Page 308 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Unit 13: Logistics Design and Operational Planning

Variable and Fixed Costs: The final location analysis data requirements are the variable and fixed Notes
costs associated with operating distribution facilities. Variable cost includes expenses related to
labour, energy, utilities, and materials. In general, variable expenses are a function of throughput.
Fixed costs include expenses related to facilities, equipment, and supervisory management. Within
a relevant distribution facility operating range, fixed costs remain relatively constant. While
variable and fixed cost differences by geography are typically not substantial, there are minor
locational considerations, which should be included to ensure analysis accuracy. The major
differences result from locational peculiarities in wage rates, energy cost, land values, and taxes.
Substantial logistics planning emphasis is placed on location analysis. In the past, distribution
networks were relatively stable, so it was unnecessary for firms to complete logistics system
analyses regularly; however, the dynamics of alternative supply chain options, changing cost
levels, and availability of third-party services requires that supply chain networks be evaluated
and refined more frequently today. It is common for firms to perform evaluations annually or
even monthly.

13.2.5 Inventory

Inventory analysis decisions focus on determining the optimum inventory management
parameters which meet desired service levels with minimum investment. Inventory parameters
refer to safety stock, reorder point, order quantity, and review cycles for a specific facility and
product combination. This analysis can be designed to refine inventory parameters on a periodic
or daily basis. Daily refinements make parameters more sensitive to environmental changes
such as demand levels or performance cycle length; however, they also result in nervous inventory
management systems. System nervousness causes frequent expediting and de-expediting of
numerous small shipments.
Inventory analysis focuses on the decisions. Specific questions include: (1) How many products
should be produced during the next production cycle? (2) Which distribution centres should
maintain inventories of each item (e.g., should slow-moving items be centralized)? (3) What is
the optimum size of replenishment orders (the order quantity decision)? and (4) What is the
necessary re-order point for replenishment orders (the safety stock decision)?

Did u know? There are two types of methods to evaluate and select from inventory
management options: analytic and simulation.

Analytic Inventory Techniques

Analytic inventory methods utilize functional relationships such as those to determine ideal
inventory stocking parameters and the desired service level. The technique uses service objectives,
demand characteristics, performance cycle characteristics, and the logistics system characteristics
as input to calculate optimum inventory parameters. From an inventory management
perspective, service objectives are typically defined in terms of case or order fill rates. Demand
characteristics describe the periodic average and standard deviation of customer demand;
performance cycle characteristics, the average and standard deviations for replenishment
performance cycles; and logistics system characteristics, the number of distribution stages or
echelons requiring inventory management decisions. The analytical inventory technique is
based on assumptions describing the logistics system characteristics (stocking echelons) and the
probabilities relating demand and performance cycle characteristics. The probability
relationships, along with the service level objectives, determine the optimal inventory
management parameters in terms of replenishment order quantities and reorder points. Numerous

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