Lecture 1 (chapter 1 and 2)

Supply chain management

IPO Framework

- Management of the process in an effective and efficient way

- INPUTS → OUTPUTS → PERFORMANCE

- Look at the inputs and outputs

- Give feedback
- Feedback goes to performance and measurement control
- Fix the problems

Performance

The following factors impact the competitiveness of the business:

- Quality → being right

- Speed → being fast
- Dependability → being on time
- Flexibility → being able to change
- Cost → being productive

- In many cases there are tradeoffs (more of one thing results in less of another)
- You must sacrifice one factor for another
- Eg. difficult to have low cost and high quality // difficult to be flexible and fast

- It is possible to measure the performance of everything

- If you achieve good results in performance, you are more likely to succeed
Supply chain

Supply chain: encompasses all activities associated with the flows and transformation of goods and services from the
raw materials stage through to the end-user, as well as the associated information and monetary flows

- Supply chains consist of stakeholders and flows

- Supply chain management is not a chain but rather a network of suppliers, distributors, customers etc.
- For simplification, every level is one circle of a chain

SUPPLIERS → MANUFACTURERS → DISTRIBUTORS → CUSTOMERS

Exam question

- Question 1 is based on content from this lecture (15% of final exam)

- First part
- Mapping a supply chain based on a text
- Understand which ones are the actors, stakeholders, suppliers, manufacturers, distributors etc.
- How are these linked together (flows of material and information)
- Flow of information is from customer to supplier (no customer = no supply chain)
Supply chain management

- Cooperation and integration of materials and information and trust throughout the supply chain might be
necessary to obtain a valuable chain with satisfied customers
- Effective supply chain management is the management of flows between and among supply chain stages to
maximize total supply chain surplus

supply chain surplus=customer value−supply chain cost

Example exam question

The PhoneCorporation (PC) has 25 stores (“The PhoneShop”) where customers buy Samsung mobile phones. The
PhoneShops can place their orders electronically on the website of the distribution center of PC. This distribution
center submits the orders to the Samsung factory of Samsung. There is one transport per week from Samsung to
this distribution center of the PC. Thereafter, delivery vans transport the mobile phones to the PhoneShops.
Customers are encouraged to return their used and broken phones to the PhoneShops. On the return trip from the
shop, the delivery van takes those returned phones to the distribution center. Once a week, there is a trip with all
collected phones to the central depot in the Netherlands, where returned mobile phones are collected.

Draw a figure to describe this supply chain of mobile phones

Indicate clearly all flows of information and mobile phones

Answer
Logistics

Logistics: the part of supply chain process that plans, implements, and controls the efficient, effective flow and
storage of goods, service and related information from the point of origin to the point of consumption in order to
meet customer’s requirements

- Examples of logistics activities are transportation and inventory of products

Schematic view on logistics

Materials management: all activities to move materials, components and information efficiently to and within the
production process and all activities to use the production process efficiently

Physical distribution: refers to the movement of goods and information outward from the end of the assembly line
to the customer

Important questions involving logistics:

1. Which logistics decisions should be made?
2. Which logistics costs should be paid?
3. Which objectives do you want to achieve?
4. Which constraints can you define?

Objectives and constraints

Objectives

Objective: expression that maximizes or minimizes some aspect

Examples:
- Maximize quantity to be produced
- Maximize profit
- Minimize costs
- Minimize cycle times
Constraints

Constraint: restrictions that limit the degree to which a manager can pursue an objective

Examples:
- Total waiting times < 1 hour
- Total inventory < 100 units
- Occupancy degree > 90%

Exam question
Based on the description of the PhoneCorporation, the firm aims at increasing its profits by improving the
operational efficiency. Due to the budget limit, the total value of the inventory in the warehouse cannot exceed
100,000 Euros weekly.

1. Discuss 5 logistics decision problems which might occur in this supply chain.
2. Discuss 5 types of logistics costs in this supply chain.
3. Formulate objectives and constraints for this specific supply chain.

Answer

1 - Discuss 5 logistics decision problems which might occur in this supply chain.

● Selection of suppliers of mobile phones

● Planning of transport from Samsung to the PhoneCorporation.
● Determination mode of transportation which will be used to transport mobile phones from the distribution
center of the PhoneCorporation to the PhoneShops.
● Determination of order size and specifications (number of phones).
● Planning of production of mobile phones

2 - Discuss 5 types of logistics costs in this supply chain.

● Costs planning production mobile phones
● Inventory costs of mobile phones at the PhoneShops
● Transportation costs from the PhoneCorporation to the shops and back
● Costs for flows of information from the PhoneCorporation to the shops and the other way round
● Costs for forecasting amount of mobile phones that customers will buy and/or return

3 - Formulate objectives and constraints for this specific supply chain.

● Maximize profit of the PhoneCorporation
● Minimize transportation costs between the PhoneCorporation and the PhoneShops
● Maximize % of customers that can buy a mobile phone
● Total value of inventory of mobile phones <= 100,000 euro
● Total transportation costs per week <= 20,000 euro
● % of customers that can buy a mobile phone per day > 99%
Logistics control

Looks at performance of entire supply chain:

- Quality of product
- Possibilities of responding to demand of customers
- Inventory levels
- Cycle time of supply chain

*The supply chain is as strong as its weakest link!*

Productivity

Single factor (partial) productivity

output (goods∧¿∨services )
input factor

- Input factors: labor, capital, management

Example:
- 1000 units produced in 250 hours
- Productivity = 100/250 = 4 units per hour

Multifactor (total factor) productivity

output total outputs

∨
labor+material +energy +capital + other total inputs

Exam question

PhoneCorporation DC Third party logistics provider

Output: 10,000 mobile phones Output: 12,500 mobile phones
Labor costs: 2,000 euro Costs: 15,000 euro
Material handling costs: 5,000 euro
Fixed costs: 10,000 euro

Which increase in productivity can be obtained by outsourcing the warehousing function?

Answer

10,000 10 12,500
= =0.588 =0.833
2,000+5,000+10,000 17 15,000

Increase in productivity of 42% if the warehousing function is outsourced

Lecture 2 - Process Analysis (ch 4)

- For any given description of a production or service facility, using the assumption that all values are
deterministic, you must be able to determine the following performance criteria:
- Throughput times
- Work in progress
- Location and maximum capacity of the bottleneck
- Departure rate (=throughput)
- Utilization, efficiency

What is capacity?

- Capacity is in the static, physical sense means the scale of an operation.

- But this may not reflect the operation’s processing capability.
- So we must incorporate a time dimension appropriate to the use of assets.
- Eg. 24,00 liters per day, 57 patients per session, 10,000 calls per week

What is capacity planning?

- Capacity planning is a Strategic Decision

- How much and when to spend capital for additional facilities and equipment?
- Long-term strategic capacity decisions

- Capacity planning is a Tactical decision

- What should be the ideal workforce and inventory levels, day-to-day use of equipment?
- Short-term capacity decisions focusing on routine day-to-day activities within a facility.

