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. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 2 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 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 4 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… © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 5 Deregulation (continued) … with greater freedom comes new responsibilities Key point Logistics has evolved from being a “tactical” area to a “strategic” one © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 6 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? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 7 Environmental Concerns Even while certain aspects of logistics have been deregulated, other areas are being controlled more stringently Fuel efficiency Pollution Recovery, recycling, and reuse of packaging, containers, and products © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 8 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!) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 9 Logistics Decision Areas Transportation… – Modes – Formats – Pricing Warehousing – Consolidation – Cross-Docking and Break-Bulk – Hub-and-Spoke – Inventory © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 10 Major Transportation Modes • Highway (truck) • Water • Rail • Air • Pipeline © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 11 Modal Shares of Shipments (within US, 1999/2002) Mode Highway (trucking, parcel, postal, courier) Value (%) Tons (%) Ton Miles (%) 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 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 12 Highway Mode Strengths Weaknesses • 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 • Not the fastest • Not the cheapest © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 13 Water Mode Strengths Weaknesses • Highly cost effective for bulky items • Works best for high weight-to-value items • Most effective when linked into multimodal system • Limited locations • Relatively poor delivery reliability/speed • Often limited operating hours at docks © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 14 Air Mode Strengths Weaknesses • Quickest delivery over • Often the most longer distances expensive, particularly on a per • Can be very flexible pound basis when linked to highway mode • Works best for low weight-to-value items Grew 90.5% in value of goods shipped from 1993 to 2002 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 15 Rail Mode Strengths Weaknesses • Highly cost effective for bulky items • Can be most effective when linked into multimodal system • Limited locations, but better than for water. • Better delivery reliability/speed than water Increasing part of multimodal solutions, dual tracks on major routes © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 16 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 ? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 18 Multi-Modal Solutions (An example) North Carolina’s Global TransPark © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 19 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 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 20 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. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 21 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” © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 23 Warehousing Benefits Economic benefits: Accrue directly to company Must consider total system costs Service benefits: Support customer service needs May or may not reduce costs © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 24 Consolidation Small shipments in ... Warehouse Large economical shipments out ... © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 25 Example 1 Customer Shipment Weight Venetian Artist Supply Kaniko 100 boxes, artist supplies 100 PC printers 3,000 lbs. Ardent Furniture 10 dining room sets 4,000 lbs. 3,000 lbs. •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 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 26 Cost Benefits of Consolidated Warehousing Warehousing costs Cost of one truck to Atlanta Delivery to final customer 10,000 lbs × $9/100 lbs = $900 $2,000 3 customers × $200 = Total: $600 $3,500 How does this compare to the cost of separate dedicated shipments? What about truck utilization (assume 3 trucks hold 60,000 lbs.) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 27 Cross-Docking Large economical shipments in ... Warehouse Small shipments out ... What about supply / demand mismatches? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 28 Break-Bulk Like cross-docking, but usually refers to a single source Plant A Warehouse Customer Delivery © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 29 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. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 30 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. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 31 Hub-and-Spoke Systems A To Los Angeles A C Syracuse A B B Phoenix B To El Paso © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 32 Postponement Coca Cola syrup Bulk food products, paints, etc. high volumes containers Customer A Postponement Assembly, Packaging, Labeling, etc. Customer B Customer C Minimizes risk Minimizes inventory (how?) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 33 Warehousing Service Benefits: Spot stock Assortment Spot Stock Region 1 Manufacturer or Centralized Source Region 2 Warehouse Time sensitive, seasonal items Often temporary, public storage Region 3 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 35 Assortment Broad product line and good inventory control key to success Customer A Supplier F Supplier G Assortment Warehouse Supplier E Customer B Customer C Supplier H Customer D © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 36 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) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 37 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? