Logistics

Chapter Objectives

Be able to: Describe why logistics is important and discuss the major decision areas that

make up logistics. List the strengths and weaknesses of the various modes of transportation and

discuss the role of multimodal solutions. Identify the major types of warehousing solutions and their benefits. Discuss the purpose of a logistics strategy and give examples of how

logistics can support the overall business strategy. Calculate the percentage of perfect orders. Calculate landed costs. Explain what reverse logistics systems are, and some of the unique

challenges they create for firms. Use the weighted center of gravity method to identify a potential location for a

business. Develop and then solve, using Microsoft Excel’s Solver function, an

assignment problem.

Logistics

Planning, implementing, and controlling the efficient, effective flow and storage of goods and materials between the point of origin and

the point of consumption

Why the Increasing Interest?

• Deregulation

• Globalization

• Technological breakthroughs

• Environmental concerns

• Performance impact

Deregulation

• Transportation providers– Elimination of artificial barriers

– Unrestricted markets

– Multimodal solutions

– Price, schedule, and terms flexibility

• Buyers have greater freedom– Negotiate prices, terms, and conditions

– Ownership issues

BUT…

Deregulation (continued)

… with greater freedom comes new responsibilities

Key pointLogistics has evolved from being a

“tactical” area to a “strategic” one

Globalization(Worldwide Statistics)

Year Expenditures % GDP

1997 $5,095 Billion 13.4%

2002 $6,732 Billion 13.8%

Change +32% +3%

What is driving this activity?

Environmental Concerns

Even while certain aspects of logistics have been deregulated, other areas are being controlled more stringently

Fuel efficiencyPollutionRecovery, recycling, and reuse of packaging,

containers, and products

Management Areas

Transportation Warehousing (and more generally, location) Material handling Packaging Inventory management Logistics information systems

(And some would put logistics service providers here as well!)

Logistics Decision Areas

Transportation…– Modes– Formats– Pricing

Warehousing– Consolidation– Cross-Docking and Break-Bulk– Hub-and-Spoke– Inventory

Major Transportation Modes

• Highway (truck)

• Water

• Rail

• Air

• Pipeline

Modal Shares of Shipments(within US, 1999/2002)

Mode Value (%) Tons (%) Ton Miles (%)

Highway (trucking, parcel, postal, courier)

80.3/86.0 58.5/67.4 28.4/28.7

Water 2.5/1.1 11.1/11.1 20.4/13.6

Rail 4.8/3.7 11.2/16.1 26.7/36.8

Air 2.7/3.2 0 0.2/0.4

Pipeline 4.2/1.8 13.7/5.9 17.6/20.5

Multimodal/Unknown 5.6/5.6 5.5/5.5 6.8/6.8

Highway Mode

Strengths• Flexibility to pick up and

deliver where and when needed

• Often the best balance between cost/flexibility and delivery reliability/speed

• Can deliver straight to the customer (increasing)

• Can be available 24/7

Weaknesses• Not the fastest• Not the cheapest

Water Mode

Strengths• Highly cost effective

for bulky items• Works best for high

weight-to-value items• Most effective when

linked into multimodal system

Weaknesses• Limited locations• Relatively poor

delivery reliability/speed

• Often limited operating hours at docks

Air Mode

Strengths• Quickest delivery over

longer distances• Can be very flexible

when linked to highway mode

• Works best for low weight-to-value items

Weaknesses• Often the most

expensive, particularly on a per pound basis

Grew 90.5% in value of goods shipped from 1993 to 2002

Rail Mode

Strengths• Highly cost effective

for bulky items• Can be most effective

when linked into multimodal system

Weaknesses• Limited locations, but

better than for water.• Better delivery

reliability/speed than water

Increasing part of multimodal solutions, dual tracks on major routes

Question

How can businesses design solutions that exploit the strengths

of each mode?

Technological Breakthroughs

• Standardized containers for ease of transfer• “Roadrailers,” etc.• Multimodal solutions

– Ship Truck Train Truck ?