Why is capacity planning important?

- Cost implications (idle capacity, excess inventory, higher operating costs)

- Revenue implications (unfulfilled customer demand)
- Customer dissatisfaction (unfulfilled customer demand)
- Uncertainty associated with future demand (forecasting uncertainties)
- Long-term commitment of expensive resources (this is inherently risky)
- Capacity is usually purchased in “chunks” rather than in smooth increments

Deterministic vs stochastic

Deterministic: no random input (everything is known in advance)

Stochastic: under similar circumstances different things could happen (eg. throwing a dice)
Concept: arrivals

Inter-arrival time: time between two subsequent arrivals of products at their entrance in the process

Arrival rate: number of products that arrive per time unit (eg. number of products that arrive per hour)

Example Solution
Inter arrival time = 20 minutes

**If average inter-arrival time is 20 minutes, then the arrival rate

equals 60/20=3 products per hour**

Arrival rate = 3 units per hour

Concept: throughput time

Throughput time: time that passes between the moment at which the customer/product enters the system and the
moment at which the customer/product is ready

Deterministic throughput times: can be estimated by adding up the expected processing times of the different
processes

- Deterministic means that you ignore any probability distributions and just use the average value
(mean/expected value), ignore waiting-line effects in the system

Normal distribution

- If a product / service time follows a normal distribution Normal(μ , σ ), then:

- The mean equals μ
- The standard deviation equals σ

Calculate deterministic throughput time

Example Solution

6+ 2+ 4=12 minutes

*exclude interarrival time*

Deterministic throughput time = ?? minutes

In calculating deterministic throughput times the four following steps must be followed:

1. Estimate deterministic throughput time for one of the paths

2. Multiply resulting deterministic throughput time with probability that the path will be followed
3. Repeat 1 and 2 until all paths are handled
4. Compute the total deterministic throughput time = sum of results of step 2 for all paths

Example 2 Red (upper) path:

> 6+ 2+ 4=12 minutes (searching + transport + checkout)

Step 2a: the red route occurs with a 70% chance

> 0.70 ⋅12=8.4 minutes

Blue (lower) path:

> 6+ 2+12=20 minutes (searching + transport +
info/checkout)

Step 2b: the blue route occurs with a 30% chance

> 0.30 ⋅20=6 minutes

In total:
8.4 +6=14.4 minutes

Deterministic throughput times for different types of products/customers

Different types of products/customers follow processes in the same environment, you might be asked to calculate a
throughput time for each type of product/customer

Example Solution

Step 1: staff
2+6=8 minutes

Step 2: student
3+6=9 minutes

Calculate the deterministic throughput time

 Example

Calculate the throughput time for the library

Solution

Calculate average number of books per student: 0.25 ⋅1+0.25 ⋅2+0.25 ⋅3+ 0.25⋅ 4=2.5

Average time required to search for books can be calculated: 2.5 ⋅2=5

Upper path (purple): 5+2+1+3+10+ 2=23 minutes (30% chance)

Lower path (green): 5+2+1+3+1=12 minutes (70% chance)

In total: 0.7 ⋅12+0.3 ⋅23=15.3 minutes

Concepts: design and effective capacity

Design capacity: theoretical maximum output of a system or process in a given period

Effective capacity: actual capacity that can be expected given the product mix, methods of scheduling, maintenance,
and standards of quality

Example

Check-out books
Time required: Normal(4,1) minutes
Not available: 10% of time

Design capacity = 15 customers per hour

Only 90% of time effective

Effective capacity = 0.9 ⋅15=13.5 customers per hour

Concepts: serial and parallel processing

Serial: steps are performed consecutively (one after the other)

Parallel: steps can be performed simultaneously

Concept: parallel servers

- If we say that a single process consists of x parallel servers (machines or operators), we mean that:
- Each product only needs to be treated by one of the servers
- The other servers can simultaneously treat other products

Example
- Suppose one employee can serve 10 customers per hour + there are three employees
- The design capacity of the process (consisting of all 3 employees) is 30 customers per hour
- Throughput time for a customer is 6 minutes

Sufficiency of design capacity

- Is design capacity sufficient to handle the expected number of products that arrive at the various processes?
- Follows a 3 step procedure
1. Calculate design capacity of each process
2. Calculate the expected number of products arriving at that process (use percentages in systems with
multiple paths)
3. Compare answers from steps 1 and 2

Determine sufficiency design capacity

Is design capacity sufficient? Step 1: determine design capacity

Design capacity = 6 customers per hour
Step 2: determine expected number of customers arriving
Arrival rate = 12 customers per hour
Step 3: compare answers from step 1 and step 2
Design capacity is insufficient

Concept: bottleneck

Bottleneck: an operation that limits output in the system

- If none of the processes in the system is a bottleneck, then we say that the system is constrained by the
arrivals
Determining a bottleneck

1. Calculate the design capacity of each process

2. Calculate the arrival rate of the system
3. If design capacity of all processes is sufficient, then the system is constrained by the arrivals; else the process
with the smallest design capacity (rate) is the bottleneck

Example Solution
1. Calculate the design capacity of each process
Searching: 6 min. Design capacity = 10 p.h.
Check-out: 4 min. Design capacity = 10 p.h
2. Calculate expected # of customers arriving
Arrival rate = 60/5 = 12 customers per hour

Determining a bottleneck in a system with multiple paths

1. Calculate design capacity of each process

2. Calculate for the arrival rate for each process
3. If design capacity all processes is sufficient, then the system is constrained by the arrivals; else check for each
path if there are one or more processes with insufficient design capacity: process with the smallest design
capacity is the bottleneck

Example

Solution
Concept: departure rate

Departure rate (ie. throughput): number of products that leave the system per time unit

- The departure rate is determined by the capacity of the bottleneck

- Only if the system is constrained b y the arrivals, the departure rate is equal to the arrival rate

Departure rate
- Interarrival time is 7 minutes
- Therefore, arrival rate is 60 /7=8.6 customers / hour
- However, the bottleneck in this library is “Process Check-out”
- Therefore departure rate is 60 /10=6 customers / hour

What is the departure rate?

