1-1 Logistics Management LSM 730 Dr. Khurrum S. Mughal Lecture 31

Course Material Course Text Book – Business Logistics/Supply Chain Management, 5 th Edition by Ronald H. Ballou Recommended Books – Logistics – An Introduction to Supply Chain Management by Donald Waters – Introduction to Logistics Systems Management by Gianpaolo Ghiani, Gilbert Laporte, Roberto Musmanno – Supply Chain Management: In Theory and Practice by Birgit Dam Jespersen, Tage Skjott-Larsen Miscellaneous Sources: – Council of Supply Chain Management Professional – Journal of Business Logistics 1-2

Introduction Needs in the historical perspective Constraints due to low technological developments in transportation and storage Locating near production – Self sustaining villages As old as trade itself Principle of Comparative Advantage 1-3

1-4 Supply Chain Management Defined  Interaction between marketing, logistics and production  Interactions that take place legally separated firms  Importance of Supply Chain Relationships

1-5 The Logistics/SC Mission

Supply Chain Schematic 1-5

The Supply Chain The process is full of Recurring activities Usually no single source point is located in one place Control of firm over its raw material source and the point of consumption for customers Physical Supply Channel Vs Physical Distribution Channel The reverse logistics channel 1-7

Warehousing Transportation Vendors/plants/ports Transportation Factory Transportation Customers Information flows The Immediate Supply Chain for an Individual Firm 1-2

1-9 Evolution of Supply Chain Management

Scope of the Supply Chain for Most Firms Physical distribution Physical supply (Materials management) Business logistics Sources of supply Plants/ operations Customers Transportation Inventory maintenance Order processing Acquisition Protective packaging Warehousing Materials handling Information maintenance Transportation Inventory maintenance Order processing Product scheduling Protective packaging Warehousing Materials handling Information maintenance Focus firm’s internal supply chain 1-14

Key Activities/Processes Primary – Setting Customer service goals – Transportation – Inventory Management – Order Processing and Information Flows Secondary, or supporting – Warehousing – Materials Handling – Acquisition (Purchasing) – Protective Packaging – Product Scheduling – Information Maintenance 1-11

Key Activities/Processes Primary – Setting Customer service goals (work with marketing) Identify customer needs and wants for logistics customer service Determine customer response to service Set customer service level – directly related to costs – Transportation (primary cost absorbing activity which adds place value) Mode and transport service selection Freight consolidation Carrier Routing Vehicle Scheduling Equipment Selection Claims Processing Rate Auditing 1-12

Key Activities/Processes Primary – Inventory Management (adds time value to the products, bridges the gaps between supply and demand) Raw Materials and finished goods stocking policies Short term sales forecasting Product mix at stocking points Number, size and location of stocking points Just-in-time (low levels), push (forecasting based) and pull (order based) strategies – Order Processing and Information Flows (Activity that triggers the whole process) Sales order – inventory interface procedures Order information transmittal methods Ordering Rules 1-13

Key Activities/Processes Secondary, or supporting – Warehousing Space Determination Stock layout and dock design Warehouse configuration Stock placement – Materials Handling Equipment selection Equipment replacement policies Order-picking procedures Stock storage and retrieval 1-14

Key Activities/Processes Secondary, or supporting – Acquisition (Purchasing) Supply source selection Purchase timing Purchase quantities – Protective Packaging Handling Storage Protection from Loss and Damage 1-15

Key Activities/Processes Secondary, or supporting – Product Scheduling Specify aggregate quantities Sequence and time production output Schedule supplies for production/operations – Information Maintenance (Supports all other logistics activities) Information Collection, Storage, and manipulation Data Analysis Control Procedures 1-16

The Activity Mix Difference between Key and Support activities – Key activities almost in every logistics channel Contribute most to the total logistics cost 1-17

1-18 Significance of Logistics

1-19 Significance of Logistics

1-20 Significance of Logistics

1-21 Significance of Logistics

1-22 Significance of Logistics

1-23 Focus Company Suppliers Supplier’s suppliers Customers Customers/ End users AcquireConvert Distribute The Supply Chain is Multi-Enterprise Product and information flow Scope in reality

1-24 Study Framework It involves the decision triangle---The focus is here

1-25 Customer service goals  The product  Logistics service  Information sys. The Logistics Strategy Triangle

PRODUCTION/ OPERATIONS Sample activities:  Quality control  Detailed production scheduling  Equipmentmaint.  Capacity planning  Work measurement &standards LOGISTICS Sample activities:  Transport  Inventory  Order processing  Materials handling Interface activities:  Product scheduling  Plant location  Purchasing MARKETING Sample activities:  Promotion  Market research  Product mix  Sales force management Interface activities:  Customer service standards  Pricing  Packaging  Retail location Production- logistics interface Marketing- logistics interface Relationship of Logistics to Marketing and Production Internal Supply Chain. 1-21

Corporate Strategy Broad goals need to be converted to definite plans – Based on external and internal environment Xerox – Number 1 in field service Star Kist Foods – Dominant packer in Tuna Business Corporate strategies are then converted into strategies for functional areas 1-27

