INTEGRATED PRODUCTION, INVENTORY, AND DISTRIBUTION

INTEGRATED SUPPLY CHAIN PLANNING functional integration of purchasing, manufacturing, transportation and warehousing activities spatial integration of these activities across geographically dispersed vendors, facilities, and markets inter-temporal integration of these activities over strategic, tactical and operational planning horizons

Developing Integrated Supply Chains Traditional systems:  Purchasing: the management of the acquisition process, which includes deciding which supplier to use, negotiating contracts, and deciding whether to buy locally  Production: the management of the transformation process devoted to producing the service or product  Distribution: the management of the flow of service or materials from firms to external customers

New System  The firm initiates internal integration by creating a SCM Department SCM Department:  The decisions that are made by a firm concerning the purchase of services and materials, inventories, production levels, staffing patterns, schedules, and distribution

Egg supplier Sugar supplier Flour supplier Chocolate chips supplier Maintenance services supplier Purchasing domain of responsibility SCM Department

Egg supplier Sugar supplier Flour supplier Chocolate chips supplier Maintenance services supplier Purchasing domain of responsibility FG storage RM storage Transformation process and WIP storage SCM Department

Production domain of responsibility Egg supplier Sugar supplier Flour supplier Chocolate chips supplier Maintenance services supplier Purchasing domain of responsibility FG storage RM storage Transformation process and WIP storage SCM Department

Production domain of responsibility Egg supplier Sugar supplier Flour supplier Chocolate chips supplier Maintenance services supplier Purchasing domain of responsibility FG storage RM storage Transformation process and WIP storage SCM Department

Egg supplier Sugar supplier Flour supplier Chocolate chips supplier Maintenance services supplier Purchasing domain of responsibility FG storage RM storage Transformation process and WIP storage Production domain of responsibility Supermarket A distribution center Supermarket B distribution center Transportation services supplier Distribution domain of responsibility SCM Department

Egg supplier Sugar supplier Flour supplier Chocolate chips supplier Maintenance services supplier Purchasing domain of responsibility Supermarket A distribution center Supermarket B distribution center Transportation services supplier Distribution domain of responsibility FG storage RM storage Transformation process and WIP storage Production domain of responsibility SCM Department

Aggregate Production Planning (Aggregate) Planning is Concerned With Determining The Quantity And Timing Of Production For The Intermediate Future, Often From Three To 18 Months Ahead. The Goal is To Minimize Costs Over The Planning Period.

Aggregate Production Planning Other Objectives May Be To Minimize Fluctuations In The Work Force Or Inventory Levels. Based on the planning horizon, We can divide plans into 3 general categories:

Aggregate Production Planning

The Heart Of The Medium Range Planning Is The Aggregate Production Plan. In Aggregate Planning, Given The Demand Forecast, Production Capacity, Inventory Levels, Size Of Work Force, And Other Inputs, The Planner Has To Select The Rate Of Output For The Next 3 To 18 Months.

An Example Aggregate Plan A Company Produces Four Models Of Microcomputers: 1) Laptops, 2) Hard Disk Machines, 3) Advanced Technology Machines With High Speed Chips, 4) Home/Game Pcs.

An Example Aggregate Plan

Here, Operations Manager Makes Decisions About Intermediate Range Capacity Without Getting Into Details Of Specific Products, Parts, Or People. Later, He/She Deals With Financial Data, Personnel, Capacity, And Availability Of Raw Material As Well.

An Example Aggregate Plan As an intermediate type planning, The aggregate plan interacts with both long range strategies, AND short-term planning activities.

Relationships Of Aggregate Plan

What Is Inventory? Stock of items kept to meet future demand Purpose of inventory management  how many units to order  when to order

Example A supermarket keeps a stock of goods on its shelves and in the stockroom. It holds stock because large deliveries are made at infrequent times (e.g. Once a week). However, customers are continuously buying small amounts of this stock. So in order for the supermarket not to run out of stock it needs to hold stock/inventory.

