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Global Logistics & Supply Chain

Management

Contents Part A............................................................................................................................................................. 2

1. Calculation of Economic Order Quantity and Reorder level ................................................................. 2

2. Calculation of the Economic Review Period in weeks and maximum stock Level ................................ 3

3. Advantages and disadvantages of Re order Level System and Reorder Cycle System ......................... 4

Part B ............................................................................................................................................................. 6

Introduction .............................................................................................................................................. 6

2.1 Importance of Logistics and SCM in the dynamic environment of automotive sector. ..................... 6

2.2 Contribution of ‘Postponed Manufacturing’ and ‘Postponed Purchasing’ to the dynamics of supply

chain integration. ...................................................................................................................................... 9

2.3 The impact of the ‘modular’ supply chain concept at both MCC and the VW Resende Plant in

Brazil. ....................................................................................................................................................... 12

2.3.1 Impact of modularization in MCC .............................................................................................. 12

2.3.2 Impact of modularization in VW Resende Plant in Brazil .......................................................... 13

References .............................................................................................................................................. 14

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Part A

1. Calculation of Economic Order Quantity and Reorder level

Economic Order Quantity (EOQ)

According to Kamal (2009) economic order quantity is the inventory related equation,

which is applied for minimizing inventory holding costs and ordering costs of a

company.

Economic Order Quantity (EOQ) calculation:

Bought-in cost or the purchase cost = £40

Hence, Annual cost of holding one unit = 10% of £40,

= £4

Ordering cost per order = £15

Therefore EOQ = √ (2 * annual quantity * ordering cost / carrying cost)

= √ (2 * 40*48 * 15 / 4)

= √ (14400)

= 120units per order.

As per the above problem, the EOQ of garment retailer is 120 units per order, which

means the quantity of material to be ordered by garment retailer at one time is 120 units

so as to minimize cost of ordering and carrying the stock.

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Reorder level, M

According to Halderman (2011) reordering level is the level at which garment retailer

need to place new order.

Reorder level, M = (Annual demand * Lead time) + k (standard deviation * SQRT of

lead time), where k= 1.75

= (1920*1) + 1.75 *7.25 *1

= 1920 + 12.6875

= 1932.69 units

As per the above stated problem, the re order level of garment retailer is 1932.69 units.

At this level, the production and processing in the garment retailing may not stop

functioning due to shortage of raw materials.

2. Calculation of the Economic Review Period in weeks and maximum stock

Level

Economic Review Period

In the view of Gobetto (2013), economic review period is the period at which, the

company need to make review on their inventory for eliminating and reducing the

abundance and insufficiency of stocks.

Economic review period, R = Annual weeks / r,

Where, r = √ (annual demand * ordering cost / 2* carrying cost)

= √ (1920 * 4/ 2 * 15)

= √ (256)

= 16

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Hence, Economic review period, R = 48 / 16

= 3 weeks

As per the above stated problem, garment retailer need to review the stocks in every 3

weeks.

Maximum Stock Level

This is the stock level, over and above which the organization must not maintain any

more units of inventory, says Gobetto (2013).

Maximum stock Level, S

= weekly demand (R + lead time) + k * standard deviation * √ (R + lead time)

= 40 (3+1) + 1.75 * 7.25* √4

= 40 * 4 + 25.375

= 184.375 units

3. Advantages and disadvantages of Re order Level System and Reorder Cycle

System

Reorder level system

Advantages

This method is suitable for different types of stocks within the same business.

Inventory related costs can be minimized through EOQ model

Optimal reorder quantity and appropriate reorder point can be calculated through

EOQ model to ensure prompt replenishment of inventory without shortages.

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It is suitable for organizations like retail garment sector, in which the owner can

take decisions about how much inventory to order each time and how much to

keep on hands etc.

Disadvantages

Variable demand, ordering costs etc may sometime leads to the non accuracy of

EOQ calculation.

