ASSIGNMENT NICMAR - SODE (PGPPM)

1.

Name

Ashutosh Kumar

2.

Reg. No. 2141

212-08-31-10966-

3.

Course No.

PGPM 31

4.

Course Tit e

AN$

MAT!R"A#

#%G"&T"C MANAG!M!NT

CONTENTS
I. II. III. I#. #. #I. #II. Materials management - Definition Goal & Quality control in Material management Enterprise esource !lanning & "ill of Materials Costs in Material management $ogistics management !ro%uction& Military & T'ir% party logistics (are'ouse management

#III. In)entory control & management I*. Supply c'ain management-Definition& issues& mo%els & uses *. eferences

Materia s Ma'ageme't
Definition: Materials Management can be defined as that function of business that is responsible for the coordination of planning, sourcing, purchasing, moving, storing and controlling materials in an optimum manner so as to provide service to the customer, at a pre-decided level at a minimum cost. Meaning: It is a business function for planning, purchasing, moving, storing material in a optimum way which help organi ation to minimi e the various costs li!e inventory cost, material handling cost and distribution cost. Materia s ma'ageme't is the branch of logistics that deals with the tangible components of a supply chain. "pecifically, this covers the ac#uisition of spare parts and replacements, #uality control of purchasing and ordering such parts, and the standards involved in ordering, shipping, and warehousing the said parts. Areas o( Co')e'tratio' $oals % &b'ectives of material management: (hree basic ob'ectives are )uying*purchasing "torage Movement (he goal of materials management is to consolidate and efficiently handle core services. It creates truc! deliveries and service vehicle routes that reduce conflicts for vehicles and pedestrians. Delivery sites and loading doc!s are more effective and reduce redundancy. +ost is reduced when it comes to solid and ha ardous waste removal, storage, and recycling. ,tility infrastructure and service e#uipment relocation can improve aesthetics. Buying/purchasing: -ay low price for best .alue obtain, /egotiation, .endor selection, 0ight #uality on right time Storage: Minimi ing transport and handling cost, 1de#uate % proper "torage and preservation, "tore as per re#uirement Movement/Distribution: Distribution of finished goods to customer, Disposal of raw material PR"MAR* %+,!CT"-!&. 2ow price 3igh inventory turn over 2ow cost ac#uisition and possession +ontinuity of supply +onsistency of #uality 4

 5avorable supplier relation $ood record

&!C%N$AR* %+,!CT"-!&. /ew materials and products 6conomic ma!e- or- buy "tandardi ation -roduct improvement Interdepartmental harmony 5orecasts

"MP%RTANC! %/ MAT!R"A# MANAG!M!NT 2ower prices for material % e#uipment 5asten inventory turnover +ontinuity of supply 0educe transportation cost 0educe material obsolesce )etter inter-departmental cooperation

&)o0e o( Materia ma'ageme't. 6mphasi e the ac#uisition aspect7 Inventory control and stores management, (o materials logistics, movement control and handling aspects. -urchasing, supply, transportation, materials handling etc., "upply management8 or 9logistics management8 +overs all the interrelate activities concerned with materials

M!R"T& %/ MAT!R"A# MANAG!M!NT 3elps to save cost 6fficiency in wor! )est control over inventory )est utili ation of resources 0educe fault and damages

$!M!R"T& %/ MAT!R"A# MANAG!M!NT +ontinuous observation is re#uired It re#uires good infrastructure facility which may need huge investment 6:tra man power can re#uired

1ua it2 Assura')e 1 large component of materials management is ensuring that parts and materials used in the supply chain meet minimum re#uirements by performing #uality assurance <=1>. ?hile most of the writing and discussion about materials management is on ac#uisition and standards, much of the day to day wor! conducted in materials management deals with =1 issues. -arts and material are tested, both before purchase orders are placed and during use, to ensure there are no short or long term issues that would disrupt the supply chain. (his aspect of material management is most important in heavily automated industries, since failure rates due to faulty parts can slow or even stop production lines, throwing off timetables for production goals. "tandards (he other ma'or component of materials management will be gradual movement toward compliance. (here are standards that are followed in supply chain management that are important to a supply chain@s function. 5or e:ample, a supply chain that uses A 'ust-intimeB <CI(>or lean replenishment re#uires clarity. in the shipping of parts and material from purchasing agent to warehouse to place of destination. "ystems reliant on vendormanaged inventories may begin to ac#uire up-to-date computeri ed inventories and begin to e:plore robust ordering systems for outlying vendors to place orders on. Promoti'g &ustai'a3i it2 Many business and institutional campuses have cluttered, noisy, and oftentimes inefficient service environments. Delivery truc!s compete with pedestrians, loading doc!s are in plain sight, trash dumpsters sprout up, and lobbies, hallways, and stairwells are cluttered with unplanned storage. ?ith forethought and creativity, these systems can reduce energy use and carbon emissions, minimi e traffic congestion, streamline operational flows, and enhance esthetics. "m0ro4i'g Cir)u atio' "'(rastru)ture 0edundancy can be reduced and effectiveness is increased when service points are clustered to reduce the amount of redundancy. 1n effective materials management program can also resolve AislandB approaches to shipping, receiving, and vehicle movement. "olutions can include creating a new central loading location, as well consolidating service areas and doc!s from separate buildings into one. Developing better campus circulation infrastructure also means re-evaluating truc! delivery and service vehicle routes. .ehicle type, si e, and schedules are studied to ma!e these more compatible with surrounding neighborhoods. (his will reduce truc! traffic, creating a safer environment for pedestrians and a more attractive environment for other uses. Materia s Ma'ageme't 5ee6 6ach year, an entire wee! is dedicated to celebrating resource and materials management professionals for their outstanding contributions to healthcare and the overall success of the supply chain. "ponsored by the 1ssociation for 3ealthcare 0esource % Materials Management <130MM>, /ational 3ealthcare 0esource % Materials Management ?ee! <MM ?ee!> provides an opportunity to recogni e the integral role materials management professionals play in delivering high-#uality patient care throughout the health care industry. In 2D1D Material Management ?ee! is &ctober ;-1D &ctober. E

+e'e(its 1n effective materials management plan builds from and enhances an institutional master plan by filling in the gaps and producing an environmentally responsible and efficient outcome. 1n institutional campus, office, or housing comple: can e:pect a myriad of benefits from an effective materials management plan. 5or starters, there are long-term cost savings, as consolidating, reconfiguring, and better managing a campus8 core infrastructure reduces annual operating costs. 1n institutional campus, office, or housing comple: will also get the highest and best use out of campus real estate. 1n effective materials management plan also means a more holistic approach to managing vehicle use and emissions, solid waste, ha ardous waste, recycling, and utility services. 1s a result, this means a Agreener,B more sustainable environment and a manifestation of the many demands today for institutions to become more environmentally friendly. In fact, than!s to such environmental advantages, creative materials management plans may #ualify for 266D Innovation in Design credits. 1nd finally, an effective materials management plan can improve aesthetics. 0emoving unsafe and unsightly conditions, placing core services out of sight, and creating a more pedestrian-friendly environment will improve the visual and physical sense of place for those who live and wor! there. $re7ge7 Materia Ma'ageme't (hree management alternatives may be considered for dredged material: open-water disposal confined <di!ed> disposal, and beneficial use. &pen-water disposal is the placement of dredged material in rivers, la!es, estuaries, or oceans via pipeline or release from hopper dredges or barges. +onfined disposal is placement of dredged material within di!ed near shore or upland confined disposal facilities via pipeline or other means. -otential environmental impacts resulting from dredged material disposal may be physical, chemical, or biological in nature. )ecause many of the waterways are located in industrial and urban areas, sediments often contain contaminants from these sources. ,nless properly managed, dredging and disposal of contaminated sediment can adversely affect water #uality and a#uatic or terrestrial organisms. "ound planning, design, and management of pro'ects are essential if dredged material disposal is to be accomplished with appropriate environmental protection and in an efficient manner. +e'e(i)ia 8se 1D broad categories of beneficial uses have been identified, based on the functional use of the dredged material. (hey are: 3abitat restoration*enhancement <wetland, upland, island, and a#uatic sites including use by waterfowl and other birds>. )each nourishment. 1#uaculture. -ar!s and recreation <commercial and noncommercial>. 1griculture, forestry, and horticulture.

