Logistics Management

Can Tho University

Jaewoo Chung
Operational Management
School of Business Administration
Kyungpook National University
Daegu, South Kroea

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Kyungpook National University

§Daegu, South Korea
§https://www.google.com/maps/@31.1314041,118.2504215,
4.96z?entry=ttu
§School of Business Administration
§ Found in 1972
§ Around 40 full time faculty with over 1,200 students
§ 6 academic disciplines
Research Interests
§Smart Manufacturing
§Logistics Systems – Supply Chain Management
§Operational Management

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Education
§BS Sungkyunkwan Univ. (1995)
§MS University of Wisconsin – Milwaukee (2004)
§Ph.D. Purdue University – West Lafayette (2008)

Career
§Kyungpook National University
(Since June 2009)
§Samsung Electronics (1995-2008)
•Production Systems Design
•Material Handling Systems
§Montana State University-Bozeman (2008-2009)
§Helsinki Metropolia University of Applied Sciences
(International SCM, August 2012)
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 Questions?

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CHAPTER 1:
21st-Century Supply Chains

MGMT236 Logistics Management Chapter 1 21st –Century Supply Chains

Supply Chain and Logistics Management

Definitions
• Supply chain management (pp. 8)
• A set of processes to effectively and efficiently integrate suppliers,
manufacturers, distribution centers, distributors, and retailers so that
products are produced and distributed at the right quantities, to the
right locations, and at the right time to minimize system-wide costs
while achieving the customer’s desired value proposition.

• Logistics management (pp. 8)

• The process and activities that create value focused on the design and
administration of a system to control the timing and geographical
positioning of raw material, work-in-process, and finished inventory at
the lowest total cost

• Logistics management is one of the components of the supply

chain management.
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 Main Topics of SCM
Category Topics Chapter
Plan Location (network) planning Chapters 3, 11
Demand forecasting Chapter 5
Capacity planning
Production planning Chapter 5
MRP (material requirement planning) Chapter 5
DRP (distribution resource planning) Chapters 5, 8
Sourcing Procurement Chapter 6
Contracts
Manufacturing Product design
Production management Chapter 6
Logistics Inventory management Chapter 7
(Chapter 3) Routing and distribution (transportation) Chapter 8
Warehouse management Chapter 9
Material handling and packaging Chapter 9
Order/credit processing
Returns of goods
Common Risk management Chapter 14
Global supply chain management Chapter 10
Customer relationship management Chapters 4, 12
Performance measurement Chapter 13
Information Chapter 2

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Overview of 21st-century supply

chains
• The supply chain revolution and logistical renaissance
• Shift firm’s management focus from manufacturing to integration
• Technology advancement (increased productivity, increased visibility)
• Change of values (customer centered)
• Intensive outsourcing
• Global competition
• Why integration creates value

Table 1.1 Integrative Management Value Proposition

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Overview of 21st-century supply

chains
• Generalized supply chain model

Figure 1.1 The Integrated Supply Chain Framework s 1-9

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 Overview of 21st-century supply
chains
• Supply chain applications (table 1.2 in pp. 7)
• Product supply chain: traditionally applied to a manufacturing
firm as a focal firm with support of suppliers, distributors,
retailers, and supply chain service providers.
• But there are number of nontraditional supply chain applications
• Promotional supply chain: for heavily promoted items (timing is very
important)
• Bulk material supply chain: for bulk products such as grains, metals, and
chemicals (economies of scale)
• B2C supply chain: for online sales, directly from manufacturers or distributors
to customers
• Humanitarian supply chain: for supporting disaster recovering (equipment,
foods, medical care items, and commodities to support reconstructions
• Global supply chain: for multiple sources of demand and supply over the
world (demand variations, distance, and documentation)
• Agricultural commodity supply chain: for agricultural commodities from farm
to markets or processing plants (distance, economic factors)
• Military supply chain: for military operations (a wide rage of items with
demanding environment)

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Supply Chain Value Proposition

• Supply Chain Value proposition
• How the supply chain delivers an extra value to firms or
eventually to their customers.
• Originally refers a promise of value to be delivered,
communicated, and acknowledged to customers

Figure 1.2 in pp. 14

EERS Supply Chain
Value Diamond Effectiveness

Value Efficiency
Sustainability
Creation

Relevancy

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Supply Chain Value Proposition

• Effectiveness
• Refers to the supply chain’s ability to deliver products in a timely
manner to customer’s(a consumer, retailer, distributor,
manufacturer etc.) desire location.
• Efficiency
• Refers to the supply chain’s ability to deliver products at the
minimum total cost.
• Relevancy
• Refers to the supply chain’s ability to react to changes in the
environment, market place, or consumer requirements.
• Sustainability
• Refers to the supply chain’s ability to reconfigure the supply chain
to enhance both the environment and the firm. (not only
reducing fuel consumption and emissions, but also reducing risks
while providing access to key talent.

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 Responsiveness
• Supply chain integration provides firms with more
responsive business models through IT.
• Anticipatory business model vs responsive business
model
• Anticipatory business model
• Uses push based system (make-to-stock, build-to-stock)

Forecast Buy components Manufacturer Warehouse Sell Deliver

and materials

• Manufacturing is initiated from forecasting customer demands

• Responsive business model
• Uses pull based system (make-to-order, build-to-order)
• Manufacturing is initiated from customer orders

Sell Buy components Manufacturer Deliver

and materials

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Responsiveness
• Anticipatory business model vs responsive business model

Push-based supply chain Pull-based supply chain

• Longer reaction time to changing • Intuitively more attractive:
marketplace: • Reduced lead times through the ability
• Inability to meet changing demand to better anticipate incoming orders
patterns. from the retailers.
• Obsolescence of supply chain • Reduced inventory since inventory
inventory as demand for certain levels increase with lead times
products disappears. • Less variability in the system
Variability of orders received much Decreased inventory at the
ale
• •
sc in customer
larger than the variability
fbullwhip
manufacturer due to the reduction in
demand due to the o effect. variability.
• ies due to the need
Excessive inventories • Customer’s benefits
nomstocks
for large safety • More choices of suppliers
o
• Larger and Ec more variable production • More information on price options
batches • Customized products and services
• Unacceptable service levels available
• Product obsolescence

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Responsiveness
• Barriers to implementing responsive systems
• The need for publicly held corporations to maintain
planned quarterly profits
• Inventory is required to this achievement (sales promotions)
• The need for establish and maintain collaborative
relationships with suppliers and buyers
• Often difficult to implement when lead times are long
• impractical to react to demand information.
• More difficult to take advantage of economies of scale
• Today’s best supply chain practices takes the best of
both.
• Push–pull supply chain strategy

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 Globalization
• Provides both supplying(purchasing) and market
opportunities in developing countries
• Market opportunities
• Population increases sharply in developing countries
• Basic commodities foods, clothing, and consumer durables
• Purchasing opportunities
• Raw materials and components
• Labor advantages
• Favorable tax laws
• Differences of logistics in globalization
• Distance
• Documentation
• Diversities in work practices and local environments
• Cultural diversities in customer demands
• Risks related to terrorism, disasters, epidemics

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Industry Disruptors
• Main disruptors: changes in customer
requirements and technologies
• Consumer requirements
• “want it now” mentality
• Refers to the consumer’s desire to have quick access to the
desired product at their desired location. (delivery time)
• Personalization
• Refers to the increasing trend for consumers to request for
customization (larger variety of products)
• Millennial preferences
• Refers to the need for more variations in package sizes
• Omni-channel shopping
• Refers to the desire to purchase products from multiple distribution
channels such as retailers, manufacturers, wholesale clubs, or online
• Aging consumer needs
• Aged customers demands creates extra variations (health care
products)

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Industry Disruptors
• Main disruptors: changes in customer
requirements and technologies
• Technology adoption
• Autonomous vehicles and IoT
• Artificial intelligence
• 3D printing
• Big data
• Alternative fuels

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 Study Objectives
• Define the supply chain management and logistics
management and clearly explain the differences.
• Explain main topics of supply chain management.
• Explain why SCM becomes more important these days.
• Explain what the supply chain value proposition is and
how to obtain.
• Explain the difference between the anticipatory business
model and responsive business model.
• Explain about the main industry disruptors in supply
chain.

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CHAPTER 2: Supply Chain

Information Technology

MGMT236 Logistics Management Chapter 1 21st –Century Supply Chains

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Information System
Functionality
• Crucial roles of Information System on SCM
• Enhancing speed, accessibility, accuracy, relevancy, and simple access
• Information System became a major tool
• Initiating activities, tracking processes, facilitating information sharing, and
assisting manager’s decision making
• Major roles of information systems
• Transactions, communication components, decision supports
• Five critical roles
• Real-time customer support: order status, product availability, delivery
tracking, and invoice transactions
• Reducing inventory and human resource requirements
• Increasing resources flexibility (used for right time and places)
• Facilitating collaborations and redefining SC relationships
• Reducing uncertainties and variations

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 Information System
Functionality
• Logistics activities and decisions at each level of
functionality

Strategic
form ation and
evaluation

Long-term
perform ance
im provem ents

Perform ance
m easurem ent
and reporting

Day-to-day
operations

Figure 2.1 Information Functionality 1-22

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Information System
Functionality
• Transaction system
functionality consists of
formalized rules and
procedures
• Standardized communications
focus on tracking and
regulating day-to day logistical
transactions
• For example,
• Order entry
• Order fulfillment
• Inventory adjustment
• Invoicing

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Information System
Functionality
• Management control
functionality focuses on
performance management and
reporting
• Provides real time feedback on
supply chain performance and
resource utilization
• Common performance
dimensions include
• Cost
• Customer service
• Productivity
• Quality

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 Information System
Functionality
• Decision analysis functionality
focuses on software tools to
assist managers
• Software tools help to identify,
evaluate and compare alternatives
to improve effectiveness
• E.g., Excel solver
• Types of analysis include
• Supply chain design
• Inventory management
• Resource allocation
• Routing
• Segmental profitability
• Also called decision support
software in MIS departments

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Information System
Functionality
• Strategic planning
functionality transforms
transactional data to assist in
strategy evaluation
• Organizes transaction and
performance data into a
relational database to assist in
evaluating alternative business
strategies
• Examples include
• Strategic alliance decisions
• Development of manufacturing
capabilities
• Customer responsiveness opportunities
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Information System
Functionality
• More opportunities exist for improvements at higher levels of
functionality

Figure 2.2 SCIS Usage, Decision Characteristics, and Justification 1-27

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 Supply chain information
system modules
• ERP as a SC major system

ERP Modules

Figure 2.3 Application Oriented SCIS Framework

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Enterprise resource management (ERP)

• The backbone of most firm’s logistical

information systems
• Maintains an integrated database of current and
historical data
• Processes most (if not all) transactions across all
business functions
• Example transactions include
• Order entry and management
• Inventory assignment
• Shipping

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Enterprise resource management (ERP)

• Enterprise integration and administration

modules are not specific supply chain apps

Figure 2.4 Enterprise Integration and Administration Components

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 Enterprise resource management (ERP)
• Enterprise operations modules support day-to-day sup
ply chain operations
Enterprise Operations

Customer Inventory
relationship Logistics Manufacturing Purchasing
Deployment
management
Custom er Relationship Purchase O rder Integrated Inventory
Finished Inventory
M anagem ent M anufacturing A dm inistration Planning
M anagem ent
(CRM ) Resource Planning (PO A ) A dvanced Planning and
(FIM )
(M RP II) Scheduling\
Forecasting O rder Processing
Capacity M anagem ent M aterials Requirem ents
(O PS)
D em and M anagem ent Planning (CM P) Planning (M RP)
(D M S) W arehouse
M aster Production Supplier Relationship
M anagem ent (W M S)
Collaborative Schedule (M PS) M anagem ent (SRM )
Planning, Forecasting Transportation
and Replenishm ent Production Execution A ccounts Payable
M anagem ent (TM S)
(CPFR ) and Control (Shop Floor) Interface
Y ard M anagem ent
Q uality M anagem ent
O rder M anagem ent (Y M S)
(Q M )
(O M S) Figure 2.5 Enterprise Operations Modules
A ccounts Receivable
Interface 1-31

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Enterprise resource management (ERP)

• Enterprise planning and monitoring modules facilit

ate exchange of planning information

Figure 2.6 Enterprise Planning and Monitoring Modules

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Logistics Operations Modules

System components Functionalities

TMS (transportation • Building loads (items) on a truck(s) from multiple orders

management system) • Identify possible carriers for orders
• Maintaining database of shipment rates
• Determining shipment mode and route
• Providing documentation to pick products to ship and stage in the warehouse
• Developing documentation for shipment
• Tracking the order while it is in transit between facilities
• Transferring shipment information to accounts receivables
WMS (warehouse • Shipment receipt
management system) • Product storage or put-away
• Product retrieval from the storage locations
• Product staging for shipment
• Initiation of value-added activities such as packaging, labelling, or other forms
of customization
YMS (yard Managing truck trailers or rail cars in the firm’s yard or storage area (a major
management system) distribution center may have more than hundreds of trucks in the yard waiting
for loads or unloads)
• Allocation of trucks for loading and unloading at a location
• Initiating the movement of trailers between the yard and distribution center

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 Study Objectives
• Explain the roles of the information technology.
• Explain the four levels of information systems
functionalities.
• Explain ERP and its modules in the SCIS.
• Explain Logistics operations modules in the SCIS.

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CHAPTER 3: Logistics

MGMT236 Logistics Management Chapter 1 21st –Century Supply Chains

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Importance of Logistics
• Logistics
• Involves the management of order processing, inventory,
transportation, and packaging.

business = physical products + services

• Is the biggest part of SCM. The biggest part of

service is logistics
• Logistics costs account for 7.5% of US GDP.
• Transportation costs account for 64.3% of logistics costs and 4.8% of
US GDP.
• Transportation Costs keep going up because of fuel prices and
movement of globalization.
• Inventory Costs relative to the Total Cost of Logistics have gone
down because of JIT, Lean, and technology adoption.

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 Logistics Value Proposition
• Logistics should be managed as an integrated effort to
achieve customer satisfaction at the lowest total cost
• Elements of the logistical value proposition include Service
and Cost Minimization
• Service benefits
• Logistics adds value to the supply chain process when inventory
is strategically positioned to achieve sales.
• The profit impact of logistical failure can be significant such as
increasing costs, lost sales, and loss of major customer’s business.
• The more significant the service failure impact upon a customers
business, the greater priority placed on error-free logistical
performance.

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Logistics Value Proposition

• Service benefits (cont.)
• Elements:
• Availability – the probability of having inventory meet customer
requirements
• Information technology facilitates system flexibility to achieve high-
level logistics performance.
• Operational Performance – time required to deliver an order
• Delivery speed and consistency (in delivery time)
• Flexibility to accommodate unusual and unexpected customer
requests
• Frequency of malfunction (preciseness) and its recovery time when it
occurs
• Service Reliability – the quality of performance, how consistent?
• Measured by the inventory availability and operational performance

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Logistics Value Proposition

• Cost minimization
• Early cost model: Total landed cost – tradeoff between individual
cost elements to achieve total system cost
• Recent and advanced cost model: Elimination of silo approach to
cost management, establishment of cost-to-cost tradeoffs and
activity-based costing capabilities
• Logistics value generation
• Key to achieving logistical leadership is to master the art of
matching operating competency and commitment to key
customer expectations, in an exact cost framework.
• A well designed logistics effort must provide high customer
impact while controlling operational variance and minimizing
inventory commitment (usage or input)
• EERS model

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 The Work of Logistics
• Functional areas in logistics are closely related

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The Work of Logistics

• Order processing
• Superior logistics performance much depends on fast information
exchange (fully understanding what a customer wants)
• Fast order processing enables less costly transportation with fast
and more consistent delivery service
• Forecasting and communication of customer requirements driven
by information
• The more responsive supply chains, the greater importance in
information exchange
• Customer order includes initial order receipt, delivery
(requirements), invoicing (specification), and collection (payment)
• Inventory
• Service rate = fill rate ↔ stockout rate
• Higher service rate = higher inventory holding cost
• The objective of inventory strategy is to achieve desired service
levels.
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The Work of Logistics

• Inventory (cont)
• Five considerations for inventory strategy
• Core customer segmentation: prioritize and support core customers
• Product profitability
• A wide variety of variance in the volume and profitability across different
products
• 80/20 rule or Pareto principle: less than 20% of all available products account
for more than 80% of total revenue or profit.
• Transportation integration
• Most transportation benefits from economies of scale
• Sufficient stock levels for consolidated shipments offset inventory holding
costs
• Time-based performance
• Shorter and consistent transportation lead-time creates values for customers
through low safety-stock.
• Competitor performance
• Consider competitive advantage on logistics

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 The Work of Logistics
• Transportation
• Three ways meeting transportation requirements
• Private fleet owned by the firm
• Short-term contract arrangement with dedicated transportation specialists
• Long-term engagement with a transportation service provider
• Transportation performance
• Cost: total system wide cost should be considered
• Speed: balance between cost and speed is necessary
• Consistency: avoid unexpected variance causes higher safety stock
• Speed and consistency together create quality of transportation
• Warehousing, material handling, and packaging
• Warehousing
• Sorting, sequencing, order selection, transportation consolidation
• Consolidation center – product modification and assembly for
postponement
• Reverse logistics: receiving, processing, and disposing returns and damaged
products
• Material handling
• Receiving, moving, storing, sorting, assembling
• Packaging

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The Work of Logistics

• Facility network design
• Determining the number (size), location and ownership
arrangement of all type of facilities
• Also determining how much to stock at which facilities
• Including transportation and information capabilities

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Logistical Operations
• Scope of Logistical Operations
• The internal operational scope of integrated logistics operations is
illustrated by the shaded area of Figure 3.2.

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 Logistical Operations
• Inventory flow
• The operational management of logistics is concerned with
movement and storage of inventory in the form of materials,
work-in-process, and finished products.

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Logistical Operations
• Information flow
• Identifying specific locations of products and orders within a
logistics system produce, send, and receive information thus
enabling the integration of this information across all operating
areas.
• Information type
• Size of order, status of given work process, availability of inventory,
urgency of the order, etc.
• Primary objective – reconcile and streamline information
connectivity to improve overall supply chain performance
• Important Observation: Occurs in parallel to physical product flow

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Logistical Integration Objectives

• Six operational objectives
• Responsiveness
• A firm’s ability to satisfy customer requirements in a timely manner is
referred to as responsiveness
• Importance of Information Technology
• Reduction of Inventory in anticipation of customer requirements
• Shift from forecasting future requirements towards accommodating
customers on a rapid order-to-shipment basis
• Variance reduction
• All operating areas of a logistical system as susceptible to variance
• Common solutions to safeguard against variance include additional
inventory and/or expedited transportation
• Information technology is a catalyst to address variance
• To the extend variance can be minimized, logistical productivity will
improve
• Inventory Reduction
• Control of asset commitment and turnover
• Goal to reduce overall assets committed to support a customer and/or
integrated operation
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 Logistical Integration Objectives
• Six operational objectives
• Shipment Consolidation
• Transportation cost is the most significant logistical expenditure
• Transportation cost is directly related to product type, size of shipment,
and distance traveled
• System object to achieve consolidation, where possible, to reduce the
transportation cost of each individual shipment
• Quality
• Focus on continuous quality improvement
• Total Quality Management (TQM)
• Sunk logistics cost of quality defects
• Emphasis on zero-defect order-to-delivery performance
• Life Cycle Support
• Few products sold without some guarantee the product will perform as
advertised
• Reverse Logistics capabilities, both government required (recycling) and
disaster recovery (product recalls) are critical
• Cost recovery through reverse flow / secondary markets
• Cradle-to Cradle logistics and opportunities for margin enhancement
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Logistical Operating Arrangements

• Use of different logistical operating arrangements
• All logistical arrangements have two common characteristics
• Designed to manage inventory positioning
• Range of alternative is limited by information technology
• Commonly observed logistical operating arrangements
• Echelon
• Flow of products typically proceeds through an established arrangement of
firms as it moves from origin to final destination.
• Use of Warehouses.

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Logistical Operating Arrangements

• Use of different logistical operating arrangements
• Commonly observed logistical operating arrangements (cont)
• Direct
• In contrast to inventory echeloning are systems designed to ship product direct
to the customers destination from one or a limited number of centrally located
inventories.
• Use of expedited or premium transportation.
• Truck load shipment

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 Logistical Operating Arrangements
• Use of different logistical operating arrangements
• Commonly observed logistical operating arrangements (cont)
• Combined
• The ideal logistical arrangement is a situation wherein the inherent benefits of
echeloned and direct logistics structures are combined.
• Use of different strategy (Echelon vs. Direct) depending on customer value,
inventory value, and goals specific to unique business channels
• Example:
• Automobile Replacement Parts
• Machine Parts to Industrial Firm

Arrangement Cases

Echelon For items with high turn over rate (fast moving materials), Low
demand variance, Important service level, Low unit price
Direct For items with low turn over rate (slow moving materials), High
demand variance, Service level not critical, High unit price

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Flexible Structure
• Preplanned contingency strategies to prevent logistical
failures in delivering products to customers on time
• Back-order: A back order is the status of an order that the
product is out of stock and cannot be shipped immediately.
It is generally cancelled or delivered after the desired due
date.
• Approaches
• More than one facility to serve a customer order
• Increased utilization and improved service level
• With different order size, using an alternative channel
arrangement
• Retailer or wholesaler depending on the order size.
• Toilets for a house or for an apartment complex
• Selective inventory stocking strategy
• Use of the combined echelon or direct stocking method
• The echelon arrangement can reduce inventory risk due to multiple
facilities used.
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Flexible Structure
• Approaches (cont)
• Introduction of Integrated Service Providers (ISP), Cross Dock or Flow
Through Operations, and/or consolidation centers
• Cross-dock: directly from supplier to buyer at the warehouse, no storage
is used.
• ISP: used a consolidation center

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 Performance Cycle Uncertainty
• A major objective of logistics in all operating areas is to reduce
performance cycle uncertainty.
• The inherent dilemma is that the structure of the performance
cycle itself, operating conditions, and the quality of the logistical
operations all randomly introduce operational variance.

Example

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Performance Cycle Uncertainty

• Order transmission: highly reliable with EDI or Internet and more
variable with telephone and mail.
• Order processing time and variance: a function of workload,
degree of automation, policies related to credit approval.
• Order selection speed and variance: capacity, material handling
sophistication, and human resource availability.
• Order transportation and delivery: distance, size of shipment,
transportation mode, and operating conditions

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Study Objectives
• Explain the importance of logistics.
• Explain what are the sources of logistics value
proposition.
• Explain the functional areas of logistics and their main
issues.
• Explain the scope of the logistics operation in relation
to inventory flow and information flow.
• Explain the six operational objectives of logistics.
• Explain three types of commonly observed logistical
operation arrangements.
• Explain what the performance cycle structure and
performance cycle uncertainty are.

