QUESTIONS AND PROBLEMS
1. What do wholesalers and retailers perceive to be the order cycle provided to them by a manufacturer?
Wholesalers and retailers perceive the order cycle as all of the elapsed time from placement of the order until the product is received and placed into inventory. The typical order cycle consists of the following components: (1) order preparation and transmittal; (2) order receipt and order entry; (3) order processing; (4) warehouse picking and packing; (5) order transportation; and, (6) customer delivery and unloading. It should be noted that manufacturers view the order cycle similarly when they place orders with their suppliers.
2. Explain the impact of order cycle variability on the inventory levels of wholesalers and retailers.
Variability in the order cycle, which is the deviation between the actual elapsed time and the anticipated elapsed time, is costly to the manufacturer's customers because safety stock must be carried to cover possible delays or sales will be lost as a result of stockouts. Customers can plan their operations more efficiently around a consistent cycle time. For example, if the average order cycle (replenishment cycle) is 10 days but covers a range of from six to 14 days, four extra days of inventory must be held in order to avoid stockouts. Safety stock held to cover variability in the order cycle could be eliminated if the order cycle was a consistent 10 days.
3. How is logistics performance affected by the order processing system used?
The order triggers all activity within a logistics system. It is a key information system and the quality and speed of the information flow will determine both the effectiveness and the efficiency of logistics performance. The more quickly an order is transmitted, entered and processed, the more time (lead time) management has for planning transportation and inventory activities while meeting the required customer service levels. For example, if order preparation, order transmittal, order entry and order processing requires three days within an eight day order cycle which customers find to be acceptable, then reducing the time required for the successful completion of these activities will release time for management planning. Figures 4-2 and 4-3 can be used to illustrate how this will occur. Implementing an advanced order processing system could eliminate most of the first three days. By using this time for planning transportation consolidations, production and inventory levels, management can reduce the cost of transportation, holding inventory, and warehousing. Warehousing costs will be lower because consolidated shipments can be made directly from plant locations to customers, thereby avoiding handling at field warehouses. Also, the planning time will result in more efficient scheduling of warehousing resources. In addition, variability in the order cycle will be reduced enabling customers to reduce their inventories.
4. What are the primary advantages associated with the implementation of an integrated and automated order processing system?
The primary advantages associated with the implementation of an integrated and automated order processing system are:
(a) improved customer service levels
(b) lower transportation costs
(c) improved warehousing efficiency
(d) better short-term production scheduling
(e) lower inventory levels for both the seller and the buyer organizations.
5. Electronic data interchange applications have experienced significant growth in recent years. Why do you believe this growth in EDI has occurred? What are the primary benefits of EDI? Do you think that the growth rate in EDI applications will be sustained? Why or why not?
EDI growth has occurred for two reasons. First, the technology is available at a reasonable cost. Second, the logistical savings and marketing advantages of EDI make it possible to provide economic justification for the investment.
The growth in EDI applications will be sustained because these investments provide significant benefits by increasing the accuracy and timeliness of information that is necessary to operate the business.
While EDI may still be the best approach for companies with large volumes of data to be transmitted and particularly for those firms implementing EDI in an application to application environment, the Internet is playing an increasingly important role. The Internet enables firms that could not afford to implement EDI to be part of the electronic age. The example in the Technology box on page 160 of Chapter 4 shows that savings are also possible for large companies that use the Internet.
6. In this chapter, we described how Ford Motor Company was planning to use e-commerce to link with customers and suppliers. One of management's goals was to use the Internet to enable Ford to build cars to individual customer orders. What are the logistics implications of this strategy for Ford, its customers and suppliers, and the efficiency of the entire supply chain?
According to Lee A. Sage of Ernst & Young (see Box 4-1, page 165), completed vehicle inventories are about $60 billion in the United States. As will be shown in Chapter 5 (use Figure 5-10), finished goods inventory positioned at the point-of-sale or consumption is the most expensive inventory in terms of the amount of cash involved. Also, with the amount of variety in brands, models and options, forecasting is a nightmare and forecast errors are large. For this reason, consumers are able to negotiate the best prices for automobiles that are not exactly what they want in terms of color, options, etc. Dealers have large sums of money tied up in inventory as well as real estate which may not be in locations that are the most convenient for consumers to obtain service of their vehicles after the sale has been made. The manufacturers periodically find themselves offering rebates and low cost financing to unload excessive inventories which erodes profitability and causes them to put more pressure on suppliers for lower prices. Clearly, the most efficient supply chain would be one in which cars were built to exactly conform to customer desires for color, options, etc. within a time frame short enough to be an acceptable waiting period. For this to work, lead times must be compressed throughout the supply chain but once implemented, all members of the supply chain could react to actual consumer demand.
An interim solution might be for the auto manufacturers to hold regional inventories and provide one or two day delivery periods once dealers have a firm customer order. While this would improve total supply chain efficiency, it would require that auto companies such as Ford hold the finished goods inventory. Currently, inventories only represent about two percent of assets for Ford because finished goods inventories are considered to be dealer inventories.
7. How does the order processing system form the foundation of the logistics management information system?
The order processing system is the communications network which provides information necessary for the management of the interfaces between logistics and the other functional areas of the firm as well as within logistics. For example, the primary input to the sales forecast is historical sales data captured from the order processing system. The quality and timeliness of the information will impact:
(1) The reliability of the forecast and therefore the accuracy of the operating plan. The operating plan is the set of activities that the firm will engage in during the coming year. It determines production schedules, procurement requirements sales promotion, sales force requirements, advertising levels, inventory levels, transportation requirements, warehousing needs and the cash budget. The plan must be modified as actual sales lead to re-evaluations of the forecast and new forecasts.
(2) The company's marketing effectiveness. The order processing system provides the sales history that drives the forecast and the communications information network relays the information to the necessary levels of management. Also, the information system drives day-to-day operations such as warehouse order picking, transportation scheduling and inventory management.
(3) The company's future profitability. The information system can be used to monitor costs and customer service performance. This is required if least cost logistics is to be successfully implemented.
8. How is the logistics management information system used to support planning of logistics operations?
Use of Table 4-2 to illustrate examples of strategic and operational decisions that must be made within the logistics function. The logistics information system can aid management in both strategic and operational planning by providing timely and accurate information. Telephone, fax machines, personal conversations, and computer-to-computer linkup are just a few of the ways that the information can be transferred. In addition to information processing, the logistics information system must have an information storage capability in order to hold information until it is required for decision-making. Figure 4-11 identifies the data storage and reporting capabilities that may be associated with a logistics information system.
9. Explain how point-of-sale data and bar coding contribute to supply chain integration.
Point-of-sale data gathering is simply scanning the bar codes of items as they are sold or consumed. The data when shared with other members of the supply chain can be used by these organizations to better plan short-term production and to replenish inventories of immediate customers based on sales or consumption at the end of the supply chain.
Bar coding also can be used when receiving goods at a warehouse, putting these goods away and picking individual orders to ensure accuracy in updating information on inventories and eliminate errors in put-away and picking of products.
In transportation, bar codes can be used for tracing purposes as well as to reduce counting errors (number of boxes on the trailer) and shipping errors (bar code scanner will not accept a package that is loaded on a vehicle going to a destination different from the package's destination).