization (Simchi-Levi et al. 2003)
• Global cost forces – low wages, and supply
advantages (parts and raw materials).
• Global market forces – products and assets.
• Technological forces – better access to
technologies and management know-hows.
• Risks of globalization
• More demanding logistics operating environments
• Security considerations
• More complex total cost analyses
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Global Economics
• Table 10.1 Rational for globalization
Objective Rationale
Increase revenue • Open up more markets
• Expand beyond competitors
• Obtain accessibility to markets that limit access
without local operations
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Global Economics
• Table 10.1 Rational for globalization
Objective Rationale
Reduce firm’s • Obtain local or regional tax benefits related to
global tax property, inventory, or income
liability • Obtain reductions in value-added-taxes due to localized
production or other value added services (i.e.,
packaging inventory management, customization)
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329
• Rep. of Korea
• 164,311 billion won (about 150 billion
USD)
• 9.5% of GDP in 2017
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Global Supply Chain Integration
• Globalization Strategies
• Four strategies: No international strategy, Multi-domestic strategy, Global
strategy, Transactional strategy
• No international strategy
• No international businesses except for sourcing or delivery
• Minimizes complexity and minimum coordination
• Limited growth opportunity
• Multi-domestic strategy (multi-national corporation-
MNC)
• Have separate headquarters (semi-autonomous headquarters)
in different countries, thereby attaining more localized
management.
• A strategy by which companies try to achieve maximum local
responsiveness by customizing both their product offering
and marketing strategy to match different national conditions.
• The firm can focus on local markets while minimizing overall
coordination requirements.
• Disadvantage - at the higher cost of forgoing the economies
of scale from cost sharing and centralization.
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Global Supply Chain Integration
• Globalization Strategies
• Evolvement of no international strategy,
Figure 10.1
Generic
international
strategies
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Global Supply Chain Integration
• Globalization Strategies
• Global strategies and logistics decisions
• Sourcing and resource choices are influenced by artificial constraints
such as use restrictions, local content laws, or price surcharges.
• Use restriction – limitation imposed by government (chemical materials)
• Local content law – restriction to use resources within local economy.
• Price surcharges – duties (import taxes) or tariffs (duty rates)
• Logistics to support global operations increases planning complexity.
• Higher uncertainty, infrastructure constraints, time differences, language
differences, and government restrictions
• Global operations extend domestic logistics systems and practices to
a broad range of locations and operating environment.
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Global Supply Chain Integration
• Managing the global supply chain
• Operational considerations
• Requires multiple Languages for both product and documentation
• Multi-lingual documentation and postponement are used to reduce inventory
requirements.
• E.g. Minimizing the use of language for products (Apple and IKEA)
• Unique national accommodations
• Performance features – product functionalities (e.g. speed or process
constraints)
• Technical characteristics – power supply and documentation
• Environmental considerations - chemicals
• Safety requirements – automatic shutoffs and specialized documentation
• Sheer amount of documentation required
• Order contents, transportation, financing, and government control
• Table 10.4
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Global Sourcing
• Rational for international sourcing from low-cost
countries
• Reducing manufacturing cost (low labor cost) results
in increasing logistics cost
• Reducing sourcing cost (low cost suppliers) results
in increasing competitive pressure on domestic
suppliers.
• Reducing sourcing cost (low cost suppliers) results in
increasing the domestic supplier’s exposure (investment)
to state-of-art product and process technologies.
• Without a pressure from suppliers of low cost countries, domestic
suppliers will not invest new technologies due to significant assets
tied up in older technologies.
• Sourcing is to establish a local presence to facilitate sales
in the international country.
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Global Sourcing
• Modes of entry
• Four approaches (modes) for globalization
• Exporting and importing
• A firm sells its products either to an international firm for remarketing or to
a firm local in the target country.
• Licensing and franchising
• Franchising in a target country
• International joint venture
• Foreign direct ownership (investment)
• Table 10. 7 the characteristics, strengths, and weaknesses for each
entry mode
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Study Objectives
• Explain the rational for globalization.
• Explain about the four strategies of globalization including
their advantages and disadvantages.
• Explain how the no globalization strategy can be evolved into
other globalization strategies.
