Enterprise Resource Planning (Erp) Applied To Logistics & Supply Chain MANAGEMENT (2 Credits)

UNIVERSITY OF ECONOMIC OF HO CHI MINH CITY
School of International Business and Marketing
ENTERPRISE RESOURCE PLANNING (ERP)

APPLIED TO LOGISTICS & SUPPLY CHAIN
MANAGEMENT (2 credits)
This textbook is for internal circulation only | 2020

1
COURSE INTRODUCTION
Learning Objectives
• Understand the overview of ERP
• Recognize common problems in SCM
• Understand theoretical supply chains and common types of problems
• Know how to use Excel Solver and QM for Windows software
applications to solve transportation and inventory problems in SCM
2
COURSE INTRODUCTION
4. Assessment and Grading (TBA)
No Assessment Weight Note
1 Attendance and In-class discussion 20%
2 Groupwork & homework 30%
3 Final assessment (group project + 50%

presentation)
3
COURSE INTRODUCTION
WEEK LEARNING OBJECTIVES AND TOPICS
Week 1 Course introduction
Grouping
INTRODUCTION TO ERP (Group discussion and presentation)
Software applications for transportation and inventory problems in SCM
SOFTWARE APPLICATIONS IN TRANSPORTATION
Transportation problems (P&T Co. case study)
Homework
Week 2 VARIATION OF TRANSPORTATION PROBLEMS
• Supply ≠ Demand (Metro Water, Better Products Co.)
• Combination cannot be used for distributing units (Case study Energetic)
Homework
4
COURSE INTRODUCTION
Week 3 VARIATION OF TRANSPORTATION PROBLEMS (cont.)
• Unstable Demand between Min and Max Range (Case Study
Middletown)
• The objective is to maximize profit (Case Study Nifty Co.)
Quiz 1
Week 4 SOFTWARE APPLICATIONS IN INVENTORY MANAGEMENT

Introduction to Inventory
Cost Components of Inventory Models
The Basic Economic Order Quantity (EOQ) Model
Case study: The Atlantic coast tire corp. (ACT) problem
Homework 5
COURSE INTRODUCTION
Week 5 VARIATION OF EOQ MODEL IN INVENTORY MANAGEMENT

The EOQ model with Planned Shortages (ACT Co.)
The EOQ Model with Quantity Discounts (ACT Co.)
The EOQ Model with Gradual Replenishment (SOCA)
Homework
Week 6 Wrap – up
Final Exam (Group project and presentation)
6
INTRODUCTION TO ERP
• Group discussion and presentation
7
Common ERP problems
• Purchasing
• Production planning
• Sales – Distribution
• Inventory management
• Warehousing management
• HRM
• Finance
8
Common problems in SCM
• Supply chain refers to processes that move information and material to
and from the manufacturing and service processes of the firm. These
include the logistics processes that physically move product and the
warehousing and the storage processes that position products for quick
delivery to the customers.
(Jacobs & Chase, 2013).
9
10
Transportation problems
• Transportation problems received this name because many of their
applications involve determining how to transport goods optimally (
Hillier, F., & Hillier, M., 2013).
• In mathematics and economics, transportation problems refer to the
study of optimal transportation and allocation of resources.
11
Inventory problems
• The inventory control problems are problems faced by a firm that must
decide how much to order in each time period to meet demand for its
products.
• Typical questions include:
oHow much to store/order?
oWhen to place order?
oSize of each order?
oHow to classify inventory?
12
Software applications for transportation and inventory
problems in SCM
• Managers usually search best solutions to optimize the enterprise’s
resources usage by implementing software applications in order to
integrate all business activities.
• Some of used software applications for transportation and inventory
problems in SCM are Excel Solver and QM for Windows.
• QM for Windows application assist managers to make decisions on how
to use resources best.
13
Software applications in this course
• Excel Solver is a Microsoft Excel add-in program you can use for what-if
analysis (Microsoft, 2020).
• POM-QM for Windows (also known as POM for Windows and QM for
Windows) is a Decision Science software package developed by Prentice
Hall (Howard J. Weiss, 2010).
Free download at:
• https://qm-for-windows.software.informer.com
• https://wps.prenhall.com/bp_weiss_software_1/1/358/91664.cw/index.
html
14
SOFTWARE APPLICATIONS IN TRANSPORTATION
Learning Objectives:
• Understand transportation problem characteristics
• Apply Solver and QM for Windows to solve transportation problems
• Understand the variation of transportation problems
15
Characteristics of Transportation Problems
• Transportation problems in general are concerned (literally or figuratively)
with distributing any commodity from any group of supply centers, called
sources, to any group of receiving centers, called destinations, in such a
way as to minimize the total distribution cost (Hillier, F. & Hillier, M.,
2013).
16
The Requirements Assumption
Each source has a fixed supply of units, where this entire supply
must be distributed to the destinations.
Each destination has a fixed demand for units, where this entire
demand must be received from the sources.
The Feasible Solutions Property
A transportation problem will have feasible solutions if and only if
the sum of its supplies equals the sum of its demands.
17
The Cost Assumption
• The cost of distributing units from any particular source to any
particular destination is directly proportional to the number of units
distributed.
• This cost is just the unit cost of distribution times the number of units
distributed.
18
Terminology for a General Model in Transportation Problem
• Units of a commodity
• Sources
• Destinations
• Supply from a source
• Demand at a destination
• Cost per unit distributed from a source to a destination
19
Variation of transportation problems
• Supply ≠ Demand
• Combination cannot be used for distributing units
• Unstable Demand between Min and Max Range
• The objective is to maximize profit
20
Transportation problems (P&T case study)
• The P&T Company is a small family-owned business. It receives raw
vegetables, processes and cans them at its canneries, and then
distributes the canned goods for eventual sale. One of the company’s
main products is canned peas.
• The peas are prepared at three canneries (near Bellingham, Washington;
Eugene, Oregon; and Albert Lea, Minnesota) and then shipped by truck to
four distributing warehouses in the western United States (Sacramento,
California; Salt Lake City, Utah; Rapid City, South Dakota; and
Albuquerque, New Mexico).
21
Transportation problems (P&T case study)
• The company’s current approach for many years, the company has used the
following strategy for determining how much output should be shipped from
each of the canneries to meet the needs of each of the warehouses. Current
shipping strategy are:
• Since the cannery in Bellingham is furthest from the warehouses, ship its output to its
nearest warehouse, namely, the one in Sacramento, with any surplus going to the
warehouse in Salt Lake City.
• Since the warehouse in Albuquerque is furthest from the canneries, have its nearest
cannery (the one in Albert Lea) ship its output to Albuquerque, with any surplus going to
the warehouse in Rapid City.
• Use the cannery in Eugene to supply the remaining needs of the warehouses.
For the upcoming harvest season, an estimate has been made of the output
from each cannery, and each warehouse has been allocated a certain amount
from the total supply of peas. This information is given in Table 2.1.
22
P&T current approach
23
P&T CURRENT APPROACH
Table 2.1 – Shipping data for the P&T Co.
Cannery Output Warehouse Allocation
Bellingham 75 truckloads Sacramento 80 truckloads
Eugene 125 truckloads Salt Lake City 65 truckloads
Albert Lea 100 truckloads Rapid City 70 truckloads
Total 300 truckloads Albuquerque 85 truckloads
Total 300 truckloads

