MARIUS M. SOLOMON
CRT, University of Montreal
March, 2000
Logistics Evolution
Local
Regional
National
Global
Progression of Competitive Advantage
‘80s
Increased
Variety
Qualit
‘80s y
Fast Response
Time
Focused
Production
‘70s
‘50s
‘90s
E-Business
Scale
Facilities
Low Wage
Rates
Cost Based
Management
‘60s
Time Based
Management
Source: Adapted from Stalk and Hout, Competing Against Time, 1991
Technology
Enabled
Management
2000
Competitive
Advantage
Strategic
Vision
Planning
Global Competitors
Global Markets
World-Class
Manufacturing
Quality
People
Speed
Technology
Management Resources
Customers
Integration
TQC
JIT
CIM/CIL
Source: Adapted from Gunn, Manufacturing for Competitve Advantage, Ballinger, 1987
Recent Evolution
Fragmentation
1960s
Demand Forecasting
Purchasing
Requirements Planning
Production Planning
Manufacturing Inventory
Evolving Integration
1980s
Materials
Management
Warehousing
Materials Handling
Industrial Packaging
Inventory
Physical
Distribution
Distribution Planning
Order Processing
Transportation
Customer Service
Source: Adapted from Coyle, Bardi, and Langley, The Management of Business Logistics, West 1992
Total Integration
2000s
Supply
Chain
Logistics
Integration
Warehousing
Distribution
Planning
Order
Processing
Transportation
Inventory
Materials
Handling
Information
Technology
Industrial
Packaging
Demand
Forecasting
Production
Requirements
Planning
Planning
Customer
Service
Purchasing
Manufacturing
Inventory
The physical, financial, and information networks that
move the materials, funds, and related information
through the full logistics process ... from acquisition of
raw materials to delivery of finished products to the
end user.
The Supply Chain
 Plan
 Implement
 Control
Raw Materials
Production
Material Flow and Storage
Storage
Information Flow and Storage
Customer
Nodes and Links
in a Logistics System
Node
Node
Link
Retailer
Warehouse
Node
Link
Node
Link
Plant
Link
Link
Warehouse
Node
Retailer
Typical Supply Chain Network
Suppliers
Plants
Distribution
Centers
Customers
Hierarchy of Logistics Management Decisions
STRATEGIC
Location Choice
Transport Mode Selection
Vendor Choice
TACTICAL
Throughput levels
Employment levels
Distribution routes
Uncertainty
Time
frame
Scope
OPERATIONAL
Vehicle scheduling Order
tracking
Inventory
replenishment
Logistics Environments
External -Macro
Value-added Role
Time Utility
Place Utility
Economic Impacts
Economic Importance
Intrafirm-Micro
Competitive Advantage
Value Chain
Logistics Interfaces
with Value Activities
Interfirm Distribution Channels
Channel
Structure
Relationships
Source: Adapted from Coyle, Bardi, and Langley, The Management of Business Logistics, West , 1992.
Fundamental Utility Creation in the
Economy
Production
Form Utility
Logistics
Place Utility
Marketing
Possession Utility
Time Utility
Source: Adapted from Coyle, Bardi, and Langley, The Management of Business Logistics, West, 1992.
The Generic Value Chain
Cost leadership
Differentiation
Focus
Firm Infrastructure
Support
Activities
Human Resource Management
Technology Development
Procurement
Inbound
Operations
Logistics
Outbound
Logistics
Marketing
Service
and Sales
Primary Activities
Source: Michael E. Porter, Competitive Advantage, Free Press, 1985.
Conflicting Objectives
Objectives
High revenues through:
Sales and
Marketing
High levels of product
availability
Cost-effective production
through:
Production
High, capacity utilization
Long production runs
Few set-ups
Finance
and
accounting
Reduce investments and
costs through:
Fewer facilities
Lower inventory levels
Implications
L
o
g
i
s
t
i
c
s
Source: Magee, Copacino, Rosenfield, Modern Logistics Management, Wiley, 1985.
Higher
Lower
More
Fewer
Customer
Service
Disrupting
factors in
production
Higher
Inventories
Lower
Product
Price
Promotion
Logistics
Place / Customer
Service Levels
Inventory
carrying costs
Lot quantity cost
Transportation
costs
Order processing
and information
costs
Warehousing costs
(throughput cost
not storage)
Total Cost =Transportation costs + Inventory carrying costs +...
Source: Lambert and Stock, Strategic Logistics Management, Irwin, 1993.
Marketing
Cost Trade-offs in
Logistics
Distribution Channels
Manufacturers and
Industrial Users
Retailers
Inventory Repositioning
Farm and
Raw
Materials
Consumers
and
Government
Wholesalers
Distribution Channel -- Loose Links,
Independent Businesses
Inventory management by
each channel participant
Manufacturer
Company Truck
Manufacturer
Distributor
Common Carrier
Retailer
Local Delivery
Source: Adapted from Bowersox and Closs, Logistical Management McGraw-Hill, 1996.
