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**Impact of Product Classes on Logistics Plans and Decisions**

Consumer Goods Convenient Goods Shopping Goods Specialty Goods Industrial Goods

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**Product Characteristics Impacts on Planning**

Product life cycle 80-20 rule Individual characteristics: Weight-Bulk ratio (ration of weight to volume, density; e.g. cotton vs. steel) Value-Weight ratio (coal vs. jewelry) Substitutability (customer’s reaction when not in stock) Risk characteristics (perishability, flammability, ease of being stolen)

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**Product Life Cycle Sales Volume Time Introduction Maturity Growth**

Decline

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**80-20 Rule and ABC Classification**

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**The 80-20 curve with an Arbitrary Product Classification**

Total Sales(%) Total Items(%) A C B 20 50

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**ABC Analysis Divides on-hand inventory into 3 classes**

A class, B class, C class Basis is usually annual $ volume $ volume = Annual demand x Unit cost Policies based on ABC analysis A items receives wide geographic distribution through many warehouses, with high levels of stock availability Give tighter physical control of A items Forecast A items more carefully C items might be distributed from a single, central stocking point(e.g. plant), with lower total stocking levels than for the A items B items would have an intermediate distribution strategy where few regional warehouses are used © 1998 by Prentice Hall, Inc. A Simon & Schuster Company Upper Saddle River, N.J Transparency Masters to accompany Operations Management, 5E (Heizer & Render) 12-13 13

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**Inventory Value of the Products in a Warehouse**

80-20 rule and ABC analysis can be used as the basis of grouping the products in a warehouse y= (1+A)x A+X where, Y= Fraction of cumulative sales X= Fraction of items A: constant to be determined If the relation between X and Y is already known: A= X(1-Y) (Y-X)

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**Product Characteristics**

Weight- Bulk Ratio Value-Weight Ratio Substitutability Risk Characteristics

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**Logistics Cost as a percentage of sales price**

Increasing Weight-bulk ratio Logistics Cost as a percentage of sales price Storage Cost Transportaiton Cost Total Cost Generalized Effect of Product Density on Logistics Cost

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**Logistics Cost as a percentage of sales price**

Generalized Effect of Value-weight Ratio on Logistics Cost Increasing value-weight ratio Logistics Cost as a percentage of sales price Transportation cost Storage Cost Total Cost

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**Effect of Improved Transportation on Logistics Cost for a given level of substitutability**

Improved transportation service Storage Cost Lost Sale cost Transport cost Total cost Logistics cost as a percent of price

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**Effect of Average Inventory Level on Logistics Cost for a Given Level of Substitutability**

tics cost as a percentage of price Transportation cost Lost Sale cost Storage cost Total cost

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**Generalized Effect of Product Risk On Logistics Cost**

Increasing Level of Risk of the Product Costs Storage Cost Transportation Cost Total Cost

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© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S 7-1 Operations Management Capacity Planning Supplement 7.

© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S 7-1 Operations Management Capacity Planning Supplement 7.

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