From \ To Warehouse
Cannery Sacramento Salt Lake City Rapid City Albuquerque

Current
Bellingham 75 0 0 0
Shipping
Eugene 5 65 55 0
Plan
Albert Lea 0 0 15 85
From \ To Warehouse

Shipping
Bellingham $464 $513 $654 $867
Cost per
Eugene 352 416 690 791
Truckload
Albert Lea 995 682 388 685
Total shipping cost = 75($464) + 5($352) + 65($416) + 55($690) + 15($388) + 85($685)

= $165,595
QUESTIONS
They now are reexamining the current shipping strategy to see if

P&T Co. can develop a new shipping plan that would reduce the
total shipping cost to an absolute minimum.
1. If you were the CEO of the P&T Co., what do you concern in
this case study?
2. How do you solve this problem?

26
P&T case study
The Requirements Assumption

• Each source has a fixed supply of units, where this entire supply must
be distributed to the destinations. Similarly, each destination has a fixed
demand for units, where this entire demand must be received from the
sources.
• This assumption that there is no leeway in the amounts to be sent or
received means that there needs to be a balance between the total supply
from all sources and the total demand at all destinations.
P&T case study
The Feasible Solutions Property
• A transportation problem will have feasible solutions if and only if the
sum of its supplies equals the sum of its demands.
P&T case study
The Model
• Any problem (whether involving transportation or not) fits the model for
a transportation problem if it
(a) can be described completely in terms of a table like Table 2.4 that
identifies all the sources, destinations, supplies, demands, and unit costs,
and
(b) satisfies both the requirements assumption and the cost
assumption. The objective is to minimize the total cost of distributing the
units.
29
P&T case study
The Unit cost Data for the P&T Co. Problem Formulated as a
Transportation Problem
From \ To Warehouse
Bellingham $464 $513 $654 $867
Eugene 352 416 690 791
Albert Lea 995 682 388 685

The Network Representation of a Transportation Problems
distributing a product from
several sources or origins to
several destinations
Figure 2.1 – Network Representation of a P&T Problem

31
P&T case study
• The Transportation Problem is a linear programming problem to
demonstrate that the P&T Co. problem (or any other transportation
problem) is, in fact, a linear programming problem, let us formulate its
mathematical model in algebraic form.
• Let xij be the number of truckloads to be shipped from Cannery i to
Warehouse j for each i = 1, 2, 3 and j = 1, 2, 3, 4.
• The objective is to choose the values of these 12 decision variables (the
xij) so as to
32
Minimize cost = 464x11 + 513x12 + 654x13 + 867x14 + 352x21 + 416x22 + 690x23 + 791x24 +
995x31 + 682x32 + 388x33 + 685x34,
subject to the constraints
x11 + x12 + x13 + x14 = 75
x21 + x22 + x23 + x24 = 125
x31 + x32 + x33 + x34 = 100
x11 + x21 x31 = 80
x12 + x22 + x32 = 65
x13 + x23 + x33 = 70
x14 + x24 + x34 = 85
and xij ≥ 0 (i = 1, 2, 3; j = 1, 2, 3, 4), xij is integer number

