M&DC Physical Distribution

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M&DCPurchasing&SupplyChain:MaterialManagement

Physical Distribution

Contents

1. Introduction

2. PhysicalDistributionSystem

3. Interfaces

4. Transportation

5. LegalTypesofCarriage

6. TransportationCostElements

7. MaterialsHandling

8. MultiWarehouseSystems

1.Introduction

Chapter1introducedthesupplychainconcept.Itwaspointedoutthatasupplychainiscomposedofaseriesofsuppliersandcustomerslinkedtogetherbyaphysicaldistributionsystem.Usuallythesupplychainconsistsofseveralcompanieslinkedinthisway.Thischapterwilldiscussthephysicaldistributionaspectofsupplychains.Physicaldistributionisthemovementofmaterialsfromtheproducertotheconsumer.Itistheresponsibilityofthedistributiondepartment,whichispartofanintegratedmaterialsmanagementorlogisticssystem.Figure13.1showstherelationshipofthevariousfunctionsinthistypeofsystem.InFigure13.1,themovementofmaterialsisdividedintotwofunctions:physicalSupplyandphysicaldistribution.Physicalsupplyisthemovementandstorageofgoodsfromsupplierstomanufacturing.Dependingontheconditionsofsale,thecostmaybepaidbyeitherthesupplierorthecustomer,butitisultimatelypassedontothecustomer.Physicaldistribution,ontheotherhand,isthemovementandstorageoffinishedgoodsfromtheendofproductiontothecustomer.Theparticularpathiiiwhichthegoodsmovethroughdistributioncenters,wholesalers,andretailersiscalledthechannelofdistribution.

Figure13.1Supplychain(logisticssystem).

ChannelsofDistribution

Achannelofdistributionisoneormorecompaniesorindividualswhoparticipateintheflowofgoodsand/orservicesfromtheproducertothefinaluserorconsumer.Sometimesacompanydeliversdirectlytoitscustomers,butoftenitusesothercompaniesorindividualstodistributesomeorallofitsproductstothefinalconsumer.Thesecompaniesorindividualsarecalledintermediaries.Examplesofintermediariesarewholesalers,agents,transportationcompanies,andwarehouses.Therearereallytworelatedchannelsinvolved.Thetransactionchannelisconcernedwiththetransferofownership.Itsfunctionistonegotiate,sell,andcontract.Thedistributionchannelisconcernedwiththetransferordeliveryofthegoodsorservices.Thesameintermediarymayperformbothfunctions,butnotnecessarily.

IntroductiontoMaterialManagement

MasterScheduling

MaterialRequirementsPlanning

CapacityManagement

ProductionActivityControl

Purchasing

Forecasting

InventoryFundamentals

OrderQuantities

IndependentDemandOrderingSystems

PhysicalInventoryandWarehouseManagement

PhysicalDistribution



Figure13.2showsanexampleoftheseparationofdistributionandtransactionchannels.Theexamplemightbeforacompanydistributingamajorappliancesuchasarefrigeratororstove.Insuchasystemtheretailerusuallycarriesonlydisplaymodels.Whenthecustomerordersanappliance,deliveryismadefromeithertheregionalwarehouseorthepublicwarehouse.Inthistextweareconcernedwiththedistributionchannel.

Althoughitcanbearguedthatonefirmsphysicalsupplyisanotherfirmsphysicaldistribution,frequentlythereareimportantdifferences,particularlyastheyrelatetothebulkandphysicalconditionofrawmaterialsandfinishedgoods.Thelogisticsproblemsthatoccurinmovingandstoringironorearequitedifferentfromthosethatoccurinmovingsheetsteel.Thesedifferencesinfluencethedesignofalogisticssystemandareimportantindecidingthelocationofdistributioncentersandfactories.Thistextreferstobothphysicaldistributionandphysicalsupplyasphysicaldistribution,butthedifferencesforanyparticularcompanyshouldberemembered.

Figure13.2Separationofdistributionandtransactionchannels.

Physicaldistributionisvitalinourlives.Usually,manufacturers,customers,andpotentialcustomersarewidelydispersedgeographically.Ifmanufacturersserveonlytheirlocalmarket,theyrestricttheirpotentialforgrowthandprofit.Byextendingitsmarket,afirmcangaineconomiesofscaleinmanufacturing,reducethecostofpurchasesbyvolumediscounts,andimproveitsprofitability.However,toextendmarketsrequiresawellrundistributionsystem.Manufacturingaddsformvaluetoaproductbytakingtherawmaterialsandcreatingsomethingmoreuseful.Breadismadefromgrainandisfarmoreusefultohumansthanthegrainitself.Distributionaddsplacevalueandtimevaluebyplacinggoodsinmarketswheretheyareavailabletotheconsumeratthetimetheconsumerwantsthem.Thespecificwayinwhichmaterialsmovedependsuponmanyfactors.Forexample:

Thechannelsofdistributionthatthefirmisusing.Forexample,producertcwholesalertoretailertoconsumer.Thetypesofmarketsserved.Marketcharacteristicssuchasthegeographicdispersionofthemarket,thenumberofcustomers,andthesizeoforders.Thecharacteristicsoftheproduct.Forexample,weight,density,fragility,andperishability.Thetypeoftransportationavailabletomovethematerial.Forexample,trainsships,planes,andtrucks.

Allarecloselyrelated.Forinstance,floristssellingaperishableproducttoalocalmarketwillselldirectlyandprobablyusetheirowntrucks.However,anationalcanningcompanysellinganonperishableproducttoanationalmarketthroughadistributionchannelcomposedofwholesalersandretailersmayusetrucksandrailtransport.

2.PhysicalDistributionSystem

Physicaldistributionisresponsiblefordeliveringtothecustomerwhatiswantedontimeandatminimumcost.Theobjectiveofdistributionmanagementistodesignandoperateadistributionsystemthatattainstherequiredlevelofcustomerserviceanddoessoatleastcost.Toreachthisobjective,allactivitiesinvolvedinthemovementandstorageofgoodsmustbeorganizedintoanintegratedsystem.



