2. Introduction into Logistics PhD Natasha Lutovinova Logistics Lecturer E-mail: Lutovinova.N@nhtv.nlLutovinova.N@nhtv.nl Room: G1.006

3. Handbook: Paul R. Murphy & Donald F. Wood, Contemporary logistics (New Jersey 2011), 10 th edition 3

4. Introduction into Logistics Course Outline 12.05 Introduction 13.05 SCM Concept, Inventory 14.05 Demand Management, Warehousing Management 15.05 Transportation Management, International Logistics 16.05 Poster Session

5. Demand Management, Order Management, and Customer Service Inventory 5 - 4

6. Learning Objectives To understand demand forecasting’s role in logistics management To understand the concept of Demand Management To understand the order cycle and its role in logistics management To understand the costs of holding inventory To understand reordering concepts To differentiate the various inventory flow patterns To understand the dimensions of customer service 6 - 4

7. Inventory Management Inventories are stocks of goods and materials that are maintained to satisfy normal demand patterns Inventory management Decisions drive other logistics activities Different functional areas have different inventory objectives Inventory costs are important to consider Inventory turnover (the number of times an inventory is used or replaced during a year) 7 - 3

8. Demand Management A coordinated flow of demand creation Demand-Order-Inventory-Customer service Demand forecasting: Make-to-stock situations Make-to-order situations Demand Forecasting Models Judgmental (surveys, analog technique) Time series (based on past demands) Cause and effect (decrease of interest rates) Forecasting Issues CPFR concept (collaborative planning, forecasting, and replenishment Benefit with accurate forecasting 8 - 4

10. Demand Management 10 - 4

11. Delivery Procurement Manufacturing Customer’s order cycle Logistics lead time Order fullfilment Lead-time gap Logistics lead time Customer’s order cycle 11 - 4

12. Order Management Activities associated with the order cycle (lead time) or order to cash cycle Order management Order cycle (or lead time) Order cycle stages: - Order transmittal - Order processing - Order picking and assembly - Order delivery 12 - 4

13. Order entry Order processing Customer places order Order assembly Transport Order received 13 - 4

14. Order Management Order Transmittal (from when a customer places an order till a seller receives an order) includes: In person By mail By telephone By fax machine electronically 14 - 4

15. Order Management Order Processing (a seller receives an order till an appropriate location is authorized to fill the order) includes: Checking for completeness and accuracy A customer credit check Order entry into the computer system Marketing department credits salesperson Accounting department records transaction Inventory department locates nearest warehouse to customer and advises them to pick the order Transportation department arranges for shipment 15 - 4

16. Figure 4-3: Flowchart of Order Handling (Order Processing) System 16 - 4

17. Order Management Order processing If there is a stock out Notify the customer as soon as possible of stock out Notify when shipment will occur Give the customer the option of accepting in stock similar products Export orders Need a letter of credit international freight forwarders prepare documents and arrange shipment 17 - 4

18. Order Management Order picking and assembly Notifying the warehouse to assemble a given order Providing an order picking list, indicating items and order of pick to a warehouse employee Checking picked orders for accuracy Stockout information sent to order handling department so that documents can be adjusted Packing list enclosed with order including employee initials of person who packed order 18 - 4

19. Order Management - Handheld scanners - Radio-frequency identification - Voice-based order picking - Pick-to-light technology 19 - 4

20. Order Management Order Delivery Changes: Mass logistics-tailored logistics Shippers emphasize both transit time and transit time reliability (delivery windows) Faster transit time Order delivery time Load planning is the arrangement of goods within the trailer or container Carriers establish their own service standards Some customers pick up their orders 20 - 4

21. Visser, Logistics: Principles, fig.1.8 cost structure of physical distribution 21 - 3

22. Inventory Management Inventory management Inventory costs are important to consider Inventory turnover: cost of goods sold divided by average inventory at cost cost of goods sold = inventory turnover average inventory $200,000 = inventory is sold 4 times per year $ 50,000 Compare with competitors or benchmarked companies 22 - 3

23. Visser, Logistics: Principles, fig.6.7 inventory costs in the logistics process 23 - 3 Order costs Cost of stock out Inventory costs InputOutputThroughput

24. Logistics objectives are mutually interdependent Low inventory turnover = high inventory carrying costs, little (or no) stockout costs High inventory turnover = low inventory carrying costs, high stockout costs Managing the trade-off is important to maintain service levels Total cost approach Reduction of the lead time Reduction of the lead time Improve delivery reliability Improve delivery reliability Increase flexibility Increase flexibility 24 - 1

