Logistics

Chapter Objectives Be able to: Describe why logistics is important and discuss the major decision areas that make up logistics. List the strengths and weaknesses of the various modes of transportation and discuss the role of multimodal solutions. Identify the major types of warehousing solutions and their benefits. Discuss the purpose of a logistics strategy and give examples of how logistics can support the overall business strategy. Calculate the percentage of perfect orders. Calculate landed costs. Explain what reverse logistics systems are, and some of the unique challenges they create for firms. Use the weighted center of gravity method to identify a potential location for a business. Develop and then solve, using Microsoft Excel’s Solver function, an assignment problem. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Logistics Planning, implementing, and controlling the efficient, effective flow and storage of goods and materials between the point of origin and the point of consumption

Why the Increasing Interest? Deregulation Globalization Technological breakthroughs Environmental concerns Performance impact © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Deregulation Transportation providers Buyers have greater freedom BUT… Elimination of artificial barriers Unrestricted markets Multimodal solutions Price, schedule, and terms flexibility Buyers have greater freedom Negotiate prices, terms, and conditions Ownership issues BUT… © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Deregulation (continued) … with greater freedom comes new responsibilities Key point Logistics has evolved from being a “tactical” area to a “strategic” one © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Globalization (Worldwide Statistics) Year Expenditures % GDP 1997 $5,095 Billion 13.4% 2002 $6,732 Billion 13.8% Change +32% +3% What is driving this activity? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Environmental Concerns Even while certain aspects of logistics have been deregulated, other areas are being controlled more stringently Fuel efficiency Pollution Recovery, recycling, and reuse of packaging, containers, and products © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Management Areas Transportation Warehousing (and more generally, location) Material handling Packaging Inventory management Logistics information systems (And some would put logistics service providers here as well!) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Logistics Decision Areas Transportation… Modes Formats Pricing Warehousing Consolidation Cross-Docking and Break-Bulk Hub-and-Spoke Inventory © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Major Transportation Modes Highway (truck) Water Rail Air Pipeline © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Modal Shares of Shipments (within US, 1999/2002) Mode Value (%) Tons (%) Ton Miles (%) Highway (trucking, parcel, postal, courier) 80.3/86.0 58.5/67.4 28.4/28.7 Water 2.5/1.1 11.1/11.1 20.4/13.6 Rail 4.8/3.7 11.2/16.1 26.7/36.8 Air 2.7/3.2 0.2/0.4 Pipeline 4.2/1.8 13.7/5.9 17.6/20.5 Multimodal/Unknown 5.6/5.6 5.5/5.5 6.8/6.8 Lots of other data from the US Department of Transportation at http://www.bts.gov/ © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Highway Mode Strengths Weaknesses Flexibility to pick up and deliver where and when needed Often the best balance between cost/flexibility and delivery reliability/speed Can deliver straight to the customer (increasing) Can be available 24/7 Weaknesses Not the fastest Not the cheapest © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Water Mode Strengths Weaknesses Highly cost effective for bulky items Works best for high weight-to-value items Most effective when linked into multimodal system Weaknesses Limited locations Relatively poor delivery reliability/speed Often limited operating hours at docks © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Air Mode Strengths Weaknesses Quickest delivery over longer distances Can be very flexible when linked to highway mode Works best for low weight-to-value items Weaknesses Often the most expensive, particularly on a per pound basis Grew 90.5% in value of goods shipped from 1993 to 2002 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Rail Mode Strengths Weaknesses 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 Increasing part of multimodal solutions, dual tracks on major routes © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Question How can businesses design solutions that exploit the strengths of each mode? Lecturer can discuss trucking solutions like direct shipment, less than truckload (LTL), etc.

Technological Breakthroughs Standardized containers for ease of transfer “Roadrailers,” etc. Multimodal solutions Ship  Truck  Train  Truck  ? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Multi-Modal Solutions (An example) North Carolina’s Global TransPark © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

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 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Justification for Such a Facility 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. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Warehousing Any operation that stores, repackages, stages, sorts, or centralizes goods or materials

New View Warehousing a key piece of logistics strategy J. B. Hunt Lowe’s More than just storage “Warehousing”  “Distribution Centers” © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Warehousing Benefits Economic benefits: Service benefits: Accrue directly to company Must consider total system costs Service benefits: Support customer service needs May or may not reduce costs © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Consolidation Tend to be near customers or source of products © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Example 1 Customer Shipment Weight Venetian Artist Supply 100 boxes, artist supplies 3,000 lbs. Kaniko 100 PC printers Ardent Furniture 10 dining room sets 4,000 lbs. 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 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Cost Benefits of Consolidated Warehousing 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 How does this compare to the cost of separate dedicated shipments? What about truck utilization (assume 3 trucks hold 60,000 lbs.) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

What about supply / demand mismatches? Cross-Docking Tend to be close to customers or source of products What about supply / demand mismatches? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Break-Bulk Like cross-docking, but usually refers to a single source Tend to be close to customers © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

