APLLICATION OF THIRD PARTY LOGISTICS TO

IMPLEMENT JUST-IN-TIME SYSTEM UNDER A

GLOBAL ENVIRONMENT

Seminar Report

Submitted in partial fulfillment of the requirements for the award of the

degree of

Master of Technology
in
Industrial Engineering and Management

by

KAILAS SREE CHANDRAN (Roll No.: M100447ME)

Department of Mechanical Engineering

NATIONAL INSTITUTE OF TECHNOLOGY CALICUT
November 2010
 CERTIFICATE

This is to certify that the report entitled “APLLICATION OF THIRD

PARTY LOGISTICS TO IMPLEMENT JUST-IN-TIME SYSTEM UNDER A
GLOBAL ENVIRONMENT” is a bonafide record of the Seminar presented by
KAILAS SREE CHANDRAN (Roll No.: M100447ME), in partial fulfilment of
the requirements for the award of the degree of Master of Technology in
Industrial Engineering and Technology from National Institute of Technology
Calicut.

Dr. R. Sridharan
Faculty-in-Charge
(MEA692- Seminar)
Dept. of Mechanical Engineering

Dr. S. Jayaraj
Professor & Head
Dept. of Mechanical Engineering

Place : NIT Calicut

Date :
 ACKNOWLEDGEMENT

I am deeply indebted to my guide Dr. R. Sridharan, Professor, Department of Mechanical

Engineering, for his invaluable guidance, consistent encouragement and suggestions
throughout the course of the work.

I wish to express my sincere thanks to Dr. S. Jayaraj, Professor and Head, Department of
Mechanical Engineering, for providing the necessary facilities to carry out this work.

Last but not the least, I extend hearty thanks to all our teachers whose constant support
and encouragement helped me to complete this seminar in time.

KAILAS SREE CHANDRAN

 ABSTRACT
Consider a supply chain which has a manufacturer in the upstream and an
assembler in the downstream(PC manufacturing company). The assembler who
follows Just-In-Time(JIT) policies wants their upstream manufacturer to deliver
goods in smaller lot size and higher delivery frequency. But the upstream
manufacturer wants to send the products in large delivery lot size and less delivery
frequency for reducing transportation costs. For the upstream manufacturer who
adopts sea transportation to deliver products, a third party logistics (3PL) can act
as an interface between the upstream manufacturer and the downstream
partner/assembler so that the products can be delivered globally at a lower cost to
meet the JIT needs of the downstream assembler. In this seminar, a quantitative
JIT model is developed to find the optimal delivery lot size and number of
shipments from the manufacturer to 3PL provider at the minimum total cost. A
case study is also included to explain the model.
 CONTENTS
List of Symbols ii

1. Introduction 1
1.1. Introduction 1
1.2. Problem Definition 1
1.3. Outline of the Report 2

2. Literature Review 3
2.1. Literature Review 3

3. Modeling 4
3.1. Introduction 4
3.2. Assumptions in the Model 4
3.3. Annual Total Cost of the Manufacturer 6
3.4. Delivery Lot Size 7
3.5. JIT Cost Model Associated with the 3PL 8
3.6. Algorithm 9

4. Case Study 10
4.1. Case Study 10

5. Conclusion 12
5.1. Conclusion 12

References 13
 LIST OF SYMBOLS

f Freight rate of the 3PL provider to the assembler

i Annual profit margin of 3PL (%)
kj number of shipments from the 3PL provider to the assembler
mj Number of shipments of jth container type.
qj Actual delivery lot size of transportation container type j (Units/Lot).
rj real number of shipments from the 3PL provider to the assembler.
w Weight of the Product (Kilogram per unit)
B 3PL’s Pickup cost per unit product (amount per unit)
Cj 3PL’s cost for the transportation container type j (amount per year).
Dp Annual demand rate of the Product (Units/Year)
Dr Annual Demand of Raw Materials (Units per year)
E Annual Inventory Holding Cost of rate 3PL
Fj Transportation cost of the transportation container type j from the
manufacturer to the 3PL (amount/lot).
Hp Inventory Holding cost of a unit of product (amount per year).
Hr Inventory Holding cost of Raw materials per unit (Amount per year)
Ij Average product inventory of the manufacturer for transportation
container type j (amount per year).
K Ordering Cost (Amount per Order)
Nj Production Lot Size of jth container type(Units per lot)
Nr Ordering Quantity of Raw Materials (Units per Order)
P Production rate of Product (Units/Year)

