knnow where is the best region for distributio??

should be KY

study thoroughly

He will give a lot of question where there is multiple correct answer..

Supply chains in Global economy

Economies and companies could improve their wealth

by allowing specialization of tasks.

Advantage is true, if

Demand for increased volume produced

Total landed cost is lower

Growth of companies in Asia and Latin American

countries

Not just as source of products

GLOBAL DIMENSIONS OF
But also as emerging markets for the products

Now growth is higher in African (stable nations) and east

SUPPLY CHAINS
European countries

Arunachalam Narayanan

Global Markets and Strategy

Top U.S. Trading Partners

Success in the global market place requires developing

a cohesive strategy, including

Product development
Technology

Marketing
Manufacturing, and

Supply chains.
Key characteristics:

Supply Chain Security

Ports

More cargo inspections

Ports of Entry (POE)

Much more paperwork, and

Over $2 trillion in trade value per year passes
Longer time to clear U.S. borders are now a reality.

through U.S. ports, and over $18 billion is collected

Who is in charge?
in industry fees and taxes.

Some initiatives
Sea Ports
COUNTRY
Canada
China
Mexico
Japan
Germany
United Kingdom
South Korea
France
Taiwan
Brazil
Total

2008
601
408
367
204
152
112
83
73
61
63
$2,124

2009
431
366
306
147
115
93
68
61
47
46
$1,679

2010
525
457
393
181
131
98
88
66
62
59
$2,059

VALUE OF TRADE ($ BILLIONS)

standardization reduces complexity

global competition reduces the product life cycle
traditional organizational structures and business models
frequently change (Culture, Time Zone, Language)
globalization introduces more volatility

US CBP (Customs and Border Protection)

know one of these

two and it definition

C-TPAT : Customs Trade Partnership Against Terrorism -a

cooperative effort to secure the global supply chain and to
facilitate legitimate cargo and conveyance.
FAST : Free and Secure Trade program - provides passage to
pre-approved eligible goods through streamlined customs process
agreed upon by the respective governments.
Dedicated lanes at port of entry

LA/Long Beach
New York/ New Jersey
Houston
Port of South Louisiana, LA

Port statistics
Rankings vary by tonnage, number of containers,
value of imports/exports
Chinese ports dominates international rankings
By tonnage:
In US , No. 1 is Port of South Louisiana, No 2 is Houston
and No.3 is LA/Long Beach

By no. of containers

Ports
Land Ports are also POE
Examples
Along US-Mexico
Laredo
El Paso
Otay Messa

Along US-Canada
Detroit (MI)
Buffalo (NY)

In US, No. 1 is LA/Long Beach and No.2 is New

York/NJ

Ports

Land port distribution in US

Challenges along POE

Capacity
Security

Affect wait time at the port

Either in inspection
Storage/warehouse space close to the ports

Land port distribution in US

Global transportation options

Ocean most common, lowest cost
Liner, Charter and private carriers

Air expensive
Only advantage is speed

Motor
Adjacent countries, e.g. Between US-Mexico, US-Canada or in between European
countries

Rail
International rail traffic is limited because border crossing points are scarce.
But Intermodal movements are increasing. An example (from text)
Japan to Europe by Sea alone is 28-31 days
Another intermodal route:
Japan to Seattle (by sea) : 10 days
Seattle to NY (by rail) : 5 days
NY to Europe (by sea) : 7 days
Total : 22 days

Challenges is several countries and carriers are involved, therefore cost will tend to
increase

Global Intermediaries
Freight forwarders
Foreign freight forwarders
Typical surface/ocean freight forwarders

Global Intermediaries
know this one

Supplies expertise to international shippers

Consolidate small shipments into more economical sizes
Derives income from fees for service

Airfreight forwarders

Non-Vessel- Operating Common carriers (NVOCC)

Arose from inability to find outbound traffic after unloading
inbound containers
Carriers charge same rate to move containers whether loaded/empty

Consolidates and dispenses containers at inland points

Uses the shipping expertise that NVOCCs possess
Ocean carrier gains from the increased market area

Global Intermediaries
Customs House Brokers
Typically seen in US-Mexico border transactions
CHBs are licensed by Dept. of Treasury

Oversee the movement of goods through customs and

ensure that the documentation accompanying a
shipment is complete and accurate for entry into the
country
Operate under power of attorney from the shipper to
pay all import duties due on the shipment
The importer is ultimately liable for any unpaid duties
Keeps abreast of the latest import regulations and
specific requirements of individual products

Export Management Companies

EMCs act as agents for domestic firms in the international arena
Obtain orders, selecting appropriate markets, distribution
channels, and promotional campaigns
They may have exclusive contracts or sell goods on commission

Export Trading Companies

ETC exports goods and services to overseas buyers and handles
most of the export arrangement
ETC allows small- to medium-size firms to engage in foreign trade
Example : Sogo Shosha in Japan

Storage and Handling

Transit sheds
Provide temporary storage while the goods await the next portion of
the journey. After a fixed number of free days, fees are charged on a
daily basis

Hold on dock storage

Carrier provided hold-on-dock storage free of charge until the vessels
next departure date.

Public warehouses
Available for extended storage periods. Services and fee charges are
similar to domestic shipments

Bonded warehouses
operate under customs agencys supervision and are used to store,
repack, sort, or clean imported merchandise entered for warehousing
without paying import duties while the goods are in storage.

learn this slide

Free Trade Zones

Where manufacturing does not have to take place for
trading privileges to be gained (retailing).
Sometimes called Export Processing zones, where
Labour-intensive manufacturing centres that involve
the import of raw materials and the export of factory
products.
It is an area that is located within a nation (say, the
United States), but is considered outside of the
customs territory of the nation.

Free Trade Zones

FTZs provide many cash flow and operating benefits
to zone users
1. Duty deferral and elimination
2. Lower tariff rates
3. Lower tariff incidence
4. Exchange rate hedging
5. Tax breaks by host nations

learn this slide

NAFTA

Typical Shipment to Mexico

Agreement between Canada, US and Mexico

Based on the principles of
Unimpeded flow of goods
Most Favored Nation (MFN) status : low duties/custom
fees (if any) and simplified paperwork
Commitment to enhance cross border movement of
goods and services

Some barriers still remain

Trucking restrictions (Intra country shipments)
Especially between US and Mexico

What happens at the border?

