Logistics. ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management...

Logistics

©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Chapter 11, Slide 2

Logistics

• Logistics defined

• Logistics decision areas

• Logistics strategies in action

– Kraft Foods, page 336.


Chapter 10, Slide 3

Logistics

Planning, implementing, and controlling the effective flow and storage of goods and materials from the point of origin to

the point of consumption (CLM)


Chapter 11, Slide 4

Key Decision Areas

Transportation Warehousing (and more generally, location) Packaging Material handling Logistics information systems Logistics service providers

(And some would put inventory here as well!)


Chapter 11, Slide 5

Why the Increasing Interest?

• Deregulation

• Globalization

• Technological breakthroughs

• Environmental concerns

• Performance impact


Chapter 11, Slide 6

Deregulation

• Transportation providers– Elimination of artificial barriers

– Unrestricted markets

– Multi-modal solutions

– Price, schedule, and terms flexibility

• Buyers have greater freedom– Negotiate prices, terms, and conditions

– Ownership issues

BUT…


Chapter 11, Slide 7

Deregulation (continued)

… With greater freedom comes new responsibilities

Key pointLogistics has evolved from being a

“tactical” area to a “strategic” one


Chapter 11, Slide 8

Globalization(US Statistics)

Year Exports Imports

1992 $449 Billion $700 Billion

1998 $670 Billion $917 Billion

Change +49% +31%

What is driving this activity?


Chapter 11, Slide 9

Technological Breakthroughs I

Information Systems• Global positioning systems• Bar-coding applications

– RFID on the horizon as replacement

• Real-time simulation and optimization• Precise coordination of multi-modal

solutions


Chapter 11, Slide 10

Technological Breakthroughs II

Transportation Systems• Standardized containers for ease of

transfer• “Roadrailers,” etc.• Multi-modal solutions

– Ship Truck Train Truck ?



Environmental Concerns

Even while certain aspects of logistics have been deregulated, other areas are being controlled more stringently

Fuel efficiencyPollutionRecovery, recycling, and reuse of

packaging, containers, and products



Performance Impact I

Region

Gross Domestic Product

Logistics Expenditure

Logistics % of GDP

North America 8,495 915 10.8

Europe 7,981 941 11.8

Pacific 5,605 652 11.6

Other 7,080 916 12.9

Total 29,161 3,424 11.7

Comparative GDP and Logistics Expenditures (billions of $, 1998)

Source: D. Bowersox and R. Calantone, “Executive Insights: Global Statistics,” Journal of International Marketing, Vol. 8, no. 4, 1998, pp 83-93.



Performance Impact II

Customer “touch points”Delivery reliabilityDelivery speedDelivery trackingQuality

“Ford is hiring UPS”



Performance Impact III

2000 2004

Manufacturing Time 2 days 0.5 days

Shipping Time 4 days 4 days

Total Time to the Customer 6 days 4.5 days

Total time to the customer at WolfByte Computer

75% decrease in manufacturing time, but only 25% decrease in time to customer. Where is the leverage now?



The Evolution of Logistics Strategy

From functional silos to strategic positioning



Strategic Disconnect

OrganizationStrategy

MarketingStrategy

OperationsStrategy

FinancialStrategy

Strategic Disconnect

TransportationDecisions

InformationSystems

InventoryDecisions

LocationDecisions



Who “Owns” Logistics?

OrganizationStrategy

MarketingStrategy

OperationsStrategy

FinancialStrategy

Executive-level of representationDifficult goal of functional integrationOrganizational question: Who really ‘owns’ logistics?

Transportation?Marketing?Operations?

LogisticsStrategy



Logistics Decision Areas

Transportation…– Modes– Formats– Pricing

Warehousing– Consolidation– Cross Docking and Break-Bulk– Hub and Spoke– Inventory



Major Transportation Modes

• Highway (truck)

• Water

• Rail

• Air

• Pipeline



Modal Shares of Shipments(within US, 1999)

Mode Value (%) Tons (%) Ton Miles (%)

Highway (trucking, parcel, postal, courier)

