INDUSTRIAL LOGISTICS

INDUSTRIAL LOGISTICS

Industrial Technology Management ProgrammeFaculty of Technology

Ahmad Nazif Bin Noor Kamar

Objectives / OutcomesAt the end of this chapter, students should be able to:• Understand industrial logistics

management concept• Describe the elements and role of logistics

in operations• Explain achievement of competitive

advantage through logistics

Contents• Definition of Logistics• Logistics Management Concepts• The Work / Element of Logistics

1. Order Processing2. Inventory Management3. Facility Network Design4. Materials Handling and Packaging5. Warehousing6. Transportation

• Logistics and Competitive Advantage

Logical Thinking Statistics Logistics

“the detailed coordination of a complex operation involving many people, facilities or

supplies”

LOGISTICS

[ New Oxford American Dictionary]

Definition of Logistics

Definition of Logistics

Suppliers Procurement

Operations

Distribution Customers

Logistics ManagementLogistics concept was introduced due to need for planning and coordinating the materials flow from source to user as an integrated system, rather than managing the flow of goods as a series of independent activities.

Materials Flow

Information Flow

Objective• The purpose of logistics management is to plan

and co-ordinate all those activities necessary to achieve desired levels of delivered service and quality at lowest possible cost.

Scope• From the total systems viewpoint, the scope

encompasses management of raw materials and other inputs through the delivery of the final product in order to satisfy a customer.

Logistics Management

“part of supply chain management that plans, implements and controls the

efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customer requirements”

Logistics Management

Elements of Logistics

• Specific customer requirements flow into a firm in the form of orders.

• Processing of orders including initial order receipt, delivery, invoicing and collection.

• Orders may arrive by phone, mail, fax etc.• Once received, they must be edited and entered

into a company’s information system.• Failures and errors in order processing impact the

cost of logistics as well as the speed and accuracy of service provided to customers.

1. Order Processing

1. Order Processing (cont.)• Order processing is a key element of order

fulfillment. Order processing operations or facilities are commonly called "distribution centers".

• Order processing is the term generally used to describe the process or the work flow associated with the picking, packing and delivery of the packed item(s) to a shipping carrier.

• The specific order fulfillment process or the operational procedures of distribution centers are determined by many factors. Each distribution center has its own unique requirements or priorities.

1. Order Processing (cont.)

Example of Order Processing Control System

2. Inventory Management• Inventory is an important element in operational

effectiveness and often appears on the balance sheet as the biggest of current assets.

• Inventory is created when the receipt of materials, parts or finished goods exceeds their disbursement.

• Issues in managing inventory:– How much inventory of each material item to

hold?– Where in the system to hold each item and in

what form (raw material, work in process, finished goods)?

– How often to replenish each item?

2. Inventory Mgmt. (cont.)

High inventories will hide problems


Less inventories will expose problems

Different inventory control procedures are appropriate depends on the types

2. Inventory Mgmt. (cont.)Types of

Inventory

Provide a stock of goods to meet anticipated customer demand and provide a “selection” of goods

Provision for fluctuations in sales or productionMistakes in planningAllow one to take advantage of quantity

discountsTo provide a hedge against inflationTo protect against shortages due to delivery

variationTo permit operations to continue smoothly with

the use of “work-in-process”

2. Inventory Mgmt. (cont.)Functions of Inventory

• Inventory classification helps allocate time and money .• This system allows firms to deal with multiple product

lines and multitude of stock keeping units.


• Based on Pareto principles – created by Juran• The main idea of ABC is to focus resources on the

critical few and not on the trivial many.• (Annual Dollar Volume of An Item) = (Its Annual Demand) x (Its Cost per

unit)

ABC Analysis

Classification of Inventory

• Divides on-hand inventory into 3 classes– A class, B class, C class

• Policies based on ABC analysis– Develop class A suppliers more– Give tighter physical control of A items– Forecast A items more carefully

2. Inventory Mgmt. (cont.)ABC

Analysis

Class Percentage of Total Items in Inventory

Percentage of Total Dollars Tied up in

InventoryA 10 70 – 80B 10 – 20 10 – 15C 70 - 80 10 - 20

020406080

100

0 50 100% of Inventory Items

% Annual RM Usage

A

BC

Class % RM Vol. % ItemsA 80 15B 15 30C 5 55

2. Inventory Mgmt. (cont.)ABC Analysis

Example

• Concerned with achieving a balance between two competing objectives: 1. Minimizing the cost of maintaining inventory2. Maximizing service to customers