Mexico

USA

Custom Broker

Mexican Export
Customs
Compound

Export docum entation

& cargo inspection

Tran sfer /
Drayage
Operations

Custom Broker

US Federal
Compound

Im port docum entation,

prim ary and secondary
cargo inspection

State
Compound

Long-Haul
trucking firm or
Freig ht
forwarder

Recipient/
Customer

Drayage
Operator

Long-Haul
trucking firm or
Freig ht
forwarder

Drayage
Operator

Shipper/
Customer

What happens at border?

Vehicle and
Driver Inspection

Takes about 2-6 hours to complete this process at

the WTB (which includes the waiting time)

understand this slide. He will ask this with the NAFTA question

Challenges in cross border traffic

Capacity
Number of operating lanes
Hours of operations

Truck movement restrictions

Security
Lack of integration
Many intermediaries not with a common objective

Maquiladora
Maquiladora are factories in Mexico run by a foreign
company and exporting its products to the country of that
company.
A U.S. Manufacturer operates or subcontracts with a
facility in Mexico to manufacture, process, or assemble
products to capture labor savings.
U.S. manufacturers now operate more than 2,000 maquiladora
facilities in Mexico
Limited tariff duties (if any)

Sometimes called 'twin plant' manufacturing program

under which specialized production facilities (usually along
the US-Mexican border) can import components duty-free
for in-bond storage, assembly, and subsequent re-export.

Asian Emergence and challenges

Hourly Manufacturing compensation

The most significant trend in the past 25 years is

that of the rise of pacific rim countries as important
players in the global economy.
Many countries are now the worlds preferred sources
for raw material and components

Another primary reason is labor cost.

First it was China
Then Vietnam and Thailand

But labor is only one piece of puzzle

Think about total logistics cost

New directions
Locating factories and logistics facilities in countries
that use or consume the products.
Focused production
A plant produces only one or two products
Typically located in different countries requiring a
global logistics system
Intel example (journey of Intel microprocessor chip)

Life of an Intel chip

Intel chip travels two times across the pacific
ocean before being installed in a machine
The supply chain cost is only $5.50, but with a new
atom chip in the horizon how to reduce the supply
chain cost?
Chips dont cost a lot to transport, major cost is in
inventory.
See article.

Role of distribution in SCM

Balancing supply and demand.
Stockpile inventory to buffer supply and demand
Example: Valentine day cards sold in Feb but produced and stocked months
ahead of time

Protecting against uncertainty.

Disruptions like weather events, forecast mistakes etc.

Allowing quantity purchase discounts.

Supporting production requirements.

DISTRIBUTION AND
WAREHOUSING

Batch production reduces cost

Promoting transportation economies.

Arunachalam Narayanan

Distribution

DCs Accumulation role

Facilitys Functionality
Accumulation
Sortation
Allocation
Assortment

Value adding role of operations

Assembly services
Inventory management
Product kitting, bundling and unbundling
Product postponement
Production sequencing
Recycling, repair and returns management

DCs Mixing capability

Distribution tradeoffs
External tradeoffs
Number of distribution centers vs. cost of transportation
Number of distribution centers/warehouses vs. Cost of
inventory
Cost of additional facilities vs. level of customer service

Internal tradeoffs
Space vs. equipment
Equipment vs. people
People vs. space

Distribution Challenges

Strategic Distribution Decisions

Labor availability
Demand variation
Increasing customer requirements
Managing all cost trade offs

Distribution Planning and Strategy

Capability requirements
Product characteristics
e.g., product value, durability, temperature sensitivity, obsolescence, and
volume must drive the design of the distribution process.

Two options for product flow:

Direct shipment of goods
from the manufacturer to retailer
from the retailer to consumer

Distribution Planning and Strategy

Roles to be fulfilled
Types of facilities
Traditional warehouses
DCs
Cross docking facilities
They can provide a high velocity alternative to direct shipping at
low transportation cost

Movement of goods through distribution facilities to customers

Must analyze the inventory, transportation, and service trade offs

before choosing between direct shipping and the use of
distribution facilities.

Cross docking operation

Cross docking: Dabbawallah

A video
lecture at the answer on your quiz
Know
this video-look

know what always always decrease when warehouse increase?

the answer would be cost of lost sale

Distribution Planning and Strategy

Distribution Planning and Strategy

Network Design Issues

Inventory positioning focuses on the issue of where inventory is located
within the supply chain
Single location
Multiple customer-facing positions

Number and locations of distribution facilities within the supply chain.

Involves the evaluation of cost tradeoffs with other functional areas:
Transportation costs
Cost of lost sales
Warehousing costs
Inventory costs

Top 10 warehouse location article

Own or contract?
Benefit of contracting, dont have pay for facilities or personnel
It comes down to volume, cost and risk of the operation

Factors Affecting Distribution Facility Ownership

Distribution Planning and Strategy

Facility Considerations
Size of each operation within the network.
Space for storage
Space for interface with the transportation network (dock doors)
Space for order picking and assembly (if needed)
An area may be needed for processing rework and returns
Office space is needed for administrative and clerical activities
Space must be planned for miscellaneous requirements

A facility view

Facility layout principles

General guidelines
Facility design should be flexible
Proper use of automation and materials-handling
equipment
Slotting (next slide)
Guidelines based on products
High value goods must be safe-guarded against
pilferage
Temperature sensitive products in refrigerated areas.
Hazardous materials must be stored separately

Slotting by popularity

Slotting
Product placement within the facility for the purpose
of optimizing material handling and space
efficiency.
Common criteria
Popularity
Unit Size
Cube

Slotting by popularity
Class based Storing strategies

Slotting by cube and size

Small size items are locater near the shipping area
and larger size are placed farther away

Routing strategy
By routing pickers we can increase productivity and ensure
safety. Optimal routes are not available for all layouts, it may
seem illogical for picker and may cause congestion

Objective is to reduce order picking distance

Sometimes bigger items are placed at one of the
warehouse with separate access doors

Smaller total cubic space requirement products are

placed closer to shipping area

Routing Strategy

Layout of warehouse
Number of aisles, length and width of warehouse

know the layout of warehouse-which one is best?