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 CHAPTER 4:
Customer Accommodation

MGMT236 Logistics Management Chapter 1 21st –Century Supply Chains

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Customer-Focused Marketing
• Who are the customers of the SCM?
• From perspective of the total supply chain
• Individual or households: end user of product or service in consumer
market
• Organizational end use: company is customer in business market
• From perspective of specific firm within a supply chain
• Intermediate customer organizations exist between the firm and end
users
• manufacturers, suppliers, wholesalers and retailers, etc.
• From perspective of a logistics manager
• Any delivery location
• For example, consumer home’s, retail / wholesale businesses, receiving
docks of manufacturing plants and warehouses

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Basic Principles of the Marketing

Concept

• Customer needs and requirements are more basic

matters than products and services.
• Ex) smart phone choice
• Different customers have different needs and
requirements.
• There is no single market for any given product or service.
-> effective market segmentation
• Products and services become meaningful only when
available and positioned from the customer’s
perspective.
• Four economic utilities add value to customers: form
(manufacturing), possession (ownership exchange), time,
and place.
• Time and place are provided by logistics
• Profit is more important than sales volume.

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 Transactional vs.
Relationship Marketing

• Transactional marketing is a • Relationship marketing is a

traditional strategy with a new strategy with a focus on
focus on creating successful the development of long-
individual transactions term relations with key supply
chain participants in an effort
between the company and its to develop and retain long-
customers. term preference and loyalty.
• Short-term interaction with • Micromarketing or one-to-
customers one marketing recognizes
• Emphasizing on that each individual customer
may indeed have unique
accommodating customer’s requirements.
needs and requirements • For example, WalMart and
Target are both mass
merchandisers.
• However, their requirements to
interact logistically with
suppliers differs significantly.

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Transactional vs.
Relationship Marketing

• Micromarketing or one-to-one relationship

• Micromarketing is a marketing strategy in which marketing and/or
advertising efforts are focused on a small group of tightly targeted
consumers.
• Significantly reduce transaction costs.
• Better accommodate customer requirements.
• Move individual customer transactions into a matter of routine.
• Types of micromarketing
• Local: in a particular city or location.
• Relationship: people who you know.
• Job title: specific type of job title (doctors, professors, university students)
• Industry: specific industry (agricultural industry, audio industry)
• Size: targeting a particular size (very large or small, food wholesale, mini table
saw)
• Customer needs
• Brand loyalty
• Customer recovery
• Price sensitivity

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Supply Chain Service Outputs

• 3 discrepancies must be overcome to enable exchange of
goods and services
• Discrepancy in space: the locations of production and consumption
are different.
• Time: the difference in timing between production and consumption.
• Quantity and assortment: the difference in quantity between the time
of production and the time of consumption
• Four generic service outputs necessary to satisfy customer
requirements (by Louis Bucklin), which eliminate the
discrepancies
• Spatial convenience: the amount of shopping time and effort will be
required on the part of the customer (the higher level of spatial
convenience guarantees less customer efforts)
• Lot size: the amount of purchasing at each transaction (the smaller
the lower cost incurs with the same price)
• Waiting time: the time from order to delivery (the shorter the more
convenient)
• Product variety and assortment

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 Omnichannel Marketing
• Describes an approach by which firms market to customers
through a variety of channels (online, bricks and mortar
facilities, telephone, etc.)
• It is different from multi-channel marketing.
• It uses more than one channel to serve a customer order.
• Different channels offer different mixes of the generic supply
chain service outputs
• Online shopping does not have any limitation on spatial and time
convenience for orders but waiting time is a significant issue.

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64

Customer Service
• Three levels of customer accommodation
• Supply chains provide a mix of services in order to accommodate a
range of customer requirements.
• Each service mix can be configured to achieve one of the following
levels of customer accommodation.
• Customer service
• Customer satisfaction
• Customer success
• Customer service
• The customer service of logistics provides customers with
• With the right amount
• Of the right product
• At the right time
• And the right place
• In the right condition
• At the right price
• With the right information

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65

Customer Service
• Three fundamental elements of customer service (chap 3)
• Availability • Service Reliability
• Fill rates • Damage free
• Stockout frequency • Error-free invoices
• Orders shipped complete • Shipment matches order
• Operational Performance • Shipped to correct location
• Speed • Etc.
• Consistency
• Flexibility
• Malfunction recovery

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22
 Customer Service
• Availability is the capacity to have inventory when
desired by a customer.
• Stockout frequency (rate, level)
• Stockout occurs when a firm has no product available to meet a customer
order. (For each order, the stockout rate is either 0 or 1, i.e. occurred or not
occurred.)
• When a customer orders an item, the stockout occurs when the firm has not
enough inventory in stock, otherwise the service is met.
• Stockout rate (probability of stockout)
= orders unable to shipped on time / total number of orders
• Ex. 8% stockout average for retail business (by an empirical study)
• Fill rate
• It measures the magnitude or impact of stockouts over time for a specific
order.
• A customer orders 100 units, but only 97 units are immediately available,
then the fill rate is 97%. (at this time, the stockout rate is 0)
• Fill rate = order quantity shipped on time/total order quantity

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Customer Service
• Availability (cont)
• Order shipped complete
• The most exact measure of product availability and delivery.
• It is calculated by shipments including many orders.
• 1 if all the orders shipped is completed on time, otherwise 0 (nothing)
• Order shipped complete = probability a shipment complete on time.
• Operational performance
• Speed
• Speed of the performance cycle is the elapsed time from when a customer
established a need to order until the product is delivered.
• Faster speed can reduce customer inventory level.
• Consistency
• Consistency of the order cycle is measured by the number of times that
actual order cycles meet the time planned for completion.
• Logistics order requirements often include specific time and date for
inventory replenishment. (on time is better than faster)

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Customer Service
• Operational performance (cont)
• Flexibility
• is a firm’s ability to accommodate special situations and unusual or
unexpected customer requests.
• Typical unexpected cases: changes in ship-to locations, support of unique
promotion programs, new product introduction, product recall, disruption in
supply, one time customization, product modifications, delivery time change)
• Malfunction recovery
• is a firm’s ability to quickly implement contingency plans when a failure
occurs in the supply chain.

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23
 Customer Service
• Service reliability
• Is a firm’s ability to perform all order-related activities and provide
critical information.
• Involves a combination of logistics attributes beyond simply
availability and operational performance.
• Examples
• Damage free measures how many shipments arrive without damaged
products.
• Error-free invoices measures what percentage of invoices contain no errors.
• Shipment matches order measures how many shipments contain the exact
amount of product ordered.
• Shipped to correct location measures how many shipments are made to the
customer’s selected location
• Plus a capability and willingness to provide customers with accurate
information regarding operations and order status.

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Customer Service
• Perfect order
• Is an order that is
• Delivered complete.
• Delivered on time.
• Delivered at the right location.
• Delivered in perfect condition.
• Delivered with complete and accurate documentation.
• This requires the total order cycle performance to be executed
with zero defects.
• Table 4.1 Typical perfect order failures

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71

Customer Service
• Perfect order

• Consider an order cycle that achieves

the following performance levels for
shipments
• 97% delivered complete
• 97% delivered on time
• 97% delivered in perfect condition Therefore, the
• 97% delivered with correct probability that any
documentation
order has a problem is
• Probability that any order will be 11.5%
delivered with no defects is only
88.5%
• P (zero defects) = .97 x .97 x .97 x .97 What resources are needed
= .885
to achieve a zero-defect
level?

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24
 Customer Service
• Logistics service platform
• is a commitment (or promise, target) to customers in terms of
availability, operational performance, and reliability.

Service platform for customer A Service platform for customer B

• Availability level = Medium • Availability level = Low
• Operational performance • Operational performance
= High = Medium
• Service reliability Operational • Service reliability =
= Above average Performance
Level Average

Basic
Service
Platform
Service
Availability Reliability
Level Level
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73

Customer Service
• Logistics service platform
• How much basic service should the supply chain
provide?
• Many firms establish their basic service platforms
using two factors.
• Competitor or industry acceptable practice
• Minimum and average service performance levels have emerged
in most industries
• The firm’s overall marketing strategy
• High service levels needed to compete on basis of logistics
competency
• Low service levels are more common when competing on the
basis of price
• Zero-defect approach is not taken across the board
for all customers.
• Establish internal performance standards for each
service component to reflect industry practice, cost
and resource requirements.
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74

Customer Satisfaction
• What is customer satisfaction?
• Expectancy disconfirmation states if a customer’s
expectations of a supplier’s performance are met or
exceeded, the customer will be satisfied.
• If Perceived Performance > = Expectations, then Satisfaction
• If Perceived Performance < Expectations, then Dissatisfaction

“Customers will be satisfied if a supplier meets or

exceeds the customer’s expectations”

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25
 Customer Satisfaction
• Table 4.2, customer expectations related to
logistical performance
• Reliability • Security
• performance as promised • Feelings of risk and doubt
• Responsiveness • Courtesy
• Willingness and ability • Politeness
• Access • Competency
• The ease of contact and • Judged by every interaction with
accessibility a supplier.
• Communication • Tangibles
• Pro-activeness of information • Physical appearance of facilities,
provided equipment, and personnel
• Credibility • Knowing the customer
• How much believable and • Supplier’s understanding
honest customer’s uniqueness

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76

Customer Satisfaction
Figure 4.1 Satisfaction
and Quality Model

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77

Customer Satisfaction
• The model identifies gaps managers must fill to
help satisfy their customers.
• Gap 1: Knowledge • Gap 4: Communications
• Reflects management’s lack of • Overcommitment or
knowledge or understanding promising higher levels of
performance than can actually
of customers. be provided.
• Gap 2: Standards • Gap 5: Perception
• Exists when internal • Customers sometimes
performance standards do not perceive performance to be
adequately reflect customer higher or lower than actually
expectations. achieved.
• Gap 3: Performance • Gap 6: Satisfaction/Quality
• The difference between • When one or more gap exists
standard and actual customer perception is that
performance does not meet
performance. expectations.
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26
 Customer Satisfaction
• Increasing customer
expectations
• Performance that meets
customer expectations one
year may result in extreme
dissatisfaction next year
• Competition in an industry
will often raise the
minimum standards that
customer expect
• For example, Federal
Express introduced real-
time tracking of
shipment status
• In response UPS and
other parcel delivery
firms added this service
to their platform
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79

Customer Satisfaction
• Limitations of Customer Satisfaction
• Satisfied customers may not be happy with the supplier’s
performance.
• Customer satisfaction focuses on expectations - not customer’s real
requirements
• Considerable research suggests that “satisfied” customers still are
likely to defect (leave).
• What satisfies one customer may not satisfy other, much less all,
customers.
• There is a tendency by companies to treat all customers as being
equal and identical
But what if customer
requirements are not
met?

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80

Customer Success
• 3 levels of customer focus
Level 3 Focus
• Assess customer requirements
• Extend supply chain to include our
customer ’s customer
• Provide value-added services for select
customers
• Manage performance cycles and levels
Customer to address needs of each customer
Success segment in the extended supply chain

Level 2 Focus
• Assess customer perceptions of
satisfaction
• Manage performance cycle levels to
Customer keep customers satisfied
Satisfaction
Level 1 Focus
• Assess industry and competitor practices
• Achieve internal standards for performance
cycles
Customer Service

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27
 Customer Success
Table 4.3 Evolution of Management Thought

Philosophy Focus
Customer service Meet internal standards
Customer satisfaction Meet expectations
Customer success Meet customer requirements

• Achieving customer success requires knowledge of individual

customer requirements.
• Not all customers have the same requirements.
• Know your customers’ processes.
• Determine how your capabilities can enhance your customers’
performance.
• Extend the supply chain boundaries to include next-destination
customer requirements.
• Introduce new performance metrics.
• Develop value-added services for select customers.
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82

Customer Success
• Achieving Customer Success
• Requires to work intensively with customers to understand requirements,
internal processes, competitive environment, and so on.
• Also requires the logistics firm to understand how it can utilize its ability to
enhance customer success.
• Logistics firms should understand their customer’s customers and further the
entire supply chain participants for customer success.

Figure 4.3 Moving Towards

Customer Success

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83

Customer Success
• Value-added services are a first step in achieving customer success.
• Value-added services refer to unique or specific activities that firms can jointly
develop to enhance their efficiency, effectiveness and relevancy.
• Transportation carriers, warehouse firms and other specialists may become
intimately involved to make value-adding activities a reality.
• For example, a retail customer may desire a unique palletization alternative to
support its cross-dock activities for its individual stores.
• Each store requires different quantities of specific product to maintain in-stock performance
with minimum inventory.
• Proper sorting and sequencing of products to meet specific customer
requirements
• For example, an auto assembly plant may require that components not only
be received on time but also sorted and sequenced in a particular manner for
convenience of assembly works.

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28
 Developing Customer
Accommodation Strategy
• Basic principle of supply chain logistics is that customers should be
segmented based on their service needs.
• Different focuses for different firms
• Customer service, customer satisfaction, customer success
• Logistics firms need
• A framework for choosing the appropriate customer specific strategies.
• Programs for customer relationship management.

• Framework for strategic choice

• Which type of relationship approach would be best for which customers?
• Pareto principle (80/20 rule)
Revenue
Table 4.4 Choosing customer relationship strategy

A
B D
C
Product
variety
Product category
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85

Developing Customer
Accommodation Strategy
• Customer Relationship Technology
• Customer relationship management has grown rapidly in recent years.
• Customer relationship management (CRM) is a process for improving the
overall performance of a business by better understanding and anticipating
the wants and needs of customers.
• In practice, companies and vendors use the term CRM to mean different things.
• CRM is often used to describe technology and software that is used for analyzing customer
requirements.
• CRM technology generally expands the functionality of ERP. (Figure 4.4)
• Sales history, shipment history, order status, promotional summaries, shipment
information
• Amazon
• Initially developed customer profiles giving individual customer’s interests and
purchasing habits
• Tips for purchasing preferences or promotions
• CRM’s relevance to Logistics
• The need for cross functional transparency
• Chapter 12

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86

Developing Customer
Accommodation Strategy
Figure 4.4 Typical CRM Extension System

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29
 Study Objectives
• Explain the difference between transactional marketing and
relationship marketing.
• Explain about micromarketing or one-to-one relationship with types
of it.
• Explain the difference between omnichannel marketing and
multichannel marketing.
• Explain the three levels of customer accommodation and their focuses.
• Explain the three fundamental elements of customer service and what
each of them consists of and be measured.
• Explain about the logistics service platform.
• Explain about customer expectations related to logistical performance.
• Explain about the customer satisfaction model and related 6 gaps.
• Explain about the philosophy of customer success with some
examples.
• Explain about developing customer accommodation strategy.
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88

CHAPTER 5:
Integrated Operations
Planning

MGMT236 Logistics Management Chapter 1 21st –Century Supply Chains

89

Integrated Operations Planning

• Dominant theme of SCM is operational integration.
• Integration level determines the efficiencies of SCM.
• High level of SC integration can be achieved through
supply chain planning.
• Chapter topics
• Supply chain planning
• Supply chain planning applications
• Sales and operations planning (S&OP)
• Advanced Planning Scheduling (APS) Overview
• Collaborative Planning, Forecasting, and Replenishment
• Forecasting

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30
 Supply Chain Planning
• is coordinating various processes between SC
participants.
• Sales <-> Manufacturing, Manufacturing <-> Procurement
• Supplier <-> Manufacturer, Manufacturer <-> Wholesalers
• Etc
• Generally more important for Anticipatory SC process
• MTS, Push based SC
• Three drivers of SC planning
• Supply chain visibility
• Visibility regarding location and status of inventory
• Identify inventory status exceptions
• Reduce risk and uncertainty

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91

Supply Chain Planning

• Three drivers of SC planning (cont)
• Simultaneous resource consideration
• Jointly balance supply chain
• Demand
• Capacity
• Material requirements
• Constraints
• Jointly balance supply chain assets
• Raw materials
• Production
• Storage
• Transportation
• Resource utilization
• Minimize plant and equipment resources
• Production run lengths
• Set-ups
• Complete trade-off assessment
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92

Supply Chain Planning

• Objectives
• Developing a consistent forecast within the firm
• Balancing supply and demand within the firm
• Exchanging demand and inventory availability information with
supply chain partners
• Developing consistent inventory availability plans throughout
the supply chain

The Challenge of Functional Boundaries

The Great Divide Distribution

Supplier
and and
Operations Customer
Collaboration Collaboration

Why Not One Forecast and One Plan and One Metric Framework?
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31
 Supply Chain Planning
• Why Is Balance So Hard To Achieve?
• Supply and demand “sides” have different objectives

Operations-Focused Customer-Facing

Efficiency Effectiveness
Cost-to-Provide Cost-to-Serve
Predictable demand patterns is Tailored service and product
assumed/desired offerings – flexibility
Cost reduction/containment Maximize service options
Operational plans/order Sales forecasts/sales targets
forecasts

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94

Supply Chain Planning Applications

• SC planning terms
• General form of supply chain planning
• Planning horizon: 5 weeks
• Planning frequency: one week
April 5th
Week
Week 15 Week 16 Week 17 Week 18 Week 19
Product
A1 100 100 100 0 0
A2 200 0 0 0 100
B1 0 0 100 300 300
B2 0 200 100 0 0

April 12th
Week
Week 16 Week 17 Week 18 Week 19 Week 20
Product
A1 100 0 0 100 100
A2 0 0 100 200 0
B1 100 300 300 0 0
B2 100 0 0 0 200
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95

Supply Chain Planning Applications

• SC planning example
• Production planning for a simplest desk
• Notation
Desk
• Q: minimum batch – once produced, the quantity
must be a multiple of Q. 4
• LT: lead time – periods from order to delivery Leg
• SS: safety stock – the inventory level must be 2
greater than SS at the end of each period. Bolt & nut
• To produce a desk, 4 legs are required.
• To produce a leg, 2 bots and nuts are
required.

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32
 Supply Chain Planning Applications
• SC planning example
• Production planning for a simplest desk

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97

Supply Chain Planning Applications

• Demand planning
• Developing demand forecasts for anticipatory
SC processes
• Monthly, weekly, daily demand Demand
planning system
• Creating forecast consistency across multiple
products and warehouse facilities
• Single accurate forecast for each item across
different departments Production
• Developing unconstrained marketing plan planning system
• Without manufacturing or logistics constraints
• Main factors being considered
• Product life cycle, changes in distribution channels,
Logistics
pricing and promotional tactics, and product mix
variations planning system
• Rationalizing detailed logistics plan, and unique
Hierarchical steps of SC
forecasts for each warehouse and product, and Planning Applications
production aggregation across regions.

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98

Supply Chain Planning Applications

• Production planning
• Uses demand planning as an input or target
• Developing workable manufacturing plan
• Considerations: manufacturing resources and constraints
• Matching demand requirements with production constraints
• Resource capacities (machine, labor, material handling)
• Material availabilities
• Objectives
• Satisfying demand requirements at the minimum total cost without
violating constraints
• Effective production planning
• Increases the utilization of resources
• Reduces uncertainties related to production

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33
 Supply Chain Planning Applications

• Logistics planning
• Coordinates transportation, warehousing and inventory within
the firms and between supply chain partners
• Integrates overall movement demand, vehicle availability, and
relevant movement cost
• Seeking opportunities of economies of scale by consolidating freight
transportation requirements
• Facilitating information sharing with carriers and other service
providers

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100

Supply Chain Planning Applications

• Inventory deployment
• Coordinates product demand with the ability to produce and ship
product to the consumer.
• Major integrators of sales, marketing, and financial goals
• Is called S&OP (sales and operations planning) when it is
coordinated manner within the entire firm (long-term)
• Multi-year planning horizon with quarterly update
• Horizon: years, Frequency: quarter
• Strategic objectives of sales and marketing with financial plans
• Defines target markets, product development, promotions, other
marketing mix plans, and the role of logistics value-added activities such
as service levels and capabilities
• Objectives
• Determining customer scope, breadth of products and services, planned
promotions, and desired performance levels
• Short-term elements
• Focuses on weekly and daily plans with objective of coordinating supply
chain and logistics resources

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101

Sales and Operations Planning (S&OP)

• Sales and Operations Planning (S&OP) Defined
• An internal-to-firm demand collaboration process where individuals
from operations-focused and customer-facing processes collaborate
to develop a coordinated plan for responding to customer
requirements within the resource constraints of the enterprise.
• S&OP may also be used collaboratively across enterprises.
• S&OP technology integrates firm’s information regarding forecasts,
inventory availability, production resources, and other resource
constraints.
• S&OP is extremely complicated and includes high variability.

