Global SCM Course Objectives and Key Concepts

Adel Abou Heneidy
Course objectives
Upon completion of this course, students will be able to:
1. Discuss issues on the role of global supply chain
management
2. Understand the supply chain concepts from different aspects
of theories;
3. Recognize the building blocks of global supply chain
strategy;
4. Understand how to design the global supply chain and;
5. Discuss the importance of collaboration across the supply
chain.
GlobalSCM AdelAbouHeneidy
Overview
Introduction
Globalization & International Trade
Supply Chain Strategies
Logistics service providers
Procurement & Outsourcing
Inventory Management
Particulars of Bill of Lading & Letter of Credit
Optimizing transport cost in Supply Chains by using spreadsheet
Supply Chain Risk Management
Measuring & Managing Logistics Performance
Aggregate planning in supply chain
References:
Global Logistics & Supply Chain Management- John Mangan, Chandra Lalwani
Supply Chain Management Sunil Chopra & Peter Meindl
References:
Global Logistics & Supply Chain Management- John Mangan, Chandra Lalwani
Supply Chain Management Sunil Chopra & Peter Meindl
INTRODUCTION
1
What is Logistics?
Getting the right product to the right place, in the right quantity, at
the right time, in the best condition, and at an acceptable cost
The Chartered Institute of Logistics & Transport (CILT-UK): www.ciltuk.org.uk
Logistics involves getting, in the Right way, the Right product, in
the Right quantity, in the Right place, at the Right time, for the
Right customer at the Right cost. [7Rs]
What is a Supply Chain?
A supply chain is a network of facilities and distribution options that
performs the functions of procurement of materials, transformation of these
materials into intermediate and finished products, and the distribution of
these finished products to customers.
Ganeshan and Harrison, 1995
The supply chain is the network of organizations that involved that are
involved. Through upstream and downstream linkages, in the different
processes and activities that produce value in the form of products and
services in the hand of the ultimate consumer.
What is Supply Chain Management?
Supply chain management is the coordination of production, inventory
location, transportation, and information among the participants in a supply
chain to achieve the best mix of responsiveness and efficiency for the
market being served.
Hugos, 2002
Supply Chain Management (SCM) is the management across a network of
upstream and downstream organizations of material, information, and
resources (finance, people, equipment) flows that lead to the creation of value
in the form of products and/or services.
Key SCM Issues
Distribution network design
Determine plant and warehouse locations, capacities, and
production/storage levels
Inventory Control
The purpose of inventory is to avoid interrupting a supply
process, be it production or end customer demand
How can we avoid such disruptions at the minimum total
cost?
Must rely on forecasts
Key SCM Issues
Distribution strategy
Where to hold inventory and how to efficiently
transport it to customers?
Ship directly from plant to customers in full truckloads?
Maintain stocks in regional warehouses and distribute
locally?
Integration and strategic partnerships
How involved should a firm be with suppliers of
both materials and services?
What level of information sharing is appropriate?
Key SCM Issues
Product design issues
Tradeoffs between design changes and
logistics savings?
Can design strategies buffer against
demand uncertainties?
Information technology
What significant data is critical for sharing with partners?
What is the role of the Internet/e-Commerce in all of this?
Customer value (CVP)*
How does SCM contribute to customer value?
* a customer value proposition (CVP) consists of the sum total of benefits which a vendor promises a
customer will receive in return for the customer's associated payment
Supply Chain Management Problems
Supply chain management must address the
following problems:
Distribution Network Configuration
Distribution Strategy
Information
Trade-Offs in Logistical Activities
Cash-Flow
What is a Global Supply Chain ?
The global supply chain is made up of the
interrelated organizations, resources, and
processes that create and deliver products and
services to end consumers.
In the instance of global supply, the chain is
extended to many different countries around
the world.
Global Logistics
Components of a GSC
Structures
Structuring the supply chain requires an understanding of the demand
patterns, service level requirements (SLA), distance considerations, cost
elements and other related factors.
Processes
Different processes are demand and supply planning, sourcing, forecasting,
purchasing, service operations, logistics, etc.
Linkages (shared information or continuous communications)
Information Sharing (example)
Chrysler makes the cars
Leer makes the seats
Third party cuts & sews fabric
Milliken makes the fabric
Dupont makes raw material

