Business Logistics

Chapter 3

The Inbound Logistics System

Adam Conrad

Learning Objectives

Understand the role and nature of inbound logistics in a supply chain context

Explain the different types of inbound systems in a supply chain

Discuss the major materials management activities

Understand the procurement process

Learning Objectives (cont.)

Identify the four steps necessary for

procurement

Explain the criteria for evaluating

vendors

Understand the major inventory

techniques associated with materials

management

Logistics Profile

Robbins Company

– Parts too big and costly to ship by air

– Ocean transport too unreliable

– Impact of missed deliveries

– Trans-Atlantic shipping runs like clockwork

• Systems in place when not (Fax/EDI)

– Despite transportation improvements –

Customs remains difficult

Inbound vs. Outbound

Inbound

– Materials management

– Procurement

Outbound

– Customer service

– Channels of distribution

Focus on MM, Inventory management and Procurement

Inbound Logistics along the

Supply Chain

Mining Firm – extractive, most concerned about outbound

Steel Firm – inbound items stored outside in piles, finished steel requires more sophisticated handling

Container firm – cans of different sizes, also part of supply chain for auto making etc

Inbound Logistics along the

Supply Chain (cont.)

Food Firm – stores cans as „brights‟

adding labels later

Retail Store- labels added per orders

Return – today‟s economy recycles

Complexity – Boeing vs. US Steel

inbound vs. outbound

Materials Management

Integration

– Information needs to flow both directions

for effective coordination

Definition

– “the planning and control of the flow of

materials that are a part of the inbound

logistics system”

Procurement

Importance

– Links members in the supply chain and

assures the quality of the suppliers

Definition

– “act of buying goods and services for a firm

or the process of it”

– Activities are interfirm (org boundaries) and

intrafirm (functional boundaries)

Procurement - Activities

Identify or reevaluate needs– Specifications from external customers

Define and evaluate user requirements– Measurable criteria

Decide whether to make or buy

Identify the type of purchase– Straight rebuy

– Modified Rebuy

– New buy

Procurement - Activities

Conduct a market analysis– Oligopoly/ monopoly markets etc.

Identify all possible suppliers– Simple as the yellow pages for small companies

Prescreen all possible sources– Demands vs. desires of users

Evaluate the remaining supplier base

Choose a supplier– Mechanics of the relationship (T‟s and C‟s)

Procurement - Activities

Receive delivery of the product or

service

Make a postpurchase performance

evaluation

– “control” activity

– Measure supplier performance against

user requirements

Managing the Procurement

Process

Determine the type of purchase

Determine the necessary levels of investment

– Time and information of the firm

Perform the procurement process

Evaluate the effectiveness of the procurement

process

– Control step to determine:

• User needs met

• Was the investment necessary

Vendors

Vendor Partners

– Competitive advantage of the company

– Customer satisfaction

– Reduced total number of suppliers

– TQM and JIT systems

Vendor Selection Criteria

Quality– Life of product, ease of repairs

Reliability– Delivery and performance history and

performance life of the product

Capability– Production facilities, capacity and technical

capability, management, organizational capabilities and operating controls

Financial– Must be stable or it affects supply chain

Vendor Selection Criteria

Desirable Qualities

– Image or impression

– Training aids

Vendor Location

– Fill rush orders, delivery dates

Factor Importance

– Depends on the material being purchased

Procurement Price

Sources of Price

– Commodity Markets• Grain, oil, sugar and raw materials

– Price List• Publishes, may offer volume breaks

– Price negotiations• RFP/RFQ

– Negotiations• When other methods don‟t apply or fail

Hierarchy of Costs

Traditional basic input costs– Primary price (bid, quoted, negotiated)

Direct transaction costs– Detecting inventory need, requisitioning, preparing

and transmitting order documents, receiving information - EDI

Supply relational costs– Travel, training, links between purchasing and

traffic, engineering, research, product development

Hierarchy of Costs

Landed costs– Actual transportation costs

– Sales/F.O.B terms

– Four different inbound options:• Supplier selected for hire or private carrier

• Buyer selected for hire or private carrier

– Who owns it and when/claims and damage

Quality costs/factors– Conformance of goods to desired spec.

