Chapter 7
Logistics
7-1
Lecture Outline
• What is Logistics?
• Logistics Tasks
• Transportation
• Warehouse
• Third-Party Logistics (3PL) Providers
7-2
What is Logistics?
Logistics is the business function responsible
for transporting and delivering products to the
right place at the right time throughout the
supply chain
– organize and manage distribution network
– requires access to information in real time
– requires large investments in infrastructure
– often outsourced
7-3
Evolution of Logistics
Since the growth of SCM in the 1990s, logistics
has been extended to include the movement of
goods through the entire supply chain, both
upstream and downstream.
7-4
Types of Logistics
Three types of Logistics
Business
Logistics
Military
Logistics
Event
Logistics
moving and
storing goods
throughout the
entire supply
chain
supporting
military needs
organizing and
deploying
resources in
preparation for
an event
Impact on the Organization
Look at the Impact on:
• Operations
• Marketing
• Packaging
• Finance
7-6
Impact on Operations
Logistics plans the timing and quantity of inventory
receipts throughout the supply chain
•Historical Manufacturing
– long production runs
– economies of scale, stored excess inventory
– less frequent, large quantity inventory deliveries
• Just-in-Time (JIT) Manufacturing
– shorter production runs
– more frequent, small quantity inventory deliveries
– less safety stock
– precise timing is essential
7-7
Impact on Marketing
Logistics works with marketing to
understand customer requirements, as
well as storage and delivery needs
– right timing of shipments
– right quantity of shipments
7-8
Impact on Packaging
Logistics makes packaging decisions for
goods as they are being transported
– assure materials are protected from
damage
– decisions impact the ability to handle the
materials
7-9
Impact on Finance
Logistics is responsible for large capital
expenditures: transportation, warehousing, and
inventory
• Return on Assets (ROA) can be positively
affected by:
– reducing inventory
– reducing investments in transportation and
warehousing
– improving customer service with timely and
7-10
accurate deliveries of goods
Impact on SCM
Logistics provides SCM with three utilities:
• Place
– ensures goods arrive at the right place
• Quantity
– ensures correct quantities are delivered
– tradeoff between too many goods and having shortages
• Time
– ensures goods arrive at the right time
7-11
Reverse Logistics
Reverse logistics is the process of moving products upstream
from the customer back toward manufacturers and suppliers
–
–
–
–
items customer did not want
returns of damaged items
overstock items
recalled items
Considerations:
– reverse flow does not directly add value
– ability to easily return goods is becoming an “order qualifier”
– items returned for different reasons may have different paths
The logistics function must:
– handle cash flows
– arrange for warehousing, transport, sorting, inspecting, and
storage
– abide by “green” laws
7-12
Logistics Tasks
• Transportation
• Storage
• Material Handling
• Packaging
• Inventory Control
• Order Fulfillment
• Facility Location
7-13
Logistics Tasks
• Transportation
– moves products throughout the supply chain
– high cost
– must decide mode of transportation
• consider required speed, security, and product
characteristics/requirements
• Storage
– where goods will be stored
– # of warehouses and distribution centers
– amount of inventory to store at each center
7-14
Logistics Tasks Continued
• Material Handling
– loading and unloading goods from vehicles
– placement and order picking
– moving goods throughout a facility
– decide degree of automation vs. manual labor
• automated storage and retrieval systems
(ASRS)
7-15
Logistics Tasks Continued
• Packaging
– protect products during transport and storage
– compatible with material handling equipment
– compatible with mode of transportation
• Inventory Control
– manage quantities of inventory
– arrange for timely replenishments
– maintain accurate counts of inventory
– electronic tracking and “cycle counting”
7-16
Logistics Tasks Continued
• Order Fulfillment
– pick and pack order
– arrange for transportation
– ship order
– assure lead time is not exceeded
• Facility Location
– determine best location of storage facilities
– consider relation to manufacturing facilities,
customers, and suppliers
7-17
Transportation
• Transportation moves products and arranges for optimal modes
of transportation
• Need to balance economies of scale and distance with
customer service
• Economies of Scale
– the larger the amount shipped at one time, the lower the
per unit cost
• avoid less-than-truck-load (LTL) shipments
• Economies of Distance
– the longer the distance moved at one time, the lower the
per unit cost
7-18
Modes of Transportation
Challenge is to select the right mode(s)
Common modes include:
• Truck
• Water
• Air