ii
 CHAPTER 1
INTRODUCTION

1.1 INTRODUCTION

With the globalization of businesses, the on-time delivery of products

through the support of a logistics system has become more and more important.
Global corporations must constantly investigate their production systems,
distribution systems, and logistics strategies to provide the best customer service
at the lowest possible cost. Long-range survival for international corporations
will be very difficult without a highly optimized, strategic, and tactical global
logistics plan. The activities and processes should be coordinated along a supply
chain to capture decisions in procurement, transportation, production and
distribution adequately.

Recently, the study of the Just-In-Time (JIT) system under a global

environment has attracted more attention in the Personal Computer (PC) related
industries because of the tendency towards vertical disintegration. The JIT system
can be implemented to achieve numerous goals such as cost reduction, lead-time
reduction, quality assurance, and respect for humanity. Owing to the short product
life cycle of the personal computer industry, downstream companies usually ask
their upstream suppliers to execute the JIT system, so that the benefits, like the
risk reduction of price loss incurred from inventory, lead times reduction, on-time
delivery, delivery reliability, quality improvement, and lowered cost could be
obtained.

1.2 PROBLEM DEFINITION

The globalization of the network economy has resulted in a whole new

perspective of the traditional JIT system with the fixed quantity-period delivery
policy. The fixed quantity-period delivery policy with smaller quantities and
shorter periods is suitable to be executed among those companies that are close to
each other. However, it would be hard for the manufacturer to implement the JIT
system under a global environment, especially when its products are conveyed by
transnational sea transportation globally. Therefore, many corporations are trying

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to outsource their global logistics activities strategically in order to obtain the
numerous benefits such as cost reduction and service improvement.

The 3PL, which involves a firm acting as a middleman not taking title to
the products, but to whom logistics activities are outsourced, has been playing a
very important role in the global distribution network. A 3PL firm is a
professional logistics company profiting by taking charge of a part or the total
logistics in the supply chain of a focal enterprise. 3PL also connects the suppliers,
manufacturers, and the distributors in supply chains and provide substance
movement and logistics information flow. The core competitive advantage of a
3PL firm comes from its ability to integrate services to help its customers
optimize their logistics management strategies, build up and operate their logistics
systems, and even manage their whole distribution systems.

1.3 OUTLINE OF THE REPORT

The report starts with the literature review of various studies conducted in
this area. Then the model is explained starting with stating the assumptions, then
Annual Total cost, Delivery Lot Size, JIT Cost model and the model algorithm. A
case study is also explained to show how the model performs in real world.

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 CHAPTER 2
LITERATURE REVIEW

2.1 LITERATURE REVIEW

The Economic Order Quantity (EOQ) model is widely used to

calculate the optimal lot size to reduce the total cost, which is
composed of ordering cost, setup cost, and inventory holding cost
for raw materials and manufactured products (David & Chaime,
2003; Kelle, 2003; Khan & Sarker, 2002; Sarker & Parija, 1996).
However, some issues such as the integration of collaborative 3PL
and the restrictions on the delivery lot size by sea transportation are
not discussed further in their studies. For the above involved costs,
(David and Chaime, 2003) further discuss a vendor–buyer
relationship to include two-sided transportation costs in the JIT
system. The annual setup cost is equal to the individual setup cost
times the total number of orders in a year (Koulamas, 1995). The
transportation cost can be affected by freight rate, annual demand,
and the products’ weight (McCann, 1996). Compared to the above
studies which assume that the transportation rate is constant per unit,
(Swenseth and Godfrey, 2002) assumed that the transportation rate
is constant per shipment, which will result in economies of scale for
transportation. Besides, (McCann, 1996) presented that the total
logistics costs are the sum of ordering costs, holding costs, and
transportation costs.

The numerous costs involved will be formulated in different ways

when the manufacturer operates the JIT system associated with a
collaborative 3PL under a global environment. In this study, the
implementation of sea transportation from the manufacturer to the
3PL provider will be particularized, and the corresponding cost
model will also be presented to obtain the minimum total cost, the
optimal production lot size, and the optimal delivery lot size from
the manufacturer to the 3PL provider.