"trip mine reclamation and landfill cover for solid waste management. "horeline stabili ation and erosion control <fills, artificial reefs, submerged berms, etc.>. +onstruction and industrial use <including port development, airports, urban, and residential>. Material transfer <fill, di!es, leaves, par!ing lots, and roads>. Multiple purpose

MAT!R"A#& MANAG!M!NT
"N-!NT%R* C%NTR%# &*&T!M. 1 good inventory management system has always been important in the wor!ings of an effective supply chain. /ew technologies and collaborative methods of wor!ing with trading partners will revolutioni e this practice. (hose who embrace, implement, lead and master these new technologies and inventory management system methods will develop a significant competitive edge over rival firms in the mar!etplace. (o be used to effectively manage products within the supply chain, the "upply +hain Management inventory management system must have accurate product information in it. T9o +i' &2stems..(he two-bin system is e:actly that--a system that re#uires two storage containers. (he containers will each hold a predetermined #uantity of the same material. (he #uantities may be the same, or one may hold a larger #uantity than the other. T9o 3i's o( items are )reate7.G (he first bin is stac!ed on top of, or in front of, the second bin. G 1 reorder card is placed on the bottom of each bin. G Material is drawn from the first <or most accessible> bin only. G ?hen the first bin is empty, it is e:changed with the second bin. G (he reorder card is used to replace items in the first bin. G Material is then drawn from the second bin while waiting for receipt of the material on order. G ?hen the new material arrives, it is placed in the empty bin, and the reorder card is returned to its proper place in the bin. H

G (he procedure is continued, with material being selected from one bin until it is depleted. (he material is then replenished through use of the reordering card. 1s long as the #uantity of the material in each bin is the same, you can continue to deplete one bin7 place the order for the replenishment amount, then deplete the second bin, and so forth. 3owever, if the second bin has a smaller #uantity of material than the first bin <there may be an advantage in doing this if the material is e:pensive and you do not want to have a high volume of material in stoc! when issuing are placement order>, then the #uantity in the second bin <called the reorder point #uantity> must be sufficient to cover the time re#uired to receive the material <ordering lead time>. /or e:am0 e; if it ta!es 2 wee!s to receive new material, then the second bin must contain at least a 2-wee! supply of that material. ?hen the new material comes in, someone must withdraw a sufficient amount of material to replenish the reorder point #uantity in the second bin, and then place the balance of the received material into the first bin. ,sers will then withdraw material from that bin. (he two-bin system is a simple procedure, mainly because we are not relying on a computer to tell us when to order. Instead, we are relying on our own eyes. (raining is necessary to ensure that warehouse personnel !now to reorder material when one bin is empty. /ot doing training will li!ely lead to unanticipated stoc! outs. (he ris! of stoc! outs can also be reduced through periodic audits of the items in the warehouse. "uch audits can, for e:ample, discover instances in which only one bin contains material, yet both reorder cards are still visible. In such cases, some type of action needs to be ta!en immediately to avoid a stoc! out. (he only analysis re#uired in the two-bin system is the reorder point #uantity to be placed in the second bin. Most companies are overly conservative with this #uantity because they are fearful of running out of stoc!. 1s a result, they set this reorder point #uantity too high, so material arrives before it is actually needed. 3owever, it is easy to periodically review the reorder point #uantities and ad'ust when necessary. (he easiest way to do this is to count the number of items remaining in the second bin when the new items arrive. If the remaining #uantity e:ceeds a few days@ supply and vendor deliveries are relatively consistent, the reorder point #uantity should be reduced. Do this by reducing the #uantity of material in the second bin.

(he two-bin system is easy to implement and maintain, and it is typically 'ust as

/or e:am0 e; if it ta!es 2 wee!s to receive new material, then the second bin must contain at least a 2-wee! supply of that material. ?hen the new material comes in, someone must withdraw a sufficient amount of material to replenish the reorder point #uantity in the second bin, then place the balance of the received material into the first bin. ,sers will then withdraw material from that bin. (he two-bin system is a simple procedure, mainly because we are not relying on a computer to tell us when to order. Instead, we are relying on our own eyes. (raining is I

necessary to ensure that warehouse personnel !now to reorder material when one bin is empty. /ot doing training will li!ely lead to unanticipated stoc! outs. (he ris! of stoc! outs can also be reduced through periodic audits of the items in the warehouse. "uch audits can, for e:ample, discover instances in which only one bin contains material, yet both reorder cards are still visible. In such cases, some type of action needs to be ta!en immediately to avoid a stoc! outs. (he only analysis re#uired in the two-bin system is the reorder point #uantity to be placed in the second bin. Most companies are overly conservative with this #uantity because they are fearful of running out of stoc!. 1s a result, they set this reorder point #uantity too high, so material arrives before it is actually needed. 3owever, it is easy to periodically review the reorder point #uantities and ad'ust when necessary. (he easiest way to do this is to count the number of items remaining in the second bin when the new items arrive. If the remaining #uantity e:ceeds a few days@ supply and vendor deliveries are relatively consistent, the reorder point #uantity should be reduced. Do this by reducing the #uantity of material in the second bin. (he two-bin system is easy to implement and maintain, and it is typically 'ust as effective as any comple: computer driven system used to reorder parts.

!%1 .Inventory models for calculating optimal order #uantities and reorder points have been in e:istence long before the arrival of the computer. ?hen the first Model ( 5ords were rolling off the assembly line, manufacturers were already reaping the financial benefits of inventory management by determining the most cost effective answers to the #uestions of whenJ % how muchJ Kes long before CI(, (=M, (&+, and M0-, companies were using these same <then unnamed> concepts in managing their production and inventory. I recently read -urchasing and "toring, a te:tboo! that was part of a AModern )usiness +ourseB at the 1le:ander 3amilton Institute in /ew Kor!. (he te:tboo! published in 1L41 <that8s right 1L41> was essentially a how to boo! on inventory management in a manufacturing environment. If you8re wondering why I would want to read a HD-year-old business te:t, my answer would be that the fundamental concepts of managing a business change very little with time, and reading about these concepts in a vintage te:t is a great way to reinforce the value of the fundamentals. (he occasional reference to A(he ?arB <referring to ??I> also !eeps it interesting and the complete absence of acronyms is refreshing. 1s you may have guessed, this HD-year-old boo! contained a section on Minimum +ost =uantity, which is what we now refer to as 6conomic &rder =uantity <6&=>. I can imagine that in the 1L4D8s an accountant <or more li!ely a room full of accountants> would have calculated 6&= or other inventory related formulas one item at a time in a dimly lit office using the inventory boo!s, a mechanical adding machine and a slide rule. (ime consuming as this was, some manufacturers of the time recogni ed the financial benefits of ta!ing a scientific approach to ma!ing these inventory decisions.

