Introduction to LOGISTICS & Supply Chain Management Qafqaz University Center for Entrepreneurship Development and Research Ahmad Badalov Research Assistant, Member of CEDR

Simple Description of Logistics  The easiest understanable definition is below and known as 7R  Collection of activities to deliver  the Right amount of Right material  to the Right consumer  at the Right conditions  at the Right place  at the Right time  at the Right cost  Logistic is responsible for flow of materials along the supply chain,

The Role of Logistics  Logistics is responsible for the flow of material : material  from suppliers into organizations,  through operations within organizations,  and to customers External supplier Operations within organizations External customers Internal supplier Internal customer Materials management Logistics Inbound logistics Outbound logistics

Supply Chain  is a series of activities which provide the flow of goods and services from initial suppliers to manufacturer and final customers.  More complex logistics system in which raw materials are converted into finished products and then distributed to the final users ORGANISATION Upstream activitiesDownstream activities 1. tier supplier 2. tier supplier 3. tier supplier Initial supplier 1. tier customer 2. tier customer 3. tier customer final customer

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Integrating Logistics  Related activities add value to the final products,  These are managed seperately,  Their aims might be conflict,  These conflicts cause some problems Operations Warehousing Stock control Materials handling SuppliersCustomers Procurement Inward transport Receiving Picking Consolidating Physical distribution Outward transport returns

Benefits of Integration of Logistics  Genuine co-operation between all parts with shared information  Lower cost due to  balanced operations, lower stocks, less expediting, Economies of scale  Elimination of activities that do not add value….  Improved performance due to  Accurate forecasting, Better planning, Higher productivity of resources…..  Improved material flows  Better customer service, with shorter lead times, faster deliveries  More flexibility, organizations reacting faster to changing conditions  Standardized procedures, becoming routine and well-practiced with less duplication of effort, information, planning, so on…  Reliable quality and fewer inspection, with integrated quality management programs

EDI ( Electronic Data Interchange )

EFT (Electronic Fund Transfer)

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Cross-Docking

CHAPTER 5 Logistics Network Design

What is Logistics Network?  Logistics system is also logistics network.  Network design is planning the logistics system through which material flow from suppliers to demand points  The main issues in network design are;  To determine the number, location, equipment and size of new facilities,  As well as divestment, displacement or downsizing of facilities  To determine suppliers  Selection of distribution chanel and transportation modes  Flow of raw material, semi-finished products and goods through network

Logistics Network

Forward and Reverse Logistics Suppliers Production Distribution Customers Collecting Reprocessing recyling

Three Face Decisions Strategic decisions:  Selection of location and capacities for production plants and warehouses  Minimum planning period is 3-5 years  All of the cost should be taken into account

Three Face Decisions Tactical decisions:  Supplier selection  Production places for goods,  related to selection of distribution collection channels, and transportation methods  Needs to revised within 3-5 months

Three Face Decisions Operational decisions:  Related to flow of raw material, semi- finished products and products through network  Revised very often.  Production scheduling  Labor assignment  Recycling activities

Importance of Location  To find the best geographic locations for the different facilities in the logistics network  Right location does not guarantee success  But wrong location will guarantee failure  Locations decision are invariably difficult and many factors should be considered  Some factors can be measured  Some of them can not be measured

Affecting Factors Measurable factors:  Operating cost, Wage rates, Taxes,  currency exchange rates, number of competitors, distance from current locations,  Development grants, population, reliability of supplies Nonquantifiable factors:  Quality of infrastructure, political stability,  Social attitudes, industrial relations, legal system,  Future development of economy, etc.

Example (page 107) Warwick supplies is planning to expand into Europe. It is considering a number of options with fixed and variavle cost as given in Table. Alternatively, Warwick can avoid entering the market by licensing a local manufacturer to make the product in return for a royalty of about 2% of sales. If it is planning on selling about units a year with a contribution to profit of 10%, what might be the decision? AlternativeFixed CostVariable Cost A export form existing facilities B using local disributor C open a facility for local finishing D open limited production facilities E open larger production facilities

Breakeven-Analyse  A is cheapest until production is equal to 8000 units  B is cheapest between 8000 and 16471units  D is cheapest after units For units production B, local distributor, is best alternative, cost 9.4M Alternative A cost 9.8M but easier to organize Average cost for option B is €940, so selling price is €1034, This provides € profit. Royalty gives only €206800

Facility Location  Requires a hierarchy of decisions 1. First broad area decision, geographic decisions (business strategy) 2. Second alternative countries or areas within this region 3. Third, alternative towns and cities within this area 4. Lastly, different sites within preferred town or city

Factors for choosing regions  Location of customers,  Location of suppliers and materials  Culture  Government attitudes  Direct costs  İndirect costs  Exchange rates  Social attitudes  Organisations  Operations

