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Logistics PPS5 Topic 2.

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1 Logistics PPS5 Topic 2

2 http://www.google.co.za/imgres?imgurl=http://www.packandtrackltd.co.uk/images/Logistics/logistics.jpg&imgrefurl=http://www.packandtrackltd.co.uk/Logistics.html&usg=__XQNmi6sMWgzhvDOKLoPVmN0xSYQ=&h=310&w=330&sz=65&hl=en&start=0&tbnid=a-HZeZS6V41wrM:&tbnh=167&tbnw=208&prev=/images%3Fq%3Dlogistics%26um%3D1%26hl%3Den%26sa%3DN%26rlz%3D1T4RNSN_enZA388ZA388%26biw%3D1003%26bih%3D500%26tbs%3Disch:1&um=1&itbs=1&iact=hc&vpx=528&vpy=226&dur=797&hovh=218&hovw=232&tx=98&ty=139&ei=P-JWTPKeBNOSjAeW4OTDBA&page=1&ndsp=8&ved=1t:429,r:6,s:0 Logistics management

3 LEARNING UNIT OBJECTIVES http://www.google.co.za/imgres?imgurl=http://www.packandtrackltd.co.uk/images/Logistics/logistics.jpg&imgrefurl=http://www.packandtrackltd.co.uk/Logistics.html&usg=__XQNmi6sMWgzhvDOKLoPVmN0xSYQ=&h=310&w=330&sz=65&hl=en&start=0&tbnid=a-HZeZS6V41wrM:&tbnh=167&tbnw=208&prev=/images%3Fq%3Dlogistics%26um%3D1%26hl%3Den%26sa%3DN%26rlz%3D1T4RNSN_enZA388ZA388%26biw%3D1003%26bih%3D500%26tbs%3Disch:1&um=1&itbs=1&iact=hc&vpx=528&vpy=226&dur=797&hovh=218&hovw=232&tx=98&ty=139&ei=P-JWTPKeBNOSjAeW4OTDBA&page=1&ndsp=8&ved=1t:429,r:6,s:0 Explain how logistics management encompasses physical distribution; Define “logistics management”; Explain the objectives of logistics; Indicate where total logistics cost can be reduced; Illustrate the various aspects that determine customer service; Reason about the trade-offs between reduced costs and increased customer service; Explain order processing and information systems as activities of logistics management; Discuss the modes of transport and the factors that influence the selection of transport modes; Explain “inventory management”; Discuss warehousing as a logistics activity; Discuss material handling as a logistics activity; Explain the concept of “integrated logistics”; Assess how logistics contribute to healthy brand practice Explain how logistics management encompasses physical distribution; Define “logistics management”; Explain the objectives of logistics; Indicate where total logistics cost can be reduced; Illustrate the various aspects that determine customer service; Reason about the trade-offs between reduced costs and increased customer service; Explain order processing and information systems as activities of logistics management; Discuss the modes of transport and the factors that influence the selection of transport modes; Explain “inventory management”; Discuss warehousing as a logistics activity; Discuss material handling as a logistics activity; Explain the concept of “integrated logistics”; Assess how logistics contribute to healthy brand practice

4 Distribution vs Logistics http://www.google.co.za/imgres?imgurl=http://www.packandtrackltd.co.uk/images/Logistics/logistics.jpg&imgrefurl=http://www.packandtrackltd.co.uk/Logistics.html&usg=__XQNmi6sMWgzhvDOKLoPVmN0xSYQ=&h=310&w=330&sz=65&hl=en&start=0&tbnid=a-HZeZS6V41wrM:&tbnh=167&tbnw=208&prev=/images%3Fq%3Dlogistics%26um%3D1%26hl%3Den%26sa%3DN%26rlz%3D1T4RNSN_enZA388ZA388%26biw%3D1003%26bih%3D500%26tbs%3Disch:1&um=1&itbs=1&iact=hc&vpx=528&vpy=226&dur=797&hovh=218&hovw=232&tx=98&ty=139&ei=P-JWTPKeBNOSjAeW4OTDBA&page=1&ndsp=8&ved=1t:429,r:6,s:0 Logistics management – inbound and outbound Physical distribution – what happens with outbound goods only Logistics management – inbound and outbound Physical distribution – what happens with outbound goods only

