Supply chain management

Supply chain management

Logistics processes

Video 1: What is material handling?

The material handling industry is responsible for how products are stored, protected, and moved from one point in the supply chain to the next, all the way to local stores or doorsteps. As products are shipped across the globe, one industry is responsible for the safe delivery of nearly every type of material product and consumable. The material handling industry is one of America's largest industries and it is growing as companies learn how to produce their products quicker and in greater quantities.

The material handling industry is powered by a large variety of equipment to power the supply process:

• Storage equipment
• Lifting equipment
• Conveyor belts
• Information technology

These tools are all utilized to keep the material handling industry functioning and constantly evolving. Material handling equipment can be divided into four different categories:

• Handling and storage equipment
• Engineering systems
• Industrial transportation
• Bulk material handling

It is important to almost every other industry and the entire global economy that the material handling process works properly: if the material handling industry just stopped working, it would cause a crisis worldwide. Thankfully, the material handling industry is always becoming more efficient at getting products to their destination as quickly as possible. New technologies are presenting possibilities that were never available before, making the material handling industry a profitable opportunity for employment as it prepares for the challenges of today and the future.

The material handling industry has opportunities for those with expertise in:

• Engineering production and operations manufacturing
• Administration
• Logistics
• Inventory control
• Supply chain management
• Systems integration
• Marketing and sales
• Information technology
• Customer services
• Facility design

Video 2: Transportation 101 - What you need to know about freight

Transport and material handling are two different activities of logistics. Depending on the change of the location of goods:

• If the location does not vary, it's material handling, which involves the movement of the product from one step to another in the supply chain. A large variety of equipment is used in material handling like conveyor belts, storage equipment, lifting equipment, and information technology. It can be divided into four categories: handling and storage equipment, engineering systems, industrial transportation, and bulk material handling.
• If the material handling stops, it would cause a crisis worldwide, which we actually experienced during Covid-19. It's an internal activity, from one location to another in the same warehouse, building, company, or production plant.
• If the location varies, it's transport, which implies moving over land, sea, and air. I move an item from the supplier to my company or from me to a customer. Modifying the product availability (in space) generates added value place utility, making the product available where requested.

We don't mean only finished products, but it could be a component, a material. So, we should better call it an ITEM - a product (better: ITEM because it’s not a finished product, but also a component) is originally available in a given location (location A) and will be moved to another location (location B) where it is requested. Any logistic activity is expected in some way to generate value. The value in this case grounds on the fact that a product is made available in a place where it is requested, known as place utility.

Warehousing (storage)

A warehouse can be represented as a black box in which a given amount of product flow enters and a given amount of product flow exits at a different time. Modifying the product availability (in time) generates added value time utility, making the product available when requested.

Input and output flows can be different because of:

• The time in which they occur – the quantity of products that enter the warehouse may not be the same as the product that exits the warehouse daily.
• Their qualitative/quantitative nature – it may enter as raw material and exit as finished product. For example, food products have agricultural raw materials, and they are available in typical times of the year. So the warehouse starts being filled with raw materials that will be used later during the year when the raw material would not be available anymore. It is necessary to have it ready in the warehouse to make the final product available at any time.

Inventory management

Inventory management deals with what and how much stock should be kept in the warehouse. It aims to improve and optimize something. Determining the inventory level for each product in the warehouse and the reorder policy to be used for each product is key. There may be particular policies for particular products; for example, if you deal with a perishable product, you have to think about it carefully to not make it expire, which would be a cost for the company.

The inventory level of a product consists of:

• Cycle stock – the average inventory level generated by the reorder policy applied. If we decide that a product has to be kept in stock, there will always be part of the product in stock due to the fact that we periodically reorder it.
• Safety stock – an additional inventory level used to counteract variability of demand and procurement lead time. If I think that my supplier won’t be able to send me the quantity of product I need in time, I may decide to order more than I need in advance to counterbalance a possible lack of a future order. For example, if I know that my supplier won’t be available in July, I can double the order of June to be covered also for the period of time in which my supplier won’t be available. Sometimes, the supplier may be able to send me the quantity I need, but it may need more time than the company demands.

