1. MANAGEMENT SCIENCE DEPARTMENT DPS 306 Logistics and Transportation Management Logistics and Transportation Management June 27, 20161

2. Real You get into your supermarket of choice to pick a certain item. "It's out of stock," a supermarket employee tells you. Actually, several people have been looking for it... must be a popular item," s/he adds. Why was this product out-of-stock? So, if that item had been in the “supaa”, how would it have gotten there? June 27, 20162

3. Introduction In today's highly competitive global marketplace, the pressure on organizations to find new ways to create value and deliver it to their customers grows ever stronger. Consequently, many organizations in the last two decades, have moved the logistics function to the center stage. June 27, 20163

4. Introduction – Cont... There has been a growing recognition that effective Logistics Management (LM) throughout the firm and Supply Chain (SC) can greatly assist in the goal of cost reduction and service enhancement. The keys to success in LM require heavy emphasis on integration of activities, cooperation, coordination and information sharing throughout the firm and the entire supply chain, from suppliers to customers. June 27, 20164

5. Logistics Defined Traces its origin to: Greek word logistikos Latin word logisticus Meaning the science of computing and calculating. In ancient times, the term was frequently used in connection with moving armies and supplies of food and armaments to the war front. Its use can be traced back to 17 th Century in French army. June 27, 20165

6. Logistics Defined – Cont... It gained importance in army operations during WWII as it was used in reference to movement of supplies, men, and equipment across the border. The US army officially used the word after WWII. Today logistics has acquired a wider meaning and is used in business to refer to movement of raw materials from suppliers to the manufacturer and finished goods to the consumers. June 27, 20166

7. Just a thought!!!! What is Logistics = Logical thinking + Statistics June 27, 20167

8. Definitions – Cont… Logistics refers to the movement of materials within a production facility and to incoming (inbound/upstream) and outgoing (outbound/downstream) shipments of goods and materials. (William J. Stevenson) June 27, 20168

9. Definitions – Cont... “Logistics is that part of SCM that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and point of consumption in order to meet customers’ requirements.” (Council of Supply Chain Management Professionals) June 27, 20169

10. Logistics vs Transportation Logistics vs Transportation Clearly there is an explicit difference between logistics and transportation. The term logistics is often misinterpreted to mean transportation. In fact, the scope of logistics goes well beyond transportation. Logistics forms the system that ensures the delivery of the product in the entire SC. This includes transportation, packaging, storage and handling methods, and information flow. June 27, 201610

11. Logistics vs Transportation – Cont.. Transportation refers to the means of distributing goods, supplies, resources, info, people, and energy from the original point to the destination point using a mode of transport. Since transportation is concerned only with moving the supplies, someone has to take care of handling, packaging, managing the time the goods are fetched and delivered, and maintaining coordination, especially incases where inter-modal transport is used. That's when logistics comes in. June 27, 201611

12. Logistics vs SCM Some authors regard SCM and Logistics as synonymous. Cooper (1997) regards Logistics as concerned with material and material flows and SCM as the integration of all business processes across the supply chain. According to the UK Institute of Logistics and Transport: LM makes possible the optimized flow and positioning of goods, materials, June 27, 201612

13. Logistics vs SCM – Cont... information and all resources of an enterprise. SC is the flow of materials through procurement, manufacture, distribution, sales and disposal, together with the associated transport and storage. SCM views the SC as a single entity and thus demands system integration. June 27, 201613

14. June 27, 201614 Activities of Logistics As materials move through an organization, the following activities are normally included in Logistics: Procurement or purchasing – material flow through an organization is initiated when procurement sends a purchase order to a supplier. Inward transport or traffic – moves materials from suppliers to the firm’s receiving area. Receiving – ensures materials delivered correspond to the order, acknowledges receipt, unloads delivery vehicles, inspects materials for damage and sorts them.

15. Activities of Logistics – Cont... Warehousing or stores – moves materials into storage, and takes care of them until they are needed. Stock control – sets inventory policies. Considers the materials to store, overall investment, customer service, stock levels, order sizes, and timing. Order picking – finds and removes materials from stores to the departure area. Materials handling – moves materials, within short journeys, through the operations within an organization. June 27, 201615

16. Activities of Logistics – Cont... Outward transport – takes materials from the departure area and delivers them to customers. Physical distribution management – delivers FGs to customers, including outward transport. Is aligned to marketing and forms an important link with downstream activities. Recycling, returns and waste disposal – reverse logistics or reverse distribution. Location – moving materials nearer to place of need. Communication – alongside flow of materials, logistics facilitates flow of info. June 27, 201616

17. Aims of Logistics Logistics managers have two main aims: i.Customer responsiveness - success of an organization depends on its ability to satisfy customers. ii.Move materials into, through, and out of their own organization as efficiently as possible i.e focus on minimizing costs. The challenge however is that outstanding customer service requires more resources which come with higher costs. June 27, 201617

18. Aims of Logistics – Cont... Thus a realistic aim for Logistics is to balance the achievement of customer satisfaction with the cost of achieving it. This balance can be phrased in terms of perceived customer value. Logistics adds value by making products available in the right place and at the right time. If a product is available at the place needed, June 27, 201618

19. Aims of Logistics – Cont... Logistics is said to have added place utility; if it is delivered at the right time, Logistics has added time utility. June 27, 201619

20. Importance of Logistics Helps move a country's economy i.e it is an essential feature of all economic activity. Provides the wheels that help bring in and distribute goods and materials within an economy. There are few aspects of human activity that do not ultimately depend on the flow of goods. Without Logistics, no materials move, no operations can be done, no products are delivered, no customers served, and hence no economy. June 27, 201620

21. Importance of Logistics – Cont... Logistics is not only essential, but it is also expensive. Organizations are known to reduce their overheads significantly, but they are left with surprisingly high Logistics costs. Being expensive, Logistics has impact on overall financial performance. Logistics affects customer satisfaction, operating costs, profit etc June 27, 201621

22. Importance of Logistics – Cont... Poor Logistics are the cause of roughly 50% of all customer complaints. No organization can expect to prosper if it ignores Logistics and organizing Logistics can give huge competitive advantage. We can, then, summarize the importance of Logistics by saying that it: June 27, 201622

23. Importance of Logistics – Cont...  is essential, as all organizations, even those offering intangible services, rely on movement of materials.  is expensive, with costs often forming a surprisingly high portion of turnover.  directly affects profits and other measures of organizational performance.  has strategic importance with decisions affecting performance over the long term.  forms links with suppliers, developing mutually beneficial, long-term trading relationships. June 27, 201623

24. Importance of Logistics – Cont...  forms links with customers, contributing to customer satisfaction and added value  has a major effect on lead time, reliability and other measures of customer service  determines the best size and location of facilities  can be risky, because of safety, health and environmental concerns  can encourage growth of other organizations – such as suppliers and intermediaries offering specialized services June 27, 201624

25. Integrating Logistics Progress in Logistics -Historically, firms put all their effort into making of products & put little thought to the associated movement of materials. -Transport & storage were seen as unavoidable costs of doing business not worth much attention. -The main reason for change was the recognition that Logistics was expensive (1970s & 80s surveys were showing that it accounted for 15-20% of revenue). -As a high cost function, managers believed significant savings could be made. June 27, 201625

26. Pressures to improve Logistics As well as potential savings, many other factors put pressure to organizations to improve their Logistics: -More knowledgeable customers, demand higher quality, lower costs and better service. -Fiercer competition & thus organizations must look at every opportunity to remain competitive. -Changes in retail markets e.g growth of 24-hour opening, home deliveries, telephone & online shopping -International trade continues to grow (EU, EAC, NAFTA) -Recognition of the strategic importance of Logistics. June 27, 201626

