LNW 2204 Final Exam Final Exam Preparation 6 questions. Answer 4 minimum Essay Format (15 points...

LNW 2204 Final ExamFinal Exam Preparation

6 questions. Answer 4 minimumEssay Format (15 points each)Date: 27th May 2010 Thursday

Time: 9.00am – 1200pmDuration: 3 Hours

Fundamentals of Logistics Management

Chapter 1

3 questions

Question 1

Logistics is a broad, far reaching function whichhas a major impact on a society’s standard of living.

a) In your own words, what is the impact of logistics to the economy and organization. (7 marks)

b) Name 5 of the key logistics activities that might play a major role in aviation industry. State your reason. (5 marks)

c) Design 3 new creative customer service level can be implemented by a new developed company. (3 marks)

Logistics plays a key role in the economy in two significant ways:

1) Logistics is one of the major expenditures for business, thereby affecting and being affected by other economics activities. The expenses of the logistics is very high and thus, by improving the efficiency of logistics operations, logistics makes an important contribution to the economy as a whole.

2) Logistics support the movement and flow of many economic transactions; it is important activity in facilitating the sale of virtually all goods and services.Example: if good do not arrive on time, in the proper place or in the proper condition, no sale can be made. Thus, all economic activity throughout the supply chain will suffer.

Part 2: The Role of Logistics in the Economy

Logistics adds value by creating utility(From an economic standpoint, Utility the value or usefulness that an item or

service has in fulfilling a want or need)

1) Form Utility • the process of creating the good or service or putting it in the proper form for

the customer to use• Example; Transforms parts and raw materials into a car, form utility is created

2) Possession Utility • the value added to a product or service because the customer is able to take

actual possession. • This is made possible by credit arrangements, loans and so on.

3) Time Utility • the value added by having an item when it is needed

4) Place Utility • having the item or service available where it is needed

The 5 Rights of Logisticsi) Right itemii) Right placeiii) Right timeiv) Right conditionv) Right cost

The Role of Logistics in the Economy

Logistics support marketing:

1) The marketing concept is a “customer-driven” perspective which holds that a business exists to meet customer needs.

2) For a firm to be successful, any marketing effort must integrate the ideas of having the right product, at the right price and available in the right place. Logistics plays a critical role particularly in support of getting the product to the right place.

3) To achieve customer satisfaction, the firm need to examine the trade-offs among alternatives, thereby reducing the overall cost of activities within a system

Part 3: The Role of Logistics in the Organization

Major element of the marketing mix interact and are affected by logistics operation:1) Product

• in an effort to reduce cost, management may decide to reduce product quality, eliminate product feature, reduce customer service and etc.

• In the long term, may reduce the attraction of the product for consumers --> creating a loss

2) Price • Supplier may attempt to increase sales by reducing the price of its product,

changing the terms or service offering.

3) Promotion • increasing the advertising expenditure or the size of direct sale can have a

positive impact on sales. A point exist where the extra money being spent does not yield sufficiently high increases in sales or profit to justify the added expenses.

4) Place • Place is the key element of the marketing mix with which logistics interfaces

directly. Place expenditures support the levels of customer service provided by the organization. (i.e: on-time delivery, consistent transit times)

5) Customer service • is an output of the logistic system. When the organization performs well on all

elements of the marketing mix, customer satisfaction occurs.

The Role of Logistics in the Organization

1. Customer service • getting the right product to the right customer at the right place, in the right

condition and the right time.

2. Demand forecasting/planning • Marketing forecasts customer demand based promotions, pricing, competition

and so on.• Logistics usually becomes involved in forecasting in terms of how much

should be ordered from its supplier and how much of finished product should be transported or held in each market that the organization serves

3. Inventory management • involves trading off the level of inventory held to achieve high customer

service levels with the cost of holding inventory, including capital tied up in inventory, variable storage costs and obsolescence.

4. Logistics communications Communication must occur between:

• The organization and its suppliers and customer• The major functions within the organization, such as logistics,

engineering, accounting, marketing and production.• The various aspect of each logistics activities, such as coordinating

warehousing of material, work in process and finished goods.

5. Material handling • encompasses all aspects of all movement of raw material, work in process or

finished goods within a plant or warehouse.


6.Order processing• the system that an organization has for getting orders from customers,

checking on the status of orders and communicating to customers about them and actually filling the order and making it available to the customer.

• is a key area of customer interface with the organization, it can have a big impact on a customer’s perception of service and satisfaction

• organizations today are turning to advanced order-processing method such as electronic data interchange (EDI) and electronic fund transfer (EFT) to speed the process and improve accuracy and efficiency.

7. PackagingPackaging is valuable both as form of:

• advertising/ marketing Convey important information to inform the customer Pleasing packaging can attract the consumer’s attention

• for protection and storage from a logistical perspective. Provides protection during storage and transport.

8. Parts and service supportProviding after-sale service support

• this may include delivery of repair parts to dealers, stocking adequate spares, picking up defective or malfunctioning products from customers and responding quickly to demand for repairs


9. Plant and warehouse site selection• Determining the location of the company’s plants and warehouses is a

strategic decision that affects not only the costs of transporting raw materials inbound and finished goods outbound, but also customer service levels and speed of respond.

10. Procurement• Is the purchase of materials and services from outside organizations to

support the firm’s operation from production to marketing, sales and logistics.

• also referred to as purchasing, supply management and by a number of other names, includes activities such as supplier selection, negotiation of price, terms and quantities and supplier quality assessment.

11.Return goods handling• Returns make take place because of a problem with the performance of the

item or simply because the customer changed his or her mind.

• return goods handling is complex because it involves moving small quantities of goods back from the customer to the manufacturer


12.Reverse Logistics• Removal and disposal of waste materials left over from the production,

distribution or packaging processes.

13.Traffic and transportation• Key logistics activity is to actually provide for the movement of

materials and goods from point of origin of consumption and perhaps to its ultimate point of disposal as well.

• Transportation involves selection of the mode (e.g., air, rail, water, truck), the routing of the shipment, assuring of compliance with regulations in the region of the country where shipment is occurring and selection of the carrier.

14.Warehousing and storage• Warehousing supports time and place utility by allowing an item to be

produced and held for later consumption.


Question 2

Highly efficient and effective logistics systems provide consumers with goods and services that improve their standard of living.

a)Explain in your own word what is Logistics Management (3 marks)

b) Discuss the five Logistics Cost that might impact the Logistics activities. (9 marks)

c) From your observation, why organizations would optimize in purchasing high number of quantity lot in their logistics system. (3 marks)

Logistics is the management of the flow of goods, information and other resources, including energy and people, between thepoint of origin and the point of consumption in order to meet the requirements of consumers. Logistics involve the integration of information, transportation, inventory, warehousing, materialhandling and packaging.


• the process of a logistics provider participating in the management and administration of a manufacturer’s business

• the logistics provider designs the logistics plan and offers comprehensive services related to the supply chain.

• modern logistics operator aims to offer services that meet customer needs, optimize overall performance of logistics functions and maximize profits and minimize costs across all logistics activities.

• modern logistics is about service and integrated management of the whole supply chain.

Modern Logistics Function

Product

Price Promotion

Place/ customer service levels

Cost trade-offs required in marketing and logistics

Inventory carrying cost

Transportation costs

Lot quantity costs Warehousing costs

Order processing and information costs

Marke

ting

logis

tics

Marketing objective: Allocate resources to the marketing mix to maximize the long run profitability of the firmLogistics objective: Minimize total costs given the customer service objective where total costs = ICC + LQC + TC + WC + OPIC

Question 3

The primary goal of logistics in any organization is to support the organization is to support the organization’s customer service goals in an effective and efficient manner.

a)Discuss all future challenges and areas for logistics performance improvement. (9 marks)

b) Provide examples for a quality management that monitor the organization logistics system. (3 marks)

c) Briefly discuss in your own words the term “boundary-spanning activities”. (3 marks)

Logistics need to meet the challenge and improve its performance to support those goals:

1. Strategic Planning and Participation• Activities such as logistics budgeting and control, inventory planning and

positioning, and customer service have become important parts of the organization’s strategic planning process.

