zes performance of each element the constraints to plan logistics performance.

• Service Level
• Fill Rate. It is the portion of demand I have inventory on hand to satis
these bridges have been built by • OTIF Delivery.
s training, just about 10% of the • Response Time
stics (US) have any kind of formal • Delivery Frequency
fferent around the world but not • Note. “If you want 100% of availability for the 100% of the SKUs at
hich makes the probability of 100% of the time, then there’s a 100% of chance you go out of busine
successful so low, 30%
Increase Inventory Financial Performance
• Improve Forecasting Accuracy
oblem is that nobody holds the
Inventory • Reduce Lead Times and its Variability
t logistics is. This lack of a
Planning • Reduce Setup/Purchase Order Cost
es a phenomenon called Scope
• Improve Supply Chain Visibility
here are defined activities that the
• Reduce Inventory Carrying Rate
address but people start adding or
hat the project was designed to do Lot Size Optimization
ike what you wind up with it in Inventory Deployment
robability of success. Develop Supply Network Planning
Supplier SLA should match Customer SLA. Otherwise you fill the gap
rying to connect sourcing, with excess inventory, excess transportation and so on
Supply
ution, and customer service in • Supplier Service Policy
organization’s financial and • Sourcing Integration and Supplier Selection
hat’s why you should have only • Order Quantity (Making or Buying) and Replenishment
ch you can communicate and • How should I serve the DCs/FCs/stores?
y effectively, so development and • What mix of sources maximizes inventory performance?
ore efficiently. Transportation connects supply sources and consumer po
the lowest possible cost. To create a transportation strateg
Transportation
necessary to know the service level policy, supplier and cu
Distribution Network locations, demand volume, time and cost of the lanes
Design • Network Design (Transportation Capacity)
• Mode and Carrier Selection
• Routing and Scheduling
Warehousing • Shipment and Fleet Management
• Freight Costs

Warehouse is the last element to design/optimize. All other elements

 Profit we start by prunin
It is a key part of the constraints in logistics resources and then
Business quality on those se
• Volume
-oriented. Organizations think that just by surveying the • Profit
l the feedback we need, but normally, if the customer is • Margin
even have the time to fill out the survey. Even sometimes, Strategic Cost-to-Serve
ng those customers means going beyond what is required, • Growth • Forecastability
what’s in the customer service policy. Most customers are • Market • Compliance
at you said what you were going to do. • Location • Standarization

hospitals do it for different reasons. Therefore Customer-SKU Segmentation Does

s duration vary accordingly. Once you set customer service have
and Segmentation policy values, you get the Profit. The volume is servic
helps healthcare stakeholders understand customer constraints to make supply chain concentrated in A for D
etter serve their consumers. The customer service policy is planning feasible; e.g. at this items going to A
es the main dimensions of service by customer and SKU customers The s
point you’re able to embark on
servic
mostly comes from customer valuation. In healthcare, this planning the frequency of typica
ore important than others. Service-oriented, condition-risk replenishment to each location, A-A,
part to develop logistics planning by dismantling which generally consists of a for D
works to hedge uncertainty. tradeoff between transportation
and inventory carrying costs vs
How should we differentiate fill rates, inventory availability.
response times, and delivery frequencies
Policy (Example) for customer segmentation? There are many ways you can do
segmentation on your customers A
B
and your products. In C C
manufacturing, sales volume is Customer D D
the rule of thumb to follow when Loss. These services, D items goin
valuating products customers, need to improve effici

Segmenting SKUs by Sales Volume and Demand Variability

Building the Supply Chain of the Future. McKinsey & Company. (Article Jan 2011)
Yogesh Malik, Alex Niemeyer, and Brian Ruwadi.

A US-based consumer durables manufacturer had moved most of its productio

past decade. All of its plants used a unified production-planning process in wh

After analyzing its portfolio of
products and components along
two dimensions - the volatility of
demand for each SKU it sold and
the overall volume of SKUs
produced per week - the company
began rethinking its supply chain
configuration
ny decided to split its one-size-fits-all supply chain into four
high-volume products with relatively stable demand, the
cing and production in China. The facilities in North America
roducing the rest of the company’s SKUs, including high- and
volatile demand (US) and low-volume, low-demand-volatility
o). Ramping up production in a higher-cost country such as the
nse even for the low-volume products because the company
ket much faster, minimize lost sales, and keep inventories
olume SKUs
SKUs (the ones produced in the US), the company no longer
er demand at all, choosing instead to manufacture directly to
nwhile, US plants created a simplified forecasting process to
ing products—those with low production runs but more stable
operations, the company continued to have its Chinese plants
s on the basis of long-run forecasts, as they had done before.
w better, though, because planners were no longer trying to
s for the “noise” caused by the products with highly volatile
Healthcare usually performs its segmentation analysis by demographics to
locations and most-frequent health conditions, but another feature to enga
analysis might be consumer behavior and decision-making process in orde
service delivery by better targeting consumers.
Healthcare Providers can use Segmentation Analysis to Better Targ
How do consumers navigate the health care frontier? Deloitte Insights. Article Oc
Leslie Read and Leslie Korenda
The analysis results categorized individuals into four distinct groups that r
differences in preferences for managing their health and interacting with h
stakeholders. Each of these four groups has unique needs and expectations
health care system differently. Such segmentation can help tailor customer
Four Consumer Segments: Navigating the US Healthcare System
Key Features
• Most willing to share their tracked health informatio
• Use technology more than any other segment for hea
purposes.
• Most likely to have a virtual visit with a doctor.
• Most likely to follow their doctor’s recommendation
• Most likely to change doctors if dissatisfied with com
Key Features
• Least willing to share health information from an EH
wearable device.
• Least likely to use technology for healthcare and to f
recommendation
• When choosing a doctor, most likely to consider out
and convenient hours
Key Features
• Willing to share health information and EHR data.
• When looking for a new physician , they prefer to as
care doctor for a recommendation. They also rely he
when making decisions.
Key Features
• Against sharing health information and EHR data
Reducing Inventory by simplifying Forecasting and using POS Data 
This section assesses the value to vendors (health device makers, pharmaceuticals, and distributors) of using POS Data t
retailers (health facilities) will order from them. Value in the Supply Chain: For vendors > Reduce Inventory, For custom
purchase price/Improve purchasing terms. All this by providing data to improve forecasting using a less distorted deman
It encourages to have a better patient data recording system, which should include all the service stages from scheduling
and getting a diagnosis, to receive a treatment for the patient’s condition Agarwal, Atul; Barton, Gregory. Reducing Inve
Simplifying Forecasting and Using Point of Sale Data. MIT. US. 2005
 Agarwal, Atul; Barton, Gregory. Reducing Inventory by Simplifying Forecasting and Using Point of Sale Data. MIT. U

Operations Research Application: Inventory allocation/Resource allocation/Inventory Deployment

