1. Logistics

2. Chapter Objectives Be able to:
Describe why logistics is important and discuss the major decision areas that make up logistics.
List the strengths and weaknesses of the various modes of transportation and discuss the role of multimodal solutions.
Identify the major types of warehousing solutions and their benefits.
Discuss the purpose of a logistics strategy and give examples of how logistics can support the overall business strategy.
Calculate the percentage of perfect orders.
Calculate landed costs.
Explain what reverse logistics systems are, and some of the unique challenges they create for firms.
Use the weighted center of gravity method to identify a potential location for a business.
Develop and then solve, using Microsoft Excel’s Solver function, an assignment problem.
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3. Logistics
Planning, implementing, and controlling the efficient, effective flow and storage of goods and materials between the point of origin and the point of consumption

4. Why the Increasing Interest?
Deregulation
Globalization
Technological breakthroughs
Environmental concerns
Performance impact
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5. Deregulation Transportation providers Buyers have greater freedom BUT…
Elimination of artificial barriers
Unrestricted markets
Multimodal solutions
Price, schedule, and terms flexibility
Buyers have greater freedom
Negotiate prices, terms, and conditions
Ownership issues
BUT…
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6. Deregulation (continued)
… with greater freedom comes new responsibilities
Key point
Logistics has evolved from being a “tactical” area to a “strategic” one
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7. Globalization (Worldwide Statistics)
Year
Expenditures
% GDP
1997
$5,095 Billion
13.4%
2002
$6,732 Billion
13.8%
Change
+32%
+3%
What is driving this activity?
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8. Environmental Concerns
Even while certain aspects of logistics have been deregulated, other areas are being controlled more stringently
Fuel efficiency
Pollution
Recovery, recycling, and reuse of packaging, containers, and products
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9. Management Areas Transportation
Warehousing (and more generally, location)
Material handling
Packaging
Inventory management
Logistics information systems
(And some would put logistics service providers here as well!)
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10. Logistics Decision Areas
Transportation…
Modes
Formats
Pricing
Warehousing
Consolidation
Cross-Docking and Break-Bulk
Hub-and-Spoke
Inventory
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11. Major Transportation Modes
Highway (truck)
Water
Rail
Air
Pipeline
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12. Modal Shares of Shipments (within US, 1999/2002)
Mode
Value (%)
Tons (%)
Ton Miles (%)
Highway (trucking, parcel, postal, courier)
80.3/86.0
58.5/67.4
28.4/28.7
Water
2.5/1.1
11.1/11.1
20.4/13.6
Rail
4.8/3.7
11.2/16.1
26.7/36.8
Air
2.7/3.2
0.2/0.4
Pipeline
4.2/1.8
13.7/5.9
17.6/20.5
Multimodal/Unknown
5.6/5.6
5.5/5.5
6.8/6.8
Lots of other data from the US Department of Transportation at
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13. Highway Mode Strengths Weaknesses
Flexibility to pick up and deliver where and when needed
Often the best balance between cost/flexibility and delivery reliability/speed
Can deliver straight to the customer (increasing)
Can be available 24/7
Weaknesses
Not the fastest
Not the cheapest
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14. Water Mode Strengths Weaknesses Highly cost effective for bulky items
Works best for high weight-to-value items
Most effective when linked into multimodal system
Weaknesses
Limited locations
Relatively poor delivery reliability/speed
Often limited operating hours at docks
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15. Air Mode Strengths Weaknesses Quickest delivery over longer distances
Can be very flexible when linked to highway mode
Works best for low weight-to-value items
Weaknesses
Often the most expensive, particularly on a per pound basis
Grew 90.5% in value of goods shipped from 1993 to 2002
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16. Rail Mode Strengths Weaknesses
Highly cost effective for bulky items
Can be most effective when linked into multimodal system
Weaknesses
Limited locations, but better than for water.
Better delivery reliability/speed than water
Increasing part of multimodal solutions, dual tracks on major routes
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17. Question
How can businesses design solutions that exploit the strengths of each mode?
Lecturer can discuss trucking solutions like direct shipment, less than truckload (LTL), etc.