27. Pressures - Cont... -New operations e.g JIT, lean operations, time compression, flexible manufacturing, mass customization, virtual operations & so on. -Turn from a product focus to a process focus. This needs improvement in operations, including Logistics. -Considerable improvement in communication e.g EDI, EFT(M-pesa?), e-commerce etc -Outsourcing of peripheral activities (Logistics) and concentrating on core operations. -Increased co-operation through alliances and partnerships. This is important for Logistics, which is usually the main link between organizations in a SC. June 27, 201627

28. Pressures – Cont... -Attitudes towards transport are changing, because of increased congestion on roads, concerns about air quality and pollution, broader environmental issues, privatization of rail services, deregulation of transport, and a host of other changes. N/B: There are many other pressures including uncertain market conditions, political change, shortage of skilled staff, fluctuating exchange rates, and so on. How will(has) Logistics respond(ed) to these pressures? June 27, 201628

29. Integrating Logistics within an organization The figure summarizes the view of logistics within an organization, where a series of related activities add value to the final product. ProcurementPhysical Distribution Inward transportOutward Transport Warehousing Returns ReceivingStock ControlPicking Materials HandlingConsolidating Communications Location June 27, 201629 Suppliers Operations Customers

30. Integrating Logistics – Cont... These activities have traditionally been managed separately, so that an organization might have a distinct purchasing department, transport department, warehouse, distribution fleet, and so on. Unfortunately, dividing up logistics in this way creates a number of problems. -Purchasing – look for most reliable suppliers -Warehousing – fast stock turnover -Inventory control – low unit costs -Transport – full vehicle loads June 27, 201630

31. Integrating Logistics – Cont... Though worthy, these aims will soon come into conflict. In reality, these activities are closely related, and policies in one part inevitably affect operations in another. Example – RP Turner Corp. In summary, fragmented Logistics has the disadvantages of: -giving different, often conflicting, objectives within an organization. -duplicating effort and reducing productivity. -giving worse communications & information flows between the parts. June 27, 201631

32. Integrating Logistics – Cont... -reducing co-ordination between the parts – leading to lower efficiency, higher costs & worse customer service. -increasing uncertainty & delays along the SC. -making planning more difficult. -introducing unnecessary buffers between the parts, such as stocks of WIP, additional transport & administrative procedures. -obscuring important information, such as the total cost of Logistics. -giving Logistics a low status within the organization. June 27, 201632

33. Integrating Logistics – Cont... To avoid these problems, logistics should: be considered not as a series of distinct activities, but as a single integrated function. be considered not as a series of distinct activities, but as a single integrated function. be responsible for all storage and movement of materials throughout the organization. be responsible for all storage and movement of materials throughout the organization. tackle problems from the viewpoint of the whole firm, and looks for the greatest overall benefit. tackle problems from the viewpoint of the whole firm, and looks for the greatest overall benefit. In practice, it is difficult to integrate all logistics within a firm. Perhaps the major cause is the difficulty in finding someone with the knowledge, enthusiasm, ability & authority to carry through necessary changes. June 27, 201633

34. Integrating Logistics – Cont... Hence to succeed; A senior manager who has the necessary power should start the changes Individuals working together & coming up with new practices and relationships, developing a culture that is based on teamwork and co-operation rather than self-interest & conflict. Analyze the total logistics cost (TLC). TLC = transport cost + warehouse cost + holding cost + packaging cost + information processing cost + other logistics overheads. June 27, 201634

35. Integrating Logistics – Cont... N/B: Some of these costs are inversely related e.g Lewis et al (1956) found out that airfreight is much more expensive than alternative road transport, but faster delivery eliminated the need for local stocks & warehouses, and gave considerable overall savings. Make available integrated information & control systems. An information system might show that stocks are running low, & a control system uses this information to place an order with suppliers. To enhance this, there should be a shift from LANs & intranets to internet which is more efficient route for logistics information. June 27, 201635

36. Stages in integration The movement of logistics from; low priority, fragmented function strategic, integrated function, is a major change, which goes through the following stages: 1.Separate logistics activities that are not given much attention or considered important. 2.Recognizing that the separate activities of logistics are important for the success of the organization. 3.Making improvements in the separate functions, making sure that each is as efficient as possible. June 27, 201636

37. Stages in integration – Cont... 4.Internal integration – recognizing the benefits of internal co-operation and combining the separate functions into one. 5.Developing a logistics strategy, to set the long-term direction of logistics. 6.Benchmarking – comparing logistics’ performance with other organizations, learning from their experiences, identifying areas that need improvement & finding ways of achieving it. 7.Continuous improvement – accepting that further changes are inevitable and always searching for better ways of organizing logistics. June 27, 201637

38. Integrating along the SC If each organization only looks at its own operations, there are unnecessary boundaries between them, disrupting the flow of materials & increasing costs. External integration removes these boundaries to improve the whole chain. Christopher (1999) supports this move, saying “most opportunities for cost reduction and/or value enhancement lie at the interface between supply chain partners”. Hence there are 3 levels of integration: separate activities within a firm; internal integration into a single function, and external integration June 27, 201638

39. Three levels of Logistics integration The figure below shows the three levels of integration: Logistics activities Logistics with internal integration Logistics with external integration June 27, 201639 Suppliers Suppliers Suppliers Operations Customers Customers Customers Operations Operations

40. N/B: Organizations within the same supply chain should CO-OPERATE to get final customer satisfaction. They should not compete with each other, but with firms in other supply chains. Forrester (1961) described on interesting effect of fragmented SC. Imagine a retailer who notices that demand for a product rises by 5 units in a week. When it is time to place the next order, the retailer assumes demand is rising, and orders 10 extra units to make sure its enough. The wholesaler sees demand rise by 15 units, so it orders another 20 units. As this travels through the SC, a small change in final demand is amplified into major variation for early suppliers. June 27, 201640

41. Benefits of integration i.Genuine co-operation between all parts of the SC, with shared information & resources ii.Lower costs – due to balanced operations, lower stocks, less expediting, EoS, elimination of time wasting or non value adding activities, & so on. iii.Improved performance – due to more accurate forecasts, better planning, higher productivity of resources, rational priorities, & so on. iv.Improved material flow, with co-ordination giving faster & more reliable movements v.Better customer service, with shorter lead times,& faster deliveries. June 27, 201641

42. Benefits – Cont... vi. More flexibility – faster reaction to changes vii. Standardized procedures, becoming routine & well practiced with less duplication of effort, information, planning & so on. viii. Reliable quality & fewer inspection, with integrated quality management programmes. N/B: Although the benefits of integration are clear, there are many practical difficulties in achieving them. Many organizations simply do not trust other members of the SC, & they are reluctant to share information. June 27, 201642

43. - Cont... Even with sufficient trust, there can be problems with different priorities, competition, data exchange, appropriate systems, skills, security, & so on. How then do we achieve integration? June 27, 201643

44. Achieving integration Co-operation & Conflict Why should distinct firms each working for their own benefit co-operate? Why benefit another firm? – external integration brings benefits that can be shared among all members of the SC. Example – Perman Frėre There is need to overcome the traditional view of firms as adversaries. This will be achieved by recognizing that for long-term interests conflict should be replaced by agreement. This calls for a major culture change. June 27, 201644

45. Achieving integration – Cont... FactorConflict viewCo-operation view ProfitOne firm Πs at theBoth share Πs expense of the other R/shipOne is dominantEqual partners TrustLittleConsiderable CommunicationLtd & formalWidespread & open InformationSecretiveOpen & shared ControlIntensive policingDelegation & empowerment QualityBlame for faultsSolving shared problems ContractRigidFlexible Focus onOwn operationsCustomers June 27, 201645

46. Achieving integration – Cont... Co-operation can either be: Informal – no commitment, flexible & non-binding but either party can end it without warning. (Japanese use the concept, keiretsu, to bring together groups of firms that work together without forming partnerships), or Formal – has a written contract setting out the obligations of each party. June 27, 201646

