Posted: March 5th, 2014

The CEO expects you to be providing a number of various logistics reports and recommendations to her. She has asked you to prepare a chart on 1–2 pages of frequently used logistics techniques.

Weekly tasks or assignments (Individual or Group Projects) will be due by Monday and late submissions will be assigned a late penalty in accordance with the late penalty policy found in the syllabus. NOTE: All submission posting times are based on midnight Central Time.

The CEO expects you to be providing a number of various logistics reports and recommendations to her. She has asked you to prepare a chart on 1–2 pages of frequently used logistics techniques. To demonstrate your understanding of the breadth and depth of the logistics function, research the following terms, and for each of the 8 terms, complete the following:

  • Provide a definition, in your own terms, of frequently used logistics techniques.
  • Give an example of a real company or industry that uses this logistics technique.
  • What would the pros and cons be of using each technique listed below?
    1. Distribution center
    2. Public warehouse
    3. Third-party logistics
    4. Common carrier
    5. Dedicated private fleet
    6. Backhauls
    7. Deadheading
    8. Freight equalization

Provide citations and references to support your information.

Please submit your assignment.

Click on Student Expectations to view the expectations for this assignment.

Assignment Grading Rubric

For assistance with your assignment, please use your text, Web resources, and all course materials.

Course Materials

Course Materials

 

Presentation
Presentation: Metrics for Logistics Success
Introduction

As in all other function areas in an organization, logistics needs and has its own types of metrics. Metrics are what tell the manager and his or her employees whether or not they met their expected results. Just as the marketing function of a firm typically looks at market share and dollars of sales from products that were launched in the last 3 years, the logistics function must similarly consider a range of metrics that reflects what is important to both the customer and the company.

Variation by Industry

Given the wide variation in types of customers that are served by the logistics function, their varying needs, and the challenges of different industries, it is no surprise that the metrics that are used for the logistics function in one industry may differ greatly from those in other industries. On the other hand, it is likely that the key logistic metrics are pretty similar within an industry.

The following is an example of how metrics may differ by industry. The logistics function for an airline might include the following:

  • Percentage of downtime of airplanes and average repair time
  • Number of planes arriving and taking off on time
  • Percentage of planes for which the catering or the cabin cleaning did not occur prior to take-off
  • Percentage of planes that had to wait longer than planned for refueling or de-icing
  • Percentage of lost luggage

When considering the steel mill industry, which deals with large amounts of raw materials and finished goods traveling all around the country, the metrics would be completely different. They may include the following:

  • Inbound freight costs for raw materials
  • Percentage of on-time shipments for inbound freight
  • Outbound shipping cost and sales spending
  • Percentage of on-time shipments to customers
  • Percentage of added costs to the company for premium freight shipments caused by the firm’s shipping errors, if the firm has its own fleet
  • Percentage of truck miles with no backhauls (called deadhead miles)
  • Percentage of damaged or lost shipments

Criteria to Use

As in any endeavor, whether it is an elementary school or a prestigious corporation, the choice of metrics is important. If a wrong or unimportant metric is chosen, and the organization focused resources and effort on excelling at that metric, time and money could be wasted. The logistic function has two main stakeholder groups to consider when establishing important metrics and striving toward improved performance. The internal stakeholder group includes the firm’s owners, stockholders, and senior managers. They are typically concerned with costs, profits, and market share. The external stakeholders are any and all customer groups.

How Criteria Affect Decision Making

In the case of an airline company, a metric addressing both stakeholder groups would be on-time airline departure. This obviously keeps passengers happy but simultaneously keeps added costs to the airline from piling up, such as the cost of providing hotel rooms for passengers who are not able to take their scheduled plane because of maintenance problems. On the other hand, the passenger railroads logistics function may focus on having to pay premium charges to get food delivered to the dining car for customer satisfaction, yet the railroad owners and managers may see this as an unnecessary added cost.

Navigating these necessary compromises is analogous to modern management thinking in recent years about the silo mentality. Senior management has recognized the harmful impact of functional silo thinking, whereby one organization’s department may strive to achieve its goal, but it sacrifices another department or overall company’s goal achievement. Therefore, the best set of metrics is one that recognizes both internal and external stakeholder agendas simultaneously.

Activity
Determining Logistics Costs for Public Warehousing
Scenario: As the logistics manager for a retailer of children’s toys, you have been asked to make some logistics decisions. You are trying to determine if your company should complete the following business activities or use a public warehouse instead. To make a decision, you must determine what your monthly costs would be, given your situation.

Activity 1: Select the following link to review Exhibit A from a sample business contract to find out more information: com/build-a-bear/js.svc.2002.02.01.shtml” target=”_blank” rel=”nofollow”>http://contracts.onecle.com/build-a-bear/js.svc.2002.02.01.shtml

Use the rates found in the sample business contract. In a typical month, you will receive 100 pallets stacked with cases or cartons and 5,000 separate cartons.

