Logistics/Supply Chain Control

1. Logistics/Supply Chain Control The logistician is now a process manager and no longer just an activities administrator. Chapter 16 CR (2004) Prentice Hall, Inc.

2. Controlling in Logistics/Supply Chain Management CR (2004) Prentice Hall, Inc.

3. A Control Paradigm DefinitionThe process where planned performance is brought into line or kept in line with desired objectives. • Control can be represented as a model whose key elements are: • Inputs, process, and outputs • Standards and goals • Performance measurement • Monitoring • Corrective action • Control systems are: • Open-loop • Closed-loop • Modified

4. Schematic of Control Process Elements of the control process Standards or goals Monitor Comparison by manager, consultant, or computer Corrective action Performance reports Process Ongoing supply chain activities Inputs Outputs Supply chain activities and customer service levels Activity costs and customer service External and internal forces and changes 16-4 CR (2004) Prentice Hall, Inc.

5. Open-Loop Control System Service and inventory level goals Monitor Corrective action: The manager Adjust supply Reports on cost and service Process Inputs Outputs Warehouse Stock resupply Stockouts and operation inventory costs Demand 16-5 CR (2004) Prentice Hall, Inc.

6. Inventory standards for Q* and ROP Decision rule When L < ROP, order Q* Corrective action: Adjust supply Computer report on L Process Warehouse operation Inputs Outputs Stock resupply, Q Inventory on hand, L Demand, D Closed-Loop Control System 16-6 CR (2004) Prentice Hall, Inc.

7. Reports on costs, service, product promotions, production schedules, etc. Inventory standards for Q* and ROP Manager Decision rule When L < ROP, order Q* Corrective action Stock order on supplier Computer report on L Process Warehouse operation Inputs Outputs Stock resupply, Q Inventory on hand, L, stockouts and inventory costs Demand, D Modified Control System 16-7 CR (2004) Prentice Hall, Inc.

8. Auditing Performance • Reasons for conducting an audit • Bring logistics system in line with the inherent demand characteristics • Identify opportunities for improvement • Understand the nature of logistics in the firm and its relative costs • Determine if logistics meets its performance goals • Elements to evaluate • Customer service levels • Transportation costs • Inventory costs • Demand levels • Purchase costs

9. Benchmarking Performance • Benchmarking • Establishes an external reference point • Compares company performance to the best-in- class • Sources of benchmarking data • Consulting firms • University research centers • Trade associations • Sponsored studies CR (2004) Prentice Hall, Inc.

10. Physical Distribution This Year Last Year Budget/Target Transportation of finished goods Freight charges inbound to warehouses $2,700,000 $2,500,000 $2,800,000 Delivery charges outbound from warehouses 3,150,000 2,950,000 3,000,000 Freight charges on stock returns to plant 300,000 250,000 275,000 Extra delivery charges on back orders 450,000 400,000 400,000 Subtotal $6,600,000 $6,100,000 $5,475,000 Finished goods inventories Inventories in transit 280,000 260,000 250,000 a Storage costs at warehouses 1,200,000 600,000 1,000,000 Materials-handling costs at warehouses 1,800,000 1,600,000 1,700,000 Costs of obsolete stock 310,000 290,000 300,000 a Storage costs at plants 470,000 460,000 460,000 Cost-Service Statement Materials-handling costs at plants 520,000 510,000 510,000 Subtotal $4,580,000 $4,020,000 $4,230,000 Order processing costs Processing of customer orders $830,000 $840,000 $820,000 Processing stock replenishment orders 170,000 165,000 160,000 Processing of back orders 440,000 300,000 300,000 Subtotal $1,440,000 $1,305,000 $1,280,000 Administration and overhead Proration of unallocated managerial expenses $240,000 $220,000 $230,000 Depreciation of owned storage space 180,000 180,000 180,000 Depreciation of materials-handling equipment 100,000 100,000 100,000 Depreciation of transportation equipment 50,000 70,000 50,000 Subtotal $ 570,000 $ 570,000 $ 560,000 Total distribution costs $13,190,000 $11,995,000 $12,545,000 16-10 CR (2004) Prentice Hall, Inc.

