Transcript Lecture 31.pptx

Logistics Management
LSM 730
Lecture 31
Dr. Khurrum S. Mughal
1-1
Course Material
• Course Text Book
– Business Logistics/Supply Chain Management, 5th 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 https://cscmp.org/
– 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
Supply Chain Management Defined

Interaction between marketing, logistics and
production

Interactions that take place legally separated
firms

Importance of Supply Chain Relationships
SCM is the integration of all activities associated with the
flow and transformation of goods from raw materials
through to end user, as well as information flows, through
improved supply chain relationships, to achieve a
sustainable competitive advantage.
Handfield and Nichols
1-4
The Logistics/SC Mission
Getting the right goods or services
to the right place, at the right time,
and in the desired condition at the
lowest cost and highest return on
investment.
1-5
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
The Immediate Supply Chain for an Individual Firm
Transportation
Warehousing
Transportation
Customers
Information
flows
Factory
Transportation
Vendors/plants/ports
Warehousing
Transportation
1-2
Evolution of Supply Chain Management
Activity fragmentation to 1960
2000+
Activity Integration 1960 to 2000
Demand forecasting
Purchasing
Requirements planning
Production planning
Manufacturing inventory
Purchasing/
Materials
Management
Warehousing
Logistics
Material handling
Packaging
Finished goods inventory
Distribution planning
Physical
Distribution
Supply Chain
Supply Chain
Management
Management
Order processing
Transportation
Customer service
Strategic planning
Information services
Marketing/sales
Finance
1-9
Scope of the Supply Chain for Most Firms
Business logistics
Physical supply
(Materials management)
Sources of
supply
Physical distribution
Plants/
operations
• Transportation
• Inventory maintenance
• Order processing
• Acquisition
• Protective packaging
• Warehousing
• Materials handling
• Information maintenance
Customers
• 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
Significance of Logistics
 Costs are high




About 12% of World’s GDP internationally (IMF)
About 10.5% of GDP domestically
A range of 4 to 30% of sales for individual firms, avg. about 10%
A high as 70-80% of sales if purchasing and production are
included
1-18
Significance of Logistics
 Customers are more demanding of the supply chain
 Desire for quick response
 Desire for mass customization
 Dell Computers
 L. L. Bean sells customized clothes
 National Bicycle Industrial Co.
 11 million variations over 18 models of road, racing, and
mountain bikes
1-19
Significance of Logistics
 An integral part of company strategy
 Expand to Generate revenue
 Optimize to Improve profit
1-20
Significance of Logistics
 Logistical lines are lengthening
 Going global to cut costs
 Globalized trade pushed by trade agreements
 Local vs. long distance supply
 Produce and sell globally vs produce locally sell internationally
 An increase in logistics costs against decrease in labor and
material costs
 Logistics is a key to trade and an increased standard of living
 Law of comparative economic advantage applies
1-21
Significance of Logistics
 Logistics adds customer value
 Four types of values:
 Possession Utility - the value or usefulness that comes from a
customer being able to take possession of a product
 Form Utility - in a form that can be used by the customer and is
of value to the customer
 Place Utility - available where they are needed by customers
 Time Utility - available when they are needed by customers
 Example: Online clothing stores
1-22
The Supply Chain is Multi-Enterprise
Scope in
reality
Focus
Company
Suppliers
Customers
Customers/
End users
Supplier’s
suppliers
Acquire
Convert
Distribute
Product and information flow
1-23
ORGANIZING
Customer
service goals
• The product
• Logistics service
• Ord. proc. & info. sys.
Transport Strategy
• Transport fundamentals
• Transport decisions
PLANNING
Inventory Strategy
• Forecasting
• Inventory decisions
• Purchasing and supply
scheduling decisions
• Storage fundamentals
• Storage decisions
CONTROLLING
Study Framework
Location Strategy
• Location decisions
• The network planning process
It involves the decision triangle---The
focus is here
1-24
The Logistics Strategy Triangle
Inventory Strategy
 Forecasting
Transport Strategy
 Storage fundamentals
 Transport fundamentals
 Inventory decisions
 Transport decisions
 Purchasing and supply
scheduling decisions
Customer
Storage
decisions