Layout of warehouse
Number of cross aisles or type of cross aisles

For interested students

Kevin Gue
Faculty in University of Arkansas
http://kevingue.wordpress.com/

A free textbook of warehouse design

http://www.warehouse-science.com/

i think this

is the best one

know this slide

Purpose of slotting and strategy

Increase picking productivity
Work balancing
Minimize product damage
Increase accuracy
Improve Ergonomics
In Short : Increase efficiency, safety at the same
time protect the health of employees.

Distribution Execution
Product-Handling Functions (terminologies)
Receiving transferring goods into facility
Put away moving goods into storage locations
Order picking selecting goods for customers
Replenishment moving product from storage locations to picking slots
Shipping loading goods for delivery

Support Functions
Inventory control
Safety, maintenance, and sanitation
Security
Performance analysis
Information technology

Primary DC process

Best practices in order picking

know this slide: cubescan, packsize and how many current

type of box they have today.

One additional job of distribution is

Packaging while shipping.
Have you received a small item in a big box?
Thought about the wastage (cardboard box, shipping
charge etc. ?)

Customized packaging in Staples

Two key ingredients
Cubescan : Helps in identifying the dimension of the
products stored in warehouse
Packsize : Build custom size packages based on orders
placed by customers
Staples self chose 150 types (previous they had only 6
different types/sizes of box)

End result
Less wastage
Safe space in truck (20% extra space in trucks)

Warehouse Management System

Software control system that improves product movement
and storage operations
Value-added capabilities
Generate performance reports
Support paperless processes
Enable integration of materials handling equipment
Picking systems
Help in routing

Sorting systems
Help in storage

Distribution Metrics
Customer Facing metrics
Order accuracy and order completeness
Timeliness
Perfect order Index (POI)
Delivered to the right place
At the right time
In defect-free condition
With the correct documentation, pricing, and invoicing

Leverage wireless communication

Barcodes, RF scanners, RFID, voice recognition etc.

Distribution Metrics

An Example: Metrics benchmark

Internal Measures
Distribution cost efficiency
US warehousing and distribution cost is $119 billion in 2009

Measures Used

Median level performance

Best in class
performance

Aggregate cost efficiency

Total distribution spending versus goal or budget
Item level metric cost per pallet, cost per order or cost per case

Asset utilization
Most often used goal is 80 to 85% of DC capacity

Resource productivity
Distribution costs averaging nearly 10 percent of a sales dollar

Resource efficiency
Compares activity completion to expected time

this chapter-learn all the problems, practice the problem from the inverntory assignment, question 1 and 3 will be in the lest in the writing portion.
Understand the relationship of all the equation and what will affect the equation

Managing inventory in SCs

SCM 4301
Arunachalam Narayanan

Inventory Basics
Inventory: Stock of any item or
resource used by the firm.
Raw Material
Work in Progress
Finished Goods
Spare parts, supplies, etc.

Reasons for Inventories

Improve Customer Service.
Reduce Costs
Economies of Scale in Production.
Economies of Scale in Purchasing & Transportation.
Hedge Against Price Changes.
Deal with Uncertainties in Demand and Lead-Times.
Hedge Against Contingencies.

Reasons Against Inventories

Consumes Capital Resources.
Masks Quality Problems.
Insular Attitude Towards Logistics Channel
Management.

Nature of Demand
Perpetual (Constant) Demand
Sufficiently long enough demand.

Seasonal Demand.
Spike(s) in the demand pattern.

Lumpy, Intermittent and Erratic Demand.

Unpredictable demand pattern.

Terminating Demand.
Zero demand in the foreseeable future.

Derived Demand.
Dependent demand. (MRP)

Lumpy, Erratic and Intermittent

Classification parameters
ADI
Average Demand Interval
How often the demand occurs
High ADI demand is very intermittent
Low ADI demand is frequent
If 1 demand occurs every period

CV2
Coefficient of variation of demand
Std. dev of Demand / Average demand

States how variable the demand

High CV high variability
Low CV - Low variability

Lumpy, Erratic and Intermittent

High

Low

High

Erratic
(GammaDistribution)

Lumpy
(PoissonDistribution)

Smooth
(Normal distribution)

Intermittent
(PoissonDistribution)

CV2 = 0.49

Low

ADI = 1.32

Examples of demand pattern

Intermittent Demand
Infrequent but reliable demand

Erratic Demand
Frequent but unreliable demand

Lumpy Demand
know this

Infrequent and unreliable demand

ABC Analysis
Divides on-hand inventory into mainly 3 classes
A class, B class, C class
More possible

Policies based on ABC analysis

Reduce inventory through the reduction of poor performers
Increase fill rates on top sellers
Develop class A suppliers more
Give tighter physical control of A items
Forecast A items more carefully

ABC methods
Based on
GMROI
Hits
Sales
Product Lifecycle
Logistics Cost
Managerial Review

A Typical ABC makeup

Class
A
B
C

% Annual $ Usage
100
80
60

% $ Vol
80
15
5

% Items
15
30
55

40

20

0
0

50

100

% of Inventory Items

Inventory Objectives
Product Availability

At a 5% Stockout Rate

95% fill rate?

If you deliver multiple items on an order:
Two items on an order gives you an order fill rate of: 90%
Three items: 86%
Four items: 81%

= (0.95) 4

Five items: 77%

Ten items: 60%

= (0.95) 10

Whats more important to your customer, the item or the order fill
rate?

Inventory Objectives
Product Availability

learn how to calculate this type problem

Example: The product line of a chemical company contains

three separate items that are ordered by customers in various
combinations. From a sampling of orders over a period of time,
the items appear on orders in 7 different combinations with the
frequencies given. The service levels for items A, B and C are
0.95, 0.90 and 0.80 respectively. What is the probability that
the company will not be able to supply all items in an order at
the time of customer request?

Inventory Objectives
Product Availability
Item Combination

Frequency

Prob. of Filling

Marginal

on Order

of Order

Order Complete

Value

0.1

0.1

0.2

A, B

0.2

A, C

0.1

B, C

0.1

A, B, C

0.2

___________

1.0

Inventory Objectives
Relevant Costs
Out-of-Stock Costs.

Procurement Costs.

Lost-Sales Cost.

Order preparation.

Profit Loss.

Order transmission.

Goodwill Loss.

Production setup (if appropriate).

Material handling and processing.

Backorder Cost.
Additional order handling.