The Supply Chain
Apparel Pipeline
Raw
Materials
Textile
Production
Apparel
Retail
Customers
Pipeline inventory
management
Information sharing
Joint planning
Organization of ProductionDistribution System
6
Inventory
Factory
1
1
Factory
Warehouse
2
0.5
Weeks
Inventory
2
1
Distributors
1
0.5
Inventory
3
Retailers
Orders From
Customers
Forrester, J.W. (1958) Industrial Dynamics:
A Major Breakthrough for Decision Makers. Harvard Business Review.
1
Delivery of Goods
To Customers
The Apparel Pipeline
Raw
Material
Textile
Production
Apparel
Retail
Customer
Average Time:
66 Weeks
Information sharing
Joint planning
Source: Blackburn, Time Based Competition, 1991
Pipeline inventory
management
FORECAST ERROR (%)
Effect of Lead Time on Retailer’s
Stocking Decision
+40
+20
0
+/-40%
+/-20%
+/-10%
-20
-40
-26
Weeks
Source: Blackburn, Time Based Competition, 1991
-16
Weeks
Start of
Season
TIME
Two-Way Flows in Apparel Chain
Product
Textiles
Apparel
Orders and
Capacity
Commitments
Source: Blackburn, Time Based Competition, 1991
Inventory and
Order Information
Retail
Point of
Sale
Sales
Information
Keys to Fast-Cycle Logistics
Cultural
Change From
Top Down
Information
Technology
Partnerships
Shorter
Manufacturing
Cycles
Information
Sharing
Fast Cycle
Logistics
Source: Blackburn, Time Based Competition, 1991
OR Contributions
Economics
 Game theory
 Information Management
Inventory Models
Inventory Control and Vehicle Routing
Distribution Requirements Planning
Enterprise Resource Planning
Multiobjective Decision Support Systems
Economics
 Capacity Choice and Allocation: Strategic Behavior and
Supply Chain Performance, G. Cachon and M. Lariviere,
Management Science/Vol. 45, No. 8, August 1999
 Truth telling provides some advantages to the supply chain that
should be weighed against the costs of inducing it
 Competitive and Cooperative Inventory Policies in a TwoStage Supply Chain, G. Cachon and P. Zipkin, Management
Science/Vol. 45, No. 7, July 1999
 Competition generally lowers supply chain inventory relative to the
optimal solution
Economics
 The Role of Returns Policies in Pricing and Inventory
Decisions for Catalogue Goods Authors: H. Emmons and S.
Gilbert, Management Science /Vol. 44, No. 2, February 1998
 Relationship of such policies return policies on both retailer’s and
manufacturer’s profits
 Capacity Allocation Using Past Sales: When to Turn-and-Earn
G. Cachon and M Lariviere, Management Science/Vol. 45,
No. 5, May 1999
 Turn-and-earn allocation does not generally coordinate the system, and
in certain cases is a means for the supplier to increase profits at the
expense of retailers
Economics
 Centralization of Stocks: Retailers vs. Manufacturer, R.
Anupindi and Y. Bassok, Management Science/Vol. 45, No.
2, February 1999
 Shows that centralizing stocks by retailers increases profits for the
manufacturer up to a certain level of “market search” in the supply
chain
 Value of Information in Capacitated Supply Chains, S.
Gavirneni, et al., Management Science/Vol. 45, No. 1,
January 1999
 Examine benefits of partial vs complete information sharing in a
supplier-retailer setting
Economics
 The Quantity Flexibility Contract and Supplier-Customer
Incentives, A. Tsay, Management Science/Vol. 45, No. 10,
October 1999
 Quantity Flexibility (QF) contract and its implications for the
behavior and performance of suppliers and customers
 Quantity Flexibility Contracts and Supply Chain Performance,
A. Tsay and W. Lovejoy, Manufacturing & Service
Operations Management Vol 1, No 2, 1999
Analysis extended to multiple time periods
Economics
 Coordinating Investment, Production, and Subcontracting, J.
Van Mieghem, Management Science/Vol. 45, No. 7, July
1999
Analysis of the role of transfer prices and of the bargaining
power of buyer and supplier
 Decentralized Multi-Echelon Supply Chains: Incentives and
Information : H. Lee and S. Whang, Management
Science/Vol. 45, No. 5, May 1999
Desirable properties of performance measurement schemes
that align the incentives and interests of the multiple
managers in decentralized supply chains
Economics
 Echelon Reorder Points, Installation Reorder Points, and the
Value of Centralized Demand Information, F. Chen,
Management Science /Vol. 44, No. 12, Part 2 of 2, December
1998
 Examine cost difference between an echelon stock and an installation
stock policy.
