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JNB225 Logistics

Module 4

Demand side logistics

1JNB225 - Logistics - Lecture 4


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MLM survey You have recently received an e-mail from the Head of the Department of

Maritime and Logistics Management, Dr. Stephen Cahoon, inviting you toparticipate in a small survey on your views about the programs offered byMLM.

The survey contains only 12 questions and responses are sought by 8August.

Your response to this survey would be greatly appreciated.

JNB225 - Logistics - Lecture 4 2


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Whats going on?

An important aspect of addressing the elements of demand side logistics isknowledge of what is happening in the broader business environment.

Environmental scanning provides such information. It is a starting point for

the strategic management process and is a key factor in maintainingcompetitive advantage.

Reading 4.1 provides information about environmental scanning.

Reading 4.2 provides example of how environmental scanning created newopportunities for companies by combining their traditional productofferings with trends displayed by global consumers.



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Environmental scanning



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Environmental scanning

Sources of information for environmental scanning:

External:Personal business contacts; journals; books; newspapers; conferences;

radio and television news and documentaries; customers; commercialdata bases.

Internal:Personal contacts; internal documents (reports, research papers,memoranda); development proposals; internal databases



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Demand planning the traditionalfunction approach

Source: Bowersox, Closs & Cooper 2010, p. 136.



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Demand planning an integrated approach

Source: Bowersox, Closs & Cooper 2010, p. 137.



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ForecastingForecasting provides a picture of the future and is the driving force behind

forward planning activities.

It provides guidance on:

Demand, sales or requirements

Cost of inputs and prices for outputs Replenishment and delivery times Demand for transport, from where to where and when

The time horizon for forecasts may be: Long term more than 3 years Mid term one to three years Short term less than a year



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ForecastingThere are a very large number of forecasting techniques available which fit

broadly into three categories. They are:

Qualitative methods:Use of judgement, intuition, surveys or comparative techniques toprovide quantitative estimates about the future.

Historical projection methods:Future estimates based on historical trends, seasonal variationsand time cycles

Causal methods:Forecast is derived from relationship to related variables.Come in various forms e.g. Statistical regression models orDescriptive input/output, life cycle or simulation models.



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Components of Demand Forecasting

Time frame short, medium, long term

Demand behavior

Trendgradual, long-term up or down movement

Cycleup and down movement repeating over long time frame

Seasonal

periodic oscillation in demand which repeats Random

movements follow no pattern



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Forms of Forecast Movement

D e m a n d

Time

Trend

Randommovement

D e m a

n d

Time

Seasonalpattern

D e m a n d

Time

D e m a n d

Time

Cycle

Trend withseasonal pattern



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Collaborative Planning, Forecasting andReplenishment (CPFR)

CPFR seeks to alter the trade off between inventory and customer servicethrough improved collaboration between buyer and supplier.

CPFR brings plans and projections from both the supplier and the buyer

into synchronisation

It requires cooperation and exchange of data between the businesspartners

It is a closed loop continuous process that uses feedback of performanceassessment as input for strategic planning



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The CPFR Business model

JNB225 - Logistics - Lecture 4 14Source: Coyle, Langley, Gibson, Novack & Bardi 2009, p. 253


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The Bullwhip Effect The bullwhip effect is amplification of demand changes arising from poor

coordination within a supply network. The resulting huge swings indemand from high to low result in higher cost manufacturing, periodicexcessive inventories in the chain and instability in the supply process.

The four main causes of the bullwhip effect are:

Demand signalling

Order batching

Price fluctuations

Rationing and shortage gaming



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The Bullwhip Effect Demand signalling:

Orders placed for replenishment stock plus safety stock areregarded as signals of future demand and demand forecasts areupdated accordingly at various stages of the supply chain. Orderquantity is then much greater than demand followed by a periodof low or no order.

Order batching:Companies generally do not place frequent orders because it isadministratively expensive to do so and foregoes the per unit

economies of transporting larger quantities. Periodic order placingby customer around month end contributes to demandfluctuation.