• Explain the five differences between domestic and
international operations.
• Explain the guideline for sourcing decisions.
• Explain about the four approaches (modes) for globalization.
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CHAPTER 11:
Network Design
347
Chapter Outline
• Enterprise facility network
• Warehouse requirements
• Systems concepts and analysis
• Total cost integration
• Formulating logistical strategy
• Other considerations in logistics network design
• Planning methodology
• Phase I: problem definition and planning
• Phase II: data collection and analysis
• Phase III: Recommendations and implementation
• Application of supply chain principles
• Strategy drivers
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116
Network Design
• Physical configuration and infrastructure of the supply
chain.
• A strategic decision with long-lasting effects on the firm.
• Decisions relating to plant and warehouse location as
well as distribution and sourcing.
• Key decisions (Simchi-Levi et al. 2003)
• Determining the appropriate number of facilities such as plants
and warehouses.
• Determining the location of each facility.
• Determining the size of each facility.
• Allocating space for products in each facility.
• Determining sourcing requirements.
• Determining distribution strategies, i.e., the allocation of customers to
warehouse
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Network Design
• Objectives
• Least total cost with maximum flexibility for services
• Design or reconfigure the logistics network in order to
minimize annual system-wide cost subject to a variety of
service level requirements (Simchi-Levi et al. 2003).
• Flexibility
• Achieving a high level of logistical process integration.
• Network integration of warehouse facilities
• Supporting relationships across the supply chain
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Enterprise Facility Network
• Early theories of location (cont)
• Alfred Weber (1928)
• Industrial location
• Weight losing products
• The material index is greater than 1 (weight losing), location tends
to be toward (closer) material sources.
• Ex. Electronics and chemical industries
• Centralized distribution strategy with relatively few plants or
distribution centers
• Weight gaining products
• The material index is less than 1, location tends to be toward the
market.
• Ex. Beverages or cotton
• A decentralized distribution strategy with many production or
distribution centers
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Warehouse Requirements
• Two types of warehouses due to specialized material
handling, inventory process requirements, and just in
time manufacturing process
• Supply facing warehouse
• Warehouse for raw materials or parts
• Demand facing warehouse
• Warehouse to support customers
• Three drivers of warehouses
• Procurement drivers
• Manufacturing drivers
• Customer relationship drivers
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Warehouse Requirements
• Procurement drivers
• Focuses on purchasing materials at the lowest total
inbound cost.
• The recent trend is the development of a limited number
of supplier relationships that can be operationally integrated
into a firm’s supply chain to reduce the total landed cost
while eliminating waste, duplication, and unplanned
redundancy.
• Supplier facing warehouse
• Manufacturing drivers
• Consolidating finished products for outbound customer
shipment.
• Proving customers with full-line product assortment on
a single invoice at truckload transportation rates.
• MTO (make-to-order) – supplier facing warehouse
• MTP (make-to-plan) – demand facing warehouse
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Warehouse Requirements
• Customer relationship drivers
• Providing customized inventory assortments to wholesalers
and retailers.
• Demand facing warehouse
• Rapid replenishment
• Replenishing retail inventories from warehouses close to retail stores.
• Market-based ATO (assemble-to-order)
• Common or undifferentiated components are stocked in warehouse
inventory in anticipation of performing customized manufacturing
assembly
or at the warehouse upon receipt of customer orders.
• Warehouse justification
• Lower total cost through consolidation
• Freight consolidation requires inventory to support assembly
of customized orders.
• Flow-through operation or cross-dock operations
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Total Cost Integration
• Transportation economics (cont)
• Network transportation cost minimization
• The generalized relationship of transportation cost and number of warehouses in a
network
• Whether to build a new warehouse or not is a matter of the total cost that has a trade-
off between transportation cost and inventory holding cost.
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Formulating Logistical Strategy
• Service sensitivity analysis
• Searching for improvement opportunities
• The basic service capabilities are changed by
• variation in number of warehouses
• change in one or more performance cycles to increase speed
or consistency of operations
• and/or change in safety stock policy.
• Location modification
• Changes in service time with additions of warehouses (Table 11.5)
• The numbers in the first row of the table are service
hours (performance).
• Incremental service is a diminishing function.