2. Total Quality Management (TQM)• TQM is a philosophy that is integrated in designing logistics systems to

achieve desired results, performing logistics activities and monitoring result.• In logistics – short, predictable transit times, certain levels of in-stock

availability and certain fill rates on customer order.• The ISO 9000 – is an internationally recognized certification program whereby

the quality processes of firms are audited to verify whether they have well-documented and effective quality processes in place.

3. Just-in-time (JIT)• JIT is an inventory management philosophy aimed at reducing waste and

redundant inventory by delivering product, components or materials just when an organization needs them.

• Reduce inventory -> reduce costs.

Part 6: Future Challenges and Areas for Logistics Performance Improvement

4. Quick Response

• QR is a tactics to improve inventory management and efficiency, while speeding inventory flows.

• When fully implemented, QR applies JIT principles throughout the entire supply chain, from raw material suppliers through ultimate customer demand.

• The concept works by:a) Combining electronic data interchange (EDI) with bar coding technology,

so that the customer sales are tracked immediatelyb) This information can be passed on to the manufacturer, who can then

notify its raw material supplierc) Schedule production and deliveries as required to meet replenishment

needs.• This allows inventory reductions while speeding response time, lowering the

number of out-of-stock products and reducing handling and obsolescence.

Future Challenges and Areas for Logistics Performance Improvement

5. Efficient Consumer Response (ECR)

• ECR is an effort to improve the competitiveness of the grocery industry by cutting waste in the supply chain.

• ECR includes the following strategies:a) Widespread implementation of electronic data interchange up and down

the supply chain, both between; Suppliers and manufacturers Manufacturers and distributors Distributors and customers

b) Greater use of point-of-sale data obtained by greater and more accurate use of bar coding

c) Cooperative relationships between manufacturer, distributors, supplier and customers.

d) Continuous replenishment of inventory and flow through distribution (on JIT basis)

e) Improved product management and promotions.



6. Logistics as a Competitive Weapon

• Logistics may be the best source of competitive advantage for a firm because it is less easily duplicated than other elements of the marketing mix; product, price and promotion.

• For example, forming close, ongoing relationships with carriers or logistics service providers can help give the firm a distinct competitive advantage in speed to the customer, reliability, availability or other customer service factors.

7. Accounting for Logistics Costs

• In general, accounting systems have not changed and adapted to accurately account for the many trade-offs inherent in logistics activity and logistics decision making

• More organizations move into activity-based costing (ABC) systems to allocate costs to activities on a more accurate and meaningful basis.

8. Logistics as a Boundary-Spanning Activity

• Logistics plays a key role in activities throughout the supply chain, both within and outside the organization

• Outside organization logistics interfaces with customers in the ordering processing, order

fulfillment and delivery cycles. Interfaces with carriers, warehouses, suppliers and other 3rd parties that

play a role in the supply chain.• Within the organization

logistics interfaces with finance in the planning process and in the analysis of capital expenditure on investment in building and equipment to support distribution, transportation, warehousing, information technology and etc.

logistics interfaces with accounting in establishing logistics costs for various product, customers and distribution channel.

Interfaces with marketing – plays an important role in customer satisfaction by providing high levels of customer service

Interfaces with production – manages the flow of materials or work in process, stocking and shipping the finished product as it is available


9. Global Logistics

• Many leading organizations are heavily involved in international markets through purchasing inputs to production, other importing, exporting, joint ventures, alliances, foreign subsidiaries and divisions, and other means. This creates a need for familiarity with global logistics and global logistics network.

10.Increasing Skill Requirements

• As logistics become increasingly involved in setting corporate strategy and other aspects of the strategic planning process, different skill sets are required in quality issues, global logistics and improving relationships with third party providers.


11. Logistics Information Systems

• The ability to monitor customer demand and inventory level, to act in a timely manner to prevent stockouts and to communicate potential problems to customer.

• May link with a variety of information technology such as EDI to communicate with suppliers, receiving information such as shipment, timing, quantities and even invoicing.

• Use bar coding to scan sales as customers make their purchases.

12.Outsourcing, Partnering and Strategic Alliances

• Outsourcing – an organization hires an outside organization to provide a good or service because this third party is an expert in efficiently providing this good or service, while the organization itself may not be.

• Partnering – the concept of partnering or establishing long term working relationships with supplier of goods or services, customers and third party providers.

• Strategic Alliances – the most close integrated partnerships are often referred to as Strategic Alliances. It must be strategic in nature and must directly support one of the organization’s distinctive competencies.


13. Technology

• Combining information technology with automated warehousing reduces inherent human variability, creating an opportunity to improve customer service.

14. Green Marketing

• Transportation and disposal of hazardous materials are frequently regulated and controlled.

• Organization are continually looking at reducing, reusing and reapplying packaging materials, by-product of production and obsolete items.


Warehousing

Chapter 2

5 questions

Question 1

Warehousing is an integral part of every logistics system. Warehouse activity is an important link between the producers and the customers.

a)Explain in your own word what is warehousing. (3 marks)

b) Discuss the four uses of Warehousing in physical supply and distribution. (8 marks)

c) If you plan to start a company, name the warehouse option that you might consider to use. Which type of warehouse that you will opt to use.(4 marks)

Warehousing

• part of a firm’s logistics system that stores products (raw material, parts, goods-in-process, finished goods) at and between point of origin and point of consumption and provides information to management on the status, condition and disposition of items being stored.

• The term distribution center (DC) is sometimes used, but the terms are not identical. Warehouse is the more generic term.

• Short production runs minimize the amount of inventory held throughout the logistic system by producing quantities near to current demand

• Long production runs lead to larger inventories and increased warehouse requirements.

• Warehousing was necessary if the company was to take advantage of quantity purchase discounts on raw materials or other products. Not only is the per unit price lower as a result of the discount, but if the company pays the freight, transportation costs will be less on a volume purchase because of the transportation economies.

• Increasingly, companies operating with a JIT manufacturing philosophy are negotiating with their suppliers to receive cumulative quantity discounts. Thus, they receive the lower rate base on total yearly order volume rather than individual order size.

Relationships between Warehousing and Production

Warehouse and Customer Service

• Customer service policies, such as a 24-hour delivery standard, may require a number of field warehouses in order to minimize total costs while achieving the standard.

• Changing the market condition may make it necessary to warehouse product in the field, primarily because companies are unable to accurately predict consumer demand and the time of retailer or wholesaler order. By keeping some excess inventory in field warehouse location, companies can response quickly to meet unexpected demand.

• Excess inventory allows manufacturers to fill customer order when shipments to restock the field a warehouse arrive late

Several Uses of Warehousing in physical supply and distribution

Supplier A

Supplier B

Supplier C

Supplier D

Warehouse Plant

Plant A

Plant B

Plant C

Mixing warehouse

Customer 1

Customer 2

Customer 3

Customer 4

Plant A

Plant B

Plant C

Consolidation warehouse

Customer 1

Customer 2

Customer 3

Breakbulk Warehouse

Customer 1

Customer 2

Customer 3

Plant

CL or TL

CL or TL

CL or TL

CL or TL

CL or TL

CL or TL

CL or TL

A B C

A B C

A B C

BA

CL, TL or LTL

CL or TL

CL or TL

CL or TL

CL, TL or LTL

CL, TL or LTL

CL, TL or LTL

CL or TL

CL or TL

CL or TL

CL or TL

LTL

LTL

LTL

A. Manufacturing support

B. Product - Mixing

C. Consolidation

D. Breakbulk

Manufacturing support

• A firm order raw materials, parts, components or supplier from various suppliers, who ship truckload (TL) or carload (CL) quantities to a warehouse

• Items are transferred from the warehouse to the manufacturing plant

Product Mixing

• Often involves multiple plant location (e.g. plant A, B and C) to a central warehouse.• Shipment are usually make in large quantities (TL or CL) to the central warehouse,

where customer orders for multiple product are combined or mixed for shipment

Outbound Consolidation

• TL and CL shipments are made to a central facility from a number of manufacturing locations

• The warehouse consolidates or combines product from the various plants into a single higher volume shipment to the customer

Break-bulk Warehouse

• Facilities that receive large shipments of product manufacturing plants• Several customer orders are combined into a single shipment from the plants to the

break-bulk warehouse.• When the shipment is received at the warehouse, it is broken down into smaller LTL

shipments which are sent to customers.