18. Technological Breakthroughs
Standardized containers for ease of transfer
“Roadrailers,” etc.
Multimodal solutions
Ship  Truck  Train  Truck  ?
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19. Multi-Modal Solutions (An example)
North Carolina’s Global TransPark
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20. Global TransPark
15,700 acres at full development with two parallel runways of 11,500 feet and 13,000 feet
Integrated air, rail, road, and nearby sea transportation capabilities
Free trade zone status
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21. Justification for Such a Facility
Shift from domestic to global economies
Emergence of just-in-time, flexible and agile manufacturing practices requiring sophisticated logistics solutions
The rapid growth of distribution via air freighters (roughly four times the growth rate of passenger service by the airlines)
The need to use air cargo, shipment by sea, and delivery by trucks and trains in an overall distribution system
The need for a commercial distribution hub in the Eastern United States that can reach more than 60 percent of the nation’s population overnight and also provide a gateway to global markets.
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22. Warehousing
Any operation that stores, repackages, stages, sorts, or centralizes goods or materials

23. New View Warehousing a key piece of logistics strategy
J. B. Hunt
Lowe’s
More than just storage
“Warehousing”  “Distribution Centers”
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24. Warehousing Benefits Economic benefits: Service benefits:
Accrue directly to company
Must consider total system costs
Service benefits:
Support customer service needs
May or may not reduce costs
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25. Consolidation
Tend to be near customers or source of products
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26. Example 1 Customer Shipment Weight Venetian Artist Supply
100 boxes, artist supplies
3,000 lbs.
Kaniko
100 PC printers
Ardent Furniture
10 dining room sets
4,000 lbs.
Dedicated truck from Los Angeles to Atlanta: $2,000
Cost to run consolidation warehouse: $9 per hundred-weight
Local delivery in Atlanta: $200 per customer
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27. Cost Benefits of Consolidated Warehousing
Warehousing costs
10,000 lbs × $9/100 lbs =
$900
Cost of one truck to Atlanta
$2,000
Delivery to final customer
3 customers × $200 =
$600
Total:
$3,500
How does this compare to the cost of separate dedicated shipments?
What about truck utilization (assume 3 trucks hold 60,000 lbs.)
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28. What about supply / demand mismatches?
Cross-Docking
Tend to be close to customers or source of products
What about supply / demand mismatches?
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29. Break-Bulk Like cross-docking, but usually refers to a single source
Tend to be close to customers
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30. Example 2 Manufacturer  Customers 500 lb. average order size
Direct shipments: $7.28 per hundred-wt. $7.28 × 5 = $36.40
> 20,000 lbs: $2.40 per hundred-wt.
Local delivery: $1.35 per hundred-wt.
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31. Insight: If we can run a warehouse for less than: we should do it.
5 × ($7.28 – $2.40 – $1.35) = $17.65/500 lbs. Or
$17.65 / 5 = $3.53 per hundred-weight
we should do it.
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32. Hub-and-Spoke Systems
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33. Postponement Coca Cola syrup Bulk food products, paints, etc.
 high volumes
 containers
Customer A
Customer B
Customer C
Postponement
Assembly,
Packaging,
Labeling, etc.
Minimizes risk
Minimizes inventory (how?)
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34. Warehousing Service Benefits:
Spot stock
Assortment

35. Spot Stock Region 1 Region 2 Region 3 Time sensitive, seasonal items
Often temporary, public storage
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36. Assortment
Broad product line and good inventory control key to success
Customer A
Supplier E
Supplier F
Customer B
Assortment
Warehouse
Supplier G
Customer C
Supplier H
Customer D
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37. Information Systems Decision support tools
Real-time simulation and optimization
Location selection
Cost estimations
Precise coordination of multimodal solutions
Execution systems
Global positioning systems
Bar-coding applications
RFID on the horizon as replacement (NYK Logistics)
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38. Material Handling and Packaging
What are the typical marketing criteria?

39. Unitization Unit loads Non-rigid containers Rigid containers
Transport and handling efficiencies
Non-rigid containers
pallets and unit load platforms
ropes, steel, shrink and stretch wrap
Rigid containers
Maximum protection (Viper windshield frame)
Standard sizes?
Recycling?
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40. Packaging Implications
Transportation
Class segmentation
Damage protection
Material handling and warehousing
Storage requirements
Unitization
Container recycling
Ease of handling
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41. Questions
What are the strengths and weaknesses of each? How does the choice of format tie into the business strategy?

42. The Evolution of Logistics Strategy
From functional silos to strategic positioning

43. Logistics Strategy Choices
Performance Dimension
Transportation Mode
Warehousing System
Delivery Reliability
Highway, Air
Direct Ship, Assortment, Spot Stock
Delivery Speed
Air, Highway
Mix Flexibility
Highway, Air, Rail
Assortment, Spot Stock
Design Flexibility
Postponement
Volume Flexibility
Cost
Rail, Water, Pipeline, Highway
Consolidation, Cross-Docking, Hub-and-Spoke
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44. Who “Owns” Logistics?
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45. Owning Versus Outsourcing
Does the firm’s volume justify a private system?
Would ownership limit firm’s ability to respond to marketplace changes?
Is logistics a core competency?
Are outsource capabilities are available?
Kellogg logistics strategy example in text
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46. Transportation “Outsources”
Common (public) carriers
Published rates and schedules
“Nondiscriminatory” pricing
Increased flexibility to partner
Contract carriers
Service for select customers
Unlimited number of customers
Third-Party Logistics Providers (3PLs)
Service firms specializing in logistics for other companies
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47. Warehouse Ownership Issues
Public Contract Private
EOS EOS ???
High Moderate Low
High Moderate Low
Less Varies Highest
High High ???
Cost structure
Financial flexibility
Location flexibility
Managerial control
Expertise
EOS = Economy of scale
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48. When would it make sense to combine private and public ownership?
Question:
When would it make sense to combine private and public ownership?