"o why is it that, in these days of advanced information technology, many companies are still not ta!ing advantage of these fundamental inventory modelsJ -art of the answer lies in poor results received due to inaccurate data inputs. 1ccurate product costs, activity costs, forecasts, history, and lead times are crucial in ma!ing inventory models wor!. Ironically, software advancements may also in part to blame. Many 60- pac!ages come with built in calculations for 6&= which calculate automatically. &ften the users do not understand how it is calculated and therefore do not understand the data inputs and system setup which controls the output. ?hen the output appears to be Mout of whac!M it is simply ignored. (his sometimes creates a situation in which the e:ecutives who had purchased the software incorrectly assume the material planners and purchasing cler!s are ordering based upon the systems recommendations. I should also note that many operations will find these built-in 6&= calculations inade#uate and in need of modifications to deal with the diversity of their product groups and processes. +orporate goals and strategies may sometimes conflict with 6&=. Measuring performance solely by inventory turns is one of the most prolific mista!es made in the name of inventory management. Many companies have achieved aggressive goals in increasing inventory turns only to find their bottom line has shrun! due to increased operational costs. 6&= is essentially an accounting formula that determines the point at which the combination of order costs and inventory carrying costs are the least. (he result is the most cost effective #uantity to order. In purchasing this is !nown as the order #uantity, in manufacturing it is !nown as the production lot si e. ?hile 6&= may not apply to every inventory situation, most organi ations will find it beneficial in at least some aspect of their operation. 1nytime you have repetitive purchasing or planning of an item, 6&= should be considered. &bvious applications for 6&= are purchase-to-stoc! distributors and ma!e-to-stoc! manufacturers, however, ma!eto-order manufacturers should also consider 6&= when they have multiple orders or release dates for the same items and when planning components and sub-assemblies. 0epetitive buy maintenance, repair, and operating <M0&> inventory is also a good application for 6&=. (hough 6&= is generally recommended in operations where demand is relatively steady, items with demand variability such as seasonality can still use the model by going to shorter time periods for the 6&= calculation. Cust ma!e sure your usage and carrying costs are based on the same time period. Doesn8t 6&= conflict with Cust-In-(imeJ ?hile I don8t want to get into a long discussion on the misconceptions of what Cust-In-(ime <CI(> is, I will address the most common misunderstanding in which CI( is assumed to mean all components should arrive in the e:act run #uantities A'ust in timeB for the production run. CI( is actually a #uality initiative with the goal of eliminating wasted steps, wasted labor, and wasted cost. 6&= should be one of the tools used to achieve this. 6&= is used to determine which components fit into this CI( model and what level of CI( is economically advantageous for your operation. 1s an e:ample, let us assume you are a lawn e#uipment manufacturer and you produce 1DD units per day of a specific model of lawn mower. ?hile it may be cost effective to have 1DD engines arrive on your doc! each day, it would certainly not be cost effective to have EDD screws <1 days supply> used to mount a plastic housing on the lawn

1D

mower shipped to you daily. (o determine the most cost effective #uantities of screws or other components you will need to use the 6&= formula. (he basic 6conomic &rder =uantity <6&=> formula is as follows:

The "'0uts
?hile the calculation itself is fairly simple the tas! of determining the correct data inputs to accurately represent your inventory and operation is a bit of a pro'ect. 6:aggerated order costs and carrying costs are common mista!es made in 6&= calculations. ,sing all costs associated with your purchasing and receiving departments to calculate order cost or using all costs associated with storage and material handling to calculate carrying cost will give you highly inflated costs resulting in inaccurate results from your 6&= calculation. I also caution against using benchmar!s or published industry standards in calculations. I have fre#uently seen references to average purchase order costs of N1DD to N1ED in maga ine articles and product brochures. &ften these references trace bac! to studies performed by advocacy agencies wor!ing for business that directly benefit from these e:aggerated <my opinion> costs used in 0&I calculations for their products or services. I am not denying that some operations may have purchase costs in this range, especially if you are fre#uently re-sourcing, re-#uoting, and*or buying from overseas vendors. 3owever if your operation is primarily involved with repetitive buying from domestic vendors O which is more common O you8ll li!ely see your purchase order costs in the substantially lower N1D to N4D range. 1s you prepare to underta!e this pro'ect !eep in mind that even though accuracy is crucial, small variances in the data inputs generally have very little effect on the outputs. (he following brea!s down the data inputs in more detail and gives insight into the aspects of each. A''ua 8sage. 6:pressed in units, this is generally the easiest part of the e#uation. Kou simply input your forecasted annual usage. %r7er Cost. 1lso !nown as purchase cost or set up cost, this is the sum of the fi:ed costs that are incurred each time an item is ordered. (hese costs are not associated with the #uantity ordered but primarily with physical activities re#uired to process the order. 5or purchased items, these would include the cost to enter the purchase order and*or re#uisition, any approval steps, the cost to process the receipt, incoming inspection, invoice processing and vendor payment, and in some cases a portion of the inbound freight may also be included in order cost. It is important to understand that these are costs associated with the fre#uency of the orders and not the #uantities ordered. 5or e:ample, in your receiving department the time spent chec!ing in the receipt, entering the receipt, and doing any other related paperwor! would be included, while the time spent repac!ing 11

materials, unloading truc!s, and delivery to other departments would li!ely not be included. If you have inbound #uality inspection where you inspect a percentage of the #uantity received you would include the time to get the specs and process the paperwor! and not include time spent actually inspecting, however if you inspect a fi:ed #uantity per receipt you would then include the entire time including inspecting, repac!ing, etc. In the purchasing department you would include all time associated with creating the purchase order, approval steps, contacting the vendor, e:pediting, and reviewing order reports, you would not include time spent reviewing forecasts, sourcing, getting #uotes <unless you get #uotes each time you order>, and setting up new items. 1ll time spent dealing with vendor invoices would be included in order cost. 1ssociating actual costs to the activities associated with order cost is where many an 6&= formula runs afoul. Do not ma!e a list of all of the activities and then as! the people performing the activities Mhow long does it ta!e you to do thisJM (he results of this type of measurement are rarely even close to accurate. I have found it to be more effective to determine the percentage of time within the department consumed performing the specific activities and multiplying this by the total labor costs for a certain time period <usually a month> and then dividing by the line items processed during that same period. It is e:tremely difficult to associate inbound freight costs with order costs in an automated 6&= program and I suggest it only if the inbound freight cost has a significant effect on unit cost and its effect on unit cost varies significantly based upon the order #uantity. In manufacturing, the order cost would include the time to initiate the wor! order, time associated with pic!ing and issuing components e:cluding time associated with counting and handling specific #uantities, all production scheduling time, machine set up time, and inspection time. -roduction scrap directly associated with the machine setup should also be included in order cost as would be any tooling that is discarded after each production run. (here may be times when you want to artificially inflate or deflate set-up costs. If you lac! the capacity to meet the production schedule using the 6&=, you may want to artificially increase set-up costs to increase lot si es and reduce overall set up time. If you have e:cess capacity you may want to artificially decrease set up costs, this will increase overall set up time and reduce inventory investment. (he idea being that if you are paying for the labor and machine overhead anyway it would ma!e sense to ta!e advantage of the savings in reduced inventories. 5or the most part, order cost is primarily the labor associated with processing the order7 however, you can include the other costs such as the costs of phone calls, fa:es, postage, envelopes, etc. Carr2i'g )ost. 1lso called 3olding cost, carrying cost is the cost associated with having inventory on hand. It is primarily made up of the costs associated with the inventory investment and storage cost. 5or the purpose of the 6&= calculation, if the cost does not change based upon the #uantity of inventory on hand it should not be included in carrying cost. In the 6&= formula, carrying cost is represented as the annual cost per average on hand inventory unit. )elow are the primary components of carrying cost.