Figure 5.1 Period logistics requirements

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34
 Sales and Operations Planning
(S&OP)
• S&OP process

Figure 5.2 Planning process conflict

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103

Sales and Operations Planning

(S&OP)
• S&OP process
• Collaboratively establishes a coordinated plan for responding
to customer requirements within the resource constraints of
the enterprise.
• Consider marketing and sales plans (Including innovation and
pricing plans).
• Consider materials availability.
• Prioritize plans and choices
• Evaluate and prioritize risks
• Set risk tolerances
• Manage, monitor, and control demand and supply plan
performance and variances

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104

Sales and Operations Planning

(S&OP)
• S&OP process
• Effective S&OP requires a blending of process and technology with
organizational collaborations
c

c c

c c

c :S&OP components

Figure 5.3 S&OP process 1-105

105

35
 Sales and Operations Planning
(S&OP)
• Figure 5.3
• Business plan
• Used to guide activity levels and determine aggregate volume and
resource requirements.
• Unconstrained marketing plan
• Calculates the maximum sales and profitability if no constraints exist.
• Information regarding orders on hand, current customers, new customers,
competition, selling margins, new produced potential, pricing, and overall
economy
• Sales plan
• Developed from unconstrained marketing plan
• Determining the most profitable and realistically achievable plan based
on the unconstrained marketing plan
• Resource plan
• Is internal and supplier’s resource constraints
• Operations plan
• Making a trade-off between demand requirements and resource
constraints

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106

Sales and Operations Planning

(S&OP)
• S&OP process
• Develop functional input (Marketing, sales, finance, and
operations)
• Collaborate to develop common demand forecast
• Collaborate to determine resource availability (Supply, raw
materials, and capacity)
• Identify alternatives and assess trade-offs
• Review financial implications
• Review with executives to agree on common plan
• Execute plan
• Review results of plan

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107

Sales and Operations Planning

(S&OP)
• Making S&OP Work
• Keys to successful S&OP implementation (Table 5.1)
• Executing the process every month: adjusting S&OP plan
• Process ownership and clarity of roles and responsibilities
• Organizational commitment to achieving high forecast accuracy
• Collaboration across internal and external participants
• Focus should be on the next 3 to 12 months
• One integrated plan that integrates the actions of the entire
organization
• Senior management decision making
• Measuring end-to-end supply chain performance
• S&OP forecast versus operating plan or budget
• Realistic plan required after considering demand forecast and
constraints in resources and budgets

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36
 Sales and Operations Planning
(S&OP)
• Making S&OP Work
• Benefits from S&OP
• Improved forecast accuracy
• Increases customer service and perfect order percent
• Reduces cast-to-cash cycle time
• Enhances gross profit margin
• Improves capacity utilization
• Barriers to an Effective S & OP
• Disconnect between S & OP and corporate strategy – e.g., transaction
versus business focus
• Lack of senior management support/decision
• Unrealistic “single-number”
• Lack of commitment to regular meetings
• Short-term planning horizon/focus
• Unbiased “leader”
• Failure to consider product life cycle issues and external business
trends
• Failure to prioritize
• Lack of proper and consistent measures

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109

APS System Overview

• APS: Advanced Planning and Scheduling
Typical S&OP Implementation

MPS (Master Production Planning) 3-12 months

APS (advanced planning and scheduling) Hours to weeks

Logistics systems Realtime to days

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110

APS System Overview

• APS System Overview

Figure 5.4 Advanced Planning and Scheduling Overview

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37
 APS System Overview
• APS System Overview
Table 5.2 - Sample APS Planning Situation
Time Period 1 2 3 4 5
Requirement 200 200 200 600 200
Production Capacity 300 300 300 300 300
Alternative 1 (overtime):
Production 200 200 200 600* 200
Inventory Carryover - - - - -

Alternative 2 (build ahead):

Production 30 0 300 300 300 200
Inventory Carryover 100 200 300 - -

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112

APS System Overview

• APS System Components
• Demand management Requirements
Resource Management
• Demand requirements Optimization
• Generally from MPS
Demand Management Resource Allocation
• Resource management
• Product and customer definition
• Resource definitions and costs
• System limitations ERP/Legacy System
• Planning objectives
• Resource optimization
• Computational engine-creates most profitable plan
• Resource allocation
• Detailed what to product/transport/store when for resources
• Available to promise (ATP)

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APS System Overview

• APS System Components
• ATP
• Information sharing with customers
• Inventory ATP(available-to-promise)

Weeks 15 16 17 18 19 20
Item
Demand (order received) 500 300 200 50 0 0

Inventory in stock at the 700 200 300 100 50 450

beginning of period
Production capacity 400 400 400 400 400 400

Production plan 0 400 0 0 400 0

Inventory availability at 700+0-500 200+400- 300+0-200 100+0-50 50+400 = 450

the end of period = 200 300 = 300 = 100 = 50 450
ATP 200 50 50 50 450 450

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38
 APS System Overview
• APS System Components
• ATP
• ATP calculation cycle is determined by a production plan to the next.
• Week 15, Weeks 16, 17, and 18, Weeks 19 and 20
• ATP for a week = available inventory – orders received(from the week
after and before the next production plan)
Weeks 15 16 17 18 19 20
Item
Demand (order received) 500 300 200 50 0 0

Inventory in stock at the 700 200 300 100 50 450

beginning of period
Production capacity 400 400 400 400 400 400

Production plan 0 400 0 0 400 0

Inventory availability at 700+0-500 200+400- 300+0-200 100+0-50 50+400 = 450

the end of period = 200 300 = 300 = 100 = 50 450
ATP 200 50 50 50 450 450

ATP Calculation 200-0 300-200-50 100-50 50-0 450-0 450-0

=200 =50 =50 =0 =450 =450 1-115

115

APS System Overview

• APS System Components
• ATP –example Week 16th
Weeks 15 16 17 18 19 20
Item
Demand (order received) 500 300 200 50 0 0

Inventory in stock at the 700 200 300 100 50 450

beginning of period
Production capacity 400 400 400 400 400 400

Production plan 0 400 0 0 400 0

Inventory availability at 700+0-500 200+400- 300+0-200 100+0-50 50+400 = 450

the end of period = 200 300 = 300 = 100 = 50 450
ATP 200 50 50 50 450 450

ATP Calculation 200-0 300-200-50 100-50 50-0 450-0 450-0

=200 =50 =50 =0 =450 =450

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116

APS System Overview

• APS System Components
• ATP-example week 19th
Weeks 15 16 17 18 19 20
Item
Demand (order received) 500 300 200 50 0 0

Inventory in stock at the 700 200 300 100 50 450

beginning of period
Production capacity 400 400 400 400 400 400

Production plan 0 400 0 0 400 0

Inventory availability at 700+0-500 200+400- 300+0-200 100+0-50 50+400 = 450

the end of period = 200 300 = 300 = 100 = 50 450
ATP 200 50 50 50 450 450

ATP Calculation 200-0 300-200-50 100-50 50-0 450-0 450-0

=200 =50 =50 =0 =450 =450

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39
 Collaborative Planning, Forecasting
and Replenishment
• CPFR overview
• Coordinates the requirements planning process between
supply chain partners for demand creation and demand
fulfillment activities.
• Steps
• Create a joint business plan where a customer and supplier share, discuss,
coordinate, and rationalize their own individual strategies to create a
joint plan
• Create a joint calendar for planning activities
• Create a common sales forecast
• Develop production, replenishment, and shipment plans

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118

Collaborative Planning, Forecasting

and Replenishment
• CPFR overview

Figure 5.6 CPFR in the retail information technology environment

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119

Forecasting
• Overview
• Forecast is the specific definition of what is projected to be sold,
when and where.
• Forecasting is a critical capability.
• Many logistics and supply chain activities must be completed in
anticipation of a sale.
• Forecasting approaches to achieve enhanced service or reduced
inventory.
• Improve forecast accuracy
• Forecast at a higher level of aggregation
• Forecasting requirements
• Collaborative planning
• Requirements planning
• Inventory projections, replenishment or production requirements
• Resource management
• Trade-offs

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120

40
 Forecasting
• Forecasting Components
• For each SKU(stock keeping unit)
• Base
• Seasonal 𝐹! = 𝐵! ×𝑆! ×𝑇×𝐶! ×𝑃! + 𝐼
• Trend 𝐹! : 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡𝑖𝑛𝑔 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡
• Cyclical
• Promotional 𝐵! : 𝑏𝑎𝑠𝑒 𝑙𝑒𝑣𝑒𝑙 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡
• Irregular
𝑆! : 𝑠𝑒𝑎𝑠𝑜𝑛𝑎𝑙𝑖𝑡𝑦 𝑓𝑎𝑐𝑡𝑜𝑟 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡

𝑇:trend component index reflecting increase

or decrease per time period
𝐶! : 𝑐𝑦𝑐𝑙𝑖𝑐 𝑙𝑒𝑣𝑒𝑙 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡
𝑃! : 𝑝𝑟𝑜𝑚𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑓𝑎𝑐𝑡𝑜𝑟 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡
𝐼:irregular or random quantity

1-121

121

Forecasting
• Forecasting Process

Figure 5.7 Forecasting management process

1-122

122

Forecasting
• Forecasting Techniques
• Qualitative: personal or group opinions
• Time series
• Only one factor affecting to the demand is time.
• Moving average
• Exponential smoothing
• Extended exponential smoothing Adaptive smoothing
• Casual
• Factor or factors affecting to demand is or are various including time.
• Regression
• Simple regression
• Multiple regression

1-123

123

41
 Forecasting
• Forecasting Techniques
• Moving average 𝐹$' = (𝑆$( + 𝑆$) + 𝑆$* )/3
∑% 𝑆!&"
𝐹! = "#$
𝑛
𝐹! : 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡𝑖𝑛𝑔 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡
𝑆!&" : 𝑎𝑐𝑡𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡 − 𝑖
𝑛: 𝑡𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 (𝑚𝑜𝑣𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑)

1-124

124

Forecasting
• Forecasting Techniques
• Moving average
Moving
Actual Demand Moving Average
Month Average
(Sales) (n=3)
(n=5)
Jan 100- -
Feb 110- -
Mar 90- -
Apr 130 100.0 -
May 70 110.0 -
Jun 110 96.7 100.0
Jul 120 103.3 102.0
Aug 90 100.0 104.0
Sep 120 106.7 104.0
Oct 90 110.0 102.0
Nov 80 100.0 106.0
Dec 90 96.7 100.0
Forecast 86.7 94.0

1-125

125

Forecasting
• Forecasting Techniques
• Exponential smoothing

𝐹! = 𝛼𝐷!&$ + (1 − 𝛼)𝐹!&$

𝐹! : 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡𝑖𝑛𝑔 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡

𝐹!&$ : 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡 − 1

𝐷!&$ : 𝑎𝑐𝑡𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑 𝑎𝑡 𝑝𝑒𝑟𝑖𝑜𝑑 𝑡 − 1

𝛼: 𝑎𝑙𝑝ℎ𝑎 𝑓𝑎𝑐𝑡𝑜𝑟 𝑜𝑟 𝑠𝑚𝑜𝑜𝑡ℎ𝑖𝑛𝑔 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡 (0 ≤ 𝛼 ≤ 1)

1-126

126

42
 Forecasting
• Forecasting Techniques
• Exponential smoothing 𝛼 = 0.5

Exponential 𝐹! = 𝛼𝐷!&$ + (1 − 𝛼)𝐹!&$

Month Actual Demand
Smoothing
Jan 100 100
Feb 110 100.0 = 0.5(100) + 1 − 0.5 100.0
Mar 90 105.0 = 0.5(110) + 1 − 0.5 100.0
Apr 130 97.5 = 0.5(90) + 1 − 0.5 105.0
May 70 113.8 …
Jun 110 91.9
Jul 120 100.9
Aug 90 110.5
Sep 120 100.2
Oct 90 110.1
Nov 80 100.1
Dec 90 90.0
Forecast 90.0
1-127

127

Forecasting
• Forecasting Accuracy
• Measures
• MAD(mean absolute deviation)
∑%"#$ 𝐸"
𝑀𝐴𝐷 =
𝑛
𝐸" = 𝐷" − 𝐹"

• MAPE(mean absolute percentage error)

𝐷" − 𝐹"
∑%"#$ 𝐷" ×100
𝑀𝐴𝑃𝐸 =
𝑛

1-128

128

Forecasting
• Forecasting Accuracy A: 100
B: 100,000
• Measures
• MAD(mean absolute deviation)
• MAPE(mean absolute percentage error)

Exponential
Month Actual Demand Error MAD MAPE(%)
Smoothing

Jan 100 100 0.0 - -

Feb 110 100.0 10.0 10.0 9.1
Mar 90 105.0 -15.0 15.0 16.7
Apr 130 97.5 32.5 32.5 25.0
May 70 113.8 -43.8 43.8 62.5
Jun 110 91.9 18.1 18.1 16.5
Jul 120 100.9 19.1 19.1 15.9
Aug 90 110.5 -20.5 20.5 22.7
Sep 120 100.2 19.8 19.8 16.5
Oct 90 110.1 -20.1 20.1 22.4
Nov 80 100.1 -20.1 20.1 25.1
Dec 90 90.0 0.0 0.0 0.0
Average 19.9 21.1
1-129

129

43
 Forecasting
• Forecasting Accuracy
• Forecasting aggregation
• Dimensions of aggregation
• Time: day, week, month, year
• Product: SKU, group, family
• Location: city, state, country
• Forecasting accuracy increases when aggregated.
100

80
Percent Error

60

40

20

0
N ational Brand Forecast Level SKU -Location

Figure 5.9 Comparative Forecast Errors

1-130

130

Study Objectives
• Explain about the three drivers of SCM.
• Explain the objectives of SC planning.
• Explain the SC applications.
• Explain the conflicts of S&OP
• Explain S&OP process.
• Explain about key factors for successful implementation of S&OP.
• Explain the role of APS in SC planning.
• Explain components and procedure of the APS system.
• Explain what ATP and CTP are.
• Explain what the CPFR is.
• Understand forecasting techniques and accuracy measures.

1-131

131

CHAPTER 6:
Procurement and
Manufacturing

MGMT236 Logistics Management Chapter 1 21st –Century Supply Chains

132

44
 Overview of Chapter 6
• The quality imperative
• Procurement importance
• Procurement objectives
• Procurement strategy
• Logistical interfaces with procurement
• Manufacturing processes
• Matching manufacturing strategy to
market requirements
• Manufacturing strategies

1-133

133

Quality Imperative
• Quality is an overriding concern of all
organizations
• Dimensions of product quality
• Performance
• How well the product performs in comparison to how it was
designed to perform.
• Ex) Computer – speed, Audio – sound clarity
• Reliability
• Likelihood that the product will perform throughout its expected
life without breakdowns and failures.
• Ex) Maytag’s slogan “The dependability people”
• Durability
• The actual life expectancy of the product
• Conformance
• Does the product meet its specifications as designed, when a
product is made
1-134

134

Quality Imperative
• Dimensions of product quality (cont)
• Features
• What different functions or tasks can the product perform.
• Ex) TV-internet connection, premium sound etc.
• Aesthetics
• Is the styling, color, workmanship pleasing to the customer
• Appealing design
• Serviceability
• What is the ease of fixing or repairing the product if it fails
• Without time and cost losses
• Perceived Quality
• Based on customer’s experience before, during and after they
purchase a product
• Reputation on a product

1-135

135

45
 Quality Imperative
• Dimensions of service quality
• Convenience
• Accessibility and availability (location and time)
• Reliability
• Consistency of good services
• Responsiveness
• How actively help customers (time and attitude)
• Time
• Speed of a service
• Assurance
• Enough knowledge, skill, and confidence
• Courtesy
• How friendly employees are (attitude)
• Tangibles
• Facility, equipment, tools and appearance

1-136

136

Quality Imperative
• Total quality management (TQM)
• Total quality management (TQM) is a philosophy focused on
meeting customer expectations with respect to all needs, across all
company functions, and recognizing all customers, both internal
and external.
• TQM’s basic conceptual elements are:
• Top Management commitment and support
• Maintaining a customer focus in product, service and process
performance
• Integrated operations within and between organizations
• A commitment to continuous improvement
• Cost of quality
• Appraisal cost
• Inspection and test costs
• Failure cost
• internal and external failure costs
• Prevention cost
• Training, maintenance, and quality control procedures
1-137

137

Procurement Importance
• Purchasing was historically perceived as just a buying
function for manufacturing and repair materials and
supplies. (a clerical task)
• Purchasing agent tried to get lowest price possible for acceptable
quality.
• Transactional focus led to getting the best possible “deal” today.
• Did not focus on future transactions
• No concept of Supply Chain
• Purchasing seldom looked beyond the first-tier supplier.
• Purchasing simply responded to demands of production group.
• Procurement is now a strategic activity of the firm.
• Procurement looks up and down the entire supply chain for impacts
and opportunities.
• Focuses on building relationships with suppliers and downstream
customers.
• Involvement with outsourcing includes more than just purchasing raw
materials and parts.
• Also includes finding alternate sources for manufactured products or
services to help manage demand.

1-138

138

46
 Procurement Importance
• Several factors have elevated the importance of
procurement to the firm.
• Purchased goods and services are among the largest cost
elements for most firms.
• Goods and service account for 55 cents of every sales
dollars.
• While direct labor accounts for only 10 cents of every sales
dollars
• The growing emphasis of outsourcing has expanded the
supply base of organizations.
• This added complexity requires more management attention
on the organizational interfaces with suppliers.

1-139

139

Procurement Objectives
• Procurement objectives focus on several issues related
to the firms’ supply base.
• Ensuring continuous supply
• Stockout impacts greatly to business
• Minimizing inventory investment
• Quality improvement of supply
• Accessing to technology and innovation
• Lowest total cost of ownership (TCO)
• Minimizing purchasing price as well as quality, labor, logistics,
inventory, and after-usage costs.
• The purchasing price is only one part of the total cost.
• Looking at the cost of owning an asset in the long-term base.

1-140

140

Procurement Objectives
• Total cost of ownership (TCO)

Figure 6.1 Major Categories for the Components of TCO

1-141

141

47
 Procurement Strategy
• Two main decisions
• Insourcing vs. outsourcing
• make vs. buy decision (make-buy decision)
• Alternative procurement strategies
• User buy, volume consolidation, supplier operational integration,
value management
• Insourcing vs. outsourcing
• Outsourcing benefits
• Reduce capital investment
• Reduce risks of investments
• Capital investment risks transferred to suppliers.
• Focus on core competency
• Can use financial resources for more important activities
• Increased flexibility
• The ability to use the supplier’s technical knowledge to accelerate
product development cycle time
• The ability to gain access to new technologies and innovation.
1-142

142

Procurement Strategy
• Insourcing vs. outsourcing (cont)
• Outsourcing risks
• Loss of competitive knowledge
• Outsourcing critical components to suppliers may open up
opportunities for competitors.
• Outsourcing implies that companies lose their ability to
introduce new designs based on their own agenda rather than
the supplier’s agenda.
• Outsourcing the manufacturing of various components to
different suppliers may prevent the development of new insights,
innovations, and solutions that typically require cross-functional
teamwork.
• Loss of control over suppliers
• Loss of control over product quality
• Loss of control over demand and delivery
• Loss of control over price

1-143

143

Procurement Strategy
• Insourcing vs. outsourcing decision procedure
• Make-buy analysis
• Evaluation of a product or service relationship to firm’s core
competencies
• Analyzing financial benefits
• Various costs (TCO analysis for both)
• Analyzing qualitative factors
• Loss of control over quality
• Supply risk (loss of control over demand and delivery)
• Product shortages and delays
• Loss of product intellectual property
• Potential price increase
• Product safety problem
• Harms on firm’s reputation

1-144

144

48
 Procurement Strategy
• Alternative procurement strategies
• User buy
• The end users in the firm purchase needs
• For low cost items
• Volume consolidation
• Reducing total number of suppliers while minimizing supply
risk
• Increases buyer’s negotiation power in relation to supplier.
• Reduced cost due to supplier’s economies of scale and
economies of scope.
• Higher service level (lowering stockout risk) due to supplier’s
higher capacity.
• Higher supply risk
• Rigorous supplier selection and certification programs required.
• Not necessarily a single supplier but a few suppliers

1-145

145

Procurement Strategy
• Alternative procurement strategies (cont)
• Supplier operational integration
• Building partnerships
• Sharing information and knowledge
• Identifying linked processes and shared opportunities for
improvement.
• Different levels of supplier operational integration
• Buyer shares sales and orders information with suppliers.
• Buyers and suppliers working together to redesign linked
processes for reducing order time and communication errors.
• Eliminating redundant tasks performed by both the buyer and
supplier.
• Continuous replenishment program
• Vendor managed inventory
• Can provide incremental savings of 5% to 25% over the
benefits of volume consolidation

1-146

146

Procurement Strategy
• Alternative procurement strategies (cont)
• Value management
• Early supplier involvement (ESI) in product design
• Reducing complexity
• Value engineering

Figure 6.2 Flexibility

and Cost of Design
Changes

1-147

147

49
 Procurement Strategy
• Procurement Strategy Portfolio
• Through spend analysis

• Long-term contract • Supplier operational

integration or value
management

• Volume consolidation
or Supplier
operational
integration

• User buy

Figure 6.3 Procurement Strategy Matrix

1-148

148

Logistical Interfaces with Procurement

• Procurement is implemented through logistics.
• Just-in Time
• JIT delivery
• More frequent delivery of smaller quantities
• Close cooperation and communication
• JIT II
• Integration of suppliers into manufacturing processes
• Supplier’s personal involved into buyer’s processes
• Procurement of logistics services
• Allows a company to focus on its core competencies
• Logistics expertise left to the logistics experts
• Performance-based logistics
• Initiated by US Department of Defense to purchase performance
outcomes instead of individual transactions defined by product
specifications (when and what).
• Government specifies desired outcomes and lets suppliers
determine the best way to meet those requirements.
• Currently limited to government purchasing but business
organizations are expected to adopt the practice.
1-149

149

Manufacturing
• The four basic manufacturing processes
• Job shop creates a custom product for each customer.
• Batch process manufactures a small quantity of an item
in a single production run.
• Line flow process has standard products with a limited
number of variations moving on an assembly line
through stages of production.
• Continuous process is used to manufacture such items
as gasoline, laundry detergent and chemicals.
• Modifications of the above can create new options.
• Mass customization produces a unique product quickly and
at a low cost using a high volume production process.

1-150

150

50
 Manufacturing Strategies
• Manufacturing strategies should match market requirements.
• Market requirements
• Mass marketing or one-to-one marketing
• Engineer to Order (ETO)
• is used when products are unique and extensively customized for the
specific needs of individual customers.
• Nothing done until a customer order arrives
• Make to Order (MTO)
• Customer order based on a standardized design.
• Supplier prepare raw materials in advance.
• relies on relatively small quantities, but more complexity
• Requires much interaction with customer to work out design and
specification.
• Usually shipped direct to customer.
• Assemble to Order (ATO)
• is when base components are made, stocked to forecast, but products
are not assembled until customer order is received
• Manufacturing postponement practiced here.
• Make to Plan (MTP or MTS)
• features economies of scale, large volumes, long production runs, low
variety, and distribution channels.
1-151

151

Manufacturing Strategies

Figure 6.4 Manufacturing Strategy and Performance Cycles

1-152

152

Manufacturing Strategies

Table 6.1 Manufacturing process characteristics

1-153

153

51
 Mass Customization
• Takes advantages of MTO and MTS
Postponement
or ATO

Raw MTS ETO/MTO End

materials customers

• Mass customization: Where does it work?

• Market Characteristics:
• Sufficiently large customer segment that values “translatable variety”
• Turbulent, dynamic market
• Unpredictable demand - but not entirely unpredictable!
• Little impact of regulation or other constraints
• Product/Process Characteristics:
• Modular or adjustable product building blocks
• Predictable components/functions interactions
• Standardized process/skill building blocks
• Reasonable lead times, steps, work content

1-154

154

Lean Systems and Six Sigma

• Lean is a philosophy of manufacturing that emphasizes the
minimization of the amount of all resources used in operations of a
firm -> Elimination of waste
• Objectives
• To produce only the good/services that customers want
• To produce as quickly as customers want
• To produce with only features customers want
• To produce with perfect quality
• To produce in minimum possible lead time
• To produce without waste
• To produce with occupational development of workers

• Six Sigma
• Focused on finding CTQ (critical to quality)
• CTQ has the highest impact on financial performance
• Quality improvement through elimination of defects and variation

1-155

155

Design-for-Logistics
• Design for logistics includes the requirements and framework for
logistical support in the early phases of product development.
• Considers
• What we are going to make.
• How we are going to make it.
• What logistics capabilities do we need.
• How we are going to integrate our suppliers into the process.
• Any subassembly manufacture by suppliers.
• The need for outsourcing of some parts or assemblies.

