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Physical Distribution
Chapter 13
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Physical Distribution
Physical Supply goods moving from supplier to manufacturer “inbound” Physical Distribution goods moving from manufacturer to customers “outbound”
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Physical Distribution
Figure Supply chain (logistics system)
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Channels of Distribution
Any series of firms or individuals that participates in the flow of goods and services from the raw material supplier and producer to the final user or consumer.” APICS 12th Edition Dictionary
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Channels of Distribution
Company may deliver directly to customers Use other companies or individuals to deliver goods Intermediaries wholesalers – agents transportation companies – warehousers
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Distribution Channels
Transaction channel negotiate, sell, contract concerned with the transfer of ownership (and money) Distribution channel concerned with the delivery of goods or services
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Distribution Channels
Figure Separation of distribution and transaction channels
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Physical Distribution
Adds place value by delivering goods to customers Adds time value by delivering goods when customers want them
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The Way Materials Move Depends on:
the channels of distribution being used the types of markets served geographic dispersion number of customers the characteristics of the product type of transportation available
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Reverse Logistics Supplier Customer Returned Goods Information
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Reverse Logistics - Information
Goods are returned to supplier Information is also needed reason / approval for the return credit information
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Reverse Logistics Green Logisitics
Return and disposal of packaging materials Return and disposal of environmentally sensitive materials heavy metals oil Use of reusable (returnable) packaging
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Returned Goods - Disposition
Returned to inventory Refurbished for resale Sold into alternate markets Disassembled to retrieve components Sorted for material recovery Value
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Physical Distribution - Activities
1. Transportation 2. Distribution inventory 3. Warehouses 4. Materials handling 5. Protective packaging 6. Order processing
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Transportation Movement of goods Highest portion of distribution costs
% Adds place value to the product
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Distribution Inventory
Includes all finished goods anywhere in the distribution system Second highest cost of distribution % Inventories add time value to the product
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Warehouses Used to store inventory
improved customer service transportation efficiencies Warehouse management concerned with: site selection, number of warehouses layout and methods of receiving, storing and retrieving goods
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Materials Handling Movement and storage of goods within a distribution center Type of equipment used affects the costs of operation High capital cost Tradeoff between capital cost and operating (labor) cost
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Protective Packaging Containment, protection and identification
Packages must fit in storage spaces and transportation vehicles item package carton pallet container Fragile
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Order Processing “The activity required to administratively process a customer’s order and make it ready for shipment or production.” APICS 12th Edition Dictionary Represents an element of time in a customer’s order Important part of customer service May involve intermediaries
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Total Cost Concept Cost trade-off Total cost
a cost decrease in one area may incur a smaller increase in another area Total cost consider all of the costs increases in one area are offset by reductions in other areas Keep customer service in mind
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Total Cost Concept - Example Problem
A company normally ships a product by rail. Transport by rail costs $200, and the transit time is 10 days. However, the goods can be moved by air at a cost of $1000 and it will take one day to deliver. The cost of inventory in transit is $100 per day. What are the costs involved in the decision? Rail Air Transportation Cost $ $1000 Inventory Carrying Cost Total $ $1100
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Global Distribution Differences in: Distance Language Currency
Measurement
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Standards ISO (International Organization for Standardization)
Geneva Switzerland Incoterms (International Commercial Terminology) Standard size containers
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3PLs – Third Party Logistics Providers
Provide a wide range of logistics services Delivery Warehousing EDI Freight Forwarding Packaging
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3PLs – Third Party Logistics Providers
Can provide the service at less cost They have the equipment and networks Can react to seasonal increase Reverse logistics Examples: Fed Ex Kuehne + Nagel DHL
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Interfaces A bridge between: Marketing Production
