Chapter 3: The Product
1. Classification.
2. Life Cycle.
3. 80-20 Curve.
4. Product Characteristics.
5. Packaging.
6. Pricing.
1. Classification
• Different products should be treated differently.
• Consumer Goods:
– Directed to ultimate consumers.
– Buyer seeks goods.
– Marketing is important.
• Industrial Goods:
– Used to produce other goods and services.
– Raw materials, components, equipment.
– Vendors seek buyers (usually).
Classification: Consumer Goods
• Convenience goods & services:
– Food, convenience store products, gasoline, etc.
– Dry cleaners, banking, etc.
• Shopping goods & services:
– Clothes, furniture, automobiles, etc.
– Healthcare (personal physician), restaurants, etc.
• Specialty goods & services:
– Luxury autos, gourmet foods, custom products, etc.
– Advanced medical treatments, etc.
Consumer Goods & Logistics
Convenience
goods
Shopping
goods
Specialty
goods
Substitutability HIGH
MEDIUM
LOW
Availability
HIGH
MEDIUM
LOW
LOW
MEDIUM
HIGH
Value
2. Life Cycle
Sales
• Logistics system changes as product “ages”.
Maturity
Growth
Decline
Introduction
Time
Life Cycle
• Logistics system changes as product “ages”.
Sales
Growth:
Expanding
availability;
High service
level
Introduction:
Limited
availability
Maturity:
Widest
availability
Decline:
Decreasing
availability;
Reduced
service
Time
3. 80-20 Curve (Pareto Principle)
• Most of the revenue (or profit) comes from a
relatively small percentage of items (products).
• Focus on the small number of important items.
– Identify the important items: ABC classification.
– Apply highest service level to most important items.
• Examples:
– 20% of the people do 80% of the work.
– 10% of the people cause 90% of the problems.
– 15% of the items (products) create 90% of the sales.
ABC Classification
1. Rank products (items) by sales ($/year).
2. a. Calculate cumulative % of total sales.
b. Calculate cumulative % of total products (items).
3. Plot 2.a. vs. 2.b.
4. Select top items as “A”, middle as “B”, and bottom
as “C”.
- Breakpoints are flexible; depend on data.
- Generally more B’s than A’s, and more C’s than B’s.
ABC Classification Example: 8 Products
Product
P-74
P-26
P-51
Q-47
P-33
Q-65
Q-66
P-17
Sales
($x1000)
760
640
240
140
100
60
40
20
% of Sales
Given
Cumulative
% of Sales
% of Items
Cumulative
% of Items
Class
ABC Classification Example
Product
P-74
P-26
P-51
Q-47
P-33
Q-65
Q-66
P-17
Sales
($x1000)
760
640
240
140
100
60
40
20
% of Sales
38
32
12
7
5
3
2
1
Total Sales = 2000
Calculate
Cumulative
% of Sales
38
70
82
89
94
97
99
100
% of Items
12.5
12.5
12.5
12.5
12.5
12.5
12.5
12.5
Cumulative
% of Items
12.5
25
37.5
50
62.5
75
87.5
100
Class
ABC Classification Example
Product
P-74
P-26
P-51
Q-47
P-33
Q-65
Q-66
P-17
Sales
($x1000)
760
640
240
140
100
60
40
20
% of Sales
38
32
12
7
5
3
2
1
Cumulative
% of Sales
38
70
82
89
94
97
99
100
% of Items
12.5
12.5
12.5
12.5
12.5
12.5
12.5
12.5
Class
100%
Cumulative % of Sales
Total Sales = 2000
80-20 Curve
Cumulative
% of Items
12.5
25
37.5
50
62.5
75
87.5
100
50%
0%
0%
50%
100%
Cumulative % of Items
ABC Classification Example
Product
P-74
P-26
P-51