Question 1: What are your inbound costs for the pallets?

Pause to consider a response.

Response: The cost of your inbound pallets is 100 x $4.30 = $430.

Question 2: What are your inbound costs for the separate cartons?

Pause to consider a response.

Response: The cost of your inbound separate cases is $0.46 x 5,000 = $2,300.

Activity 2: Use the rates found in the sample business contract. In a typical month, you will ship out 200 orders, each requiring a bill of lading (BOL) to be prepared. Each order will typically be only 5 cases each. The price before markup of outbound freight is $200 per order.

Question 3: What is the cost of your BOL?

Pause to consider a response.

Response: The cost of your outbound BOL is 200 x $5.75 each = $1,150.

Question 4: What is the cost of your outbound case handling?

Pause to consider a response.

Response: The cost of your outbound case handling is 200 orders x 5 cases x $.46 / case = $460.

Question 5: What is the cost of your outbound freight with markup?

Pause to consider a response.

Response: The cost of your outbound freight with markup is 200 orders x $200 / order x 1.15 for markup = $46,000.

Activity 3: The following chart contains a summary of the calculations that you have done throughout this exercise.

Question 6: Use the rates found in the sample business contract to determine the storage cost, and then calculate the total cost per month.

Cost Description

$ Amount

Total Storage Cost

$ 65,888.00

Inbound pallets

$ 430.00

Inbound separate cases

$ 2,300.00

Total Inbound Cost

$
Outbound BOL

$ 1,150.00

Outbound case handling

$ 460.00

Outbound freight with mark-up

$ 46,000.00

Total Outbound Cost

$

Total Cost

$

Pause to consider a response.

Model Answer:

Cost Description

$ Amount

Total Storage Cost

$ 65,888.00

Inbound pallets

$ 430.00

Inbound separate cases

$ 2,300.00

Total Inbound Cost

$ 2,730.00

Outbound BOL

$ 1,150.00

Outbound case handling

$ 460.00

Outbound freight with mark-up

$ 46,000.00

Total Outbound Cost

$ 47,610.00

TOTAL COST

$ 116,228.00

Activity 4: As the logistics manager for a major shipping company, use the following data to determine the total revenue, cost, and net profit for the round trip by the common carrier for trip A, assuming no backhaul is found:

  • Common carrier’s normal shipping revenue = $1.85/mile
  • Common carrier’s backhaul shipping revenue = $1/mile
  • Common carrier’s empty deadhead cost = $0.90/mile
  • Trip A from New York to California = 3,000 miles

Question 7: What is the total revenue earned, cost, and net profit?

Pause to consider a response.

Response: Trip A earns the carrier 3,000 miles x $1.85/mile = $5,550 revenue, but costs 3,000 x $0.9 = $2,700. Therefore, the total net profit is $5,550 – $2,700 = $2,850.

Activity 5: As the logistics manager for a major shipping company, use the following data to determine the total revenue, cost, and net profit for the round trip by the common carrier for trip A and trip B with a backhaul from California to Chicago:

  • Common carriers normal shipping revenue = $1.85/mile
  • Common carriers backhaul shipping revenue = $1/mile
  • Common carrier empty deadhead cost = $0.90/mile
  • Trip A from New York to California = 3,000 miles
  • Trip B backhaul from California to Chicago = 2,000 miles
  • Trip B deadhead from Chicago to New York = 1,000 miles

Question 8: What is the total revenue earned, cost, and net profit?

Pause to consider a response.

Response: Trip B earns the carrier 3,000 miles x $1.85/mile = $5,550. The backhaul to Chicago earns 2,000 miles x $1 = $2,000 for a total of $7,550.00. The cost is 1,000 x 0.9 = $900. Therefore, the total net profit is $7,550 – $900 = $6,650.

Reference

Sample business contracts. (2012). Retrieved from the Onecle Web site: http://contracts.onecle.com/build-a-bear/js.svc.2002.02.01.shtml

Article
Criteria Examples by Industry
The following demonstrates which logistics metrics might be important to internal stakeholders and external stakeholders, as well as some reasonable compromises to avoid focusing too much on one stakeholder’s primary agenda:

Industry Internal Stakeholder Metrics External Stakeholder Metrics
Cruise line
  • Actual versus planned fuel usage
  • No overbooking
  • On-time departure and arrival
  • Percentage of lost passenger luggage
Home and garden store
  • Fresh flowers and sod available
Electric utility company
  • Overtime costs to address unexpected outages
  • Premiums to be paid for borrowing power from another utility during periods of downtime
  • Number and length of service interruptions
  • Time to get service back after a storm
Fast-food restaurants
  • Amount of food thrown out (in terms of price)
  • Percentage of late supplier deliveries
  • Average time to be served
  • Percentage of accurate orders
Online universities
  • Percentage of time to get online tech support
  • Percentage of time server is down
  • Percentage of time during which the server is down
  • Average time to get online tech support

Choices of Techniques That Can Impact Results

To achieve the desired results in terms of both sets of metrics, the logistics manager has a variety of techniques that he or she can employ. For example, the actual warehousing function can be done at the manufacturing location, at various regional distribution centers, or by a completely separate company (referred to as public warehousing).

