Production Plan IV

A firm faces a firm schedule of delivery commitments for a product over the next six months. The production cost varies by month due to anticipated changes in material costs.
The company's production capacity is 100 units per month on regular time and an additional 15 units per month on overtime.

The following table contains delivery requirements and production costs by month

The cost of carrying an unsold unit in stock is $2 per month.
The firm has no units on hand at the beginning of month 1 and wishes to have no units on hand at the end of month 6.

Transportation

Transport or transportation is the movement of people, cattle, animals and goods from one location to another.Transport is important since it enables trade between peoples, which in turn establishes civilizations.

By making a product available at a particular point in the distribution system, it adds place value to the product. On a broader perspective, transportation contributes to the social and economic development. There are basically five modes of transportation

Rail
Road
Air
Water
Pipeline

Costs of carriage
To provide transportation service, any carrier must have certain basic physical lements. These elements are ways, terminals and vehicles. Each results in a cost to the carrier and, depending on the mode and the carrier, may be either capital (fixed) or operating (variable) costs. Fixed costs are costs that do not change with the volume of goods carried. The purchase cost of a truck is a fixed cost. However, many costs of operation, such as fuel, maintenance and driver’s wages, depend on the use made of the truck. These are variable costs.

Ways are the paths over which the carrier operates. The nature of the way and how it is paid vary with the mode. They may be owned and operated by the government or by the carrier or provided by the nature.

Terminals are places where carriers load and unload goods to and from vehicles and make connections between local pickup and delivery service and linehaul service. Other functions performed at terminals are weighing; connections with other routes and carriers; vehicle routing, dispatching and maintenance; and administration and paperwork. The nature, size and complexity of the terminal varies
with the mode and size of the firm and the types of good carried. Terminals are generally owned and operated by the carrier but, in some special circumstances, may be publicly owned and operated.

Vehicles of various types are used in all modes except pipelines. They serve as carrying and power units to move the goods over the ways. The carrier usually owns or leases the vehicles, although sometimes the shipper owns or leases them.

Rail
Railways provide their own ways, terminals and vehicles, all of which represent a large capital investment. This means that most of the total cost of operating a railway is fixed. Thus, railways must have a high volume of traffic to absorb the fixed costs. Therefore, railways are best able to move large volumes of bulky goods over long distances.

Rail speed is good over long distances, the service is generally reliable and trains are flexible about the goods they can carry. Train service is cheaper than road for large quantities of bulky commodities moved over long distances.

Although the rail mode of transportation has the advantages of large volume transportation over long distances, less per unit transportation costs compared to the other modes, good transportation speed over long distances, reliable service, flexibility in the
types of goods carried, etc., it has certain drawbacks as listed below :
They operate on specific predetermined time schedules and hence the frequency and transit times are not flexible.
They operate between their terminals and hence cannot provide a stock-point to stock-point type of service
Unlike the road transport, general availability at the required locations and at the required times cannot be guaranteed.

Road
Trucks do not provide their own ways but pay a fee to the government as license, gasoline and other taxes and tolls for the use of roads. Terminals are usually owned and operated by the carrier but may be either privately owned or owned by the government. If owned, they are a major capital expense. However, in comparison to other modes, the cost of a vehicle is small. This means that for road carriers most of
their costs are operating (variable) in nature.

Trucks can provide door-to-door service. They are particularly suited to distribution of relatively small-volume goods to a dispersed market.

Air
Air transport requires an airway system that includes air traffic control and navigation systems. These systems are usually provided by the government. Carriers pay a user charge that is variable cost to them. Terminals include all of the airport facilities, most of which are provided by the government. However, carriers are usually responsible for providing their own cargo terminals and maintenance facilities,
either by owning or renting the space. The aircraft are expensive and are the single most important cost element for the airline. Since operating costs are high, airlines’ costs are mainly variable.

The main advantage of air transport is speed of service, especially over long distances. Most cargo travels in passenger aircraft and thus many delivery schedules are tied to those of passenger service. Transportation cost for air cargo is higher than for a other modes. For these reasons, air transport is most often suitable for high-value,
low-weight cargo or for emergency items.