Selecting areas, town, cities and individual sites There are two distinct approaches to location decision; 1. Infinite set approach: uses geometric argument to find the best location assuming there are no restrictions on site availability 2. Feasible set approaches If there are only a small number of feasible sites  First one finds the best location in principle and then looks for nearby sites,  Second one compares available sites to choose the best

Infinite sets There basic alternatives;alternatives  Near to customer; good customer service, low cost for transport to customer, but high cost for transport from the suppliers  Near to suppliers: low cost for inward transport but high cost for outward transport  Between customers and supplier: reasonable service and lower cost  The well known methods to find best location is centre of gravity

Center of Gravity Finds location that minimizes distribution cost The factors take into considerations are;  Locations of customers  Amount of load to be sent  Transportation cost (or distance)

Centre of Gravity 

Page 115, example  LocationX,Y coordSupply or demand Supplier 1 Supplier 2 Supplier 3 Warehouse 1 Warehouse 2 Warehouse 3 Warehouse 4 Warehouse 5 Warehouse 1 91,8 93,35 3,86 83,26 89,54 63,87 11,85 9,16 44,  

Best place is near to Warehouse 6 There are some weakness of this method, but it gives reasonable location.

Feasible Set ( Costing models)  This approach identify available sites, compare them and find the best.  It is based on the total cost,  Assuming cost of running a facility are fixed regardless of its location, then we look into total variable cost. T.variable cost = operating cost + inward transport cost + outward transport cost Transport cost depends on distance, type of vehicles, frequency of journeys,routes taken, ways to combine customer order, organisation of drivers, order patterns, etc.

Page 120 (example)  Inward and outward transport cost is same for all locations.  Find rectilinear distance to customers  Distance from A to customer 1:  =(diff x-coord + diff y coord) = ( )+(110-90)= 40  Results are given in below

 Results show that Site B is the best

Feasible Set ( Scoring models)  Costing model is usefull but have weakness  To overcome some of this weakness scoring model is developed  The model emphasize the factors that are important for locations, but which can not be easily costed or quantified,  Important factors are;  Infrastructure,  Proximity of supplies and customers,  Political and tax consideration  International trade conditions

The steps of scoring model:  Decide the relevant factors in a decision  Give each factor a maximum possible score that shows its importance  Consider each location in turn and give an actual score  Add the total score for each location and find the highest  Discuss the result and make a final decision Notes: total of maksimum scores will be equal to 100. Feasible Set ( Scoring models)

Page 124 (example) C has the highest score. Before final decision all other relevant information should be considered WP considered five alternatives for a new warehouse for music distribution business.

Important factors for scoring Important factors and the weight of each factor depends on the circumstances, Large facilities are often near to raw materials. Then important factors are:  availability of workforce with appropriate skills  Labour relations and community attitudes  Environment and quality of life for employees  Closeness of suppliers and services,  Quality of infrastructure  Government policies toward industry

Important factors for scoring Services can not be kept in stock, look for places near to customers, Then important factors are:  Population density  Socio-economic characteristics of the nearby population  Location of competitors and other services  Location of other attractions such as retail shops  Convenience for passing traffic and public transportation  Ease of access and convenient parking  Visibility of site Why town centers have shops but no factories ?? Why industrial estates have factories but no shops?

NETWORK MODELS (GIS)  Sometimes two approaches can not be related to actual road layout and geographic features.  There are many databases of road networks that automatically find the best road between two points  This road can be shortest, cheapest, fastest, etc.  This system is known as utilisation of GISGIS  Several models can be built up based on these system  There are two standard models:  Single Median Problem  Covering problem

Single Median Problem  There are towns connected to each other  Demands for some product in each town,  Want to locate a depot to deliver to these towns  Depot could be in one of the town or on a roadside ??  Previous studies indicated that best location is always in a town  We have to compare locations in each town  Performance measurement is average travel distance or time.  Finding the shortest is called single median problem

Steps to solve single median problem: S1: create shortest distance matrix. To do so;  Find straight-line or rectilinear distance  Determine the loads to be carried on those roads  Multiply distance by loads S2: add weight-distance of each town S3: choose the smallest total as location town

Weight ALBECPDIENFRGOHT AL BE CP DI EN FR GO HT Total Weight-Distance at AL = =10x0+15x15+25x22+20x24+20x31+10x28+10x32+15x36 = 3015 As it can be seen EN has the lowest total cost

Covering Problem  Sometimes the average distance or time to a facility is less important than the maximum time. Especially for public services such as fire-fighters, ambulance or police. Those try to respond emergencies within a maximum time. This problem is called covering problem.  There are two types covering problem:  To find single location that gives the best service to all towns. (The lowest values for the maximum time needed to reach anybody)  To find a location a level of service that must be achieved. (Such as ambulance needs to arrive within 10 minutes). The problem is to find the number of facilities and their best location.

Basic Locations Alternatives Customers suppliers Customers suppliers Customers suppliers

GIS

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