The EOQ calculation may goes wrong, and creates issues to the inventory

management of the garment retailer , during the situations of varying demands or

changing ordering cost re-order occurs.

Reorder Cycle System

Advantages

The periodic analysis of inventory in cycles reduces the accumulation of outdated

stocks.

The garment retailer will be provided with larger discounts from the suppliers,

when the products ordered are in larger quantities.

Disadvantages

The calculation of reorder quantities are not up to the optimum level of calculated

EOQ

Varying needs and demands leads to the complications in setting appropriate

periods for review.

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Part B

Introduction

In the view of Gobetto (2013) being world’s largest industry, the automotive industry

contributes their best for the critical development of nation and for the prosperity of

global economy, through their single manufacturing activity. The liberating technology

and constantly changing nature of automotive industry generated revenues in the record

level. Halderman (2011) states that, the extensive interconnection of automotive

industry with various industries and culture fabric played pivotal role in the development

of the economy. As a result of globalization, the manufacturing costs exhibited slight

rise and demand graph found to be shifting in this industry. In order to establish new

markets in the potential areas, the supplier, distributors and dealers are always

searching for the opportunities.

In the view of Biesebroeck and Sturgeon (2010) the efficient logistics and supply chain

management (SCM) essential for automotive industry are made with the effect of

globalization and through the above stated variations in the manufacturing and demand

graphs. The importance of logistics and supply chain management in the automotive

industry will be evaluated in this study based on the topic ‘Individual analysis of Smart

Car and Smart Logistics at MCC case study’.

2.1 Importance of Logistics and SCM in the dynamic environment of

automotive sector.

According to Samson (2011) the pattern of automotive industry flows starts from

supplier to manufacturer, then to wholesaler, then to retailer and finally to customer. The

SCM in this industry deals with direction and control of materials; finances required etc

are handled by the SCM in the organization, when the business flows from one party to

another. In the view of Sinha (2011) the elements such as planning, execution and

control of all the activities related to the flow of goods between the parties is managed

by the logistics, which is the core part of SCM in the organization.

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According to Blanchard (2010) as a result of globalization the automotive industries

monitors the strategic techniques of potential competitors while considering the varying

needs and wants of customers everyday and this current scenario resulted to the failure

of segregation of any organization from the automotive sector. The impacts on

automotive industry are mainly from global economic trends, advanced technologies,

competitions etc.

According to Sturgeon et al. (2009) the net outcomes of globalization, privatization and

liberalization made the automotive industry as highly competitive industry. The major

contributions made by globalization, privatization and liberalization to automotive

industry consists of factors such as availability of raw materials, low tariffs, convenient

transportation facilities, delivery facilities, improved communication etc. According to

Leeman (2010) with the result of globalization, the availability of products and services

increased due to increase in the customer needs and wants. In order to fulfill the

requirements of customers, the automotive industry begins to move global with supply

chain management and logistics. The automotive industry is capable to innovate and

develop their idea in one nation, manufacturer it in another nation and sell the end

products to some other nation.

In order to improve the quality and to reduce the costs, the need for restructuring the

internal business process and integration of operations with the help of SCM and

logistic emerged due to the combined effect of above stated matters. In the view of

Boyer and Verma (2009) introduction of new products and services is carried out rapidly

in the automotive industry due to enhanced manufacturing technology and assurance of

fast progressing of product availability everywhere in the global markets. According to

Kotabe and helson (2014) the automotive industries have gained degree of

consideration among other similar organizations with the help of their SCM and logistics

tools. The SCM and logistics tool of automotive industry is capable enough to identify

and meet the external demands such as customer’s needs and grievances.