Shared schedule information
Issues / considerations when designing a GSC
Strategic plan or Goals
Objectives
Uncertainty: discuss !
Communication and information flow
Types and numbers of facilities and location
Before an effective supply chain can be established, certain things must be considered. First a
strategic plan with clear objectives and goals must be made. For this to occur it is necessary to
understand current performance and what is possible after improvement or reengineering.
First, a company must understand and identify causes of uncertainty and determining how it
affects other activities throughout the supply chain. Next, ways to eliminate or reduce
uncertainty need to be formulated. Communication and information flow is also important
when designing a global supply chain. Reliable and instantaneous information can enhance the
ability to coordinate different supply chain processes. Types and numbers of facilities and
location help dictate many decisions regarding modes of transportation, which suppliers to
use, customer markets, etc. They also help determine transportation and distribution costs,
making them careful considerations.
How Toyota & Honda use facilities decisions to be more
responsive to their customers?
1) By opening manufacturing facilities in every major market that
they enter to be near of the customers.
2) Also, by opening local facilities they protect themselves from
currency fluctuation and trade barriers.
Practicality and Usefulness
Help companies compete all over the world
Expand business operations
Offer new services and applications to meet global customers needs
Give company a competitive advantage
Implicating a global supply chain will allow companies to compete all over the world, in
many different countries. By expanding current business operations internationally,
companies can over new products and services that many have never seen before. New
markets allow for more sales and more recognition. Expanding globally with an
effective supply chain will give companies a comparative and competitive advantage
over others.
Implicating a global supply chain will allow companies to compete all over the world, in
many different countries. By expanding current business operations internationally,
companies can over new products and services that many have never seen before. New
markets allow for more sales and more recognition. Expanding globally with an
effective supply chain will give companies a comparative and competitive advantage
over others.
Goal of the Global Supply Chain
Prompt and reliable delivery of high-quality products and
services at the least cost
To effectively meet rising customer expectations
In order for a global supply chain to be effective, is must be reliable and fast. The
goal is to deliver a companies products and services quickly and at the least cost
possible. Customer expectations are hugely important in todays business world and
companies must strive their needs, wants, and desires.
Elements of customer service:
Response time
Product variety
Product availability
Customer experience
Order visibility: access to up-to-the-minute information about the
orders.
Return ability
Supply chain costs:
Inventories
Transportation
Facilities and handling
Information
Recent changes effecting the GSC
Internet and technological change
Proliferation of trade agreements
Falling Trade Barriers
Increase in international trade groups
New Markets
Advantages of GSC
Diversified business and trading
Lower supply chain costs
Reduced cycle time
Competitive advantage (USP)
Untapped markets*
Enhance speed (responsiveness) and efficiency: discuss !
A successful global supply chain will help your company accomplish many useful things. Once
the global supply chain is in place, it will only continue to aid your company in its success and
help you become more profitable.
For example, the personal hygiene market was an untapped market for the makers of baking soda, until they
developed a baking soda toothpaste
Disadvantages and problems
Member nations VS. Non member nations
Inefficient and undersized transportation and distribution systems
Market instability
Doing business globally is not fool proof, and still can have some disadvantages.
Many trade agreements only benefit member nations, which creates obstacle for non member nations.
Non members end up paying large tariffs which can greatly increase supply chain costs and cycle
times.
Another disadvantage with conducting business globally is the inefficient and undersized
transportation and distribution systems in new markets. Many countries dont have the capacity or
equipment to transport or handle the large supplies needed to engage in business. This causes for
uncertainty with high transportation costs and delay.
Market instability is also an issue in dealing with the global supply chain. Many times, foreign
markets are fragmented which forces companies to customize their operations for each country.
Different countries speak different languages, with different customs, believs,and cultures. All of
these obstacles make it very difficult for an effective global supply chain.
Solutions
Duty specialists and trade specialists
Vertically integrating
Banding together
Infrastructure improvements
Flexibility
Despite the different problems, opportunities for global business activities are great. Many
common problems can be creatively overcome and solved. In order to avoid tariffs or duties,
duty specialists are hired by companies. These specialists advise how taxes effect the supply
chain and how to avoid them. Trade specialists help manage transportation and distribution
operations in the foreign countries. Many companies vertically integrate different portions of
their supply chain. An example would be: investing in their own trucking fleets and
distribution systems in order to control their own product delivery. Many companies have also
banded together in order to consolidate shipping, warehousing, distribution, and many others.
Improvements in infrastructure help to sustain and accelerate market growth. Paving public
roads, privatizing railroads, establishing transport systems and others are examples. Perhaps
most importantly, in order for your global supply chain to be effective, it must be flexible.
Markets are constantly changing and to remain competitive, a companys global supply chain
must innovative, creative, and strategically designed.
Brainstorming Discussion
What are some reasons for extending
your business and supply chain
globally?
Increase sales
Satisfy shareholders
Falling tariffs
Increase in International Trade
Increase in internet use throughout the world.
The main objective of expanding a business globally is to increase sales and make more money.
If a company can effectively do this at the least cost possible, profits will increase. A company
with established global sales and activity is far more valuable than a domestic company
operating in only one company. This increases market share and satisfies shareholders. Tariffs
have fallen from almost 48 percent to 6 percent by 1980. Tariffs are expected to continually fall
to around 3 percent. International trade is expected to grow 6 percent annually for the next 10
years. It has already grown exponentially since World War II. The Internet currently has 50
million active users. This number is doubling every year. That is an enormous amount of people
able to be reached all over the world, almost instantaneously.
Globalization & International Trade
Supply Chain Strategies
2
Comparative advantage
Economic theory first advanced by Robert
Torrens and David Ricardo that analyzes
international trade in terms of differences in
relative opportunity costs. The theory suggests
that countries should specialize in the goods
they can produce most efficiently rather than
trying for self-sufficiency and argues strongly
in favor of free international trade.
Production and consumption before trade
Country Food Clothes
Northland 50 50
Southland 200 100
TOTAL 250 150
Consumption after trade
Northland 75 50
Southland 225 100
TOTAL 300 150
Production after trade
Northland 0 100
Southland 300 50
TOTAL 300 150
Northland requires a price of at least one ton of food
in exchange for one ton of clothes; and Southland
requires at least one ton of clothes for two tons of
food. If the international trading price of one ton of
food for 2/3 ton of clothes.
If both specialize in the goods in which they have
comparative advantage, their outputs will be:
World production of food increased. clothes
production remained the same. Using the
exchange rate of one ton of food for 2/3 ton of
clothes, Northland and Southland are able to
trade to yield the above level of consumption:
Example
Globalization
Globalization describes the process by which regional economies,
societies, and cultures have become integrated through a global
network of communication, transportation, and trade. In other words,
it is growth to a global or worldwide scale.
People around the globe are more connected to each other than ever
before. Information and money flow more quickly than ever. Goods
and services produced in one part of the world are increasingly
available in all parts of the world. International travel is more
frequent. International communication is commonplace. This
phenomenon has been titled "globalization."
Defining globalization
An open economic system
Non-discrimination
Global brands
Global structures
Globalization
In general, it is the shift toward a more integrated and interdependent
world economy
Negative integration: is the breaking down of trade barriers or
protective barriers such as tariffs and quotas.
Positive integration: aims at standardizing international
economic laws and policies.
Two components:
The globalization of markets
The globalization of production
Impact of globalization
Improvement of International Trade
Technological Progress: governments have upgraded their level of technology
Increasing Influence of Multinational Companies
. Power of the WTO, IMF, and WB : discuss the role of each!
Greater Mobility of Human Resources across Countries
.Greater Outsourcing of Business Processes to Other Countries
Civil Society: an important trend in globalization is the increasing influence and broadening
scope of the global civil society.
Please comment!
Proponents of globalization argue that it allows
developing countries to continue and hasten
their levels of development, and that it protects
consumers in developed countries.
Opponents believe that globalization serves the
interests of multinational corporations at the
expense of small businesses, which sends jobs
to other countries needlessly.
Drivers of Globalization Drivers of Globalization
Two factors underlie globalization
Decline in barriers to the free flow of
goods, services, and capital that has
occurred since the end of World War II
Technological change
Two factors underlie globalization
Decline in barriers to the free flow of
goods, services, and capital that has
occurred since the end of World War II
Technological change
Cheap travel
Trade liberalization
Information technology
High technology
Drivers of Globalization Drivers of Globalization
Globalization Forces
Political forces
Reduction of barriers to trade and foreign investment by
governments
Privatization of former communist nations
Technological forces
Advances in computers and communications technology
Internet and network computing
Globalization Forces, contd.
Market forces
Globalizing companies become global customers
Cost forces
Goal for economies of scale to reduce unit costs
Competitive forces
Increase in intensity due to explosive growth in
international business
Environments of International Business
Environment
All the forces influencing the life and development
of the firm
Forces
External Forces (Uncontrollable) Forces over
which management has no direct control
Internal Forces (Controllable) Forces that
management can use to adapt to external forces
External Forces
Competitive
Kind, number, location
Distributive
For distributing goods and services
Economic
GNP*, unit labor cost, personal consumption expenditure
Socioeconomic
Characteristics of human population
Financial
Interest rates, inflation rates, taxation
* Gross National Product (GNP) is the market value of all goods and services produced
in one year by labor and property supplied by the residents of a country.
External Forces, contd.
Legal
Laws governing how international firms must operate
Physical
Topography, climate, and natural resources
Political
Forms of government, and international organizations
Sociocultural
Attitudes, beliefs, and opinions
Labor
Skills, attitudes of labor
Technological
Equipment and skills that affect how resources are converted to
products
Internal Environmental Forces
Factors of Production
Capital, raw materials, and people
Activities of the organization
Personnel, finance, production, and marketing
Why Is International Business
Different?
Domestic Environment
All the uncontrollable forces in the home country that
surround and influence the firms life and development
Foreign Environment
All the uncontrollable forces originating outside the home
country that surround and influence the firm:
different values
difficult to assess
interrelated
Why Is International Business
Different? contd.
International Environment
Interaction between domestic and foreign
environmental forces or between sets of foreign
environmental forces
Increased complexity for decision-making
Decision making more complex
The negative effects of globalization
Developed nations have outsourced manufacturing and white collar jobs. That
means less jobs for their people.
Globalization has led to exploitation of labor
Local industries are being taken over by foreign multinationals
Job insecurity
Companies have set up industries causing pollution in countries with poor
regulation of pollution
Fast food chains like McDonalds and KFC are spreading in the developing
world. People are consuming more junk food
The rich are getting richer and the poor are becoming poorer
Bad aspects of foreign cultures
Deadly diseases like HIV/AIDS are being spread by travelers
The increase in prices has reduced the governments ability to sustain social
welfare schemes in developed countries
Multinational Companies and corporations which were previously restricted to
commercial activities are increasingly influencing political decisions.
AntiGlobalizationMovement
The anti-globalization
movement developed in the
late 20
th
century to fight the
globalization of corporate
economic activity and the
free trade with developing
nations that might result
from such activity.
The positive effects of globalization
Globalization has created the concept of outsourcing
Increased competition forces companies to lower prices
Increased media coverage draws the attention of the world to
human right violations
Countries move to market sectors that they are better at.
Everyone grows more prosperous. Just look at China and India.
Before globalization they were very poor countries. The standards
of living were extremely bad. Now these people are becoming
more prosperous.
Please have a look on the following paper:
http://www.cluteinstitute-onlinejournals.com/PDFs/200786.pdf
Key terms
An international business: any business with
international sales, sourcing, or investment.
A multinational business: any business with
productive activities in 2 or more countries.
A global business: a business that takes a
global approach to production and sourcing
(Coca-Cola, Intel)
International Business
Exporting
Local products are sold abroad
Importing
The process of acquiring products abroad and selling them in domestic
markets.
Licensing
one firm pays a fee for rights to make or sell another companys products.
Franchising
a firm pays a fee for rights to use another companys name and operating
methods.
International Business
Joint Venture
A firm operates in a foreign country through co-ownership with local
parties.
Strategic Alliance
each partner hopes to achieve through cooperation things they couldnt
do alone.
Foreign Subsidiary
a local operation completely owned by a foreign firm.
Multinational Corporations
Multinational Corporation (MNC)
A business with extensive foreign operations in more than one county.
Transnational Corporation
A MNC that operates worldwide on a borderless basis.
Fortunes Top 10 Multinational Corporations
1. Wal-Mart Stores 6. DaimlerChrysler
2. BP 7. Toyota Motor
3. Exxon Mobil 8. General Electric
4. Royal Dutch Shell Group 9. Total
5. General Motors 10. Chevron
Multinational Corporations
Multinational corporations do substantial business in several
countries.
Multinational corporations can be controversial at home and
abroad.
Multinational corporations face a variety of ethical challenges.
Planning and Controlling are complicated in multinational
corporations.
Organizing is complicated in multinational corporations.
Leading is complicated in multinational corporations.
MNC Issues
MNC Organizations
International Trade
International trade is the exchange of goods and services
across international boundaries and/or territories.
One guiding force behind international trade is competitive
advantage (countries find goods/services that they can
produce more competitively than another country)
The importance of international trade has been increasing
throughout the past centuries because of Industrialization,
Globalization and the introduction of Multi-national
corporations
The recent growth in international trade has been the result of
both major technological advances and concerted efforts to
reduce global trade barriers.
International Trade and World
Economy
Over the past 20 years, the growth of
international trade has averaged 6 percent per
year, increasing twice as fast as world output.
Since 1947, when the General Agreement on
Tariffs and Trade (GATT) was created, the
world trading system has benefited from eight
rounds of multilateral trade liberalization, as
well as from unilateral and regional
liberalization.
Impacts of World Trade
The resulting integration of the world economy has
raised the standard of living around the world.
Many developing countries have substantially
increased their exports of manufactured goods.
Compared with traditional commodity exports,
manufactured goods have risen to 80 percent of
developing country exports.
Trade between developing countries has grown
rapidly, with nearly 40 percent of their exports now
going to other developing countries.
Trade Agreements
International trade is a major source of economic revenue for
any nation which is involved.
Without international trade, nations would be limited to the
goods found within their own borders.
New developments in international trade include the
integration of countries into trade agreements or blocks:
European Union - APEC
NAFTA - AFTA
EFTA
CEFTA
Globalization & Intl Trade
World trade increased about 20x since 1950, while
global production has increased about 6.5x
Between 90 and 00 FDI increased 5x & trade by 2x
By 2000:
60,000 parent companies operated away from home
markets through 820,000 subsidiaries/affiliates
Produced US$14 trillion in global sales, twice the value of
global exports
US, Japanese, Western European companies are the major
investors in Europe, Asia, and North America
Implications for Globalization of Production
New markets opened through WWW.
Jet aircrafts move people and goods.
Global media such as CNN, MTVare creating a worldwide culture
Production dispersed to economical locations due to transportation
and communication advances.
It has allowed firms to create and manage a globally dispersed
production system, further facilitating globalization of production
Implications for Globalization of Markets
Exports % share of world
production
0
5
10
15
20
25
1913 1950 2000
Globalization from a Regional Perspective
Globalization from a Regional Perspective
Developed Economies
U.S. the European Union and Japan account for one-half of
world trade
Emerging and Transition Economies
Economies in Latin America and Asia are increasingly
important global players
BRIC, economic powers with large internal markets
Eastward expansion of the EU
Less Developed Countries (LDCs)
Some fast growing and increasingly open to the global system
Others, notably in Africa, struggle to compete globally
US investment now more global
Percentage of foreign stocks
held by US investors
Cumul at i ve US di rect
forei gn i nvest ment
% of GDP
0
5
10
15
20
1980 1995
1975 1996
One
percent
Ten
percent
Discuss the effect of globalization on:
- Business
- Work
Effects of globalization on business
Cheap offshore production
Reduced transport costs
Virtual communication
Standardization of logistics
Global marketing
Bigger and smaller
Greater scale in manufacturing
- commodities are globally priced
Specialization in manufacturing
Globalization of specialist manufacturing
Globalized business
Greater specialization of production - Hewlett
Packard
More outsourcing Soap and medicines
Greater increase in brand values
- LG
New technology niches steel mini mills
Effects of globalization on work
Jobs in services rather than
manufacturing
Workers provide services rather than
do a job
End of lifetime employment
Individuals manage more of their own
affairs
Types of production approaches
Make-to-Stock: we will manufacture finished products by considering
future expected demand [Push]
Assemble to- order: is a production method that occurs when an item is
assembled after receipt of a customer's order. The key items used in the
assembly or finishing process are planned and usually stocked in
anticipation of a customer order. Receipt of an order initiates assembly of
the customized product [Push-Pull]
Build to- order, often abbreviated as BTO and sometimes referred to as
make to order (MTO), is a production approach where once a confirmed
order for products is received, products are built. BTO is the oldest style of
order fulfillment and is the most appropriate approach used for highly
customized or low-volume products. [Pull]
SCM definition by APICS*
SCMis the "design, planning, execution, control,
and monitoring of supply chain activities with the
objective of creating net value, building a
competitive infrastructure, leveraging worldwide
logistics, synchronizing supply with demand and
measuring performance globally."
APICS: association for operations management www.apics.org
Advancing Productivity, Innovation, and Competitive success
SCM- Strategic level
Strategic network optimization, including the number, location, and size of
warehousing, distribution centers, and facilities.
Strategic partnerships with suppliers, distributors, and customers, creating
communication channels for critical information and operational improvements such
as cross docking, direct shipping, and third-party logistics.
Product life cycle management, so that new and existing products can be optimally
integrated into the supply chain and capacity management activities.
Information technology chain operations.
Where-to-make and make-buy decisions.
Aligning overall organizational strategy with supply strategy.
It is for long term and needs resource commitment.
SupplyChainManagementAdel
AbouHeneidy
Framework for
Supply Chain Strategy
Business
Objectives
Management
Processes
Focus of Top
Management
Supply Chain
Objectives
Supply Chain
Processes
Importance to
Top Management
Business
Strategy
Supply Chain
Strategy
Aligning Supply Chain Strategy with
Aligning Supply Chain Strategy with
Business Strategy
Business Strategy
Business Objectives
Management
Processes
Focus of Top Management
Supply Chain
Objectives
Supply Chain
Processes
Importance to Top
Management
Business
Strategy
Supply Chain
Strategy
What it is meant by Strategic Fit
in SC, and how you can achieve it?
Predictable demand Unpredictable demand
Long lead time
Short lead time
Supply & Demand uncertainties
Lean manufacturing
Is a production practice that considers the
expenditure of resources for any goal other
than the creation of value for the end customer
to be wasteful, and thus a target for
elimination.
The lean manufacturing process is a
comprehensive way to reduce waste of all
types. It could be a waste of time or material, it
is still waste.
What is Lean Production?
Lean production is aimed at elimination of
waste
Organize processes to add value to the
customer
Deliver goods just-in-time
Service organizations also using lean
Just-In Time Manufacturing
JIT- A philosophy of continuous improvement that
puts emphasis on prevention rather than correction,
and demands a company wide focus on quality.
JIT- operational management approach to achieve
world class manufacturing.
JIT- production is based on demand
81
JIT Objectives
Ultimate objectives:
Zero Inventory.
Zero lead time.
Zero failures.
Flow process.
Flexible manufacture.
Eliminate waste.
Just-In-Time philosophy is:
Continuous Improvement
Just-In-Time Techniques
Inventory Reduction as a Tool for Improvement
Supplier Relationships
Inventory Pull
Uniform Plant Loading
Reduced Setup Times
Shop-Floor Layout and Production Cells
Total Quality Assurance
Preventive Maintenance
7 Principles of Toyota Production
System (TPS)
Reduced Setup Times
Small-Lot Production
Employee Involvement and Empowerment
Quality at the Source
Equipment Maintenance
Pull Production
Supplier Involvement
Agile Manufacturing
Is a term applied to an organization that has created the
processes, tools, and training to enable it to respond quickly to
customer needs and market changes while still controlling
costs and quality.
The agile systems focus is on flexible, efficient response to
unique customer demand. It uses a make-to-order (MTO)
process for manufacturing and order fulfillment. Instead of
relying on speculative notions of what might be demanded, the
quantity of demand, and the location of that demand, agility
employs a wait-and-see approach to demand, not
committing to products until demand becomes known.
Leagile is a hybrid of lean and agile systems
However, this can take one of several approaches:
1. Using make-to-stock/lean strategies for high volume, stable demand
products, and make-to-order/agile for everything else
2. Have flexible production capacity to meet surges in demand or
unexpected requirements [Chase / Time flexible strategies]
3. Use of postponement strategies, where platform products are made
to forecast, and then final assembly and configuration done upon final
customer order
Leagile Manufacturing
Processing /Postponement
Warehouses
Warehouses can also be used to postpone, or delay, production
by performing processing and light manufacturing activities.
A warehouse with packaging or labeling capability allows