- Arrival: 60 /7=8.6 customers per hour
60
- Check out: 2 ⋅ =12 customers per hour
10
- The system is constrained by the arrivals

- Departure rate = arrival rate = 8.6 customers per hour

Concepts: utilization rate and efficiency

Utilization rate: fraction of the total time in which a machine is used for production

Utilization rate = total operating time / total time = actual output / design capacity

40% of the time busy

0.40
→ utilization= =0.40
60% of the time idle 0.40+ 0.6

Efficiency = actual output/effective capacity

40% of the time busy

50% of the time idle 0.40
→ efficiency = =0.44
10% of the time in repair 0.40+0.50
Utilization rate

Is it possible that utilization rate can be larger than 1? → Only if the system is constrained by the arrivals

The utilization rate ρ for a workstation consisting of n identical, parallel servers can be computer from

ρ=λ/n μ

λ : arrival rate
μ: production rate

- Always locate the bottleneck before you start calculating

- Utilization rate of process “check-out”

- Every 5 minutes, 1 customer arrives in the
system
- However, only every 12 minutes a product
arrives at Process “Check-out”!
- Utilization rate of process “check-out” is
5/20=0.25

Concept: Batch production

Step 1: compute the processing time per batch

4x5+2=22 minutes

Step 2: compute the average number of batches

processed per hour
60/22=2.727 batches per hour

Step 3: compute the design capacity

2.727x5=13.635 products per hour
Concept: productive utilization rate

Productive utilization rate is calculated similar to normal utilization, only now set-up times are excluded

- Processing time for each batch = 5*4 + 2 = 22

minutes
- Production rate = 60*5/22 =13.635 products per
hour
- Arrival rate = 60/5 = 12 products per hour
- Utilization rate = 12/13.635= 0.88
- Productive utilization rate = 12/15 = 0.8

Concept: work in progress (WIP)

Work in progress (WIP): number of products that have been taken into production, but have not yet been finished

- Use Little’s equation to estimate WIP

Little’s equation: L=λ ⋅ W

- L is the average WIP

- W is the deterministic throughput time
- λ is the arrival rate

Another estimation is:

n

∑ ρi X i
i=1

- ρi is the utilization of process i

- X i is the batch size on process i
- n is the number of processes

Example Solution

Work in progress:
6+2+3
L=λ W =5 ⋅ =0.92
60

Constrained by arrivals
 Only if the system is constrained by the arrivals, we can
apply the Little’s equation to accurately estimate WIP

This means that there are too many arrivals and the
arrivals are the reason the system fails

Calculate WIP with formula

Example Solution

3+ 2+ 4 ⋅5
L=λ W =12 ⋅ =5
60
n

∑ ρi X i= 35 ⋅1+ 25
22
⋅5=5
i−1

Example

What is the requirement of the batch size at Process 2 in order to prevent Process 2 from being the bottleneck?
Lecture 3 - Service Processes and Queuing (ch7)

Learning objectives:

- Use and apply waiting line models (queuing models) for analyzing and designing service processes under the
stochastic environment

- Two fundamental models: M/M/1 and M/D/1

- Performance measures for service

Waiting line (queuing models)

- A service problem is often a question concerning

waiting times
- Performance of a queueing system can be
determined by capacity and variability

Structure of queuing systems

- Single-server and single line

- Multi-server and single line
- Multi-server and multi line

Single-server and single line Multi server and single line Multi-server and multi line

Waiting line terminology

Queue: waiting line

Arrival: 1 person, 1 job, etc. that arrives and demands service

Queue discipline: rules for determining the order that arrivals receive service

Channel: number of servers

Phase: number of steps in service
Queuing characteristics

Arrival process:
- λ = arrival rate (on average)
- Number of arrivals per time unit (uncertain)

Service process:
- μ = service rate (on average)
- Service time (uncertain)
- Number of servers

Queue discipline:
- First-come-first-serve
- Priority
- Etc.

Customers’ behavior
- Patient
- Impatient
- Balking: upon arrival customer examines queue and decides to leave right away
- Reneging: customer enters queue and at certain point reaches the conclusion that they leave the
queue
- Jockeying: customers switch between queues if they think they will get served faster by doing so

Length of waiting line:

- Limited
- Unlimited

Queuing characteristics for this lecture:

Arrival process:
- Poisson process

Service process:
- Service time: negative exponential or constant
- Number of server: a single server

Queue discipline:
- First-come-first-serve

Customers’ Behavior:
- Patient

Length of waiting line:

 - unlimited
Arrival process: Poisson distribution

- Number of events that occur in an interval of time

- Example: number of customers that arrive in an hour

- Mean = λ (eg. 5/hour)

−λ x
e λ
- Probability on x events: P(x )=
x!

λ=5 per hour

Service time: Negative exponential distribution

- Mean service rate = μ

1
- Mean service time =
μ

−μ x
f (x)=μ e

Single-server waiting line model

Queuing models: M/M/1 vs M/D/1

Common characteristics
- Type: single channel
- Input source: infinite; patient customers
- Arrival process: poisson
- Queue: unlimited; single line
- Queue discipline: first-come-first-serve
- Service rate > arrival rate
M/M/1
- Service-time distribution: negative exponential
- Example: information booth at an NS station

M/D/1
- Service-time distribution: constant
- Example: automated car wash

Solving an exam question

Steps to solve a typical exam question:

1. Identify the appropriate waiting line model

2. Determine λ and μ
3. Identify the appropriate performance measure
4. Find the correct formula
5. Fill out the formula

Example:

A coffee-corner in a large mall is staffed by one employee. On average 60 customers arrive per hour (poisson
arrivals). It takes on average 20 seconds to serve a fresh cup of coffee (negative exponential service times). What is
the average time a customer has to wait before they can start drinking coffee?

Solution

Step 1: identify the appropriate waiting line model

- Two options M/M/1, M/D/1

- The first letter refers to the arrival process
- The M means “poisson distributed” arrivals
- The second letter refers to the service process
- M means “negative exponential” (random) service times
- D means “deterministic” (constant) service times
- The third letter refers to the number of service channels

- The right choice is: M/M/1

Step 2: determine λ and μ

- λ = mean number of arrivals per time period

- μ = mean number of people (or items) served per time period
- Note that there is a distinct difference between the rate and the time between two events

- If average service time is 20 seconds, then μ is 180 customers per hour

 - The right choice is: λ=60 customers per hour and μ=180 customers per hour
Step 3: identify the appropriate performance measure

- W q = the average queue time

- W s = the average time in the system
- Lq = the average queue length
- Ls = the average number of customers waiting in the system
- Po = the probability of idle service facility
- Pn >k = probability of more than k customers in a system

- The right choice is: W s

Step 4: find the correct formula:

M/M/1 formulas M/D/1

λ λ(2 μ− λ)
● Ls = ● Ls =
μ−λ 2 μ( μ−λ)
1 2 μ−λ
● W s= W s=
μ−λ ●
2
2 μ(μ−λ)
λ
● Lq = 2
λ
μ( μ−λ) ● Lq =
λ 2 μ(μ− λ)
● W q=
μ (μ− λ) λ
● W q=
2μ¿¿
● Pn >k =() λ
μ

1
- The right choice is: W s=
μ−λ

Step 5: fill out the formula

1 1
W s= = =0.0083 hours
μ−λ 180−60

So, on average 30 seconds from arriving to actually getting your coffee

 Example 2:

Consider a coffee vending machine. On average every 25 seconds a person arrives (Poisson arrivals). It takes the
machine 15 seconds (exactly) to make a cup of coffee. How many people are expected to be waiting in the queue
on average?
A. 02
B. 0.45
C. 1
D. 2.1

Solution

1. The appropriate model is: M/D/1

2. λ=¿ 144 persons per hour
μ=¿ 240 persons per hour
3. The appropriate performance measure is: Lq
2
λ
4. The correct formula is: Lq=
2 μ(μ− λ)
2 2
λ 144
5. The answer is: Lq= = =0.45
2 μ(μ− λ) 2 ⋅240 ⋅( 240−144)

The correct answer is D. 0.45

More performance measures

λ
- Utilization rate: ρ=
μ

- Probability of 0 units in the system, ie. system is idle: ρ0 =1−ρ

[]
k+1
λ
- Probability of more than k units in system, where n is the number of units in the system: Pn >k =
μ

Example:

A coffee-corner in a large mall is staffed by one employee. On average 60 customers arrive per hour (Poisson
arrivals). It takes on average 20 seconds to serve a fresh cup of coffee (negative exponential service times).

