WELCOME

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4 Manufacturer Assembler Distributors Customers
 Manufacturer Assembler

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 MANUFACTURER 3RD PARTY LOGISTICS

 Manufacturer deliver the products based on their

Optimum Production and Delivery Lot size which
minimizes their Annual Total Cost.
7 (High Delivery Lot size and Less Delivery Frequency)

3RD PARTY LOGISTICS ASSEMBLER

 3RD Party Logistics provider deliver the products to

assembler based on assembler’s demand .
(Less Delivery Lot size and High Delivery Frequency)
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 𝐷𝑟 𝐷𝑝 𝑁
ATC= 𝐾 + 𝑟 Hr +IjHp +
𝑁𝑟 𝑃 2
12 𝐷𝑝
Fj + (1+i)Cj for j= 1,2,3…n
𝑞𝑗
Where,
𝐷𝑝 𝑚𝑗 −1
Ij = 1 − 𝑁𝑗 − 𝑞𝑗 for j = 1,2,3…n
2𝑃 2
Cj = 𝑞𝑗E + DpB + Dpwf for j = 1,2,3…n
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 𝐷𝑟 𝐷𝑝 𝑁 𝐷𝑝
ATC= 𝐾 + 𝑟 Hr +IjHp + Fj + (1+i)Cj
𝑁𝑟 𝑃 2 𝑞𝑗
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Ordering Cost Holding Cost Holding Cost Transportation

of Raw materials of Products Cost

3PL’s Cost
 𝐷𝑟
Ordering Cost = 𝐾
𝑁𝑟
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Dr= Annual Demand of Raw Materials (Units per
year)
Nr = Ordering Quantity of Raw Materials (Units
per Order)
K = Ordering Cost (Amount per Order)
 Inventory Holding Cost of Raw
𝐷𝑝 𝑁
Materials = 𝑟 H
15 2
𝑃 r

Dp = Annual demand of the Product (Units/Year)

P = Production rate of Product (Units/Year)
Nr = Ordering Quantity of Raw Materials (Units
per Order)
Hr = Inventory Holding cost of Raw materials
per unit (Amount per year)
 Inventory Holding cost of Products = IjHp
16 Ij = Average product inventory of the
manufacturer for transportation container type
j (amount per year).
Hp = Inventory Holding cost of a unit of product
(amount per year).
 Average Product Inventory in the Manufacturer,
𝐷𝑝 𝑚𝑗 −1
Ij = 1 − 𝑁𝑗 − 𝑞𝑗
17 2𝑃 2

Nj = Production Lot Size of jth container

type(Units per lot)
mj = Number of shipments of jth container type.
qj = Actual delivery lot size of transportation
container type j (Units/Lot).
 𝐷𝑝
Transportation Cost = Fj
𝑞𝑗
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Dp = Annual demand of the Product (Units/Year)

qj = Actual delivery lot size of transportation
container type j (Units/Lot).
Fj = Transportation cost of the transportation
container type j from the manufacturer to the
3PL (amount/lot).
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 Cost of 3rd Party Logistics Provider = (1+i)Cj
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Cj = 3PL’s cost for the transportation

container type j (amount per year).
i = Annual profit margin of 3PL (%)
 Actual Cost of 3rd Party Logistics Provider ,
Cj = 𝑞𝑗E + DpB + Dpwf
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E = Annual Inventory Holding Cost of 3rd Party
Logistics
B = 3PL’s Pickup cost per unit product (amount per
unit)
w = Weight of the Product (Kilogram per unit)
f = Freight rate of the 3PL provider to the
assembler
 Actual Cost of 3rd Party Logistics Provider ,
22 Cj = 𝑞𝑗 E + DpB + Dpwf
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Holding Cost Pick Up Cost Delivery Cost

  Demand of the customer(per month), d = 150
 Demand rate per year, Dp = 1800
 Delivery Lot Size, Qj = 500
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 No. of shipments required = 4
 No of products delivered = 4 x 500 = 2000
 Remaining inventory at the end of each
year(in 3PL’s) = 2000-1800 = 200.
 𝑄𝑗
kj = for j = 1, 2, 3..n
𝑑
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𝑘𝑗 when kj is an integer
rj = for j = 1, 2, 3..n
𝑘𝑗 otherwise

