Introduction To Logistics & Supply Chain Management

INTRODUCTION TO
LOGISTICS & SUPPLY CHAIN MANAGEMENT
Pgs, Ts Nguyễn Thị Thu Hà

Email: nguyenthithuha.cs2@ftu.edu.vn
ĐT/Zalo: 090219557
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© Copyright 2018, Vietnam Logistics Research
and Development Institute
FIATA Higher Diploma in SCM (FHD)
1. Introduction to LSCM
2. Global Marketing management
3. Market and Finance management
4. Contract management in SC
5. Global purchasing management
6. Production operation management
7. International transportation management
8. Insurance and Risk management
9. Sea and Air transport
10. Multimodal transport
2
Subject planning and assessment
• 15 sessions
+ Lectures 11
+ Guest speakers 02
+ Midterm test + Group Presentations 02
+ Revision: 01
• Marking (%): 10/30/60
Attendance/(Contribution in class + midterm test+ Group
presentation)/ Final exam
• References: slides and books
3
CONTENT
Chapter 1: Introduction to Logistic & Supply Chain Management
Chapter 2: Warehousing Strategy and Materials-Handling
Chapter 3: Inventory Management & Bullwhip Effect
Chapter 4: Information Technology in Supply Chain
Chapter 5: Strategic Alliances in Supply Chain
Chapter 6: Efficient Transport and Distribution Strategy
Chapter 7: Quality Management System in SCM
Chapter 8: SCM Performance Measurement, Control and Strategic
Logistics Plan
Chapter 9: Security of Supply Chains
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Chapter 1:
Introduction to LSCM

Objectives
By the end of this chapter, you would be able to…

- Differentiate between logistics management and
supply chain management
- Establish an overall understanding and appreciation
of the impact that supply chain management has on
organizations’ performances
- Understand the supply chain relationship and some
of the barriers to effective supply chain collaboration
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1.1. Supply Chain vs Logistics management

What is a supply chain?
$
Retailer
- Truck, folk-lift: capital cost, amortization, insurance, fuel, …

Supplier Supplier - Truck driver, warehouse keeper, wholesaler, retailer: salary,
insurance, ….
- Product: Lost, damage, insurance
- Marketing, accounting, HR, office/warehouse/retailing shop
Supplier’s suppliers
8
What is Supply Chain? SCM Management?
• Supply chain (SC) is the system by which organizations

source, make, and deliver their products and services
according to the market’s demand.
• SC consists of independent and interdependent
firms/organizations working together to control, manage and
improve the flow of materials, information, and finance
from the first suppliers to final consumers.
• The supply chain is the network of organizations 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 hands of the end
consumers
• Supply Chain Management
- In a SC firms collaborating to leverage strategic positioning
and to improve operating efficiency, effectiveness
- Supply chain strategy is a channel arrangement based on
acknowledged dependency and relationship, where
customers treat their suppliers as partners, not sellers
- Value Chain vs Demand Chain
- https://www.reuters.com/article/us-foxconn-vietnam-apple-
exclusive-idUSKBN2860VN
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• Scope of Supply Chain Management
– SCM is defined as the integration of activities along the supply chain
linking customer orders, distributor orders, inventory ordering,
placement of manufacturing orders, cash flows and ultimately supplier
orders
Finance
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• Scope and Goals of Supply Chain management
– Scope: Effective supply chain management requires integration
of departments /functional areas within an organization and
also the integration and coordination among trading partners
accomplished through information sharing
– Goal: to achieve seamless flow of products/services with the
lowest total costs and achieve the highest customer
satisfaction
• Reliable time of delivery, shorter lead time, quicker response
(Time compression)
• Flexible response to customers’ requirement
• Waste reduction, unit cost reduction;
•Lowest total cost of ownership – TCO
13
How much profit would Nike
and Adidas make?
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How much does Nike and Adidas earn from a pair of shoes
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• Logistics
- The work required to move and position inventory throughout

a supply chain
- Creates value by timing and positioning inventory;
- Logistics is the combination of a firm’s order management,
inventory, transportation, warehousing, material handling and
packaging as integrated throughout a facility network
- Integrated logistics serves to link and synchronize overall
supply chain connectivity - Not only maximize but optimize,
best fit.
- The purpose of logistical work has remained essentially the
same – the way the work performed continues to radically
change
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• Logistics Element of Supply Chain
- Logistics is the primary passage of product and service flow and

Information flow within a supply chain arrangement
- Firm engages in a supply chain is involved in performing logistics
- Logistical integration is the main focus and desire for organizations to
achieve competitive advantage
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• Logistics Management
– Refers to as “the process of planning, implementing and controlling
the efficient, effective flow and storage of goods, services and related
information from point of origin to the point of consumption for the
purpose of conforming to customer requirements”
– Logistics is a component of supply chain
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Classification of logistics
• Logistics activities vs logistics services?
 Order placement
 Inward transport – inbound logistics
 Receiving – Warehousing - Inventory controlling
 Work-in-process logistics operations
 Order picking - Material handling – labeling – coding – assembling –
sorting, break bulk, consolidation….
 Outward transport – outbound logistics
 Distribution management
 Reverse logistics/distribution
 Positioning of distribution centers, manufacturing plants,
 Information management
 ………………
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Classification of logistics
Reverse logistics
Raw material
Equipment
Customers
Manufacture/ Pack- Ware-
housing
DC
Machinery assembly
aging
Parts
Services Material flow Information flow
Inbound Logistics In process

Logistics
Outbound logistics
Logistics
Classification based on logistics providers
Management of all parties of the

supply chain in conjunction with
5 e-business
(E-business)
P
L Management of different stages
(Supply Chain
4PL in a supply chain
Management)
Management of complex service

3PL (Forwarding/ chain
Contract Logistics)
Traditional transport and

2PL - Asset-Based Logistics warehouse operators
1PL (Producer) Logistics performed by producer

Classification of logistics activities
• Key Activities
- Customer service standards
- Transportation
- Inventory management
- Order processing
 Supporting Activities
- Warehousing
- Materials handling
- Purchasing
- Protective packaging
- Cooperate with internal customers
- Information & technical maintenance
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Key activities
• Customer service standards set the level of output and

degree of readiness to which the logistics system must
respond.
• Each of transportation and inventory represents ½ to 2/3
of total logistics costs. Transportation adds place value,
inventory adds time value
• Inventories serve as buffers between supply and demand
(both internal demand and customer’s demand)
• Order processing costs are minor but order processing is
the activity that triggers product movement.
24
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Key activities
Transportation
Customer service standards
a. Mode and transport service
Cooperate with marketing to selection
a. Determine customer needs and b. Freight consolidation
wants for logistics customer c. Carrier routing
service
d. Vehicle scheduling
b. Determine customer response to
service e. Equipment selection
f. Claims processing
c. Set customer service levels
g. Rate auditing
Inventory management
a. Raw materials and finished Information flows and order
goods stocking policies processing
b. Short-term sales forecasting a. Sales order-inventory interface
c. Product mix at stocking points procedures
d. Number, size, and location of b. Order information transmittal
stocking points methods
e. Just-in-time, push, and pull c. Ordering rules
strategies
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Supporting activities
• Supporting activities (purchasing, warehousing, material

handling, packaging, sorting…) also affect overall logistics
effort and the efficiency of transportation and inventory
management.
Example: Packaging
• Information maintenance supports all logistics activities by
providing the needed information for planning, operating,
controlling….
Example
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Purchasing Protective packaging
a. Supply source selection a. Handling
b. Purchase timing b. Storage
c. Purchase quantities c. Protection from loss
and damage
Cooperate with
Materials handling production/operations to
a. Equipment selection a. Specify aggregate
b. Equipment replacement quantities
policies b. Sequence and time
c. Order-picking procedures
d. Stock storage and retrieval
Supporting production output
activities
Warehousing
a. Space determination
Information maintenance
b. Stock layout and dock
design a. Information collection,
Storage, and manipulation
c. Warehouse
configuration b. Data analysis
d. Stock placement c. Control procedures
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Possible Logistics activities in
an Organization’s Immediate Supply Chain
Business logistics
Physical supply Physical distribution

(Materials management)
Source Plants/
of supply Operations Customers
• Transportation • Transportation
• Inventory maintenance • Inventory maintenance
• Order processing • Order processing
• Acquisition (purchasing) • Product Scheduling
• Protective packaging • Protective packaging
• Warehousing • Warehousing
• Materials handling • Materials handling
• Information maintenance • Information maintenance
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1. What is TCO?
2. What is Lead-Time?
3. What are flows in SCM and Logistics
Management?
4. List any 5 logistics activities?
5. What are differences between inbound and
outbound logistics?
6. What are differences b/t 3rd PL Provider and
4th PL Provider?
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1.2. Strategic importance of SCM
- Customer satisfaction is a key factor in retaining customer

or creating customer loyalty. Three dimensions contribute
to a feeling of overall satisfaction:
+ Cost – what customer receive for what they paid
+ Convenience – the effort expended to achieve the purchase
+ Confidence in services included both expected and promised
- Objective of SCM is to provide customer satisfaction by
having the correct product, in the correct quantity and
correct quality, at the correct place, correct time with the
correct price…
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Generic Supply Chain Model
Information, product, service, financial and knowledge flows
Integrated
Enterprise Distributive
Network
Market
Procurement Distribution
Manufacturing
Capacity, information, core competencies, capital and human resource constrains
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Roles of SCM in Organization
– Vary from firm to firm
Transportation Warehouse Transportation Customers
Information
flows
Factory Financial
flows
Transportation
Warehousing Transportation Vendors/plants/ports
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Phases of SCM development

Role of Logistics and SCM
• Since 1998 many Japanese companies producing
automobile parts moved to US.
• The competition in the field became more and more
severe, forcing US companies to seek ways to improve
their production lines, capability, reduce costs….
• One American manufacturer of automobile parts facing
the problem of high labor costs and outdated
technology decided to sell its plant in the US and totally
moved to the Philippines. The company built a new
production plant and invested a modern production line
• The Philippines’ government policy for foreign
investors: No taxes for the first six years, low land
rental fees
The top 25 SCM in 2019
Gartner Three-
Peer Opinion1 Three- Inventory CSR Component
Opinion1 Year Weighted Composite
Rank Company (162 voters) Year Weighted Turns3 Score5
(38 votes Revenue Growth4 Score6
(25%) ROA2 (20%) (10%) (10%)
25%) (10%)
1 Colgate-Palmolive 961 347 19.9% 5.0 -0.2% 10.00 4.88
2 Inditex 1,091 341 16.2% 3.8 6.5% 10.00 4.80
3 Nestlé 1,262 374 6.9% 4.8 1.2% 10.00 4.27
4 PepsiCo 997 368 11.7% 9.0 1.2% 8.00 4.22
5 Cisco Systems 699 518 4.0% 10.2 0.7% 10.00 4.13
6 Intel 576 454 12.4% 3.7 9.6% 6.00 4.12
7 HP Inc. 293 353 11.7% 8.2 7.3% 10.00 3.81
8 Johnson & Johnson 737 348 7.6% 3.1 5.8% 10.00 3.80
9 Starbucks 900 167 19.3% 12.7 9.0% 4.00 3.74
10 Nike 1,194 186 13.3% 3.9 6.0% 4.00 3.73
11 Schneider Electric 677 256 5.4% 4.9 .7% 10.00 3.71
12 Diageo 625 404 9.8% 0.9 4.3% 10.00 3.44
13 Alibaba 1,095 72 10.6% 23.4 52.6% 0.00 3.43
14 Walmart 1,415 268 4.6% 8.6 2.5% 5.00 3.40
15 L’Oréal 858 229 9.9% 2.7 3.6% 8.00 3.38
16 H&M 582 155 13.7% 2.7 5.1% 10.00 3.35
17 3M 597 192 14.3% 3.8 3.2% 8.00 3.34
18 Novo Nordisk 86 54 36.4% 1.1 0.8% 10.00 3.31
19 Home Depot 402 124 2.2% 5.0 7.0% 5.00 3.29
20 Coca Cola Company 1,329 196 5.8% 4.2 -10.7% 6.00 3.13
Samsung Electronics
21 748 83 13.2% 9.8 8.7% 7.00 3.05
22 BASF. 597 252 6.4% 3.9 -0.6% 8.00 2.89

23 Adidas 714 172 9.2% 3.2 7.9% 5.00 2.75
24 Akzo Nobel 137 0 20.9% 4.6 -8.6% 8.00 2.61
25 BMW 733 131 3.8% 3.8 1.3% 10.00 2.57
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1.4. New market realities and future SCM
• Customers requirements:
Primary determinant of the shape and form of future SC
requirements will be nature of demand and needs of customers
(quantity, quality, cost, experience upon buying…)
• Changes in market and business environment
+ Competition and changes in business model
+ Globalization, outsourcing – offshoring
+ Security issues, Ethical and Green issues
+ Internet, E-commerce,
+ Risks of economic and social-political instability, nature
disasters….
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What do customers need?
• What are “rights” in SCM?
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Business Models & SC Strategies
Anticipatory/Push Responsive/Pull
• Based on demand forecast • Seek reduction or

• Participants have their elimination forecast reliance
unique forecast • Reduce anticipatory
• Almost essential work is inventory deployment
performed in anticipation of • Joint planning and rapid
future requirements exchange of information
• Each firm in the distribution • Time based competition
channel duplicates the • Synchronize operations of
anticipatory process
members of SC
• High risk and high cost
• Reduce duplicate practices
Anticipatory Business Model
Buy
components
Forecast Manufacture Warehouse Sell Deliver
and
materials
Buy components Manufacture/

Sell Deliver
and materials Assemble

Characteristics of Push, Pull strategies
Criteria PUSH PULL
Objective Minimize cost Maximize service level
Complexity Low High
Focus Resource allocation Responsiveness
Lead time Short Long
Processes Supply chain planning Order fulfillment
Source: Simchi-Levi
Business models and
manufacturing strategies
Business
model
Anticipator Responsive
y (Push) (Pull)
Make to Assembly Make to

plan order

Hybrid model and Push-Pull strategies
• Early stages of product assembly are done in “push” way: Partial
assembly of product based on aggregate demand forecast
• Final product assembly is done in “pull” way: based on customer demand
for specific product configuration
• Supply chain timeline determines push-pull boundary
Push
- Pull
Generic boundary Customized
product product
Push Strategy Pull Strategy

Raw End
materials customer
Supply Chain timeline

Cost per unit of product in different strategies
Manufacturing
Business Transport Inventory Total cost
+
strategy costs
order costs
costs per unit
MTO/ The The

High High
DTO Lowest highest
ATO Average Average Average Average
MTP/ Average/ The High/

The lowest
MTS Low highest Average

Total cost per unit
Total cost
Cost per unit
Inventory/warehouse
Procurement/manufacturing
Transportation
MTO ATO MTP

Push or Pull Strategies
Pull High
• High Customization • Low Customization

• Uncertain demand • Uncertain demand
Demand uncertainty
• Low scale of economy • High scale of economy
Computer equipment Furniture
• Low customization • Low customization

• Low scale of economy • Stable demand
• Push-Pull supply chain • High scale of economy
Books, CD’s Beverage, grocery
Push Low
Low Scale of economy High
Pull Push
Source:
© Copyright Simchi-Levi
2018, Vietnam Logistics Research
Globalization – outsourcing – offshoring
• Discussion on the case of ABC Ltd.

