CHAPTER 7
Managing Materials Flow
Materials Management Activities• Anticipating materials requirements
• Sourcing and obtaining materials
• Introducing materials into the organization
• Monitoring the status of materials as a current asset
Objectives of Integrated Materials Management
• Low costs
• High level of service
• Quality assurance
• Low level of tied-up capital
• Support of other functions
Differences Between Inbound and Outbound Transportation
• Market demand that generates the need for outbound movement is more uncertain and fluctuating
• Inbound transportation tends to involve bulk raw materials, supplies, or parts
• Firms exercise less control over inbound transportation due to total delivered pricing programs
Types of Forecasts• Demand forecast
• Supply forecast
• Price forecast
• Long-term
• Midrange
• Short-term
Forecasting Supply Chain Requirements
I hope you'll keep in mind that economic forecasting is far from a perfect science. If recent history's any guide, the experts have some explaining to do about what they told us had to happen but never did.
Ronald Reagan, 1984
What’s Forecasted in the Supply Chain?
•Demand, sales or requirements
•Purchase prices
•Replenishment and delivery times
Some Forecasting Method Choices
•Historical projectionMoving averageExponential smoothing
•Causal or associativeRegression analysis
•QualitativeSurveysExpert systems or rule-based
•Collaborative
Typical Time Series Patterns:Random
0
50
100
150
200
250
0 5 10 15 20 25
Time
Sa
les
Actual salesAverage sales
Example 3-Month Moving Average Forecasting
Month, iDemand formonth, i
Total demandduring past 3months
3-monthmovingaverage
.
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20 120 . .21 130 360/3 12022 110 380/3 126.6723 140 360/3 12024 110 380/3 126.6725 13026 ?
CR (2004) Prentice Hall, Inc.
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period current in forecast
period current in demand actual
period next for forecast
0.30 to 0.01 usually constant smoothing
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Actions When Forecasting is Not Appropriate
Seek information directly from customers
Collaborate with other channel members
Apply forecasting methods with caution (may work where forecast accuracy is not critical)
Delay supply response until demand becomes clear
Shift demand to other periods for better supply response
Develop quick response and flexible supply systems
Collaborative Forecasting
• Demand is lumpy or highly uncertain
• Involves multiple participants each with a unique perspective—“two heads are better than one”
• Goal is to reduce forecast error
• The forecasting process is inherently unstable
Collaborative Forecasting: Key Steps
• Establish a process champion
• Identify the needed Information and collection processes
• Establish methods for processing information from multiple sources and the weights assigned to multiple forecasts
• Create methods for translating forecast into form needed by each party
• Establish process for revising and updating forecast in real time
• Create methods for appraising the forecast
• Show that the benefits of collaborative forecasting are obvious and real
Managing Highly Uncertain Demand
Delay forecasting as long as possible
Prioritize supply by product’s degree of uncertainty (supply to the more certain products first)
Apply the principle of postponement to the most uncertain products (delay committing to a final product form until an order is received)
Create flexible supply to changing demand (alter capacity and output rates through subcontracting, computer technology, multi-purpose processes, etc.)
Be able to respond quickly to uncertain demand levels
Total Quality Management (TQM)
the application of quantitative and human resources to improve the material services supplied to an organization, all the processes within the organization, and the degree to which the needs of customers are met - now and in the future.
Administration and Control of Materials Flow
• Kanban/Just-in-time » Kanban (Toyota Production System)» JIT
• MRP » Materials requirements planning (MRP I)» Manufacturing resource planning (MRP II)
• DRP » Distribution requirements planning (DRP I)» Distribution resource planning (DRP II)
Benefits Resulting from Implementing Just-in-Time
• Improved inventory turns.
• Improved customer service.
• Decreased warehouse space.
• Improved response time.
• Reduced logistics costs.
• Reduced transportation costs.
• Improved quality of vendor products.
• Reduced number of vendors.
• Reduced number of transportation carriers.
