Principle of Logistics

Question: The purpose of this report is to show the integration of the logistics activities in the core functional areas such as production, marketing, accounting and finance.The report also shows the efficacy of fixed time interval and fixed quantity interval of ordering. Answer: Introduction The purpose of this report is to show the integration of the logistics activities in the core functional areas such as production, marketing, accounting and finance. The report also shows the efficacy of fixed time interval and fixed quantity interval of ordering. The applications of the various techniques such as ABC inventory analysis and economic order quantity to improve the present order cycle are based on the best to the industry standards. In order to increase the operational efficiency models based on program evaluation and review techniques has been shown based on the present operation cycle. Terex, headquartered at Westport Connecticut, United States is recognized as a leading manufacturer for construction equipments and providing material handling solution to variety of industries range from shipping, mining, infrastructure building, transportation facilities and refining. The companys main logistics center of Terex is based in North Blend, Washington for the aerial work p latform of the equipment. The Companys European and Asian Pacific parts of the logistics operation are mainly controlled through outsourcing of man power resources. The MHPS (material handling port solutions) section of Terex provides new designs for manufacturing universal cranes, ropes, electric motors and light crane component. The material process section of the company provides various solutions like material processing of equipment, washing systems, apron feeders, biomass, wood processing and recycling machines. The company has major distribution hubs in Louisville and Kentucky and a large part of the raw materials is supplied to other parts of the world from these locations. (Equipment - Terex Corporation, 2016) The Interfaces The amalgamation of the various business activities with the supply chain operant is known as logistics management. The integration of the supply chain operations with the core functional areas like accounting, marketing finance and production is done by enterprise resource planning. The implementation of Enterprise resource planning makes the integration process effortless. The company uses Oracle software solutions in order to link all the areas of financial services, material handling, procurement and marketing activities through the mentioned ERP system. The various modules that the company uses to make interface with software includes Oracle Financials (equipment financing), Oracle warehouse module (for material management) The quality management if the company is also handles with the use of ERP system. The entire operation material management like creation of purchase orders, sourcing of vendors, plant maintenance, and procurement of the construction equipment along with vendor evaluation becomes seamless through the integration of all the functional areas with the enterprise resource planning software. The vendor sourcing plays a crucial role in tracking of the distributors and selection of the vendors offering distribution service at best price in the market. The company is not only able to efficiently manage the activities related to production and ordering, it also takes care of the warehousing activities through the ERP implementation process (Madapusi D'Souza, 2012).The impacts of logistics in the core departmental areas are discussed below as follows: Warehouse Costs Depending on the logistics activities the warehouse storage and selection of the storage facility needs to be done. As the company deals with logistics operations of construction equipments, the warehouse should have an ample amount of free space for the handling and movement of forklifts. The warehouse should be located ideally near the pot for easy shipment of heavy construction parts to different places. Purchasing- As the organization deals in manufacturing of construction equipments, the integration of logistics is critical. The activities involved in purchasing such as raw materials, delivery of the goods to a facility and procurement services is highly dependent on the logistics operation. It also ensures the suppliers are adhering to the logistics policies. Customer service- Logistics has a direct impact on the reducing the shipping costs by making the service accessible to broader range of customers. The improved facility of logistics enables the customer to track the transit process. The advent of newer technology has a groundbreaking impact on providing an improved customer service. Inventory management/Inventory carrying cost- Logistic management plays a key role in determination of the vendor lead time and order processing for customers. It is directly related to efficient planning of the inventory activities in maintaining adequate stock level, inventory planning. It acts as a platform to determine the reorder level, safety stock and danger level based on the supplies. The implementation of reverse logistics helps the company to increase speed of production and reduces the transportation cost of the unsold products. (Ralston et al., 2013). Transportation According to a survey by National council of physical distribution management (NCPDM) the transportation expenses on an average account for 6.5% of the market revenue and 44% on the logistics costs. A study reveals that the overall impact of transportation on logistics shows that highest cost is associated with transportation with 29.4%. The improvement of the item with the higher operation costs can produce better results. The changes in the transportation policies influence production and sale. (Subramanian et al., 2014)Marketing- The increase in marketing costs shows a relative increment in the logistics cost to offset the increased expenditure. Marketing and logistics should be closely integrated to determine the profitability and long term implications of the promotional efforts. Marketing needs cost and operations input from Logistics and Manufacturing to evaluate accurately the true costs of each promotion. Order Cycle Terexs Order to cash cycle The order to cash (O2C) is the standard business procedure for accepting and managing customer orders dealing in goods and varied range of service offered by a business entity. These activities are of paramount importance for an efficient order processing and avoiding financial discrepancies. The outcomes of improper order management can have a detrimental impact either departmental or core functional areas of a business due to O2C cycle The primary purpose of order to cash is to fulfill the orders placed by the customers. (Brooks Mukherjee, 2013) The order to cash cycle involves the following procedure: The first step involves accepting orders from the customers through various channels such as sales person, email or Electronic data interchange. The order transaction can either be a straightforward purchase request, or a short term/long-term business proposal depending on the nature of services. In certain situation when the payment option is based on deferred payment mode the company can verify the credit history of the customer before processing such orders. Once the received order is recorded into the ERP system, the products