Stocks are the stores of materials that an organisation holds until it needs them The main reason for holding stocks is to give a buffer between supply and demand. Other reasons include:  to act as a buffer between different production operations – ‘decoupling’ consecutive operations  to allow for demands that are larger than expected, or at unexpected times  to allow for deliveries that are delayed or too small  to take advantage of price discounts on large orders  to buy items when the price is low and is expected to rise  to buy items that are going out of production or are difficult to find  to make full loads and reduce transport costs  to give cover for emergencies

Water Tank Analogy for Inventory Supply Rate Inventory Level Demand Rate Inventory Level Buffers Demand Rate from Supply Rate

Types of Inventory Raw materials Purchased parts and supplies Work-in-process (partially completed) products (WIP) Items being transported

Classification of stocks

Why are inventories important? For a firm today  Customers do not easily forget shortages or delivery delays  But tremendous stocks are costly  Critical to a firm’s viability Concerns every industries  Nowadays: success stories like Wal-Mart, Toyota or Dell are founded on keeping inventories lean

Zero Inventory? Reducing amounts of raw materials and purchased parts and subassemblies by having suppliers deliver them directly. Reducing the amount of works-in process by using just-in-time production. Reducing the amount of finished goods by shipping to markets as soon as possible.

Reasons To Hold Inventory Meet variations in customer demand:  Meet unexpected demand  Smooth seasonal or cyclical demand Pricing related:  Temporary price discounts  Hedge against price increases  Take advantage of quantity discounts Process & supply surprises  Internal – upsets in parts of or our own processes  External – delays in incoming goods Transit

Reasons To NOT Hold Inventory Carrying cost  Financially calculable  Inventory deteriorates, becomes obsolete, lost, stolen, etc. Takes up valuable factory space  Especially for in-process inventory Inventory covers up “problems” …  That are best exposed and solved

Inventory Hides Problems Poor Quality Unreliable Supplier Machine Breakdown Inefficient Layout Bad Design Lengthy Setups

To Expose Problems: Reduce Inventory Levels Poor Quality Unreliable Supplier Machine Breakdown Inefficient Layout Bad Design Lengthy Setups

Remove Sources of Problems and Repeat the Process Poor Quality Unreliable Supplier Machine Breakdown Inefficient Layout Bad Design Lengthy Setups

Costs involved in Inventory Models Ordering (Setup) cost Unit purchasing (Production) cost Holding (Carrying) cost Shortage (Penalty) cost Revenue (Selling price)

Basic EOQ Model EOQ: Economic Order Quantity Assumptions of EOQ models:  Demand is constant (unvarying ), expressed as annual demand (units per year ).  Models use continuous review, not periodic review.  Lead time is constant & known.  Quantity discounts are not possible.  2 variable costs: setup cost and holding cost.

Inventory Levels Inventory vs. time. Inventory ( Q ) time Usage rate (D) Cycle time (T) Lead time ( L, l ) Reorder Point (ROP)

Symbols in EOQ models Order quantity:Q Optimal order quantity: Q* Annual demand (units):D Setup cost per order:K Holding cost (per unit):H

Total Cost vs. Order Quantity. Annual Cost Order Quantity Holding cost curve Setup cost curve Combined curve: holding & setup. Minimum annual cost Optimal order quantity We’ll find an equation for this amount

Annual setup cost: equation What is related to it? Annual setup cost = DQDQ K * Q, K, & D demand / quantity per order = # of orders. # of orders * K = annual setup cost.

Annual holding cost: equation. Q: order quantityQ & H. inventory is replenished precisely when no inventory remains. Average inventory = Q time Constant slope Q/2

Annual holding cost: equation. Q time Annual holding cost = Q2Q2 H *

Distribution Planning Objectives  Explain distribution planning  Name and describe the three levels of distribution intensity  Explain the effect of the Internet on distribution planning  Describe the challenges of distribution planning for international markets Key Terms exclusive distribution integrated distribution selective distribution intensive distribution e-marketplace

Distribution Planning Study Organizer In a chart like this one, note the main components of distribution planning.

Understanding Distribution Planning Distribution planning involves decisions about a product’s physical movement and transfer of ownership from producer to consumer.

Multiple Channels A producer uses multiple channels when its product fits the needs of both industrial and consumer markets.

Control Versus Costs All manufacturers must weigh the control they want to keep over the distribution of their products against costs and profitability.

Distribution Planning for Foreign Markets Foreign market environments require that businesses adjust their distribution systems. They also give businesses a chance to experiment with different distribution strategies. Cultural considerations should also be weighed when planning distribution in foreign markets.

Achieving An Integrated Supply Chain Material Control Production Sales Distribution Purchasing Stage one: Base Line Material Flow Customer Service

Materials Management Manufacturing Management Distribution Stage two: Functional Integration Material Flow Customer Service Achieving An Integrated Supply Chain

Materials Management Manufacturing Management Distribution Stage three: Internal Integration Material Flow Customer Service Achieving An Integrated Supply Chain

Suppliers Internal Supply Chain Customers Stage four: External Integration (Total Supply Chain Management) Material Flow Customer Service Achieving An Integrated Supply Chain