ActivitiesinthePhysicalDistributionSystem

Asystemisasetofcomponentsoractivitiesthatinteractwitheachother.Acarengineisasystemifanypartmalfunctions,theperformanceofthewholeenginesuffers.Inadistributionsystem,sixinterrelatedactivitiesaffectcustomerserviceandthecostofprovidingit:

a. Transportation.Transportationinvolvesthevariousmethodsofmovinggoodsoutsidethefirmsbuildings.Formostfirms,transportationisthesinglehighestcostindistribution,usuallyaccountingfor30%to60%ofdistributioncosts.Transportationaddsplacevaluetotheproduct.

b. Distributioninventory.Distributioninventoryincludesallfinishedgoodsinventoryatanypointinthedistributionsystem.Incostterms,itisthesecondmostimportantitemindistribution,accountingforabout25%to30%ofthecostofdistribution.Inventoriescreatetimevaluebyplacingtheproductclosetothecustomer.

c. Warehouses(distributioncenters).Warehousesareusedtostoreinventory.Themanagementofwarehousesmakesdecisionsonsiteselection,numberofdistributioncentersinthesystem,layout,andmethodsofreceiving,storing,andretrievinggoods.

d. Materialshandling.Materialshandlingisthemovementandstorageofgoodsinsidethedistributioncenter.Thetypeofmaterialshandlingequipmentusedaffectstheefficiencyandcostofoperatingthedistributioncenter.Materialshandlingrepresentsacapitalcost,andatradeoffexistsbetweenthiscapitalcostandtheoperatingcostsofthedistributioncenter.

e. Protectivepackaging.Goodsmovinginadistributionsystemmustbecontained,protected,andidentified.Inaddition,goodsaremovedandstoredinpackagesandmustfitintothedimensionofthestoragespacesandthetransportationvehicles.

f. Orderprocessingandcommunication.Orderprocessingincludesallactivitiesneededtofillcustomerorders.Orderprocessingrepresentsatimeelementindeliveryandisanimportantpartofcustomerservice.Manyintermediariesareinvolvedinthemovementofgoods,andgoodcommunicationisessentialtoasuccessfuldistributionsystem.

TotalCostConcept

Theobjectiveofdistributionmanagementistoprovidetherequiredlevelofcustomerserviceattheleasttotalsystemcost.Thisdoesnotmeanthattransportationcostsorinventorycostsoranyoneactivitycostshouldbeaminimum,butthatthetotalofallcostsshouldbeaminimum.Whathappenstooneactivityhasaneffectonotheractivities,totalsystemcost,andtheservicelevel.Managementmusttreatthesystemasawholeandunderstandtherelationshipsamongtheactivities.

ExampleProblem

Acompanynormallyshipsaproductbyrail.Transportbyrailcosts$200,andthetransittimeis10days.However,thegoodscanbemovedbyairatacostof$1000andwilltakeonedaytodeliver.Thecostofinventoryintransitforaparticularshipmentis$100perday.Whatarethecostsinvolvedintheirdecision?

AnswerRailAirTransportationCost$200$1000InTransitInventoryCarryingCost1000100Total$1200$1100

Therearetworelatedprinciplesillustratedhere:

a. Costtradeoff.Thecostoftransportationincreasedwiththeuseofairtransport,butthecostofcarryinginventorydecreased.Therewasacosttradeoffbetweenthetwo.

b. Totalcost.Byconsideringallofthecostsandnotjustanyonecost,thetotalsystemcostisreduced.Notealsothateventhoughnocostisattributedtoit,customerserviceisimprovedbyreducingthetransittime.Thetotalcostshouldalsoreflecttheeffectofthedecisiononotherdepartments,suchasproductionandmarketing.

Theprecedingexampledoesnotmeanthatusingfastertransportalwaysresult~insavings.Forexample,ifthegoodsbeingmovedareoflowvalueandinventory

3.Interfaces

Bytakingthegoodsproducedbymanufacturinganddeliveringthemtothecustomer,physicaldistributionprovidesabridgebetweenmarketingandproduction.Assuch,thereareseveralimportantinterfacesamongphysicaldistributionandproductionandmarketing.

Marketing



Althoughphysicaldistributioninteractswithalldepartmentsinabusiness,itsclosestrelationshipisprobablywithmarketing.Indeed,physicaldistributionisoftenthoughtofasamarketingsubject,notaspartofmaterialsmanagementorlogistics.Themarketingmixismadeupofproduct,promotion,price,andplace,andthelatteriscreatedbyphysicaldistribution.Marketingisresponsiblefortransferringownership.Thisisaccomplishedbysuchmethodsaspersonalselling,advertising,salespromotion,merchandising,andpricing.Physicaldistributionisresponsibleforgivingthecustomerpossessionofthegoodsanddoessobyoperatingdistributioncenters,transportationsystems,inventories,andorderprocessingsystems.Ithastheresponsibilityofmeetingthecustomerservicelevelsestablishedbymarketingandtheseniormanagementofthefirm.Physicaldistributioncontributestocreatingdemand.Promptdelivery,productavailability,andaccurateorderfillingareimportantcompetitivetoolsinpromotingafirmsproducts.Thedistributionsystemisacost,soitsefficiencyandeffectivenessinfluencethecompanysabilitytopricecompetitively.Alloftheseaffectcompanyprofits.

Production

Physicalsupplyestablishestheflowofmaterialintotheproductionprocess.Theservicelevelmustusuallybeveryhighbecausethecostofinterruptedproductionschedulescausedbyrawmaterialshortageisusuallyenormous.Therearemanyfactorsinvolvedinselectingasiteforafactory,butanimportantoneisthecostandavailabilityoftransportationforrawmaterialstothefactoryandthemovementoffinishedgoodstothemarketplace.Sometimes,thelocationoffactoriesisdecidedlargelybythesourcesandtransportationlinksofrawmaterials.Thisisparticularlytruewheretherawmaterialsarebulkyandofrelativelylowvaluecomparedtothefinishedproduct.ThelocationofsteelmillsontheGreatLakesisagoodexample.Thebasicrawmaterial,ironore,isbulky,heavy,andoflowunitvalue.Transportationcostsmustbekeptlowtomakeasteelmillprofitable.IronorefromminesineithernorthernQuebecorMinnesotaistransportedtothemillsbyboat,theleastcostlymodeoftransportation.Inothercases,theavailabilityoflowcosttransportationmakesitpossibletolocateinareasremotefrommarkets,butwherelaborisinexpensive.Unlessafirmisdeliveringfinishedgoodsdirectlytoacustomer,demandonthefactoryiscreatedbythedistributioncenterordersandnotdirectlybythefinalcustomer.AsnotedinChapter11,thiscanhavesevereimplicationsonthedemandpatternatthefactory.Althoughthedemandfromcustomersmayberelativelyuniform,thefactoryreactstothedemandfromthedistributioncentersforreplenishmentstock.Ifthedistributioncentersareusinganorderpointsystem,thedemandonthefactorywillnotbeuniformandwillbedependentratherthanindependent.Thedistributionsystemisthefactoryscustomer,andthewaythatthedistributionsysteminterfaceswiththefactorywillinfluencetheefficiencyoffactoryoperations.

4.Transportation

Transportationisanessentialingredientintheeconomicdevelopmentofanyarea.Itbringstogetherrawmaterialsforproductionofmarketablecommoditiesanddistributestheproductsofindustrytothemarketplace.Assuch,itisamajorcontributortotheeconomicandsocialfabricofasocietyandaidseconomicdevelopmentofregionalareas.

a. Rail.b. Road,includingtrucks,buses,andautomobiles.c. Air.d. Water,includingoceangoing,inland,andcoastalships.e. Pipeline.