What is the probability that there are more than 3 customers waiting to drink coffee?

Solution

[]
k+1
λ
Pn >k =
μ
 λ=60 customers per hour , μ=180 customers per hour , k =3
What is the probability that there is exactly 1 customer?

Pn=1=Pn >0−Pn >1

Pn >0=Pn=1 + Pn=2 +...

Pn >1=Pn=2+ ...

Relation between W s and Ls

Quite generally it holds: Ls =λ ⋅W s

Similarly it holds that: Lq= λ ⋅W q

- On average, μ units can be served per time period (eg. per hour)
- Therefore, it takes 1/ μ on average to process one unit

- The average time spent in the queue equals the average time spent in the system minus the average time
spent in the server

Relation between Lq∧L s

- Observe that there are on average λ/μ units in the server

- The average number of units in the queue equals the average number of units in the system minus the
average number of units in the server(s)
Waiting line costs

Decision problem

- Balance cost of providing good service with cost of customers waiting

Dilemma

Customers arrive at the store at the average rate of 8 per hour (Poisson arrivals). Except for wages, Annette makes
customer related costs such as security and customer relations costs. The estimated costs of having a customer in
the store are € 4 per customer per hour.
Which applicant should Annette hire if she wants to minimize the costs (including the costs of having customers in
the store)?

Key information

𝜆=8 𝑐𝑢𝑠𝑡𝑜𝑚𝑒𝑟𝑠 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟

Martha: 𝜇=10 𝑐𝑢𝑠𝑡𝑜𝑚𝑒𝑟𝑠 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟

Ken: 𝜇=12 𝑐𝑢𝑠𝑡𝑜𝑚𝑒𝑟𝑠 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟

Eddie: 𝜇=15 𝑐𝑢𝑠𝑡𝑜𝑚𝑒𝑟𝑠 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟

Who achieves the minimal cost?
Performance measure
The total cost per hour = hourly wage + customers waiting cost

Candidate: Martha
- Hourly wage: 6 Euros per hour
- Customers waiting cost

Martha: total cost per hour

λ 8
Ls = = =4 customers
μ−λ 10−8

Customers waiting cost: 4× 4=16 𝐸𝑢𝑟𝑜𝑠 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟

Total cost per hour = hourly wage + waiting cost

= 6 +16
= 22 Euros per hour

Ken: total cost per hour

λ 8
Ls = = =2 customers
μ−λ 12−8

Customers waiting cost: 2× 4=8 𝐸𝑢𝑟𝑜𝑠 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟

Total cost per hour = hourly wage + waiting cost

= 10 + 8
= 18 Euros per hour

Eddie: total cost per hour

λ 8
Ls = = =1.143 customers
μ−λ 15−8

Customers waiting cost: 1.143× 4=4.572 𝐸𝑢𝑟𝑜𝑠 𝑝𝑒𝑟 ℎ𝑜𝑢𝑟

Total cost per hour = hourly wage + waiting cost

= 14 +4.572
= 18.572 Euros per hour
Lecture 4 - Operations design (ch6)

Outline of lecture

- Volume vs variety: the process matrix

- Project – job shop – batch – mass/line – continuous production

- Layout
- Fixed position, functional layout, cellular layout, product layout

- Efficient planning vs customized: order penetration point

- Make to stock, assemble to order, make to order, engineer to order, purchase to order

- Assembly line design and optimization

Volume vs variety: the process matrix

Process type

- Process types represent the way products are approached ina n organization
- Unique, as a commodity, or anything in between
- The two distinguishing factors in determining how products are handled are:
1. Volume
2. Variety
- Fit between product and process

Product – Process matrix

- Ships require a much lower

level of standardization than
gasoline

- Ships are also produced in a

much smaller volume

- They are frequently more

customized
Production processes used

Organization of production processes

Project: unique product, general equipment and resources

- The product remains in a fixed location - Tailored to fit unique requirements

- Large-scale - Clear start and finish
- One or a few end-items - Eg. buildings, movies, highways, aircraft, ships

Job shop / jobbing: unique, but similar products, similar equipment or functions are grouped together

- Small-scale - Many change-overs

- Output is one or a few – often customized - identical items - Special equipment / machine parts
- Instead of being dedicated to one product, resources are - E.g. Gear production
shared by many low volume/high variety products

Batch: production in small series, less variation

- Same production line is used for multiple products - Focus more on standardized
- Jobs follow more-or-less the same line products
- Set-up or Change-over time between various products - E.g. Bread, silicone chips
Mass / line: same products in large amounts, work processes are arranged according to the progressive steps by
which the product is made

- Production line produces only a single type of product - Few interruptions / change-overs in the
continuously process
- All products follow the same path of activities - Emphasis on efficiency
- Similar or identical items are produced in high volumes - Eg. cars, telephones, and packaging lines

Continuous process: like a line only the flow is continuous such as with liquids

- Products are not discrete (i.e. only kilos, liters and - The product seldom changes
meters) - Only after packaging the product
- Similar or identical end products (mass production) becomes a discrete unit
- Clear flow through the process - Eg. chemicals, Fibers, Paper

Layouts

Type of layout
- The layout can be defined as the physical arrangement or grouping of production resources, e.g.
- placement of departments,
- workgroups within departments,
- workstations, machines, and
- stock-holding points within a facility.