Water
Waterways are provided by nature or by nature with assistance of the government. The carrier thus has no capital cost in providing the ways but may have to pay a fee for using the waterway. Terminals may be provided by the government but are increasingly privately
owned. The carrier will pay a fee to use them. Thus, terminals are mainly a variable cost. Vehicles are either owned or leased by the carrier and represent the major capital or fixed cost to the carrier.

The main advantage of water transport is cost. Operating costs are low and, since the ships have a relatively large capacity, the fixed costs can be absorbed over large volumes. Ships are slow and are door-to-door only if the shipper and the consignee are on the waterway. Therefore, water transportation is most useful for moving low-value, bulky cargo over relatively long distances where waterways are
available.

Pipelines
Pipelines are unique among the modes of transportation in that they move only gas, oil and refined products on a widespread basis. Capital costs for ways and pipelines are high and are borne by the carrier, but operating costs are very low.

Warehouses

Warehouses provide a place to store , handle and protect goods. They form an integral part of the business functions of an organization and contribute to the competitive advantage of a company by improving customer service levels and reducing transportation costs.Warehouses include plant warehouses, regional warehouses and local warehouses. They may be owned and operated by the supplier or intermediaries such
as wholesalers, or may be public warehouses.

The general activities carried out by warehouses can be broadly classified as follows :

1. Receiving
2. Put-away / Storing
3. Order Picking
4. Shipping
5. Maintaining an Information System

The service functions warehouses perform can be classified into 2 kinds:

- The general warehouse where goods are stored for long periods and where the prime purpose is to protect goods until they are needed. There is minimal handling, movement and relationship to transportation. It is also the type used for inventories accumulated in anticipation or seasonal sales;
- The distribution warehouse has a dynamic purpose of movement and mixing. Goods are received in large-volume uniform lots, stored briefly,
and then broken down into small individual orders of different items required by the customer. The emphasis is on movement and handling rather than on storage. This type of warehouse is widely used in distribution systems.

Warehouses represent an interruption in the flow of material and thus add cost to the system. Items should be warehoused only if there is an offsetting benefit gained from storing them.

Role of Warehouses in the Distribution System
In a physical distribution system, the primary activities of the distribution warehouses / distribution centers include product mixing, handling and moving goods to meet customer requirements at reduced costs.
To be effective in their functioning, distribution warehouses should perform the following roles :

Consolidation :

 Usually products shipped to the distributors from various sources are in less-than-truckload (LTL) shipments. Consolidation function helps to convert many such small shipments into full / truckload (TL) shipments and in transporting these truckloads to the deployment warehouses. From the deployment warehouses, the shipments are broken down into smaller, less-thantruckload (LTL) shipments to cater to the local market requirements and this process is called break-bulk.

Product mixing. Product mixing deals with the grouping of different items into an order and the economies that warehouses can provide in doing this. When customers place orders, they often want a mix of products that are produced in different locations.

Service. Distribution centers improve customer service by providing place utility. Goods are positioned close to markets so the markets can be serve more quickly.

Materials Handling & Packaging

Typically, distribution warehouses perform the activities of receiving, shipping and storing large number of goods on a continuous basis. This demands large amounts of internal movement of goods, loading and unloading activities and good storage mechanism within the warehouse.

Material handling is responsible for :

Designing efficient processes required for handling and moving goods.
Using these processes for the actual handling and movement of goods from / to the required locations to / from the storage areas

Some objectives of materials handling are as follows:
- To increase cube utilization by using the height of the building and by reducing the need for aisle space as much as possible;
- To improve operating efficiency by reducing handling. Increasing the load per move will result in fewer moves;
- To improve the service level by increasing the speed of response to customer needs

For convenience, materials handling equipment can be grouped into 3 categories:
- Conveyors are devices that move material horizontally or vertically between 2 fixed points. They are expensive, create a fixed route and occupy
space continuously. They are used only where there is sufficient throughput between fixed points to justify their cost;

- Industrial trucks are vehicles powered by hand, electricity, or propane. Industrial trucks are more flexible than conveyors in that they can move
anywhere there is a suitable surface and no obstructions. They do not occupy space continuously. For these reasons, they are the most often-used form of material handling in distribution centers and in manufacturing;

- Cranes and hoists can move materials vertically and horizontally to any point within their area of operation. They use overhead space and are used to move heavy or large items. Within their area of operation, they are very flexible.