For the actual freight part of the logistics system, the manager can choose to have a private fleet that is dedicated to the company, employ third-party carriers, ask the public warehouse to manage that, or have a third-party logistics firm assume total responsibility for that activity. Each of these alternatives comes with financial pros and cons (fixed cost and variable costs), as well as customer service pros and cons.

Conclusion

As with any process design, the optimum process cannot be determined until there is an agreement on the goals or outputs of the process and the metrics that will be used to assess performance. The logistics function is no different. For example, the criteria of excellent customer service may be enhanced by locating multiple factories or distribution centers around the country, but that will likely not make internal stakeholders—such as business owners and stockholders —happy from a profitability perspective because of high added fixed costs. The best compromises must be established up front before any major logistics decision is made.

At the same time, the logistics manager has a menu of techniques available to him or her, each with favorable and unfavorable impacts on the different metrics that were identified as important. He or she must design the system to optimize the overall results that are being sought.

Article
FAQ: Analyzing the Supply Chain
Question 1:What is a process reference model, and why is it useful?Answer 1: A process reference model integrates concepts of business process management, benchmarking, and metrics into a cross-functional framework. This helps organizations capture the current state of a process, the desired future state of a process, and process objectives. Organizations can quantify operational performance, establish new internal performance targets, and benchmark best-in-class results. Process reference models describe standard processes and the relationship between different processes. Standard metrics are defined for process performance management and improvement. Best-in-class management practices and software solutions are also described and discussed. A process reference model, such as Supply Chain Operations Reference (SCOR), provides standard definitions for processes, results, and metrics, so companies in the same or different industries can communicate more easily about their businesses to each other (SCOR 8.0 Reference Booklet, n.d.).

Question 2: The SCOR model incorporates best practices. My business is unique, so will those practices work for me?

Answer 2: The SCOR does incorporate best practices. It incorporates more best practices than most businesses will use. The choice of using any particular best practice depends upon the strategies driving the supply chain. Each company will probably have its own unique company and supply chain strategy. This uniqueness will be reflected in the choice of best practices and metrics for performance management from the SCOR model. Further, although the SCOR model describes best practices, it does not dictate the implementation of any best practice. These implementations are meant to vary by company.

Question 3: What is aggregate demand?

Answer 3: Aggregate demand is the total demand for goods and services. Economists use the termaggregate demand to refer to demand for all goods and all services in the whole economy. In supply chain management, aggregate demand is used to refer to the total demand for goods or services from your company. Aggregate demand is used as a big picture number for planning purposes. When a company or supply chain has flexible production facilities, aggregate demand can help determine the overall number of facilities required or the amount of capacity required. Aggregate demand can be affected by pricing, promotions, and new demand. Aggregate capacity can be affected by hiring and laying off workers, use of overtime, use of part-time workers, the use of inventories, and subcontracting. Companies use aggregate demand and aggregate capacity to do aggregate, or rough-cut, planning.

Question 4: Why do companies care about metrics?

Answer 4: According to Behn (2003), “what gets measured gets done” is perhaps the most famous aphorism of performance measurement. As a company develops a comprehensive set of performance metrics, it will determine what is achievable and when it can be achieved. The metrics can prove what is working and what is not working. Metrics allow a company to rally around the common goals of enriching the company and its shareholders by holding all employees accountable to performance standards. This accountability is good for businesses, shareholders, and individual careers.

It is important that not only the correct performance measurements but also the correct portfolio of metrics be instituted. Good performance measures that have staff involvement and commitment utilize the correct measurement tool and performance tied to pay.

Question 5: What are examples of metrics in the SCOR model?

Answer 5: In the SCOR model, there are perhaps 400 performance measures in total, which is too many to list here or to comprehend in a single reading. Examples of Level 2 metrics for the Make process category would include assets turns, cost per unit, indirect to direct headcount ratio, and overhead costs. There are 21 Make Level 2 metrics in the SCOR model.

Examples of SCOR metrics for Make Level 3 include capacity utilization, delivered to commit date variance, fill rates, plant finished goods inventory days of supply, packaging costs, warranty costs, yield variability, and so forth. There are at least 90 metrics for Make Level 3 (Cohen & Roussel, 2004). There is a similar number of metrics for the plan, source, deliver, and returned areas.

Question 6: How would a company know if a particular metric score is good or bad?

Answer 6: A metric score, all by itself, gives very little information. More information can be gleaned in two ways. First, a company may look at the trend of metric scores for a particular metric over time. This trend will tell the company whether it is making improvements in the metric or not. The trend will also tell the company whether the improvements are fast enough.