Elements of an MRP I System
Inventorytransactions
Customers’orders
Forecasts Engineering changes
Master productionschedule (which
products to produce, inwhat quantity, and when)
Bill-of-materials file(product structure
and routing)
Inventory status file (finished items, work in progress, planned orders)
Planned schedules and various other reports
MRP I system
Source: MCB University Press Ltd., Amrik Sohal, and Keith Howard, "Trends in Materials Management," International Journal of Physical Distribution and Materials Management 17, no. 5 (1987), p.11.
MRP SchedulingExample
The master schedule for a particular part over the next 8 weeks shows requirements of:
1 2 3 4 5 6 7 8150 500 350 300 1000 800 700 500
The average lead-time to receive these parts from a vendor is 2 weeks. A previous order for 800 units has been placed with the vendor and will arrive by week 2. An inventory of 200 units is currently on hand.
Lot-for-lot scheduling
Purchase orders are matched on a one-for-one basis with requirements.
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MRP Example (Cont’d)
Week 1 2 3 4 5 6 7 8
Require-ments 150 500 350 300 1000 800 700 500
Scheduledreceipts 800 300 1000 800 700 500
Quantityon hand 200 50 350 0 0 0 0 0 0
Purchasereleases 300 1000 800 700 500
Lot-for-lot scheduling (Cont’d)
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Order min. qty.
MRP Example (Cont’d)
Week 1 2 3 4 5 6 7 8
Require-ments 150 500 350 300 1000 800 700 500
Scheduledreceipts 800 300 800 800 700 500
Quantityon hand 200 50 350 0 200 0 0 0 0
Purchasereleases 500 800 800 700 500
Order minimumsSuppose the vendor has an order minimum of 500 units.
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Vendor Managed Inventory
•The supplier usually owns the inventory at the customer’s location
•The supplier manages the inventory by any means appropriate and plans shipment sizes and delivery frequency
•The buyer provides point of sale information to the supplier
•The buyer pays for the merchandise at the time of sale
•The buyer dictates the level of stock availability required
Elements of an MRP II System
Materials requirements
planning(MRP)
Capacity requirements
planning (CRP)
Execute capacity plans
Execute material plans
Realistic?
Order (production plan)
Order (production plan)
Inventory records
Yes
No
Source:Karl A. Hatt, ‘What’s the Big Deal about MRP II?” Winning Manufacturing 5, no. 2 (1994), p. 2.
Elements of a DRP II System
Source: “How DRP Helps Warehouses Smooth Distribution,” Mondern Materials Handling 39, no. 6 (April 9, 1984), p. 53. Modern Materials Handling, copyright 1984 by Cahners Publishing Company, Division of Reed Holdings.
Distribution center
Distribution center
Distribution center
Distribution center
Customers
Distribution center
Distribution center
Regional warehouse
Plantwarehouse
Regional warehouse
Distributionresource planning
Elements of a DRP II System (cont.)
Source: “How DRP Helps Warehouses Smooth Distribution,” Mondern Materials Handling 39, no. 6 (April 9, 1984), p. 53. Modern Materials Handling, copyright 1984 by Cahners Publishing Company, Division of Reed Holdings.
Plantwarehouse
Final assembly (manufacturing)
Subassembly B Subassembly C
Subassembly A Part C
Raw materials
Part C
Part D
Part B
Part E
Part A
Material requirements planning
CHAPTER 8
Transportation
Factors Influencing Transportation Costs
• Product-related factors– density
– stowability
– ease or difficulty of handling
– liability
• Market-related factors– Degree of competition
– Location of markets
– Government regulation
– Balance or imbalance of freight traffic
– Seasonality
– Domestic versus international movement
Transportation Impacts on Customer Service
• Dependability
• coverage
• flexibility
• loss and damage - FEDEX
• Time Definite Delivery
Terms of Sale and Corresponding Buyer and Seller Responsibilities
Source: Harold Fearon, Donald Dobler, and Ken Killen, The Purchasing Handbook, National Association of Purchasing Management, 1993, McGraw-Hill.
1.Terms of Sale FOB Shipping Point, FREIGHT COLLECT
Buyer pays freight charges.
Buyer bears freight charges.
Buyer owns goods in transit.
Buyer files claims (if any).
Title passes to buyer
Freight charges paidby buyer
Seller Buyer
2.Terms of Sale FOB Shipping Point, FREIGHT ALLOWED
Seller pays freight charges.