1-156

156

52
 Design-for-Logistics

Table 6.2 Strategic Integration Framework

1-157

157

Study Objectives
• Explain the dimensions of product and service quality.
• Explain the basic conceptual elements of TQM.
• Explain three costs of quality.
• Explain why the procurement became a strategic activity of a firm.
• Explain the objectives of the procurement.
• Explain the benefits and risks of outsourcing.
• Explain about make-buy analysis.
• Explain about four alternative procurement strategies and the portfolio.
• Explain three ways of logistics to implement procurement.
• Explain the characteristics of four manufacturing strategies with their
performance cycles.
• Explain the market characteristics and product/process characteristics of mass
customization.
• Explain the focuses of Lean system and Six sigma.
• Explain the concept of design for logistics and the strategic integration
framework.
1-158

158

CHAPTER 6:
Procurement and
Manufacturing

MGMT236 Logistics Management Chapter 1 21st –Century Supply Chains

159

53
 Overview of Chapter 6
• The quality imperative
• Procurement importance
• Procurement objectives
• Procurement strategy
• Logistical interfaces with procurement
• Manufacturing processes
• Matching manufacturing strategy to
market requirements
• Manufacturing strategies

1-160

160

Quality Imperative
• Quality is an overriding concern of all
organizations
• Dimensions of product quality
• Performance
• How well the product performs in comparison to how it was
designed to perform.
• Ex) Computer – speed, Audio – sound clarity
• Reliability
• Likelihood that the product will perform throughout its expected
life without breakdowns and failures.
• Ex) Maytag’s slogan “The dependability people”
• Durability
• The actual life expectancy of the product
• Conformance
• Does the product meet its specifications as designed, when a
product is made
1-161

161

Quality Imperative
• Dimensions of product quality (cont)
• Features
• What different functions or tasks can the product perform.
• Ex) TV-internet connection, premium sound etc.
• Aesthetics
• Is the styling, color, workmanship pleasing to the customer
• Appealing design
• Serviceability
• What is the ease of fixing or repairing the product if it fails
• Without time and cost losses
• Perceived Quality
• Based on customer’s experience before, during and after they
purchase a product
• Reputation on a product

1-162

162

54
 Quality Imperative
• Dimensions of service quality
• Convenience
• Accessibility and availability (location and time)
• Reliability
• Consistency of good services
• Responsiveness
• How actively help customers (time and attitude)
• Time
• Speed of a service
• Assurance
• Enough knowledge, skill, and confidence
• Courtesy
• How friendly employees are (attitude)
• Tangibles
• Facility, equipment, tools and appearance

1-163

163

Quality Imperative
• Total quality management (TQM)
• Total quality management (TQM) is a philosophy focused on
meeting customer expectations with respect to all needs, across all
company functions, and recognizing all customers, both internal
and external.
• TQM’s basic conceptual elements are:
• Top Management commitment and support
• Maintaining a customer focus in product, service and process
performance
• Integrated operations within and between organizations
• A commitment to continuous improvement
• Cost of quality
• Appraisal cost
• Inspection and test costs
• Failure cost
• internal and external failure costs
• Prevention cost
• Training, maintenance, and quality control procedures
1-164

164

Procurement Importance
• Purchasing was historically perceived as just a buying
function for manufacturing and repair materials and
supplies. (a clerical task)
• Purchasing agent tried to get lowest price possible for acceptable
quality.
• Transactional focus led to getting the best possible “deal” today.
• Did not focus on future transactions
• No concept of Supply Chain
• Purchasing seldom looked beyond the first-tier supplier.
• Purchasing simply responded to demands of production group.
• Procurement is now a strategic activity of the firm.
• Procurement looks up and down the entire supply chain for impacts
and opportunities.
• Focuses on building relationships with suppliers and downstream
customers.
• Involvement with outsourcing includes more than just purchasing raw
materials and parts.
• Also includes finding alternate sources for manufactured products or
services to help manage demand.

1-165

165

55
 Procurement Importance
• Several factors have elevated the importance of
procurement to the firm.
• Purchased goods and services are among the largest cost
elements for most firms.
• Goods and service account for 55 cents of every sales
dollars.
• While direct labor accounts for only 10 cents of every sales
dollars
• The growing emphasis of outsourcing has expanded the
supply base of organizations.
• This added complexity requires more management attention
on the organizational interfaces with suppliers.

1-166

166

Procurement Objectives
• Procurement objectives focus on several issues related
to the firms’ supply base.
• Ensuring continuous supply
• Stockout impacts greatly to business
• Minimizing inventory investment
• Quality improvement of supply
• Accessing to technology and innovation
• Lowest total cost of ownership (TCO)
• Minimizing purchasing price as well as quality, labor, logistics,
inventory, and after-usage costs.
• The purchasing price is only one part of the total cost.
• Looking at the cost of owning an asset in the long-term base.

1-167

167

Procurement Objectives
• Total cost of ownership (TCO)

Figure 6.1 Major Categories for the Components of TCO

1-168

168

56
 Procurement Strategy
• Two main decisions
• Insourcing vs. outsourcing
• make vs. buy decision (make-buy decision)
• Alternative procurement strategies
• User buy, volume consolidation, supplier operational integration,
value management
• Insourcing vs. outsourcing
• Outsourcing benefits
• Reduce capital investment
• Reduce risks of investments
• Capital investment risks transferred to suppliers.
• Focus on core competency
• Can use financial resources for more important activities
• Increased flexibility
• The ability to use the supplier’s technical knowledge to accelerate
product development cycle time
• The ability to gain access to new technologies and innovation.
1-169

169

Procurement Strategy
• Insourcing vs. outsourcing (cont)
• Outsourcing risks
• Loss of competitive knowledge
• Outsourcing critical components to suppliers may open up
opportunities for competitors.
• Outsourcing implies that companies lose their ability to
introduce new designs based on their own agenda rather than
the supplier’s agenda.
• Outsourcing the manufacturing of various components to
different suppliers may prevent the development of new insights,
innovations, and solutions that typically require cross-functional
teamwork.
• Loss of control over suppliers
• Loss of control over product quality
• Loss of control over demand and delivery
• Loss of control over price

1-170

170

Procurement Strategy
• Insourcing vs. outsourcing decision procedure
• Make-buy analysis
• Evaluation of a product or service relationship to firm’s core
competencies
• Analyzing financial benefits
• Various costs (TCO analysis for both)
• Analyzing qualitative factors
• Loss of control over quality
• Supply risk (loss of control over demand and delivery)
• Product shortages and delays
• Loss of product intellectual property
• Potential price increase
• Product safety problem
• Harms on firm’s reputation

1-171

171

57
 Procurement Strategy
• Alternative procurement strategies
• User buy
• The end users in the firm purchase needs
• For low cost items
• Volume consolidation
• Reducing total number of suppliers while minimizing supply
risk
• Increases buyer’s negotiation power in relation to supplier.
• Reduced cost due to supplier’s economies of scale and
economies of scope.
• Higher service level (lowering stockout risk) due to supplier’s
higher capacity.
• Higher supply risk
• Rigorous supplier selection and certification programs required.
• Not necessarily a single supplier but a few suppliers

1-172

172

Procurement Strategy
• Alternative procurement strategies (cont)
• Supplier operational integration
• Building partnerships
• Sharing information and knowledge
• Identifying linked processes and shared opportunities for
improvement.
• Different levels of supplier operational integration
• Buyer shares sales and orders information with suppliers.
• Buyers and suppliers working together to redesign linked
processes for reducing order time and communication errors.
• Eliminating redundant tasks performed by both the buyer and
supplier.
• Continuous replenishment program
• Vendor managed inventory
• Can provide incremental savings of 5% to 25% over the
benefits of volume consolidation

1-173

173

Procurement Strategy
• Alternative procurement strategies (cont)
• Value management
• Early supplier involvement (ESI) in product design
• Reducing complexity
• Value engineering

Figure 6.2 Flexibility

and Cost of Design
Changes

1-174

174

58
 Procurement Strategy
• Procurement Strategy Portfolio
• Through spend analysis

• Long-term contract • Supplier operational

integration or value
management

• Volume consolidation
or Supplier
operational
integration

• User buy

Figure 6.3 Procurement Strategy Matrix

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Logistical Interfaces with Procurement

• Procurement is implemented through logistics.
• Just-in Time
• JIT delivery
• More frequent delivery of smaller quantities
• Close cooperation and communication
• JIT II
• Integration of suppliers into manufacturing processes
• Supplier’s personal involved into buyer’s processes
• Procurement of logistics services
• Allows a company to focus on its core competencies
• Logistics expertise left to the logistics experts
• Performance-based logistics
• Initiated by US Department of Defense to purchase performance
outcomes instead of individual transactions defined by product
specifications (when and what).
• Government specifies desired outcomes and lets suppliers
determine the best way to meet those requirements.
• Currently limited to government purchasing but business
organizations are expected to adopt the practice.
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Manufacturing
• The four basic manufacturing processes
• Job shop creates a custom product for each customer.
• Batch process manufactures a small quantity of an item
in a single production run.
• Line flow process has standard products with a limited
number of variations moving on an assembly line
through stages of production.
• Continuous process is used to manufacture such items
as gasoline, laundry detergent and chemicals.
• Modifications of the above can create new options.
• Mass customization produces a unique product quickly and
at a low cost using a high volume production process.

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59
 Manufacturing Strategies
• Manufacturing strategies should match market requirements.
• Market requirements
• Mass marketing or one-to-one marketing
• Engineer to Order (ETO)
• is used when products are unique and extensively customized for the
specific needs of individual customers.
• Nothing done until a customer order arrives
• Make to Order (MTO)
• Customer order based on a standardized design.
• Supplier prepare raw materials in advance.
• relies on relatively small quantities, but more complexity
• Requires much interaction with customer to work out design and
specification.
• Usually shipped direct to customer.
• Assemble to Order (ATO)
• is when base components are made, stocked to forecast, but products
are not assembled until customer order is received
• Manufacturing postponement practiced here.
• Make to Plan (MTP or MTS)
• features economies of scale, large volumes, long production runs, low
variety, and distribution channels.
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Manufacturing Strategies

Figure 6.4 Manufacturing Strategy and Performance Cycles

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Manufacturing Strategies

Table 6.1 Manufacturing process characteristics

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60
 Mass Customization
• Takes advantages of MTO and MTS
Postponement
or ATO

Raw MTS ETO/MTO End

materials customers

• Mass customization: Where does it work?

• Market Characteristics:
• Sufficiently large customer segment that values “translatable variety”
• Turbulent, dynamic market
• Unpredictable demand - but not entirely unpredictable!
• Little impact of regulation or other constraints
• Product/Process Characteristics:
• Modular or adjustable product building blocks
• Predictable components/functions interactions
• Standardized process/skill building blocks
• Reasonable lead times, steps, work content

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Lean Systems and Six Sigma

• Lean is a philosophy of manufacturing that emphasizes the
minimization of the amount of all resources used in operations of a
firm -> Elimination of waste
• Objectives
• To produce only the good/services that customers want
• To produce as quickly as customers want
• To produce with only features customers want
• To produce with perfect quality
• To produce in minimum possible lead time
• To produce without waste
• To produce with occupational development of workers

• Six Sigma
• Focused on finding CTQ (critical to quality)
• CTQ has the highest impact on financial performance
• Quality improvement through elimination of defects and variation

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Design-for-Logistics
• Design for logistics includes the requirements and framework for
logistical support in the early phases of product development.
• Considers
• What we are going to make.
• How we are going to make it.
• What logistics capabilities do we need.
• How we are going to integrate our suppliers into the process.
• Any subassembly manufacture by suppliers.
• The need for outsourcing of some parts or assemblies.

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61
 Design-for-Logistics

Table 6.2 Strategic Integration Framework

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Study Objectives
• Explain the dimensions of product and service quality.
• Explain the basic conceptual elements of TQM.
• Explain three costs of quality.
• Explain why the procurement became a strategic activity of a firm.
• Explain the objectives of the procurement.
• Explain the benefits and risks of outsourcing.
• Explain about make-buy analysis.
• Explain about four alternative procurement strategies and the portfolio.
• Explain three ways of logistics to implement procurement.
• Explain the characteristics of four manufacturing strategies with their
performance cycles.
• Explain the market characteristics and product/process characteristics of mass
customization.
• Explain the focuses of Lean system and Six sigma.
• Explain the concept of design for logistics and the strategic integration
framework.
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CHAPTER 7:
Inventory

MGMT236 Logistics Management Chapter 1 21st –Century Supply Chains

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62
 Overview of Chapter 7
• Inventory functionality and definitions
• Inventory carrying cost
• Planning inventory
• Managing uncertainty
• Inventory management policies
• Inventory management practices

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Inventory Functionality and Definitions

• Inventory functionality

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Inventory Functionality and Definitions

• Inventory decisions
• How much to carry for the future sales or usages?
• Strongly related to procurement plan
• How much to order.
• Strongly related to customer service
• Stockout rate, fill rate or service rate
• Strongly related to production plan
• Overstock
• Increases costs due to space, working capital,
insurance, taxes, and obsolescence.
• Shortage
• Increases costs due to shutdown manufacturing,
production schedule modification, added cost,
potential finished goods shortage

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63
 Inventory Functionality and Definitions

• Dimensions of inventory risk

• Time duration or depth: long or short
• Breadth of commitment: number of products
• Manufacturers or wholesalers
• Inventory risk is long but not broad.
• From raw materials to sales (consignment inventory)
• Retailers
• Inventory risk is short but broad.
• Dealing with many different types of products.
• Inventory turnover ratio is a main issue.
• Turnover ratio = (total revenue)/(average inventory)
• Retail markets deal with 50,000 SKUs to 70,000 SKUs
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Inventory Functionality and Definitions

• Inventory functionality
• Economies of scale
– Purchasing advantages
– Transportation advantages
– Manufacturing advantages
• Balancing supply and demand
– Seasonality/Speculative
– Maintaining supply sources
• Buffering against uncertainty
– Uncertainty in demand
– Uncertainty in supply

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Inventory Functionality and Definitions

• Inventory definitions
• Inventory policy
• Guidelines regarding what to purchase, when to
purchase, and what quantity.
• Central or decentralized inventory management
• Inventory at different locations is independently managed
in decentralized management.
• Centralized inventory management requires
communication and management systems.
• Utilizes inventory pooling and reduce inventory risks

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64
 Inventory Functionality and Definitions
• Inventory definitions
• Service level
• Performance target
• Measurements
• Case fill rate, line fill rate, order fill rate, or any
combination of this.
• An Order example
Q uantity
Line Item s Q uantity Case Due date
per case
Product A 10 1 10

1 Product B 200 20 10 April 20th 2020

Product C 5 5 1

2 Product B 20 20 1 April 30th 2020

Product B 60 20 3
3 April 25th 2020
Product C 30 5 6
Total 325 - 31 -

• Firms use their own measurements.

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Inventory Functionality and Definitions

• Inventory definitions
• Order quantity in monetary value
• $70,000 – $30,000 = $40,000
• Average cycle inventory
• A half of order quantity Safety stock
• $40,000/2 = $20,000
• Transit inventory
• Inventory under transportation or order processing
• Speculative inventory
• Inventory purchased in advance to hedge against price increases
or various disruptions, or to take advantage of quantity discount
• Obsolete inventory
• Out of date inventory
• Safety stock
• Inventory to protect stockout due to high demand during
leadtime.
• Average inventory = One-half of order quantity +
Safety stock + in-transit stock
= ($70,000 – 30,000)/2 + 30,000 + in-transit stock

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Inventory Functionality and Definitions

• Inventory definitions
• Average inventory across multiple performance cycles
• Fixed order quantity model
• EOQ (economic order quantity) model
• No safety stock assumed
Q
O rder
Usage rate, inventory position
quantity

A verage
inventory
O rder cycle
R eorder
point

Tim e
R eceive Place R eceive Place R eceive
order order order order order

Lead time 1-195

195

65
 Inventory Functionality and Definitions
• Inventory definitions
• Average inventory across multiple performance cycles
• Usage rate: 10 units per day
• Order quantity, average inventory, and reorder point in days?
• How many purchases in a year if 240 working days a year is assumed?
• Lead-time? 5 days
• Inventory turnover? 2400units/100=24

200
O rder
10 per day, Usage rate
quantity

100
A verage
inventory O rder cycle

50
R eorder
Point

Tim e
Lead time
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Inventory Functionality and Definitions

• Inventory definitions
• What if the order quantity is changed?
• What if the reorder point is lower?
• Inventory carrying (holding) cost
• Ordering cost

• Independent demand
• Final good’s demand that will be delivered to customers.
• Dependent demand
• Demand that will be used for producing independent demand.
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Inventory Carrying Cost

Capital
costs Inventory investment

Inventory Insurance
service
costs Taxes

Inventory Plant warehouses

carrying
costs Storage Public warehouses
space costs
Rented warehouses
Company-owned warehouses

Obsolescence

Inventory Damage
risk costs
Pilferage
Relocation costs
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66
 Inventory Carrying Cost
• Capital cost
• Prime (loan) interest rate – lower bound
• Return on investment (ROI)
• Taxes
• Sales tax = (Sales revenue – Purchase cost – Operational cost)*Tax rate
• Purchase cost = (Purchase quantity – Average inventory)*unit price
• Insurance
• risks over losses (natural disaster or stolen loss)
• Depending on product characteristics and facility characteristics
• Obsolescence
• Decreases of product value through decays, or changes in
customer preference
• Storage (holding or carrying)
• Facility expenses

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Inventory Carrying Cost

• Table 7.2
• Inventory carrying cost components
• Example

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200

Planning Inventory
• When to order
• Determining reorder point

𝑅 = 𝐷×𝑇 where 𝑅: Reorder points in units

D: Average daily demand in units
T: Average performance cycle length in days
if D = 20 unit/day and T=10 days
R = 20 x 10 = 200 units

If the safety stock (𝑆𝑆) is considered

𝑅 = 𝐷×𝑇 + 𝑆𝑆
𝑆𝑆 will be studied in “Managing Uncertainty”

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67
 Planning Inventory
• How much to order
• EOQ (economic order quantity) model
• Total cost = Inventory carrying cost + Ordering cost
• EOQ is the quantity that makes the same ordering cost as the inventory
holding cost.

2𝐶+ 𝐷
𝐸𝑂𝑄 =
𝐶" 𝑈
Holding
cost 𝐷: 𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑 (𝑣𝑜𝑙𝑢𝑚𝑒)
𝑈: 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝐶+ : 𝑜𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑜𝑟𝑑𝑒𝑟
𝐶" : 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑟𝑎𝑡𝑒 𝑜𝑛 𝑈

Ordering cost Total cost 𝑇𝐶

, -
𝑇𝐶 = * 𝐶" 𝑈 + , 𝐶+
Q Holding
cost
Ordering
cost
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202

Planning Inventory
• How much to order
• EOQ (economic order quantity) model

2𝐶+ 𝐷 2(19)(2,400)
𝐸𝑂𝑄 = = = 302 ≅ 300
𝐶" 𝑈 0.20(5.00)

300 2,400
𝐷: 2,400 𝑇𝐶 = 0.2 5.00 + 19.00
𝑈: $5.00 2 300
= $152 + $150 = $302
𝐶+ : $19.00 𝑝𝑒𝑟 𝑜𝑟𝑑𝑒𝑟
𝐶" : 20%

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203

Planning Inventory
• How much to order
• Assumptions of EOQ model
• All demand is satisfied.
• Rate of demand is continuous, constant, and known.
• Replenishment performance cycle time is constant and known.
• There is a constant price of product that is independent of order quantity
or time.
• There is an infinite planning horizon.
• There is no interaction between multiple items of inventory.
• No inventory is in-transit.
• No limit is placed on capital availability.
• Relationships
• EOQ is obtained at the point that the ordering cost is the same as the
holding cost.
• Average inventory is one-half of order quantity.
• The value of inventory unit will have a direct relationship with
replenishment order frequency. Higher the value, more frequent order.

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68
 Planning Inventory
• How much to order (EOQ)
• Volume transportation rate
• Transportation cost is considered as the ordering cost in EOQ.
• However in practice, the greater the order quantity, the lower ordering
cost due to lower transportation cost per unit.
• If transportation cost is separated from ordering cost just like the
example the below

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205

Planning Inventory
• How much to order (EOQ)
• Quantity discount

• Larger quantity might be better than EOQ.

• Other EOQ adjustments
• Production lot size
• Multiple-item purchase
• Limited capital
• Dedicated trucking
• Unitization

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Inventory Management Policies

• Inventory control
• The procedure for implementing an inventory policy.
• Perpetual review (continuous review)
• Having an ordering chance anytime it required.
• An order is placed as soon as the inventory position is less than the ROP.
• Periodic review
• Having an ordering chance periodically (regular interval)
• Perpetual review
• 𝑅𝑂𝑃 = 𝐷×𝑇 + 𝑆𝑆
• 𝐷: average daily demand in units
• 𝑇: average performance cycle length in days
• 𝑆𝑆: Safety stock or buffer stock in units
• If 𝐼 + 𝑂𝑄+ ≤ 𝑅𝑂𝑃, 𝑡ℎ𝑒𝑛 𝑜𝑑𝑒𝑟 𝑂𝑄
• 𝐼: inventory position (on-hand inventory)
• 𝑂𝑄+: Inventory on order from supplier
• 𝑂𝑄: Order quantity in units
• Average inventory level with the perpetual review
1,
• 𝐼./0 = *
+ 𝑆𝑆

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69
 Inventory Management Policies
• Inventory control
• Periodic review
• FOI(fixed order interval) model
2
• 𝑅𝑂𝑃 = 𝐷 𝑇 + * + 𝑆𝑆
• 𝑃: Review period in days
• Example) 𝐷 = 20, 𝑇 = 10, 𝑃 = 7, 𝑆𝑆 = 0,
• 𝑅𝑂𝑃 = 20 10 + 3.5 = 270 𝑢𝑛𝑖𝑡𝑠
• Inventory level with FOI
1, 2×-
• 𝐼./0 = + + 𝑆𝑆
* *
• Example) OQ = 300, 𝐷 = 10, 𝑃 = 7, 𝑆𝑆 = 0,
)44 5×$4
• 𝐼./0 = *
+ * + 0 = 185 𝑢𝑛𝑖𝑡𝑠
• Generally requires higher inventory level than perpetual review due to the
time interval.