47. Achieving integration – Cont... Strategic alliance or partnering Is ‘an ongoing relationship between firms, which involves a commitment over an extended time period, and a mutual sharing of information and the risks and rewards of the relationship.’ Partnerships can lead to changes in operations. Example – Petro-Canada Vertical integration Describes the amount of a SC that is owned by one organization. To go beyond partnerships, a firm has to own more of the SC eg take minority shareholding in a supplier. June 27, 201647

48. Achieving integration – Cont... If the firm owns a lot of the supply side it has backward or upstream integration; if it owns a lot of the distribution network it has downstream or forward integration. Alternatively, two firms can start a joint venture where they both put up funds to start a third company with shared ownership. N/B: In some circumstances vertical integration is the best way of getting different parts of the SC work together. Example – GZ Rexam June 27, 201648

49. Logistics Strategy Strategic Decisions Some decisions are very important to a firm, with consequences felt over many years. Other decisions are less important, with consequences felt over days or even hours. Hence the classification: Strategic decisions – most important & set the overall direction of the whole organization; have effects over long term, involve many resources; most risky. Tactical decisions – concerned with implementing the strategies over the medium term; look at more detail, involve fewer resources & some risk. Operational decisions – most detailed & concern short term activities; involve fewer resources & little risk. June 27, 201649

50. Strategic Decisions – Cont... Traditional view: senior managers make strategic decisions that set the organization on its course; it is still a popular approach. New styles of mgt & improved technology encourage changes; decisions are discussed, negotiated & agreed rather than simply passed down; recognition that the best person to make a decision is the person most closely involved i.e junior manager on the spot rather than remote senior manager. There are several types of strategic decision which are known by different names, but the most common are: June 27, 201650

51. Strategic Decisions – Cont... mission – a statement to give the overall aims of the organization; corporate strategy – which shows how a diversified corporation will achieve its mission; business strategy – shows how each business within a diversified corporation contribute to the corporate strategy; functional strategies – which describe the strategic direction of each function, including logistics. Higher strategies set goals & general direction of the firm, & the functional strategies show how to achieve this. June 27, 201651

52. Strategic Decisions – Cont... e.g for a business strategy of being the lowest cost provider, logistics strategy shows how it will reduce logistics costs to a minimum; if the organization is working to get fast deliveries to customers, the logistics strategy defines policies for achieving this. June 27, 201652

53. Logistics Strategy (i)Consists of all the strategic decisions, policies, plans, and culture relating to the management of supply chains. (ii)Is the set of guiding principles, driving forces & ingrained attitudes that help to coordinate goals, plans & policies, & which are reinforced through conscious and subconscious behaviour within and between partners across a network. Whittington (2000) proposes four approaches to setting strategy. He starts by suggesting different motivations for setting strategy: June 27, 201653

54. Logistics Strategy – Cont... How deliberate are the processes of strategy setting? These can range from carefully planned to a series of ad hoc decisions taken on a day-to-day basis. What are the goals of strategy setting? These can range from a focus in maximizing Π to allowing other business priorities such as sales growth to be included With these two considerations, the four options for crafting a strategy are developed as follows: June 27, 201654

55. Logistics Strategy – Cont... June 27, 201655AccommodateSystemicEvolveClassical Strategy goals Day-to-dayPlanned Strategy process Several Profit

56. Logistics Strategy – Cont... (i) Evolve – strategy is not formally undertaken at all. ‘our strategy is not to have a strategy’ is a typical view point. Operating decisions are taken in relation to the needs of the moment, with financial goals as the main guiding principle. (ii) Classical – financial goals are the main guiding principle, this is achieved through a formal planning process. ‘Classical’ because it is the oldest & most influential option. (iii) Accommodate –decisions are taken day to day, but financial objectives are not the only concerns. Strategy is accommodated instead to the realities June 27, 201656

57. Logistics Strategy – Cont... of the focal firm and the markets in which it operates. (iv) Systemic – this option sees no conflict between the ends and means of realizing business goals. Goal setting takes place across all major aspects of the business (HR, marketing & operations), these are linked to the means by which they will be achieved in practice. Logistics strategy usually demands systemic strategy setting between network partners, who may have to coordinate order winners & qualifiers across different market segments. June 27, 201657

58. Logistics Strategy – Cont... Logistics strategy forms a link between the higher strategies & the detailed operations of the SC. While corporate & business strategies give general aims, logistics strategy concerns actual movement of materials needed to support these aims. June 27, 201658

59. Logistics Strategy – Cont... discussion & agreement June 27, 201659 Logisticsmanagers Other senior managers Businessstrategy Lower logistics decisions Logisticsstrategy

60. Logistics Strategy – Cont... The higher strategies set the context for the logistics strategy. Logistics managers should actively contribute to the formulation of higher level strategies. Their views on what level of performance are actually achievable by logistics form one of the inputs for the design of higher strategies. The recognition, for instance, that a firm can achieve efficient logistics allows it to have a business strategy of aiming at outstanding service. June 27, 201660

61. Focus of the Logistics Strategy Factors leading to organization being superior to competitors? Marketers 4 p’s – product, price, place, promotion Operations management competitive dimensions – cost, quality, delivery reliability, delivery speed, coping with changes in demand, flexibility and new product introduction speed, and other product-specific criteria Porter generic strategies – cost leadership, product differentiation. Can a logistics strategy enhance success of these factors? June 27, 201661

62. Strategy Options Michael Porter’s two basic strategies: Cost leadership, makes the same, or comparable, products more cheaply; ???? Cost leadership, makes the same, or comparable, products more cheaply; ???? Product differentiation, makes products that customers cannot get from other suppliers.???? Product differentiation, makes products that customers cannot get from other suppliers.???? In logistics, these two approaches are usually phrased in terms of lean & agile strategies i.e Lean logistics – aiming at low costs Agile logistics – aiming at higher customer satisfaction. June 27, 201662

63. Lean Strategies Since the cost of logistics is high and unavoidable, the best option is to make it as cheap (by eliminating waste) as possible. Hence, a reasonable objective is to min. TLC while ensuring acceptable levels of customer service. This approach is generalized as lean logistics. Robert Townsend says that, ‘All organizations are at least 50% waste – waste people, waste effort, waste space and waste time’. A lean strategy looks for ways of eliminating this waste. The typical approach does a detailed analysis of current operations, and then removes operations June 27, 201663

64. Lean Strategies – Cont... that add no value, eliminates delay, simplifies movements, reduces complexity, uses higher technology to increase efficiency, looks for EoS, locates near customers to save travel, and removes unnecessary links from the supply chain. N/B: (i) Low costs do not automatically mean lean operations. Lean operations maintain customer service while using fewer resources – they do not just minimize costs. (ii) Lean operations might not work when there are variable and uncertain conditions. Hence, the more flexible alternative strategy of agility. June 27, 201664

65. Agile Strategy Supporters of this strategy say that lean operations put too much emphasis on costs, and cannot deal with changing conditions (demand), increasing competition, or more sophisticated and demanding customers. As markets are demanding more variety and customization, logistics should be more flexible. There are two aspects of agility. (i)Speed of reaction – keep a close check on customer demands and react quickly to changes. (ii)Ability to tailor logistics to demands from individual customers. Thus, end customer satisfaction is a prime concern even if this comes at somewhat higher price. June 27, 201665

66. Agile Strategy – Cont... This is strategy is said to be customer focused. Without customers an organization has no sales, no income, no profit, no business - & soon no organization. Satisfied customers » repeat business, it costs 5x to attract a new customer as it does to retain an existing one, recommend a good service to 4 or 5 other people (compared with dissatisfied customers who warn a dozen potential customers about a bad experience). N/B: Lean & Agile are not mutually exclusive, they both have merits as well as limitations. June 27, 201666

