3-1 The Logistics/Supply Chain Product “Logistics/Supply Chain managers are ‘owners’ of the product-flow process from raw material sources to final consumers, not activity administrators.” CR (2004) Prentice Hall, Inc. Chapter 3

3-2 Product in the Planning Triangle CR (2004) Prentice Hall, Inc. PLANNING ORGANIZING CONTROLLING Transport Strategy Transport fundamentals Transport decisions Customer service goals The product Logistics service Ord. proc. & info. sys. Inventory Strategy Forecasting Inventory decisions Purchasing and supply scheduling decisions Storage fundamentals Storage decisions Location Strategy Location decisions The network planning process PLANNING ORGANIZING CONTROLLING Transport Strategy Transport fundamentals Transport decisions Customer service goals The product Logistics service Ord. proc. & info. sys. Inventory Strategy Forecasting Inventory decisions Purchasing and supply scheduling decisions Storage fundamentals Storage decisions Location Strategy Location decisions The network planning process

3-3 The Logistics Product CR (2004) Prentice Hall, Inc. Product is the center of logistics system design It generates firm’s revenues in its economic form We will concentrate on- Product’s basic dimensions represented by its characteristics, package, price

3-4 Nature of the SC Product CR (2004) Prentice Hall, Inc. Company Offering Tangible part Intangible part Classification of products: Convenience Products- Goods & services consumers purchase frequently, immediately and with little comparison Shopping Products- Consumers are willing to seek & compare, shopping many locations, compare price, quality performance Specialty Products- Buyers are willing to expend a substantial effort & can wait a significant amount of time to acquire them Industrial Products- Directed to individuals and organizations

3-5 Nature of the SC Product… Distribution decisions for different classes of products CR (2004) Prentice Hall, Inc. Convenience Products Require wide distribution through many outlets Distribution costs are high but justified by the wide distribution and large volume of sales Customer services concerns are- product availability, accessibility

3-6 Nature of the SC Product… Distribution decisions for different classes of products CR (2004) Prentice Hall, Inc. Shopping Products No of stocking points should be reduced than convenience items Distributors may stock goods only in few outlets in a given marketplace/area Distribution cost of such suppliers are comparatively low to convenience but it could be offset by higher per unit margin/ trade margin

3-7 Nature of the SC Product… Distribution decisions for different classes of products CR (2004) Prentice Hall, Inc. Specialty Products Distribution is centralized as consumers insist on particular brand Customer services levels is not much concern for the sellers Distribution cost might be the lowest than other product category

3-8 Nature of the SC Product… Distribution decisions for different classes of products CR (2004) Prentice Hall, Inc. Industrial Products Buyers are not demanding different levels of customer services for different product classes Require customization of typical logistics channels and terms for customer services

3-9 Intro- duction GrowthMaturityDecline Sales volume Time Nature of the SC Product Product Life-Cycle Curve CR (2004) Prentice Hall, Inc.

3-10 Nature of the Product CR (2004) Prentice Hall, Inc. The Product life cycle and distribution decisions INTYRODUCTION Typical SC strategy is careful one. Stocking restricted to few locations Product availability is limited GROWTH Sales history might not be enough to guide the Sc decisions- level & no of stocking points Distribution need lots of managerial judgment

3-11 Nature of the Product CR (2004) Prentice Hall, Inc. MATURITY Prolonged phase for similar distribution strategies Product has its widest distribution at this time Many stocking points are used to have good control over distribution DECLINE Inventory deployment have to be adjusted with the product movement No of stocking points likely to be decreased at more centralized location The Product life cycle and distribution decisions

3-12 Nature of the Product CR (2004) Prentice Hall, Inc. The Product life cycle and Pareto's law THE PRINCIPLE The majority of sales is generated from relatively few products in the product line (most of the product lines generate little sales) Pareto’s Law- 80 percent of a firm’s sales are generated by 20 percent of the product line items. An exact ratio is rarely observed, but the disproportionality between sales and the number of items are generally true.