 PACKAGING
The basic role of packaging in any industrial organization is to carry the goods safely through a distribution system to the customer. The package must do the following:

- Identify the product,
- Contain and protect the product,
- Contribute to physical distribution efficiency.

For consumer products, the package may also be an important part of the marketing program. The package serves as a means of identifying the product in a way not possible from its outward appearance. The package must be robust enough to protect and contain the product through all phases of distribution.

Unitization
Unitization is the process of consolidating individual products into bigger units in order to achieve reduction in material handling and labour costs and in improving the transportation efficiency of the products. These bigger units are called unit loads. Unit loads can represent containers, boxes, cartons, racks, pallets and other possible packaging forms.

Unitization can be successive where the initial products can be consolidated in a unit load, these unit loads can further be consolidated into bigger unit loads and so on. Effective unitization requires the products to be consolidated into the appropriate unit loads. To achieve this, it is necessary to understand the dimensional relationshipsbetween the products and their subsequent unit loads.

As an example, consider a soft drink bottle to be a product. 20 such bottles are handled in a crate, the racks in one transport vehicle handles 100 crates and the distribution storage area is designed to hold 10 racks.
One product = one soft drink bottle
One crate = 20 soft drink bottles
One rack = 100 crates = 2000 soft drink bottles
Storage area = 10 racks = 1000 crates = 20000 soft drink bottles
In addition to the advantages of material handling and transport efficiency, unitization also helps in reducing the chances of damage to the products

Transportation Costs

In a physical distribution system, transportation function is concerned with the movement of goods from the factory to the end customer through a number of intermediaries.

In a typical distribution setup, the finished goods are shipped to the factory warehouse, from the factory warehouse, the goods are shipped to the distribution warehouses, from the distribution warehouses the goods are sent to local storage. From the local storage, the goods are sent to the final customers.

An efficient transportation system helps attain a high customer service level and contributes in gaining a competitive advantage by being cost effective in their operations. This requires transportation to understand and analyse the various costs of the system,
which further help in gaining economies of transportation by selecting the appropriate transportation mode, optimizing on the transportation capacity, transportation routes etc.,

The following are the costs associated with the transportation function :

Line – Haul Costs
Pickup and Delivering Costs
Handling Costs
Billing and Collection Costs

Goods move either directly from the shipper to the consignee or through a terminal. In the latter, they are picked up in some vehicle suitable for short-haul local travel. They are then delivered to a terminal where they are sorted according to destination and loaded onto highway vehicles for travel to a destination terminal. There they are again sorted, loaded on local delivery trucks and taken to the consignee.

Line-haul costs
When goods are shipped, they are sent in a moving container that has a weight and a volume capacity. The carrier has basic costs to move this container, which exit whether the container is full or not. These costs vary with the distance travelled, not the weight carried. For example, if for a given commodity, the line-haul costs is $3 per mile and the distance is 100 miles, the total line-haul cost is $300. if the shipper sends 50,000 pounds the total line-haul is the same as if 10,000 pounds is sent. However, the line-haul costs (LHC) per hundred weight (cwt.) is different.
LHC / cwt. = 300 / 500 (for 50,000 lb.) = $0.60 per cwt.
LHC / cwt. = 300 / 100 (for 10,000 lb.) = $3.00 per cwt.

Thus, the total line-haul cost varies with the cost per mile and the distance moved. However, the line-haul cost per hundred weight varies with the cost per mile, the distance moved and the weight moved.

The carrier has 2 limitations or capacity restrictions on how much can be moved on any one trip: the weight limitation and the cubic volume limitation of the vehicle. With some commodities, their density is such that the volume limitation is reached before the weight limitation. If the shipper wants to ship more, a method of increasing the density of the goods must be found. This is one reason that some products are made so they nest and others are shipped in an unassembled state.