67. Lean versus agile FactorLean logisticsAgile logistics ObjectiveEfficient operationsFlexibility to meet demand MethodRemove all wasteCustomer satisfaction ConstraintCustomer serviceCost Rate of changeLong-term stabilityFast reaction to cha- nging circumstances Measures ofProductivity,Lead time, performanceutilizationservice level WorkUniform, Variable, more standardizedlocal control ControlFormal planningLess structured by cyclesempowered staff June 27, 201667

68. Strategic Alliances A third strategy develops the ideas of integration. An organization can put so much emphasis on close co- operation with other parts of the SC that it has a strategy of forming alliances with suppliers and customers. The purpose of this strategy is to get efficient supply chains, with all members working together and sharing the benefits (better customer service, increased flexibility, reduced costs, avoidance of investment in facilities, and lack of expertise within the organization) of long-term co-operation. Common areas are transport, warehousing, import/export services, materials storage & information processing. June 27, 201668

69. Designing a Logistics Strategy The starting point is to examine the higher strategies and see how logistics can contribute. Then the results are summarized in a logistics mission. This gives a simple statement of the aims for SCM, sets the scene & shows the overall direction & priorities. After the logistics mission, the next steps are less clear. Gooderham says: No one ‘right’ way to develop & implement strategy exists. The key to successful planning is to get the best fit between the chosen tools & techniques, the organization’s current culture capabilities & business environment & the desired outcome. June 27, 201669

70. Designing – Cont... This leads to the need for finding the best balance between the organization’s internal strengths and the external constraints – matching what the organization is good at & what customers want. Hence, there are three factors to be considered when designing a logistics strategy: – the higher strategies, – the higher strategies, - the business environment, and - the business environment, and - the organization’s distinctive competence. - the organization’s distinctive competence. June 27, 201670

71. Designing – Cont... June 27, 201671 LogisticsStrategy HigherStrategies Other internal Strengths Facilities Resources Employees Products Other external Strengths Customers Marketconditions Technology Economicclimate Business Environment Distinctive Competence

72. Designing – Cont... Higher strategies set the organization’s goals & the context for all logistics decisions. The logistics strategy must support these higher strategies. The business environment consists of the factors that affect logistics, but over which it has no control. These include: Customers – their expectations, attitudes, demographics Customers – their expectations, attitudes, demographics Market conditions – size, location, stability Market conditions – size, location, stability Technology – current availability, likely developments, rate of innovation Technology – current availability, likely developments, rate of innovation Economic climate – GDP, rate of growth, inflation Economic climate – GDP, rate of growth, inflation June 27, 201672

73. Designing – Cont... Legal restraints – trade restrictions, liability & employment laws Legal restraints – trade restrictions, liability & employment laws Competitors – numbers, ease of entry to the markets, strengths Competitors – numbers, ease of entry to the markets, strengths Shareholders – target ROI, objectives, profit needed Shareholders – target ROI, objectives, profit needed Social conditions – lifestyles, changing demands, significant trends Social conditions – lifestyles, changing demands, significant trends Political conditions – stability, amount of government control, external relations Political conditions – stability, amount of government control, external relations Interest groups – their objectives, strengths, amount of support Interest groups – their objectives, strengths, amount of support June 27, 201673

74. Designing – Cont... Distinctive competence – set the organization apart from competitors since the business environment is similar for all. These are factors under the organization’s control, and which it uses to distinguish itself. They stem from the firm’s assets, and include: Employees – skills, expertise, loyalty Employees – skills, expertise, loyalty Finances – capital, debt, cashflow Finances – capital, debt, cashflow Customers – loyalty, relationships Customers – loyalty, relationships Products – quality, reputation, innovations Products – quality, reputation, innovations Facilities – capacity, age, reliability Facilities – capacity, age, reliability Technology – currently used, plans, special types Technology – currently used, plans, special types Organization – structure, relationships, flexibility Organization – structure, relationships, flexibility June 27, 201674

75. Designing – Cont... Processes – structures, technology used, flexibility Processes – structures, technology used, flexibility Marketing – reputation, experience Marketing – reputation, experience Suppliers – service, flexibility, partnerships Suppliers – service, flexibility, partnerships Other assets – knowledge, innovation, patents Other assets – knowledge, innovation, patents In essence, the business environment and distinctive competence show where an organization is now, and the higher strategies show where it wants to be in future. The logistics strategy shows how to move from one to the other. June 27, 201675

76. Logistics Audit The purpose of a logistics audit is to collect relevant information about existing practices & performance of logistics. It gives a systematic review of current operations, describing the procedures, costs, resources, utilization, performance, products, and all other relevant details. It has two main parts: external audit – looks at the environment in which logistics work. external audit – looks at the environment in which logistics work. internal audit – looks at the way things are done within the organization & identifies areas of improvement internal audit – looks at the way things are done within the organization & identifies areas of improvement June 27, 201676

77. Logistics Audit – Cont... This approach is similar to SWOT analysis. By the end of the audit. The firm knows where it wants to go, & where it is at the moment. The next stage therefore is to identify the gaps between these two & show how to bridge the gaps. June 27, 201677

78. Developing the Strategy Novich (1990) recommends four steps for designing a strategy: Understand & measure customer needs Understand & measure customer needs Find the weaknesses of the current logistics Find the weaknesses of the current logistics Benchmark Benchmark Simplify the whole logistics system Simplify the whole logistics system However, on the basis of the above (earlier) analysis, we can come up with an eight step systematic approach: Do an external logistics audit Do an external logistics audit Do an internal logistics audit Do an internal logistics audit June 27, 201678

79. Developing the Strategy Design the general features of SCs that can best deliver the desired services (network, capacity, location, technology & so on) Design the general features of SCs that can best deliver the desired services (network, capacity, location, technology & so on) Set specific goals to show what each logistics activity must achieve – internal audit is a good starting point Set specific goals to show what each logistics activity must achieve – internal audit is a good starting point Design the best organizational structure, controls & systems to support the logistics network Design the best organizational structure, controls & systems to support the logistics network Benchmark Benchmark Implement the strategy, setting the conditions for lower levels of logistics decisions Implement the strategy, setting the conditions for lower levels of logistics decisions Monitor actual performance, look for ways to CI, update strategies & give feedback Monitor actual performance, look for ways to CI, update strategies & give feedback June 27, 2016 79

80. Implementing the Strategy It means translating the general or long-term (strategic) aims of the strategy into lower decisions (tactical / operational). It entails doing what is necessary to achieve the aims of the strategy. So implementation shows the movement from the fairly vague aspirations (‘the best’, ‘world class’, ‘leaders’ etc) of the strategy to the nuts-and- bolts of how to move materials. June 27, 201680

81. Difficulties with Implementation It can be difficult to translate a poorly designed strategy into lower decisions. Vague concepts like ‘global leader’ are difficult to operationalize. It is also important to note that even properly designed strategies may be difficult to implement. This may be due to high costs or strain it will cause to the SC. Therefore, strategy designers need to have a clear enough view of operations i.e. ensure that it can be implemented, & that long-term plans lead to realistic tactical & operational decisions. The following are some common problems with implementing logistics strategy: June 27, 201681

82. Difficulties – Cont... People who design the strategies are not responsible for their implementation Strategies are badly designed, perhaps with the wrong aims or focus. It is impossible, or very difficult, to implement them properly. They do not take enough account of actual operations, perhaps because there were not broad enough discussions They are over-ambitious, or somehow not realistic. They ignore key factors, or emphasize the wrong features June 27, 201682

83. Difficulties – Cont... People only pay lip-service to supporting the strategies Enthusiasm for the strategies declines over time. One common mistake is to design a logistics strategy & then think about implementing it. To avoid this, think about implementation all the way through the design. This needs widespread participation in the design process, particularly from those most closely involved with implementation. To help devise a good strategy, the following are some important factors that can be used: June 27, 201683