– Cost of conformance, nonconformance, appraisal and ultimate use costs

Hierarchy of Costs

Operations/Logistics costs

– Receiving and make ready costs:

unpacking, inspecting , counting, sorting,

grading, and moving to the use point

– Lot size costs

– Production costs – similar goods with

dissimilar impact on production lines

– Logistics costs

Other MM Activities

Warehousing

– Facilities required

• Raw materials vs. Finished product

Production Planning and Control

– Coordinating product supply with product

demand

• Forecast customer demand

• Provide from inventory or producing the product

Other MM Activities

Traffic

– Managing inbound transportation of materials

– Vendor Control – analyze periodically

– Modal Choice

– Rush Shipments – less on inbound

Receiving

– Inspection – Notify AP, Purchasing and Users

– Damage Claims –Notes on Bill of Lading „Guilty‟

Other MM Activities

Quality Control– Quality Standards – Meet the purchase agreement

– Quality Implications – Affects finished product

– Sample – vs. 100%

Salvage and Scrap Disposal– Value of Scrap

• Excess and obsolete materials

• Solid market exists for salvage

– Disposal• Legal and regulatory requirements for safe disposal of

hazardous materials

Inventory

Holding inventory = significant costs

Companies can reduce cost of business and improve ROI/ROA by decreasing inventory levels

MM/Inbound logistics plays a major role in driving inventory levels

Uncoordinated inventory approach = loss for company and customers

Just-in-Time

Available when a firm needs them– short consistent lead times

Kanban– Signboard indicates replenishment quantities and

times it must take place

JIT Operations– Production cards (kan cards) establish the amount

to be produced

– Requisition cards (ban cards) authorize the withdrawal of materials from feeding or supply operation

– Andon (light system), yellow (little), red (big) prob.

Just-in-Time

Fundamental Concepts– Zero inventory

– Short lead times

– Small, frequent replenishment quantities

– High quality, zero defects

Similarity to two-bin system– Or „reorder‟ point system

– One bin to fill demand for a part and when empty the second bin supplies the part

Reducing lead times– Forklift example of 1 month for Toyota vs. 6-9

months for American manufacturers

JIT vs. Traditional Approaches

Reduce Inventories– Does the supplier carry more?

Shorter Production Runs– Setup issues

Minimize Waiting lines– When and where firms need them

Short, consistent lead times– Proximity

Quality

Win-Win relationships

JIT Summary

Demand responsive, resembles EOQ

and Fixed order Quantity approaches

Difference is reliance on improved

responsiveness and flexibility

Relies heavily on accuracy of

forecasting, communication, IS, and

transportation

MRP

Materials Requirements Planning – Joseph Orlicky– Supplying materials and component parts whose

demand depends upon the demand for a specific end product

Logically related procedures, decision rules and records designed to translate a master production schedule in to time-phased net inventory requirements, and the planned coverage of such requirements for each component item needed to implement this schedule

MRP

Goals– Ensure availability of materials, components and

products for planned production and for customer delivery

– Maintain the lowest possible inventory level

– Plan manufacturing activities, deliver schedules, and purchasing activities

Exploding– Determine how much customers desire and when

they need it – timing and need for components based upon the scheduled end product need

MRP

Master Production Schedule

– MPS – detailed schedule of SKU‟s and when they

must be produced

Bill of materials file

– Recipe and when they must be available BMF

shows interrelationship of components and

subunits

Inventory status file

– Also does safety stock and lead times

MRP

MRP program

– Calculates gross requirements and takes into

account inventory and places orders

Outputs and reports

– Quantities and time of order

– Need to expedite or reschedule order dates

– Canceled need for product

– MRP system status

MRP Summary

Responsiveness– Quickly react to changing demand for finished

products

Strengths– Safety stock levels, minimize or eliminate

inventories

– Identify process problems and potential supply chain disruptions and take corrective actions

– Coordinate materials ordering across points in a firm‟s logistics system

– Most suitable for batch/intermittent production/assembly

MRP Summary

Limitations

– Computer intensive and making changes is sometimes difficult while in operation

– Ordering and transportation costs could increase as smaller amounts arrive more frequently

– Not as sensitive to short-term fluctuations in demand as order point approaches

– Complex and don‟t work as intended

Advanced Approaches

MRPII – Manufacturing Resource Planning

– Integrates financial planning and operations/logistics – „what if‟

Distribution Resource Planning (DRP)

– MRP for marketplace

– Customer demand drives time-phased plan for distributing product from plants and warehouses to customers