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Midterm - fthmfv

Principle of Management (International University - VNU-HCM)

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CHAPTER 1: FUNDAMENTALS OF LOGISTICS AND SUPPLY

CHAIN MANAGEMENT
I. SUPPLY CHAIN
Products and Operation
- Products: Goods (tangible) and Services (intangible)
- Operations: manufacturing, service, transporting, selling, training, and so on. The main
outputs are products.

The Supply Chain

Supply chain is a network/system/chain/process/(series of activities and organizations) that raw
materials move through on their journey from initial suppliers to final customers.
There are at least 3 members of the SC: suppliers, manufacture (factory), final customers
3 flows in the SCM:
- Materials flow/product flow
- Cash flow
- Information flow

Activities in SC

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Structure of the SC
Supply Chain is a series of activities and organizations that move materials from initial suppliers
to final customers.
Upstream activities: involve initial supplier, second tier supplier, first tier supplier. (suppliers to
factory)
Downstream activities: involve first tier customer, second tier customer, final customer. (factory
to customer)

Supply Chain Management

Supply chain management is defined as: “The planning and management of all activities involved
in sourcing and procurement, conversion, and all logistics management activities. Importantly, it
also includes coordination and collaboration with channel partners, which can be suppliers,
intermediaries, third-party service providers, and customers”
SCM is the manager tries to manage the SC to achieve the goal of their business
Goals:
- Produce and distribute products at the right quantities, to the right place, at the right time
- Minimizing total cost while satisfy service level requirements.
(Goals: profit | profit = revenue – cost (maximize R – minimizing C => >>P => satisly customer)

Importance of SCM
When a firm, its customers, and its suppliers all know each other’s future plans and are willing to
work together → the planning process is easier and much more productive.
- Lower purchasing and inventory carrying costs
- Better product quality

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- Higher levels of customer service

 All leading to more sales and better profits.
EX:

There are 7 members of the Coca cola SC

Up stream: Suppliers → Factory
Downstream: Factory → Customer

II. LOGISTICS
- Logistics is a part of the SC
- Logistics is defined as the process of planning, implementing and controlling the efficient,
effective flow and storage of goods, services and related information from point of origin to
point of consumption for the purpose of conforming to customer requirements.
- Logistics is the function responsible for the flow of materials/information from suppliers into
an organization, through operations within the organization, and then out to customers.
- Logistical value proposition:
o Cost minimization.
o Service benefits/Customer satisfaction.
Role of Logistics

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- Inbound logistics: activities between external suppliers and the organization

- Outbound logistics: activities between external customers and the organization.
- Operations within the organization (Internal supplier - Internal customer): activities between
internal suppliers and internal customers.

Activities of Logistics

Logistics is responsible for the movement and storage of materials as they move through the
supply chain
- Procurement or purchasing (thu mua): the flow of materials through an organisation is
usually initiated when procurement sends a purchase order to a supplier. Procurement finds
suitable suppliers, negotiates terms and conditions, organises delivery, arranges insurance and
payment, and does everything needed to get materials into the organisation.
- Inward transport or traffic: moves materials from suppliers to the organisation’s receiving
area. This has to choose the type of transport (road, rail, air, and so on), find the best transport
operator, design a route, make sure that all safety and legal requirements are met, get deliveries
on time and at reasonable cost, and so on.
- Receiving: makes sure that materials delivered correspond to the order, acknowledges receipt,
unloads delivery vehicles, inspects materials for damage, and sorts them.
- Warehousing or stores: moves materials into storage, and takes care of them until they are
needed. As well as making sure that materials can be available quickly when needed,
warehousing also makes sure that they have the right conditions, treatment and packaging to
keep them in good condition.

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- Stock control: sets the policies for inventory. It considers the materials to store, overall
investment, customer service, stock levels, order sizes, order timing and so on.
- Order picking: finds and removes materials from stores. Typically materials for a customer
order are located, identified, checked, removed from racks, consolidated into a single load,
wrapped and moved to a departure area for loading onto delivery vehicles.
- Materials handling: moves materials through the operations within an organisation. It moves
materials from one operation to the next, and also moves materials picked from stores to the
point where they are needed. The aim of materials handling is to give efficient movements,
with short journeys, using appropriate equipment, with little damage, and using special
packaging and handling where needed.
- Outward transport: takes materials from the departure area and delivers them to customers
(with concerns that are similar to inward transport).
- Physical distribution management: is a general term for the activities that deliver finished
goods to customers, including outward transport.
- Recycling, returns and waste disposal: Some materials are not reused, but are brought back
for recycling, such as metals, glass, paper, plastics and oils. Finally there are materials that
cannot be used again, but are brought back for safe disposal, such as dangerous chemicals.
Activities that return materials back to an organisation are called reverse logistics or reverse
distribution.
Importance of Logistics
Return on assets (ROA) is a fundamental indicator of efficiency, measuring how well a business
is using its assets to generate profit.

Example
J. Mitchell currently has sales of £10 million a year, with a stock level of 25% of sales. Annual
holding cost for the stock is 20% of value. Operating costs (excluding the cost of stocks) are
£7.5 million a year and other assets are valued at £20 million.
a. What is the current return on assets?
b. How does this change if stock levels are reduced to 20% of sales?
Solution
a.
Stock = 10 million × 0.25 = £2.5 million/year
Holding cost for stock = stock × holding cost = 2.5 million × 0.2 = £0.5 million/year
Total costs = operating cost + holding cost for stock = 7.5 million + 0.5 million = £8 million/ year

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Profit = sales − total costs = 10 million − 8 million = £2 million/ year

Total assets = other assets + stock = 20 million + (10 million × 0.25) = £22.5 million
Return on assets = profit / total assets = 2 million / 22.5 million = 0.089 or 8.9%

b.
Stock = 10 million × 0.2 = £2 million/year
Holding cost of stock = stock × holding cost = 2 million × 0.2 = £0.4 million/year
Total costs = operating cost + holding cost for stock = 7.5 million + 0.4 million = £7.9 million/
year
Profit = 10 million − 7.9 million = £2.1 million/ year
Total assets = £20 million + (£10 million × 0.20) = £22 million
Return on assets = 2.1 million / 22 million = 0.095 or 9.5%
Reducing stocks gives lower operating costs, higher profit and a significant increase in ROA.