5 Materials supply Materials management Physical distribution Suppliers Inbound logistics Suppliers Inbound logistics Manufacturing Scheduling, order processing, materials handling etc. Manufacturing Scheduling, order processing, materials handling etc. Field inventory Outbound logistics Field inventory Outbound logistics CUSTOMER Logistics Logistics and physical distribution

6 Physical distribution What happens with outbound goods as they move from the organisation (M) to its Cs. All activities re flow of these materials, components, finished goods

7 Materials supply Materials management Physical distribution Suppliers Inbound logistics Suppliers Inbound logistics Manufacturing Scheduling, order processing, materials handling etc. Manufacturing Scheduling, order processing, materials handling etc. Field inventory Outbound logistics Field inventory Outbound logistics C C Logistics Logistics and physical distribution

8 Materials supply Materials management Physical distribution Suppliers Inbound logistics Suppliers Inbound logistics Manufacturing Scheduling, order processing, materials handling etc. Manufacturing Scheduling, order processing, materials handling etc. Field inventory Outbound logistics Field inventory Outbound logistics C C Logistics Logistics and physical distribution STRATEGIC ISSUES I.E. TOMWI PLUS STRATEGIC ISSUES I.E. TOMWI Transportation; Order processing (including information systems); Materials handling; Warehousing; Inventory management.

9 The logistics process Raw materials supplier Manufacturer Wholesaler Retailer Customer Transport

10 Objectives of logistics Costs decrease Happy customers Improve profitability Improve competitive performance Two key objectives: Inversely related to one another – cannot accomplish both optimally – trade off between the 2 categories

11 Decreasing total logistics costs 1.Order processing and admin costs – writing, receiving acknowledgement and processing 2.Inventory related costs –in transit, in storage or WIP 3.Transportation costs – vary depending on mode of transport used, product and size Trade off between the various cost factors

12 Improving customer service 1.Order lead time 2.Dependability 3.Convenience 4.Inventory availability 5.Factors that influence customer service levels C expectations and reaction to stock out … Cost-income trade-off Competitors’ level of C-service

13 Tradeoffs between cost and C-service 100% Investment in inventory Service level

14 Objectives of logistics -Order processing costs -Inventory-related costs -Transportation costs -Order processing costs -Inventory-related costs -Transportation costs Increasing customer service Decreasing total logistics costs Customer service performance levels: -Order lead time -Dependability -Convenience -Inventory availability Customer service performance levels: -Order lead time -Dependability -Convenience -Inventory availability Factors that influence customer service levels: -Customer’s expectations and reactions -Trade-offs -Competitors Factors that influence customer service levels: -Customer’s expectations and reactions -Trade-offs -Competitors

15 Trade-off decisions when determining logistics objectives Reducing total logistics costs Increasing customer service Reduce inventory levels Use cheaper (but slower) forms of transport Reduce unnecessary duplication of information Increase inventory levels Ensure quicker delivery (but by using more expensive transport) Provide enough information to satisfy customers in the process vs

16 GROUP ACTIVITY ENTERPRISE RENT A CAR CASE STUDY TNT CASE STUDY

17 ACTIVITIES OF LOGISTICS 1. ORDER PROCESSING INFORMATION SYSTEMS 2. TRANSPORT 3. INVENTORY MANAGEMENT W 4. WAREHOUSING M 5. MATERIAL HANDLING

18 INFORMATION SYSTEMS Most Shoprite stores linked by satellite to a central database and replenishment system Every 15 minutes management knows of every sale made in that period