• Rail
• Pipeline
• Multimode
7-19
Modes of Transportation Continued
• Truck
– most flexible mode
– government maintains infrastructure
– challenge to find qualified drivers
• Water
– ability to transport very large and heavy
shipments
– very affordable
– extremely slow
7-20
Modes of Transportation Continued
• Air
– appropriate for lighter, smaller, and
higher priority items
– fastest mode
– most expensive mode
• Rail
– appropriate for moving heavy loads very
long distances
– long transit time
– low cost
– typically combined with another mode
7-21
Modes of Transportation Continued
• Pipeline
– limited to liquids and gases
– very specific infrastructure
• Multimode
– several modes are often combined for
optimal cost and customer service
– coordination can be a challenge
– common for companies to use thirdparty-logistics (3PL) providers
7-22
7-23
Warehouses in the Supply Chain
Warehouses provide a centralized location
that stores and organizes inventories before
distribution
– often called distribution centers
– JIT and lean manufacturing can locate
warehouses near the manufacturing
facility for frequent deliveries
– can be utilized to create product
assortments
7-24
Nontraditional Warehouse Tasks
Increasingly warehouses are being used to
perform nontraditional tasks such as:
– repair items
– add labels and price tags
– sequence items in preparation for the
retail floor
– put garments on hangers
7-25
Cross-Docking
Cross-docking is a popular form of warehouse
sorting that attempts to move products “cross the
dock” from inbound to outbound, without ever
being stored
– arriving larger shipments are broken into
smaller shipments for local delivery
– requires precise timing and coordination
– information technology tracks inventories
– especially used in retail industry
7-26
Facility Location
Factors to consider when locating warehouses
and distribution centers:
– proximity to customers or manufacturing facilities
– availability of infrastructure and access to
transportation
– cost and availability of labor
– overall business climate including tax structure
7-27
Third-Party Logistics (3PL) Providers
3PLs are companies that provide logistics and
transportation services to other firms
• Common to outsource logistics
– many companies deem logistics activities as noncore
activities
– logistics activities require significant assets
– potential for large cost savings
• 3PLs play comprehensive strategic role in
customer’s supply chain activities
7-28
29
LOCATION
Location - 29
30
SUPPLY NETWORK DESIGN
Location Techniques
1.Weight Score method
2.Break Even analysis
3.Center of Gravity method
Location - 30
Weighted-score method
31
A company has decided to expand overseas by opening its first
business in Europe. The rating sheet in the table below provides a
list of qualitative factors that management has decided are
important; their weightings and rating for two possible sites –
Dijon, France and Copenhagen, Denmark – are shown.
SCORES (OUT OF 100)
FACTOR
WEIGHT
France
Denmark
Labor availability and attitude
0.25
70
60
People experience
0.05
50
60
Per capita income
0.1
85
80
Tax structure
0.39
75
70
Education & health
0.21
60
70
TOTALS
1.00
Location - 31
Weighted-score method
32
WEIGHTED SCORES
France
Denmark
Labor availability
and attitude
0.25
0.25(70)
17.5
0.25(60)
15
People experience
0.05
0.05(50)
2.5
0.05(60)
3
Per capita income
0.1
0.1(85)
8.5
0.1(80)
8
Tax structure
0.39
0.39(75)
29.3
0.39(70)
27.3
Education & health
0.21
0.21(60)
12.6
0.21(70)
14.7
TOTALS
1.00
70.4
68
Location - 32
Weighted-score method
33
FACTOR INFORMATION FOR ELECTRONICS MANUFACTURER
Factor Score for Each Location
Location Factor
Factor Weight
A
B
C
D
1.
Labor climate
20
5
4
4
5
2.
Quality of life
16
2
3
4
1
3.
Transportation system
16
3
4
3
2
4.
Proximity to markets
14
5
3
4
4
5.
Proximity to materials
12
2
3
3
4
6.
Taxes
12
2
5
5
4
7.
Utilities
10
5
4
3
3
Location - 33
Weighted-score method
34
CALCULATING WEIGHTED SCORES FOR ELECTRONIC MANUFACTURER
Weighted Score for each Location
Location Factor
Factor Weight
A
B
C
D
1.
Labor climate
20
100
80
80
100
2.
Quality of life
16
32
48
64
16
3.
Transportation system
16
48
64
48
32
4.
Proximity to markets
14
70
42
56
56
5.
Proximity to materials
12
24
36
36
48
6.
Taxes
12
24
60
60
48
7.
Utilities
10
50
40
30
30
100
348
370
374
330
Totals
Location - 34
Weighted-score method
35
Based on the weighted scores shown below, location C is
the preferred site, although location B is a close second.
CALCULATING WEIGHTED SCORES FOR ELECTRONIC MANUFACTURER
Weighted Score for each Location
Location Factor
Factor Weight
A
B
C
D
1.
Labor climate
20
100
80
80
100
2.
Quality of life
16
32
48
64
16
3.
Transportation system
16
48
64
48
32
4.
Proximity to markets
14
70
42
56
56
5.
Proximity to materials
12
24
36
36
48
6.
Taxes
12
24
60
60
48
7.
Utilities
10
50
40
30
30
100
348
370
374
330
Totals
Location - 35
36
Factor Rating