- The physical manifestation of the process type, and there is often some overlap between process types and
the layouts that they could use.
- Type of process and Layout are different concepts, which is not very clear in the book
- Layout might refer to a whole organization or to one department.
- The observed lay-out is not necessarily the most logical one based on volume and variety

Basic layout types

1. Fixed position layout: product remains in one position and production means are brought to the product
2. Functional layout (work center): production means are grouped together to function/specialize
3. Cellular layout (manufacturing cell): production means are grouped to optimize movement of materials
4. Product layout: production means are grouped following the steps of the production process

Fixed position layout

- The product remains in a fixed location
- Resources move towards products
- A high degree of task ordering/priority setting/sequencing is common
- A project layout may be developed by arranging materials according to their assembly priority
- Often associated with projects
Functional layout
- Clustering around activities
- Machines and/or resources are grouped by their
speciality
- Medical specialisms or technology
- Often associated with jobbing

Cell lay-out
- Dissimilar equipment and tools are clustered into
manufacturing cells
- Jobs are routed through the areas more efficiently due to
smart clustering of resources
- Often associated with jobbing and/or batch production

Product layout
- Activities are centered around products
- Order of production steps determines sequence of
machines/resources
- Dedicated product lines
- Often associated with mass/line production and/or continuous
production

Functional layout vs. product layout

Processes and lay-outs

Efficient planning vs customized: order penetration point

Customer order decoupling point

- Corresponds with the last major stock point in the goods flow
- Deliveries to customers are made from here
- It separates order-drive activities from forecast-driven activities
- It creates a certain degree of freedom to optimize the upstream activities independently from
irregularities/uncertainties in market demand
- The actual CODP is not always located where you would it expect it to be, given all factors influencing it
 Operations push vs consumer pull Sense and respond vs. planning and control

CODP and the key performance indicators Speed and the CODP

DP1: Make-to-stock
- Typical products: televisions, clothing, packaged food products
- Make to stock firms serve customers from finished goods inventory
- Essential issue is balancing the level of inventory against the level of customer service
- Typical way to achieve operational excellence: lean manufacturing

DP2: Assemble-to-order
- Typical example: dell for desktop computers
- Assemble-to-order firms combine a number of pre assembled modules to meet a customer’s specifications
- A primary task is to define a customer’s order in terms of alternative components
- One capability required: design that enables as much flexibility as possible in combining components
- Manufacturing results in customer specific products, assembled in a similar way
- Maintaining inventories of components is a key issue
- Forecasting at aggregate/component level

DP3: Make-to-order
- Examples of products are machines, some cars, exclusive sofas, chairs, tables
- Make-to-order firms make the customer’s products from raw materials and parts
- Essential issue is to deliver on time, while keeping costs low through high capacity utilization
- Catalog products with small demands and specific customer details/specification
- Limited inventory of raw materials, extensive planning and scheduling efforts
DP4: Purchase-to-order
 - Typical products include expensive spare parts in car repair shop, expensive/very specific products, furniture
- Purchase-to-order firms will work with the customer and will start buying parts/products after an order has
been placed
- Companies wait for the customers to specify their wishes and start procuring after receiving an order
- Products are very exclusive or specific and will not be kept in stock, but specification is more or less known
- Customer is willing to wait

DP4: Engineer-to-order
- Typical products include large machines (ASML and Boeing), factories, packaging materials
- Engineer-to-order firms will work with the customer to first design, then purchase raw material and finally
make the product
- Frequently, design of the products requires novel solutions and a lot of engineering knowledge
- Manufacturing might be relatively easier, but still complex: many suppliers, materials, and subcontractors

Determining the CODP: downstream forces Determining the CODP: upstream forces

Determining the CODP position

Resetting the CODP

1. Postponement (Moving backward, MTS → ATO)

- Techniques:
- Modular production
- Value added logistics
- Pros and cons
- Customization (+)
- Reduced inventory of end products (+)
- Increased order lead times (-)

2. Moving forward (MT → ATO)

- Increased efficiencies (+)
- Reduced customization (-)
- Reduced lead time (+)

In summary

- The design of a factory relies heavily on the volume – variety characteristics of products
- There should be a fit between process type and lay-out
- The CODP allows producers to balance the need for flexibility (by customers) and efficiency
- Upstream and downstream forces determine the position of the CODP

Assembly line design

Zernike Hair Salon: Utilization and Balancing

- Assume ZHS receives customers 8 hours per day, 5 days per week
- Capacity of ZHS = [2 cust/h] x [40 hours/week] = 80 customers per week
- Utilization Anna = 2/6 = 33%
- Utilization Brit = 2/3 = 67%
- Utilization Christine = 2/2 = 100%
Assembly Line balancing

Example
- The Model J Wagon is assembled at a moving assembly line
- Desired capacity: 500 wagons / day (= demand)
- Production time per day: 7 hours (= 420 minutes = 25,200 seconds)
- List of activities, sequence of assembly activity (steps) and times per step are given

- Problem:
- Find an assignment of steps to work stations so that efficiency of the line is maximized
- Precedence constraints must be satisfied
- Demand must be met

Balancing steps
1. Specify the sequential relationships among tasks.
2. Determine the required workstation cycle time (C).
3. Determine the theoretical minimum number of workstations.
a. One workstation should include as many tasks as the cycle time allows.
b. Sequence of tasks cannot be broken by a divide in workstations.
c. Assign tasks
4. Evaluate the efficiency of the balance
5. Rebalance if needed

Step 1: Specify the sequential relationships among tasks

Step 2: Determine the required workstation cycle time (C)

Production time per day: 7 hours (= 420 minutes = 25,200 seconds)

Desired capacity: 500 wagons / day (= demand)

Production time per day 25200

Cycle time(C)= = =50.4
Required output per day (¿ units) 500
“Random” workstations

Line efficiency

Step 3: Determine the theoretical minimum number of workstations

a. One workstation should include as many tasks

as the cycle time allows.
b. Sequence of tasks cannot be broken by a
divide in workstations.
c. Assign tasks
The most efficient (rule eg. longest task time)

Step 4: Evaluate the efficiency of the balance

Problems in balancing

- What if production has to go to 525 per day? → CT = 48

Determine Line efficiency

Problems in balancing
 - If cycle time can not be reached
- Split the task (shorten task time)
- Use parallel workstations
- Share the task
- Use a more skilled worker (shorten task time)
- If balancing remains problematic
- Work overtime (lengthen work time)
- Redesign the product
- Motivation due to repetition

In summary
- The design of a factory relies heavily on the volume – variety characteristics of products
- There should be a fit between process type and lay-out
- The CODP allows producers to balance the need for flexibility (by customers) and efficiency
- Upstream and downstream forces determine the position of the CODP
- Assembly lines can be balanced by fitting tasks within a Cycle Time
Lecture 5 - Line design and lean management (ch10 and 12)

Outline of lecture

- The lean philosophy

- Total Quality Management

The lean philosophy

Various names

- Toyota production system → introduced at Toyota, Japan in 150s by Taiichi Ohno

- Lean manufacturing → Term coined by Womack, Jones, and Roos in their study on the Automobile industry:
“The Machine that Changed the World”
- Just-in-time (JIT)
- Stockless production
- Japanese management

Waste reduction

- Fundamental Lean/JIT approach: “remove waste”

- Waste: all things that do not add value
- Muda (無駄): An activity that is wasteful and doesn't add value
- Mura (斑): Unevenness
- Muri (無理): Over-burden of resources

Seven sources of waste (TIMWOOD)