• Two different inventory control systems are required: 1. Order point systems – for independent

demand items2. Material requirements planning – for

dependent demand items

2. Inventory Mgmt. (cont.)Inventory Control

1. Independent Demand• Demand or consumption of the item is

unrelated to demand for other items• Eg.: end products and spare parts

2. Dependent Demand• Demand for the item is directly related to

demand for something else, usually because it is a component of a product subject to independent demand

• Eg.: tires on new automobiles

2. Inventory Mgmt. (cont.)Types of Demand

• Two related issues encountered when controlling inventories of independent demand items: 1. How much to order - often decided by means

of economic order quantity (EOQ) formula2. When to order - accomplished using reorder

points (ROP)

Model of inventory level over time in the typical make to stock situation

2. Inventory Mgmt. (cont.)Independent Demand

• Demand rate is constant• Known and constant lead time• Instantaneous receipt of material• No quantity discounts• Only relevant costs are set-up (ordering) and

holding• No constraints on lot size• Decisions for items are independent from other

items

2. Inventory Mgmt. (cont.)EOQ Assumptions

Order Quantity, Q

Annual cost ($) Total Cost

Holding Cost =HQ2

Slope = 0

Minimum total cost

Optimal order Qopt

Set-up Cost =SDQ

(Carrying)

(Ordering)


EOQ Cost Model

More units must be stored if more ordered

Purchase OrderDescription Qty.Microwave 1

Order quantity


Order quantity

Why Holding Costs Increase?


Cost is spread over more units





1 Order (Postage $ 0.32) 1000 Orders (Postage $320)

Order quantity


Why Order Costs Decrease?


S - set-up (ordering) cost D - annual demandH – holding (carrying) cost Q - order quantity

1. Total annual cycle-inventory cost = Holding Cost + Set-up Cost SD

Q

HQ

2+TIC =

2. Economic (Optimal) Order Quantity, EOQ = D× × SH

2

3. Expected Number of Orders, N = DEOQ

4. Expected Time Between Orders, T =Working Days/ Year

N


H = $0.75 per yard S = $150 D = 10,000 yards

Qopt =2SD

H

Qopt =2(150)(10,000)

(0.75)

Qopt = 2,000 yards

TIC = +SDQ

HQ2

TIC = +(150)(10,000)

2,000(0.75)(2,000)

2

TIC = $750 + $750 = $1,500

No. of orders,N = D/Qopt

= 10,000/2,000= 5 orders/year

Order Cycle Time,T = 311 days/ N = 311/5

= 62.2 store days

EOQ Calculation Example

ExerciseFaris Haikal is the logistics executive for the headquarters of a large insurance company chain with a central inventory operation. His fastest-moving inventory item has a demand of 120 units per week. The cost of each unit is RM100 and the inventory carrying cost is RM10 per unit per year. The average ordering cost is RM30 per order. It takes about 5 days for an order to arrive and there are 250 working days per year. Calculate the:

a. EOQb. total costc. expected number of ordersd. expected time between orders e. reorder point

• When the inventory level for a given stock item declines to some point defined as the reorder point, this is the signal to place an order to restock the item

• Reorder point is set at a high enough level so as to minimize the probability that a stock out will occur during the period between when the reorder point is reached and a new batch is received

• Reorder point policies can be implemented using computerized inventory control systems

2. Inventory Mgmt. (cont.)Reorder Point System (ROP)

Operation of a reorder point inventory system

dWorking Days / Year

= D = ×ROP d L

D = Demand per year ; d = Demand per day ; L = Lead time in days


EOQ and ROP


Material Requirements Planning (MRP)

• Computational procedure to convert the master production schedule for end products into a detailed schedule for raw materials and components used in the end products

• The detailed schedule indicates the quantities of each item, when it must be ordered, and when it must be delivered to achieve the master schedule

• Capacity requirements planning coordinates labor and equipment resources with material requirements


• The master schedule specifies the production of final products in terms of month‑by‑month deliveries

• Each product may contain hundreds of components – These components are produced from raw

materials, some of which are common among the components (e.g.: sheet steel for stampings)

– Some of the components themselves may be common to several different products

• These materials and components are called common use items in MRP


Lead Times in MRP

• The lead time for a job is the time that must be allowed to complete the job from start to finish.