Current trends in Logistics

- Improving communication:
 Electronic data interchange (EDI).
 Electronic point-of-sales data (EPOS).
 E-purchasing of e-procurement.
 Support of EDI.
 Item coding (often bar-coding, QR codes).
 Electronic Fund Transfer (EFT).
- Improving customer service:
 Lower lead-times
 Synchronized material movement.
 Mass customization.
- Other significant tendencies:
 Globalization.
 Reduced number of suppliers.
 Concentration of ownership.
 Outsourcing.
 Make or Buy.
 Cross-docking.
 Direct delivery.
 Stock reduction methods.
 Increasing environmental concerns.
 More collaboration along the supply chain.

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CHAPTER 2: LOCATING FACILITIES

I. LOCATION DECISIONS
Importance of location decisions
- Make decisions where to put the facilities
- Location decisions are needed when an organisation opens new facilities → Affect
organization’s performance over many years.
- A poor facility location leads to poor performance → low productivity, unreliable suppliers,
poor materials, low quality products and high costs.
- To make location decisions, organisations have to consider many factors:
o Quantifiable factors: operating costs, wage rates, currency exchange rates, etc.
o Nonquantifiable factors: quality of infrastructure, political stability, etc.

Reasons for considering location

- The end of lease/premises (hết hạn hợp đồng/mặt bằng) ⇒ extend the contract or find another
place
- Geographical expansion, reorganization, M&A - Mergers (Sáp nhập) và Acquisitions (Mua
lại) or changes of ownership
- Change to operations/transport mode/transport network.
- Changes in location of customers/suppliers.
- Upgrading facilities.

Alternatives to locating new facilities

- Expand or change existing facilities at an existing site.
- Open additional facilities at another site while keeping all existing facilities.
- Close down existing operations and move all operations to a new site.

Break-Even model
The break-even model is a useful location analysis technique when fixed and variable costs can
be determined for each potential location.
This method involves the following steps:
Step 1. Identify the locations to be considered.
Step 2. Determine the fixed cost for each facility.
Step 3. Determine the unit variable cost for each facility.
Step 4. Construct the total cost lines for each location on a graph.
Step 5. Determine the break-even points on the graph. Alternatively, the break-even points can be
solved algebraically.
Step 6. Identify the range over which each location has the lowest cost.

II. CHOOSING GEOGRAPHIC REGION

Hierarchy of Location decisions
Hierarchy: level by level

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Important factors for choosing a region

- Location of customers (low value goods: soft drinks, brewers, dairies,…).
- Location of suppliers and materials (natural resources,…).
- Culture (ex: hot pot franchise restaurants).
- Government attitudes (ex: Apple moving to Vietnam).
- Direct costs (wages, materials, utilities, …).
- Indirect costs (local taxes, social insurance, pension and social costs).
- Exchange rates.
- Social attitudes (ex: social welfare & employee union).
- Organization.
- Operations.
III. APPROACHES TO LOCATION DECISIONS
1. Infinite set approach
Uses geometric arguments to find the best location, assuming that there are no restrictions on site
availability → finds the best location in principle and then looks for a site nearby.
Simple model

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3 suppliers and 3 customers

Compromise location/center of gravity:
A simple way for finding the best compromise location is to calculate the Centre of gravity of
supply and demand.
The co-ordinates of the centre of gravity are:

where,
(𝑋0, 𝑌0): co-ordinates of the centre of gravity which gives the facility location
(𝑋𝑖, 𝑌𝑖): co-ordinates of each customer or supplier, 𝑖
𝑊𝑖: expected demand at customer 𝑖, or expected supply from supplier 𝑖
Example
Van Hendrick Industries is building a central logistics centre that will collect components from
three suppliers, and send finished goods to six regional warehouses. The locations of these and
the amounts supplied or demanded are shown in the following table. Where should they start
looking for a site?

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The centre of gravity is X0 = 45.5 and Y0 = 50.3, which you can check by calculating:
∑ 𝑋𝑖 𝑊𝑖 91.40 + 93.60 + 3.80 + 83.24 + 89.16 + 63.22 + 11.38 + 9.52 + 44.28
𝑋0 = =
∑ 𝑊𝑖 40 + 60 + 80 + 24 + 16 + 22 + 38 + 52 + 28
16380
= = 45.5
360
∑ 𝑌𝑖 𝑊𝑖 8.40 + 35.60 + 86.80 + 26.24 + 54.16 + 87.22 + 85.38 + 16.52 + 48.28
𝑌0 = =
∑ 𝑊𝑖 40 + 60 + 80 + 24 + 16 + 22 + 38 + 52 + 28
18108
= = 50.3
360
A good place to start looking for locations is around (45.5, 50.3). As this is very close to warehouse
6 it might be better to expand on this site rather than look for an entirely new location

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Drawbacks of Infinite Set Approach

- Infinite set approaches need approximated data.
- Chosen location of infinite set approach may be not practical:
 no suitable site available anywhere near the solution.
 available sites may be too expensive .
 further development may be prohibited.
 no roads or workforce.
 solution might be at the top of a mountain or in the sea.
⇒ To deal with such problems, the alternative approach is used to identify available sites and
choose the best.
2. Feasible set approach
Where there are only a small number of feasible sites, and an organization has to choose the best.
⇒ compares sites that are currently available and chooses the best.
Feasible set approaches identify available sites, compare them, and find the best.
Two models are introduced:
- Costing model

