Supply Chain Operations

Management
Lecture One

An AAST Course
Community Service Programs and Continuous
Education
Mar2020 Designed By: Ramy El Shal 1
 Introduction
• About the Lecturer:
Ramy El Shal
M.Sc. Economics, Faculty of African Postgraduate Studies, Cairo University
MBA, ESLSCA Business School Paris
EJLog, European Logistics Association
Certified Salesforce Service Cloud Consultant
18 years of experience in
Real Estate, Property, Automotive, IT, and Rail Industries
+201223192139
[email protected]

• Now, About You …

(Name, Location, Education, Ambition and Experience Background)

May 2022 Designed By: Ramy El Shal 2

 How to get the best out of
this Course
• The only stupid question is the question you never
ask.
• Interact. Please.
• No Side Talks.
• Silent your Phone, But you can, and are
encouraged to, use the Camera and Calculator
when needed.
• Video/Audio Recording is allowed.
• Bring a pencil and papers next to you.
• Do have a look at the resources when you get the
material.
May 2022 Designed By: Ramy El Shal 3
 Course Objectives
Highlight
Dig further Further
into Areas of
knowledge 1) Get Familiar with
Interest
the underlying
Concepts
2) Develop Critical
Thinking
3) Stimulate
Initiative

Mar2020 Designed By: Ramy El Shal 4

 Course Syllabus
• Introduction
• Demand Forecasting
• Material Requirement Planning
• Aggregate Planning
• Master Scheduling
• Advanced Planning and Scheduling
• Inventory Control
• Warehouse Planning
• Location Planning
• Work Measurement

Now let’s begin …

Mar2020 Designed By: Ramy El Shal 5
 Introduction

May2021 Designed By: Ramy El Shal 6

 Introduction
• What is “Supply Chain Management”?
• What is “Supply Chain Planning”?

May2021 Designed By: Ramy El Shal 7

 Introduction

Supply is the The Strength Getting things done

counterpart of a chain is through the …
of … measured by
its …

May 2022 Designed By: Ramy El Shal 8

 Introduction
• Definition:

Involved in Fulfilling
OR
Without which the
company cannot fulfill

May 2022 Designed By: Ramy El Shal 9

 Introduction

The Right Product

The Right Quantity
The Right Quality
The Right Price
The Right Time
The Right Condition
The Right Information
The Right Service

How to do all of that .. At a profitable level of Cost-to-serve?

It all Depends on the Accuracy of Forecasting all these elements
May 2022 Designed By: Ramy El Shal 10
Reading - Free people icons

Introduction
• There are three levels of Supply Chains

Supplier Company Customer

Supplier’s Customer’s
Supplier Supplier Company Customer Customer

3PLogistics

Supplier’s Customer’s
Supplier Supplier Company Customer Customer
Market Research
Financial Provider
May 2022 Designed By: Ramy El Shal 11
 Introduction
• The three main components of a Supply Chain:

Stream

Source Make Deliver

Upstream Downstream
Reverse Flow of Primary Flow of
Goods + Information Goods + Information

Supplier Company Customer

May 2022 Designed By: Ramy El Shal 12

 Introduction
• A Deeper Insight: Toyota
Production System
• In TPS: each process has a supplier
(Predecessor Process) and Customer
(Subsequent Process)

Capacity: 1 Car/Hour 3 Cars/Hour 2 Cars/Hour

Sales Forecast
Demand: 1 Car/Hour 1 Cars/Hour 1 Cars/Hour
May 2022 Designed By: Ramy El Shal 13
 Introduction
• Vertical Integration
Customer

Integration
= Forward
By means of with key
Integration
Distributors
Long term Deals/ Company
Merger & Acquisition
Integration
= Backward
with key
Integration
Suppliers

Supplier

May 2022 Designed By: Ramy El Shal 14

 Introduction
• Horizontal Integration
Customer

Different Company Competitor

Product Maker
Unrelated Related
Integration Integration

Supplier Supplier Supplier

3 1 2
May 2022 Designed By: Ramy El Shal 15
 Introduction

Supplier Company Customer

Purchasing Production Marketing

Leasing Operations Sales

Sourcing Decision Making Service

May 2022 Designed By: Ramy El Shal 16

 Introduction
• Supply Chain Planning:
• Mapping of Required Steps
• To Ensure a Product (Goods or Services)
• Is Available to fulfill Anticipated Demand
• Efficiently

May 2022 Designed By: Ramy El Shal 17

 Introduction
• Supply Chain Planning:
• Mapping of Required Steps
Resources
Movement

Manpower
Sales
Operations
Cashflow

Storage

Processing
May 2022 Designed By: Ramy El Shal 18
 Introduction
The Enemies of Efficiency
• Supply Chain Planning:
• Efficiently

Efficiency VS
Effectiveness?

May 2022 Designed By: Ramy El Shal 19

 Introduction
• Supply Chain Planning:
• Efficiently

Inventory Over Over Defects

Production Processing

Transportation Motion Waiting Unused

Talents
May 2022 Designed By: Ramy El Shal 20
 Introduction
• Supply Chain Planning:
• Core Activities:
• Source:
• Required Raw Materials
• Suppliers Relationship
• Make:
• Production Planning
• Capacity Planning
• Deliver:
• Demand Forecasting
• Distribution Planning
• Replenishment

May 2022 Designed By: Ramy El Shal 21

 Introduction
• Supply Chain Planning:
• Processes:
Advanced
Demand
Planning and
Forecasting
Scheduling

Production Sales
Planning Planning

Material
Requirement
Planning

May 2022 Designed By: Ramy El Shal 22

 Introduction
• Supply Chain Planning:
• Objectives:
• Increasing Sales
• Customer Satisfaction
• Optimizing Production
• Effectiveness
• Efficiency
• Reducing Cost-to-Serve
• Reinforce Relationships with Suppliers
• Available
• In Time
• At the Right Price
May 2022 Designed By: Ramy El Shal 23
 Forecasting Models for
Demand Planning

May2021 Designed By: Ramy El Shal 24

 Forecasting Models for
Demand Planning
• What is Forecasting? Stock Out = Opportunity
Cost (loss)
Dependent Variable (Outcome)

JIT

Over Stock = Actual Costs

(Excess
Inventory -
Write-offs)
Actual Prediction

Independent Variable (Predictor)

May2021 Designed By: Ramy El Shal 25

Reading - Free people icons

Forecasting Models for

Demand Planning
• Factors to Consider when Choosing a
Forecasting Method:
• The Context
• Relevance and Reliability of Historical Data
• Acceptable Degree of Accuracy
• Time Span of the Forecast
• Cost-Benefit of Forecast
• Available Time for Analysis
• Revisiting all of the above constantly

May2021 Designed By: Ramy El Shal 26

 Forecasting Models for
Demand Planning

May2021 Designed By: Ramy El Shal 27

 Forecasting Models for
Demand Planning
• General Types of Forecasting Methods:
• Qualitative Techniques (Expert Opinion)
• Time-series and Projection (Historical Data)
• Causal Models (Underlying Elements)

May2021 Designed By: Ramy El Shal 28

 Forecasting Models for
Demand Planning
• General Types of Forecasting Methods:
• Qualitative Techniques (Expert Opinion)
• Delphi Method
• Market Research
• Panel Consensus
• Visionary Forecast
• Historical Analogy

May2021 Designed By: Ramy El Shal 29

 Forecasting Models for
Demand Planning
• General Types of Forecasting Methods:
• Time-series and Projection (Historical Data)
It Explains:
• Regularities and Systematic Variations
• Trends
• Cycles and Patterns Existence
• Growth Rates
Direction
Further research: Amount
Elliot Waves
Significance
Fibonacci Retracement

May2021 Designed By: Ramy El Shal 30

 Forecasting Models for
Demand Planning
• General Types of Forecasting Methods:
• Time-series and Projection (Historical Data)
Methods:
• Trend Projections
• Moving Average
• Exponential Smoothing
• X-11 Seasonality
• Box-Jenkins (ARIMA)

May2021 Designed By: Ramy El Shal 31

 Forecasting Models for
Demand Planning
• General Types of Forecasting Methods:
• Causal Models (Underlying Elements)
• Regression Model (ANOVA)
• Econometric Model
• Anticipation Surveys
• Input-Output Model
• Economic Input-Output Model
• Diffusion Index
• Leading Indicator
• Life-Cycle Analysis

May2021 Designed By: Ramy El Shal 32

 Forecasting Models for
Demand Planning
• Steps to Forecast: Y = a + b.(X)

Choose Test
Method Model
• Establish
• Dependent • Apply Target
Relationship
(Y) • Bias Y to find
• Seasonality • Identify Trend required level
• Independent • MAD
(X) • # of X • Run Forecast on of X
Actual Data • MAPD
Variables
• MSE
Collect Construct • Running Sum
Run
Data Model Forecast

May2021 Designed By: Ramy El Shal 33

 Material Requirement
Planning (MRP)

July2021 Designed By: Ramy El Shal 34

 Material Requirement
Planning (MRP)
• What is MRP? BOM
What we need …
Bill of
Material

MRP
Material
What we have …
Requirement When do we need it …
Planning
MPS
IRF
Master
Inventory
Production
Record File
Schedule

July2021 Designed By: Ramy El Shal 35

 Material Requirement
Planning (MRP)
What to
Order?
MRP
Material Inventory When to
Inventory
Requirement Policy Order?
Planning
How
Much to
Order?