Question 2 Effective warehousing management involves a

thorough understanding of the functions of warehousing and the service aspects of warehousing decisions.

a)State the two basic types of inventories that can be place into storage. (2 marks)

b) Discuss why does company hold inventories in storage? (4 marks)

c) Briefly discuss the Pull versus Push system warehousing and the types of public warehouses. (9 marks)

WarehousingPart 1: Introduction

Warehouse

• part of a firm’s logistics system that stores products (raw material, parts, goods-in-process, finished goods) at and between point of origin and point of consumption and provides information to management on the status, condition and disposition of items being stored.

• The term distribution center (DC) is sometimes used, but the terms are not identical. Warehouse is the more generic term.

Warehousing has traditionally provided storage of products (referred to as inventory) during all phase of the logistics process. Two basic type of inventories can be place into storage:

1. raw materials, components, and part (physical supply);

2. finished goods (physical distribution).

Why do companies hold inventories in storage?

a) Achieve transportation economies

b) Achieve production economies

c) Maintain a source of supply

d) Take advantages of quantity purchase discount and forward buys

e) Meet changing market condition

Nature and Importance of Warehousing

Push Systems

1.The traditional method of distribution

2.Productions plans are based on capabilities and capacities of the plant

3.The product is produced in the expectation that it will sell

4.When it is produced faster than it can be sold, it is stockpiled at the plant

warehouse

5.If sales cannot be accelerated, then the plant will be slowed down until supply

moves into balance with demand.

6.Warehouse serves to absorb excess production

Pull Systems

1.Depends on information

2.It is based on a constant monitoring of demand

3.There is no need for a reservoir

4.The warehouse serves as a flow-through center offering improved service by

positioning inventory closer to the customer

Pull versus Push Systems in Warehousing

i. Cross-docking

• the warehouses serve primarily as “distribution mixing centers.”

• Product arrive in bulk and is immediately broken down and mixed in the proper range and quantity of product for customer shipment.

• In essence, the product never enters the warehouse.

• Cross-docking is becoming popular among retailers, who can order TL, then remix and immediately ship to individual store locations.

When a firm decides to store product in the field, it faces two warehousingoptions: rented facilities, called public warehousing, or owned or leased facilities, called private warehousing

Types of Warehousing

Contract Warehousing

• “…a long-term mutually beneficial arrangement which provides unique and specially tailored warehousing and logistics service exclusively to one client, where vendor and client share the risks associate with the operation. (There is a) focus on productivity, service and efficiency, not the fee and rate structure itself”.

Types Customer service Financial Considerations

Public • Operating costs tend to be higher because the warehouse attempt to operate at a profit

Contract • Provide higher service levels because of its more specialized facilities and equipment and its better familiarity with the firm’s product, customers and markets

ii. Contract Warehousing VS Public Warehouses

Types of Warehousing

iii. Public Warehouses

1. General Merchandise Warehouse• The most common form storing almost any kind of

product

2. Refrigerated Warehouse• Provide a temperature controlled storage environment• Used for preserving perishable items such as fruits and

vegetables

3. Bonded Warehouse• These warehouses undertake surety bonds and place their

premises under the custody of an agent of the Treasury.• Goods such as imported tobacco and alcoholic beverages

are stored in this type of warehouse, although the government retains control of the goods until they are distributed to the market.

• The importers must pay customs duties

Types of Public Warehouses

4. Household Goods Warehouse• Used for storage of personal property rather than merchandise

5. Special Commodity Warehouse• Used for particular agricultural such as wool, grains and cotton.• Ordinarily, handles one kind of product and offers special

services specific to that product

6. Bulk Storage Warehouses• Provide tank storage of liquids and open or sheltered storage

of dry products such as coal, sand and chemicals.• Provide services such as filling drums from bulk or mixing

various types of chemical with others to produce new compound or mixtures.

Types of Public Warehouses

Question 3 Warehousing serves an important role in firm’s

logistics system. In combination with other activities, it provides the firm’s customers with an acceptable level of service.

a)Briefly discuss in your own words the basic function for warehousing. (6 marks)

b) Briefly discuss the Pull versus Push System Warehousing? (6 marks)

c) State the examples of information that is vital to the successful operation of a warehouse.

(3 marks)

•3 basic functions:1) Movement2) Storage3) Information transfer

Reserve storage and

pallet picking

Case picking

Broken case

picking

Accumulation, sortation, packing and utilization

ShippingCross-docking

Replenishment Replenishment

Direct-putaway to primary

Direct-putaway to reserve

Receiving

Typical warehouse functions and flows

Part 2: Warehousing Operations: Three Functions

a) Receiving - unloading of products from the transportation carrier, the updating of warehouse inventory records, inspection of damage and verification of the merchandise count against order and shipping records

b) Transfer or put-away – the physical movement of the product into the warehouse for storage, movement to areas for specialized services such as consolidation and movement to outbound shipment.

c) Order picking / selection – is the major movement activity and involves regrouping products into the assortments customers desire. Packing slip are made up at this point.

d) Cross docking – bypasses the storage activity by transferring items directly from the receiving dock to the shipping dock.

e) Shipping – consists of product staging and physically moving the assembled orders onto carrier equipment, adjusting inventory and checking orders to be shipped.

MovementDivided into several activities:

Can be performed on a temporary or a semi-permanent basis

a) Temporary storage

Emphasizes the movement function of the warehouse and includes only the storage of product necessary for basic inventory replenishment.

b) Semi-permanent storage

Is the storage of inventory in excess of that required for normal replenishment -> this inventory referred as buffer of safety stock

The most conditions leading to semi-permanent storage;1) Seasonal demand2) Erratic demand3) Speculation or forward buying4) Special deals such as quantity discount

Storage

Occurs simultaneously with the movement and storage function

Management needs timely and accurate information as it attempts to administer the warehouse activity.

Examples of information that is vital to the successful operation of a warehouse; Inventory levels Throughput levels (i.e., the amount of product moving

through the warehouse) Stock keeping locations Inbound and outbound shipment Customer data Facility space utilization

Organizations are relying on computerized information transfer utilizing electronic data interchange (EDI) and bar coding to improve both the speed and accuracy of information transfer.

•Information Transfer

Push Systems

1.The traditional method of distribution

2.Productions plans are based on capabilities and capacities of the plant

3.The product is produced in the expectation that it will sell

4.When it is produced faster than it can be sold, it is stockpiled at the plant

warehouse

5.If sales cannot be accelerated, then the plant will be slowed down until supply

moves into balance with demand.

6.Warehouse serves to absorb excess production

Pull Systems

1.Depends on information

2.It is based on a constant monitoring of demand

3.There is no need for a reservoir

4.The warehouse serves as a flow-through center offering improved service by

positioning inventory closer to the customer

Pull versus Push Systems in Warehousing

Question 4One of the most important warehousing decisions

a company make is whether to use public or private facilities.

a)Briefly discuss in your own words the advantages and disadvantages of Public and Private warehousing . (9 marks)

b) State the impact of having a good warehouse Layout and Design? (3 marks)

c) Which type of warehouse would you choose when you plan to set up a new manufacturing company. (3 marks)

Advantages and Disadvantages of Public Warehousing

The benefits of uses public warehouses rather than private warehousing

1.Conservation of capital

• Require no capital investment from the user• The user avoids the investment in buildings, land and material

handling equipment

2.The ability to increase warehouse space to cover peak requirement

• If a firm’s operations are subjected to seasonality, the public warehouse allows the user to rent as much storage space as needed to meet peak requirement

Chapter 3: Public (rented) versus Private Warehousing (owned or leased)

3.Reduced risk

• The user firm can switch to another facility in a short period of time, often within 30 days.