Price of the goods.

Additional transportation.

Carrying Costs.

Additional setup costs.

Storage, taxes, insurance, interest

payments, cost of capital, etc.

Inventory Management Objectives

Customer Service ,
i.e., Stock Availability

Inventory Holding costs

Good inventory management requires a careful balance

between stock availability and the cost of holding
inventory.

Inventorys Conflicting Cost

Patterns

Minimum cost
reorder quantity

Cost

Total cost

Procurement cost
Stockout cost
Replenishment quantity

Total Relevant Cost

D
TC =

Q
*S+I*C*

D
*k* d2 *

+I*C* SS+
2

2 +
LT

LT *

*E(Z)

Where D = Total Demand

Q = Economic Order Quantity (EOQ)
S = Order Cost
I = Holding Cost
C = Item Cost
LT = Lead Time

Holding cost
Holding cost or carrying cost or
Inventory cost (I)
Consists of
Cost of storage (Labor and space)
Taxes
Insurance
Cost of Capital
Loss/ Damage/ Obsolescence

Table 9.5 (book)

Inventory System
An inventory system is the set of policies and controls
that monitor levels of inventory and determines what
levels should be maintained, when stock should be
replenished, and how large orders should be
Inventory policy answers two questions:
How much to order?
When to order?

Inventory Systems
Push System
Pull system (basic model)
Single-period Model (Newsboy)
Multi period models (Repetitive
replenishments)

Push vs. Pull Inventory Control

PUSH - Allocate supply to each
warehouse based on the forecast
for each warehouse.

PULL - Replenish inventory with

order sizes based on specific needs
of each warehouse.

Demand
forecast
Q1

Warehouse #1

A1
A2
Plant

Q2
Warehouse #2

A3

Demand
forecast

Q3
A = Allocation quantity to each warehouse
Q = Requested replenishment quantity
by each warehouse

Warehouse #3

Demand
forecast

Inventory Control
Push Approach
Appropriate when production quantities exceed the shortterm inventory requirements.
When purchasing or production economies of scale outweigh the
benefits of minimum inventory levels of pull system

How much inventory should be maintained at each stocking

point?
How should a production lot (purchase) be allocated
between the stocking points?
How should excess supply be apportioned between stocking
points?

Steps in estimating inventory level in push

system
1. Determine through forecasting the requirements for the period
2. Find the current on hand quantities at each stocking point
3. Establish the stock availability at each stocking point
4. Calculate the total requirements from the forecast quantities plus
additional quantities needed to cover uncertainty
5. Determine the net requirements
6. Apportion the excess over total net requirements to the stocking
points on the basis of the average demand rate that is the
forecasted demand
7. Sum the net requirements and prorate the excess quantities to find
the amount to be allocated to each stocking point

Push Inventory Control

this is the writing calculation

Example: Three warehouses are used to supply 900 retail

drugstores. Each warehouse serves approximately 300
stores. A large purchase of clock radios is made, where
radios were to be a promotional item in the next forecast
period. The special buy will result in more stock than needed,
but the company expects to sell all stock eventually.
Warehouses are to have a 90% in-stock probability. All of
the purchased radios are to be allocated to the warehouses
based on the anticipated demand levels at each warehouse.
Account is taken of the inventory already on hand. A total of
5,000 radios is purchased. The next purchase will be made in
one month. Further information is given below.

Push Inventory Control

Warehouse
1
2
3

Current Stock
Level, units
400
350
0

Forecasted Forecast
error (std. dev.)
demand,
units
units
2,300
1,400
900
4,600

100
55
20

How should the allocation to the warehouses be made?

Areas under
Standardized
Normal
Distribution

A table entry is the proportion of the

area under the curve from a z of 0 to a
positive value of z. To find the area
from a z of 0 to a negative z, subtract the
tabled value from 1.
z
0.0
0.1
0.2
0.3
0.4

