CHAPTER 7 Managing Materials Flow. Materials Management Activities Anticipating materials requirements Sourcing and obtaining materials Introducing materials

CHAPTER 7

Managing Materials Flow

Materials Management Activities• Anticipating materials requirements

• Sourcing and obtaining materials

• Introducing materials into the organization

• Monitoring the status of materials as a current asset

Objectives of Integrated Materials Management

• Low costs

• High level of service

• Quality assurance

• Low level of tied-up capital

• Support of other functions

Differences Between Inbound and Outbound Transportation

• Market demand that generates the need for outbound movement is more uncertain and fluctuating

• Inbound transportation tends to involve bulk raw materials, supplies, or parts

• Firms exercise less control over inbound transportation due to total delivered pricing programs

Types of Forecasts• Demand forecast

• Supply forecast

• Price forecast

• Long-term

• Midrange

• Short-term

Forecasting Supply Chain Requirements

I hope you'll keep in mind that economic forecasting is far from a perfect science. If recent history's any guide, the experts have some explaining to do about what they told us had to happen but never did.

Ronald Reagan, 1984

What’s Forecasted in the Supply Chain?

•Demand, sales or requirements

•Purchase prices

•Replenishment and delivery times

Some Forecasting Method Choices

•Historical projectionMoving averageExponential smoothing

•Causal or associativeRegression analysis

•QualitativeSurveysExpert systems or rule-based

•Collaborative

Typical Time Series Patterns:Random

0

50

100

150

200

250

0 5 10 15 20 25

Time

Sa

les

Actual salesAverage sales

Example 3-Month Moving Average Forecasting

Month, iDemand formonth, i

Total demandduring past 3months

3-monthmovingaverage

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20 120 . .21 130 360/3 12022 110 380/3 126.6723 140 360/3 12024 110 380/3 126.6725 13026 ?

CR (2004) Prentice Hall, Inc.

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period current in forecast

period current in demand actual

period next for forecast

0.30 to 0.01 usually constant smoothing

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Actions When Forecasting is Not Appropriate

Seek information directly from customers

Collaborate with other channel members

Apply forecasting methods with caution (may work where forecast accuracy is not critical)

Delay supply response until demand becomes clear

Shift demand to other periods for better supply response

Develop quick response and flexible supply systems

Collaborative Forecasting

• Demand is lumpy or highly uncertain

• Involves multiple participants each with a unique perspective—“two heads are better than one”

• Goal is to reduce forecast error

• The forecasting process is inherently unstable

Collaborative Forecasting: Key Steps

• Establish a process champion

• Identify the needed Information and collection processes

• Establish methods for processing information from multiple sources and the weights assigned to multiple forecasts

• Create methods for translating forecast into form needed by each party

• Establish process for revising and updating forecast in real time

• Create methods for appraising the forecast

• Show that the benefits of collaborative forecasting are obvious and real

Managing Highly Uncertain Demand

Delay forecasting as long as possible

Prioritize supply by product’s degree of uncertainty (supply to the more certain products first)

Apply the principle of postponement to the most uncertain products (delay committing to a final product form until an order is received)

Create flexible supply to changing demand (alter capacity and output rates through subcontracting, computer technology, multi-purpose processes, etc.)

Be able to respond quickly to uncertain demand levels

Total Quality Management (TQM)

the application of quantitative and human resources to improve the material services supplied to an organization, all the processes within the organization, and the degree to which the needs of customers are met - now and in the future.

Administration and Control of Materials Flow

• Kanban/Just-in-time » Kanban (Toyota Production System)» JIT

• MRP » Materials requirements planning (MRP I)» Manufacturing resource planning (MRP II)

• DRP » Distribution requirements planning (DRP I)» Distribution resource planning (DRP II)

Benefits Resulting from Implementing Just-in-Time

• Improved inventory turns.

• Improved customer service.

• Decreased warehouse space.

• Improved response time.

• Reduced logistics costs.

• Reduced transportation costs.

• Improved quality of vendor products.

• Reduced number of vendors.

• Reduced number of transportation carriers.