4.Economies of scale

• Can offer a number of specialized services more economically than a private warehouse; Packaging of manufacturers product for shipping Consolidation of damaged and recalled product for

shipment to the manufacturer in CL or TL quantities. Can performed the reworking of damaged product.

5. Greater Flexibility

• Require only a short term contract and short term commitments.

• Short term contract make it is easy for firms to change warehouse locations

• A firm that uses public warehouses does not have to hire or lay off employees as the volume of business changes

6. Tax advantages

• If the company does not currently own property in a state, it may find it advantageous to use a public warehouse

• Since it doesn’t own property, it is not subjected to taxes, which is quite substantial

7. Knows Exact Warehousing Costs

• know the exact storage and handling costs because we receives a bill each month

• The user can forecast costs for different levels of activity because the costs are known in advance.

8. Can Minimize Labor Disputes

• The court has ruled that a labor union does not have the right to picket a public warehouse when the union is involved in a labor dispute with one of the customers of that warehouse.

Public (rented) versus Private Warehousing (owned or leased)

Advantages and Disadvantages of Public Warehousing

The disadvantages of uses public warehouses

1. Communication Problems

Not all computer terminals and system are compatible A warehouse operator may hesitate to add another terminal

for only one customer

2. Lack of Specialized Services

Many public warehouse facilities provide only local service A manufacturer that wants to use public warehouses for

national distribution may find it necessary to deal with several different operators and monitors several contractual agreements

3. Space May Not Be Available

Public warehousing space may not be available when and where a firm wants it.

Shortage of space do occur periodically in selected markets, which can have an adverse affect on the logistics and marketing strategies of a firm.

Public (rented) versus Private Warehousing (owned or leased)Advantages and Disadvantages of Public Warehousing

The Benefits of uses Private Warehousing

1. Degree of Control

The firm has direct control of and responsibility for the product until the customer takes possession or delivery

2. Flexibility

With warehouse control comes a greater degree of flexibility to design and operate the warehouse to fit the needs of customers and the characteristics of the product.

The warehouse can be modified through expansion or renovation to facilitate product changes or it can be converted to manufacturing plant or branch office location.

3. Less Costly Over the Long Term Private warehousing can be less costly over the long term

3. Better Use of Human Resources

• There is greater care in handling and storage when the firm’s own workforce operates the warehouse

4. Tax Benefits

• Depreciation allowances on buildings and equipment reduce taxes payable

5. Intangible Benefits

• When a firm distributes its product through a private warehouse, it can give the customer a sense of permanence and continuity of business operation

• The customers sees the company as a stable, dependable and lasting supplier of product

Public (rented) VS Private Warehousing (owned or leased)

Advantages and Disadvantages of Private Warehousing

The disadvantages of uses Private Warehousing

1. Lack of Flexibility

Many experts feel that the major drawback of private warehousing is the same as one its main advantages Flexibility

May be too costly because of its fixed size and costs In a short run, a private facility cannot expand and contract

to meet increases or decreases in demand

2. Financial Constraints

high costs involved, many firms are simply unable to build or buy a warehouse

The hiring and training employees, the purchase of material handling equipment makes start up a costly and time consuming process

A warehouse is a long-term, often risky investment which later may be difficult to sell because of its customized design

3. Rate of Return

At a minimum, the investment in a corporate warehouse should generate the same rate of returns as the firm’s other investments.

most companies find it advantageous to use a combination of public and private warehousing.

It is best to use private warehousing to handle the basic inventory levels

On the other hand, any extra volume can be stored in the public warehouse during peak periods where private warehouse is full.

Facility Development

3. Warehouse Layout and Design

• Good warehouse layout can:

1. Increase output

2. Improve product flow

3. Reduce costs

4. Improve service to customer

5. Provide better employee working conditions

Question 5One of the most important decisions a logistics

executive faces is how to develop an optimal warehousing network for the firm’s products and customers

a)State the 4 factors are significantly in deciding the number of warehousing facilities (2 marks)

b) Briefly explain in your own words the warehouse location analysis and selection approach? (8 marks)

c) Discuss the 4 ways to improve warehouse productivity. (5 marks)

1. Size and Number of Warehouse

• Size can be defined in terms of square footage or cubic space• Cubic space refer to the total volume of space available

within a facility• Greater space required when product are large, production

lead time is long, manual material handling are used and demand is erratic and unpredictable

• 4 factors are significantly in deciding the number of warehousing facilitiesa) Cost of Lost Sales ↑, no. warehouse ↓b) Inventory Costs ↑, no. warehouse ↑c) Warehousing Costs ↑, no. warehouse ↑d) Transportation Costs ↑, no. warehouse ↓

Part 4: Facility Development


2. Location Analysis

• Macro Approaches;

Market Positioned

Locates warehouses nearest to the final customer Maximize CSL and enables to utilize transportation

economies


Production Positioned

Locates warehouses in close proximity to sources of supply or production facilities

The factors influence the placement are perishability of raw materials, no. of product in the firm’s mix, assortment of products ordered by customer and transportation consolidation rates

Intermediately Positioned

Strategy that places warehouses at a midpoint location between the final customer and the producer

If it must offer high customer service level and if it has a varied product offering manufactured at several plant location


• Micro Approaches;

Quality and variety of transportation carriers serving the site

Quality and quantity of available labor Labor rates Cost and quality of industrial land Potential for expansion Cost of construction Cost and availability of utilities Tax structure Nature of the community environment

1. Method-Related Programs

• Consider alternative processes for achieving desired result• Warehouse cube utilization, warehouse layout and design,

method and procedures analysis, batch picking of small order, wrap packaging and standardized packaging

2. Equipment-Related Programs

• The use of new technology such as optical scanners, automatic labeling devices, automated handling equipment, communication devices, computer and automated storage/ retrieval systems (AS/RS) and conveyors

Part 5: Improving Warehouse Productivity

3. Systems-Related Programs

• Include the use of router/location systems, geographic or zone picking and random location of products in the warehouse

4. Training/ Motivation-Related Programs

• Include employee training, management development programs, work teams, incentive systems and awards recognition

Part 5: Improving Warehouse Productivity

Inventory Concept

Chapter 3

4 questions

Inventory is a large and costly investment. Better management of corporate inventories can improve cash flow and return on investment

a) Briefly explain what is Inventory Concept and why is it so important to logistics system (3marks)

b) Discuss the purposes to hold inventory in firms or organization (9 marks)

c) Give your explanation on reverse logistics and the impact to inventory (3 marks)

Question 1

Inventory Concepts

Inventory

• Inventory is a list/record for goods and materials, held available in stock by a business

• Is a large and costly investment.

• Better management of corporate inventories can improve cash flow and return on investment

Inventory serves 5 purposes

1. It enables the firm to achieve economies of scale2. It balances supply and demand3. It enables specialization in manufacturing4. It provides protection from uncertainties in demand

and order cycle5. It acts as a buffer between critical interfaces within

the channel of distribution

Part 2: Basic Inventory Concept

• Inventory is required to realized the economies of scale in purchasing, transportation or manufacturing

• Example: ordering large quantities of raw materials/ finished goods inventory allows the manufacturer to take advantage of the per unit price reductions associated with the volume purchases.

• Purchased materials have a lower transportation cost per unit if ordered in large volumes because less handling is required.