.00
0.5000
0.5398
0.5793
0.6179
0.6554

.01
0.5040
0.5438
0.5832
0.6217
0.6591

.02
0.5080
0.5478
0.5871
0.6255
0.6628

.03
0.5120
0.5517
0.5910
0.6293
0.6664

.04
0.5160
0.5557
0.5948
0.6331
0.6700

.05
0.5199
0.5596
0.5987
0.6368
0.6736

.06
0.5239
0.5636
0.6026
0.6406
0.6772

.07
0.5279
0.5675
0.6064
0.6443
0.6808

.08
0.5319
0.5714
0.6103
0.6480
0.6844

.09
0.5359
0.5753
0.6141
0.6517
0.6879

0.5
0.6
0.7
0.8
0.9

0.6915
0.7257
0.7580
0.7881
0.8159

0.6950
0.7291
0.7611
0.7910
0.8186

0.6985
0.7324
0.7642
0.7939
0.8212

0.7019
0.7357
0.7673
0.7967
0.8238

0.7054
0.7389
0.7704
0.7995
0.8264

0.7088
0.7422
0.7734
0.8023
0.8289

0.7123
0.7454
0.7764
0.8051
0.8315

0.7157
0.7486
0.7794
0.8078
0.8340

0.7190
0.7517
0.7823
0.8106
0.8365

0.7224
0.7549
0.7852
0.8133
0.8389

1.0
1.1
1.2
1.3
1.4

0.8413
0.8643
0.8849
0.9032
0.9192

0.8438
0.8665
0.8869
0.9049
0.9207

0.8461
0.8686
0.8888
0.9066
0.9222

0.8485
0.8708
0.8907
0.9082
0.9236

0.8508
0.8729
0.8925
0.9099
0.9251

0.8531
0.8749
0.8944
0.9115
0.9265

0.8554
0.8770
0.8962
0.9131
0.9279

0.8577
0.8790
0.8980
0.9147
0.9292

0.8599
0.8810
0.8997
0.9162
0.9306

0.8621
0.8830
0.9015
0.9177
0.9319

1.5
1.6
1.7
1.8
1.9

0.9332
0.9452
0.9554
0.9641
0.9713

0.9345
0.9463
0.9564
0.9649
0.9719

0.9357
0.9474
0.9573
0.9656
0.9726

0.9370
0.9484
0.9582
0.9664
0.9732

0.9382
0.9495
0.9591
0.9671
0.9738

0.9394
0.9505
0.9599
0.9678
0.9744

0.9406
0.9515
0.9608
0.9686
0.9750

0.9418
0.9525
0.9616
0.9693
0.9756

0.9429
0.9535
0.9625
0.9699
0.9761

0.9441
0.9545
0.9633
0.9706
0.9767

2.0
2.1
2.2
2.3
2.4

0.9772
0.9821
0.9861
0.9893
0.9918

0.9778
0.9826
0.9864
0.9896
0.9920

0.9783
0.9830
0.9868
0.9898
0.9922

0.9788
0.9834
0.9871
0.9901
0.9925

0.9793
0.9838
0.9875
0.9904
0.9927

0.9798
0.9842
0.9878
0.9906
0.9929

0.9803
0.9846
0.9881
0.9909
0.9931

0.9808
0.9850
0.9884
0.9911
0.9932

0.9812
0.9854
0.9887
0.9913
0.9934

0.9817
0.9857
0.9890
0.9916
0.9936

2.5
2.6
2.7
2.8
2.9

0.9938
0.9953
0.9965
0.9974
0.9981

0.9940
0.9955
0.9966
0.9975
0.9982

0.9941
0.9956
0.9967
0.9976
0.9982

0.9943
0.9957
0.9968
0.9977
0.9983

0.9945
0.9959
0.9969
0.9977
0.9984

0.9946
0.9960
0.9970
0.9978
0.9984

0.9948
0.9961
0.9971
0.9979
0.9985

0.9949
0.9962
0.9972
0.9979
0.9985

0.9951
0.9963
0.9973
0.9980
0.9986

0.9952
0.9964
0.9974
0.9981
0.9986

3.0
3.1
3.2
3.3
3.4

0.9987
0.9990
0.9993
0.9995
0.9997

0.9987
0.9991
0.9993
0.9995
0.9997

0.9987
0.9991
0.9994
0.9995
0.9997

0.9988
0.9991
0.9994
0.9996
0.9997

0.9988
0.9992
0.9994
0.9996
0.9997

0.9989
0.9992
0.9994
0.9996
0.9997

0.9989
0.9992
0.9994
0.9996
0.9997

0.9989
0.9992
0.9995
0.9996
0.9997

0.9990
0.9993
0.9995
0.9996
0.9997

0.9990
0.9993
0.9995
0.9997
0.9998

Push Inventory Control

Solution
Warehouse

Total Requirements

1
2
3

Total requirements = Forecast + z(Forecast error)

10

Push Inventory Control

Warehouse

(1)

(2)

Total Req.

On-hand
stock

(3)= (1)-(2)
Net Req.

(4)
Proration of
excess units

(5)=(4)+(3)
Allocation
units

2
3

Total

aTotal

requirements less (quantity on hand + quantity on order backorders)

purchase quantity times forecast for warehouse divided by total
forecast quantity.
bExcess

Basic Pull inventory systems

Pull system (basic model)
Single-period Model (Newsboy)

which one is not multi period model?

Single perid model

For short life-cycle products.

One-time order.

Multi period models (Repetitive replenishments)

Fixed Order Quantity System
Quantity discount models
Fixed Time Period Model (Next semester)
Practical Pull inventory systems
Min-Max
Two bin
S, s
R, mQ

Single-period Inventory Model

Newsboy Problem
One time purchase opportunity
Seasonal goods: ski parkas
One time event: Rose Bowl T-shirts,
ordering of fashion items, overbooking of
airline flights
Tradeoff is between overage and shortage
cost.
Based on marginal analysis of the incremental
stocking unit.

11

Multi-period inventory system

Multi-Period Inventory Models
Fixed-Order Quantity Models
Event triggered (Example: running out of stock)
Fixed-Time Period Models
Time triggered (Example: Monthly sales call by
sales representative)

Fixed Order Quantity

Continuous Review (EOQ)
How much: fixed amount Q
When: on hand inventory equals demand during
replenishment lead time plus safety stock (R = dL + SS)

know 2 of these

he asked to write

Assumptions:
Instantaneous and complete replenishment of the material
Known and Constant demand
Known and Constant Lead time
Fixed price
Fixed order cost & inventory holding cost.
No backorders or lost sales.

2 of EOB assumption

EOQ Model: When to Order?

Demand Rate

Q
Reorder
Point, R
0

Lead
time
Order
Order
Placed Received

Lead
Time
time
Order
Order
Placed
Received

12

Mathematical Description
How Much to Order
Total Cost = Ordering + Holding Cost
TC

(D/Q) S + ( Q/2)(i C)

where
D
C
S
Q
H

= annual demand
= item cost
= ordering cost
= order quantity
= holding cost = iC

Mathematical Description
At optimality:
ordering costs = holding costs
(D / Q) S =

Q* =

(Q / 2) H

2 DS
H

Fixed Order Quantity

Total Cost
Cost
(Q/2 ) H

(D/Q)* S

Q*

Quantity

13

EOQ Model: Equations

Optimal Order Quantity

2 D S
H
D
=N =
Q*

= Q* =

Expected Number of Orders

Expected Time Between Orders

d =

D
Working Days

ROP = d

/ Year

LT

=T =

Working Days

/ Year

D = Annual Demand
S = Setup (order) cost per order
H = Holding (carrying) cost
d = Demand per day
LT = Lead time in days

EOQ Model
Given:
d = 50 units/week
I = 10%/year
S = $10/order
C = $5/unit
LT = 3 weeks

know this type problem

Develop a simple control system by finding the replenishment

quantity (Q) and the reorder point (ROP).
The relevant total cost is:

TC ordering cost
DS IC Q
Q
2

carrying costs

EOQ Model

The optimum value for Q will be:

The reorder point is:

ROP = d(LT) =
When the inventory level drops to _____units (ROP) then
reorder _____ units (Q*).

14

EOQ Model
Henrys Computer Store sells a printer for $200. Demand is constant
during the year, and annual demand is forecasted to be 600 units.
Holding cost is $20 per unit per year, whereas the cost of ordering is
$60 per order. Currently, the company is ordering 12 times per year (50
units each time). There are 250 working days per year, and the leadtime is 10 days.

know this type problem

a. Given the ordering policy of 50 units at a time, what is the total of the
annual ordering and holding cost?
b. If the company used the absolute best inventory policy, what would be
the total of ordering and holding costs?
c.