Elements of an MRP I System

Inventorytransactions

Customers’orders

Forecasts Engineering changes

Master productionschedule (which

products to produce, inwhat quantity, and when)

Bill-of-materials file(product structure

and routing)

Inventory status file (finished items, work in progress, planned orders)

Planned schedules and various other reports

MRP I system

Source: MCB University Press Ltd., Amrik Sohal, and Keith Howard, "Trends in Materials Management," International Journal of Physical Distribution and Materials Management 17, no. 5 (1987), p.11.

MRP SchedulingExample

The master schedule for a particular part over the next 8 weeks shows requirements of:

1 2 3 4 5 6 7 8150 500 350 300 1000 800 700 500

The average lead-time to receive these parts from a vendor is 2 weeks. A previous order for 800 units has been placed with the vendor and will arrive by week 2. An inventory of 200 units is currently on hand.

Lot-for-lot scheduling

Purchase orders are matched on a one-for-one basis with requirements.


MRP Example (Cont’d)

Week 1 2 3 4 5 6 7 8

Require-ments 150 500 350 300 1000 800 700 500

Scheduledreceipts 800 300 1000 800 700 500

Quantityon hand 200 50 350 0 0 0 0 0 0

Purchasereleases 300 1000 800 700 500

Lot-for-lot scheduling (Cont’d)

CR (2004) Prentice Hall, Inc. 10-11

Order min. qty.

MRP Example (Cont’d)

Week 1 2 3 4 5 6 7 8

Require-ments 150 500 350 300 1000 800 700 500

Scheduledreceipts 800 300 800 800 700 500

Quantityon hand 200 50 350 0 200 0 0 0 0

Purchasereleases 500 800 800 700 500

Order minimumsSuppose the vendor has an order minimum of 500 units.

CR (2004) Prentice Hall, Inc. 10-13

Vendor Managed Inventory

•The supplier usually owns the inventory at the customer’s location

•The supplier manages the inventory by any means appropriate and plans shipment sizes and delivery frequency

•The buyer provides point of sale information to the supplier

•The buyer pays for the merchandise at the time of sale

•The buyer dictates the level of stock availability required

Elements of an MRP II System

Materials requirements

planning(MRP)

Capacity requirements

planning (CRP)

Execute capacity plans

Execute material plans

Realistic?

Order (production plan)

Order (production plan)

Inventory records

Yes

No

Source:Karl A. Hatt, ‘What’s the Big Deal about MRP II?” Winning Manufacturing 5, no. 2 (1994), p. 2.

Elements of a DRP II System

Source: “How DRP Helps Warehouses Smooth Distribution,” Mondern Materials Handling 39, no. 6 (April 9, 1984), p. 53. Modern Materials Handling, copyright 1984 by Cahners Publishing Company, Division of Reed Holdings.

Distribution center

Distribution center

Distribution center

Distribution center

Customers

Distribution center

Distribution center

Regional warehouse

Plantwarehouse

Regional warehouse

Distributionresource planning

Elements of a DRP II System (cont.)

Source: “How DRP Helps Warehouses Smooth Distribution,” Mondern Materials Handling 39, no. 6 (April 9, 1984), p. 53. Modern Materials Handling, copyright 1984 by Cahners Publishing Company, Division of Reed Holdings.

Plantwarehouse

Final assembly (manufacturing)

Subassembly B Subassembly C

Subassembly A Part C

Raw materials

Part C

Part D

Part B

Part E

Part A

Material requirements planning

CHAPTER 8

Transportation

Factors Influencing Transportation Costs

• Product-related factors– density

– stowability

– ease or difficulty of handling

– liability

• Market-related factors– Degree of competition

– Location of markets

– Government regulation

– Balance or imbalance of freight traffic

– Seasonality

– Domestic versus international movement

Transportation Impacts on Customer Service

• Dependability

• coverage

• flexibility

• loss and damage - FEDEX

• Time Definite Delivery

Terms of Sale and Corresponding Buyer and Seller Responsibilities

Source: Harold Fearon, Donald Dobler, and Ken Killen, The Purchasing Handbook, National Association of Purchasing Management, 1993, McGraw-Hill.

1.Terms of Sale FOB Shipping Point, FREIGHT COLLECT

Buyer pays freight charges.