84. Difficulties – Cont... An organizational structure that is flexible & allows innovation Formal procedures for translating the strategy into reasonable decisions at lower levels Effective systems to distribute information & support management decisions Open communications which encourage the free exchange of ideas Acceptance that strategies are not fixed, but continue to evolve over time Control systems to monitor progress June 27, 201684

85. Difficulties – Cont... Convincing everyone that the strategy is beneficial, so that they conscientiously play their part in implementation Developing an organizational culture that supports the strategy June 27, 201685

86. Areas of Decisions in Implementation Types of decision There are two types of strategic decisions - Those that set out the principles to work with -Those that show how the organization will achieve these principles E.g. If the principle is: ‘rapid delivery of customer orders’, a practical way of achieving it would be ‘building warehouses close to customers’ ‘rapid delivery of customer orders’, a practical way of achieving it would be ‘building warehouses close to customers’ ‘easy customer access’, - ‘using websites to collect orders’ would be a good means of doing it. ‘easy customer access’, - ‘using websites to collect orders’ would be a good means of doing it. June 27, 201686

87. June 27, 2016 Areas of Decisions – Cont... 2nd Tier Supplier 2nd Tier 3rd Tier First TierFIRMTier First Customer

88. Structure of the Supply Chain SC for a product consists of tiers of suppliers & customers. In practice, there are many variations on this basic model. E.g. few tiers to many tiers, simple flows to complex & convoluted networks. Different strategies lead to different types of SC. Thus, organizations should design appropriate structures for their SC i.e. decide the types of intermediaries, warehousing arrangements, work done in logistics centres, modes of transport, delivery speed etc June 27, 201688

89. Areas of Decisions – Cont... Location of facilities The structure of the SC sets the # of participants, including wholesalers, warehouses, logistics centres, and so on. The next question concerns the best location for each of these. Questions of location should be tackled very carefully as they have considerable impact over the long-term. Ownership & outsourcing When a company uses other companies to run its logistics (third party or contract logistics), its likely to reap enormous benefits. June 27, 201689

90. Areas of Decisions – Cont... Enabling practices Are the activities associated with a SC that allow it to work efficiently e.g. reliable information processing, use of JIT to reduce stocks, EDI to link partners etc. Though not necessarily core SC activities, they do ensure a smooth flow of materials to help the SC work as planned. Capacity To get a smooth flow of materials through the SC, each part should have an appropriate capacity. The overall capacity should match total demand, & the capacity of each part is matched, to avoid restrictive bottlenecks. June 27, 2016 90

91. Managing Change As the strategy evolves, the operations of the whole logistics function must adjust & move forward. These new practices affect everyone. Unfortunately, this presents a problem, as most of us do not really like changes. This is because changes need a lot of effort, forcing us to abandon old & familiar practices, learn new skills, new ways of doing things, & form new relationships. Change moves us from a reasonably predictable future to one with uncertainty & risk. Change is a normal part of business & failure to respond leads to the more flexible competitors gaining competitive advantage. June 27, 201691

92. Managing Change – Cont... Change must be managed, things must be done differently & people must be convinced that changes are both essential & beneficial. Getting this message across is the difficult part of change management. Organizations therefore need a champion, or change manager who has a vision to see how an organization can improve, & the ability to move it in the right direction. Unfortunately, this can be a traumatic journey, & organizations typically move through a series of stages: June 27, 201692

93. Managing Change – Cont... Denial – employees deny that there is need for change Denial – employees deny that there is need for change Defence – defending the current way of doing things & criticizing new proposals Defence – defending the current way of doing things & criticizing new proposals Discarding - beginning to move away from the old ways & towards the new ones Discarding - beginning to move away from the old ways & towards the new ones Adoption – using the new ways & accepting that they are beneficial Adoption – using the new ways & accepting that they are beneficial Integration – assuming the new ways are normal & using them naturally Integration – assuming the new ways are normal & using them naturally June 27, 201693

94. Rate of Change Some organizations change very quickly (BPR), while others change slowly (CI / Kaizen). June 27, 201694

95. Logistics Planning The objectives are to see how: Activities along the SC are planned – designing timetables to show when they will be done. Resources are controlled. Planning allows us face the future with some confidence, rather than descending into chaos. Planning the SC starts with the logistics strategy, which gives the overall aims. More details are added, and we get long-term plans which show how these aims will be achieved. These plans are, in turn, expanded with more details added. The following is the approach to planning logistics: June 27, 201695

96. Logistics Planning – Cont... Higher strategic decisions Strategic decisions for logistics Tactical decisions for logistics Operational decisions for logistics i June 27, 201696 Mission Corporate strategy Business strategy Functional strategy Logistics strategy Capacity plans Aggregate plans Master schedule Short-term schedules

97. Logistics Planning – Cont... The major levels of planning therefore are: Capacity plans, which make sure there is enough capacity to meet long-term demand. Aggregate plans, which give summaries of the work done in related activities, typically by month at each location. Master schedules, which show a detailed timetable for all activities, typically by week. Short-term schedules, which show detailed timetables for jobs and resources, typically by day. June 27, 201697

98. Capacity Planning The capacity of an operation is its maximum throughput in a specified time. Capacity planning is the determination of which level of capacity to operate at to meet customer demand in a cost-efficient manner. It is an important concept for logistics, as it sets the maximum amount of product that can flow through a SC and thus be delivered to final customers in a given time. Most organizations do not like to work at full capacity, as this puts pressure on resources and people. Instead they operate at a lower level that they can sustain over time. June 27, 2016 98

99. Capacity Planning – Cont... Consequently, there are different kinds of capacity: a) Designed capacity – max throughput of a SC that is working in ideal conditions with no disruptions or problems of any kind. In reality, you seldom find such ideal conditions, and a more realistic measure is the; b) Effective capacity – this is max throughput that can be sustained under normal conditions, and allows for disruptions, variations in performance, breakdowns, maintenance periods, and so on. c) Actual throughput – is normally lower than effective capacity. N/B: c/a = C.U.R June 27, 201699

100. Bottlenecks Not all parts of the SC have the same capacity. There is a part that limits the overall throughput, and this forms a bottleneck. This part of the SC works at full capacity, but other parts have spare capacity that is not used. Example The main bottling plant at Eldoret Soft drinks has a capacity of 80,000 litres per day, and works a seven-day week. It fills standard bottles of 750 ml, and these are passed to a packing area which can form up to 20,000 cases a day with 12 bottles each. The packing area works a five-day week. The cases are June 27, 2016100

101. Bottlenecks – Cont... taken to warehouses by a transport company whose 8 lorries can each carry 300 cases, and make up to 4 trips a day for 7 days a week. There are two main warehouses, each of which can handle up to 30,000 cases a week. Local deliveries are made from the warehouses by a fleet of small vans that can handle everything passed to them by the warehouse. Required: i.Find the capacity (bottles per week) of each of the five parts of the SC. ii.Determine the bottleneck and state how Eldoret bottling can increase capacity. June 27, 2016101

102. Bottlenecks – Cont... Capacity of a SC can only be increased by adding more capacity at the bottleneck. Unfortunately, you often see cases where this is not done. June 27, 2016102

103. Matching Capacity and Demand The aim of capacity planning is to match the available capacity of facilities to the demand put on them. Any mismatch can be expensive. If capacity < demand, bottlenecks restrict the movement of materials, and customer service declines. If capacity > demand, the organization can move all its materials but it has spare capacity underused resources. There is a standard approach to capacity planning that can be illustrated in the following example: June 27, 2016103

104. Matching – Cont... Hannah Samuel has a contract to deliver 100 computer systems a week to schools in Nyaribari Masaba. The system has customized software installed, which takes an hour to test before delivery. The testing is done by trained staff, who achieve an average efficiency of 75%. They work a single eight-hour shift five days a week, but could move to double shifts or have overtime at weekends. Required: How many testers should Hannah employ? June 27, 2016104