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- Scoring model
a. Costing model
- Use quantifiable factors
- Calculates the total cost from each location and chooses the cheapest.
- In practice, many of the costs of running a facility are fixed regardless of its location → we
concentrate on varying costs, particularly the transport and operating costs.
- Assume that the operating costs in nearby locations are the same → we only concentrate of
transport costs.
- Assume that the transport cost is proportional to the distance moved → Rectilinear distance
between points will be found.
How to calculate?
Step 1: Calculate Distance for each site. There are two ways to measure the distance between two
facilities:
- Rectilinear Distance
When distance between two facilities is measured along path that is orthogonal to each other
→ the distance is called Rectilinear Distance.
Suppose two facilities are located at points represented by (𝑋1, 𝑌1) and (𝑋2, 𝑌2) → the
rectilinear distance between the facilities will be calculated as:

- Euclidean Distance
When distance is measured along straight-line path between the two facilities → the distance
is termed as Euclidean distance.
Suppose two facilities are located at points represented by (𝑋1 , 𝑌1 ) and (𝑋2 , 𝑌2 ) → the
Euclidean distance between the facilities will be

Step 2: Compute (Load x Distance) for each site.

Step 3: Choose site with lowest (Load x Distance).
Load-Distance value (𝐿𝐷) is calculated as:

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𝑳𝑫 = ∑ 𝒍𝒊 × 𝒅𝒊
𝒊=𝟏

𝑙𝑖 : load expressed as a weight or units being shipped to location 𝑖.

𝑑𝑖 : rectilinear distance between the proposed site and location 𝑖 (using Euclidean distance).
𝑛: total number of locations considered for each site
Example
Bannerman Industries want to build a depot to serve 7 customers with different loads. Three
locations A, B and C are available. Which is the best site if operating costs and transport costs
to its suppliers are the same for each location?

The distance from A to customer 1 is: difference in X co-ordinates + difference in Y co-ordinates

= (120-100) + (130-110) = 40

 site B is clearly best.

Drawbacks of Costing model
Difficulty of finding:
- accurate costs,
- data that depends on accounting conventions,
- costs that vary over time,
- customer locations not being known in advance,
- order sizes not known in advance,

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- factors that cannot be costed, and so on.

→ To avoid these problems, other method for comparison is used.
b. Scoring model
- Use non-quantifiable factors
- Assigns a range of factors, weighted scores to compare locations.
- Scoring model emphasizes the factors that are important for locations but cannot easily
be costed or quantified.
- Even if we cannot quantify the important factors, we still need to identify them.
Factors in location decisions
In the region and country:
- availability, skills and productivity of workforce.
- local and national government policies, regulations and attitudes.
- political stability.
- economic strength and trends.
- climate and attractiveness of locations.
- quality of life – including health, education, welfare and culture.
- location of major suppliers and markets.
- infrastructure – particularly transport and communications.
- culture and attitudes of people.
In the city or area:
- population and population trends.
- availability of sites and development issues.
- number, size and location of competitors.
- local regulations and restrictions on operations.
- community feelings.
- local services, including transport and utilities.
In the site:
- amount and type of passing traffic.
- ease of access and parking.
- access to public transport.
- organizations working nearby.
- total costs of the site.
- potential for expansion or changes.
Procedure of scoring model:
Although we cannot quantify these factors directly → giving each a score. The scoring model
procedure is discussed as:
Step 1: Decide the relevant factors in a location decision.
Step 2: Give each factor a Maximum possible score (usually 0-100) or a Weight (0.00-1.00) that
shows its importance.

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Step 3: Consider each location in turn and give an actual score for each factor, up to this
maximum
Step 4: Calculate the Total score or Total weighted score (Site Score x Factor Weight) for each
location and find the highest.
Step 5: Discuss the result and make a final decision.
Example
Williams-Practar considered five alternative locations for a new warehouse for their music
distribution business. After many discussions they compiled a list of important factors, their
maximum scores, and actual scores for each site.
What is the relative importance of each factor? Which site would you recommend?

The most important factors are the available infrastructure and closeness to customers, with 20
points each. The closeness of suppliers is a bit less important with up to 15 points, and then
come climate, accessibility and community attitude with up to 10 points each. Construction cost,
government views and availability of workforce are least important.
Adding the scores for each location gives:

These scores suggest that location C is the best. The company should now consider all other
relevant information before coming to a final decision.
IV. NETWORK MODELS
Sometimes it is difficult to relate the costing model and the scoring model to actual road layout
and geographic features.
Electronic maps of road networks allow another approach to location, which is based on actual
road layouts.
Two standard models are illustrated for the approach:
- Single median problem
- Covering problem
1. Single median problem

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Suppose a network of towns connected by roads. There are demands for some products in each
town, and you want to locate a depot to deliver to these towns.
→ Standard analysis shows that the best location is always in a town.
We only have to compare locations in each town and identify the one that gives the best value
for some measure of performance.
A common measure is average travel distance or time, and finding the shortest is called the
single median problem.
How to find the Single median
Step 1: Starts with a matrix of the shortest distances between towns.
Step 2: To find the shortest average distance, we have to combine these distances with the loads
carried.
Step 3: Multiply the distances by the demands at each town, to get a matrix of the weight-
distances.
Step 4: Add these for each town, and find the lowest overall value.
Example
Ian Bruce delivers goods to eight towns, with locations and demands as shown in Figure 5.12.
He wants to find the location for a logistics centre that minimises the average delivery time to
these towns. Where should he start looking?

Weight-distance of a centre at AL = (10 × 0) + (15 × 15) + (25 × 22) + (20 × 24) + (20 × 31) +
(10 × 28) + (10 × 32) + (15 × 36) = 3015

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2. Covering problem
Sometimes the average distance or time to a facility is less important than the maximum time.
Classic example of this is fire engines and ambulances which try to respond to emergencies
within a maximum time. This is an example of the covering problem.
There are two versions of the covering problem:
- Look for the single location that gives the best service to all towns → To solve this problem,
we compare the longest journey times from each location, and choose the location with the
shortest of these.
- Specifies a level of service that must be achieved → Find the number of facilities needed to
achieve a level of service and their best locations.
Example:
The next figure shows part of a road network, with the travel time (in minutes) shown on each
link.
Q1. Where would you locate a depot to give best customer service?
Q2. Where would you locate two depots which give a maximum journey of 15 minutes?
Solution:
Q1.