1. Transportation: Material movement

2. Inventory: Work-in-Process Inventory Waste (eg. buffers; large batch sizes)

3. Motion: Unnecessary motion of producer, worker or equipment (eg. poor house-keeping)

4. Wait: Waiting time of Jobs and Resources

5. Over-processing: doing more work than what is required by customer (eg. using tools that are more precise,
complex, or expensive than require)

6. Overproduction: Producing too early, too much (eg. atack end product inventories)

7. Defect: Rework, rescheduling, repair (quality Management)

Lean: objective

- Produce
- Exactly what is needed (quality)
- Exactly how much is needed (variety – volume)
- Exactly when it is needed (just-in-time)
- Exactly where it is needed (location)
- At the lowest possible cost

- It is not primarily a cost-cutting / productivity strategy

- Cutting cost is result of
- More Efficient Operations (“Operational Excellence”)
- Higher Quality
- Less Inventory

The lean-philosophy

- Attack problems rather than containing them

Be “pragmatic”: Inventories and Defects do exist. However, the long term goal is to remove them
- “Labor is concerned with quality and Management with productivity”
- Management is focused on avoiding the problems to occur
- Quality first, productivity comes later
- Integration: Functions should work together as one organization
- Do not strive for local optima
- Does not rely on automation: “Simplicity” is key

Attack problems rather than containing them

Traffic planning analogy

Employee involvement

- Everybody is part of the company

- In-company communication
- Productivity graphs etc.
- Single status facilities
- Job-security (“life-time employment”

- Empowered Employees
- Management enables workers (Coaches)

- Responsibilities on the work-floor

- Require problem-solving capabilities (“good thinking” of all employees)

- Team approach
- Job-rotation: Share tasks in an “honest” way
- Minimize “boredom” (highly repetitive tasks)
- Increases flexibility

- Bottom-up suggestions for improvement

- Appraisal systems (“Employee of the month”)

- Extensive training
- Cross-functional
- Problem solving
Lean: some tools

- Value Stream Mapping (process focus) - Fool-proofing (Poka-Yoke)

- 5S - One-piece flow
- 5 Whys - Cellular Manufacturing
- Visual Control (Jidoka) - Leveled Scheduling (Heijunka)
- Pull (Kanban) - SMED; Transfer batches
- Continuous Improvement (Kaizen)

Value stream mapping

5S: Organizing the working place

 - Seiri (整理): sort
- Seiton (整頓):stabilize
- Seisō (清掃): sustain
- Seiketsu (清潔): shine
- Shitsuke (躾): standardize

5 whys to find the root case

- The problem: My car will not start

- 1. Why?
The battery is dead
- 2. Why?
The alternator is not functioning
- 3. Why?
The alternator belt has broken
- 4. Why?
The alternator belt was well beyond its useful service life and has never been replaced
- 5. Why?
I have not been maintaining my car according to the recommended service schedule

Reducing unevenness: one piece flow

- What
- Small quantities – frequently
- Continuous replenishment
- Why
- Produce only when needed
- No waiting time for jobs
- How
- Transfer batches
- Heijunka – level scheduling
- SMED (single minute exchange of die) – set up time reduction
- Cellular manufacturing
- Just-in-time deliveries by suppliers

Leveled scheduling (Heijunka)

- Assume that in a given day the MPS says that the following items have to be produced
- 15 items of A
- 20 items of B
- 40 items of C

- Traditional schedule: 15A - 20B - 40C

 - Heijunka schedule:
3A - 4B - 8C - 3A - 4B - 8C - 3A - 4B - 8C -
3A - 4B - 8C - 3A - 4B - 8C
(i.e. 5 times the series 3A - 4B - 8C)

- Why?
- Decreased Inventories; Synchronization of production with sales
- Less WIP-inventories means faster throughput

- Why not?
- Frequent changeovers and set-up times

- How to reduce set-up times?

- Technological improvements
- Separate off-line adjustments from on-line adjustments
- Move materials closer
- Standardize tooling
- Training

Pull vs push production

Tool: pull production by using Kanban

- Produce only when there is a demand

- Emptycontainer from process 2 triggers
process 1
- Possibility to control and reduce WIP
inventories
1.

2.

3.
 4.

5.

Visual control (Jidoka)

- Immediate problem detection by visual control
- U-shaped Assembly lines in Cells (Teamwork)
- Andon pulls / Andon board
- Use photos to show the way to put things

- Allows solving the problem immediately after it occurs, allows finding the cause of the problem

- Making problems visible rather than covering them up

- Example:
Very strict working rules + timing
Lines on working-floor that
indicate desired progress
Andon
- Problems in production process are indicated by lights
- In general:
- Green means everything is good
- Yellow means there is a small problem, should slow down
- Red means there is a large problem and the whole production process is likely stopped completely

Kaizen: Ongoing improvement

- Kaizen: incremental improvement
- Rather than Kaikaku: Radical improvement
- What is possible today is the standard for tomorrow
- There is no “finish line”

Total Quality Management

The quality - circle

Quality definition

- Quality of design: inherent value of the product in the marketplace

- Is the design of the product according to the customer’s wishes?
- Quality of conformance: degree to which the product / service design specifications are met
- Is the product manufactured according to its design

- Transcendent definition: Quality is neither mind nor matter, but a third entity independent of the two …
even though Quality cannot be defined, you know what it is (Pirsig)
- Product-Based definition: Differences in quality amount in differences in the quantity of some desired
ingredient or attribute (Abbott)
- User-based definition: Quality is fitness for use (Juran)
- Manufacturing-based definition: Quality means conformance to requirements (Crosby)
- Value-based definition: Quality means best for certain customer conditions (Feigenbaum)
Quality dimensions

- Performance: Primary product/service characteristics

- Features: Added touches, bells and whistles, secondary characteristics
- Reliability: Consistency of performance over time
- Durability: Useful life
- Serviceability: Resolution of problems and complaints
- Esthetics: Sensory characteristics (sound, feel, look etc.)
- Reputation: Past performance and other intangibles
- Timeliness: Speed, Reliability
- Flexibility: Level of Customer Specifications that can be met

The importance of quality

Externally
- Satisfy Customers
- Reputation of the Company
- Long term Strategic objective
- Product liability (Health, Safety & Environment)

Internally
- Quality and Productivity are positively correlated
- Decrease of cost: “Less scrap, Less rework”
- Improved planning: “It is not Quality that costs, it is all the things that you do because you
did not have quality in the first place”
- Reduce “Fire-fighting”
- Better Motivated Personnel

From quality to profitability

The cost of quality

Costs associated with quality

Prevention costs Internal failure costs

- Process/product design - Yield losses

- Training - Rework charges
- Vendor relations - Replanning
- Supplier development

Appraisal costs External failure costs

- Quality audits - Returns / recalls,

- Statistical quality control - (Warranty) repairs
- Lost business

Cost of quality
A historic view on quality management

Statistical process control (SPC)

- Basic Assumptions
- In any Production Process there is a “Natural Variation”
- Production Processes are not always in a “State of Control”

- Aim: Seek sources of non-natural variation (“Special causes”)

- Tool: Control Charts

Control chart
Statistical process control

- SPC Charts can be used to detect whether or not a process is “in control”
- Non-random behavior: System is out of Control

The need for a range chart (R-chart)

- Assume: - In both samples the average is 20

- Central Line (CL) is 20 - Range in Sample 1: 22 – 18 = 4
- Sample size = 4 - Range in sample 2: 32 – 8 = 24

- What results would you like better?