are shipped and delivered to the appropriate destination. The customer orders are documented in this stage. As soon as the orders relating to a product or service are dispatched for shipment and made available for delivery, invoice is generated clearly specifying the description of the goods or services, amount owned, currency and total amount to be borne by the customer. The final step in the order cycle deals with making a workbook entry into the accounting system for recording entry of customer payment in the general ledger. Organizations focus on enhancing the credit exposure visibility by optimization of the outstanding amount at the day end. The key components involved in order to cash service to meet the key challenges involve: Optimization of the Day sales outstanding(DSO) Monitoring the activities of order cycle in a better way to avoid credit risk exposure, probable losses due to bad-debts and expense of the various collection process. The companies also use an efficient O2C in order to improve the forecasting of the cash inflows and reducing errors in receivables processing (Mulama et al., 2013) Improvement in the ordering cycle Some of the improvement in the ordering activities includes directly placing of the materials to the customer. Hence only after the materials having been procured though procure to pay cycle the required equipments can be prepared for the final delivery. The next step is inventory sourcing from the warehouse of the company. The warehouse picking of the materials is based on the warehouse pick slip. The slip consists of crucial information related to quantity rack or bin location. After the shipments are conformed the items will be ready to be shipped to the customers destination. The seamless tracking of the equipment is made possible thorough GPS tracking facility. The customers are able to check their order status by logging in to the companys website. The billing and payment activities are followed after the shipments of the products. Figure 2 Inventory Management The present inventory planning needs to be designed as per the model stated by A, B, C analysis. According to this form of inventory planning the A category of items are of the highest importance due to its cost and demand and thus this product is given the first priority in the inventory. The A category item are considered in the top 30% of the dollar value. The next sets of items are categorized as B category items and these items are prioritized on the basis of below 30% of the total dollar value. The C category items are of least importance and they are the items which are categorized in the below 10% of the total dollar value. A Top 30% of total dollar volume B Below 30% C Below 10% Terexs present inventory and improvement through EOQ Product Yeary Demand (Billion) Ordering Cost (million $) Demand x Cost (million $) Holding Cost Order Quantity (EOQ) % of total cost Product Class Aerial Work Platforms 0.2 39 7.8 0.035 36 54% A Construction Equipment 0.1 1 0.1 0.04 3 1% C Concrete mixer trucks 0.1 1.2 0.12 0.035 3 2% C Cranes 0.4 2.3 0.92 0.05 12 3% C Light Towers 0.3 9 11.7 0.03 62 12% C Material Handlers 0.3 2.8 0.84 0.045 11 4% C Off Highway Trucks 0.1 16 1.6 0.04 10 22% B Crawler Vehicle 0.1 1.3 0.13 0.05 2 2% C Total 1.6 73 116.16 0.325 42 100% Ordering time of a product In order to get a better understanding of when to order a product we need to consider fixed point model and fixed order interval model into ordering cycle of Terex Limited. Fixed Point Ordering Model The fixed order point technique of ordering stock takes into consideration the reorder point of a stock. Reorder point is the sum total of average demand per day times the lead time and safety stock. The ideal ordering tine is that time when the inventory which currently being used goes to reorder point. The inventory ordering time follows a fixed quantity for ordering of new items. Fixed order point model Figure 3 The advantage of using fixed order point is to precisely locate the reorder point of individual items in the inventory. It also takes into account less safety stock in compared to the fixed interval mode of ordering as the ordering quantity is fixed. Fixed order interval model The second model of ordering inventory deals with fixed order interval for ordering of inventory. Terex can use this model to set an ordering time interval for example every Friday for cranes and every Monday for aerial platforms. The ordering process can be based either on monthly basis or biweekly basis. The orders are placed for varying quantities so that the company is able to achieve. The diagram given below shows the difference between ordering as per fixed quantity and fixed time interval. Figure 4 Model showing the difference between fixed quantity ordering and fixed interval ordering Methods for minimizing the inventory levels Terex needs to analysis the present ordering lead time and apply various quantitative tools such as optimization and critical path analysis. An augmented effort needs to put on the inventory level by elimination of low turnover and obsolete items in the inventory. If Terex is able to forecast the customer demands from beforehand then it will be able to considerably reduce the holding costs and delivery time of the manufacturing and construction equipments. (Bartmann Bach, 2012). Measurement of inventory performance The performance measurement of inventory is done on the basis of amount of reorder quantity weekly or monthly basis. The measurement factor also takes into consideration the safety stock level of the present inventory. If the company is unable to meet the demand due to poor supply then the inventory will reach in danger level and the company will face acute shortage of inventory. (Marodin Saurin,2015) Improvement in the supply chain operations of the company The improvement in the present distribution activities can be improved through Critical path analysis. Terex needs to develop the critical path strategy for the supply chain operations. In order to implement the critical path method at first it needs to determine the unit rate productivity, assigning of working hours of the working of labors, loading/unloading time of the products. (Kazamzadeh Yari, 2015). Conclusion The integration of core functional activities have been shown thorough the ERP implementation process and the various interface shows the connection of logistics management with the core functional areas of the company. The report takes into consideration various practices currently followed by Terex corporations in terms of logistics and supply chain operations. The report also shows the various inventory planning procedures by studying the current ordering cycle and production activities of the companies. The report represents comprehensive details on procure to pay cycle of Terex and its feasibility on the present system of the company. The customer order cycle also shows the various steps involved in delivering the items to the final customers following the procurement procedure. The warehouse operation of the company is integrated to the ERP system so it becomes easy to plan and manage the inventory for the company. It is equally important for the company to maintain a fixed tim e of oredering and fixed quantity of ordering. The ABC analysis and EOQ will further enhance the selection and ordering process of the inventory. 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