INTEGRATED PRODUCTION,
INVENTORY, AND DISTRIBUTION
INTEGRATED SUPPLY CHAIN PLANNING
functional integration of purchasing,
manufacturing, transportation and
warehousing activities
spatial integration of these activities
across geographically dispersed
vendors, facilities, and
markets
inter-temporal integration of these
activities over strategic,
tactical and operational planning
horizons
Developing Integrated Supply Chains

Traditional systems:



Purchasing: the management of the acquisition process,
which includes deciding which supplier to use, negotiating
contracts, and deciding whether to buy locally
Production: the management of the transformation process
devoted to producing the service or product
Distribution: the management of the flow of service or
materials from firms to external customers


New System  The firm initiates internal
integration by creating a SCM Department
SCM Department:

The decisions that are made by a firm
concerning the purchase of services and
materials, inventories, production levels,
staffing patterns, schedules, and distribution
SCM Department
Purchasing
domain of
responsibility
Egg
supplier
Sugar
supplier
Flour
supplier
Chocolate
chips
supplier
Maintenance
services
supplier
SCM Department
FG storage
Transformation
process and WIP
storage
Purchasing
domain of
responsibility
Egg
supplier
RM storage
Sugar
supplier
Flour
supplier
Chocolate
chips
supplier
Maintenance
services
supplier
SCM Department
FG storage
Production domain
of responsibility
Transformation
process and
WIP storage
RM storage
Egg
supplier
Sugar
supplier
Flour
supplier
Purchasing
domain of
responsibility
Chocolate
chips
supplier
Maintenance
services
supplier
SCM Department
FG storage
Production domain
of responsibility
Transformation
process and
WIP storage
RM storage
Egg
supplier
Sugar
supplier
Flour
supplier
Purchasing
domain of
responsibility
Chocolate
chips
supplier
Maintenance
services
supplier
SCM Department
Supermarket A
distribution center
Distribution
domain of
responsibility
Supermarket B
distribution center
FG storage
Transportation
services supplier
Production domain
of responsibility
Transformation
process and
WIP storage
RM storage
Egg
supplier
Sugar
supplier
Flour
supplier
Purchasing
domain of
responsibility
Chocolate
chips
supplier
Maintenance
services
supplier
SCM Department
Supermarket A
distribution center
Supermarket B
distribution center
Distribution
domain of
responsibility
Transportation
services supplier
FG storage
Production domain
of responsibility
Transformation
process and
WIP storage
RM storage
Egg
supplier
Sugar
supplier
Flour
supplier
Purchasing
domain of
responsibility
Chocolate
chips
supplier
Maintenance
services
supplier
Aggregate Production Planning


(Aggregate) Planning is
Concerned With Determining
The Quantity And Timing Of
Production For The
Intermediate Future, Often From
Three To 18 Months Ahead.
The Goal is To Minimize Costs
Over The Planning Period.
Aggregate Production Planning


Other Objectives May Be To Minimize
Fluctuations In The Work Force Or Inventory
Levels.
Based on the planning horizon, We can
divide plans into 3 general categories:
Aggregate Production Planning
Aggregate Production Planning



The Heart Of The Medium Range Planning Is The
Aggregate Production Plan.
In Aggregate Planning, Given The Demand
Forecast, Production Capacity, Inventory Levels,
Size Of Work Force, And Other Inputs,
The Planner Has To Select The Rate Of Output For
The Next 3 To 18 Months.
An Example Aggregate Plan

A Company Produces Four Models Of
Microcomputers: 1) Laptops, 2) Hard Disk
Machines, 3) Advanced Technology
Machines With High Speed Chips, 4)
Home/Game Pcs.
An Example Aggregate Plan
An Example Aggregate Plan


Here, Operations Manager Makes Decisions
About Intermediate Range Capacity Without
Getting Into Details Of Specific Products,
Parts, Or People.
Later, He/She Deals With Financial Data,
Personnel, Capacity, And Availability Of Raw
Material As Well.
An Example Aggregate Plan

As an intermediate type planning, The
aggregate plan interacts with both long range
strategies, AND short-term planning activities.
Relationships Of Aggregate Plan
What Is Inventory?

Stock of items kept to meet future demand

Purpose of inventory management
how many units to order
 when to order

Example

A supermarket keeps a stock of goods on its
shelves and in the stockroom.

It holds stock because large deliveries are
made at infrequent times (e.g. Once a week).

However, customers are continuously buying
small amounts of this stock.

So in order for the supermarket not to run out
of stock it needs to hold stock/inventory.
Stocks are the stores of materials that an organisation holds
until it needs them

The main reason for holding stocks is to give a
buffer between supply and demand.

Other reasons include:








to act as a buffer between different production operations –
‘decoupling’ consecutive operations
to allow for demands that are larger than expected, or at
unexpected times
to allow for deliveries that are delayed or too small
to take advantage of price discounts on large orders
to buy items when the price is low and is expected to rise
to buy items that are going out of production or are difficult to
find
to make full loads and reduce transport costs
to give cover for emergencies
Water Tank Analogy for Inventory
Inventory Level
Supply Rate
Inventory Level
Demand Rate
Buffers Demand Rate
from Supply Rate
Types of Inventory
 Raw
materials
 Purchased parts and supplies
 Work-in-process (partially completed)
products (WIP)
 Items being transported
Classification of stocks
Why are inventories important?