105. Matching – Cont... The main steps therefore in capacity planning find the resources needed, compare these with the resources available, and then look at alternative plans for overcoming any differences. More specifically: a)examine forecast demand and translate this into a capacity needed b)find the capacity available in present facilities c)identify mismatches between capacity needed and that available d)suggest alternative plans for overcoming any mismatch e)compare these plans and find the best f)implement the best and monitor performance June 27, 2016 105

106. Matching – Cont... Unfortunately, taking the steps in this straightforward sequence does not usually work. Why? there can be a huge number of potential plans to consider, and its impossible to look at them all in detail, there can be a huge number of potential plans to consider, and its impossible to look at them all in detail, difficult to compare the alternatives, as there may be competing objectives and non-quantifiable factors. difficult to compare the alternatives, as there may be competing objectives and non-quantifiable factors. A more realistic view replaces the single procedure with an iterative one i.e. design a plan & see how close it gets to achieving its objectives; if it performs badly, modify it to find improvements. In effect steps 4 & 5 are repeated until they give a reasonable solution. June 27, 2016 106

107. Adjusting Capacity One of the practical problems with capacity planning is how to match discrete capacity to continuous demand. demandCapacityTime June 27, 2016107

108. Adjusting Capacity – Cont... One of the three capacity strategies has to be used: a)More or less match capacity to demand, so that there is sometimes excess capacity and some times a shortage (Neutral Strategy). demand demandCapacityTime June 27, 2016108

109. Adjusting Capacity – Cont... b) Make capacity at least equal to demand by early expansion, which needs more investment in facilities and gives lower utilization (Reactive Strategy). demandCapacityTime June 27, 2016109

110. Adjusting Capacity – Cont... c) Only add capacity when the additional facilities would be fully used, which has lower investment and high utilization, but restricts throughput (Reactive Strategy). demandCapacityTime June 27, 2016110

111. Adjusting Capacity – Cont... Each of these strategies is best in different circumstances. Factors that encourage an early increase in capacity include high cost of shortages, widely variable demand, varying efficiency, and low cost of spare capacity. The main factor that encourages a delay before increasing capacity is the capital cost. Another concern is the size of the changes; few large increases or many smaller increases? Any change in capacity is likely to cause some disruption, so it might be better to have a few large increases rather than more smaller ones. June 27, 2016111

112. Short-term Adjustments to Capacity There are two ways of making short-term adjustments to capacity:  capacity management – adjusting capacity to match demand. This may be achieved through; changing the work pattern to match demand, employing part-time staff to cover peak demands, using outside contractors, renting or leasing extra facilities, adjusting the speed of working, rescheduling maintenance periods, making the customer do some work ( e.g. packing their own bags in supermarkets) e.t.c June 27, 2016112

113. Short-term Adjustments – Cont...  demand management - adjusting demand to match available capacity. This may be achieved by; vary the price, change the marketing effort, limit the customers served (demand specific ‘qualifications’), offer incentives to change demand patterns (e.g. off-peak travel rates), vary the lead time, use a reservation or appointment system, use stocks to cushion demand, change related products to encourage substitution (e.g. holiday destinations) etc. June 27, 2016113

114. Changing capacity over time So far we have assumed capacity is constant over time. In reality, the effective capacity of a SC can change quite markedly (could be due to short-term variations due to staff illness, interruptions, breakdowns, weather, enthusiasm of employees etc). There are, however, other more systematic changes in capacity like the effect of a learning curve. These systematic changes arise from: The more often something is repeated, the easier it becomes and the faster it is done. The more often something is repeated, the easier it becomes and the faster it is done. Aging equipments and facilities (can be slowed by preventive maintenance & rational replacement policies). Aging equipments and facilities (can be slowed by preventive maintenance & rational replacement policies). June 27, 2016 114

115. Example Euanito has recorded the costs of an automatic guided vehicle (AGV) that moves materials around an assembly hall. The longer the AGV works without maintenance, the higher are the expected failure costs (shown below). The maintenance also affects the resale value, giving a varying capital charge. Preventive maintenance can be done at a cost of $1000 and this brings the AVG back to new condition. What is the best time between maintenance periods? June 27, 2016115

116. Example – Cont... Months since maintenance012345 Cost of breakdown in month05015020016003000 Capital charge100200400500 8001200 June 27, 2016116

117. Tactical Planning These plans bridge the gap between longer term strategic plans and operational details. They show how the capacity will be used, and develop medium- term timetables for activities. Different names are used for this level of planning, but the most common are aggregate plans and master schedules. Aggregate planning takes the forecast demand for logistics and uses this to design plans for each type of activity for, typically, each of the next few months. Aggregate plans only look at families of activities and are not concerned with details. June 27, 2016117

118. Tactical Planning – Cont... They might show the # of cases moved through a logistics centre, but do not break this down into types of case or contents. Aggregate plans try to meet forecast demand, while using capacity as efficiently as possible. They typically aim at low costs, high customer service, stable throughput, full utilization of resources and so on. To achieve this, they can adjust the values of several variables e.g. change the # of employees, hours worked, amounts of stock, amount subcontracted, and so on. June 27, 2016118

119. Tactical Planning – Cont... The Master schedule adds details to aggregate plans by giving timetables for activities, typically for each week. Its aim is to achieve the activities described in aggregate plans as efficiently as possible. The overall approach of tactical planning can follow the general capacity procedure discussed earlier: More specifically: a)translate forecasts and other information into a demand for resources b)find the resources currently available c)identify mismatches between resources needed and available June 27, 2016119

120. Tactical Planning – Cont... d) suggest alternative plans for overcoming any mismatches e) compare these plans and find the best f) implement the best and monitor performance Remember that steps d, e & f are usually repeated until a reasonable solution is found. Example: HopHopi Coaches plan their capacity in terms of ‘coach-days’. They classify their business as either ‘full day’, which are long distance journeys, or ‘half day’ which are shorter runs. Forecasts show expected annual demands for the next two years June 27, 2016120

121. Tactical Planning – Cont... to average 400,000 full-day passengers and 750,000 half-day passengers. HopHopi have 61 coaches, each with an effective capacity of 40 passengers a day for 300 days a year. Breakdowns and other unexpected problems reduce efficiency to 90%. They employ 86 drivers who work an average of 220 days a year, but illness and other absences reduce their efficiency to 85%. If there is a shortage of coaches the company can buy extra ones for $ 110,000 or hire them for $ 100 a day. If there is a shortage of drivers they can recruit extra ones at a cost of $20,000 a year, or hire them from an agency for $110 a day. June 27, 2016121

122. Tactical Planning – Cont... Required: How can the company approach its tactical planning? Approach the problem using the first five steps of the six-step procedure outlined above. June 27, 2016122

123. Generating alternative plans There are many ways of generating alternative plans, ranging from simple intuition through to sophisticated mathematical models. The most appropriate depends on several factors, key being the balance between the cost of planning and the expected benefits. The following are some of the most common methods for generating plans: 1.Negotiations – get the support of all the people most closely concerned. 2.Adjust previous plans – update them in light of current circumstances. 3.Other intuitive methods – use skills, knowledge and experience of the planners. June 27, 2016 123

124. Generating – Cont... 4. Graphical methods – try to match cumulative demand to cumulative supply 5. Spreadsheet calculations – enables ‘what-if’ analyses to be performed. 6. Simulation – imitate real operations over some typical period. 7. Expert systems – computers duplicate the methods of skilled planners. 8. Mathematical models – for optimal solutions. June 27, 2016124

125. Short-term Schedules They give detailed timetables for jobs, people, materials, equipment and all other resources. They give the sequence of activities, and the times they should be done. !!! The aim of these schedules is to organize the resources needed for the master schedule, giving low costs, high utilizations, or achieving some other measure of performance. June 27, 2016125