• What are advantages and disadvantages of going
global?
• What would be solutions for company that wants to
extend their supply chain overseas?
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Mixed, Efficiency - oriented SC Strategies
- Logistics Optimizer: Emphasizing a balance of supply

chain efficiency and effectiveness (Toyota)
- Trade Focused: Prioritizing “low price, best value” for the
consumer (Target, Costco…)
- Market Saturation Driven: Focusing on generating high
profit margins through strong and ubiquitous marketing
and distribution and/or offering creative, innovative
products (Electrical appliances market)
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Mixed, responsive-oriented SC Strategy
- Consumer Customization: Using mass customization
to build and maintain close relationships with end
customers through direct sales (Dell)
- Operationally Agile: Configuring assets and
operations to react nimbly/quickly to emerging
consumer trends along lines of product category or
geographic region (H&M, Zara, Forever 21)
- Freshness Oriented: Concentrating on earning a
premium by providing the consumer with product
that is fresher than competitive offerings
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Principles of new model of SCM
• Customers come first

• SCM = an economic value added process – not just a cost
effective process
• Mutual benefits for all participants along the chain
Þ Independent participants => partners
Þ Competitors => partners
Þ Win-win partnership
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Supply Chain –The Future
Collaborative chains based on collaborative planning, forecasting,
replenishment (CPFR) programs that apply some specific
techniques:
- QR (quick response): cooperative efforts b/t retailers and
suppliers to improve inventory velocity to match customers’
requirements
- Vendor Managed Inventory (VMI): the buyer provides
information to a vendor about product and the vendor takes full
responsibility for maintaining an agreed inventory of the
material, usually at the buyer's consumption location.
- Continuous Replenishment (CR): retailer set replenishment level
of inventory and make restocking decisions
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Supply Chain –The Future
- Functional to Process integration: the logistics work has

remained relatively the same but the way it performs
rapidly changes. The focus is on process rather than
individual functions.
- Vertical to Virtual integration. Vertical integration requires
tremendous capital investment and incredibly complex
organization structure => it’s better to harness expertise
and synergy of external supply chain partners including
virtual enterprises (5th PL)
- Mass customization
- Postponement
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VS
53
• Postponement and customization
Advantages and disadvantages of customization?
54
Case study
• What are reasons behind the need for Dell to decrease

inventory? Explain the meaning of numbers bellow
55
Postponement and mass customization at Dell
Items No of options
1. What business model
Processor 5
does Dell pursue?
OS 15 2. What kind of
Monitor 14 postponement does
Memory 4 Dell implement?
HD 2 3. What is mass
customization? What
Network card 3
are conditions for
Speaker 3
company to
Keyboard 2 implement mass
Mouse 2 customization?
Graphic options 3 4. Pros and cons of MC?
PSU 2

SC inaction - price
 Leaders created competitiveness advantages for the
industries: Dell, Hewlett Packard, Walmart….
 Implementation of CPFR:
+ Johnson and Johnson reduced out-of- stock level (65%),
improved overall service level (4%), increased fill rate (4%)
+ Cisco systems eliminated most of paperwork on the supply
side, saved up to 250 mill USD per year
 US postal Service (USPS) vs United Parcel Service (UPS)
and Federal Express
 Future challenges for SCM: customer requirements,
shortage of natural resources/raw material, ecological
considerations, slow changes in SCM of companies….
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Barriers to Effective Supply Chain Relationships
- Widespread resistance to change
- Lack of trust and reluctance to share information and
fear of losing control
- Inadequate Information systems and poor
communication
- Different goal and objectives
- Short term “wall-street” focus on outcomes
- Involvement in too many SC
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• Overcoming the Barriers
– Develop a New Breed of Manager
– Build Relationship-Management Skills
– Establish Inter-organizational Teams
– Create New Performance Measures (new KPI)
– Invest in Information Technology and Internet of things
– Engage in More Practical and Applied Research
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1.5. Supply Chain Operation Reference
(SCOR Model)
- Score model was introduced in 1996 by SC Council of 69
members (Dow Chemical, Merck, Texas Instruments, Compaq,
Fedex…)
- The model introduced the best practice examples of SCM,
benchmarked performance data and optimal software applications
=> It’s a tool for:
+ Measuring SC performance and effectiveness of SC re-engineering;
+ Testing and planning for future process improvement
- The model focuses on five areas of the supply chain: plan,
source, make, deliver and return that repeat again and again
along SC
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SCOR Model
• Plan:
+ Demand and supply planning and management
+ Balancing resources with requirements and determining communication
along the entire chain
+ Determining business rules to improve and measure supply chain
efficiency (inventory, transportation, assets, regulatory compliance…)
+ Aligns the supply chain plan with the financial plan of the company
• Source:
+ How to manage inventory, the supplier network, supplier agreements,
and supplier performance
+ How to handle supplier payments and when to receive, verify, and
transfer product.
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SCOR Model
• Make:
+ To answer question: make-to-order, make-to-stock, or assemble -to-order?
+ Production activities, packaging, staging product, and releasing
+ Managing the production network, equipment and facilities, and transportation.
• Deliver:
+ Order management, warehousing, and transportation.
+ Receiving orders from customers and invoicing them once product has been
received.
+ Management of finished inventories, assets, transportation, product life cycles,
and importing and exporting requirements (3).
• Return
+ Return of containers, packaging material, or defective products.
+ Management of business rules, return inventory, assets, transportation, and
regulatory requirements
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SCOR Model
• Benefits of Using the SCOR Model
Help a company analyze its supply chain.
Gives companies an idea of how advanced its supply chain is.
The process helps companies understand how the 5 steps
repeat over and over again between suppliers, the company,
and customers. Each step is a link in the supply chain that is
critical in getting a product successfully along each level .
To identify supply chain problems.
The model enables full leverage of capital investment, creation
of a supply chain road map, alignment of business functions,
and increase return on investment.
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Group assignment
1. Amazon case 1. Describe the supply chain

2. Wal Mart of the company
3. Uniqlo 2. Analyze each element of
4. Apple inc the company SCM
5. Renault-Nissan- (Strengths, weaknesses and
Mitsubishi strategic strategy that the company
Alliance uses to achieve their goals)
6. 3 cases 3. Compare their performance
7. Nike and Reebok with those of other
SCM companies in the industries.
8. Li & Fung + Report
+ Presentation
64
1. List as much as possible characteristics of the SCM?
2. What is logistics? How does logistics differ from SCM?
3. What are barriers of SCM improvement? (at least 3 barriers)
4. MTO and logistics characteristics? MTP, ATO
5. What is manufacturing postponement?
6. What is geographical postponement?
7. How does postponement relate to customization?
8. What is mass customization?
9. What are the most cost-burden elements in SCM
10. What is the purpose of launching and using SCOR model?
11. What are drivers of SCM?
65
CHAPTER 2
WAREHOUSING STRATEGY
AND MATERIALS-HANDLING
• Objectives
– To establish the role of warehousing as a strategic competitive
advantage
– To understand the importance of warehouse design for
improving productivity
– To establish the role of material handling equipment in
warehousing
….
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Warehousing – An integrated logistics component
Order
processing
Facility
Inventory
Network
Warehouse
Materials handling Transportation
Packaging

• Strategic Warehousing
- In the self sufficient economy, storage performed by
households
- Later warehousing performed by retailers and manufacturers
and it was considered as element adding costs to the
distribution process. Warehouse provided inventory for
production and retailing - role of middlemen wasn’t highly
appreciated.
- Forecasting and production scheduling techniques improved
=> decreased the need of keeping big inventory
- Retail challenges: customers required more assortments of
products => it’s difficult to maintain purchasing and
transportation economics when buying from manufacturers
68
Suppliers Manufacturer’s
Retailer’s WH
warehouse

Suppliers Retailers/
Manufacturers
Holds no parts inventory
What are challenges for retailers?

Oversea suppliers
what are the solutions for them?

Suppliers
Retailers/
Manufacturers
Intermediate
warehouse
Oversea suppliers

Suppliers Retailers/
Manufacturers
Intermediate
Warehouse
Short to moderate distance

72

- In manufacturing, strategic warehousing enables to reduce quantity
and holding time of materials and parts, to support JIT and lean
production strategy.
+ JIT
+ Lean/Stockless production
- Role of warehousing has changed – Warehouse becomes value
adding element of SCM offering diversified services beside storage:
mixing, sorting, consolidation, assembling….as a vital extension of
manufacturing
- Application of IT in warehouse management makes it flexible, creates
new and better ways to perform storage and handling, quickly and
efficiently to respond to changing customer requirements…
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• Distribution Facilities
74
Retailer
Retailer
supplier
Retailer
supplier Retailer
distribution
center
supplier
Global Regional National

Manufacturer Consolidation Consolidation Consolidation
Center Center Center
supplier
Manufacturer Manufacturer
Retailer
supplier distribution
supplier center
supplier
supplier Retailer
supplier supplier
Retailer Retailer
A typical map of warehouse operation in a global SC

Warehouse benefits
Economic benefits Service benefits

Consolidation and Reverse logistics
break-bulk
Assortment Spot stocking,

(cross-docking, mixing Full line stocking
and assembly)
Production support
Postponement
Transportation support
(unitization)
Stockpiling for seasonal
production or demand Market presence

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• Consolidation and Break-bulk
– Reduce transportation cost by using warehouse capability to increase
economies of scale
Consolidation
Plant A
Customer
Plant B Consolidation
A B C
warehouses
Plant C
Break - bulk
Customer A
Plant A Break-bulk Customer B

warehouses
Customer C
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• Assortment
- Cross-docking: Combine inventory from multiple origins
into an assortment for a specific customer; It is used
extensively by retailers
- Mixing: Mix an arriving inventory with some inventory
stored at the warehouse before delivering to the last
customer
- Assembly: To support manufacturing –products and
components from a variety of second-tier suppliers are
assembled at a warehouse located in close to the
manufacturing plant
78
Plant A Cross - Dock Customer A
Distribution
Plant B Customer B
warehouses
Plant C Customer C
Mixing Customer X
Plant A
A B C D
Plant B Transit Mixing
point Customer Y
Plant C A B D
Product D
Customer Z
A D
Vendor A Assembly
Lead supplier
Vendor B Customer
warehouse
Vendor C
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• Processing / Postponement
- Postpone finalizing product configurations by delaying packaging,
labeling and light manufacturing….
- Economic benefits
• Reduce risks as products are finalized only when customers place an order
• Reduce total inventory
- Overall reduction of warehousing cost and therefore cost per unit of
product will be reduced
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• Stockpiling
- Accommodates seasonal production or demand
- Is Required to support marketing efforts
- Provides an inventory buffer which allows production efficiencies
within constraints imposed by material sources and consumers
- Serves as safety stock, in-transit stocks
Examples of need for stockpiling
- Lawn furniture is produced year round but is sold only during a
short marketing period
- Agriculture products are harvested at specific times but are
consumed throughout the year.
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Service benefits
• Reverse logistics
+ Physical work related to product recall, refurbishment, disposal
of overstock and damaged, defective inventory as well as
recall of controlled inventory that is performed at warehouses
+ Controlled inventory = hazardous materials, products that
have potential consumer health and environmental
consideration
+ Reverse movement consists of non-uniform individual
packages and cartons => manual sortation and inspection to
determine appropriate disposal
=> Reverse logistics provide economic, environmental and
service benefits to companies
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Service benefits …..
- Spot stocking: to support market distribution of highly
seasonal products – usually just prior to a maximum period
of seasonal sale rather than maintaining inventory in
warehouse year-round. Companies can use temporary
warehouses
Ex?
- Full line stocking: deploy at a few strategic locations and
operates year-round. Full line stocking improves service by
reducing the number of suppliers that customers must deal
with and combined assortments to make economical larger
shipment.
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Service benefits …..
- Production support: stock inventory to support manufacturing
operations due to long lead time and/or potential supply
disruption and/or variation in demand
Production support warehouses usually have higher average
inventory level and slower inventory turnover
- Market presence: Local warehouse can respond faster to
customers requirements=> increase customer service level,
sales and profitability.
Technology-based order processing and reliable transportation
shorten response time gap regardless distance => Companies
will consider establishing local warehouse unless it is
economically and service justified
84
Additional material
• Which operations are executed at Amazon DC
https://www.youtube.com/watch?v=Yiafb0-gqF4
• How Amazon provides fast delivery of goods to it’s customers?
https://www.youtube.com/watch?v=Y-lBvI6u_hw
Seller requirements from Amazon
https://sellercentral.amazon.com/gp/help/external/200978400