 Decentralized Supply Chains Subject to Information Delays,
F. Chen, Management Science/Vol. 45, No. 8, August 1999
 Information lead times play the same role as the
production/transportation counterparts in the determination of the
optimal replenishment strategies, but they are less costly
Inventory Models
 Managing Supply Chain Demand Variability with Scheduled
Ordering Policies, G. Cachon, Management Science/Vol. 45,
No. 6, June 1999
 Identify two strategies that reduce the supplier’s demand variance and
also reduce total supply chain costs
 The Stabilizing Effect of Inventory in Supply Chains, M.
Baganha and M. Cohen, Operations Research Vol. 46, Supp.
No. 3, May–June 1998
 Model helps to explain the “bullwhip” effect and indicates
mechanisms that can promote stabilization
Inventory Models
 A Single-Item Inventory Model for a Nonstationary Demand
Process, S. Graves, Manufacturing & Service Operations
Management Vol. 1, No. 1, 1999
 Demand process for the upstream stage is more variable than that
for the downstream stage
Probabilistic Analyses and Algorithms for
Three-Level Distribution Systems
Wal-Mart’s cross-docking strategy
Integrate inventory control and vehicle routing for a
distribution system consisting of a single vendor, a
fixed number of warehouses, and many retailers
Warehouses receive fully loaded trucks from the
vendor but never hold inventory
Warehouses serve only to coordinate the frequency,
time and sizes of deliveries to retailers
Source: L. Chen and D. Simchi-Levi, MANAGEMENT SCIENCE/Vol. 44, No. 11, Part 1 of 2, November 1998
Distribution Requirements Planning
 A Dynamic Model For Requirements Planning With
Application To Supply Chain Optimization, S. Graves, et al.,
Operations Research Vol. 46, Supp. No. 3, May–June 1998
 Use a model for a single production stage as a building block for
modeling a network of stages
 Apply the DRP model to strategic inventory placement in the film
manufacturing processes at Kodak
Extended-Enterprise Supply-Chain
Management at IBM Personal Systems
Group
and Other Divisions
Source: G. Lin et al., ITERFACES 30: 1 January–February 2000 (pp. 7–25)
Cooperative Multiobjective Decision
Support
for the Paper Industry
The A-team
architecture
Source: S. Murthyet al., I TERFACES 29: 5 September–October 1999 (pp. 5–
Unifi: Begin at Home - ERP
 Keys to competing: Automation and process control systems
 Message to supply chain: Cooperate as if vertically integrated
 Companywide program of linkages among processes and
machines
 Exchanging production and quality information with suppliers over the
Internet
 Daily WIP information to make-to-order customers
 Computer to computer exchanges
 Allow partners to come in, rather than pushing data out
 Spin off as Manufacturing-Systems Consultant
Source: How a Tighter Supply Chain Extends the Enterprise, Fortune, November 8, 1999.
Mercury Marine: Dealer focus
 Vertically integrated
 Supplier consigns truckload loads to factory and gets
paid as used
 MercNet - Private electronic network for parts ordering
moved to the Internet
 Share forecasts and collaborate with dealers on promotions
 Resistance from sales on electronic ordering
Source: How a Tighter Supply Chain Extends the Enterprise, Fortune, November 8, 1999.
Rocketdyne: Suppliers Beyond the
Firewall
Brought engineering, manufacturing and suppliers
together from the start
Alleviated job-shop problems with Manufacturing
Execution System (MES)
Computer connections to work areas
Linked with MRP and Product Data Management
Included suppliers via the Internet
Dedicated server, control on depth of system access
Source: How a Tighter Supply Chain Extends the Enterprise, Fortune, November 8, 1999.
Adaptec: Value Added Cycle Time
 100 day cycle time
 Manually entered information
 Different computer systems
 Treat suppliers as partners
 Incompatible systems: SAP vs homemade ERP
 Extricity Internet Software
 Fast orders, drawings, confirmations
 Cycle time dropped to 55 day
 WIP shrank from $18 M to $9 M
 If customers would share forecasts, Adaptec could deliver
directly rather than from the current 22 FG warehouses
Source: How a Tighter Supply Chain Extends the Enterprise, Fortune, November 8, 1999.
Nimbus: Streamlined Supply Chain by
Merging
Most studios outsource production, distribution,
and packaging of VHS tapes and DVDs
Technicolor - largest converter of movies to VHS
People, systems, and facilities capability to handle
distribution
Nimbus’ sales rose to $89 M in first six months of 1999
Consolidation of production facilities and other supply
chain moves - $10.2 M savings for the first half of 1999
Conclusions
Integration and coordination
Production and Distribution
Routing and Location
Routing and Inventory
Dynamic Problems
Real Time
Conclusions
Increase in fast-cycle logistics for companies of all size
Doing business faster, and especially smarter
replacing inventory with information
With real-time information companies can manage
inventory in motion, rather than at rest
Supply chains are increasingly moving online
Can dramatically reduce overhead and obsolescence
while speeding time to market
Source: Fedex Corporation, 1999 Annual Report