25. Inventory Management Inventory Classifications: -Cycle (base) stock (satisfy normal demand during a course of an order cycle) -Safety (buffer) stock (SS) ((addition to a cycle stock against uncertainty in demand) (in-process inventory waiting for further procession) -Pipeline (in-transit) stock -Speculative stock (Easter eggs) -Physic stock (Metro, Achan etc.) (stimulates demand) -Dead stock (never used, sold or sent) -Strategic stock

26. 26 - 3

27. Inventory-Related Costs 1. Inventory carrying (holding) costs Inventory carrying (holding) costs include: Obsolescence costs (planned also) Inventory shrinkage Storage costs Handling costs Interest charges (investment in inventory) Insurance costs Taxes Opportunity cost 27 - 3

28. How to calculate Inventory Carrying Costs 1. Calculate Inventory Carrying Rate: 1. Add up your annual Inventory Costs: Example: $800k = Storage $400k = Handling $600k = Obsolescence $800k = Damage $600k = Administrative $200k = Loss $3,400k Total

29. How to calculate Inventory Carrying Costs 2. Divide the Inventory Costs by the Average Inventory Value: Example: $3,400k / $34,000k = 10% 3. Add up your: 9% = Opportunity Cost of Capital (the return you could reasonably expect if you used the money elsewhere) 4% = Insurance 6% = Taxes 19%

30. How to calculate Inventory Carrying Costs 4. Add your percentages: 10% + 19% = 29% Your Inventory Carrying Rate = 29% 2. Calculate Inventory Carrying Costs: Inventory Carrying Cost = Inventory Carrying Rate (see above) X Average Inventory Value Example: $9,860,000 = 29% X $34,000,000

31. Inventory Costs 2. Ordering Costs – costs associated with ordering inventory: number of orders per year x ordering cost per order -Order costs (costs of receiving an order, conducting a credit check, verifying inventory availability, entering orders into a system, preparing invoices, receiving payments) -Setup costs (modification of a production process to make the products necessary to satisfy particular orders)

32. Inventory-Related Costs Trade-offs Exist between Carrying and Ordering Costs: Respond in opposite ways to the numbers of orders or size of orders: increase in the number leads to a higher order costs and lower carrying costs 32 - 3

33. Inventory Costs 3. Stock out costs – estimation the cost of a stockout or penalties for a stockout Involves a customer’s reaction when he wants to buy an item: -Comes back (delayed sale) -Asks to call -Buys a substitute product (higher/lower profit) -Back order -Goes to a competitor for this (lost sale) or future purchases (lost customer)

34. When to Order Fixed order quantity system (fixed amount of inventory) Fixed order interval system (fixed time intervals) Reorder (trigger) point (replenishment order is to be placed) (ROP) ROP = DD x RC (under certainty) ROP = (DD x RC) + SS (under uncertainty) Where DD = (average) daily demand RC = length of replenishment cycle SS = safety stock 34 - 3

35. R = Variable order interval Q = Fixed order quantity T = Fixed order interval S = Variable order quantity Fixed Variable Order quantityR, QR, S Order intervalT, QT, S Quantity Ordering Reorder (trigger) point 35 - 3

36. When to Order ROP = DD x RC (under certainty) ROP = (DD x RC) + SS (under uncertainty) DD = daily demand=30 pieces RC = replenishment cycle=2 (days) SS = safety stock=60 Reorder point = 120 pieces 36 - 3

37. How Much to order Economic order quantity (EOQ) calculates the proper order size, two costs: carrying and ordering in dollars, Determines the point when the sum of carrying costs and ordering costs are minimized EOQ = √2AB/C Where EOQ = the most economic order size, in dollars A = annual usage, in dollars B = administrative costs per order of placing the order C = carrying costs of the inventory (%) 37 - 3

38. Determining EOQ by Use of a Graph 38 - 3

39. How Much to Reorder Economic order quantity (EOQ) in dollars EOQ = √2AB/C A = annual usage= $1000 B = administrative costs= $25 C = carrying costs= 0.2 (20%) EOQ = √2*1000*25/0.2 = $500 order size 39 - 3

40. How Much to order at a particular time Economic order quantity (EOQ) calculates the proper order size, two costs: carrying and ordering, in units EOQ = √2DB/IC Where EOQ = the most economic order size, in units D = annual demand, in units B = administrative costs per order of placing the order C = carrying costs of the inventory (%) I = dollar value of the inventory, per unit 40 - 3