Second, a company may establish benchmarks for the metrics that it utilizes. These benchmarks may come from companies within the industry or outside the industry. The objective of benchmarking is to define reasonable and outstanding performance levels for the metrics that the company is using.

Question 7: What is a value chain? Why is it an important concept?

Answer 7: A value chain characterizes the value adding activities performed by an organization. The value chain for a company includes at the minimum the first upstream vendor and the first downstream customer. Companies have begun to think in terms of capturing the value generated along the chain. The value chain group has developed a value chain reference model called the value chain operations reference model (VCOR) (SCOR 8.0 Reference Booklet, n.d.). VCOR extends the supply chain processes of plan, source, make, deliver, and return to include market, research, develop, brand, sell, and support (VCOR Model, n.d.). Michael Porter made the case that the value chain was a source of continuing competitive advantage and therefore of abiding importance to companies (Porter, 1985).

Question 8: Is there a best practice in aligning the supply chain strategy with the firm’s strategy?

Answer 8: After an extensive search, no best practices for aligning the supply chain strategy with the firm strategy were found. Supply chains tend to be unique. This uniqueness makes it very difficult to develop a generic set of best practices for the alignment strategy and supply chain strategy. In addition, any company’s practices for aligning strategy are likely to be unique and not entirely applicable to other companies. Although the best sources describe what you need to do to align strategies, they do not describe how it should be done.

Question 9: What happens if the supply chain strategy is not aligned with the firm’s strategy?

Answer 9: Examples of companies whose supply chain strategies do not align with the firm’s strategy abound. The outcomes tend to be somewhere in the continuum of minor effect to going out of business. Minor effects would include supply disruptions, increased costs, and unhappy customers. In a case where a firm has a strong competitor who has aligned its supply chain with a good company strategy, the firm may expect to lose market share.

Sometimes, changing the supply chain strategy to align with the firm’s strategy is impossible because of very high capital investment, contractual obligations, or new regulations. In these cases, the firm should align its company strategy to take advantage of current supply chain strategy and the inherent strengths and weaknesses in its supply chain.

Question 10: Are SCOR, Lean, and Six Sigma compatible?

Answer 10: The short answer is yes. The longer answer is that these core best practices and metrics are extensive enough to allow the choice of those best practices that support Lean and Six Sigma if that is the company’s direction (Smartwood, 2003). In addition, under the SCOR model, companies are allowed to implement best practices as they see fit, which would include adapting those processes for Lean or Six Sigma compliance. Further, one of the objectives of the SCOR model and best practices is to drive costs out of the supply chain, which is in line with the objectives of Lean and Six Sigma (i.e., to reduce costs and improve quality).

References

Behn, R. (2003). Why measure performance? Different purposes require different measures. Public Administration Review, 63(5), 586–606. Malden, MA: Blackwell Publishing.

Cohen, S., & Roussel, J. (2004). Strategic supply chain measurement. New York: McGraw-Hill.

Porter, M. (1985). Competitive advantage: Creating and sustaining superior performance. New York: The Free Press.

SCOR 8.0 reference booklet. (n.d.). Retrieved from the Supply Chain Council Web site: http://www.supply-chain.org/page.ww?name=”SCOR”+8.0+Download+Thank+You§ion=”SCOR”+Model

Smartwood, D. (2003). Using lean, Six Sigma, and SCOR to improve competitiveness. Retrieved from: http://www.bptrends.com/publicationfiles/10-03%20ART%20Lean%20Six%20Sigma%20SCOR%20-%20Swartwood.pdf

Article
FAQ: Efficiency in the Supply Chain
Question 1:What is a postponement strategy?Answer 1:

A postponement or delayed differentiation strategy involves manipulating the point at which a company differentiates its product or service. These delays move the point at which a company differentiates its product closer to the customer.

Companies that execute this strategy most effectively have developed standard products that can be quickly, easily, and inexpensively differentiated or customized once the actual consumer demand is realized.

To support this type of strategy, companies must develop and implement specific inventory strategies that satisfy consumer service expectations and meet company objectives on inventory-carrying costs while mitigating the risk of holding the right inventory, at the right place, at the right time, and in the right form.

Question 2: What is the bullwhip effect?

Answer 2:

The bullwhip effect occurs when there is a lack of information along the supply chain. In the simplest terms, the bullwhip effect is when companies establish safety stock in an effort to minimize and/or eliminate stockouts at the next customer level.

This phenomenon takes place when partners through the supply chain have information that is not aligned or congruent with others in the supply chain, causing suppliers to carry additional inventory to protect against stockouts at the next customer. The further down the supply chain, the more variables are introduced, causing suppliers to carry even more inventory to satisfy the uncertain demand from the customer.

The term bullwhip describes the phenomenon as even small incremental changes by the end of the supply chain cause exponential changes in demand throughout the supply chain. As the small movements occur and the suppliers react, the end result is excess inventory, and therefore cost, to the suppliers and, ultimately, the final customer.