Buyer bears freight charges.

Buyer owns goods in transit.

Buyer files claims (if any).

Title passes to buyer

Freight charges paidby buyer

Seller Buyer

2.Terms of Sale FOB Shipping Point, FREIGHT ALLOWED

Seller pays freight charges.

Seller bears freight charges.

Buyer owns goods in transit.

Buyer files claims (if any).


Freight charges paidby seller

Seller Buyer

3.Terms of Sale FOB Shipping Point, FREIGHT PREPAID AND CHARGED BACK

Seller pays freight charges.Buyer bears freight charges.Buyer owns goods in transit.Buyer files claims (if any).


Freight charges paid by seller, then collected from buyer by adding amount to invoice.

Seller Buyer

Terms of Sale and Corresponding Buyer and Seller Responsibilities (cont.)

Source: Harold Fearon, Donald Dobler, and Ken Killen, The Purchasing Handbook, National Association of Purchasing Management, 1993, McGraw-Hill.

6.Terms of Sale FOB Destination, FREIGHT COLLECT AND ALLOWED


Seller Buyer

Buyer pays freight charges.Seller bears freight charges.Seller owns goods in transit.Seller files claims (if any).

Freight charges paid by buyer, then charged to seller by deducting amount from invoice.

4.Terms of Sale FOB Destination, FREIGHT COLLECT

Buyer pays freight charges.

Buyer bears freight charges.

Seller owns goods in transit.

Seller files claims (if any).


Seller Buyer

Freight charges paid by buyer

5.Terms of Sale FOB Destination, FREIGHT PREPAID

Seller pays freight charges.

Seller bears freight charges.

Seller owns goods in transit.

Seller files claims (if any).

Freight charges paid by seller


Seller Buyer

Five Basic Transportation Modes• Motor

• Rail

• Air

• Water

• Pipeline

Comparison of US Domestic Transportation Modes

Economic Characteristics

Motor Rail Air Water Pipeline

Cost

Moderate

Low

High

Low

Low

Market coverage

Point-to-point

Terminal-to-terminal




Number of competitors

Many Moderate Moderate Few Few

Predominant traffic

All types Low-moderate value, moderate-high- density

High value, low moderate density

Low value, high density

Low value, high density

Average length of haul

Short to long Medium to long

Medium to long

Medium to long

Medium to long

Equipment capacity (tons)

10-25 50-12,000 5-125 1,000-60,000 30,000-2,500,000

Comparison of US Domestic Transportation Modes (cont.)

Motor Rail Air Water Pipeline

Speed

Moderate

Slow

Fast

Slow

Slow

Availability High Moderate Moderate Low Low

Consistency (delivery time variability)

High Moderate High Low-moderate

High

Loss and damage Low Moderate-high

Low Low-moderate

Low

Flexibility (adjustment to shipper’s needs)

High Moderate Low-moderate

Low Low

Service Characteristics

Rail in South Africa

• Excess capacity

• Good rail network

• Lousy service reputation

• Companies are considering buying own systems

Nonoperating Third Parties• Freight forwarders

• Shippers’ associations or cooperatives

• Transportation brokers

• Intermodal marketing companies or shippers’ agents

• Third-party logistics service providers

Major U.S. Agencies Regulating Transportation

• Surface Transportation Board

• Department of Transportation

• Federal Maritime Commission

• Federal Energy Regulatory Commission

The Domestic Transportation System

• Transportation is the movement of goods and people between two points– Nodes– Links– Air, water, motor carriage, rail, pipeline– Intermodal transportation– Routing guides

Switching Milk Cans from a

Farmer’s Buggy to a Truck on a Rural Road in

North Carolina, 1929

Early form of intermodal transport and cross docking

The Domestic Transportation System

• Supply chain success requires transportation– Transportation costs are affected by node location– Inventory requirements are influenced by mode– Packaging requirements are dictated by mode– Materials handling equipment and design of the

docks are dictated by mode– Maximum consolidation of loads achieved with

order-management technology reduces costs– Customer service goals influence carrier choice