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 CHAPTER 3
MODELING
3.1 INTRODUCTION

A complete supply chain should consist of five participants, including the

raw materials supplier, the manufacturer, the assembler, the warehouse operator,
and the consumer. Here the main focuses are on the relationships among the
manufacturer, the 3PL provider and the assembler within the JIT system under a
global environment. In order to achieve the fixed quantity-period JIT delivery
policy, which implies that the actual delivery lot size has to be determined by
identifying the downstream assembler’s needs instead of the upstream
manufacture’s economical delivery lot size, higher transportation costs with
higher delivery frequency are necessary.

Since the JIT system are more appropriately executed among those
companies that are close to each other, a collaborative 3PL connected the
upstream manufacture with the downstream assembler is necessary when the
products have to be delivered from the upstream manufacture to the downstream
assembler by sea transportation over a long distance. Here a JIT cost model is
proposed to obtain the optimal production lot size, the actual delivery lot size, the
most suitable transportation container type, and the exact number of shipments
from the manufacturer to the 3PL provider at the minimum total cost.

3.2 ASSUMPTIONS IN THE MODEL

The study has the following assumptions in the JIT system.

i. There is only one assembler and one manufacturer for each product.
ii. The production rate of manufacturer is uniform, finite and higher than
the demand rate of the assembler.
iii. There is no shortage in both raw materials and products.
iv. The demand for products that the assembler receives is fixed and is at
regular intervals.
v. Delivery lot size from manufacturer to 3PL provider is more than
assembler’s demand during that interval.

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 vi. The space of the manufacturer’s warehouse is sufficient for keeping all
inventories of products that the manufacturer produces.
vii. Products are delivered to 3PL providers in large containers.
viii. The transportation rates from the manufacturer to the 3PL and from the
3PL to the assembler are computed by the number of shipments and
the product’s weight, respectively.
ix. Qj is much greater that demand at a regular interval, d (qj d. where
j=1, 2, 3….n).
In this study, the buyer’s average inventories can be divided into IL and
IA since the 3PL provider has been collaborated besides the manufacturer and the
assembler. In addition to IT; IA is a constant due to the constant demand rate.
I.e., the total of IM and IL , have to be a constant as well. Under the JIT system
focusing towards the assembler, the manufacturer’s inventories will be kept either
with the manufacturer himself or with the 3PL provider. In general, the
manufacturer usually delivers the necessary inventories of products to the 3PL
provider so as to cope with the down- stream assembler’s needs under the JIT
system. Based on the assumption (vi), the inventories of products will be kept
with the manufacturer and, therefore, all unnecessary inventories of products
should be kept with the manufacturer rather than with the 3PL provider to avoid
extra expenses. Since the delivery lot size is based on the downstream
assembler’s needs instead of the total capacity of the adopted transportation
container type, the method used to decide the delivery lot size and the
corresponding number of shipments from the manufacturer to the 3PL provider so
as to reduce the total cost under the JIT system will be demonstrated in this
study. In addition, the optimal production lot size of the manufacturer will also
be explored based on the delivery lot size so that production and transportation
can be synchronized.

Based on the assumption (viii), the quantities delivered from the

manufacturer to the 3PL provider are determined by the delivery lot size which
depends on the capacity of the different transportation container types; and the
quantities delivered by the 3PL provider to the assembler based on the
assembler’s real needs without limiting delivery lot size.

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3.3 ANNUAL TOTAL COST OF THE MANUFACTURER

The Total cost includes Ordering Cost, Inventory Holding Cost of Raw
materials, Inventory Holding cost of Products, Transportation Costs from
Manufacturer to 3rd Party Logistics provider and Cost of 3rd Party Logistics
provider (including profit).