July2021 Designed By: Ramy El Shal 36

 Material Requirement
Planning (MRP)

Inventory

Is a Necessary Evil
Keep it as Low as Possible
Use Just-In-Time .. Not Just-In-Case

July2021 Designed By: Ramy El Shal 37

 Material Requirement
Planning (MRP)

July2021 Designed By: Ramy El Shal 38

 Material Requirement
Planning (MRP)
= Structure of Each End Item
BOM
Here it refers to Table
Bill of
Material Or Hierarchy .. 1A 4D
(Plate) (Nails)
End Item
(Table)
In the form of Diagram .. 4B 2C 4D
(Legs) (Angles) (Nails)
6 cm

Or Database ..
100 cm
Item Quantity Source Description
A (Plate) 1 Table 150*90*6 cm plate
B (Legs) 4 Table 100*4*4 cm Legs
C (Angles) 2 B 3*3 cm Angles
4 cm 4 cm D (Nails) 4 A 3 cm 4" Screw Nails
2 Angles (3*3) D (Nails) 4 C 3 cm 4" Screw Nails
for each Leg

July2021 3 cm 4" Screw Nails Designed By: Ramy El Shal 39

 Material Requirement
Planning (MRP)
MPS
Master = Demand of Each End Item (Table)
Production
Schedule

Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Demand 25 30 33 34 29 25 22 24 25 28 31 29

July2021 Designed By: Ramy El Shal 40

 Material Requirement
Planning (MRP)
IRF
Inventory = Inventory Information
Record File

Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Demand 25 30 33 34 29 25 22 24 25 28 31 29
Past Release Receipt
(Order)
Receipt
Release Receipt
Scheduled (Order)
Receipt (SR)
Release Receipt
Planned (Order)
Receipt
July2021 Designed By: Ramy El Shal 41
 Material Requirement
Planning (MRP)
IRF
Inventory = Inventory Information
Record File

Beginning Inventory (BI)

Also Known As:
Projected Stock Balance (PSB)
Lead Time (LT)
Scheduled Safety Stock (SS)
Receipt (SR) Lot Size Discipline (Qd)
Planned
Receipt
July2021 Designed By: Ramy El Shal 42
 Material Requirement
Planning (MRP)
IRF
Inventory
Record File
Lot Size Discipline (Qd)

Qd = LFL Qd = 12 Qd = 12+
Lot-For-Lot Fixed Lot Minimum Lot
+ LFL

July2021 Designed By: Ramy El Shal 43

 Material Requirement
Planning (MRP)
End Item MRP
Material Requirement Planning
MPS
Master Month Jul Aug Sep Oct Nov Dec
Production GR (Gross
Schedule Requirement) 24 25 28 31 29
IRF SR (Scheduled
Inventory Receipt)
40 SS= 0
Record File PSB (Projected
Stock Balance) 50 26 41 13 2 3

IOH (Inventory On Hand) 50 26 41 13 2

Inventory 18
NR (Net Requirement) 27
Policy
PR (Planned Receipt) (When – 20 30 Qd = 10
POR (Planned Order How Much)
Release) 20 30 LT= 2 Months
July2021 Designed By: Ramy El Shal 44
 Material Requirement
Planning (MRP)
End Item MRP
Material Requirement Planning
MPS
Master Month Jul Aug Sep Oct Nov Dec
Production GR (Gross
Schedule Requirement) 24 25 28 31 29
IRF SR (Scheduled
Inventory Receipt)
40 SS= 0
Record File PSB (Projected
Stock Balance) 50 26 41 13 2 3

IOH (Inventory On Hand) 50 26 41 13 2

NR (Net Requirement) Average 18 27

Inventory = 21.7
PR (Planned Receipt) 20 30 Qd = 10
POR (Planned Order
Release) 20 30 LT= 2 Months
July2021 Designed By: Ramy El Shal 45
 Material Requirement
Planning (MRP)
1A 4D
(Plate) (Nails)
End Item
(Table)

IRF 4B 2C 4D
(Legs) (Angles) (Nails)
Inventory
Record File
SR
ITEM LT SS Qd BI Quantity Time

End Item 2 0 10 50 40 Feb

A (Plate) 3 10 10+ 70 40 Feb
B (Legs) 2 40 LFL 150 200 Feb
C (Angles) 1 30 50+ 73 50 Jan
D (Nails) 1 300 1000 350 1000 Jan
July2021 Designed By: Ramy El Shal 46
 Aggregate Planning
(MRP II)

May2021 Designed By: Ramy El Shal 47

 Aggregate Planning
(MRP II)
• What is MRP II?
Aggregate Planning refers to the higher level of
MRP: Manufacturing Resource Planning

ERP

MRP II

MRP I

July2021 Designed By: Ramy El Shal 48

 Aggregate Planning
(MRP II)

July2021 Designed By: Ramy El Shal 49

 Aggregate Planning
(MRP II)
Start with
Demand
Forecast
Define
Production
Level
Aggregate Maximize
Planning Profit
Define
Inventory
Level
Define
Capacity
Level

July2021 Designed By: Ramy El Shal 50

 Aggregate Planning
(MRP II)
Maximize
Profit

Demand
Forecast Production Inventory Capacity

Maximize Minimize
Revenue Expenses

July2021 Designed By: Ramy El Shal 51

 Aggregate Planning (MRP
II)

Production Inventory Capacity

How much we When do we expect The Labor Needed

need to produce? Stockouts? The Machines
(MRP I) Needed
When do we expect
Backlogs? The current
How much we need to availability of Both
source/subcontract? What is our Seasonal
Inventory? The Increase/Reduction
Needed in Both
What is our Average
Flowtime?

July2021 Designed By: Ramy El Shal 52

 Aggregate Planning (MRP
II)
• Aggregate Planning Strategies:

Chase Flexibility Level

Strategy Strategy Strategy

Capacity Lever Utilization Lever Inventory Lever

July2021 Designed By: Ramy El Shal 53

 Aggregate Planning
(MRP II)
• Aggregate Planning Strategies:
Capacity Lever Utilization Lever Inventory Lever

Chase Flexibility Level

Strategy Strategy Strategy

Cost Inventory
Holding
Cost

Machine
Cost
Units
July2021 Designed By: Ramy El Shal 54
 Aggregate Planning
(MRP II)
• Aggregate Planning Strategies:
Buy/Sell Machines Use when:
Capacity Lever
Hire/Layoff Labor You do not
need Highly
Skilled Labor
Very hard on Very low
Chase Short Notice Inventory Inventory
Levels Holding Cost
Strategy Negative is Very High
Effects on
Labor Morale
Machine Cost
Expensive is Low

July2021 Designed By: Ramy El Shal 55

 Aggregate Planning
(MRP II)
• Aggregate Planning Strategies:
Stable Machine/Labor Use when:
Inventory Lever Capacity
Constant Output

Fluctuating High Labor

Level Inventory Morale Inventory
Levels Holding Cost
Strategy is Low
Prone to
Backlogs
Machine Cost
is High

July2021 Designed By: Ramy El Shal 56

 Aggregate Planning
(MRP II)
• Aggregate Planning Strategies:
Overtime/Flexible Use when:
Utilization Lever Working Hours
Excess Machine Capacity

Low levels of low Inventory

Flexibility Utilization Levels Inventory
Holding Cost is
Strategy Intermediate

Machine Cost
is
Intermediate

July2021 Designed By: Ramy El Shal 57

 Aggregate Planning (MRP
II)
• Workforce:
• Objectives:
• Workers Needed Wt
• Hiring Needed Ht
• Layoffs Needed Lt
• Overtime Needed Ot Capacity Lever
• Input:
• Productivity per Period w
Number of Units a worker produces during the period.
• Cost of Worker Normal Time per Period W$t
Worker Wage in Normal Hours per Period
• Cost of Worker Overtime per Period O$t
Worker Wage in Overtime Hours per Period
• Cost of Hiring H$t
• Cost of Layoff L$t
• Constraints:
• 𝑊𝑜𝑟𝑘𝑓𝑜𝑟𝑐𝑒 𝑊𝑡 = 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑊𝑜𝑟𝑘𝑓𝑜𝑟𝑐𝑒 𝑊𝑡 − 1 + 𝐻𝑖𝑟𝑒𝑑 𝐻𝑡 − 𝐿𝑎𝑖𝑑𝑜𝑓𝑓 𝐿𝑡
• 𝑂𝑣𝑒𝑟𝑡𝑖𝑚𝑒 𝑖𝑠 𝑙𝑖𝑚𝑖𝑡𝑒𝑑 𝑡𝑜 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑊𝑜𝑟𝑘𝑓𝑜𝑟𝑐𝑒 𝑊𝑡

July2021 Designed By: Ramy El Shal 58

 Aggregate Planning
(MRP II)
• Inventory:
• Objectives:
• Production Needed (Units) Pt
• Subcontracting Needed (Units) Ct
Inventory Lever
• Ending Inventory Expected (Units) It
• Stockouts Expected (Units) St
• Input:
• Cost of Material per Unit P$t
• Cost of Subcontracting per Unit C$t
• Cost of Holding Inventory per Unit I$t
• Cost of Stockout per Unit S$t (Penalties – Opportunity Cost)
• Constraints:
• 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 ≤ 𝑇ℎ𝑒 𝑐𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑣𝑒 𝑝𝑟𝑢𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 w 𝑜𝑓 𝑤𝑜𝑟𝑘𝑓𝑜𝑟𝑐𝑒 𝑊𝑡 +
𝑤ℎ𝑎𝑡 𝑡ℎ𝑒𝑦 𝑐𝑎𝑛 𝑝𝑟𝑜𝑑𝑢𝑐𝑒 𝑑𝑢𝑟𝑖𝑛𝑔 𝑜𝑣𝑒𝑟𝑡𝑖𝑚𝑒
• 𝑂𝑣𝑒𝑟𝑡𝑖𝑚𝑒 𝑖𝑠 𝑙𝑖𝑚𝑖𝑡𝑒𝑑 𝑡𝑜 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑊𝑜𝑟𝑘𝑓𝑜𝑟𝑐𝑒 𝑊𝑡