reasons; economies of scale, by using inventory it
ed costs over large production quantities; also it can
oduction when demand fluctuates; moreover,
ortages –safety stocks- finally, we can purchase
due to prices speculation.
nput to plan inventory levels within the distribution
he inventory is created to serve the same purpose.
ate inventory buckets, there are models associated
out how much inventory to have.
the type of inventory associated to forecast error. It
d supply variability.
it Inventory. Goods in transit can’t be sold, so it is an
ent. Therefore, optimization looks for reducing lead
iability in the network. On the other hand, if you
es, the forecast error can be very harmful by yielding
over long periods of time.
y.. Reduce the purchase order cost if you’re procuring
e setup costs if you are making products.
Improve visibility on the replenishment process
ain blind spots which are points where you can’t see
s placed) Simulations are always helpful to assess the
e right inventory level you may minimize
ate. It is what it costs you to hold inventory, normally
tory value within a period of time: storage cost,
scence cost, lost and damage cost, insurance cost, and
ges between 20% and 40%
educed by streamlining warehouse operations,
nsity, placing the inventory in geographies where the
s lower. You can reduce 15% to 40% inventory levels,
erformance of the inventory.
Order Cost = S * (R/Q)
Carrying Cost = H *(Q/2); H=(h+r)*C
Purchase Cost = C*R
Economic Order Quantity
Minimizes total ordering and carrying costs over a year
Assumptions:
Demand is known, constant and independent
Lead time is known and constant
Receiving is instantaneous and complete
Quantity Discounts (Price Breaks)
Reorder Point
When should I place the replenishment order?
How much inventory is expected to be used between the
time the order is placed and when it is received? – Lead
time
What if demand or lead time varies? – Safety Stock
Too much inventory incurs extra costs, but not enough
inventory causes production downtime.
Service Level. It’s the probability that there will be no
stockouts within a period of time or that our expected
demand is going to be less or equal than the reorder point
Assumption. Demand is represented by the normal
distribution (mean and SD)
 . It is a critical part to get
properly.
the ordering entry-processing
mer requests, we should be able to
customer; 20% of the SKUs are
%C. here are the rules for servicing
mer: the fill rate, the returns policy,
olicy should be, so if somebody
it’s a high priority customer and
inventory, distribution have an
es are on deliveries.
t tradeoffs
imation: How long have they been
you? And How profitable?
tion.
ervice Policy objective is to create
pply chain possible
ustomer service could be Minimum
Outboun Total Logistics
d Transp. Logistics Margin
Cost
n is based on the size of the order. It
ble region where order quantities
gistics costs (It shouldn’t be
an a full pallet
• What if customers A buy C SKUs?
• What products do customers order together?
• How do we decide to make to stock or make
to order?
2. Measure and improve forecast accuracy. If it isn’t
measured, there’s no accountability.
• Forecast Optimization
• What mix of forecasting models maximizes
the forecast accuracy?
• How does our current forecasting perform
against optimal solutions?
• How much bias is in our forecast?
• How much less safety stock would carry if
we improved forecasting?
3. If sales is accountable for forecasting, there are two
ways bias gets in, either: Increased forecast –
Production gears up to make more than actually
needed. This means excess inventory, overtime,
capacity wasted.
4. Sandbagging. Production can keep up with the Objective Function:
sales, then you make your own forecast and that Maximize Financial Performance of the Inventor
breaks the process. The best way is to make Inventory Turn Rate = COGS / Aver. Inv. Value
forecasting an activity onto itself, without For AIV, it is recommended to record inventory valu
significant bias, reporting to preferably the supply during end of the quarter when inventory level is at
chain head, because it is the only process that needs item
or oversees that the whole system is balanced. AIV ($) = Aver.Inv.Level (units) * UnitInv.Value($/u
UIV. It is the purchase or production cost of the item
5. Inventory is meant for different purposes:
6. Forecast Error > Safety Stock Inventory Carrying Cost = AIV ($)* Inv.Carrying.Ra
7. Reduce lead times and lead time variability in each ICR = Opportunity Cost of Capital + Storage Cost +
link and node in the supply chain Cost + Loss and Damage + Taxes and Insurance (It r
8. Pipeline or In-Transit Inventory
• Lead Times Optimization Lost Sales Cost = Unit.Selling.Price ($/unit) * Annu
• What lead times minimize our total supply * Shortage Factor (How much do you lose when sto
chain cost; inventory carrying costs, COGS,
transportation, warehouse? First, determine the value of sales potential, then the
and finally, what’s the cost of those lost sales (sales
 Develop FG Distribution Plan • Production Runs and OEE (per line, per ítem) amount of inventory that m
T1 (Plant (Production/Purchase) > DCs > FCs)
• Distribution Capacity (Storage and Transport) performance.
What to stock? Where to stock? How much to• stock?
Storage Locations and Handling Capacity
Develop RM Distribution Plan
(Vendor > Plant) • Optimal Inventory Levels and Reorder Points (Inventory Policy)
• Time-phased order point for RM by an exploding MRP
• Lead times and variability
Outline Replenishment Process • Safety Stock levels
• Multi-echelon inventory
Determine supply surplus and shortage • Weekly (MPS) - Monthly Inventory levels
(w/ Materials Management) • Backlog Prioritization and Backorder Management

Monitor Distribution Performance

Distribution Budget and Cost Analysis: Workforce, Inv Carrying Cost • Shipping Schedule
Relationships: IT, Finance, Purchasing, Production, Warehouse and Transport, MKT & Sales, Vendor • Delivery Performance
and Customers
• Inventory Levels (Network)
Distribution Network Design and Optimization • Warehousing Performance
• Productivity Outcome
• Evaluate what parameters and values are optimal • Fill Rate Targets
• Cost-Reduction Projects
• Optimization requires an objective function and constraints
(what makes difficult to achieve the objective)
• Optimization is a way of solving planning problems
Service Level Policy
Reporting: requirements, progress and fulfillment

Logistics Optimization Surface Plot L

Framework •

Total •
Logistics
Cost ($)
oyment’s objective is to meet fill rate targets for each location in the network. It involves manily on determining how much of the inventory in
ng to be allocated. Some of it can stay with the supplier, some of it can be in transit or in a hub/regional/local warehouse, or even some of it can b
cation.

yment needs to consider several factors. For instance, in MRO inventory, criticality (severity and probability of each failure mode) of spare parts
ssed. Should it be at the surgery room? Should it be at the hospital/hub warehouse? Or should it be managed by the vendor? Another factors to be
ge of the part, cost of the part, impact of non-availability, the dimensions and locations of the part, the seasonality/trend, lead time from the vendo
ty, fill rate’s vendor.
ment issue involves: Who should pick/deliver the part to the consumer?
, it is not as popular as it once was, the rationale goes like this, What type of vendor do you need to have to control your inventory? But if you
art logistics with anybody else, who has the better logistics system? So, who should be managing the inventory?
ntory should be deployed in each location?
should be centralized, regionalized, and localized?
r pull the optimal deployment strategy?

s another feature of deploying inventory

e-to-stock strategy push for deploying inventory at storage locations before an order is placed. Conversely, postponement argues for awaiting until
for before deployment occurs in that area.
an occur for manufacturing and for logistics. Evaluate these four scenarios to make a decision on deployment scheme
ploy it before an order is placed: Advantages- In terms of manufacturing, it is the most efficient decision, in logistics, the response time is the faste
lity is the best for the consumer. Disadvantages, from an inventory standpoint, it is the most expensive. You should evaluate different scenarios to
cost of each. Every scenario evaluating the tradeoffs of each stage should take into account forecast accuracy so the cost of safety stock can be
sess obsolescence rate so the cost of risk is the lowest
make-to-forecast but not deploy it. This could be for C items, because you make production runs longer and reduce transportation costs by
But additionally, you don’t see the demand very often so the forecast error and variability are very high. If you try to deploy locally, you’re going t
ur forecast, reducing its accuracy and increasing inventory in the network

you postpone manufacturing and logistics together. It means you’re making the product in the market location where it is going to be consumed.
our number of locations.
od job managing their inventories. They’re not placing
h inventories soon enough to avoid shortages.

on, inventory purchasing cost is the biggest asset, and

d to storing inventory; i.e. inventory carrying costs, are
osts in logistics function.

stems
hasizes planning and scheduling so that the needed
ust-in-time” for their use. Ideally, there should be no
age, but this system’s approach in the real world is to
evels to a bare minimum.

much to replenish the inventory?

athematical model describing the behavior of the

l inventory policy with respect to this model.

ized information processing system to maintain a
ent

rd of current inventory levels, apply the optimal

o signal when and how much to replenish inventory
inventory models used with this approach can be
oad categories—deterministic models and stochastic
g to the predictability of demand involved. If the
periods can be forecast with considerable precision, it is
an inventory policy that assumes that all forecasts will
ely accurate. This is the case of known demand where a
ntory model would be used. However, when demand
d very well, it becomes necessary to use a stochastic
here the demand in any period is a random variable
wn constant.
Minimize Total Acquisition Cost (Price of
tation cost, inventory cost, warehousing
urns

oduce?
ory)
Ordering/Setup Cost
size minimizes the sum of those costs?

purchase, the higher the inventory and its

order/setup cost declines

to an EOQ analysis
re over-producing/purchasing

oduction Attainment not Machinery

ts of EOQ equation we have influence on?

p Cost and Inventory Carrying Rate

will allow to have bigger lot sizes, and

y increase because it’s expensive to carry

rder cost, the EOQ will be lower so less

nd the inventory policy cost as well. Then
de a higher fill rate

e Capacity > Outbound

re than what you’re shipping out.
 important to calculate MRP.
nctioning you can end up We need to assess scenarios, heavily oriented to
ore items than you actually evaluate supply chain cost tradeoffs considering
the type of product.
system and its processes need
er properly on a regular basis.
One you achieve integrity on
stability in your processes,
xecuting and improving you
ormance. What should be the
rmance? What should the
ot size inventory/ pipeline
each node for every item?
t you get your operation
modeling scenarios without
e tool but the process. Then
ate your optimized model with