1. Economies of scale

• Seasonal supply or demand may make it necessary for a firm to hold inventory

• Example: Boxed Chocolate sales increase during Mother’s Day

• Demand for a product may be relatively stable throughout the year, but raw materials may be available only at certain times during the year (e.g. producer of canned fruits and vegetables) this makes necessary to manufacture finished products in excess of current demand and hold in inventory

2. Balancing Supply and Demand for Seasonal Inventories

• Inventory makes it possible for each of a firm’s plants to specialize in the products that it manufactures

• The finished product can be shipped to field warehouses where they are mixed to fill customer order

• The specialization by facility is known as Focused Factories

3. Specialization

• Inventory is held to prevent a stock-out in the case of variability in demand or variability in the replenishment cycle

• example: price increase, supply shortage and to maintain a source of supply

4. Protection from Uncertainties and Order Cycle

• Often maintained between manufacturing operations within a plant to avoid a shutdown if a critical piece of equipment were to break down

• Inventory planning is critical to successful manufacturing operations because a shortage of raw materials can shut down the production line or lead to a modification of the production schedule

• While shortages of raw materials can disrupt normal manufacturing operations, excessive inventories can increase inventory carrying cost and reduce profitability

• Finished good inventory can be used as a means of improving customer service levels by reducing the stock-out due to unanticipated demand or variability in lead time

Work-in-process Inventory

• Inventory is held throughout the supply chain to act as a buffer for the following critical interfaces:

1. Supplier – procurement (purchasing)2. Procurement – production3. Production – marketing4. Marketing – distribution5. Distribution – intermediary6. Intermediary – consumer/user

5. Inventory as a Buffer

Raw materials inventory

Supplier inventory

Work-in-process

inventory

Finished goods

inventory at plant

location

Retail inventory

Reworking or repackaging of product

Waste and by product

Waste disposal KEY: Forward logistics flow

Reverse logistics plow

The Logistics Flow

Reverse logistic move product backward through the channel for a number of reasonExample: a customer may return a product because it is damaged/ manufacturer may need to recall a product because of defects

Finished goods inventory at field

location

Consumer inventory

Inventory can be classified based on the reasons for which they are accumulated and why they exist.

a) Briefly explain in your own words the types of inventory (9 marks)

b) From your opinion, why inventory is held throughout the supply chain (3 marks)

c) Which types of inventory associate with antique products and why company would hold such inventory (3 marks)

Question 2

1. Cycle stock

• That results from replenishment of inventory sold or used• It is required in order to meet demand under conditions of

certainty; when the firm can predict demand and replenishment times (lead times)

• Example: if the rate of sales for a product is a constant 20 units per day and the lead time is always 10 days no inventory beyond the cycle stock would be required

Types of Inventory

2. In-transit Inventories

• Items that are en route from one location to another• Considered part of cycle stock even though they are not

available for sale or shipment until after they arrive at the destination

• In-transit inventory should be considered as inventory at the place of shipment origin since the items are not available for use, sale or subsequent reshipment

3. Safety or Buffer Stock

• Is held in excess of cycle stock because of uncertainty in demand or lead time

• Average inventory at a stock-keeping location is equal to half the order quantity plus the safety stock

4. Speculative Stock

• Is inventory held for reason other than satisfying current demand.

• Example: materials may be purchased in volumes larger than necessary in order to receive quantity discount, because of a forecasted price increase or materials shortage or to protect against the possibility of a strike.

5. Seasonal Stock

• Is a form of speculative stock that involves the accumulation of inventory before a seasonal periods begins

• Example: agricultural product, fashion industry and seasonal items

6.Dead Stock

• Refers to items for which no demand has been registered for some specified period of time

• Might be obsolete throughout a company or only at one stock-keeping location

• Inventory is held throughout the supply chain to act as a buffer for the following critical interfaces:

1. Supplier – procurement (purchasing)2. Procurement – production3. Production – marketing4. Marketing – distribution5. Distribution – intermediary6. Intermediary – consumer/user

5. Inventory as a Buffer

The key measure of effective inventory management is the impact that inventory has on corporate profitability

a) Explain in your own words the two measures of Inventory Management Effectiveness (6 marks)

b) Briefly discuss the Impact of the Demand patterns on Inventory Management (6 marks)

c) Which type of Demand pattern would you prefer for your business organization. State your reason.(3 marks)

Question 3

Measures of Inventory Management Effectiveness

• The key measure of effective inventory management is the impact that inventory has on corporate profitability

• Effective inventory management can improve profitability by lowering costs or supporting increased sale

• Better inventory management can increase the ability to control and predict how inventory investment will change in response to management policy

Part 3: Basic Inventory Management

• Measured as:

Annual dollar sales volumeAverage dollar inventory investment

• A higher number is preferred, indicating that inventory moves through the firm’s operation quickly, rather than being held for an extensive period

• Example: annual sales = RM500,000 valued at cost and an average inventory investment of RM100,000 would have a turnover of five times.

Inventory Turnover

• A logistics measure of inventory effectiveness at meeting demands

• Is a common measure of the customer service performance of inventory

• Low inventory level can reduce fill rates, hurting customer service and creating loss sales

• Increased sales are often possible if high levels of inventory lead to better-in-stock availability and more and more consistent service level

• Example: Fill rate = 96% 4% of requested unit were unavailable when ordered by the customer

Fill Rate

Pull versus Push Systems

• Pull System If a company waits to produce until customer demand it (customer demand ‘pull’ the inventory)

• Push System if a firm produces to forecast or anticipated sales to customers (the firm is pushing its inventory into the market in anticipation of sales)

Impact of Demand Patterns on Inventory Management

• Independent versus Dependent Demand inventory focuses on whether the demand for an item depends on demand

• An independent demand item is a finished good

• A dependent demand item are a raw materials and components that go into the production of that finished good

• The demand for raw materials or components is derived based on the demand for the finished product

• The need for dependent demand items can be calculated based on the production schedule of the finished product

• The need for production of the finished good may be forecasted or based on customer demand/order

Independent versus Dependent Demand

The best ordering policy can be determined by using Economic Order Quantity which is a concept that determines the optimal order quantity

a) Discuss in your own words the concept of Economic Order quantity (6 marks)

b) Explain in detail the policy of Fixed Order Point and Fixed Order Interval(6 marks)

c) Which type of fixed ordering policy would you prefer for your organization. State your reasons.(3 marks)

Question 4

• The best policy by minimizing the total of inventory carrying costs and ordering costs

• The EOQ is a concept which determines the optimal order quantity on the basis of ordering and carrying costs

• When incremental ordering costs equal incremental carrying costs, the most economic order quantity exists

Economic Order Quantity

Two questions seem appropriate in reference to the example of the previous diagram

1. Should we place order for 200, 400, or 600 units, or some other quality?

2. What is the impact on inventory if orders are place at 10, 20, or 30-day intervals, or some other time period? Assuming constant demand and lead time, sale of 20 units per day, and 240 working days per year, annual sales will be 4,800 units. If orders are place every 10 days, 24 orders off 200 units will be placed. With a 20-day order interval, 12 orders of 400 units are required. If the average inventory is 100, 200, and 300 units, respectively. Which of these policies would be best?

• The EOQ in unit can be calculated using the following formula;

EOQ = 2PDCV

P = The ordering cost (RM per order)D = Annual demand or usage of product (number of unit)C = Annual inventory carrying cost (as a percentage of product

cost or value)V = Average cost or value of one unit of inventory

• Example;

P = RM40D = 4800 unitsC = 25%V = RM100 per unit

EOQ = 2 (40)(4800)(25%)(100)

= 124 units (rounded to 120)

Economic Order Quantity

√√

√

Size of order

Inventory carrying cost

Total cost

Annual Cost(dollars) Lowest total cost

(EOQ)

Ordering cost

Cost trade-offs required to determine the most economical order quantity

Fixed Order Point

• An order is placed when inventory on hand reaches a predetermined minimum level necessary to satisfy demand during the order cycle

• The automated inventory control system normally generates an order or at least a management report when the reorder point is reached

Fixed Order Point versus Fixed Order Interval Policy

Fixed Order Interval

• Inventory level are reviewed at a certain, set time interval, perhaps every week

• An order is placed for a variable amount of inventory, whatever is required to get the company back to its desired inventory level

• A weekly order may be placed to reduce ordering costs and take advantage of purchase volume discounts and freight consolidation

Chapter 4: Purchasing

5 Questions

Purchasing is looked upon primarily as a service function which is responsible in questioning the customer needs and forge long-term relationships with suppliers.

a) Describe in your own words the definition and the role of purchasing in the Supply Chain Management (3 marks)

b) Briefly discuss the objectives and the importance of purchasing in total customer satisfaction (6 marks)

c) Describe in your own words the strategic role of purchasing .(6 marks)