postponement of final production until actual demand is
known.
For example, vegetables can be processed and canned in
"brights*" at the manufacturer.
* Brights are cans with no pre-attached labels.
Mass customization
Mass production of goods with differing
individual specification through the use of
components that may be assembled in a
number of different configurations.
Mass customization is a cost-efficient way of
offering some of the benefits of customization.
After the core product has been mass
produced, the manufacturer can make small
changes to create a customized finished
product.
Lean Supply Chain
A set of organizations directly linked by upstream and downstream
flows of products, services, finances and information that
collaboratively work to reduce cost and waste by efficiently and
effectively pulling what is needed to meet the needs of the individual
customer.
The ability is to respond rapidly to unpredictable changes in demand.
Agility is not a single company concept, it extends from one end of
the supply chain to the other.
Agile Supply Chain
Principles Of JIT Manufacturing
Total Quality Management
Production Management
Supplier Management
- Delivery of Parts = 100% Defect Free
Where they are needed
When they are needed
The exact quantity
- Work Together
- Eliminate Safety Stock = Zero Inventory
- Reduce WIP "Work In Process "
- JIT is not an inventory control system
- Reduction in inventory opens up space
Human Resource Management
Discuss:
Cycle Time vs. Lead Time
If one of your SC strategies is to reduce lead times,
how you are going to manage it?
3
What are the major reasons for
outsourcing of supply chain activities?
Process Effect iveness
24%
Lower Cost
27%
Lack of I nt ernal
Capabilit y
11%
I nvest ment Reasons
12%
St rat egic Reasons
26%
A third-party logistics provider (abbreviated 3PL, or
sometimes TPL) is a firm that provides a one stop shop
service to its customers of outsourced (or "third party")
logistics services for part, or all of their supply chain
management functions.
Third party logistics providers typically specialize in
integrated operation, warehousing and transportation services
that can be scaled and customized to customers needs based
on market conditions and the demands and delivery service
requirements for their products and materials.
Remember:
1PL : shipper 2PL: carrier
Why Use 3PL?
To Save Time: Outsourcing the Logistics function can free up resources to
focus on core competencies.
Because Someone Else Can do it Better: Even if you have resources
available, another organization within the supply chain may be able to do it
better, simply because its relative position in the supply chain, supply chain
expertise and economies of scale.
To Share Responsibility: 3PL companies can share responsibility for
managing global supply chains, keeping customers and stores properly
stocked, and delivering the perfect order every time.
To Re-Engineer Distribution Networks: Logistics outsourcing can be a
quick way to re-engineer distribution networks to meet global market
demands and gain a competitive edge.
Implementing a Successful 3PL Project
Outsourcing Strategy
Document the Processes (SOP)
Analyze SWOT
Conducting a Comprehensive Study
Create a Robust Selection Process
Document the Expectations
Use a Request for Information (RFI)
Do Your Homework
Create Good Legal Documentation
Define Targets (KPIs)
Measure and Review Performance
Develop an Efficient Costing System
Create a Project Implementation Strategy
Nurture the Relationship
Metrics to evaluate a 3PL relationship
Warehousing metrics
Orders processed
Order accuracy
On-time receiving
On-time departure
Inventory accuracy
Cycle counts
Quantity picked/handled
per man-hour
Rush shipments handled
3PL cost per unit vs.
historic cost per unit
Inventory-related metrics
Measure inventory on hand
Inventory in transit
Obsolete inventory
Supplier routing compliance percentage
Supplier on-time order shipping percentage
Consigned inventory/ATP (Available To Promise)
Transportation-based metrics
On-time delivery
On-time pickup
Claims ratio
Rating and billing accuracy percentage
3PL cost per shipment vs. historic cost per
shipment
Monthly optimized cost savings from mode
shifting and end-to-end matching
3PL relationship Remember !
Contracts do not manage relationships - people do!
Trust is enhanced when quality information is exchanged
Each side must understand the others situation on risk and
margin
Enhanced understanding improves mutual performance
SLA is central to the Relationship
KPIs must be accurate and unbiased
Positive Quarterly Reviews
Partnership means what can I do to help you?
Please read the following paper
Global Logistics outsourcing trends:
Challenges in managing 3PL relationship
General liability of freight forwarder
A) The freight forwarder shall not be liable for any loss or damage whatsoever arising from :
* The act of omission by the customer.
* Compliance with the instructions given by the customer.
* Insufficiency of packing or labeling of goods provided by the customer.
* Handling, loading , stowage or unloading of goods by the customer.
* Inherent vice of the goods.
* Force Majored, strikes,..
* Any cause which the freight forwarder could not avoid.
B) Howsoever caused , the freight forwarder shall not be liable for loss, damage to the
property other than the goods themselves ; not to indirect or consequential loss , or
damage , loss of profit , delay ,.
Amount of compensation : THE LEAST OF :
1) The value of lost or damaged goods , or
2) 2 SDR / Kg
*** SDR :Special Drawing Right
Daily, the international bank issues its applicable value. Now, one SDR equals
approximately $ 2
**Compensation shall be affected provided that the freight charges are paid.
ALL BUSINESS IS TRANSACTED AS PER COMPANY's STANDARD TRADING CONDITIONS
COPY AVAILABLE UPON REQUEST
Choosing International Freight Forwarder
Does the forwarder have experience in shipping your type of products ?
Does the forwarder have good contacts with shipping lines & airlines?
Does the forwarder have experience in shipping to your particular market ?
Is the forwarder is well represented in your particular markets?
What are the value added services , the forwarder can offer?
Are the forwarders current customers are satisfied with the service?
Is the forwarder financially sound?
How to find an international freight forwarder ?
Other business people in your area or industry.
Egyptian International Freight Forwarders Association EIFFA
Internet & yellow pages.
The international banking department of your bank.
Cubic evaluation of 3PL
1 to 5 1 to 5 1 to 5
Rating Importance Competitor Evaluation
Pre-sales approach 4 3 2 0.19
staff experience 4 4 5 0.64
Responsiveness & follow up 3 4 2 0.19
Timing 3 5 5 0.60
Pricing 3 4 3 0.29
Financial issues 3.5 4 3 0.34
Value added services 3 3 4 0.29
AVG. 0.36
Evaluation Criteria
Outsourcing of Logistics Services (Source: 13th Annual Third Party Logistics Report, Dr. John
Langley, Georgia Institute of Technology)
The 3PL Market Slump Is Over
As the market for third-party logistics improves, manufacturers will see costs begin to rise.
http://www.industryweek.com/articles/the_3pl_market_slump_is_over_22559.aspx
A Fourth-party logistics provider (abbreviated 4PL ; LLP),
lead logistics provider, or 4th Party Logistics provider, is a
consulting firmspecialized in logistics, transportation, and
supply chain management.
A 4PL is sometimes described as non-asset-owning service
provider, their role is to provide broader scope managing of
the entire supply chain.
A 4PL is neutral and will manage the logistics process,
regardless of what carriers, forwarders, or warehouses are
used.
The international logistics industry has been researching on the
development of the fifth-party logistics. A key function of
the 5PL is to aggregate the demands of the 3PL into a bulky
volume for negotiating more favorable rates with airlines and
shipping companies regardless of which generation of logistics
solution belongs to all.
The 5PL firm attributed to logistics service providers who
plan, organize and implement logistics solutions on behalf of a
contracting party (mainly information systems) by exploiting
the appropriate technologies (conceptual level).
Outsourcing is often taking a set of work, tasks,
responsibilities or functions and transferring them to
an outside service provider.
Business Processing Outsourcing (BPO) involves
that and more. A BPO service provider (6 PL) brings
a different perspective, knowledge, experience and
technology to the existing function and can and will
work with the firm to re- engineer it into an improved
or new process. It is an outcome-based result, not
just a pure cost reduction issue.
Case Study
Ontex chooses the 4PL model
Based on revenue-sharing and trust
BettR&Ontex Presentation-Case study.pdf
Procurement & Outsourcing
4
What is Procurement?
Procurement includes sourcing, purchasing,
and cover all of the activities from identifying
potential suppliers through to delivery from
supplier to customer.
Purchasing vs. Procurement
In the traditional sense, there is a significant difference in that purchasing
merely reflects the act of acquisition, while procurement encompasses more
elements such as development of the procurement strategy, preparation of
contracts, sourcing, qualifying, negotiating, etc, as well as some logistics
activities like customs clearance, transportation,
In other words, purchasing has evolved into a subset (part) of procurement,
with purchasing becoming an acquisition activity, whilst procurement
addresses the functions from identifying the need through to the
management of the end result.
In general use, the word purchasing means buying things with money, but
procurement is more broad; it can include buying, renting / leasing, trading
things, --getting the necessary items by whatever means".
Purchasing is the process of buying.
All departments in the company are involved in purchasing.
The procurement department has the major responsibility for locating
suitable sources of supply and for negotiating prices.
_________________________________________________________
The objectives of purchasing:
Obtaining goods and services of the required quantity and quality.
Obtaining goods and services at the lowest cost.
Ensuring the best possible service and prompt delivery by the
supplier.
Evaluating vendors, managing, and developing of relationships with vendors.
Purchasing & its objectives
Purchasing Interfaces
Purchasing
Legal
Accounting
Operations
Data
processing
Design
Receiving
Suppliers
1. Requisition received
2. Supplier selected
3. Order is placed
4. Monitor orders
5. Receive orders
Procurement methods
Procurement method is the way of ordering
material.
Some of the new developments in this area
include:
1) Electronic Ordering
2) Stockless Purchasing
3) Standardization, and
4) Just in Time Purchasing.
Electronic Ordering
Electronic Ordering Reduce Paper Transactions.
Paper Transactions Include Purchase Order,
Receiving Document, Authorization To Pay, Etc.
Transactions Between Firms Are Increasingly Done
Via Electronic Data Interchange (EDI).
EDI Is A Standardized Data Transmittal Format For
Computerized Communications Between
Organizations.
It Provides Data Transfer For Any Business
Application, Including Purchasing.
For Example, Data For A Purchase Order (Such As
Order Date, Due Date, Quantity, Part Number, Order
Number, Address, Etc.) Are Fitted Into Standard EDI
Format.
Electronic Ordering Also Speeds Up The
Traditionally Long Procurement Time
Electronic Ordering
Stockless Purchasing
This Means That The Supplier Maintains The Inventory For
The Purchaser.
Here, The Cost Of Stocking Inventory Has Been Temporarily
Transferred From The Purchaser To The Supplier.
If The Supplier Can Maintain The Stocks For A Variety Of
Customers Who Use Same Products, Then There May Be Net
Savings In This Option. Otherwise, Purchasing Costs May Go
up.
Standardization
Rather Than Obtaining A Variety Of Components
Similar In Labeling, Coloring, Packaging, Etc. The
Purchasing Agent Should Try To Have Those
Components Standardized.
There Is One Less Invoice, One Less Item To Be
Inventoried, Etc.
Just In Time Purchasing
Just In Time (Jit) Purchasing Is Directed Toward The
Reduction of Waste.
Elimination Of In-Plant Inventory.
Elimination Of In-Transit Inventory.
Quality And Reliability Improvement.
Purchasing cycle
Receiving and analyzing purchase requisition
Selecting suppliers, issuing RFQs, receiving and analyzing
quotations, and selecting the right supplier.
Determine the right price.
Issuing PO.
Following up to assure delivery dates are met.
Receiving and accepting goods.
Approving suppliers invoice for payment.
Establishing specifications
In purchasing an item or a service from a supplier, several factors are
included in the package bought: (Best Buy)
* quality requirements
* price requirements
* functional requirements
Functional specification description:
- by brand.
- by physical and chemical characteristics, material, and
method of manufactures, and performance.
- by engineering drawings.
- miscellaneous.
Sources of specifications: Buyers / Standard
Total Cost of Ownership (TCO)
instead of purchase price
Total Cost of Ownership
Pre-transaction components
1.Identifying need
2. Investigating sources
3. Qualifying sources
4. Adding supplier to internal system
5. Educating:
a) supplier in firms operations
b) firm in suppliers operation
Transaction components
1.Price
2. Order placement / preparation
3. Delivery (transportation)
4. Tariffs / duties
5. Billing / payment
6. Inspection
7. Return of parts
8. Follow-up & correction
Post-transaction components
1.Line fallout
2. Defective finished goods
3. Field failure
4. Repair / replacement in field
5. Reputation of firm
6. Cost of repair parts
7. Cost of maintenance & repair
Major categories for the components of Total Cost of Ownership
Procurement Strategies
1) Volume consolidation:
The first step in developing an effective procurement strategy is volume
consolidation through reduction in number of suppliers.
By applying this strategy, procurement is able to leverage its share of a
suppliers business, and rises the buyers negotiating strength. Also, the supplier
can gain greater economics of scale in its internal processes, partially by being
able to spread its fixed costs over a larger volume of output.
Clearly, when a single source of supply is used risk increases. For this reason
supply base reduction programs are almost always accompanied by rigorous
supplier screening, selection, and certification programs
2) Supplier operational integration:
It means that buyers and sellers integrate their processes and activities
in an attempt to achieve substantial operational performance
improvement in the supply chain.
The primary objective of operational integration is to cut waste, reduce cost,
and develop a relationship that allows both buyer and seller to achieve
mutual improvements. Such integration can take many specific forms such
as:
1. the buyer may allow the seller to have access to its sales or ordering
information system, giving the seller early warning of which products are
being sold and what future purchases to expect.
2. establishing EDI (Electronic Data Interchange) linkage to reduce order time
3. eliminating counting and inspection of incoming deliveries as greater
reliance is placed on suppliers capabilities.
3) Value management:
Value Management is a powerful management tool for use in an overall strategic
management framework.
Value engineering, reduced complexity , and early supplier involvement in
product design represent some of the ways procurement can work with
suppliers to reduce further the TCO.
If we approach the issue from supplier management perspective, we shall have
the following possible procurement strategies to pursue:
(1) Purchasing management,
(2) Materials management,
(3) Sourcing management, and
(4) Supply management.
Strategic sourcing
Strategic sourcing is a process where several
purchasing activities are streamlined to support a total
supply chain vision focusing on the ultimate
customer.
It is an institutional procurement process that
continuously improves and re-evaluates the
purchasing activities of a company.
In a production environment, it is often considered
one component of supply chain management.
Strategic sourcing
The steps in a strategic sourcing process:
1. Assessment of a companys current spends (what is bought where?).
2. Assessment of the supply market (who offers what?).
3. Total cost analyses (how much does it cost to provide those goods or services?).
4. Identification of suitable suppliers.
5. Development of a sourcing strategy (where to buy, what considering demand and
supply situation, while minimizing risk and costs).
6. Negotiation with suppliers (products, service levels, prices, geographical
coverage, etc.).
7. Implementation of new supply structure.
8. Track results and restart assessment (continuous cycle).
Selecting suppliers
There are three types of sourcing:
Sole sourcing
Multiple sourcing
Single sourcing
Factors in selecting suppliers:
Technical ability
Manufacturing capability
Reliability
After-sales services
Supplier location
Price
others ( credit terms, )
Supplier selection check list
1. Are they a significant "player" as an outsource organization?
2. What experiences do have they in managing contracts of a similar size / type?
3. Can they demonstrate high levels of performance in current contracts? (third
party references)
4. Can they manage your contract within their current resources?
5. If yes to (4) how do they intend to structure their resources to manage the
additional workload?
6. If no to (4) what additional resources do they intend to put in place?
7. How do they recruit and train new staff?
8. What level of staff turnover do they experience?
9. If they were awarded the contract what percentage of their business would this
represent?
10. What experience do they have in your market sector?
Supplier selection check list
11. What evidence was there that they had researched your company prior to the
initial meeting?
12. How responsive were they to requests during the selection / bidding process?
13. Has their tender response addressed all of the key issues?
14. To what extent did they "push back" and question the brief as given?
15. What creativity / innovation did they demonstrate that adds additional value?
16. Does their response clearly define how they will report on performance against
the key measures?
17. Have they clearly described how they will internally respond to performance
issues?
18. How competitive is their bid price compared to your budget, and to other bid
prices?
19. In which areas are they demonstrating added value over their competitors?
20. To what extent is there a culture fit between you and their organization?
Certification
Partnership
Traditional
Price emphasis
Multiple sources
Inspections
Many transactions
Quality
On-time delivery
Technology transfers
Trading agreements
Supplier assessment programs
Supplier development programs
Long-term contracts
No inspection
Time
The evolution of the customer-supplier relationship
Supplier Positioning
High
Risk
Low
Low Value High
Security
[Bottleneck]
Manage
Process
[ Non crit ical]
Strategic
[ part ner]
Leverage
BUYER
DOMINANCE
INTER-
DEPENDENCE
INDPENDENCE
SUPPLIER
DOMINANCE
Low High
Supplier Resource
Buyer
Resource
Low
High
Supplier Positioning
SUPPLIER RELATIONSHIP MANAGEMENT
The case for SRM
Supply chains more integrated
Focus on core competencies
Supplier technical capability & geographic coverage increasing
Globalisation requires more security of sources of supply
When SRM is absent, the risks
Cost over runs
Persistent delays
Constant specification changes
Deficient product
SRM AN AGENDA
Establish ground rules, review cycle & define the
relationship
Supplier/buyer development transparent exchange
Regular & consistent appraisal of KPIs
Development programmes, forums & workshops
Shared vision & values
Reward & recognition systems
SRM- Case study: d:\Work Data\aheneidy\Desktop\SRM -Case study.ppt
Ideas from suppliers could lead to improved competitiveness
1. Reduce cost of making the purchase
2. Reduce transportation costs
3. Reduce production costs
4. Improve product quality
5. Improve product design
6. Reduce time to market
7. Improve customer satisfaction
8. Reduce inventory costs
9. Introduce new products or services
Supplier Partnerships
Procurement & Supplier Management KPIs
Number of suppliers managed / purchasing FTE
Supplier in full
Supplier on time
Supplier rejections
Average variable cost of placing order with supplier
Cost of purchasing as % of gross sales
Total procured spend as % total business costs
Account payable days
Global Sourcing
Global sourcing is a strategic sourcing strategy that effectively broadens the
scope of the procurement process to include companies that operate in
other countries.
The use of global sourcing has been the driving force behind the
development and expansion of the global economy.
Including suppliers from around the world in the bidding process for large
contracts reduces prices and increases competition.
The creation of this type of infrastructure allows firms to create subsidiary
offices in locations around the world. There are three main industries that
are ideal for global souring: manufacturing, skilled services and telephone
call centers.
_______________________________________________________________
What is the distinction between outsourcing and off-shoring?
Example of DELLs Global (sourcing) Supply Chain
Customers order
computers on-line
Dell
Assembly
Plant
Monitors by SONY (Mexico)
Keyboards by Acer (Taiwan)
CPU by Intel
(USA)
Other components
Supplier
Supplier Factory
Factory
Client
Client
Source: INSEAD Supply Chain Management Programme 2004
Global Sourcing
Considerations
Costs
Control
Expertise
Distance
Languages
Laws and regulations
Begin simple
Then move to complex
Global Sourcing
The Lure of Global Sourcing
Suppliers with improved competitiveness
Cost
Quality
Timeliness
Suppliers in less developed countries with low-cost labor
Attractive for labor-intensive products with low skill requirements
Global Sourcing Arrangements
Arrangement that provide a firm with foreign
products
Wholly owned subsidiary
Overseas joint venture
In-bond plant contractor
Overseas independent contractor
Independent overseas manufacturer
Use of Electronic
Purchasing for Global Sourcing
Growth of electronic procurement exchanges
Identify potential suppliers or customers
Facilitate efficient and dynamic interactions among
prospective buyers and suppliers
Recognize strategic function of purchasing
Global Electronic Procurement
Electronic Exchange Options
Catalog purchases
Permits buyers and suppliers to interact through a standard
bid/quote system
Facilitates obtaining letters of credit, contracting for logistics
and distribution, and monitoring daily
Benefits
Cut costs and invoice and ordering errors
Improve productivity and internal purchasing processes
Reduce trading cycle time, paper
Compare bids
Global Sourcing
Problems
Unanticipated added costs
Currency fluctuations
Transportation cost increases
E-procurement exposes business systems to wide
range of potential security issues
Added Costs
International freight, insurance and packing
Import duties
Customhouse brokers fees
Transit or pipeline inventory
Cost of letter of credit
International travel and communication costs
Company import specialists
Reworking of products out of specification
Outsourcer & outsourcee relationship development
Master- Servant Stage
Consultative Stage
Peer- to- Peer Relationship Stage
Competitive Stage
Take Effect January 1st, 2011
Consist of 11 terms
Organized into two distinct categories:
a) for all mode of transport
b) for sea and waterway transport
Terms of sale
Group E Departure
EXW Ex Works (named place) The seller makes the goods
available at his premises. The buyer is responsible for all
charges. This trade term places the greatest responsibility on
the buyer and minimum obligations on the seller.
The Ex Works term is often used when making an initial
quotation for the sale of goods without any costs included.
EXW means that a seller has the goods ready for collection at
his premises (Works, factory, warehouse, plant) on the date
agreed upon.
The buyer pays all transportation costs and also bears the risks
for bringing the goods to their final destination
Group F Main carriage unpaid
FCA Free Carrier (named places). The seller hands over
the goods, cleared for export, into the custody of the first
carrier (named by the buyer) at the named place.
FAS Free Alongside Ship (named loading port). The seller
must place the goods alongside the ship at the named port. The
seller must clear the goods for export. [Bulk]
FOB Free on board (named loading port). The seller
must load the goods on board the ship nominated by the buyer,
cost and risk being divided at ship's rail.
Group C Main carriage paid
CFR or CNF Cost and Freight (named destination port) .Seller must pay
the costs and freight to bring the goods to the port of destination. However, risk
is transferred to the buyer once the goods have delivered to the first carrier.
CIF Cost, Insurance and Freight (named destination port) . Exactly the
same as CFR except that the seller must in addition procure and pay for
insurance for the buyer.
CPT Carriage Paid To (named place of destination) .It is equivalent of
CFR.. The seller pays for carriage to the named point of destination, but risk
passes when the goods are handed over to the first carrier.
CIP Carriage and Insurance Paid (To) (named place of destination)
equivalent of CIF. Seller pays for carriage and insurance to the named
destination point, but risk passes when the goods are handed over to the first
carrier.
Group D Arrival
DAT : delivered at terminal NEW!
DAP : delivered at place NEW!
DDP Delivered Duty Paid (named destination place) .This term means
that the seller pays for all transportation costs and bears all risk until the
goods have been delivered and pays the duty. Also used interchangeably
with the term "Free Domicile".
Incoterms 2010 applicable for all modes of transport
EXW : ex works
FCA : free carrier
CPT : carriage paid to
CIP : carriage and insurance paid to
DAT : delivered at terminal
DAP : delivered at place
DDP : delivered duty paid
Incoterms 2010 only applicable for sea
and inland waterway transport
FAS : free alongside ship
FOB : free on board
CFR : cost and freight
CIF : cost, insurance and freight
Discuss:
The factors would typically be considered in
contingency planning in outsourcing arrangement
5
Two Forms of Demand
Dependent
Dependent
Items used to produce final products