Question 3: What is offshoring? What is the impact to the supply chain?

Answer 3:

Offshoring is a relatively new tactic used by companies where companies relocate business processes from one country to another. There can be many reasons for offshoring, including those strategic in nature. Most often though, offshoring is used to support efforts to reduce costs, primarily by obtaining a comparative advantage by exploiting the availability of cheap labor.

Most companies began offshoring efforts by relocating noncritical or noncore elements of their businesses offshore; today’s companies are effectively and efficiently offshoring virtually any aspect of the business deemed appropriate, including core production and service functions. Even more startling are companies shifting innovation efforts offshore by relocating research and development (R&D) activities to other countries.

There is much public attention on the impact of offshoring on domestic jobs and companies are simultaneously addressing concerns of higher levels of risk in supply chains due to loss of control and visibility from these extended supply chains. The fact is with the proliferation of the Internet and the ability for instantaneous communication, companies that do not include offshoring in their supply chain portfolio of strategic weapons, will likely be at competitive disadvantage.

Question 4: What is a Kanban system?

Answer 4:

Kanban is a manufacturing and inventory control signaling system that originally used cards to signal the need for an item. Kanban is perhaps most well-known and has been historically used in conjunction with and in support of just in time (JIT).

Kanban systems can be an effective weapon in the efforts to minimize or eliminate the bullwhip effect in a supply chain. By sending congruent and orderly signals with the result being a high level of visibility or transparency throughout the supply chain, suppliers develop the confidence to carry lower inventories to protect against changing demand by the customer. The result of this activity is lower costs for those in the supply chain and ultimately the customer.

Throughout its deployment, one of the Kanban system’s strengths has been its simplicity. Kanban systems have not remained static and have progressed to include faxbans and now e-bans as electronic information exchange has become more common. Although Kanban systems have been used primarily within factory walls and between manufacturer and supplier, another progress has been the use with customers to support replenishment methods used at the point of purchase by the customer (Cork, 2006).

Question 5: What is MRP? What is the difference between MRP and MRP II?

Answer 5:

MRP (materials requirements planning) is a production planning and inventory control system used by most firms in one form or another. While MRP is most commonly associated with a software application or program, it can be used without the aid of software or a computer. MRP and MRPII are both predecessors to today’s ERP (enterprise resource planning) systems employed by many firms.

The primary objectives of a MRP system are fundamental to a business. The first objective is to ensure product availability to the customer. The secondary objective is to maintain the lowest level of inventory possible while still satisfying objective number one. Finally, in support of objectives one and two, it is to plan manufacturing, delivery, and purchasing efforts and activities. The foundation for MRP systems is the input of a master production schedule, the driver of rudimental supply chain setups.

MRP systems and MRPII (manufacturing resource planning) systems differ in that MRPII addresses the need to coordinate and align the entire manufacturing operation including the finance, materials, and human resource disciplines. MRPII is generally a modular system (that includes the MRP module) and can, and often does, include modules that assist the company in managing all areas of the company with the output coming in the form of a labor and equipment schedule that supports the master production schedule in the most efficient manner available.

Question 6: How can technology support supply chain efficiency?

Answer 6:

There is a variety of technological tools available to those responsible for their company’s supply chain. At the core of each of these technologies is the company’s ability to share data. This ability includes sharing more detailed information in an essentially instantaneous manner in the essence of what technology has brought to supply chain management professionals and the activities for which they are responsible.

Beyond the benefits that technology has over traditional communication that technology offers, tools such as UPC (uniform product code) and bar coding have grown into EPC (electronic product code) and RFID (radio frequency identification): powerful new tools for the supply chain. EPC and RFID, by attaching tiny transponders to the inventory, can track that inventory any place on the globe in real time. Companies can now have accurate and timely data, allowing for previously unattainable visibility and transparency to inventory with the result being improved inventory management, lower costs for the company, and lower prices for the consumer. As companies embrace and master the opportunities offered by these technologies, companies will be able to focus efforts on other core issues of the business rather than focus on the supply chain issues addressed by these new technology solutions.

Question 7: What are the factors to be considered when locating a production or distribution center? Why?

Answer 7:

For an individual business, the factors for selecting a production facility or distribution center can vary; however, the following are the most basic issues to be addressed when considering this type of decision:

  • location of the customer
  • required delivery time
  • shipment configuration
  • product characteristics
  • variety of products
  • logistics cost structure (handling, storage, and transport)

Once the key characteristics of the location optimization equation are identified and understood, they can be easily converted into agreed-upon measurables with the appropriate values and solved by a wide variety of available commercial software or 3PL (third-party logistics) service companies. In determining the optimum location of a production or distribution location, what is of real importance is that the supply chain value stream be fully and correctly analyzed so that the true cost drivers of the supply chain can be identified. Once these key drivers are identified, the appropriate metrics and action plans can be established and executed to create competitive advantages for the firm and ultimately improve the performance of the company.