12

Interest. If you had to borrow money to pay for your inventory, the interest rate would be part of the carrying cost. If you did not borrow on the inventory, but have loans on other capital items, you can use the interest rate on those loans since a reduction in inventory would free up money that could be used to pay these loans. If by some miracle you are debt free you would need to determine how much you could ma!e if the money was invested. Insurance. "ince insurance costs are directly related to the total value of the inventory, you would include this as part of carrying cost. (a:es. If you are re#uired to pay any ta:es on the value of your inventory they would also be included. &torage Costs. Mista!es in calculating storage costs are common in 6&= implementations. $enerally companies ta!e all costs associated with the warehouse and divide it by the average inventory to determine a storage cost percentage for the 6&= calculation. (his tends to include costs that are not directly affected by the inventory levels and does not compensate for storage characteristics. +arrying costs for the purpose of the 6&= calculation should only include costs that are variable based upon inventory levels. If you are running a pic!*pac! operation where you have fi:ed pic!ing locations assigned to each item where the locations are si ed for pic!ing efficiency and are not designed to hold the entire inventory, this portion of the warehouse should not be included in carrying cost since changes to inventory levels do not effect costs here. Kour overflow storage areas would be included in carrying cost. &perations that use purely random need to classify your inventory based upon a ratio of storage space re#uirements to value in order to assess storage costs accurately. 5or e:ample, let@s say you have 'ust storage for their product would include the entire storage area in the calculation. 1reas such as shipping*receiving and staging areas are usually not included in the storage calculations. 3owever. if you have to add an additional warehouse 'ust for overflow inventory then you would include all areas of the second warehouse as well as freight and labor costs associated with moving the material between the warehouses. "ince storage costs are generally applied as a percentage of the inventory value you may open a new 6-business called M)obs?e"ell6verything.comM. Kou calculated that overall your annual storage costs were EP of your average inventory value, and applied this to your entire inventory in the 6&= calculation. Kour average inventory on a particular piece of software and on ID lb. bags of concrete mi: both came to N1D,DDD. (he 6&= formula applied a NEDD storage cost to the average #uantity of each of these items even though the software actually too! up only 1 pallet position while the concrete mi: consumed HE pallet positions. +ategori ing these items would place the software in a category with minimal storage costs <1P or less> and the concrete in a category with e:treme storage costs <EDP> that would then allow the 6&= formula to wor! correctly. (here are situations where you may not want to include any storage costs in your 6&= calculation. If your operation has e:cess storage space of which it has no other uses you may decide not to include storage costs since reducing your inventory does not provide 14

any actual savings in storage costs. 1s your operation grows near a point at which you would need to e:pand your physical operations you may then start including storage in the calculation. 1 portion of the time spent on cycle counting should also be included in carrying cost, remember to apply costs which change based upon changes to the average inventory level. "o with cycle counting, you would include the time spent physically counting and not the time spent filling out paperwor!, data entry, and travel time between locations. &ther costs that can be included in carrying cost are ris! factors associated with obsolescence, damage, and theft. Do not factor in these costs unless they are a direct result of the inventory levels and are significant enough to change the results of the 6&= e#uation. -ariatio's (here are many variations on the basic 6&= model. I have listed the most useful ones below. =uantity discount logic can be programmed to wor! in con'unction with the 6&= formula to determine optimum order #uantities. Most systems will re#uire this additional programming. 1dditional logic can be programmed to determine ma: #uantities for items sub'ect to spoilage or to prevent obsolescence on items reaching the end of their product life cycle. ?hen used in manufacturing to determine lot si es where production runs are very long <wee!s or months> and finished product is being released to stoc! and consumed*sold throughout the production run you may need to ta!e into account the ratio of production to consumption to more accurately represent the average inventory level. Kour safety stoc! calculation may ta!e into account the order cycle time that is driven by the 6&=. If so, you may need to tie the cost of the change in safety stoc! levels into the formula. "m0 eme'ti'g !%1 (here are primarily two ways to implement 6&=. )oth methods obviously re#uire that you have already determined the associated costs. (he simplest method is to set up your calculation in a spreadsheet program, manually calculate 6&= one item at a time, and then manually enter the order #uantity into your inventory system. If your inventory has fairly steady demand and costs and you have less than one or two thousand "Q,s you can probably get by using this method once per year. If you have more than a couple thousand "Q,s and*or higher variability in demand and costs you will need to program the 6&= formula into your e:isting inventory system. (his allows you to #uic!ly re-calculate 6&= automatically as often as needed. Kou can also use a hybrid of the two systems by downloading your data to a spreadsheet or database program, perform the calculations and then update your inventory system either manually or through a batch program. ?hichever method you use you should ma!e sure to follow the following steps:

1;

(est the formula. -rior to final implementation you must test the programming and setup. 0un the 6&= program and then manually chec! the results using sample items that are representative of the variations of your inventory base. Pro<e)t Resu ts. Kou@ll need to run a simulation or use a representative sampling of items to determine the overall short-term and long-term effects the 6&= calculation will have on warehouse space, cash flow, and operations. Dramatic increases in inventory levels may not be immediately feasible, if this is the case you may temporarily ad'ust the formula until arrangements can be made to handle the additional storage re#uirements and compensate for the effects on cash flow. If the pro'ection shows inventory levels dropping and order fre#uency increasing, you may need to evaluate staffing, e#uipment, and process changes to handle the increased activity. Maintain 6&=. (he values for &rder cost and +arrying cost should be evaluated at least once per year ta!ing into account any changes in interest rates, storage costs, and operational costs. 1 related calculation is the (otal 1nnual +ost calculation. (his calculation can be used to prove the 6&= calculation. Tota A''ua Cost = >?a''ua usage i' u'its@A?or7er Bua'tit2@?or7er )ost@C D E>.F?or7er Bua'tit2@D?sa(et2 sto)6@CG?a''ua )arr2i'g )ost 0er u'it@H (his formula is also very useful when comparing #uotes where vendors offer different minimum order #uantities, price brea!s, lead times, transportation costs. ,se itR (he 6&= calculation is M3ard "cienceM, if you have accurate inputs the output is the most cost-effective #uantity to order based upon your current operational costs. (o further increase inventory turns you will need to reduce the order costs. 6-procurement, vendor-managed inventories, bar coding, and vendor certification programs can reduce the costs associated with processing an order. 6#uipment enhancements and process changes can reduce costs associated with manufacturing set up. Increasing forecast accuracy and reducing lead times which result in the ability to operate with reduced safety stoc! can also reduce inventory levels. &ite store a'7 Re0orti'g. Storage fulfills valuable functions. It provides a break in the supply and transportation Chain and/or the transit and consumption chain and is essential to participants operating in specific markets in a number of !ays: 1. "torage allows the accumulation of larger #uantities of material giving possible 1dvantages in economies of scale. 2. "torage can provide a security of supply, particularly in the case of imported cement that is shipped considerable distance to meet seasonal demands. 4. "torage during off-pea!s periods allow manufacturing plants to operate throughout the year as demand for cement follows seasonal patterns. 1E