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Inventory Management Policies

• Planning methods
• uses a shared database to coordinate inventory requirements across
multiple locations or stages in the supply chain.
• APS (advanced planning and scheduling) system often used
• Two inventory planning methods
• Fair share allocation
• Equitable distribution of available inventory

Available capacity
(Plant warehouse requires 100,
and the rest 500 can be allocated.

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Inventory Management Policies

• Planning methods
• Requirement planning
• Takes into account specific factors such as leadtime, EOQ, and safety stock.
• Uses MRP(material requirement planning) or DRP (distribution requirement
planning)
• MRP is driven ty production schedule while DRP is driven by supply chain
demand.
• MRP is for dependent demand while DRP is for independent demand.
• MRP coordinates scheduling and integration of materials into finished goods,
and so controls inventory until manufacturing or assembly is completed.
• DRP takes coordination responsibility after finished goods are received in plant
warehouse.

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70
 Inventory Management Policies
• Planning methods
• Requirement planning Figure 7.12
Conceptual design
of Integrated
MRP/DRP system
MRP

DRP

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Figure 7.13 Distribution Requirement Planning

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Practice Problem: Distribution Requirement Planning

Fill the blanks in grey.

Eastern W arehouse W eek Safety stock 200

Past due 1 2 3 4 5 6 7 8 O rder quantity 500
G ross requirem ent 100 120 150 130 100 200 70 90 Leadtim e 2 w eeks
Scheduled receipts 0
Projected on hand 600
Planned orders

Plant W arehouse W eek Safety stock 500

Past due 1 2 3 4 5 6 7 8 Batch size 1000
G ross requirem ent Leadtim e 1 w eeks
Scheduled receipts
Projected on hand 600
Planned production

W estern W arehouse W eek Safety stock 50

Past due 1 2 3 4 5 6 7 8 O rder quantity 150
G ross requirem ent 40 50 60 90 70 100 40 30 Leadtim e 1 w eeks
Scheduled receipts 0 0 0 150 150 0 0 150
Projected on hand 200 160 110 50 110 190 90 50 170
Planned orders 0 0 150 150 0 0 150 0

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71
 Inventory Management Policies
• Collaborative Inventory Replenishment
• Focuses on streamlining the flow of goods within the supply chain
mainly between retailers and wholesales (or manufacturers).
• Depending on collaboration level different techniques are used.
• QR(quick response)
• Sharing retail sales information in realtime.
• Reducing the time from order to delivery
• VMI (vendor managed inventory)
• Elimination of order placements in addition to QR.
• Redundant tasks of buy’s are eliminated.
• Warehouses of buyers are often eliminated.
• Inventory ownership at buy’s places is taken by suppliers.
• PR(profile replenishment)
• More rights are given to suppliers
• The responsibility for forecasting future demands is given to supply.
• A category profile includes sizes, colors, and associated products that
usually sell in a particular type of retail outlets.

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Inventory Management Policies

• Collaborative Inventory Replenishment

Table 7.17 Comparative service and inventory characteristics for

anticipatory versus responsive inventory system

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Inventory Management Policies

• Collaborative Inventory Replenishment
Table 7.18 Suggested inventory management logic

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72
 Inventory Management Policies
• Postponement
• Reduces inventory risks of anticipatory supply chain.
• Enabled through information technology.
• Two types of postponement strategies
• Manufacturing, or form postponement
• Geographic, or logistic postponement
• Manufacturing postponement
• Manufacturing up to a certain stage and stock up WIP, and waiting until
customer order specifications are known (customer commitments).
• Up to the manufacturing stage that can utilize the benefits of the
economies of scale
• Finalizing manufacturing at the warehouse (consolidation).
• Example) mixing colors of paints at retail stores, HP power cable
• Geographic postponement
• mass-produced products in a warehouse and distribute them when the
customer's needs are known.
• Facilitated by increased logistical system capability.

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Inventory Management Practices

• Product/Market classification
• Fine-line or ABS classification
• Classification criteria includes sales, profit contribution, inventory
value, usage rate, and item category.
• 80/20 Rule or Pareto rule is applied.
• High volume or fast-moving items require higher safety stock
• Qualitative measures are often used such as importance to
customers
• Enhances the efficiency of inventory management.

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Inventory Management Practices

• Product/Market classification
• Fine-line or ABS classification
Table 7.19 Product
market classification
(sales)

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73
 Inventory Management Practices
• Segment strategy definition
• Uses a different strategy for different classification.
• The strategy includes service objectives, forecasting methods,
management technique, and inventory review cycle.
• Product segments have different importance.
Table 7.20 Integrated strategy

• Policies and parameters

• Policies include data requirements, software applications, performance
objectives, and decision guidelines.
• Parameters include review period lengths, service objectives, inventory
carrying cost percentage, order quantities, and reorder points.

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Study Objectives
• Explain the definitions used for inventory management.
• Explain main functionalities of inventory.
• Explain the principles of the EOQ model.
• Explain how to determine the ROP.
• Explain the elements of inventory carrying cost.
• Explain the principles of management uncertainties.
• Explain the difference between periodic review and perpetual
review.
• Explain the inventory planning methods with DRP and MRP.
• Explain the methods of collaborative inventory replenishment.
• Explain two postponement strategies.
• Explain inventory classification methods and different strategies
with different classifications.

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CHAPTER 8:
Transportation

MGMT236 Logistics Management Chapter 1 21st –Century Supply Chains

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74
 Overview of Chapter 8
• Transportation functionality and participants
• From regulation to a free market system
• Transportation modal structure
• Specialized transportation services
• Transportation economics and pricing
• Transportation operations management
• Documentation

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Transportation Functionality and

Participants
• Largest expenditure in logistics.
• Transportation managers are responsible for moving inventory
throughout a firm’s supply chain and to customers.
• Transportation is the largest expenditure in logistics, usually
representing over 60% of a typical firm’s total logistics spend.
• Precise transportation execution helps a firm provide service
and reduce cost, inventory, storage, and materials handling.
• If not managed effectively and efficiently, transportation can
be a major barrier to a successful supply chain strategy.
• Value addition of transportation
• Product sorting, sequencing, modifications, guarantee of
delivery completed by or at a specific time.

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Transportation Functionality and

Participants
• Functionality
• Main functionalities are product movement and product
storage.
• Product movement
• Restrictive element—in-transit inventory is “captive”, usually
inaccessible during transportation → should be minimized
• Transportation consumes time, financial and environmental resources.
• Smart phone applications help enhancing transportation accuracy.
• Product storage
• Product storage occurs while product is in transit, or waiting to be
moved or unloaded.
• Transportation vehicle storage instead of loading and unloading to a
warehouse – demurrage fee
• Diversion—inventory can be diverted during shipment to a
new destination

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75
 Transportation Functionality and
Participants
• Participants
• Shipper and consignee (receiver)
• have a common interest in moving goods from origin to destination
within a given time at the lowest cost.
• Key elements: pickup and delivery, transit time, product damages or
losses, accurate invoicing, accurate and timely information exchange
(ASN-advanced shipment notification).
• Carriers
• desire to maximize their revenue for movement while minimizing
associated costs.
• Agents (brokers and freight forwarders)
• facilitate carrier and customer matching.
• Government
• desires a stable and efficient transportation environment to support
economic growth.

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Transportation Functionality and

Participants
• Participants
• Information Technology
• Wide array of technology applications, primary focused on providing
real time status information
• Realtime visibility to all assets including empty trucks or warehouses,
and available shipments with GPS technology
• Opportunities of consolidation
• Spot market board to track market pricing
• Public
• Concerned with transportation accessibility, expense, and standards for
security, safety and the environment.

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Transportation Functionality and

Participants
• Participants

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76
 Transportation Modal Structure
• Freight transportation structure consists of the rights-of-way, vehicles,
and carriers that operate within five basic transportation modes.
• Rail
• Highway
• Water
• Pipeline
• Air
• Relative importance of each transportation varies across countries.

Table 8.1 The nations freight bill (billions) - USA

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Transportation Modal Structure

Table 8.3 Domestic shipments by mode and revenue in the US

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230

Transportation Modal Structure

• Rep. of Korea’s main transportation modes.
• Road for domestic, and water for oversea
Trans Mode Tons in thousands %
Domestic 690,779 100.0%
Rail 43,341 6.3%
Road 529,278 76.6%
Water 117,805 17.1%
Air 355 0.1%
Oversea 812,684 100.0%
Water 809,830 99.6%
Air 2,854 0.4%

• Vietnam in 2021
Trans Mode Rail Road Inland water Maritime Air
Ton’s in thousands 4,546 89,890 31,612 91,249 6,090
Percentage 2% 40% 14% 41% 3%

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77
 Transportation Modal Structure
• Rail
• Rail-road once ranked first in the number of miles in service but significantly
reduced recent years.
• Appropriate for transporting large tonnage over long distances.
• High fixed cost but low variable cost
• Main products in the US – automobiles, Farm equipment, Machinery (bulk or
heavy industry )
• Intermodal service – combining rail with road transportation services
• Truck
• Dominating mode in manufacturing and distributive trades.
• Highest flexibility in size, maneuverability, and roadways
• Relatively lower fixed cost but higher variable cost
• Appropriate for small shipments moving short distances.
• Obstacles – high replacement and maintenance costs, safety, increased
regulations, fuel cost, and driver shortages.
• Increased driver pay, improved line-haul scheduling, computerized billing systems,
mechanized terminals, tandem operations (hauling two or three trailers by one truck)

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Transportation Modal Structure

• Truck (cont)
• Integrated logistics service providers (ISPs)
• A truck owner provides transportation services under contract with ISP.
• A company that performs a variety of end-to-end logistics-related service activities like air,
ocean, road and rail transportation, warehousing and other value-added services that make
up a total logistics services package.
• ISPs will build on their strengths and solicit the assistance of other best-in-class providers
with specific expertise in areas where they themselves are not as strong.
• An ISP may perform services for multiple shippers and thus gain both economies of scale
and distance.
• Carrier types
• TL (truck load) – loads over 6.8 tons (15,000 pounds) (not intermediate stop necessary)
• LTL (less than truck load) – loads less than 6.8 tons (15,000 pounds) that generally be
consolidated to a full truck load (origin and destination terminals required).
• Special carriers – focuses on specific transport requirements such as waste management

• Water
• Percentage of ton-miles has stayed between 19 and 30% since 1960’s in the US
• However, ship size has increased dramatically
• Advantages – Large capacity with lower fixed cost than rail
• Disadvantages – Slow speed and limited access

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Transportation Modal Structure

• Pipeline
• Used for transporting natural gas, oil, liquid products.
• Operates 24 hours a day and 365 days a year, a large capacity.
• Highest fixed cost but lowest variable cost
• The lowest flexibility and often a security is an issue.
• Air
• Speed is a significant advantage but costly.
• Limited by size, weight, and aircraft availability.
• Scheduled global airfreight service recently available
• A large airport hub is used (FedEx)
• Relatively low fixed cost but highest variable cost
• Most products air-shipped have high value, high priority or extreme
“perishability”
• Computers, electronic parts, repair parts, medical supplies, high-end fashion, and
fresh fish

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 Transportation Modal Structure
• Modal comparative characteristics and capabilities
• Modal comparative characteristics
• Speed is the elapsed movement time from origin to destination
• Availability is ability of a mode to service any given pair of locations
• Dependability is the potential variance from expected delivery schedule
• Capability is the ability to handle any load size or configuration
• Frequency is the quantity of scheduled movements a mode can handle

Table 8.4 Cost structure for each mode

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Transportation Modal Structure

• Modal comparative characteristics and capabilities
Table 8.5 Modal operating characteristics

• Rank of transportation modes on operating characteristics (from 1 to 5).

• Truck ranks first or second in all categories except for capability.
• Water and pipeline rank lowest.

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Transportation Modal Structure

• Modal comparative characteristics and capabilities

Mode Fixed costs Var. costs Traffic composition

Rail high low bulk food, mining,

heavy mfg
Motor low medium consumer goods,
medium/light

Water medium low Steel, mining, bulk

food, chemicals
Air low high high-value goods,
rush shipments
Pipe high low petroleum, chemical,
mineral slurry

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 Specialized Transportation Service
• Increased intermodal or more integrated logistics services
• Transportation services can be improved by combining modes.
Numerous specialized services are now considered
commonplace to today’s consumer.
• Parcel service
• Last mile delivery or small package delivery service
• Significantly increase recent years due to on-line shopping.
• The trend is likely to last for a while (Post COVID 19).
• Main players in parcel service in the US or world.
• FedEx, UPS, USPS
• Main players in ROK.
• CJ Logistics (48.2%), Lotte Logistics (13.1%), HanJin Logistics (12.5),
Korean Postal Service (8.4), Logen (7.3%), others (10.0%) in 2018
• Fees are charged by speed, distance and weight in the US.

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Specialized Transportation Service

• Intermodal
• Combines two or more modes to
take advantages of integrations.
• TOFC/COFC
•TOFC – trailers on flat car
•COFC – containers on flat car
•Containers are popularly used
for intermodal transportation.
•ISO standard Size – 8 ft x 8ft x 20 or 40 ft
(2.44m x 2.44m x 6.1m (or 12.2m)
• Containership
• Loads a truck trailer, railcar, container
onto a barge or ship for moving
containers inland rails or highways.
• Panama Canal expansion accommodate
13,000 TEU(twenty-foot equivalent units).

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Specialized Transportation Service

• Non-operating intermediaries
• Logistics business firms that do not own or operate
equipment.
• ISP (integrated logistics service providers) or 4PL (party
logistics) are one type of the intermediaries.
• Create a customer value through consolidation
• By consolidation of small shipping orders, it reduces extra-charges
from minimum freight charges, surcharges, less-than volume rates.
• Facilitates savings for shippers
• Freight forwarders
• For-profit businesses that consolidate small shipments into a bulk
shipment and then utilizing a common surface or air carrier.
• At the destination, the freight forwarder splits the shipment into the
original small shipments. And arrange a parcel delivery service if
necessary.

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 Specialized Transportation Service
• Non-operating intermediaries (cont)
• Shipper association
• The roles are similar to freight forwarder but it is nonprofit business
organization.
• Members in a specific industry.
• Purchases from a common vendor in one area.
• Broker
• Intermediaries that coordinate transportation arrangements for
shippers, consignees, and carriers.
• Brokers typically operate on a commission basis.
• Provide extensive services such as shipment matching, rate
negotiation, billing and tracing

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Transportation Economics and Pricing

• The primary factors of transportation economics

• Distance, weight, and density
• Economy of distance
• Distance directly influences to labor, fuel, and maintenance.

Figure 8.2
Generalized
Relationship between
Distance and
Transportation cost

• Fixed cost due to pickup and delivery regardless of distance.

• Costs are saturated as the distance increases
• Tapering principle

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Transportation Economics and Pricing

• Economy of weight
• Transportation cost per unit of weight decreases as load size
(weight) increases.
• Fixed cost including pickup, delivery and administrative cost
are spread over incremental weight.
• Small loads should be consolidated for scale economics.
• Economies of density
• Combination of weight and volume
• Transportation charges are commonly quoted per
hundredweight (CWT).

Figure 8.3 and 8.4

Impact of weight and
density on
transportation cost

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 Transportation Economics and Pricing

• Other pricing factors

• Stowability
• Refers to how product dimensions fit into transportation equipment.
• Items having a rectangular shape is much easier to stow than a odd-
shape.
• Nest-ability, length, etc.
• Handling
• Extra-cost required for special handling equipment
• Liability
• Insurance fee for product characteristics that can result in damage.
• Hazardous materials
• Market
• Transport lane – movements between origin and destination points.
• A back-haul load or empty return (deadheading)
• Two-way or balanced movement of loads is ideal.
• Depends on demand locations and seasonality
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Transportation Economics and Pricing

• Costing freights
• Cost allocation is a carrier’s concern but eventually it is
important to shippers.
• Variable
• Labor, fuel, and maintenance
• Measured through the cost per mile or per unit of weight
• Fixed
• Equipment or facility costs (terminals, trucks, support equipment),
rights-of-way, information systems.
• Joint
• Expenses created by the decision to provide a particular service.
• A back-haul shipping cost is a joint cost for forward shipping.
• Common
• Includes carrier costs that are incurred on behalf of all or selected
shippers.
• Overhead costs (terminals or management expenses of shared
facility)
• Charged based on activity levels
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Transportation Economics and Pricing

• Pricing freight
• Class rates
• Rate – the price per CWT in monetary value to move a specific
product between locations.
• Tariffs – the rate listed on pricing sheets.
• Class rate - all products moved by common carriers are classified for
pricing purposes (to enhance consistency across industry).
• Two steps
• Grouping or classification
• Determining the rate based on the freight classification of the product,
weight, and shipment origin/destination.
• Freight classification
• Product characteristics that influence to the cost of handling and
transport (density, stowability, handling, liability, value etc).
• In the US
• National motor freight classification (18 classes) – truck carriers
• Uniform freight classification (31 classes) – rail carriers

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 Transportation Economics and Pricing

• Pricing freight
• Freight classification (cont)
• The class rate is a relative index of 100 for each product.
• From 35 to 500. Higher the class rate, the more expansive
transportation rate. The product with 200 is twice more expansive
than that of 100.
• Rating criteria
• Product groups or classifications
• TL or LTL
• Packaging
• Shipment size
• Transport mode
• Significant savings may be realized by obtaining an improved
classification for a product.

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Transportation Economics and Pricing

• Pricing freight
• Cube rate and freight dimensioners
• Used for correct classification of mixed commodities (LTL freight)
• Dimensioner – weight and volume measuring device
• Cub shaped or 3D volume measurement
• Realtime volume measurement
• Used for charging shipments
• Other rate structures
• Commodity rate – for large quantities of product
move between two locations with a regular basis
• Aggregate tender rate – utilized when a shipper
agrees to provide multiple shipments to a carrier
with a discount from the class rate.
• Limited service rate – utilized when a shipper agrees to perform a selected
service typically performed by the carrier.
• Released value rates – limits the carrier liability in case of loss or damage.

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Transportation Economics and Pricing

• Pricing freight
• Special rates and services
• Specific applications, examples include local rates, joint rates, split
delivery, or multi-stop loads
• FAK(freight-all-kind) – enables a mixture of different products to be
transported under a single negotiated rating. Simplifying the pricing
process.
• Local rate or single-lane rate – rating from a tariff of a single carrier.
• Joint rate – local rate with more than one carriers
• Diversion – change of the destination
• Reconsignment – change of freight owner during transportation
• Split delivery or multistop load – when shipment has multiple parts with
unique delivery locations.

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 Transportation Economics and Pricing

• Pricing freight
• Assessorial service charges (table 8.9)

• Environmental services – temperature control (ex. Hurshey), or cold

chain logistics
• Lift gate pallet jack service – when the destination does not have a
transportation dock.

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Transportation Operations
Management
• Planning, execution, and administrative responsibilities
• Transportation management system (TMS)
• Capabilities and Functionalities
• Select transportation modes, plan loads to travel, consolidate shipments,
route vehicles, and efficiently utilize transportation capacity.
• Creation and facilitation of a transportation plan that increases the
likelihood of an on-time delivery while achieving the most optimal cost
performance.

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Transportation Operations
Management
• Operations
• TMS functionality related to operations
• Equipment scheduling and yard management
• Serious cost and bottleneck can result from waiting to be loaded or
unloaded.
• Load pickup and delivery arrangements.
• YMS – Yard management system is used to reduce waiting times of trucks
• YMS, WMS, and TMS work in collaboration to increase resource utilization.
• Load planning
• TMS optimizes the transport mode selection based on the size and
attributes of a given shipment.
• It determines a truck to maximize cube utilization.
• Shipment routing
• Delivery routing based on delivery appointments, preferred road type, and
projected traffic conditions.
• Static routing and dynamic routing
• Track and trace
• ASN (advanced shipment notice)
• Enhances shipment visibility and information exchange

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 Transportation Operations
Management
• Operations

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Transportation Operations
Management
• Consolidation
• Traditional approach
• Combines LTL or parcel shipments moving to a general location.
• The number of trips can be reduced.
• New challenges of consolidation
• To reduce inventory, synchronizing replenishment with demand.
• Smaller orders with frequent shipments
• Faster delivery time required
• Reactive consolidation
• Does not attempt to influence the composition and timing of movements.
• Under given shipments, it seeks to combine individual orders into larger
shipments (FedEx and UPS parcel delivery).
• Market area consolidation
• Shipments departing from one location and heading for a similar final destination are
pooled together.
• Scheduled area delivery
• Holds shipments for specific markets for delivery on a selected day.
• Pooled delivery
• A Freight forwarder, public warehouse, or transportation company arranges the
consolidation for multiple shippers servicing the same market area.
• Example) grocery suppliers sending their shipments to an ISP, which then make a
single delivery.
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Transportation Operations
Management
• Consolidation
• Proactive consolidation
• More aggressive approach to increase efficiency
• Preorder planning
• Consolidation is considered from the ordering stage (buy participation).
• Quantity and timing of an order are considered to facilitate consolidation.
• Multivendor consolidation
• Combines two or more vendors to increase efficiency.
• Vendors in the same geographical area serving the same customers
• Considering the characteristics of the products
• Heavy products first and loading the second products on the top of the
first products.

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 Transportation Operations
Management
• Negotiation
• Win-win agreements where in both suppliers and buyers share
productivity gains for long term relationship.
• Control
• TMS helps ensuring all regulations such as driver’s hours of service, and
weight limitations.
• Payment, auditing, and claims administration
• TMS supports back-end administrative tasks.
• Payment and auditing use information from TMS.
• Claims
• Over, short, and damaged (OS & D)

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Documentation
• Three primary type of documentation
• Bill of landing
• Freight bills
• Shipment manifests
• Bill of landing
• The basic document for purchasing transport services
• Serves as a receipt describing products and quantities shipped.
• Also includes all responsibilities related to timing and ownership.
• Is often used for damage claims.
• Specifies terms and conditions or carrier liability and documents responsibility
for all involved.
• Freight bill
• A carrier’s method of charging transportation services.
• Either prepaid (shipper) or collect (receiver)
• Shipment manifest
• Lists individual stops or consignees when multiple shipments are placed on a
single vehicle.
• Includes the stops, bill of landing, weight, and case count for each shipment

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 Product Pricing and Transportation
• The terms and conditions of pricing determine which party
has responsibility for performing logistics activities.
• Product pricing is an important aspect of marketing strategy
that directly impacts logistical operations, transportation
costs can play a large part in pricing strategy.
• A major recent trend is to debundle the price of products
and materials so that transportation becomes a separate
visible item (pricing unit).
• The focus of the textbook is on the relationship between
pricing, logistical operations, and transportation decisions.