33
Solving Transportation Problems
• Reasons for using the transportation simplex method
34
Applying Excel Solver and QM for Windows for the P&T Co.
problem
• Applying Excel Solver
35
Applying Excel Solver to Formulate and Solve Transportation
Problems
• The decisions to be made are the number of truckloads of peas to ship
from each cannery to each warehouse.
• The constraints on these decisions are that the total amount shipped
from each cannery must equal its output (the supply) and the total
amount received at each warehouse must equal its allocation (the
demand).
• The overall measure of performance is the total shipping cost, so the
objective is to minimize this quantity.
36
• Figure 2.2 – Excel Solver illustration for P&T
37
• Figure 2.2 – Excel Solver illustration for P&T
38
Applying Excel Solver and QM for Windows for the P&T Co.
problem
Applying QM for Windows
• Practice directly in QM for Windows
Step 1: Open QM → Modules → Transportation
Step 2: Define all sources and destinations (Figure 2.3)
Step 3: Input data (Figure 2.4)
Step 4: Click ‘Solve’
39
Figure 2.3 – Create data set for the P&T Co. Transportation problem
40
Figure 2.4 – Input data for the P&T Co. Transportation problem
41
A LESSON FROM P&T CASE STUDY
42
VARIATION OF TRANSPORTATION PROBLEMS
Learning objectives:
• Understand variation of transportation problems
• Enable to solve the transportation problems in Solver and QM for
windows
Variation of transportation problems
• Supply ≠ Demand
• Combination cannot be used for distributing units
• Unstable Demand between Min and Max Range
• The objective is to maximize profit
43
VARIATION OF TRANSPORTATION PROBLEMS
Supply ≠ Demand (Metro Water, Better Products Co.)
• Metro Water District is an agency that administers water distribution in a
large geographic region. The region is fairly arid, so the district must
purchase and bring in water from outside the region.
• The sources of this imported water are the Colombo, Sacron, and Calorie
rivers. The district then resells the water to users in its region. Its main
customers are the water departments of the cities of Berdoo, Los Devils,
San Go, and Hollyglass.
44
Variant 1: Supply ≠ Demand
Metro Water
• It is possible to supply any of these cities with water brought in from any of the
three rivers, with the exception that no provision has been made to supply
Hollyglass with Calorie River water. However, because of the geographic layouts
of the aqueducts and the cities in the region, the cost to the district of
supplying water depends upon both the source of the water and the city being
supplied.
• The variable cost per acre foot of water for each combination of river and city is
given in Table 3.1 Using units of 1 million-acre feet, the bottom row of the table
shows the amount of water needed by each city in the coming year (a total of
12.5). The rightmost column shows the amount available from each river (a
total of 16).
45
Metro Water (cont.)
• Since the total amount available exceeds the total amount needed,
management wants to determine how much water to take from each
river, and then how much to send from each river to each city. The
objective is to minimize the total cost of meeting the needs of the four
cities.
46
Metro Water (cont.)
• Table 3.1 – Water Resources Data for Metro Water District
Cost Per Acre Foot

To
From Berdoo Los Devils San Go Hollyglass Available
Colombo $160 $130 $220 170 5

River
Sacron River $140 $130 190 150 6
Calorie River $190 $200 230 - 5
Needed 2 5 4 1.5 (million acre feet)
47
Variant 2: Combination cannot be used for distributing units
Energetic
• The Energetic Company needs to make plans for the energy systems for a new
building.
• The energy needs in the building fall into three categories: (1) electricity, (2)
heating water, and (3) heating space in the building. The daily requirements for
these three categories (all measured in the same units) are 20 units, 10 units,
and 30 units, respectively.
• The three possible sources of energy to meet these needs are electricity,
natural gas, and a solar heating unit that can be installed on the roof. The size
of the roof limits the largest possible solar heater to providing 30 units per day.
However, there is no limit to the amount of electricity and natural gas available.
48
Energetic (cont.)
• Electricity needs can be met only by purchasing electricity. Both other
energy needs (water heating and space heating) can be met by any of the
three sources of energy or a combination thereof.
• The unit costs for meeting these energy needs from these sources of
energy are shown in Table 3.2 below. The objectives of management are
to minimize the total cost of meeting all the energy needs.
49
Energetic (cont.)
• Table 3.2 – Cost data for the Energetic Co. Problem
Unit Cost
Need
Electricity Water Heating Space heating
Source
Electricity $400 $500 $600
Natural Gas ⁃ $600 $500
Solar Heater ⁃ $300 $400
50
WEEK 3
VARIATION OF TRANSPORTATION PROBLEMS (cont.)

