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.

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

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…

Deregulation (continued) … with greater freedom comes new responsibilities Key point Logistics has evolved from being a “tactical” area to a “strategic” one

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?

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

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!)

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, 1999/2002) 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/

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

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

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

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

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  ?

Multi-Modal Solutions (An example) North Carolina’s Global TransPark

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

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.

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”

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

Consolidation Tend to be near customers or source of products

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

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.)

What about supply / demand mismatches? Cross-Docking Tend to be close to customers or source of products What about supply / demand mismatches?

Break-Bulk Like cross-docking, but usually refers to a single source Tend to be close to customers

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: 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.

Hub-and-Spoke Systems

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?)

Warehousing Service Benefits: Spot stock Assortment

Spot Stock Region 1 Region 2 Region 3 Time sensitive, seasonal items Often temporary, public storage

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

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)

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?

Packaging Implications Transportation Class segmentation Damage protection Material handling and warehousing Storage requirements Unitization Container recycling Ease of handling

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

Who “Owns” Logistics?

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

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

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

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)

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

Logistics Decision Models Weighted Center of Gravity Method Optimization Assignment Problem

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.

CupAMoe’s Coffee Example 12.6 in text.

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:

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)

Case Study in Logistics Just-In-Time Shipping