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Q2.

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CHAPTER 3: PLANNING RESOURCES

I. OVERVIEW OF PLANNING
Why to make plan:
- All activities along the supply chain have to be planned → It means that we design timetables
to show when they will be done.
- Planning helps us face the future with some confidence.
- If an organization does not plan for the future → it can be in danger of meeting unexpected
circumstances that it cannot cope with
An approach to planning logistics

Types of planning:
Capacity plans: ensure there is enough capacity to meet long-term demand (the ability..)
Aggregate plans: give summaries of the work done in related activities, typically by month at
each location
Master schedules: show a detailed timetable for all activities, typically by week
Short-term schedules: show detailed timetables for jobs and resources, typically by day
Master schedules will based on aggregate plans and short-term schedules will based on the
master schedules. (bigger ⇒ smaller)
II. CAPACITY PLANNING
Definitions
Capacity of a SC sets the maximum amount of product that can be delivered to final customers
in a given time

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Designed capacity is the maximum possible throughput in ideal conditions

Effective capacity is the maximum realistic throughput in normal conditions
Actual throughput/output is normally lower than effective capacity
Measure the capacity utilization
𝐴𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑢𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 = × 100%
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦
𝐴𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡
𝐷𝑒𝑠𝑖𝑔𝑛 𝑢𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 = × 100%
𝐷𝑒𝑠𝑖𝑔𝑛 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦

Example:
A manufacturer of ballet shoes built up a production facility designed to produce up to 300
shoes/week. However, the factory can produce only 230 shoes/week in reality, despite working
at its maximum effort.
What is the meaning of manufacturer's capacity utilizations relative to both design and effective
capacity if output is 200 shoes/week?
𝐴𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡 200
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑢𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 = × 100% = × 100% = 86.9%
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 230
𝐴𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡 200
𝐷𝑒𝑠𝑖𝑔𝑛 𝑢𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 = × 100% = × 100% = 66.7%
𝐷𝑒𝑠𝑖𝑔𝑛 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦 300
The utilization shows that the company didn’t use its fully capacity
Bottlenecks

Not all parts of a supply chain have the same capacity → Some parts limit overall throughput,
and this forms a bottleneck.
→ The bottlenecks in a supply chain limit its overall capacity. (Have lowest capacity)
Bottleneck operation
An operation in a sequence of operations whose capacity is lower than that of the other
operations
Go by sequence:

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20 in ope1 ⇒ 10 in ope2 ⇒ 10 in ope3 (although ope3 can produce 15) ⇒ 10 in final. So bottle
neck is ope2
Go parallel:

Go parallel ⇒ combine together ⇒ bottle neck is 30 but not 10

Example:
The bottling plant at J&R has a capacity of 80,000 liters/day and works a 7-day week.
It fills standard bottles of 750 ml, and these are passed to a packing area which can form up to
20,000 cases/day with 12 bottles each. The packing area works a 5-day week.
The cases are taken to warehouses by a transport company whose 8 lorries can each carry 300
cases, and make up to 4 trips/day for 7 days/week.
There are two main warehouses, each of which can handle up to 30,000 cases/week.
Local delivery vans can handle everything passed to them by the warehouse.
What is the capacity of these parts of the distribution system? How can J&R increase the
capacity?
Solution:
7 × 80000
𝐵𝑜𝑡𝑡𝑙𝑖𝑛𝑔 𝑝𝑙𝑎𝑛𝑡: = 746,666 𝑏𝑜𝑡𝑡𝑙𝑒𝑠/ 𝑤𝑒𝑒𝑘
0.75
𝑃𝑎𝑐𝑘𝑖𝑛𝑔 𝑎𝑟𝑒𝑎: 5 × 12 × 20,000 = 1,200,000 𝑏𝑜𝑡𝑡𝑙𝑒𝑠/ 𝑤𝑒𝑒𝑘
𝑇𝑟𝑎𝑛𝑠𝑝𝑜𝑟𝑡 𝑐𝑜𝑚𝑝𝑎𝑛𝑦: 300 × 12 × 8 × 4 × 7 = 806,400 𝑏𝑜𝑡𝑡𝑙𝑒𝑠/𝑤𝑒𝑒𝑘
𝑇𝑤𝑜 𝑚𝑎𝑖𝑛 𝑤𝑎𝑟𝑒ℎ𝑜𝑢𝑠𝑒𝑠: 2 × 30,000 × 12 = 720,000 𝑏𝑜𝑡𝑡𝑙𝑒𝑠/𝑤𝑒𝑒𝑘
We only know that the capacity of the delivery vans is greater than the capacity of the
warehouses.

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The capacity of the warehouses of the supply chain is the smallest of these separate capacities,
with 720,000 bottles/ week.
J&R can only increase capacity by expanding the warehouses. Improving other parts of the
supply chain will have no effect at all. Of course, when one bottleneck is removed another is
formed, and this will probably be at the bottling plant.

Matching capacity and demand

The aim of capacity planning is to match the available capacity of facilities to the demands put
on them → Mismatch can be expensive.
- If capacity < demand: bottlenecks restrict the movement of materials and customer service
declines ⇒ decrease customer services
- If capacity > demand: the organization can move all its materials but it has spare capacity
and underused resources ⇒ increase the cost of the company (holding cost)
⇒ try to match the capacity to the demand (capacity=demand)
Short-term adjustments to capacity
The capacity planning includes decisions at all levels; strategic plans give the overall picture,
modified by shorter term adjustments
There are two ways of making short-term adjustments to capacity:
- Capacity management adjusts capacity to match demand.
- Demand management adjusts demand to match available capacity.
Ways of adjusting capacity:
- Changing the work pattern to match demand.
- Employing part-time staff to cover peak demands: increase capacity (add more employees)
- Using outside contractors.
- Renting or leasing extra facilities.
- Adjusting the speed of working.
- Rescheduling maintenance periods.
- Making the customer do some work, such as packing their own bags in supermarkets.
Ways of adjusting demand:
- Vary the price.