86
87
• Warehouse Operations
Analysis
Information
Receiving Put away Storage Picking Shipping

Data
Base
Data
Stock-taking
Maintenance
System for Warehouse Information Flow

88
• Warehouse operations
• WH = place where inventory on the move.
• 3 typical handling activities:
+ Receiving inbound inventory and put away
+ In-storage operations
+ Shipping outbound inventory.
• Goal of WH: to facilitate efficient material handling.
+ Movement continuity: Provides longer moves of inventory
from place to place .
+ Scale Economy through out the warehouse: move unitized
shipment (pallets, containers instead of separate cases)
89
What should we do
when shopping bags
arrive?
90
Warehouse layout for effective handling
3 considerations driving WH layout: product volume-weight,
product demand and specific storage requirements.
Example:
+ high volume and heavy product should be positioned so
that the movement distance is minimum
+ high-velocity products should be positioned near doors, at
primary aisles and at lower racks
+ Receiving docks and shipping docks should be separated
and convenient for transport vehicles to move in and
move out
91
• Warehouse Operations
Receiving
Storage space for docks
Storage space for high-volume product Storage space for
low-volume product low-volume product
Primary
aisle
Shipping
docks
92
Shipping docks
Receiving docks
93
• Receiving
- Characteristics of arrived inventory: large quantity of
similar products
- Activities:
+ unloading from arriving transportation – performed by
mechanized equipment or mix of a lift truck/conveyors
and manual processes
+ Breaking bulk
+ Sorting inbound inventory
+ Recording information about inbound inventory
94
• In-Storage operation: In-storage handling and storage
- In-storage handling involves lower volume movement than
receiving but still relatively similar products.
- In-storage handling includes Transfer movement and order
selection
+ Transfer movements:
(1) From place of unloading -> place of storage;
(2) From place of storage to
(a) shipping docks or
(b) From the place of storage => the place of order
selection => to the shipping docks.
+ Order selection: according to specific customer order
requirements.
95
Type of storage
 Active storage relates to inventory for the
periodic demands of the service area and for
achieving transportation/ handling economies
Active of scale
storage  Material handling processes and
technologies for active storage focus on quick

movement, flexibility
 Extended storage relates to inventory that

excesses normal replenishment of customer
Extended
stocks.
Storage  Example: speculative, seasonal, obsoleted/off-
season, discounted inventory or product

conditioning…
96
• Shipping:
+ order verification record of outbound inventory,
+ consolidation for shipment: unitization into standardized
units such as pallets, containers to facilitate quick and more
safe handling processes
+ Loading into transportation vehicles.
+ Warehouse Managed System (WMS) can provide real-time
visibility of the inventory flow and the shipment accuracy
97
Warehouse operation
98
• Warehouse Ownership Classification
– Private
• Operated by firm owning products
• Decision to own or lease is essentially financial, or
constrains by physical nature of an available building
• Benefits of a private WH include control, flexibility, cost,
and a range of intangibles
• Requires substantial investment and depreciation, Private
WH may lead to increase of product unit cost.
99
– Public warehouse: general merchandise, refrigerated,
special commodity, bonded, and household goods and
furniture
+ Able to achieve lower WH operating cost than private facilities
+ Do not require capital investment
+ Offers flexibility of size and number of warehouses, time of
storage, type of products
+ Able to achieve lower transportation cost by combined delivery
and consolidation
+ Disadvantages?
100
– Contract warehouse
+ Long-term contractual relationship results in lower total cost
+ Offers services such as transportation, inventory control,
order processing, customer service, and return
merchandise processing
+ Benefits of contract WH
 Customers: Expertise services, flexibility, lower capital
investment
 WH operator: long-term contract, higher service quality as
they know customer/stored goods very well, having deep

understanding about business specification/needs to
provide customized services
+ Disadvantages?
101
• Mixed Warehouse strategy
– Organizations may use a combination of private, public,
and contract facilities
– The best WH utilization rate of the time/space is 75-85%
– 15 - 25% of the time/space is reserved for peak
requirements
– Private and/or contract warehouse cover 75%
requirement while public facilities to accommodate peak
demand
102
103
• Warehouse Planning
1. Site Selection (Processing Zone? Target Marketplace,
like DC hub, Hub system, Time to market &
contingency,…group them together to see where to
decide)
2. Product-Mix Analysis (DG? Value? Competitor? …)
3. Materials Handling Considerations
4. Layout and sizing
5. Future Expansion
104
Site selection decision
Business strategy New site
Culture, policy, labor

Country, Region
cost, suppliers…
Conditions, policy of
the local authority Province, City
Feasible location City or province

Considerations for site selection
 Execution, transportation costs

 Labor costs, labor skills, language barrier
 Competitors
 Potential customers
 Reliability of the suppliers
 Infrastructure
 Legal framework for investors
 Potential economic development of the region/city
 …….

Site selection
• Since 1998 many Japanese companies producing
automobile parts moved to US.
• The competition in the field became more and more
severe, forcing US companies to seek ways to improve
their production lines, capability, reduce costs….
• One American manufacturer of automobile parts facing
the problem of high labor costs and outdated
technology decided to sell its plant in the US and totally
moved to the Philippines. The company built a new
production plant and invested a modern production line
• The Philippines’ government policy for foreign
investors: No taxes for the first six years, low land
rental fees
Principle for site selection
 General principles
- Close to customers
- Close to suppliers
- Intermediate location with labor advantages (low labor
cost and skilled workers), reliable sources of raw
materials and affordable transportation costs

Marking method
 Site selection is based on criteria that are

important for company
 Prioritize and rank criteria with certain point
according to their importance
 Compare total marks of all sites to choose the
best one

Example
Criteria Maximum A B C D E
Climate 10 8 6 9 7 5
Infrastructure 20 12 16 15 8 13
Accessibility 10 6 8 7 9 9
Establish costs 5 3 1 4 2 1
Relationship with local 10 6 8 7 4 8

authority
Relationship with local 5 2 2 3 4 3
citizens
Closeness to customers 15 10 10 13 13 10
Closeness to suppliers 20 12 10 15 17 10
High quality of labor 5 1 2 4 5 3
Total 100

Case for discussion
Company A produces Instant noodles. It has a main manufacturing
plant in the South of Vietnam and distribution centers in the South,
in the Central and in the North of VN
- Advantages: (1) keeping the secret of production; (2) having a
good control over quality (3) utilizing economies of scale
- Disadvantages: (1) Transportation by sea (to the Northern DC)
and trucks (To the central DC) can causes noodles to break; (2)
The demand for instant noodles is highly seasonal and
unpredictable while expired date is 3-6 months. Company’s goal
is to supply the newest noodles to their distributors and
customers – within 1 month after production (3) Distributors get a
very thin profitability – especially if noodles are expired or
damaged
Product ABC analysis
• Analyze of product’s annual sale, demand (fast – medium – slow
moving), weight, cube, packaging/handling
• Classify product into group (A,B,C)
• Design WH space, layout, material handling equipment, operating
procedures and control prioritizing the most profitable products.
112
Warehouse design and layout
• 3 consideration for WH design: the number of floors,

cube utilization plan and product flow.
- The general rule is one floor WH except for WH in the
business centers where land is restricted or expensive
- WH should maximize cube utilization – appropriate
height is 20-30 feet
- WH design and WH layout should facilitate continuous
straight product flow through the building: Receiving =>
mixing/order selecting => shipping
113
• Basic Warehouse Design
Unitization
must be
defined
114
•Warehouse Layout
115
116
• Initiating Warehouse Planning
Prior to operations, there are activities and work
procedures must be developed
- Stocking (how to store, how many to store,…)
- Training: video
- Installing WMS
- Security and Pilferage Protection plan (internal
people, …)
- Product Deterioration (perishable…)
- Safety and Maintenance
- Customer service level
117
Which food are
Which food do you unsure of
you know is about where it is
always at the located?
same place in
the fridge?
118
• Stocking: Which type of inventory, in which quantities
and how to store? https://www.youtube.com/watch?v=ThL9N7mvaiQ&t=361s
- Plan initial stocking before operation: Schedule and
sequence of product arrival and receive inbound inventory
=> takes 2-4 weeks to complete initial stocking
- Planning the WH: 2 methods of slot assignment
+ Fixed slotting: assign product to a permanent location in
the WH.
+ Variable/Dynamic slotting: assign products to different
location based on availability of the WH space at the time
of product arrival.
=> WMS with real-time track on inventory
119
• Hiring and training
- WH is the single largest labor intensive element:
administrator, supervisor, selectors, equipment
operators, support workers such as maintenance.
- Labor requirements: Physical strong, not addicted to
drugs or alcohol drinks, disciplinary to follow certain
rules, able to interface with computers, honest and
hardworking…
- Training both theoretical and practical aspects by
simulating the work of each position to avoid possible
mistakes in future
- https://www.youtube.com/watch?v=n9syC93m_cM 120
• Security
+ Pilferage Protection (internal people, …)
+ Product Deterioration (perishable…): FIFO, FILO….
+ Safety and Maintenance
+ Customer service level
121
Future expansion
- Future expansion should be considered upon initial
planning stage and provide WH to function at least 5-
10 years
- Building design should accommodate future
expansion without seriously affecting ongoing
operations (move some walls, build new spaces….
- Expansion: 45/45/10
122
Options for WH expansion
 Extending the existent site

 Acquiring a new plant/warehouse and keeping the
existent facilities
 Changing to a totally new location
 45/45/10
=> Advantages and disadvantages of each options

• Conclusion on Warehousing:
 Temporary storage of goods before consumption
 Performs movement, storage and information transfer
124
1. What are consolidation and unitization?
2. What are the economic/service benefits of WH? Explain 1 of
them.
3. What is the controlled inventory?
4. What are the differences between extended and active WH?
5. What is fixed/dynamic slotting?
6. What are factors that should be considered while designing
warehouse layout?
7. List some risks of inventory storage at the warehouses?
8. What are factors that should be considered while planning
WH layout?
125
CHAPTER 3
INVENTORY MANAGEMENT
& BULLWHIP EFFECT
• Objectives
- To provide an understanding and appreciation of inventory
management
- To provide an overall understanding of the various costs involved
in maintaining and carrying inventory
- To craft common inventory control management techniques
- To study the Bullwhip effect and its impact on inventory
126
What is inventory
• Inventory - any material/component parts or goods that a firm

holds in order to satisfy internal needs and/or customer
demand
• Inventory is an accumulation and standby of the material flow
in logistics chain
Inventory of
Inventory of Inventory of Work-in- finished goods
raw component process
materials parts inventory inventory in
transit

• Inventory flow and role of Inventory in SCM
- Logistical operations start with initial shipment of material/
components & are finalized when finished products are
delivered to a customer
- Logistics process adds value by moving inventory when,
where needed – material and component parts gain value
at each step of their transformation into finish inventory.
- For providing continuous flow of material/parts inventory
must be properly positioned and inventory movement
becomes part of the value added process.
- Consequences of shortage or overstock of inventory?
128
• Inventory Flow
Information flow
Enterprise
Market Manufacturing
Customers Procurement Suppliers
distribution support
Information flow

• Inventory – A Critical Supply Chain Component
- Inventory requirements link to the facility network and the
desired customer service level
- Objective of inventory strategy: to achieve desired customer
service level with the minimum inventory commitment/costs
- Excessive inventories: (+) compensate for the deficiencies in
SC design, (+) increase customer service level; (-) lead to
higher total supply chain cost
=>SC strategies aim to maintain the lowest possible financial
investment in inventory while achieving the highest customer
service level by maximizing inventory turnover.
130
Core
customer
segmentation
Product
profitability
Inventory
strategy
Competitive Transport
performance integration
Time-based
performance
131
1.Core customer segmentation
- Companies usually have different customers bringing
different level of profitability
- Highly profitable customers constitute the core market of
every company => company’s inventory strategy should
focus on them.
- Customer’s business profitability depends upon products
purchased, volume, price, value-added services required
and supplemental activities/costs necessary to develop
and maintain ongoing relationship
- The key to effective logistical segmentation is inventory
priority dedicated to support core customers
132
2. Product profitability
- Pareto Principle (20/80): <20% of all products marketed
account for >80% of total profit
Þ Inventory strategy should be based on analysis of product
assortments, fine-line product classification
Þ What strategy should company focus on?
+ High availability and consistent delivery of profitable
products?
+ High-level support of less profitable items for core
customers?
+ High-level support of less profitable items for non-core
customers?
133
3. Transportation integration
- The size of shipment (the volume and size of specific
product to be transported) is inversely proportional to
transportation rate.
+ A big size of shipment will enjoy lower transportation
rate and vise versa.
+ Stocking sufficient range and assortment of products at
a WH for consolidated shipment may cause higher
inventory carrying cost and at the same time result in
lower transportation cost
Þ Inventory management strategy should provide the
equilibrium of transportation and inventory carrying costs.
134
4. Time-based performance
Inventory strategy of the company should be relevant to its
commitment to deliver products rapidly to meet customer’s
inventory requirement.
Ex: Company promised to deliver products every 10 days =>
customer will keep 10-day inventory without holding safety stock.
5. Competitive performance
Customers typically desire to do business with those who
promise and perform rapid and consistent delivery than
competitors => Companies need to position inventory in a
specific warehouse to satisfy their core customers, to gain and
maintain competitive advantage over their competitors
135
Inventory risk commitment
- Inventory management is risky as inventory cost directly impact
on profitability of a company (example in the table)
Companies Sale Net Net income as Total Inventory Inventory as