In the view of Shah (2009) the supply chain management is the integral part of

automotive industry for increasing their operational efficiency. This strategic tool

undertakes all the essential activities related to manufacturing, warehousing, and

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transportation, distribution, marketing and sales of the products of an organization. In

the view of Sturgeon et al. (2009) before getting transformed in to final products, the

automotive industry deals accessory parts and with the raw materials needed for

molding components such as steel, glass, alloy, rubber, plastics etc. According to Boyer

and Verma (2009) the management of the activities carried out in the industry and

actual delivery of finished goods to end consumers at their location are the major

functions performed by the SCM and logistics in the automotive industry.

In the view of Kamal (2009) the SCM and logistics have benefited the automotive

industries to rank top among other organization, with the increase in the inventory

turnover about 18.2% and through increases in the best delivery of about 97%. Boyer

and Verma (2009) states that, even though automotive industry highly relies up on its

assets, materials, and labor, the application of SCM and logistics plays pivotal role in

enhancing the operational planning and execution of the plans at every level of the

industrial activities.

In the view of Kotabe and helson (2014) the automotive supply chain management

consists of three categories namely, Tier 1-3 (suppliers of components), Car

manufacturers (referred as OEM) and Retailers (distributors and dealers).

Synchronization of supply with the demands of customers, effective utilization of

inventories and elimination of wastes are the major functions carried out by SCM in

automotive industry.

From the view of Sturgeon et al. (2009) it is revealed that, Information and

Communication Technology, also known as ICT is the recent innovation in the logistics

of automotive industry. The global communication between manufacturers and suppliers

is enhanced with the effect of this innovation. The ICM benefited the automotive

industry to pass clear and concise communication between numerous customers

located at multiple areas and also this innovation benefited the industry to enhance the

internal business systems of the suppliers. With the help of ICM responses, services,

feedbacks, reviews are quickly made than before.

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It is observed from the case study that, in order to reduce cost and time along with the

improvement of quality in product and services, the MCC has chosen to outsource the

supply chain management activities in the organization. As stated before by Boyer and

Verma (2009) it is the SCM, which enabled the MCC to procure materials and supplies

from distant and multiple areas through various suppliers.

From the case study it is found that, MCC consists of 140 assembling activities.

According to Boyer and Verma (2009) a detailed plan which includes the activities and

duties of every process or party is constructed by MCC for the SCM of the company,

and this road map enabled MCC to process with manufacturing and assembling

activities at respective rates. Dynamite Nobel, Bosch, Magna Door Systems, Krupp etc

are the various suppliers delivered by MCC with the help of their SCM in the company.

While analyzing the case study, it is revealed that, the efficiency of SCM in MCC

ensured 80% of smooth flow of supply which is around 40% of product value from the

seven integrated suppliers of the company. It is similar with the case of non integrated

and other suppliers of MCC.

According to Golinska (2013) the free flow of communication takes place between

employees, distributors, suppliers, partners and customers situated at multiple

locations, by the MCC, with the help of ICT, and it is evident from the analysis of

logistics in company. By making use of ICT, the company identifies the suppliers, who

maintains lower level of quality and thereby MCC stops the lifetime contracts with them.

The logistics system in MCC calculates the frequency and size of every module and

helps the company to evaluate and analyze the volume of output of each component.

According to Boyer and Verma (2009) advancements in automotive supply chain

management and logistics and latest technological innovations are inevitable in the

strategic concern of every organization, and this fact is concluded from the case study.

2.2 Contribution of ‘Postponed Manufacturing’ and ‘Postponed Purchasing’ to

the dynamics of supply chain integration.

According to Golinska (2013) it is the automobile sector which emits wastes, gases and

other factors, which makes the environment highly polluted. The current approach of

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industrial world gives more emphasis on the customer- friendly and eco- friendly

approaches and this truth is to be specially mentioned in case of automobile sector.

According to Kotabe and Helson (2014) the extreme competition in the automotive

sector made the companies to customize their products at highly competitive prices.

The competitions among the organizations in automotive industries to meet customer

demands and needs through customized products and competitive pricing leads to

company’s additional cost and time and have great impact on the profitability of firm.

