Impact of Product Classes on Logistics
Plans and Decisions


Consumer Goods
 Convenient Goods
 Shopping Goods
 Specialty Goods
Industrial Goods
1
Product Characteristics Impacts on
Planning



Product life cycle
80-20 rule
Individual characteristics:




Weight-Bulk ratio (ration of weight to volume, density; e.g.
cotton vs. steel)
Value-Weight ratio (coal vs. jewelry)
Substitutability (customer’s reaction when not in stock)
Risk characteristics (perishability, flammability, ease of being
stolen)
2
Product Life Cycle
Sales
Volume
Intro
ducti
on
Growth
Maturity
Declin
e
Time
3
80-20 Rule and ABC Classification
4
Product
Number
Product
Rank by
Sales
Monthly
Sales
(1000 $)
Cumulative Cumulative Product
Percentage Percen tage Classific
of Total
of Total
ation
Sales
Items
%36,2
%7,1
A
D-204
1
5056
D-212
2
3424
60,7
14,3
A
D-185-0
3
1052
68,3
21,4
B
D-191
4
893
74,6
28,6
B
D-192
5
843
80,7
35,7
B
D-193
6
727
85,9
42,6
B
D-179-0
7
451
89,1
50
B
D-195
8
412
91,9
57,1
C
D-196
9
214
93,6
64,3
C
D-186-0
10
205
95,1
71,4
C
D-198-0
11
188
96,4
78,6
C
D-199
12
172
97,6
85,7
C
D-200
13
170
98,7
92,9
C
D-205
14
159
100
100
C
$13966
5
The 80-20 curve with an Arbitrary
Product Classification
Total Sales(%)
A
B
20
C
50
Total Items(%)
6
ABC Analysis

Divides on-hand inventory into 3 classes


Basis is usually annual $ volume


A class, B class, C class
$ volume = Annual demand x Unit cost
Policies based on ABC analysis





A items receives wide geographic distribution through many warehouses,
with high levels of stock availability
Give tighter physical control of A items
Forecast A items more carefully
C items might be distributed from a single, central stocking point(e.g.
plant), with lower total stocking levels than for the A items
B items would have an intermediate distribution strategy where few
regional warehouses are used
Transparency Masters to accompany Operations
Management, 5E (Heizer & Render)
12-13
© 1998 by Prentice Hall, Inc.
A Simon & Schuster Company
Upper Saddle River, N.J. 07458
7
Inventory Value of the Products in a
Warehouse

80-20 rule and ABC analysis can be used as the basis of
grouping the products in a warehouse
y= (1+A)x
A+X
where,
 Y= Fraction of cumulative sales
 X= Fraction of items
 A: constant to be determined
 If the relation between X and Y is already known:
A= X(1-Y)
(Y-X)
8
Product
Rank
Cumulative Item
Proportion (X)
Cumulative Sales
(Y)
Projected Item
Sales
Turnover
Ratio
D-204
1
0,0909
$12068
12068
7:1
Average
Inventory
Value
$1724
D-212
2
0,1818
16867
4798
7:1
685
D-185-0
3
0,2727
19444
2577
5:1
515
D-192
4
0,3636
21052
1608
5:1
322
D-193
5
0,4545
22151
1099
5:1
220
D-179-0
6
0,5454
22950
799
5:1
160
D-195
7
0,6363
23557
607
3:1
202
D-198-0
8
0,7272
24034
477
3:1
159
D-199
9
0,8181
24419
384
3:1
128
D-200
10
0,9090
24735
316
3:1
105
D-205
11
1,0000
25000
265
3:1
88
$25000
$4308
9
Product Characteristics




Weight- Bulk Ratio
Value-Weight Ratio
Substitutability
Risk Characteristics
10
Logist
ics
Cost
as a
percen
tage
of
sales
price
Generalized Effect of Product Density on
Logistics Cost
Total Cost
Transportaiton Cost
Storage Cost
Increasing Weight-bulk ratio
11
Generalized Effect of Value-weight Ratio on
Logistics Cost
Logistic
s Cost
as a
percenta
ge of
sales
price
Total Cost
Storage Cost
Transportation cost
Increasing value-weight ratio
12
Effect of Improved Transportation on Logistics Cost for a given
level of substitutability
Total cost
Logistics
cost as a
percent of
price
Transport cost
Lost Sale cost
Storage Cost
Improved transportation
service
13
Effect of Average Inventory Level on Logistics
Cost for a Given Level of Substitutability
Total cost
Logis
tics
cost as
a
percen
tage of
price
Storage cost
Transportation
cost
Lost Sale cost
Average inventory level
14
Generalized Effect of Product Risk On Logistics Cost
Costs
Total Cost
Transportation Cost
Storage Cost
Increasing Level of Risk of
the Product
15