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- Limit the customers served, by demanding specific ‘qualifications’.

- Change the marketing effort.
- Offer incentives to change demand patterns, such as offpeak travel rates.
- Change related products to encourage substitution, such as holiday destinations.
- Vary the lead time.
- Use a reservation or appointment system.
- Use stocks to cushion demand.

III. TACTICAL PLANNING

Tactical plans
Tactical plans show how the capacity will be used, and develop medium-term timetables for
activities. Two tactical plans are discussed:
- Aggregate planning makes the tactical decisions that translate forecast demand and
available capacity into schedules for families of activities, typically for each month.
- Master schedule gives a timetable for activities, typically for each week. Its aim is to achieve
the activities described in aggregate plans as efficiently as possible.
Aggregate plans
Aggregate planners are looking for answers to questions:
- Should we keep throughput at a constant level, or change it to meet varying demand?
- How should we use stocks to meet changing demand?
- Should we vary the size of the workforce with demand?
- Can we change work patterns to meet changing demand?
- Should we use outside organizations to cover peak demands?
- Can we allow shortages, perhaps with late delivery?
- Can we smooth the demand?
Overall approach of tactical planning
(Resoucre Requirement Planning)
 Step 1: Translate forecasts and other information into a demand for resources.
 Step 2: Find the resources currently available.
 Step 3: Identify gaps between resources needed and available.
 Step 4: Suggest alternative plans for overcoming any gaps.
 Step 5: Compare these plans and find the best.
 Step 6: Implement the best plan and monitor performance.

Example
A&B Coaches of Blackpool plan their capacity in terms of ‘coach-days’.
Forecasts show expected annual demands for the next two years to average 400,000 full-day
passengers and 750,000 half-day passengers.
A&B have 61 coaches, each with an effective capacity of 40 passengers a day for 300 days a
year. Breakdowns and other unexpected problems reduce efficiency to 90%.
They employ 86 drivers who work an average of 220 days a year, but illness and other absences
reduce their efficiency to 85%. If there is a shortage of coaches the company can buy extra ones

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for $110,000 or hire them for $100 a day. If there is a shortage of drivers they can recruit extra
ones at a cost of $20,000 a year, or hire them from an agency for $110 a day.
How can the company approach its tactical planning?
Solution:
Step 1: Translate forecasts and other information into a demand for resources
- 400,000 full-day passengers are equivalent to 400,000/40 = 10,000 coach days a year, or
10,000/300 = 33.33 coaches.
- 750,000 half-day passengers are equivalent to 750,000 / (40 × 300 × 2) = 31.25 coaches.
- Adding these two gives the total demand as 64.58 coaches. Each coach needs 300/220
drivers, so the company needs a total of 88.06 drivers.

Step 2: Find the resources currently available

- The company has 61 coaches, but the efficiency of 90% gives an availability of 61 × 0.9 =
54.9 coaches.
- There are 86 drivers, but an efficiency of 85% reduces this to 86 × 0.85 = 73.1 drivers.

Step 3: Identify mismatches between resources needed and available

Without details of the timing, we can only take overall figures. There is a total shortage of
64.58 – 54.9 = 9.68 coaches and 88.06 – 73.1 = 14.96 drivers

Step 4: Suggest alternative plans for overcoming any mismatches

Assuming that A&B do not want to reduce demand, they can either buy or hire coaches, and
employ drivers or hire them from an agency. The only information we have about these
alternatives are some costs.
- To buy 10 coaches would cost £1,100,000. To hire coaches to make up the shortage would
cost 9.68 × 300 × 100 = £290,400 a year. There is, of course, the alternative of buying some
coaches and hiring others.
- To hire 15 drivers would cost £300,000 a year, while using temporary drivers from an agency
would cost 14.96 × 220 × 110 = £362,032 a year. There is also the option of hiring some
drivers and making up shortages from an agency.

Step 5: Compare these plans and find the best

We do not have enough information to make the final decisions, and we have only outlined some
of the alternatives. This very limited analysis might suggest a reasonable solution of buying
eight coaches and making up any shortages by hiring, and hiring 12 drivers and making up the
shortage from the agency.
When these plans are finalised, A&B can start looking at more detailed plans. The next stage
would develop aggregate plans for types of journeys each month, perhaps showing the number
of continental journeys each month, and so on. Then they could break the aggregate plans into
master schedules of journeys each week, perhaps showing the number of journeys to the
Netherlands in the first week, and so on.

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IV. SHORT-TERM SCHEDULES

Short-term schedules give detailed timetables for jobs, people, materials, equipment and all
other resources.
The aim of these schedules is to organize the resources needed for the master schedule, giving
low costs, high utilizations, or achieving some other measure of performance.

Approaches to scheduling
- Backward scheduling, where schedulers know when a job has to be finished. Then they can
work back through all the activities to find the date when the job must be started.
- Forward scheduling, where schedulers know when a job can start. Then they can work
forward through all activities to find the date when the job will be finished.

Scheduling rules
Four scheduling rules for assigning jobs:
1. First Come, First Served (FCFS).
2. Most Urgent Job first (MUJ).
3. Shortest Job first (SJ).
4. Earliest Due Date first (EDD).

Example:
Zambrucci Transport has to schedule the following six jobs for a heavy lift crane. How can it
design a reasonable schedule?

