Ch 4: Tactical Logistics Management

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Tactical logistics management
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Managers on the Tactical Tier of the management hierarchy is responsiblethe Implementation of operational activitiesManagers on Operational Tier of managementis responsible for the Control of operational activitiesTactical vs. Strategic logisticsThe tactical level (i.e. organisation and implementation) includes decisions that are updated any time between once every month and once a year. Strategic decisions may be made by company executives about the number and location of distribution centers to be operated. However, it is at a tactical level that decisions are made on how to distribute the products at the lowest cost Tactical management objectives normally strive to serve the combined strategic supply chain objective": Customer satisfactionThe main tactical management objectives in a supply chain are:- Minimising time to convert orders into cash - Minimising the total WIP in the supply chain - Improving pipeline visibility - Improving visibility of demand by each partner --- Improving quality - Reducing costs - Improving servicesManaging the goods flowIf finished goods are available in the finished goods store, the distribution function will deliver the goods to the customer (retailer / wholesaler...) If the finished goods are NOT available, the customer demand becomes part of the Master Production Schedule (MPS) The MPS is a time-phased plan which explicitly specifies how many of each end product the business intends to manufacture and when Production planning will place a works order on the production function, who will pick the components from the components store, assembles or manufactures the finished product and forwards to the finished goods store for distribution If components are not available in the components store, then Material Requirements Planning (MRP) program gets involved to place demand on Procurement function - via PO's Procurement function (via MRP) converts the demand to raw materials requirement and places orders for raw materials against suppliers for delivery into the components store - to enable manufacture of finished product internally... MRP is mainly concerned with the scheduling of manufacturing activities and the associated inventory managementMaterial Requirement Planning (MRP)MRP Process: Begins by forecasting customer demand Customer demand is checked against existing inventories Remaining demand is broken down to component parts Component parts are scheduled against available production capacity, including those parts that must be purchased if any...) MRP process also identifies shortages that may occur due to capacity limitations or stock-outs MRP Process: Updated at regular intervals, during which demand is forecasted and necessary adjustments made in order to fulfill this demand MRP requires considerable data capture (a) to accurately predict future demand and (b) for the scheduling of all component parts required to associated demand...MRP OUTPUTS:Purchase requirements Manufacturing activity schedules Expected shortages Surplus components inventory Available free capacityBill Of Material (BOM) FileBOM -more than a list of parts to produce a final product BOM is a listing of all the raw materials, sub-assemblies, semi-finished, and other items needed SEQUENTIALLY as they should be added in the process to form the product Like a recipe - how a product is assembledImpact of lead time on the management of goods flow...The example above shows that an unplanned, unexpected customer order could have a lead time of 25 time units This means that in order to guarantee customer service levels for this example, sales need to be forecasted accurately 25 time units in advance The unlikelihood of accurate forecasts over and extended time period necessitates the use of logistics systems to accommodate the above situations The next sections investigate logistics concepts that can alter order lead times and introduce flexibilityProduct supply chain processesPush-based supply chain systems Pull-based supply chain systems Push-pull-based supply chain systems The above-mentioned supply chain processes are at the heart of manufacturing and inventory management The decision to adopt one of the above strategies will dramatically influence the way in which manufacturing and inventory systems are handled...Product supply processesPull versus Push Pull approach is a "reactive" system, relying on customer demand to "pull" product through a logistics system. (e.g. Dell Computers) Push approach is a "proactive" system, and uses inventory replenishment to anticipate future demand. (e.g. FMCG products)Push-based supply chain processesManufacturing decides when, and how much of a product will be produced and sent to storage Inputs: Long-term forecast of demand, present inventory position Forecasts are based on orders from wholesalers and retailers - will take much longer to respond to changes in end-user demand Delay in response to market changes may lead to inability to meet market demand, obsolescence of product for which demand has disappeared Variability in replenishment orders from retailers and wholesalers is larger than that of end-users, and this increased variability leads to the BULLWHIP effect: uncertainty i.t.o size of orders will lead to excess / insufficient buffer stock: Excess in inventory carrying cost (ICC) - inefficiency Stock-outs losses - ineffectivenessPushed based supply chains and the Bullwhip effectThe bullwhip effect is associated with a push system The increase in variability of replenishment