Question 8: What is an economic order quantity (EOQ)?

Answer 8:

The EOQ is the order quantity that provides the company the minimal total inventory carrying and ordering costs for the fiscal year. It is important to note that EOQ is not always able to provide exact data; however, it does provide insight as to whether or not current order quantities are reasonable. The formula for EOQ is the square root of (2 * A * Cp) divided by (Ch). In the formula, (A) is the demand for the year, (Cp) represents the cost to place a single order, and (Ch) is the cost to hold one unit for 1 year. The EOQ formula also has some important assumptions, a relatively uniform and known demand rate, a fixed item cost, a fixed ordering and holding cost, and a constant lead time.

Specifically, the model equates total inventory costs to one-half the product of the economic order quantity and the incremental holding cost plus the product of the incremental cost to place an order and the annual usage divided by the incremental holding cost. The primary advantage of the EOQ model over others is its relative ease of use. Another cited advantage is that when there is a degree of variability in the demand of an item, the total cost provided by EOQ is not much higher than another possible method. As stated, some argue that the EOQ model is not acceptable because it does not adequately account for fluctuations in demand; as in many such situations, the total cost is understated and the inputs can be, at best, good estimates. This problem is largely attributed to the fact that costs associated with ordering and holding inventory are shared with other functions or disciplines. Like any other tool, EOQ should be evaluated in context of the circumstances of the specific application or situation (Fullbright, 1979).

Question 9: Can you identify the two independent demand inventory models?

Answer 9: The two types of independent demand inventory models are the periodic review model and the perpetual review models.The feature of the perpetual review model is that it has an inventory level that is constantly monitored. Whenever inventory levels drop to a pre-established reorder point (R), additional inventory is delivered. Economic order quantity (EOQ) is a popular method for establishing order quantities for both of the independent demand inventory models.

Like the perpetual review model, the periodic review independent demand inventory model is also a method of inventory maintenance and replenishment. The process begins as inventory levels start at an identified restocking level (R). At established time intervals, the inventory is analyzed and the new inventory level is established (I). Then, an amount of inventory is brought in to increase the inventory level back to (R), resulting in the equation (Q = R – I). The restocking level trigger is calculated by the equation (RS = Drpl + l + SS). In this equation (Drpl) equals average demand during the reorder time frame in addition to any required replenishment lead time. (SS) in the equation stands for safety stock, which is extra inventory that a company carries to help prevent stockouts in the presence of uncertainty of both supply and demand.

Question 10: What is safety stock? How do you calculate safety stock?

Answer 10:

There are many variations to the exact definition of safety stock, but there is a general consensus among most that safety stock is the extra inventory kept on hand by a company to protect against out-of-stock conditions due to unexpected demand and delays in delivery.

As noted, in normal materials management, there are two basic inventory management systems: the periodic and perpetual models.  The periodic model is a system wherein replenishment is done, keeping the quantity constant. The period becomes the variant. In summary, you fix the quantity you want for the stock to dip to trigger a requirement. As soon as the stock level is reached, you replenish the stock. The perpetual system is a system wherein replenishment is done, keeping the period constant. The quantity becomes the variant. This means you will check for the level of stock at fixed time intervals (daily, weekly, monthly, and so forth) and compare it with the requirements  that normally relate with your MRP.  In addition, there are four other factors that could affect the ideal procurement pattern:

  • ordering lead time
  • manufacturing lead time
  • transporting lead time
  • conversion lead time

A delay in any of these can have effect on the entire replenishment process. A buffer stock must be designed to take into account the previously mentioned coverage. Again, the determination of your safety stock depends on the accuracy of your forecast because the greater your accuracy, the lower the amount of safety stock. This relationship between forecast accuracy and service level  is denoted by factor (R). It should be noted that the customer demand cannot be always satisfied 100% of the time.  Therefore, what you have is (R) equaling the relationship between forecast accuracy and service level (service factor), (W) equaling the delivery time (in days) / forecast period (in days), and (MAD) = mean absolute deviation (parameter for forecast accuracy). The calculation proceeds; if replenishment lead time is greater than the forecast period by factor W, then safety stock = (R * Sq.rt. W * MAD) or else safety stock equals (R * W * MAD). Another widely accepted common method of calculating safety stock is the statistics model of standard deviation of a normal distribution (the bell curve). This statistical tool has proven to be very effective in determining optimal safety stock levels in a variety of environments. The basis for this safety stock calculation is standardized, and its appropriate use generally requires adaptation of the formula and inputs to meet the specific characteristics of your operation.References

Cork, L. (2006). A sign of things to come. Works Management, 53(2), 26.

Economic order quantity (EOQ) model. (2006). Retrieved from the SCRC Web site: http://scm.ncsu.edu/public/inventory/6eoq.html#1

Fullbright, J. E. (1979). Advantages and disadvantages of the EOQ model. Journal of Purchasing and Materials Management, 15(1), 8.