Eachmodehasdifferentcostandservicecharacteristics.Thesedeterminewhichmethodisappropriateforthetypesofgoodstobemoved.Certaintypesoftrafficaresimplymorelogicallymovedwithinonemodethantheyareinanother.Forexampletrucksarebestsuitedtomovingsmallquantitiestowidelydispersedmarkets,butrainsarebestsuitedtomovinglargequantitiesofbulkycargosuchasgrain.

CostsofCarriage

Toprovidetransportationservice,anycarrier,whatevermode,musthavecertainbasicphysicalelements.Theseelementsareways,terminals,andvehicles.Eachresultsinacosttothecarrierand,dependingonthemodeandthecarrier,maybeeithercapital(fixed)oroperating(variable)costs.Fixedcostsarecoststhatdonotchangewiththevolumeofgoodscarried.Thepurchasecostofatruckownedbythecarrierisafixedcost.Nomatterhowmuchitisused,thecostofthevehicledoesnotchange.However,manycostsofoperation,suchasfuel,maintenance,anddriverswages,dependontheusemadeofthetruck.Thesearevariablecosts.Waysarethepathsoverwhichthecarrieroperates.Theyincludetherightofway(landareabeingused),plusanyroadbed,tracks,orotherphysicalfacilitiesneededontherightofway.Thenatureofthewayandhowitispaidforvarywiththemode.Theymaybeownedandoperatedbythegovernmentorbythecarrierorprovidedbynature.Terminalsareplaceswherecarriersloadandunloadgoodstoandfromvehiclesand



makeconnectionsbetweenlocalpickupanddeliveryserviceandlinehaulservice.Otherfunctionsperformedatterminalsareweighingconnectionswithotherroutesandcarriersvehiclerouting,dispatching,andmaintenanceandadministrationandpaperwork.Thenature,size,andcomplexityoftheterminalvarieswiththemodeandsizeofthefirmandthetypesofgoodscarried.Terminalsaregenerallyownedandoperatedbythecarrierbut,insomespecialcircumstances,maybepubliclyownedandoperated.Vehiclesofvarioustypesareusedinallmodesexceptpipelines.Theyserveascarryingandpowerunitstomovethegoodsovertheways.Thecarrierusuallyownsorleasesthevehicles,althoughsometimestheshipperownsorleasesthem.Besidesways,terminals,andvehicles,acarrierwillhaveothercostssuchasmaintenance,labor,fuel,andadministration.Thesearegenerallypartofoperatingcostsandmaybefixedorvariable.

Rail

Railwaysprovidetheirownways,terminals,andvehicles,allofwhichrepresentalargecapitalinvestment.Thismeansthatmostofthetotalcostofoperatingarailwayisfixed.Thus,railwaysmusthaveahighvolumeoftraffictoabsorbthefixedcosts.Theywillnotwanttoinstallandoperateraillinesunlessthereisalargeenoughvolumeoftraffic.Trainsmovegoodsbytrainloadscomposedofperhapsahundredcarseachwithacarryingcapacityintheorderof160,000pounds.Therefore,railwaysarebestabletomovelargevolumesofbulkygoodsoverlongdistances.Theirfrequencyofdeparturewillbelessthantrucks,whichcanmovewhenonetruckisloaded.Railspeedisgoodoverlongdistances,theserviceisgenerallyreliable,andtrainsareflexibleaboutthegoodstheycancarry.Trainserviceischeaperthanroadforlargequantitiesofbulkycommoditiessuchascoal,grain,potash,andcontainersmovedoverlongdistances.

Road

Trucksdonotprovidetheirownways(roadsandhighways)butpayafeetothegovernmentaslicense,gasoline,andothertaxesandtollsfortheuseofroads.Terminalareusuallyownedandoperatedbythecarrierbutmaybeeitherprivatelyownedorownedbythegovernment.Vehiclesareowned,orleased,andoperatedbythecarrier.Ifowned,theyareamajorcapitalexpense.However,incomparisontoothermodes,thecostofavehicleissmall.Thismeansthatforroadcarriersmostoftheircostsareoperating(variable)innature.Truckscanprovidedoortodoorserviceaslongasthereisasuitablesurfaceonwhichtodrive.IntheUnitedStatesandCanada,theroadnetworkissuperb.Theunitofmovementisatruckload,whichcanbeuptoabout100,000pounds.ThesetwofactorstheexcellentroadsystemandtherelativelysmallunitofmovementmeanthattruckscanprovidefastflexibleservicealmostanywhereinNorthAmerica.Trucksareparticularlysuitedtodistributionofrelativelysmallvolumegoodstoadispersedmarket.

Air

Airtransportdoesnothavewaysinthesenseoffixedphysicalroadbeds,butitdoesrequireanairwaysystemthatincludesairtrafficcontrolandnavigationsystems.Thesesystemsareusuallyprovidedbythegovernment.Carrierspayauserchargethatisavariablecosttothem.Terminalsincludealloftheairportfacilities,mostofwhichareprovidedbythegovernment.However,carriersareusuallyresponsibleforprovidingtheirowncargoterminalsandmaintenancefacilities,eitherbyowningorrentingthespace.Thecarrierprovidestheaircrafteitherthroughownershiporleasing.Theaircraftareexpensiveandarethesinglemostimportantcostelementfortheairline.Sinceoperatingcostsarehigh,airlinescostsaremainlyvariable.Themainadvantageofairtransportisspeedofservice,especiallyoverlongdistances.Mostcargotravelsinpassengeraircraft,andthusmanydeliveryschedulesaretiedtothoseofpassengerservice.Theserviceisflexibleaboutdestinationprovidedthereisasuitablelandingstrip.Transportationcostforaircargoishigherthanforothermodes.Forthesereasons,airtransportismostoftensuitableforhighvalue,lowweightcargoorforemergencyitems.

Water

Waterwaysareprovidedbynatureorbynaturewiththeassistanceofthegovernment.TheSt.LawrenceSeawaysystemisanexampleofthis.Thecarrierthushasnocapitalcostinprovidingthewaysbutmayhavetopayafeeforusingthewaterway.Terminalsmaybeprovidedbythegovernmentbutareincreasinglyprivatelyowned.Ineithercase,thecarrierwillpayafeetousethem.Thus,terminalsaremainlyavariablecost.Vehicles(ships)areeitherownedorleasedbythecarrierandrepresentthemajorcapitalorfixedcosttothecarrier.Themainadvantageofwatertransportiscost.Operatingcostsarelow,andsincetheshipshavearelativelylargecapacity,thefixedcostscanbeabsorbedoverlargevolumes.Shipsareslowandaredoortodooronlyiftheshipperandtheconsigneeareonawaterway.Therefore,watertransportationismostusefulformovinglowvalue,bulkycargooverrelativelylongdistanceswherewaterwaysareavailable.