19 Activities of logistics Order processing Transportation Inventory management Warehousing Materials handling Task of order processing: -Order entry - Order handling - Order delivery Information systems: EDI (electronic data interchange) Task of order processing: -Order entry - Order handling - Order delivery Information systems: EDI (electronic data interchange) Modes of transport: -Rail - Road - Air - Pipeline - Water - Intermodal Selection factors: -Cost - Time - Access - Capability - Frequency - Reliability Modes of transport: -Rail - Road - Air - Pipeline - Water - Intermodal Selection factors: -Cost - Time - Access - Capability - Frequency - Reliability Objectives: -Reorder point - EOQ - JIT - ABC analysis Objectives: -Reorder point - EOQ - JIT - ABC analysis Functions: -Receiving goods - Sorting goods - Storage of goods - Filling the order - Dispatching Decisions: -How many - Types - Location Functions: -Receiving goods - Sorting goods - Storage of goods - Filling the order - Dispatching Decisions: -How many - Types - Location Objectives: -Lowest cost - Max capacity - Minimum handling costs - Safety - Quality service Equipment Objectives: -Lowest cost - Max capacity - Minimum handling costs - Safety - Quality service Equipment

20 1. ORDER PROCESSING Customer Credit department Manufacturing Warehouses Order handling Order entry Suppliers Checks, Credit, Terms etc. Place orderConfirmation, Billing Order delivery

21 EDI Electronic data interchange -Transport planning -Order processing -Production planning -Inventory levels -Account management

22 EDI - advantages -Increased internal and external productivity (faster feedback; shorter lead times) -Improved channel relationships -Increased market opportunities -Increased accuracy -Decreased paperwork and operating costs

23 2. TRANSPORTATION

24 MODES OF TRANSPORT RAIL ROAD AIR PIPELINES WATER INTERMODAL

25 Factors in selecting modes of transport Cost Time Accessibility Capability Frequency Reliability Cost Time Accessibility Capability Frequency Reliability You want to get to the Congo with your family ….

26 3. Inventory management

27

28 Issues: 1.When to order (reorder point) 2.How much to order (economic order quantity)

29 Reorder point Look at: 1.Order lead time 2.Usage rate 3.Safety stock Reorder point = (Order lead time x usage rate) + safety stock Other factors influencing reorder point: 1.Variance of order lead time 2.Fluctuations in C- demand 3.C-service standard Other factors influencing reorder point: 1.Variance of order lead time 2.Fluctuations in C- demand 3.C-service standard

30 Order lead time = 5 days Usage rate = 200 units per day Safety stock = 300 units What would the reorder point of certain stock item be?

31 Order lead time = 5 days Usage rate = 200 units per day Safety stock = 300 units What would the reorder point of certain stock item be? 200 Safety stock = 300 units that must lie there. = 1000 units

32 Order lead time = 5 days Usage rate = 200 units per day Safety stock = 300 units What would the reorder point of certain stock item be? 200 Safety stock = 300 units that must lie there. = 800 units

33 Order lead time = 5 days Usage rate = 200 units per day Safety stock = 300 units What would the reorder point of certain stock item be? 200 Safety stock = 300 units that must lie there. = 600 units

34 Order lead time = 5 days Usage rate = 200 units per day Safety stock = 300 units What would the reorder point of certain stock item be? 200 Safety stock = 300 units that must lie there. = 400 units

35 Order lead time = 5 days Usage rate = 200 units per day Safety stock = 300 units What would the reorder point of certain stock item be? 200 Safety stock = 300 units that must lie there. = 200 units

36 Order lead time = 5 days Usage rate = 200 units per day Safety stock = 300 units What would the reorder point of certain stock item be? Safety stock = 300 units that must lie there. = 0 units

37 Order lead time = 5 days Usage rate = 200 units per day Safety stock = 300 units What would the reorder point of certain stock item be? 200 Safety stock = 300 units that must lie there. = 1000 units 1000 Days

38 Order lead time = 5 days Usage rate = 200 units per day Safety stock = 300 units What would the reorder point of certain stock item be? 200 Safety stock = 300 units that must lie there. = 800 units 1000 Days

39 Order lead time = 5 days Usage rate = 200 units per day Safety stock = 300 units What would the reorder point of certain stock item be? 200 Safety stock = 300 units that must lie there. = 600 units 1000 Days

40 Order lead time = 5 days Usage rate = 200 units per day Safety stock = 300 units What would the reorder point of certain stock item be? 200 Safety stock = 300 units that must lie there. = 400 units 1000 Days

