Lecture Note - Day 3

Logistics Cost

Warehousing costs
- are created by warehousing and storage activities, and by the plant and warehouse site selection process.

Order Processing/Information Cost
- Includes costs related to activities such as order processing, distribution communications, and forecasting demand.
- Order processing is important to support good customer service levels and control costs.
- E.g. Order transmittal, order entry, processing order, related internal and external costs such as notifying carriers and customers of shipping information and product availability.
- Information system and technology such as Electronic Data Interchange (EDI), satellite data transmission, and bar coding and scanning shipments and sales. Others are artificial intelligence (AI) and expert systems.

Lot Quantity Cost
- Purchasing or production related costs that vary with changes in order size or frequency and include:
- Setup costs
- Time required to set up a line or locate a supplier and place an order
- Scrap due to setting up the production line
- Operating inefficiency as the line begins to run, or as a new supplier is brought on board
- Capacity lost due to downtime during changeover of line or changeover to a new supplier
- Material handling, scheduling and expediting
- Price differentials due to buying in different quantities
- Order costs associated with order placement and handling

Inventory Carrying Cost
- Includes inventory control, packaging, and salvage and scrap disposal.
- Major categories of inventory cost are:
- Capital cost, or opportunity cost - the return that the company could make on the money that has tied up in inventory
- Inventory service cost – insurance and taxes on inventory
- Storage space cost – warehousing space-related costs which change with the level of inventory
- Inventory risk cost – obsolescence, pilferage, relocation within the inventory system, and damage.


Scope of Material Management
- Material management is typically comprised of four basic activities:
¨Anticipating material requirements
¨Sourcing and obtaining materials
¨Introducing materials into the organization
¨Monitoring the status of materials as a current asset

Why forecast
- Increasing customer satisfaction
- Reducing stock-outs
- Scheduling production more efficiently
- Lowering safety stock requirements
- Reducing product obsolescence costs
- Managing shipping better
- Improving pricing and promotion management
- Negotiating superior terms with suppliers

Type of forecast
- Demand forecast – Investigation of the firm’s demand for the item, to include current and projected demand, inventory status and lead times.
- Supply forecast – Collection of data about current producers and suppliers, the aggregate projected supply situation, technological and political trends that might affect supply
- Price forecast – Based on information gathered and analyzed about demand and supply. Provides a prediction of short and long-term prices and the underlying reasons for those trends.

Material Management Philosophies
- TQM
- Kanban (cards) – Toyota Production System 1950s.
¨Material should be supplied at the very moment they are needed in the factory production process.
- JIT – Kanban linked with purchasing, manufacturing and logistics.
¨Reduce manufacturing costs, eliminate waste, resource utilization
¨Right materials to the right place at the right time
¨High quality products (zero defects), high productivity, lower inventory, long-term relationships with channel members
- MRP System
¨Material Requirement Planning (MRP I)
-computer system
-inventory
-production scheduling
¨Material Resource Planning (MRP II) - upgraded
-financial
-marketing
-purchasing
- DRP System
¨Distribution Requirement Planning (DRP I)
¨Distribution Resource Planning (DRP II) – upgraded
- The application of MRP principles to the distribution environment



Warehouse
- That part of the firm’s logistics system that stores products (raw materials, parts, goods-in-process, finished goods) at and between point of origin and point of consumption, and provides information to management on the status, condition, and disposition of items being stored.

Importance of warehouse
-Achieve transportation economies
-Achieve production economies
-Take advantage of quantity purchase discounts and forwards buys
-Maintain a source of supply
-Support the firm’s customer service policies
-Meet changing market conditions (e.g. seasonality, demand fluctuations, competition)
-Overcome the time and space differentials that exist between producers and consumers
-Accomplish least total cost logistics commensurate with a desired level of customer service
-Support the just-in-time programs of suppliers and customers
-Provide customers with a mix of products instead of a single product on each order
-Provide temporary storage of materials to be disposed of or recycled

Improving Warehouse Productivity
- Methods related – cube utilization, layout and design, procedures, batch picking of small orders, standardized packaging, warehouse consolidation
- Equipment related – optical scanners, automatic labeling, automated material handling equipment, communication devices, computers, automated storage/retrieval system (AS/RSs), conveyors.
- System related – router/location systems, geographical or zone picking
- Training/motivation related – training, management development, incentive systems, awards, etc.

Factors Affecting Warehouse Size
- Customer service levels
- Size of market or market served
- Number of products marketed
- Size of the product or products
- Material handling system used
- Throughput rate
- Production lead time
- Economies of scale
- Stock layout
- Aisle (gap) requirements
- Office area in warehouse
- Types of racks and shelves used
- Level and pattern of demand

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