41. How Much to Reorder Economic order quantity (EOQ) in units EOQ = √2DB/IC D = annual demand, in units= 200 B = administrative costs= 25 C = carrying costs= 5 I = value per unit= 0.2 (20%) EOQ = √2*200*25/.20*5 = 100 41 - 3

42. Table 9-3: EOQ Cost Calculations Number of orders per year Order size ($) Ordering cost ($) Carrying cost ($) Total cost (sum of ordering and carrying cost) ($) 11,000 25100125 2 500 50 100 3 333 75 33108 4 250 100 25125 5 200 125 20145 42 - 3 BC

43. Inventory Flows Safety stock can prevent against two problem areas Increased rate of demand Longer-than-normal replenishment When fixed order quantity system like EOQ is used, time between orders may vary (When reorder point is reached, fixed order quantity is ordered) 43 - 3

44. Inventory Flow Diagram 44 - 3 Reorder point Average inventory in units = Q/2 (+ SS)

45. Inventory Management: Special Concerns FiFo Complementary items Dead inventory Deals Defining stock-keeping units (SKUs) Informal arrangements outside the distribution channel Repair and replacement parts Reverse logistics Substitute Products 45 - 3

46. Complementary and Substitute Products Complementary products (inventories which can be used or distributed together) Substitute products (products which can fill the same need or want as another product)

47. Contemporary Approaches to Managing Inventory ABC Analysis (inventory is not of equal value for a company) - A highest criticality - B modest criticality - C lowest criticality D – dead inventory (dead stock) (prepayment or no-return policy, drastic price reduction, charity) 47 - 3

48. Visser, Logistics: Principles, fig.5.4 ABC analysis 48 - 3

49. Inventory Management Inventory turnover: cost of goods sold divided by average inventory (the sum of beginning and ending inventory divided by 2): cost of goods sold = inventory turnover average inventory $200,000 = inventory is sold 4 times per year $(30,000+70,000):2 Compare with competitors or benchmarked companies 49 - 3

50. Contemporary Approaches to Managing Inventory (addition) Just-in Time (JIT) Approach minimizes inventory by reducing SS as well as by having the required amount of materials arrive at the production location at the exact time when they are needed 50 - 3

51. Trailer that opens on the side and is used for rapid discharge of parts 51 - 3

52. Contemporary Approaches to Managing Inventory Service parts logistics involves designing of a network of facilities to stock service parts, deciding upon inventory ordering policies, stocking the required parts and transporting parts from stocking facilities to customers (especially an automotive industry) 52 - 3

53. Contemporary Approaches to Managing Inventory Vendor-Managed Inventory (VMI) The size and timing of replenishment orders is on a manufacturer. An access to a distributor’s or retailer’s sales and inventory data via Electronic Data Interchange (EDI) or the Internet.

54. Customer Service Customer service is a collection of activities performed in a way that keeps customers happy and creates in the customer’s mind the perception of an organization that is easy to do business with. CS is the ability of the logistics management to satisfy users in terms of time, dependability, communication and convenience Customer service is much more difficult for competitors to imitate than price cuts or other competitive strategies. 54 - 4

55. Customer Service 55 - 4

56. Customer Service Components Time – to reduce the order cycle time Dependability refers to reliability of service encounter (consistent order cycles, safe delivery, complete delivery) Order fill rate – percentage of orders that can be completely and immediately filled from stock Communication (effective, complete) Convenience (“ease of doing business concept”, multichannel marketing systems) 56 - 4

57. Range of Customer Expectations:  If it exceeds your expectations, you’re impressed  If the service you receive meets your expectations you are satisfied  If it is below your expectations  Creating customer value and loyalty comes from consistently exceeding expectations 57 - 4

58. Managing Customer Service Customer Profitability Analysis (CPA) (ABC) Establishing Customer Service Objectives Measuring Customer Service Service Failure and Recovery 58 - 4

59. Customer Service Establishing Customer Service Objectives Specific Measurable Achievable Cost-effective Consistent with broader firm goals Must consider competitor’s objectives Provide guidance to operating personnel Performance benchmarking Process benchmarking 59 - 4

60. Role of Logistics in Establishing Customer Service Levels Advisor to marketing Establishing a customer service program Ask the customer what is important to them Investigate the service offered by competitors Consider the cost of alternative service programs Analyze the information and write the objectives Using the Internet to improve customer service 60 - 4

61. Measuring Customer Service -Determining the data sources to be used - What factors to measure - Metrics should be relevant and important from the customer’s perspective 61 - 4

62. Measuring and Controlling Customer Service Service Failure and Service recovery Service recovery Returned products 62 - 4