• Two kinds of lead times in MRP: – Ordering lead time - time required from

initiation of the purchase requisition to receipt of the item from the vendor

– Manufacturing lead time - time required to produce the item in the company's own plant, from order release to completion


Inputs to the MRP System

• For the MRP processor to function properly, it must receive inputs from several files: – Master production schedule– Product design data, as a bill of materials file– Inventory records– Capacity requirements planning


MRP Output Reports

• Order releases - authorize placement of orders planned by MRP system

• Planned order releases in future periods• Rescheduling notices, indicating changes in due

dates for open orders• Cancellation notices - indicate that certain orders

are canceled due to changes in the master schedule

• Inventory status reports• Exception reports, showing deviations from

schedule, overdue orders, scrap, etc.


Bill of Materials

J (4)Seat-frame

boards

I (1)Seat

cushion

H (1)Seat

frame

G (4)Backslats

F (2)Backlegs

C (1)Seat

subassembly

D (2)Frontlegs

B (1)Ladder-backsubassembly

E (4)Leg

supports

ALadder-back

chair

2. Inventory Mgmt. (cont.)Dependent Demand

Master Production Schedule

Ladder-back chair

Kitchen chair

Desk chair

1 2

April May

3 4 5 6 7 8

Aggregate production plan for chair family

200

670

200

150

120

200

150

200

120

670

A part of the material requirements plan that details how many end items will be produced within specified periods of time.

Inventory RecordItem: CDescription: Seat subassembly

Lot Size: 230 unitsLead Time: 2 weeks

Gross requirements

1 2 3 4 5 6 7 8

Scheduled receipts

Projected on-hand inventory

Planned receipts

Planned order releases

Week

150

230

0

0

0

0

120

0 0

150

0

120

0 0

37

00



Gross requirements 150

1

230

0

2

0

0

3

0

120

4

0

5

0

150

6

0

120

7

0

8

0Scheduled receipts


Planned receipts


37

Week

00

Explanation:Gross requirements are the total demand for the two chairs. Projected on-hand inventory in week 1 is 37 + 230 – 150




1

230

117

0

2

0

0

3

0

120

4

0

5

0

150

6

0

120

7

0

8

0Scheduled receipts


Planned receipts


37

Week

00

Explanation:Gross requirements are the total demand for the two chairs. Projected on-hand inventory in week 1 is 37 + 230 – 150 = 117 units.




1

230

117

0

2

0

0

3

0

120

4

0

5

0

150

6

0

120

7

0

8

0Scheduled receipts


Planned receipts


37

Week

00




1

230

117

0

2

0

0

3

0

120

4

0

5

0

150

6

0

120

7

0

8

0Scheduled receipts


Planned receipts


37

Week

00

Projected on-hand inventory balance at end of week t

Inventory on hand at end of week t - 1

Gross requirements

in week t

Scheduled or planned receipts in

week t= + –




1

230

117

0

2

0

0

3

0

120

4

0

5

0

150

6

0

120

7

0

8

0Scheduled receipts


Planned receipts


37

Week

00

117 117 – 3 – 3 –153 –273 –273

Projected on-hand inventory balance at end of week t

Inventory on hand at end of week t - 1

Gross requirements

in week t

Scheduled or planned receipts in

week t= + –

Item: CDescription: Seat subassembly



1

230

117

0

2

0

0

3

0

120

4

0

5

0

150

6

0

120

7

0

8

0Scheduled receipts


Planned receipts


37

Week

00

117 117 –3 – 3 –153 – 273 – 273

Planned OrdersExplanation:Without a new order in week 4, there will be a shortage of three units: 117 + 0 + 0 – 120 = – 3 units.




1

230

117

0

2

0

0

3

0

120

4

0

5

0

150

6

0

120

7

0

8

0Scheduled receipts


Planned receipts


37

Week

00

117 117

Planned Orders




1

230

117

0

2

0

0

3

0

120

4

0

5

0

150

6

0

120

7

0

8

0Scheduled receipts


Planned receipts


37

Week

00

117 117 227

230

Planned OrdersExplanation:Adding the planned receipt brings the balance to 117 + 0 + 230 – 120 = 227 units.




1

230

117

0

2

0

0

3

0

120

4

0

5

0

150

6

0

120

7

0

8

0Scheduled receipts


Planned receipts


37

Week

00

117 117 227

230

230

Planned OrdersExplanation:Offsetting for a two-week lead time puts the corresponding planned order release back to week 2.




1

230

117

0

2

0

0

3

0

120

4

0

5

0

150

6

0

120

7

0

8

0Scheduled receipts


Planned receipts


37

Week

00

117 117 227

230

230

227 77 –43

Planned OrdersExplanation:The first planned order lasts until week 7, when projected inventory would drop to – 43.