July2021 Designed By: Ramy El Shal 59

 Aggregate Planning
(MRP II)
Practice Time
Month Forecast Additional Information
Material Cost 10 $/Unit
Jan 1600
Inventory Carrying Cost 2 $/Unit/Month
Feb 3000
Stockout Cost 5 $/Unit/Month
March 3200 Hiring and Training Cost 300 $/Worker
Apr 3800 Layoff Cost 500 $/Worker

May 2200 Labour Hours Required 4 Hrs/Unit

Regular Time Cost 4 $/Hr
June 2200
Overtime Cost 6 $/Hr
• Get: Revenue Per Unit 40 $/Unit
• Minimum Cost
Subcontracting Cost 30 $/Unit
• Minimum
Inventory Beginning Workforce (8 hrs/20 days) 80 Workers
• Level Capacity Beginning Inventory 1000 Units
Ending Inventory 500 Units
July2021 Designed By: Ramy El Shal 60
 Inventory Control

Feb2023 Designed By: Ramy El Shal 61

 Major Stock Point
• Major Stock Point
• No Stock Before it
• Stock after it is very limited and economically
justified

Major Stock Point

Supply Demand

Forecast Push Order Pull

Feb2023 Designed By: Ramy El Shal 62

 Major Stock Point
Procurement Manufacturing Assembly Distribution Delivery
Supplier Customer

Raw Sub Finished Finished

Material Assembly Goods at Goods at
Plant Distribution

Make and Deliver to Stock 5

Make to Stock 4

Assembly to Order 3

2 Make to Order

1 Engineer to Order

Feb2023 Designed By: Ramy El Shal 63

 Economic Order Quantity
(EOQ)

Feb2023 Designed By: Ramy El Shal 64

 Economic Order Quantity
(EOQ)
𝟐 × 𝑨𝒏𝒏𝒖𝒂𝒍 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑼𝒔𝒆𝒅 × 𝑶𝒓𝒅𝒆𝒓𝒊𝒏𝒈 𝑪𝒐𝒔𝒕
𝑬𝑶𝑸 =
𝑯𝒐𝒍𝒅𝒊𝒏𝒈 𝑪𝒐𝒔𝒕 𝒇𝒐𝒓 𝑶𝒏𝒆 𝒀𝒆𝒂𝒓

Interest Cost: Warehousing Cost:

𝐴𝑛𝑛𝑢𝑎𝑙 𝑊𝑎𝑟𝑒ℎ𝑜𝑢𝑠𝑖𝑛𝑔 𝐶𝑜𝑠𝑡𝑠
𝑊𝐴𝐶𝐶 × 𝑈𝑛𝑖𝑡 𝑃𝑟𝑖𝑐𝑒
𝑊𝑎𝑟𝑒ℎ𝑜𝑢𝑠𝑒 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦

How much meat should you buy every time for

your house?
Feb2023 Designed By: Ramy El Shal 65
 Reorder point
Lead
(ROP)
Time
Inventory Level

EOQ
Re-order
Point

Safety
Stock

0 Time

𝑹𝑶𝑷 = 𝑫𝒆𝒎𝒂𝒏𝒅 𝒅𝒖𝒓𝒊𝒏𝒈 𝑳𝒆𝒂𝒅 𝑻𝒊𝒎𝒆 + 𝑺𝒂𝒇𝒆𝒕𝒚 𝑺𝒕𝒐𝒄𝒌

Feb2023 Designed By: Ramy El Shal 66
 Reorder point (ROP)
• Practice: You are a manufacturer of Chairs
• You Produce 100 chairs per day
• Your Supplier provides Enough wood for 3,000
chairs per order, 20 days lead time
• Safety Stock Policy is to cover 500 Chairs
• What is your Reorder Point?
• At what Frequency should you order wood?

• 𝑅𝑂𝑃 = 100 × 20 + 500 = 2500 𝑊𝑜𝑜𝑑 𝑓𝑜𝑟 𝑎 𝐶ℎ𝑎𝑖𝑟

3000
• 𝐹𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦 = = 𝑒𝑣𝑒𝑟𝑦 30 𝑑𝑎𝑦𝑠
100
365
• 𝐴𝑛𝑛𝑢𝑎𝑙 𝐹𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦 = = 12.16 𝑜𝑟𝑑𝑒𝑟𝑠 𝑎 𝑦𝑒𝑎𝑟
30

Feb2023 Designed By: Ramy El Shal 67

 Safety stock
• Simple, Quick, Inaccurate Formula:

𝑺𝑺
= 𝑴𝒂𝒙 𝑫𝒆𝒎𝒂𝒏𝒅 𝒑𝒆𝒓 𝑫𝒂𝒚 × 𝑴𝒂𝒙 𝑳𝒆𝒂𝒅 𝑻𝒊𝒎𝒆
− 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑫𝒆𝒎𝒂𝒏𝒅 𝒑𝒆𝒓 𝑫𝒂𝒚 × 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑳𝒆𝒂𝒅 𝑻𝒊𝒎𝒆

• Good for quick analysis, insufficient data, or if

you are not getting paid well.

Feb2023 Designed By: Ramy El Shal 68

 Safety stock
• Back to the chair factory:
• You Produce average 100 chairs per day (standard
deviation 15 chairs)
• Your Supplier provides Enough wood for 3,000
chairs per order, 20 days lead time (standard
deviation 2 days)
• What is your Safety Stock?
• Calculate ROP?

• 𝑆𝑆 = 100 + 15 × 20 + 2 − 100 × 20 =
530 𝑊𝑜𝑜𝑑 𝑓𝑜𝑟 𝑎 𝐶ℎ𝑎𝑖𝑟
• 𝑅𝑂𝑃 = 100 × 20 + 530 = 𝑊𝑜𝑜𝑑 𝑓𝑜𝑟 2530 𝐶ℎ𝑎𝑖𝑟s

Feb2023 Designed By: Ramy El Shal 69

 Safety stock
• The Right Way:
• First, we need to calculate Cycle Service Level
(CSL)
• CSL means: the probability that the actual demand
during the lead time is less than or equal to (does
not exceed) ROP
𝑴𝒆𝒂𝒏

𝑺𝒕𝒂𝒏𝒅𝒂𝒓𝒅 𝑫𝒆𝒗𝒊𝒂𝒕𝒊𝒐𝒏 𝑺𝒕𝒂𝒏𝒅𝒂𝒓𝒅 𝑫𝒆𝒗𝒊𝒂𝒕𝒊𝒐𝒏

𝑷𝒓𝒐𝒃𝒂𝒃𝒊𝒍𝒊𝒕𝒚

𝑹𝑶𝑷

𝑪𝑺𝑳

𝑫𝒆𝒎𝒂𝒏𝒅 𝒅𝒖𝒓𝒊𝒏𝒈 𝑳𝒆𝒂𝒅 𝑻𝒊𝒎𝒆

Feb2023 Designed By: Ramy El Shal 70

 Safety stock
𝑪𝑺𝑳
= 𝑭 𝑹𝑶𝑷, 𝑫𝒆𝒎𝒂𝒏𝒅 𝒅𝒖𝒓𝒊𝒏𝒈 𝑳𝒆𝒂𝒅 𝑻𝒊𝒎𝒆, 𝑺𝒕𝒂𝒏𝒅𝒂𝒓𝒅 𝑫𝒆𝒗𝒊𝒂𝒕𝒊𝒐𝒏 𝒇𝒐𝒓 𝑫𝒆𝒎𝒂𝒏𝒅 𝒅𝒖𝒓𝒊𝒏𝒈 𝑳𝒆𝒂𝒅 𝑻𝒊𝒎𝒆

𝑻𝒉𝒆 𝑵𝒐𝒓𝒎𝒂𝒍 𝑪𝒐𝒎𝒎𝒖𝒍𝒂𝒕𝒊𝒗𝒆 𝑫𝒊𝒔𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝑭𝒖𝒏𝒄𝒕𝒊𝒐𝒏 𝑶𝒏 𝑬𝒙𝒄𝒆𝒍: 𝑵𝑶𝑹𝑴𝑫𝑰𝑺𝑻

𝑪𝒐𝒔𝒕 𝒐𝒇 𝑼𝒏𝒅𝒆𝒓 𝑺𝒕𝒐𝒄𝒌 𝒃𝒚 𝑶𝒏 𝑼𝒏𝒊𝒕

𝑪𝑺𝑳 =
𝑪𝒐𝒔𝒕 𝒐𝒇 𝑼𝒏𝒅𝒆𝒓 𝑺𝒕𝒐𝒄𝒌 𝒃𝒚 𝑶𝒏 𝑼𝒏𝒊𝒕 + 𝑪𝒐𝒔𝒕 𝒐𝒇 𝑶𝒗𝒆𝒓 𝑺𝒕𝒐𝒄𝒌 𝒃𝒚 𝑶𝒏 𝑼𝒏𝒊𝒕

𝑳𝒐𝒔𝒕 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝒑𝒆𝒓 𝑼𝒏𝒊𝒕 𝑬𝑶𝑸 × 𝑯𝒐𝒍𝒅𝒊𝒏𝒈 𝑪𝒐𝒔𝒕 𝒑𝒆𝒓 𝑼𝒏𝒊𝒕
𝑨𝒏𝒏𝒖𝒂𝒍 𝑫𝒆𝒎𝒂𝒏𝒅