. Unfortunately, most people

collaborating. But if your
system is not working, other
ely don’t want to engage with
replenishment process.
scenario.
rget is to minimize or maximize an objective function by
f variables within constraints. Usually, optimization models
near programming:
ive function. It is the element of the system you try to
imize profit or minimize logistics cost.
ion variables. These affect the function performance, you can
s to find the optimal solution; e.g. units produced per time,
pecific routes.
operation parameters. These are values you shouldn’t
er to change during analysis and implementation; e.g.
r unit, distribution cost per route.
aints. These values restrict the possible choices you might
decision variables; e.g. maximum number of units shipped
upply point, minimum number of units produced by line.
asibility region. It involves the set of solutions provided
that meet the acceptance criteria.
can be used to solve a wide range of problems; e.g. selecting
machinery schedule in a factory to make best use of available
mizing profit, and minimizing production and inventory costs.
for Transportation Problem
tation cost = Sum (Flow x Cost) between sources and sinks
es
Rate
y 4. Scenario Building and Analysis. This step involves develo
and quantified view of the supply chain.
Network decisions, as similar to other management decisions
three levels: strategic, tactical, and operational. At strategic le
term decisions are addressed, like structural setting - facility l
size - and investment projects. At tactical level, decisions are
cost structure and operating policies, like which market shoul
from which facility or what should be the inventory level at c
region. While at operational level, focus remain on operating
Network optimization provides a quantitative output which enab
decision making.
• Source/Supply Locations
• DC/WH Locations
• DC/WH Size and Capacity
• Inventory Level
• Transportation Cost
• Customer Service Level
• Total Logistics Cost
Usually, network optimization involves:
1. Data Gathering and As-is Assessment. The process starts
data collection to get and understanding of the existing netw
data includes operational and financial performance, operati
processes, service framework, and strategic initiatives
2. Baseline Developing. At this point, models are developed c
specific assumptions to simulate and evaluate different scen
operation and cost performance. The model output must mat
network performance.
3. As-is Optimization. This step allows to identify efficiency-
or cost-saving gaps, without doing any structural change.
alternatives of operating methods. Such alternatives can be b
future requirements, demand clusters, customer service inpu
compliance, or network design features; e.g. number and loc
 an error on every forecast, growing the safety stock trends in transportation and
on used to work by analyzing supply chain
o determine individual cost savings without could move depending on s
of functions to each other. In addition, the
ually very slow. It might take a supply chain
onths to develop a model for studying a Inventory
ed in what-if scenario modelling is essential
Carrying Cost
mpacts on the organization before making
k.

u wanted to save on freight costs, you looked

or filled up the truck so you could reduce unit
eads to savings in the function, but when you
e supply chain, you may transferring or
onto other functions such as inventory or
mple, when Cardinal Health analysed
rk found that by combining delivery runs to
s, they could make one less delivery per week
inventory carrying costs while reducing
y $276,000 while improving service to its
ent up because of more frequent resupplies.
n inventory levels in both DCs.
es distribution of pharmaceuticals and
ospitals, drug stores, ambulatory surgical
boratories. It is also a leading manufacturer of
roducts. It delivers to more than 100,000
running a distribution network with one
4 regional DCs. Each DC generally carries
units (SKUs.)
ago Cardinal Health was making three
om its national DC in Dublin, Ohio to each of
In general, the fewer the number of DCs the
better. As you increase the number
Number of of
DCsDCs, there’s
duplication of SKUs because you need to forecast
the consumption of that region, making forecast
errors which need safety stock to cover the Tradeoff 4: Total Log
influence of that error. Time Number of DC
Safety Stock (Network) ~ √ (# of DCs)
i.e. if you go from 9 DCs to 1, You will end up with
three times less of your original safety stock in the
network. Total
Logistics
When you do network analysis, it is recommended Cost
to start with the least number of facilities possible
(1 DC)
Number of
Tradeoff 2: Travel Time & Distance vs Number of
DCs
As you add DCs in the network, the proximity to the
customer is getting closer

ld the company make more frequent

Average Delivery Time
uck with
h facility and still maintain adequate Distance per
Trip ADT
disease. Considering no future
reventive medicine.
ave two, or three, based on the
tradaoffs. Include the distance range
ving. This is creating alternatives for
shipping everything from MX
tates
ons and % of volume
st of Transportation
best case 1day, aver. 2days, worst
ng Cost
ost (USD 4.7M
be for setting up regional DCs?
be an option.
= USD 2.3M > 1.6M
Cost = It is higher because we added
= USD 5.8M
ained the same
s can be tricky. For instance,
from one centralized location but if
olicy changes and we need a faster
ng a new DC is not always the right
ographically closer but in transit
me, due to several reasons; one can
oped lanes to those regions; cargo
frequent as we may require
re not necessarily correlated in
diabetes and heart diseases.
>> use the maps to highlight the importance of data
aggregation (US map – it is well limited for patients
20+ years, while in MEX isn’t
Data profile: by diabetes type, gender, and age for
both mortality and morbidity rates. Also estado
nutricional y medidas antropométricas de la
población (peso, talla, indice de masa corporal,
niveles de hemoglobin y de glucose, habitos
alimenticios, y actividad fisica. Actualmente, en
México no existe una base de datos diseñada
apropiadamente para el estudio de la dinámica
epacial de la incidencia, persistencia y severidad de
la diabetes. Sin embargo, es posible utilizar los datos
sobre defunciones a nivel municipal para buscar
indicios que nos permitan entender mejor la
Trend is constant and forec
problemática.
high. Unless, efficiency incr
Could we say diabetes mortality rates is because of
medicine
supply disruptions?
Assumptions.
la tasa de mortalidad ha segu
a. Obesity rates remain in future trends
creciente generalizada entre
edad mayor a 30 años desde
Situación Actual
En términos de políticas púb
En México, estas cifras son más elevadas, la tasa por
mencionar que no sólo basta
cada 100 mil habitantes de las defunciones por
quiénes, a cuántos y en dónd
diabetes a nivel nacional fue de 86.3. Tan sólo en
sino que es necesario conoce
2016, 15 de cada 100 muertes en el país se atribuyen
salud existentes son suficient
a la diabetes (INEGI, 2016). De acuerdo con el
tratar este padecimiento. Un
Instituto Mexicano de Seguridad Social, la diabetes
es mediante el análisis de los
mellitus es la segunda causa de consulta de medicina
realizan los enfermos de diab
familiar en este instituto, sólo después de las
estadísticas del INEGI, permi
enfermedades del corazón y por encima de las
fallecimiento y el de residenc

f facilities (size) > goods
nventory deployment >
ansportation mode, delivery
d planning, tracking)
Size and Profile Mix, Fleet
anagement, Carriers Management,
des Analysis
es some of the most important issues
rend of growing delivery volumes
p size and increased delivery
ns more work for the same cargo,
e last-mile delivery but the main
ntories because inventory is riskier
ut the smaller the shipment, the
s more expensive per weight and
hortage and turnover (lifestyle).
ace DC outside cities with highway
deterioration (), fuel pricing (for
could place surcharge or hedging,
from a model agreed between
d, volatility pricing shapes different
operations, you need flexibility)
pressure. The more people know
er they want to negotiate.
e on carriers and transportation
es low. But remember, transportation
o reduce costs. Sometimes, you
ntmore in transportation to get goods
nventory in the network.
2. Load Planning
Shipment Tracking
How can we be sure if we did a good job at load
The worst thing than bad news is no
setting? A pallet load? A trailer load? A container
load? Customer needs information for plan
the worst case.
a. Do not exceed the weight restrictions of the
container (Constraints) You can take shipment tracking to al
b. Maximize container utilization (volume or levels of detail . The point is to figure
weight) (Objective Function) level of tracking is value added (freq
value of tracking based on your prod
c. Determine cargo stability (weight and integrity of
cargo mix) (Constraint) (Cargo weight vs Fuel value) visibility tools
Tradeoff
(Tracking of cold1: chain
Inventory Level for
shipments vs
consumed)
d. Minimize load/unload time (Objective Function) pharmaceuticals) opportunity to
This is because every DC is goin
what inventory is required at eac
e. Set cargo in stop sequence for routing
(Constraint)
supplies are re
an error on every forecast, growi
How do we get the three objective function into one?
Minimize Total Loading Cost =
Number of Trips * Cost per Trip [Container Cost] Inventory
+ Load/ Unload Time * Wage Rate [Load/Unload Carrying Cost
Cost]
Search for “Route and Load Planning Software”
After you’ve plan loading, you need to physically
Numb
load the container
Picking Execution Tradeoff 2: Travel Time & Dista
• Automated Storage Retrieval System DCs
• Justification for this type of systems, it is not As you add DCs in the network, th
only on labor reduction but includes also asset customer is getting closer
utilization, e.g. transportation trucks and
driver’s time, that is, the impact on other
Average
logistics activities.
Distance per
Bin-Packing Algorithm Trip ADT
o make objective optimization decisions.