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Marketing Product Promotion Place Price Created by Physical
Distribution
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Interface with Marketing
Marketing is responsible for the transfer of ownership selling, advertising, sales promotion, merchandising and pricing Physical distribution is responsible for delivering the goods contributes to creating demand prompt delivery, availability of product, accurate order filling
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Interface with Production
Production requires a steady flow of raw materials and components interruptions are very expensive Factory location may depend on the transportation cost raw materials finished goods Factory demand is created by distribution centers
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Transportation Costs Ways
land, water, road, space, etc over which goods are moved may be owned by the operator (railroad tracks), operated by the government (roads, canals) or mother nature (ocean)
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Transportation Costs Terminals Used to sort, load and unload goods
connection between line-haul and local deliveries connection between different modes or carriers dispatching, maintenance, administration
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Transportation Costs Vehicles Other (fixed or variable)
owned or leased by the carrier Other (fixed or variable) maintenance administration fuel labor
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Transportation - Modes
Rail Road Air Water Pipeline Vary by flexibility and operating cost
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Rail Provide own ways, terminals and vehicles
large capital investment need high volume modest flexibility Used for bulky commodities over long distances
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Road Pay for ways through taxes or tolls Provide their own terminals
Vehicle cost though large, is smaller than vehicle costs for water or rail Door-to-door service (very flexible) Used for small volume goods to many delivery locations
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Air Uses government provided terminals and air traffic control systems (ways) High variable costs for fuel and operating costs Most expensive mode Used for high value, low weight goods over long distances
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Water Nature provides ways Carrier pays for use of terminals
canals are government controlled Carrier pays for use of terminals Carrier owns the ships Operating cost is very low Slow and not very flexible Used for low value bulk cargo over long distances
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Pipelines Very high capital costs Operating costs are very low
Not flexible! Used for high volume gases or liquids moving from point to point
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For Hire Carriers Common carriers Contract carriers
licensed to carry only certain goods available to public designated points or areas served scheduled service Contract carriers provides specific service to a shipper
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Private Carriers Need to buy and operate their own equipment
Carry their own goods licenses are still required Very high volume to justify expense
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Other Transportation Agencies
Use combinations of modes Freight Forwarders Post Office Couriers Agencies make use of load consolidation
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Transportation Cost Elements
Line haul Pickup and delivery Terminal handling Billing and collecting Principles are the same for all modes
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Transportation Cost Elements
Figure Shipping patterns
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Line Haul Costs Fuel, labor, depreciation
Approximately the same per mile whether full or empty LHC = Total Line-Haul Cost Distance Travelled
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Line-Haul Costs - Example
For example, for a given commodity, the line-haul cost is $3 per mile and the distance shipped is 100 miles. The total line-haul cost is therefore, $300. If the shipper sends 50,000 pounds, the total line haul cost is the same as if 10,000 pounds were shipped. However the line-haul cost (LHC) per hundredweight (cwt) will vary. LHC50,000 lbs = $300 = $.60 per cwt 500 LHC10,000 lbs = $300 = $3.00 per cwt 100
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Line-Haul Costs Total line-haul cost varies with:
cost per mile distance moved Line-haul cost per cwt varies with: weight moved
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Line-haul Cost - Example
For a particular commodity, the line-haul cost is $2.50 per mile. For a trip of 500 miles and a shipment of 600 cwt, what is the cost of shipping per cwt? If the shipment is increased to 1000 cwt, what is the savings per cwt? Cost600 =($2.50 x 500) / 600 = $2.083 / cwt Cost1000 = ($2.50 x 500) / = $1.25 / cwt Savings = $ = $0.833 / cwt
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Increasing Weight Shipped
Truck will have a weight limitation Some products have a low density and the truck is filled before the weight limitation is met Therefore, nest products or ship products unassembled to increase the weight shipped
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Shipping un-assembled
Some Assembly Required
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Shipping Cost - Example
A company ships barbecues fully assembled. The average line-haul cost is $12.50 per mile, and the truck carries 100 assembled barbecues. The company decides to ship the barbecues unassembled and can ship 500 barbecues in a truck. Calculate the line-haul cost per barbecue assembled and unassembled. If the average trip is 300 miles, calculate the savings per barbecue.