Accordingly, the annual total cost of the manufacturer, who adopts the jth
transportation container type to deliver the products to the 3PL provider, under the
JIT system can be determined as follows:

ATC= ( )Hr + IjHp + ( )Fj + (1+i)Cj

for j= 1,2,3…n (3.1)

Where,

( )
Ij = ( )

for j = 1,2,3…n (3.2)

Cj = E + DpB + Dpwf

for j = 1,2,3…n (3.3)

In Eq. (3.1), ( )Hr, IjHp, ( )Fj and (1+i)Cj are the Holding cost,

Inventory Holding Cost of Raw Materials, Inventory Holding cost of Products,

Transportation Cost and Cost of 3rd Party Logistics Provider respectively. In the
operation of a supply chain, the 3PL provider’s cost consists of several logistics
activities in procurement, transportation and storage of raw materials and
machining, packaging and delivering of products. Therefore, the 3PL provider’s
charge to the manufacturer, which includes both the above 3PL provider’s cost, Cj
and their profit (assumed that the profit margin is i percentage of its cost), is
illustrated in (1+i)Cj. The 3PL provider’s cost in Eq. (3.3) includes the inventory
holding cost, the pickup cost, and the delivery cost of products. Eq. (3.3) gives
Average Product Inventory in the Manufacturer.

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3.4 DELIVERY LOT SIZE

According to assumption (viii), the transportation cost from the manufacturer to

the 3PL provider is determined by the capacity of the adopted transportation
container type with fixed charges per shipment; and the transportation cost from
the 3PL provider to the assembler which is depended on the assembler’s real
needs, d, is at the rate of the product’s weight. If the inventories of products are
delivered from the manufacturer to the 3PL provider using the full load of the jth
transportation container type, Qj, there will be a remainder of inventory items at
the 3PL provider at the end of each interval because Qj is not a multiple of d. The
remaining inventories which are kept with the 3PL provider will cost extra to the
manufacturer since the inventory holding cost shown in the first term of the Eq.
(3.3) is larger. Another dilemma is that these remaining inventories will be
different at the end of each interval, and, therefore, the average inventories kept
by the 3PL provider will not be equal, which implies that the shape of the 3PL
provider’s inventories in each interval cannot be the same. In such circumstances,
it would not be possible to determine the average inventory cost incurred by
the 3PL provider.

In order to avoid these remaining inventories, the appropriate delivery lot

size, qj, should be a multiple of d instead of the full load of the jth transportation
container type, Qj. Since qj is smaller than Qj, the constraint on this model will
have to be explained so that the number of shipments will not be increased when
the delivery lot size is qj rather than Qj with the fixed Nj. Assuming that the
transportation containers which are used to deliver the products from the
manufacturer to the 3PL provider can be classified into n types. When the full
load of the jth transportation container type is adopted, the number of shipments,
kj.

kj = for j = 1, 2, 3..n (3.4)

Based on Eq. (3.4), the quotient kj is not an integer when Qj is not a

multiple of d, which implies that there will be remaining inventories kept with the
3PL provider at the end of each interval. Therefore, the real number of shipments

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from the 3PL provider to the assembler at each interval, rj, is obtained as follows
so that these remaining inventories can be avoided.

rj = { for j = 1, 2, 3..n (3.5)

⌊ ⌋

The actual delivery lot size of the jth transportation container type, qj, is:

qj = rjd for j = 1, 2, 3..n (3.6)

3.5 JIT COST MODEL ASSOCIATED WITH THE 3PL

Assume all raw materials are converted into final product without any
wastage. Then the ratio between raw materials with ordering quantity of raw
materials and Annual demand rate of product with production lot size becomes
equal.

(3.7)

And the Production Lot size, Nj can be calculated by multiplying number of

shipments, mj and Delivery Lot size, qj.

Nj = mjqj for j = 1, 2, 3...n (3.8)

Substitute the equations of Cj, Ij and Nj in equation (1):

( )
TC(mj) = K+ mjqj Hr+ ( ) Hp+ Fj +

(1+i) E + DpB +Dpwf

for j = 1, 2, 3...n (3.9)

Since Eq. (3.9) is a convex function, the potential optimal number of

shipments, mj, in the JIT cost model can be obtained when

( )
=0 (3.10)

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 mj* = √ ( )
for j = 1, 2, 3...n (3.11)

The number of shipments of the jth transportation container type, mj,

obtained by the Eq. (3.11) is not an integer. Since the number of shipments that
manufacturer delivers must be an integer in this model, the optimal total cost of
the jth transportation container type is constructed as:

TCj* = Minimize { (⌊ ⌋) (⌈ ⌉)}

for j = 1, 2, 3...n (3.12)