Pipelines

Pipelinesareuniqueamongthemodesoftransportationinthattheymoveonlygas,oil,andrefinedproductsonawidespreadbasis.Assuch,theyareoflittleinteresttomostusersoftransportation.Capitalcostsforwaysandpipelinesarehighandarebornebythecarrier,butoperatingcostsareverylow.

5.LegalTypesofCarriage

Carriersarelegallyclassifiedaspublic(forhire)orprivate(notforhire).Inthelatter,individualsorfirmsownorleasetheirvehiclesandusethemtomovetheirowngoods.Publictransport,ontheotherhand,isinthebusinessofhaulingforothersforpay.Allmodesoftransporthavepublicandforhirecarriers.Forhirecarriersaresubjecttoeconomicregulationbyfederal,state,ormunicipalgovernments.Dependingonthejurisdiction,economicregulationmaybemoreorlesssevere,andinrecentyears,therehasbeenastrongmovebygovernmenttoreduceregulations.Economicregulationhascenteredonthreeareas:

a. Regulationofrates.b. Controlofroutesandservicelevels.c. Controlofmarketentryandexit.

Privatecarriersarenotsubjecttoeconomicregulationbut,likepubliccarriers,areregulatedinsuchmattersaspublicsafety,licensefees,andtaxes.

ForHire

Aforhirecarriermaycarrygoodsforthepublicasacommoncarrierorundercontracttoaspecifiedshipper.CommoncarriersmakeastandingoffertoservethepublicThismeansthatwhateverproductstheyoffertocarrywillbecarriedforanyonewantingtheirservice.Withsomeminorexceptions,theycancarryonlythosecommoditiestheyarelicensedtocarry.Forinstance,ahouseholdmovercannotcarrygravelorfreshvegetables.Commoncarriersprovidethefollowing:

Serviceavailabletothepublic.

Servicetodesignatedpointsorindesignatedareas.

Scheduledservice.

Serviceofagivenclassofmovementorcommodity.

Contractcarriershaulonlyforthosewithwhomtheyhaveaspecificformalcontractofservice,notthegeneralpublic.Contractcarriersofferaserviceaccordingtoacontractualagreementsignedwithaspecificshipper.Thecontractspecifiesthecharacteroftheservice,performance,andcharges.

Private

Privatecarriersownorleasetheirequipmentandoperateitthemselves.Thismeansinvestmentinequipment,insurance,andmaintenanceexpense.Acompanynormallyonlyconsidersoperatingitsownfleetifthevolumeoftransportishighenoughtojustifythecapitalexpense.

ServiceCapability

Servicecapabilitydependsontheavailabilityoftransportationservice,whichinturndependsonthecontrolthattheshipperhasoverthetransportationagency.Theshippermustgotothemarketplacetohireacommoncarrierandissubjecttotheschedulesandregulationsofthatcarrier.Leastcontrolisexercisedovercommoncarriers.Shipperscanexercisemostcontrolovertheirownvehiclesandhavethehighestservicecapabilitywithprivatecarriage.

OtherTransportationAgencies

Thereareseveraltransportationagenciesthatusethevariousmodesorcombinationsofthemodes.Someofthesearethepostoffice,freightforwarders,couriers,andshippers.Theyallprovideatransportationservice,usuallyasacommoncarrier.Theymayownthevehicles,ortheymaycontractwithcarrierstomovetheirgoods.Usually,theyconsolidatesmallshipmentsintolargeshipmentstomakeeconomicloads.



6.TransportationCostElements

Therearefourbasiccostelementsintransportation.Knowledgeofthesecostsenablesashippertogetabetterpricebyselectingtherightshippingmode.Thefourbasiccostsareasfollows:

a. Linehaul.b. Pickupanddelivery.c. Terminalhandling.d. Billingandcollecting.

Wewillusemotortransportasanexample,buttheprinciplesarethesameforallmodes.Goodsmoveeitherdirectlyfromtheshippertotheconsigneeorthroughaterminal.Inthelatter,theyarepickedupinsomevehiclesuitableforshorthaullocaltravel.Theyarethendeliveredtoaterminalwheretheyaresortedaccordingtodestinationandloadedontohighwayvehiclesfortraveltoadestinationterminal.There,theyareagainsorted,loadedonlocaldeliverytrucks,andtakentotheconsignee.Figure13.3showsthispatternschematically.

Figure13.3Shippingpatterns.

LineHaulCosts

Whengoodsareshipped,theyaresentinamovingcontainerthathasaweightandvolumecapacity.Thecarrier,privateorforhire,hasbasiccoststomovethiscontainer,whichexistwhetherthecontainerisfullornot.Foratruck,theseincludesuchitemsasgasoline,thedriverswages,anddepreciationduetousage.Thesecostsvarywiththedistancetraveled,nottheweightcarried.Thecarrierhasessentiallythesamebasiccostswhetherthetruckmovesfullorempty.Ifitishalffull,thebasiccostsmustbespreadoveronlythosegoodsinthetruck.Therefore,totallinehaulcostsvarydirectlywiththedistanceshipped,notontheweightshipped.Forexample,ifforagivencommodity,thelinehaulcostis$3permileandthedistanceis100miles,thetotallinehaulcostis$300.Iftheshippersends50,000pounds,thetotallinehaulcostisthesameasif10,000poundsissent.However,thelinehaulcosts(LHC)perhundredweight(cwt.)isdifferent.

300LHC/cwt=.500

=$0.60percwt.[for50,000lb.(500cwt.)

300LHC/cwt=.500

=$3percwt.[for10,000lb.(100cwt.)

Thus,thetotallinehaulcostvarieswith(a)thecostpermileand(b)thedistancemoved.However,thelinehaulcostperhundredweightvarieswith(a)thecostpermile,(b)thedistancemoved,and(c)theweightmoved.

ExampleProblem



Foraparticularcommodity,thelinehaulcostis$2.50permile.Foratripof500milesandashipmentof600cwt.,whatisthecostofshippingpercwt.?Iftheshipmentisincreasedto1000cwt.,whatisthesavingincostpercwt.?

Answer

Totallinehaulcost=$2.5X500=$1250Costpercwt.=$1250600=$2.083

If1000cwt.isshipped:

Costpercwt.=$12501000=$1.25Savingpercwt.=$2.08$1.25=$0.83

Thecarrierhastwolimitationsorcapacityrestrictionsonhowmuchcanbemovedonanyonetrip:theweightlimitationandthecubicvolumelimitationofthevehicle.Withsomecommodities,theirdensityissuchthatthevolumelimitationisreachedbeforetheweightlimitation.Iftheshipperwantstoshipmore,amethodofincreasingthedensityofthegoodsmustbefound.Thisisonereasonthatsomelightweightproductsaremadesotheynest(forexample,disposablecups)andbicyclesandwheelbarrowsareshippedinanunassembledstate.Thisisnottofrustrateuspoormortalswhotrytoassemblethembuttoincreasethedensityoftheproductsomoreweightcanbeshippedinagivenvehicle.Thesameprincipleappliestogoodsstoredindistributioncenters.Themorecompacttheyare,themorecanbestoredinagivenspace.Therefore,ifshipperswanttoreducetransportationcost,theyshould(a)increasetheweightshippedand(b)maximizedensity.