11. This Year Last Year Budget/Target Physical Supply Transportation of supply goods Freight charges inbound to plant $1,200,000 $1,400,000 $1,115,000 Expedited freight charges 300,000 250,000 350,000 Subtotal $1,500,000 $1,650,000 $1,465,000 Supply goods inventories Storage costs on raw materials $300,000 $375,000 $275,000 Materials-handling cost on raw materials 270,000 245,000 260,000 Subtotal $570,000 $620,000 $535,000 Order processing Processing of supply orders $55,000 $50,000 $50,000 Costs of expedited orders 10,000 10,000 10,000 Subtotal $65,000 $60,000 $60,000 Administration and overhead supply goods ¾ Proration of unallocated managerial expenses $50,000 $60,000 $40,000 Depreciation of owned storage space 30,000 30,000 30,000 Depreciation of materials-handling equipment 40,000 40,000 40,000 Depreciation of transportation equipment 25,000 25,000 25,000 Subtotal $145,000 $155,000 $135,000 Total supply costs $2,280,000 $2,485,000 $2,195,000 Total distribution costs $13,190,000 $14,480,000 $14,740,000 Total logistics costs $15,470,000 $14,480,000 $14,740,000 Cost-Service Statement (Cont’d) 16-11 CR (2004) Prentice Hall, Inc.

12. Cost-Service Statement (Cont’d) Customer Service Percentage of warehouse deliveries within 92% 90% 90% one day b Average in-stock percentage 87% 85% 85% c Total order cycle time (a) Normal processing 7 2 6 2 6 2 ± ± ± ¾ (b) Back-order split delivery processing 10 3 10 3 10 3 ± ± ± Back orders and split deliveries (a) Total number 503 490 490 (b) Percentage of total orders 2.5% 2.7% 2.5% Orders filled complete 90% 86% 87% Customer returns due to damage, dead stock, order processing errors, and late 1.2% 2.6% 1.0% d deliveries Percentage of available production time shutdown due to supply out-of-stocks 2.3% 2.4% 2.0% a Includes space, insurance, taxes, and capital costs. b Percentage of individual product items filled directly from warehouse stocks. c th Based on the distribution of order cycle times at the 95 percentile. d Percentage of gross sales. 16-12 CR (2004) Prentice Hall, Inc.

13. Audit Instruments (Cont’d) The productivity report This This Last Quarter Company Industry a Productivity Measure Quarter Quarter Last Year Standard Average Transportation Freight costs as a percentage of distribution 31% 30% 32% 29% 31% costs Damage and loss claims as a percentage of freight 0.5% 0.5% 0.6% 0.5% 0.5% costs Freight costs as a percentage of sales 9.6% 9.2% 10.2% 9.0% 8.8% Inventories Inventory turnover 4.5 4.4 5.0 4.7 6.0 Obsolete stock to sales 0.1 0.1 0.3 0.1 0.2 Order Processing Orders processed per labor hour 50 45 55 50 50 Percentage of orders processed within 24 hours 96% 92% 85% 95% 93% of receipt Order processing costs to the total number of orders processed $5.50 $4.95 $5.65 $5.00 ¾ 16-13 CR (2004) Prentice Hall, Inc.

14. Productivity Report (Cont’d) Warehousing Percentage of cube utilized 75% 70% 70% 70% 70% Units handled per labor 200 250 225 200 200 hour Customer Service Stock availability (percentage of orders filled from primary stock) 98% 92% 90% 90% 85% Percentage of orders delivered within 24 hours 72% 70% 61% 85% 90% of receipt CR (2004) Prentice Hall, Inc.

15. Performance Control Graph Control graph for inventory turnover CR (2004) Prentice Hall, Inc.

16. SCOR Model • The SCOR model: • Links processes or supply chain activities to performance measures, best practices, and software requirements • Provides a systematic approach for identifying, evaluating, and monitoring supply chain performance • Has a broad scope beginning with a demand forecast or order placement and ending with final invoice and final payment • Accepts process description that can be product specific • Has a five component framework of plan, source, make, deliver, and return • Incorporates five performance measures of reliability, responsiveness, flexibility, costs, and efficiency of asset utilization CR (2004) Prentice Hall, Inc.

17. Scope of the SCOR Model 16-17 CR (2004) Prentice Hall, Inc.

18. Process “Thread” Diagram P=plan, S=source, M=make, and D=deliver CR (2004) Prentice Hall, Inc.

19. Performance Metrics 16-19 CR (2004) Prentice Hall, Inc.

20. Linking Processes and Metrics 16-20 CR (2004) Prentice Hall, Inc.

21. Artificial Intelligence in Control Artificial intelligencerefers to computer recognition of adverse patterns in the performance reports and makes suggestions as to the courses of action that might be taken to correct the adverse performance patterns. • Pattern recognition • Performance patterns • Courses of action CR (2004) Prentice Hall, Inc.