Consequently, the optimal production lot size of the jth transportation

container type, Nj, in the JIT cost model can be obtained as follows:

Nj * = mj* qj for j = 1, 2, 3..n (3.13)

3.6 ALGORITHM
The algorithm for investigating the optimal production lot size and delivery
lot size under the JIT system associated with the 3PL is:
i. Collect data such as Qj, d, Dp, P, Hr, Hp, K, Fj, I, E, B, w and f.
ii. Compute Actual Delivery lot size, qj.
iii. Find the Optimal number of shipments, mj*.
iv. Compute Annual Total cost, TC(⌊ ∗⌋), TC(⌈ ∗⌉).

v. Actual number of Shipments required which minimize the total cost

and Compute the Optimal Production Lot size, Nj*.

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 CHAPTER 4
CASESTUDY
4.1 CASESTUDY

A case study is conducted on Matshita Company which is an Optical

Drive manufacturing firm located in Japan. They are the suppliers of Optical
drives to Dell Computers. In this case study, Assembly section of Dell Computers
India is situated in Bangaluru. So the manufacturer, in this case its Matshita, have
to send their products to bangaluru through sea transport. Here we have to
calculate the Optimum number of shipments and delivery lot size from
manufacturer to 3PL which minimizes the total cost. The collected data is given
below*.

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(INR), `.

Calculations for 20-foot containers:

k1 = = = 10.32

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.
Here m1 is giving the minimum total cost, so it is selected.
Optimum no. of shipments, m1* = 5
Optimum Production Lot size, Nj* = m1* x qj = 5 x 4650 = 23,250

Table 4.1: Comparison between 20-foot & 40-foot Containers:

Container J Qj mj mj * Qj Nj* TCj*
20-foot 1 4800 5.19 5 4650 23,250 `189,755
40-foot 2 9600 2.59 3 9300 27900 `200,877

So 20-foot containers are giving minimum total cost compared to 40-foot.

So we have to select 20-foot containers for transporting products to 3PL with 5 as
optimum number of shipments and 4650 units as optimum delivery lot size.
Optimum production lot size is 23,250 units.

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 CHAPTER 5
CONCLUSION
5. 1 CONCLUSION

How to implement the JIT system under a global environment has been
attracting increasing attention. Since the downstream assemblers ask the
upstream manufacturers to deliver products using the JIT system, the integration
of 3PL provider will become an extremely important partner in implementing
the JIT system under a global environment in the future.

Accordingly, this study presents the following main conclusions:

 By integrating 3rd Party logistics, both manufacturer’s and
assembler’s requirements are satisfied.
 By altering the delivery lot size different from container size, the
inventory of 3PL is decreased which reduces the inventory holding
cost included in 3PL provider’s cost.
 Production lot size of manufacturer is also calculated based on no.
of shipments and delivery lot size.

Some products with larger delivery lot sizes are suitable for sea
transportation. When these products have to be delivered from the upstream
manufacturer to the downstream assembler under a JIT system, the 3PL
provider can collaborate as an inter- face between the upstream manufacturer and
the downstream assembler. The products can be delivered from the
manufacturer to the 3PL provider by optimal delivery lot size to reduce the
transportation cost, and the products can also be delivered from the 3PL
provider to the assembler using smaller delivery lot sizes at a higher delivery
frequency to satisfy the assembler’s needs. A quantitative cost model which can
be executed using a JIT system associated with the 3PL is proposed in order to
investigate the most cost-effective transportation container type, the optimal
production lot size and delivery lot size of the manufacturer which gives the
lowest total cost.

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 REFERENCE

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relationship go? International Journal of Production Economics, 361–
368.
[3]. Kelle, P., Khateeb, F. A., & Miller, P. A., 2003, Partnership and
negotiation support joint optimal ordering/setup policies for JIT.,
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[4]. Khan, L. R., & Sarker, R. A., 2002, An optimal batch size for a JIT
manufacturing system, Computers & Industrial Engineering, 42(2–4),
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[5]. Koulamas, C. P., 1995, Simultaneous determination of the cutting
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[6]. McCann, P., 1996, Logistic costs and the location of the firm: A one-
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interval, lumpy demand delivery system, European Journal of
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