SCM B371F SCM B371F Logistics SCM B371F SCM B371 Logistics Unit 1 Introduction to logistics Unit 2 Logistics performance and customer service Unit 3 Inbound logistics Unit 4 Outbound logistics Unit 5 Logistics network and strategy SCM B371F Scope of Logistics 3 SCM B371F Unit 3 Inbound logistics Module 1 Procurement Procurement Objectives Supplier Selection and Evaluation Global Procurement (sourcing) Sustainable Procurement Module 2 Inventory Management Inventory Trade-offs Types of Inventory Inventory Reduction Tactics ABC Analysis Economic Order Quantity Continuous Review System (Q system) Periodic Review System (P system) SCM B371F Procurement Module 1 SCM B371F Discussion Questions: 1. What kind of risk assessments involved in procurement 2. Are supplier risk assessments the same for all SKUs 6 SCM B371F Procurement WHAT – Refers to the raw materials, component parts, and supplies bought from outside organizations to support a company’s operations WHY – Procurement costs often range between 60 and 80 percent of an organization’s revenues SCM B371F Procurement Objectives Supporting organizational goals and objectives (e.g. profitable growth) Managing the purchasing process effectively and efficiently (e.g. JIT/VMI) Managing the supply base (sourcing) Developing strong relationships with other functional groups Supporting operational requirements (satisfying internal customer) SCM B371F Supplier Selection/Evaluation Process One of procurement’s most important responsibilities Involves stating an organization’s needs and determining how well various potential suppliers can fulfill these needs Figure 6.1 Supplier Selection Framework e.g. what, when & qty e.g. quality/price/service EDI capabilities e.g. single/multiple sourcing/ just- in-time/green purchase Process/performance based e.g. supplier audit & scorecard SCM B371F Procurement Portfolio Approach Situation analysis Kraljic’s Portfolio Matrix2 – Used to classify corporate purchases in terms of their financial importance and supply risk/complexity – Goal is to minimize supply vulnerability and getting the most out of the firm’s purchasing power 4 categories: different procurement strategies 2Peter Kraljic, “Purchasing Must Become Supply Management,” Harvard Business Review 61, no. 5 (1983): 109–117. Local suppliers Reverse auctions/ multiple suppliers Global, new suppliers with new technology Long-term, cost-based contracts with key suppliers SCM B371F Global Procurement (Sourcing) Refers to buying components and inputs anywhere in the world Driven by: – Factor-input strategy (organization is seeking low-cost or high-quality sources of supply) – Market access strategy (organization is sourcing in markets where it plans to do significant business) SCM B371F Global Procurement (Sourcing) Challenges in establishing a successful global sourcing strategy include understanding hidden costs as supply bases are expanded Examples of hidden costs: – Increased costs of dealing with suppliers outside the domestic market – Duty and tariff changes that occur over supply agreement life – Increased inventory-related costs associated with global supply chains – Rising levels of logistics cost volatility (e.g., ocean freight rates) Total cost of ownership SCM B371F Sustainable Procurement Refers to the integration of social and environmental considerations into all stages of the purchasing process Goal is to minimize the impact of procurement activities on human health and the environment Social responsibility – The environment – Safety SCM B371F Lenovo 14 SCM B371F Activity 3.1 As organizations continue to expand their supply bases, many are realizing hidden cost factors are affecting the level of benefits that were projected to be achieved through this approach. What is total cost of ownership and why is it important to consider SCM B371F Case study 3.1 Please read the case ‘TEMPO LTD’ on page 89 in your custom textbook and attempt the questions below. 1. Should Terim let somebody else complete the transaction because he knows that if he doesn’t sell to the North Koreans, somebody else will 2. What other costs and risks are involved in these proposed transactions via Romania or Syria, including some not mentioned in the case SCM B371F Inventory management Module 2 SCM B371F Discussion Question: 1. If safety stock recommendations generated by inventory management technology solutions are ignored, what policy could be implemented to reduce safety stock or dated inventory items at a company like L.L. Bean 2. How would better collaboration with key suppliers reduce the stock-out concerns by Sales and Marketing 18 SCM B371F What is a Inventory Management Inventory Management – The planning and controlling of inventories to meet the competitive priorities of the organization. Inventory – A stock of materials used to satisfy customer demand or to support the production of services or goods. What is Inventory SCM B371F Inventory Costs Assets cost money, which means that inventory costs money Inventory costs between 2010 and 2014 represent approximately one-third of total logistics costs Logistics manager must understand nature of each cost as well as trade-offs Inventory costs include: – Carrying cost – Ordering cost – Stockout cost SCM B371F Inventory Trade-Offs Figure 9.1 Creation of Inventory SCM B371F Types of Inventory Figure 9.2 Inventory of Successive Stocking Points Accounting Inventories – Raw materials – Work-in-process – Finished goods Operational Inventories – Cycle Inventory – Safety Stock Inventory – Anticipation Inventory – Pipeline Inventory SCM B371F Cycle Inventory Refers to inventory that is needed to satisfy normal demand during the course of an order cycle 1. The lot size, Q, varies directly wi