;. "torage may present opportunities for mar!et manipulation under certain +ircumstances. ?hile the value of storage as a mar!eting tool is not in doubt, the choice of which type of storage to select for a specific purpose is less clear-cut. The storage (a)i it2Is 7esig'; s0e)i(i)atio's a'7 re) aim s2stems 7e0e'7 o' a 'um3er o( (a)tors. 1. -rotecting materials from the elements and environment protection. 2. -roduct storage time - depending on annual throughput, it is important to select a reclaim system best suited to specific operations since the cost to load and reclaim the product adds a substantial investment to the storage installation 4. (he amount of product to be stored at a given time - certain storage designs are particularly economical for larger #uantities. ;. (he amount of land space available for storage

(he primary concern for storing -ortland cement is to prevent e:posure to moisture. +ement stored in damp air or moisture sets more slowly and has less strength than cement that is !ept dry. )agged cement stored on a 'ob site should be stac!ed closely together on pallets to reduce air circulation and to raise the cement above any moisture sources7 it should also be covered with tarpaulins or other water-proof covers for further protection from moisture. If possible, store cement inside a structure to further reduce the potential for moisture e:posure, but never place the cement directly ne:t to an e:terior wall. (he relative humidity within the structure should be reduced as much as possible. )ul! storage of cement in silos is the preferred method of storing cement for concrete production. (he following recommendations can ensure the safe, clean and trouble-free operation of cement silos. (he si ing of a cement silo depends upon the demand placed on it. Ideally one should aim for a storage capacity of at least 2 days. 6:tra capacity should be included in the silo to allow for variations in the supply timetable.(he silo should be erected securely and inspected regularly. It is important that all connections are !ept free of hardened cement. 1F

"ilos and supply lines should be clearly mar!ed to display the type of cement which they contain. "plit silos should indicate the contents of each sector of the silo. -roper vehicle access to the silo is essential. ?ith vehicles up to 1E metres long and ;D tonnes in weight, ade#uate ground strength and manouvering room are re#uired. 2ighting is re#uired if deliveries are to be made outside daylight hours. A74a')e 0 a''i'g 9i (a)i itate 7e i4er2 at s0e)i(ie7 times. (he level of cement in the silo should always be chec!ed before filling begins. 6nsure that the time between filling of the silo and shutting off the cement supply is !ept to a minimum to avoid overfilling. (he bul! density of fresh cement varies from 1DDD to 14ED !g*m4. (he capacity of a silo may therefore be reduced by over 2EP with S It is therefore advisable to be conservative when estimating the weight of cement re#uired to fill a silo.

(he Materials Management component of the +ompiere open source 60- <6nterprise 0esource -lanning> business solutions software addresses a broad range of issues around your material inventory: products, price lists, inventory receipts, shipments, movements, and counts within a company, its organi ations, as well as to and from suppliers and customers. -roduct 1 @-roduct@ in the +ompiere 60- system is something that can be sold and*or purchased, <or something that can be stored> and it has to have a -rice. (he main e:amples of -roducts in the inventory management software are: 1. 2. 4. ;. Items "ervices 0esources 6:pense (ypes

1n @Item@ in +ompiere is a physical good that can be sold. @"ervices@ are not restricted in terms of availability whereas @0esources@ are restricted. @6:penses@ can be billed, for eg: a consultant who incurs some travel e:penses can be invoiced to the customer. 1 -roduct can also be described as a Mcollection of items with similar attributes.M &ne of the attributes of a product is its storage location as defined by warehouses and locators. (he warehouse is the point of service. 1 warehouse may have more than one locator. 6ach 2ocator has up to five user-defined dimensions such as aisle, bin, rac!, level, bay, etc. 1nother attribute for -roducts in the +ompiere 60- system is the @-roduct +ategory.@ -roduct +ategories enable you to group products with similar characteristics, pricing structures, accounting rules and reporting. 5or e:ample, by using the controls of the +ompiere 60- business solutions software you can globally set or change a discount structure for a -roduct +ategory. 1ll products in that category inherit the revised discount structure. -roduct +atalog

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(he -roduct +atalog organi es all of your products for simplified searching based on product attributes. 5or e:ample, you may use the -roduct +atalog to search for all products that are Mshirts,M MyellowM and Mshort-sleeved.M (he -roduct +atalog optionally details product bills of material and substitutes. -rice 2ists Multiple -rice 2ists are supported for all purchased and sold items. +ompiere@s 60business solutions software has a -urchase -rice 2ist functionality, which allows simple control of discounts from suppliers. (he system provides general and customer specific sales price lists. -rice 2ists are date controlled to allow special sales initiatives. )ill of Materials 1 )ill of Materials <)&M> is a product structure that lists the parts and components that constitute the product in the conte:t of an assembly, !it, or model. It contains one or more -roducts, "ervices, or )&Ms. (he number of components a )ill of Materials may contain is unlimited. 1 )ill of Materials has to be Mcycle-freeM, which means that a )&M cannot refer to itself or parts <e.g. found in recipes in the chemical industry>. +ompiere@s 60system maintains the following types of )ill of Materials: "toc!ed O (he available #uantity represents what actually is stoc!ed, not what could be produced. If the price is D.DD, the price is dynamically calculated <i.e. sum of the individual parts>. /on-"toc!ed O (he available #uantity of a non-stored )ill of Materials is dynamically calculated on an item to item base and represents what could be available. /on-"toc!ed )&Ms are mainly for data entry convenience. ?hen processing the order or invoice, individual order lines are generated for each product sold. (he price of a non-stoc!ed )&M is always the summary price of its individual parts. Distribution and Multi-?arehouse +ontrol +ompiere@s 60- business solution supports multiple warehouses with user-defined locations within each warehouse for recording stoc! locations in shelves and bays <)in 2ocations>. ?ith the +ompiere inventory management software, a physical warehouse can be bro!en into multiple logical warehouses such as receiving, #uality assurance and testing, bul! storage and pic!ing. -riorities can be set to ensure that pic!ing ta!es place from bin locations in a prescribed se#uence. Inventory movements can be effected between bin locations and warehouses. Movements between warehouses can be configured to produce appropriate shipping documentation, and manage @in transit@ stoc!. Inventory counts and Inventory valuation ad'ustments are managed by recording the difference between the boo! stoc! #uantity and the count #uantity. "toc! used for internal purposes can be written-off to record the stoc! decrement and related ad'ustments in the $eneral 2edger. Material 0eceipts and 0eplenishment ,sing the +ompiere 60- business solution, shipment documentation can be created in batches, or individually on a per order basis. $oods received from vendors can be compared directly with the purchase order or the vendor invoice. (he inventory management software shows @available to promise@, after considering reserved inventory for future customer shipments and e:pected vendor receipts. 1I