• Unstable Demand between Min and Max Range (Case Study
Middletown)
Quiz 1
51
Different variation of transportation problems
• Supply ≥ Demand (Case Study Metro Water)
• Supply ≤ Demand (Case Study Better Products Co.)
• Combination cannot be used for distributing units (Case study Energetic)
• Unstable Demand between Min and Max Range (Case Study Middletown)
52
Variant 3: Unstable Demand between Min and Max Range
Middletown
• The Middletown School District is opening a third high school and
thus needs to redraw the boundaries for the areas of the city that will
be assigned to the respective schools.
• For the preliminary planning, the city has been divided into nine
tracts with approximately equal populations. (Subsequent detailed
planning will divide the city further into over 100 smaller tracts.)
53
Variant 3: Unstable Demand between Min and Max Range
Middletown (cont.)
• The school district management has decided that the appropriate
objective in setting school attendance zone boundaries is to minimize
the average distance that students must travel to school.
• The unit costs for meeting these energy needs from these sources of
energy are shown in Table 3.3. The objective of management is to
minimize the total cost of meeting all the energy needs.
54
Variant 3: Unstable Demand between Min and Max
Range
Middletown (cont.)
• Table 3.3 – Data for the Middletown school district problem
Distance (Miles) to School Number of High
Tract
1 2 3 School students
1 2.2 1.9 2.5 500
2 1.4 1.3 1.7 400
3 0.5 1.8 1.1 450
4 1.2 0.3 2.0 400
5 0.9 0.7 1.0 500
6 1.1 1.6 0.6 450
7 2.7 0.7 1.5 450
8 1.8 1.2 0.8 400
9 1.5 1.7 0.7 500
Minimum enrollment 1,200 1,100 1,000
Maximum enrollment 1,800 1,700 1,500 55
Variant 4: The objective is to maximize profit
Nifty
• Read the case on LMS.
56
Variant 4: The objective is to maximize profit
Nifty
• Table 3.4 – Data for the Nifty Co. Problem
Unit profit
Customer Production
Plant 1 2 3 4
quantity
1 55 42 46 53 8,000
2 37 18 32 48 5,000
3 29 59 51 35 7,000
Minimum purchase 7,000 3,000 2,000 0
Requested purchase 7,000 9,000 6,000 8,000

57
Glossary of Transportation
• Demand at a destination: The number of units that need to be received
by this destination from the sources.
• Destinations: The receiving centers for a transportation problem.
• Network simplex method: A streamlined version of the simplex method
for solving distribution network problems, including transportation and
assignment problems, very efficiently.
• Sources: The supply centers for a transportation problem.
58
Glossary of Transportation
• Supply from a source: The number of units to be distributed from this
source to the destinations.
• Tasks: The jobs to be performed by the assignees when formulating a
problem as an assignment problem.
• Transportation simplex method: A streamlined version of the simplex
method for solving transportation problems very efficiently.
59
WEEK 4
• SOFTWARE APPLICATIONS IN INVENTORY MANAGEMENT

• Introduction to Inventory
• Cost Components of Inventory Models
• The Basic Economic Order Quantity (EOQ) Model
• Case study: The Atlantic coast tire corp. (ACT) problem
60
SOFTWARE APPLICATIONS IN INVENTORY MANAGEMENT
Learning Objectives:
After studying this topic, you are being able to:
• Identify the cost components of inventory models
• Describe the basic economic order quantity (EOQ) model
• Use a square root formula to obtain the optimal order quantity for this
model
• Use Excel Solver and QM for windows software to solve different
inventory problems
61
Introduction to Inventory Management
Jacobs & Chase (2017) 62

• Inventories pervade the
business world, including
manufacturers,
wholesalers, and retailers.
• For ex.: The average cost of
inventory in the United
States is 30 to 35 percent of
its value.
• The purpose of inventory
management is to
determine how much and
when to order
Jacobs & Chase (2017)
63
• Managers use scientific inventory management comprising the following
steps:
a. Formulate a mathematical model describing the behavior of the
inventory system.
b. Seek an optimal inventory policy with respect to this model.
c. Use a computerized information processing system to maintain a
record of the current inventory levels.
d. Using this record of current inventory levels, apply the optimal
inventory policy to signal when and how much to replenish inventory.
64
• Acquisition cost: The direct cost of replenishing inventory, whether
through purchasing or manufacturing of the product.
Notation: c = unit acquisition cost.
• Setup cost: The setup cost to initiate the replenishing of inventory,
whether through purchasing or manufacturing of the product.
Notation: K = setup cost.
65
• Holding cost: The cost of holding units in inventory
Notation: h = annual holding cost per unit held = unit holding cost.
• Shortage cost: The cost of having a shortage of units, i.e., of needing
units from inventory when there are none there.
Notation: p = annual shortage cost per unit short = unit shortage
cost.
66
• Combining of these cost components:
Annual acquisition cost = c times number of units added to inventory per
year.
Annual setup cost = K times number of setups per year.
Annual holding cost = h times average number of units in inventory
throughout a year.
Annual shortage cost = p times average number of units short throughout
a year.
TC = total inventory cost per year = sum of the above four annual costs.
TVC = total variable inventory cost per year = sum of the variable annual
costs.
67
Where the Model is applicable
• A constant demand rate.
• The order quantity to replenish inventory arrives all at once just when
desired.
• Planned shortages are not allowed.
Reorder point = (daily demand) x (lead time).
𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑 𝑟𝑎𝑡𝑒
Daily demand =
𝑡𝑜𝑡𝑎𝑙 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑑𝑎𝑦𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
68
• Annual demand rate (denoted as D): number of units being withdrawn
from inventory per year
• Lead time: The amount of time between the placement of an order and
its receipt
• Reorder point: inventory level when placing an order
69
• Figure 4.1 – The pattern of inventory levels over time for a product
70
The Objective of the Model
• Since the model assumes that the order arrives at the same moment that
the inventory level drops to 0, this delivery immediately jumps the
inventory level up from 0 to Q. With the constant demand rate, the
inventory level then gradually drops down over time at this rate until the
level reaches 0 again, at which point the process is repeated. This saw-
toothed pattern is depicted in Figure 4.2. The pattern is the same as in
Figure 4.1, where Q = 1,000, but now we want to choose the best value of
Q.
71
• Figure 4.2 – The pattern of inventory levels over time assumed by the basic
EOQ model
72
• The specific objective in choosing Q is to
Minimize TVC = total variable inventory cost per year.
• TVC excludes the cost of the product, since this is a fixed cost. TVC also does not
include any shortage costs, since the model assumes that shortages never occur.
Therefore,
TVC = annual setup cost + annual holding cost,
where
Annual setup cost = K times number of setups per year,
Annual holding cost = h times average inventory level.
As described in the preceding section,
K = setup cost each time an order occurs,
h = unit holding cost.
73
• For any inventory system fitting the basic EOQ model, here are some key
formulas.
𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑 𝑟𝑎𝑡𝑒 𝐷
Number of setups per year = = .
𝑜𝑟𝑑𝑒𝑟 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑄
𝑚𝑎𝑥𝑖𝑚𝑢𝑚 𝑙𝑒𝑣𝑒𝑙 + 𝑚𝑖𝑛𝑖𝑚𝑢𝑚 𝑙𝑒𝑣𝑒𝑙
Average inventory level =
2
𝑄 + 0 𝑄
= =
2 2
Total variable cost (TVC) = annual setup cost + annual holding cost =
𝐷 𝑄
𝐾 +ℎ
𝑄 2
74
• The value of Q which gives the minimum value on the TVC curve is the
optimal order quantity Q*, when annual holding cost is equal to annual
setup cost
Annual holding cost = Annual setup cost.
𝑄 𝐷
ℎ =𝐾
2 𝑄
75
• This yields the following formula for Q* (The Square Root Formula for the
Optimal Order Quantity)
2𝐾𝐷
𝑄∗ =
ℎ
Where
D = annual demand rate,
K = setup cost,
76
Figure 4.3 – The pattern of inventory levels over time for the 185/70
R13 Eversafe tire under ACT’s current inventory policy
77
Read the case study on LMS