ExampleProblem

Acompanyshipsbarbecuesfullyassembled.Theaveragelinehaulcostpershipmentis$12.50permile,andthetruckcarries100assembledbarbecues.Thecompanydecidestoshipthebarbecuesunassembledandfigurestheycanship500barbecuesintruck.Calculatethelinehaulcostperbarbecueassembledandunassembled.Iftheaveragetripis300miles,calculatethesavingperbarbecue.

Answer

Linehaulcostassembled=$12.50100=$0.125perbarbecuepermileLinehaulcostunassembled=$12.50500=$0.025perbarbecuepermileSavingpermile=$0.1250.025=$0.10Tripsaving=300x$0.10=$30.00perbarbecue

PickupandDeliveryCosts

Pickupanddeliverycostsaresimilartolinehaulcostsexceptthatthecostdependsmoreonthetimespentthanonthedistancetraveled.Thecarrierwillchargeforeachpickupandtheweightpickedup.Ifashipperismakingseveralshipments,itwillbelessexpensiveiftheyareconsolidatedandpickedupononetrip.

TerminalHandling

Terminalhandlingcostsdependonthenumberoftimesashipmentmustbeloaded,handled,andunloaded.Iffulltruckloadsareshipped,thegoodsdonotneedtobehandledintheterminalbutcangodirectlytotheconsignee.Ifpartloadsareshipped,theymustbetakentotheterminal,unloaded,sorted,andloadedontoahighwayvehicle.Atthedestination,thegoodsmustbeunloaded,sorted,andloadedontoalocaldeliveryvehicle.Eachindividualparcelmustbehandled.Ashipperwhohasmanycustomers,eachorderingsmallquantities,willexpecttheterminalhandlingcoststobehighbecausetherewillbeahandlingchargeforeachpackage.Thebasicruleforreducingterminalhandlingcostsistoreducehandlingeffortbyconsolidatingshipmentsintofewerparcels.

BillingandCollecting

Everytimeashipmentismade,paperworkmustbedoneandaninvoicemadeout.Billingandcollectingcostscanbereducedbyconsolidatingshipmentsandreducingthepickupfrequency.

TotalTransportationCosts

Thetotalcostoftransportationconsistsoflinehaul,pickupanddelivery,terminalhandling,andbillingandcollectingcosts.Toreduceshippingcosts,theshipperneedstodothefollowing:

Decreaselinehaulcostsbyincreasingtheweightshipped.

Decreasepickupanddeliverycostbyreducingthenumberofpickups.Thiscar



bedonebyconsolidatingandincreasingtheweightperpickup.Decreaseterminalhandlingcostsbydecreasingthenumberofparcelsbyconsolidatingshipments.Decreasebillingandcollectingcostsbyconsolidatingshipments.

Foranygivenshipment,thelinehaulcostsvarywiththedistanceshippedHowever,thepickupanddelivery,terminalhandling,andbillingcostsarefixed.Thetotalcostforanygivenshipmentthushasafixedcostandavariablecostassociatedwithit.ThisrelationshipisshowninFigure13.4.Thecarrierwillconsiderthisrelationshipandeitherchargeafixedcostplussomuchpermileorofferataperedrate.Inthelatter,thecostpermileforshortdistancesfarexceedsthatforlongerdistances.

Figure13.4Distanceversuscostofcarriage.

Theratechargedbyacarrierwillalsovarywiththecommodityshippedandwilldependuponthefollowing:

Value.Acarriersliabilityfordamagewillbegreaterthemorevaluabletheitem.

DensityThemoredensetheitem,thegreatertheweightthatcanbecarriedinagivenvehicle.Perishability.Perishablegoodsoftenrequirespecialequipmentandmethodsofhandling.Packaging.Themethodofpackaginginfluencestheriskofdamageandbreakage.

Inaddition,carriershavetworatestructures,onebasedonfullloadscalledtruckload(TL)orcarload(CL)andonebasedonlessthantruckload(LTL)andlessthancarload(LCL).Foranygivencommodity,theLTLratescanbeupto100%higherthantheTLrates.Thebasicreasonforthisdifferentialliesintheextrapickupanddelivery,terminalhandlingandbilling,andcollectioncosts.Truckers,airlines,andwatercarriersacceptlessthanfullloads,butusuallytherailwaysdonotacceptLCLshipments.

6.Warehousing

Thelastchapterdiscussedthemanagementofwarehouses.Thissectionisconcernedwiththeroleofwarehousesinaphysicaldistributionsystem.Warehousesincludeplantwarehouses,regionalwarehouses,andlocalwarehouses.Theymaybeownedandoperatedbythesupplierorintermediariessuchaswholesalers,ormaybepublicwarehouses.Thelatterofferageneralservicetotheirpublicthatincludesprovidingstoragespaceandwarehouseservices.Somewarehousespecializeinthekindsofservicestheyofferandthegoodstheystore.Afreezerstorageisanexample.Theservicefunctionswarehousesperformcanbeclassifiedintotwokinds:

a. 1.Thegeneralwarehousewheregoodsarestoredforlongperiodsandwheretheprimepurposeistoprotectgoodsuntiltheyareneeded.Thereisminimalhandling,movement,andrelationshiptotransportation.Furniturestorageoradepositoryfordocumentsareexamplesofthistypeofstorage.Itisalsothetypeusedforinventoriesaccumulatedinanticipationofseasonalsales.

b. Thedistributionwarehousehasadynamicpurposeofmovementandmixing.Goodsarereceivedinlargevolumeuniformlots,storedbriefly,andthenbrokendownintosmallindividualordersofdifferentitemsrequiredbythecustomerinthemarketplace.Theemphasisisonmovementandhandlingratherthanonstorage.Thistypeofwarehouseiswidelyusedindistributionsystems.Thesizeofthewarehouseisnotsomuchitsphysicalsizeasitisthethroughput,orvolumeoftraffichandled.

Asdiscussedinthelastchapter,warehouses,ordistributioncenters,areplaceswhererawmaterials,semifinished,orfinishedgoodsarestored.Theyrepresentaninterruptionintheflowofmaterialandthusaddcosttothesystem.Itemsshouldbewarehousedonlyifthereisanoffsettingbenefitgainedfromstoringthem.

RoleofWarehouses



Warehousesservethreeimportantroles:transportationconsolidation,productmixing,andservice.

