3-1 The Logistics/Supply Chain Product “Logistics/Supply Chain managers are ‘owners’ of the product-flow process from raw material sources to final consumers, not activity administrators.” CR (2004) Prentice Hall, Inc. Chapter 3

3-2 Product in the Planning Triangle CR (2004) Prentice Hall, Inc. PLANNING ORGANIZING CONTROLLING Transport Strategy Transport fundamentals Transport decisions Customer service goals The product Logistics service Ord. proc. & info. sys. Inventory Strategy Forecasting Inventory decisions Purchasing and supply scheduling decisions Storage fundamentals Storage decisions Location Strategy Location decisions The network planning process PLANNING ORGANIZING CONTROLLING Transport Strategy Transport fundamentals Transport decisions Customer service goals The product Logistics service Ord. proc. & info. sys. Inventory Strategy Forecasting Inventory decisions Purchasing and supply scheduling decisions Storage fundamentals Storage decisions Location Strategy Location decisions The network planning process

3-3 Nature of the Product CR (2004) Prentice Hall, Inc.

3-4 Intro- duction GrowthMaturityDecline Sales volume Time Product Life-Cycle Curve CR (2004) Prentice Hall, Inc.

ABC Classification for 14 Products CR (2004) Prentice Hall, Inc. 3-5

Total items (%) Total sales (%) A itemsB itemsC items Cumulative Curve CR (2004) Prentice Hall, Inc. 3-6

3-7 Example Suppose that in an inventory of 10 items, 15% of the items account for 80% of the sales volume. The totalsales of all 10 items is $90,000 per year. Howmuch inventory can be expected if turnover First, findA = )-.15(1 =A Then, usingA= and the first item (1/10), we project the sales volume to be: sales the of 71.6% or, ).10+(1 =Y  The inventory for this item is expected to be 0.716(90,000)/8 = $8,055. Continue for the remaining items and generate the following table. Nature of the Product (Cont’d) for A items = 8, B items = 5, and C items = 2? Turnover Total sales CR (2004) Prentice Hall, Inc.

Example (Cont’d) CR (2004) Prentice Hall, Inc. 3-8

3-9 Nature of the Product (Cont’d) CR (2004) Prentice Hall, Inc.  Product characteristics - Weight-bulk ratio - Value-weight ratio - Substitutability - Risk  Product packaging  Product pricing - F.o.b. origin - F.o.b. destination - Zone pricing - Single and uniform pricing - Quantity discounts - Deals

3-10 Effect of Weight-Bulk Ratio on Logistics Costs CR (2004) Prentice Hall, Inc. Storage costs Transportation costs Total costs (transport + storage) Weight-bulk ratio 0 0 Logistics costs as a percent of sales price

3-11 Effect of Value-Weight Ratio on Logistics Costs CR (2004) Prentice Hall, Inc. Total costs (transport + storage) Storage costs Transportation costs Logistics costs as a percent of sales price Value-weight ratio 0 0

3-12 Effect of Transport Service and Inventory Level on Logistics Costs CR (2004) Prentice Hall, Inc. Total costs (transport + lost sales + storage costs) Transport costs Lost sales Storage costs Logistics costs as a percent of sales price Improved transportation service 0 0 (a) Average inventory level0 0 Logistics costs as a percent of sales price Total costs (transport + lost sales + storage costs) Lost sales Storage costs Transport costs (b)

3-13 Effect of Product Risk on Logistics Costs CR (2004) Prentice Hall, Inc. Increasing degree of risk in the product 0 0 Logistics costs as a percent of sales price Total costs (transport + storage) Transport costs Storage costs

3-14 Reasons for Product Packaging CR (2004) Prentice Hall, Inc. Facilitate storage and handling Promote better utilization of transport equipment Provide product protection Promote the sale of the product Change the product density Facilitate product use Provide reuse value for the customer

3-15 Product Pricing CR (2004) Prentice Hall, Inc. Geographic pricing methods - F.o.b. pricing - Zone pricing - Single, or uniform, pricing - Freight equalization - Basing point pricing Incentive pricing - Quantity discounts

Terms of Sale: F.O.B. Origin, Freight Collect Buyer-Pays Freight Charges Buyer-Bears Freight Charges Buyer-Owns Goods in Transit Buyer-Files Claims (If Any) 2. Terms of Sale: F.O.B. Origin, Freight Prepaid Seller-Pays Freight Charges Seller-Bears Freight Charges Buyer-Owns Goods in Transit Buyer-Files Claims (If Any) 3. Terms of Sale: F.O.B. Origin, Freight Prepaid and Charged Back Seller-Pays Freight Charges Buyer-Bears Freight Charges Buyer-Owns Goods in Transit Buyer-Files Claims (If Any) then Collected from Buyer by Adding Amount to Invoice 4. Terms of Sale: F.O.B. Destination, Freight Collect Buyer-Pays Freight Charges Buyer-Bears Freight Charges Seller-Owns Goods in Transit Seller-Files Claims (If Any) 5. Terms of Sale: F.O.B. Origin, Freight Prepaid (Delivered) Seller-Pays Freight Charges Seller-Bears Freight Charges Seller-Owns Goods in Transit Seller-Files Claims (If Any) 6. Terms of Sale: F.O.B. Destination, Freight Collect and Allowed Buyer-Pays Freight Charges Buyer-Bears Freight Charges Seller-Owns Goods in Transit Seller-Files Claims (If Any) then Charged to Seller by Deducting Amount from Invoice Freight Charges Paid by Buyer Freight Charges Paid by Seller Freight Charges Paid by Buyer Freight Charges Paid by Seller Freight Charges Paid by Buyer... Title Passes to Buyer Title Passes to Buyer Title Passes to Buyer Title Passes to Buyer Title Passes to Buyer Title Passes to Buyer SELLE R BUYER Freight Charges Paid by Seller... A Variety of Pricing Arrangements

Quantity purchased (cases) Logistical costs ($/case) Total per-case costs (transport + inventory + order processing and handling costs) Per-case inventory carrying costs Less than truckload Rail carload Truckload Transport costs Per-case order processing and handling costs Per-Case Logistics Costs as a Justification for Price Discounts CR (2004) Prentice Hall, Inc.

Zone 8 $ Zone 7 $ Zone 6 $ Zone 5 $ Zone 4 $ Zone 3 $ Zone 2 $ Boston UPS Pricing Zones CR (2004) Prentice Hall, Inc. 3-18