several data sources to comply a transportation analysis: Shipping

r, Customer, Supplier, and Material Master Data. Usually because
grated.

del image]
n Lane Characterization
ansportation Lanes). For each lane yoou need the frequency, volume
value), carriers and their capacity and availability, distance and time,
OTIF, % Damage, Cube Utilization, % Rejections, EVA Analysis
ue, and capital)

n is needed to perform transportation decision making through

ation models: We need to choose a transportation mode, a carrier

entation (Transportation Lanes) 80% of the volume is on 20% of the

of the lanes are on 20% of the carriers.
Variables Correlation (e.g. Load Volume vs Weight, Volume vs Sales
reight Cost. This is done to narrow down on the factors that we
y be concerned about

Profile Analysis > Images

pment vs Freight Cost per Shipment

rofile
work to define success but if that’s oriented
going to go down the wrong path.
erformance Measuring Program (Metrics – Targets
rement – Presentation)
untability. People should only be held accountable
influence. For instance, the metric: transportation
one of the most used, has nothing to do with
ce, all the accountability is tied to sales variability.
go beyond financial metrics to find out how
ally performing.
t Order/Setup Cost + Transportation Cost (IB/OB) + Warehousing Cost
vestment)
ce Consumed – Amounts of money
mption Rate - % per year (Depreciation)
ce Consumed – Gallons of Gasoline
mption Rate – Gallons * Price (year)
ver and Maintenance)
ce Consumed – Man Hours
mption Rate – Man Hours * Wage Rate (year)
ce Consumed – Investment
mption Rate – % per year (ROI)
manager does not influence or establish interest
ices, nor labor wages. It turns out that a logistics
y influence somewhere between 30% - 40% of the
nothing to do with the rates but with the resources;
can influence the amount of investment in the fleet
ion), how much fuel is consumed (Optimization:
g, Loading), how many man hours are utilized. For
nager can be held accountable. So, this will help us
cs
Deliveries What do you want out of the machine?
I want as many perfect deliveries with restricted amounts of resources
(Total Logistics Cost per Perfect Order) = you get credit only by
things that add value
One of the things that transportation metrics have to do is to line up
with the supply chain metrics as a whole. First lay out a set of metrics
for supply chain and then we can deal with transportation. So, the
program needs to be holistic and in balance with a set of resource-
and service-oriented metrics.
Cost (Resource-Oriented)
Total Logistics Cost = Inventory Carrying Cost + Purchasing
+ Customer Service Cost
Productivity (Resource-Oriented)
Labor Productivity = Planning + Purchasing + Inbound Transp. +
Warehousing + Outbound Transp. + Customer Service (Man-Hour) /
Number of Orders
Contai
Quality (Service-Oriented) Contai
% of Perfect Orders = (% correct order entering) * (% of On-Time) * Weight
(% of In-Full)*(% right place) * (% right qty) *(% no damage) …
Normally, companies don’t measure this metric correctly; but if it is Carrie
recorded properly, then the first number you get is really low. consoli
Tradeoff: Size of the Order vs % Perfect Order
to opti
Cost of an Imperfect Order
this, du
called,
Time
Response Time = Logistics Cycle Time
Fleet Y
 Shipment Frequency
od routing? How often should I make a trip?
r/location is visited (constraint) Inventory Carrying Cost
dow requirements (constraints) Setup Cost
er Fill Rate (constraint) Transportation Cost
consumption/driver’s time/elapsed time (objective) Customer Satisfaction
service/safety requirements Lead Time
probability of damage/theft (objective)
e utilization (objective) If it’s more frequent, the in-transit carrying cost is going to be lower
’s workload (constraint) (lot size inventory)
idelines (speed limit, weight limit)
very density If it’s more frequent, the lower the safety stock because it reduces the
t volume throughout the day and week lead time
e regulations (driver) If it’s more frequent, the more expensive the freight cost is, because
Capacity and Fleet size the shipment size is smaller and the truck allocation time/cost gets
bigger (setup cost)
s not allow for several objective functions. So, you
all of them into your priority target: Cost
Lead Time for ea
Costs Involved (Carrying mix (red line)
Cost,
Routing Cost: Fuel + Driver’s Time + Capital + Transp Cost, Setup
Cost)

ation Algorithms
Cluster Second
Route Second
Consolidation (Small Size Pick Ups and High
ery Points)
Mix of Transportation
Shipping Modes, Frequency
If Cost is the only criteria. The most expensive,
from a transportation cost perspective, and the
 Transportation Management System (TMS)
ysis What kinds of things the TMS helps you do that you couldn’t do
without it?
• Load Planning (Container Utilization)
ow you’ve sized the fleet correctly? • Fleet Configuration
y requirements (constraint)
• Routing and Scheduling (Asset Allocation)
utilization (objective)
cost (objective)
• Tracking and Tracing (Identify Variable Costs (Fuel, Tolls,
g cost/TCO (objective) Detention, Identify time bottlenecks in the process: Loading,
enance cost (objective) staging, transit, delay, unloading, detention)
y • Maintenance Schedule (Optimal Time to Replace/Repair a
cles and containers) Vehicle: Ownership Cost vs Maintenance Cost)
he % of availability, you need to calculate the cost of • Transprotation Performance Metrics
to justify high availability rates. And to find out the
mporary assets to fulfill customer demand.

Optimal Fleet
Size
Asset Cost

Shortage Cost

Availability

e depends on the level of lateness acceptable

Fleet Ownership
Cost (Annual)

% of Late Loads

d out the optimal number and mix of vehicles (and drivers) you need for a
operation while maintaining the lowest cost possible and the service
s varies along time, depending on factors such as demand volume,
straints, and budget available. There are two overarching environments
that are focused on the demand behavior.
The pickup and delivery points are known, and the drop size is mostly
is constrained by fill rates, time and cost. The commute of passengers,
ervice and the delivery of goods such as medical suppliers are example of
ng (Vehicle Routing Problem VRP, Travelling Salesman Problem
d. The fleet utilization is random, as is usual among car sharing, vehicle
cles, and ambulance services. Since demand is random, the consumer
until a vehicle is available. (Queue Theory)
profile and its yearly forecast (seasonality, trend, and variability)
vice level and fill rate.
imensions (volume, weight, and stacking) and order profile.
bution network (plants, warehouses, customer locations), their distance,
ansit times (including variability)
bution zones (what source supplies what delivery points?)
er of vehicles and their capacities (pallets, weight, volume) – current and
vehicles for optimizing scenarios
nning and territory segmentation (model)
e fleet downtime, response time, fleet size, fuel consumption, traveled
service time, total fleet costs (investment, maintenance, execution)
e truck utilization, OTIF deliveries, fill rates.
ne you operating cost (fixed and variable) and CAPEX investment, fuel
tion performance, maintenance costs
segmentation to balance the total workload
ntil the model reaches the service level desired.
mulation to determine the number and profile of vehicles, and the mix of
skills, and capacity utilization. The fuel consumption is highly related
and load planning and fleet maintenance.
Routing optimization looks for minimizing deadhead shipping or trav
distance, maximizing number of deliveries. Maintenance should aim
the asset uptime during execution and to minimize downtime while o
Fleet Maintenance Policy
The maintenance policy will try to maximize fleet utilization (uptime
minimize the costs of maintenance and of downtime.
Another cost relevant to maintenance involves selecting the right mix
insourcing and outsourcing maintenance. Usually the easier more fre
repairs can be insourced.
Fleet Operations Planning (Routing and Loading)
1. Route Design (distance between locations, total cost, and transit
windows and service time)
2. Load Planning
3. Route Requirements (determine the number and mix of vehicles,
labor size and mix
4. Route Execution (execution tracking and performance monitorin
Fleet Renewal Policy
This policy develops mainly a tradeoff between depreciation cost (low
maintenance cost (high) to determine the best point to replace an asse
of depreciation, the total operating cost of a new vehicle is higher tha
one, but instead less fuel is consumed and maintenance is performed
ensure a higher availability.
Fleet Costs
• Fuel Consumption. (record consumption per vehicle and fleet ave
identify unusual trends that might foresee engine performance iss
• Consumption Analysis. It is the process to identify fuel consumpt
variability causes and how to improve consumption efficiency.
1. Current Consumption. It is necessary to set a baseline by gatheri
as fleet staff, time and distance, route and frequency, and vehicle
(consumption, emissions, age, maintenance
3. Include assets lifespan and the decay of productiv
goes. (maintenance reduce uptime and operating

4. Productivity Model different outputs from wareh

and equipment handling, and the transportation c
transit time, unloading time, deadhead time) – W
Transportation Capacity Link : Number of Delive
(hours/year)
5. How much cost to move a unit/kg/case?