Pickup and delivery costs
Pickup and delivery costs are similar to line-haul costs except that the cost depends more on the time spent than on the distance travelled. The carrier will charge for each pickup and the weight picked up. If a shipper is making several shipments, it will be less expensive if they are consolidated and picked up on one trip.

Terminal handling costs
Terminal-handling costs depend on the number of times a shipment must be loaded, handled and unloaded. If full truckloads are shipped, the goods do not need to be handled in the terminal but can go directly to the consignee. If part loads are shipped, they must be taken to the terminal, unloaded, sorted and loaded onto a highway vehicle. At the destination, the goods must be unloaded , sorted and loaded onto a local delivery vehicle.

The basic rule for reducing terminal-handling costs is to reduce handling effort by consolidating shipments into fewer parcels.

Billing and collecting costs
Every time a shipment is made, paperwork must be done and an invoice made out. Billing and collecting costs can be reduced by consolidating shipments and reducing the pickup frequency.

Total transportation costs
The total cost of transportation consists of line-haul, pickup and delivery, terminal-handling and billing and collecting costs. To reduce shipping costs, the shipper needs to do the following:
- Decrease line-haul costs by increasing the weight shipped;
- Decrease pickup and delivery cost by reducing the number of pickups. This can be done by consolidating and increasing the weight per pickup;
- Decrease terminal-handling costs by decreasing the number of parcels by consolidating shipments;
- Decrease billing and collecting costs by consolidating shipments

For any given shipment, the line-haul costs vary with the distance shipped. However, the other costs are fixed. The total cost for any given shipment thus has a fixed cost and a variable cost associated with it. In the latter, the cost per mile for short distances far exceeds that for longer distances.

The rate charged by a carrier will also vary with the commodity shipped and will depend upon the following:

- Value. A carrier’s liability for damage will be greater the more valuable the item;
- Density. The more dense the item, the greater the weight that can be carried in a given vehicle;
- Perishability. Perishable goods often require special equipment and methods of handling;
- Packaging. The method of packaging influences the risk of damage and breakage.

In addition, carriers have 2 rate structures, one based on full loads called truckload (TL) or carload (CL) and one based on less than truckload (LTL) and less than carload (LCL). For any given commodity, the LTL rates can be up to 100% higher than the TL rates. The basic reason for this differential lies in the extra pickup and delivery, terminal-handling and billing and collection costs. Truckers, airlines and water carriers accept less than full loads but usually the railways do not accept.

Multi Warehouse System

We want to know what happens to the service level as more distribution centers are added to the system. To make valid comparisons, we must freeze the sales volume. We can then compare the costs as we add distribution centers to the system.

Transportation costs
Generally, as more distribution centers are added to a system, we expect the following:

- The cost of TL shipments increases,
- The cost of LTL shipments decreases,
- The total cost of transportation decrease.

The major savings are made with the addition of the first distribution centers. Eventually, as more distribution centers are added, the marginal savings decrease.

Warehousing costs
The space needed depends on the amount of inventory carried. As we have seen, as more distribution centers are added to the system, more inventory has to be carried, which requires more space. In addition, there will be some duplication of non-storage space such as washrooms and offices. So as the number of distribution increases, there will be a gradual increase in distribution center space costs.

Operating costs depend largely on the number of distribution center increases. Operating costs depend largely on the number of units handled. Since there is no increase in sales, the total number of units handled remains the same, as does the cost of handling. However, the non-direct supervision and clerical costs increase.

Inventory-carrying cost
The average inventory carried depends on the order quantity and the safety stock. The total SS will be affected by the number of warehouses in the system. For the same SKU, the standard deviation varies approximately as the square root of the ratio of the different annual demands. Suppose that the average demand is 1000 units and, for a service level of 90%, the safety stock is 100 units. If the 1000 units is divided between 2 distribution centers each having a demand of 500 units, the safety stock in each is:

Thus, with a constant sales volume, as the number of distribution centers increases, the demand on each decreases. This causes an increase in the total safety stock in all distribution centers.

Material handling costs
There will be a little change in materials handling costs as long as the firm can ship units loads to the distribution center. However, if the number of distribution centers increases to the point that some non-unitized loads are shipped, materials handling costs increase.