Items used to produce final products
Independent
Independent
Items demanded by external customers

Items demanded by external customers
Inventories
Materials and supplies that a firm carries for
sale or inputs.
Inventories are used their value is converted to
cash.
Represent 20 to 60 % of total assets.
Reasons to Hold Inventory
Meet unexpected demand

Meet unexpected demand
Smooth seasonal or cyclical demand

Smooth seasonal or cyclical demand
Meet variations in customer demand

Meet variations in customer demand
Take advantage of price discounts

Take advantage of price discounts
Hedge against price increases

Hedge against price increases
Quantity discounts
Quantity discounts
Functions of Inventories
One purpose of inventory in batch
manufacturing is to buffer :
Supply and demand
Customer demand and finished goods
Finished goods and component availability
Parts and materials needed to production
Types of inventory based on the flow of materials
Raw materials - Items purchased that have not entered the
process. I.e. components , subassemblies etc
WIP (work in process) RMthat have entered the process and not
yet complete.
Finished goods Finished products that are ready to be sold.
Distribution Inventories Finished Goods in distribution
system.
MRO ( Maintenance, repair, operational) Items used in production that do
not become part of the product.
General kinds of inventory
Cycle stock
(demand and lead time are constant)
In-transit stock
(ordered but still not available in warehouse)
Safety or buffer stock
(due to uncertainty of demand and lead time)
Speculative stock
(acquired to reach economies of scale )
Seasonal stock
(acquired to meet seasonal demand)
Dead stock
(no demand has been registered and may become obsolete)
Classification of inventories according to
their function
Anticipation Inventory for peak season, promotion or threat of strike.
(Milk and bread)
Fluctuation Inventory protects against random fluctuations in demand ,
supply or lead-time.
Lot-size inventory these take advantage of lot pricing. (Wal-Mart)
Transportation Inventory (pipeline) in transit inventory:
Example:
Delivery of goods from supplier is in transit for 10 days. If the annual demand is
5200 units, what is the average annual inventory in transit?
Solution:
I = 10 x 5200 = 142.5 units
365
Hedge inventory Protects against price fluctuations
The prime objective for all supply chains is to
provide customers with what they want, when
they want it. Inventory management plays a
central role in every supply chains need to
satisfy its customers.
Objectives of inventory management
Maximize customer service correct materials in stock, % of
orders filled:
Order cycle time:
Elapsed time between the release of purchasing order by
the buyer and the receipt of the corresponding goods.
* Case fill rate: % of delivered quantity to ordered one.
* Order fill rate: % of customer orders filled completely.
Low cost plant operation
Minimum inventory investment
Dont Control Inventories Control Processes
Inventories are Symptoms of Processes
Why Do Goals Conflict?
Forces for keeping low inventory
inventory expensive
low salvage values
Forces for keeping high inventory
long lead times
customer service is important
demand is hard to predict
reduction in transportation quantity
Inventory Costs
Order costs: are those associated with placing an order. It does not
depend upon the quantity ordered.
Carrying costs
* Capital (opportunity) costs
* Inventory risk costs
* Space costs
* Inventory service costs (capacity associated costs)
Out-of-stock costs
* Lost sales cost
* Back-order cost
Financial inventory performance measures
Inventory turns = annual cost of goods sold
average inventory in dollars
COGS = $1M
AVG Inv = $ 0.5M
$1M/0.5 = 2 turns per year
What will be the inventory turns ratio if the cost of goods sold is 24 million a year and the average inventory
is 6 million. 24M / 6M = 4 turns per year
Days of supply = inventory on hand
average daily usage
A company has 9000 units on hand and the annual usage is 48,000 units. There are 240 working days in the
year. What is the days of supply.
Average daily usage= 48000/240 = 200 nits
Days of supply = 9000 / 200 = 45 days
Methods of evaluating inventory
First In First Out (FIFO):
in case of rising prices replacement is at higher price.
Last In First Out (LIFO)
in case of rising prices replacement is at current price.
Average cost
in case of changing prices (+/-), the av. Cost is not related to actual one.
Standard cost
pre-determined cost. Any difference between the std. cost and actual one is stated
as a variance.
ABC inventory control
(Pareto Principle)
A way to categorize/group your products. There are a few different ways to set up
an ABC Ranking, such as Velocity (times sold), Quantity sold/Consumed or by
Margin. But the most common method is the Annual Sales Volume ranking. This
method will allow you to identify the small amount of products that usually account
for most of your sales dollars (think 80/20 rule):
1. Calculate the 12 month dollar usage for all of your products (volume X cost).
2. Rank the items in descending order by the dollar usage.
3. The "A" items are the top 80%of the total annual usage dollars.
4. The "B" items make up the next 15%of total annual usage.
5 The "C" items are the remaining items are the remaining 5%with >0 usage in the past 12
months.
A Items: very tight control, complete and accurate records, frequent review
B Items: less tightly controlled, good records, regular review
C Items: simplest controls possible, minimal records, large inventories, periodic
review and reorder
Information Replaces Inventory
This saying emphasizes the fact that more
accurate and timely information reduces the
need to hold inventories as a hedge against
uncertain product demand or supply.
The Bullwhip Effect describes the phenomenon in which order
variability is amplified as it moves up the supply chain from
end-consumers through distribution and manufacturing to raw
material suppliers.
The Bullwhip Effect
Example: Procter & Gamble: Pampers
Smooth consumer demand
Fluctuating sales at retail stores
Highly variable demand on distributors
Wild swings in demand on manufacturing
Greatest swings in demand on suppliers
BullwhipEffect
Tier 2
Suppliers
Tier 1
Suppliers
Producer Distributor Retailer
Final Final
Customer Customer
Amount of Amount of
inventory inventory
=
The Dynamics of the Supply Chain
O
r
d
e
r

S
i
z
e
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
Customer
Demand
Customer
Demand
Retailer Orders
Retailer Orders
Distributor Orders
Distributor Orders
Production Plan
Production Plan
Bullwhip Effect:
Variability-Contributing Factors
1. Demand forecasting
2. Lead time
3. Batch ordering
4. Price fluctuation
5. Inflated Orders supply shortage is suspected.
How to Cop with Bullwhip Effect?
Reducing uncertainty
Make information at each stage available to others.
Reducing demand variability
Regular low price; no promotion ?!
Reducing lead time.
Strategic partnerships
Vender Managed Inventory / Information sharing
Incentive to make customers demand data available.
Information Sharing
Chrysler makes the cars
Leer makes the seats
Third party cuts & sews fabric
Milliken makes the fabric
Dupont makes raw material