- Sample 1 results: 19, 22, 21 and 18
- Sample 2 results: 8, 29, 11 and 32
Control charts (using range instead of σ or s)
SPC: Example

Example: X-bar chart Example: R-chart

Process control and improvement

Process capability

- Measure of ability to meet specifications (determined by customer)

- Process limits (as in the previous): Based on normal variation in the process
- Specification limits: variation as designed and which is acceptable for customers

- Specifications:
- USL: Upper Specification Limit
- LSL: Lower Specification Limit

- “Good” if Cp > 1; “Bad” if Cp < 1

Capability and variation

Process capability index Cpk

 - Shows how well the parts being produced fit into the range specified by the design specifications
- Aim is to have Cpk larger than one
- When two numbers (X-LSL and USL-X) are not close, indicates mean has shifted

- Formula: C pk =min
[ X−LSL USL− X
3σ
∨
3σ ]
Process capability - example

- Process capability index: used to incorporate cases when the central line is not “on target”

Capability index

Statistical process control

- SPC charts do not give the reason why the process is out of control

- Techniques to find such “Assignable causes”

- Cause-and-Effect Diagrams (Fishbone-diagrams)

- Pareto Chart
Cause and effect diagram (fishbone diagram)
Pareto-histogram

Pareto’s Law: 80% of the problems are due to 20% of the possible causes

99.9% (3 sigma) quality producers

- At least 20,000 wrong prescriptions/year

- Nearly 500 incorrect surgical operations/week
- No electricity, water, heat for 8.6 hours/month
- No telephone service for nearly 10 minutes each week
- Two short or long landings at Schiphol Airport /day
- About 2000 pieces of mail lost every hour
Six sigma

- Improvement technique introduced within Motorola and GE

- Quality improvement program
- Focus: Objective is to minimize “span” (6s)
- Result is increased reliability / dependability

The DMAIC cycle used in Six Sigma

Quality assurance systems

- Describes standards for a quality system (the way in which the end-product is produced)
- A handbook / self-assessment has to be made with
- Description of the production processes
- Description of the procedures (e.g. complaint-handling)
- Description of Responsibilities
- Quality improvement cycles

- Quality system is audited by an external authorized organization

- A “Certificate” is obtained, but only for a limited amount of time
Total quality management
 - Everybody in the organization is responsible for delivering good quality
- Marketing, Production, R&D
- Management and Workforce
- Not a separate “Quality Department”

- Each Process has an (internal) Customer

- The entire organization is focused on achieving quality

- Strategy; Design; Planning & Control

Components of TQM

1. Everything is focused on the customer

2. Empowerment
3. Quality at the source
4. Ongoing improvement (kaizen)
5. Management based on facts

Components of TQM

1. Everything is focused on the customer (either internal or external)

2. Empowerment

- Everybody has responsibilities

- Focus on quality of their own work
- Employee commitment is essential

- Everybody has the power to make decisions (within certain guidelines)

- Manager is Coach: Stimulate, Give feedback

- Teamwork: Joint decision making → “Self-steering teams”

- Bottom-up suggestions for improvement

3. Quality at the source
- Prevention
- “You can not inspect quality into the product”
- Quality control at each process

- Quality control by “process-owner” himself / herself

- “Immediate feed-back”
- Training is essential

- Supplier-Customer Partnership
- Trust
- Knowledge in each-other’s production process
- No incoming inspection
- Joint problem-solving

4. Ongoing improvement (Kaizen)

- Target:
- “Zero-defects”
- “Do it right - On time, the first time, and every time”
- Strive for excellence

- There is no finish line!

- Incremental Improvement as opposed to radical improvement

- Tool: Deming-wheel
Tool: The Deming-wheel

Deming-wheel: ongoing improvement

5. Management based on facts

- Measure performance to see where mistakes are made and prevent them from happening again
Lecture 6 - Strategic sourcing (chapter 13)

Supply chain

- Includes suppliers, manufacturers, distributors, and customers

- Supply chains have both flows on information and flows of material
- Wherever there is a flow of material, there is almost always a flow of information
- Flows of information typically go both ways

Why is sourcing important?

- Focus on “core” activities

- Specialization of organizations
- More customized products
- Focusing on shorter response times, less costs, increased flexibility, etc.

- No more gains within the manufacturing process (lean, TQM)

- Huge savings through eliminating unnecessary inventory between organizations in a chain
- Outsourcing increases the need for coordination

What is outsourcing?

Outsourcing: the act of moving a firm’s internal activities and decision responsibility to outside providers

- Allows a company to create a competitive advantage while reducing cost

- An entire function (eg. distribution, manufacturing) may be outsourced, or some elements of an activity (eg.
producing parts) may be outsourced, with the rest kept in-house
Reasons to outsource

1. Organizational
○ Focus on core capability
○ Increase flexibility
2. Financial
○ Selling assets, specifically low-return assets
○ Access to new markets by locally producing
○ Lower costs (eg. outsourcing to a low-wage country)
○ Fixed costs become variable costs
3. Improvement
○ Improve quality and productivity
○ Obtain expertise, skills, and technologies that are otherwise not obtainable
○ Improve image by being associated with reputed suppliers

However…

- Do we always know what strategic or core is?

- Much outsourcing primarily based on lower wage for outsourced activities
- Many advantages can also be disadvantages

- Factors for evaluation

1. (Strategic) control
2. Required coordination
3. Intellectual property

Integration or outsourcing

Vertical integration Outsource

1. Specific investments, high risk of loss of 1. Low specific investment, many alternatives
reputation, knowledge, brand
2. Mutual dependency, high degree of 2. Standardized tasks, codified information
information, task interdependence
3. Interrelated technology, hard to protect (easy to 3. Clear protection, hard to imitate
copy), or to protect by law

Purchasing and sourcing

- Negotiating in purchasing has been stressed

- Requirements and costs
- As opposed to strategic cooperation and strategic sourcing
- Working together, mutual benefit
Strategic sourcing

Strategic sourcing: the development and management of supplier relationships to acquire goods and services in a
way that aids in achieving the needs of the business

- In the past, sourcing was another name for purchasing

- As a result of globalization, sourcing implies a more complex process suitable for products that are
strategically important

Drivers of sourcing relations

Specificity: refers to how common the item is and, in a relative sense, how many substitutes might be available

- Commonly available products can be purchased using a relatively simple process

Transaction costs: costs associated with making a purchase: ordering, selecting, billing, price setting, etc.