126. Approach to Scheduling Consider a scheduling problem in terms of a set of jobs waiting to use equipment. The master schedule shows when jobs have to be finished, so the short- term schedules must take this dates into account. There are two ways of doing this: i) Backward scheduling, where schedulers know when a job has to be finished. They can work back through all the activities to find the date when the job must be started. ii) Forward scheduling, where schedulers know when a job can start. They can work forward through all activities to find the date when the job will be finished. June 27, 2016126

127. Scheduling Rules a) First come, first served: most obvious scheduling rule and simply takes jobs in the order they arrive. It assumes no priority, no urgency, or any other measure of relative importance. Its drawback is that urgent jobs may be delayed while less urgent ones are being processed. b) Most urgent job first: assigns an importance, or urgency, to each job and they are processed in order of decreasing urgency e.g. hospitals. More important jobs have higher priority but low priority jobs wait for a longer time. June 27, 2016127

128. Rules – Cont... c) Shortest job first: a useful objective is to minimize the average time spent in the system, where time in the system = processing time + waiting time time in the system = processing time + waiting time It allows jobs that can be done quickly to move on through the system, while longer jobs are left until later. d) Earliest due date first: this sorts jobs into order of delivery date, and the ones that are due earliest are processed first. This has the benefit of minimizing the maximum lateness of jobs, but again some jobs may wait a long time. June 27, 2016128

129. Example ZYX Transport has to schedule the following six jobs for a heavy lift crane (n jobs on one machine). How can it design a reasonable schedule? JobsABCDEF Duration (days)12 8 416210 Target completion12404448420 June 27, 2016129

130. Transportation Management Transportation is an indicator which measures the economic, social and commercial progress of a country. It has transformed the entire world into one organization and greatly contributed to the evolution of civilization. It is the most visible element of logistics operation and thus takes a significant share in overall logistical cost of the firm and needs a great deal of planning to control it. June 27, 2016130

131. TM – Cont... Transportation is about the movement of products from where they are (origin) to where they need to be (destination). Those that study transportation refer to this movement as providing place and time utility. That is, transportation adds value to the customer. It is the addition of this value that represents the goals and objectives of the customer. utility. That is, transportation adds value to the customer. It is the addition of this value that represents the goals and objectives of the customer. Management is about the control of the resources used to provide transportation to achieve goals and objectives. June 27, 2016131

132. TM – Cont... e-commerce has had a major effect on organizations’ logistics. Its used to give product description (website), send orders, arrange payments – but transport is still needed to deliver the product (tangibles). Intangibles such as information, music, software e.t.c. can be delivered by the website. At the heart of logistics are transport vehicles moving goods between suppliers and customers. This topic focuses on the movement of product. That is, we are discussing freight and not passenger transportation. June 27, 2016132

133. TM – Cont... Transportation derives from demand, it is tangible. One can touch the shipment, the container in which it may ride, the truck upon which the container may be placed, the roadway on which the truck rides. That is, transportation is provided through a combination of infrastructure (e.g., roadways, rail tracks, ports and harbors) and equipment (e.g., trucks and trailers, locomotives and railway cars, container-handling equipment). June 27, 2016133

134. Transport Rate Rate or tariff is the price of moving a unit of material between locations in cases where organizations use third-party transport. It is set by the cost of the service provided, value to the customer, the distance moved, weight, size and value of goods, complexity of journey, and so on. Although important, service users have little influence in setting this rate. However, they can influence through choice of mode of transport to use. June 27, 2016134

135. Mode of Transport Describes the type of transport used. There are basically five different options – rail, road, water, air and pipeline. Each mode has different xtics, and the best in any particular circumstances depends on the type of goods to be moved, locations, distance, value and so on. RAIL Most commonly used for heavy and bulky loads over long land journeys. Trains can maintain a consistent, reasonably high speed, and can link with other modes to carry containers and bulk freight. Rail services are organized in different ways. June 27, 2016135

136. Mode – Cont... They are almost invariably public carriers (giving a service to all other organizations) rather than private carriers (carrying goods for one organization). This public service is often considered so important that it is run by the state. Even when the rail service is not nationalized, it is allowed a (near) monopoly. Advantages of rail  Very high capacity and low unit costs, thus discouraging competition.  Unit transport cost is low, so that it can be used to move large volumes of relatively low-priced materials June 27, 2016136

137. Disadvantages of rail  Inflexibility – all train services have to be timetabled in advance, so that they can all fit onto the same tracks. This leaves little flexibility for last minute or emergency deliveries.  Trains can only travel along specified routes between fixed terminals, and cannot stop at intermediary points.  Limited access – it can be overcome by locating facilities near to rail terminals, build a special rail line to your facility, use intermodal transport. June 27, 2016137

138. Road Most widely used and is used – at least somewhere – in almost all supply chains. Advantages of road  Flexibility – able to visit almost all locations.  Despite limited maximum speed on roads, ability to give door-to-door service avoids transfers to other modes and gives a shorter overall journey time.  Vehicles can go on journeys at short notice and do not have to keep rigid timetables.  Road transport is characterized by a large # of carriers working in the same areas. Thus, competition is likely to be more intense and pricing more flexible. June 27, 2016138

139. Disadvantages of road  Weight and size limits – road transport is more likely to be used for delivering finished goods than bulky raw materials  Lorries are particularly vulnerable to congestion and traffic delays.  e.t.c June 27, 2016139

140. Water There are basically three types of water transport:  Rivers and canals - usually called inland waterways and are associated with smaller loads, perhaps narrow boats.  Coastal shipping – moving materials from one port to another along the coast  Ocean transport – across the major seas Advantages of water  Most supply chains use shipping to cross the oceans at some point, and over 90% of world trade is moved by sea.  Ships get considerable economies of scale, and thus can move big loads at low unit costs. June 27, 2016 140

141. Disadvantages of water  Inflexible – limited to appropriate ports  Relatively slow  Needs time to consolidate loads and transfer them at ports.  Conference services – all carriers in a given area agree to charge a common price and regulate the frequency of their service. June 27, 2016141

142. Air Passengers account for most airline business. Airlines also carry a significant amount of freight, for products where speed of delivery is more important than cost. In practice, this limits airfreight to fairly small amounts of expensive materials. Perhaps the most common movements are documents and parcel delivery. There are three main types of operation:  Regular service – major airlines use the cargo space in passenger aircraft that is not needed for baggage.  Cargo service – operators run cargo planes on regular schedules. These are public carriers, moving goods for any customers. June 27, 2016 142

143. Air – Cont...  Charter operations – a whole aircraft is hired for a particular delivery. Disadvantages of air  Transfer of materials to and from facilities located around major airlines take time and can reduce the benefits of air travel.  Expensive June 27, 2016143

144. Pipeline The main uses of pipelines are oil and gas together with utilities of water and sewage. Advantages of pipeline  Moves large quantities over long distances.  Cheapest way of moving liquids Disadvantages of pipeline  Slow - typically moving at less than 10km per hour  Inflexible – only transporting between fixed points  Only carries large volumes of certain types of fluids  Huge initial investment. June 27, 2016144

145. Choice of mode Depends on the following factors amongst others:  Nature of materials to move, the volume and distance.  Value of materials, as expensive items raise inventory costs and encourage faster modes  Importance, as even low-value items that would hold up operations need fast, reliable transport  Transit times, as operations that have to respond quickly to changes cannot wait for critical supplies using slow transport  Reliability, with consistent delivery often being more important than transit time June 27, 2016145

146. Choice – Cont...  Cost and flexibility to negotiate rates  Reputation and stability of carrier  Security, loss and damage  Schedules and frequency of delivery  Special facilities available June 27, 2016146

