Chapter 3: The Product 1. Classification. 2. Life Cycle. 3. 80-20 Curve. 4. Product Characteristics. 5. Packaging. 6. Pricing.

1. Classification Different products should be treated differently. Consumer Goods: Directed to ultimate consumers. Buyer seeks goods. Marketing is important. Industrial Goods: Used to produce other goods and services. Raw materials, components, equipment. Vendors seek buyers (usually).

Classification: Consumer Goods Convenience goods & services: Food, convenience store products, gasoline, etc. Dry cleaners, banking, etc. Shopping goods & services: Clothes, furniture, automobiles, etc. Healthcare (personal physician), restaurants, etc. Specialty goods & services: Luxury autos, gourmet foods, custom products, etc. Advanced medical treatments, etc.

Consumer Goods & Logistics Convenience Shopping Specialty goods goods goods Substitutability HIGH MEDIUM LOW Availability HIGH MEDIUM LOW Value LOW MEDIUM HIGH

2. Life Cycle Logistics system changes as product “ages”. Sales Time Maturity Growth Decline Introduction Time

Life Cycle Logistics system changes as product “ages”. Sales Time Growth: Expanding availability; High service level Sales Maturity: Widest availability Decline: Decreasing availability; Reduced service Introduction: Limited availability Time

3. 80-20 Curve (Pareto Principle) Most of the revenue (or profit) comes from a relatively small percentage of items (products). Focus on the small number of important items. Identify the important items: ABC classification. Apply highest service level to most important items. Examples: 20% of the people do 80% of the work. 10% of the people cause 90% of the problems. 15% of the items (products) create 90% of the sales.

ABC Classification 1. Rank products (items) by sales ($/year). 2. a. Calculate cumulative % of total sales. b. Calculate cumulative % of total products (items). 3. Plot 2.a. vs. 2.b. 4. Select top items as “A”, middle as “B”, and bottom as “C”. - Breakpoints are flexible; depend on data. - Generally more B’s than A’s, and more C’s than B’s.

ABC Classification Example: 8 Products Sales Cumulative Cumulative Product ($x1000) % of Sales % of Sales % of Items % of Items Class P-74 760 P-26 640 P-51 240 Q-47 140 P-33 100 Q-65 60 Q-66 40 P-17 20 Given

ABC Classification Example Sales Cumulative Cumulative Product ($x1000) % of Sales % of Sales % of Items % of Items Class P-74 760 38 38 12.5 12.5 P-26 640 32 70 12.5 25 P-51 240 12 82 12.5 37.5 Q-47 140 7 89 12.5 50 P-33 100 5 94 12.5 62.5 Q-65 60 3 97 12.5 75 Q-66 40 2 99 12.5 87.5 P-17 20 1 100 12.5 100 Total Sales = 2000 Calculate

ABC Classification Example Sales Cumulative Cumulative Product ($x1000) % of Sales % of Sales % of Items % of Items Class P-74 760 38 38 12.5 12.5 P-26 640 32 70 12.5 25 P-51 240 12 82 12.5 37.5 Q-47 140 7 89 12.5 50 P-33 100 5 94 12.5 62.5 Q-65 60 3 97 12.5 75 Q-66 40 2 99 12.5 87.5 P-17 20 1 100 12.5 100 Total Sales = 2000 50% 0% 100% Cumulative % of Sales 80-20 Curve Cumulative % of Items

ABC Classification Example Sales Cumulative Cumulative Product ($x1000) % of Sales % of Sales % of Items % of Items Class P-74 760 38 38 12.5 12.5 P-26 640 32 70 12.5 25 P-51 240 12 82 12.5 37.5 Q-47 140 7 89 12.5 50 P-33 100 5 94 12.5 62.5 Q-65 60 3 97 12.5 75 Q-66 40 2 99 12.5 87.5 P-17 20 1 100 12.5 100 Total Sales = 2000 Determine

ABC Classification Example Sales Cumulative Cumulative Product ($x1000) % of Sales % of Sales % of Items % of Items Class P-74 760 38 38 12.5 12.5 A P-26 640 32 70 12.5 25 P-51 240 12 82 12.5 37.5 Q-47 140 7 89 12.5 50 P-33 100 5 94 12.5 62.5 Q-65 60 3 97 12.5 75 Q-66 40 2 99 12.5 87.5 P-17 20 1 100 12.5 100 C Total Sales = 2000 Determine

ABC Classification: Example Sales Cumulative Cumulative Product ($x1000) % of Sales % of Sales % of Items % of Items Class P-74 760 38 38 12.5 12.5 A P-26 640 32 70 12.5 25 A P-51 240 12 82 12.5 37.5 B Q-47 140 7 89 12.5 50 B P-33 100 5 94 12.5 62.5 C Q-65 60 3 97 12.5 75 C Q-66 40 2 99 12.5 87.5 C P-17 20 1 100 12.5 100 C Total Sales = 2000 Determine In this example: A: 25% of items; 70% of sales B: 25% of items; 19% of sales C: 50% of items; 11% of sales

80-20 Curve: Mathematical Model Y = cumulative % of sales X = cumulative % of items A = shape constant (0<A) 100% Small A 50% Large A Y = (1+A)X A+X 0% A = X(1-Y) Y-X 0% 50% 100% Given an X and Y, then Given: (1) 30% of the items produce 75% of the sales (2) The first 20% are to be A items, the next 30% are B items, and the last 50% are C items. What % of sales do A, B and C items account for?