income a % of sale Asset investment a % of Asset
Albertson’s 37,478 10,314 27,52 15,701 3,249 20,69
Kroger 28,200 12,200 43,26 17,966 3,938 21,92
Safeway 28,859 8,511 29,49 14,900 2,445 16,41
Fleming 14,646 1,437 9,81 3,573 998 27,93
Spartan store 3,050 407 13,34 571 82 14,36
Supervalu 20,339 2,128 10,46 6,495 1,491 22,96
Hershey 3,971 1,616 40,70 3,347 602 17,99
Kellogg 6,984 3,659 52,39 4,809 503 10,46
Nabisco 8,268 3,766 45,55 11,961 898 7,51
136
- Risk of inventory management depends on position of a
firm in the distribution channel
- Inventory risk is measured by time duration, depth and
width of commitment.
- How is inventory risk commitment of:
+ a manufacturer?
+ a wholesalers?
+ a mass merchandiser?
+ a specialty retailers?
137
• Inventory Functionality
- Geographical specialization: allows a firm to
manufacture and distribute products where it has more
advantages
Example?
- Decoupling = specialization within a single facility
Example?
- Supply /demand balancing – regular inventory
- Buffering uncertainty - safety stock
138
• Inventory-Related Definitions
– Inventory Policy consists of:
+ Guidelines concerning: whether to purchase or
manufacture? when to take action, and in what quantity?
decisions regarding geographical inventory positioning
ex: where to store inventory? at a manufacturing plan,
regional or local DC…
+ Inventory management practice:
 Independent (at each stocking facility)
 Centralized inventory management.
139
• Inventory-Related Definitions
- Service Level: performance target specified by management such as:
+ performance cycle/cycle time = elapsed time between order
placement and goods delivery;
+ case fill rate/line fill rate/order fill rate: % of cases/lines/order that were
filled completely as requested
+ Ontime delivery, safety of good delivered, inventory turnover…
- Average Inventory = average quantity of stocked inventory for a certain
period of time (year, quarter, month, cycle…)
Average Inventory = (max Inventory+ min Inventory)/2
- Safety stock: inventory maintained in a logistical system to protect
against demand and performance cycle uncertainty.
- Re-order point: level of inventory when a replenishment order is
initiated
140
Demand = 10 units/day
Cycle time = 20 days
Demand = 10 units/day
Safety stock = 50
Cycle time = 20 days
Order
Order 250 arrival
Order
placement
arrival
Average inventory
Inventory
Average ???
inventory
Days
Days
50
Transit/Damaged stock
Speculative stock
Average inventory =??? Safety stock
141
Average inventory over multiple performance cycle
Order Arrival and order

placement
Performance cycle = 20 days
200 D= 10 units/day
Q = 200
100 Average inventory
20 40 60 Day
Order Arrival
400 Performance cycle = 20 days
D= 10 units/day
Q = 400
200
Average inventory
days
40 80
Inventory-Related Definitions…..
Inventory carrying costs consist of:

- Capital costs: costs of investment in inventory
- Tax
- Insurance
- Storage (Capital costs of warehouses, equipment,
product holding/handling, labor costs…)
- Obsolescence, damage,….
- Transportation between warehouses (if any)

Example of Inventory carrying costs
Element Percent ranges Average percent (%)

Cost of money/
4 – 40 % 15
capital cost
Tax 0,5 – 2 % 1
Insurance 0–2% 0,05
Obsolescence… 0,5 – 2 % 1,2
Storage 0–4% 2
Total 5- 50% 19,25

Inventory carrying costs
ICC= Average inventory x price x % of inventory costs

Eg:
- Average inventory = 200 units
- Price = 10 $/unit
- Percent of inventory costs = 19.25%
Þ ICC=?
Þ Which are the factors impacting inventory carrying
costs?

Planning inventory
Planning inventory is the process of making a decision
relating to inventory: When to order and How much to
order?

When to order?
• Re-order point – the level of inventory when a replenishment
order is initiated
ROP = D x T
Where:
-ROP = periodical/cycle inventory
-D = daily demand (unit)
-T = Performance cycle (days)
• Inventory control systems: systems that continuously
monitor inventory levels and place an order when the
inventory is depleted to a reorder point

Re-order point?
and average inventory over multiple performance cycle
Inventor arrival
Performance cycle = 20 days
200 D= 10 units/day
Q = 200
20 40 60 Day
ROP=?
Inventory arrival
400 Performance cycle = 20 days
D= 10 units/day
Q = 400
days
40 80
ROP with safety stock
ROP = (D x T )+ SS
Where:
- ROP = Periodical inventory (units)
- D = Daily demand
- T = Performance cycle (days)
- SS = safety stock

Assuming that: LT = 10 days
- 1nd cycle: the daily demand = 20 units pd

- 2nd cycle: the daily demand = 18 units pd
- 3rd cycle: the daily demand = 24 units pd
When orders arrive? When to order?

Inventory Order
placement
250
Average Inventory =?
50 SS 10 20 ? ? days

Planning inventory (continue…)
• Number of orders
• Size of orders
• Inventory strategy

How many orders to place
and how much inventory to order?
800
1 order of the size of 800 units?
2 orders of the size of 400 units?
4 orders of the size of 200 units?
400
200
days
10 20 30 40
How many orders to place?
Total costs
Total costs
Ordering cost
Holding/Carrying costs
Most economical
Number of orders No of orders per year

How much to order?
Total costs
Total costs
Holding/Carrying costs
Minimum
cost
Ordering cost
Economical Order quantity (EOQ) Order size

EOQ?
• EOQ is the size of the order when annual total cost is
minimum
• Annual total cost is minimum when Annual Inventory
carrying cost = Annual ordering cost
• Annual carrying cost = % of carrying cost (Ci ) x Price
per unit (Pu) x Average Inventory
• Annual ordering cost = Number of order x ordering
cost (cost to place 1 order)
• Number of order = Annual demand/Order size

Economical Order Quantity = EOQ
EOQ =
√ 2 Co D
Ci Pu
= √ 2 x19 x2400
0,2 x 5
= 302
Annual demand volume D 2400 units

Price per unit Pu 5 $/unit
Inventory carrying cost per year (%) Ci 20% annually
Ordering cost Co 19 $/per order

Transportation costs and order volume
• The economic scale of an order depends on discount for

transportation, order volume…
• Assuming: transportation costs are as follow:
Q = 300 units – Transportation costs = 1$/unit
Q = 480 units – Transportation costs = 0.75 $/unit
Order size
Transportation cost Inventory costs *
($/unit) ($)
300 1 150
480 0.75 240
Which size of order will be more economical?

Annual demand volume D 2400 units
Unit value at cost Pu 5 $/unit
Inventory carrying cost percent Ci 20% annually
Ordering cost Co 19 $/per order
Transportation cost for Q = 300 1 $/ unit
Transportation cost for Q = 480 0,75 $/ unit
The Comparison of two cases
Carrying costs Case1 = 300 Case2 = 480
Number of orders 8 5
Inventory cost 150 240
Ordering cost 152 95
Transportation cost 2400 1800
Total costs 2702 2135
Example: Discount for big orders
Some considerations when Order size Price

defining an order size: (unit) ($/unit)
- Discount for big orders
1 - 100 5
- Capital for procurement
- Economical scale of 101 – 200 4,5
manufacturing
201 – 300 4,0
- Economical scale of
transportation 301 – 400 3,5
401 – 500 3,0

• Bullwhip Effect
- Bullwhip effect = variability, unpredictable changes in demand
- Variability in one activity and/or by one participant may effect
the chain and create havoc in inbound, storage, production,
shipment and delivery
- Cause of bullwhip effect:
+ Overreaction to backlogs
+ Failed attempt to reduce inventory
+ No communication/coordination up/down the supply chain
+ Delay in information and material flows
+ Order batching
+ Incorrect demand forecast….
- Solution?
161
• Bullwhip Effect
162
Uncertainty management
• Uncertainty of demand
• Uncertainty of lead time
• Combined uncertainty
Reasons?
How to manage uncertainty?
How much safety stock to keep for covering
uncertainty?

Uncertainty of demand
Inventory
days
0 20 30
10
Forecast Actual
Example of actual demand
Cycle 1 Cycle 2 Cycle 3

Day Accumulated Accumulated Accumulated
Demand Demand Demand
demand demand demand
1 9 9 0 0 5 5
2 2 11 6 6 5 10
3 1 12 5 11 4 14
4 3 15 7 18 3 17
5 7 22 10 28 4 21
6 5 27 7 35 1 22
7 4 31 6 41 2 24
8 8 39 9 50 8 32
9 6 45 Stock out 50 3 35
10 5 50 Stock out 50 4 39

Example of factual demand
• Forecast: daily demand = 5 units

• Performance cycle = 10 days
• Reorder point = ? 50
• Average inventory = ? 25
• Actual demand (as in the table)
- 30 days
- Demand: 139 units
- Average demand = 4,6 units
- Actual demand is always less than 10 units, so there
is no probability of stock out in the first 5 days

Safety stock
• Out-of-stock: Planned situation when company

intentionally set the stock to zero.
• Stock-out situation: Unplanned situation – zero stock is
undesirable as it can increase customer dissatisfaction
• Safety stocks as a tool to minimize stock-outs. The
choice of safety stocks depends on:
+ Company’s customer service philosophy
+ Customer service level eg no of stock-outs per period
+ Stock investment
+ Cost of stock-out versus cost of non-stock-out.
167
Safety stock
• Role of safety stock?
168
Safety stock and production life cycle
Further reduce
SS to lower
obsolescence
risk
Carry SS to
minimize
stock-out
Carry sufficient SS
- Support production
- EC
Volume
Reduce SS
- CS level
- LT
- Product mix
Introduction Growth Maturity Decline

Time
169
Safety stock technique – 3 methods
• Statistical Method: SS is computed using statistics,
based on the historical demand/lead-time or both
+ Safety stock = Z + σD x √LT
Where: Z = service level,
σD, σLT = standard deviation of demand, lead-time
LT = lead-time
DA = Average demand
+ Safety stock = Z x σLT x DA
+ Safety stock = Z x √[LT x (σD )²] + [(σLT)²x DA²]
• Fixed Method
• Time Method: looking at the future demands
170
Safety stock vs fluctuation of demand
Daily demand Frequency

- Sale history is aggregated – (days)
Stock out 2
it’s a frequency distribution:
0 1
average daily demand 1 2
varies around 5 units/day. 2 2
3 3
- Demand exceeds average
4 4
in 11 days 5 5
- Demand was less than 6 3
7 3
average in 14 days
8 2
9 2
10 1
Historical Analysis of demand history
Number of days
Average sale (mean) = the median (middle) = The most Frequently

observed (the mode) = 5 units/day

Normal Distribution
• Normal distribution has 3 measures of central

tendency equal (mean, median and mode)
• Basis for predicting demand during performance cycle
using a normal distribution is the standard deviation of
observations around the three measures of central
tendency
• Standard deviation is the dispersion of events within
specified areas under the normal curve – for inventory
management, the event is unit sales per day and the
dispersion is the variation in daily sales.

Calculation of standard deviation
σ = √ ∑ F i Di2
n
Where:
- σ: Standard deviation
- Fi: Frequency of event i
- Di = Deviation of event from mean for event i
- N = Total observations available

Calculation of standard deviation of daily demand
Frequency Deviation Deviation
unit FiDi2
(Fi) (Di) square
0 1 -5
1
2
2
2
-4
-3
σ = √ ∑ Fi Di2
n
= ???
3 3 -2
4 4 -1
Calculate safety stock
5 5 0 for if the firm sets the
6 3 +1 target customer
7 3 +2 service = 95%?
8 2 +3
9 2 +4
10 1 +5
N=28= Mean = 5
• Lead-time issues of Inventory
- Lead time/Cycle time = total elapsed time required to
complete a business process
- Companies must be able to compete on the basis of
time so that they can respond to customers needs faster
than their competitors
- How does Apple manage their inventory
176
- Causes of long cycle time?
+ Waiting time between processed steps
+ Non-value added activities/Repeating Process activities
+ Serial vs Parallel Operations
+ Batching (waiting until order/material is accumulated )
+ Excessive controls/lengthy procedures
+ Lack of synchronization in materials movement, information,
effective training
+ Poor communication, coordination, cooperation within a
company and along SC
+ Outdated technology
+ …..
=> Solution? Case study?
177
Lead time variability
Actual
Frequency Deviation Deviation
lead time FiDi2
(Fi) (Di) square
(day)
-Calculate Standard
6 1
deviation of lead time?
7 3
-Calculate SS based on
8 7
LT variable assuming
9 5 that average demand is
10 13 20 unit/day?
-Calculate SS based on
11 9
demand and lead-time
12 6
variables assuming that
13 4 average demand is 20
14 2 unit/day?
178
Exercise
• Calculate Safety stock to cover uncertainty of

demand?
• Calculate Safety stock to cover uncertainty of lead-
time?
• Calculate Safety stock to cover uncertainty of
demand and lead-time?
179
Inventory flow types
• Base flow inventory: core business products/

product with stable demand
• Wave flow inventory: Seasonal fashion products
• Surge flow inventory: Fad products

Inventory flow types
Fad products
Surge Flow inventory
Seasonal
products Wave Flow inventory
Core business Base flow inventory

products

Stockholding policies
for alternative inventory flows
Types Characteristics Stockholding Policy
− Minimum stocks, regular
Base flow Predictable high flow rates replenishment
− Direct delivery from the suppliers
Slow moving flow rates − Minimize stockholdings, building
High criticality. Perishable. them during peak demand period
Wave flow
Peaks are relatively − Direct delivery from the suppliers
predictable where possible
Highly critical - Low value
Surge flow (1) Long lead time - Hold high level of stock
Small physical size
− Minimize stockholding, building
Low critical - High value
them only during peak period
Bulky physical characteristics
Surge flow (2) − Direct delivery from supplier where
Peaks are relatively
possible
predictable