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 39 Packaging Implications • Transportation – Class segmentation – Damage protection • Material handling and warehousing – – – – Storage requirements Unitization Container recycling Ease of handling © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 40 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 Performance Dimension Transportation Mode Warehousing System 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, CrossDocking, Hub-and-Spoke © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 43 Who “Owns” Logistics? Organization Strategy Marketing Strategy Logistics Strategy Operations Strategy Financial Strategy Executive-level of representation Difficult goal of functional integration Organizational question: Who really ‘owns’ logistics? Transportation? Marketing? Operations? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 44 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 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 45 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 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 46 Warehouse Ownership Issues Public Contract Private Cost structure EOS EOS ??? Financial flexibility High Moderate Low Location flexibility High Moderate Low Managerial control Less Varies Highest Expertise High High ??? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 47 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) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 49 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 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 50 Logistics Decision Models • Weighted Center of Gravity Method • Optimization • Assignment Problem © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 51 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 Wi X i Weighted X coordinate X i 1n * Wi i 1 n W i Yi Weighted Y coordinate Y i 1n * Wi i 1 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 52 CupAMoe’s Coffee 6 (1,5) 5 Capital City (Pop. 400,000) 4 Y CupAMoe’s Springfield (Pop. 200,000) (2.57,3.6) 3 (4.5,3) 2 Shelbyville (Pop. 170,000) 1 (4,1) 0 0 1 2 3 4 5 6 X © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 53 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: © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 54 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) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 55 Case Study in Logistics Just-In-Time Shipping Supplemental Slides on Transportation Costs and Factors Pricing, Distance, Economic Factors Pricing Transportation Services •Economic factors –Pricing versus distance –Price/pound versus density –Stowability, handling, and liability –Market factors •Ratings –Goods classification –Class index © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 58 Price Economic Factors I … why the “tapering principle”? Price/pound Distance Density © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 59 Economic Factors II Stowability, handling, and liability versus © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 60 Economic Factors III Market factors What might this include? West Coast, USA © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 East Coast, USA Chapter 12, Slide 61 Ratings Translating economic factors into actual prices Ratings (a simplified view) • Goods classification – Perishability, stowability, handling, etc. • Class index? – From 35 - 400 – “average product” = 100 – Based on expected transportation costs © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 63 Determining Transportation Rates • Rate Determination – By weight (Less-than-truckload shipment) – By distance (truckload shipments) Minimum charges and surcharges • Exceptions to the rule – Seasonal commodities – FAK (freight of all kinds) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 64 Example 1 Shipping 800 lbs of glass slides from Atlanta, GA to Lansing, MI … Looking at a rate classification guide Item Articles Class - LTL Shipment Class – TL Shipment Minimum TL Weight 86770 Glass, microscopical slide or cover, in boxes 70 40 3,600 lbs. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 65 Specific Rates for Shipments FROM Atlanta TO Lansing Rates express $ charged per hundred-weight Rates fall as rate class falls and volume increases Rate Class < 500 lbs $98.37 500 to 1,000 lbs $61.97 1,000 to 30,000 lbs $17.00 200 100 $52.62 $43.68 $9.22 70 $40.48 $33.59 $8.10 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 66 Result • $33.59 × 8 = $268.72 shipping cost • Key points – Classification tables standardized, BUT – Rate tables vary by transportation provider – Real-time updating of provider tables © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 67 Example 2 • 3 Shipments of Class 100 to Lansing: – 5,000 lbs., 10,000 lbs., 7,000 lbs. • Different stops in Lansing • Can consolidate, but extra $100 for two additional stops • What to do? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 68 What to Do? Separate shipments at costs below: Consolidated shipments at costs below: 50×$18.94 220×$9.22 = $2,028 = $947 100×$14.74 = $1,474 70×$18.94 = $1,326 $3,747 Additional drop-off charges: © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 $100 $2,128 Chapter 12, Slide 69 Key Points • Choosing a mode – Five choices – Speed? Cost? Flexibility? • Choosing a format – Flexibility versus control • Controllable factors affecting cost – Density, stowability, packaging, and containerization © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036 Chapter 12, Slide 70