Article
FAQ: Transportation
Question 1: Why would a company be interested in transportation-oriented supply chain metrics?

Answer 1:

Any company that buys from a supplier or ships products to a customer should be interested in transportation-oriented metrics. Metrics will allow the company to make good choices regarding shipping modes and shipping vendors. Many companies will also use the vendors to evaluate the trade-offs between cost and shipping time, shipping cost versus customer service, cost and inventory, as well as vendor reliability. Further uses for the metrics include measuring performance to contracted standards and understanding lead times. Transportation makes a majority of the logistics budgets of the company, so proper corporate governance requires close management of this activity.

Question 2: What sized company is more likely to utilize third-party logistics (3PL)? Why?

Answer 2:

The ARC Advisory Group (Beyond Software, 2002) performed a study in which it looked at who was more likely to outsource its logistics activity. Its study indicated that large companies were more likely to outsource their logistics to third-party logistics providers. Further, large companies indicated that they were likely to outsource nonstrategic business processes. The authors found that smaller companies were reluctant to outsource their logistics because of their greater need to control their entire supply chain to remain in competition with larger companies, whereas larger companies were more likely to focus on their strategic competencies, giving up some measure of control to the 3PL firms. The study also indicated that although all companies desired control over logistics functions, larger firms indicated that they required less control than smaller firms.

Question 3: How does delivery reliability affect the decision of transportation mode?

Answer 3:

Delivery reliability, which is the ability to deliver when specified, depends upon how much and where inventory is placed in the supply chain. To run the supply chain with minimum inventory, a high degree of delivery reliability is required. When delivery reliability is not high, extra inventory must be kept. If the inventory costs exceed the difference in transportation costs, a more reliable form of transportation may be purchased. In general, slower modes of transportation are less reliable. Absolute reliability of delivery can be required in certain circumstances, for example, delivery of parts to an assembly line. Some assembly lines cost the company hundreds of thousands of dollars a minute when they are shut down for any reason, including lack of parts. Other companies maintain enough inventory to cover any eventuality.

Question 4: Why is the foot mode of transportation still viable?

Answer 4:

The foot mode of transportation for the delivery of goods is still viable for a couple reasons. First, many goods must be delivered to facilities without a proper shipping dock. These facilities would include offices, homes, worksites, and so forth. The items that may be delivered via foot would typically be items such as small packages, mail, food, and so forth.

The other reason that items may be delivered by foot is that in certain countries, the cost of labor is much less expensive than the cost of fuel and vehicles to deliver packages. Certainly, this is the case in many third-world countries. Such foot deliveries are also made in cities such as Hong Kong.

Question 5: If your company competes on cost or customer service, what supply chain metrics would you use?

Answer 5:

  • Cost: When a company competes on cost, the strategy and tactics are to drive costs out of the supply chain. Transportation is the largest component of logistics cost, so measuring transportation costs to reduce them is an important activity. A company might measure the cost of processing and export transaction, the cost of inventory required to maintain desired customer service levels, transportation costs, average delivery time, and so forth. All of these metrics would orient company performance toward the reduction of costs, thereby aligning the supply chain with company strategy.
  • Customer Service: A company that competes for time needs to have customer service desire to have products available whenever a customer demands. Such a company would be interested in having enough inventory on hand to satisfy customer demand. As such, the focus is not on costs of inventory but rather having a sufficient amount of inventory. Other metrics that the company might use would include the cost of missed deliveries, stockout costs, delivery reliability, detailed metrics on customer demand pattern, and so forth. Stockouts can be minimized even with slightly unreliable deliveries through properly placed and sized inventory. Much attention must be given to maintaining the proper inventory levels—not too much and not too little.

Question 6: How is the supply chain operations reference (SCOR) model organized?

Answer 6:

The SCOR framework stands for the supply chain operations reference model. It is a management tool that was developed to describe the business activities associated with all phases of satisfying customer demand. The SCOR framework includes the standard descriptions of processes, relationships between those processes, and standard metrics for the processes, and it must process best practices and standard alignment to the features and functionality required in the supply chain (SCOR 8.0 Reference Booklet, 2006).

There are four levels in this SCOR model as follows (SCOR 8.0 Reference Booklet, 2006):

  • Level 1 is the top level and defines the plan, source, make, deliver, and return processes and objectives.
  • Level 2 provides the ability to configure-to-order the 26 possible core supply chain management processes.
  • Level 3 develops information for planning and goal-setting improvements, which include process element definitions, process element information inputs and outputs, process performance metrics, best practices, and the system capabilities required to support the best practices.
  • Level 4 is the implementation step and defines practices to achieve competitive advantage to adapt to changing business conditions.