Shared schedule information
The objective of inventory management are :
1) to provide the required level of customer service.
2) to reduce the sum of all costs involved.
To achieve these objectives, two basic questions must be answered:
a) How much should be ordered at one time?
b) When should an order be placed?
Definitions:
Stock-keeping Unit (SKU)
Lot-Size decision rules:
- Lot-for-lot: to order the exactly needed quantity. Used for A items & in JIT.
- Fixed-order quantity.
- Order n periods supply (Periodic).
Main types of inventory control systems
Time between orders Order quantity
Re-order system (Saw-tooth)
Variable fixed
Periodic review
fixed variable
Material Requirements Planning
( MRP)
Dependant
demand items
Dependant
demand items
Answers how much to order
Orders placed at fixed intervals
Inventory brought up to target amount
Amount ordered varies
No continuous inventory count
Possibility of stockout between intervals
Useful when vendors visit routinely
Example: P&G representative calls every 2
weeks
Fixed Period Model
The Inventory Order Cycle: Saw-tooth Model
QTY / mont h
Ti me
500
0
Aver. invent ory
one mont h one mont h
Monthly demand = 500 Pcs
Lead Time (LT) = 7 days
Safety stock (SS) = 5 pcs
Saw-tooth Model
QTY / mont h
Ti me
LT
ROP
500
0
Aver. invent ory
LT = 7 days
Re-order Point
Quantity to which inventory is allowed to drop before
replenishment order is made.
ROP = D X LT
= 500 x 0.25 = 125 Pcs
D = Demand rate per period
LT = lead time in periods
** When safety stock is necessary to accommodate
uncertainty, the reorder point is: ROP = D X LT + SS
= 500 x 0.25 = 125 Pcs + 5 = 130 pcs
Four ways to reduce safety inventory
1. Reduce demand uncertainty
2. Reduce order lead time
3. Reduce lead time variability
4. Reduce availability uncertainty
Economic Ordering quantity (EOQ)
EOQ = mathematical device for arriving at the
purchase quantity of an item that will minimize the
cost equation below:
Total cost = holding costs + ordering costs
Demand (Usage) per period D (constant)
Order cost Co (fixed)
Inventory carrying (holding cost) per unit per period h:
Cc= I + W
I = Opportunity cost of money used for purchasing
W = Warehousing cost per unit per period.
* Lead time is zero
* Initial inventory is zero
Wilson Formula
How large should your orders be?
If your orders are too large, youll have excess inventory and high holding costs
If your orders are too small, you will have to place more orders to meet demand,
leading to high ordering costs
Order Size Holding Costs Ordering Costs
Too LARGE High Low
Too SMALL Low High
EOQ helps you find the balance!!!
EOQ is a tool, not a simple solution.
Assumptions Of Basic EOQ Model
The ordering cost is constant.
The rate of demand is constant
The lead time is fixed
The purchase price of the item is constant (i.e no
discount is available)
The replenishment is made instantaneously, the whole
batch is delivered at once.
188
EOQ Decision Model Example 1
R
e
l
e
v
a
n
t