Q-47
P-33
Q-65
Q-66
P-17
Sales
($x1000)
760
640
240
140
100
60
40
20
% of Sales
38
32
12
7
5
3
2
1
Cumulative
% of Sales
38
70
82
89
94
97
99
100
% of Items
12.5
12.5
12.5
12.5
12.5
12.5
12.5
12.5
Cumulative
% of Items
12.5
25
37.5
50
62.5
75
87.5
100
Class
Total Sales = 2000
Determine
ABC Classification Example
Product
P-74
P-26
P-51
Q-47
P-33
Q-65
Q-66
P-17
Sales
($x1000)
760
640
240
140
100
60
40
20
% of Sales
38
32
12
7
5
3
2
1
Cumulative
% of Sales
38
70
82
89
94
97
99
100
% of Items
12.5
12.5
12.5
12.5
12.5
12.5
12.5
12.5
Cumulative
% of Items
12.5
25
37.5
50
62.5
75
87.5
100
Class
A
C
Total Sales = 2000
Determine
ABC Classification: Example
Product
P-74
P-26
P-51
Q-47
P-33
Q-65
Q-66
P-17
Sales
($x1000)
760
640
240
140
100
60
40
20
% of Sales
38
32
12
7
5
3
2
1
Cumulative
% of Sales
38
70
82
89
94
97
99
100
% of Items
12.5
12.5
12.5
12.5
12.5
12.5
12.5
12.5
Cumulative
% of Items
12.5
25
37.5
50
62.5
75
87.5
100
Class
A
A
B
B
C
C
C
C
Total Sales = 2000
In this example:
A: 25% of items; 70% of sales
B: 25% of items; 19% of sales
C: 50% of items; 11% of sales
Determine
80-20 Curve: Mathematical Model
Y = cumulative % of sales
X = cumulative % of items
A = shape constant (0<A)
100%
50%
Y=
(1+A)X
A+X
Given an X and Y, then A =
X(1-Y)
0%
0%
50%
Y-X
Given: (1) 30% of the items produce 75% of the sales
(2) The first 20% are to be A items,
the next 30% are B items, and
the last 50% are C items.
What % of sales do A, B and C items account for?
100%
Using the Mathematical Model
Given an X (% of items) and a corresponding Y (% of sales).
Find shape constant A:
A=
X(1-Y)
Y-X
For each set of items:
Use the shape constant A and the % of items (X) to calculate %
of sales (Y).
Y=
(1+A)X
A+X
80-20 Curve: Mathematical Model
Given: (1) 30% of the items produce 75% of the sales
(2) The first 20% are to be A items,
the next 30% are B items, and
the last 50% are C items.
What % of sales do A, B and C items account for?
X=0.30; Y= 0.75
A items: X = 0.20
A=
Y=
X(1-Y)
Y-X
0.30(1-0.75)
=
(1+0.1666)X
0.1666+X
0.75-0.30
=
= 0.16666
(1+0.1666)0.2
0.1666+0.2
= 0.6363
A: 63.6% of sales
B: 23.9% of sales
C items:
C: 12.5% of sales
Y = 1 - 0.875 = 0.125
ANSWER
A+B items:
X = 0.50
Y = 0.875
B items alone: Y = 0.875 - 0.636 = 0.2387
Turnover Ratio
Turnover Ratio =
Example:
Average Inventory
$1,000,000 sales per year
$200,000 average inventory
Turnover Ratio =
Small inventory
Annual Sales
1,000,000
200,000
=5
(5:1
Large turnover ratio
Small inventory cost
Average Inventory =
Annual Sales
Turnover Ratio
or
5 to 1)
Average Inventory
Given: (1) 30% of the items produce 75% of the sales
(2) The first 25% have a 10:1 turnover ratio (A items),
the next 30% have a 5:1 turnover ratio (B items), and
the last 45% have a 2:1 turnover ratio (C items).
(3) Total annual sales are estimated to be $5,000,000.
What is the total average value of inventory (for A, B and
C items together)?
TO SOLVE:
1. Compute shape constant A.
2. For each set of items:
- Calculate % of sales (Y) using shape constant A and % of items (X).
- Calculate average inventory where Annual Sales is Y times total
annual sales.
