1. Managing Materials Flow
CHAPTER 7
Managing Materials Flow

2. Materials Management Activities
Anticipating materials requirements
Sourcing and obtaining materials
Introducing materials into the organization
Monitoring the status of materials as a current asset

3. Objectives of Integrated Materials Management
Low costs
High level of service
Quality assurance
Low level of tied-up capital
Support of other functions

4. 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

5. Types of Forecasts Demand forecast Supply forecast Price forecast
Long-term
Midrange
Short-term

6. 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

7. What’s Forecasted in the Supply Chain?
Demand, sales or requirements
Purchase prices
Replenishment and delivery times

8. Some Forecasting Method Choices
Historical projection
Moving average
Exponential smoothing
Causal or associative
Regression analysis
Qualitative
Surveys
Expert systems or rule-based
Collaborative

9. Typical Time Series Patterns:
Random

10. Is Time Series Pattern Forecastable?
Whether a time series can be reasonably forecasted often depends on the time series’ degree of variability. Forecast a regular time series, but use other techniques for lumpy ones. How to tell the difference:
Rule
A time series is lumpy if
where
regular, otherwise.

11. Example 3-Month Moving Average Forecasting
Total demand
3-month
Demand for
during past 3
moving
Month, i
month, i
months
average . . . . . . . . . . . . 20
120 . . 21
130
360/3
120 22
110
380/3
126.67 23
140
360/3
120 24
110
380/3
126.67 25
130 26 ?
CR (2004) Prentice Hall, Inc.

12. Weighted Moving AverageMA = w A + w A +
... + w A 1 1 2 2 n n n å
where w = 1 i i = 1 If
weights ( w )
are
exponential in
form,
then MA = a A + a ( 1 - a ) 1 A t t - 1 + a ( 1 - a ) 2 A + a ( 1 - a ) 3 A t - 2 t - 3 +
... + a ( 1 - a ) n A t - n
Weighted Moving Average
which
reduces to
the
basic,
level
only,
exponential
smoothing
formula MA = F = a A + ( 1 - a ) F t + 1 t t
where a =
smoothing
constant
usually
0.01 to
0.30 F =
forecast
for
next
period t + 1 A =
actual
demand in
current
period t F =
forecast in
current
period t

13. 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
CR (2004) Prentice Hall, Inc.

14. 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

15. 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

16. 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

17. 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.

18. 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)

19. 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.

20. Elements of an MRP I System
Inventory
transactions
Customers’
orders
Forecasts
Engineering
changes
Master production
schedule (which
products to produce, in
what 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.

21. MRP Scheduling Example
The master schedule for a particular part over the next 8 weeks shows requirements of: 1 2 3 4 5 6 7 8
150
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.
CR (2004) Prentice Hall, Inc.

22. MRP Example (Cont’d) Lot-for-lot scheduling (Cont’d) Week 1 2 3 4 5 67 8
Require-
ments
150
500
350
300
1000
800
700
500
Scheduled
receipts
800
300
1000
800
700
500
Quantity
on hand 200 50
350
Purchase
releases
300
1000
800
700
500
10-11
CR (2004) Prentice Hall, Inc.

23. MRP Example (Cont’d) Purchase order minimums
Vendors can set order minimum quantities to avoid the high cost of handling small orders. This will usually force some inventory into the system.
Part period cost balancing
The economically best order quantities can be set by balancing the cost of processing an order with the cost of carrying the inventory associated with ordering more than what is immediately needed.
Suppose it costs $120 to process and deliver each order. Inventory carrying costs are 25% per year, or $0.07 per unit per week on parts valued at $15.
10-12
CR (2004) Prentice Hall, Inc.

24. MRP Example (Cont’d) Order minimums
Suppose the vendor has an order minimum of 500 units.
Week 1 2 3 4 5 6 7 8
Require-
ments
150
500
350
300
1000
800
700
500
Scheduled
receipts
800
300
800
800
700
500
Quantity
on hand 200 50
350
200
Purchase
releases
500
800
800
700
500
Order min. qty.
10-13
CR (2004) Prentice Hall, Inc.

25. 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

26. Elements of an MRP II System
Materials
requirements
planning
(MRP)
Capacity
(CRP)
Execute
capacity plans
material plans
Realistic ?
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.

27. Elements of a DRP II System
Distribution
center
Customers
Regional
warehouse
Plant
resource planning
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.

28. Elements of a DRP II System (cont.)
Plant
warehouse
Final assembly
(manufacturing)
Subassembly B
Subassembly C
Subassembly A
Part C
Raw materials
Part D
Part B
Part E
Part A
Material requirements planning
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.