• Product classification
What are the reasons for product classification?
183
• A Class
– High value item that typically accounts for 75 –80% of
the value of the total inventory but only represents 15 –
20% of inventory in terms of quantity or volume
• B Class
– Lesser value items that accounts for 10 –15% of the
value of the total inventory but only represents 20 –25%
of inventory in terms of quantity or volume
• C Class
– Low value items that account for 5 –10% in terms of
value and 60 –65% in terms of quantity or volume of
total inventory
184
• The same degree of control is NOT justified for all items!
– Class A items should have the greatest attention
– Class C items should have the least attention
• there is no need for special calculations of order qty
• order qty might be a one-year supply with periodic review
185
• How to do classification?
– List all items that need to be analyzed
– Multiply annual usage in units by unit cost to obtain value of annual usage
– Rank items in descending order of value of annual usage
– Calculate the cumulative percentage of value of annual usage and
percentage range of inventory items
– Plot a graph of percentage of cumulative value of annual usage against
the percentage of inventory items
– Divide the items into groups based on management criteria I e A class
70%, B class 25%, and C class 5%
– Plot a graph of percentage cumulative value of annual usage against the
percentage of inventory items
– Divide the items into groups based on management criteria I e A class
70%, B class 25%, and C class 5%
186
• Example -ABC Analysis
– Step 1
187
– Step 2
188
– Step 3
189
Inventory reduction strategies
• Pool inventory
• Reduce variation
• Reduce lead time: time of production + delivery
time
• Just-in-time inventory system (JIT)
• Delayed product differentiation
• Transit inventory reduction: Reduce lead times
• Warehouse reduction for in-transit inventory:
Mobile/rolling warehouses - The gearbox
approach

Cisco’s - Inventory Write-down
Description
At one time, Cisco Systems Inc was expected to become the world's
first trillion-dollar company. Its business model was based on a virtual
supply chain with apparently limitless capacity, and an emphasis on
high customer reliability. Cisco referred to this approach as global
virtual manufacturing.
But when the telecoms industry hit a downturn, Cisco was one of the
worst affected -perhaps in part because of the high gearing that had
served it well on the way up. Customer orders fell, production orders
continued to go out, raw-parts inventory increased by more than
300% between the third and fourth quarter of 2000. Cisco was forced
to write down $2.25 billions.
According to Lakenan, Boyd and Frey, "Cisco simply wasn't able to
scale up or down as quickly as it thought it could."
191
Cisco had never experienced anything but growth management was
unable to recognize the impending downturn.
Furthermore, because production had been outsourced to ECM, who
had no incentive to tell Cisco that Cisco projections were wrong. Cisco
continued planning for growth until it was too late.
At the roof of Cisco’s problem was its push system. Component orders
were driven by demand forecasts without any mechanism to limit the
amount of inventory growth that could build up at the various levels in
the chain.
Adding to the problem, competition for materials and contract
manufacturing capacity led Cisco to forecast and purchase huge
quantities well in advance of actual demand.
As long as demand grew, the huge inventory build-up was OK. But
when demand fell abruptly, inventory became a huge liability.
192
Exercise
Given the following information:
Annual requirements (D) = 5,000 units
Order cost (Co) = $100 per order
Holding rate (Ci) = 20%
Unit cost (Pu) = $20 per unit
Lead time (LT) = 6 days
Number of days per year = 360 days
Compute the (a) EOQ, (b) total cost of purchased inventory,

(c) annual inventory holding cost, (d) annual order cost, (e)
annual total cost, (f) reorder point, (g) number of orders
placed per year and (h) time between orders.
Extra: Transport cost: 500  0,75 $/unit; 800  0,5 $/unit.
193
Exercise
Given the following information for a purchased part,
compute the (a) EOQ, (b) total purchase cost, (c) Total
annual inventory holding cost, (d) annual order cost, (e)
annual total cost, (f) reorder point, (g) number of orders
placed per year and (h) time between orders.
Monthly demand (d) = 3,500 units
Order cost (Co) = $250 per order
Holding cost (Ci) = $8.65 per unit per year
Unit cost (Pu) = $85 per unit
Lead time (LT) = 12 days
Number of days per year = 365 days
194
1. Describe the average inventory?
2. What is inventory carrying cost?
3. What is the EOQ?
4. What is the ROP? How to calculate the ROP?
5. What is safety stock? Which factors should be considered
upon safety stock planning?
6. What are 5 factors that should be considered while
planning inventory
7. How does lead-time relate to the inventory level?
8. What is the inventory turnover?
9. How does the inventory relate to the service level?
10. What are the WMS and VMI?
195
CHAPTER 4
INFORMATION TECHNOLOGY
IN SUPPLY CHAINS
• Objectives
– Explain the importance of IT in supply chain
integration
– Analyze the impact of information visibility on cycle
time in supply chain management
– Analyze impact of e-business on supply chain
– Apply e-business strategy in supply chain
management.
196
Logistics information system
• Logistics Information system is a system of

records and reports (paper based or electronic form)
used to aggregate, analyze, validate and display data
from all level of logistics system that can be used for
logistics decision making and SC management
197
The functions of the logistics information
Planning
• Demand forecasting
• Strategy planning
• Materials requirement
planning (MRP – ERP)
• Sales/Marketing planning
Databases Customer service

Co-ordination communication
• External data
• Production scheduling - Customer orders • Customer order status
• Stock/WH management - Inbound shipments • Inventory availability
- By products/ customers • Internal data - By product
- By location - Production, Inventory, - By stock location
• Transportation management - Outbound shipment • Outbound shipment status
Control
• Customer service levels
• Vendor performance
• Carrier performance
• System performance
• Paper-based vs electronic format of information
-Ease of Record and storage of information
-Sharing ability
-Accuracy-Reliability
-Visibility
-Accessibility
=>Impacts of the information technology on SM
performances?
199
Ford motor
Order Inventory Ford

Procurement Supplier
Warehouse
Invoice money
O
t
ip
rd
ce
e
Re
r’s
co
py
Accounting
Department
(500 ->125)

• Goals of IT
- Collect information on each product at each process
to provide complete visibility for all participants
involved;
- Access any data in the system from a single-point of
contact;
- Analyze, plan activities for decision making at
strategic, Operational and Tactical levels
Þ To have visible information trail that follows the
product’s physical movement
201
Goals of Information technology
202
=> Support
decision making
at strategic, Access from
operational and single point of
tactical level contact
Collect Analyze
information

Key drivers of the development
of SC information technologies
- Increasing information complexity

- Increasing information proliferation
- Increasing information diffusion
- Increasing information velocity
- Increasing information accuracy

Information technology infrastructure
1. Interface devices: PC, Terminal, Internet devices, Bar-

code/RFID readers
2. Communication devices: LAN/WAN, Intranet or external
network (internet)
- Wireless communication: satellite, EDI, Bar coding, Radio
Frequency Identification (RFID)
- Single point of contract for communication (phone, email,
fax)
- Electronic data exchange (EDI), GPS
3. Databases
4. System architecture
204
IT System Architecture
205
IT System Architecture

Electronic Data Interchange (EDI)
• EDI = computer - to - computer exchange of business
document in a standard format
• EDI = communicating information between two or more
organizations electronically
• EDI links SC participants in terms of order processing,
production planning, inventory management,
accounting, transportation management
=> Benefits of EDI?

EDI example
208
• Principle of EDI
– To exchange information using EDI, Search
Pre-Sale
documents must be translated into a Negotiate
format that complies with an EDI
standard Order
Execution
– Mapping is the initial process that Deliver EDI
describes how each element of the
original document, such as a Invoice
purchase order or invoice, relates to Settlement
Payment
an "EDI transaction" that complies
with the standard being used After Sales After Sale
– The translation software uses this
mapping to translate the EDI
transactions so they can be used by
the receiving organization
209
Barcode system
• Bar code = machine-
readable representation of
data relating to the object to
which it attached
• Bar code reader?
• Standard of bar codes
• QR code

RFID - Radio Frequency Identification
Basic RFID System consists of:
- An antenna or coil
- A transceiver (with decoder)
- A transponder (RF tag) electronically programmed with
unique information.
https://www.youtube.com/watch?v=gEQJxNDSKAE&t=8s
211
• RFID – Radio Frequency Identification Tags
- RFID tags have different shapes and sizes
- Active and passive tags:
+ Active tags are powered by an internal battery and are
typically read/write, i. e. tag data can be rewritten and/or
modified
+ Passive tags are operated with a separate external power
source - operating power of the reader
Passive tags are lighter, less expensive, and offer a virtually
unlimited operational lifetime
Passive tags have shorter read ranges than active tags and
require a higher powered reader
212
The advantages of RFID applications in SCM
• RFID tags are very secure, can be hidden
• RFID can be read through non-metallic materials without
touching to a tag at a very fast speed
• Multiple RFID label can be read at one
Þ Application of RFID results in:
+ Improving asset tracking and management
+ Increasing security of freight
+ Improving stock management and availability
+ Speeding data collection
+ Reducing errors in product data handling
+ Reducing labor costs, time

RFID can enhance competitiveness
• Lowering cost: US national retail security: 2001 – inventory lost

due to administrative errors was US$ 5.8 billion
• Increasing revenue: lost due to stock-out inventory was 3.8%.
• Decreasing working capital thank to shorter amount of time for
order processing, material handling => shorter cycle time
• Reducing fixed capital: tracking asset such as containers,
pallets and reducing their loss or under-utilization, cutting back
redundant equipment...
• Improving customer service level
Uniqlo: https://www.youtube.com/watch?v=Ay8cZfe8S_o

RFID can enhance competitiveness
Walmart is expected to save US$8.35 billion (5% of its total
revenue) by implementing RFID across all their operation:
- 6.7 billion = 15% of labor cost by eliminating the need to have
people scan bar codes on pallets, cases in the SC and on items in
the store
- 600 million – using smart shelf to monitor on-shelf availability of
inventory for avoiding out-of-stock situation
- 575 million – by reducing inventory loss
- 300 million by better tracking more than 1 billion pallets, cases
that move through its DC each year
- 180 million by improving visibility of SC resulting in reducing
inventory and inventory carrying costs

Financial Barrier to RFID implementation
Tags:
- Basic passive RFID: 10¢ USD each – Good for paper or other
non-metal, liquid material.
- Metal passive RFID: $1.50 USD each – Larger passive tags
that work on metal surfaces.
- Active RFID: $15-$20 USD each
Readers:
- Handheld – Passive RFID handheld readers - $3,000
- Fixed Position passive RFID: $10,000–20,000 per portal for
hardware, installation and configuration
- Active RFID readers: $1,250-$1,500 each.
- Active RFID Rack/Room Locators: $150-$200 each.
Databases
• Relation databases.
• Object databases
• Data warehouses
• Data-marts: smaller version of data warehouses
Generic system Architecture

• GSA = configuration of various components like
databases, interface devices and communications.
• The most current system design is client/server
structure
• © Copyright 2018, Vietnam Logistics Research
Enterprise Resource Planning (ERP)
• An application that spans an enterprise to integrate the

various business functions across multiple
locations
• ERP is used for planning and control of resources
• Commonly requires business process reengineering to
align work organization with the technology
• Not supply chain spanning

Collaborative planning forecasting
and replenishment (CPFR)
• Not just an information technology

• IT-enabled CPFR is essential in high velocity SC such
as those of the major supermarket
• Commonly offered as a “bolt-on” to ERP to enable ERP
to extend beyond a single organization

Collaborative
planning-forecasting-Replenishment
CRM
CPFR solution
Generate
demand
Promotion
Trading
partner 1
EDI Forecasts
Collaboration
Determine
Trading requirements
partner 2
Item catalog
Internet
Trading Make to
partner 3 Orders demand
Supplier ERP
Information visibility
• Information visibility = ability to see information at the

various points across the SC as and when required
• Information visibility helps to manage complexity
Þ benefits:
-Reduced schedule variability
-Shorter planning periods
-SC synchronization and coordination
-A single point of control
-Integrated information systems

Information visibility
• Order visibility: provides information for customer to know
about their order status
• Shipment Visibility: Provides tracking in-transit movement
of the product through web-based tracking system. The
tracking system can also serve as an exception
management tool to alert supplier or distributor if there is
delay during the in-transit movement.
• Inventory Visibility: provides exact information about
product availability and stock level to make replenishment
as required. The inventory visibility can be achieved
through the use of warehouse management system
(WMS). http://www.pier2pier.com/

Shipment visibility
223
Barriers to information visibility
• Cultural barriers: a reluctance to share information with

other supply chain partners
• Financial barriers: The high costs of implementing and
maintaining supply chain spanning information
technologies
• Technical barriers: information system across the supply
network should have the ability to talk/communicate/
compatibility to each other
• Organizational barriers: To align the numerous disparate
processes across multiple supply chain echelons is a
highly complex program of activities
• WMS – Warehouse Management System
- A WMS= a software application that helps control and
manage the day-to-day operations in a warehouse.
- A WMS can be a standalone application or part of an
ERP system.
- WMS - to control the movement and storage of materials
within an operation
- The system can provide visibility of the inventory back to the
manufacturing environment for replenishment and forward to
order processing and management for allocation to a
customer's order
- The main functions: to determine where to stock, where to
pick, and in what sequence to perform these operations.
225
• WMS Functionalities
• Audit trails
1. Inventory Control: • Query
• Lead time calculation
• Random put-away algorithms

• Integrates storage of products by
2. Storage Location velocity
Management: • Assigns location by size, weight,
status
• Stores by types
• Quality control hold

3. Quality Control
• Lot and batch tracking by SKU/customer
Interfacing:
• Notification
226
WMS Functionalities (cont’d)
• Batch pick plan