For a firm today
Customers do not easily forget shortages or
delivery delays
 But tremendous stocks are costly
 Critical to a firm’s viability


Concerns every industries

Nowadays: success stories like Wal-Mart, Toyota
or Dell are founded on keeping inventories lean
Zero Inventory?
 Reducing
amounts of raw materials and
purchased parts and subassemblies by
having suppliers deliver them directly.
 Reducing
the amount of works-in process
by using just-in-time production.
 Reducing
the amount of finished goods
by shipping to markets as soon as
possible.
Reasons To Hold Inventory
 Meet
variations in customer demand:
Meet unexpected demand
 Smooth seasonal or cyclical demand

 Pricing
related:
Temporary price discounts
 Hedge against price increases
 Take advantage of quantity discounts

 Process
& supply surprises
Internal – upsets in parts of or our own processes
 External – delays in incoming goods

Reasons To NOT Hold Inventory

Carrying cost
Financially calculable
 Inventory deteriorates, becomes obsolete, lost,
stolen, etc.


Takes up valuable factory space


Especially for in-process inventory
Inventory covers up “problems” …

That are best exposed and solved
Inventory Hides Problems
Bad
Design
Lengthy
Setups
Inefficient
Layout
Poor
Quality
Machine
Breakdown
Unreliable
Supplier
To Expose Problems:
Reduce Inventory Levels
Bad
Design
Lengthy
Setups
Inefficient
Layout
Poor
Quality
Machine
Breakdown
Unreliable
Supplier
Remove Sources of Problems and
Repeat the Process
Poor
Quality
Lengthy
Setups
Bad
Design
Inefficient
Layout
Machine
Breakdown
Unreliable
Supplier
Costs involved in Inventory Models





Ordering (Setup) cost
Unit purchasing (Production) cost
Holding (Carrying) cost
Shortage (Penalty) cost
Revenue (Selling price)
Basic EOQ Model


EOQ: Economic Order Quantity
Assumptions of EOQ models:





Demand is constant (unvarying ), expressed as
annual demand (units per year ).
Models use continuous review, not periodic review.
Lead time is constant & known.
Quantity discounts are not possible.
2 variable costs: setup cost and holding cost.
Inventory Levels

Inventory vs. time.
Usage rate (D)
Reorder Point
(ROP)
Lead time ( L, l )
Cycle time (T)
time
Symbols in EOQ models





Order quantity:
Optimal order quantity:
Annual demand (units):
Setup cost per order:
Holding cost (per unit):
Q
Q*
D
K
H
Annual Cost
Total Cost vs. Order Quantity.
Combined curve:
holding & setup.
Minimum
annual
cost We’ll find
an equation
for this amount
Optimal order quantity
Holding cost curve
Setup cost curve
Order Quantity
Annual setup cost: equation

What is related to it? Q, K, & D
demand / quantity per order = # of orders.
# of orders * K = annual setup cost.
D
Annual setup cost =
*K
Q
Annual holding cost: equation.



Q: order quantity Q & H.
inventory is replenished precisely when no
inventory remains.
Average inventory = Q/2
Constant
slope
Q
time
Annual holding cost: equation.
Q
Annual holding cost =
*H
2
Q
time
Key Terms
exclusive
distribution
integrated
distribution
selective
distribution
intensive
distribution
e-marketplace
Distribution Planning
Objectives




Explain distribution planning
Name and describe the three levels of distribution
intensity
Explain the effect of the Internet on distribution
planning
Describe the challenges of distribution planning for
international markets
Distribution Planning
Study Organizer
In a chart like this one, note the main components of
distribution planning.
Understanding Distribution
Planning
Distribution planning involves decisions about a product’s
physical movement and transfer of ownership from
producer to consumer.
Multiple Channels
A producer uses multiple channels when its product fits
the needs of both industrial and consumer markets.
Control Versus Costs
All manufacturers must weigh the control they want to
keep over the distribution of their products against costs
and profitability.
Distribution Planning for
Foreign Markets
Foreign market environments require that businesses
adjust their distribution systems. They also give
businesses a chance to experiment with different
distribution strategies.
Cultural considerations should also be weighed when
planning distribution in foreign markets.
Achieving An Integrated Supply Chain
Stage one: Base
Line
Material
Flow
Purchasing
Customer
Service
Material
Production
Control
Sales
Distribution
Achieving An Integrated Supply Chain
Stage two: Functional
Integration
Material
Customer
Flow
Service
Materials
Management
Manufacturing
Management
Distribution
Achieving An Integrated Supply Chain
Stage three:
Internal Integration
Material
Flow
Materials
Manufacturing
Management Management
Customer
Service
Distribution
Achieving An Integrated Supply Chain
Stage four:
External Integration
(Total Supply Chain Management)
Material
Customer
Flow
Service
Suppliers
Internal
Customers
Supply Chain