Average Inventory =
Annual Sales
Turnover Ratio
Average Inventory Example
Given: (1) 30% of the items produce 75% of the sales
(2) The first 25% have a 10:1 turnover ratio (A items),
the next 30% have a 5:1 turnover ratio (B items), and
the last 45% have a 2:1 turnover ratio (C items).
(3) Total annual sales are estimated to be $5,000,000.
Determine shape constant A, then inventory for A items.
X=0.30; Y= 0.75
A items:
A=
X(1-Y)
Y-X
X = 0.25
Average Inventory =
0.30(1-0.75)
=
0.75-0.30
Y = 0.70
0.70x5000000
10
= 0.16666
70% of sales
= $350,000
Average Inventory Example - continued
Determine cumulative sales for A and B items,
then inventory for B items (5:1 turnover ratio),
then inventory for C items (2:1 turnover ratio).
A items:
X = 0.25
Y = 0.70
0.70x5000000/10 =
70% of sales
$350,000 inventory
A+B items:
X = 0.55
Y = 0.895
B items alone: Y = 0.895 - 0.7 = 0.195
0.195x5000000/5 =
19.5% of sales
$195,000 inventory
C items:
Y = 1 - 0.895 = 0.105
0.105x5000000/2 =
10.5% of sales
$262,500 inventory
ANSWER = $807,500
Average Inventory Sample Problems
Given: (1) 30% of the items produce 75% of the sales
(2) The first 25% have a 10:1 turnover ratio (A items),
the next 30% have a 5:1 turnover ratio (B items), and
the last 45% have a 2:1 turnover ratio (C items).
(3) Total annual sales are estimated to be $5,000,000.
(4) There are 260 items.
What is the average inventory value for the top 10 items?
What is the average inventory value for the 11th item?
What is the average inventory value for items 51-80?
See Chapter 3 #11, 12
4. Product Characteristics
• Density (weight/bulk or weight/volume)
– High: Metals, printed matter, liquids, etc.
– Low: Snack foods, light bulbs, etc.
– Vehicles have weight and volume limits.
– Can increase density by disassembly.
– Mix loads to adjust density.
Density Example
Need to ship:
60,000 lbs of paper @ 20 lbs/ft3
6,000 lbs of light bulbs @ 2 lbs/ft3
Truck capacity:
= 3,000 ft3
= 3,000 ft3
40,000 lbs and 3,000 ft3
Plan A
Truck 1: 40,000 lbs paper (2,000 ft3)
Truck 2: 20,000 lbs paper + 4,000 lbs light bulbs (3,000 ft3)
Truck 3: 2,000 lbs light bulbs (1,000 ft3)
Plan B
Truck 1: 30,000 lbs paper + 3,000 lbs light bulbs (3,000 ft3)
Truck 2: 30,000 lbs paper + 3,000 lbs light bulbs (3,000 ft3)
4. Product Characteristics - Value
• Value
– High value:
• Transport quickly.
• Few items and short time in inventory.
• Extra security may be needed.
– Low value:
• Can transport slowly.
• Large inventories OK.
4. Product Characteristics - Substitutability
• Substitutability
– High substitutability:
• Wide availability at many locations.
• High service level; Always in stock; Quick service.
– Low substitutability:
• Few locations; Customers will travel.
• Customers will wait.
4. Product Characteristics - Risk
• Risk
– Theft, Perishability, Explosion, Fire, etc.
– High risk:
• Few locations, small inventories.
• Increased security for storage.
• Increased security for transportation.
– Low risk:
• Many locations.
• No added security.
5. Packaging
• For easier and safer storage, handling and
transportation.
• For economies of scale in movement and storage.
•For protection of product and workers.
• For promotion (marketing).
• For information.
6. Pricing
• Transportation price depends mainly on distance and
weight transported.
• Zone pricing:
– Constant price over geographic regions.
– Price increases with distance.
• f.o.b. = free on board
– Where price takes effect; Where ownership changes.
– fob factory: Buyer pays for transportation from factory and
owns product at factory.
– fob destination: Seller transports and owns until
destination.
• Negotiation: Key in deregulated environment.