T
o
t
a
l

C
o
s
t
s

(
D
o
l
l
a
r
s
)
2,000
4,000
6,000
8,000
5,434
600 1,200 1,800 2,400 988
EOQ
Annual relevant
carrying costs
Annual relevant
total costs
Annual relevant
ordering costs
Order Quantity (Units)
LogisticsOpsMgt AdelAbouHeneidy 189
EOQ Example
Carrying cost = $0.75 per piece
Order cost = $150 per order
Annual demand = 10,000 Pcs
Find EOQ, number of order per year, and cycle time
* NOTE: store working days = 311
= SQRT [2 (10,000 x 150) / 0.75 ] = 2,000 pcs
days store 62.2
5
311
D/Q
311
= time cycle rder
5
000 , 2
000 , 10
Q
D
= year per orders of
opt
opt
= =
= =
O
Number
Solution:
In the previous example calculate the total cost of purchasing
if the unit price is $8 /unit.
1) In case of ordering EOQ (2000 pcs per order):
(10000 x 8) + ( 5 x 150) + ( 2000 x 0.5 x 0.75) = $81,500
2) In case of ordering 5000 pcs per order:
(10000 x 8) + ( 2 x 150) + ( 5000 x 0.5 x 0.75) = $82,175
3) In case of ordering 1000 pcs per order:
(10000 x 8) + ( 10 x 150) + ( 1000 x 0.5 x 0.75) = $81,875
Introducing Quantity Discounts
What are quantity discounts?
Example:
Order Size 1 - 100 101 - 200 201 - 300
Price per unit $20 $18 $16
EOQ with Quantity Discounts
Minimize the following equation:
Total cost = holding costs + ordering costs + item costs
EOQ with Quantity Discounts
This is done in 2 steps:
1. Calculate EOQ. If this amount can be purchased at the lowest price, you have
found the quantity that minimizes the equation. If not, proceed to step 2.
2. Compare total cost at the EOQ quantity with total costs at each price break
above the EOQ.
Example: Suppose you are responsible for ordering inventory. You have the
following information:
It costs $5 to hold one unit of a product in inventory for a year.
It costs $100 to place an order for this product, regardless of size.
Customers demand 2,500 units every year.
The following quantity discounts are available:
Order Size 1 - 200 201 - 350 351 - 500
Price per unit $20 $18 $16
What amount should be purchased?
Step 1 = compute
Can 316 be ordered at the lowest purchase price? No. Proceed to step 2
Step 2 = compare total cost at EOQ and total cost at price steps above EOQ
Total cost = (Q/2)H + (D/Q)S + DP
Total cost at EOQ = [(316/2) x 5] + [(2,500/316) x 100] + (2,500 x 18)
Total cost at EOQ = 790 + 791 + 45,000 = $46,581
Total cost at 351 units = [(351/2) x 5] + [(2,500/351) x 100] + (2,500 x 16)
Total cost at 351 units = 878 + 712 + 40,000 = $41,590
In this case we should purchase (351 units) , which is more than EOQ to take
advantage of the quantity discount.
Solution:
= SQR [2 (2500 x 100) / 5 ] = 316 pcs
Period-Order Quantity (POQ)
It uses EOQ formula to calculate an economic time between orders.
EOQ
Average weekly usage
Period-order quantity =
Example:
The EOQ for an item is 2800 units, and the annual usage is 52,000 units.
What is the POQ?
Solution:
Average weekly usage = 52000 / 52 = 1000 units per week
POQ = 2800/ 1000 = 2.8 weeks
3 weeks
Case study: Nick's Camera Shop
EOQ with Quantity Discounts Model
Nick's Camera Shop carries Zodiac instant print
film. The film normally costs Nick $3.20 per roll,
and he sells it for $5.25. Zodiac film has a shelf life
of 18 months. Nick's average sales are 21 rolls per
week. His annual inventory holding cost rate is 25%
and it costs Nick $20 to place an order with Zodiac.
If Zodiac offers a 7% discount on orders of 400
rolls or more, a 10% discount for 900 rolls or more,
and a 15% discount for 2000 rolls or more,
determine Nick's optimal order quantity.
Solution:
Annual demand (D) = 21(52) = 1092; C
c
= .25(C
i
); C
o
= 20
Unit-Prices Economical, Feasible Order Quantities
For C
4
= .85(3.20) = $2.72
To receive a 15% discount Nick must order at least 2,000 rolls.
Unfortunately, the film's shelf life is 18 months.
The demand in 18 months (72 weeks) is 72 X 21 = 1512 rolls.
If he ordered 2,000 rolls he would have to scrap 488 of them.
This would cost more than the 15% discount would save.
For C
3
= .90(3.20) = $2.88
Q
3
* = 2DC
o
/C
c
= 2(1092)(20)/[.25(2.88)] = 246.31 (not feasible)
The most economical, feasible quantity for C
3
is 900.
For C
2
= .93(3.20) = $2.976
Q
2
* = 2DC
o
/C
c
= 2(1092)(20)/[.25(2.976)] = 242.30 (not feasible)
The most economical, feasible quantity for C
2
is 400.
For C
1
= 1.00(3.20) = $3.20
Q
1
* = 2DC
o
/C
h
= 2(1092)(20)/.25(3.20) = 233.67
(feasible)
When we reach a computed Q that is feasible we stop computing
Q's. (In this problem we have no more to compute anyway.)
Total Cost Comparison
Compute the total cost for the most economical, feasible order
quantity in each price category for which a Q * was computed.
Total cost = (Q/2)H + (D/Q)S + DP
TC
3
= (1/2)(900)(.72) +((1092)(20)/900)+(1092)(2.88) = $3493
TC
2
= (1/2)(400)(.744)+((1092)(20)/400)+(1092)(2.976) = $3453
TC
1
= (1/2)(234)(.80) +((1092)(20)/234)+(1092)(3.20) = $3681
Comparing the total costs for 234, 400 and 900, the lowest
total annual cost is $3453. Nick should order 400 rolls at a
time.
Decisions in Inventory Management
How much to order?
When to order?
Re-Order Point (ROP)
Fixed demand & lead time
Variable demand & lead time
Basic Q*
Q* with quantity discount
Q* with Qty discount and limited shelf life.
Economic Order
Quantity (EOQ): Q*
Safety Stock (SS)
Safety Stock (SS)
QTY / mont h
Ti me
LT
ROP
500
0
Aver. invent ory
LT = 7 days
ROP
SS
How Much Inventory Is Too Much?
There is no perfect safety stock calculation applicable to all
situations.
According to the book "Purchasing and the Management of
Materials" by Gary Zenz,
"The size of [safety stock] depends on the importance of the
particular item to the process, the value of the investment, and
the availability of substitutes on short notice."
SS = z x STD x LT
To get value of Z:
www.inventoryops.com/safety_stock.htm
Z: Service Factor
Calculating ROP in case of variable
demand & lead time
Safety Stock=
{Z*SQRT (Avg. Lead Time * STD of Demand^2 + Avg. Demand^2 * STD of Lead Time^2)}
Re-Order Point (level of inventory for re-ordering) =
Average demand X Average lead time + Safety Stock
Remark: Demand during same unit of time as that of Lead Time
Remark: Demand during same unit of time as that of Lead Time
* Solve the distributed problem # 1
INVENTORY Risk Pooling
Risk pooling is an important concept in supply chain
management.
Risk pooling suggests that demand variability is
reduced if one aggregates demand across locations
because, as we aggregate demand across different
locations, it becomes more likely that high demand
from one customer will be offset by low demand
from another. This reduction in variability allows a
decrease in safety stock and therefore reduces
average inventory.
Inventory Consolidation
(Risk Pooling) {example}
Suppose there is a product stocked in two warehouses.
The replenishment quantities are determined by the economic order
quantity formula.
The replenishment lead-time is 0.5 months, the cost for a replenishment
order (S) is $50, the inventory carrying cost (IC) is 2% per month, and
the item value is $75 per unit.
The probability of an out of stock during the lead-time period is 5%.
Estimate the average inventory levels for two-warehouses and one-
warehouse supply channels.
Risk Pooling (Contd)
Month
Demand
in Whse
A
Demand
in Whse
B
Combined
Demand in a
Central
Whse
1 35 67 102
2 62 83 145
3 46 71 117
4 25 62 87
5 37 55 92
6 43 66 109
Avg. (D) 41.33 67.33 108.66
Std. Dev. (s
d
) 11.38 8.58 19.07
6
units 50 . 33
2
00 . 67
2
) 75 ( 02 . 0
) 50 )( 33 . 67 ( 2
units 25 . 26
2
49 . 52
2
) 75 ( 02 . 0
) 50 )( 33 . 41 ( 2
2
2
2
= = =
= = =
= =
B
A
RS
RS
IC
DS
Q
RS
Regular stock (RS) in the system is:
units 75 . 59 50 . 33 25 . 26 = + = + =
B A
RS RS
s
RS
Regular stock if item is entirely in one warehouse
units 56 . 42
2
11 . 85
2
) 75 ( 02 . 0
) 50 )( 66 . 108 ( 2
= = =
C
RS
Safety stock
System safety stock in two warehouses
SS = z x STD x LT
SSA= 1.64 (11.38) 0.5 = 13.20 unit s
SSB= 1.64 (8.58) 0.5 = 10.26 unit s
SSA + SSB = 13.20 + 10.26 = 23.46 units
Safety stock in one warehouse
Total inventory
= Regular stock + Safety stock
= 59.75 + 27.66 = 87.41 units
In a one-warehouse channel
= 42.56 + 22.11 = 64.67 units
Two
warehouses
Conclusion There is a reduction in the average inventory
level of an item as the number of stocking points in the
supply channel is decreased. In this example, both regular
stock and safety stock decline.
Conclusion There is a reduction in the average inventory
level of an item as the number of stocking points in the
supply channel is decreased. In this example, both regular
stock and safety stock decline.
SSc = 1.64 (19.07) 0.5 = 22.11 unit s
To Centralize or not to Centralize
What is the effect on:
Safety stock?
Service level?
Overhead?
Lead time?
Transportation Costs?
In-Transit Inventory
In general, the key strategy is to reduce the amount of inventory that they hold.
To use transport as a mobile warehouse .
Speeding up and slowing down the flow of inventory through the SC by using
alternative transport mode.
When inventory moves across SC, it is in transit.
Regardless of whether the upstream or the downstream stage owns this inventory,
holding cost are incurred and has to be considered.
Annual transit inventory cost = D x L x H
where: D is annual demand
L is delivery lead time (duration when the order is in transit)
H is inventory holding cost per item per year
* Solve the distributed problem # 2
Particulars of:
Bill of Lading & Letter of Credit
6
BillofLading(B.L)
BILL OF LADING - The document issued on behalf of the carrier describing
the kind and quantity of goods being shipped, the shipper, the consignee, the
ports of loading and discharge and the carrying vessel.
A memorandum or acknowledgment in writing, signed by the captain or
master of a ship or other vessel, that he has received in good order, on board of
his ship or vessel, therein named, at the place therein mentioned, certain goods
therein specified, which he promises to deliver in like good order, (the dangers
of the seas excepted,) at the place therein appointed for the delivery of the
same, to the consignee therein named or to his assigns, he or they paying
freight for the same. Or it is the written evidence of a contract for the carriage
and delivery of goods sent by sea for a certain freight.
A bill of lading ought to contain the name of the consignor; the name of the
consignee the name of the master of the vessel; the name of the vessel; the
place of departure and destination; the price of the freight; and in the margin,
the marks and numbers of the things shipped.
It is usually made in three original's, or parts. One of them is commonly sent to
the consignee on board with the goods; another is sent to him by mail or some
other conveyance; and the third is retained by the merchant or shipper. The
master should also take care to have another part for his own use.
The bill of lading is assignable, and the assignee is entitled to the goods,
subject, however, to the shipper's right, in some cases, of stoppage in transit .
OCEAN BILL OF LADING ( BL)
* It is a negotiable document
* Issued in three originals
* In case of FOB terms it will
on collect basis (payable at destination)
* In case of C&F or CIF basis it will
prepaid
The significance of BL:
Negotiable
Contract of carriage
Proof of receipt of cargo
Represents title to the goods. Ownership can be transferred by endorsing it
Consignee must present original to get delivery of the goods
Forwarder must ensure:
Has taken charge of the consignment
Goods are in good order and condition
Details correspond to instructions
Responsibility for insurance has been agreed with shipper
Number of originals has been specified
FormsofBillofLadings
Clean BL
Bears an indication that the goods were received without damages, irregularities, or
short shipment:
clean on board
apparent good order and condition
Foul BL[ Unclean / dirty / claused BL ]
Bears an indication that the goods were received with damage, irregularities, or short
shipment:
unclean on board
insufficient packing
missing safety seal
one carton short
The bank will reject a foul BL, unless stipulated otherwise in LC.
Short Form BL [ blank back BL]
The terms and conditions of carriage on the reverse (back)
of BL are omitted, instead they are listed on a document
other than BL.
The bank accepts a short form BL, unless stipulated otherwise in
LC.
Long Form BL
The terms and conditions of carriage are printed on the reverse ( back)
of BL.
It is commonly used in international shipping
Received BL
Does not prove that the goods have been shipped.
It only acknowledges that the goods have been received
by carrier for shipping. Therefore, the goods could be in
the dock or warehouse.
On Board BL
Proves that the goods have been shipped:
on board
laden on board
shipped on board
Order BL [ negotiable BL ]
The title to the goods is conferred to the order of shipper, or bank
in case of LC.
Thus, a shipper's order (negotiable) B/L can be bought, sold, or traded
while goods are in transit.
The title to the goods is transferable to another party by endorsement
by the holder of BL.
Bearer BL
This bill states that delivery shall be made to whosoever holds the bill. Such
bill may be created explicitly or it is an order bill that fails to nominate the
consignee whether in its original form or through an endorsement in blank
A bearer bill can be negotiated by physical delivery.
Straight BL [ non negotiable ]
The title of goods is conferred directly to the name of importer in LC,
as such the title to the goods is not transferable to another part by
endorsement.
* LC calls for a straight BL usually by using such words
as : consigned to.. / issued in the name of.
* By straight BL the consignee can obtain the goods
directly from the carrier at destination. Therefore, unless
the cash payment is received by the exporter, or the buyers integrity
is unquestionable, the use of straight BL is risky.
House BL
A BL issued by a freight forwarder for consolidated shipments, by which the
forwarder assumes the risk and obligations of being "the carrier."
Unless otherwise authorized in LC, the freight forwarder
{house} B L is not acceptable in LC negotiations.
Through Bill of Lading
A single bill of lading covering receipt of cargo at a point of origin for
delivery to an ultimate consignee, usually involving multiple carriers and
multiple modes of transport.
Letter of Credit particulars
L/C is a binding document that a buyer can request from his bank in order to
guarantee that the payment for goods will be transferred to the seller.
Basically, a letter of credit gives the seller reassurance that he will receive the
payment for the goods.
In order for the payment to occur, the seller has to present the bank with the necessary
shipping documents confirming the delivery of goods within a given time frame.
It is often used in international trade to eliminate risks such as unfamiliarity with the
foreign country, customs, or political instability.
In summary, an L/C is:
- A formal document of payment
- Opened by a party wishing to import
- Communicated through banking channels
- Paid by the opening bank within a specified timeframe upon presentation of stipulated
documentation
Sight Draft
That is payable as soon as the required documents have been presented.
A time Draft
Is not payable until the lapse of a particular time period stated on the draft.
Confirmed Letter of Credit
A letter of credit, issued by a foreign bank, which has been verified
and guaranteed by a domestic bank in the event of default by the
foreign bank or buyer.
Commercial Letter of Credit
A commercial letter of credit assures the seller that the bank will
provide payment for any goods or merchandise shipped to the bank's
customer, assuming the seller provides any required documentation of
the transaction and its shipment of the purchased goods.
Typically the documents requested in a Letter of Credit are the
following:
Commercial invoice
Transport document such as a Bill of lading or Airway bill,
Insurance document;
Inspection Certificate
Certificate of Origin
But there could be others too.
Irrevocable Letter of Credit
An irrevocable letter of credit includes a guarantee by the issuing bank
that if all of the terms and conditions set forth in the letter are satisfied
by the beneficiary, the letter of credit will be honored.
Revocable Letter of Credit
An revocable letter of credit may be cancelled or modified after its date
of issue, by the issuing bank.
Standby Letter of Credit
In the event that the bank's customer defaults on a payment to the
beneficiary, and the beneficiary documents proof of its loss consistent
with any terms set forth in the letter, a standby letter of credit may be
used by the beneficiary to secure payment from the issuing bank.
Transferable Letter of Credit
In transferable L/C, the first beneficiary (exporter) may request
paying the whole or part of the credit to one or more beneficiaries.
This L/C is expressly designated Transferable by the issuing bank
on instructions of the applicant.
** If the words, transmissible , assignable , divisible ,
or fractionable are used, L/C is not transferable.
Non - Transferable Letter of Credit
In which, the beneficiary can not transfer the credit to other beneficiary.
A letter of credit is used for one
transaction, but a revolving L /C can
be used for many transactions.
For example
If the bank approves L/C limit for $100,000 and the client wants to issue L/C
for $20,000 revolving for 3 times.The bank will book the facility for
$80,000, or the bank will book only for the $20,000 than after utilization of
the first revolving will book for the second revolving until the last revolving.
Revolving line of credit
Back-to-Back Credit
It is a new credit opened on the basis of an already existing,
non transferable credit.
It is used by traders to make payment to the ultimate supplier.
A trader receives a documentary credit from the buyer and then
opens another documentary credit in favour of the ultimate
supplier.
The first documentary credit is used as collateral for the
second credit. The second credit makes price adjustments from
which comes the trader's profit.
Trader
Supplier Buyer
1st L /C of $ 50000 2nd L /C of $ 45000
Red Clause Credit
A red clause credit has a special clause (red clause) that authorizes the
confirming bank to make advances to the beneficiary (seller) prior to the
presentation of the shipping documents.
In this credit the buyer, in essence, extends financing to the seller and
incurs ultimate risk for all sums advanced under the credit.
Latest Negotiation date
Is the last day of the period of time allowed by L / C for the presentation of
documents to the bank.
** In case the L/C does not stipulate the latest negotiation date, it is
within 21 days after date of issuance the transport documents, but
on or before L/C expiry date.
** B/L which is presented to the bank later than the agreed time limit or 21
days later than the date of issuance of B/L is called Stale B/L.
Expiry date
Is the last day of validity of the L/C for payment.
** In case the validity of a L/C is stated in a period of time, for example
(this L/C is valid for three months) without specifying the date from
which the time is to run, its validity starts from issuance date of L/C.
Latest date of shipment
Is the last day of the period of time allowed by L/C for shipment, or
dispatching.
Remark:
In case the expiry date and/or latest negotiation date falls
on a day on which the bank is closed for reason not beyond
the banks control these two dates ( if any) are extended
to the succeeding first day on which the bank is opened.
Such extension, whoever, does not extend the latest date
of shipment.
Can a Letter of Credit be amended
or revoked without your consent?
Some Letters of Credit can be amended or revoked without
the Exporter's consent. It depends on whether the credit is
Revocable or Irrevocable. A Revocable Letter of Credit
can be revoked without the consent of the Exporter,
meaning that it may be canceled or changed up to the time
the documents are presented. As a Revocable Letter of
Credit affords the Exporter little protection, it is rarely
used.
On the other hand, an Irrevocable Letter of Credit cannot
be canceled or changed without the consent of all parties,
including the Exporter.
Unless otherwise stipulated, all Letters of Credit are
Irrevocable.
How to get a Letter of Credit Confirmed ?
An Exporter who decides to have a Letter of Credit confirmed should
inform the Importer to instruct the Issuing Bank to issue an
Irrevocable Letter of Credit requesting a confirmation. For a bank to
add its confirmation, the Letter of Credit must state that a
confirmation be added.
It is recommended that you check with your own bank prior to the
issuance of the Letter of Credit as to whether it is prepared to add its
confirmation, should it be requested to do so by the Issuing Bank.
To make this decision, the bank will need preliminary information
about the Letter of Credit such as the name of the Issuing Bank,
country of issuance, expiry date and amount.
Does a Letter of Credit protect you from country
risks (e.g. war, embargo) and / or Issuing Bank
risks (e.g. bank failure, bank fraud)?
When a Letter of Credit is issued, the risk of payment has shifted from
the Importer to the Issuing Bank. However, you still assume both
Issuing Bank and country risks.
In the case where the Issuing Bank is not considered an acceptable risk
and/or the country where it is located has high political or economic
uncertainty, you should consider requesting a Confirmed Letter of
Credit. With a Confirmed Letter of Credit, another bank, known as
the Confirming Bank, usually located in your country, will add its
"confirmation" to the Letter of Credit. By adding its confirmation,
the Confirming Bank undertakes to honor your claim under the Letter
of Credit, assuming all terms and conditions of the Letter of Credit are
met.
The risk of payment is now assumed by the Confirming Bank, as well
as the Issuing Bank, thereby providing you more protection.
Are there agreed-upon, international
standards for transactions involving
Letters of Credit ?
The International Chamber of Commerce (ICC) publishes
internationally agreed-upon rules, definitions and practices
governing Letters of Credit, called :
"Uniform Customs and Practice for Documentary Credits
(UCP)
The UCP facilitates standardization of Letters of Credit among all
banks in the world that subscribe to it. These rules are updated from
time to time; the last revision is UCP 600.
What an Exporter Should Look for when
Reviewing a Letter of Credit ?
1. Which Bank issued the Letter of Credit?. Is this bank a reputable one
that can be relied on for payment? .Does the country in which the Issuing
Bank is located have a stable economic and political environment? If not,
does the Letter of Credit allow for confirmation by another bank in
another country?
2. Is the L/C irrevocable? If it is not stated, the Letter of Credit is
irrevocable.
3. Are the Importer's (Applicant's) name and address spelled correctly?
4. Are your name and address spelled correctly?
5. Are the dollar amount and currency of the Letter of Credit correct?
6. Does the payment term agree with the sales contract?
7. If necessary, are partial shipments / transhipment allowed?
8. Are the points of shipment and destination as agreed?
9. Is forwarder [House] B/L ( or AWB) is allowed? If it is not stated, it is
not allowed.
10. Is charter B/L (AWB) is allowed? If it is not stated, it is not allowed.
11. Is it possible for you to meet the latest shipping date? Are enough
days allowed to present documents? You may need to check with
the Freight Forwarder handling the shipment and preparing the
documents for you.
12. Is the merchandise description correct and if needed, does it include
unit price, weight and quantities? If necessary, does the Letter of
Credit allow for any leeway on the quantity and/or dollar amount?
13. Can all documents listed in the Letter of Credit be obtained?
14. Which party is responsible for the Letter of Credit banking charges?
15. Where is the Letter of Credit payable? Note, this will affect the
length of time required to receive your funds.
16. Is the Letter of Credit confirmed?
What an Exporter Should Look for
when Reviewing a Letter of Credit ?
Sample L/C
3 Most Common Reasons
why Letters of Credit Fail
1)TimeLines:
The letter of credit should have an expiration date that gives sufficient time to
the seller to get all the tasks specified and the documents required in the LC. If
the letter of credit expires, the seller is left with no protection.
Most LC s fail because Sellers/Exporters/Beneficiaries were unable to perform
within the specified time frame in the LC.
Three dates are of importance in an LC:
a) The date by when shipment should have occurred. The date on B/L.
b) The date by when documents have to be presented to the Bank.
c) The expiry date of the LC itself.
A good source to give you an idea of the timelines would be your freight
forwarding agent. As a seller check with your freight forwarding agent to see
if you would be in a position to comply.
2)Discrepancy within the Letter of Credit:
Letters of credit could also have discrepancies. Even a discrepancy as small as
a missing period or comma can render the document invalid. Thus, the earlier
in the process the letter of credit is examined, the more time is available to
identify and fix the problem. This is another common reason why LCs fail.
3) Compliance with the Documents and Conditions within
the Letter of Credit:
Letters of credit are about documents and not facts; the inability to produce a
given document at the right time will nullify the letter of credit. As a
Seller/Exporter/Beneficiary you should try and run the compliance issues with
the various department or individuals involved within your organization to see
if compliance would be a problem. And if so, have the LC amended before
shipping the goods.
3 Most Common Reasons
why Letters of Credit Fail
Optimizing transport cost in SC
by using spreadsheet
7
Linear Programming (LP)
The manager of a distribution
system between factories
(A, B and C) and distributors
(W, X, Y and Z) wishes to minimize
the global transport costs between a
set of origins (factories) and
destinations (distributors).
Consider the cost of transportation
between factories and distributors
are as shown in the table ($/ unit).
W X Y
Z
Capacity
A
20 40 70 50
400
B
100 60 90 80
1500
C
10 110 30 200
900
D
700 600 1000 500
2800
BTP: Balanced Transport Problem
Linear Programming (LP)
W X Y
Z
Capacity
A
20
0
40
400
70
0
50
0
400
B
100
0
60
200
90
800
80
500
1500
C
10
700
110
0
30
200
200
0
900
D
700 600 1000 500
2800
The cost =
(700 x 10) + (400 x 40) + (200 x 60) +
(800 x 90) + (200 x 30) + (500 x 80) =
$ 153000
Is it the optimum cost ?
Network optimization models
SunOil The capacitated plant location model
The capacitated plant location model
Two different plant sizes with different capacities & fixed costs.
The model focuses on minimizing the cost of meeting global demand.
Demandregion
High Fixed Low Fixed Production&transportationcostper1,000,000units
capacity cost ) $ ( capacity cost ) $ ( Africa Asia Europe S.America N.America Supplyregion
20 9,000 10 6,000 115 130 101 92 81 N.America
20 6,750 10 4,500 100 98 108 77 117 S.America
20 9,750 10 6,500 111 119 95 105 102 Europe
20 6,150 10 4,100 74 59 90 125 115 Asia
20 6,000 10 4,100 71 105 103 100 142 Africa
7 16 14 8 12 Demand
SCM- Spread sheet .xlsm
The Distance Formula
Given the two points (x1, y1) and (x2, y2), the
distance between these points is given by the
formula:
ht t p: / / www.mat hopenr ef .com/ coor ddi st .ht ml
Grid technique:
Locations of Sources and Markets
x
y
d = (X-xi) + (Y-yi)
2 2
8
Management of risk includes the development of continuous strategies designed to control,
mitigate, reduce, or eliminate risk.
Potential disruptions can either occur within the supply chain (e.g. insufficient quality,
unreliable suppliers, machine break-down, uncertain demand etc.) or outside the supply
chain (e.g. flooding, terrorism, labor strikes, natural disasters, large variability in demand
etc.).
Supply chain risk management is the systematic identification, assessment, and quantification
of potential supply chain disruptions with the objective to control exposure to risk or
reduce its negative impact on supply chain performance.
Defining Supply Chain Risk Management
Customers
Suppliers
(And outsource
Manufacturing)
Suppliers
Environment
Customers
Environment
Organization
Organizations Environment
Customer
Facing
Supplier
Facing
Internal Facing
Global Environment
Supply Chain Risk Perspectives
Relationship Risk
Supplier Performance Risk
Human Resource Risk
Supply chain disruption risk
Supplier Environment Risk
Market Dynamics Risk
Disaster Risk
Political / Country Risk
Supplier Financial Risk
Regulatory Risk
Financial Risk
Distribution Risk
Relationship Risk
Market Risk
Brand / Reputation Risk
Product Liability Risk
Environmental Risk
Political/ Country Risk
Operational Risk
Technical Risk
Financial Risk
Legal / Regulatory Risk
Environmental Risk
HR / Health and
Safety Risk
Political/ Country Risk
Supply chain risk refers to an uncertainty or unpredictable event affecting on or
more of the parties within the supply chain or its business setting, which can
negatively influence the achievement of your own business objectives.
Within the SC we have two types of risks:
1) External risks: can be driven by events either upstream or downstream in the
supply chain:
- Demand risks related to unpredictable or misunderstood customer or end-customer
demand.
- Supply risks related to any disturbances to the flow of product within your supply
chain.
- Environment risks that originate from shocks outside the supply chain.
- Business risks related to factors such as suppliers financial or management
stability.
- Physical risks related to the condition of a suppliers physical facilities
2) Internal risks: are driven by events within company control:
- Manufacturing risks caused by disruptions of internal operations or processes.
- Business risks caused by changes in key personnel, management, reporting
structures, or business processes.
- Planning and control risks caused by inadequate assessment and planning, and
ineffective management.
- Mitigation and contingency risks caused by not putting in place contingencies.
Risk
Risk
Result
Result
Market Risk
Price risk , Demand risk, Payment
risk ,Access risk
Operational
Risk
Quality risk, Quantity risk
Performance
Risk
Documentary risk , Security risk
Credit Risk Interest risk, Access risk, Cost risk
Policy Risk Policy risk
Example of SC risks
Risk Management for the SC
Risk Analysis
Risk Assessment
Risk Management
Provides an objective assessment of the Supply
Chain and process weaknesses
Provides an actionable list of improvements to be
implemented
Provides the foundation for a successful and
sustainable security program
Diagnostics of physical assets
Mapping of Supply Chain flows
Gap analyses
Quantitative models and assessments
Regulatory reviews
Sustainable business continuity plans
Documentation of exposures to Sarbanes-Oxley
compliance
Integrated and holistic Supply Chain strategies
Broaden cooperation and collaboration between
Supply Chain links
Consider the tradeoffs between costs to implement
the program versus potential losses
Pay equal attention to non-quantifiable risk
1. Fraud and/or Theft
2. Product Delivery Interruptions
3. Cost Control and Predictability
4. Pricing Control and Predictability
5. Supplier Relationship Sensitivity
6. Customer Relationship Sensitivity
7. Political & Legislative Effects
8. Legal Effects
9. Quality Control Issues
10. Lack of Safeguarding Company Assets
11. Speed to Market Issues
12. Inadequate Market Intelligence
Prime Supply Chain Risk Elements
Performance
Performance
CAUSES
(Categories of
Predictive Measures)
DISRUPTION
EVENTS
CONSEQUENCES
(Impacts)
Human Resources
Human Resources
Supply Chain
Disruption
Supply Chain
Disruption
Financial Health
Financial Health
Environmental
Environmental
Relationship
Relationship
Quality, Delivery,
Service Problems
Quality, Delivery,
Service Problems
Supplier Union Strike,
Ownership Change,
Workforce Disruption
Supplier Union Strike,
Ownership Change,
Workforce Disruption
Supplier Locked
Tier II Stoppage
Supplier Locked
Tier II Stoppage
Supplier Bankruptcy
(or financial distress)
Supplier Bankruptcy
(or financial distress)
Market Dynamics,
Merger/Acquisition
Disasters (Weather,
Earthquake, Terrorists)
Transportation
Market Dynamics,
Merger/Acquisition
Disasters (Weather,
Earthquake, Terrorists)
Transportation
Misalignment of
Interests
Misalignment of
Interests
Finished Goods
Shipments Stopped
Finished Goods
Shipments Stopped
Locate and Ramp Up
Back up Supplier
Locate and Ramp Up
Back up Supplier
Emergency Buy
and Shipments
Emergency Buy
and Shipments
Reputation
Reputation
Market Share Loss
Market Share Loss
EFFECTS
Revenue
Losses
and
Recovery
Expenses
OTHER
IMPACTS
Foregone
Income
Emergency Rework
and
Rushed FG Shipments
Emergency Rework
and
Rushed FG Shipments
Recall for
Quality Issues
Recall for
Quality Issues
Sudden Loss of
Supplier
Sudden Loss of
Supplier
S
u
p
p
l
i
e
r