Questions:
• When a wholesaler (like ACT) places an order for goods, what can
cause the cost to exceed the purchase price?
• What are cost components of ACT inventory model?
78
The optimal inventory policy for the basic EOQ model of
ACT
The Square Root Formula for the Optimal Order Quantity
Number of setups per year = annual demand rate / order quantity = D/Q
Average inventory level = (maximum level + minimum level)/2
TVC (Total Variable Cost) = annual setup cost + annual holding cost
2𝐾𝐷
𝑄 ∗=
ℎ
Q*: the optimal order quantity
D = annual demand rate, K = setup cost,
79
The current inventory policy of ACT
Figure 4.4 – A spreadsheet formulation of the basic EOQ model for the ACT problem when using the
current order quantity of Q = 1,000
80
Applying Excel Solver to formulate and solve the basic EOQ
model
• Figure 4.5 – Excel Solver solution

81
Applying QM for Windows to formulate and solve the basic
EOQ model
• Step 1: Create data set for ACT (Figure 4.6)

• Step 2: Input data for ACT on QM (Figure 4.7)
• Step 3: Click ‘Solve’
82
EOQ model
Figure 4.6 – Data settings in QM for Windows 83

EOQ model
Figure 4.7 – Input data in QM for Windows 84

WEEK 5
VARIATION OF EOQ MODEL IN INVENTORY MANAGEMENT
• The EOQ model with Planned Shortages
• The EOQ Model with Quantity Discounts
• The EOQ Model with Gradual Replenishment
85
VARIATION OF EOQ MODEL IN INVENTORY MANAGEMENT
Learning objectives
• Understand variation of inventory problems
• Enable to solve the inventory problems in Solver and QM for windows
86
Different variants of Inventory problems
• The EOQ model with Planned Shortages
• The EOQ model with Quantity Discounts
• The EOQ model with Gradual Replenishment
87
Variant 1: The EOQ model with Planned Shortages
This model is a variation of the basic EOQ model described in the preceding two
sections. The difference arises in the third of its key assumptions (Planned
shortages are allowed):
Assumptions
• The order quantity to replenish inventory arrives all at once just when desired.
• Planned shortages are allowed. When a shortage occurs, the affected
customers will wait for the product to become available again. Their backorders
are filled immediately when the order quantity arrives to replenish inventory.
88
Assumptions
• The order quantity to replenish inventory arrives all at once just when
desired.
• Planned shortages are allowed. When a shortage occurs, the affected
customers will wait for the product to become available again. Their
backorders are filled immediately when the order quantity arrives to
replenish inventory.
89
Figure 5.1 – The pattern of inventory levels over time assumed by the EOQ model with planned
shortages, where both the order quantity Q and the maximum shortage S are the decision variables.
90
• This model has two decision variables — the order quantity Q and the
maximum shortage S. The objective in choosing Q and S is to
• This TVC needs to include the same kinds of costs as for the basic
EOQ model plus the cost of incurring the shortages. Thus,
TVC = annual setup cost + annual holding cost + annual shortage cost.
91
As for the basic EOQ model,
Annual Setup cost 𝐷