Using the Mathematical Model Given an X (% of items) and a corresponding Y (% of sales). Find shape constant A: For each set of items: Use the shape constant A and the % of items (X) to calculate % of sales (Y). A = X(1-Y) Y-X Y = (1+A)X A+X

80-20 Curve: Mathematical Model Given: (1) 30% of the items produce 75% of the sales (2) The first 20% are to be A items, the next 30% are B items, and the last 50% are C items. What % of sales do A, B and C items account for? A = X(1-Y) Y-X = 0.30(1-0.75) 0.75-0.30 = 0.16666 X=0.30; Y= 0.75 Y = (1+0.1666)X 0.1666+X = (1+0.1666)0.2 0.1666+0.2 = 0.6363 A items: X = 0.20 A: 63.6% of sales A+B items: X = 0.50 Y = 0.875 B items alone: Y = 0.875 - 0.636 = 0.2387 B: 23.9% of sales C items: Y = 1 - 0.875 = 0.125 C: 12.5% of sales ANSWER

Turnover Ratio Annual Sales Average Inventory Turnover Ratio = Example: $1,000,000 sales per year $200,000 average inventory = 5 (5:1 or 5 to 1) 1,000,000 200,000 Turnover Ratio = Small inventory Large turnover ratio Small inventory cost Annual Sales Turnover Ratio Average Inventory =

Average Inventory Given: (1) 30% of the items produce 75% of the sales (2) The first 25% have a 10:1 turnover ratio (A items), the next 30% have a 5:1 turnover ratio (B items), and the last 45% have a 2:1 turnover ratio (C items). (3) Total annual sales are estimated to be $5,000,000. What is the total average value of inventory (for A, B and C items together)? TO SOLVE: 1. Compute shape constant A. 2. For each set of items: - Calculate % of sales (Y) using shape constant A and % of items (X). - Calculate average inventory where Annual Sales is Y times total annual sales. Annual Sales Turnover Ratio Average Inventory =

Average Inventory Example Given: (1) 30% of the items produce 75% of the sales (2) The first 25% have a 10:1 turnover ratio (A items), the next 30% have a 5:1 turnover ratio (B items), and the last 45% have a 2:1 turnover ratio (C items). (3) Total annual sales are estimated to be $5,000,000. Determine shape constant A, then inventory for A items. A = X(1-Y) Y-X = 0.30(1-0.75) 0.75-0.30 = 0.16666 X=0.30; Y= 0.75 A items: X = 0.25 Y = 0.70 70% of sales 0.70x5000000 Average Inventory = = $350,000 10

Average Inventory Example - continued A items: X = 0.25 Y = 0.70 70% of sales 0.70x5000000/10 = $350,000 inventory A+B items: X = 0.55 Y = 0.895 B items alone: Y = 0.895 - 0.7 = 0.195 19.5% of sales 0.195x5000000/5 = $195,000 inventory C items: Y = 1 - 0.895 = 0.105 10.5% of sales 0.105x5000000/2 = $262,500 inventory ANSWER = $807,500 Determine cumulative sales for A and B items, then inventory for B items (5:1 turnover ratio), then inventory for C items (2:1 turnover ratio).

Average Inventory Sample Problems Given: (1) 30% of the items produce 75% of the sales (2) The first 25% have a 10:1 turnover ratio (A items), the next 30% have a 5:1 turnover ratio (B items), and the last 45% have a 2:1 turnover ratio (C items). (3) Total annual sales are estimated to be $5,000,000. (4) There are 260 items. What is the average inventory value for the top 10 items? What is the average inventory value for the 11th item? What is the average inventory value for items 51-80? See Chapter 3 #11, 12

4. Product Characteristics Density (weight/bulk or weight/volume) High: Metals, printed matter, liquids, etc. Low: Snack foods, light bulbs, etc. Vehicles have weight and volume limits. Can increase density by disassembly. Mix loads to adjust density.

Density Example Need to ship: 60,000 lbs of paper @ 20 lbs/ft3 = 3,000 ft3 6,000 lbs of light bulbs @ 2 lbs/ft3 = 3,000 ft3 Truck capacity: 40,000 lbs and 3,000 ft3 Plan A Truck 1: 40,000 lbs paper (2,000 ft3) Truck 2: 20,000 lbs paper + 4,000 lbs light bulbs (3,000 ft3) Truck 3: 2,000 lbs light bulbs (1,000 ft3) Plan B Truck 1: 30,000 lbs paper + 3,000 lbs light bulbs (3,000 ft3) Truck 2: 30,000 lbs paper + 3,000 lbs light bulbs (3,000 ft3)

4. Product Characteristics - Value High value: Transport quickly. Few items and short time in inventory. Extra security may be needed. Low value: Can transport slowly. Large inventories OK.

4. Product Characteristics - Substitutability High substitutability: Wide availability at many locations. High service level; Always in stock; Quick service. Low substitutability: Few locations; Customers will travel. Customers will wait.

4. Product Characteristics - Risk Theft, Perishability, Explosion, Fire, etc. High risk: Few locations, small inventories. Increased security for storage. Increased security for transportation. Low risk: Many locations. No added security.

5. Packaging For easier and safer storage, handling and transportation. For economies of scale in movement and storage. For protection of product and workers. For promotion (marketing). For information.

6. Pricing Transportation price depends mainly on distance and weight transported. Zone pricing: Constant price over geographic regions. Price increases with distance. f.o.b. = free on board Where price takes effect; Where ownership changes. fob factory: Buyer pays for transportation from factory and owns product at factory. fob destination: Seller transports and owns until destination. Negotiation: Key in deregulated environment.