4. Order Selection • Query that permits access to the status of any
product by FIFO, lot, order number
• Inventory Allocation
• Stock replenishment
5. Automatic Inventory
• Product ‘movement’ reports
Replenishment
• Let down schedule
• ASN receipt (Advanced Shipping Notice)

6. Receiving • Blind receipt
• ‘Instant routing’ for backordered product
227
• WMS Functionalities (cont’d)
• Shipping documentation creation

7. Shipping • ASN (Advanced Shipping Notice)
• Notification of special handling requirements
• Task performance records

8. Operator Productivity • Interleaving tasking
• Random order checking
• Management report
9. Report Generation • Productivity report
• Inventory report
228
Vendor Managed inventory
• It is a software package as a module of WMS

• Customers outsource their inventory management to
their suppliers
• VMI provides a mutual beneficial relationship where both
sides will be able to more smoothly and accurately
control the availability and flow of goods
• VMI requires information visibility

Vendor managed inventory
Remote access Collaborative supply Optimizing supply

to collected data chain initiative chain
performance
Manufacturer has access to

Collection and
distributor inventory data
and are responsible for
VMI centralization of
inventory data
generating purchase order
Manufacturer is responsible Integration of

for maintaining distributors inventory data and
inventory level business systems

• E-Commerce/E-business
- E-Business involves the execution of business
transactions over the electronic way (internet, email,
television…)
- Activities that are performed online:
+ Offering products/services
+ Negotiating prices and contracts
+ Placing and receiving orders
+ Tracking orders
+ Paying and receiving payment
+ Warranty registration
+ ….
231
• 4 Levels of e-Commerce
– One-way communication (other party does not need
to respond):
+ Email
+ FTP (File Transfer Protocol)
+ Browsing
– Database access:
+ Personal inquiry of product catalogue, order status,
inventory level
– Data Exchange:
 Business to business transactions
 EDI
– Sharing Processes: CPFR, WMS, VMI
232
Example of E-commerce system
233
Vertical Hubs Horizontal Hubs
 Covisint: automotive  BidCom: project
 Altra Energy: energy management
Strategies of E-Business
 E-Steel: steel  CarrierPoint: global
of Supply Chain  PlasticsNet: plastics logistics
 SciQuest.com: life  The Return
(E-Marketplace,
sciences Exchange: reverse
Exchanges and Hubs)  ChemConnect: logistics
chemicals
Using Auctions in
Procurement
234
E-Business
Advantages?
- Global access - Direct sales to customers - Faster time to market
- Cost saving (Business launching, facility, processing, inventory
costs…) and price reduction
- Easy availability through search engines quick and affordable
marketing (learning of customers’ habits)
- Improved SC coordination - Mass customization …..
- customer service – easier inventory management
Disadvantages
 Reduces profits to suppliers
 Contrary to integrated supply chain philosophy of long term alliances and
trust
 security (for both customer and seller)
 dependency on the website/ risk of site crush/hack
 High tech personnel – no testing, trying - high % of return – Competition
 poor customer buying experience, product delivery…..
235
• Conclusion - benefits of ITS
- Facilitate effective competition
- Improve supply chain process
- Achieve seamless information sharing
- Reshape the tradition model of SCM in the areas of:
 Customer order processing
 Inventory management
 Purchasing
 Transportation
 Warehousing
 Information management
 Others…
236
IT system
1. Discuss the goals of logistics information system? Why IT is

important for L&SCM?
2. What are the 4 components of a IT system?
3. Discuss drives for companies to build their IT system?
4. Discus the advantages of RFID over barcodes
5. What is information visibility in SCM? Discuss the
importance of information visibility for logistics and supply
chain management? What are barriers to achieve
information visibility?
6. How does IT impact the commerce? Explain the differences
between buyers’ and sellers’ bidding.
CHAPTER 5:
STRATEGIC ALLIANCES
IN SUPPLY CHAIN
• Objectives
– To conceptualize of strategic alliances between
companies
– To understand the role 3PL and LLP
238
• Strategic Alliance
– A close, trustful, long term, cooperative relationship
formed for the purpose of
+ gaining synergies to improve performance of partners
+ offering a broader set of skills or services to improve
customers satisfaction
+ creating and strengthening an advantage over
competitors
+ gaining mutual benefits
239
CN Railway
 60 purchasing point with 1400 staff
 Strategy: big size order from low-cost suppliers (discount 10-
35%)
 1994 – stopped buying from 500 suppliers on the west of
Canada
 Establish alliance with distributor Acklands: 6000 invoices
were replaced by 1 payment report per month => saved 1,2
mill CAD
 Business Re engineering with 23,000 staff
 1995: 25 purchasing points - 280 staff => saved 14 mill CAD
on purchasing & 3.4 mill CAD on inventory
 Objective of 1996: cut 40 mill CAD of purchasing costs and
34mil AUD on inventory
241
• Relationship • The concerns of Strategic
Characteristics alliance
- Trusting relationship - Loss of control over L channel
- Long term goal - Fear of being out of the LC
- Complementary to each other - Concern of logistics failure and
- Broader skills, products and no direct way to handle them for
services customers
- Impacting end results - Not enough trust to try such an
arrangement
- Synergy along the chain
- Partners may not be viewed as
- Competitive advantage
equals
- Win-Win relationship
- Difficulty of identifying the
- New value chains through economies to be achieved as
collaboration compared with the partner’s
current logistics cost
242
Logistics partnership decision
243
• Ex: at Cisco, strategic alliances engage in impact partnering that
is differentiated by 8 unique but integrated characteristics:
244
Conceptual Model of Alliance Development
• Strategic Component
Examines how strategic expectations and evaluations of
alliance effectiveness evolve as an alliance progresses in
the development stage
• Process Component
Outlines the stages of alliance development –e g
formation, implementation, maintenance or termination
• Operational Component
Standard operating procedure for managing an alliance
245
General Alliances development model
Stage 1 =>
Stage 2 =>
Stage 3 =>
Stage 4 =>
246
• Conceptual Model: Horizontally there are 4 stages:
Alliance conceptualization
- Discovering a need for a special arrangement with a certain partner
- Joint planning
Alliance pursuance
- There is a decision to form an alliance
- The firm establishes operational and strategic criteria to select the strategic
alliance partner
Alliance confirmation
- Determining the strategic and operational expectations for the arrangement
- Joint planning
- Opportunity for interaction can result in better partner relationship
Alliance implementation and continuity

- Focus on performance assessment to determine whether an
alliance will be sustained, modified or get terminated
- Conflict resolution process is required
247
Reliability
- Functional competence
- Interpersonal
Loyalty Competence competence
- Business sense
competence
Developing
a trusting
relationship
Vulnerability Affect- - Openness

based trust - Faith/goodwill
248
Reliability
The ability to produce a consistent and predictable
outcome over a period of time
The act of integrity and honesty of parties in even
unusual situations
249
Competence = ability
- Functional competence – the ability to know,
understand and find a solution to a specific area.
- Interpersonal competence – the ability to work with
others and the ability to listen, negotiate,
communicate, make a presentation, reach an
agreement with a group, and other related skills to
deal with people on a day-to-day basis.
- Business sense competence – is about individual’s
experience, wisdom and common sense.
250
Affect-Based Trust (“Goodwill”)
- Openness –being open with other party on
problem or information.
For example, a supplier who provides information
on internal costs or a buyer who provides
information on future forecasts.
- Benevolence –the acknowledgement of duty by
one party to protect the rights and interests of the
other party.

251
Vulnerability
 Adverse selection –the inability to evaluate accurately the
quality of the assets the other partner brings to the
relationship.
For example, a buyer may not know exactly whether the
supplier’s production system can meet his requirements.
 Moral hazard –the inability to evaluate the assets
committed when a relationship exists.
For example: a supplier based on a buyer’s request,
increase its production capacity. However, there is no
means to ascertain that the supplier has indeed invested in
the plant and increase the production capacity. There will
be asymmetric investment by partner that commits more to
the relationship than other.
252
253
Loyalty = Strong commitment to each other
In loyal relationship, there is the belief of one party that the
other party will perform well in unusual situations, when it
really counts.
254
Challenges to strategic alliances
• Loss of control over the logistics channel

• Increased concern of logistics failures and no direct
way to handle them for their customers
• Trust-Confidentiality
• Inequality in relationship
• Difficulty in identifying logistics cost efficiency
• ……

Partnership in Logistics and SCM
Management of all parties of

5 the supply chain in
P
(E-business) conjunction with e-business
L
4PL Management of different

(Supply Chain stages in a supply chain
Management)
3PL
(Forwarding/ Management of complex
Contract Logistics) service chain
2PL Traditional transport and

(Asset-Based Logistics) warehouse operators
1PL
Self operation of logistics by
(Producer)
producer
• Third-Party Logistics Provider (3PL)
- An organization that manages and executes a
particular logistics function, using its own assets
and resources, on behalf of another company
- Outside firms perform materials management
and logistics functions
- Long term commitments and multiple functions
257
Growth drivers of 3PL, 4PL
• Globalization-global sourcing and selling

• Supply Chain management requirements
− Trust
− Information
− Capital utilization
− Expense control

All North Asia Latin
Outsourced services Europe
regions America Pacific America
Domestics transportation 83% 75% 94% 89% 80%
International transportation 75 62 89 86 74
Warehousing 74 73 82 77 63
Customs brokerage 58 57 54 68 65
Forwarding 53 47 54 70 48
Cross-docking 38 33 47 42 34
Product labeling, packaging, assembly… 36 32 41 41 34
Reverse logistics (defective, repair, return) 35 27 47 46 25
Transportation planning and management 31 32 32 30 26
Freight bill auditing and payment 28 40 22 23 15
Information technology (IT) services 20 20 15 19 25
SC consultancy services provided by 3PLs 18 20 11 25 17
Order entry, processing and fulfillment 16 17 11 21 14
Fleet management 15 15 17 14 20
Customer service 13 9 10 21 15
LLP/4PL services 13 9 13 16 19
Reasons to outsource logistics activities
• Concentrate on core competences
• Avoid large capital investment
• Reduce labor costs
• Improve standard of services
• Enjoy a greater logistical expertise offered by 3PL
and lower costs
• Have wider geographical coverage and product
range offered by 3 PL

Benefits of outsourcing logistics services
Result All region

Logistics cost reduction 15%
Logistics fixed asset reduction 25%
Inventory cost reduction 11%
Average order cycle length Changed from 17 days
Changed to 12 days
Order fill rate Changed from 73%
Changed to 81%
Order accuracy Changed from 83%
Changed to 89%
Source: Langley and Capgemini Consulting (2010)

Economic benefits of sourcing from
low cost offshore locations
Profit Profit
Marketing
Marketing
Domestic sources
Logistics
Foreign sources
Logistics
Overhead
Tariffs
Materials
Overhead
Materials
Labor
Labor

263
Advantage and disadvantage of 3PL outsourcing
Advantages Disadvantages
• Cost reduction • Span of control
• Non-Core business • Pricing
• Leverage on 3PL’s logistics • Confidential information
network sharing
• Cut down asset investment • Gaps in expectations
• Improve customer service • Implementation timeline
• Short lead time
• Flexibility of business
expansion and reduction

IT systems provided by 3PL
• Shipment and Inventory tracking

• Cross dock management
• Inventory and warehouse management
• Customer relationship management
• Vendor/supplier management
• Returned material authorization
• Transportation planning and scheduling
• Order fulfillment
• SC design and planning
• …………..
4PL - 5PL
• A 4PL = an integrator that assembles the resources,

capabilities and technology of its own organization and
other organizations to design, build and run
comprehensive supply chain solution
• Globalization-global sourcing and selling
• Evolution of supply chain outsourcing:
- 4PL delivers comprehensive supply chain solution
- 4PL delivers values through the ability to impact the
entire supply chain

Characteristics and fundamental of 4PL
• Neutrality
• Specific Know-hows
• Extensive IT competence
• Management capacity
• Task of designing, coordinating and controlling supply
networks
• Delivering comprehensive SC solutions
• Managing an integrated material and information flow
• Taking over operative responsibilities for the clients
• Offering a portfolio of different service modules by
cooperating with other service providers
Key services of 4PL
• Transportation and warehousing
• Manufacturing
• Procurement/sourcing
• Supply chain IT
• Demand forecasting
• Network management
• Customer service management
• Inventory management
• Administration

Specific set of SC initiatives and goals
• 4PL common services (invoice management, call

centers, warehouse/distribution facilities)
• Implementation center (business process analysis/
scoping, and development of all activities into an open
system framework)
• Product/Skill training centers (SC engineering)
• IT system center (Pure IT selection for design and
implementation/connectivity)
• 4PL backstage operation (Functional support in
administration, quality, finance, legal)
• Knowledge transfer, Business development,

Benefits of 4PL Disadvantages
• Revenue growth • Span of control

• Reduction of supply chain • Pricing
cost • Confidential information
• Reduction in working sharing
capital requirement • Gaps in expectations
• Supply chain related • Implementation timeline
capital reduction • Limited choices of 4PL
• Leveraging high
• Dependence on 4PL
technology in a 4PL
solution

Levels of 4PL solutions
Reinvention: aligning business strategy with SC strategy

and using technology to integrate and optimize operations
both within and across participating SC
Transformation: improving internal SC functions such as

sales and operation planning, distribution management,
procurement strategy and customer support.
Implementation = business process realignment,

technology and system integration
Execution: at the tactical level. An organization can

outsource the entire range of its supply chain
activities to a 4PL provider for execution.