At the same time, I need to be sure that I have enough space to store them. There are different cost components with different behaviors:

• Green line is the cost of holding stocks, which increases with the increasing of stock because we need a warehouse with bigger sizes.
• Blue line is the expected stock-out cost. It occurs when the company experiences more orders than the stock they have available, it decreases. It is a loss of sale because they cannot satisfy all the customers and the orders they received; also, if the customer knows that the company is in an out-of-stock situation, it will not place orders at all, meaning a loss of sale for the company.
• Order cost is identified with the blue line as well. It is something quite fixed. If we place fewer orders, we have a lower cost of order. It decreases when increasing the stock level and it increases every time we place an order. In the end, the quantity is the same, but placing fewer orders and ordering more products per month, the cost of order decreases. In reality, we may have more cost components.

Goal: minimum total cost of inventory (orange curve). It has a minimum and if it is our goal, we can derive the optimal stock level solution that will help us reach the minimum cost. Cost utility: value added by the inventory management that tries to minimize the cost of the system.

Manufacturing and operations management (5 Ps)

• Product: quantity and quality, reliability, performance, delivery schedule, selling price, aesthetics, ergonomics.
• Process: safety, capacity, production types, cost of manufacturing, maintenance, plant layout, labor skills.
• Plant: must be effective enough to allow smooth movement of materials and manpower.
• People: mandatory to match an individual with a perfect job he is capable of doing.
• Programs: there should be a proper time schedule for the implementation and completion of various programs.

In manufacturing, we distinguish:

• Processes with constrained technological cycle: production and operations management does not depend on the amount of product manufactured (lot size). Examples: food industry; chemical industry. We cannot change the quantity/order of activities. There is little room for improvement and optimization. Examples - food industry: I need to produce 300 liters of milk. The quantity is strictly defined; if I enter a lower quantity, the plant doesn’t work. The same could happen in the chemical industry.
• Processes with non-constrained technological cycle (manufacturing or assembly processes): production scheduling and operations management depends strictly on the amount of finished product manufactured. Quantity can be changed, and you can use the techniques you want in order to optimize the result. I can change the decision-making, so we have more opportunity to optimize the result with respect to the constrained processes.

Production scheduling and operations management depends strictly on the amount of finished product manufactured. Logistics concepts can be applied. In this case, the optimization refers to the production mix/process. Optimization with operational research (OR) techniques: I create a mathematical problem, identify a decision variable to optimize this process. Product utility (optimization of the processes).

Information management

Regardless of the context (production, logistics, service...), any physical flow is associated with an information flow. Example: university (not a production process). There are flows (of students, information).

Information flow:

• Personal information (date of birth).
• Study plan (still it is strictly associated with me, it could be customized in the case I come from another course of study).
• Career (if I have a positive evaluation in an exam, the university has to record it).
• Presence in the university - In a given moment in time we are doing a class in a room. I must tell my university that I’m here in the room. This is due to the pandemic.

Example 2: production of a product physical product flow:

• We buy a raw material from a supplier. Economic transaction, so there is an invoice. There are many documents related to this step.
• It gets to the factory; it is recorded.
• Warehouse
• Outlets
• Consumers

Any time there is a step in the physical flow, there is also an information flow. There is typically a lot of data that needs to be collected about the flows that occur in the system, no matter if it is a production process, logistics, or university.

Players/item of the logistics system

• Supplier: flow of the product that starts with the supply of raw material. Shipped to the production facility.
• Factories: Product is manufactured.
• Warehouse: Product is stored.
• Outlets/retail stores: Product is shipped to be sold to the customer.
• Consumers: Final destination of the product information.

Set of information:

• If I plan to introduce a new product, the first aspect is to decide why, which kind of product, which characteristics satisfy the final consumer.
• Decide how to design the product.
• Evaluation of the stock level.
• Where to stock the product (facility warehouse/retailer warehouse).
• Forecast the demand to plan all the activities.

The physical flow has a specific direction (we start with the supplier and end with the consumer). Information flow can have different directions: information starts from the final consumer and goes back, because the first point to be investigated is the kind of product that is interesting to the consumer (analysis of the consumer).

Typically, there are both types of information:

• The one that goes oppositely to the physical product flow.
• The one that follows the flow of the physical product (e.g., bottle of product – analysis made on the product, information directly associated with the product).