𝑰𝒇 𝑷𝒓𝒐𝒇𝒊𝒕 𝑴𝒂𝒓𝒈𝒊𝒏 𝒊𝒔 𝑳. 𝑬 𝟐𝟓𝟎 𝑯𝒐𝒍𝒅𝒊𝒏𝒈 𝒄𝒐𝒔𝒕 𝒊𝒔 𝑳. 𝑬 𝟕𝟎

𝟐𝟓𝟎
𝑪𝑺𝑳 = = 𝟗𝟕. 𝟕𝟓%
𝟑𝟎𝟎𝟎 × 𝟕𝟎
𝟐𝟓𝟎 +
𝟏𝟎𝟎 × 𝟑𝟔𝟓
Feb2023 Designed By: Ramy El Shal 71
 Safety stock
• Next: Calculate Standard Deviation for Demand During Lead
Time
• We have standard deviation for Daily Demand
• We have standard deviation for Lead Time
• We need Standard Deviation for the combination of both.
𝟏𝟏𝟓
𝑫𝒂𝒊𝒍𝒚 𝑫𝒆𝒎𝒂𝒏𝒅 𝟏𝟎𝟎
𝟖𝟓

𝟏𝟖 𝟐𝟎 𝟐𝟐
𝑳𝒆𝒂𝒅 𝑻𝒊𝒎𝒆
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑 𝑑𝑢𝑟𝑖𝑛𝑔 𝐿𝑒𝑎𝑑 𝑇𝑖𝑚𝑒
= 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐿𝑒𝑎𝑑 𝑇𝑖𝑚𝑒 × 𝑆𝑞𝑢𝑎𝑟𝑒𝑑 𝐷𝑎𝑖𝑙𝑦 𝐷𝑒𝑚𝑎𝑛𝑑 𝑆𝐷 + 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝐷𝑒𝑚𝑎𝑛𝑑 × 𝑆𝑞𝑢𝑎𝑟𝑒𝑑 𝐿𝑒𝑎𝑑 𝑇𝑖𝑚𝑒 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛

𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑 𝑑𝑢𝑟𝑖𝑛𝑔 𝐿𝑒𝑎𝑑 𝑇𝑖𝑚𝑒 = 20 × 152 + 100 × 22 = 64.03

Feb2023 Designed By: Ramy El Shal 72
 Safety stock
• Then: Get the ROP

𝑅𝑂𝑃 = 𝐹 −1 𝐶𝑆𝐿, 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑒𝑚𝑎𝑛𝑑 𝐷𝑢𝑟𝑖𝑛𝑔 𝐿𝑒𝑎𝑑 𝑇𝑖𝑚𝑒, 𝑆𝐷 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑 𝑑𝑢𝑟𝑖𝑛𝑔 𝐿𝑒𝑎𝑑 𝑇𝑖𝑚𝑒
𝟗𝟕. 𝟕𝟓% 64.03

𝑇ℎ𝑒 𝐼𝑛𝑣𝑒𝑟𝑠𝑒 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝐷𝑒𝑚𝑎𝑛𝑑 × 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐿𝑒𝑎𝑑 𝑇𝑖𝑚𝑒

𝑁𝑜𝑟𝑚𝑎𝑙
100 × 20 = 2000
𝐶𝑜𝑚𝑚𝑢𝑙𝑎𝑡𝑖𝑣𝑒
𝐷𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
𝐹𝑢𝑛𝑐𝑡𝑖𝑜𝑛

On Excel: pick any cell and type:

NORMINV(0.9775,2000,64.03)

𝑅𝑂𝑃 ≅ 2128

Feb2023 Designed By: Ramy El Shal 73

 Safety stock
• Finally: Get the Safety Stock

𝑠𝑠 = 𝑅𝑂𝑃 − 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑒𝑚𝑎𝑛𝑑 𝑑𝑢𝑟𝑖𝑛𝑔 𝐿𝑒𝑎𝑑 𝑇𝑖𝑚𝑒

𝑠𝑠 = 2128 − 2000

𝑠𝑠 = 𝑊𝑜𝑜𝑑 𝑓𝑜𝑟 128 𝐶ℎ𝑎𝑖𝑟𝑠

Feb2023 Designed By: Ramy El Shal 74

 Inventory Turnover
• Inventory Turnover Ratio (ITR) is the number
of times Inventory is sold and replenished
during the studied period (day, week, month,
quarter, year, custom).
• You cannot stock all your needs for the period
at once. You buy .. Sell .. Buy again .. Sell again
.. And so on.

Feb2023 Designed By: Ramy El Shal 75

 Inventory Turnover
Direct Costs (Labor + Material)
Get it from your accountant /
financial statements

𝑪𝒐𝒔𝒕 𝒐𝒇 𝑮𝒐𝒐𝒅𝒔 𝑺𝒐𝒍𝒅 𝑫𝒖𝒓𝒊𝒏𝒈 𝒕𝒉𝒆 𝑷𝒆𝒓𝒊𝒐𝒅

𝑰𝑻𝑹 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝑫𝒖𝒓𝒊𝒏𝒈 𝒕𝒉𝒆 𝑷𝒆𝒓𝒊𝒐𝒅

𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

=
2

Feb2023 Designed By: Ramy El Shal 76

 Inventory Turnover
• You need it to get the average days in
inventory
• You need to apply it on each Stock Keeping
Unit (SKU) to identify the FSN
• Fast moving Items (Flying off the shelf)
• Slow moving Items (Question Marks)
• None moving Items (Dead Weight)
• Hence you can set scraping policies

Feb2023 Designed By: Ramy El Shal 77

 Days Inventory
Outstanding (DIO)
• Also known as Average Days in Inventory
• From the name, the Average Days an Item
spends in your Inventory before being sold.
• You need to reduce it to minimum:
• To decrease Cash Conversion Cycle
• To decrease holding cost
• To increase Supply Chain Efficiency

Feb2023 Designed By: Ramy El Shal 78

 Days Inventory
Outstanding (DIO)
• Can be tracked from your Inventory
Management System, OR:

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
= =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝐶𝑜𝐺𝑆 𝐶𝑜𝐺𝑆
𝑌𝑒𝑎𝑟 𝐷𝑎𝑦𝑠
365
=
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
• You can also use it to get Inventory Turnover
365
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 365
𝐷𝐼𝑂
𝐼𝑇𝑅 𝐷𝐼𝑂
Feb2023 Designed By: Ramy El Shal 79
 Sell-through rate
• Sell-through rate is the percentage of Units
Sold out of the Units Added to your Inventory.
𝑅𝑒𝑔𝑖𝑠𝑡𝑒𝑟𝑒𝑑 100 𝑢𝑛𝑖𝑡𝑠 𝑖𝑛 𝐹𝑒𝑏𝑟𝑢𝑎𝑟𝑦 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝑆𝑜𝑙𝑑 90 𝑢𝑛𝑖𝑡𝑠 𝑖𝑛 𝐹𝑒𝑏𝑟𝑢𝑎𝑟𝑦

(𝐸𝑥𝑝𝑟𝑒𝑠𝑠𝑒𝑑 𝑖𝑛 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒)
𝑈𝑛𝑖𝑡𝑠 𝑠𝑜𝑙𝑑 𝐷𝑢𝑟𝑖𝑛𝑔 𝐹𝑒𝑏𝑟𝑢𝑎𝑟𝑦
= = 90%
𝑈𝑛𝑖𝑡𝑠 𝑅𝑒𝑔𝑖𝑠𝑡𝑒𝑟𝑒𝑑 𝑖𝑛𝑡𝑜 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐷𝑢𝑟𝑖𝑛𝑔 𝐹𝑒𝑏𝑟𝑢𝑎𝑟𝑦

𝑃𝑒𝑟𝑓𝑒𝑐𝑡
𝐵𝑎𝑑 𝐴𝑙𝑠𝑜 𝐵𝑎𝑑

0% 𝑂𝑣𝑒𝑟𝑠𝑡𝑜𝑐𝑘 100% 𝑈𝑛𝑑𝑒𝑟𝑠𝑡𝑜𝑐𝑘

𝐽𝑢𝑠𝑡 − 𝐼𝑛 − 𝐶𝑎𝑠𝑒 𝐽𝑢𝑠𝑡 − 𝐼𝑛 − 𝑇𝑖𝑚𝑒 𝐽𝑢𝑠𝑡 − 𝐼𝑠𝑛′ 𝑡
− 𝐸𝑛𝑜𝑢𝑔ℎ
Feb2023 Designed By: Ramy El Shal 80
 Warehouse Planning

Feb2023 Designed By: Ramy El Shal 81

 Warehouse Planning
• Picking operations typically amount for 60% of
warehousing cost
Minimize
Movement

Maximize Decrease
Safety Cost

Optimize
Space
Feb2023 Designed By: Ramy El Shal 82
 Warehouse Planning
• Typical Operations

Receiving Shipping

Work Areas
Staging Area Staging Area
Inspection Storage Picking Inspection
Breakdown Put Away Replenish Packaging

Support Areas
Offices Labor Equipment Maintenance

Feb2023 Designed By: Ramy El Shal 83

 Warehouse Planning
• Material Flow
• Infrastructure
• Warehouse Networks
• Transportation Model
• Assignment Model

Feb2023 Designed By: Ramy El Shal 84

 Material Flow Analysis
‘MFA’
• Nothing is Lost
• Nothing is Created
• Everything is Transformed

The Golden Rule:

What gets in ..
Will eventually get out.
Antoine Lavoisier

Feb2023 Designed By: Ramy El Shal 85

 Material Flow Analysis
‘MFA’
• Assessment of Flow
• Of Stock and Material
• In a System
• Of Defined Space and Time

Input/ System/ Output/

Supply Processes Demand

Feb2023 Designed By: Ramy El Shal 86

 Material Flow Analysis
‘MFA’
• SANKEY Diagram
• Flows
• Nodes

Feb2023 Designed By: Ramy El Shal 87

 Material Flow Analysis
‘MFA’
• SANKEY Diagram

Feb2023 Designed By: Ramy El Shal 88

 Material Flow Analysis
‘MFA’
SANKEY Diagram: Pharma Warehouse reception process A

