Logistics Cost
Professor Goodchild
Spring 11
Initial gains from deregulation (restructuring of networks), stalling in the mid-90s
dropping off again after 9/11, but increasing with congestion and fuel prices
After 2003.
Logistics Decisions
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Improve/change your existing system
Create a new system
Comparison with other systems
Evaluate choices in your own system
Transportation Goals
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Reduce cost (5-10% of sales)
Meet reliability goals
Meet service quality goals
Simplify operations
Increase sustainability
Integration of Logistics into Business
Operations
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Operational, or daily decisions are made by
comparing transportation and inventory costs
Strategic, or long term decisions are made by
comparing logistics costs (transportation and
inventory) to manufacturing and production costs
Lengthening of supply chains as transportation cost
decreased and new opportunities to reduce
manufacturing cost were found
• Strategic Decisions
– System design, acquisition of resources, based on
aggregated data
• Tactical Decisions
– Monthly or quarterly decisions, production and
distribution planning, based on disaggregated
data
• Operational Decisions
– Daily decisions, based on very detailed data
Methods
• Benchmarking
• Simulation
• Optimization
• Continuous approximation
Considerations
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How accurate is your input data?
How do errors propagate in your analysis?
What have you learned from the analysis?
What kind of decision will you be making?
How does your analysis handle variability?
How well can your results be communicated?
Can your method be solved, or is your answer an
approximation?
• What level of complexity can be managed?
Logistics Decisions
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Should I open a new facility? Where?
How many trucks should I buy? What size?
How much should be manufactured? Where?
How often should I send out delivery trucks?
What mode of transportation should I use?
How many drivers do I need today?
How does REI get goods to market?
Asian
Factories
West Coast
Port
Container on
marine vessel
In transit inventory
Distribution
Center
Drayage
truck
Destination
Store
Short or
Long-haul
truck
• Cycle Inventory: the average amount of inventory used to satisfy demand
between receipt of supplier shipments. The size of the cycle inventory is a
result of the production or purchase of material in large lots. Companies
produce or purchase in large lots to exploit economies of scale in the
production, transportation, or purchasing process. With the increase in
lot size, however, also comes an increase in carrying costs. The basic tradeoff supply managers face is the cost of holding larger lots of inventory
(when cycle inventory is high) versus the cost of ordering product
frequently (when cycle inventory is low). Some of this inventory may be
in-transit, while some may be inventory-at-rest.
• Safety inventory: inventory held in case demand exceeds expectation; it is
held to counter uncertainty. If they have too much safety inventory, goods
go unsold and may have to be discounted. If the company has ordered too
little safety inventory, however, the company will lose sales and the
margin those sales would have brought. Therefore, choosing safety
inventory involves making a trade-off between the costs of having too
much inventory and the costs of losing sales due to not having enough
inventory. Generally this inventory is inventory-at-rest, so that it is
immediately available.
How do goods get to market?
Asian
Factories
West Coast
Port
Container on
marine vessel
Distribution
Center
Drayage
truck
Destination
Store
Short or
Long-haul
truck
Transportation cost is typically much less significant than the reductions in
manufacturing.
Logistics Costs
• Transportation cost
– The cost incurred through the need to move
products over space.
– In a vehicle, with a forklift, etc.
• Inventory cost
– The cost incurred through the need to hold goods
over time.
– In a vehicle, in a distribution center, etc.
• In-transit inventory or pipeline inventory: inventory
that is in the process of movement from point of
receipt or production and between points of storage
and distribution.
• Inventory-at-rest: inventory that is NOT in the
process of movement from point of receipt or
production and between points of storage and
distribution, rather it is stationary, typically at a
production facility, warehouse, distribution center, or
consumption facility.
How does REI get goods to market?
Asian
Factories
West Coast
Port
Container on
marine vessel
In transit inventory
Distribution
Center
Drayage
truck
Destination
Store
Short or
Long-haul
truck
Follow the path of an item
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Carried from production area to storage area
Held in temporary storage
Loaded into transport vehicle
Transported to the destination
Unloaded, handled, and held for consumption
What incurs cost?
• Overcoming distance (motion):
– transportation cost (over the road/rail)
– handling cost (through a terminal, in and out of vehicles)
• Overcoming time (holding):
– holding cost:
• Rent (proportional to D’H)
• Waiting (value*time*interest rate)
– In transit
– At rest
How you calculate the value depends on the analysis you are doing (cost or price)
We will include all costs, regardless of who pays them (we are designing systems)
Cumulative Number of Items Diagram
Production (rate D’)
shipments
cumulative
number of
items
An item is a
fixed quantity
of infinitely
divisible
quantity (e.g.
person,
parcel, case
of beer)
H
tm
Consumption (D’)
arrivals
time
Consider units on area
Queue Discipline
• FIFO: First In First Out
• LIFO: Last In First Out
• Others
If LIFO inventory cost is usually underestimated
Holding cost: Rent
• proportional to max. accumulation
• Independent of flow rate, D’
• Proportional to max. time between dispatches
Holding cost: Waiting
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Cost associated with delay to items
ciHi + citm
Stationary + pipeline inventory
Determining ci is difficult
Transportation Cost
• Shipment cost has fixed and variable portions:
cf + cvv (v is number of items)
– Fixed cost: driver wage
– Variable cost: increased fuel consumption
• Cost for n shipments: cfn + cvV
(V is total items across shipments, n is number
of shipments)
Transportation cost
• Cost per item:
(cfn + cvV)/V = cf/vavg+cv
– Economies of scale from sharing fixed cost
– vavg=D’Havg so cost per item is (cf/D’Havg)+cv
• Transportation cost per item decreases with
increasing average headway
• Holding cost increased with maximum headway
– ciHi + citm
• Shipments should be spread so as to minimize
the maximum (all the same)
Transportation cost and distance
• cf (fixed shipment cost) is independent of v
(items)
• both cf and cv are typically functions of
distance (d)
• cf=cs+cdd
• cv=c’s+c’dd
Transportation cost and distance
• cf=cs+cdd
• cv=c’s+c’dd
• Cost for n shipments: cfn+cvV
– csn+cddn+c’sV+c’ddV
– Add cost of multiple stops:
cs(1+ns)n+cddn+c’sV+c’ddV
So small we neglect it
Transportation cost
• Cost per item (divide by nvavg):
– cs(1+ns)/vavg+cdd/vavg+c’s or
– cs(1+ns)/D’Havg+cdd/D’Havg+c’s
• If headways vary a lot so do shipment sizes,
and therefore truck sizes, better to use
consistent truck sizes
Capacity Restrictions
Trans. Cost
Per
shipment
vcv
cf
Slope is cost per item, lowest
when truck full
shipment size
vmax – number of items that will fit in vehicle
Relationship to size
Magnitude of fixed and variable cost determine most economic
choice as a function of shipment size.
Trans. Cost
Per
shipment
As shipment size increases, favor lower variable
and higher fixed costs.
shipment size