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Shipping Cost - Example
Line-haul costassembled = $12.50/100 =$0.125 / bbq / mile Line-haul cost unassembled = $12.50/500 =$0.025/ bbq/mile Savings per mile = $ = $0.10 / bbq / mile Trip savings = 300 miles x $0.10 / bbq/mile =$30 per barbecue probably worth the cost of assembly at the buyer’s
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Pickup and Delivery Costs
Depends on time spent (not distance) Charged for each pickup Therefore, consolidate multiple shipments to avoid many trips
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Terminal Handling Cost depends on how many times the shipment must be handled Full truckloads (TL) go directly to the customer Less than truckloads (LTL) must be sent to a terminal, sorted and consolidated Therefore, consolidate shipments into fewer parcels
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Billing and Collecting
Costs of paperwork Costs of invoicing Therefore, reduce the number of pickups and pieces shipped (consolidating)
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Total Transportation Costs
Line-haul + pickup and delivery + terminal handling + billing and collecting To reduce costs: increase the weight shipped (line-haul cost) reduce the number of pickups (pickup and delivery cost) decrease the number of parcels (terminal handling costs) consolidate shipments (billing and collecting costs)
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Distance Versus Cost of Carriage
Total Cost Fixed Cost: pickup, and delivery terminal handling, billing and collecting Distance
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Rate Charged - Other Factors
Value - to cover carrier’s liability Density - can affect the total weight shipped Perishability - may require special equipment i.e. refrigeration Packaging - to reduce the risk of damage and breakage
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Warehousing Plant warehouses Regional warehouses Local warehouses
Wholesalers Public warehouses
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Warehousing - Services
General warehouse storage and protection of goods need to minimize handling and movement Distribution warehouse goods are received in large volumes goods are then sorted and consolidated into customer orders concerned with throughput
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Role of Warehouses Transportation consolidation Product Mixing Service
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Transportation Consolidation
Reduces transportation costs Truckload (TL) shipments to warehouse Less than truckload (LTL) shipments to local customers “Break-bulk” breaking down large shipments from factories into small shipments for local buyers
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Product Mixing Avoids many small LTL shipments
Customers want a mix of products often from different manufacturers or locations The distribution center can assemble many small items into one shipment
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Service Local distribution centers can improve customer service by being close to the customer Faster response time Improved variety of products May add value e.g. customer specific labelling
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Product Mixing Figure Product mixing
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Warehousing and Transportation Costs
Number of customers Geographic distribution of customers Customer order size Number and location of plants and distribution centers $ Customer Service
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Warehousing and Transportation Costs - Example Problem
A plant located in Toronto is serving customers in the Boston area. If they ship direct to customers most shipments will be LTL. However if they locate a distribution center in Boston they can ship TL to the warehouse and LTL from the warehouse to the local customers. Costs are as follows: Plant to customer (LTL) = $100 / cwt Plant to distribution center (TL) = $50 / cwt Distribution center = $10 / cwt Distribution center to customer (LTL) = $20 / cwt
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Warehousing and Transportation Costs - Example Problem
Costs if a distribution center is used: TL Toronto to Boston = $50 per cwt Distribution center costs = $10 per cwt LTL Boston area = $20 per cwt Total cost = $80 per cwt Savings per cwt = $100 - $80 = $20 per cwt Annual savings at 10,000 cwt = $20x10,000 = $200,000
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Market Boundaries The line between two methods of distribution where the laid down cost is the same. Deciding which customers should be served from which location
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Laid-down cost (LDC) “The sum of the product and the transportation costs. The laid-down cost is useful in comparing the total cost of a product shipped from different suppliers from a customer point of view” APICS 12th Edition Dictionary
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Laid-down Costs - Example Problem
Syracuse is 300 miles from Toronto. The product cost is $10 per cwt, and the transportation cost is $0.20 per mile. What is the laid down cost per cwt? LDC = Product cost +(trans’n cost per mile x distance) = $10 + ($0.20 x 300) = $70 per cwt
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Market Boundary - Example Problem
Figure Market boundary
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Market Boundary - Figure 13.7
In the example, the distance between A and B is 100 miles. If we let the distance from A to Y be X miles, then the distance from B to Y is (100 - X) miles. Assume supply A is the factory and B is a distribution center. Assume the product cost from A is $100 and from B is $110 which includes inventory and TL costs to the distribution center. LTL costs are $.40 per unit per mile from either location. LDCA = LDCB X = (100 - X) X = 62.5 miles Customers within 62.5 miles from the factory A, ship direct. The rest of the customers, ship from the distribution center B.
