Chapter 12
Logistics:
Positioning Goods in the
Supply Chain
McGraw-Hill/Irwin
©The McGraw-Hill Companies, Inc. 2008
Learning Objectives
• Understand and describe the logistics function and its importance to business.
• Describe the concept of logistics networks.
• Explain why businesses outsource logistics functions and issues to consider when
selecting a logistics service provider.
• Explain what reverse logistics is and why its importance is increasing.
• Describe and compare the modes of transportation used in supply chains.
• Describe the configuration of different warehousing and distribution strategies, as
well as the strengths and weaknesses of each.
• Explain the concept of postponement and how it can be used in supply chains.
• Compute the center-of-gravity solution for determining distribution center
location.
• Compute the landed cost to determine product costs that include logistics.
• Describe the Customer-Trade Partnership Against Terrorism (C-TPAT)
• Explain how radio frequency identification (RFID) and global positioning system
(GPS) technologies can enhance logistics effectiveness.
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Introduction to Logistics
“the process of planning, implementing, and controlling the
efficient, effective flow and storage of goods, services, and
related information from point of origin to point of consumption
for the purpose of conforming to customer requirements.”
Exhibit 12.1 Logistics and the Supply Chain
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Logistics Network Configuration
• Costs are incurred and time is required to move goods
from raw materials to consumers.
• An important task for supply chain management is to
determine distances and how travel will take place.
• Logistics networks include warehouses, production
facilities, retailers, and the inventory that flows between
them.
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Outsourcing Logistics Services
• Third party providers are known as 3PLs
• 3PLs can be narrow in focus or quite broad
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3PL Selection
• Steps to selecting a 3PL
Exhibit 12.2 Ten Steps to Selecting a 3PL
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Reverse Logistics
• The flow of goods back to their producer
• Increasing in importance
• Often outsources
Exhibit 12.3 Reverse Logistics Paths for Product Returns
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Transportation Modes
• U.S. Commercial Freight Activity by Transportation Mode
Truck is the largest mode.
Air is fastest growing
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Road Transport
– Truck is most commonly used cargo mode
– Most goods transportation ends with a truck delivery
– FTL is the cheapest. LTL costs more.
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Rail Transport
• Less flexible than truck. But less costly over long
distances.
• Trend is toward specialty wagons.
• Double stacking is becoming more common.
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Marine Transport
• Breakbulk ships carry loose freight
• Containerships carry containers.
– Faster loading and unloading
– Easy transfer to rail or truck
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Pipeline
• Least flexible
• Often used to transport between isolated areas
• High initial investment, but low operating costs
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Intermodal Transport
• At least two different modes are used
• Marine/rail, rail/road, marine/road, marine/rail/road, etc.
• Integrated transport carriers use whatever is best
– Customer doesn’t have to deal with modes and is given total
cost up front
• Utilizes containerized shipping.
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Incoterms: International Carriage Not Paid
By the Seller
• FCA stands for Free Carrier. The seller delivers the goods, cleared for export,
to the carrier the buyer specifies, at a named location, not loaded. The seller’s
responsibility is fulfilled when he delivers the goods to the carrier.
• FAS means Free Alongside Ship. The seller delivers when the goods are placed
alongside the vessel at the named port of shipment. This is specifically used for
ocean shipments that aren’t containerized.
• FOB stands for Free on Board. FOB means that the seller delivers when the
goods pass the ship’s rail at the named port of shipment. The buyer is responsible
for costs and risks as soon as the goods pass the ship’s rail.
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Incoterms: International Carriage Paid By
the Seller
• CFR designates Cost and Freight. The seller is responsible for the cost and
fright required to bring the goods to the named destination, but risks become the
buyers when the goods pass the ship’s rail in the port of shipment.
• CIF means Cost, Insurance, and Freight. This is the same a CFR, except that
the seller is responsible for insurance against loss or damage.
• CPT stands for Carriage Paid To. The seller is responsible for the cost of freight
to the named destination. The risks associated with loss, damage, or cost
increases becomes the buyer’s when the goods have been delivered to the custody
of the first carrier.
• CIP stands for Carriage and Insurance Paid To. This is the same as CPT,
except the seller is responsible for transport insurance against loss or damage.
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Incoterms: Arrival at Stated Destination
• DAF stands for Delivered at Frontier. DAF means that the seller’s
responsibility stops when the goods have arrived at the frontier, but before
the customs border of the country specified in the contract.
• DES stands for Delivered Ex Ship. DES means that the seller’s
responsibility ends upon placement of the goods at the disposal of the buyer
on board the ship at the named port of destination.