Seller bears freight charges.
Buyer owns goods in transit.
Buyer files claims (if any).
Title passes to buyer
Freight charges paidby seller
Seller Buyer
3.Terms of Sale FOB Shipping Point, FREIGHT PREPAID AND CHARGED BACK
Seller pays freight charges.Buyer bears freight charges.Buyer owns goods in transit.Buyer files claims (if any).
Title passes to buyer
Freight charges paid by seller, then collected from buyer by adding amount to invoice.
Seller Buyer
Terms of Sale and Corresponding Buyer and Seller Responsibilities (cont.)
Source: Harold Fearon, Donald Dobler, and Ken Killen, The Purchasing Handbook, National Association of Purchasing Management, 1993, McGraw-Hill.
6.Terms of Sale FOB Destination, FREIGHT COLLECT AND ALLOWED
Title passes to buyer
Seller Buyer
Buyer pays freight charges.Seller bears freight charges.Seller owns goods in transit.Seller files claims (if any).
Freight charges paid by buyer, then charged to seller by deducting amount from invoice.
4.Terms of Sale FOB Destination, FREIGHT COLLECT
Buyer pays freight charges.
Buyer bears freight charges.
Seller owns goods in transit.
Seller files claims (if any).
Title passes to buyer
Seller Buyer
Freight charges paid by buyer
5.Terms of Sale FOB Destination, FREIGHT PREPAID
Seller pays freight charges.
Seller bears freight charges.
Seller owns goods in transit.
Seller files claims (if any).
Freight charges paid by seller
Title passes to buyer
Seller Buyer
Five Basic Transportation Modes• Motor
• Rail
• Air
• Water
• Pipeline
Comparison of US Domestic Transportation Modes
Economic Characteristics
Motor Rail Air Water Pipeline
Cost
Moderate
Low
High
Low
Low
Market coverage
Point-to-point
Terminal-to-terminal
Terminal-to-terminal
Terminal-to-terminal
Terminal-to-terminal
Number of competitors
Many Moderate Moderate Few Few
Predominant traffic
All types Low-moderate value, moderate-high- density
High value, low moderate density
Low value, high density
Low value, high density
Average length of haul
Short to long Medium to long
Medium to long
Medium to long
Medium to long
Equipment capacity (tons)
10-25 50-12,000 5-125 1,000-60,000 30,000-2,500,000
Comparison of US Domestic Transportation Modes (cont.)
Motor Rail Air Water Pipeline
Speed
Moderate
Slow
Fast
Slow
Slow
Availability High Moderate Moderate Low Low
Consistency (delivery time variability)
High Moderate High Low-moderate
High
Loss and damage Low Moderate-high
Low Low-moderate
Low
Flexibility (adjustment to shipper’s needs)
High Moderate Low-moderate
Low Low
Service Characteristics
Rail in South Africa
• Excess capacity
• Good rail network
• Lousy service reputation
• Companies are considering buying own systems
Nonoperating Third Parties• Freight forwarders
• Shippers’ associations or cooperatives
• Transportation brokers
• Intermodal marketing companies or shippers’ agents
• Third-party logistics service providers
Major U.S. Agencies Regulating Transportation
• Surface Transportation Board
• Department of Transportation
• Federal Maritime Commission
• Federal Energy Regulatory Commission
The Domestic Transportation System
• Transportation is the movement of goods and people between two points– Nodes– Links– Air, water, motor carriage, rail, pipeline– Intermodal transportation– Routing guides
Switching Milk Cans from a
Farmer’s Buggy to a Truck on a Rural Road in
North Carolina, 1929
Early form of intermodal transport and cross docking
The Domestic Transportation System
• Supply chain success requires transportation– Transportation costs are affected by node location– Inventory requirements are influenced by mode– Packaging requirements are dictated by mode– Materials handling equipment and design of the
docks are dictated by mode– Maximum consolidation of loads achieved with
order-management technology reduces costs– Customer service goals influence carrier choice
Product vs. Pricing
• Ease/difficulty of load• equipment availability• capacity of equipment
• Inefficiencies drive up prices
• zones• unexpected costs -
increase in cost of diesel
Target Markets
• Cost of reaching market
• network on other end
• Shipping to Hawaii - Matson (small monopoly)
• $6/gal for milk in Hawaii
• Facility location based on trans network - Reno/Ontario/Atlanta/Memphis
Product related factors
• Density of product -
• stowability