Material 0eplenishment lists are created based on inventory replenishment rules, past sales, or targeted inventory levels. 0e#uisitions or -urchase &rders can also be automatically generated from the Material 0eplenishment report. &ptionally, you can also replenish a warehouse from another warehouse. Costi'g o( Pro7u)t a'7 &er4i)es (he +osting functionality in the +ompiere 60- system is fle:ible and comprehensive. ,sers can customi e it to meet their uni#ue business needs, such as specifying the level of detail to trac!. ,sers can have multiple parallel costing methods. (hese can include "tandard and 1ctual costs. -roduct costs may be composed of both Material and nonMaterial costs. +ompiere@s 60- business solution maintains the information for the following costing methods: "tandard +osting 1ctual +osting <2ast -&, 2ast Invoice, 2I5&, 5I5&> and 1verage <-&, Invoice> +osts can be recorded at three levels: +ompany, &rgani ation, or )atch*2ot. Kou can also specify a different costing method or level for a -roduct +ategory. (his allows the ma:imum fle:ibility for financial analysis. Kou may switch the costing method used any time. (he information is very valuable to compare trends. +osts are maintained in your accounting currency. ,sing different costing methods <"tandard, 1ctual, or 1verage> can result in different financial results. (he +ompiere 60- supports more than one costing method, e.g. for legal accounting and business decision-ma!ing. (he following general information is maintained per -roduct and 1ccounting "chema: +urrent +ost <based on "tandard or 1ctual +osting> 2ast -urchase &rder -rice <converted> 2ast 1- Invoice -rice <converted> (otal lifetime Invoice =uantity and 1mount <resulting in lifetime average cost>

#ogisti)s ma'ageme't #ogisti)s is the management of the flow of goods, information and other resources between the point of origin and the point of consumption in order to meet the re#uirements of consumers <fre#uently, and originally, military organi ations>. 2ogistics involves the integration of information, transportation, inventory, warehousing, material-handling, and pac!aging, and occasionally security. 2ogistics is a channel of the supply chain which adds the value of time and place utility. (oday the comple:ity of production logistics can be modeled, analy ed, visuali ed and optimi ed by plant simulation software. %rigi's a'7 7e(i'itio' (he term MlogisticsM comes from the $ree! MlogosM <TUVWX> meaning speech, reason, ratio, rationality, language, phrase and more specifically from the $ree! wor! Mlogisti!iM <TWVYZ[Y\]> meaning accounting and financial organi ation. 2ogistics is considered to 1L

have originated in the military@s need to supply themselves with arms, ammunition and rations as they moved from their base to a forward position. In ancient $ree!, 0oman and )y antine empires, there were military officers with the title "ogistikas who were responsible for financial and supply distribution matters. (he &:ford 6nglish dictionary defines logistics as: #$he branch of military science having to do !ith procuring maintaining and transporting material personnel and facilities.% 1nother dictionary definition is: M(he time-related positioning of resources.M 1s such, logistics is commonly seen as a branch of engineering which creates Mpeople systemsM rather than Mmachine systems.M Mi itar2 ogisti)s I2" Integrated 2ogistics "upport is a discipline used in military industries to ensure an easy supportable system with a robust customer service <logistic> concept at the lowest cost and in line with <often high> reliability, availability, maintainability and other re#uirements as defined for the pro'ect. In military logistics, logistics officers manage how and when to move resources to the places they are needed. In military science, maintaining one@s supply lines while disrupting those of the enemy is a crucialOsome would say the most crucialOelement of military strategy, since an armed force without resources and transportation is defenseless. (he defeat of the )ritish in the 1merican ?ar of Independence, and the defeat of the 1:is in the 1frican theatre of ?orld ?ar II, have been largely attributed to logistical failure. (he historical leaders 3annibal )arca, 1le:ander the $reat, and the Du!e of ?ellington are considered to have been logistical geniuses. 1nother field within logistics is called Medical logistics. #ogisti)s ma'ageme't 2ogistics management is that part of the supply chain which plans, implements and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customer % legal re#uirements. 1 professional wor!ing in the field of logistics management is called a logistician. (he +hartered Institute of 2ogistics % (ransport <+I2(> was established in the ,nited Qingdom in 1L1L and was granted a 0oyal +harter in 1L2F. (he +hartered Institute is one of the professional bodies or institutions, for the logistics and transport sectors, that offers professional #ualifications or degrees in logistics management. Thir7-0art2 ogisti)s (hird-party logistics involves the utili ation of e:ternal organi ations to e:ecute logistics activities that have traditionally been performed within an organi ation itself. ^1_ 1ccording to this definition, third party logistics includes any form of outsourcing of logistics activities previously performed in-house. If, for e:ample, a company with its own warehousing facilities decides to employ e:ternal transportation, this would be an e:ample of third party logistics. 2ogistics is one of the emerging business areas in many countries.

5arehouse ma'ageme't s2stem a'7 9arehouse )o'tro s2stem 2D

1lthough there is some functionality overlap, the differences between warehouse management systems <?M"> and warehouse control systems <?+"> can be significant. (o put it simply, the ?M" plans a wee!ly activity forecast, based on such factors as statistics, trends, and so forth, whereas a ?+" acts li!e a floor supervisor, wor!ing in real time to get the 'ob done by the most effective means. 5or instance, a ?M" can tell the system it8s going to need five of "Q, 1 and five of "Q, ), hours in advance, but by the time it acts, other considerations may have come into play or there could be a potential log'am on a conveyor. 1 ?+" can prevent that problem by wor!ing in real time and adapting to the situation by ma!ing a 9last-minute decision8 based on current activity and operational status. ?or!ing synergistically, ?M" and ?+" can resolve these issues and ma:imi e efficiency for companies that rely on the effective operation of their warehouse or distribution center.

+usi'ess ogisti)s 2ogistics as a business concept evolved only in the 1LEDs. (his was mainly due to the increasing comple:ity of supplying one@s business with materials and shipping out products in an increasingly globalised supply chain, calling for e:perts in the field who are called "upply +hain 2ogisticians. (his can be defined as having the right item in the right &uantity at the right time at the right place for the right price in the right condition to the right customer and is the science of process and incorporates all industry sectors. (he goal of logistics wor! is to manage the fruition of pro'ect life cycles, supply chains and resultant efficiencies. In business, logistics may have either internal focus <inbound logistics>, or e:ternal focus <outbound logistics> covering the flow and storage of materials from point of origin to point of consumption <see supply chain management>. (he main functions of a #ualified logistician include Inventory management, purchasing, transportation, warehousing, consultation and the organi ing and planning of these activities. 2ogisticians combine a professional !nowledge of each of these functions so that there is a coordination of resources in an organi ation. (here are 2 different forms of logistics. &ne optimi es a steady flow of material through a networ! of transport lin!s % storage nodes. (he other coordinates a se#uence of resources to carry out some pro'ect. Pro7u)tio' ogisti)s (he term is used for describing logistic processes within an industry. (he purpose of production logistics is to ensure that each machine and wor!station is being fed with the right product in the right #uantity and #uality at the right point in time. (he issue is not the transportation itself, but to streamline and control the flow through the value adding processes and eliminates non-value adding ones. -roduction logistics can be applied in e:isting as well as new plants. Manufacturing in an e:isting plant is a constantly changing process. Machines are e:changed and new ones added, which gives the opportunity to improve the production logistics system accordingly. -roduction logistics provides the means to achieve customer response and capital efficiency. -roduction logistics is getting more and more important with the decreasing batch si es. In many industries <e.g. mobile phone> batch si e one is the short term aim. (his way even a single customer demand can be fulfilled in an efficient way. (rac! and tracing, which is an 21