Logistics/SC Strategy Almost same creative process as corporate strategy – Replacement machines by an office machine company – American Hospital Supply – terminals at each customers office 1-28

2-29 Corporate to Functional Strategic Planning Economic Regulatory Technological Competitive External factors Corporate strategic plan Marketing Finance Manufacturing Logistics Functional strategic plans

Logistics/SC Strategy The objectives of logistics strategy are: – Cost reduction – Capital Reduction – Service Improvement 1-30 Use ROLA

Logistics/SC Strategy The objectives of logistics strategy are: – Cost reduction Reducing Variable Costs Minimize cost of movement and storage Minimize cost at constant service levels Evaluating alternate routes and warehousing locations 1-31

Logistics/SC Strategy The objectives of logistics strategy are: – Capital Reduction Minimize level of investment in logistics system Shipping direct to customers Public vs private warehouses Just-in-time inventory Outsourcing logistics Increase in Variable costs but increase in ROI 1-32

Logistics/SC Strategy The objectives of logistics strategy are: – Service Improvement Maximize customer service Costs Increase – Parker Hannifin- seals and O-rings Competitors price on same product 8% less Demand for Inventory stocking point with additional value added services 1-33

2-34 Logistics’ Objective Maximize return on logistics assets (ROLA) Logistics’ contribution to sales Investment in logistics assets Costs of logistics operations

Logistics/SC Strategy To answer the questions: What, When and How Levels of logistical planning: Strategic – Longer than 1 year Tactical – Usually less than a year Operational – Daily or hourly basis – To ensure the efficient and effective product flow through strategically planned logistics channel 1-35

Decision areaStrategicTacticalOperational TransportationMode selectionSeasonal equip- ment leasing Dispatching InventoriesLocation, Control policiesSafety stock levelsOrder filling Order processing Order entry, transmittal, and processing system design Processing orders, Filling back orders PurchasingDevelopment of supplier- buyer relations Contracting, Forward buying Expediting WarehousingHandling equipment selection, Layout design Space utilizationOrder picking and restocking Facility location Number, size, and location of warehouses Strategic, Tactical, and Operational Decision Making 2-7

Six Concepts for Logistics Strategy Formulation Total Cost Concept – Tradeoff conflicting costs at optimum Differentiated distribution – Not all products should be provided the same level of customer service Mixed strategy – A pure strategy has higher costs than a mixed strategy Postponement – Delay formation of the final product as long as possible Shipment consolidation – Smaller shipment sizes have disproportionately higher transportation costs than larger ones Product standardization – Avoid product variety since it adds to inventory 1-37

Six Concepts for Logistics Strategy Formulation Total Cost Concept – Tradeoff analysis – Tradeoff conflicting costs at optimum – Examples: Direct cost of Transport Service vs Indirect cost of inventory levels 1-38

2-39 A Cost Conflict in Logistics

Nature of the Product Product classification – Consumer Products Convenience goods Shopping goods Specialty goods – Industrial goods 1-40

Nature of the Product Product classification – Industrial Products Raw Material that is part of finishes goods Machinery and equipment that is used for production process Goods not directly involved like business services, and office Supplies 1-41

3-42 Intro- duction GrowthMaturityDecline Sales volume Time Product Life-Cycle Curve

3-43 Nature of the Product 80% of Firm’s sales are generated by 20% of the product line items -Difference in inventory and distribution

ABC Classification for 14 Products 3-5

Total items (%) Total sales (%) A itemsB itemsC items Cumulative Curve 3-6

3-46 Nature of the Product (Cont’d)  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

Zone 8 $ Zone 7 $ Zone 6 $ Zone 5 $ Zone 4 $ Zone 3 $ Zone 2 $ Boston UPS Pricing Zones 3-18

3-48 Nature of the Product (Cont’d)  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

13-49 CR (2004) Prentice Hall, Inc. Location Overview What's located?  Sourcing points  Plants  Vendors  Ports  Intermediate points  Warehouses  Terminals  Public facilities (fire, police, and ambulance stations)  Service centers  Sink points  Retail outlets  Customers/Users

13-50 CR (2004) Prentice Hall, Inc. Bid Rent Curve

13-51 Weber’s Classification of Industries CR (2004) Prentice Hall, Inc.

13-52 CR (2004) Prentice Hall, Inc. Hoover’s Transport Curves

13-55 CR (2004) Prentice Hall, Inc. COG Method (Cont’d) where V i = volume flowing from (to) point I R i = transportation rate to ship V i from (to) point i X i,Y i = coordinate points for point i = coordinate points for facility to be located

Example The firm is considering 2 alternative sites for its new facility, France and Denmark After evaluating the firm’s Needs, the Managers have Narrowed the list of Important Selection Criteria down into 5 major Factors. – Labor availability and attitude – People to car ratio – Per capita income – Tax structure – Education and Health

Cost-Profit-Volume Analysis

Since Bowling Green has the lowest Total Cost at the volume being produced, it will be chosen as the site of new facility