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Product Pricing and Transportation

• FOB (free on board) pricing
• Also called freight on board pricing, numerous variations, however
two dominant
• FOB Origin
• Seller loads shipment but assumes no further responsibility, buyer
responsible for transportation.
• Buyer selects transportation mode and carrier, pays transport charges, and
take the risk of in-transit loss or damage.
• FOB Destination
• Seller delivers product to buyers door, seller responsible for transportation.
• Seller arranges the transportation and adds the charges are added in the
sales invoice.

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Product Pricing and Transportation

• Delivered pricing
• A seller establishes a price that includes transportation.
• Transportation cost is not specified as a separate item.
• Multiple different options
• Single Zone Pricing
• Used when transportation costs are relatively small.
• Multiple Zone Pricing
• Logistical costs are more fairly assigned.
• Typically based on distance.
• Base Point System Pricing
• Different logistical costs for different
a based point (usually a manufacturing
or warehouse location).
• Typically used in car industry

Figure 8.6 Base-point pricing

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 Product Pricing and Transportation
• Delivered pricing(cont)
• Phantom freight
• Occurs when buyers pay more than actual logistical expenses.
• Freight absorption
• Occurs when sellers pay more than actual logistical expenses.
• Base-point pricing simplifies the price quotation but has some
negative impact on customers due to phantom freight or freight
absorption.
• Pickup allowances
• Equivalent to purchasing FOB origin, however seller provides a
discount to buyer to account for transportation expense.
• The only difference is the discount.
• Shippers (sellers) don’t need to take care of small shipment.
• Buyers gain control over the products earlier and can achieve a
higher utilization of transportation equipment and drivers.

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Study Objectives
• Explain transportation functionalities.
• Explain participants of transportation and their main issues.
• Explain the main purposes of the transportation regulations.
• Explain the characteristics of transportation modes and the
modal structure.
• Explain about ISP.
• Explain about specialized transportation services.
• Explain the principles of transportation economics and
pricing.
• Explain the main functions of the TMS (transportation
management system).
• Explain the tree documents used for transportation.
• Explain the principles of product pricing and transportation.
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CHAPTER 9:
Warehousing, Material
Handling, and Packaging

MGMT236 Logistics Management Chapter 1 21st –Century Supply Chains

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 Overview of Chapter 9
• Strategic Warehousing
• Warehouse Ownership Arrangement
• Warehouse Decisions
• Warehouse Operations
• Primary Warehouse Operations
• Secondary Warehouse Operations
• Systems
• Packaging Perspectives
• Packaging for Handling Efficiency

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Warehousing, Materials Handling, and

Packaging
• Often thought of as independent areas, but recently we consider them
collectively, as part of an integrated functional area that affects all areas
of the supply chain.
• Warehousing – Traditionally thought of as a place to hold or store
inventory.
• Materials Handling & Packaging – Traditionally viewed as a basic
functions that collectively support the handling of, identification, and
protection of product.
• However, in contemporary logistical systems, warehousing functionality
has become strategic in nature, taking into consideration significant
complexities to efficiently meet customer requirements.
• Similarly Materials Handling, fueled by the advent of e-commerce has
become a very large and strategic investment for many firms.
• Packaging has continued evolve, simultaneously incorporating both
commercial marketing related elements as well as traditional industrial
handling considerations.
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Warehousing, Materials Handling, and

Packaging

• Different types of warehouses within a logistics network

Source: Tompkins
et al. 2013
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 Strategic Warehousing
• Inventory stored in warehouse serves as a bridge
between production and marketing.
• After World War II, the strategic storage is recognized as
an opportunity to increase sales.
• State-of-art warehouse systems support replenishment of
the retail industry (distribution center).
• Manufacturing uses warehouses to implement JIT or
stockless production strategies (e.g. postponement).
• Marketing side uses warehouses to increase efficiency of
order fulfillment (consolidation and cost reduction).
• An important goal in warehousing is to maximize
flexibility which can be facilitated by information
technology.
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Strategic Warehousing
• Service benefits
• Warehouse can improve service in three ways – spot stocking,
full-line stocking, value-added services.
• Spot stocking
• A spot stocking strategy stores a narrow product assortment in a large
number of warehouses for a limited time period.
• Manufacturers of highly seasonal products often use spot stocking.
• Selected products are positioned or spot-stocked at local warehouses
for a peak season.
• Full-line stocking
• The difference between spot-stocking and full line stocking is the
degree and duration of warehouse utilization.
• The full line stocking is a traditional use of warehouse.
• Warehouses provide one-stop shopping capability for goods from
multiple manufacturers.
• The full line stocking warehouse improve service by reducing the
number of suppliers.
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Strategic Warehousing
• Service benefits
• Value-added services
• Value-added vs Non-value-added
• Postponement – completing packaging, labelling, and light
manufacturing.
• Canned vegetables in a manufacturing plant (brights) are labelled and
packaged based on a customer’s order in a warehouse.
• Benefits of postponements – reducing risks and reducing inventory levels
• Other value-added services (Table 9.1)

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 Strategic Warehousing
• Economic benefits
• Reducing transportation cost and operational cost through consolidation
and break-bulk, sortation, seasonal storage, and reverse logistics.
• Consolidation and break-bulk
• Enable to reduce transportation cost through large shipments.
• Unit transportation cost can be reduced through consolidation.
• The break-bulk receives a large shipment and arranges delivery to
multiple destinations.

Figure 9.1
Consolidation
and break-bulk
arrangements

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Strategic Warehousing
• Economic benefits
• Sortation
• Reconfiguring freight as it is being transported from origin to
destination.
• Three types of assortments – crossdocking, mixing, and assembly
• Crossdocking
• Assorting freights from multiple origins into multiple destinations without
storing in shelves.
• Generally used for fast-moving materials.
• Mixing
• An end result is similar to crossdocking but it uses a mixing facility.
• Inbound products are mixed with stored products to assortments.
• Reducing overall product storage while achieving customer specific
assortments.
• Assembly
• Commonly used to support manufacturing operations.
• One type of value-added activity

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Figure 9.2 Sorting

Arrangement

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 Strategic Warehousing
• Economic benefits
• Seasonal storage
• Supporting marketing efforts and increasing utilization of production
facilities.
• Reverse logistics
• Much more difficult to handling due to variety of sizes and conditions
with small quantities.
• Requires significant manual inspection and sortation
• Types of reverse logistics
• Return management – accommodating unsold products or recalls.
• Remanufacturing and repair – refurbished products
• Remarketing – used equipment
• Recycling – decomposing and distribution for reproduction.
• Disposal
• Hazardous Materials & Government Regulation

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Warehouse Ownership Arrangements

• Private
• Typically operated by the firm owning the product (building can be
owned or leased)
• Benefits
• Control – authority and priority are given to the owner
• Flexibility – operating policies, hours, and procedures
• Cost – not operated for profit
• Intangible benefits – building advertising, customer perceptions enhancing
customer marketing image
• Public
• Outsource warehousing operations on a pay for service basis
• From user’s perspective, no investment required.
• Public warehouse take the advantage of scale economics.
• Many firms use public warehouse due to variable cost, scalability,
range of services, and flexibility
• Types of public warehouse
• General merchandise
• Refrigerated
• Special commodity
• Bonded – licensed to store goods before payment of taxes or duties.
• Household goods & furniture
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Warehouse Ownership Arrangements

• Contract
• Operated by ISP and providing customized service with long-
term relationships.
• Contract warehouses offer a range of logistical services such as
transportation management, inventory control, order processing,
customer service, and return merchandise processing.
• Network deployment
• Done correctly combines best of private, public, and contract.
• 75 percent of capacity is used generally for private and contract,
the other will be used for the peak demand of public.
• Key customers require more customized value-added services
and capabilities.

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 Warehouse Decisions
• Site selection
• Procedural decision
• General area and then specific warehouse location
• General area determines country, state, or region.
• Specific location concerns service ability and cost.
• Criteria
• Land cost, building cost, operating cost (transportation cost, taxes, labor
cost, utility cost, insurance), room for expansion, availability of utilities, etc.

• Design
• Considers product movements
• Ideal design is one floor since vertical move requires extra
equipment such as elevators, conveyors, or lifters.
• Maximizing cubic utilization.
• Should consider material handling equipment or regulations
• lift trucks or rack design and fire safety

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Warehouse Decisions
• Design (cont)
Figure 9.3 Basic
Warehouse Design
(facilitating a straight
flow of materials)

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Warehouse Decisions
• Product-Mix analysis
• Used to identify total space requirement and capacity
• Annual demands, weights, and packaging of each product type
• Total size, cube, and weight of average order
• Expansion
• Typically 5 to 10 years horizon is considered.
• Three to five times of initial capacity
• Handling system (equipment)
• Basic driver of warehouse
• Handling equipment and technology
• Layout
• Designing the structure of warehouse
• Facilitating continuous flow and shortest travel distances

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 Warehouse Decisions
• Layout (cont)
• Difficult to be generalized and usually customized to specific
handling requirements
• Receiving and shipping areas have a key for efficiency.
Figure 9.4
Layout A and B

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Warehouse Decisions
Warehouse
example in
grocery industry

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Warehouse Decisions
• Sizing
• Projection of total volume expected to move through the
warehouse during a given horizon.
• Consider normal or peak inventory
Probability

Volume demand

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 Warehouse Operations
• Primary warehouse operations
• Product handling and storage
• Receiving, put-away into storage, move while storage when
necessary, assembly into unique customer orders, and execute
customer shipments
• Secondary warehouse operations
• Make warehouse operations complete and efficient
• Main concerns
• Inventory accuracy
• Facility security
• Safety
• Maintenance

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Primary Warehouse Operations

Source: Tompkins
et al. 2013
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Primary Warehouse Operations

§ Processes within a warehouse
Temporary Storage
(Urgent Items)
Verification & Bulk Storage
Receiving
Staging

Long-term Storage
(rack)

Inventory Picking Areas:

Replenishment 1. Flow Rack
2. Carousels
3. Sortation Source: Tompkins et al. 2013
4. Manual

Merging Staging & Shipping

(merge area) verification

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 Primary Warehouse Operations

§ Order picking is the most critical function in distribution

operations.

Source: Tompkins et al. 2013

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Primary Warehouse Operations

• Product handling
• Movement continuity – longer move at once is better than short
and frequent moves (loading and unloading result in losses of
time and potential damage)
• Largest quantity – Larger quantity at once is better than small
quantities with frequent moves.
• Receiving
• Unloading large quantity shipments using a lift truck, or
conveyor.
• Ensuring that the quantities and SKU’s on the bill of landing
match physical receipt.
• Reporting OS&D.
• Product put-away
• Moving products from receiving area to storage area

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Primary Warehouse Operations

• In-Storage product handling
• Replenishment – active storage location (case picking or broken
case picking) from secondary locations
• Product consolidation for space efficiency
• Order picking
• One of the primary handling operations in warehouse
• Assembly orders
• Strategies for increasing picking efficiency
• Splitting orders by orders type
• Utilizing different order picking equipment
• Conveyance system
• Shipping
• Order verification
• Loading transportation equipment

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 Primary Warehouse Operations
• Product handling considerations
• Basic handling considerations
• Handling system classification – mechanized, semi-automated,
automated
Table 9.2 Principles of handling

• Mechanized systems
• Lift trucks
• Towlines
• Tractor trailers
• Conveyors
• Carousel
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Primary Warehouse Operations

Lift trucks Conveyors Towline

Carousel
Tractor trailers

https://people.engr.ncsu.edu/kay/mhetax/index.htm
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Primary Warehouse Operations

• Semi-automated systems
• AGV(automated guided vehicle) – substitute lift trucks or tow
trailers
• Sortation – used with combination of conveyors
• Robotics
• Substitute highly repetitive jobs
• Palletizing, order selection, routine material handling situations
• Factors influencing economic justifications of industrial robots
• Space limitations, faster order to delivery cycle-time requirements,
predictable and substantial throughput volume, high labor cost, or
restrictive work environments such as frozen food warehouse order
selection
• Robotics require combined human and technology interaction
• Significant potential exists for increased use of robotics in warehousing
and material handling
• Flow racks
• Semi automated racks – product automatically flows to a selection
position
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 Primary Warehouse Operations
• Semi-automated systems
• https://youtu.be/YE_xHrsA0v0
• https://youtu.be/Y-lBvI6u_hw
• Flow racks https://youtu.be/mb2S3UkiWRs

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Primary Warehouse Operations

• Automated systems
• Potential to automate
• Capital investment required
• Reduces labor costs
• Enhance accuracy, less product damage, and speed
• Create a synergy together with IT (information system) such as WMS
• Information handling and monitoring
• Order selection
• Flow racks with automated conveyance sortation
• AS/RS (automated retrieval and storage system)
• Components
• Racks, automated crane (storage and retrieval), input/output system,
control system
• Warehouse functions are automated inside an AS/RS
• Receiving, storage, order selection, and shipping
• Provides a maximum storage density and minimum direct labor

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Primary Warehouse Operations

• Automated systems
• AS/RS (automated retrieval and storage system)
• https://youtu.be/8ypcAtJOHbI

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 Primary Warehouse Operations
• Special handling considerations
• E-Fulfillment
• Both on- and off-line retailers have been forced to adopt e-trail for their
order processing procedures to meet the specific needs of this marketplace.
• Should process a large number of very small orders.
• Picking operations are difficult to achieve scale economics.
• Dealing with a wide range of products with high inventory
• Consolidation and shipping require highly intensive tasks.
• Increased customer expectation
• Higher speed and accuracy
• Return processing
• One of the major drivers of on-line shopping growth
• Up to 30% of orders are returned
• Manual handling is unavoidable
• Separated flows of materials by ISP to reduce chance of errors and
contamination

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Primary Warehouse Operations

• Storage
• Slotting – assignment of product for storage
• Factors of a slotting plan
• Product velocity, weight, and special storage requirements
• Product velocity
• High-volume products – moving distance should be minimized.
• Near doors, primary aisles, and at lower level

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Primary Warehouse Operations

• Storage
• Active storage alternative
• Serving customers directly with short-time storage
• Sufficient inventory required to meet customer orders
• Focuses on speed and flexibility
• Pursuing flow-though or cross docking distribution
• Extended storage
• Inventory held for long time and required normal replenishment of
customer stocks
• Focuses on maximum space utilization with minimal need for quick
access.
• Seasonal items, and items with erratic demand, product conditioning,
speculative purchases, and special discounts

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99
 Secondary Warehouse Operations
• Accuracy and audits
• Matching physical inventories with data (book) in IT system
• Physical inventory counting is not desirable
• Must close the warehouse for inventory counting.
• Significant physical labor cost required
• Cycle counting
• Selective audit of certain number of SKU’s or bin location on a
predetermined schedule.
• Day-to-day operation is not disturbed.
• Security
• Pilferage
• Single gate control, vehicle control, CCTV, RFID etc.
• Damage
• From careless handling
• Stacking height, temperature or humidity control etc.

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Secondary Warehouse Operations

• Safety and maintenance
• A comprehensive safety program requires constant examination
of work procedures and equipment to locate and take corrective
action to eliminate unsafe, conditions before an accident.
• Preventive maintenance program is necessary for handling
equipment.
• Environmental concerns and regulatory environment

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Systems
• Warehouse Management System (WMS)
• Transaction management
• All the activities in a warehouse are supported and recorded.
• Product ID, quantity and locations are updated based on a transaction.
• Warehouse monitoring and transaction records
• Coordinating work procedures
• Order picking, receiving, inspection, shipping, put-way etc.
• Oder selection (picking)
• Discrete selection – one customer order is prepared by an employee
• Wave selection (batch selection)
• Multiple orders are picked during one picking trip.
• Administrative and maintenance coordination
• Managing value-added services
• Packaging, labeling, kitting, and setting up displays

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100
 Systems
• Warehouse Management System (WMS)

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Systems
• Warehouse Management System (WMS)

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Systems
• Yard Management System (YMS)
• Managing inbound and outbound transportation equipment
• Managing warehouse yard
• Location of trucks in the yard and their inventory
• Scheduling and dispatching receiving and shipping docks
• Accessing sequence of trucks and time of access
• Scheduling and dispatching trucks
• Accessing dock for loading and unloading

• Terms
• Scheduling
• Tasks or jobs are planed in advance (determining which
employees or machines process which products at what time.
• Dispatching
• Tasks or jobs are assigned to employees or machines in realtime.
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 Systems
• Information Directed Systems
• RF Wireless (Wi-Fi) and RFID
• RF Wireless provides directions in real-time for mechanized equipment
with a driver
• RFID enables to synchronize locations of mechanized material handling
equipment in WMS.
• Two-way communication is available.
• Improving speed and flexibility of operations
• Light directed
• Pick-to-light or pull-to-light
• Guides order pickers to pick upon light signal.

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Packaging Perspective
• Focuses of packaging
• Consumer (B2C) – Marketing point
• Industry (B2B) – Logistics
• Unit load principle
• All cartons or products should be grouped into a handling unit.
• Principle of Unit Load states that, “it is quicker and economical
to move a lot of items at a time rather to move each one of
them individually”.
• Unit load should be large enough to provide economies of scale
but light enough for safe handling.
• One size fit all – modular compatibility (Figure 9.8)
• Logistical modularity should be evaluated along with manufacturing,
marketing, and product design to select a master carton.
• Protection requirements
• cost of protection and handling considerations
• Vibration, impact, puncture, and compression

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Packaging Perspective
• Unit load principle

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 Packaging for Handling Efficiency
• Package design
• Standard configuration (cubic shape) and order quantities
facilitates logistical efficiency.
• E.g. Cube minimization strategy – IKEA
• Unitization
• Forming unit load (unitization or containerization)
• Handling and transportation efficiency
• Rigid Devices – extra carton for unitization
• Flexible Devices – pallets or slip sheet
• Communication
• Universal product code (UPC) – barcode
• Quick response code (QR) – QR code
• Electronic product code (EPC) - RFID

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Study Objectives
• Explain benefits of strategic warehousing.
• Explain characteristics of warehouse ownership arrangements.
• Explain critical issues related to warehouse decisions.
• Explain typical material flows in a warehouse.
• Explain about product handling in primary warehouse
operations.
• Explain material handling equipment used in primary
warehouse operations.
• Explain product handling considerations with material
handling systems.
• Explain about secondary warehouse operations.
• Explain information systems related to warehouse
management.
• Explain principles of packing to increase efficiency.
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Facilities Planning

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 Introduction
§ Facilities Planning is Capacity
Expansion
Plan
Facility
Location
Strategic

a strategic part of
Planning
Building Design

Supply Chain
Material Flow Pattern
Excellence Facility
Block Layout Layout

§ Facilities Planning Machine Layout

Procedure (Left)
Flow Path Design
MHS (material
handling
MHS Design system) Design

Decision Making Procedure for Facilities Planning in Supply Chain

Management

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Decision Making Procedure of Layout

Design
Example

(1) Material Flow (2) Block Layout (3) Detailed Layout and (4) Material Handling
Pattern or Layout Type Machine Layout Design

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Material Flow Pattern

Design of Material Flow pattern
§ The process of designing the overall framework of material handing within a building; the
structures of various Material Flow Patterns are shown below.
§ Key decisions in Material Flow Patterns design: Determination of input and shipment
location, floor arrangement plan, material flow structure

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Layout Types
Determination of Layout Types
§ Layout types include product layout, process layout, cell layout, and product fixed layout
(refer to the picture below).
§ Most manufacturing processes utilize product layout, process layout, or something in
between.

Product Layout
(Flow shop)

Fixed Position Layout

Cell Layout

Process Layout
(Job shop)

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Layout Types
Characteristics of Layout Types

§Product Layout
Factors Product Layout Process Layout
§Advantages in WIP/cycle time,
WIP/Cycle Time Low High
setup time, material handling,
Setup Low High
space efficiency, throughput,
Material Handling Low High
and ease of general
Space Efficiency High Low
management and accounting (Transportation)
processing. Scheduling/Dispatching Simple Complex
§Process Layout Investment Costs High Low
§Advantages in investment cost Utilization Low High
(number of machines), Flexibility Low High
utilization, and flexibility. *Throughput High Low
§Cell Type Layout Operational Costs Low High
§ Has mid-level performance Accounting Complexity Easy Difficult
between process and product *Throughput: speed of production
layout in all evaluation factors
§ Cell formation possible through
DCA (direct clustering
algorithm)

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Layout Types
Determination of Layout Types
§ Factors that affect the decision of layout type include product diversity, product life cycle,
and facility/process stability.
§ If the Pareto principle is applicable through Pareto analysis of product diversity, the
product layout is appropriate. If not, the process layout is appropriate.

Pareto principle can be applied Pareto principle cannot be applied

Pareto analysis of product diversity

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105
Block Layout
Determination of Layout Types
§ Based on the material flow pattern and layout type determined above, a block
layout is developed to determine the arrangement of each process group.
§ The purpose of block layout development is to review as many alternatives as
possible in a short period of time, so as many alternatives as possible are
sketched and reviewed.
§ When developing alternatives, a block layout is developed while maintaining
the input/output location and material flow patterns.

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Detailed Layout (Machine Layout)

§ Developing a detailed layout to place actual machines based on the
block layout.
§ Design a detailed layout based on a few best block layout alternatives
selected in the above step and place material handling equipment.
§ Adjust machine location in detail considering the movement of raw
materials and workers.
§ Identifying the bottleneck of material handling, and improving it.