80.3 58.5 28.4

Water 2.5 11.1 20.4

Rail 4.8 11.2 26.7

Air 2.7 0 0.2

Pipeline 4.2 13.7 17.6

Other/Unknown 5.5 5.5 6.7



Highway Mode

Strengths• Flexibility to pick up

and deliver where and when needed

• Often the best balance between cost/flexibility and delivery reliability/speed

• Can be available 24/7

Weaknesses• Not the fastest• Not the cheapest



Water Mode

Strengths• Highly cost effective for

bulky items• Most effective when

linked into multimodal system

Weaknesses• Limited locations• Relatively poor delivery

reliability/speed• Often limited operating

hours at docks



Rail Mode

Strengths• Highly cost effective for

bulky items• Can be most effective

when linked into multimodal system

Weaknesses• Limited locations, but

better than for water.• Better delivery

reliability/speed than water



Air Mode

Strengths• Quickest delivery over

longer distances• Can be very flexible

when linked to highway mode

Weaknesses• Often the most

expensive, particularly on a per pound basis



Question

How can businesses design solutions that exploit the strengths of each mode?



Multi-Modal Solutions

North Carolina’s Global TransPark



Justification

Shift from domestic to global economies

Emergence of just-in-time, flexible and agile manufacturing practices requiring sophisticated logistics solutions

The rapid growth of distribution via air freighters (roughly four times the growth rate of passenger service by the airlines)

The need to use air cargo, shipment by sea, and delivery by trucks and trains in an overall distribution system

The need for a commercial distribution hub in the Eastern United States that can reach more than 60 percent of the nation’s population overnight and also provide a gateway to global markets.



Global TransPark

• 15,700 acres at full development with two parallel runways of 11,500 feet and 13,000 feet

• Integrated air, rail, road, and nearby sea transportation capabilities

• Free trade zone status



Kinston, NC



Transportation “Formats”

• Common carriers– Published rates and schedules– “Nondiscriminatory” pricing– Increased flexibility to partner

• Contract carriers– Service for select customers– Unlimited number of customers

• Private carriers



Questions

What are the strengths and weaknesses of each?

How does the choice of format tie into the business strategy?



Pricing Transportation Services

•Economic factors–Pricing versus distance–Price/pound versus density–Stowability, handling, and liability–Market factors

•Ratings–Goods classification–Class index



Economic Factors I

Distance

Pric

e

… why the “tapering principle”?

Density

Pric

e/po

und



Economic Factors II

Stowability, handling, and liability

versus



Economic Factors III

Market factorsWhat might this include?

EastCoast,USA

WestCoast,USA



Ratings

Translating economic factors into actual prices



Ratings (a simplified view)

• Goods classification– Perishability, stowability,

handling, etc.

• Class index?– From 35 - 400– “average product” = 100– Based on expected

transportation costs



Determining Transportation Rates

• Rate Determination– By weight (Less-than-truckload shipment)– By distance (truckload shipments)

Minimum charges and surcharges

• Exceptions to the rule– Seasonal commodities– FAK (freight of all kinds)



Example 1

Shipping 800 lbs of glass slides from Atlanta, GA to Lansing, MI

… Looking at a rate classification guide

Item Articles Class - LTL Shipment

Class – TL Shipment

Minimum TL Weight

86770 Glass, microscopical slide or cover, in boxes

70 40 3,600 lbs.



Rates express $ charged per hundred-weightRates fall as rate class falls and volume increases

Rate Class < 500 lbs 500 to 1,000 lbs

1,000 to 30,000 lbs

200 $98.37 $61.97 $17.00

100 $52.62 $43.68 $9.22

70 $40.48 $33.59 $8.10

Specific Rates for Shipments FROM Atlanta TO Lansing



Result

• $33.59 × 8 = $268.72 shipping cost

• Key points– Classification tables standardized, BUT– Rate tables vary by transportation

provider– Real-time updating of provider tables



Example 2

• 3 Shipments of Class 100 to Lansing:– 5,000 lbs., 10,000 lbs., 7,000 lbs.

• Different stops in Lansing

• Can consolidate, but extra $100 for two additional stops

• What to do?



What to Do?

Separate shipments

50×$18.94 = $947

100×$14.74 = $1,474

70×$18.94 = $1,326

$3,747

Consolidated shipments

220×$9.22 = $2,028

Additional

drop-off

charges: $100

$2,128



Key Points

• Choosing a mode– Five choices– Speed? Cost? Flexibility?