FCFS rule:

Average time in system = Average finish time

The jobs are finished by day 52.
SJ rule:

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By day 36 this schedule has finished five journeys, while the FCFS schedule had only finished
three.
EDD rule:

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CHAPTER 4: CONTROLLING MATERIAL FLOW

I. MATERIAL REQUIREMENTS PLANNING (MRP)
- One drawback for planning logistics → slow to react to changing conditions. Ex: If a
customer urgently wants a delivery, we cannot tell them to wait until we fit them in to the
next planning cycle.
- Thus, planners need to take forecasts of demand for logistics, and then plan the supply to
meet this → But forecasts are often wrong.
- To solve these problems: Matching the supply of logistics to actual demand rather than using
unreliable forecasts.
 Material Requirements Planning (MRP) uses the master schedule to plan the supply of
materials.
Independent vs. Dependent Demand
- Independent demand:
o Final products: automobiles,
televisions, tables.
o Demand occurs at constant rate.
- Dependent Demand:
o Raw materials, components, and
subassemblies.
o Demand occurs in lumps.

Operations Planning

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Aggregate production plan (APP): long-term

Master production schedule (MPS): mid-term
Material requirements planning (MRP): short-term

MRP Approach
MRP comes from three main sources:
- Master schedule, giving the number of every product to be made in every period.
- Bill of materials, listing the materials needed for every product.
- Inventory records, showing the materials available.

Production Planning Hierarchy

Master production schedule (MPS)

- Based on the Aggregate Production Plan (APP).
- Indicates When and How many exact end items will be produced.

Example: The ATV Corporation makes three models: Model A, Model B, and Model C. ATV’s
MPS for January and February is as follows

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Bill of Materials (BOM)

- It is an ordered list of all the parts (i.e., raw materials, components, and assemblies) needed
to produce a product.
- It shows way a final product/parent item putting together from individual components.
- Final product is at level zero. Subsequent levels are parent components, then components.
- Production planners explode BOM for level zero item to determine the number, due dates,
and order dates of components.

Part of a BOM for an ATV

MPS: When and How many final products needed

BOM: 1 final product ⇒ how many materials needed
MPS+BOM ⇒ when and how many materials needed
⇒ Check inventory status/records for available materials

Inventory Records
It shows the materials available with On-hand inventory: the inventory at the end of the period.
On-hand inventory (period 𝒕) = Max{0, On-hand inventory (period 𝒕 − 𝟏)
+ Scheduled/Planned receipts (period 𝒕)
– Gross requirement (period 𝒕)}
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where:
- Scheduled/Planned receipts: a committed order awaiting delivery for a specific period.
- Gross requirement: a time-phased requirement prior to considering on-hand inventory and
lead time to obtain the product.

Gross requirement (period 𝒕) = Customer demand (period 𝒕) + Backlog (period 𝒕 − 𝟏)

MRP system use inventory records to determine the quantity available for use in a given period.
MRP Procedure

MRP Computation
To compute a dependent demand, it requires:
- independent demand information (the demand of the final product) from the MPS.
- parent–component relationships from the BOM.
- inventory records of the final product and all of its components.
Based on the information, the net requirements of the final product and components are
computed as follows:

Net requirements (period 𝒕) = Gross requirements (period 𝒕)

– On-hand invnetory (period 𝒕 − 𝟏)
– Scheduled/Planned receipts (periods  𝒕)

The net requirements are offset with appropriate lead times to ensure orders are released on time,
called planned order releases, the most important output of the MRP.
MRP Computation Procedure
Step 1: Use the MPS to find the Gross requirements for all time periods of level 0 items.

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Step 2: Compute the On-hand inventory, Net requirement (materials needed to order), and
Planned order receipt for level 0 items. If there is a Planned order receipt, use the Lead time and
any other relevant information to offset Planned order release.
Step 3: Take the next level. Use the BOM to translate the Net requirements from the previous
level into Gross requirements for this level.
Step 4: Take each material in turn and compute On-hand inventory, Net requirement, and
Planned order receipt for the level. Then if there are more levels of materials, go back to step 3.
Step 5: Finalise the timetable, adding any specific adjustments.

Example

Q: lot size: total quantity of a product ordered for manufacturing, với 1 số lượng order nhất định,
chỉ dc nhân lên (vd thiếu 10⇒mua 10, nhưng thiếu 12 thì phải mua 20)
LT: lead time (vd LT=2, nhận hàng ở tuần 5 thì phải đặt hàng ở tuần 3)
SS: safety stock: the least number of product which is stored in the warehouse to prevent an out-
of-stock situation.
Lot for lot: make order whatever we want

A Close-Loop MRP System

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Benefits of MRP
- Higher inventory turnover.
- Better customer service – limit delays caused by shortages of materials.
- More reliable and faster delivery times.
- Less time spent on expediting and emergency orders.
- Ability to track material requirements.
- Ability to evaluate capacity requirements.
- Ability to plan other logistics activities.
- Availability of production information providing visibility for schedulers to plan ahead.

Issues of MRP
- Reduces the flexibility to deal with changes.
- Needs a lot of detailed and reliable information.
- Becomes very complex.
- Does not recognize capacity and other constraints.
- Be expensive and time consuming to implement.
- Risks: quantity and lead time.
- Capacity limit.

Enterprise resource planning

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- By the end of the 20th century, the global business environment has changed.
- Additional tasks are required and the existing MRP systems could not handle these added
tasks.
- To deal with the tasks, ERP systems that operated from a single, centralized database were
engineered to replace the existing MRP systems.

II. JUST IN TIME (JIT)

Principles of JIT
- Just-in-time (JIT) systems organize materials to arrive just as they are needed (right time –
right place – right quantity).
- By coordinating supply and demand, they eliminate stocks/inventory of raw materials and
work in progress.
- JIT’s view of stock:
o Stocks are held to cover short-term mismatches between supply and demand.
o These stocks serve no useful purpose – they only exist because poor co-ordination
does not match the supply of materials to the demand.
o To improve operations, the reasons for differences between supply and demand are
needed to be found, and the differences are needed to be solved → No stock is needed
at all.