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. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Insight: If we can run a warehouse for less than: we should do it. 5 × ($7.28 – $2.40 – $1.35) = $17.65/500 lbs. Or $17.65 / 5 = $3.53 per hundred-weight we should do it. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Hub-and-Spoke Systems © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Postponement Coca Cola syrup Bulk food products, paints, etc.  high volumes  containers Customer A Customer B Customer C Postponement Assembly, Packaging, Labeling, etc. Minimizes risk Minimizes inventory (how?) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Warehousing Service Benefits: Spot stock Assortment

Spot Stock Region 1 Region 2 Region 3 Time sensitive, seasonal items Often temporary, public storage © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Assortment Broad product line and good inventory control key to success Customer A Supplier E Supplier F Customer B Assortment Warehouse Supplier G Customer C Supplier H Customer D © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Information Systems Decision support tools Real-time simulation and optimization Location selection Cost estimations Precise coordination of multimodal solutions Execution systems Global positioning systems Bar-coding applications RFID on the horizon as replacement (NYK Logistics) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Material Handling and Packaging What are the typical marketing criteria?

Unitization Unit loads Non-rigid containers Rigid containers 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? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Packaging Implications Transportation Class segmentation Damage protection Material handling and warehousing Storage requirements Unitization Container recycling Ease of handling © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Questions What are the strengths and weaknesses of each? How does the choice of format tie into the business strategy?

The Evolution of Logistics Strategy From functional silos to strategic positioning

Logistics Strategy Choices Performance Dimension Transportation Mode Warehousing System Delivery Reliability Highway, Air Direct Ship, Assortment, Spot Stock Delivery Speed Air, Highway Mix Flexibility Highway, Air, Rail Assortment, Spot Stock Design Flexibility Postponement Volume Flexibility Cost Rail, Water, Pipeline, Highway Consolidation, Cross-Docking, Hub-and-Spoke © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Who “Owns” Logistics? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Owning Versus Outsourcing Does the firm’s volume justify a private system? Would ownership limit firm’s ability to respond to marketplace changes? Is logistics a core competency? Are outsource capabilities are available? Kellogg logistics strategy example in text © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Transportation “Outsources” Common (public) carriers Published rates and schedules “Nondiscriminatory” pricing Increased flexibility to partner Contract carriers Service for select customers Unlimited number of customers Third-Party Logistics Providers (3PLs) Service firms specializing in logistics for other companies © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Warehouse Ownership Issues Public Contract Private EOS EOS ??? High Moderate Low High Moderate Low Less Varies Highest High High ??? Cost structure Financial flexibility Location flexibility Managerial control Expertise EOS = Economy of scale © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

When would it make sense to combine private and public ownership? Question: When would it make sense to combine private and public ownership?

Measuring Performance Perfect Order Delivered on time Shipped complete Invoiced correctly Undamaged in transit Landed Costs Packing Insurance Customs, other fees Warehousing Transportation Documentation (Redwing Automotive Example) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Reverse Logistics Systems Customer returns Warranty failures Incorrect or damaged orders Repair and remanufacture process support Recycling (increasing importance!) Generally independent systems because of low volume and mix complexity © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Logistics Decision Models Weighted Center of Gravity Method Optimization Assignment Problem © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

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. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

CupAMoe’s Coffee Example 12.6 in text. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Optimization Requires an objective function to be maximized or minimized. Decision variables — values to be manipulated to affect outcome of objective function Constraints — limits set on range of decision variables to be used or on other aspects of the solution possible For Example: © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Assignment Problem Specialized optimization model. Decision variables are the shipment quantities Known values are demand, capacity, and shipping cost between warehouses Constraints: Sum of shipments from a warehouse cannot exceed its capacity Sum of shipments to meet demand must be greater than or equal to the demand Sum of shipments from each warehouse must be greater than or equal to zero (Flynn Boot Company Excel example in text) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Case Study in Logistics Just-In-Time Shipping

Supplemental Slides on Transportation Costs and Factors Pricing, Distance, Economic Factors

Pricing Transportation Services Economic factors Pricing versus distance Price/pound versus density Stowability, handling, and liability Market factors Ratings Goods classification Class index © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Economic Factors I Price … why the “tapering principle”? Distance Density Price/pound Discuss effects of unloading and loading costs being similar to fixed costs with distance as a variable cost Discuss effect of density in being able to pack more in a load – but what about energy requirements? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Economic Factors II Stowability, handling, and liability versus © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Economic Factors III Market factors What might this include? West Coast, USA East Coast, USA © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Translating economic factors into actual prices 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 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

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) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

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. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Specific Rates for Shipments FROM Atlanta TO Lansing Rates express $ charged per hundred-weight Rates 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 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

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 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

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? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

What to Do? Separate shipments at costs below: 50×$18.94 = $947 50×$18.94 = $947 100×$14.74 = $1,474 70×$18.94 = $1,326 $3,747 Consolidated shipments at costs below: 220×$9.22 = $2,028 Additional drop-off charges: $100 $2,128 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036

Key Points Choosing a mode Choosing a format Five choices Speed? Cost? Flexibility? Choosing a format Flexibility versus control Controllable factors affecting cost Density, stowability, packaging, and containerization © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036