Chapter 3 The logistics product 1.Nature of the logistics product 2.The 80-20 curve 3.Product characteristics 4.Product packaging 5.Product pricing 6.Incentive pricing arrangement The Logistics Product

Nature of the logistics product Classifying products: 1.customer products. a. convenience products. b. shopping product. c. specialty products. 2.industrial products. Ex: raw materials, component parts, used in the manufacturing process. The Logistics Product

Customer products b. shopping product a.convenience products there products require wide distribution ex: Pepsi-cola and coca-cola telephone companies banking services. b. shopping product customers are willing to seek and compare The Logistics Product

Customer products distribution costs for such suppliers are somewhat lower than for convenience products, and product distribution need not be as widespread. Ex: fashion clothes, automobiles, home furnishings and medical care. c.specialty products Buyers are willing to expend a substantial effort and often to wait a significant amount of time in order to acquire them. Ex. Custom-made automobiles, professional musicians. The Logistics Product

The product life cycle Introduction : new product. Growth : increase rapidly. Maturity : growth is slow or stabilized at a peak. Decline : the sales volume declines. The Logistics Product

The 80-20 curve Pareto’s law 80% of a firm’s sales are generated by 20% of product line items. Useful in distribution planning when the products are grouped or classified by their sales activity. The top 20% might be called A items, the next 30% B items, and the remainder C items ITEMS(%) SALES(%) A 10-20 60-70 B 20-30 20-30 C 60-70 10-20 The Logistics Product

Step 1 : Ranked according to sales volume. Step 2 : Calculated cumulative percent of total sales. Step 3 : Calculated cumulative percent of total items. The Logistics Product

Advanced decisions Determine the relationship between various percentages of items and sales. where Y = cumulative fraction of sales X = cumulative fraction of items A = a constant to be determined. Ex: If 25 percent of the items (X) represent 70 percent of the sales (Y), then The Logistics Product

Box 3.8 EXAMPLES Suppose that a certain warehouse is to store 11 of the 14 items (shown in Table 3-10, except for items 4,9, and 10) X=0.21, Y=0.68 (21% of the items result in 68% of the sales), then A=0.143. Turnover ratio (annual sales / average inventory) A items is 7/1. B items is 5/1. C items is 3/1. If the annual sales through the warehouse are forecast to be $25,000, how much inventory investment in the warehouse can be expected? The Logistics Product

(-) 11107/7=1586.4 4889/ 7= 698.4 2284.8 The Logistics Product

Product characteristics Influence logistic strategy Weight Volume Value Perishability Flammability Substitutability The Logistics Product

Weight-Bulk ratio High weight-bulk ratio rolled steel, printed materials, canned foods. good utilization of transportation equipment and storage facilities. See figure 3-3, the product density increases, both storage and transportation costs decline. Box 3.9 JCPenney ships catalog furniture items in a knocked-down condition. The Logistics Product

Value-weight ratio See figure 3-4 electronic equipment, jewelry, musical instruments higher storage costs lower transportation costs U-shaped total logistics cost curve (trade-off) The Logistics Product

Substitutability Little or no difference between a firm’s product Many food and drug products have a highly substitutable Substitutability can be viewed in terms of lost sales to the suppliers The Logistics Product

Figure 3-5 (b) increase inventory level to reduce the lost sales. Figure 3-5(a) show that improved transportation can be used to reduce lost sales (more readily available to the customer). Figure 3-5 (b) increase inventory level to reduce the lost sales. The Logistics Product

Risk characteristics Perishability (fresh fruits and whole blood) Flammability tendency to explore (gas, oil) Value, ease be stolen (pens. watches. cigarettes) Special treatment, whether transportation, storage or packaging, adds to the cost of distribution. See figure 3-6. The Logistics Product

Product packaging To facilitate storage and handling. To promote better utilization of transport equipment. To provide product protection. To promote the sale of the product. To change the product density. To facilitate the use of the product. To provide reuse value for the customer. The Logistics Product

Box 3.10 Johnson & Johnson Diapers Be packaged 12 or 24 to the box. Change the product density. Not only did this satisfy marketing, but it would save on storage, transportation and packaging costs as well. The Logistics Product

Product pricing Geographic pricing methods F.o.b pricing (free on board) ,see figure 3-7. Zone pricing, see figure 3-8. Single, or uniform pricing. Freight equalization pricing. Basing point pricing. The Logistics Product

Incentive pricing arrangement Quantity discounts. See figure 3-9. A B C Transportation cost / case 2.2 2.0 1.7 Manufacturing and sales costs 10 10 10 The Logistics Product