Question 1

Purchasing

Part 1: Introduction

• Purchasing refers to a business or organization attempting to acquire goods or services to accomplish the goals of the enterprise

Part 2: The Role of Purchasing in the Supply Chain

• Purchasing is responsible primarily for inbound or upstream, channel activities whereas logistics spans both inbound and outbound relationship and material flows

Performance metrics

Key

bu

sin

ess

pro

cess

es

Customer relationship management

Customer service management

Demand management

Order fulfillment

Manufacturing flow management

Procurement

Product development and commercialization

Returns channel

Logistics Management

Information flow

Purchasing

MRP

Tier 1supplier

MRP

managementMaterials

MRP

Production

MPS

distributionPhysical

DRP DRP

Customer

DRP

Product Flow

Just-in-time

EDI EDIQuick response

supplierTier 2

MRP

ConsumerMarketingand sales

Supply Chain Management

Objectives:

• To meet the needs of the manufacturing function or other internal functions for which it was buying

• Focused on getting the right product or service to the right place at the right time, in the right quantity, in the right condition or quality and from the right supplier at the right price

• Played a role in keeping the operation running smoothly by ensuring a reliable source of supply

Part 3: Purchasing Activities

2. The Role of Purchasing in Total Customer Satisfaction

• The receipt of high quality, reliable goods and services on a timely basis at a reasonable cost often directly affects customer satisfaction

• An organization cannot provide its ultimate customers with better quality goods and services than it receives from its supplier. If a supplier is late with delivery or has quality problems, the quality and availability of the product or service to the customer will be affected


Customer

Total customer satisfaction

Quality Cost Delivery Service Quantity Strategic

Organization

Quality Cost Delivery Service Quantity Strategic

Suppliers

Total Customer Satisfaction Depends on Supplier Performance


3. The Strategic Role of Purchasing

• Is to perform sourcing related activities in a way that support the overall objectives of the organization

i. Access to External Markets

• Through external contacts with the supply market, purchasing can gain important about new technology, potential new materials or services, new sources of supply and changes in market conditions


ii. Supplier Development and Relationship Management

• Purchasing can help support the organization’s strategic success by identifying new and existing suppliers

• Getting suppliers involved early in the development of new products and services or modifications to existing offering can reduce development times

• Among the primary purchasing activities are supplier selection, evaluation and ongoing management (sourcing), total quality management and purchasing planning


iii. Relationship to Other Function

• Virtually every department within an organization relies on the purchasing function for some type of information and support

• Purchasing often has the same functional reporting relationship as logistics, which is helpful for coordinating materials management

• Purchasing and logistics need to work closely in coordinating inbound logistics and associated material flows


Purchasing managers may consider a broad range of factors when making purchasing decision such as lead time, on time delivery performance, price competitiveness and post purchase sales support .

a) Briefly discuss the 6 major purchase categories in most companies (6 marks)

b) Describe in your own words the concept of JIT and JIT 2, and why purchasing play a significant role in these concepts. (6 marks)

c) From your opinion, why do you need to evaluate your supplier after establishing relationship? (3 marks)

Question 2

Purchase Categories

• There are 6 major purchase categories in most companies:

a) Component partsb) Raw materialsc) Operating suppliesd) Support equipmente) Process equipmentf) Services


6. Just-in-Time (JIT)

• JIT focuses on the identification and elimination of waste wherever it is found in the manufacturing system

• Elimination of waste aim of reducing waste and cost throughout the entire supply chain

• JIT implementation involves the initiation of a “pull” system of manufacturing (matching production to known demand)

• the benefits include; significant reductions of raw material, work-in-process, and finished good inventories and large decreases in the amount of space required for the manufacturing process


12. JIT II

• JIT II is an innovative type of purchasing relationship which aims JIT principles at the purchasing function

• In JIT II, the supplier places one of its employees, called an “in-plant,” in the buying company’s office, replacing a purchaser, planner, and sales person.

• The in-plant representative places order, practices concurrent engineering, and has full access to all of buyer’s facilities, information, and employees.

• The supplier benefits include greater integration with the customer, improved communications, more efficient administrative process, and savings on “sales effort.”


In purchasing process, the most important activity is selecting the best supplier from among a number of suppliers that can provide the needed material .

a) Discuss the 5 phases in the selection and management of purchasing relationships.(9 marks)

b) Describe the importance and examples of the purchase agreement. (3 marks)

c) From your opinion, would you like to practise concurrent engineering in your new established organization with your supplier? State your reason. (3 marks)

Question 3

5 phases in the selection development and management of purchasing relationships

Phase 2-Identify potential suppliers• Determine selection criteria/approach• Identify potential suppliers

Phase 1-Preliminary phase• Establish need for purchase• Form team is needed

Phase 3-Screen and select• Contact potential suppliers• Evaluate suppliers• Choose

Phase 4-Establish relationship• Document expectation/contacts• provide high attention level• Give prompt feedback

Phase 5-Evaluate relationship• Continue at current level• Expand/build relationship• Reduce/dissolve interaction


7. Purchase Agreement

• The purchase order may specify price and overall quantity, but the supplier will deliver in accordance with a schedule or with daily production needs

• The buyer expects and receives the exact quantity

• Saves much time in negotiating and pricing the order

9. “Loose” Engineering Specifications/ Early Supplier Involvement

• The concept of getting the supplier involved in the design process is often called early supplier involvement (ESI)

• Concurrent engineering is a type of early supplier involvement where the engineers in the buying and selling firms work together on product development or product improvement.

• Engineers and quality control people may pay frequent visit to a supplier’s plant to answer engineering questions and identify potential quality problem before they surface.


Strategic planning for purchasing is important to determine whether materials problems or shortages might jeopardize current or future production of new or existing product.

a) Briefly discuss the strategic planning criteria for predicted and unpredicted events. (8 marks)

b) Describe in your own words the concept of forward and speculative buying to identify the differences. (4 marks)

c) From your opinion, would you prefer to practise stockless purchasing in your new established organization? State your reason. (3 marks)

Question 4

Strategic Planning for Purchasing

• Strategic planning for purchasing involves the identification of critical purchase, supply market analysis, risk assessment, and strategy development and implementation

• It is important to determine whether materials problems or shortages might jeopardize current or future production of new or existing products, whether materials quality can be expected to change, whether price are likely to increase or decrease, and the appropriateness of forward buying.

Part 4: Purchasing Research and Planning

Strategic Planning for Purchasing

Identification of critical purchase

Supply Market

Analysis

Risk Assessment

Strategy Development

and implementation


Typical criteria to use in identifying critical purchases

1) Percentage of product cost2) Percentage of total purchase

expenditure

Typical criteria to use to determine the risk in the

supply market

1) Number of suppliers2) Availability of raw material to

supplier3) Supplier cost4) Technology trends

Typical criteria to use in Risk Assessment

1) Determine the probability of best or worst conditions occurring


What?Quality VS Cost

How much?Large VS Small Qty

When?Now or LaterForward buy

Where?Local, international

What price?Lower, Standard

Supply Strategy Development Questions develop for predicted events


Forward Buying versus Speculative Buying

• Forward buying buy more of a product than is required for current consumption to protect the organization from anticipated shortages or to delay the impact of rising prices

• When using this strategy, the purchasing manager must evaluate the trade-off between inventory carrying cost increases and the risk of supply constriction or increased prices

Part 5: Purchasing Cost Management


• Speculative buying purchases made not for internal consumption, but to resell at a later date for profit

• Speculative goods may be the same as goods purchased for consumption, but the quantities purchased will be in excess of current or future needs

• An example occurs in diverting of retail goods


Stockless Purchasing

• Arrangement in which a supplier holds the items ordered by the customer in its own warehouse, and releases them as and when required by the customer

• Is a means of reducing material-related costs such as unit purchase price, transportation, inventory and administration

• The objectives of stockless purchasing are to;1. Lower inventory levels2. Reduce the supplier base3. Reduce administrative cost and paperwork4. Provide for timely delivery of material directly to the user


Managing supplier relationship is very important in sharing business rewarding elements based mutual trust, openness and shared risk.

a) Briefly discuss the type of partnerships exist in supplier relationship. (7 marks)

b) Describe in your own words how handle price increase requests from suppliers. (5 marks)

c) From your opinion, which cost management strategies would you prefer for your organization? State your reason. (3 marks)

Question 5

Arm’s Length

Vertical Integration

Joint Venture

Type IIIType IIType 1

Partnerships

Types of Partnerships

Part 6: Managing Supplier Relationship

Arm’s Length

• a seller typically offers standard product/ services to a wide range of customer who receive standard terms and conditions

• When the exchanges end, the relationship ends

Type I

• The organization involved recognize each other as partners and on a limited basis coordinate activities and planning.