49. Measuring Performance
Perfect Order
Delivered on time
Shipped complete
Invoiced correctly
Undamaged in transit
Landed Costs
Packing
Insurance
Customs, other fees
Warehousing
Transportation
Documentation
(Redwing Automotive Example)
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50. Reverse Logistics Systems
Customer returns
Warranty failures
Incorrect or damaged orders
Repair and remanufacture process support
Recycling (increasing importance!)
Generally independent systems because of low volume and mix complexity
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51. Logistics Decision Models
Weighted Center of Gravity Method
Optimization
Assignment Problem
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52. Weighted Center of Gravity
A method to determine best location for central warehouse from n demand points.
Requires position of each demand point (Xi, Yi)
Requires weight of each demand point (Wi), based on importance, demand volume, market strategy, etc.
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53. CupAMoe’s Coffee
Example 12.6 in text.
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54. Optimization
Requires an objective function to be maximized or minimized.
Decision variables — values to be manipulated to affect outcome of objective function
Constraints — limits set on range of decision variables to be used or on other aspects of the solution possible
For Example:
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55. Assignment Problem Specialized optimization model.
Decision variables are the shipment quantities
Known values are demand, capacity, and shipping cost between warehouses
Constraints:
Sum of shipments from a warehouse cannot exceed its capacity
Sum of shipments to meet demand must be greater than or equal to the demand
Sum of shipments from each warehouse must be greater than or equal to zero
(Flynn Boot Company Excel example in text)
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56. Case Study in Logistics
Just-In-Time Shipping

57. Supplemental Slides on Transportation Costs and Factors
Pricing, Distance, Economic Factors

58. Pricing Transportation Services
Economic factors
Pricing versus distance
Price/pound versus density
Stowability, handling, and liability
Market factors
Ratings
Goods classification
Class index
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59. Economic Factors I Price … why the “tapering principle”? Distance
Density
Price/pound
Discuss effects of unloading and loading costs being similar to fixed costs with distance as a variable cost
Discuss effect of density in being able to pack more in a load – but what about energy requirements?
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60. Economic Factors II Stowability, handling, and liability versus
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61. Economic Factors III Market factors What might this include? West
Coast,
USA
East Coast,
USA
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62. Translating economic factors into actual prices
Ratings
Translating economic factors into actual prices

63. Ratings (a simplified view)
Goods classification
Perishability, stowability, handling, etc.
Class index?
From
“average product” = 100
Based on expected transportation costs
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64. Determining Transportation Rates
Rate Determination
By weight (Less-than-truckload shipment)
By distance (truckload shipments) Minimum charges and surcharges
Exceptions to the rule
Seasonal commodities
FAK (freight of all kinds)
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65. Example 1
Shipping 800 lbs of glass slides from Atlanta, GA to Lansing, MI
… Looking at a rate classification guide
Item
Articles
Class - LTL Shipment
Class – TL Shipment
Minimum TL Weight
86770
Glass, microscopical slide or cover, in boxes 70 40
3,600 lbs.
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66. Specific Rates for Shipments FROM Atlanta TO Lansing
Rates express $ charged per hundred-weight Rates fall as rate class falls and volume increases
Rate Class
< 500 lbs
500 to 1,000 lbs
1,000 to 30,000 lbs
200
$98.37
$61.97
$17.00
100
$52.62
$43.68
$9.22 70
$40.48
$33.59
$8.10
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67. Result $33.59 × 8 = $268.72 shipping cost Key points
Classification tables standardized, BUT
Rate tables vary by transportation provider
Real-time updating of provider tables
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68. Example 2 3 Shipments of Class 100 to Lansing:
5,000 lbs., 10,000 lbs., 7,000 lbs.
Different stops in Lansing
Can consolidate, but extra $100 for two additional stops
What to do?
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69. What to Do? Separate shipments at costs below: 50×$18.94 = $947
50×$ = $947
100×$ = $1,474
70×$ = $1,326
$3,747
Consolidated shipments at costs below:
220×$9.22 = $2,028
Additional
drop-off
charges: $100
$2,128
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70. Key Points Choosing a mode Choosing a format
Five choices
Speed? Cost? Flexibility?
Choosing a format
Flexibility versus control
Controllable factors affecting cost
Density, stowability, packaging, and containerization
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