What is the reorder point?

Henrys computer system

What if Analysis: Order Quantity

What happens if demand doubles?
If set up cost is reduced by 50%?
Square root rule for cycle stock.

15

Case of non instantaneous replenishment

Allows partial receipt of material
Other EOQ assumptions apply

Suited for production environment

Material produced, used immediately

POQ Model
Inventory Levels
Inventory Level
Production portion of cycle

Demand portion of cycle with no supply

Supply
Begins

Time

Supply
Ends

POQ Model
Inventory Levels
Inventory Level
Inventory level with no demand
Production
Portion of Cycle

Q*

Supply
Begins

Supply
Ends

Max. Inventory
Q(1- d/p)

Demand portion of cycle with

no supply

Time

16

Reorder Point
When to Place an Order
Reorder point when demand is certain
R = demand during replenishment lead
R = dL
Reorder point when demand is not certain
(assuming there is no lead time variation)
R = expected demand + safety stock .
R =

dL

Reorder Point Calculation

Expected demand and standard deviation
can be forecast
Expected demand per period = d
Standard deviation per period =

Expected demand during lead time is d L

Standard deviation during lead time is
L =
d L

read the instruction carefully-there is one question where he

gave you demand during lead time and he actually highlighted
for you. Think why he why he highlighted the demand during

lead time word. He meant for you to z value and multiply that
demand during lead time number. Look over this equation on
your left

demand during lead time

Question
Why
L

*L

And not
L

17

Safety Stock
Probability of Stock out
Q

R
0.5

0
Z

Safety Stock

0.5

Safety Stock
Probability of Stockout
Reorder point with safety stock.
R = dL + Z L

know this problem

Z = safety factor to set probability of no stock

out.
Normal table is used to select Z
Examples:
Z = 0 = > 50% no stock out
Z = 1 = > 84.13% no stock out
Z = 1.645 = 95% no stock out

A Reorder Point Model with Demand

Uncertainty
Given:
d = 50 units/week
d = 10 units/week
I = 10%/year
S = $10/order

C = $5/unit
LT = 3 weeks
P = 99%

Find Q* and ROP

From the EOQ formula

Q*

2(50x52)(10) 322 units

0.10(5)

18

A Reorder Point Model with Demand

Uncertainty
DDLT

P
Week 1

Week 2
+

d=10

d =50

Week 3

d=10

d=10

d =50

Weekly demand is normally distributed

with a mean of d = 50 and a standard
deviation of sd = 10
Lead time is 3 weeks

=17.3

d =50

X = 150

X'

d LT

'
DDLT

50(3) 150
LT

ROP d * LT

10 3 17.3
z(

'
DDLT

A Reorder Point Model with Demand

Uncertainty
Now,
X d (LT )
LT
d
DDLT

Hence,
ROP X z

DDLT

where ____is the z-value for the probability of __%.

ROP and Safety stock

(Practice Problem 7)
Annual demand for a product is 13,000 units; weekly
demand is 250 units with a standard deviation of 40
units. The cost of placing an order is $100, and the
time from ordering to receipt is four weeks. The
annual inventory carrying cost is $0.65 per unit. To
provide a 98 % service probability what must the
reorder point be?

know this problem

Suppose the production manager is told to reduce

the safety stock of this item by 100 units. What will
the new service probability be?

19

ROP and Safety stock

A Reorder Point Model with Demand &

Lead-Time Uncertainty
If the demand and lead-time are
independent and can be represented by
separate distributions:
DDLT

LT ( d2 ) d 2 (

2 )
LT

Why Worry About Safety Stock?

Very large component of inventory (larger than you
think)!
Most do not properly track safety stocks.
Safety stock costs twice as much as regular inventory.
Safety stock is driven by fear of stockouts (a sales force
issue).

20

Safety Stocks
Typical SS
After Sales Force
Involvement

Busy Season Safety Stock Needs

Planner Initial
Safety Stock
Setting

Slow Season Safety Stock Needs

Safety Stock / Reorder Point

Standard Inventory Policy when SS is pressured by the Sales Force

Total Inventory

Average
Inventory
ROP
Constant Safety
Stock

Time

Lead
Time

Safety Stock / Reorder Point

Inventory Reduction
Total Inventory

Incoming Orders

ROP
Safety
Stock
Excess Inventory
Time

21

there is one problem where he asked you to calculate safety stock and give you z value =0. then your safe stock would = 0 too

another different question where he asked: safety stock depend on what? it should be all 3 of these factore: fill rate or cust. service level, demand and lead time

What affects Safety stock

Fill rate
Increase - SS increases
Decrease - SS decreases
Demand variability
Lead Time variability

Total Cost vs. Service Level

9500

8500

Total Cost

7500

6500

5500

4500

0.
50
00
00
0.
55
00
0
0.
60 0
00
00
0.
65
00
00
0.
70
00
0
0.
75 0
00
0
0.
80 0
00
00
0.
85
00
00
0.
90
00
00
0.
95
00
0
0.
96 0
00
00
0.
97
00
0
0.
98 0
00
00
0.
99
00
0
0.
99 0
50
00
0.
99
90
00
0.
99
99
0
0.
99 0
99
9
0.
99 0
99
99
1.
00
00
00

3500

Service Level

EOQ Assumptions
Assumptions:
Constant demand
Constant lead time
Price
Fixed order cost
Inventory holding cost.
No backorders or lost sales.

22

Quantity Discount Model

Allows quantity discounts
Reduced price when item is purchased in
larger quantities
Other EOQ assumptions apply

Trade-off is between lower price &

increased holding cost
Total cost calculations include purchase
price, holding costs, and ordering costs

What About Quantity Discounts?

Determine discount break points.

Calculate order size at each discount point.
Calculate the Total Cost for that policy.
Choose least costly option.

Quantity Discount Example

know this problem-writing
Discount Discount Quantity
Number

Discount
(%)

Discount Price
(C)

0 to 999

No discount

$5.00

1,000 to 1,999

$4.80

2,000 and over

$4.75

Annual demand = 5000 cars; Ordering cost (setup) = $49

Holding cost = 20% of cost = 0.2C
To solve the problem, we find the lowest cost feasible order quantity for
each price break and select the one with the lowest cost.