essential part of production logistics - due to product safety and product reliability issues is also gaining importance especially in the automotive and the medical industry. Pro(essio'a ogisti)ia' 1 logistician is a professional logistics practitioner. -rofessional logisticians are often certified by professional associations. "ome universities % academic institutions train students as logisticians, by offering undergraduate and postgraduate programs. (he term 2ogistics Management is that part of "upply +hain Management that plans, implements, and controls the efficient, effective, forward, and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers8 re#uirements. #ogisti)s Ma'ageme't &o(t9are "oftware is used for logistics automation which helps the supply chain industry in automating the wor! flow as well as management of the system. (here are very few generali ed software available in the new mar!et in the said topology. (his is because there is no rule to generali e the system as well as wor! flow even though the practice is more or less the same. Most of the commercial companies do use one or the other of the custom solutions. )ut there are various software solutions that are being used within the departments of logistics. (here are a few departments in 2ogistics, namely: +onventional Department, +ontainer Department, ?arehouse, Marine 6ngineering, 3eavy 3aulage, etc. "oftware used in these departments: +onventional department: +.( software * +(M" software +ontainer (ruc!ing: +(M" software ?arehouse: ?M" *?+" "m0ro4i'g !((e)ti4e'ess o( #ogisti)s Ma'ageme't. 2ogistical /etwor!, Information, (ransportation, "ound Inventory Management, ?arehousing, Materials 3andling % -ac!aging &8PP#* CJA"N MANAG!M!NT. ?hat is a supply chainJ : 1 supply chain is a networ! of facilities and distribution options that performs the functions of: 1. -rocurement of materials 2. (ransformation of these materials into intermediate and finished products 4. (he distribution of these finished products to customers Implementation: "upply chain management is a two-way based strategy to lin! across enterprise business operations to achieve a shared vision of mar!et opportunity. 1> "upply chain management is a collaborative effort that combines many parties or processes in the product cycle. 22

2> "upply chain management can cover the entire product cycle from the introduction of raw materials to the point at which the consumer purchases the product.

C%MP%N!NT& %/ &8PP#* CJA"N MANAG!M!NT. -lan: +ompanies need a strategy for managing all the resources that go toward meeting customer demand for their product or service. "ource: "election of "uppliers. -ricing, delivery and payment processes with suppliers. -rocesses for managing goods and services inventory, including receiving and verifying shipments, transferring them to the manufacturing facilities and authori ing supplier payments. Ma!e: "chedule the activities necessary for production, testing, pac!aging and preparation for delivery

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 Deliver: +oordination of receipt of orders from customers, develop a networ! of warehouses, pic! carriers to get products to customers and set up an invoicing system to receive payments. 0eturn: 0esponsive and fle:ible networ! for receiving defective and e:cess products bac! from their customers and supporting customers who have problems with delivered products. "ssues i' &u00 2 Chai' Ma'ageme't. (he classic ob'ective of a supply chain is to be able to have: ` the right products ` in the right #uantities ` at the right place ` at the right moment ` at minimal cost

Bullwhip effect $istortio' o( i'(ormatio' a3out the 7ema'7 (or a 0ro7u)t as it 0asses (rom o'e e'tit2 to the 'e:t a)ross the su00 2 )hai'. More a))ura)2 (rom the &u00 2 )hai' ma'ageme't s2stem )a' he 0 i' o4er)omi'g the 3u 9hi0 e((e)t. 5ith Per(e)t i'(ormatio' a3out 7ema'7 a'7 0ro7u)tio'; a (irm )a' im0 eme't a' e((e)ti4e <ust-i' time ?a ,a0a'ese )o')e0t@; 7e i4eri'g goo7s i' the right amou't a'7 at the right time as the2 are 'ee7e7.

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"N/%RMAT"%N T!CJN%#%G* "N &CM. Inaccurate information can cause minor fluctuations in demand for a product to be amplified as one moves further bac! in the supply chain. Minor fluctuations in retail sales for a product can create e:cess inventory for distributors, manufacturers, and suppliers. 6-enabled "+M is emerging as a core strategy. Importance of I( in supply chain management. 6-business has enhanced both supply chain efficiency % responsiveness. &CM so(t9are. "+M software, or "upply +hain Management software addresses one or more issues, mainly the planning, sourcing, production, delivery and return of goods. "upply +hain Management software involves real-time data from all lin!s of the chain, with the internet being a vital ingredient to greater supply chain visibility. "+M software will allow companies to trac! demand, supply, manufacturing status, logistics and distribution of their products =uic!er customer response % fulfillment rates $reater productivity % low rate 0educed inventory throughout the chain Improved forecasting precision 6nhanced inter operational communication and co-operation 5ewer suppliers % shorter planning cycle More reliable financial system

$!-!#%PM!NT& "N &8PP#* CJA"N MANAG!M!NT. +reation 6ra, -a (erm "+M was introduced in early 1LIDs Integration 6ra -a Developed through 1LLDs by introduction of 60- systems, this era continued to develop into 21st century based on internet based collaborative systems $lobali ation 6ra -a 6:pansion of supply chains over national boundaries and into other continents "peciali ation 6ra -a -hase-I: &utsourced manufacturing % Distribution . 2ate 1LLD8s industries began to focus on core competencies, sold off non core operations and outsourced those functions to others "peciali ation 6ra -a -hase-II: "+M as "ervice, 6stablishment of speciali ed companies for handling different tas!s of supply chain management "upply +hain Management 2.D <"+M 2.D> : -a ?eb 2.D based "+M

&*&T!M& %/ &8PP#* CJA"N MANAG!M!NT. - +lassified into two types: 2E

a>. "upply chain planning system: 1>. $enerate demand forecasts for a product. 2>. Develop sourcing and manufacturing plans for that product 4>. Ma!e ad'ustments to production and distribution plans ;>. "hare that information with relevant supply chain members. &ne of the most important supply chain planning functions is demand planning, which determines how much product a business needs to ma!e to satisfy all of its customers@ demands b>. "upply chain e:ecution system: -hysical flow of products through distribution centers and warehouses to ensure that products are delivered to the right locations in the most efficient manner. (oday, using intranets and e:tranets, all members of the supply chain can instantly communicate with each other, using up-to-date information to ad'ust purchasing, logistics, manufacturing, pac!aging, and schedules.