=𝐾
𝑄
Annual holding cost = h times (average inventory level when positive)

times (fraction of time inventory level is positive)
𝑄−𝑆 𝑄−𝑆 (𝑄−𝑆)2

=ℎ = ℎ
2 𝑄 2𝑄
92
• To obtain a similar expression for the shortage costs, recall that

p = annual shortage cost per unit short
where the symbol p is used to indicate that this is the penalty for
incurring the shortage of a unit. Since this unit shortage cost only is
incurred during the fraction of the year when a shortage is occurring,
93
Since this unit shortage cost only is incurred during the fraction of the
year when a shortage is occurring,
Annual shortage cost = p times (average shortage level when a

shortage occurs) times (fraction of time shortage
is occurring)
𝑆 𝑆 𝑆2
=𝑝 = 𝑝
2 𝑄 2𝑄
Combining these expressions gives

2 2
 D  (Q − S) S
TVC = K   + h +p
 Q 2Q 2Q
94
The optimal inventory policy
• Calculus now can be used to find the values of Q and S that
minimize TVC. This leads to the following formulas for their optimal
values, Q* and S*.
h + p 2KD
Q* =
p h
where
D = annual demand rate,
K = setup cost,  h 
S* =   Q*
h = unit holding cost,  h + p
p = unit shortage cost
95
After some algebra, these two formulas also yield

Maximum inventory level = Q* – S*
𝑝 2𝐾𝐷
=
ℎ+𝑝 ℎ
96
Since the first square root is less than 1 and the second square
root is the value of Q* when planned shortages are not allowed, the
maximum inventory level for this model always will be less than for the
basic EOQ model. This level can be considerably less if h is fairly large
compared to p. This is good, since we want the inventory levels to
come down when the unit holding cost goes up. Having shortages, a
significant fraction of the time also helps to drive down the annual
holding cost.
Therefore, this model does a good job of reducing the annual
holding cost well below that for the basic EOQ model when h is fairly
large compared to p. When p is considerably larger than h instead, the
trade-offs between the cost factors will lead to an optimal inventory
policy that is not much different than for the basic EOQ model.
97
Application to the ACT Case Study
Table 5.1 –Data of the ACT problem
D= 6000 (demand/year)
K= $115 (setup cost)
h= $4.20 (unit holding cost)
p= $7.50 (unit shortage cost)
98
Table 5.1 –Data of the ACT problem
D= 6000 (demand/year)
K= $115 (setup cost)
h= $4.20 (unit holding cost)
p= $7.50 (unit shortage cost)
99
Applying Excel Solver to formulate and solve ACT’s planned shortage
problem.
Figure 5.2 – The results obtained for the ACT problem by applying either of the
Excel templates (Solver version or analytical version) for the EOQ model with
planned shortages 100
Applying QM for Windows to formulate and solve ACT’s planned
shortage problem.
Step 1: Data settings for ACT – EOQ model with planned shortage
(Figure 5.3)
Step 2: Input data in QM for ACT – EOQ model with planned shortage
(Figure 5.4)
Step 3: Click ‘Solve’
101
Figure 5.3 – Data settings in QM for ACT problem with planned shortage 102
Figure 5.4 – Input data in QM for Windows

103
Variant 2: The EOQ Model with Quantity Discounts
• Commonly, suppliers always wish to increase their sales by offering
quantity discounts for large orders (Refer to the Table 5.3 in ACT discount
case as an example).
• The drawback of placing larger orders is that this increases the average
inventory level and thereby increases the holding cost. Therefore, we
need to do a careful cost analysis to determine whether it is worthwhile
to take advantage of these quantity discounts.
104
Assumptions
• Annual acquisition cost becomes a variable cost.
• Holding cost varies upon purchasing price.
• TVC = annual acquisition cost + annual setup cost + annual holding cost.
105
• For the basic EOQ model, the only components of the total variable
inventory cost per year (TVC) are the annual setup cost and the annual
holding cost, since the annual cost of purchasing the product is a fixed
cost. Now, with quantity discounts, this annual acquisition cost becomes
a variable cost.
TVC = annual acquisition cost + annual setup cost + annual holding cost.
106
TVC = annual acquisition cost + annual setup cost + annual holding cost.
where
c = unit acquisition cost (as given in Table 5.3)
D = annual demand rate
K = setup cost
Q = order quantity (the decision variable),
I = inventory holding cost rate
h = Ic
107
The decision variable of this model is the order quantity Q. The
objective in choosing a feasible Q is to get a minimum total variable cost.
This TVC needs to include the same kinds of costs as for the basic EOQ
model plus the annual acquisition cost.
Thus,
𝐷 𝑄∗
Minimize TVC = 𝑐𝐷 + 𝐾 +ℎ
𝑄∗ 2
108
Discount Order quantity Discount Unit cost