• The partnership usually has a short term focus and involves only one division or functional area within each organization


Type II

• The organizations involved progress beyond coordination of activities to integration of activities

• Although not expected to last “forever”, the partnerships has a long term horizon

• Multiple divisions and functions within the firm are involved in the partnerships

Type III

• The organizations share a significant level of integration• Each party views the other as an extension of their own firm• Typically no “end date” for the partnerships exists


Price Change Management

• It is important to work with suppliers to restrict price increase to a reasonable and equitable level

• Purchasing should work with the supplier to offset price increase through other improvements, such as reduced delivery lead times, better service, or other opportunities

• To restrict price increases, management should require price protection clauses and advance notification of 30, 60, 90 days for price increases

• Purchasing should determine the impact of engineering changes on product cost before it recommends making these changes


Determine the reason

for the price change request

Strategies to deal with

price increases

Review the price change

by management

Justification of the price change by suppliers

Alternatives for reducing other price elements to offset the

price increase

Handling Price Increase Requests From Suppliers



• Forward buying buy more of a product than is required for current consumption to protect the organization from anticipated shortages or to delay the impact of rising prices

• When using this strategy, the purchasing manager must evaluate the trade-off between inventory carrying cost increases and the risk of supply constriction or increased prices



• Speculative buying purchases made not for internal consumption, but to resell at a later date for profit

• Speculative goods may be the same as goods purchased for consumption, but the quantities purchased will be in excess of current or future needs

• An example occurs in diverting of retail goods


Volume Contract

• Way to leverage purchase requirements over time, between various business units/ locations in the company

• As a result of combining purchases can reduce purchase prices and administration costs

• An increase in the purchase quantity can enable suppliers to reduce their costs and prices as a result of production/ purchasing economies

• Cumulative volume discount allows a buyer to combine purchase volume and getting lower prices

• Non-cumulative discount the price based on the amount of each order


Stockless Purchasing

• Arrangement in which a supplier holds the items ordered by the customer in its own warehouse, and releases them as and when required by the customer

• Is a means of reducing material-related costs such as unit purchase price, transportation, inventory and administration

• The objectives of stockless purchasing are to;1. Lower inventory levels2. Reduce the supplier base3. Reduce administrative cost and paperwork4. Provide for timely delivery of material directly to the user


Chapter 5: Transportation

5 questions

Efficient transportation systems are the hallmark of industrialized society that moves product arrive on time, undamaged and in the quantities required.

a) Describe in your own words the function of transportation in logistics system.(3 marks)

b) Briefly discuss the two factors that can influence transportation cost and pricing(9 marks)

c) From your opinion, which type of carrier services would you prefer for your organization? State your reason.(3 marks)

Question 1

PART 1: Introduction

Transportation Provides Value-Added through Place and Time Utility

Place Utility: The value added to the product when product is moved from they are produced to where they are needed

Time Utility: Determines how fast and how consistently a product moves from one point to another

Transportation is the Largest Logistics Cost

• Transportation is one of the largest logistics costs

• The efficient management of transportation becomes more important to a firm as inbound and outbound transportation’s share of product cost increases


Factors Influencing Transportation Costs and Pricing

Can be grouped into 2 major categories:

Product Related Factors Market Related Factors


• Product-related factors

1. Density refers to a product’s weight-to-volume ratio Items such as steel, canned food, building

product and bulk paper have high weight-to-volume ratios

Electronics, clothing, luggage and toys have low weight-to-volume ratios

Low density product (low weight-to-volume ratios) tend to cost more to transport on a per pound (kilo) basis than high-density product


2. Stowability

Degree to which a product can fill the available space in a transport vehicle

Example; grain, ore and petroleum product in bulk have excellent stow-ability because they can completely fill the container

Automobiles and machinery do not have good stow-ability or cube utilization

A product’s stow-ability depends on its size, shape, fragility and other physical characteristics


3. Ease or Difficulty of Handling

Difficult to handle items are more costly to transport

Product that are uniform in their physical characteristics that can be manipulated with material handling equipment require less handling expense and are therefore less costly to transport


4. Liability

Product that have high value-to-weight ratios are easily damaged and are subject to higher rates of theft or pilferage, cost more to transport


• Market-Related Factors

Location of markets which determines the distance goods must be transported

Nature and extent of government regulation of transport carriers

Balance or imbalance of freight traffic into and out of a market

Seasonality of product movements Whether the product is transported domestically

and internationally


6. Third Parties

• Third parties are companies that provide linkages between shippers and carriers

• There are several type of third parties, including; transportation brokers freight forwarders (domestic and foreign) shippers’ associations inter-modal marketing companies (shippers’

agents) third-party logistics service providers.

Part 2: Carrier Characteristics and Services

7. Small-Package Carriers

• Parcel Post

• provides both surface and air parcel post services

• to companies shipping small packages • The advantages of parcel post;

low cost wide geographical coverage, both

domestically and internationally


8. Inter-modal Services

• Piggyback (TOFC/COFC) a motor carrier trailer or a container is placed on

a rail flatcar and transported from one terminal to another

Axles can be placed under the containers, so they can be delivered by a truck

At the terminal facilities, motor carriers perform the pickup and delivery functions

Piggyback service thus combines the low cost of long-haul rail movement with the flexibility and convenience of truck movement


Transportation moves products to markets that are geographically separated and provides added value to customers when the products arrive, creating place utility and contributing time utility.

a) Briefly explain in detail the 5 transportation characteristics and provide example to support your explanation (7 marks)

b) Describe in your own words the concept, advantages and disadvantages of roadrailers (5 marks)

c) From your opinion, which third parties services would you prefer for your organization for a single mode large shipment transportation? State your reason. (3 marks)

Question 2

1. Motor

• Motor carriage offer fast, reliable service with little damage or loss in transit. Most consumer goods are transported by motor carrier.

• Domestically, motor carriers compete with air for small shipments (pickup & delivery operation~point to point services) for 500miles or less and rail for large shipments

• Compete with railroads for truckload (TL) shipment that are transported 500 miles or more


• Motor carriers are very flexible and versatile

Flexible can offer point-to-point service between almost any origin-destination combination (network of over 4million miles of roads)

Versatile motor can transport products of varying sizes and weights over any distance


2. Rail

• Rail transport costs less than air motor carriage• Lacks the versatility and flexibility of motor carriers

because it is limited to fixed track facilities• Provide terminal-to-terminal service rather than

point-to-point service unless companies have a rail siding at their facility


• Disadvantages in terms of transit time and frequency of service if compared to motor carriers

• Some of this rail disadvantages may be overcome through the use of trailer-on-flatcar (TOFC) or container-on-flatcar (COFC) service (rail or water movements combined with the flexibility of trucking)

• Trailer-on-flatcar (TOFC) or container-on-flatcar (COFC) service offer the economy of rail and water movements combined with the flexibility of trucking

• Refer as piggyback services that would a benefit to logistics transportation


3. Air• Most view as a premium service because of its

higher cost• Offers the quickest time-in-transit of any transport

mode• Air carriers generally handle high-value products • usually cannot be cost-justified for low-value items,

because the high price of air freight would represent too large a percentage of the product cost

• Air transport provides reliable service and rapid time-in-transit, but terminal and delivery delays and congestion may appreciably reduce some of this advantage.