41 Order lead time = 5 days Usage rate = 200 units per day Safety stock = 300 units What would the reorder point of certain stock item be? 200 Safety stock = 300 units that must lie there. = 200 units 1000 Days

42 Order lead time = 5 days Usage rate = 200 units per day Safety stock = 300 units What would the reorder point of certain stock item be? 200 Safety stock = 300 units that must lie there. = 1000 units

43 Order lead time = 5 days Usage rate = 200 units per day Safety stock = 300 units What would the reorder point of certain stock item be? Reorder point = (order lead time x usage rate) + safety stock = (5 x 200) + 300 = 1 300 units

44 Order lead time = 5 days Usage rate = 200 units per day Safety stock = 300 units What would the reorder point of certain stock item be? Reorder point = (order lead time x usage rate) + safety stock = (5 x 200) + 300 = 1 300 units What would the inventory stock level be if the supplier delivers one day late?

45 Order lead time = 5 days Usage rate = 200 units per day Safety stock = 300 units What would the reorder point of certain stock item be? Reorder point = (order lead time x usage rate) + safety stock = (5 x 200) + 300 = 1 300 units What would the inventory stock level be if the supplier delivers one day late? 100 units

46 Order lead time = 5 days Usage rate = 200 units per day Safety stock = 300 units What would the reorder point of certain stock item be? Reorder point = (order lead time x usage rate) + safety stock = (5 x 200) + 300 = 1 300 units What would the inventory stock level be if the supplier delivers one day late? 100 units Be able to sketch graph on page 187

47 Economic ordering quantity

48 Cost Quantity Total costs Carrying costs Order processing costs EOQ

49 =2DO/IC D = annual demand in units O = cost of placing order I = inventory carrying cost as percentage of annual inventory investment C = cost of one unit of the product = quantity whether the sum of the inventory carrying costs and the order processing costs are at a minimum

50 EOQ =2DO/IC Demand = 200 000 units = annual demand = D Cost of placing one ORDER = R200 per order = O Unit cost of the product = R25 = C Inventory carrying cost is 20% of the annual inventory investment = I

51 EOQ =2DO/IC Demand = 200 000 units = annual demand = D Cost of placing one ORDER = R200 per order = O Unit cost of the product = R25 = C Inventory carrying cost is 20% of the annual inventory investment = I EOQ = 2 x 200 000 x 200 25 x 0.2

52 EOQ =2DO/IC Demand = 200 000 units = annual demand = D Cost of placing one ORDER = R200 per order = O Unit cost of the product = R25 = C Inventory carrying cost is 20% of the annual inventory investment = I EOQ = 2 x 200 000 x 200 25 x 0.2 = 4 000 units per order placed

53 OPTIMAL AMOUNT OF ORDERS = ANNUAL DEMAND EOQ

54 OPTIMAL AMOUNT OF ORDERS = ANNUAL DEMAND EOQ = 200 000 4 000

55 OPTIMAL AMOUNT OF ORDERS = ANNUAL DEMAND EOQ = 200 000 4 000 = 50 ORDERS PER YEAR

56 Question: When would you have a higher reorder point than usual? - Unreliable suppliers - Huge variations in order lead time - Large fluctuations in C-demand Thus, have to increase safety stocks as well … increased inventory costs …

57 GROUP ACTIVITY Logistics management worksheet

58 Just in time - JIT Right products at the right quantities just when they are required. Information system

59 KANBAN Concept that implies that the organisation holds LOW inventory levels and NO SAFETY STOCK because carrying inventory tied up working capital.

60 KANBAN Coordination between producers and suppliers = essential … Deliveries are synchronised closely.

61 NB RE JIT: 1.Close relations between supplier and customer 2.Attention given to quality 3.Organisations must have adequate storing facilities 4.Organisations must have adequate transport options 5.Suppliers must deliver a reliable service 6.Short and reliable order lead times 7.Purchasing quantities are reduced

62 Advantages of having JIT: 1.Lower inventory levels = reduced stock holding cost 2.Low/ no safety stock levels = reduced stock holding cost 3.If organisation and supplier have good relationships … leads to higher quality (cannot send back due to time issue)