• Choosing a format– Flexibility versus control

• Controllable factors affecting cost– Density, stowability, packaging, and

containerization



Warehousing

Any operation that stores, repackages, stages, sorts, or

centralizes goods or materials



New View

Warehousing a key piece of logistics strategy

– Proctor & Gamble

– Kraft

– Lowe’s

• More than just storage

– “Warehousing” “Distribution Centers”



Warehousing Benefits

Economic benefits:Accrue directly to companyMust consider total system costs

Service benefits:Support customer service needsMay or may not reduce costs



Consolidation

Warehouse

Small shipments in ...

Large economical shipments out ...



Example 1

•Dedicated truck from Los Angeles to Atlanta: $2,000•Cost to run consolidation warehouse: $9 per hundred-weight•Local delivery in Atlanta: $200 per customer

Customer Shipment Weight

Venetian Artist Supply 100 boxes, artist supplies

3,000 lbs.

Kaniko 100 PC printers 3,000 lbs.

Ardent Furniture 10 dining room sets 4,000 lbs.



Cost Benefits of Consolidated Warehousing

How does this compare to the cost of separate dedicated shipments?

What about truck utilization (assume trucks hold 60,000 lbs.)

Warehousing costs 10,000 lbs × $9/100 lbs = $900

Cost of one truck to Atlanta $2,000

Delivery to final customer 3 customers × $200 = $600

Total: $3,500



Cross-Docking

What about supply / demand mismatches?

Warehouse

Small shipments out ...

Large economical shipments in ...



Break-Bulk

Like break-bulk, but usually refers to a single source

Warehouse

Customer Delivery

Plant A



Example 2

• Manufacturer Customers

• 500 lb. average order size

• Direct shipments: $7.28 per hundred-wt. $7.28 × 5 = $36.40

• > 20,000 lbs: $2.40 per hundred-wt.

• Local delivery: $1.35 per hundred-wt.



Insight:

If we can run a warehouse for less than:

5 × ($7.28 – $2.40 – $1.35) = $17.65/500 lbs.

Or

$17.65 / 5 = $3.53 per hundred-weight

we should do it.



Hub and Spoke Systems

Syracuse

Phoenix

To Los Angeles

To El Paso

A

A

A

B

B

B

C



Processing and Postponement

Coca Cola syrupBulk food products,paints, etc.

high volumes containers

Processing andPostponement

PackagingLabeling, etc.

Customer A

Customer B

Customer C

Minimizes riskMinimizes inventory (how?)



Service Benefits:

Spot stockAssortment



Spot Stock

Warehouse

Time sensitive, seasonal items Often temporary, public storage

Region 3

Region 2

Region 1

Manufactureror Centralized

Source



Weighted Center of Gravity

A method to determine best location for central warehouse from n demand points.– Requires position of each demand point (Xi, Yi)

– Requires weight of each demand point (Wi), based on importance, demand volume, market strategy, etc.

n

ii

n

iii

n

ii

n

iii

W

YWYcoordinateYWeighted

W

XWXcoordinateXWeighted

1

1*

1

1*



CupAMoe’s Coffee

Y

X0

01

1

2

2 3

3

4

4 5

5

6

6

(4,1)

(1,5)

(4.5,3)

Shelbyville(Pop. 170,000)

Springfield(Pop. 200,000)

Capital City(Pop. 400,000)

(2.57,3.6)

CupAMoe’s



Assortment

Customer D

Customer C

Customer B

Customer ASupplier E

Supplier F

Supplier G

Supplier H

Broad product line and good inventory control key to success

Ass

ort

men

tW

areh

ou

se



Warehouse Ownership Issues

Cost structure

Financial flexibility

Location flexibility

Managerial control

Expertise

Public Contract Private

EOS EOS ???

High Moderate Low

High Moderate Low

Less Varies Highest

High High ???

(how do these compare to transportation formats?)



Question:

When would it make sense to combine private and public

ownership?



Packaging and Unitization

What are the typical marketing criteria?



Packaging Implications

• Transportation– Class segmentation– Damage protection

• Material handling and warehousing– Storage requirements– Unitization– Container recycling– Ease of handling



Unitization• Unit loads

– Transport and handling efficiencies

• Non-rigid containers– pallets and unit load platforms– ropes, steel, shrink and stretch wrap

• Rigid containers– Maximum protection (Viper windshield frame)– Standard sizes?– Recycling?

Logistics. ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management...

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