Challenges for 4PL
• Enterprises do not outsource controlling tasks

• Lack of clear cost allocation in outsourcing projects
• Inadequately developed supply network
• 4PL concept and benefits are not well known
• Fragmented implementation of 4PL along supply
chain
• Comprehensibility of the enterprise

What need to be a 4PL?
• Trained and competent supply chain professionals
• Global capability/Regional capability in terms of geographical
presence, resources, technology
• Ability to manage multiple service providers
• Strong program management skill, people relationship and teaming
skill
• Ability to deliver of world class SC strategy formulation and
business process redesign
• Substantial experiences in integrating SC technologies and
outsourcing capabilities
• Understanding and management of organizational changes, issues
and challenges
• Ability to anticipate and prepare customers for future SC
development, trends, standards
4PL Cross Border Integration of Supply Chain
4 PL - Solution
Co-ordination
Supply of an integrated platform and cross company ICT system
3 PL 3 PL 3 PL
Supplier OEM Distribution Customer
The 4 PL concept provider integrated, process-orientated

planning, coordination and control of complete supply chains
274
1. What are the purposes and the characteristics of
strategic alliances?
2. What are the benefits for a company to partner with
3PL, 4PL, 5PL?
3. What are the disadvantages of strategic partnership
in LSCM?
4. What are the factors impacting decision on
strategic partnership in logistics?
5. What are the stages of developing a strategic
partnership?
6. What are differences between 3PL and 4PL?
275
CHAPTER 6: EFFICIENT TRANSPORT
AND DISTRIBUTION STRATEGY
1. The importance of transport in a supply chain

2. Functions, principles and participants of a transport
system
3. Structure of a transport system
4. Transport and Incoterms
5. Transport operations (Pricing, Operation management,
Utilization of different modes of transport
6. Guidelines for distribution strategy
276
1. The importance of transport
• Provide the movement of material flow from the first

supplier to the hands of consumer.
• Transport is one of the most cost absorbing element
of SCM and transport cost takes a certain share in
product cost
• Successful SC is linked to successful and
appropriate use of transportation
• Transport creates place and time utility

The importance of transport

Role of time and place utilities in transportation
Warehouse/
Storage
Time utility
Transportatio Time in transit

n
Place of
Place utility
consumption

2. Transport functions
 Product movement
+ Transport material from suppliers
+ In house transport
+ Transport finished products to the final customers
+ Transport returned goods
 Product storage

 Method of providing transport
– Owned transport fleet

– Outsource to professional carriers
– Outsource when needed (contract based)
 Efficiency of transport system
– Cost of delivery
– Lead time
– Reliability
– Security
– …..
282
Relationship among transportation participants
Public
Government
Carriers and
Shipper Consignee
agent
Internet

3. Transport structure
Sea
Pine
Air
line
Multimodal
transport
Rail Truck

Advantages and disadvantages of
five modes of transportation

https://www.marineinsight.com/know-more/top-10-worlds-
largest-container-ships-in-2019/
https://www.youtube.com/watch?v=DmEfQxg9whI
286
4. Transport and Incoterms
• Incoterms 2010
• Incoterms 2020

5. Transport operation
 Pricing
 Operating
 Transport documents

5.1. Pricing
• Principles of transport costing

• Factors affecting transport costs
• Transportation cost structure
• Strategy of pricing
• Types of freight
• Transport services

Principle of transport costing
- Economic scale of volume:

+ Cost per unit of weight decreases as the size of a
shipment increases
+ Cost per unit of weight decreases as the capacity
of the means of transport increases
- Economy of distance
+ Transport cost per unit of weight decreases as
distance increases.

Factor affecting transport cost
+ Volume/Density
+ Capacity of the means of transport
+ Distance
+ Reputation of the carrier
+ Packaging, sizing
+ Handling method
+ Liability of the carrier
+ Demand and competition of the transport market

Cost and distances
Total cost
Cost per transport unit
Distance

Costs and volume
Cost per transport unit
Volume and capacity of the means/modes of transport

Transport cost structure
Total cost
Cost
Variable cost
Fixed cost
Distance
Components of the transport cost
• Direct carrier cost associated with movement of
Variable each load (labor, fuel, maintenance)
cost • Measured by S/mile, per unit of weight
• Constant cost that carrier should spend anyway

Fixed cost • Vehicle, terminal, right of way, information system,
support equipment
• Expenses created by the decision to provide a

Joint cost
particular service
Common • Terminal, management… expenses that

cost incurred on behalf of all selected shippers

Pricing strategy
 Cost of service = cost of service + profit

- Based on minimum charges
- Applied for low value goods, in a highly competitive market
 Value of service
- Based on the value perceived by the shipper
- Used for high value goods or in a limited competitive
market
 Mixed
 Net-Rate Price

Types of freight rate
• General cargo rates

• Commodity rates
• FCL, LCL freight rate
• Time volume rates
• Special rates and service

Some services of the carrier
• COD: Collect payment on delivery

• Inside delivery: Deliver products inside the building
• Notify before delivery
• Re-consignment of delivery: Redirect to a new
destination while in transit
• Redeliver: second delivery
• Sorting and segregating: sort prior delivery
• Storage
(Bowersox, Bixby)
Cargo flows on container trade route (TEUs)

5.2. Transport operation
 Pricing
 Operation management
 Transport documentation

Operational management
– Order consolidation
– Route optimization
– Carrier rate management
– EDI link with the carrier
– Internet-based shipment tracking
– Integrated claims management
– Identify most economical modes
– Calculate best route
– Carrier selection
– Yard management
Modal choice matrix
Larger shipment Smaller shipment

Shipment Size
Slower Faster
Speed
Sea/Rail Intermodal Truckload LTL Parcel Air
Less expensive More expensive

Transport cost
Slower Quicker
Service response
More expensive Less expensive

Inventory cost
Selecting the carrier
• Traditional carriers
• Contracting carriers
• Intermediaries
- Freight forwarders
- Agents
- Brokers

An example of assessing the carrier
The importance Effectiveness of
Criteria Mark
of the criterion the carrier
(1) (2) (3) (4) = (2) X(3)
Cost 1 1 1
Time 3 2 6
Credibility 1 2 2
Technical capacity/
2 2 4
Service
Availability 2 2 4
Security 2 3 6
Total 23
- Importance: 1 = very important, 2 = important, 3 = less important

- Effectiveness: 1 = very effective, 2 = Average, 3 = less effective

• Transport Cost Characteristics
305
6. Guidelines for distribution strategy formulation
from transportation perspective
• Total cost concept

• Differentiated distribution
• Mixed strategy
• Postponement
• Consolidation
306
•Total Cost Concept and trade-off analysis
307
308
309
310
311
Trade-off analysis and total cost concept
• Central scope and design of SC and Logistics system is
trade-off analysis as cost patterns of different activities
are in conflict
• The conflict of costs pattern is managed by balancing the
activities so that they are collectively optimized
• The best economic choice occurs at the point where the
sum of both costs is lowest.
• The logistics decision of one company may effect the
logistics costs of other companies
Ex: The inventory policy of a buyer affect both the inventory
costs of the shipper and operating cost of the carrier.
312
Differentiated distribution
• As transportation rates depend on volume, speed/time of

transportation, distance then the distribution policies should
be established based on customer service level, sale,
profitability, characteristics of the product
=> Examples
- Fast moving, vulnerable, high-profitable, high-service level,
low-volume… items should be placed in the field WHs with
the most forward location
- Medium-volume items – in fewer regional locations
- Slow moving, high-volume items, low-profitable items – only
at centralized stocking point/plant
313
Mixed strategy
• The concept of a mixed strategy is similar to that of

differentiated distribution: A mixed distribution strategy will
have lower costs than a pure, or single, strategy.
• A mixed strategy allows an optimal strategy to be
established for separate product groups having varied cube,
weight, order size, sales volume, and customer service
requirements.
• This often has lower costs than a single, global strategy that
must be averaged across all product groups
314
Postponement
• Postponement = delaying in delivery until customer’s order is

received
• Time postponement = delaying in distribution
Example: Product is stocked at centralized WH and it will be
shipped to local WH only when customer order is received
• Form postponement = delaying in finalizing products (labeling,
packaging, assembly and manufacturing)
Example: automobile won’t be colored until the order is
received
• Advantages? Disadvantages?
315
• Postponement Types
316
Consolidation
• Consolidation = Creating large shipments from small ones
Benefits? Disadvantages?
Example?
317
Standardization
• Product variety can increase inventories and decrease

shipment size
• Adding 1 item to the product line that is similar to an
existing one can increase the combined inventory levels
of both items by 40% while total demand does not
increase
Þ Standardization + postponement
• Standardization = creating interchangeable parts,
modularized products and labeling the same product
under different brand name
318
1. Discuss the roles of transportation in LSCM
2. What are participants of transport system? Discuss their
relationship.
3. Discuss advantages and disadvantages of each mode of
transport?
4. How a company can provide transportation? Discuss
Amazon’s transportation strategy?
5. Is transportation just a movement of inventory?
6. Explain economy of transport distance, volume?
7. Discuss structure of the transportation cost?
8. What are the pricing strategies for transportation?
9. What are the factors influencing transportation rates?
10.What are type of transportation rates?
CHAPTER 7:
QUALITY MANAGEMENT SYSTEM IN SCM
• Objectives
Provides an understanding and appreciation of the
importance of quality management in SCM, supplier
capability assessment, and corrective action process in
a supply chain environment.
320
• What is quality management system (QMS)?
- A QMS includes the company's policies, requirements
and process documents that reflect the best practices
of the company
- A QMS provides organization with a set of processes
that ensure a common sense approach to the
management of organization
- A QMS ensures consistency and improvement of
working practices
- A QMS provides products and services that meet
customer’s requirements
321
Benefits of QMS
- Greater understanding of
+ Customer’s requirements with a view to achieving
customer satisfaction
+ Organization’s processes
+ How statutory and regulatory requirements impact on the
organization and customers
- Improving internal and external communications;
- Establishing clearer responsibilities and authorities among
staff and management
- Improving time and resource usage
- Providing greater consistency and traceability of products
and services
322
What is ISO 9000
• ISO 9000 = a set of international standards on quality

management and quality assurance
• ISO 9000 is not specific to any one industry, it can be
applied to organizations of any size.
• ISO 9000 can help a company satisfy its customers,
meet regulatory requirements, and achieve continual
improvement.
• ISO 9000 is considered to be a first step or the base
level of a quality system.
323
What is ISO 9000
• ISO 9000 is a series/family of quality management

standards, while ISO 9001 is a standard within the
family.
• The ISO 9000 family of standards also contains an
individual standard named ISO 9000 - the fundamentals
and vocabulary for quality management systems (QMS).
• ISO 9000 was first published in 1987 by the ISO.
• ISO 9000 underwent the major revisions in 2000, 2008
and 2015.
324
What is ISO 9000
The ISO 9000 family contains these standards:

• ISO 9001:2015: Quality Management Systems -
Requirements
• ISO 9000:2015: Quality Management Systems -
Fundamentals and Vocabulary (definitions)
• ISO 9004:2018: Quality Management - Quality of an
Organization - Guidance to Achieve Sustained
Success (continuous improvement)
• ISO 19011:2018: Guidelines for Auditing Management
Systems
325
7 Quality Management Principles
of ISO 9000-2015 and 9001-2015
326
ISO 9001:2015 Requirements for a QMS
327
328
• Requirements of QMS
1. General Requirements
2. Document Requirements
3. Management Responsibility
4. Resource Allocation
5. Product Realization
6. Measurement Analysis and Improvement
329
1. General Requirements
- Identify the processes needed for the QMS and their
application throughout the organization;
- Determine the sequence and interaction of these
processes
- Ensure the availability of resources and information
necessary to support the operation and monitoring of
these processes
- Monitor, measure and analyze these processes
- Implement actions necessary to achieve planned
results and continual improvement of these processes
330
• 2. Documentation Requirements
• General Requirements
– QMS documentation needs to include:
» Documented statements of a quality policy and quality
objectives
» A quality manual
» Documented procedures required by the International
Standard
» Documents needed by the organization to ensure the
effective planning, operation and control of its
processes
» Records required by the International Standard
331
• Principles and Guidelines of ISO for SC (Cont…)
– Quality Manual
• Organization shall establish and maintain manual
that includes:
- The scope of the QMS, including details of and
justification for any exclusions
- The documented procedures established for the
QMS, or reference to them, and
- A description of the interaction between the
processes of the QMS
332
• Principles and Guidelines of ISO for SC
– Control of Documents
 Documents required by the quality management
system shall be controlled
 A documented procedure shall be established to
define the controls needed to:
» Approve documents for adequacy prior to issue
» Review and update as necessary and re-approve
documents
» Ensure that changes and the current revision status of
documents are identified
333
3. Management Responsibilities
• Management Commitment: Top management shall
provide evidence of its commitment to the development
and improvement of the quality management system by:
» Communicating to the organization the importance of
meeting customer as well as regulatory and legal
requirements
» Establishing the quality policy and quality objectives
» Conducting management reviews
» Ensuring the availability of necessary resources
334
Customer Focus
Customer needs and expectations are determined and
converted into requirements, obligation to products including
regulatory and legal requirements
- Management Review
The organization's quality management system is
reviewed at planned intervals, to ensure its continuing
suitability, adequacy and effectiveness
This review includes assessing opportunities for
improvement and the need for changes to the quality
management system, including the quality policy and
quality objectives
335
4. Resource Allocation:
+ The organization shall determine and provide the resources
needed to: (1) implement and maintain the quality
management system and continually improve its effectiveness,
and (2) enhance customer satisfaction by meeting customer
requirements
+ Internal courses development: When the organization develops
internal training courses, it should provide a process of
planning, developing, and implementing these courses
+ Quality Improvement Concepts: employees that have a direct
impact on the quality of the product, including leadership, shall
be trained in the fundamental concepts of quality improvement,
problem solving, and customer satisfaction
336
Resource Allocation (cont…)
+ Training Requirements and Awareness: Training
requirements shall be defined for all positions that
have a direct impact on the quality of products
Employees shall be made aware of training
opportunities
+ Electrostatic discharge (ESD) Training is provided
for all employees with functions that involve any
handling, storage, packaging, preservation, or
delivery of ESD-sensitive products prior to
performing their jobs
337
5. Product Realization
+ The organization shall plan and develop the
processes needed for product realization
+ Planning of product realization shall be consistent
with the requirements of the other processes of the
quality management system
338
• Customer Related Processes
- Requirements related to the Product: statutory and
regulatory requirement, requirements specified by the
customer in terms of delivery, post-delivery activities,
intended use….
- Review of requirements related to the Product: review
should be conducted before product is introduced to
customers
- Customer communication: Effective communication
for product information, inquiries, feedback
339
• Purchasing
- The organization shall ensure that purchased product
conforms to specified purchase requirements
- The control is extended to the supplier
- Evaluation and selection of suppliers are based on their
ability to supply product in accordance with
requirements
- Criteria for selection, evaluation and re-evaluation shall
be established
- Records of the results of evaluations and any necessary
actions arising from the evaluation shall be maintained
340
• Production and Service Provision
- Control of production and service provision during
production
- Organization’s support program
- Validation of processes for production and service
provision
- Identification and traceability: Product identification,
traceability for recall, traceability for design changes,
Preservation of product etc
Example of Apple guaranty process of Iphones
341
6. Measurement, Analysis and Improvement
– The organization shall plan and implement the
monitoring, measurement, analysis and improvement
processes needed to:
• Demonstrate conformity of the product
• Ensure conformity of the quality management
system, and
• Continually improve the effectiveness of the quality
management system
– This shall include determination of applicable methods,
including statistical techniques, and the extent of their
use
342
• Supplier Capability Assessment
- Purpose of SCA
+ to assess a supplier’s
+ to establish baseline data and the rating base of
suppliers;
+ to drive suppliers development and improvement
- Scope of SCA: existing or potential suppliers,
- Content of SCA: assess suppliers’ quality system,
and critical processes; observe quality and
workmanship of work in process, validate ISA (Initial
Supplier Questionnaire) and survey data accuracy
=> The SCA is a risk assessment tool
343
Logistics Audit and Control
Purposes:
+ to review the supplier’s capabilities, procedures,
documentation and effectiveness of actual
practices,
+ to confirm requirement compliance using the SCA
Evaluation Audit,
+ observe the overall effectiveness of each Element
in the SCA Evaluation Audit
=> To suggest corrective actions and improvement
344
• Logistics Audit and Control
345
CHAPTER 8:
SCM PERFORMANCE MEASUREMENT,
CONTROL AND STRATEGIC LOGISTICS PLAN
• Objectives
– Understand the importance of SCM performance
measurement and control in driving company business
performance
– Discuss various approaches of supply chain performance
measurement systems
– Develop a strategic logistics plan to ensure long term viability
of company
346
• The Importance of Performance Measurement
- Performance measurement and control of SC related
costs offers significant potential for improving cash flow
and return on assets
- Objective performance of SCM:
+ Finance Management: Sales, Market share, Cost,
+ Quality, Inventory holdings
+ Productivity: Cycle times, Delivery, Responsiveness
+ Assets management: Assets utilized
+ Customer service
347
Typical performance metrics
Finance
management
Quality Customer
service
Performance
metrics
Asset
management Productivity