SCOR metrics are designed to help the company achieve its goals. There are performance attributes that the metrics are intended to support: reliability, responsiveness, flexibility, cost, and assets. A Level 1 metric includes perfect performance fulfillment, which supports the reliability performance attribute. There are similar metrics at Level 2, Level 3, and Level 4. All of the metrics are intended to support best-in-class performance and are rolled up into the next level metric. This allows for implementation to roll into operational and then strategic performance measurement (Chopra & Meindl, 2003).

Question 7: What role does software or technology play in transportation decisions?

Answer 7:

Customer

The customer of transportation services look for two properties in the software or technologies offered by the transportation company. First, the customer looks for visibility into shipment location. Many companies provide their customers with websites that allow queries into a shipment’s location and progress to the destination. Many companies are using new technologies such as radio frequency identification (RFID) to provide this capability for their internal supply chain.

The second property that a customer of transportation services desires is automation for shipping, billing, and notifications. Many transportation providers have already provided these sorts of automation through their Web sites.

Transportation Company

The transportation company desires software and technology to help it reduce costs, increase reliability, and maintain regulatory compliance. There is software that allows competitive shippers true aggregate shipments that are less-than-truckload (LTL) into full truckloads to reduce costs. There is software that allows the trucking company to find shipments to fill the trip back. There are systems that allow the company to track their trucks using a global positioning system (GPS). Not only does the company know where the truck is, but it can also track its progress and determine the speed at which the driver is making progress toward the destination. Online trucking logs integrated with tracking software helps the company prove compliance with trucking regulations.

Question 8: How does location affect transportation decisions?

Answer 8:

When sourcing a part, component, or product, consideration must be made of the transportation from vendor to customer. Sometimes the consideration is trivial, such as when a product can be easily mailed. Other times, the size and volume of the product involved make transportation a much more important issue.

For example, if you were a sports apparel manufacturer who had sourced your shoe manufacturing to Dongguan, China, the volume of shoes (which would probably be in the hundreds of thousands of pairs) and the location of the manufacturing facility will limit you to two possible choices: airfreight and container ship. In this situation, the advantage of airfreight is the very quick delivery, and the disadvantage is cost. The advantage of container ship is cost, and the disadvantage is slower delivery, which is on the order of a month. Other products further limit choices. For example, coal and iron ore may be shipped by rail or ship but not by airfreight.

Question 9: Who pays the freight bill?

Answer 9:

When goods are shipped, the responsibility for payment of transportation is negotiated beforehand. This is typically done by the purchasing agent as part of the contract negotiation for purchase of goods and products. The term free on board (FOB) means that the seller pays the shipping. FOB shipping point and FOB destination refer to vendor- and customer- paid shipping, respectively. Many times, a vendor will have specialized equipment for transportation of materials. Examples include ships and or railroad cars for iron ore or coal, specialized ships for liquid natural gas, and so forth. The cost of shipping, therefore, is paid either by the buyer or seller. All shipping costs would be included in the final price paid by the consumer. In the end, the consumer pays for all shipping.

Question 10: How does the bull-whip effect change transportation costs?

Answer 10:

When a supply chain suffers from the bull-whip effect, transportation costs rise. It might seem that because the same amount of goods is purchased by consumers regardless of the bull-whip effect, transportation costs would remain the same. The reason transportation costs rise is because the bull-whip effect requires that excess transportation capacity be maintained because of the high quantities ordered during the peaks. This has two cost components: capital equipment costs and excess labor costs. If the bull-whip effect can be eliminated, the excess transportation capacity is not required and transportation costs can be decreased.

References

Beyond software: Maximizing value via outsourcing. (2002). Retrieved from ARC Advisory Group Web Site: http://www.arcweb.com/research/pdfs/09-2002sw.pdf

Chopra, S., & Meindl, P. (2003). Supply chain management: Strategy, planning, and operation. Upper Saddle River, NJ: Prentice Hall.

SCOR 8.0 reference booklet. (2006). Retrieved from Supply Chain Council Web site: http://www.supplychain.org/page.ww?name=SCOR+8.0+Download+Thank+You§ion=SCOR+Model

 

Resource Links

  • Supply Chain Metrics

    (http://www.supplychainmetric.com/)

    This article describes the purpose of metrics and how you go about picking good ones.

  • Warehouse Metrics: Measure What Matters

    (http://www.inboundlogistics.com/cms/article/warehouse-metrics-measure-what-matters/)

    This article describes how to go about picking good logistics metrics and examples of commonly used ones.

  • Public Warehousing in the Supply Chain

    (http://logistics.about.com/od/tacticalsupplychain/a/public_warehousing.htm)

    This article describes what public warehousing is all about and how companies may benefit from using it.

  • Supply Chain and Logistics Terms and Glossary

    (http://www.logisticsservicelocator.com)

    This web page provides a link to a comprehensive guide to terminology in the logistics function.

  • Backhauling Offers Transport Savings

    (http://ezinearticles.com/?Backhauling-Offers-Transport-Savings&id=2607788)

    This article provides a brief but excellent description of what backhauling is.

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