Packaging costs
Per-unit packaging costs will remain the same, but since there will be more inventory, total packaging costs will rise with inventory.

Total system cost

Figure shows graphically how the cost of transportation, warehousing, materials handling inventory and packaging behave as distribution centers are added to the system. Up to a point, total cost decrease and then start to increase. It is the objective of logistics to determine this least-cost point.

System service capability
The service capability of the system must also be evaluated. One way of assessing this is by estimating the percentage of the market served within a given period.

As expected, the service level increases as the number of distribution centers increases. The first distribution center is built to serve the best market, the next to serve the second best market and so on. Let us assume that a study has been made of a system of 1 to 10 distribution centers and the costs are as shown in figure:

A three-distribution center system would provide the least total cost. Figures show that by moving from 3 to 10 distribution centers, the one-day service level increases by 8%. Management must decide which system to select. The decision must be based on adequate analysis of the choices available and a comparison of the increase in costs and service level.

PAC Definitions

Order Processing
APICS defines order processing as the activity required to administratively process a customers’ order and make it ready for shipment or production.

Order Promising
APICS defines order promising as the process of making a delivery commitment, I.e. answering the question, when can you ship? For make-to-order products, this usually involves a check of uncommitted material and availability of capacity, often as represented by the master schedule available to promise.

Pull System
APICS defines Pull System as a system that In production, produces items only as demanded for use or to replace those taken for use
In material control, withdraws inventory as demanded by using operation. Material is not issued until a signal comes from the user In distribution, replenishes field warehouse inventories where replenishment decisions are made at the field warehouse itself, not at a central warehouse or plant.

Push System
APICS defines Push system as a system that In production, produces items at times required by a given schedule planned in advance
In material control, issues the material according to a given schedule or issues material to a job order at its start time. In distribution, replenishes field warehouse inventories where replenishment decision making is centralized, usually at the manufacturing site or central supply facility.

Planning files
PAC must have a data or information system from which to work. The files contained in the databases are of 2 types: planning and control.
4 planning files are needed: item master file, product structure file, routing file and work center master file.

Item master file
There is one record in it for each part number. The file contains all of the pertinent data related to the part. For PAC, this includes the
following:
- Part number, a unique number assigned to a component;
- Part description;
- Manufacturing lead time;
- Quantity on hand;
- Quantity available;
- Allocated quantity;
- On-order quantities, the balance due on all outstanding orders;
- Lot-size quantity.

Product structure file (bill of material file) It contains a list of single-level components and quantities needed to assemble a parent.

Routing file It contains a record for each part manufactured. For each product, this file contains a step-by-step set of instructions describing how the product is made. It gives details of the following:
- The operations required to make the product and the sequence in which those operation are performed;
- A brief description of each operation;
- Equipment, tools and accessories needed for each operation;
- Setup times;
- Run times;
- Lead times for each operation.

Work center master file It collects all of the relevant data on a work center.For each work center, it gives details on the following:
- Work center number,
- Capacity,
- Number of shifts worked per week,
- Number of machine hours per shift,
- Number of labor hours per shift
- Queue time,
- Alternate work centers, work centers that may be used as alternatives.

Control files
Control in intermittent manufacturing is exercised through shop orders and control files that contain data on these orders. There are generally 2 kinds of files: the shop order master file and the shop order detailed file.

Shop order master file
Each active manufacturing order has a record in it.The purpose is to provide summarized data on each shop order such as the following:
- Shop order number, a unique number identifying the shop order;
- Order quantity;
- Quantity completed;
- Quantity scrapped;
- Quantity of material issued to the order;
- Due date, the date the order is expected to be finished;
- Priority, a value used to rank the order in relation to others;
- Balance due, the quantity not yet completed;
- Cost information.

Shop order detail file
Each shop order has a detail file that contains a record for each operation needed to make the item. Each record contains the following:
- Operation number;
- Setup hours, planned and actual;
- Run hours, planned and actual;
- Quantity reported complete at that operation;
- Quantity reported scrapped at that operation;
- Due date or lead time remaining.