6. Production and Transportacion Capacity

 ts.
as market share, demand/supply volatility, product
d reduced customer lead times have an impact on the
Warehouses should be designed to meet functional and
ents of its supply chain. As a result, there are not
different settings such as Distribution Centers, Cross
d Fulfillment Centers. Nevertheless, there are certain
mmon to most warehouses. For an inventory-holding
cesses and material flows are:
Reverse Logistics
(Returns, Recalls, and
Rejections)
• Network Design (Facility Location and Node Throughput)
• Determine number of warehouses and their locations, storage size, m
flow, slotting items, packaging, and handling capacity
• WH Process: Receiving, Put away, Storage, Picking, Shipping
For all these five activities you have to plan, execute and monitor their
performance
Replenishment Process:
Supplier > Hub/Regional Warehouse > Hospital Warehouse > Medical Stations
Replenishment
Order

Receiving Put-away and Storage Shipping

• Inbound Scheduling
• Yard Management
• Shipment Unloading
ing • Quality Control
ning (Expiration dates and
: Regulatory Compliance)
• Record the Incoming
Goods (Goods Posting)
• Identify Storage Location
(Slotting and Zoning)
• Material Handling and
Storing (Good Storage
Practices)
• Update Inventory Records
• Inventory Control (Cycle
and Physical Count)
• Outbound Scheduling
• Picking and Packing
• Added Value Services
(Kitting and Labelling)
• Shipment Loading
• Record the Outgoing
Goods (Goods Issue)

• Information Management
• Labor Management
• MHE Management
• Facilities Design
• Data Analysis and
Performance Optimization
Receiving and Put-away
Cycle Counting and Inventory Record Accuracy IRA (Strategos Inc. Physical Inventory (Error Removal Rate)
Kansas US) In a physical inventory, normal operations cease while a physical count of every
item is conducted. The counts are compared to inventory records and, when
The units of measure for accuracy are either dollar-based or item-based. Both have necessary, the records are corrected.
different purposes and may vary widely. The former is preferred by accounting and
finance; its concern is to ensure that inventory value on books and tax returns is Cycle Counting (Error Removal Rate)
accurate at an aggregate level. The latter is focused on material management interest in Cycle counting finds and corrects inventory record errors. A selected number of
individual-SKU accuracy. If one item is short, it can rarely be substituted preventing the items are physically counted, daily, on a random or semi-random basis. The
order from being fully shipped. physical count is compared to the inventory record. When necessary, the records
are corrected.
Why is IRA important?
IRA is a measure of how closely virtual inventory records match the physical inventory. Cycle Counting removes errors from the system, much like a physical inventory,
Financial Reasons but has significant advantages. Cycle counting can achieve high accuracies, level
• Stakeholders know that the book value is accurate. workload, reduce inventory, continuously measure inventory accuracy, function
• Lenders facilitate loans with inventory as collateral. without total interruption of operations, and reduce the need of the annual
• Taxation depends on inventory value. Overpayment reduces profits, and inventory audit.
underpayment can incur penalties.
• Poor accuracy requires more capital for inventory building
Operational Reasons (Blind Counting and Verification Counting)
• Stockouts interrupt production and delays deliveries. How is the sample selected?
• Time wasted on looking for misplaced items How is the frequency calculated?
• Frequent stockouts lead to inventory level growth requiring not more
capital, space, equipment, and labor.
Process Improvement (Error Creation Rate)
Inaccuracy Reasons Process changes are identified that reduce the probability of error.
There are many reasons for inaccurate records. Nonetheless, an all-embracing
classification of causes are either process-related (each process step introduces some Transaction Reduction (Error Creation Rate)
error probability) and volume-related (every process has an inherent error; if the process Fewer transactions introduce fewer errors. Kanban, BOM simplification, cellular
remains unchanged, over time and the number of transactions increase the probability of manufacturing and other elements of Lean make this feasible.
error)
The process needs improving through optimization, and the number of transactions to
be reduced by back-flushing or cellular zoning, and evaluate how the error rate drops.
Methods for Improving Accuracy
error creation rate < error removal rate
Then it’s necessary to decrease errors
flowing in or increase the removal rate.
There are four primary methods to
improve accuracy, but an optimal
approach may use them all.

1. Physical Inventory
2. Cycle Counting
3. Transaction Reduction
4. Process Improvement
SAP Warehouse Management
The primary difference between a technical consultant and a functional
consultant, is that the latter focuses on the configuration while the
former understand the implementation from a business point of view.
SAP WM is fully integrated into SAP R3. It is an extension of SAP
MM.
SAP WM provides support to assist in processing all goods movements
and in maintaining current stock inventories in your warehouse. It
allows organizations to control warehouse operations from the time
goods or materials enter a warehouse until the move out.
WM is a part of Logistics Execution (LE)
Why to use SAP WM?
• SAP MM falls behind when it comes to detailed visibility of the
material flow. Virtual inventory and status DO NOT fully represent
the physical process
• Limited visibility of material locations. You can only assign a
single fixed bin location per storage location, but bin location is
“text” only, thus, no strategies are available
• SAP MM goes through multiple material handling. It cannot
assign incoming materials to outbound demand.
Benefits of SAP WM compared to SAP MM
• Tracking and Traceability of exact stock locations within a storage location
(WH)
• Manages the warehouse operations no matter how complex its structure is.
• Manages resources and tasks within the warehouse
• Provides functionality to optimize key processes (picking and put-away
strategies)
• Enables bar-code scanners utilization
• Manages inventory at storage-bin level
• Provides options to monitor stock movements, to visualize the physical activity,
and to process all stock movements – receipts, issues, transfers, etc.
Benefits of SAP WMS (Gartner Report)
• 16-25% picking productivity improvement
• 11-25% customer returns reduction
• 10-25% MH labor savings
• 10-40% space utilization improvement
• 08-15% carrying cost reduction.
SAP WMS
• Real-time and automatic MM-WM integration
• Enables granular traceability and control
• Ability to synchronize the system and material flow
• Allows placement and removal strategies
• Assignment of inbound orders to outbound deliveries
• Allocation of storage bins
• Processing of all stock movements: goods receiving, put-away (stock
placement), picking (stock retrieval), packing, goods issue, and cycle counting
• PROS
• Allows advanced functions like two-step picking, two-step confirmation,
managing multiple SLOCs with a single WH
• Cross-docking – inbound/outbound
• Real-time visibility of the process
• Visual queues at detailed steps
• Open/completed tasks reports
• Track exact stock location within one storage location
• CONS
• Increased master data maintenance
• Additional process steps for receipt and picking, confirmation and posting.
• Requires more configuration and expert knowledge to setup
• Designing the warehouse layout and setup
houses you should have should be? Space. What kind of space each of those activities need?
map th
• Adjustment. Once relationships and space are set, you can •Alloca
zation issue the first layout draft by adjusting both requirements. •Freeze
should storage? If you want to reduce •Plan fo
Steps of Layout Planning Wareh
ou should remove SKUs that don’t 1. Chart the Relationships •Mark
sing) 2. Establish Space Requirements •Analy
3. Diagram Activity Relationships movem
Flow Optimization 4. Draw Space Relationship Layouts •Submi
5. Evaluate Alternate Arrangments Rack D
•Float R
ptimization 6. Detail the Selected Layout Plan •Coord
a perfect packing configuration related •Estima
cost •Procur
Warehouse Design: Adjacency and Paymatching Materi
•Decide
ation (analysis and presentation) Warehouse / Distribution Center Layout
•Finaliz
• Determine space requirements for every WH function (storage, staging, Parts C
mization docks, picking, etc) •Map p
• Storage Space Capacity •Catego
• Planned Occupancy Level (Graph: Productivity as a function of Occupancy •Conce
timization
Resour
ize warehouse workload by reducing • Normallly, productivity is maximized at 70%-90% utilization. On a daily •Arrive
ess: direct shipping or cross docking? basis, monitor both productivity and utilization to build a correlation mode •Estima
• When utilization is below 50%, look for closing or shrinking warehouse WMS
mization locations to reduce travelling from, to, and between locations •Gather
• Space for Peak Accommodation (ratio of peak to average, and peak duratio •Custom
•Build
mization time) •Demo
• How many years you are planning the facility for?
Warehouse Floor Usage  Wareh
ptimization • >> What’s the forecasted volume through the facility? What’s the
Typical split of floor areas for Added Value projected
•Proces
Other
7%
turn rate? So, the usage dividedthese
by the turnswithin 8%
yieldsa the average inventory •Set up
processes
•Submi
ation level, and convert that to location units. (Note. The
warehouse:
Safety
percentage on “other” Receiving
may
Shipping
&
•Hazard
zation include activities such as 16% •Aisle G
reverse logistics stock, E&O Wareh
Flow Optimization inventory, quality inspection, •Fixed
zation (IT and Handling)
Materials Flow Analysis pallet storage, packaging •Releas
material,
What is the optimal material flow path forpromotional
each SKU? (direct shipping, x-
aining optimization
 and keeping records of the process. freezers should be
licable to pharmaceutical • All returned goods should be placed in protected from • MMR -15
quarantine. Quality evaluation dictates the • Oral Polio
rs, pharmacies, and hospitals. power cuts by
to fit the type of operation. final disposal: destruction, rejection, or backup generators. • DPT
return to saleable stock. • Tetanus
* Neve

s
ents
Cold
Quarantine (Returns, Storage
Recalls, and Re
Finished Goods Rejections) In
(Reserve Storage) Inspection and
C
Sampling