This scenario paved the way for the idea of Postponed manufacturing and Postponed

purchasing, in the automotive sector.

According to Kotabe and Helson (2014) various factors must be taken in to

consideration, especially, if the automotive organization is involved in the car

manufacturing sector. Even though the customers have alternate choices, the colors of

the models have great influence on the selection of customers. According to Joshi

(2013) the dealers of the cars are required to maintain colors of models around eight.

This leads the manufacturer to produce eight times the different inventories. The current

scenario is solved with the help of postponed manufacturing process.

According to Joshi (2013) postponement strategy makes delay the creation and delivery

of final product. Until the order is placed by the customers for the customized products,

the SCM in organization makes delay on the processes carried out to create the

products. This method is known as postponed strategy. Sehgal (2010) mentions that,

reducing the multiple inventories at various stages of SCM and avoiding the activities

considering the future orders are the main reason behind the concept of postponement

strategy. Postponement manufacturing and postponement purchasing is mainly

considered in this part of the study.

In the view of Zott (2010), the supply chain will be more differentiated, when the

products move down the supply chain. This concept is achieved, when the products or

models move from point of departure closer to point of purchase.

The requirements needed at the each stage of processing are maximized with the

application of value added service in the postponed manufacturing process. In the view

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of Shah (2009) with the reduction of complexity of manufacturing process, the

integrated supply chain management is benefited by postponed manufacturing process.

In the view of Chopra and Meindl (2012) the decisions associated with particular

demand by respective customers or the parties is essential for both the processes of

postponed manufacturing and postponed purchasing. These processes have both

advantages and disadvantages. Reduction of the errors, that are emerged during the

period of forecasting and the availability of variety of products are the major advantages

of postponed manufacturing and purchasing.

From the case study, it is revealed that, the MCC, even in a flow- shop style, assembles

the cars with respect to needs and wants of customers and provides them with the

customized cars. With reference to Zott (2010) the supply chain of MCC is flow down ,

due to the differentiation of body parts, and the customization of cars according to

demands of customers are done by the ‘Smart Centres’. The risks associated with

variety and inventory is reduced with the help of postponement manufacturing. The

virtual specification of Bill of Material is carried out by the customer, and thus the lead

time of customers in MCC comparing with VW is considerable less. The application of

principles of postponement in the plant layout design of MCC benefitted the company to

have control over the processes and material flow, which leads the MCC to keep low

inventory in a JIT (Just-in-time) environment).

In MCC, the modules are brought in to the company also when the final assembly

process starts. The manufacturer starts to assemble the modules just 1.5 hours before

the final assembly process. In the view of Feng and Zhang (2013) postponement

purchasing in MCC reduces the complexity in manufacturing process. The main benefits

of this approach include elimination of wastage of inventories, time and cost saving,

better product customization, effective utilization of resources etc. In the view of

Rushton, Croucher and Baker (2014), postponement purchasing strategy enables the

company to deliver the future demands and customer specifications and product

expectations in detail with more accuracy. According to Zott (2010) the postponement

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purchasing approach benefits the company to save their time for future innovations and

to identify the potential needs of customers for the improvement of their products.

2.3 The impact of the ‘modular’ supply chain concept at both MCC and the VW

Resende Plant in Brazil.

According to Feng and Zhang (2013) coordinating with the suppliers to deliver the

products within short time frame is known as modular supply chain management. In this

process, the complexity and speed of manufacturing process benefits the suppliers to

create and develop the components quickly.

2.3.1 Impact of modularization in MCC

In the view of Danese, Romano and Bortolotti (2011) MCC considers outsourcing as an

important approach in their industry, and for their enhancement of efficiency, the

company integrates their suppliers in to smart plant. The suppliers prepare main

modules, that are assembled by the MCC’s employees on the chain and thus the

outcomes and investments are proportionally shared between MCC and module

suppliers.