orders as one moves upstream in the supply chain is known as the bullwhip effect This effect arises when members upstream in the supply chain are faced with a high degree of uncertainty about the timing and size of replenishment orders from downstream members The amplification of order sizes is greater than the variation in demand Buffer stocks (safety stocks) at each level in the supply chain makes the problem worse Order variation is greater upstream in the supply chain Uncertainty and batch ordering is the problem Everybody orders up to cover uncertaintyPush-based supply chain processesIncreased variability also specifically leads to: Bigger and more variable production batches Excessive inventories due to a need for huge safety stock Product obsolescence Unacceptable service levels due to stock-outs Due to difficulty to plan - Inefficient resource utilisation Transport planning not clearly definable in variable situation of demand Often high transport, Inventory and manufacturing costs due to need for emergency manufacturing change-overs Push systems do have the following benefits: Increased lot sizes during manufacturing Reduced transport cost due to freight consolidation during transport Large buffer stocks close to customers also reduce stock-out lossesPull-based supply chain processesInputs: Customer orders - must be FAST! Warehouse decides when, and how much of a product will be required and when Manufacturing and distribution are demand-driven (rather than forecast), consolidated from actual customer orders True pull-based systems carry no inventory and have system that can process information (POS) quickly to the various supply-chain members Impact: A decrease in order lead times due to ability to better anticipate incoming orders from the retailers Less inventory at the retailers, since inventory at retailers increase with order delivery lead times Reduced variability in the system, but specifically for manufacturers due to order/delivery lead-time reduction... Less inventory at the manufacturer due to the reduction in order/delivery lead-time variability Reduced variability also specifically leads to: Substantial decrease in system inventory levels Enhanced ability to manage resources Reduction in supply-cost when compared to equivalent push-based supply chains Pull-based systems do have the following issues: Often difficult to implement when lead times are so long that it becomes unrealistic to respond to demand information Often more difficult to take advantage of economies of scale in manufacturing and transport The advantages and disadvantage of push- and pull- supply chain strategies have led firms to seek new supply chain tactics that enjoy the benefits of both. This often entails a combined push-pull supply chain configuration.....Push-pull-based supply chain processesUpstream stages are push-based, downstream stages are pull-based The point where push- becomes pull is known as the order decoupling point or the push-pull boundary The pull-phase normally consists of stages that contribute towards product differentiation Imagine a manufacturer of cell-phones, with manufacturing based on forecast of actual demand.... The push phase would be the manufacturing of all components up JUST before the differentiation per product The pull phase will be represented by ACTUAL orders / customer demand Decoupling point is at the start of final assembly per order (Postponement) Demand for a COMPONENT is the sum of the demand for ALL finished products that use the component Aggregate forecasts are more accurate than individual forecasts, therefore uncertainty in component forecast is smaller than for that of finished product demand Postponing the decoupling point (where push becomes pull) to the latest point of product differentiation, based on actual demand for the specific product reduces inventory of components and reduces safety stock requirements Customer order decoupling point position determines the supply chain approach Different approaches are needed for different industries and market conditions Decoupling point is the furthest upstream point in the supply chain where a specific customer order affects inventory-level decisions directly In push-pull strategy, interaction happens only at the customer decoupling point generally through buffer stock Buffer stock fulfills different roles in different positions in the supply chain Different ways in which supply chain can respond to customer demand....Implementing a supply chain approach - Customer order decoupling pointsPick and ship to stock:Characteristics: Swift delivery to customer, inventory MUST be available to avoid substitution Decoupling point - distribution center Industry - FMCG Challenge: demand management, forecasting of independent demand Risks: inventory levels, short - poor customer service, surplus - obsolescence or demand evaporationMake to stock:Characteristics: finished goods held at plant or warehouse inventory, display stock held with back-up at finished goods store Decoupling point - finished goods store Industry - Domestic appliances Challenge: demand management, forecasting of independent demand Risks: inventory levels, short - poor customer service, surplus - obsolescence or demand evaporationAssemble to order:Characteristics: Key components are stocked, assembly when order is received, common where many finished products require same components, more pull than push, inventory is managed at sub-assembly level Decoupling point - finished goods store Industry - E.g.. Cell phone manufacturer / Laptops Challenge: Forecasting of demand at sub-assembly level, keeping assembly lead times short to create value for customers