63 Disadvantages of having JIT: 1.Risk of running out of stock due to late deliveries SO – SELECTING SUPPLIERS ON FOLLOWING CRITERIA: a)Quality of goods they provide b)Their reliability c)Their capability d)Sound financial position e)Good location f)Stable labour force

64 ABC INVENTORY ANLYSIS Determine how important each item is for organisation. Small # of items responsible for large % investment Small # of items responsible for large % investment

65 ABC A A B B C C Most NB – 10% # items; 70% of capital investment in inventory 20% # items; 20% of capital investment in inventory 70% # items; 10% of capital investment in inventory

66 ABC A A B B C C Most NB – 10% # items; 70% of capital investment in inventory 20% # items; 20% of capital investment in inventory 70% # items; 10% of capital investment in inventory

67 Example The principle

68

69 Magical Menagerie The Magical Menagerie is a magical creature shop that in addition to selling magical creatures also offers advice on animal care and health. The shop is very cramped, noisy and smelly, due to every inch being covered with cages. Among the creatures in the Magical Menagerie are enormous purple toads, a firecrab, poisonous orange snails, a fat white rabbit that can turn into a silk top hat and back, cats of every colour, ravens, Puffskeins, and a cage of sleek black rats that play skipping games with their tails. Magical Menagerie The Magical Menagerie is a magical creature shop that in addition to selling magical creatures also offers advice on animal care and health. The shop is very cramped, noisy and smelly, due to every inch being covered with cages. Among the creatures in the Magical Menagerie are enormous purple toads, a firecrab, poisonous orange snails, a fat white rabbit that can turn into a silk top hat and back, cats of every colour, ravens, Puffskeins, and a cage of sleek black rats that play skipping games with their tails.

70 Inventory for Magical Menagerie (Diagon Alley, London) Inventory itemAnnual usage in PoundsPercentage of total inventory usage in Pounds Black cage£37,50031% White cage£12,00010% Copper cage£1,0001% Purple toad£6,5005% Firecrab£8001% Orange snail£1,2001% Magical rabbit£4,0003% Blue cat£6501% Black cat£45,00037% Ginger cat£1,0001% White cat£1,0001% Raven£7,9006% Snake£1,0001% Puffskein£6501% Rat£8501% Hamster£7001% £121,750 31 + 37 = 68%Top 70%of capital investment 10 + 5 + 6Next 20%of capital investment RestLast 10%of capital investment 2 out of 1613% 3 out of 1619% 11 out of 1668%

71 How to do it nicely

72 Inventory for Magical Menagerie (Diagon Alley, London) Inventory item Annual usage in Pounds Cumulative annual usage in Pounds % of total inventory usage in Pounds Cumulative % of total inventory usage in Pounds Black cat£45,000 37% Black cage£37,500£82,50031%68% White cage£12,000£94,50010%78% Raven£7,900£102,4006%84% Purple toad£6,500£108,9005%89% Magical rabbit£4,000£112,9003%93% Orange snail£1,200£114,1001%94% Copper cage£1,000£115,1001%95% Ginger cat£1,000£116,1001%95% White cat£1,000£117,1001%96% Snake£1,000£118,1001%97% Rat£850£118,9501%98% Firecrab£800£119,7501%98% Blue cat£650£120,4001%99% Puffskein£650£121,0501%99% Hamster£700£121,7501%100% £121,750

73 Understand graph on page 194

74 WAREHOUSING

75 Functions of warehouses Receiving goods Sorting goods Storage of goods Filling the order Dispatching of order

76 Warehousing decisions How many WH needed Types of WH required Location of WHs

77 Warehousing decisions: (1) Private warehouses For their own logistical ops Owned by any organisation (M, W, R) NB to have necessary resources and expertise Reasons for having: 1.Long time / term commitment 2.Special handling procedures 3.Want to control design and ops within the WH GOOD: sales are consistent & property value appreciate BAD: Fixed costs (insurance, debt, maintenance, taxes) & non-flexible (location)