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Market Boundary - Example Problem
The distance between Toronto and Boston is about 500 miles. Given the cost structure in the previous example, calculate the location of the market boundary between Toronto and Boston. Assume the product cost at Toronto is $10 per cwt. Product cost at Boston = product cost at Toronto + TL transportation + handling costs
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Market Boundary - Example Problem
Product cost at Boston = product cost at Toronto + TL transportation + handling = $10 + $50 + $10 = $70 LDCT = LDCB $10 + $0.20X = $70 + $020(500 - X) 0.4X = 160 X = 400 The market boundary is 400 miles from Toronto or 100 miles from Boston. Ship orders direct within 400 miles from Toronto. Closer to Boston ship from Distribution Center in Boston.
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Effect of Adding More Warehouses
As more distribution centers are added: TL shipments to DC’s will increase LTL costs to customers will decrease Total cost of transportation will decrease
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Effect of Adding More Warehouses
Figure Transportation cost versus number of warehouses
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Packaging Identifies product Contains and protects the product
may be part of marketing promotion size, description, date of manufacture Contains and protects the product movement environment Contributes to distribution efficiency handling in larger quantities
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Packaging Primary package Secondary package Unit load
holds the product for the consumer e.g. a box of cereal Secondary package contains small products for distribution e.g. a corrugated carton Unit load e.g. a pallet
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Unitization Container
“In warehousing, the consolidation of several units into larger units for fewer handlings.” APICS 12th Edition Dictionary Container Box Pallet
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Pallets Standard sizes Sized to fit into further unitized loads
e.g. 48”x40”x4” (grocery) Sized to fit into further unitized loads e.g. railcar, truck, container Handled by fork lift trucks
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Materials Handling Objectives: Increase the cube utilization
use as much height as possible keep aisles to minimum Improve operating efficiency increase the load per move Improve speed of response
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Equipment Conveyors Industrial trucks Cranes and hoists
move in a fixed route, consume space need high volumes Industrial trucks can move anywhere in the plant do not consume fixed space Cranes and hoists make use of overhead space
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Figure 13.10 Railcar and trailer pallet position plan
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Multi-Warehouse System
Transportation costs Inventory-carrying cost Warehousing costs Materials handling costs Packaging costs Total system cost System service capability
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Transportation Costs TL shipments will be made over long distances
LTL shipments to customers will be shorter Total costs decrease with more warehouses diminishing effect as more warehouses are added
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Inventory-Carrying Cost
order quantity - stays the same safety stock increases with the number of warehouses varies with the square root of the change SSnew = SSold Previous # of warehouses New # of warehouses
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Inventory Carrying Costs
A company is considering adding a warehouse. For an item with an average demand of 1000 units each warehouse will have a demand of 500 units. The safety stock in one warehouse was 100 units for a service level of 90%. What is the new safety stock? SS = 100 x = 71 units (in each warehouse) 1000
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Warehousing Costs Space for additional inventory
Duplication of non-storage space offices, washrooms, lunchrooms Duplication of support staff supervisory, clerical, support
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Materials Handling Costs
Number of units handled will remain the same As number of warehouses increase, the size of the loads handled will decrease Handling of non-unitized loads increases costs
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Packaging Costs Per unit costs remain the same
Total costs increase with inventory
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Total System Cost Figure Total system cost
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System Service Capability
Customer service (speed of delivery) improves with more distribution centers diminishing effect as more DC’s are added Must consider cost of service with total system cost
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System Service Capability
Figure Estimate of market reached versus number of warehouses
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System Service Capability
3 distribution centers provide the lowest total system cost Figure Cost versus number of warehouses
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