According to Feng and Zhang (2013) the modular supply chain consists of tier 1 to 3

suppliers and OEM. The tiers represent commercial difference between manufacturer

and suppliers. The tier 1 suppliers make own designing decisions and engineering

structures with the guidance of development center where as tier 2 procures parts for

the assembling of the products and provide it to tier1. When the tier 1 develops and

assembles the product using the component parts received from tier 2, the manufacture

and deliver of the final product is completed. With the help of this concept, the MCC can

create finished vehicle quickly and can easily make available for delivery. The essential

components for constructing the products such as dashboard systems, seating

modules, break control systems; ABS, complete frontier rear ends etc are easily made

available by the module suppliers of MCC.

According to Zott (2010) the implementation and resigning of products with complex

functions can be easily developed in MCC within short time frame through

modularization concept. Modularization of suppliers in MCC increased their quality in

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products and improved the dynamic flexibility of production. The modularization in the

MCC is technologically advanced and cost efficient and have lesser lead time

approximately two to three week while comparing with VW. The major benefit of

modular concept in MCC is, the manufacturer is able to prepare car with more

efficiently, by meeting all the needs and specification of customers, with least cost and

time. The least cost production helped the MCC to introduce smart car in the market

with moderate rate.

The demands of MCC in markets have simultaneously increased, with the increase in

customer demand. In the view of Danese, Romano and Bortolotti (2011) the major

impacts of modularization in MCC includes, reduced face to face communication,

financial risks, ownership and partnership conflicts, logistics constraints etc.

According to Rushton, Croucher and Baker (2014) the reduced frequency of face to

face communication, between integrator and module providers indulged in designing

and implementing process of products and components leads to central issue for the

organizational flexibility. The company keeps observation on the overall management of

the company, whereas the modular suppliers undertake all the tasks starting from the

development of the product to the finishing stage. Thus the company and suppliers

have equal value in the performance of the company and this leads to emergence

conflicts related to the ownership and partnership among company and the suppliers.

According to Rodrigues (2014), the market changes and viabilities lead to the

emergence of logistics constraints in the company.

2.3.2 Impact of modularization in VW Resende Plant in Brazil

According to Rodrigues (2014) the modular consortium in the Resende plant, Brazil, the

Volkswagen (VW) reduced the labor costs and increased their efficiency in assembling

the body parts of the products. The fractal concept of modularization allocated the

employees in the VW in to eight subcontracting firms; in order perform the tasks

assigned to them. Supply of components, coordinate the final assembly, installation

process etc are the functions performed by the modular suppliers in VW for the delivery

of their products within the short time.

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VW have entered in to the contract with the three suppliers namely US, Japan and

German companies. In the view of Danese, Romano and Bortolotti (2011) the tasks can

be carried out in parallel to one another and the ability to produce the modules

independently of each other are the main benefits of modularity in production. The 7

modular workshops of subsystems of VW bring component suppliers in to factory for

assembling the products, at least cost and time.

The VW acts as only an external observer, and all the integral activities were performed

by the modular supplier of the company. According to Boyer and Verma (2009) all the

activities, beginning from the development of the products up to finishing stage is done

efficiently by the suppliers of the modular concept of VW. Even though the VW and the

suppliers have the equal role in the development of the products, the conflicts related to

ownership and partnership arises.

According to Sharland (2012) logistical constrains are one of the impact of

modularization. The downsizing of economy during recession, significantly impacts the

logistics and manufacturing capability of the VW. The shortage of parts, non availability

of materials, reduced customer demands will affect the functioning of modular suppliers.

The automakers cannot afford the immediate changes in the market condition and so

thus current scenario hugely impacts the logistics capability of VW.

According to Sharland (2012) the modularization in both MCC and VW helped the

companies to gain competitive advantage in the global market. This concept improved

the cooperation of suppliers and co workers involved in the process of production and

assembling of the products. The modularization concept provided more advantages to

MCC than the VW.

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