A
t
t
r
i
b
u
t
e
s
S
i
t
u
a
t
i
o
n
a
l

F
a
c
t
o
r
s
The Supply Risk Model
Main impacts of SC risks
Operational impact: on distribution planning & scheduling
Customer impact: on reputation and future revenues
Legal impact: of contractual obligations
Risk transfer (e.g insurance)
Risk sharing (e.g supplier chargeback)
Risk avoidance
Mitigation of SC Risks
Assessment -> Prioritization
Moderate risk;
medium priority for
mitigation
Critical risk; high
priority for
mitigation
Low risk; low
priority for
mitigation
Moderate risk;
medium priority for
mitigation
High Low
Low
High
Risk Prioritization
Potential
Impact
Likelihood of
Occurrence
1 2 3 4 5
Severity Max. 1 a year 2-4 a year Monthly Weekly Daily
5. Catastrophic
5 10 15 20 25
4. Severe
4 8 12 16 20
3. Critical
3 6 9 12 15
2. Marginal
2 4 6 8 10
1. Negligible
1 2 3 4 5
Risk Assessment Matrix
Risk/Impact = Frequency x Severity
Risk Priority Number (RPN)
R / I greater than 10: High risk / impact
Action must be taken immediately to reduce
the risk / impact
R / I greater than 3 and less than or
equal 10 : Medium risk / impact
Action must be taken to reduce the
frequency and/or the severity of the events.
R / I less than or equal 3: Low risk / impact
Acceptable without required further action
Effective Risk Management
For risk management to be effective, it must be fully integrated
into the companys business processes.
The process of identifying risks, analyzing them, and planning
mitigation strategies must be documented and reported
throughout the organization.
To effectively evaluate risk strategy, management must
balance the cost of mitigation with available resources and
optimum cost management objectives [cost & benefit]
The risk management strategy should apply to everyone at all
levels in the organization and focus on achieving the
companys business objectives.
Be a Risk Shaper
The Impact of Uncertainty on Network Design
Supply chain design decisions include investments in number
and size of plants, number of trucks, number of warehouses
These decisions cannot be easily changed in the short- term
There will be a good deal of uncertainty in demand, prices,
exchange rates, and the competitive market over the lifetime of
a supply chain network
Therefore, building flexibility into supply chain operations
allows the supply chain to deal with uncertainty in a manner
that will maximize profits
Net Present Value (NPV)
The difference between the present value of cash inflows and the present value of
cash outflows. NPV is used in capital budgeting to analyze the profitability of an
investment or project .
NPV analysis is sensitive to the reliability of future cash inflows that an investment
or project will yield .
NPV compares the value of a dollar today to the value of that same dollar in the
future, taking inflation and returns into account. If the NPV of a prospective project
is positive, it should be accepted. However, if NPV is negative, the project should
probably be rejected because cash flows will also be negative.
For example, if a retail clothing business wants to purchase an existing store, it
would first estimate the future cash flows that store would generate, and then
discount those cash flows into one lump-sum present value amount, say $565,000.
If the owner of the store was willing to sell his business for less than $565,000, the
purchasing company would likely accept the offer as it presents a positive NPV
investment. Conversely, if the owner would not sell for less than $565,000, the
purchaser would not buy the store, as the investment would present a negative NPV
at that time and would, therefore, reduce the overall value of the clothing company
Discounted Cash Flow Analysis
Supply chain decisions are in place for a long time, so they
should be evaluated as a sequence of cash flows over that
period
Discounted cash flow (DCF) analysis evaluates the present
value of any stream of future cash flows and allows managers
to compare different cash flow streams in terms of their
financial value
Based on the time value of money a dollar today is worth
more than a dollar tomorrow
Discounted Cash Flow Analysis
return of rate
flows cash of stream this of lue present va net the
periods T over flows cash of stream a is ,..., ,
where
1
1
1
1
factor Discount
1 0
1
0
=
=
|
.
|
\
|
+
+ =
+
=
=
k
NPV
C C C
C
k
C NPV
k
T
T
t
t
t
Compare NPV of different supply chain design options
The option with the highest NPV will provide the greatest financial return
Solved example
Draw the decision tree and calculate the NPV of the expected
revenue after 4 years given that:
Current demand: 100 tons
Uncertainty in demand : () 10%
Probability of uncertainty (+) in the demand: 60%
Selling price will stay the same: USD 800/ ton
Discounted rate ( K ) : 12 %
D= 100
P= 0.6
Year 0
Year 0
Year 2
Year 2
Year 1
Year 1
D= 110
D= 90
D= 81
D= 133.1
D= 99
D= 99
D= 121
P= 0.4
P= 0.6
P= 0.4
P= 0.6
P= 0.4
Year 3
Year 3
D=89.1
D=89.1
D=89.1
D= 108.9
D= 72.9
P= 0.6
P= 0.6
P= 0.6
P= 0.6
P= 0.4
P= 0.4
P= 0.4
P= 0.4
D= 108.9
D= 108.9
Solved example
Solution:
Revenue at year 0 = (800 x 100) = $ 80,000
Revenue at the end of year 1 = (110 x 800x 0.6) + (90 x 800x 0.4) = $ 81.600
Revenue at the end of year 2 =
(121x 800 x 0.6 x 0.6) + ( 99 x 800 x 0.4 x 0.6) +
(99x 800 x 0.6x 0.4) + (81x 800 x 0.4 x 0.4) = $ 83,232
Revenue at the end of year 3 =
(133.1 x 800 x 0.6 x 0.6 x 0.6) + (108.9 x 800 x 0.4 x 0.6 x 0.6) +
(108.9 x 800 x 0.6 x 0.4 x 0.6) + (89.1x 800x 0.4 x 0.4 x 0.6) +
(108.9 x 800 x 0.6 x 0.6 x 0.4) + (89.1x 800x 0.4 x 0.6 x 0.4) +
(89.1 x 800 x 0.6 x 0.4 x 0.4) + (72.9 x 800x 0.4 x 0.4 x 0.4) = $ 84,897
NPV of the total revenue @ year 0 =
80,000 81,600 83,232 84,897 = $ 279,637
(1+0.12) (1+0.12) (1+0.12)
2
3
+