Order
Picking
(by case)
Shipping and
Receiving

Order
Picking
(by each)
are stored within a temperature
25’C and due to the wide variety of
use a selective pallet racking
fficiency of stock handling, and they
nd allow easier access to stock for
Dispatch and Transport
• Transportation should k
storage conditions.
• When using dry ice, saf
prevent contamination.
• Monitor and record tem
transportation.
• Dispatching only occur
Temperature and Humidity (2) delivery order.
• Storage in dry, well-ventilated premises at temperatures of 15–25°C
• Dispatch procedure shou
• Maintain within acceptable temperature and humidity limits considering the type of
• Special storage conditions (temperature and relative humidity) should be
• All containers should pr
provided, checked, monitored, and recorded product and be clearly la
houses you should have should be? Total Cost = Carrying Cost + Picking
Cost
zation Picking Cost
Total Cost
should storage? If you want to reduce Inv Carrying
ou should remove SKUs that don’t cost
sing) Optimal Issue Pack
Size (32 units)
Flow optimization

ptimization
a perfect packing configuration related 1
Pack (Units) 200 Pack (Units)
cost

ation (analysis and presentation) If you want to increase your warehouse productivity, you just can’t increase the number of pie
package, that way when you get that case instead of having, lets say, 12 units every time there
mization be 24 or 36 units with one activity. That way, if you started with one-week worth inventory in
might now end up with 1-month worth.
timization
ize warehouse workload by reducing
ess: direct shipping or cross docking?
Warehouse Performance Gap Analysis
mization The process has to yield accountab
Productivity and influence.
Storage
Utilization
mization Density
Namely, the cost of the resources:
Safety & Facilities, Equipment, and WMS is
ptimization Counterfeit warehouse manager control. Howe
Inventory consumption and performance of t
ation Accuracy is something he/she can be held ac
ResponseTime
zation (Dock-to-Stock, • How good is he/she doing at co
Order Cycle) Shipping resources into the desired outpu
zation (WMS & MHE) Accuracy warehouse.(input-output model
Inventory Carrying Cost • What does it worth to close tho
• Do you have a set of metrics fo
Optimization
houses you should have should be?
Storage Mode Optimization
Pallet Storage and Handling
zation
What pallet storage modes and retrieval vehicles minimize storage and labo
should storage? If you want to reduce
Storage modes – floor storage, single/double deep rack, push back rack, pallet fl
ou should remove SKUs that don’t
selective racking, drive-through racking
sing) Retrieval Vehicles – Lift trucks, reach trucks, turret trucks, AGV, or ASRS mach
What mix of broken case storage modes minimize labor, space, and error costs?
Flow optimization - bin shelving, storage drawers, flow rack, carousels, ASRS machines, or au
dispensing machines
ptimization What mix of each pick handling methods minimize labor, space, and error costs?
a perfect packing configuration related - pick carts, conveyors, ASRS machines, AGV machines
cost  
 
ation (analysis and presentation) Handling Capacity (inbound-outbound)
Storage Capacity
mization Storage Space Calculation
Material Handling
timization - Equipment Selection (acquisition, capacity analysis, and replacing rules)
ize warehouse workload by reducing - Order-picking procedures
ess: direct shipping or cross docking? - Stock storage and retrieval
- packaging for transportation and storage
mization  

mization

ptimization
Workforce Optimization
ation What is the optimal number and mix of full-time, temporary, and overtime
our warehouse?
zation

zation (WMS & MHE)

Optimization
houses you should have should be? Picking Strategies

Single Order
zation
Picking
should storage? If you want to reduce
ou should remove SKUs that don’t Freeform Picking
Batch Picking
sing)

Flow optimization

ptimization Progressive
Assembly
a perfect packing configuration related
Zone Picking Downstream
cost
Sortation
Picking Strategies Selection:
ation (analysis and presentation) How much time takes to complete an order?
How much does it cost picking? Capital investment,
mization labor costs, space requirements.

timization
ize warehouse workload by reducing
ess: direct shipping or cross docking?

mization

mization

ptimization

ation

zation Size Optimization

The faster Inv Turns, the smaller
zation (WMS and Handling) the warehouse size
If you have more sales or SKUs,
aining optimization you’ll need more storage space
houses you should have should be?

zation
should storage? If you want to reduce Slotting Optimization
ou should remove SKUs that don’t Where should we slot each SKU in its optimal storage mode to minimize pick
sing) space costs?
How often should we re-slot the warehouse?
Flow optimization Pick Face Replenishment
How much pick face should each SKU be allocated to minimize picking and
ptimization costs?
a perfect packing configuration related How many storage lanes should each SKU be allocated?
cost  

ation (analysis and presentation)

mization

timization
ize warehouse workload by reducing
ess: direct shipping or cross docking?

mization

mization

ptimization

ation

zation

zation (WMS and Handling)

aining optimization
houses you should have should be? identify resources constraints. Simulations will help determine warehouse zoning, mat
picking operations, labor and work shifts, handling equipment and scheduling, storage
zation racking systems, item packaging and handling units, and the foundation for the slotting
should storage? If you want to reduce 1. Order Profiling.
ou should remove SKUs that don’t • The warehouse is there to fulfill orders. The more you understand the
sing) behavior, the better you can design the facilities and organizing the w
process to pick those orders.
• The warehouse is there to store items. Understand the demand, inven
Flow optimization
and you’ll be able to design the facility throughput and transportatio
• Order Mix Distribution > Warehouse Zoning (Product Families: Wha
ptimization
orders can be completed out of just one family?)
a perfect packing configuration related • (Handling Unit: Should I create a zone for case picking and another f
cost picking? – Tradeoff: Cost of extra space + zone replenishment vs Fulf
Productivity)
ation (analysis and presentation) • Products per Line/Order
• Lines per Order Distribution
mization • Weight per Line/Order
• Units per Order
timization • Cube per Order > It’s useful to set the item package, the required han
ize warehouse workload by reducing equipment, transportation containers, and the picking technique
ess: direct shipping or cross docking? • Lines and Cube per Order
2. Item Profiling
mization • The warehouse is there to store items
• Popularity of the items (ABC segmentation and SKU rationalization;
mization items generate 70% of the picking, and 40% of the items generate 2%
• Turnover of the items
ptimization • Movement of the items (How much volume is moved out of the wareh
day/month? 15% of the items are shipping less than a case, and 12%
more than 20 pallets. Should these items be in the same storage mode
ation
• Density of the items (Weight/Volume)
• Demand correlation Profile (certain items that tend to be requested to
zation • Order completion Profile (if an order has three or more items on it, th
at least one of them is a B or a C item. So you need to those areas too.
zation (WMS and Handling) look for the minority of the items that by themselves can complete the
the orders, forming the order completion zone. The productivity, accu
aining optimization
houses you should have should be? > Gresham, Tom. Top 6 factors for selecting and implementing a WMS. Inbound Logistics M
 