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Detailed Layout (Machine Layout)

§ Detailed Layout with Machines

§ Drawing of individual machine required for designing a detailed
layout must be obtained.
§ Determine the direction of movement of the worker's location
§ Check the possibility of changes in machine structure during the layout
process
§ If necessary, the worker's work space and maintenance space for
each machine must be indicated.
§ Securing information on auxiliary equipment required for
maintenance of each facility: whether cranes/shelves, etc. are
needed to be installed, installation area, work area, etc.
§ Information on parts/raw materials for each machine must be
obtained.
§ Space required to move parts/raw materials cart (length, width
including cart, and height) and load (weight including vehicle)
§ Movement lines must be secured based on parts/raw materials of the
largest size and weight for each facility.
§ Specifications and layout of logistics facilities must be obtained.
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 Importance of Facilities
Planning
§ Difficult to Change
• Reconstruction Cost
• Opportunity Cost due to Downtime
§ High Risk High Return
• Large Investment
• Upstream of Operational Efficiency

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Facilities Planning Criteria

§ Cost (construction and operation)
§ Flexibility
§ Robustness
§ Location efficiency (customers and
supplies)
§ Space efficiency

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 Input Data of Facility Planning
§ Product Design
•Product design creates input data for facility planning
•Drawings and product specifications
§ Process Design
• For finished product, half-finished, parts, and raw materials
• Designing process steps and sequences
• Obtaining a list of equipment types

§ Production Schedule Design

• How much and when to produce
• Phase by phase
• Partly include cost analysis
• Main outputs: space requirements and material flows

322
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Input Data
Data types Purpose/Usage
Machine profiles Identifying space requirements
Tact time(cycle time) Identifying demand or requirements of process &
material handling equipment
Production demand over Identifying demand or requirements of process &
time material handling equipment
TAT(turn around time) Identifying storage space, average WIP level.
Process sequence Identifying qualitative proximities between process steps
Activities relationship Identifying qualitative proximities between process steps
Unit load size and weight Identifying material handling requirements such as aisle
width and weight.
Material handling equipment Identifying material handling requirements in the layout
Process constraints Identifying special requirements in the layout

323
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Input Data
§ Activity relationship
chart
§ Determine proximities
of processes

324
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 CHAPTER 10:
Global Supply Chain

MGMT236 Logistics Management Chapter 1 21st –Century Supply Chains

325

Global Economics
• Globalization became a main business environment
regardless of sizes of firms.
• Drivers of globalization (Simchi-Levi et al. 2003)
• Global cost forces – low wages, and supply advantages
(parts and raw materials).
• Global market forces – products and assets.
• Technological forces – better access to technologies
and management know-hows.
• Risks of globalization
• More demanding logistics operating environments
• Security considerations
• More complex total cost analyses
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Global Economics
• Table 10.1 Rational for globalization
Objective Rationale
Increase revenue • Open up more markets
• Expand beyond competitors
• Obtain accessibility to markets that limit access without
local operations
Achieve economies of • Take advantage of production capacity
scale
Reduce direct cost • Take advantage of lower labor rates or real estate expense
Advance technology • Reduce energy requirements by reducing distance or
changing transportation mode
• Take advantage of differences in production requirements
• Obtain access to advanced technology that may not be
available from current locations due to historical
investments
• Obtain access to specialized expertise or language skills

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109
 Global Economics
• Table 10.1 Rational for globalization
Objective Rationale
Reduce firm’s • Obtain local or regional tax benefits related to property,
global tax inventory, or income
liability • Obtain reductions in value-added-taxes due to localized
production or other value added services (i.e., packaging
inventory management, customization)
Reduce market • Source product from location that involves less transportation
access uncertainty
uncertainty • Source product from location that involved fewer security
constraints
Enhance • Source products or other resources (including human
sustainability resources) from locations that have ongoing availability of
materials and expertise such as energy or trained workers

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Global Supply Chain Integration

• Global logistics must support operations in a variety of
different national, political, and economic settings while
also dealing with increased uncertainty associated with the
distance, demand, diversity, and documentation of
international commerce.
• North America
• A large geography with extensive and flexible transportation
options
• Europe
• Numerous political, cultural, regulatory, and language situations
• Pacific rim
• Island-based environment with relatively poor infrastructure
(extensive water and air shipments)
• Firms require to develop and maintain a wide variety of
logistics capabilities and expertise.
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Global Supply Chain Integration

• Logistics in global economy
• Table 10-2 Estimated 2012 National logistics expenditures
Country/Region Logistics as a Percent of Gross Domestic
Product
United States 8.5%
Japan 11.0
Europe 12.9
India 12.9
Mexico 14.0
China 14.4
Asia 16.8

• Rep. of Korea
• 164,311 billion won (about 150 billion USD)
• 9.5% of GDP in 2017

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110
 Global Supply Chain Integration
• Globalization Strategies
• Four strategies: No international strategy, Multi-domestic strategy, Global
strategy, Transactional strategy
• No international strategy
• No international businesses except for sourcing or delivery
• Minimizes complexity and minimum coordination
• Limited growth opportunity
• Multi-domestic strategy (multi-national corporation-
MNC)
• Have separate headquarters (semi-autonomous headquarters)
in different countries, thereby attaining more localized
management.
• A strategy by which companies try to achieve maximum local
responsiveness by customizing both their product offering
and marketing strategy to match different national conditions.
• The firm can focus on local markets while minimizing overall
coordination requirements.
• Disadvantage - at the higher cost of forgoing the economies
of scale from cost sharing and centralization.
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Global Supply Chain Integration

• Globalization Strategies
• Global operation strategy
• This strategy is the complete opposite of the multi-domestic strategy.
• Cross-broader operations with some local market customization
• A single headquarter coordinates global operations.
• Logistics and supply chain activities occur globally.
• Transactions between difference regions or countries are based on an
arm’s length relationship.
• Financial integration is common but product development, marketing,
and supply chain, and planning are not common.
• Advantages – ability to focus on multiple local markets, meeting the
requirements of local customers, and ability to take advantage of global
brands and products.
• Disadvantages – difficulty of responding in an integrated manner to
global customers and it is not scalable.
• Examples: Microsoft, Procter & Gamble

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Global Supply Chain Integration

• Globalization Strategies
• Transactional strategy
• Uses a headquarter structure that optimizes effectiveness and
performance.
• Different operations are located at different regions
• E.g. financial operations in EU or US, production or sourcing in Asia.
• Firms have limited number of consolidated customer centers, limited
number of production control centers, and limited number of purchasing
centers.
• A transnational product keeps its same characteristics, regardless of the
country in which it is sold.
• Advantages – utilizing economies of scale, and highly scalable for both
domestic firms and global firms.
• Disadvantages – substantial coordination and information integration are
required and it reduces a firm’s ability to respond to individual market
uniqueness.
• Examples – ABB, Coca-Colar, Dow Chemical, etc.

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111
 Global Supply Chain Integration
• Globalization Strategies
• Evolvement of no international strategy,
Figure 10.1
Generic
international
strategies

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Global Supply Chain Integration

• Globalization Strategies
• Advantages and disadvantages of globalization strategies
Global Advantages Disadvantages
Strategies
No • Focused on local market • Growth limited to local markets
international • Minimum coordination efforts • Not easy to respond to globally based
• Cross functional decisions made by small g customers
roup of executive managers • Not large enough to take advantage of
economies of scale
Multi- • Focused on local market • Not scalable
domestic • Minimum coordination efforts • Not easy to respond to globally based
• Allows firm to focus on key growth markets customers
while minimizing complexity across a large
number of markets.
Global • Focused on local market • Not scalable
operations • Firm begins to take advantage of global • Not easy to respond to globally based
brands and products customers
• Can meet the unique needs of individual • Limited synergies when working with global
markets customers
• Limited drivers for global data and
processes
Transactional • Global focus to facilitate global solution • Requires substantial coordination and
development and delivery information integration
• Very scalable to domestic and global firms • Reduced ability to respond to market
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Global Supply Chain Integration

• Globalization Strategies
• Comparison of global logistics and supply chain strategies with five factors
• Service focus, marketing strategy, delivery strategy, management strategy, and
human resource strategy
Development Service Focus Marketing Delivery Management Human
Stages Strategy Strategy Strategy Resource
Development

No international Standard product Single strategy Direct to Single simple Operated by

strategy for local market focused on local customer financials entrepreneur with
market limited
specialization
Multi-domestic Domestic Domestic Collaboration Transaction Management
strategy marketing and customers driven with with “home
delivery integrated country” focus
financials
Global strategy Local market Focused specific Subsidiaries with Decentralized Limited top
customization market areas local presence operations with management
which may cross local profit with international
international responsibility experience
boundaries
Transnational Global branding Global customers Worldwide flow Centralized International
strategy and integrated of key resources planning in global training and
operations sites experience
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112
 Global Supply Chain Integration
• Globalization Strategies
• Global strategies and logistics decisions
• Sourcing and resource choices are influenced by artificial constraints such
as use restrictions, local content laws, or price surcharges.
• Use restriction – limitation imposed by government (chemical materials)
• Local content law – restriction to use resources within local economy.
• Price surcharges – duties (import taxes) or tariffs (duty rates)
• Logistics to support global operations increases planning complexity.
• Higher uncertainty, infrastructure constraints, time differences, language
differences, and government restrictions
• Global operations extend domestic logistics systems and practices to a
broad range of locations and operating environment.

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Global Supply Chain Integration

• Managing the global supply chain
• Five differences between domestic and international operations.
• Performance cycle structure, operational considerations, information
system integration, and alliances
• Performance cycle structure
• Domestic – 1 to 5 days transportation and 2 to 10 days of total
performance cycles
• International – weeks to months of total performance cycles
• Reasons of longer cycle time
• Financing requirements, special packaging requirements, ocean freight
scheduling, slow transit times, and customs clearance
• Security issues can require extra delay.
• Unbalance material moves – containers shortage from the US to Asia
• Less consistent and flexible

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Global Supply Chain Integration

• Managing the global supply chain
• Transportation
• International shipments require multi-modal transportation.
• Joint pricing and operating agreement are required.
• Initially controlled by government but deregulated.
• Influences of globalization to transportation industry
• Intermodal ownership and operation
• Deregulated intermodal ownership restrictions
• Privatization
• More flexible and efficient services available
• Cabotage and bilateral agreements
• Moving products and passengers between domestic ports
• Deregulated the usage restrictions
• Infrastructure constraints
• Significantly increased demands result in substantial congestions

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113
 Global Supply Chain Integration
• Managing the global supply chain
• Operational considerations
• Requires multiple Languages for both product and documentation
• Multi-lingual documentation and postponement are used to reduce inventory
requirements.
• E.g. Minimizing the use of language for products (Apple and IKEA)
• Unique national accommodations
• Performance features – product functionalities (e.g. speed or process
constraints)
• Technical characteristics – power supply and documentation
• Environmental considerations - chemicals
• Safety requirements – automatic shutoffs and specialized documentation
• Sheer amount of documentation required
• Order contents, transportation, financing, and government control
• Table 10.4

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Global Supply Chain Integration

• Managing the global supply chain
• Operational considerations
• Sheer amount of documentation required (cont)

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Global Supply Chain Integration

• Managing the global supply chain
• Operational considerations (cont)
• High incidence of countertrade (product return) and duty drawback
(return) found in some international situations.
• Countertrade – upon agreement
• Duty drawback – when products return it should be processed.
• Information system integration
• Integration of information system across different countries required
• Global transaction or ERP integration
• Global planning system that is used for maximizing resource utilization
• Third-party alliances
• Alliances with carriers and special service providers are essential for global
logistics
• Provides market access and expertise
• Reduces inherent global risks

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114
 Global Sourcing
• Rational for international sourcing from low-cost
countries
• Reducing manufacturing cost (low labor cost) results in
increasing logistics cost
• Reducing sourcing cost (low cost suppliers) results in
increasing competitive pressure on domestic suppliers.
• Reducing sourcing cost (low cost suppliers) results in
increasing the domestic supplier’s exposure (investment) to
state-of-art product and process technologies.
• Without a pressure from suppliers of low cost countries, domestic
suppliers will not invest new technologies due to significant assets
tied up in older technologies.
• Sourcing is to establish a local presence to facilitate sales in
the international country.

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Global Sourcing
• Modes of entry
• Four approaches (modes) for globalization
• Exporting and importing
• A firm sells its products either to an international firm for remarketing or to
a firm local in the target country.
• Licensing and franchising
• Franchising in a target country
• International joint venture
• Foreign direct ownership (investment)
• Table 10. 7 the characteristics, strengths, and weaknesses for each
entry mode

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115
 Study Objectives
• Explain the rational for globalization.
• Explain about the four strategies of globalization including
their advantages and disadvantages.
• Explain how the no globalization strategy can be evolved into
other globalization strategies.
• Explain the five differences between domestic and
international operations.
• Explain the guideline for sourcing decisions.
• Explain about the four approaches (modes) for globalization.

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CHAPTER 11:
Network Design

MGMT236 Logistics Management Chapter 1 21st –Century Supply Chains

347

Chapter Outline
• Enterprise facility network
• Warehouse requirements
• Systems concepts and analysis
• Total cost integration
• Formulating logistical strategy
• Other considerations in logistics network design
• Planning methodology
• Phase I: problem definition and planning
• Phase II: data collection and analysis
• Phase III: Recommendations and implementation
• Application of supply chain principles
• Strategy drivers
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116
 Network Design
• Physical configuration and infrastructure of the supply
chain.
• A strategic decision with long-lasting effects on the firm.
• Decisions relating to plant and warehouse location as
well as distribution and sourcing.
• Key decisions (Simchi-Levi et al. 2003)
• Determining the appropriate number of facilities such as plants and
warehouses.
• Determining the location of each facility.
• Determining the size of each facility.
• Allocating space for products in each facility.
• Determining sourcing requirements.
• Determining distribution strategies, i.e., the allocation of customers to
warehouse

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Network Design
• Objectives
• Least total cost with maximum flexibility for services
• Design or reconfigure the logistics network in order to
minimize annual system-wide cost subject to a variety of
service level requirements (Simchi-Levi et al. 2003).
• Flexibility
• Achieving a high level of logistical process integration.
• Network integration of warehouse facilities
• Supporting relationships across the supply chain

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Enterprise Facility Network

• Early theories of location
• Joachim von Thϋnen (1826)
• The primary determinant of economic development was the price of land and
cost of transportation from farm to market.
• The value of land is directly related to transportation cost, and a product
ability on price to cover transportation cost.
• The value of product at glowing place (farm) decreases with distance from
the primary selling market.
• Alfred Weber (1928)
• Industrial location
• Classify materials as ubiquitous or localized.
• Ubiquitous – water, Localized – mineral deposits found only a selected
areas
67"08! +9 :.; <.!7:".=>
• Material index =
67"08! +9 ?+<@=7!7A @:+AB?!
• Locational weight for an industry = material index

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117
 Enterprise Facility Network
• Early theories of location (cont)
• Alfred Weber (1928)
• Industrial location
• Weight losing products
• The material index is greater than 1 (weight losing), location tends
to be toward (closer) material sources.
• Ex. Electronics and chemical industries
• Centralized distribution strategy with relatively few plants or
distribution centers
• Weight gaining products
• The material index is less than 1, location tends to be toward the
market.
• Ex. Beverages or cotton
• A decentralized distribution strategy with many production or
distribution centers

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Enterprise Facility Network

• Spectrum of location decisions
• Location decisions include retail stores, finished goods
warehouses, manufacturing plants, and raw material or part
storage warehouses
• Local presence: an obsolete paradigm
• Local presence with many small warehouses was a norm in
the past.
• But the expansion of reliable transportation services with
advanced information technology
• A large warehouse covers a larger geographical area.
• A warehouse for next-day delivery covers 800 to 1000 miles.
• A strategy of fewer but larger warehouses is preferred.

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Warehouse Requirements
• Two types of warehouses due to specialized material
handling, inventory process requirements, and just in
time manufacturing process
• Supply facing warehouse
• Warehouse for raw materials or parts
• Demand facing warehouse
• Warehouse to support customers
• Three drivers of warehouses
• Procurement drivers
• Manufacturing drivers
• Customer relationship drivers

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118
 Warehouse Requirements
• Procurement drivers
• Focuses on purchasing materials at the lowest total inbound
cost.
• The recent trend is the development of a limited number of
supplier relationships that can be operationally integrated into
a firm’s supply chain to reduce the total landed cost while
eliminating waste, duplication, and unplanned redundancy.
• Supplier facing warehouse
• Manufacturing drivers
• Consolidating finished products for outbound customer
shipment.
• Proving customers with full-line product assortment on a
single invoice at truckload transportation rates.
• MTO (make-to-order) – supplier facing warehouse
• MTP (make-to-plan) – demand facing warehouse
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Warehouse Requirements
• Customer relationship drivers
• Providing customized inventory assortments to wholesalers
and retailers.
• Demand facing warehouse
• Rapid replenishment
• Replenishing retail inventories from warehouses close to retail stores.
• Market-based ATO (assemble-to-order)
• Common or undifferentiated components are stocked in warehouse
inventory in anticipation of performing customized manufacturing or
assembly at the warehouse upon receipt of customer orders.
• Warehouse justification
• Lower total cost through consolidation
• Freight consolidation requires inventory to support assembly of
customized orders.
• Flow-through operation or cross-dock operations

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Warehouse Concept and Analysis

• 7 functions (or components) of logistics – chapter 3
• Order processing, Inventory, Transportation, Warehousing,
Material handling, Packaging, Facility network design
• Systems concept – analytical framework that seeks total integration
of components for achieving logistics objectives.
• Systems analysis – quantifying trade offs among these seven
functions to minimize the total cost.
• The focus is on interaction between components.
• Systems principle
• The performance of total system or process
• Best or optimum design for individual components
• Trade-off between components to achieve greater performance

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119
 Total Cost Integration
• Transportation economics (cont)
• Network transportation cost minimization
• The generalized relationship of transportation cost and number of warehouses in a
network
• Whether to build a new warehouse or not is a matter of the total cost that has a trade-
off between transportation cost and inventory holding cost.

Number of warehouse locations

Figure 11.2 transportation cost as a function of the number of warehouse locations
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Total Cost Integration

• Inventory economics
• As the number of local warehouses increases, both the inventory level
and service level increase while the cost and risk also increase.
• Service-based warehouse justification
,!
𝐼 = ∑%
"#$ *
+ 𝑆𝑆" + 𝐼𝑇"
where
𝐼 = average inventory in the total network
𝑛 = number of warehouses in the network
𝑄" = order quantity for warehouse 𝑖 subscript
𝑆𝑆" = Safety stock, for a given warehouse identified by the appropriate
subscript
𝐼𝑇" = In-transit inventory for warehouse 𝑖

• The impact on the base stock of adding warehouses is not significant.

• The base stock is determined by ordering, manufacturing and transportation lot
sizes.
• The base stock determination is independent of the number of market warehouses.

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Total Cost Integration

• Inventory economics
• Network inventory cost minimization
• Change in average inventory level with change in the number of
warehouses in a logistics network (figure 11.5)
• The safety stock dominates the impact
of transit inventory.
• For overall network, the average
inventory is the safety stock plus half
of the order quantity and transit
inventory.
• The given the same demand and
customer service goals, total inventory
increases at a decreasing rate as the
number of warehouses in a logistical
network increases.

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120
 Formulating Logistical Strategy
• Service sensitivity analysis
• Searching for improvement opportunities
• The basic service capabilities are changed by
• variation in number of warehouses
• change in one or more performance cycles to increase speed or
consistency of operations
• and/or change in safety stock policy.
• Location modification
• Changes in service time with additions of warehouses (Table 11.5)
• The numbers in the first row of the table are service hours
(performance).
• Incremental service is a diminishing function.
• To make the service level double (from 42% to 84%), 9 more warehouses
are required(from 5 warehouses to 14 warehouses) with 24-hour service.
• High degrees of service are achieved much faster for longer
performance intervals (rather than additions of warehouses).
• The total cost associated with each warehouse addition to the
logistical network increases dramatically.
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Other Considerations in Logistics

Network
• Major considerations of logistics network designs
• Demand location – near consumer markets for outbound
logistics
• Labor costs and availability
• Material costs
• Direct and indirect costs are considered
• Transportation costs
• Other considerations
• Taxes and duties
• Supply chain risk
• Sustainability
• Political environment

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362

Planning Methodology
• Market changes in logistics
require reevaluating logistics
network design
• How many warehouses and
where?
• What are the inventory/service
trade-offs for each warehouse?
• What types of transportation
capabilities?
• Is a redesign of our warehouses
network justified?

Figure 11.9 research process 1-363

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121
 Phase I: Problem Definition and
Planning
• Feasibility assessment
• Objectives
• to understand the environment, process, problems, and performance
characteristics of the current system.
• to determine what, if any modifications appear worthy of
consideration.
• Situation analysis
• Evaluating current logistics environment including performance
measures, characteristics, and information.
• Internal operation review
• Understanding existing logistics practices and processes.
• Understanding existing logistics capabilities and deficiencies.
• Table 11.7 illustrates an internal operation review.

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364

Table 11.7
Selected internal
review topics

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365

Phase I: Problem Definition and

Planning
• Feasibility assessment
• Situation analysis (cont)
• Market assessment: A review of the trends and service demands
Table 11.8
Sample market
assessment
topics

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122
 Phase I: Problem Definition and
Planning
• Feasibility assessment
• Situation analysis (cont)
• Technology assessment
• Focuses on the application and capabilities of key logistics
technologies including transportation, storage, materials
handling, packaging, and order processing.
• Technological abilities
• Potential for applying new technologies
• Objectives
• To identify advancements capable of facilitating effective
trade-offs with other logistics resources such as transportation
or inventory.

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Table 11.9
Typical
technology
assessment

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Phase I: Problem Definition and

Planning
• Feasibility assessment
• Supporting logic
• Integrating findings of situational analysis
• Building a comprehensive review in three ways
• Identifying value proposition
• Potential improvement opportunities by cost/benefit justification
• E.g. transportation tapering principle, principle of inventory
aggregation, and total landed cost.
• Critically evaluating current procedures and practices to remove
perceptual biases.
• Are there big losses that are not recognized?
• Suggesting redesign alternatives
• Definition of current procedures and systems
• Identification of the most likely system design alternatives based on
leading industry competitive practices and the prevailing theories of
integrated logistics and supply chains
• Suggestion of innovative approaches based on new theory and
technology.

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123
 Phase I: Problem Definition and
Planning
• Feasibility assessment
• Cost/benefit estimate
• Final task of feasibility assessment
• Benefit analysis
• Service improvement: enhanced availability, quality, or capability
• Eventually increases loyalty of existing customers and attract new
business
• Cost reduction: reduction in financial or managerial resources, and
variable cost reduction.
• Cost prevention: eliminating involvement in programs and operations
experiencing cost increases.
• Risk analysis

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Phase I: Problem Definition and

Planning
• Project planning
• Statement of objectives
• Documenting the cost and service expectations for the logistics system revisions.
• The objective define market or industry segments, the time frame for change,
and specific performance expectations.
• Examples
A. Provide the 100 most profitable customers with perfect order performance
B. For all other customers provide the following performance
1. Inventory availability
• 99% for category A products
• 95% for category B products
• 90% for category C products
2. Delivery of 98% of all orders within 48 hours of placement
3. Minimize customer shipments from secondary warehouses
4. Fill mixed product orders without back order on a minimum of 85% of
all orders
5. Hold back orders for a maximum of 5 days.