78 Warehousing decisions: (1) Private warehouses For their own logistical ops Owned by any organisation (MANUFACTURER, WHOLESALER, RETAILER) NB to have necessary resources and expertise Reasons for having: 1.Long time / term commitment 2.Special handling procedures 3.Want to control design and ops within the WH GOOD: sales are consistent & property value appreciate BAD: Fixed costs (insurance, debt, maintenance, taxes) & non-flexible (location) Trend: own fewer private WHs --- product s must flow quicker from M to C (reducing inventory carrying costs)

79 Warehousing decisions: (2) Public warehouses Now owned but rented Include related distribution activities: receiving, unloading, inspecting goods, completing orders & financing. USEFUL:

80 Warehousing decisions: (2) Public warehouses Now owned but rented Include related distribution activities: receiving, unloading, inspecting goods, completing orders & financing. USEFUL: (1) seasonal products (2) low-volume storage needs (3) developing new markets (4) additional storage space if already have private (5) inventory levels to be maintained in many locations (6) specialise BENEFITS related to variable costs i.e. rent space, certain services, concurrent + FLEXIBILITY

81 Warehousing decisions: (3) Distribution centres Moving rather than storing … Large and automated … BENEFITS: C-service & product availability increased whilst order lead time = decreased Trends: (1) use of new technology = speed and efficiency (2) less inventory --- JIT and MRP (Materials Requirement Planning) (3) quality = NB (4) emphasis on SERVICE (5) MATERIALS HANDING

82 Materials handling

83 Materials handling equipment

84 Free-flowing equipment that moves on the ground Overhead materials handling equipment

85 Integrating Logistics Order processing Inventory management Transportation Warehousing Materials handling Pic: http://www.google.co.za/imgres?imgurl=http://kotaku.com/assets/resources/2007/05/wii.jpg&imgrefurl=http://kotaku.com/260840/canada-uses-wii-in-hospitals&usg=__Uk2Ojzm9fX3WGTIvKJ0uJFjGiuk=&h=918&w=1024&sz=103&hl=en&start=0&tbnid=Xc9KY1DeBLNCwM:&tbnh=111&tbnw=140&prev=/images%3Fq%3Dwii%26um%3D1%26hl%3Den%26rlz%3D1R2RNSN_enZA388%26biw%3D1003%26bih%3D539%26tbs%3Disch:1&um=1&itbs=1&iact=hc&vpx=249&vpy=215&dur=1344&hovh=213&hovw=237&tx=115&ty=123&ei=MgNZTKWKLM6WOJrv2cgJ&page=1&ndsp=16&ved=1t:429,r:7,s:0 TOMWI

86 Hmmm … Silo’s want to improve their own performance Purchasing manager: lower inventory levels = lower carrying costs Marketing manager: higher inventory levels = better C-service

87 Focus in past = internal single-organisation focus: -Value analysis -Process improvements -Standardisation -Technological improvements Focus in past = internal single-organisation focus: -Value analysis -Process improvements -Standardisation -Technological improvements Integrated logistics inside the organisation

88 Now: supply-chain focus: Cost management initiatives require logistics executives to adopt a series of initiatives that can have a positive impact on bottom line Now: supply-chain focus: Cost management initiatives require logistics executives to adopt a series of initiatives that can have a positive impact on bottom line Integrated logistics outside the organisation

89 Now: supply-chain focus: Cost management initiatives require logistics executives to adopt a series of initiatives that can have a positive impact on bottom line Now: supply-chain focus: Cost management initiatives require logistics executives to adopt a series of initiatives that can have a positive impact on bottom line Integrated logistics outside the organisation Two supply chain partners working together to identify process improvements to reduce costs across entire supply chain

90 Integrated logistics outside the organisation Partnership forms: 1.Cross-fx, cross-org teams 2.Shared projects 3.Info-sharing 4.Continuous inventory replenishment systems

91 Integrated logistics outside the organisation Partnership forms: Also: -Value-engineering efforts -Supplier development -Cross-org cost-reduction efforts -Joint new product development projects -Supply-chain redesign efforts

92 Integrated logistics outside the organisation Result

93 Integrated logistics outside the organisation Result Lead times reduced Improved C-service Manage chain based on C- responses If not done: have to M on sales forecasts … storing … inventory carrying costs …

94 GROUP EXERCISE American Swiss case study Review questions p204 La Mercy Case Study p205


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