• special handling equipment
• special shipping containers
• hazmat - liability
Common/contract/exempt vs. private
• All shippers• any shipper• contract - limited
number under specific contract
• Private fleet• Move only company’s
products• lease or own
Small-Volume Shippers
• Parcels are packages weighing up to 150 pounds
• Parcel carriers are firms that specialize in small packages (≤ 150 pounds)– UPS– FedEx
• Other carriers include– USPS– Passenger carriers—air and bus
LTL Shippers
• Less-than-truckload (LTL)– 150 to 10,000 pounds– Too big to be handled manually, too small to fill a
truck– LTL trucks carry shipments from many shippers– Most large firms are LTL carriers
• Yellow Freight• Roadway Express• ABF Freight System
LTL Shippers
• Less-than-truckload (LTL) (continued)– Process
• Local pick-up
• Origin terminal used to load aboard line haul
• Line haul to terminal near destination
• Destination local delivery on smaller trucks
• Consignee receives
LTL Shippers
• Air Cargo– Can be given directly to airline– Can be given to freight forwarder– Most carried on passenger airlines– Types of products
• High in value• Perishable• Require urgent delivery
– Shipped in air containers made to fit fuselage
LTL Shippers
• Freight forwarders– buy space at TL (truckload) rate and sell at
somewhat less than LTL rate– pick-up and deliver; motor carriers or railroads
do line-haul– function as transportation departments of small
firms– may specialize in specific cargoes
LTL Shippers• Air forwarders
– Consolidate shipments– Tender to airlines in containers ready for loading– Forwarders provide retailing function– Airline provides wholesaling function
• Shipper’s cooperatives– Similar to air and freight forwarders but are not-for-
profit organizations – Membership (shippers) receive any monies earned in
excess of costs
LTL Shippers• 3PLs
– May have equipment—trucks, trailers, terminals– May deal in information only– May operate Internet-based auctions
• Brokers– A facilitator who brings together a buyer and seller– May consolidate LTL shipments and then give to
truckers, forwarders, or shippers’ associations
Truckload and Carload Shippers
• Shipments of 20,000 to 30,000 pounds• Fill one truck• Cost less per pound than LTL shipments
– The shipper loads and consignee unloads the trailer– Load goes from shipper to consignee without
passing through a terminal– Paperwork, billing, and control costs are the same
Truckload and Carload Shippers
• Rate per haul may be negotiable
• Largest TL companies– Schneider National Van Carriers– J.B. Hunt Transport
• Many firms are smaller, without national presence
• Smaller firms may be owner-operators
Truckload and Carload Shippers
• Private transportation is when the shipper provides and operates its own equipment
• Dedicated equipment is carrier owned but assigned to serve specific customers for indefinite periods
• Shippers and consignees using railroad service need sidings on their property
Large Bulk Shippers
• Bulk cargo – Travels in loose rather than in packaged form – Handled by pumps, scoops, conveyor belts, or the
force of gravity– Has various handling characteristics– Moves by
• Truckload• Railroad• Water carrier• Pipeline
Large Bulk Shippers
• Bulk cargo (continued)– Dry Bulk-Handling Systems
• Coal car unloading facility
• Grain elevator
– Vehicle and Vessel Equipment Choice
Comparison of Modes
• Costs per ton-mile
• Speed
• On-time delivery
Transportation Regulation and Deregulation
• Exceptions to economic deregulation– Rail service to captive shippers– Household goods movers– Many petroleum pipelines– Many natural gas pipelines– Some inland waterway traffic– Some water transport between mainland U.S.
and Hawaii, Puerto Rico, and Alaska
Transportation Rates
• Rate structure deals with three factors– Relationships between different products– Relationships between shipments of different
weights– Relationships between different distances
• Three factors are defined numerically and then tied to a rate of cents per hundredweight (cwt)
Transportation Rates
• To find LTL rates usually need:– Origin and destination zip codes– Weight of shipment– Classification of shipment– Supplemental services needed– Discount awarded to shipper by carrier
• Rates may be on carrier web sites
Which Mode?