Transportationconsolidation

Asshowninthelastsection,transportationcostscanbereducedbyusingwarehouses.Thisisaccomplishedbyconsolidatingsmall(LTL)shipmentsintolarge(TL)shipments.Consolidationcanoccurinboththesupplyanddistributionsystems.Inphysicalsupply,LTLshipmentsfromseveralsupplierscanbeconsolidatedatawarehousebeforebeingshippedTLtothefactory.Inphysicaldistribution,TLshipmentscanbemadetoadistantwarehouseandLTLshipmentsmadetolocalusers.Figure13.5showsthetwosituationsgraphically.Transportationconsolidationinphysicaldistributionissometimescalledbreakbulk,whichmeansthebulk(TL)shipmentsfromfactoriestodistributioncentersarebrokendownintosmallshipmentsgoingtolocalmarkets.

Productmixing

Whiletransportationconsolidationisconcernedwithreductionoftransportationcosts,productmixingdealswiththegroupingofdifferentitemsintoanorderandtheeconomiesthatwarehousescanprovideindoingthis.Whencustomersplaceorders,theyoftenwantamixofproductsthatareproducedindifferentlocations.Withoutadistributioncenter,customerswouldhavetoorderfromeachsourceandpayforLTLtransportfromeachsource.Usingadistributioncenter,orderscanbeplacedanddeliveredfromacentrallocation.Figure13.6illustratestheconcept.

Figure13.5Transportationconsolidation.

Figure13.6Productmixing.



Service

Distributioncentersimprovecustomerservicebyprovidingplaceutility.Goodsarepositionedclosetomarketssothemarketscanbeservedmorequickly.

WarehousingandTransportationCosts

Anydistributionsystemshouldtrytoprovidethehighestservicelevel(thenumberofordersdeliveredinaspecifiedtime)atthelowestpossiblecost.Theparticularshippingpatternwilldependlargelyuponthefollowing:

Numberofcustomers.

Geographicdistributionofthecustomers.

Customerordersize.

Numberandlocationofplantsanddistributioncenters.

Suppliershavelittleornocontroloverthefirstthreebutdohavesomecontroloverthelast.Theycanestablishlocaldistributioncentersintheirmarkets.Withrespecttotransportation,itthenbecomesaquestionofthecostofservingcustomersdirectfromthecentraldistributioncenterorfromtheregionaldistributioncenter.Iftruckloadshipmentsaremade,thecostislessfromthecentraldistributioncenter,butifLTLshipmentsaremade,itmaybecheapertoservethecustomerfromthelocaldistributioncenter.

ExampleProblem

SupposeacompanywithaplantlocatedinTorontoisservingamarketinthenortheasternUnitedStateswithmanycustomerslocatedinBoston.IftheyshipdirecttocustomersfromtheTorontoplant,mostshipmentswillbelessthantruckload.However,iftheylocateadistributioncenterinBoston,theycanshiptruckload(TL)toBostonanddistributebylocalcartage(LTL)tocustomersinthatarea.Whetherthisiseconomicalornotdependsonthetotalcostofshippingdirectcomparedwithshippingviathedistributioncenter.AssumethefollowingfiguresrepresenttheaverageshipmentstotheBostonarea:

PlanttocustomerLTL:$100/cwt.PlanttodistributioncenterTL:$50/cwt.Inventorycarryingcost(distributioncenter):$1O/cwt.DistributioncentertocustomerLTL:$20/cwt.

IsitmoreeconomicaltoestablishthedistributioncenterinBoston?Iftheannualshippedvolumeis10,000cwt.,whatwillbetheannualsaving?

Answer

Costsifadistributioncenterisused:

TLTorontotoBoston=$50percwt.Distributioncentercosts=$10percwt.LTLinBostonarea=$20percwt.Totalcost=$80percwt.Savingpercwt.=$100$80=$20Annualsaving=$20x10,000=$200,000

MarketBoundaries

supplycustomersinotherlocationsdirectlyfromthefactoryinTorontoorthroughthedistributioncenterinBoston.Thequestionistodecidewhichlocationsshouldbesuppliedfromeachsource.Theanswer,ofcourse,isthesourcethatcanservicethelocationatleastcost.Laiddowncost(LDC)isthedeliveredcostofaproducttoaparticulargeographicpoint.ThedeliveredcostincludesallcostsofmovingthegoodsfromAtoB.Inthepreviousexampleproblem,thelaiddowncostofdeliveringfromTorontowouldbethetransportationcostpermilexthemilestoaparticulardestination.TheLDCfromBostonwouldincludeallcostsofgettingthegoodstoBoston,inventorycostsintheBostondistributioncenter,andthetransportationcostsingettingtoaparticulardestination.

LDC=P+TX

Where

P=productcostsT=transportationcostspermileX=distance



Theproductcostincludesallcostsingettingtheproducttothesupplylocationandstoringitthere.Tnthepreviousexample,theproductcostatBostonincludestheTLcostofdeliverytoBostonandtheinventorycostatBoston.

ExampleProblem

Syracuseis300milesfromToronto.Theproductcostforanitemis$10percwt.,andthetransportationcostpermilepercwt.is$0.20.Whatisthelaiddowncostpercwt.?

Answer

LDC=Productcost+(transportationcostpermile)(distance)=$10+($0.20X300)=$70percwt.

Marketboundary

Themarketboundaryisthelinebetweentwoormoresupplysourceswherethelaiddowncostisthesame.ConsiderFigure13.7.Therearetwosourcesofsupply:AandB.ThemarketboundaryoccursatYwheretheLDCfromAisthesameasB.IntheexampleshowninFigure13.7,thedistancebetweenAandBis100miles.IfweletthedistancefromAtoYbeXmiles,thenthedistancefromBtoYis(100X)miles.AssumesupplyAisthefactoryandsupplyBisadistributioncenter.AssumetheproductcostatAis$100andproductcostfromBis$100plusTLtransportationfromAtoBandinventorycostsatB.Forthisexample,assumetheTLtransportationandinventorycarryingcostsare$10perunitsotheproductcostfromBis$110.TransportationcostsfromeitherAorBare$0.40perunitpermile.PointYoccurswhere:

LDCA=LDCB100+0.40X=110+0.40(100X)X=62.5

ThusapointY,62.5milesfromA,marksthemarketboundarybetweenAandB.

ExampleProblem

ThedistancebetweenTorontoandBostonisabout500miles.GiventhecoststructureinthepreviousexampleproblemsandanLTLtransportationcostof$0.20percwt.,calculatethelocationofthemarketboundarybetweenTorontoandBoston.AssumetheproductcostatTorontois$10percwt.