• To make the service level double (from 42% to 84%), 9 more warehouses
are required(from 5 warehouses to 14 warehouses) with 24-hour service.
• High degrees of service are achieved much faster for
longer performance intervals (rather than additions of
warehouses).
• The total cost associated with each warehouse addition to
the logistical network increases dramatically.
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Planning Methodology
• Market changes in logistics
require reevaluating logistics
network design
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121
Phase I: Problem Definition and
Planning
• Feasibility assessment
• Objectives
• to understand the environment, process, problems, and
performance characteristics of the current system.
• to determine what, if any modifications appear worthy
of consideration.
• Situation analysis
• Evaluating current logistics environment including
performance measures, characteristics, and information.
• Internal operation review
• Understanding existing logistics practices and processes.
• Understanding existing logistics capabilities and deficiencies.
• Table 11.7 illustrates an internal operation review.
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Table 11.7
Selected internal
review topics
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Phase I: Problem Definition and
Planning
• Feasibility assessment
• Situation analysis (cont)
• Technology assessment
• Focuses on the application and capabilities of key
logistics technologies including transportation, storage,
materials handling, packaging, and order processing.
• Technological abilities
• Potential for applying new technologies
• Objectives
• To identify advancements capable of facilitating effective
trade-offs with other logistics resources such as transportation
or inventory.
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Table 11.9
Typical
technology
assessment
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123
Phase I: Problem Definition and
Planning
• Feasibility assessment
• Cost/benefit estimate
• Final task of feasibility assessment
• Benefit analysis
• Service improvement: enhanced availability, quality, or capability
• Eventually increases loyalty of existing customers and attract new
business
• Cost reduction: reduction in financial or managerial resources, and
variable cost reduction.
• Cost prevention: eliminating involvement in programs and operations
experiencing cost increases.
• Risk analysis
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Phase II: Data Collection and Analysis
• Assumptions and data collection
• Defining analysis approaches and techniques
• Analytical approaches
• Spreadsheet (MS-Excel) analysis (e.g. inventory analysis in chapter 7)
• Simulation
• Software package, graphical
analysis available
• Design alternatives can be
simulated in advance
• https://youtu.be/-0pZY2wEwoY
• https://youtu.be/atbLwKjvj9w
• Optimization
• Linear programming
(management science)
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Phase II: Data Collection and Analysis
• Assumptions and data collection
• Identifying data sources
• Sales and customer orders
• Logistics volume and activity patterns
• Specific customer data for spatial dimension to a logistics analysis
• Cost associated with manufacturing and purchasing
• Number of locations of plants, product mix, production
schedules, and seasonality.
• Policies and costs associated with inventory transfer, reordering,
and warehouse processing.
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Application of Supply Chain Principles
• Decision application
• Decision application became much more complicated.
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Tables 11.13
Decision
framework
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Application of Supply Chain Principles
• Decision framework
• Exogenous drivers
• Economic dimension
• Regional economy – relative economic growth
• Labor rate – relative wage scale
• Regional technology – generation and key technologies in regions
• Regional market potential – market demand potential
• Talent dimension (firm’s own capacity and availability)
• Availability of management – senior management (management knowhow)
• Availability of design
• Availability of production
• Customer focus
• Product dimension
• Sales/Marketing/Distribution
• Social
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Study Objectives
• Explain key decisions of the network design.
• Explain Alfred Weber's location theory.
• Explain the drivers of warehouses.
• Explain the principles of trade-offs related to transportation
and inventory.
• Explain how the total cost network changed upon the
number of warehouses.
• Explain about the planning methodology.
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128
CHAPTER 12:
Relationship Management
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Development and Management of
Internal Logistics Relationships
• Functional aggregation
• Figure 12.2 is a conceptual and ideal organizational
structure, but rarely exist in reality.
• Functional aggregation is the combination of logistics
functions into a single managerial group. (chief supply
chain officer – CSO)
• Motivated by belief that grouping logistics into a
single organization would
• Increase likelihood of integration
• Improve knowledge of how operational changes
impacts performance in other areas.
• Comprehensive aggregation in organizations is still rare, but
• Trend is towards strategic management of all forms of
inventory movement and storage for maximum benefit of the
enterprise.