Contract duration: length of the relationship

Improving coordination: characterizing relations

- Characteristics of market/demand
- Functional and innovative
- Characteristics of supply
- Stable or evolving

Functional products

- Functional products include the goods that people buy in a wide range of retail outlets:
- Long product life cycle (more than two years)
- Low margin (5 to 20 percent)
- Little product variations
- Stable demand: average forecast error of less than 10 percent

Innovative products

- Newness (even just color or variations) of the innovative products makes demand for them unpredictable
- Typically have a life cycle of just a few months
- Imitators quickly erode the competitive advantage → companies are forced to introduce a steady
stream of newer innovations
- The short life cycles and the great variety typical of these products further increase unpredictability, at the
level of individual products
Match supply chain characteristics to the nature of demand

Similar for supply uncertainty

Stable: Evolving:
- Less breakdowns - Vulnerable to breakdowns
- Stable and higher yields - Variable and lower yields
- Less quality problems - Potential quality problems
- More supply sources - Limited supply sources
- Reliable suppliers - Unreliable suppliers
- Less process changes - More process changes
- Less capacity constraints - Potential capacity constrained
- Easier to change over - Difficult to change over
- Dependable lead times - Variable lead time

Hau Lee’s uncertainty framework

Supply chain dynamics

Causes of the bullwhip effect

- Order synchronization
- Customers order on the same order cycle (eg. first of the month, every monday)

- Order batching
- Retailers may be required to order in integer multiples of some batch size (eg. case quantities, pallet
quantities, full truck load)

- Trade promotions and forward buying

- Supplier gives retailer a temporary discount, called a trade promotion
- Retailer purchases enough to satisfy demand until the next trade promotion

- Reactive and over-reactive ordering

- Each location forecasts demand to determine shifts in the demand process
- Responding to a “high” demand observation
- Unfortunately, it is human to overreact

- Shortage gaming
- If supplier production is less than orders, orders are rationed
- To secure a better allocation, the retailers inflate their orders (ie. order more than they need)
Lecture 7 - Distribution Logistics and Transportation (chapter 14)

Functions of warehouses

- Storage: to facilitate the coordination between production and customer demand by buffering (storing)
products for a certain period of time

- Sorting & picking: to accumulate and consolidate products from various producers for combined shipment to
common customers

- Transport: to transship products from one mode of transportation to another

- Operations: to support product customization activities (value added logistics), such as packaging, labeling,
marking, pricing or even final assembly

Issues related to location decision

Qualitative factors Quantitative factors

- Environmental regulations - Labor costs and labor availability
- Availability of transportation - Proximity to suppliers and customers
- Quality of life (eg. level of education, cost of - Site costs (land, expansion, parking)
living, health) - Utilities (gas, electricity, water

Methods of selecting locations:

1. Cost volume analysis (economic comparison)

2. Center-of-gravity method

Cost-volume analysis

To make an economic comparison of known location:

- Determine fixed and variable costs for each location

- Fixed costs (eg. costs for a truck)
- Variable costs (eg. costs per product or costs per
kilometer)

- Graphically
- Plot costs for each location (costs on vertical axis
and annual volume on horizontal axis)
- Select location with lowest costs for expected
production volume
 Example:

The fixed costs for a warehouse in France will be 30,000 euros per year. The variable costs per unit in inventory are
75 euros. The fixed costs for a warehouse in Germany will be 60,000 euro per year. The variable costs per unit in
inventory are 45 euro.

Calculate the required number of units to be kept in inventory per year to prefer a site in Germany over a site in
France.

Solution:

France: 30,000+75 ∙ x The break-even-point equals:

Germany: 60,000+ 45 ∙ x 300,000+75 x=600,000+ 45 x

75 x−45 x=600,000−300,000

x=1,000

If more than 1,000 units are kept in inventory per year, we prefer a sit in Germany over a site in France

Center-of-gravity method

- Mathematical technique for finding the best location for a single warehouse

- Method uses:
- Location of markets (retailers)
- Volume of goods to be shipped to those markets

- Costs directly proportional to distance and volume

- Ideal location: minimizes weighted distance between warehouse and retailers

- Use coordinate system: x and y coordinate for each

retailer
 Example:

Solution:

Step 1: Total sum of goods = 6000

Step 2a: Total sum of goods to X:

30 ∙ 2,000+90 ∙1,000+ 130∙ 1,000+2,000 ∙ 40=400,000s

Step 2b: Total sum of goods moved to Y: 2,000 ∙120+ 1,000∙ 110+ 1,000∙ 130+2,000 ∙ 40=560,000

Step 3a: X coordinate warehouse:

400,000
=66.7
6,000

Step 3b: Y coordinate warehouse:

560,000
=93.3
6,000

Processes at a warehouse
Cross docking

- Approach to split large shipments into small shipments for local delivery
- Advantage: low inventory cost

- Process:
1. Receiving
2. Scanning
3. Labeling
4. Dispatch

Typical layouts: U Layout

Typical layouts: I Layout

Transportation management
 - Planning, implementation and control of external transportations services such that objectives and
constraints are met

Modes of transportation

- Rail (train)
- Road (truck)
- Water (ship)
- Air (plane)
- Pipeline for gas, oil, etc.

Criteria:

- Speed: which mode of transport has the fastest speed?

- Accessibility: can each mode of transport reach each destination?
- Costs: which mode of transport has the lowest cost?
- Frequency: with which frequency can we use a certain mode of transportation?
- Risks: which mode has the largest risk for loss or damage of the goods to be transported?
- Reliability: which mode can ensure that the right products reach the right place at the right time?
- Capability: can we use a mode of transportation for all types of goods in different sizes?

Costs analyses

- Achieve the best trade-off between transportation cost and inventory cost

inventory cost=quantity ∙ value per unit ∙interest rate ∙ time

Example:

Each day 10,000 phones need to be transported from Canada to the Netherlands. Two options: plane or ship

Plane: Ship:
- The transport time per plane equals 1 day. - The transport time per ship is 21 days.
- Costs per mobile phone for transport per plane - Costs per mobile phone are 0.20 euro
are 1 euro

Average value per phone: 250 euros

Interest rate: 10% per year

Which mode of transportation should be chosen to minimize the total cost?

Solution:

Plane:
The fixed costs equal: 1 * 10000 = 10,000 euro
Inventory costs: 10,000 * 250 * 0.10 * 1/365 = 685 euro
Total costs are: 10,000 + 685 = 10685 euro

Ship:
The fixed costs equal: 0.2 * 10000 = 2,000 euro
Inventory costs: 10,000 * 250 * 0.10 * 21/365 = 14,385 euro
Total costs are: 2,000 + 14,385 = 16,385 euro

Transporting by plane is cheaper