2
3

1 B

1 Receipt Inspection A Refrigerated Storage

B Shelf Storage
2 Pallet Unpacking C
C Pallet Recycling
3 Storage Put Away D Returns to Supplier
D
Feb2023 Designed By: Ramy El Shal 89
 Infrastructure
• Warehouse types

Raw Mat Semi-Finished Finished

Production Transit Distribution Sales

Indirect Release Direct Release

Feb2023 Designed By: Ramy El Shal 90

 Infrastructure
• Transport Equipment – Mobile
Jack

Reach Truck
Trolley
Order Picker

Counterbalance Truck
Combi Truck

Feb2023 Designed By: Ramy El Shal 91

 Infrastructure
• Transport Equipment – Stationary

Chutes

Conveyor belt
Roller Conveyors

Floor
Chain
Conveyor
Overhead Tracks
Feb2023 Designed By: Ramy El Shal Chain Conveyors
92
 Infrastructure
• Transport Equipment – Stationary

Sorters

Feb2023 Designed By: Ramy El Shal 93

 Infrastructure
• Storage Equipment – Stacking

Ground/Block Stacking

Feb2023 Designed By: Ramy El Shal 94

 Infrastructure
• Storage Equipment – Racking

Pallet Racking
Drive-in Racking

Feb2023 Designed By: Ramy El Shal 95

 Infrastructure
• Storage Equipment – Racking

Cantilever Racking Storage Drawers Mobile Racking

Feb2023 Designed By: Ramy El Shal 96

 Infrastructure
• Storage Equipment – Racking
Vertical - Horizontal
Flow Racking Bin Shelving Carousels

Feb2023 Designed By: Ramy El Shal 97

 Infrastructure
• Communication – Scanners
Batch Scanner RF Scanner
Fixed Scanner

Feb2023 Designed By: Ramy El Shal 98

 Infrastructure
• Communication – RFID
(Radio Frequency Identification)

Feb2023 Designed By: Ramy El Shal 99

 Infrastructure
• Communication – EDI /VAN
(Electronic Data Interchange /
Value Added Network)

Supplier1 Customer1

Company

Supplier2
Customer2

Feb2023 Designed By: Ramy El Shal 100

 Infrastructure
• Communication – RTLS (Real Time Locations System)

Feb2023 Designed By: Ramy El Shal 101

 Infrastructure
• Communication – Voice Recognition

Feb2023 Designed By: Ramy El Shal 102

 Warehouse Networks
• When you have several Supply Sources as
opposed to several Demand Destinations DD
• For instance:
Supply Source SS Demand Destination DD

Raw Material Warehouses Factories

Factories Finished Goods

Warehouses
Finished Goods Distribution Centers
Warehouses
Distribution Centers Retail Shops/Showrooms

Feb2023 Designed By: Ramy El Shal 103

 Warehouse Networks
• Which SS Supplies Which DD?
Varying Capacity Varying Demand
Varying Cost or Profit

Feb2023 Designed By: Ramy El Shal 104

 Warehouse Networks
• Which SS Supplies Which DD?
• 3 Use Cases:

𝑆𝑢𝑝𝑝𝑙𝑦 = 𝐷𝑒𝑚𝑎𝑛𝑑
𝑆𝑢𝑝𝑝𝑙𝑦 > 𝐷𝑒𝑚𝑎𝑛𝑑
𝑆𝑢𝑝𝑝𝑙𝑦 < 𝐷𝑒𝑚𝑎𝑛𝑑

Feb2023 Designed By: Ramy El Shal 105

 Problem1 (Minimize)
Supply = Demand
a b c Capacity

Cost of A 4 3 3 35
Transportation

B 6 7 6 50

C 8 2 5 50

Demand 30 65 40 135\135
 Create Table

a b c Capacity
SC
SC: A 35
Shadow Cost
4 3 3
B 50
6 7 6
C 50
8 2 5
Demand 30 65 40 135\135
 Fill in Table (Kick Start)

a b c Capacity
Tip: in SC
Minimization
, Fill in the A 35 35
largest 4 3 3
number of
units at the
B 30 15 5 50
LOWEST cost 6 7 6
C 50
50
8 2 5
Demand 30 65 40 135\135
Calculate Total Cost (TC1)

a b c Capacity
SC
A 35 35
4 3 3
B 30 15 5 50
6 7 6
C 50
50
8 2 5
Demand 30 65 40 135\135
Calculate Total Cost (TC1)
TC1 = 30(6) + 15(7) + 50(2) + 35(3) + 5(6) = $ 520

Now let’s test if this is the optimal route …

 Used Routes Analysis
Number of routes = (Number of Rows + Number of Columns) - 1

Ba a b c Capacity
SC
Bb
A 35 35
Cb
4 3 3
Ac
B 30 15 5 50
Bc
6 7 6
C 50
50
8 2 5
Demand 30 65 40 135\135
 Used Routes Analysis
Unused Routes Analysis
Assume: B = 0
Ba = B + a = 6 0+a=6 a=6 Aa – (A + a) = 4 – (-3 + 6) = 1
Bb = B + b = 7 0+b=7 b=7 Ab – (A + b) = 3 – (-3 + 7) = -1
C+7=2 C=-5 Ca – (C + a) = 8 – (-5 + 6) = 7
Cb = C + b = 2
Cc – (C + c) = 5 – (-5 + 6) = 4
Ac = A + c = 3 A+6=3 A=-3
Bc = B + c = 6 0+c=6 c=6 In Minimization, Negative value in
Unused Routes means your routes
are not optimal.
you should
Re-route
 Re-route

a b c Capacity
SC
A 35 35
4 3 3
B 30 20
15 5 50
6 7 6
C 45
50 5
50
8 2 5
Demand 30 65 40 135\135
Calculate Total Cost (TC2)
TC2 = 30(6) + 20(7) + 45(2) + 35(3) + 5(5) = $ 540

Higher than TC1 (520)

You are straying away from
optimality .. Undo changes and
Re-route
 Re-route

a b c Capacity
SC
A 15 35 20 35
4 3 3
B 30 15
20
5 50
6 7 6
C 50
50
8 2 5
Demand 30 65 40 135\135
Calculate Total Cost (TC3)
TC3 = 30(6) + 15(3) + 20(3) + 20(6) + 50(2) = $ 505

Less than TC1 (520)

Looks OK
 Used Routes Analysis
Unused Routes Analysis
Assume: B = 0
Ba = B + a = 6 0+a=6 a=6 Aa – (A + a) = 4 – (- 3 + 6) = 1
Ab = A + b = 3 -3 + b = 3 b = 6 Bb – (B + b) = 7 – (0 + 6) = 1
A+6=3 A=-3 Ca – (C + a) = 8 – (- 4 + 6) = 6
Ac = A + c = 3
Cc – (C + c) = 5 – (- 4 + 6) = 3
Bc = B + c = 6 0+c=6 c=6
Cb = C + b = 2 C+6=2 C=-4 In Minimization, All positive values in
Unused Routes means your routes
are optimal.
BINGO
Optimal Route (TC = $
505)
a b c Capacity
SC 6 6 6
A -3 15 20 35
4 3 3
B 0 30 20 50
6 7 6
C -4 50
50
8 2 5
Demand 30 65 40 135\135
Problem2 (Minimize)
Supply > Demand
a b c Capacity

A 4 3 3 35

B 6 7 6 50

C 8 2 5 60
We need to
Demand 30 65 40 135\145 make it equal
145\145
 Create Table

a b c Dummy Capacity
SC
A 35
4 3 3 0
B 50
6 7 6 0
C 60
8 2 5 0
Demand 30 65 40 135\145
 Create Table

a b c Dummy Capacity
SC
A 35
4 3 3 0
B 50
6 7 6 0
C 60
8 2 5 0
Demand 30 65 40 10 145\145
 Fill in Table (Kick Start)

a b c Dummy Capacity
SC
A 5 30 35
4 3 3 0
B 30 10 10 50
6 7 6 0
C 60 60
8 2 5 0
Demand 30 65 40 10 145\145
Calculate Total Cost (TC1)
TC1 = 5(3) + 30(3) + 30(6) + 10(6) + 60(2) + 10(0)
= $ 465
 Used Routes Analysis
Unused Routes Analysis
Assume: A = 0
Ab = A + b = 3 0+b=3 b=3 Aa – (A + a) = 4 – (0 + 3) = 1
Ac = A + c = 3 0+c=3 c=3 Bb – (B + b) = 7 – (3 + 3) = 1
3+a=6 a=3 Ca – (C + a) = 8 – (-1 + 3) = 6
Ba = B + a = 6
Cc – (C + c) = 5 – (-1 + 3) = 3
Bc = B + c = 6 B+3=6 B=3
Cb = C + b = 2 C+3=2 C = -1 All Positive .. Hurraaaaay
 Optimal Route (TC = $
465)
a b c Dummy Capacity
SC 3 3 3 0
A 0 5 30 35
4 3 3 0 B has
Excessive
B 30 10 10 50
3 Capacity
6 7 6 0
of 10 units
C 60 60
-1 8 2 5 0
Demand 30 65 40 10 145\145
Problem3 (Minimize)
Supply < Demand
a b c Capacity