• Motor - 75% of tonnage - average move = 400 miles
• Use motor for moves > 400 < 1000
• > 1000 air and smaller package - air
• > 500 and large - rail
• average rail move = 850 miles
Importance of Modes
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By Products Hauled
Air--very high-valued, time sensitive products Truck--moderately high-valued, time sensitive
products. Many finished and semifinished goods Rail--low-valued products including many raw
materials
Water--very low-valued products moved domestically, high -valued if moved internationally
Pipe--generally limited to petroleum products and
natural gas
Importance of Modes (Cont’d)
By Volume Moved
Percent Transportation of total mode volume Railroads 36.5% Trucks 24.9 Inland waterways 16.3 Oil pipelines 22.0 Air 0.3 Total 100.0
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Performance Overview Air generally fast over long distances and a fair
degree of relative variability
Water is very slow and moderately reliable
Pipe is very slow but reliable
Truck is moderately fast and reliable
Rail is slower and less reliable than truck
Relative Costs of Performance
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Price, Mode ¢/ton-mile Rail 2.28 Truck 26.19 Water 0.74 Pipeline 1.46 Air 61.20
Mode/Service Selection
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The problem Define the available choices Balance performance effects on inventory against
the cost of transport Methods for selection
Indirectly through network configuration Directly through channel simulation Directly through a spreadsheet approach as follows:
Alternatives Cost types Air Truck Rail Transportation In-transit inventory Source inventory Destination inventory
Rail • 1-UP; 2-BNSF; 3-Canadian National; 4-CSX• 175K miles of rail• lacks versatility and flexibility• Oct 04- UP had 140 loads waiting for power• Average times for rail up over past 3 months• Equipment shortages• BNSF – record profits last 2 years• BNSF - all switching and routing from World Wide
Operations Center (WWOC) in Fort Worth
NUMBER OF WAREHOUSES IN THE NETWORK
AVERAGE LEAD TIME
TO CUSTOMERS
(DAYS)
BEST WAREHOUSE LOCATIONS
One 2.28 Bloomington, IN
Two 1.48 Ashland, KY Palmdale, CA
Three 1.29 Allentown, PA Palmdale, CA McKenzie, TN
Four 1.20Lancaster, PA Palmdale, CA Chicago, IL
Meridian, MS
Five 1.13Summit, NJ Palmdale, CA Chicago, IL
Dallas, TX Macon, GA
Six 1.08Summit, NJ Pasadena, CA Chicago, IL
Dallas, TX Macon, GA Tacoma, WA
Seven 1.07
Summit, NJ Pasadena, CA Chicago, IL
Dallas, TX Gainesville, GA Tacoma, WA
Lakeland, FL
Eight 1.05
Summit, NJ Pasadena, CA Chicago, IL
Dallas, TX Gainesville, GA Tacoma, WA
Lakeland, FL Denver, CO
Nine 1.04
Summit, NJ Alhambra, CA Chicago, IL
Dallas, TX Gainesville, GA Tacoma, WA
Lakeland, FL Denver, CO Oakland, CA
Ten 1.04
Summit, NJ Alhambra, CA Chicago, IL
Dallas, TX Gainesville, GA Tacoma, WA
Lakeland, FL Denver, CO Oakland, CA
Mansfield, OH ©2008 Chicago Consulting - Supply Chain Consultants
Distribution Centers and Transportation
• Trade off between inventory and transportation costs
• Closer to customers allows company to claim “Green” friendly
Transportation Stuff
• Rail volume up 1.9% in January – 1.556 million car loads
• Intermodal traffic = 1.068 million containers/trailers
• Fuel Surcharges unpredictable – one company covered 96% of fuel costs with surcharges last year
• Hotel rooms in Vegas added an energy surcharge 5 years ago and still add to room charges
Chapters 7 and 8
• Modes of Transportation• Mode Selection • MRP• DRP• Inbound vs. Outbound• Forecasting • Just in Time• LTL vs TL
Next Week
• Chapter 9 and 10