zation WMSs are software applications that allow for centralized management of warehouse operatio
should storage? If you want to reduce improve warehouse efficiency while providing increased visibility.
ou should remove SKUs that don’t  
sing) WMS can be a critical tool for companies operating warehouses, but attempting to take a step
proper due diligence during implementation. WMS are often in place for 15 years or more. Th
and then change out in a few years. It's a big change and companies need to be thinking long t
Flow optimization  
WMS improves movement of materials and products, increases accuracy and timeliness, enha
ptimization order fulfilment, and strengthens control.
a perfect packing configuration related  
cost Companies that avoid adopting a WMS will fall further behind, until eventually they will be u
Soon, those companies will scramble to catch up. That leads to rash decisions around adopting
ation (analysis and presentation)  
For companies looking to adopt a WMS for the first time, or to change systems, here are six k
mization 1. Usability.
The usability of a WMS is especially important if your organization has an aging war
WMS doesn't make simple tasks more complex, which could increase training time. T
timization managers. If it's hard for them to use, then they will not be able to get a good visual o
ize warehouse workload by reducing whether operations are effective.
ess: direct shipping or cross docking? Once a company chooses a WMS, even a user-friendly system, they may not swiftly
the new system is different than their old way of operating > says Curt Barry, chairm
mization and fulfillment consultancy for the multichannel industry.
2. Complexity of operations.
mization Warehouse operations vary widely among organizations, and it's essential that compa
keep up with their particular demands; e.g. a high throughput, multichannel operation
ptimization of thousands of SKUs requires a robust WMS. Companies should be aware of any un
might not have developed their systems with an organization's specific processes or n
challenge your internal teams to work with WMS vendors to identify those activities.
ation 3. Speed kills
Rushing the process is a big mistake. Companies decide they need to have a system i
zation rush.
In some cases, an organization's leadership has committed to spending hundreds of th
zation (WMS and Handling) important part of the implementation project is managing expectations. It should take
implement it. Otherwise, an organization is likely to be unprepared for the shift in the
aining optimization WMS often might not lead to clear-cut benefits at the start. Organizations need to tak
 Now r
all the
busine
 
Imple
opera
with M
Collect historical data of every point of servic
or Me
consumption during similar periods of time. condi
Define the replenishment frequency for each item,
each department/specialty requires its own logistics
requirements: Specialties, urology, surgery,
pediatrics, emergency, ICU, laboratories. So
different
y concept for delivery/replenishment models and scenarios are going to be
operation
cess:
implemented in different times. Which departments
ional Warehouse > Hospital Warehouse > Medical Stations
require what improvement in logsitcs?
compasses the supply process from warehousing hub to patient’s consumption;
ach medical station will go down. Therefore, the stock level at the warehousing
matches with the real-consumption level.

and (supplies and quantities)

Inventory is critical to planning because it exerts
important effects throughout the system flow
(Multi-Echelon Inventory Planning)
 in the Inventory Safety stock.
Component and packaging It is held to cover unpredictable fluctuat
of the stocks. Generally used to feed demand and lead time
into a manufacturing process.
Anticipation Stock. It is inventory built
to demand peaks that covers expected tr
Work-in-progress (WIP). increased demand from forecasted event

Inventory Level
This facilitates the production by sales promotions, seasonal fluctuations,
providing semi-finished stocks shutdowns, price increases, and holidays
between different processes.
Hedge Inventory. It is held to reduce su
Pharma and Medical disruption risks, price fluctuations (seas
Device market disruptions creating imbalance in
Manufacturer Finished Goods (FG). and supply; e.g. exchange rates variabili
Stocks held at the end of strike, vendor shutdown, government po
the production line.
Transportation Inventory. It comprises
transit and pipeline inventory. Pipeline i
is the stock that is outbound to the custo

r, and Excess and Obsolete (E&O) Inventory

inventory is mostly due to poor supply c
visibility. In turn, it will create obsolete
which becomes a write-off against profi
In-Transit or Pipeline Stock.
Imports/Exports It is inventory held in the
(RMs, SPs & transportation network, including
for
FGs) inventory shipped from a supplier
ties but not received yet. The network Healthcare Delivery
design impacts the level of pipeline Network
o inventory.
evel.
 small delivery areas, reflecting low inventory turns and higher storage unit costs. But cutting the number of sites might lead to an inc
costs because delivery distances are greater, and there are large savings in inventory reduction –specifically in safety stock.
when you look at all of the warehouses as a whole, only a fraction of the combined safety stock is ever used. You can’t reduce the a
er, because each warehouse is an independent location with its own customer base and its own inventory needs. While you can look
get a basic idea of the minimum safety stock you probably need, you can’t determine which location will need it from month to mon
duce the combined safety stock is to allow cross shipments from warehouses experiencing low demand to warehouses experiencing
shuffling of inventory wastes a lot of money in transport costs. You could also ship directly from any warehouse to any customer, bu
tiple locations is lost.
o reduce the amount of safety stock you must maintain is using one central location to keep all the safety stock. Your multiple wareh
n customer base for the most part, and when they can’t, they can call upon the central safety stock location. This eliminates the dupl
hen using multiple warehouses. You still won’t know which of your different regions will see the next demand spike, but it won’t tech
u have all your safety stock in a single location – although longer shipping times may decrease your customer satisfaction rates.
ot law exists for estimating these savings. Basically, the law states that the total safety stockholding in a distribution system is proporti
mber of depot locations. The law gives a broad indication of prospective inventory savings from any DC reduction project.
a site reduction from 10 to 5 can lead to inventory savings of 29 per cent, as indicated in the following calculation:
determines the need to replenish inventory stocking
anch warehouses and ensures that supply sources will be
nd. DRP is a key input for MPS
determines distribution resources allocation by time-
t actual and projected demand for each product in what
ehouse in the distribution network.
requirements calculation of demand and supply in each
mand exceeds supply, DRP generates a planned
prevent stockout. The purpose is to reduce shortages and
and inventory carrying.
eed to replenish inventory at branch warehouses. A time-
proach is used where the planned orders at the branch
xploded via material requirements planning logic to
ments on the supplying source.
DRP inputs:
- Demand forecast (for future periods)
- Scheduled receipts (at the beginning of a period)
- On-hand inventory (at the beginning of a period)
- Target safety stock (for a period)
- Replenishment lead times
- the required quantity of product needed at the beginning of
- the constrained quantity of product available at the beginnin
- the recommended order quantity at the beginning of a perio
- the backordered demand at the end of a period
- the on-hand inventory at the end of a period

puts
SKU, by Store/DC)
edule
y (by SKU, by Store/DC)
ase/Manufacturing Orders
chasing/Distribution Lead Times
des and Deployment Frequency
KU, by Store/DC)
g/Manufacturing Quantity

ime-Phased Model
eeded, how much, where and when it is needed.
acity (by mode, by DC)
ng Capacity (staff and equipment by DC)
y Investment (by DC and total)
ng/Production Outcome (by SKU, by Supply Source)
ical location
at each location
ransportation
When is it the right time to order?
FTL, LTL
ctions
on site selection
f DC needed: area DC, regional DC, X-dock
ment process
on channels: DC, Retailer, Wholesaler, E-commerce
on cost: warehousing, transportation, material
foreign trade; operating costs, labor, taxes, land and
osts, inbound and outbound shipping costs

m
Freight Management
all goal: provide products/services timely, efficiently, and cost ·         Transportation Specialists
ive to multiple customers ·         Good Planning and Control Systems
mer Service ·         Multiple Handling
Delivery within lead times ·         Ownership vs. Subcontracting
Buffering in case of increased demand ·         Full vs. Partial Loads
Provide necessary variety of products (including samples and ·         Shipment Tracking
display products) ·         Shipment Scheduling
Item/Quantity accuracy ·         Export and Import
bution Efficiency  
Minimize transportation/storage costs  
Transportation Choices
Level production/replenishment orders
·         Mixed Loads:  combining dissimilar items into same shipment
Location/size of storage
vehicle space
Timely/accurate inventory data
·         Milk Runs:  Regular routes to pick up from several suppliers
mize Inventory Investment ·         Load Switching Points and Cross Docking:  staging/transferrin
Minimize necessary safety stock from vehicle to vehicle (semis pull in, the product is unloaded fro
Optimize order quantities loaded directly onto local delivery trucks)
·         Delivery Vehicles:  Suitable for their purpose
·         Freight Consolidation:  combining several loads on a vehicle to
the vehicle (FEDEX, UPS, and DHL all do this)

ntity on-hand, 00 is the quantity on order, QR is the
d QA is the quantity available .
ovides better information on what item to order and in
capable of answering, when will customer demand
lanned supply?
oint cannot determine what will be the projected
given item a quarter, a month, even a week from now.
rts the planner that the quantity necessary to satisfy the
lenishment lead time has fallen below the order point
equired.
y inventory planning but also deals with logistics
tion resources and production constraints. The first DRP
n 1975 at Abbott Laboratories, Montreal, Canada.
on of time to the perpetual inventory equation. The
phase supply capabilities every time a new order is
tory on hand, inventory balance, and demand
location and due date)
day/hour of the period)
• Determine the lead time for planned supply orders; i.e. the
difference between due date and release date.
• Gross Requirements
• It is the item quantity that have to be issued from inventory to
fulfill demand. Demand essentially comes from: the backlog of
customer orders, forecasted demand, and interplant resupply
orders.
• Scheduled Receipts.
• These are replenishment orders which consist of three types:
purchasing/manufacturing orders, value-added processing orders,
and interplant resupply orders.
• On-Hand Balance
• Projected On-Hand (Next Period) =
• Inventory On-Hand (Current Period) + Scheduled Receipts (Next
Period) + Gross Requirements (Next Period)
• Planned Order Receipt
• When demand exceeds supply forcing the inventory on-hand to go
negative, the system records it as a net requirement which are
covered by planned orders. A planned order is an unreleased
supply order.
• Planned Order Release
• Determine the release date by subtracting the lead time from
the receipt date