Risks: excess stocks, obsolescence of sub-assembly components due to changes in marketMake to order:Characteristics: trigger for manufacturing is customer order, push-pull where push is the minor part, more than 20% of value add happens after order is placed Decoupling point - components or sub-assembly manufacturing point Industry - Custom made furniture Challenge: Forecasting to replenish the sub-assemblies or components, balancing the capacities of the supply chainPurchase and make to order:Characteristics: Manufacturing, packaging and all other aspects of order only commences once a FIRM order has been received, pure pull process, components are only ordered once the order is received - no inventory is carried Decoupling point - Raw material store Industry - Manufacturing where components are VERY EXPENSIVE Challenge: Ensuring stock of components is available at time of order Risks: never knowing what components to have available due to nature of approach, availability shifts to supplier network....Engineer to order:Characteristics: Manufacturing of components and final products is an engineering process WITH the customer with exact instructions and requirements, not repeat orders, no economies of scale, individual PROJECTS are priced independently Decoupling point - Raw material supplier level Industry - products that must be engineered to customer requirement - Airplanes! Challenge: requires fully integrated system to be able to give customer a lead time that is accurate Risks: customer service is criticalAssessment of business response service levelConcept of service levels can be used in many manufacturing or inventory-based situations: Pick and ship-to-stock and make to stock systems (PUSH) the service level is the % of products / orders that are immediately available from inventory Assemble-to-order, make-to-order, purchase and make-to-order, and engineer to order (PULL) the service level normally translates to on-time delivery Improving the on-time delivery can be done by: Improve reliability of promise of on-time by reducing production-cycle and order lead times. Time compression opportunities during production cycleTime management in supply chainsThe importance of time:Time-based competition is one of the major factors that is forcing companies to participate in supply chain management initiative Reducing cycle lead time is the result of coordinated supply chain management efforts Reliability or consistency of cycle lead time required continuous improvement in today's competitive market Manufacturing quality no longer the differentiator - Cycle time is criticalCauses of long production cycle and order lead times:Ambiguous goals and objectives Batching (ICC to keep stock at critical points should not weigh heavier than the revenue opportunities created...) Excessive controls (multiple checks and signatures should add value...) Lack of information (from within organisation and other partners) Lack of synchronisation in materials movement (between organisation and customer) Lack of proper training (training to ensure staff focus on reducing cycle time together..) Limited co-operation (Cycle time reduction is a function of all supply chain members and ALL should be committed) Limited co-ordination (inter-firm is critical to provide supply chain processes that add value) Non-value-added activities (eliminate where possible... Check at receiving or use credible supplier?) Outdated information technology (EDI, RF, manual or paper driven??) Poor communication (List of contacts in and between supply chain organisations can be very valuable tool) Poorly designed procedures and forms (some procedures and forms add time not value) Repeating process activities (Quality issues adds DOUBLE time... must be avoided during first attempt) Serial versus parallel operations (Opportunities to manufacture components in parallel or concurrently to get to final assembly FASTER must be explored where possible...) Waiting (In some cases the waiting time exceeds the total process step times when added together.... Issue - Visibility / poor process step integration / lack of information??)Time management in supply chains (continued) Opportunities for production cycle and order lead-time reductionRequires effective co-ordination between: Selling Moving Manufacturing Storing and Buying activitiesTime management in supply chains (continued)When a product is ordered, the buy, make, move, and sell activities should be scheduled simultaneously, taking into account the schedule of the products that were ordered previously and the availability of external resources, such as raw material and order input suppliers... A REAL-TIME supply chain scheduling system is illustrated in fig. 4.5 The system enables the supply chain to meet customer demand in the shortest time and at the lowest cost by maximising the cooperation between the five activities of the supply chain.... When an order is placed, the following questions must be answered ASAP: Can order be fulfilled from existing inventories, or nearest location than will not incur undue transport costs? Is manufacturing required, which facility is best positioned to manufacture from a cost/capacity perspective? Can transport partner add value through consolidating shipments or direct drops to customers?...Process time improvement approach proposed by Harrington:Establish a time management team. Understand given supply chain process and current cycle time and order lead time. Identify opportunities for time reduction and on-time delivery improvement. Develop and implement recommendations. Measure process cycle time and lead time performance Implement continuous improvement efforts.