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The Bullwhip Effect

Price fluctuations:Sales and discounting promotions prompt customers to buy inquantities that do not reflect their on going needs resulting inpeaks and troughs of demand.

Rationing and shortage gaming:When an item is in short supply and manufacturers ration thesupply available to suppliers, customers respond by placingmultiple orders with various suppliers causing apparent demand

amplification.



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Demand side logistics

There are of two types of supply chain: Push type (goods pushed onto the customer)

Eg Woolworths Pull type (goods requested by the customer)

Eg Dell

In both

An important element of competitiveness is ORDER CYCLE time



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Order Cycle Order cycle time (Lead time)

Total time from customer initiation of order to receipt of the goods.

Order cycle time consists of: Order preparation and transmittal Order receipt and entry Order processing Warehouse picking and packing (or manufacture) Transportation Unloading and delivery to customer

Order processing is a significant part of order cycle time and may be up to70% of order cycle time in some industries.

Reading 4.3 provides information on the components of order processing.



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Order cycle time



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Order processingOrder processing is not a settled term and varies in scope in different texts

and articles.

Some texts describe it as the time from the sellers receipt of an order untilauthorisation is given to the fill the order. Others, such as Ballou (2004)(Reading 4.3) suggest it commences at the start of preparation of an orderand ends when the order is packed ready for shipping .

Order processing is administrative in nature and can involve many activitieswhich typically include:

Checking the order for completeness and accuracy Checking the buyers creditworthiness and past performance Determine stock status - inventory or back order Prepare picking list Determine shipping mode and prepare shipping documents Prepare invoice



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Typical Elements of Order cycle

Salesorder

Order Preparation Requesting

products or

services

Order Transmittal Transferring

order information

Order Entry Stock checking Accuracy checking

Credit checking Back ordering/

order canceling Transcription Billing

Order Filling Product retrieval, production, or purchase Packing for shipment Scheduling for delivery Shipping document preparation

Order Status Reporting Tracing and tracking Communicating with

customer on orderstatus

Salesorder

Order Preparation Requesting

products or

services

Order Transmittal Transferring

order information

Order Entry Stock checking Accuracy checking

Credit checking Back ordering/

order canceling Transcription Billing

Order Filling Product retrieval, production, or purchase Packing for shipment Scheduling for delivery Shipping document preparation

Order Status Reporting Tracing and tracking Communicating with

customer on orderstatus

8JNB225 - Logistics - Lecture 4(Ballou 2004, p. 132)


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Order filling

Order filling is a set of physical activities. It involves:

Acquisition through production, purchasing or retrieval frominventory

Packing and labelling Verification of completeness of the order Shipment scheduling and despatch

Expeditious order fill time is important in achieving customer service

Technology such as bar coding can reduce errors and expedite orderfill time



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Order Filling: Time is important

Processing rules affect order filling speed. Various approaches that may be

adopted include:

First-received, first-processed

Shortest processing time first

Specified priority number

Smaller, less complicated orders first

Earliest promised delivery date

Orders having the least time before promised delivery date



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Order fill rate is lower than item fill rate

FR = nP i where n = number of items on orderP i = in stock probability of item i.

Often the customer service goals cannot be met for multiple itemorders

Metrics:

- Item fill rate

- Order fill rateHave different implications and can create additional processes fororder filling due to split shipments


Filling multiple item orders


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Filling multiple item orders

Question Suppose that an order contains five items, each having

an in stock probability of 93%.

What is the probability that the order will be filled complete?

70%or,70.0)93)(.93)(.93)(.93)(.93(.FR

Answer



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Communication with customersCommunication with customers is a very important part of customer service

and is required throughout the order cycle.

It begins with acknowledgment of receipt of the order and progressesthrough the various stages of order processing. This process may be

faster if a supplier is pre-qualified by a customer. That covers much of thebackground checking that each party might do on the other.

Order status and tracking information are particularly important items of communication during the order fill process.