m can process demand and supply data, other key pieces DRP Outputs
el information must be added to the planning equation. 1. Exception Reporting
2. Planned Orders
e (Inventory On-Hand and Projected Inventory) 3. Action Messages
nd and Customer Orders (type of product, locations, • Release Planned Order
ntities) – Customer orders consume forecast demand • Lead time violation
• Expedite in scheduled receipt
e enables to backschedule order release based on the • Cancel Supply Order
eceipt date. • Pegged Requirements
• Bucketless DRP
lue added processing Orders (SUPPLY) • DRP Frequency (Essentially, DRP is a continuous rather than a
vendors make routine visits to customers and take order
when buyers want to combine orders to save transportat
determined by subtracting the current inventory position
calculated to protect against stockouts during the review
 
EOQ Models
Trade-off between having too much and not enough inve
Inventory Level vs Replenishment Frequency (transport
Inventory Level vs Service Level
Safety Stock vs Forecast Accuracy (Probability of Stock
 
ABC Segmentation
It is a method of ranking items by their importance, as fo
is crucial when resources are limited. Criteria for determ
annual cost, annual usage, revenue generated, and usage
situation, about 20 percent of items make up 80 percent
items. Another 30 percent of the items make up 15 perce
items make up the remaining 50 percent of items and co
of the cost.
 
In ABC inventory control, A items are carefully manage
investment; less time and resources are devoted to the B
and resources are dedicated to the C items. ABC Invento
counting. For example, the A items are counted often—o
items are counted less often— once per calendar quarter
counted even less often— once per year, for example.mu
industries in the last decades. Logistics is one of the non-core activities
These logistics tasks are performed by logistics service providers
ial role in making the operation of several industries more effective
perate independently from their clients and offer complex logistics
t only such classic services as transport or warehousing but also value
stponed manufacturing or assembling.
sential to attain efficient resource allocation when either a
engage with a 3PL or a 3PL wants to know how to price its services.
osting is a key part of optimization and design projects.
eld is a multi-layer integration of various players who have the niche
manage one or many logistics functions. In any network, you will not
provider being able to manage the entire supply chain. it is impossible
dinate and manage each leg and every activity in so many locations and
ors and interfaces.
gistics components get outsourced by these service providers. For
ogistics facility, the 3PL provider who has secured the contract may
he facility himself. Moreover, labor is often outsourced along with
oading/ unloading, and fleet/yard management.
he lead players are the Freight Forwarders and Warehousing Service
warders are those firms who consolidate the cargo and book the
reight using an airline or a shipping line or use ground transportation
services wherever required. Freight forwarders do not own any mode
ces. They book the space with airlines and shipping lines and negotiate
se customs clearance division to support ground logistics operations..
of providing origin and destination services coupled with single
s using other third party service providers.
pproach may not be sufficient in case of complex logistics service
improve logistics costing is through the multi-level full cost allocation
costing model contributes to making logistics costing more accurate
over, the relations between costs and performances also become more
es the effectiveness of logistics planning and controlling significantly.
when the relevance of overheads or indirect costs is low Logistics
need of the logistics plan.
Normally the warehouses consist of vertical racks with levels anywh
above with a carrying capacity of one ton per pallet position. Depen
racking design will vary from pallet racking to block stack, deck rack
Handling equipment used include Hand Pallet Jacks, Trolleys, Batter
types of Reach Trucks used in racks.
The entire warehousing operations include Receiving Process involv
inspection, in warding and put away. Delivery or shipment includes
customer along with invoice or sales documentation, picking materi
marking, preparing outbound documentation and shipping out by lo
these functions, the other main functions in the warehouse include
involves location management, managing storage capacities and bu
out inventory counts to ensure accuracy of inventory and stock take
The entire warehousing operations are dependent upon documenta
operations and inventory. Warehouses use WMS - Warehouse Mana
The system manages inbound transactions, location management a
warehousing operations for both inbound and outbound transaction
inventory in detailed level and managing inventories.
Working with a 3PL will easily bundle “unseen” financial concerns
• Cost of operational readiness. Do you have the resources and p
volume properly?
• Cost of scaling your operation. In case your company grows or
their logistics, it won’t throw your in-house operations into a cha
• Cost of determining best methods. While your company might
carriers, 3PLs typically do, giving both you and your customers
• Cost of opportunity and discovery. A 3PL has the experience n
change, and cost savings without the need for a targeted assessm
• Cost of recovery in unforeseen situations. From hurricanes to d
nightmares do happen. A 3PL has the agility and know-how to q
logistics that your company might not have otherwise considered
• Cost of experience when branching to new regions or countri
• Cost of professionalism. When your in-house logistics struggles
demand, that damages your brand. Relying on a 3PL to keep thin
provide better service to your customers.

he pricing must be determined before analyzing logistics tradeoffs.
ant to improve storage efficiency or workforce productivity? The
these two warehouse functions have opposing requirements.
aximize the space utilization can make it more complicated and
rs. Large storage areas increase the travel distance and reduce picking
ach picking requires small amounts of inventory in dedicated pick
ases the space required. This is contrary to efficient storage density.
ct these characteristics.
ss should create a model that is a blend to minimize the total cost of
minimize space costs, minimize labor costs, and minimize equipment
the warehouse operation is not isolated but part of a multifunctional
optimized as a whole.
ed to emphasize storage density or productivity? You cannot
most every improvement in storage density increases labor
vice-versa.
want the lowest overall cost? The easiest way to determine the
is to use the pricing model for what-if scenarios. This process can
s considering overall costs. It takes into consideration the cost of
ack and equipment, the cost of the space-related expenses, the labor
use, the cost of working capital on that labor, etc.
you or the 3PL willing take on? The chart below explains the different
and the level of risk or shared risk involved in each. The level of risk
el of management fee used. Higher risk relates to a higher
harged by the 3PL
not, calculate the amount of space required to run the operation, con
functions need to be and the performance of each.
• How does the product store?
Pallet Racking storage
Floor Stacking-storage
• Elements that play into the decision on racking versus floor s
Outbound order flow (ABC velocity analysis on inventory
Stackability
Inventory turns
Number of SKUs • The greater the SKU count, the higher
the honeycomb will be, and the greater consideration should be
racking.
• How wide does your aisle need to be, which is determined, in
the type of equipment you need to use on the handling side of th
• Capacity Planning. If the building gets beyond 85% full, then t
impact the productivity. And the building must be big enough to
inventory with consideration for seasonality. Bottom-line, allow
to become too full, your operation suffers; too empty, and you ca
your rent. You must decide how full is truly “full” and how profi
while still being as efficient as possible.
• Along with the cost of the space itself for storage, other costs inc
indirect space (space not used as storage, such as the front dock)
rack, building-related costs (such as building maintenance, utiliti
waste disposal, etc.), insurance, taxes, and landlord expenses like
maintenance and building upkeep. All of these costs are in your
would be in the 3PL cost structure.
 and storage strategies.
cost, approximately, to serve a potential customer with my goods

won’t affect your labor cost proactively, it’s important

ve for determining what you can––or should––pay for
Ideally, you should be striking a balance between
es and expecting superior service.
vel of efficiency can I expect as my labor cost increases or

mpany willing to accept lower output for higher cost savings?

pact your brand reputation, if so?
expectations for labor versus what I can pay realistic, industry-

portunity costs, the unseen costs of underpaying or

bor can have detrimental effects on your overall

both determine and reduce or stabilize your logistics costs. Much of

, and budget is found in the gap between your current state and the
will provide expertise to determine what is wrong, what needs to be
tively, and communicating the results of solutions to ensure there is
e

of the costs on your general ledger to see which costs can be allocated
n be allocated to labor. Those that cannot be allocated to either should
nd allocated to your bid as a known percentage.

how the operation functions, the next step is to develop the feasible
he projected business requirements.
s:
ory on-hand. Unless the inventory is 100% stable, the operation
high, if not peak, inventory level.
nts:
w product arrives, to how it leaves the facility and everything in
ves of this aspect of planning are to minimize product
ravel distance as much as possible, and to minimize the