A 4 3 3 35

B 6 7 6 50

C 8 2 5 50
We need to
Demand 30 65 50 145\135 make it equal
145\145
 Create Table
a b c Capacity
SC
A 35
4 3 3
B 50
6 7 6
C 50
8 2 5
Dummy
0 0 0
Demand 30 65 50 145\135
 Create Table
a b c Capacity
SC
A 35
4 3 3
B 50
6 7 6
C 50
8 2 5
Dummy 10
0 0 0
Demand 30 65 50 145\145
Fill in Table (Kick Start)
a b c Capacity
SC
A 15 20 35
4 3 3
B 20 30 50
6 7 6
C 50 50
8 2 5
Dummy 10 10
0 0 0
Demand 30 65 50 145\145
Calculate Total Cost (TC1)
TC1 = 15(3) + 20(3) + 20(6) + 30(6) + 50(2) + 10(0)
= $ 505
 Used Routes Analysis
Unused Routes Analysis
Assume: A = 0
Ab = A + b = 3 0+b=3 b=3 Aa – (A + a) = 4 – (0 + 3) = 1
Ac = A + c = 3 0+c=3 c=3 Bb – (B + b) = 7 – (3 + 3) = 1
3+a=6 a=3 Ca – (C + a) = 8 – (-1 + 3) = 6
Ba = B + a = 6
Cc – (C + c) = 5 – (-1 + 3) = 3
Bc = B + c = 6 B+3=6 B=3
Cb = C + b = 2 C+3=2 C = -1 No Negative .. Hurraaaaay
 Optimal Route (TC = $
505)
a b c Capacity
SC 3 3 3
A 15 20 35
a 0 4 3 3
requires
B 20 30 50
10 units 3 6 7 6
more
C 50 50
-1 8 2 5
Dummy 10 10
0 0 0
Demand 30 65 50 145\145
Optimal Route (TC = $
505)
a b c Capacity
SC 3 3 3
A 0
15 20 35
4 3 3 c
B 30 20 50 requires
3 6 7 6 10 units
more
C 50 50
-1 8 2 5
Dummy 10
10
0 0 0
Demand 30 65 50 145\145

This Solution gives the same result

 Assignment Model

May2022 Designed By: Ramy El Shal 134

Reading - Free people icons

Assignment Model
• When Performance Varies among your human
or physical assets, Who should take which
task?
• This is a special case of the Transportation
Model, involving Multiple Sources and
Destinations
• Also, Three Possible Options:
• Demand = Supply
• Demand > Supply (The Hard Choice)
• Demand < Supply (The Other Hard Choice)

May2022 Designed By: Ramy El Shal 135

 Problem1 (Minimize)
Alexandria Behaira Cairo

P1 P2 P3

From PM1 11 14 6
Cairo

From PM2 8 10 11
Alexandria

From El PM3 9 12 7
Menia

May2022 Designed By: Ramy El Shal 136

 Step1a: choose lowest value in each row
subtract from self and other values in the same
row

P1 P2 P3

PM1 11 14 6

PM2 8 10 11

PM3 9 12 7

May2022 Designed By: Ramy El Shal 137

 Step1a: choose lowest value in each row
subtract from self and other values in the same
row

P1 P2 P3

PM1 5 8 0

PM2 0 2 3

PM3 2 5 0

May2022 Designed By: Ramy El Shal 138

 Step1b: choose lowest value in each column
subtract from self and other values in the same
column

P1 P2 P3

PM1 5 8 0

PM2 0 2 3

PM3 2 5 0

May2022 Designed By: Ramy El Shal 139

 Step1b: choose lowest value in each column
subtract from self and other values in the same
column

P1 P2 P3

PM1 5 6 0

PM2 0 0 3

PM3 2 3 0

May2022 Designed By: Ramy El Shal 140

 Step2: strike through zeros with least strikes
possible to hit maximum number of zeros

P1 P2 P3

PM1 5 6 0

PM2 0 0 3 2

PM3 2 3 0

May2022 Designed By: Ramy El Shal 141

 Step3: find lowest uncovered value, then:

P1 P2 P3

PM1 5 6 0

PM2 0 0 3 2

PM3 2 3 0

• Subtract it from self and uncovered values

1

• Add it to intersections of lines

• Leave other covered numbers the same
May2022 Designed By: Ramy El Shal 142
Step3: keep repeating until the minimum number
of Strikes = Number of Rows = Number of
Columns

P1 P2 P3

PM1 3 4 0

PM2 0 0 5 2

PM3 0 1 0

3 1

May2022 Designed By: Ramy El Shal 143

 Step4: Assign: start with the lonely zeros in each
raw

Scratch the ones you assigned

PM1 to P3
P1 P2 P3
PM3 to P1
PM2 to P2 PM1 3 4 0

PM2 0 0 5 2

PM3 0 1 0

3 1

May2022 Designed By: Ramy El Shal 144

 Step5: Return to original table, find values and
sum them
P1 P2 P3

PM1 11 14 6

PM2 8 10 11

PM3 9 12 7

PM1 to P3 =6
PM3 to P1 =9
PM2 to P2 = 10

25
May2022 Designed By: Ramy El Shal 145
 Problem 2 unbalanced
assignment (Maximize)
P1 P2 P3 P4

PM1 11 14 6 7

PM2 8 10 11 9

PM3 9 12 7 10

May2022 Designed By: Ramy El Shal 146

 Convert to minimization
(Opportunity Cost)
P1 P2 P3 P4

PM1 11 14 6 7

PM2 8 10 11 9

PM3 9 12 7 10

May2022 Designed By: Ramy El Shal 147

 Convert to minimization
(Opportunity Cost)
P1 P2 P3 P4

PM1 3 0 8 7

PM2 6 4 3 5

PM3 5 2 7 4

May2022 Designed By: Ramy El Shal 148

Step0: add Dummy Row, and
Skip Column Filtration
(Step1b)
P1 P2 P3 P4

PM1 3 0 8 7

PM2 6 4 3 5

PM3 5 2 7 4

Dummy 0 0 0 0

May2022 Designed By: Ramy El Shal 149

Step0: add Dummy Row, and
Skip Column Filtration
(Step1b)
P1 P2 P3 P4

PM1 3 0 8 7

PM2 6 4 3 5

PM3 5 2 7 4

Dummy 0 0 0 0

May2022 Designed By: Ramy El Shal 150

Step0: add Dummy Row, and
Skip Column Filtration
(Step1b)
P1 P2 P3 P4

PM1 3 0 8 7

PM2 3 1 0 2

PM3 3 0 5 2

Dummy 0 0 0 0

May2022 Designed By: Ramy El Shal 151

 Strike zeros with least
number of strikes
P1 P2 P3 P4

PM1 3 0 8 7

PM2 3 1 0 2

PM3 3 0 5 2

Dummy 0 0 0 0 3

1 2

May2022 Designed By: Ramy El Shal 152

 Step3: find lowest uncovered value, then:
Subtract it from self and uncovered values
Add it to intersections of lines
Leave other covered numbers the same
P1 P2 P3 P4

PM1 3 0 8 7

PM2 3 1 0 2

PM3 3 0 5 2

Dummy 0 0 0 0 3

1 2

May2022 Designed By: Ramy El Shal 153

 Step3: find lowest uncovered value, then:
Subtract it from self and uncovered values
Add it to intersections of lines
Leave other covered numbers the same
P1 P2 P3 P4

PM1 1 0 8 5

PM2 1 1 0 0

PM3 1 0 5 0

Dummy 0 2 2 0

May2022 Designed By: Ramy El Shal 154

 keep repeating until the minimum number of Strikes =
Number of Rows = Number of Columns
P1 P2 P3 P4

PM1 1 0 8 5

PM2 1 1 0 0

PM3 1 0 5 0

Dummy 0 2 2 0 3

2 4 1

May2022 Designed By: Ramy El Shal 155

 Assign (least zeros in row or column)
PM1 to P2
PM3 to P4
PM2 to P3
Decline P1

P1 P2 P3 P4

PM1 1 0 8 5

PM2 1 1 0 0

PM3 1 0 5 0

Dummy 0 2 2 0 3

2 4 1

May2022 Designed By: Ramy El Shal 156

 Return to Original Table
and Calculate Profit
P1 P2 P3 P4

PM1 11 14 6 7

PM2 8 10 11 9

PM3 9 12 7 10

PM1 to P2 = 14
PM3 to P4 = 10
PM2 to P3 = 11
Decline P1 =0

May2022 35 Designed By: Ramy El Shal 157

 Location Selection

May2021 Designed By: Ramy El Shal 158

 Location Selection
• Why did Samsung choose
Beni Sweif for its Factory?

• Why did Amazon build its

biggest Distribution
Center in Sohag?

July2021 Designed By: Ramy El Shal 159

 Location Selection
• What factors, do you believe, are important in
the choice of Location for:
Factory Warehouse Shop/Showroom

July2021 Designed By: Ramy El Shal 160

 Work Measurement

May2022 Designed By: Ramy El Shal 161

 Work Measurement
• The usual suspects for Supply Chain Incompetence
• Inefficiency
• Just-In-Case, Waste, Non-value
Adding processes
• Chronic Bottlenecks
• Overload, Overburn of limited
Capacity
• Silo Effect
• Lack of integration, synchronization,
information sharing
• Upstream Negligence
• Neglecting feedback, customer
voice, and tracking Slow/Non-
moving Items
• Poor Data Quality
• Low Data Volume, Unreliable
Sources, Poor Choice of Variables
May2022 Designed By: Ramy El Shal 162
 Work Measurement
• A bit of Statistics: Population

Homogeneous Heterogeneous
Population Population

May2022 Designed By: Ramy El Shal 163

 Work Measurement
• A bit of Statistics: Sample
Representative
Every unit in the
population is represented
sufficiently by attributes
and characteristics

Random
No bias in selecting the
respondent sample units,
Calculated using sample
equation

https://www.calculator.net/sample-size-calculator.html

May2022 Designed By: Ramy El Shal 164

 Work Measurement
• Demand Forecast Accuracy
• Perfect Order Index ‘POI’
• Bottleneck Analysis