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Phase I: Problem Definition and

Planning
• Project planning
• Statement of constraints
• Existing manufacturing facilities and their product-mix assortment.
• The basis of financial investments and ability to absorb change.
• Customer relationship activities of different divisions.
• Measurement standards and assumptive logic
• Definitions regarding how cost components such as transportation,
inventory, and order processing are quantified, including detailed
financial account references and method of calculation.
• Assumptions should have senior leadership approval because of high
impact to analysis.
• Project work plan
• Resources and time required for completion
• Project management for the achievement of expected results within
time and budget constraints.

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 Phase II: Data Collection and Analysis
• Assumptions and data collection
• Defining analysis approaches and techniques
• Analytical approaches
• Spreadsheet (MS-Excel) analysis (e.g. inventory analysis in chapter 7)
• Simulation
• Software package, graphical
analysis available
• Design alternatives can be
simulated in advance
• https://youtu.be/-0pZY2wEwoY
• https://youtu.be/atbLwKjvj9w
• Optimization
• Linear programming
(management science)

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Phase II: Data Collection and Analysis

• Assumptions and data collection

• Defining and reviewing assumptions
• Key operating characteristics, and variables
• Economics of current and alternative systems
• Three assumptions
• Business assumptions
• Relevant market, consumer, product trends, resource availability, and
competitive actions
• Outside ability of the firm to change
• Management assumptions
• Within management’s ability to change or refine.
• Warehouse locations, transport modes, ownership arrangements,
logistics processes, and fixed and variable costs
• Analysis assumptions
• Problem size (scope), degree of analysis detail, and solution
methodology.
• Table 11.10 - Assumption categories elements

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Phase II: Data Collection and Analysis

Table 11.10 Assumption categories elements

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125
 Phase II: Data Collection and Analysis

• Assumptions and data collection

• Identifying data sources
• Sales and customer orders
• Logistics volume and activity patterns
• Specific customer data for spatial dimension to a logistics analysis
• Cost associated with manufacturing and purchasing
• Number of locations of plants, product mix, production schedules,
and seasonality.
• Policies and costs associated with inventory transfer, reordering, and
warehouse processing.
• Operating costs, capacities, product mix, storage level, and service
capabilities.
• Transportation data
• Transport modes, modal selection criteria, rates, transit times,
shipping rules, and policies.

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Phase II: Data Collection and Analysis

• Assumptions and data collection

• Data collection
• Validation
• Analysis
• Analysis questions
• Design alternatives and the degree of acceptable uncertainty.
• Table 11.11 performance(illustrative example)

• Validating baseline analysis

• Analyses of alternatives
• Sensitivity analysis
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Phase III: Recommendations and

Implementation
• Recommendations
• Estimating costs and benefits
• Costs and benefits are compared for all alternatives.
• Identifying the best alternative
• Evaluating risk
• The probability that the actual operating environment will match
assumptions.
• Potential hazards related to system implementation
• Presentation (reporting)
• Implementation
• Defining the plan
• Scheduling
• Acceptance
• Defining the acceptance criteria – service improvement, cost reduction,
improved asset utilization, and enhanced quality.
• Plan Implementation
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126
 Application of Supply Chain Principles

• Decision application
• Decision application became much more complicated.

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Application of Supply Chain Principles

• Decision application
• Decision application became much more complicated.

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Application of Supply Chain Principles

• Decision framework
• Is built in two dimensions
• Factor drivers (exogenous and strategy)
• Reflects uncontrollable environment. Independent variables
• The strategies that it chooses to employ.
• Platform (centralized or decentralized)
• The integrated supply chain network strategy that offers the best trade-
offs among firm risk, responsiveness, and cost.

Tables 11.13
Decision
framework

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 Application of Supply Chain Principles

• Decision framework
• Exogenous drivers
• Economic dimension
• Regional economy – relative economic growth
• Labor rate – relative wage scale
• Regional technology – generation and key technologies in regions
• Regional market potential – market demand potential
• Talent dimension (firm’s own capacity and availability)
• Availability of management – senior management (management knowhow)
• Availability of design
• Availability of production
• Customer focus
• Product dimension
• Sales/Marketing/Distribution
• Social

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Application of Supply Chain Principles

• Decision framework
• Strategy drivers – controllable strategies
• Manufacturing – centralized or decentralized locations
• Purchasing – single source or multiple sources
• Processes and technology – standardized (central) or customized (decentral)
• Make strategy – make or assemble in central location or assemble in
decentralized locations
• Lead time – delivery time for customers
• Human resources – managerial and technical labor considerations
• Risk management – the need to have duplicate supply chain facilities
• Centers of excellence – the need to create centers of excellence for
procurement, production, and logistics.

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Study Objectives
• Explain key decisions of the network design.
• Explain Alfred Weber's location theory.
• Explain the drivers of warehouses.
• Explain the principles of trade-offs related to transportation
and inventory.
• Explain how the total cost network changed upon the
number of warehouses.
• Explain about the planning methodology.

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 CHAPTER 12:
Relationship Management

MGMT236 Logistics Management Chapter 1 21st –Century Supply Chains

385

Development and Management of

Internal Logistics Relationships
• Fragmentation of logistics activities in the past.

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386

Development and Management of

Internal Logistics Relationships
• Functional aggregation
• Facilitate focus on total system performance.

Figure 12.2 Logistics

functional aggregation

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 Development and Management of
Internal Logistics Relationships
• Functional aggregation
• Figure 12.2 is a conceptual and ideal organizational structure,
but rarely exist in reality.
• Functional aggregation is the combination of logistics
functions into a single managerial group. (chief supply chain
officer – CSO)
• Motivated by belief that grouping logistics into a single
organization would
• Increase likelihood of integration
• Improve knowledge of how operational changes impacts
performance in other areas.
• Comprehensive aggregation in organizations is still rare, but
• Trend is towards strategic management of all forms of inventory
movement and storage for maximum benefit of the enterprise.
• Development of logistics information systems enabled
functional integration of organizations.
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Development and Management of

Internal Logistics Relationships
• Developing a process perspective
• Integration of 8 key processes (demand planning
responsiveness, customer relationship collaboration, order
fulfillment/service delivery, product/service development
launch, manufacturing customization, supplier relationship
collaboration, life-cycle support, reverse logistics (table 1.3 of
Chapter 1)
• Process integration barriers
• Functional organization
• Operational responsibility
• Measurement and reward system
• Functional achievement is stressed.
• Balanced scorecard must be developed.
• Inventory leverage
• Inventory facilitates functional performance (purchasing, manufacturing,
marketing’s performances are different).

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Development and Management of

Internal Logistics Relationships
• Developing a process perspective
• Process integration barriers (cont)
• Infocratic structure
• Structure and availability of information have traditionally been
designed to accommodate organization relationships.
• Information is typically formatted in terms of functional requirements
and accountability.
• The use of ERP appeal to management.
• Knowledge hoarding
• Unwillingness to share knowledge or lack of understanding how to
share knowledge.

• The great divide Figure 12.3 the great

• Partial integration of divide
distribution/marketing on the
outbound side, and procurement and
manufacturing on the inbound side.
• S&OP represents one mechanism to
achieve internal integration. 1-390

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 Development and Management of
Internal Logistics Relationships
• Developing a process perspective
• The great divide (cont)
• Integration appears to be easier with groups external to a
firm such as suppliers and customers.
• Senior managers in most organizations do not have a
sufficiently clear vision of internal process requirements and
related measures to drive integration across the enterprise.
• Barriers outlined earlier render end-to-end integration a
difficult-to-achieve end state in most organizations.
• Improvement can be achieved through modifying and
repositioning functional capabilities.
• The key is to align, focus, and measure functional
performance in terms of process contribution.

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Development and Management of

Internal Logistics Relationships
• Developing a process perspective
• Process structure
• Figure 12.4 illustrative example of integrated organizational
structure
• Highly involved work environment with self-directed work teams
• Improved productivity
• Rapid shared of accurate information
• Challenges of modifying organizational structure
• All focus should be on value added to the customer.
• Integrating logistics as part of a process requires that all skills
necessary to complete the work be available regardless of their
functional organization.
• Critical skills not shared can disrupt workflow and create
“bottlenecks”
• Work performed in a process context should stimulate synergism.

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Figure 12.4 Process

organization

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131
 Development and Management of
Supply Chain Relationships
• A shift from a loosely lined group of independent
businesses to a multi-enterprise coordinated effort
focused on supply chain efficiency and competitiveness.
• Belief that cooperative behavior will reduce risk and greatly
improve efficiency.
• Belief that opportunity exists to eliminate waste (redundancy)
and work effort.
• Types of supply chain relationships and dependency
• Classification based on the degree of mutual dependency
• Figure 12.5 presents five basic forms of relationships.
• Contracting and outsourcing
• Dependency is limited and the relationship is based on negotiation.
• Comprehensive supply chain integration and collaboration are limited.
• Information is shared but limited joint planning is performed.
• The relationship among the firms is clearly based in traditional
command-and-control principles (buyer is leader).
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Development and Management of

Supply Chain Relationships
Figure 12.5 Relationship Classification Framework

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Development and Management of

Supply Chain Relationships
• Types of supply chain relationships and dependency
• Figure 12.5 presents five basic forms of relationships.
• Administrated relationship
• A dominant firm has a leadership responsibility and seeks collaboration
with trading partners and/or service suppliers.
• Sharing of operational information and to a limited degree, strategic
information.
• Limited joint planning
• Advanced collaborative relationships (alliance or enterprise extension)
• The relationships are governed by the participant’s long-term desire and
willingness to work together in an intellectual and operational manner.
• Integration of human, financial, operational, or technical resources to create
greater efficiency and greater customer impact.
• Extensive joint planning

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 Development and Management of
Supply Chain Relationships
• Power vs. Leadership
• A concept to understand acknowledged dependency and how
it makes supply chain integration work.
• Power
• Increased power of retailers
• Fewer but more dominant retailers with more extensive market coverage.
• Proliferation of point-of-sale data, frequent-shopper programs, and credit card use
provides retailers with easy access to vital market information.
• Higher market dominance by retailers
• Increasing difficulty and high cost manufacturers confront in developing new
brands.
• Private-label products owned by retailers have greater market penetration than
so-called national brands.
• The process of logistical replenishment has shifted toward a response-based
posture.
• Leadership
• Leadership position by size, economic power, customer patronage, or
comprehensive product portfolio.

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397

Development and Management of

Supply Chain Relationships
• Developing trust in relationships
• No relationship without trust.
• Reliability and character-based trust
• Reliability-based trust
• Is grounded in an organization’s perception of a potential partner’s
actual behavior and operating performance.
• Character-based trust
• Is based in an organization’s culture, leadership, and philosophy.
• When this aspect of trust is developed, participants do not feel
vulnerable to the actions of one another.
• Building trust in relationships
• requires that a firm demonstrate reliability in its operations,
consistently performing as promised and meeting expectations.
• Full and frank sharing of all information for the effective relationship.

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398

Managing Supply Chain Relationships

over Time
• Relationship in logistics
• is responsibility
• supervisor-employee relationship does not exist.
• Collaborating situation sharing a common vision.
• Initiating
• Initiated by customer
• The initiating firm needs to perform an in-depth assessment
of its internal practices, policies, and culture.
• Assessment based on the total cost of ownership
• Empowerment to manage the relationship is necessary.
• Strategic and operational integration
• Information sharing, collaborative design etc.
• Integration capability should be assessed
• Important when a firm has multiple facilities in multiple locations

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133
 Managing Supply Chain Relationships
over Time
• Implementing
• The key to a successful implementation is choosing a partner
wisely.
• Compatible cultures, a common strategic vision, and supportive
operating philosophies.
• The alliances should start on a small scale to foster easily
achievable successes or early wins.
• Maintaining
• Mutual strategic and operational goals
• The goals should be tracked, reviewed, and updated frequently to
gain improvement over the long term.
• A goal should be translated into performance measures.
• Two-way measurements
• Supplier: on-time delivery and quality
• Buyer: consistency or orders and information sharing
• System wide cost can be minimized.
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400

Managing Supply Chain Relationships

over Time
• Maintaining (cont)
• Formal and informal feedback
• Annual reviews: formal feedback focusing on examining and updating
strategic goals.
• Quarterly or monthly: formal reviews focusing on tracking and
reviewing strategic goals and operational performance.
• Weekly/daily reviews: informal feedback focusing on resolving or
avoiding conflicts and allow key contract to develop close working
relationships.
• Illustrative example
• Lowe’s and Whirlpool
• Previously had bad communication and collaboration
• Initially focused on collaborative demand planning, concentrating on
forecasting.
• Understanding target inventory levels each other.
• Next, implemented S&OP process of Whirlpool
• Collaboration linkages at the mid-management level
• Collaboration on promotions, product launches, and special-event
planning 1-401

401

Managing Supply Chain Relationships

over Time
• Maintaining (cont)
• Illustrative example (cont)
• Lowe’s and Whirlpool (cont)
• Further challenges
• The planning horizon was relatively short and senior management was
not routinely involved.
• New linkages were created to extend their planning horizon to a year.
• Unit sales growth increased 12 percent while overall inventory costs fell 5
percent.

• Terminating
• In dynamic business situations, relationship termination is
unavoidable when
• No longer meet the requirements of one or more participants or they
no longer embody leading-edge practices.
• Example: Kraft Foods and Starbucks in 2010 by Green Mountain Coffee Roasters
• Logical and fair procedure for dissolving the collaboration

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134
 Study Objectives
• Explain about the functional aggregation of logistics.
• Explain the barriers of process integration.
• Explain the process structure of organizational integration.
• Explain the types of supply chain relationships and
dependency.
• Explain how to manage the supply chain relationships
over time.

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403

CHAPTER 13:
Performance Measurement

MGMT236 Logistics Management Chapter 1 21st –Century Supply Chains

404

Measurement System Objectives

• If you don’t measure it, you don’t manage it.
• Objectives of measurement system
• Monitoring (metrics)
• Ex) fill rates, on-time deliveries, logistics costs
• Controlling
• Appropriate standards of performance related to established metrics.
• The standards are used to determine when the logistics system
requires modification or attentions.
• Directing
• Related to employee motivation and reward for performance
• Balanced Score Cards (BSC)
• A framework or performance measurement
• Kaplan and Norton in 1992
• Comprehensive performance measurement system
• Financial and nonfinancial metrics
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135
 Measurement System Objectives
• Balanced Score Cards (cont)
Figure 13.1 The balanced
score card

• Customer perspective: assessment of logistics services, quality, and

satisfaction
• Internal operations perspectives: process quality, efficiency, and
productivity
• Innovation and learning perspective: human resources, employee
education, and bench marking
• Financial perspective: revenue and profit
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406

Operational Assessment
• Functional perspectives
• Five classification of logistics functional measures
(1) cost (2) customer service, (3) quality, (4) productivity, (5) asset
management
• Table 13.1 summarizes typical logistics performance metrics.
• Cost
• Measuring costs precisely is very difficult in practice.
• Integrated nature of logistics, and lack of data
• But the total cost should be monitored closely at senior management
level.
• Total landed cost: order processing + inventory + transportation +
warehousing and materials handling + facility network
• The total cost is then distributed to logistics activities.
• Activity-based costing
• Commonly monitored as a percentage of sales or as a cost per unit of
volume.

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407

Table 13.1 Typical logistics performance metrics

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408

136
 Operational Assessment
• Customer service
• Product availability measured by fill rates are in a variety of ways.
CB<D7: +9 "!7<> A7="/7:7A !+ ?B>!+<7:>
• Item fill rate = CB<D7: +9 "!7<> +:A7:7A DE ?B>!+<7:>

CB<D7: +9 @B:?8.>7 +:A7: ="%7> A7="/7:7A ?+<@=7!7 !+ ?B>!+<7:>

• Line fill rate = CB<D7: +9 "!7<> +:A7:7A DE ?B>!+<7:>

F+!.= A+==.: /.=B7 A7="/7:7A !+ ?B>!+<7:>

• Value fill rate = F+!.= A+==.: /.=B7 +9 ?B>!+<7:>

CB<D7: +9 +:A7:> A7="/7:7A ?+<@=7!7

• Order fill rate = CB<D7: +9 ?B>!+<7: +:A7:>

• Is known as orders shipped complete.

• The most stringent measure of a firm’s performance on product availability.
• Time performance
• Average order cycle time, consistency of order cycle time, and on-time
delivery
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409

Operational Assessment
• Quality
• Performance relative to service reliability
• Monitoring the effectiveness of individual activities
• Accuracy of work performance in such activities as order entry,
warehouse picking, and document preparation.
• Overall quality performance
• Damage frequency
• Warehouse damage, loading damage, and transportation damage
• Number of customer returns of damaged or defective goods.
• Customer claims and refunds
• Quality of information processing
• Ability to provide information
• The occurrence of information in accuracy

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410

Operational Assessment
• Productivity
• Productivity of labor is the biggest concern
• Labor expense
• Labor hour
• Number of individual employees
• Labor productivity in transportation
• Units shipped or delivered per employee, per labor dollar, or per labor
hour
• Labor productivity in warehouse
• Units received, picked, and shipped per employee, dollar, or hour
• Similar measures can be developed for other activities such as
order entry and order processing.
• It is common for managers to set goals for productivity
improvement compared to previous performance

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411

137
 Operational Assessment
• Asset Management
• Utilization of capital investments in facilities, equipment, and
inventory
• Wholesalers
• Inventory exceeds 80% of total capital.
• Facilities and equipment
• Capacity utilization or the percentage of total capacity used.
• Equipment down time.
• Inventory
• Three specific metrics
G+>! +9 0++A> >+=A AB:"%0 . !"<7 @7:"+A
• Inventory turnover ratio =
H/7:.07 "%/7%!+:E /.=B7A .! ?+>! AB:"%0 !87 !"<7 @7:"+A

I.=7> :7/7%B7 AB:"%0 . !"<7 @7:"+A

• Inventory turnover ratio =
H/7:.07 "%/7%!+:E /.=B7A .! >7=="%0 @:"?7 AB:"%0 !87 !"<7 @7:"+A

J%"!> >+=A AB:"%0 . !"<7 @7:"+A

• Inventory turnover ratio =
H/7:.07 B%"! "%/7%!+:E AB:"%0 !87 !"<7 @7:"+A

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412

Operational Assessment
• Asset Management
• Inventory (cont)
• Inventory turnover is a “backward-looking” looking measure.
• Forward looking measure
• Inventory days of supply (days of sales or days of inventory)
• Meaningful when future expected demand, or daily rate of usage
• Example: days of sales, 2,000,000 cars in dealer’s parking lot, expected
sales are 50,000 units per day, then days of sales = 2,000,000/50,000 = 40.
• Measurement system
• Measurement system has been significantly improved over the 10
years.
• Using EDI linkage, satellite and Internet tracking

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413

Operational Assessment
• Measuring customer relationship
• Additional set of measurements are required for measuring the
metrics beyond basic customer service.
• Perfect orders
• An indicator of a commitment to zero-defect logistics.
• Measures the effectiveness of the firm’s overall integrated logistical
performance rather than individual functions.
• Order entry, credit clearance, inventory availability, accurate packing, on-
time delivery, correct invoicing, and payment without deductions.
• As many as 20 logistical service elements may impact a perfect order.
• The ratio of perfect orders to the total number of orders
• Multiple information systems within a firm may need to be integrated
and linked to the original purchase order.

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138
 Operational Assessment
• Measuring customer relationship
• Absolute performance
• Most measures are an aggregated performance of many orders over a
period of time.
• Absolute approach provides a better indication of how a firm’s
logistical performance really impacts customers.
• 99.5% on-time delivery often is the same as 5,000 customers received late
orders.
• Customer satisfaction
• Careful inspection of customer expectations, requirements, and
perceptions of firm performance
• Survey measures regarding availability, order cycle time, information
availability, order accuracy, problem resolution, and other aspects of
logistics quality.
• Additional questions related to customer perceptions of competitor
performance.

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415

Operational Assessment
• Rationalizing performance metrics
• Over time, firms tend to add new performance metrics but rarely
delete any.
• The proliferation of metrics can lead to a vast array of data, and
too many focuses to meet the strategic objectives.
• Review questions to maintain performance metrics
• Who uses this measurement information?
• What decisions does the measurement influence?
• What individual or group is responsible, and what behavior is motivated by the
measure?
• Do they have control over the factors that influence it?
• The review can help the firm maintain a performance
measurement system relevant to the appropriate monitoring,
control and motivational objectives.

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416

Operational Assessment
• Supply Chain Comprehensive Metrics
• Integrated performance measures that can be comparable and consistent
across both firm functional departments and supply chain institutions.
• Cash-to-cash cycle time
• The time required to convert a dollar spent on inventory into a dollar
collected from sales revenue.
• Can be measured by adding a firm’s days of supply of inventory and
its days of accounts receivable outstanding, subtracting the days of
trade accounts payable outstanding.
• A measure of the firm’s effective use of cash.
• Inventory is an asset in the balance sheet but is not a truly valid asset.
• Example of a firm
• 30-day supply of inventory, 30 day’s trade credit from suppliers, and sells
to end consumers in cash-only transactions
• Firm’s cash-to-cash cycle time is zero.
• It is influenced by other factors than logistics and is a measure of the
internal process (of BSC).
• One danger is taking more days to pay suppliers.
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139
 Operational Assessment
• Supply Chain Comprehensive Metrics
• Cash spin (free cash spin)
• The potential benefits of reducing assets across a supply chain
• A dollar of inventory or the investment in a warehouse, if eliminated by
a reengineered supply chain, provides cash for other uses.
• New projects, or reducing debt
• Inventory days of supply (supply chain)
• It is traditionally used for individual firms.
• In a supply chain, one firm improves its performance by simply shifting
inventory to its suppliers or to customers.
• The supply chain inventory days of supply focuses on total inventory of
the supply chain from raw materials to finished goods.
• Dwell time
• Inventory dwell time is the ratio of the days inventory sits idle in the
supply chain to the days it is being productively used or positioned.
• Dwell time is also measured for other assets, especially transportation
equipment.

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418

Study Objectives
• Explain the objectives of the performance measurement
• Explain the principles of the BSC.
• Explain the typical metrics of the logistics performance.
• Explain the ways of measuring customer relationships.
• Explain the framework to determine appropriate metrics.
• Explain about the comprehensive metrics of the supply
chain performance.

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