147. Intermodal transport Refers to journeys that involve two or more different modes of transport. The aim is to combine the benefits of several separate modes, but avoid the disadvantages of each. The main problem is that each transfer causes delays and adds costs for extra handling. Intermodal transport only works if this transfer can be done efficiently. June 27, 2016147

148. Ownership of transport Is it better for an organization to run its own transport fleet, to use public transport, or a combination of the two? With transport the more common terms are in-house or own account transport compared with third-party transport. Own account transport This has an organization using its own transport fleet to move its materials. This has the advantage of flexibility, greater control, closer integration of logistics and easier communications. Transport can be tailored to the organization’s needs, with the best type of vehicles, fleet size, delivery schedule, customer service and so on. June 27, 2016 148

149. Ownership – Cont... -Own account transport can be expensive and an organization should only run its own fleet when its cheaper than using a specialist third-party carrier. -There are, however, potential cost savings as there is less pressure for transport to make a profit, possible tax advantages, and development grants. -There are intangible benefits, such as the marketing benefits of vehicles painted in identifiable livery and impression of reliability and long-term dependability. -Only large organizations can afford the huge capital investment and costs of running their own fleet. June 27, 2016149

150. Third-party carriers Offer a range of services to other organizations. The advantage of this arrangement is that specialized companies run the transport, leaving the organization to concentrate on its core operations. Benefits: Better services – because of skills and expertise Better services – because of skills and expertise Cheaper than own account transport – economies of scale Cheaper than own account transport – economies of scale Operational benefits – plan for vehicles to be loaded as they make return journeys Operational benefits – plan for vehicles to be loaded as they make return journeys June 27, 2016150

151. Choice of ownership There are several factors to consider when choosing the best type of ownership: Operating cost – there should be significant other benefits before an organization moves away from their cheaper option. Operating cost – there should be significant other benefits before an organization moves away from their cheaper option. Capital costs – capital is always scarce, hence the need to justify own account transport Capital costs – capital is always scarce, hence the need to justify own account transport Customer service – must use transport that provides acceptable customer service in the best possible way Customer service – must use transport that provides acceptable customer service in the best possible way Control Control Flexibility – quick adjustments to allow changing circumstances Flexibility – quick adjustments to allow changing circumstances June 27, 2016151

152. Choice – Cont... Management skills – are there specialized skills for transport mgt? Management skills – are there specialized skills for transport mgt? Recruitment and training – road transport is labour intensive Recruitment and training – road transport is labour intensive June 27, 2016152

153. Other services Other firms offer specialized services e.g. Common carriers – as we have seen, move materials between two points for any customer Common carriers – as we have seen, move materials between two points for any customer Contract carriers – offer transport services, but usually for a longer time. They set aside some facilities and dedicate them to the organization for the period stipulated in the contract. Contract carriers – offer transport services, but usually for a longer time. They set aside some facilities and dedicate them to the organization for the period stipulated in the contract. Intermodal carriers – they look after all aspects of a journey between two specified points Intermodal carriers – they look after all aspects of a journey between two specified points Terminal services – transfers from one mode to the other may be done at ports, airports, container bases, which are run by separate organizations Terminal services – transfers from one mode to the other may be done at ports, airports, container bases, which are run by separate organizations June 27, 2016153

154. Other services – Cont... Freight forwarders – collect relatively small loads, and consolidate them into bigger loads travelling between the same points Freight forwarders – collect relatively small loads, and consolidate them into bigger loads travelling between the same points Brokers – act as intermediaries between customers and carriers. They find best routes, negotiate conditions. Brokers – act as intermediaries between customers and carriers. They find best routes, negotiate conditions. Agents – local people giving a local presence to distant carriers and acting as intermediaries between them and local customers Agents – local people giving a local presence to distant carriers and acting as intermediaries between them and local customers Parcel services – similar to post office, as they deliver small packages to any location. Parcel services – similar to post office, as they deliver small packages to any location. June 27, 2016154

155. ROUTING VEHICLES A basic routing problem looks for the best path for a delivery vehicle around a set of customers. There are many variations on this problem, all of which are notoriously difficult to solve. This can be seen in the basic ‘travelling salesman problem’. The following list suggests some specific methods that have been proposed: 1.Negotiations – with people affected. 2.Adjust previous plans 3.Other intuitive methods – use skills, knowledge and experience of the routers, who typically use a series of heuristic rules (e.g savings matrix method, sweep method e.t.c) and have been successful in the past. June 27, 2016 155

156. Routing - Cont... 4. Maps 5. Spreadsheet calculations 6. Simulation 7. Expert systems 8. Mathematical models There is a lot of standard software for tackling routing problems, such as Paragon, CAST and Optrack. June 27, 2016156

157. Example: Savings Matrix Method The farmer Association distributes fodder and other supplies from a depot to six farms (customers). The customers’ demand varies from day to day. Daily route planning therefore has to be carried out in order to manage efficient distribution with a ltd # of vehicles. A distribution vehicle can carry 12 tons of fodder. For a specific day the distribution vehicle shall deliver the following quantities to the six farms: June 27, 2016157

158. Example – Cont... FarmQuantity (tons) 11.2 11.2 22.0 22.0 31.8 31.8 41.5 41.5 52.5 52.5 62.0 62.0 Distances in kilometres (km) between the depot and farms are: June 27, 2016158

159. Example – Cont... Depot Farm Farm Farm Farm Farm Farm 1 2 3 4 5 6 1 2 3 4 5 6 Depot - Farm 1 27 - Farm 2 15 21 - Farm 3 24 51 34 - Farm 4 27 39 18 30 - Farm 5 28 27 13 41 14 - Farm 6 29 12 14 53 29 10 Required: Using the savings matrix method, determine a route schedule for Farmer Association. June 27, 2016159

160. Step 3: Savings Matrix Farm Farm Farm Farm Farm Farm Farm Farm Farm Farm Farm Farm 1 2 3 4 5 6 1 2 3 4 5 6 Farm 1 0 Farm 2 21 0 Farm 3 0 5 0 Farm 4 15 24 21 0 Farm 5 28 30 11 41 0 Farm 6 44 30 0 27 47 0 June 27, 2016160

161. Assignment 1 Find a particular product whose supply chain is easy to study, such as petrol, a telephone service, cars, a restaurant chain, a computer game e.t.c. Discuss the amount of integration in the supply chain. What alternatives are there for integration? See if different organizations making similar products have the same approach, and explain any differences. Say why the existing patterns of logistics have developed, and discuss the benefits of this level of integration. Due on 30 th March 2010 Excuses will be disregarded June 27, 2016161

162. Assignment 2 The following amount of goods is to be delivered from a distribution centre to eight customers. The same type of good is delivered to all customers. Customer Quantity (tons) Customer Quantity (tons) 1 3 2 2 3 1 4 6 5 2 615 7 5 8 4 June 27, 2016162

163. Assignment 2 – Cont... Deliveries are made by three vehicles with the following capacities: Vehicle Max load (tons)Max Operating time (min/day) A 9200 A 9200 B 9200 B 9200 C12200 C12200 June 27, 2016163

164. Assignment 2 – Cont... Transport time (one way in minutes) between the distribution centre and customers are: Customer DC 1 2 3 4 5 6 7 8 DC 1 2 3 4 5 6 7 8 DC0 Customer 1 20 0 Customer 2 28 48 0 Customer 3 30 23 31 0 Customer 4 32 33 60 56 0 Customer 5 40 60 32 63 51 0 Customer 6 45 65 17 48 74 41 0 Customer 7 47 27 75 50 50 86 85 0 Customer 8 53 73 34 65 75 26 23 99 0 June 27, 2016164

165. Assignment 2 – Cont... Required: Determine a route schedule using the savings matrix method, i.e. determine which vehicle shall visit what customers and in what sequence. Also specify how much the respective vehicle is used (in minutes). Due on 30 th March 2010 Excuses will be disregarded By Michael K. Chirchir & Salome Richu 165