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1 Impact of Product Classes on Logistics Plans and Decisions Consumer Goods Convenient Goods Shopping Goods Specialty Goods Industrial Goods

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2 Product Characteristics Impacts on Planning Product life cycle rule Individual characteristics: Weight-Bulk ratio (ration of weight to volume, density; e.g. cotton vs. steel) Value-Weight ratio (coal vs. jewelry) Substitutability (customers reaction when not in stock) Risk characteristics (perishability, flammability, ease of being stolen)

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3 Product Life Cycle Time Sales Volume Intro ducti on Growth Maturity Declin e

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Rule and ABC Classification

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6 The curve with an Arbitrary Product Classification Total Sales(%) Total Items(%) ACB 2050

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7 Transparency Masters to accompany Operations Management, 5E (Heizer & Render) © 1998 by Prentice Hall, Inc. A Simon & Schuster Company Upper Saddle River, N.J 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 ABC Analysis

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8 Inventory Value of the Products in a Warehouse 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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10 Product Characteristics Weight- Bulk Ratio Value-Weight Ratio Substitutability Risk Characteristics

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11 Increasing Weight-bulk ratio Logist ics Cost as a percen tage of sales price Storage Cost Transportaiton Cost Total Cost Generalized Effect of Product Density on Logistics Cost

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12 Increasing value-weight ratio Logistic s Cost as a percenta ge of sales price Transportation cost Storage Cost Total Cost Generalized Effect of Value-weight Ratio on Logistics Cost

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13 Improved transportation service Storage Cost Lost Sale cost Transport cost Total cost Logistics cost as a percent of price Effect of Improved Transportation on Logistics Cost for a given level of substitutability

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14 Average inventory level Logis tics cost as a percen tage of price Transportation cost Lost Sale cost Storage cost Total cost Effect of Average Inventory Level on Logistics Cost for a Given Level of Substitutability

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15 Increasing Level of Risk of the Product Costs Storage Cost Transportation Cost Total Cost Generalized Effect of Product Risk On Logistics Cost

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