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E-commerceE-commerce was covered for supply side logistics in module 3. Similar

considerations apply in the demand side except that it is considered from thepoint of view of a supplier rather a customer.

For many products and services e-commerce provides alternative procurementand distribution channels to the traditional system. It by-passesintermediaries and allows supplier and consumer to deal directly with eachother. Example: online travel bookings; buying on Amazon; bidding for itemson e-bay.

E-Commerce does not facilitate integrity checking nor the development of strategic relationships between the parties.

An on-line order management system must be capable of handling a high volumeof small orders.

The transport system associated with e-commerce requires extensive deliverynetworks and expertise in small parcel handling. Fleets of small vans engagedin the this type of activity are common in cities.



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Electronic Commerce: Direct to customer delivery

Orders:ConfirmationShipment arrivalShipment status

COMMUNICATION NETWORK - INFORMATION SUPERHIGHWAY

Orders:ConfirmationShipment noticeShipment status Distributor

CustomersSuppliers Products

Logisticsprovider


( Ballou 2004, p. 139)


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Online and off line procurement Reading 3.1 reports on research which compares of online and offline

(traditional) procurement in a business to business context.

Results suggest the following trends: As the importance of the items being purchased increases, the

probability of using online procurement decreases. Thepsychological distance factor (impersonal interaction) alsosupports offline procurement for high importance items.

As the availability of online markets expand the probability of theuse of online procurement increases.

Complexity of item specifications has no influence on the use of either online or offline procurement.



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Software as a service (SaaS) Information system technology is expensive to purchase and maintain but

this is the traditional method by which firms access that capability.

A recent development is a rental service known as Software as a serviceunder which software applications are provided and operated by a thirdparty information technology provider.

This scheme offers the advantages of:Reduced capital commitmentReduced need for specialist expertiseFacilities economies of scale since costs are shared across multipleusers

Like any outsourcing, the risks need to be evaluated



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A Typical Logistics Information System

INTERNAL

Finance/Accounting

Marketing

Logistics

Manufacturing

Purchasing

EXTERNAL

Customers

Vendors

Carriers

Supply chain partners

LOGISTICSINFORMATION

SYSTEM

OMS

Stock availability Credit checking Invoicing Product allocation tocustomers

Fulfillment location

WMS

Stock levelmanagement

Order picking Picker routing Picker assignmentsand work loading

Product availabilityestimating

TMS

Shipmentconsolidation

Vehicle routing Mode selection Claims Tracking Bill payment Freight bill auditing

INTERNAL

Finance/Accounting

Marketing

Logistics

Manufacturing

Purchasing

EXTERNAL

Customers

Vendors

Carriers

Supply chain partners

LOGISTICSINFORMATION

SYSTEM

OMS

Stock availability Credit checking Invoicing Product allocation tocustomers

Fulfillment location

WMS

Stock levelmanagement

Order picking Picker routing Picker assignmentsand work loading

Product availabilityestimating

TMS

Shipmentconsolidation

Vehicle routing Mode selection Claims Tracking Bill payment Freight bill auditing


(Ballou 2004, p. 147)


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Assignment 1 Assignment 1 is due on 8 August 2011 and you should now be well advanced

with your preparation.

It is very important that your assignment is presented in the correct mannerand that you follow the referencing standard used by AMC which is detailed inthe MLM Toolbox.

You are urged to review the Preparing for an assignment section of the MLMToolbox. The tool box can be found on line by going to the AMC home page.Ports and Shipping / MLM / MLM Student Toolbox.

You are also urged to review the Writing assignments notes posted on MyLO.

Steves Automotive is the model for presentation of assignments and it shouldbe closely followed, including the information on the cover page.



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Preparation for next week

Work through the study guide for this module and read the study resourcematerial as directed.

Prepare answers to questions 2,3 and 7 on page 152 of your text book.

Assignment 1 is due for submission on 8 August.

There are no student presentations next week.

JNB225 Logistics Lecture 4 35

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