Inventory Hides Problems

Stock Levels with Types of Control

- Traditional method of stock control

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- MRP system

- JIT approach

Wider effects of JIT

- Quality: Organizations have defined some arbitrary level of acceptable quality.
o JIT recognizes that all defects have costs → find the cause and make sure that no
defects are produced → support the total quality management.
- Suppliers: JIT relies totally on its suppliers → supports the view of customers and suppliers
working closely together in long-term partnerships
- Batch size: Operations use large batch sizes to reduce set-up costs and disruptions.
o But if demand is low → the products made in large batches sit in stock for a long
time.
o JIT looks for ways of reducing the batch size so that it more closely matches demand.
- Lead times: Long lead times → high stocks to cover uncertainty until the next delivery.
o JIT aims for small, frequent deliveries with short lead times.

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- Reliability: JIT bases on continuous, uninterrupted production → all operations must be

reliable
o If equipment breaks down → managers must find the reasons and make sure it does
not happen again.
- Employees: organizations still have a friction between ‘managers’ and ‘workers’.
o JIT argues that the welfare of everyone depends on the success of the organization →
all employees should be treated fairly and equitably.
 JIT is not just a way of minimizing stocks. By coordinating all activities, it increases
efficiency and eliminates waste.

Achieving JIT Operations

- Push and pull systems
- Kanbans
- Advantages and disadvantages of JIT

Push and Pull Systems

- In a traditional process,
o each operation has a timetable of work that must be finished in a given time.
o Finished items are then ‘pushed’ through to form a stock of work in progress in
front of the next operation → this ignores what the next operation is actually doing.
o The result is delays and increased stock of work in progress.
- JIT uses another approach to ‘Pull’ work through the process.
o When one operation finishes work on a unit → it passes a message back to the
preceding operation to say that it needs another unit to work on.
o The preceding operation only passes materials forward when it gets this request.
o This process does not have earlier operations pushing work through, but has a later
operation pulling it through.

Kanbans (看板)
- JIT needs ways of organizing the flow of materials pulled through the process
- The simplest system moves materials between two stages in containers
o When the second stage needs some materials, it simply passes the empty container
back to the previous stage as a signal to fill it.

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- KANBANS are cards that control the flow of materials through JIT operations.
o Kanban is the Japanese for a card, or some form of visible record.
o They arrange the ‘pull’ of materials through a process.
o The most common way of using Kanbans is to use two cards:
 Production Kanban
 Conveyance/Movement Kanban

Example: Kanban Cards

Production Kanban: signals the need to produce more parts.

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Conveyance Kanban: signals the need to withdraw parts from one work center and deliver them
to the next work center.

Single-card Kanban System

- Each container must have a card.
- Assembly always withdraws from fabrication (Pull system).
- Containers cannot be moved without a Kanban.
- Containers should contain the same number of parts.
- Only good parts are passed along.
- Production should not exceed authorization.

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Advantages of JIT
- Lower stocks of raw materials and work in progress.
- Shorter lead times.
- Shorter time needed to make a product.
- Higher productivity.
- Higher equipment capacity and utilization.
- Less paperwork.
- Higher quality of materials and products.
- Less scrap and wastage.
- Better relations with suppliers.

Disadvantages of JIT
- High risks of introducing completely new systems and operations.
- Initial investment and cost of implementation.
- Long time needed to get significant improvements.
- Reliance on perfect quality of materials from suppliers.
- Reduced flexibility to meet specific, or changing, customer demands.
- Difficulty of reducing set-up times and associated costs.
- Lack of commitment within the organization.
- Lack of co-operation and trust between employees.
- Need to change layout of facilities.

III. LEAN AND SIX-SIGMA

Lean
- Lean has today replaced the use of the term JIT.
- Lean emphasizes the minimization of the amount of all the resources used in the operations
of a company.
- The principle of lean is the elimination of “waste”.
o by eliminating wastes of all sorts in the system,
o the lean approach lowers labor, materials, and energy costs of production.
- Lean also emphasizes building exactly the products customers want, exactly when they
need them.

Primary objectives of lean systems

- Produce only the products that customers want.
- Produce products only as quickly as customers want to use them.
- Produce products with perfect quality.
- Produce in the minimum possible lead times.
- Produce with no waste of labor, materials, or equipment; designate a purpose for every
movement to leave zero idle inventory.
- Produce with methods that reinforce the occupational development of workers.

Six-sigma

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- From statistics, the term “sigma” refers to

o standard deviation of values for the output of a process.
o an indicator of variability.
- The six-sigma approach is
o to achieve a process standard deviation that is six times smaller than the range of
outputs allowed by the product’s design specification.
o to design and improve products and processes so that variability is reduced → first
identifying sources of variability and then reducing them.
- Six Sigma (also Six Sigma Quality) is all about pleasing customers → A customer-oriented
definition of quality is the ability to satisfy customer expectations.

Six-sigma metric

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EXERCISE REVIEW
LOCATION FACILITY
Question 1. Company A wants to find the location for a logistics centre to deliver goods to 9
towns shown in the below figure. Based on the information, please answer the question:
a. Where would company A locate ONE logistics centre to give best customer service?
b. In case, company A wants to locate TWO logistics centres to serve their customers, where
would they locate the two centres which give a maximum journey of 20 minutes?

Question 2. Company B delivers goods to seven towns, with locations and demands as shown
in the Figure below.

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They need to find the location for a logistics centre that minimizes the average delivery time to
these towns. Where should they locate the centre?