• DEQ stands for Delivered Ex Quay. DEQ means that the sellers obligation
is fulfilled when the goods are made available on the quay (wharf) to the
buyer at the named port of discharge.
• DDU stands for Delivered Duty Unpaid. DDU means that the seller’s
responsibility goes up to the point when the goods have been made available
to the buyer at the named place in the country of importation. The buyer has
to pay all duties, taxes, and customs charges required for importation.
• DDP stands for Delivered Duty Paid. DDP is like DDU in that the seller’s
obligation ends when the goods have been made available to the buyer at the
named place in the country of importation. However, the seller is
responsible for all duties, taxes, and customs charges.
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Transportation Management Systems
• Integrate transportation decisions with inventory and
warehousing, order management, forecasting, and
production planning.
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Warehousing
• Distribution Strategies:
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Direct Shipment
• Shipping directly from
manufacturer to retailer
• Eliminates warehouse costs
• Probably won’t take advantage
of FTL transportation savings.
• High inventory level needed
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Consolidation Warehousing
• Storage in warehouse, then
shipped.
• More likely to use FTLs
• Risk pooling benefits of
reduced inventory in system
• Used in combination with
postponement
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Cross-Docking
• Most sophisticated system
• High cost, but very efficient
• Used by high-volume retailers
like Wal-Mart and dollar
General
• FTL bulk shipments to crossdock center, then FTL mixed
loads to retailers
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Warehouse Location Decisions
• Center-of-gravity method: used for locating a distribution
center among warehouses or retail stores.
• Finds the “most central location” for the DC by
calculating the X and Y coordinates that minimize
transportation costs.
• Considers distance between the DC and warehouses or
stores as well as the number of shipments necessary
between them
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Location Decision-Making Techniques:Centerof-Gravity Method
ΣdixVi
Cx =
Σ Vi
ΣdiyVi
Cy =
Σ Vi
where
Cx = X coordinate of the center of gravity
Cy = Y coordinate of the center of gravity
dix = X coordinate of the ith location
diy = Y coordinate of the ith location
Vi = Volume of goods moved to or from the ith
location
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Location Decision-Making Techniques:
Center-of-Gravity Example
• Example 12.1
– Regional bottler finding good location for a new facility
– Uses data on the locations of its four suppliers and the number of
truckloads shipped from each
Exhibit 12.6 Graphical Representation of Supplier Locations
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Location Decision-Making Techniques:
Center-of-Gravity Example
• Example 12.1
– For the cardboard and paper supplier,
dix = 60, diy = 290, and Vi = 13
ΣdixVi
Cx =
Σ Vi
ΣdiyVi
Cy =
Σ Vi
Exhibit 12.7 X and Y Coordinates for Suppliers
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Location Decision-Making Techniques:
Center-of-Gravity Example
• Frequency of deliveries
Exhibit 12.8 Truckloads per Month
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Location Decision-Making Techniques:
Center-of-Gravity Example
• Solution:
– Cx = (60 x 13) + (340 x 15) + (120 x 19) + (440 x 60)
13 + 15 + 19 + 60
= 322.99
– Cy = (290 x 13) + (280 x 15) + ( 200 x 19) + (110 x 60)
13 + 15 + 19 + 60
= 171.68
Locate DC at coordinates (322.99, 171.68)
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Location Decision-Making Techniques:
Center-of-Gravity Example
• Example 12.1
– The coordinates for the center-of-gravity location are approximately
(323, 172)
Exhibit 12.9 Center-of-Gravity Location
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Supply Chain Security
• Customs-trade partnership
Against Terrorism (C-TPAT)
– Voluntary certification
– Must comply with guidelines and
submit security profile
questionnaire
– Benefits include expedited
processing at borders and
reduced delivery times.
Exhibit 12.10 C-TPAT Certification
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Information Technology
• Radio Frequency Identification
(RFID)
– RFID tags emit a signal that can
be read at a distance.
– The signal contains a unique
identifier that can be read by a
reader
– Information about the item can
be stored on a host computer
– RFID can be used to aid in
inventory counts, security,
product tracking, etc.
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Information Technology
• Radio Frequency
Identification (RFID)
– Each tag has a unique
identifier that uses the
electronic product
code (EPC) format.
Exhibit 12.12 EPC Format
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Information Technology
• Potential RFID Applications:
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Information Technology
• Global Positioning systems
–
–
–
–
–
Determine precise locations using satellites.
Used to monitor vehicle locations
Estimate arrival times
Update customers on delays
Increase security
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Logistics Costs
• Example 12.2: Landed Cost computations
– Convert all logistics-related costs to a per unit basis for comparison
Exhibit 12.14 Landed Cost Computations
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