Answer

TheproductcostatBostonisthesumoftheproductcostatToronto,plusthecostofTLshipmentfromTorontotoBoston,plusthehandlingcostsatBoston.ProductcostatBoston=productcostatA+TLtransportation+handlingcosts

=$10+$50+$10=$70

ThemarketboundaryoccurswhereLDCT=LDCB$10+$0.20X=$70+$0.20(500X)0.4X=160X=400Themarketboundaryis400milesfromTorontoor100milesfromBoston.

EffectonTransportationCostsofAddingMoreWarehouses



WehaveseenfromthepreviousexamplethatestablishingadistributioncenterinBostonreducestotaltransportationcosts.Similarly,ifaseconddistributioncenterisestablished,perhapsinCleveland,weexpecttotaltransportationcoststobereducedfurther.Generally,asmoredistributioncentersareaddedtothesystem,wecanexpectthefollowing:Thecostoftruckload(andcarload)shipmentstothedistributioncenterstoincrease.

ThecostofLTLshipmentstocustomerstodecrease.

Thetotalcostoftransportationtodecrease.

Asexpected,themajorsavingsisfromtheadditionofthefirstfewdistributioncenters.Eventually,asmoredistributioncentersareadded,thesavingsdecrease.Thefirstdistributioncenteraddedtothesystemislocatedtoservethelargestmarkettheseconddistributioncenter,thesecondlargestmarket,andsoon.Thenumberofcustomersservedbyadditionaldistributioncentersdecreases,andthevolumethatcanbeshippedTLtotheadditionaldistributioncentersislessthantothefirstdistributioncenters.Figure13.8showstherelationshipthatexistsbetweentransportationcostsandthenumberofdistributioncentersinasystem.

Figure13.8Transportationcostversusnumberofwarehouses.

Packaging

Thebasicroleofpackaginginanyindustrialorganizationistocarrythegoodssafelythroughadistributionsystemtothecustomer.Thepackagemustdothefollowing:

Identifytheproduct.

Containandprotecttheproduct.

Contributetophysicaldistributionefficiency.

Forconsumerproducts,thepackagemayalsobeanimportantpartofthemarketingprogram.Physicaldistributionmustnotonlymoveandstoreproductsbutalsoidentifythem.Thepackageservesasameansofidentifyingtheproductinawaynotpossiblefromitsoutwardappearance.Whenshoesareofferedintensizes,thepackagebecomesanimportantidentifier.Packagingmustcontainandprotecttheproduct,oftenagainstawiderangeofhazardssuchasshock,compression,vibration,moisture,heat,solarradiation,oxidation,andinfestationbyanimals,insects,birds,mold,orbacteria.Packagesaresubjecttodistributionhazardsinloadingandoffloading,inmovement,intransportation,andinwarehousingandstorage.Thepackagemustberobustenoughtoprotectandcontaintheproductthroughallphasesofdistribution.Packagingisapurecostthatmustbeoffsetbytheincreasedphysicaldistributionefficiencythatthepackagecanprovide.Thereareusuallyatleastthreelevelsofpackagingrequiredinadistributionsystem.Firstisaprimarypackagethatholdstheproducttheboxofcornflakes.Next,forsmallpackages,ashippingcontainersuchasacorrugatedboxisneeded.Finally,thereisathirdlevelofpackagingwhereseveralprimaryorsecondarypackagesareassembledintoaunitload.

Unitization

Unitizationistheconsolidationofseveralunitsintolargeunits,calledunitloads,sothereislesshandling.Aunitloadisaloadmadeupofanumberofitems,orbulkymaterial,arrangedorconstrainedsothemasscanbepickedupormovedasasingleunittoolargeformanualhandling.Materialhandlingcostsdecreaseasthesizeoftheunitloadincreases.Itismoreeconomicaltomovetheproductbycartonsratherthanindividuallyandstillmoreeconomicaltomoveseveralcartonsinoneunitload.Thisprincipleisusedwhenwegoshoppingandputanumberofarticlesintobagsandthenputthebagsintothetrunkofthecar.Inindustry,unitloadsareusedinsteadofshoppingbags.Thereareanumberofunitloaddevicessuchassheets,racks,orcontainers.Oneof



themostcommonisthepallet.Thepalletisaplatformusuallymeasuring48x40x4anddesignedsothatitcanbeliftedandmovedbyaforkliftindustrialtruck.Packagesarearrangedonitsothatseveralpackagesmaybemovedatonetime.Loadedwithpackages,itformsacubethatisaunitload.

Figure13.9Stableandunstablepalletloads.

Unitizationcanbesuccessive.Shippersplacetheirproductsintoprimarypackages,thepackagesintoshippingcartons,thecartonsontopallets,andthepalletsintowarehouses,trucks,orothervehicles.Tousethecapacityofpallets,trucks(orothervehicles),andwarehouses,thereshouldbesomerelationshipbetweenthedimensionsoftheproduct,theprimarypackage,theshippingcartons,thepallet,thetruck,andthewarehousespace.Thepackagesshouldbedesignedsospaceonthepalletisfullyutilizedandsothecartonsinterlocktoformastableload.Figure13.9showstwounitloadseachusingthetotalspaceofthepallet.However,loadBdoesnotinterlockandisnotstable.Palletsfitintotrucksandrailwaycars.Thedimensionsmentionedearlierwereselectedsopalletswouldfitintonominal50railwaycarsand40trucktrailerswithaminimumoflostspace.Figure13.10showsthelayoutinrailcarsandtrailers.Thustogetthehighestcubeutilization,considerationmustbegiventothedimensionsoftheproduct,thecarton,thepallet,thevehicle,andthewarehouse.

7.MaterialsHandling

Materialshandlingistheshortdistancemovementthattakesplaceinoraroundabuildingsuchasaplantordistributioncenter.Foradistributioncenter,thismeanstheunloadingandloadingoftransportvehiclesandthedispatchandrecallofgoodstoandfromstorage.Inaddition,therackingsystemsusedindistributioncentersareusuallyconsideredaspartofmaterialshandling.Someobjectivesofmaterialshandlingareasfollows:

a. Toincreasecubeutilizationbyusingtheheightofthebuildingandbyreducingtheneedforaislespaceasmuchaspossible.

b. Toimproveoperatingefficiencybyreducinghandling.Increasingtheloadpermovewillresultinfewermoves.

c. Toimprovetheservicelevelbyincreasingthespeedofresponsetocustomerneeds.



Figure13.10Railcarandtrailerpalletpositionplan.