In a real company, there is a specific function called the “information systems division.” Some of the activities of this division are:

• Collecting and elaborating data.
• Derive value-added information useful for decision-making.

Aim: improve knowledge (sales volume...).

Information management: In a company, the information systems division is in charge of collecting and elaborating data and deriving value-added information - to improve knowledge of processes.

Examples of relevant information:

• In a manufacturing industry: finished product demand, stock level, delivery plan, production plan, type of finished products...
• In a service industry (university): students, exams, scores, rooms, professors, dates, degree...

Goal: Value-added information supports decision-makers knowledge utility. Logistics systems couldn’t be global or integrated without a modern technological infrastructure. Making technology-related decisions can be scary for even senior executives, because it is impossible to physically check the quantity of products/raw materials or whatever - I have to rely on the information system, but if someone does not record an amount of product, I can’t know that it is actually there.

Supply chain and information technology (video)

Current logistic systems are global, e.g., supplier is in China, manufacturing in Italy, warehouse is in Europe. You are therefore forced to use the integrated information technology to know what happens to my product. Executives must also be able to use technology-related decisions. Any physical flow must be associated with the right information flow. You can only base your decision on what is stored in the information system because it is impossible to check. For example, you must record the fact that raw material has arrived in the factory; otherwise, they are not available.

Supply chains need to accomplish:

• Research & analysis
• Planning & scheduling
• Purchasing
• Networking
• Relationship management

Logistics pipeline

Processes (one direction) is a possible list of activities that occur in a logistic system starting from the raw materials procurement up to the order fulfillment (consumers).

• Raw material procurement
• Check on the stock level and quality of raw materials
• Transport of raw material
• Storage of the raw material
• Production scheduling
• Packaging
• Transport from factory to the distribution center
• Storage at the distribution center
• Check of the stock level of finished products
• Transport of finished products to retailers
• Order fulfillment

In real cases, it is important to be aware of the processes needed to reach the final consumers. Example: the professor is interested in buying a computer. The goal is to have the computer. I have to start looking for the computer on specific websites. I have to prepare a draft of the order, check availability, send it to the administration, additional checks by the administration. Administration prepares the real order, signed by the director of the department. Order sent to the supplier. Supplier has 7-15 days to deliver the product. When the computer arrives, the professor checks if it’s the correct product and confirms the correctness. This triggers the payment process.

We start from raw material procurement up to order fulfillment. On the other hand, we have different flows, which could take up every direction:

• Flow of people in order to carry out the activities of the product flow – for a plant to work or transport, we need people.
• Financial flow because everything we do, we have to pay – for example, every time I receive raw materials.
• Service flow – additional characteristics that differentiate a product, not technical but of possible interest for the customer (like quick availability of the product or the possibility to pay later).
• Information flow

When we evaluate logistics, we have to take into account:

• Effectiveness – activities do not imply errors (like for example the delivery to a customer of a wrong product or the wrong quantity, the fact that the product is damaged because of some problems with the transport, it could be an error of time because the delivery is late and delayed or it could be also in terms of place, meaning that the delivery is made in the wrong place) – so if we look at it in a positive way, in order to be effective, a logistic system needs to fulfill the 5R: right product, right quantity, right condition, right time, and right place.
• Efficiency – minimum total logistics cost. If an error occurs, also costs increase, and so effectiveness and efficiency are really connected.

Logistic system (physical)

Logistic system refers to the physical process assets (warehouses, transport means, production plants). Logistic pipeline emphasizes the flows.

3 parts of the logistic system

• Procurement deals with raw materials, suppliers, raw material warehouses.
• Operations refer to the production.
• Distribution refers to the finished products: warehouses for finished products, transport means that move to the different markets.

Definition of logistics

According to the Council of Logistics Management (2002), "Logistics is that part of the supply chain process that plans, implements, and controls the efficient and effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customer requirements."

Logistics and supply chain are related. This definition recalls the concepts of efficiency and effectiveness. Flows are mentioned. Goods (products) are associated with services and information. They are all moving in the system, not only products. The final goal of the logistic system is to satisfy the final customer. Sometimes customers are inside the logistic system (retail store), sometimes outside the logistic system (final consumer). The customer is typically outside of the system because he doesn’t take action.