29. CHAPTER 8
Transportation

30. 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

31. Transportation Impacts on Customer Service
Dependability
coverage
flexibility
loss and damage - FEDEX
Time Definite Delivery

32. Terms of Sale and Corresponding Buyer and Seller Responsibilities
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 paid
by buyer
Seller
Buyer
2.Terms of Sale FOB Shipping Point, FREIGHT ALLOWED
Seller pays freight charges.
Seller bears freight charges.
by seller
3.Terms of Sale FOB Shipping Point, FREIGHT PREPAID AND CHARGED BACK
Freight charges paid by seller, then collected
from buyer by adding amount to invoice.
Source: Harold Fearon, Donald Dobler, and Ken Killen, The Purchasing Handbook, National Association of Purchasing Management, 1993, McGraw-Hill.

33. Terms of Sale and Corresponding Buyer and Seller Responsibilities (cont.)
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 bears freight charges.
Freight charges paid by buyer
5.Terms of Sale FOB Destination, FREIGHT PREPAID
Seller pays freight charges.
Freight charges paid by seller
Source: Harold Fearon, Donald Dobler, and Ken Killen, The Purchasing Handbook, National Association of Purchasing Management, 1993, McGraw-Hill.

34. Five Basic Transportation Modes
Motor
Rail
Air
Water
Pipeline

35. Comparison of US Domestic Transportation Modes
Economic Characteristics

36. Comparison of US Domestic Transportation Modes (cont.)
Service Characteristics

37. Rail in South Africa Excess capacity Good rail network
Lousy service reputation
Companies are considering buying own systems

38. Nonoperating Third Parties
Freight forwarders
Shippers’ associations or cooperatives
Transportation brokers
Intermodal marketing companies or shippers’ agents
Third-party logistics service providers

39. Major U.S. Agencies Regulating Transportation
Surface Transportation Board
Department of Transportation
Federal Maritime Commission
Federal Energy Regulatory Commission

40. 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

41. 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

42. 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

43. Product vs. Pricing Ease/difficulty of load equipment availability
capacity of equipment
Inefficiencies drive up prices
zones
unexpected costs - increase in cost of diesel

44. 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

45. Product related factors
Density of product -
stowability
special handling equipment
special shipping containers
hazmat - liability

46. 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

47. 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

48. 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

49. 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

50. 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

51. 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

52. LTL Shippers Air forwarders Shipper’s cooperatives
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

53. LTL Shippers 3PLs Brokers
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

54. 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

55. 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

56. 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

57. 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

58. Large Bulk Shippers Bulk cargo (continued) Dry Bulk-Handling Systems
Coal car unloading facility
Grain elevator
Vehicle and Vessel Equipment Choice

59. Comparison of Modes
Costs per ton-mile
Speed
On-time delivery

60. 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

61. 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)

62. 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

63. Transport Choices · · · · · Primary intercity carriers
Small shipment carriers
Air - -
UPS -
Truck -
Federal Express -
Rail -
Postal services -
Water -
Bus Package Express -
Pipe
Agents
Coordinated services -
Freight forwarders -
Piggyback -
Shipper associations -
Birdyback -
Fishyback
Others -
Autos -
Bicycles -
Taxis -
Human -
Electronic
CR (2004) Prentice Hall, Inc.

64. 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

65. Importance of Modes 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
CR (2004) Prentice Hall, Inc.

66. 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
CR (2004) Prentice Hall, Inc.

67. Relative Costs of Performance
Performance Overview
Relative Costs of Performance
Price,
Mode
¢/ton -
mile
Rail
2.28
Truck
26.19
Water
0.74
Pipeline
1.46
Air
61.20
CR (2004) Prentice Hall, Inc.

68. Mode/Service Selection
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 f
ollows:
Alternatives
Cost types Air Truck Rail
Transportation In
transit inventory
Source inventory
Destination inventory
CR (2004) Prentice Hall, Inc.

69. 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

70. ©2008 Chicago Consulting - Supply Chain Consultants
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
McKenzie, TN
Four
1.20
Lancaster, PA
Chicago, IL
Meridian, MS
Five
1.13
Summit, NJ
Dallas, TX
Macon, GA
Six
1.08
Pasadena, CA
Tacoma, WA
Seven
1.07
Gainesville, GA
Lakeland, FL
Eight
1.05
Denver, CO
Nine
1.04
Alhambra, CA
Oakland, CA
Ten
Mansfield, OH
©2008 Chicago Consulting - Supply Chain Consultants

71. Distribution Centers and Transportation
Trade off between inventory and transportation costs
Closer to customers allows company to claim “Green” friendly

72. Transportation Stuff
Rail volume up 1.9% in January – million car loads
Intermodal traffic = 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

73. Chapters 7 and 8 Modes of Transportation Mode Selection MRP DRP
Inbound vs. Outbound
Forecasting
Just in Time
LTL vs TL

74. Next Week
Chapter 9 and 10