Multi-Modal Solutions(An example)

North Carolina’s Global TransPark

Global TransPark

• 15,700 acres at full development with two parallel runways of 11,500 feet and 13,000 feet

• Integrated air, rail, road, and nearby sea transportation capabilities

• Free trade zone status

Justification for Such a Facility

Shift from domestic to global economies Emergence of just-in-time, flexible and agile manufacturing

practices requiring sophisticated logistics solutions The rapid growth of distribution via air freighters (roughly four times

the growth rate of passenger service by the airlines) The need to use air cargo, shipment by sea, and delivery by trucks

and trains in an overall distribution system The need for a commercial distribution hub in the Eastern United

States that can reach more than 60 percent of the nation’s population overnight and also provide a gateway to global markets.

Warehousing

Any operation that stores, repackages, stages, sorts, or centralizes goods or materials

New View

Warehousing a key piece of logistics strategy

– J. B. Hunt

– Lowe’s

• More than just storage

– “Warehousing” “Distribution Centers”

Warehousing Benefits

Economic benefits:Accrue directly to companyMust consider total system costs

Service benefits:Support customer service needsMay or may not reduce costs

Consolidation

Warehouse

Small shipments in ...

Large economical shipments out ...

Example 1

•Dedicated truck from Los Angeles to Atlanta: $2,000•Cost to run consolidation warehouse: $9 per hundred-weight•Local delivery in Atlanta: $200 per customer

Customer Shipment Weight

Venetian Artist Supply

100 boxes, artist supplies

3,000 lbs.

Kaniko 100 PC printers 3,000 lbs.

Ardent Furniture 10 dining room sets 4,000 lbs.

Cost Benefits of Consolidated Warehousing

How does this compare to the cost of separate dedicated shipments?

What about truck utilization (assume 3 trucks hold 60,000 lbs.)

Warehousing costs 10,000 lbs × $9/100 lbs = $900Cost of one truck to Atlanta $2,000Delivery to final customer 3 customers × $200 = $600

Total: $3,500

Cross-Docking

What about supply / demand mismatches?

Warehouse

Small shipments out ...

Large economical shipments in ...

Break-Bulk

Like cross-docking, but usually refers to a single source

Warehouse

Customer Delivery

Plant A

Example 2

• Manufacturer Customers

• 500 lb. average order size

• Direct shipments: $7.28 per hundred-wt. $7.28 × 5 = $36.40

• > 20,000 lbs: $2.40 per hundred-wt.

• Local delivery: $1.35 per hundred-wt.

Insight:

If we can run a warehouse for less than:

5 × ($7.28 – $2.40 – $1.35) = $17.65/500 lbs.

Or

$17.65 / 5 = $3.53 per hundred-weight

we should do it.

Hub-and-Spoke Systems

Syracuse

Phoenix

To Los Angeles

To El Paso

A

A

A

B

B

B

C

Postponement

Coca Cola syrupBulk food products,paints, etc.

high volumes containers

Postponement

Assembly, Packaging,Labeling, etc.

Customer A

Customer B

Customer C

Minimizes riskMinimizes inventory (how?)

Warehousing Service Benefits:

Spot stockAssortment

Spot Stock

Warehouse

Time sensitive, seasonal items Often temporary, public storage

Region 3

Region 2

Region 1

Manufactureror Centralized

Source

Assortment

Customer D

Customer C

Customer B

Customer ASupplier E

Supplier F

Supplier G

Supplier H

Broad product line and good inventory control key to success

Ass

ort

men

tW

areh

ou

se

Information Systems

• Decision support tools– Real-time simulation and optimization– Location selection– Cost estimations

• Precise coordination of multimodal solutions• Execution systems

– Global positioning systems– Bar-coding applications– RFID on the horizon as replacement (NYK Logistics)

Material Handling and Packaging

What are the typical marketing criteria?

Unitization• Unit loads

– Transport and handling efficiencies

• Non-rigid containers– pallets and unit load platforms– ropes, steel, shrink and stretch wrap

• Rigid containers– Maximum protection (Viper windshield frame)– Standard sizes?– Recycling?

