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 on point in the supply chain to the next, all the way to local store or doorstep.

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 handing industry is one of

the America’s largest industries and it is growing fastest companies are learning 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

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 will

cause a crisis worldwide. Thankfully, the material handling industry is always becoming more

and 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 the industry prepared for the

challenges of today in the future.

The material handling industry has opportunities for those the 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 -> Two different activities of logistics

Depending on the change of the location of a goods:

If the location does not vary -> material handling -> movement of the product from one step to

another of the supply chain. There is a large variety of equipment in material handling like

conveyor belts, storage equipment, lifting equipment, information technology. It can be divided

into 4 categories: handling and storage equipment, engineering systems, industrial

transportation and bulk material handling it.

If the material handling stops, it would cause a crisis worldwide (which we actually experienced

during Covid-19) -> internal activity, from one location to another in the same warehouse, in the

same building, in the same company, in the same production plant.

If the location varies -> transport -> it implies moving over land, sea and in the air. I move an

item from the supplier to my company or from me to a customer Þ

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 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 it will be moved to another

location (location B) in which it is requested.

Any logistic activity is expected in some way to generate a value -> the value in this case

grounds on the fact that a product is made available in a place in which it is requested (= 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 Þ

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 of the product that exist 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

time of the year -> so the warehouse starts being filled with raw materials and they will be used

later during the year, when the raw material would not be available anymore, so it is necessary

to have it ready in the warehouse in order to make the final product available at any time.

Inventory management -> deals with what and how much stock should be kept in the

warehouse. Aims to improve and optimize something

Determining the inventory level for each product in the warehouse

- Determining the reorder policy to be used for each product -> there may be particular

- policies for particular products; for example, if you deal with a perishable product, you

have to think about it carefully in order not to 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 in

order 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, so that I will 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

what the company demands for.

At the same time, I need to be sure that I have enough space to storage 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 experience 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 know

that the company is in an out-of-stock situation, it will no place orders at all, meaning a

loss of sale for the company.

Order cost is identified with the blue line as well -> something quite fixed. If we place

- less order, 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 less 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,

è

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):

1. Product quantity and quality, reliability, performance, delivery schedule, selling price,

→

aesthetics, ergonomics

2. Process safety, capacity, production types, cost of manufacturing, maintenance, plant

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layout, labor skills

3. Plant must be effective enough to allow smooth movement of materials and

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manpower

4. People mandatory to match an individual with a perfect job he is capable of doing.

→

5. 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

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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).

è

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 to 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 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:

1. Supplier: flow of product that starts with supply of raw material. Shipped to production

facility.

2. Factories: Product is manufactured

3. Warehouse: product is stored

4. Outlets/retail stores: product is shipped to be sold to the customer

5. 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 ends with the

consumer).

Information flow can have different direction: 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:

A. the one that goes oppositely to the physical product flow

B. 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 for 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... Þ

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 the 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.

E.g. 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 fulfilment (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 that are 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 flaw -> 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 deliver 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,

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production plants)

Logistic pipeline emphasizes the flows.

3 parts of the logistic system:

1. Procurement deals with raw materials, suppliers, raw material warehouses.

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2. Operations refers to the production.

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3. Distribution refers to the finished products: warehouses for finished products,

→

transport means that moves to the different markets.

Definition of logistics:

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). Customer is typically outside of the system because he doesn’t take action.