quantity
1 0 – 749 0 $20.00
2 750 – 1,999 1% $19.80
3 2,000 or more 2% $19.60
109
Cost Analysis
• Even though ACT will continue to purchase a fixed total of 6,000 tires
of the 185/70 R13 size per year, the annual acquisition cost now
depends on the size of the individual order quantities. Therefore, to
adapt the basic EOQ model to incorporate quantity discounts, the
total variable cost is calculated as shown in the following Figure 5.6.
• The decision-making process for Inventory policy in Excel.
110
Figure 5.6 – The application of the Excel template (analytical) for the EOQ
model with quantity discounts to the ACT problem 111
The decision-making process for Inventory policy in QM for Windows.
Step 1: Data settings in QM for Windows for EOQ model with
quantity discounts (Figure 5.7)
Step 2: Input data in QM for Windows for EOQ model with
quantity discounts (Figure 5.8)
Step 3: Click ‘solve’
The illustration is given below:
112
Figure 5.7 – Data settings in QM for Windows for EOQ model with quantity discounts
113
Figure 5.8 – Input data in QM for Windows for EOQ model with quantity discounts
114
Variant 3: The EOQ Model with Gradual Replenishment
• One of the assumptions of the basic EOQ model is that the order quantity
to replenish inventory arrives all at once just when desired. Having the
order delivered all at once is common for retailers or wholesalers (such as
ACT), or even for manufacturers receiving raw materials from their
vendors. However, the situation often is different with manufacturers
when they replenish their finished-goods and intermediate-goods
inventories internally by conducting intermittent production runs. The
EOQ model with gradual replenishment is designed to fit this situation.
• This model assumes that the pattern of inventory levels over time is the
one shown in Figure 5.10.
115
Figure 5.10 – The pattern of inventory levels over time — rising during a production run and
dropping afterward — for the EOQ model with gradual replenishment
116
Assumptions
• A production run is scheduled to begin each time the inventory level
drops to 0, and this production replenishes inventory at a constant rate
throughout the duration of the run.
• Planned shortages are not allowed.
117
The objective of the model
• The decision variable of this model is the production lot size Q. The
objective is choosing Q to
• This TVC needs to include the same kinds of costs as for the basic EOQ
model
TVC = annual setup cost + annual holding cost
• As for the basic EOQ model,
𝐷
Annual Setup cost = 𝐾
𝑄
Annual holding cost = h (average inventory level)
1
Average inventory level = (maximum inventory level)
2
Maximum inventory level = production lot size – demand during production run
118
The objective of the model
• The goal is to find the value of Q as the optimal production lot size that gives
the overall minimum cost. This requires the annual setup cost equals to the annual
holding cost.
Minimize TVC = annual setup cost + annual holding cost
𝐷 𝑄∗ 𝐷
=𝐾 +ℎ (1 − )
𝑄∗ 2 𝑅
• Where
D = annual demand rate
R = annual production rate if producing continuously
K = setup cost,
R = (daily production rate) (number of working days per year)
119
• The new square root formula is derived in the same way as
described for the basic EOQ model. The only reason the new formula
differs from the one for the basic EOQ model is that the annual holding
cost for the basic EOQ model now is being multiplied by the factor, (1 -
D/R). The reason for this factor is that the maximum inventory level has
changed from Q to
Maximum inventory level = production lot size – demand during

production run
120
Maximum inventory level = production lot size – demand during
production run
𝐷 𝐷
=𝑄− 𝑄 = (1 − )𝑄
𝑅 𝑅
The optimal production lot size can be obtained directly from a square root
formula that is similar to the one for the basic EOQ model. The new
formula is
2𝐾𝐷
𝑄∗=
𝐷
ℎ(1 − )
𝑅
121
• The corresponding total variable inventory cost per year is calculated
from the following formula:
TVC = annual setup cost + annual holding cost

𝐷 𝑄∗ 𝐷
=𝐾 +ℎ 1−
𝑄∗ 2 𝑅
122
The application to the SOCA case study
• Read the case on LMS
Applying Excel Solver to formulate and solve SOCA’s gradual replenishment