23

Price-Break Example Solution

First, plug data into formula for each price-break value of C

Q OPT =

2DS
=
iC

2(5,000)(4 9)
= 700 units
0.2(5)

Interval from 0 to 999, the Qopt

value is feasible

Q OPT =

2DS
=
iC

2(5,000)(4 9)
= 714.4 units
0.2(4.80)

Interval from 1000-1999 the

Qopt value is not feasible

Q OPT =

2DS
=
iC

2(5,000)(4 9)
= 718.2 units
0.2(4.75)

Interval from 2000 & more, the

Qopt value is not feasible

Price-Break Example Solution

Next, we plug the true Qopt values into the total annual
cost function for each price-break

TC = DC +

D
Q
iC
S +
Q
2

TC(0-999)=(5000*5)+(5000/700)*49+(700/2)(0.2*5)
= $25,700
TC(1000-1999) = (5000*4.8)+(5000/1000)*49+(1000/2)(0.2*4.8)
= $24,725
TC(2000&more) = (5000*4.75)+(5000/2000)*49+(2000/2)(0.2*4.75)
= $24,822.50
Finally, we select the least costly Qopt, which is 1000 units.

Quantity Discount

24

Fixed Time Period Model

When: review inventory every T time periods.
(Periodic review)
How much: inventory position must cover demand
until the next review period plus replenishment lead
time.
Application:
Low demand, low value items
Coordinate multiple items from a single supplier

Other Practical pull systems

know what are these

for? Example:

ROP, or SS, or
DDLT. Im not

Application:
Supplies, components & end items.
Variations:
Two bin system:
Bin 1 = Q - R
Bin 2 = R
(s,S) policy:
When inventory is less than or equal to s, order up
to S.
(R,mQ):
When inventory is less than or equal to R order
multiples of Q.

sure what is the

answer. So think
about it

Whats Wrong With Min / Max system ?

Max = Convenient Order Size

Min = DDLT + Forecast Error + LT Issues

Taken as a guess.

Increases system variability

Counts may not be
systematic
Introduces variability that
may not actually exist
Multiplies in effect as more
levels of the supply chain
employ it
Min may not be optimal
DDLT + SS
Max may not be optimal
order quantity

25

Planner Selected
Min is based on a guess of how
long it takes to get product in, how
much the customer will need
during that time period, and a
rough guess at forecast accuracy
(the last two are often called a
fudge factor).
Max is typically based on a
convenient order size (suppliers
minimum order size or a rough
guess at typical customer order
patterns).

Max = Convenient Order Size

DDLT
FUDGE FACTOR

Fudge factor Safety stock

Fill rate (Z), std. dev. of demand during lead time
(Demand variability, Lead time variability)
Fill rate

Demand
Var.

Item 1

99 %

Low

Lead time Safety Stock

var.
Low

Item 2

90 %

Low

High

Item 3

95 %

High

Low

Item 4

99 %

High

High

Item 5

75 %

High

High

Coordinated Replenishment

A.K.A. Line Buying

Balance:
Order cost = Setup cost
Freight cost = Transportation penalty
Inventory holding costs

26

Coordinated Replenishment

140

120

"A"
Reorder
Point

100

Item to Be
Ordered

80

"B"
Reorder
Point

60

40

20

0
A

Coordinated Replenishment Best Practices

Coordinated Replenishment
Combining purchases of multiple items from a single supplier.

know this

Best Practices
Coordinating purchases of items from the same supplier across
business units (divisions) to capture transportation economies of
scale and increase supplier rebates.
Quantifying holding costs and compare to different products to
determine which should be ordered in larger amounts to capture
freight and handling efficiencies.

Aggregate Control of Inventories

Turnover ratio
Risk Pooling or Inventory consolidation
How much to stock at the DCs when you consolidate?

27

Aggregate Control of Inventories

Turnover Ratios

simple writing question-give you exactly like this except only 3

A fruit grower stocks its dried fruit products in 12 warehouses around the
country. What is the turnover ratio for the distribution system?
Warehouse
1
2
3
4
5
6

Annual
Average
warehouse
inventory
throughput, $
level, $
21,136,032
2,217,790
16,174,988
2,196,364
78,559,012
9,510,027
17,102,486
2,085,246
88,228,672 11,443,489
40,884,400
5,293,539

Turnover ratio

Warehouse
7
8
9
10
11
12
Totals

Annual sales
Average inventory

Annual
warehouse
throughput, $
43,105,917
47,136,632
24,745,328
57,789,509
16,483,970
26,368,290
425,295,236

warehouse

Average
inventory
level, $
6,542,079
5,722,640
2,641,138
6,403,076
1,991,016
2,719,330
43,701,344

$425,295,236
$43,701,344

9 .7

Always Trade offs

TC = Order Cost + Regular Holding Cost + Safety stock
Cost + Stock out Cost
EOQ :
Order Cost
Inventory Cost
Newsboy Model
Cost of overage
Cost of underage

knwow what have trade offs? All of the model have trade off

Quantity discount model :

Procurement Cost (DC)
Order Cost
Inventory Cost
Risk pooling or Inventory consolidation
Inventory Cost
Transportation Cost
Customer Service (may be)

Fill rate
Safety stock
Stock out cost

Aggregate Control of Inventories

Square Root Law of Inventory Consolidation
The amount of inventory (regular stock) at multiple stocking
points can be estimated by the square root law when

learn the example he give on blackboard. n=4 and Ii=2000. He asked what
happen if he reduce to 3 warehouse.

Always calculate the IT first and used that IT to divide square root of n

Inventory control at each point is based on EOQ principles.

There is an equal amount of inventory at each stocking point.
The square root law is:

IT Ii n
IT = amount of inventory at one location.
Ii = amount of inventory at each of n locations.
n = number of stocking points.

28

Aggregate Control of Inventories

Square Root Law of Inventory Consolidation
Example: Suppose that there is $1,000,000 of inventory at 3
stocking points for a total of $3,000,000. If it were all
consolidated into 1 location, we can expect:
I

If we wish to consolidate from 3 to 2 warehouses, the level of

inventory in each warehouse would be:

I / n
T

For a total system inventory of _________ =$__________.

Inventory-Throughput Curve
Warehouse average inventory, Ii ($000s)

3000
2500
2000

Ii = 1.57Di0.72
R = 0.85

1500
1000
500
0
0

10000

20000

30000

40000

50000

Annual warehouse throughput, Dj ($000s)

29

What Is the Right Distribution Strategy?