Product vs. Pricing

• Ease/difficulty of load• equipment availability• capacity of equipment

• Inefficiencies drive up prices

• zones• unexpected costs -

increase in cost of diesel

Target Markets

• Cost of reaching market

• network on other end

• Shipping to Hawaii - Matson (small monopoly)

• $6/gal for milk in Hawaii

• Facility location based on trans network - Reno/Ontario/Atlanta/Memphis

Product related factors

• Density of product -

• stowability

• special handling equipment

• special shipping containers

• hazmat - liability

Common/contract/exempt vs. private

• All shippers• any shipper• contract - limited

number under specific contract

• Private fleet• Move only company’s

products• lease or own

Small-Volume Shippers

• Parcels are packages weighing up to 150 pounds

• Parcel carriers are firms that specialize in small packages (≤ 150 pounds)– UPS– FedEx

• Other carriers include– USPS– Passenger carriers—air and bus

LTL Shippers

• Less-than-truckload (LTL)– 150 to 10,000 pounds– Too big to be handled manually, too small to fill a

truck– LTL trucks carry shipments from many shippers– Most large firms are LTL carriers

• Yellow Freight• Roadway Express• ABF Freight System

LTL Shippers

• Less-than-truckload (LTL) (continued)– Process

• Local pick-up

• Origin terminal used to load aboard line haul

• Line haul to terminal near destination

• Destination local delivery on smaller trucks

• Consignee receives

LTL Shippers

• Air Cargo– Can be given directly to airline– Can be given to freight forwarder– Most carried on passenger airlines– Types of products

• High in value• Perishable• Require urgent delivery

– Shipped in air containers made to fit fuselage

LTL Shippers

• Freight forwarders– buy space at TL (truckload) rate and sell at

somewhat less than LTL rate– pick-up and deliver; motor carriers or railroads

do line-haul– function as transportation departments of small

firms– may specialize in specific cargoes

LTL Shippers• Air forwarders

– Consolidate shipments– Tender to airlines in containers ready for loading– Forwarders provide retailing function– Airline provides wholesaling function

• Shipper’s cooperatives– Similar to air and freight forwarders but are not-for-

profit organizations – Membership (shippers) receive any monies earned in

excess of costs

LTL Shippers• 3PLs

– May have equipment—trucks, trailers, terminals– May deal in information only– May operate Internet-based auctions

• Brokers– A facilitator who brings together a buyer and seller– May consolidate LTL shipments and then give to

truckers, forwarders, or shippers’ associations

Truckload and Carload Shippers

• Shipments of 20,000 to 30,000 pounds• Fill one truck• Cost less per pound than LTL shipments

– The shipper loads and consignee unloads the trailer– Load goes from shipper to consignee without

passing through a terminal– Paperwork, billing, and control costs are the same


• Rate per haul may be negotiable

• Largest TL companies– Schneider National Van Carriers– J.B. Hunt Transport

• Many firms are smaller, without national presence

• Smaller firms may be owner-operators


• Private transportation is when the shipper provides and operates its own equipment

• Dedicated equipment is carrier owned but assigned to serve specific customers for indefinite periods

• Shippers and consignees using railroad service need sidings on their property

Large Bulk Shippers

• Bulk cargo – Travels in loose rather than in packaged form – Handled by pumps, scoops, conveyor belts, or the

force of gravity– Has various handling characteristics– Moves by

• Truckload• Railroad• Water carrier• Pipeline

Large Bulk Shippers

• Bulk cargo (continued)– Dry Bulk-Handling Systems

• Coal car unloading facility

• Grain elevator

– Vehicle and Vessel Equipment Choice

Comparison of Modes

• Costs per ton-mile

• Speed

• On-time delivery

Transportation Regulation and Deregulation

• Exceptions to economic deregulation– Rail service to captive shippers– Household goods movers– Many petroleum pipelines– Many natural gas pipelines– Some inland waterway traffic– Some water transport between mainland U.S.

and Hawaii, Puerto Rico, and Alaska

Transportation Rates

• Rate structure deals with three factors– Relationships between different products– Relationships between shipments of different

weights– Relationships between different distances

• Three factors are defined numerically and then tied to a rate of cents per hundredweight (cwt)

Transportation Rates

• To find LTL rates usually need:– Origin and destination zip codes– Weight of shipment– Classification of shipment– Supplemental services needed– Discount awarded to shipper by carrier

• Rates may be on carrier web sites

Which Mode?