Packaging Implications

• Transportation– Class segmentation– Damage protection

• Material handling and warehousing– Storage requirements– Unitization– Container recycling– Ease of handling

Questions

What are the strengths and weaknesses of each?

How does the choice of format tie into the business strategy?

The Evolution of Logistics Strategy

From functional silos to strategic positioning

Logistics Strategy Choices

Delivery Reliability Highway, Air Direct Ship, Assortment, Spot Stock

Delivery Speed Air, Highway Direct Ship, Assortment, Spot Stock

Mix Flexibility Highway, Air, Rail Assortment, Spot Stock

Design Flexibility Highway, Air Postponement

Volume Flexibility Highway, Air Direct Ship, Assortment, Spot Stock

Cost Rail, Water, Pipeline, Highway

Consolidation, Cross-Docking, Hub-and-Spoke

Performance Dimension Transportation Mode Warehousing System

Who “Owns” Logistics?

OrganizationStrategy

MarketingStrategy

OperationsStrategy

FinancialStrategy

Executive-level of representationDifficult goal of functional integrationOrganizational question: Who really ‘owns’ logistics?

Transportation?Marketing?Operations?

LogisticsStrategy

Owning Versus Outsourcing

• Does the firm’s volume justify a private system?

• Would ownership limit firm’s ability to respond to marketplace changes?

• Is logistics a core competency?

• Are outsource capabilities are available?

Kellogg logistics strategy example in text

Transportation “Outsources”

• Common (public) carriers– Published rates and schedules– “Nondiscriminatory” pricing– Increased flexibility to partner

• Contract carriers– Service for select customers– Unlimited number of customers

• Third-Party Logistics Providers (3PLs)

– Service firms specializing in logistics for other companies

Warehouse Ownership Issues

Cost structure

Financial flexibility

Location flexibility

Managerial control

Expertise

Public Contract Private

EOS EOS ???

High Moderate Low

High Moderate Low

Less Varies Highest

High High ???

Question:

When would it make sense to combine private and public

ownership?

Measuring Performance

• Perfect Order– Delivered on time– Shipped complete– Invoiced correctly– Undamaged in transit

• Landed Costs– Packing– Insurance– Customs, other fees– Warehousing– Transportation– Documentation (Redwing Automotive Example)

Reverse Logistics Systems

• Customer returns– Warranty failures– Incorrect or damaged orders

• Repair and remanufacture process support

• Recycling (increasing importance!)

Generally independent systems because of low volume and mix complexity

Logistics Decision Models

• Weighted Center of Gravity Method

• Optimization

• Assignment Problem

Weighted Center of Gravity

A method to determine best location for central warehouse from n demand points.– Requires position of each demand point (Xi, Yi)

– Requires weight of each demand point (Wi), based on importance, demand volume, market strategy, etc.

n

ii

n

iii

n

ii

n

iii

W

YWYcoordinateYWeighted

W

XWXcoordinateXWeighted

1

1*

1

1*

CupAMoe’s Coffee

Y

X0

01

1

2

2 3

3

4

4 5

5

6

6

(4,1)

(1,5)

(4.5,3)

Shelbyville(Pop. 170,000)

Springfield(Pop. 200,000)

Capital City(Pop. 400,000)

(2.57,3.6)

CupAMoe’s

Optimization

• Requires an objective function to be maximized or minimized.• Decision variables — values to be manipulated to affect

outcome of objective function• Constraints — limits set on range of decision variables to be

used or on other aspects of the solution possible

For Example:

Assignment Problem

• Specialized optimization model.• Decision variables are the shipment quantities• Known values are demand, capacity, and shipping cost

between warehouses• Constraints:

– Sum of shipments from a warehouse cannot exceed its capacity– Sum of shipments to meet demand must be greater than or equal to the

demand– Sum of shipments from each warehouse must be greater than or equal to

zero(Flynn Boot Company Excel example in text)

Case Study in Logistics

Just-In-Time Shipping