1

230

117

0

2

0

0

3

0

120

4

0

5

0

150

6

0

120

7

0

8

0Scheduled receipts


Planned receipts


37

Week

00

117 117 227

230

230

227 77

230

Planned OrdersExplanation:Adding the second planned receipt brings the balance to 77 + 0 + 230 – 120 = 187.




1

230

117

0

2

0

0

3

0

120

4

0

5

0

150

6

0

120

7

0

8

0Scheduled receipts


Planned receipts


37

Week

00

117 117 227

230

230

227 77

230

Planned OrdersExplanation:Adding the second planned receipt brings the balance to 77 + 0 + 230 – 120 = 187.

187




1

230

117

0

2

0

0

3

0

120

4

0

5

0

150

6

0

120

7

0

8

0Scheduled receipts


Planned receipts


37

Week

00

117 117 227

230

230

227 77

230

187

230

Planned OrdersExplanation:The corresponding planned order release is for week 5.

Planned OrdersItem: CDescription: Seat subassembly



1

230

117

0

2

0

0

3

0

120

4

0

5

0

150

6

0

120

7

0

8

0Scheduled receipts


Planned receipts


37

Week

00

117 117 227

230

230

227 77

230

187

230

187

3. Facility Network Design• Determining the number and type of facility

required, their geographic locations and the work to be performed at each is an important part of network design

• Typical logistic facilities are manufacturing plants, warehouses, cross-dock operations and retail stores

• It also determines the inventory type and the quantity to be stocked at each facility and the assigning of customer orders for shipment

• The network also must integrates information and transportation capabilities

Factors that directly impact the number of facilities and their location in a network:

3. Facility Network Design (cont.)

Transportation cost

Inventory cost

Total network cost

• Important factors influence location decisions:1. Labor (availability and cost)2. Proximity of suppliers or customers3. Construction costs4. Land costs5. Taxes6. Regulations7. Incentive packages8. Transportation infrastructure9. Quality of life for employees


• The factors influencing modification of network design are:– Change in demand and supply– Product assortments– Changes in suppliers’ supplies– Manufacturing requirements


4. Materials Handling & Packaging• Managing logistics must plan the best ways to load,

offload, move, sort and select products• Work closely with engineers to design or select

packaging materials that facilitate materials handling

Packaging and materials handling decisions affect value in many ways:• Material handling costs can be substantial, and

improved labor and equipment productivities can significantly improve profits

• Materials handling is usually the number one cause of product damage and loss in logistics – poor handling practices and improperly packaged items lead to scratched, dented and broken products

4. Materials Handling & Packaging

Packaging protects the product and facilitate ease of handling in a number of ways:a. Create one large container out of several smaller

units (known as containerization / unitization)– Eg.: individual soft drinks are frequently

packaged in six-packs


Packaging

b. Packages contain information about the products they contain (useful when sorting products and processing orders)– Eg.: Automated Storage and Retrieval System

(AS/RS), Radio frequency identification (RFID)


c. Packaging concern is the relationship between the boxes size, order quantity and retail display quantity


The determination of final package design requires a great deal of testing to assure that

both marketing and logistics concerns are satisfied

Principles of Materials Handling1. Equipment for handling and storage should be as

standardized as possible2. When in motion, the system should be designed to provide

maximum continuous product flow3. Investment should be in handling rather than stationary

equipment4. Handling equipment should be utilized to the maximum

extent possible5. In handling equipment, selection the ratio of dead weight

to payload should be minimized6. Whenever practical, gravity flow should be incorporated in

system design

4. Materials Handling & PackagingMaterials Handling

Classification of Handling Systems:


Mechanized

• Lift trucks• Towlines• Tractor

Trailers• Conveyors• Carousels• Rider

Trucks

Semi-Automated

• Automated guided Vehicles (AGV)

• Robotics• Live Racks

Automated

• Potential to Automate

• Automated Storage / Retrieval (AS/RS)

Information-Directed

• RF Wireless

• Pick-to-Light

5. Warehouse Management• Nowadays, warehouse are more properly viewed

as places where products may be stored and assortments of products created in accordance with customer requirements

• Distribution Center term are being used to emphasize the difference between the storage activity and the strategic role of warehouses

• For an ideal logistics system – storage is held to a minimum and inventory moves continuously throughout the supply chain on its destination to fill customer needs