problem (Figure 5.11).
123
Figure 5.11 – The results obtained for the SOCA problem by applying the Excel
Solver for the EOQ model with gradual replenishment 124
Applying QM for Windows to formulate and solve SOCA’s gradual
replenishment problem.
• Step 1: Data settings for SOCA – EOQ model with gradual replenishment
(Figure 5.12)
• Step 2: Input data for SOCA – EOQ model with gradual replenishment
(Figure 5.13)
• Step 3: Click ‘Solve’
The illustration is displayed below:
125
Figure 5.12 – Data settings for SOCA – EOQ model with gradual replenishment 126
Figure 5.13 – Input data for SOCA – EOQ model with gradual replenishment 127
Glossary of Inventory management
• Acquisition cost: The direct cost of acquiring units of a product, either through
purchasing or manufacturing, to replenish inventory.
• Backorder: An order that cannot be filled currently because the inventory is
depleted, but will be filled later when the inventory is replenished.
• Constant demand rate: A fixed rate at which units need to be withdrawn from
inventory.
• Continuous-review system: An inventory system whose current inventory level
is monitored on a continuous basis.
• Cost of capital tied up in inventory: The rate of return from capital that is
foregone because that capital has been invested in the materials being held in
inventory.
128
• Demand: The number of units of a product that will need to be withdrawn
from inventory during a specific period.
• Dependent demand: Demand for a product that is dependent upon the
demand for another product, generally because the former product is a
component of the latter product.
• Fixed cost: A cost that remains the same regardless of the decisions made.
• Holding cost: The cost associated with holding units of a product in inventory.
• Independent demand: Demand for a product that is independent of the
demand for all products.
129
• Inventory system: the set of policies and controls that monitor levels of
inventory.
• Inventory: Goods being stored for future use or sale.
• Inventory policy: A rule that specifies when to replenish inventory and by
how much.
• Just-in-time (JIT) inventory system: A system that places great emphasis
on reducing inventory levels to a bare minimum, as well as eliminating
other forms of waste in the production process.
• Lead time: The amount of time between the placement of an order and
the delivery of the order quantity.
130
• Material requirements planning (MRP): A computer-based system for
planning, scheduling, and controlling the production of all the components of a
final product.
• Manufacturing inventory: refers to items that contribute to or become part of
a firm’s product.
• Opportunity cost: When capital is used in a certain way, its opportunity cost is
the lost return because alternate opportunities for using this capital must be
foregone.
• Order quantity: The number of units of a product being acquired, either
through purchasing or manufacturing, to replenish inventory.
• Periodic-review system: An inventory system whose inventory level is only
checked periodically.
131
• Production lot size: The number of units of a product being produced
during a production run.
• Quantity discounts: Reductions in the unit acquisition cost of a product
that are offered for ordering a relatively large quantity.
• Reorder point: The inventory level at which an order is placed.
• Safety stock: Extra inventory being carried to safeguard against delivery
delays.
• Scientific inventory management: A management science approach to
inventory management that involves using a mathematical model to seek
and implement an optimal inventory policy.
132
• Setup cost: The fixed cost associated with initiating the replenishment of
inventory, whether the administrative cost of purchasing the product or
the cost of setting up a production run to manufacture the product.
• Shortage cost: The cost incurred when there is a need to withdraw units
from inventory and there are none available.
• Square root formula: The formula for calculating the optimal order
quantity for the basic EOQ model.
• Variable cost: A cost that is affected by the decisions made.
133
WEEK 6
Wrap – up
Final Exam (Group project and presentation)
134

Enterprise Resource Planning (Erp) Applied To Logistics & Supply Chain MANAGEMENT (2 Credits)

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Enterprise Resource Planning (Erp) Applied To Logistics & Supply Chain MANAGEMENT (2 Credits)

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UNIVERSITY OF ECONOMIC OF HO CHI MINH CITY

School of International Business and Marketing

ENTERPRISE RESOURCE PLANNING (ERP)

This textbook is for internal circulation only | 2020

1 Attendance and In-class discussion 20%

2 Groupwork & homework 30%

3 Final assessment (group project + 50%

Week 4 SOFTWARE APPLICATIONS IN INVENTORY MANAGEMENT

Week 5 VARIATION OF EOQ MODEL IN INVENTORY MANAGEMENT

Cannery Output Warehouse Allocation

Bellingham 75 truckloads Sacramento 80 truckloads

Eugene 125 truckloads Salt Lake City 65 truckloads

Albert Lea 100 truckloads Rapid City 70 truckloads

Total 300 truckloads Albuquerque 85 truckloads

Total 300 truckloads

Cannery Sacramento Salt Lake City Rapid City Albuquerque

Cannery Sacramento Salt Lake City Rapid City Albuquerque

Total shipping cost = 75($464) + 5($352) + 65($416) + 55($690) + 15($388) + 85($685)

They now are reexamining the current shipping strategy to see if

2. How do you solve this problem?

The Requirements Assumption

Cannery Sacramento Salt Lake City Rapid City Albuquerque

Bellingham $464 $513 $654 $867

Eugene 352 416 690 791

Albert Lea 995 682 388 685

Figure 2.1 – Network Representation of a P&T Problem

x21 + x22 + x23 + x24 = 125

x31 + x32 + x33 + x34 = 100

x11 + x21 x31 = 80

x12 + x22 + x32 = 65

x13 + x23 + x33 = 70

x14 + x24 + x34 = 85

and xij ≥ 0 (i = 1, 2, 3; j = 1, 2, 3, 4), xij is integer number

Cost Per Acre Foot

Colombo $160 $130 $220 170 5

VARIATION OF TRANSPORTATION PROBLEMS (cont.)

Requested purchase 7,000 9,000 6,000 8,000

• SOFTWARE APPLICATIONS IN INVENTORY MANAGEMENT

Jacobs & Chase (2017) 62

Read the case study on LMS

• Figure 4.5 – Excel Solver solution

• Step 1: Create data set for ACT (Figure 4.6)

Figure 4.6 – Data settings in QM for Windows 83

Figure 4.7 – Input data in QM for Windows 84

Minimize TVC = total variable inventory cost per year.

As for the basic EOQ model,

Annual Setup cost 𝐷

Annual holding cost = h times (average inventory level when positive)

𝑄−𝑆 𝑄−𝑆 (𝑄−𝑆)2

• To obtain a similar expression for the shortage costs, recall that

Annual shortage cost = p times (average shortage level when a

Combining these expressions gives

After some algebra, these two formulas also yield

Table 5.1 –Data of the ACT problem

Table 5.1 –Data of the ACT problem

Figure 5.4 – Input data in QM for Windows

Discount Order quantity Discount Unit cost

2 750 – 1,999 1% $19.80

3 2,000 or more 2% $19.60

The illustration is given below:

Maximum inventory level = production lot size – demand during

TVC = annual setup cost + annual holding cost

Applying Excel Solver to formulate and solve SOCA’s gradual replenishment