Co')urre't su00 2 )hai' s2stem ?&CM through "'ter'et@ +oncurrent supply chain is where information flows in many directions "imultaneously among members of a supply chain networ!. (he Internet could create a Mdigital logistics nervous systemM throughout the supply chain to permit simultaneous, multidirectional communication of information about participants@ inventories, orders, and capacities

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&8PP#* CJA"N M%$!#&. -ush-based model <also !nown as build-to-stoc!> : 6arlier supply chain management systems were driven by a push-based model <also !nown as build-to-stoc!> In this model production master schedules are based on forecasts or best guesses of demand for products, and products are MpushedM to customers

Supplier

Manufacturer

Distribut or

Retail er

Customer

-ull-based model <or demand-driven model or build-to-order>: ?ith ?eb-based tools, supply chain management follows a pull-based model <or demanddriven model <or build-to-order>, in which actual customer orders or purchases trigger events in the supply chain

Supplier

Manufacturer

Distributor

Retailer

Customer

+!N!/"T& %/ &8PP#* CJA"N MANAG!M!NT. (imely -roduct "upplies 1ccurate -ricing Discounts "implified and faster payment process &nline information <-urchases, sales, inventory, financials> 2ess duplication of wor! for 3uman 0esource )etter warehousing and transportation management )etter plant maintenance 6asy access to data * information

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"'4e'tor2 Co'tro &nce goods are purchased, they represent an inventory used during the construction process. (he general ob'ective of inventory control is to minimi e the total cost of !eeping the inventory while ma!ing tradeoffs among the ma'or categories of costs: <1> purchase costs, <2> order cost, <4> holding costs, and <;> unavailable cost. (hese cost categories are interrelated since reducing cost in one category may increase cost in others. (he costs in all categories generally are sub'ect to considerable uncertainty. Pur)hase Costs (he purchase cost of an item is the unit purchase price from an e:ternal source including transportation and freight costs. 5or construction materials, it is common to receive discounts for bul! purchases, so the unit purchase cost declines as #uantity increases. (hese reductions may reflect manufacturers@ mar!eting policies, economies of scale in the material production, or scale economies in transportation. (here are also advantages in having homogeneous materials. 5or e:ample, a bul! order to insure the same color or si e of items such as bric!s may be desirable. 1ccordingly, it is usually desirable to ma!e a limited number of large purchases for materials. In some cases, organi ations may consolidate small orders from a number of different pro'ects to capture such bul! discounts7 this is a basic saving to be derived from a central purchasing office. (he cost of materials is based on prices obtained through effective bargaining. ,nit prices of materials depend on bargaining leverage, #uantities and delivery time. &rgani ations with potential for long-term purchase volume can command better bargaining leverage. ?hile orders in large #uantities may result in lower unit prices, they may also increase holding costs and thus cause problems in cash flow. 0e#uirements of short delivery time can also adversely affect unit prices. 5urthermore, design characteristics which include items of odd si es or shapes should be avoided. "ince such items normally are not available in the standard stoc!pile, purchasing them causes higher prices. (he transportation costs are affected by shipment si es and other factors. "hipment by the full load of a carrier often reduces prices and assures #uic!er delivery, as the carrier can travel from the origin to the destination of the full load without having to stop for delivering part of the cargo at other stations. 1voiding transshipment is another consideration in reducing shipping cost. ?hile the reduction in shipping costs is a ma'or ob'ective, the re#uirements of delicate handling of some items may favor a more e:pensive mode of transportation to avoid brea!age and replacement costs. %r7er Cost (he order cost reflects the administrative e:pense of issuing a purchase order to an outside supplier. &rder costs include e:penses of ma!ing re#uisitions, analy ing alternative vendors, writing purchase orders, receiving materials, inspecting materials, chec!ing on orders, and maintaining records of the entire process. &rder costs are usually only a small portion of total costs for material management in construction pro'ects, although ordering may re#uire substantial time.

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Jo 7i'g Costs (he holding costs or carrying costs are primarily the result of capital costs, handling, storage, obsolescence, shrin!age and deterioration. +apital cost results from the opportunity cost or financial e:pense of capital tied up in inventory. &nce payment for goods is made, borrowing costs are incurred or capital must be diverted from other productive uses. +onse#uently, a capital carrying cost is incurred e#ual to the value of the inventory during a period multiplied by the interest rate obtainable or paid during that period. /ote that capital costs only accumulate when payment for materials actually occurs7 many organi ations attempt to delay payments as long as possible to minimi e such costs. 3andling and storage represent the movement and protection charges incurred for materials. "torage costs also include the disruption caused to other pro'ect activities by large inventories of materials that get in the way. &bsolescence is the ris! that an item will lose value because of changes in specifications. "hrin!age is the decrease in inventory over time due to theft or loss. Deterioration reflects a change in material #uality due to age or environmental degradation. Many of these holding cost components are difficult to predict in advance7 a pro'ect manager !nows only that there is some chance that specific categories of cost will occur. In addition to these ma'or categories of cost, there may be ancillary costs of additional insurance, ta:es <many states treat inventories as ta:able property>, or additional fire ha ards. 1s a general rule, holding costs will typically represent 2D to ;DP of the average inventory value over the course of a year7 thus if the average material inventory on a pro'ect is N 1 million over a year, the holding cost might be e:pected to be N2DD,DDD to N;DD,DDD. 8'a4ai a3i it2 Cost (he unavailability cost is incurred when a desired material is not available at the desired time. In manufacturing industries, this cost is often called the stockout or depletion cost. "hortages may delay wor!, thereby wasting labor resources or delaying the completion of the entire pro'ect. 1gain, it may be difficult to forecast in advance e:actly when an item may be re#uired or when an shipment will be received. ?hile the pro'ect schedule gives one estimate, deviations from the schedule may occur during construction. Moreover, the cost associated with a shortage may also be difficult to assess7 if the material used for one activity is not available, it may be possible to assign wor!ers to other activities and, depending upon which activities are critical, the pro'ect may not be delayed. 4.9 Tra7eo((s o( Costs i' Materia s Ma'ageme't. (o illustrate the type of trade-offs encountered in materials management, suppose that a particular item is to be ordered for a pro'ect. (he amount of time re#uired for processing the order and shipping the item is uncertain. +onse#uently, the pro'ect manager must decide how much lead time to provide in ordering the item. &rdering early and thereby providing a long lead time will increase the chance that the item is available when needed, but it increases the costs of inventory and the chance of spoilage on site. 2et ( be the time for the delivery of a particular item, 0 be the time re#uired for process the order, and " be the shipping time. (hen, the minimum amount of time for the delivery of the item is ( b 0 c ". In general, both 0 and " are random variables7 hence ( is also a random variable. 5or the sa!e of simplicity, we shall consider only the case of instant processing for an order, i.e. 0 b D. (hen, the delivery time ( e#uals the shipping time ". 2L

"ince ( is a random variable, the chance that an item will be delivered on day t is represented by the probability p<t>. (hen, the probability that the item will be delivered on or before t day is given by:

;.1

If a and b are the lower and upper bounds of possible delivery dates, the e:pected delivery time is then given by:

;.2

(he lead time 2 for ordering an item is the time period ahead of the delivery time, and will depend on the tradeoff between holding costs and unavailability costs. 1 pro'ect manager may want to avoid the unavailable cost by re#uiring delivery on the scheduled date of use, or may be to lower the holding cost by adopting a more fle:ible lead time based on the e:pected delivery time. 5or e:ample, the manager may ma!e the tradeoff by specifying the lead time to be D days more than the e:pected delivery time, i.e. ;.4 where D may vary from D to the number of additional days re#uired to produce certain delivery on the desired date. In a more realistic situation, the pro'ect manager would also contend with the uncertainty of e:actly when the item might be re#uired. 6ven if the item is scheduled for use on a particular date, the wor! progress might vary so that the desired date would differ. In many cases, greater than e:pected wor! progress may result in no savings because materials for future activities are unavailable

Re(ere')es.
Defining "upply +hain Management. 'ournal of Business "ogistics pages 1-2F 2DD1, .&2 227 -10( 2. I""/ DH4E-4HFF http:**enr.construction.com* - $oing $reen (hrough Materials Management. Qnowing ?hen a ?M" or ?+" Is 0ight for Kour +ompanyM . Supply ( Demand Chain )*ecutive. )K Cohn (.-helan Cr.

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