4. Water

• can be broken down into several distinct categories:

1) inland water way, such as rivers and canals2) lakes3) coastal and intercostals ocean 4) international deep sea


4. Water (cont’d)

• limited in their movement by the availability of lakes, rivers, canals, or intercostals waterways

• Generally, water is the dominant mode in international shipping

• the most inexpensive method of shipping high-bulk, low-value commodities

• The development of very large crude carriers (VLCCs), or supertankers, has enabled marine shipping to assume a vital role in the transport of petroleum between oil-producing and oil-consuming countries


5. Pipeline

• transport only a limited number of product, including natural gas, crude oil, petroleum products, water, chemicals, and slurry products

• Pipeline offer the shipper an extremely high level of service dependability at a relatively low cost


5. Pipeline (cont’d)

• Pipelines are able to deliver their product on time because of the following factors;1. The flows of products within the pipeline are

monitored and controlled by computer2. Losses and damages due to pipeline leaks or

breaks are extremely rare3. Climatic conditions have minimal effects on

product moving in pipeline4. Pipelines are not labor-intensive; Therefore,

strikes or employee absences have little effect on their operation


• Roadrailers

combined motor and rail transport in a single piece of equipment

the trailer has both rubber truck tires and steel rails wheels

Over highways, tractor power units transport the trailers in the normal way, but instead of placing the trailer on a flatcar for rail movement, the wheels of the trailer are retracted and the trailer rides directly on the rail tracks


• The advantages : a) rail flatcars are not requiredb) the switching time to change wheels on the

trailer is less than loading and unloading the trailer from the flatcar

• The disadvantages : a) the added weight of the rail wheels reduces

fuel efficiencyb) higher movement costs in addition to the

higher cost of equipment

• The disadvantages have tended to outweight the advantages, resulting in very low usage of this intermodal option


The most important transportation characteristics affecting customer service levels are dependability, time-in-transit, market coverage, flexibility and loss/damage performance.

a) Discuss the carrier services that may be selected to transport products.(9 marks)

b) Describe the advantages of pipeline carrier characteristics. (3 marks)

c) Selangor Bangi Company is a company in Bangi producing A4 paper for office usage. As a logistics advisor which is the best transportation method to deliver the A4 paper to domestics market (3 marks)

Question 3

6. Third Parties

• Third parties are companies that provide linkages between shippers and carriers

• There are several type of third parties, including; transportation brokers freight forwarders (domestic and foreign) shippers’ associations inter-modal marketing companies (shippers’

agents) third-party logistics service providers.


7. Small-Package Carriers

• Parcel Post

• provides both surface and air parcel post services

• to companies shipping small packages • The advantages of parcel post;

low cost wide geographical coverage, both

domestically and internationally


5. Pipeline

• transport only a limited number of product, including natural gas, crude oil, petroleum products, water, chemicals, and slurry products

• Pipeline offer the shipper an extremely high level of service dependability at a relatively low cost


5. Pipeline (cont’d)

• Pipelines are able to deliver their product on time because of the following factors;1. The flows of products within the pipeline are

monitored and controlled by computer2. Losses and damages due to pipeline leaks or

breaks are extremely rare3. Climatic conditions have minimal effects on

product moving in pipeline4. Pipelines are not labor-intensive; Therefore,

strikes or employee absences have little effect on their operation


International freight transportation costs represent a much higher fraction of merchandise value than domestic transportation cost due to longer distances involved, administrative requirement and all related paperwork.

a) Briefly discuss the basic forms of international intermodal distribution. (6 marks)

b) Describe in your own words the variations of delivery pricing system. (6 marks)

c) From your opinion, what are the factors need to be identified for global transportation? State your reason. (3 marks)

Question 4

There are 3 basic forms of international intermodal distribution:

•Landbridge

• It is a service in which foreign cargo crosses a country en route to another country

• For example, European cargo en route to Japan may be shipped by ocean to the East coast of the United States, then moved by rail to the west Coast, and from there shipped by ocean to Japan

Part 3: Global Issues

There are 3 basic forms of international intermodal distribution:

• Minilandbridge (MLB)

• It is a special case of landbridge, where foreign cargo originates or terminates at a point within the same country


• Microbridge

• In contrast with minibridge, this service provides door-to-door rather than port-to-port transportation

• The big advantage of microbridge is that it provides a combined rate, including rail and ocean transportation, in single tariff that is lower than the sum of the separate rates


• Delivered Pricing

1) Zone Pricing

A method that categorizes geographic areas into zones

Each zone will have particular delivery cost associated with it

The closer the zone to the seller the lower the delivery cost

The farther away the higher the delivery charge

Part 4: Carrier Pricing and Related Issues

2) Basing-Point Pricing

The seller selects one or more locations that serve as point of origin

The buyer will pay delivery costs from that point to the buyer’s location

The seller often use a manufacturing plant, distribution center, port, free trade zone as a basing point


• Quantity Discount

Cumulative• Provide price reductions to the buyer based on the

amount of purchases over some prescribed period of time

Non-cumulative quantity discount• Are applied to each order and do not accumulate

over a time period


• Allowances

Seller will provide price reductions to buyer that perform some of the delivery function

If buyer is willing to assume some of the delivery functions, the seller will often provide some allowances/ price reduction to buyer

The most common allowances are provided for customer pickup of the product or unloading of the carrier vehicle upon delivery at the customer’s location


• Pricing and Negotiation

The goal of the negotiation process is to develop an agreement that is mutual beneficial, recognizes the needs of the parties involved and motivates them to perform

Because most negotiation are based on cost-of-service pricing, carriers should have precise measures of their costs

Only when all costs are considered can carriers and shippers work together to reduce the carriers cost base


• International freight transportation must aware of the services, costs and availability of transport

mode.

• Factors that need to be identified for global transportation is:

1) taxes and subsidies2) regulations and government ownership of

carriers 3) geography and availability

• Global transportation costs will definitely cost more domestics due to longer distances, administrative requirements and related paperwork.


Transportation pricing involves how rates are developed in general and how specific rates are determined by a carrier to transport a shipment between an origin and destination point.

a) Briefly discuss the Line-Haul rate categories that can be assessed by carriers. (9 marks)

b) Describe in your own words the concept of quantity discount and allowances to identify the differences. (3 marks)

c) From your opinion, which inter-modal services would you prefer for your organization? State your reason. (3 marks)

Question 5

• Rates and Rate Determination

• Categories of Rates

Line-Haul rates which are charged for the movement of goods

between 2 points that are not in the same local pickup and delivery area

Accessorial charges which cover all other payment made to carriers

for transporting, handling or servicing a shipment


• Rates and Rate Determination

• Line-Haul rates

Class rates

Reduce the number of transportation rates required by grouping product into classes for pricing purposes

A basic rate would be Class 100, higher number =more expensive rate and lower number= less expensive rate


• Line-Haul rates

Exception rates

Provide the rate lower than the published class rate

This type of rate was introduce in order to provide a special rate for a specific area, origin-destination or commodity when competition or volume justified the lower rate


• Line-Haul rates

Commodity rates

Apply when a large quantity of a product is shipped between two locations on a regular basis

These rate are published on a point-to-point basis without regard to product classification


• Line-Haul rates

Contract rates

Rate that apply in special circumstances Example: contract rates are those negotiated

between a shipper and carrier. Formalized through a written contractual

agreement


• Line-Haul rates

Freight-all-kinds

The product shipped can be any type The carrier provides the shipper with the rate

per shipment based on the weight of the product being shipped

Popular with companies such as the wholesalers and manufacturers


• FOB Pricing (Free On Board)

If a seller quotes a delivered price to the buyer’s retail store location, the total price includes not only the cost of the product, but the cost of moving the product to retail store

FOB specifies which party (buyer or seller) pays for which shipment and loading costs, and/or where responsibility for the goods is transferred


• Roadrailers

combined motor and rail transport in a single piece of equipment

the trailer has both rubber truck tires and steel rails wheels

Over highways, tractor power units transport the trailers in the normal way, but instead of placing the trailer on a flatcar for rail movement, the wheels of the trailer are retracted and the trailer rides directly on the rail tracks


LNW 2204 Final Exam Final Exam Preparation 6 questions. Answer 4 minimum Essay Format (15 points...

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