Therearemanytypesofmaterialshandlingequipment.Forconvenience,the)canbegroupedintothreecategories:conveyors,industrialtrucks,andcranesandhoists.Conveyorsaredevicesthatmovematerial(orpeople)horizontallyorverticallybetweentwofixedpoints.Theyareexpensive,createafixedroute,andoccupyspacecontinuously.Asaresult,theyareusedonlywherethereissufficientthroughputbetweenfixedpointstojustifytheircost.Industrialtrucksarevehiclespoweredbyhand,electricity,orpropane.Dieselandgasolinearenotusedindoorsbecausetheyarenoxiousandlethal.Industrialtrucksaremoreflexiblethanconveyorsinthattheycanmoveanywherethereisasuitablesurfaceandnoobstructions.Theydonotoccupyspacecontinuously.Forthesereasons,theyarethemostoftenusedformofmaterialshandlingindistributioncentersandinmanufacturing.Cranesandhoistscanmovematerialsverticallyandhorizontallytoanypointwithintheirareaofoperation.Theyuseoverheadspaceandareusedtomoveheav3orlargeitems.Withintheirareaofoperation,theyareveryflexible.

8.MultiWarehouseSystems

Thissectionwilllookattheresultofaddingmoredistributioncenterstothesystem.Asmightbeexpected,thereisaneffectonthecostofwarehousing,materialshandling,inventories,packaging,andtransportation.Ourpurposewillbetolookathowallofthesecostsandthetotalsystemcostbehave.Wealsowanttoknowwhathappenstotheservicelevelasmoredistributioncentersareaddedtothesystem.Tomakevalidcomparisons,wemustfreezethesalesvolume.Wecanthencomparecostsasweadddistributioncenterstothesystem.

TransportationCosts

Inthesectionontransportation,wesawthatifshipmentstocustomersareinlessthanfullvehiclelots,thetotaltransportationcostisreducedbyestablishingadistributioncenterinamarketarea.ThisisbecausemoreweightcanbeshippedforgreaterdistancesbytruckorcarloadandtheLTLshipmentscanbemadeoverrelativelyshortdistances.Generally,then,asmoredistributioncentersareaddedtoasystem,weexpectthefollowing:

ThecostofTLshipmentsincreases.

ThecostofLTLshipmentsdecreases.

Thetotalcostoftransportationdecreases.

Themajorsavingsaremadewiththeadditionofthefirstdistributioncenters.Eventually,asmoredistributioncentersareadded,themarginalsavingsdecrease.

InventoryCarryingCost

Theaverageinventorycarrieddependsontheorderquantityandthesafetystock.The



averageorderquantityinventoryinthesystemshouldremainthesamesinceitdependsondemand,thecostofordering,andthecostofcarryinginventory.Thetotalsafetystockwillbeaffectedbythenumberofwarehousesinthesystem.Safetystockiscarriedtoprotectagainstfluctuationsindemandduringtheleadlimeanddepends,inpart,onthenumberofunitssold.InChapter11,itwasshownthatthestandarddeviationvariesasthesquarerootoftheratiooftheforecastandleadtimeintervals.Similarly,forthesameSKU,thestandarddeviationvariesapproximatelyasthesquarerootoftheratioofthedifferentannualdemands.Supposethattheaveragedemandis1000unitsand,foraservicelevelof90%,thesafetystockis100units.Ifthe1000unitsisdividedbetweentwodistributioncenterseachhavingademandof500units,thesafetystockineachis:

Withtwodistributioncentersandthesametotalsales,thetotalsafetystockincreasesto142from100.Thus,withaconstantsalesvolume,asthenumberofdistributioncentersincreases,thedemandoneachdecreases.Thiscausesanincreaseinthetotalsafetystockinalldistributioncenters.

WarehousingCosts

Thefixedcostsassociatedwithdistributioncentersarespaceandmaterialshandling.Thespaceneededdependsontheamountofinventorycarried.Aswehaveseen,asmoredistributioncentersareaddedtothesystem,moreinventoryhastobecarried,whichrequiresmorespace.Inaddition,therewillbesomeduplicationofnonstoragespacesuchaswashroomsandoffices.Soasthenumberofdistributioncentersincreases,therewillbeagradualincreaseindistributioncenterspacecosts.Operatingcostsalsoincreaseasthenumberofdistributioncentersincreases.Operatingcostsdependlargelyonthenumberofunitshandled.Sincethereisnoincreaseinsales,thetotalnumberofunitshandledremainsthesame,asdoesthecostofhandling.However,thenondirectsupervisionandclericalcostsincrease.

MaterialsHandlingCosts

Materialshandlingcostsdependuponthenumberofunitshandled.Sincethesalesvolumeremainsconstant,thenumberofunitshandledshouldalsoremainconstant.Therewillbelittlechangeinmaterialshandlingcostsaslongasthefirmcanshipunitloadstothedistributioncenter.However,ifthenumberofdistributioncentersincreasestothepointthatsomenonunitizedloadsareshipped,materialshandlingcostsincrease.

PackagingCosts

Perunitpackagingcostswillremainthesame,butsincetherewillbemoreinventory,totalpackagingcostswillrisewithinventory.

PackagingCosts

Perunitpackagingcostswillremainthesame,butsincetherewillbemoreinventory,totalpackagingcostswillrisewithinventory.

TotalSystemCost

Wehaveassumedthattotalsystemsalesremainthesame.Figure13.11showsgraphicallyhowthecostsoftransportation,warehousing,materialshandlinginventory,andpackagingbehaveasdistributioncentersareaddedtothesystem.Uptoapoint,totalcostsdecreaseandthenstarttoincrease.Itistheobjectiveoflogisticstodeterminethisleastcostpoint.

SystemServiceCapability

Theservicecapabilityofthesystemmustalsobeevaluated.Onewayofassessingthisisbyestimatingthepercentageofthemarketservedwithinagivenperiod.Figure13.12representssuchanestimate.Asexpected,theservicelevelincreasesasthenumberofdistributioncentersincreases.Itincreasesrapidlyfromonetotwodistributioncentersandmuchlessrapidlyasthenumberisfurtherincreased.Thefirstdistributioncenterisbuilttoservethebestmarket,thenexttoservethesecondbestmarket,andsoon.LetusassumethatastudyhasbeenmadeofasystemofonetotendistributioncentersandthecostsanasshowninFigure13.13.



Figure13.11Totalsystemcost.

NumberofWarehouses PercentageofReachedinIDay

12310

30708795

Figure13.12Estimateofmarketreachedversusnumberofwarehouses.

Cost($1000) NumberofLocations

1 2 3 10

Transportation $8,000 $6,000 $5,000 $4,500Warehousing 500 600 700 900MaterialsHandling 1000 1000 1100 1400Inventory 400 425 460 700Packaging 100 100 100 100

TotalCost $10,000 $8,125 $7,360 $7,600

Figure13.13Costversusnumberofwarehouses.

Athreedistributioncentersystemwouldprovidetheleasttotalcost.Figure1showsthatbymovingfromthreetotendistributioncenters,theonedayservice1increasesby8%.Managementmustdecidewhichsystemtoselect.Thedecisionribebasedonadequateanalysisofthechoicesavailableandacomparisonofthcreaseincostsandservicelevel.

M&DC Physical Distribution

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