May2022 Designed By: Ramy El Shal 165

 Demand Forecast
Accuracy
• Just like you test the model against actual data
• Test the model against actual performance
Period Quarter Year Sales Data De-seasonalization Forecast Re-seasonalization

1 1 2019 410 378 322 349

2 2 2019 230 308 360 269
3 3 2019 315 339 398 370
4 4 2019 495 400 437 541

5 1 2020 605 557 475 516

6 2 2020 340 455 514 384

7 3 2020 560 603 552 513
8 4 2020 690 557 591 731
9 1 2021 720 663 629 683
10 2 2021 625 836 667 499
11 3 2021 610 657 706 656
12 4 2021 795 642 744 922
Actual
13 1 2022 783 849 750
14 2 2022 821 614 800
15 3 2022 860 798
May2022 Designed By: Ramy El Shal 850 166
16 4 2022 898 1112 890
 Demand Forecast
Accuracy
• Just like you test the model against actual data
• Test the model against actual performance
Bias -17.87
MAD 17.87
MAPD 2%
MSE 418.70
Running
Sum -71.49

May2022 Designed By: Ramy El Shal 167

 Perfect Order Index
‘POI’
• Successor of OTIF “On Time, In Full”
%
%
Orders
Orders
Shipped on
Completed
Time

• Perfect Order Index ‘POI’

% %
% %
Orders Orders
Orders Orders
Shipped on Documented
Completed Damage-Free
Time Accurately

May2022 Designed By: Ramy El Shal 168

 Bottleneck Analysis

May2021 Designed By: Ramy El Shal 169

 Bottleneck Analysis
• Bottleneck is
• An Area within a Process
• Where Workload
• Is higher than Capacity

July2021 Designed By: Ramy El Shal 170

 Bottleneck Analysis
• Bottlenecks Signs
• Area/Department/Employee constantly falling
behind schedule
• Frequent need of Mobilizing/Shuffling staff or
resources
• Overloaded Staff (Overtime – Piling up Tasks)

July2021 Designed By: Ramy El Shal 171

 Bottleneck Analysis
• Where is the bottleneck?

Capacity: 3 Cars/Hour 1 Car/Hour 2 Cars/Hour

Demand: 2 Cars/Hour
The flow will always be
limited to 1 Car/Hour
Solution: Increase Capacity/Labor, Eliminate Waste, Reengineer Flow
July2021 Designed By: Ramy El Shal 172
 Bottleneck Analysis
• Takt Time:
• Measures the production time capacity needed to satisfy
demand
𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑇𝑖𝑚𝑒 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦
• 𝑇𝑎𝑘𝑡 𝑇𝑖𝑚𝑒 =
𝐷𝑒𝑚𝑎𝑛𝑑 (𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡)

• Example: Pasta Factory

• Demand forecast: 700 Ton/Month
• Production Time Capacity: 720 Hr/Month (24 hrs/day)
720
• 𝑇𝑎𝑘𝑡 𝑇𝑖𝑚𝑒 = = 1.03 𝐻𝑟𝑠 (62 𝑚𝑖𝑛𝑠)
700
• This means: to meet the demand you have to
produce a ton every 62 minutes nonstop.

May2022 Designed By: Ramy El Shal 173

 Bottleneck Analysis
• But there could be, inevitably, Down Time
Start making Deliver
Demand Unit Demand Unit
Takt Time

Halt Resume
Down Time

Output Output
Target Cycle Time

Subprocesses Lead
Time

May2022 Designed By: Ramy El Shal 174

 Bottleneck Analysis
Subprocesses Lead
Time
Without Inventory

With Inventory

May2022 Designed By: Ramy El Shal 175

 Bottleneck Analysis
Subprocesses Lead
Time
Increase Capacity at
bottleneck

May2022 Designed By: Ramy El Shal 176

 Bottleneck Analysis
Subprocesses Lead Increase Capacity at
Time bottleneck

May2022 Designed By: Ramy El Shal 177

 Bottleneck Analysis
Subprocesses Lead Increase Capacity at
Time bottleneck

May2022 Designed By: Ramy El Shal 178

 Bottleneck Analysis
Subprocesses Lead Shuffling
Time

Kaizen

May2022 Designed By: Ramy El Shal 179

 Bottleneck Analysis
• Cycle Time:
• Measures the time for the entire cycle if fulfilled
with ZERO inventory
• The sum of the Longest possible Lead Times in
every ring of your supply chain

• Lead Time:
• Measures the time for the entire cycle if fulfilled
WITH inventory
• From time of order to time of delivery

May2022 Designed By: Ramy El Shal 180

 Bottleneck Analysis
Job: Transfer Wheat from Truck to
• Pasta Factory: Production Line

Off- P.L.
Sort Mix
load Input

2 Labor Hrs 4 Labor Hrs 6 Labor Hrs 2 Labor Hrs

You have limited resources: 4 Worker Time to Complete: 14 Hrs
1 Worker 1 Worker 1 Worker 1 Worker
You added extra resources: 1 Worker Where do you place him/her?

Time Saved Time Saved Time Saved Time Saved

1 Hr 2 Hrs 3 Hrs 1 Hr
Total Job time: Total Job time: Total Job time: Total Job time:
13 Hrs 12 Hrs 11 Hrs 13 Hrs
July2021 Designed By: Ramy El Shal 181
 Advanced Planning and
Scheduling

May2022 Designed By: Ramy El Shal 182

 Advanced Planning and
Scheduling
• When you have a set of processes, combined they
constitute a major process (Project)
• Whereas:
• The project cannot be finished unless every process is
fulfilled
• Some processes (Successors) cannot start until certain
process(es) are finished (Predecessors)
• Every process requires resources to fulfill. Resources are
mutually exclusive.
• Manpower
• Minutes
• Money
• Machine

May2022 Designed By: Ramy El Shal 183

 Advanced Planning and
Scheduling
• The Objectives:
• Identify the entire project duration, and the possible
deviation (+/-)
• Identify the Critical Path, and the tolerable delay for
each activity.
• Ensure Efficient Resource Allocation, and level the
workload.

May2022 Designed By: Ramy El Shal 184

 Advanced Planning and
Scheduling
• Mind Map MP
• Work Breakdown Structure WBS
• Responsibility Matrix RM
• Action Plan AP
• Network Diagram ND
• Gantt Chart GC

May2022 Designed By: Ramy El Shal 185

 Advanced Planning and
Scheduling
• Draw the Mind Map of the Project
Corn Flour
Packs

Production
Fetch
Packing
Start
Material Production Package
End
Product
Sort Input
Material Material Attach
Packing
Warm Print Roll
Up Upload
Material
Machine Specs
Info
 Advanced Planning and
Scheduling
• Assign the Work Breakdown Structure of the
Project
Corn Flour Packs
Production Packing
Warm Print Attach Package
Fetch Sort Upload Input Start
Up Production Material Packing End
Material Material Specs Material
Machine Info Roll Product
 Advanced Planning and
Scheduling
• Assign the Responsibility Matrix of Each
Process
Corn Flour Packs
Production Packing
Warm Print Attach Package
Fetch Sort Upload Input Start
Up Production Material Packing End
Material Material Specs Material
Machine Info Roll Product

Production Manager:
Adel
Key Responsibility:
Ahmed Ahmed Mina Adel Ahmed Mina Hossam Mina Mina
Assistance:
Hossam Hossam Hossam Adel Ahmed
 Advanced Planning and
Scheduling
• List the Action Plan:
Activity Description Predecessor
A Fetch Material from Inventory -
B Sort Material in order of Usage A
C Warm up the Machine -
D Upload Product Specifications C
E Print Used Material Batch Serial on Package B, D
F Attach Packing Roll to Package compartment E
G Input Material B, D
H Start Automated Production G
I Package End Product F, H

• Draw the simplistic Network Diagram: (Activity on the Node AON)

A B E F
Start I Finish

C D G H
 Advanced Planning and
Scheduling
• Calculate the duration of the set of processes
• You have 3 expectations for each process
duration:
• a: Optimistic e.g. 2 hours
• m: Most Likely e.g. 5 hours
• b: Pessimistic e.g. 6 hours
• Based on these expectations for each activity:
𝑎+4𝑚+𝑏
• Expected Time: 𝑇𝐸 =
6
𝑏−𝑎 2
• Variance (Sigma Square): σ2 =
6
 Advanced Planning and
Scheduling
• List the expected duration of the set of processes
Activity Expected Duration in Hours
Optimistic Most Likely Pessimistic
(a) (m) (b)
A 1.5 2 2.5
B 2 2.5 6
C 1 2 3
D 1.5 2 2.5
E 0.5 1 1.5
F 1 2 3
G 3 3.5 7
H 3 4 5
I 1.5 2 2.5
 Advanced Planning and
Scheduling Calculate this Calculate this
column by this Leave this
column by this
• Then Calculate Duration: formula
𝑎 + 4𝑚 + 𝑏
formula
𝑏−𝑎
2
column for now
We will feed it
𝑇𝐸 = 2
σ = later
6 6
Activity
Activity Expected
ExpectedDuration
Duration ininWeeks
Hours Time Expected
Time Expected Variance
Variance Slack
Slack
Optimistic
Optimistic MostLikely
Most Likely
(m) Pessimistic
Pessimistic (b) (T
(TEE)) σ2
(a) (m) (b)
A
A 1.5 2 2.5 2 0.03
B 2 2.5 6 3 0.44
C 1 2 3 2 0.11
D 1.5 2 2.5 2 0.03
E 0.5 1 1.5 1 0.03
F 1 2 3 2 0.11
G 3 3.5 7 4 0.44
H
H 3 4 5 4 0.11
I 1.5 2 2.5 2 0.03
Total
Total
 Advanced Planning and
Scheduling
• Draw the Activity-In-the-Box Network Diagram
2) Highest
Predecessor
Activity’s Early
Finish
Early Early
Activity
Start Finish 3) Early Start +
Duration