th the elapsed time (or cycle) between orders. 2. The longer the time between orders for a given item, the greater the cycle inventory must be. + 0 Average cycle inventory = = 2 2 Q Q SCM B371F Safety Inventory Refers to inventory that is held in addition to cycle stock to guard against uncertainty in demand or lead time SCM B371F Anticipation (Speculative) stock Refers to inventory that is held for several reasons, including seasonal demand, projected price increases, and potential shortages of a product Inventory that is en route between various fixed facilities in a logistics system such as a plant, warehouse, or store SCM B371F Inventory Reduction Tactics (1 of 2) Cycle inventory – Reduce the lot size 1. Reduce ordering and setup costs and allow Q to be reduced 2. Increase repeatability to eliminate the need for changeovers Safety stock inventory – Place orders closer to the time when they must be received 1. Improve demand forecasts 2. Reduce supply uncertainties SCM B371F Inventory Reduction Tactics (2 of 2) Anticipation inventory (seasonal) – Match demand rate with production rates 1. Add new products with different demand cycles 2. Provide off-season promotional campaigns 3. Offer seasonal pricing plans Pipeline inventory – Reduce lead times (air/ocean shipment) 1. Find more responsive suppliers and select new carriers 2. Change Q in those cases where the lead time depends on the lot size SCM B371F Questions to answer in inventory management What to order How much to order When to order 28 SCM B371F What is an ABC Analysis ABC Analysis Inventories are not of equal value to a firm Inventory should not be managed in the same way The process of dividing SKUs into three classes, according to their dollar usage, so that managers can focus on items that have the highest dollar value. Figure 9.4 Typical Chart Using ABC Analysis SCM B371F Inventory Management What to order How much to order When to order 30 SCM B371F Economic Order Quantity (EOQ) Trade off between holding and ordering/setup cost Ordering cost Costs of receiving an order (wages) Conducting a credit check Verifying inventory availability Entering orders into the system Preparing invoices Receiving payment Inventory holding cost Obsolescence costs Inventory shrinkage Storage costs Handling costs Insurance costs Taxes Interest costs SCM B371F Calculating EOQ Figure 9.6 Graphs of Annual Holding, Ordering, and Total Costs Total cost: Inventory carrying cost + Ordering cost = ( ) + ( ) 2 Q D C H S Q where C = total annual cycle-inventory cost Q = lot size (in units) H = holding cost per unit per year D = annual demand (in units) S = ordering or setup costs per lot = SCM B371F Managerial Insights from the EOQ Table 9.1 Sensitivity Analysis of the EOQ SCM B371F EOQ Cost Calculations example SCM B371F Economic Order Quantity Five assumptions 1. The demand rate is constant and known with certainty. 2. No constraints are placed on the size of each lot. 3. The only two relevant costs are the inventory holding cost and the fixed cost per lot for ordering or setup. 4. Decisions for one item can be made independently of decisions for other items. 5. The lead time is constant and known with certainty. SCM B371F Inventory status Reorder point Lead time variation Demand variation SCM B371F Inventory Management What to order How much to order When to order 37 SCM B371F When to Order Key issue involves when product should be ordered – Can order a fixed amount of inventory (Q system) – Or, orders can be placed at fixed time intervals (P system) SCM B371F Continuous Review System (Q system) Reorder point system (ROP) and fixed order quantity system – ROP = Daily Demand x Lead Time under certainty – ROP = (D x L) + Safety Stock under uncertainty Both Demand and Lead Time are Constant Demand is Variable and Lead Time is Constant SCM B371F Continuous Review System (13 of 13) Advantages of the Q System (ROP) 1. The review frequency of each SKU may be individualized. 2. Fixed lot sizes can results in quantity discounts. 3. The system requires low levels of safety stock for the amount of uncertainty in demands during the lead time. SCM B371F Periodic Review System (P system) Figure 9.13 P System When Demand Is Uncertain Fixed interval reorder system or periodic reorder system SCM B371F Periodic Review System Advantages of the P System 1. It is convenient because replenishments are made at fixed intervals. 2. Orders for multiple items from the same supplier can be combined into a single purchase order. 3. The inventory position needs to be known only when a review is made (not continuously). SCM B371F Discussion We understand that too much inventory creates a lot of problems for an organization. The material manager always wants to reduce the inventory level as much as possible. Will organizations ever get to the point when they will no longer need inventories Why or why not 43 SCM B371F Activity 3.3 Please read the case ‘Parts Emporium’ on page 135 in your custom textbook and attempt the questions below. Put yourself in McCaskey’s position and prepare a detailed report on managing the inventory of the EG151 exhaust gasket and the DB032 drive belt. Present a proper inventory system and recognize all relevant costs. By how much do your recommendations for these two items reduce annual cycle inventory, stockout and ordering costs 44 SCM B371F Unit 3 Summary 45 SCM B371F Unit 3 Inbound logistics Module 1 Procurement Procurement Objectives Supplier Selection and Evaluation Global Procurement (sourcing) Sustainable Procurement Module 2 Inventory Management Inventory Trade-offs Types of Inventory Inventory Reduction Tactics ABC Analysis Economic Order Quantity Continuous Review System (Q system) Periodic Review System (P system) SCM B371F END 47