• Development of logistics information systems enabled
functional integration of organizations.
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130
Development and Management of
Internal Logistics Relationships
• Developing a process perspective
• The great divide (cont)
• Integration appears to be easier with groups external to a
firm such as suppliers and customers.
• Senior managers in most organizations do not have a
sufficiently clear vision of internal process requirements and
related measures to drive integration across the enterprise.
• Barriers outlined earlier render end-to-end integration a
difficult-to-achieve end state in most organizations.
• Improvement can be achieved through modifying and
repositioning functional capabilities.
• The key is to align, focus, and measure functional
performance in terms of process contribution.
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Development and Management of
Supply Chain Relationships
• A shift from a loosely lined group of independent
businesses to a multi-enterprise coordinated effort
focused on supply chain efficiency and competitiveness.
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Development and Management of
Supply Chain Relationships
• Power vs. Leadership
• A concept to understand acknowledged dependency and how
it makes supply chain integration work.
• Power
• Increased power of retailers
• Fewer but more dominant retailers with more extensive market coverage.
• Proliferation of point-of-sale data, frequent-shopper programs, and credit card use
provides retailers with easy access to vital market information.
• Higher market dominance by retailers
• Increasing difficulty and high cost manufacturers confront in developing new
brands.
• Private-label products owned by retailers have greater market penetration than
so-called national brands.
• The process of logistical replenishment has shifted toward a response-based
posture.
• Leadership
• Leadership position by size, economic power, customer patronage, or
comprehensive product portfolio.
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Managing Supply Chain Relationships
over Time
• Implementing
• The key to a successful implementation is choosing a
partner wisely.
• Compatible cultures, a common strategic vision, and
supportive operating philosophies.
• The alliances should start on a small scale to foster
easily achievable successes or early wins.
• Maintaining
• Mutual strategic and operational goals
• The goals should be tracked, reviewed, and updated frequently
to gain improvement over the long term.
• A goal should be translated into performance measures.
• Two-way measurements
• Supplier: on-time delivery and quality
• Buyer: consistency or orders and information sharing
• System wide cost can be minimized.
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Study Objectives
• Explain about the functional aggregation of logistics.
• Explain the barriers of process integration.
• Explain the process structure of organizational integration.
• Explain the types of supply chain relationships and
dependency.
• Explain how to manage the supply chain relationships
over time.
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CHAPTER 13:
Performance Measurement
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Measurement System Objectives
• Balanced Score Cards (cont)
Figure 13.1 The balanced
score card
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Operational Assessment
• Functional perspectives
• Five classification of logistics functional measures
(1) cost (2) customer service, (3) quality, (4) productivity, (5) asset
management
• Table 13.1 summarizes typical logistics performance metrics.
• Cost
• Measuring costs precisely is very difficult in practice.
• Integrated nature of logistics, and lack of data
• But the total cost should be monitored closely at senior
management level.
• Total landed cost: order processing + inventory + transportation +
warehousing and materials handling + facility network
• The total cost is then distributed to logistics activities.
• Activity-based costing
• Commonly monitored as a percentage of sales or as a cost per unit
of volume.
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Operational Assessment
• Customer service
• Product availability measured by fill rates are in a variety of ways.
409
Operational Assessment
• Quality
• Performance relative to service reliability
• Monitoring the effectiveness of individual activities
• Accuracy of work performance in such activities as order
entry, warehouse picking, and document preparation.
• Overall quality performance
• Damage frequency
• Warehouse damage, loading damage, and transportation damage
• Number of customer returns of damaged or defective goods.
• Customer claims and refunds
• Quality of information processing
• Ability to provide information
• The occurrence of information in accuracy
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Operational Assessment
• Productivity
• Productivity of labor is the biggest concern
• Labor expense
• Labor hour
• Number of individual employees
• Labor productivity in transportation
• Units shipped or delivered per employee, per labor dollar, or per
labor hour
• Labor productivity in warehouse
• Units received, picked, and shipped per employee, dollar, or hour
• Similar measures can be developed for other activities such
as order entry and order processing.
• It is common for managers to set goals for
productivity improvement compared to previous
performance
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Operational Assessment
• Asset Management
• Utilization of capital investments in facilities, equipment,
and inventory
• Wholesalers
• Inventory exceeds 80% of total capital.