1) Fill from Late

Duration Late Start 4) Lowest Successor
TE Column Finish
Activity’s Late Start

6) Early Start – Late

5) Late Finish Slack Start
Minus Duration
OR: Early Finish –
Late Finish
 Advanced Planning and
Scheduling
• Draw the Activity-In-the-Box Diagram
Fill in Duration Forward Pass
from the Table
Backward Pass
A 0 2 B 2 5 E 5 6 F 6 8
2 0 2 3 2 5 1 10 11 2 11 13 Calculate Slack
0 0 5 5
0 0
Sta
rt I 13 15
Fini
sh 15 15

0 0 0 2 13 15 0 15 15

0 0 0
C 0 2 D 2 4 G 5 9 H 9 13

2 1 3 2 3 5 4 5 9 4 9 13 Highlight
1 1 0 0 Critical Path
 Advanced Planning and
Scheduling
• Get back to the table and feed with Slack,
Indicating Critical Activities
Activity Expected Duration in Hours Time Expected Variance Slack
Optimistic Most Likely Pessimistic (TE) σ2
(a) (m) (b)
A 1.5 2 2.5 2 0.03 0 C
B 2 2.5 6 3 0.44 0 C
C 1 2 3 2 0.11 1
D 1.5 2 2.5 2 0.03 1
E 0.5 1 1.5 1 0.03 5
F 1 2 3 2 0.11 5
G 3 3.5 7 4 0.44 0 C
H 3 4 5 4 0.11 0 C
I 1.5 2 2.5 2 0.03 0 C
Total 15 1.05

Sum the Duration and Variance of Critical Activities Only

To get the Standard Deviation, Root The sum of the Variance: σ = 1.05 = 1.02 𝐻𝑜𝑢𝑟𝑠
 Advanced Planning and
Scheduling
• The Project Duration is 15 Hours (Plus or
Minus 1.02 Hours)
• OR: The Project will take 13.98 to 16.02 Hours
• Activities A, B, G, H, and I are Critical. Any
delay in each of these activities will extend the
entire project duration.
 Advanced Planning and
Scheduling
• Draw the Gantt Chart:
Activity Hours
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
A
B
C
D
E
F
G
H
I

Early Start
Late Start
Critical Path
 Cash Conversion Cycle

May2022 Designed By: Ramy El Shal 198

Reading - Free people icons

Cash Conversion Cycle

Buy (A/P)
When?

Pay Cash Collect Cash Pay Cash

From Cash-Out
to Cash-In
Sell (A/R) Inventory
When? In a perfect world:
You buy on terms,
Collect Cash
and collect in
advance
Average Days in Inventory But this world ain’t
perfect yet.
May2022 Designed By: Ramy El Shal 199
 Cash Conversion Cycle
From Cash-Out to Cash-In

30 𝐷𝑎𝑦𝑠 Cash Conversion Cycle

Deferral Payment Terms

Average Days in Inventory Receivables Collection Period

40 𝐷𝑎𝑦𝑠 60 𝐷𝑎𝑦𝑠

𝐶𝐶𝐶 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑦𝑠 𝑖𝑛 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + Receivables Collection Period − Deferral Payment Terms
𝐶𝐶𝐶 = 40 + 60 − 30 = 70 Days

May2022 Designed By: Ramy El Shal 200

 Cash Conversion Cycle
From Cash-Out to Cash-In

Cash Conversion Cycle

From Cash-Out
Deferral Payment Terms

Average Days in Inventory Receivables Collection Period

Cash Conversion Cycle

Fr
Deferral Payment Terms

Average Days in Inventory Receivables Collection Perio

Deferral Payment Te

Average Days in Inv

May2022 Designed By: Ramy El Shal 201

 Cash Conversion Cycle
From Cash-Out From Cash-Out
to Cash-In to Cash-In

CCC CCC
30 𝐷𝑎𝑦𝑠 30 𝐷𝑎𝑦𝑠
Deferral Payment Terms Deferral Payment Terms
Receivables
Average Days in Inventory Receivables Collection Period Average Days in Inventory
Collection Period
15 𝐷𝑎𝑦𝑠 20 𝐷𝑎𝑦𝑠 15 𝐷𝑎𝑦𝑠 10 𝐷𝑎𝑦𝑠

𝐶𝐶𝐶 = 15 + 20 − 30 = 5 Days 𝐶𝐶𝐶 = 15 + 10 − 30 = −5 Days

From Cash-Out to Cash-In

CCC
Cash Only
Average Days in Inventory
Transactions
15 𝐷𝑎𝑦𝑠
𝐶𝐶𝐶 = 15 + 0 − 0 = 15 Days
May2022 Designed By: Ramy El Shal 202
 Cash Conversion Cycle

𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒

Deferral Payment Terms = =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝐶𝑜𝐺𝑆 𝐶𝑜𝐺𝑆
𝑌𝑒𝑎𝑟 𝐷𝑎𝑦𝑠

Average Days in 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

Inventory = =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝐶𝑜𝐺𝑆 𝐶𝑜𝐺𝑆
𝑌𝑒𝑎𝑟 𝐷𝑎𝑦𝑠
365
𝑎𝑙𝑠𝑜 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑦𝑠 𝑖𝑛 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 =
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟

Receivables Collection 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒

= =
Period 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝑆𝑎𝑙𝑒𝑠 (𝐴𝐷𝑆) 𝑆𝑎𝑙𝑒𝑠
𝑌𝑒𝑎𝑟 𝐷𝑎𝑦𝑠

May2022 Designed By: Ramy El Shal 203

 Cost of Trade Credit
Cost of Trade
Credit

Costly Trade Credit Total Trade Credit Free Trade Credit

Trade Terms: 1/10, net 30

Day 0 If you pay You do not need to pay Day 30 You may pay full
You Buy Within Days 0 to within Day 11 to 30 supplier amount any where
from 10 requests after Day 30
supplier You get a discount payment But you try to pay as
of 1% early as possible to
The choice is to pay early to get the discount? gain supplier’s trust
Or to pay after the amount is due?
 Cost of Trade Credit
Cost of Trade
Credit

Costly Trade Credit Total Trade Credit Free Trade Credit

Annual Purchases = 100

1 True Price (or Net Price) = 99

List Price = 100

Discount If the cost of financing early payment is less than Discount

(or Finance Charge) (or Finance Charge), then you choose to pay early
 Cost of Trade Credit
Cost of Trade
Credit

Costly Trade Credit Total Trade Credit Free Trade Credit

$10.8

In case you do not take discount

And pay at day 40

You lose 1 You Pay

𝑁𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 99 100
𝑁𝑒𝑡 Daily Purchases = = = $0.27
𝑌𝑒𝑎𝑟 𝐷𝑎𝑦𝑠 365
𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝐿𝑒𝑣𝑒𝑙 (Total Trade Credit) = 𝑁𝑒𝑡 𝐷𝑎𝑖𝑙𝑦 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 × 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝐷𝑎𝑦 = 0.27 × 40 = $10.8

𝑁𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 $99

𝐴𝑛𝑛𝑢𝑎𝑙 𝐺𝑟𝑜𝑠𝑠 Purchases = List Price = = = $100
1 − 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 100% − 1%
 Cost of Trade Credit
Cost of Trade
Credit

Costly Trade Credit Total Trade Credit Free Trade Credit

The Difference
$8.1 $10.8 $2.7

But if you take discount

And pay at day 10

You Pay 99

𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝐿𝑒𝑣𝑒𝑙 (Free Trade Credit) = 𝑁𝑒𝑡 𝐷𝑎𝑖𝑙𝑦 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 × 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝐷𝑎𝑦 = 0.27 × 10 = $2.7
 Cost of Trade Credit
Cost of Trade
Credit

Costly Trade Credit Total Trade Credit Free Trade Credit

$8.1 $10.8 $2.7

Nominal Annual Rate:
Cost of Costly 𝑟𝑁𝑜𝑚 = 𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑅𝑎𝑡𝑒 × 𝑃𝑒𝑟𝑖𝑜𝑑𝑠 𝑝𝑒𝑟 𝑌𝑒𝑎𝑟
Trade Credit 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑌𝑒𝑎𝑟 𝐷𝑎𝑦𝑠
𝑟𝑁𝑜𝑚 = ×
𝑁𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝐷𝑎𝑦 − 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝐷𝑎𝑦
1% 365
𝑟𝑁𝑜𝑚 = × = 12.29%
99% 40 − 10
Effective Annual Rate:
𝑃𝑒𝑟𝑖𝑜𝑑𝑠 𝑝𝑒𝑟 𝑌𝑒𝑎𝑟
𝐸𝐴𝑅 = 1 + 𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑅𝑎𝑡𝑒 −1 365
𝑌𝑒𝑎𝑟 𝐷𝑎𝑦𝑠 1 40−10
𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑎𝑦 𝐷𝑎𝑦−𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑃𝑎𝑦 𝐷𝑎𝑦 = 1+ − 1 = 13.01%
𝐸𝐴𝑅 = 1 + −1 99
𝑁𝑒𝑡 𝑃𝑟𝑖𝑐𝑒
 Cost of Trade Credit
Cost of Trade
Credit

Costly Trade Credit Total Trade Credit Free Trade Credit

$8.1 $10.8 $2.7

Cost of Costly
Trade Credit If Effective Annual Rate is GREATER than WACC .. Take the Discount

If Effective Annual Rate is LESS than WACC .. Turn down the Discount
and pay at the normal due date (e.g. net 30)
Thank You for Participation
Please, Read the Resources
Please, Bombard me with Questions
See You Next Wednesday …

Mar2020 Designed By: Ramy El Shal 210