Materials management control process
Standard or goal
Corrective Monitor
action Comparison by
manager or computer
Corrective action
Input Progress Output

ongoing logistics
Physical supply and activities
Activity costs and
distribution activity and
customer service
customer service levels
External & Internal
changes

• Total Cost Analysis
- Total cost analysis is one of the key concepts of
managing supply chain functions
- For a given level of customer satisfaction, the
management is required to understand the need
to maintain overall cost visibility rather than just
focusing on individual cost element of individual
activities
350
• Cost Trade-off
- Profit for the overall supply chain system can be
enhanced if the cost trade-off is managed
properly
- For example: the increase in inventory has a
much greater impact on the customer service
level and yields much better revenue over the
cost of investment incurred to stock goods, or
inventory carrying cost => it is a good trade-off to
be made as there is a net benefit is doing so
351
• Cost Trade off Due to Reduction of DC
Annual savings from reduction in number of distribution centres $650,000.00

Savings in inventory carrying costs with higher turnover $600,000.00
Gross savings $1,250,000.00
Less
Increased distance $500,000.00
Premium transportation to maintain same service level $450,000.00
Total cost increase $950,000.00
Net savings from distribution centre reduction $300,000.00
352
353
• Methodologies for Measuring Performance
- The Balanced Scorecard
- The Supply Chain Council’s SCOR Model
- The Logistics Scoreboard
- Activity-Based Costing (ABC)
- Economic Value Analysis (EVA)
354
• Balanced Scorecard
Balanced supply chain measures are based on four
perspectives:
- Financial perspective (e g , cost of manufacturing
and cost of warehousing)
- Customer perspective (e g , on-time delivery and
order fill rate)
- Internal business perspective (e g , manufacturing
adherence-to-plan and forecast errors)
- Innovative and learning perspective (e g new product
development cycle time)
355
• The Supply Chain Council’s SCOR Model
- The SCOR model was designed to enable
companies to communicate, compare and learn
from competitors and companies both within and
outside of their industry
- It not only measures supply chain performance but
also effectiveness of supply chain reengineering
- Further it has the ability to test and plan future
process improvements
356
357
Benchmarking
• Benchmarking is a tool in performance assessment

system that compare company’s operations in
relation to leading companies within or outside the
industry
• It is important to choose a company to benchmark
and a set of measures.
• There are internal or external benchmarks
• Benchmarking is a continuous process

Example: % inventory/total asset
% inventory/ total asset

Company Average of
Company
industry
Toyota 6% 15%
Coca-cola và
2,9% 34%
Retailing industry
McDonald’s 0,5% 2,9%
Home depot và
25,7% 27%
Retailing industry

Inventory turnover
Company 6/2013 6/2014

Average of the industry 2.51 2.57
Sapporo 1.9 1.85
Suntory 4.6 1.9
Heineken 3.52 3.56
Thanh Hóa Beer 2.8 3
Saigon Beer (năm) 3 3.5

• 5 Distinct Management Processes
361
• Logistics Scorecard
An integrated set of performance measures falling into
the following general categories:
- Logistics financial performance measures (ex
expenses and return on assets)
- Logistics productivity measures (ex orders shipped
per hour and transport container utilization)
- Logistics quality measures (ex inventory accuracy
and shipment damage)
- Logistics cycle time measures (ex in-transit time and
order entry time)
362
• Activity Based Costing (ABC)
- A procedure that measures the cost of objects,
such as products, services, and customers
- ABC first assigns resource costs to the
activities performed by the organization
- Then activity costs are assigned to the
products, customers and services that benefit
from or are creating the demand for the
activities
363
• Activity Based Costing (ABC)
– The ABC approach was developed to overcome
some of the shortcomings of traditional accounting
methods in tying financial measures to operational
performance
– The method involves breaking down activities into
individual tasks or cost drivers, while estimating the
resources (i.e. time and costs) needed for each one
– Costs are then allocated based on these cost
drivers rather than on traditional cost-accounting
methods, such as allocating overhead either equally
or based on less-relevant cost drivers
364
• Example of ABC
– Cost driver rates for selling and distribution activities
365
• What is EVA?
- Economic Value Added is the financial performance
measure that captures the true economic profit
- EVA is the performance measure that most directly
linked to the creation of wealth over time
- EVA = after-tax operating profit - annual cost of all the
capital used
- From an accounting perspective:
• EVA = Net operating profit after taxes,
NOPAT –After tax dollar cost of capital used to support
operations
366
• Selecting of Measurements
– Any measures that are to be selected, should be
aligned to strategic objectives of the company
– It should be in line with customer’s needs
– Supply chain strategy, however, differs for every
company and depends upon its current competencies
and strategic direction –this explains that the measures
of one company can be different from others though
they may be in the same industry (example: Table)
367
368
• Customer Service Measures:
– Number of complaints per period of time
– Respond to complaints within a period of time
– Provide resolution on time
– Customer returns
– Line item fill rate, Quantity fill rate, Order fill rate
– Order entry times
– Accuracy of order entry
– Backorder / stock-outs
– Customer satisfaction
369
• Process, Cross functional Measures
– Schedule changes
– Percent of perfect orders
– Planning process cycle time
– Forecast accuracy
– New product time-to-first make
– New product time-to-market
370
• Extended Enterprise Measures
– Percent of suppliers getting shared forecast
– Percent of customers sharing forecasts
– % of EDI transactions successfully completed
– Supplier inventories
– Total landed cost
– Point of consumption product availability
– Percent of demand/supply on VMI/CRP
– Total supply chain inventory
371
• Logistics-related Measures
– Warehousing costs – Transportation cost

– Inventory obsolescence – Shipment accuracy
– Inventory carrying costs – In-transit inventories
– On-time delivery – Premium freight charges
– Standard lead time per shipment – Warehouse space utilization

– Finished goods inventory turns
– Finished goods inventory days
– Documentation accuracy
– Lines picked/hour
– Damaged shipments
– Pick accuracy
– Inventory accuracy
372
CHAPTER 9:
SECURITY OF SUPPLY CHAINS
• Objectives
- To discuss the various security frameworks
- To summarize the impact of security initiatives on
supply chains
373
The importance of Security in SC
• 911 affair - September 11, 2001
- Security concern of air transportation and warehousing,
later – other modes of transportation
- Countries implemented measures and initiatives to keep
their boarders safe: transportation and trade security
- Consequences:
+Longer lead-time (more careful security checks, higher
rate of inspection)
+Potential of production disruption
+Increased business costs
- Solution: security frameworks for companies to voluntarily
join
374
The benefits of Security frame work
• Faster customs clearance: participating companies will gain

access to the fast lane for import and fewer inspection
• Platform for collaboration: Programs provide a network of
companies for higher level of coordination for tackling
common industry problem
• Improve supply chain efficiency: provide common practices
(ex: early warning system like e-notification of delay in
customs clearance)
• Create Security culture as voluntary firms allow security to
integrate into firms’ standard processes
• Decrease Security cost and increase visibility of SC
375
• Dual Purpose of Supply Chain Security
- For cargo owners: Cargo security through various
measures such as authorized exporter schemes,
advanced electronic cargo data and system for
scanning of boxes
Example: the content of container of sport shoes
was replaced by scrap
- For government: Minimize danger of international
supply chain being used as a means to deliver
weapons, explosives or radioactive materials
=> Pros and cons of participating in SC security
initiatives?
376
Security framework
Security Framework State Requirements
The International Ship and Port
IMO Ship and Port security requirement
Facility Security Code
Regulated Air Cargo Agent All cargoes must be screened before loading.
Singapore
Regime (RSCAR) For Regulated Cargo Agent – random screening
Identify and target containers that pose a risk and
US Container Security initiatives
USA pre-screen them at the port of departure, before
(CSI)
arrival to US
- Advanced Cargo declaration before departure
C-TPAT (The US Customs-Trade
USA (weight, number of boxes, value of goods, seal
Partnership Against Terrorism)
number, container number…)
- High security seals
The Partnership in Protection Canada - Checked by importer’s assigned C-TPAT Freight
Forwarder
A forum that unites global manufacturers, LP,
The Transported Asset Protection
freight carriers, law enforcement agencies…. to
Association (TAPA)
reduce losses from international SC.
An international high-level security management
ISO/PAS 28000 ISO
standard for SC
377
• Consequences of Lack of Security
– Less FDI
– Trade diverted to countries with security
procedures
– Higher insurance premiums
– Customs delay
– Lose export competitiveness
– Lose international credibility
378

Introduction To Logistics & Supply Chain Management

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Introduction To Logistics & Supply Chain Management

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INTRODUCTION TO

LOGISTICS & SUPPLY CHAIN MANAGEMENT

Pgs, Ts Nguyễn Thị Thu Hà

© Copyright 2018, Vietnam Logistics Research

By the end of this chapter, you would be able to…

© Copyright 2018, Vietnam Logistics Research

- Truck, folk-lift: capital cost, amortization, insurance, fuel, …

• Supply chain (SC) is the system by which organizations

- The work required to move and position inventory throughout

- Logistics is the primary passage of product and service flow and

Services Material flow Information flow

Inbound Logistics In process

Management of all parties of the

Management of complex service

Traditional transport and

1PL (Producer) Logistics performed by producer

© Copyright 2018, Vietnam Logistics Research

• Customer service standards set the level of output and

• Supporting activities (purchasing, warehousing, material

Physical supply Physical distribution

- Customer satisfaction is a key factor in retaining customer

Information, product, service, financial and knowledge flows

Capacity, information, core competencies, capital and human resource constrains

Transportation Warehouse Transportation Customers

Warehousing Transportation Vendors/plants/ports

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22 BASF. 597 252 6.4% 3.9 -0.6% 8.00 2.89

• What are “rights” in SCM?

• Based on demand forecast • Seek reduction or

Buy components Manufacture/

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Criteria PUSH PULL

Objective Minimize cost Maximize service level

Complexity Low High

Focus Resource allocation Responsiveness

Lead time Short Long

Processes Supply chain planning Order fulfillment

Make to Assembly Make to

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Push Strategy Pull Strategy

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MTO/ The The

ATO Average Average Average Average

MTP/ Average/ The High/

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MTO ATO MTP

• High Customization • Low Customization

• Low scale of economy • High scale of economy

Computer equipment Furniture

• Low customization • Low customization

Books, CD’s Beverage, grocery

• Discussion on the case of ABC Ltd.

- Logistics Optimizer: Emphasizing a balance of supply

• Customers come first

- Functional to Process integration: the logistics work has

Advantages and disadvantages of customization?

• What are reasons behind the need for Dell to decrease

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1. Amazon case 1. Describe the supply chain

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© Copyright 2018, Vietnam Logistics Research

Holds no parts inventory

What are challenges for retailers?