ABC Classification for 14 Products CR (2004) Prentice Hall, Inc. 3-5

Total items (%) Total sales (%) A itemsB itemsC items Cumulative Curve CR (2004) Prentice Hall, Inc. 3-6

3-15 ABC Classification for 14 Products recommending SC strategies A Items20% of the items account for 80% of the total dollar usage B Items30% of the items account for 15% of the total dollar usage C Items50% of the items account for 5% of the total dollar usage

3-16 ABC Classification for 14 Products recommending SC strategies n Two general rules to follow: –Have plenty of low-value items –Use control effort saved to reduce the inventory of A items n A items: Tight control n B items: Normal control n C items: Simplest possible control

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Mathematical relationship Y=(1+A)X/A+X Y=cumulative fraction of sales X=cumulative fraction of items A=a constant to be determined A=X(1-Y)/Y-X 3-18

3-19 Nature of the Product (Cont’d) CR (2004) Prentice Hall, Inc.  Product characteristics - Weight-bulk ratio - Value-weight ratio - Substitutability - Risk  Product packaging  Product pricing - F.o.b. origin - F.o.b. destination - Zone pricing - Single and uniform pricing - Quantity discounts - Deals

3-20 Effect of Weight-Bulk Ratio on Logistics Costs CR (2004) Prentice Hall, Inc. Storage costs Transportation costs Total costs (transport + storage) Weight-bulk ratio 0 0 Logistics costs as a percent of sales price

3-21 Effect of Value-Weight Ratio on Logistics Costs CR (2004) Prentice Hall, Inc. Total costs (transport + storage) Storage costs Transportation costs Logistics costs as a percent of sales price Value-weight ratio 0 0

3-22 Effect of Substitutability on Logistics Costs CR (2004) Prentice Hall, Inc. Total costs (transport + lost sales + storage costs) Transport costs Lost sales Storage costs Logistics costs as a percent of sales price Improved transportation service 0 0 (a) Average inventory level0 0 Logistics costs as a percent of sales price Total costs (transport + lost sales + storage costs) Lost sales Storage costs Transport costs (b)

3-23 Product’s Risk Characteristics Reasons for Product Packaging Importance of protective packaging CR (2004) Prentice Hall, Inc. Facilitate storage and handling Promote better utilization of transport equipment Provide product protection Promote the sale of the product Change the product density Facilitate product use Provide reuse value for the customer

3-24 Product Pricing CR (2004) Prentice Hall, Inc. Geographic pricing methods - F.o.b. pricing - Zone pricing - Single, or uniform, pricing - Freight equalization - Basing point pricing Incentive pricing - Quantity discounts - The Deal

Terms of Sale: F.O.B. Origin, Freight Collect Buyer-Pays Freight Charges Buyer-Bears Freight Charges Buyer-Owns Goods in Transit Buyer-Files Claims (If Any) 2. Terms of Sale: F.O.B. Origin, Freight Prepaid Seller-Pays Freight Charges Seller-Bears Freight Charges Buyer-Owns Goods in Transit Buyer-Files Claims (If Any) 3. Terms of Sale: F.O.B. Origin, Freight Prepaid and Charged Back Seller-Pays Freight Charges Buyer-Bears Freight Charges Buyer-Owns Goods in Transit Buyer-Files Claims (If Any) then Collected from Buyer by Adding Amount to Invoice 4. Terms of Sale: F.O.B. Destination, Freight Collect Buyer-Pays Freight Charges Buyer-Bears Freight Charges Seller-Owns Goods in Transit Seller-Files Claims (If Any) 5. Terms of Sale: F.O.B. Origin, Freight Prepaid (Delivered) Seller-Pays Freight Charges Seller-Bears Freight Charges Seller-Owns Goods in Transit Seller-Files Claims (If Any) 6. Terms of Sale: F.O.B. Destination, Freight Collect and Allowed Buyer-Pays Freight Charges Buyer-Bears Freight Charges Seller-Owns Goods in Transit Seller-Files Claims (If Any) then Charged to Seller by Deducting Amount from Invoice Freight Charges Paid by Buyer Freight Charges Paid by Seller Freight Charges Paid by Buyer Freight Charges Paid by Seller Freight Charges Paid by Buyer... Title Passes to Buyer Title Passes to Buyer Title Passes to Buyer Title Passes to Buyer Title Passes to Buyer Title Passes to Buyer SELLE R BUYER Freight Charges Paid by Seller... A Variety of Pricing Arrangements

Zone 8 $ Zone 7 $ Zone 6 $ Zone 5 $ Zone 4 $ Zone 3 $ Zone 2 $ Boston UPS Pricing Zones CR (2004) Prentice Hall, Inc. 3-18