+

+

Measuring & Managing Logistics Performance
(Creating Usable Supply Chain Metrics)
9
Creating Usable Supply Chain Metrics
Measuring the performance of your supply chain has always been difficult to
answer, as there is a lot of metrics identified.
If you use some metrics that look good one month, they may not the next; while the
ones you were not using look great.
Its hard to convince senior executives that the supply chain is at its peak
performance when the metrics provided to them for decision making change every
month.
Sometimes simple is best, and a small focused set of actionable metrics that are
relevant to the decisions that senior
Simplifying Supply Chain Metrics for Improved Decision
Making
Keys to Success with Supply Chain Metrics
Keep the number of metrics small approaches involving a large number
of metrics can swamp decision makers.
Ensure metrics are actionable establish clarity around who is responsible
for a metric if it starts moving in the wrong direction.
Provide relevant, consistent metrics to all levels within the organization and
supply chain a top to bottom relationship between metrics ensures a
simple, concise approach to performance improvement.
Deliver the relevant metrics broadly all decision makers should have
access to their metrics on an ongoing basis.
Freight cost per unit shipped:
Calculated by dividing total freight costs by number of units shipped per
period. Useful in businesses where units of measure are standard (e.g., Kg). Can
also be calculated by mode (barge, rail, ocean, truckload, less-than-truckload, small
package, air freight,..)
Outbound freight costs as percentage of net sales:
Calculated by dividing outbound freight costs by net sales. Most accounting systems
can separate "freight in" and "freight out." Percentage can vary with sales mix, but
is an excellent indicator of the transportation financial performance.
1) Transportation Metrics
Inbound freight costs as percentage of purchases:
Calculated by dividing inbound freight costs by purchase dollars. It is important to
understand the underlying detail.
The measurement can vary widely, depending on whether raw materials are
purchased on a delivered, prepaid, or collect basis.
Transit time:
Measured by the number of days (or hours) from the time a shipment leaves your
facility to the time it arrives at the customer's location. Often measured against a
standard transit time quoted by the carrier for each traffic lane. Unless you are
integrated into your customers' systems, you will have to rely on freight carriers to
report their own performance. This is often an important component of lead time.
Transit times can vary substantially, based on freight mode and carrier systems.
( Driver hours used / driver hours available) %
[in case that you own the fleet]
.
Claims as % of freight costs:
Calculated by dividing total loss and damage claims by total freight
costs. Generally measured in total and for each carrier. A high number generally
indicates packaging problems, or process problems at the carrier.
Freight bill accuracy:
Calculated by dividing the number of error-free freight bills by the total number of
freight bills in the period. Errors can include incorrect pricing, incorrect weights,
incomplete information, etc. Generally measured in total and for each carrier.
Accessorial as percent of total freight:
Calculated by dividing accessorial and surcharges by total freight expenditures for
the period. Many freight carriers will charge extra fees for trailer
detention/demurrage, re-delivery, fuel increases, and other expenses or extra
services. Often, these are extra costs incurred due to inefficient processes.
.
Percent of truckload capacity utilized:

Calculated by dividing the total weight shipped by the theoretical maximum. For
example, assume your trucks can hold 40,000 Kg. of product. During the prior
month, there were 675 shipments totaling
34,000 Kg. The percentage utilization was 85%. The 15% unused capacity is an
opportunity for more efficiency.
Mode selection vs. optimal:
This is calculated by dividing the number of shipments sent via the optimal mode by
the total number of shipments for the period. To measure this, each traffic lane must
have a designated optimal mode, based on freight costs and customer service
requirements.
Truck turnaround time:
This is calculated by measuring the average time elapsed between a truck's arrival at
your facility and its departure. This is an indicator of the efficiency of your lot and
dock door space, receiving processes, and shipping processes. This also directly
affects freight carrier profits on your business.
Shipment visibility/traceability percent:

Calculated by dividing the total number of shipments via carriers with order tracking
systems, by the total number of shipments sent during a period. This is an indicator
of the relative sophistication of your carrier base, and one measure of the non-price
value available from your carrier base.
Number of carriers per mode:
Calculated by counting the total number of freight carriers used in a given period, by
mode (ocean, barge, rail, intermodal, truckload, LTL, small package, etc.). This is
an indication of your volume leverage and control over the transportation function.
On-time pickups:
Calculated by dividing the number of pick-ups made on-time (by the freight carrier)
by the total number of shipments in a period. This is an indication of freight carrier
performance, and carriers' affect on your shipping operations and customer service.
2) Cycle Time Metrics
Customer Order Promised Cycle Time:
The anticipated or agreed upon cycle time of a Purchase Order.
It is gap between the Purchase Order Creation Date and the Requested
Delivery Date. This tells you the cycle time that you should expect
(NOT the actual).
Customer Order Actual Cycle Time:
The average time it takes to actually fill a customers purchase order.
This measure can be viewed on an Order or an Order Line level.
The measure starts when the customers order is sent/received/entered.
It is measured along its various steps of the order cycle.
Through credit checks, pricing, warehouse picking and shipping.
The measure ends at either the time of shipment or at the time of delivery to
the customer. This "actual" cycle time should be compared to the
"promised" cycle time.
Manufacturing Cycle Time:
Measured from the Firm Planned Order until the final production is reported.
It usually takes into account the original planned production quantity versus
the actual production quantity.
Example: X% of the planned quantity must be completed on a production
run or the cycle time should not be considered.
Purchase Order Cycle Time:
Measured from the creation of the PO to the receipt at your location
(Distribution Center, Hub etc). One of the keys here is not having your RDD
(Requested Delivery Date) exceed the agreed to lead time. If it does, it may
artificially inflate your Lead Time.
Additionally, any in-between points available will add value to the metric.
Example: Creation of the PO, Shipment from the Vendor, Receipt at the DC.
This will tell you the manufacturing time vs the transit time.
Inventory Replenishment Cycle Time:
Measure of the Manufacturing Cycle Time plus the time included to deploy
the product to the appropriate distribution center.
Cash to Cash Cycle Time:
The number of days between paying for Raw Materials and getting paid for
product. Calculated by Inventory Days of Supply plus Days of Sales
Outstanding minus Average Payment Period for Material.
Supply Chain Cycle Time:
The total time it would take to satisfy a customer order if all inventory levels
were zero. It is calculated by adding up the longest lead times in each stage
of the cycle.
3) Inventory Metrics

Inventory Turns (Inventory Turnover):
The number of times that a companies inventory cycles or turns over per
year. It is one of the most commonly used Supply Chain Metrics.
Calculation: A frequently used method is to divide the Annual Cost of Sales
by the Average Inventory Level.
Example: Cost of Sales = $36,000,000. Average Inventory = $6,000,000.
$36,000,000 / $6,000,000 = 6 Inventory Turns
Although results vary by industry, typical manufacturing companies may have 6 inventory
turns per year. High volume/low margin companies (like grocery stores) may have 12
inventory turns per year or more

GMROI (Gross Margin Return on Inventory):
GMROI =
(Unit Selling Price of an Item - Unit Inventory Value of an Item) X Annual Demand for the item
Average Inventory Value of the product.
Notes:
- Unit Inventory Value tells you what it costs you to make the product.
- (The Unit Selling Price - Unit Inventory Value) tells you the margin.

Inventory Carrying Rate:
Calculate the inventory carrying rate, given the following:
$800k = Storage
$400k = Handling
$600k = Obsolescence
$800k = Damage
$600k = Administrative
$200k = Loss
Average inventory value= $34,000
Solution:
Total inventory cost = $3,400k
$3,400k / $34,000k = 10%
9% = Opportunity Cost of Capital (the return you could reasonably expect if you used the money
elsewhere)
4% = Insurance
6% = Taxes
Inventory Carrying Rate = 10% + 19% = 29%

Inventory Carrying Costs:
Inventory Carrying Cost = Inventory Carrying Rate X Average Inventory Value
Example: 29% X $34,000,000 = $9,860,000
Case Fill Rate:
The amount of cases shipped on the initial shipment versus the amount of cases ordered.
Example- ABC Company orders 6 products that total 200 cases, on its Purchase Order
#1235. The manufacturer ships out 140 cases on 3/1/01 and the remaining 60 cases on
3/10/01.
Calculation: Number of Cases Shipped on the Initial Order / Total Number of Cases
Ordered . (140/200 = 70%)

Value Fill Rate:
Same as before, except the order line value is used instead of cases.
Calculation:
Value of Order Lines Shipped on the Initial Order / Total Value of the Order
= ($400/$500 = 80%)
Order fill rate:
% of customer orders filled completely.
Inventory Months of Supply:
Inventory On Hand / Avg Monthly Usage
(the Avg Monthly Usage is typically the yearly forecast divided by12)
4) Performance to Promise Dates

When a Distributor places a Purchase Order against a Manufacturer, he has certain expectations
on when he will receive the items ordered. His original expectation is the On Time Delivery
Metric. However, the manufacturer may give him a revised estimate as to when they expect to
fill the order. The manufacturers promise is called the "Performance to Promise Date Metric".
Example: ABC Company Orders 2 Products on Purchase Order #1234, with a Requested Ship
Date of June 10.
The first item is in-stock and ships on June 10th..
The second item is on backorder. The manufacturer estimates that the 2nd item will be shipped
by July 1.The item is manufactured and ships out on June 28.
The Performance to Promise Date is 100% (items ship on time or early).
*However, if the 2nd item does not ship till July 2nd, then it's late. The Performance to Promise
Date is 50%.
Setting Goals for your Supply Chain Metrics:
Once you have an understanding of basic Supply Chain
Metrics:
1. focus on a limited number of measurements that add value.
2. Choose those metrics that will track your companies true
performance.
3. I would recommend picking 5 - 7 key measures per
functional area.
4. These measures are sometimes referred to as KPI's (Key
Performance Indicators) - SMART goals
Aggregate planning in the supply chain
10
Aggregate planning
It is an operational activity which does an aggregate
plan for the production process, in advance of 3 to 18
months, to give an idea to management as to what
quantity of materials and other resources are to be
procured and when, so that the total cost of the
organization is kept to the minimum over that period .
It is an operational activity which does an aggregate
plan for the production process, in advance of 3 to 18
months, to give an idea to management as to what
quantity of materials and other resources are to be
procured and when, so that the total cost of the
organization is kept to the minimum over that period .
Information Needed for an Aggregate Plan
Demand forecast in each period
Production costs
labor costs, regular time ($/hr) and overtime ($/hr)
subcontracting costs ($/hr or $/unit)
cost of changing capacity: hiring or layoff ($/worker) and cost of adding
or reducing machine capacity ($/machine)
Labor/machine hours required per unit
Inventory holding cost ($/unit/period)
Stockout or backlog cost ($/unit/period)
Constraints: limits on overtime, layoffs, capital available, stockouts and
backlogs
Outputs of Aggregate Plan
Production quantity from regular time, overtime, and subcontracted time: used
to determine number of workers and supplier purchase levels
Inventory held: used to determine how much warehouse space and working
capital is needed
Backlog/stockout quantity: used to determine what customer service levels will
be
Machine capacity increase/decrease: used to determine if new production
equipment needs to be purchased
A poor aggregate plan can result in lost sales, lost profits, excess
inventory, or excess capacity!
Aggregate Planning Strategies
Chase strategy using capacity as the lever
Time flexibility startegy using workforce or capacity
utilization as the lever
Level strategy using inventory as the lever
Mixed strategy a combination of one or more of the
first three strategies
Chase Strategy
Production rate is synchronized with demand by varying
machine capacity or hiring and laying off workers as the
demand rate varies
However, in practice, it is often difficult to vary capacity and
workforce on short notice
Expensive if cost of varying capacity is high
Negative effect on workforce morale
Results in low levels of inventory
Should be used when inventory holding costs are high and
costs of changing capacity are low
Time Flexibility Strategy
Can be used if there is excess machine capacity
Workforce is kept stable, but the number of hours worked is
varied over time to synchronize production and demand
Can use overtime or a flexible work schedule
Requires flexible workforce, but avoids morale problems of
the chase strategy
Low levels of inventory, but lower utilization
Should be used when inventory holding costs are high and
capacity is relatively inexpensive
Level Strategy
Maintain stable machine capacity and workforce levels
with a constant output rate
No synchronization of demand and supply results in Shortages
and surpluses
Inventories that are built up in anticipation of future demand or
backlogs are carried over from high to low demand periods
Better for worker morale
Large inventories and backlogs may accumulate
Should be used when inventory holding and backlog costs are
relatively low
Example:RedTomatoTools
Demand for the gardening tools is highly seasonal.
Handle demand and maximize profits??
Options:
Hire worker in peak season
Subcontraction of some work
Build up inventory in slow period
Backlogging
Constraints:
No limit on subcontracting, inventories, stockouts, backlog
All stockouts are backlogged from the following month.
Inventory costs are incurred on the ending inventory in a month.
Inventory level at the end of June is at least 500 units.
Example: Red Tomato Tools:
Demand Forecast
Month Demand Forecast
January 1,600
February 3,000
March 3,200
April 3,800
May 2,200
June 2,200
Unit price=$40/unit
Inventory at the beginning of January= 1000 units
Workforce at the beginning of January= 80 employees
Total of 20 workdays/month are available
Regular work hours=8hrs/day/employee
Overtime work hours can not exceed 10hrs/month/employee
Required labor hours= 4hrs/unit
Costs:
Item Cost
Materials $10/unit
Inventory holding cost $2/unit/month
Marginal cost of a stockout $5/unit/month
Hiring and training costs $300/worker
Layoff cost $500/worker
Labor hours required 4/unit
Regular time cost $4/hour
Over time cost $6/hour
Cost of subcontracting $30/unit

Aggregate Planning
(Define Objective Function)

Cost tion Subcontrac
6
1
Cost Production
6
1
Cost Stockout
6
1
Cost Holding Inventory
6
1
Layoff of Cost
6
1
Hiring of Cost
6
1
Cost Labor Overtime
6
1
Cost Labor Time Regular
6
1
30 10 5 2
500 300 6 640

= = = =
= = = =
+ + + +
+ + + =
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
t
C P S I
L H O W
TC Min
* Solve the problem using excel sheet
Item Cost
Materials $10/unit
Inventory holding cost $2/unit/month
Marginal cost of a stockout $5/unit/month
Hiring and training costs $300/worker
Layoff cost $500/worker
Labor hours required 4/unit
Regular time cost $4/hour
Over time cost $6/hour
Cost of subcontracting $30/unit

Aggregate Planning in Practice
Think beyond the enterprise to the entire supply chain
Make plans flexible because forecasts are always wrong
Rerun the aggregate plan as new information emerges
Use aggregate planning as capacity utilization increases
The basic trade-offs involve balancing the cost of
capacity, inventory, and of stockouts to maximize
profitability. Increasing anyone of the three allows the
planner to lower the other two.
The basic trade-offs involve balancing the cost of
capacity, inventory, and of stockouts to maximize
profitability. Increasing anyone of the three allows the
planner to lower the other two.

Global SCM Course Objectives and Key Concepts

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Adel Abou Heneidy

Items used to produce final products

Items demanded by external customers

Meet unexpected demand

Smooth seasonal or cyclical demand

Meet variations in customer demand

Take advantage of price discounts

Hedge against price increases

Percent of truckload capacity utilized:

Shipment visibility/traceability percent:

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