• Motor - 75% of tonnage - average move = 400 miles

• Use motor for moves > 400 < 1000

• > 1000 air and smaller package - air

• > 500 and large - rail

• average rail move = 850 miles

Importance of Modes


By Products Hauled

Air--very high-valued, time sensitive products Truck--moderately high-valued, time sensitive

products. Many finished and semifinished goods Rail--low-valued products including many raw

materials

Water--very low-valued products moved domestically, high -valued if moved internationally

Pipe--generally limited to petroleum products and

natural gas

Importance of Modes (Cont’d)

By Volume Moved

Percent Transportation of total mode volume Railroads 36.5% Trucks 24.9 Inland waterways 16.3 Oil pipelines 22.0 Air 0.3 Total 100.0


Performance Overview Air generally fast over long distances and a fair

degree of relative variability

Water is very slow and moderately reliable

Pipe is very slow but reliable

Truck is moderately fast and reliable

Rail is slower and less reliable than truck

Relative Costs of Performance


Price, Mode ¢/ton-mile Rail 2.28 Truck 26.19 Water 0.74 Pipeline 1.46 Air 61.20

Mode/Service Selection


The problem Define the available choices Balance performance effects on inventory against

the cost of transport Methods for selection

Indirectly through network configuration Directly through channel simulation Directly through a spreadsheet approach as follows:

Alternatives Cost types Air Truck Rail Transportation In-transit inventory Source inventory Destination inventory

Rail • 1-UP; 2-BNSF; 3-Canadian National; 4-CSX• 175K miles of rail• lacks versatility and flexibility• Oct 04- UP had 140 loads waiting for power• Average times for rail up over past 3 months• Equipment shortages• BNSF – record profits last 2 years• BNSF - all switching and routing from World Wide

Operations Center (WWOC) in Fort Worth

NUMBER OF WAREHOUSES IN THE NETWORK

AVERAGE LEAD TIME

TO CUSTOMERS

(DAYS)

BEST WAREHOUSE LOCATIONS

One 2.28 Bloomington, IN

Two 1.48 Ashland, KY Palmdale, CA

Three 1.29 Allentown, PA Palmdale, CA McKenzie, TN

Four 1.20Lancaster, PA Palmdale, CA Chicago, IL

Meridian, MS

Five 1.13Summit, NJ Palmdale, CA Chicago, IL

Dallas, TX Macon, GA

Six 1.08Summit, NJ Pasadena, CA Chicago, IL

Dallas, TX Macon, GA Tacoma, WA

Seven 1.07

Summit, NJ Pasadena, CA Chicago, IL

Dallas, TX Gainesville, GA Tacoma, WA

Lakeland, FL

Eight 1.05

Summit, NJ Pasadena, CA Chicago, IL


Lakeland, FL Denver, CO

Nine 1.04

Summit, NJ Alhambra, CA Chicago, IL


Lakeland, FL Denver, CO Oakland, CA

Ten 1.04

Summit, NJ Alhambra, CA Chicago, IL


Lakeland, FL Denver, CO Oakland, CA

Mansfield, OH ©2008 Chicago Consulting - Supply Chain Consultants

http://www.chicago-consulting.com/

Distribution Centers and Transportation

• Trade off between inventory and transportation costs

• Closer to customers allows company to claim “Green” friendly

Transportation Stuff

• Rail volume up 1.9% in January – 1.556 million car loads

• Intermodal traffic = 1.068 million containers/trailers

• Fuel Surcharges unpredictable – one company covered 96% of fuel costs with surcharges last year

• Hotel rooms in Vegas added an energy surcharge 5 years ago and still add to room charges

Chapters 7 and 8

• Modes of Transportation• Mode Selection • MRP• DRP• Inbound vs. Outbound• Forecasting • Just in Time• LTL vs TL

Next Week

• Chapter 9 and 10

Documents

CHAPTER 7 Managing Materials Flow. Materials Management Activities Anticipating materials requirements Sourcing and obtaining materials Introducing materials