service goals
 The product
 Logistics service
 Information sys.
Location Strategy
 Location decisions
 The network planning process
1-25
Relationship of Logistics to
Marketing and Production
PRODUCTION/
OPERATIONS
Sample activities:
 Quality control
 Detailed production
scheduling
 Equipment maint.
 Capacity planning
 Work measurement
& standards
Interface
activities:
 Product
scheduling
 Plant
location
 Purchasing
LOGISTICS
Sample
activities:
Transport
 Inventory
 Order
processing
 Materials
handling
Interface
activities:
 Customer
service
standards
 Pricing
 Packaging
 Retail
location
Productionlogistics
interface
MARKETING
Sample
activities:
 Promotion
 Market
research
 Product
mix
 Sales force
management
Marketinglogistics
interface
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
Corporate to Functional
Strategic Planning
External factors
Corporate strategic
plan
•Economic
•Regulatory
•Technological
•Competitive
Marketing
Manufacturing
Finance
Logistics
Functional strategic plans
2-29
Logistics/SC Strategy
• The objectives of logistics strategy are:
– Cost reduction
– Capital Reduction
– Service Improvement
Use
ROLA
1-30
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
Logistics’ Objective
Maximize return on logistics
assets (ROLA)
Costs of
Logistics’
contribution
to sales
logistics
operations
ROLA RevenueCosts
Assets
Investment in
logistics
assets
2-34
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
Strategic, Tactical, and Operational Decision Making
Decision area Strategic
Tactical
Operational
Transportation Mode selection
Seasonal equipment leasing
Dispatching
Inventories
Location, Control policies Safety stock levels Order filling
Order
processing
Order entry, transmittal,
and processing system
design
Processing
orders, Filling
back orders
Purchasing
Development of supplier- Contracting,
buyer relations
Forward buying
Expediting
Warehousing Handling equipment
selection, Layout design
Facility
location
Space utilization
Order picking
and restocking
Number, size, and
location of warehouses
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
Cost, in dollars
A Cost Conflict in Logistics
Total cost
Cost of
transportation
service
Inventory cost
(includes
storage and
intransit
Rail
Truck
Air
Transportation service
(greater speed and dependability)
2-39
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
Sales volume
Product Life-Cycle Curve
Introduction Growth
Maturity
Decline
Time
3-42
Nature of the Product
 The Product life cycle and Pareto's law
- An empirical relationship for the 80-20 curve is
Y=
( 1+A)X
A+X
where
Y = cumulative fraction of sales
X = cumulative fraction of items
A = constant to be determined
The constant is found by
A=
X(1-Y)
Y-X
80% of Firm’s sales are generated by 20% of the
product line items
-
Difference in inventory and distribution
3-43
ABC Classification for 14 Products
Product
Number
D-204
D-212
Product
Rank by
a
Sales
1
2
Monthly
Sales
(000s)
$5,056
3,424
Cumulative Cumulative An ABC
Percent of
Percent of Classifib
c
Total Sales Total Items
cation
36.2%
7.1%
60.7
14.3
A
D-185-0
D-191
D-192
D-193
D-179-0
3
4
5
6
7
1,052
893
843
727
451
68.3
74.6
80.7
85.7
89.1
21.4
28.6
35.7
42.9
50.0
D-195
D-196
D-186-0
D-198-0
D-199
D-200
D-205
8
9
10
11
12
13
14
412
214
205
188
172
170
159
$13,966
91.9
93.6
95.1
96.4
97.6
98.7
100.0
57.1
64.3
71.4
78.6
85.7
92.9
100.0
B
C
3-5
Cumulative 80-20 Curve
100
90
Total sales (%)
80
70
60
50
40
30
A items
B items
C items
20
10
0
0
20
40
60
Total items (%)
80
100
3-6
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
3-46
Zone 2
Zone 3 $136.31
$137.38
Boston
Zone 8
$147.38
Zone 7
$144.81
Zone 6
$142.43
Zone 5
$140.00
Zone 4
$138.33
UPS Pricing Zones
3-18
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
3-48
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
CR (2004) Prentice Hall, Inc.
13-49
Bid Rent Curve
CR (2004) Prentice Hall, Inc.
13-50
Weber’s Classification of
Industries
CR (2004) Prentice Hall, Inc.
13-51
Hoover’s Transport Curves
Y
CR (2004) Prentice Hall, Inc.
13-52
COG Method (Cont’d)
VR X

X
 VR
i
i
i
i
i
i
i
VR Y

,Y 
 VR
i
i
i
i
i
i
i
where
Vi = volume flowing from (to) point I
Ri = transportation rate to ship Vi from (to) point i
Xi,Yi = coordinate points for point i
X, Y = coordinate points for facility to be located
CR (2004) Prentice Hall, Inc.
13-55
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
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