1. Trans-Shipment Point– A facility where products are received, sorted,

sequenced and selected into loads consistent with the customers’ needs

2. Stockpiling– The storage of inventories in warehouses to protect

against seasonality either in supply or demand3. Production Support– A warehouse dedicated to storing parts and

components needed to support a plant’s operations

5. Warehouse Management (cont.)Primary Functions of

Warehousing

4. Break-Bulk– Splitting a large shipment into individual

orders and arranging for local delivery to customers

5. Warehouse Consolidation– Combining shipments from a number of

sources into one larger shipment going to a single location

6. Cross-Docking– Combines break-bulk and consolidation

warehouse activities

5. Warehouse Management (cont.)

7. Reverse Logistics Support– The logistics needed to send products or

packaging materials back to disassembly, reclamation or disposal sites

– Returned products can be remanufactured or updated for resale

8. Value-Added Services– Any work that creates greater value for

customers– Services may change the physical features or

configuration of products so they are presented to customers in a unique or customized manner


1. Receiving and Unloading– Inbound shipments must be received and unloaded

from the transportation vehicles– Part of this activity may also involve checking the

shipment for the correct quantities and for potential damage to products

2. In-Storage Handling– Once unloaded the goods must be moved to the

desired destination within the facility, whether this is an actual storage location or a shipping area in the case of a cross-dock facility

5. Warehouse Management (cont.)Warehouse

Operations

3. Storage– Products are held, even if for only a few minutes in a

storage area4. Order-Picking

– The products are removed from storage and assembled into appropriate quantities and assortments to fill customer orders

5. Staging– The assembled orders are moved to an area in the

warehouse in readiness for loading into a transportation vehicle bound for customer locations

6. Shipping– Involves verifying that the assembled orders are

correct and the actual loading of the transportation vehicles


1. Private Warehouse– Facility that is owned and operated by the firm that

own the products2. Public Warehouse– A firm that offers warehouse services to the public

for a fee based on the amount of spaced used and the number of shipments into or out of the facility

3. Contract Warehouse– Companies offer to build, own and operate

warehouse facilities for the benefit of clients who do not want to undertake those responsibilities themselves

5. Warehouse Management (cont.) Warehouse

Ownership

6. Transportation Management

Product Movement

• Basic value provided by transportation is to move inventory to specified destination

Product Storage

• While a product is in a transportation vehicle, it is being stored – storage at shipment origin or destination

Transport Functionality

There are 2 fundamental economic principles that impact transportation efficiency:1. Economy of scale – is the cost per unit of weight

decreases as the size of a shipment increases2. Economy of distance – refers to decreased

transportation cost per unit of weight as distance increase– Eg.: a shipment of 800km will cost less to

perform than 2 shipments of the same weight each moving 400km

6. Transportation (cont.) Transport

Principles

• Consolidation is one of the strategy used by logistics management to reduce transportation cost by combining small orders or shipments into one larger shipment.1. Market Area Consolidation – combining several

small shipments from one shipper that are going to the same market area into one shipment

2. Pooled Delivery Consolidation – combines small shipments from different shippers that are going to the same market area; normally handled by independent transportation companies

3. Scheduled Delivery Consolidation – establishing specific times when deliveries will be made to customers

6. Transportation (cont.)

Modes of Transportation

Rail Highway Water Pipeline Air


Operating Characteristics*

Truck Rail Water Pipe Air

Speed 2 3 4 5 1

Availability 1 2 4 5 3

Dependability 2 3 4 1 5

Capability 3 2 1 5 4

Frequency 2 4 5 1 3

Cost to Shippers**

2 3 4 5 1

Typical Uses medium & light mfg.;

wholesale & retail

distribution

heavy bulk commodities

bulk commodities;

agriculture products

petroleum; natural gas

small shipments; emergency shipments


* 1 = best; 5 = worst** 1 = highest cost; 5 = lowest cost

1. Common carriers – transportation companies that provide service to the public

2. Contract carriers – carriers that have specific contracts with a limited number of shippers

3. Private carriers – companies that own and operate transportation equipment to transport their own products

6. Transportation (cont.) Carrier

Types

Competitive Advantage Through Logistics

The success in the marketplace is based around the triangular linkage of the company, customers and its competitors.

Seek Benefits at Acceptable Cost

Asset Utilization

Asset Utilization

Customers

Value Value

Cost Differenti

al

Source of Competitive Advantage

Commercial Success

Cost Advantage Value Advantage

Summary• Logistics management provides for the flow and

storage of information and products between the firm and its suppliers (inbound), the firm and its customers (outbound) and the various plants, divisions and units of the firm.

• The objectives of logistics management is to provide customers with their required service benefits at the lowest total logistics cost

• A complete logistics management system comprises 6 major decision areas: facility network design, inventory management, order management, transportation management, warehousing management and packaging and materials handling management.

INDUSTRIAL LOGISTICS

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