Actual Delivery Lot size, qj = rjd

500
kj = = 3.33, rj = 3.
150
Actual Delivery Lot size, qj = 3 x 150 = 450.
(450 x 4 = 1800)
  Assume all raw materials are converted into
final product without any wastage.
25 𝐷𝑟 𝐷𝑝
=
𝑁𝑟 𝑁𝑗
 Production Lot size, Nj = No. of shipments(mj)
x Delivery Lot size(qj)
Nj = mjqj
26 𝐷𝑝 𝐷𝑝 𝐷𝑝 𝑚𝑗 −1
TC(mj) = K + mjqj Hr + 1 − 𝑁𝑗 − 𝑞𝑗 Hp
𝑚𝑗𝑞𝑗 2𝑃 2𝑃 2

𝐷𝑝
+ Fj + (1+i) 𝑞𝑗E + DpB + Dpwf
𝑄𝑗 2
 𝑑𝑇𝐶(𝑚𝑗)
=0
𝑑𝑚𝑗
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1 2𝑃𝐷𝑝𝐾
mj* =
𝑞𝑗 𝐷𝑝𝐻𝑟 + 𝑃−𝐷𝑝 𝐻𝑝
For j = 1,2,3..n
 TCj* = Minimize TC 𝑚𝑗 ∗ , TC( 𝑚𝑗 ∗ )
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*
Nj = mj* qj
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 Company: MATSHITA Product: Optical Drives
 Capacity of Transportation container type 1, 20-foot (per Lot), Q1: 4800.
 Capacity of Transportation container type 2, 40-foot (per Lot), Q2: 9600.
 Demand of Customer (per shipment), d= 465.
 Annual Demand of Product(Units), Dp= 112,500.
 Annual Production rate of manufacturer(units), P= 150,000.
 Holding Cost of raw material (per unit), Hr= `1.2
 Holding Cost of Product (per unit), Hp= ` 1.8
 Ordering Cost (per order), K= ` 200
 Transportation Cost of type 1 container (per Lot), F1= ` 1400.
 Transportation Cost of type 2 container (per Lot), F2= ` 2600.
 Annual Profit Margin of 3PL Provider, i= 8%
 Annual inventory holding cost of 3PL, E= ` 1.8
 3PL’s Pickup cost (per unit),B= ` 0.5
 Weight of Product (Kilogram per unit), w= 0.8
 Freight rate from 3PL provider to the assembler (per Kilogram), f= ` 0.6.
*Assume the unit of cost is in Indian National Rupees, `. 30
 𝑄1 4800
 k1 = = = 10.32
𝑑 465
 No. of shipments (from 3PL to assembler), r1= 10
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 Actual Delivery Lot Size, q1 = r1 x d = 10 x 465 = 4650
 No. of shipments, m1 = 5.194, this should be an integer.
So m11 = 5, m12 = 6
 Total Cost, TC(5) = `189,755, TC(6) = `192,894.
 Optimum no. of shipments, m1* = 5
 Optimum Production Lot size, Nj* = m1* x qj = 5 x 4650
TC(mj) =
𝑫 𝒑
𝑫
K + mjqj Hr + 𝟏 −
𝒑 𝑫
𝑵𝒋 −
𝒎 −𝟏𝒑
𝒒𝒋 Hp 𝒋 = 23,250
𝒎 𝒒𝟏 𝟐𝑷 𝟐𝑷𝑫𝒑𝑲 𝟐𝑷 𝟐
mj* 𝑫=𝒋 𝒑 𝒋
+ 𝒒F𝒋 +𝑫 𝑯 +𝒒𝒋𝑷−𝑫𝒑
(1+i)
𝒑 𝒓 E + D𝑯B
𝒑 + Dpwf
𝑸𝒋 j p
𝟐
 Comparison between 20-foot &
40-foot Containers

Container j Qj mj mj* qj Nj* TCj*

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20-foot 1 4800 5.19 5 4650 23,250 `189,755

40-foot 2 9600 2.59 3 9300 27,900 `200,877

We can save `11,122 if we choose 20-foot container

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