Texas Instruments
Previous Strategy --Only Direct Sales
Current Strategy
30% of Volume to 98% of Customers Through Distributors
70% of Volume to 2% of Customers Through Direct Shipment

P&G
Large Supermarket Chains--Direct Sales
Smaller Supermarkets--Distributors

Computer Industry
Dell -HP -Gateway --

Direct to End Consumer & Retail Channel

Resellers
Company-Owned Retail Stores
(All Closed in 2004)
Apple -- Company-Owned Retail Stores

Distribution Strategies
Arunachalam Narayanan

Factors Driving Distribution Strategy

-Cost vs. ResponsivenessInventory Costs

Response Time
Product Variety
Product Availability
Customer Experience
Time-to-Market
Order Visibility
Returnability

Desired Response Time

Transportation Costs

Cost
Customer Service

Number of Facilities

Factors Driving Distribution Strategy

Number of Facilities
Facility Costs

Supply Chain Network Design

Number of Facilities

Number of Facilities

Distribution Channel Strategy

-Two Key Decisions-

Response Time
Total Logistics Cost

Number of Facilities

From textbook

Will the Product Be Delivered to the Customer

Location or Picked Up From a Prearranged Site?
Will Product Flow Through an Intermediary?

Figure 7.7
Direct to Consumer Fulfillment

know all fulfillment model-he will give you the term and definition and ask which one is right

Physical Fulfillment models

Integrated fulfillment
Retailer maintains both a bricks-and-mortar and
clicks-and-mortar presence
Operates one distribution network to service both
channels
Advantage is use of the existing network for each
Disadvantage case (retail stores) vs. each
(internet customers)

Physical fulfillment models

Drop Shipped Fulfillment
Also called direct delivery, vendor delivers directly to customer,
bypassing retailers distribution network.
Works best for products that have a short shelf life.

Store Fulfillment
The order is placed through the Internet site and sent to the nearest store
for customer pick up.

Advantages
low start-up costs for the retailer
returns can be handled through the store

Disadvantages
conflict may arise between inventories
must have real-time visibility to in-store inventories
stores lack sufficient space to store product

Selecting An Appropriate Strategy

No Strategy needs to be used Exclusively
Only Niche Companies Use A Single Distribution
Network
Different Approaches for Different Products
Strategic Position Matters

Physical Fulfillment models

Dedicated fulfillment
Both a store and an Internet presence with two
separate distribution networks
Disadvantage duplication of resources, inventory etc.

Outsourced fulfillment
Another firm will perform the fulfillment.
Advantage - low start-up costs and possible
transportation of economies (for small and medium
firms)
Disadvantage loss of control over service levels

Physical fulfillment models

Flow-Through Fulfillment
Product is picked and packed at distribution center, then sent to
the store for pickup.
Advantages:
eliminates the inventory conflict
avoids the cost of the last mile
returns can be handled through the existing store network

Disadvantage:
Storage space at the store for pickup items a problem

Example
Current Wal-Mart ship to store option

Other Considerations:
Inventory/Risk Pooling
Demand Variability & Aggregation
Facility Consolidation
Safety Stock and Average Inventory
What Happens to Inventory Levels When 2 Warehouses
Are Consolidated?
Square root rule of inventory
Why is the variability less?

Coefficient of Variation of Demand

= Standard Deviation of Demand / Average Demand

know this. it is one of the write out question-and he asked you to cal average inventory. He wont give you that table so learn the step

Example

Example (contd.)

Electronics Producer & Distributor in Northeast

Historical Demand Data for Products A & B

2 Market Areas in Northeast

2 Warehouses: NJ & MA
Customers (Retailers): Assigned to One Warehouse Only
1,500 Products; 10,000 Accounts
LT to Warehouses: 1week
Current Service Level: 97%
Ordering Costs: $60 per order
Inventory Holding Cost: $0.27 per unit per week

Week

Centralized Distribution System for Northeast

Maintain 97% Service Level

Example (contd.)
Std
Dev.

CVAR

Avg.
Dem.
During
LT

Safety
Stock

NJ
Centralized

39.25
38.63
77.88

13.18
12.05
20.71

0.34
0.31
0.27

39.25
38.63
77.88

1.125
1.250
2.375

1.36
1.58
1.92

1.21
1.26
0.81

1.125
1.250
2.375

8
58

MA

33

45

37

38

55

30

18

NJ

46

35

41

40

26

48

18

55

Total

79

80

78

78

81

78

36

113

MA

NJ

Total

Other considerations

ROP

Avg.
Inv.

Product A
MA

Product B

Challenges & Issues

Avg.
Demand

Product A

24.91 64.16
22.77 61.39
39.15 117.02

132.1
131.0
186.0

91
88
132
26.3%

22.36
23.57
32.49

13.74
14.77
19.88
30.3%

Inv. Reduc.

When you consolidate

Inventory level goes down
Transportation costs ?
Service level ?

Product B
MA
NJ
Centralized

2.56
2.99
3.63

3.69
4.24
6.01

Inv.Reduc.

he asked what happen when inventory level go down?

It should be demand variation is go down, transporation

is go up

Pictorial view of Cross-Docking

INBOUND

Perspectives of Hub and Spoke system

OUTBOUND
8:00

Products
Flow Through in
Less than 24/48
Hrs

Initial point to point system

B

10:00

12:00
G
14:00
E
D

Returnables

Source: Transfreight, LLC

Perspectives of Hub and Spoke system

Hub and Spoke system

Hub and Spoke system

10

10
B

10

10

10

10

10
B

10

50

10

10

10
50

50

10

10

10
G

10

10

10

10

10

10

10

10

10

10

50
E

10

10

10

10

10

10

50

50

which of the is not advantage?

Hub and spoke system

Advantages
Higher Utilization of the routes.
Minimum intermediate handling
Break-bulk, serve as cross-docks (Hubs)

Disadvantages
Sometimes longer distance traveled
Airlines

Distribution Network Design

Is it Strategic , Operational or Tactical decision?
Should it change?
How often?

What factors would affect that change?

Inflexibility in routes

Wal-Mart and Amazon Distributions

Discussion on the handouts of Wal-Mart and
Amazon Distribution