• Facilities and equipment
• Capacity utilization or the percentage of total capacity used.
• Equipment down time.
• Inventory
• Three specific metrics
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Operational Assessment
• Asset Management
• Inventory (cont)
• Inventory turnover is a “backward-looking” looking measure.
• Forward looking measure
• Inventory days of supply (days of sales or days of inventory)
• Meaningful when future expected demand, or daily rate of usage
• Example: days of sales, 2,000,000 cars in dealer’s parking lot, expected
sales are 50,000 units per day, then days of sales = 2,000,000/50,000 = 40.
• Measurement system
• Measurement system has been significantly improved over the
10 years.
• Using EDI linkage, satellite and Internet tracking
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Operational Assessment
• Measuring customer relationship
• Additional set of measurements are required for measuring the
metrics beyond basic customer service.
• Perfect orders
• An indicator of a commitment to zero-defect logistics.
• Measures the effectiveness of the firm’s overall integrated
logistical performance rather than individual functions.
• Order entry, credit clearance, inventory availability, accurate packing, on-
time delivery, correct invoicing, and payment without deductions.
• As many as 20 logistical service elements may impact a perfect order.
• The ratio of perfect orders to the total number of orders
• Multiple information systems within a firm may need to be
integrated and linked to the original purchase order.
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Operational Assessment
• Measuring customer relationship
• Absolute performance
• Most measures are an aggregated performance of many orders over
a period of time.
• Absolute approach provides a better indication of how a
firm’s logistical performance really impacts customers.
• 99.5% on-time delivery often is the same as 5,000 customers received late
orders.
• Customer satisfaction
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Operational Assessment
• Rationalizing performance metrics
• Over time, firms tend to add new performance metrics but rarely
delete any.
• The proliferation of metrics can lead to a vast array of data, and
too many focuses to meet the strategic objectives.
• Review questions to maintain performance metrics
• Who uses this measurement information?
• What decisions does the measurement influence?
• What individual or group is responsible, and what behavior is motivated by the
measure?
• Do they have control over the factors that influence it?
• The review can help the firm maintain a performance
measurement system relevant to the appropriate monitoring,
control and motivational objectives.
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Operational Assessment
• Supply Chain Comprehensive Metrics
• Integrated performance measures that can be comparable and
consistent across both firm functional departments and supply chain
institutions.
• Cash-to-cash cycle time
• The time required to convert a dollar spent on inventory into a
dollar collected from sales revenue.
• Can be measured by adding a firm’s days of supply of inventory and
its days of accounts receivable outstanding, subtracting the days
trade
of accounts payable outstanding.
• A measure of the firm’s effective use of cash.
• Inventory is an asset in the balance sheet but is not a truly valid asset.
• Example of a firm
• 30-day supply of inventory, 30 day’s trade credit from suppliers, and sells
to end consumers in cash-only transactions
• Firm’s cash-to-cash cycle time is zero.
• It is influenced by other factors than logistics and is a measure of
the internal process (of BSC).
• One danger is taking more days to pay suppliers.
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Operational Assessment
• Supply Chain Comprehensive Metrics
• Cash spin (free cash spin)
• The potential benefits of reducing assets across a supply chain
• A dollar of inventory or the investment in a warehouse, if eliminated
by a reengineered supply chain, provides cash for other uses.
• New projects, or reducing debt
• Inventory days of supply (supply chain)
• It is traditionally used for individual firms.
• In a supply chain, one firm improves its performance by simply
shifting inventory to its suppliers or to customers.
• The supply chain inventory days of supply focuses on total inventory
of the supply chain from raw materials to finished goods.
• Dwell time
• Inventory dwell time is the ratio of the days inventory sits idle in the
supply chain to the days it is being productively used or positioned.
• Dwell time is also measured for other assets, especially transportation
equipment.
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Study Objectives
• Explain the objectives of the performance measurement
• Explain the principles of the BSC.
• Explain the typical metrics of the logistics performance.
• Explain the ways of measuring customer relationships.
• Explain the framework to determine appropriate metrics.
• Explain about the comprehensive metrics of the supply
chain performance.
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