Factor Rating is a popular quantitative technique to help
determine warehouse and distribution center location

Evaluates multiple location alternatives based on selected
factors
7-36
Location - 36
37
Factor Rating Example
Urban Apparel has identified six factors it considers important in
determining the location of its distribution center. There are two
potential locations that have been evaluated for all six factors on
a five-point scale (1 = poor to 5 = excellent). Factor weights have
been assigned to the six factors.
7-37
Location - 37
38
SUPPLY NETWORK DESIGN
Location Techniques
1.Weight Score method
2.Break Even analysis
3.Center of Gravity method
Location - 38

Center of Gravity method
39
Suppose that the shipments of a product depicted in the figure are
according to the following table. Determine the centre of gravity.
Destination
x
y
Weekly quantity
D1
800
D2
900
D3
200
D4
100
TOTAL
2,000
Location - 39

Center of Gravity method
40
10
8
6
D2
D4
4
D3
D1
2
0
2
4
6
8
10
12
Location - 40

Destination
Center of Gravity method
41
x
y
D1
2
2
800
D2
3
5
900
D3
5
4
200
D4
8
5
100
TOTAL
Weekly quantity
2,000
x=ΣxiQi/Σqi = 2(800) +3(900) + 5(200)+8(100) /2,000 = ~3
y=ΣyiQi/Σqi = 2(800) +5(900) + 4(200)+5(100) /2,000 = 3.7
Location - 41

Center of Gravity method
42
10
8
6
D2
D4
4
(3, 3.7) D3
2
0
D1
2
4
6
8
10
12
Location - 42

Center of Gravity method
43
New York (130,130)
Chicago (30,120)
120
Location Volume
Chicago 200
Pittsburgh 100
New York 100
Atlanta
200
Pittsburgh (90,110)
60
Atlanta (60,40)
0
0
60
120
Location - 43

Location Volume
Chicago
200
Pittsburgh 100
New York
100
Atlanta
200
Center of Gravity method
X-Coordinate
30
90
130
60
44
Y-Coordinate
120
110
130
40
X coordinate of warehouse:
Cx=(200x30+100x90+100x130+200x60)/(200+100+100+200) = 66.7
Y coordinate of warehouse:
Cy=(200x120+100x110+100x130+200x40)/(200+100+100+200) = 93.3
Location - 44

Location Volume
Chicago 2000
Pittsburgh 1000
New York 1000
Atlanta
2000
Center of Gravity method
45
New York (130,130)
Chicago (30,120)
120
X
Pittsburgh (90,110)
Center of gravity = (66.7, 93.3)
60
Atlanta (60,40)
0
0
60
120
Location - 45
46
SUPPLY NETWORK DESIGN
Location Techniques
1.Weight Score method
2.Break Even analysis
3.Center of Gravity method
Location - 46
47
Using Break-Even Analysis
An operations manager narrowed the search for a new
facility location to four communities. The annual fixed costs
(land, property taxes, insurance, equipment, and buildings)
and the variable costs (labor, materials, transportation, and
variable overhead) are as follows:
Community
Fixed Costs per Year
Variable Costs per Unit
A
$150,000
$62
B
$300,000
$38
C
$500,000
$24
D
$600,000
$30
Location - 47
48
Using Break-Even Analysis
An operations manager narrowed the search for a new
facility location to four communities. The annual fixed costs
(land, property taxes, insurance, equipment, and buildings)
and the variable costs (labor, materials, transportation, and
variable overhead) are as follows:
Community
Fixed Costs per Year
Variable Costs per Unit
A
$150,000
$62
B
$300,000
$38
C
$500,000
$24
D
$600,000
$30
Location - 48