PLANNING RESOURCES
Question 3. Company B has a supply chain system for its powdered milk products as follows:
• The processing plant has a capacity of 5,000 kg/day for 7 days/week. It fills standard boxes of
900g.
• The boxes are passed to two packing areas, each of which can form up to 250 cases/day with
10 boxes/case. The packing areas works a 7-day week.
• The cases are then taken to a warehouse by a transport company whose 5 trucks can each carry
50 cases and make up to 2 trips/day for 5 days/week.
• The warehouse can handle up to 3,000 cases/week.
What is the capacity of each member of the supply chain? Where is the bottleneck of the supply
chain? (unit: boxes/week)
5000 × 7
𝑃𝑟𝑜𝑐𝑒𝑠𝑠𝑖𝑛𝑔 𝑝𝑙𝑎𝑛𝑡: = 38888.9 𝑏𝑜𝑥𝑒𝑠/𝑤𝑒𝑒𝑘
0.9
𝑃𝑎𝑐𝑘𝑖𝑛𝑔 𝑎𝑟𝑒𝑎𝑠: 2 × 250 × 10 × 7 = 35000 𝑏𝑜𝑥𝑒𝑠/𝑤𝑒𝑒𝑘
𝑇𝑟𝑎𝑛𝑠𝑝𝑜𝑟𝑡 𝑐𝑜𝑚𝑝𝑎𝑛𝑦: 50 × 10 × 5 × 2 × 5 = 25000 𝑏𝑜𝑥𝑒𝑠/𝑤𝑒𝑒𝑘
𝑊𝑎𝑟𝑒ℎ𝑜𝑢𝑠𝑒: 3000 × 10 = 30000 𝑏𝑜𝑥𝑒𝑠/𝑤𝑒𝑒𝑘
As the transport company has the smallest capacity with 25000 boxes/week, it is the bottle neck

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MIDTERM 2021
Question 1. (15 marks) There are several strategies for capacity expansion timing, by which
the management expands the capacity to match customer demand growth. Please describe
these 3 strategies with pros and cons of each.
Lead strategy
The lead strategy is the most aggressive approach because it involves an upfront investment to
increase capacity. For an attraction, this might translate to hiring more staff or buying more
equipment before an actual increase in guest demand.
This strategy is based on the assumption that your attraction will have a larger booking volume
than you currently have or have had in the past.
Advantage: This strategy takes care of anticipated demand increases. It helps in gaining the
market share higher than the competitors and helps in enhancing revenues by attracting a
higher number of customers during the peak demand period.
Disadvantage: The capacity remains idle during the period of low demand.
Lag strategy
The Lag Strategy is much more conservative than the Lead Strategy as it waits until the
current capacity is stretched to its limits before adding more capacity. In this strategy,
manufacturers respond to an actual increase in demand and boost capacity after the current
operation runs in full steam.
Advantage: It helps in utilizing the available capacity to 100%. This enhances the productivity
of workers, machines and other factors of production. The manufacturer is able to gain
maximum profit with the available capacity.
Disadvantage: When the demand arises and when the capacity available for the production is
insufficient for meeting the enhanced demand then it becomes difficult for the manufacturer to
increase the capacity of the plant and the company may lose the opportunity to capture the
market share.
Match strategy
Match strategy is adding capacity in small amounts in response to changing demand in the
market. This is a more moderate strategy.
Advantages: It helps in tapping the market share according to the demand of the customers.
This helps in preventing the wastage of the capacity.
Disadvantage: It leads to the frequent investment of the cost in enhancing the capacity.
Question 2. (25 marks) What are 2 basic ways of short-term scheduling? Provide short
definitions.

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An industrial printing machine has 8 projects to print with the processing time and deadline
(from now) as in the Table 1 below. Complete short-term schedules for these machine and
evaluation measurements in Table 2.

“First come, first served” rule “Earliest due date first” rule
Project Duration Start Finish Lateness Project Duration Start Finish Lateness
Mercury 2 0 2 0 Venus 5 0 5 0
Venus 5 2 7 2 Earth 3 5 8 1
Earth 3 7 10 3 Jupiter 4 8 12 4
Mars 8 10 18 0 Saturn 12 12 24 12
Jupiter 4 18 22 14 Mercury 2 24 26 13
Neptune 7 22 29 15 Neptune 7 26 33 19
Uranus 10 29 39 21 Uranus 10 33 43 25
Saturn 12 39 51 39 Mars 8 43 51 21
Average time in system: 22.25 hours Average time in system: 25.25 hours
Average lateness: 11.75 hours Average lateness: 11.875 hours

Question 3. (20 marks)

The bottle suppliers provide Coca – Cola company 200,000 empty bottles per week. The
company brings those bottles to the filling up area. There are 300 faucets to fill up the coke,
one faucet can fill up 1,000 bottles per week. The coke bottles after filling up will be delivered
to packing area. 6 bottles will be packed in one case. Packing area can form up to 3,000 cases
a day, and works 6 days per week. The cases are delivered to the warehouse by 6 trucks which
can carry 300 cases each, they work 4 days per week and 4 trips per day. The warehouse
systems and the local deliveries are made from the warehouse can handle all the cases
delivered from the packing area. Find the bottle neck of the system. What is the overall
capacity of the system?
𝐵𝑜𝑡𝑡𝑙𝑒 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑟𝑠: 200,000 bottles/week
𝐹𝑖𝑙𝑙𝑖𝑛𝑔 𝑢𝑝 𝑎𝑟𝑒𝑎: 300 × 1000 = 300,000 𝑏𝑜𝑡𝑡𝑙𝑒𝑠/𝑤𝑒𝑒𝑘
𝑃𝑎𝑐𝑘𝑖𝑛𝑔 𝑎𝑟𝑒𝑎: 6 × 3000 × 6 = 108,000 𝑏𝑜𝑡𝑡𝑙𝑒𝑠/𝑤𝑒𝑒𝑘
𝐷𝑒𝑙𝑖𝑣𝑒𝑟𝑦: 6 × 300 × 6 × 4 × 4 = 172,800 𝑏𝑜𝑡𝑡𝑙𝑒𝑠/𝑤𝑒𝑒𝑘

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 lOMoARcPSD|31954683

We know that the capacity of the warehouse can handle all the cases delivered from packing
area.
So the capacity of the packing area is the smallest with 108,000 bottles/week, so this is the
bottle neck of the system.
Overall capacity: 200,000 + 300,000 + 108,000 + 172,800 =780,800 bottles/week

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