Logistics Management LSM 730 Lecture 8 Dr. Khurrum S. Mughal

Logistics/Supply Chain Strategy and Planning “If you don’t know where you want to go, any path will do.”

Six Concepts for Logistics Strategy Formulation Total Cost Concept Tradeoff conflicting costs at optimum Differentiated distribution Not all products should be provided the same level of customer service Mixed strategy A pure strategy has higher costs than a mixed strategy Postponement Delay formation of the final product as long as possible Shipment consolidation Smaller shipment sizes have disproportionately higher transportation costs than larger ones Product standardization Avoid product variety since it adds to inventory

Six Concepts for Logistics Strategy Formulation Total Cost Concept Tradeoff analysis Tradeoff conflicting costs at optimum Examples: Direct cost of Transport Service vs Indirect cost of inventory levels

A Cost Conflict in Logistics

Six Concepts for Logistics Strategy Formulation Total Cost Concept Tradeoff analysis Tradeoff conflicting costs at optimum Examples: Higher level of customer service resulting in less lost sales Vs Cost of inventories, transportation and order processing

A Cost Conflict in Logistics

Six Concepts for Logistics Strategy Formulation Total Cost Concept Tradeoff analysis Tradeoff conflicting costs at optimum Examples: When customers purchase in small quantities and inventory is replenished in large quantities Out Bound inventory transport cost exceeds inbound transport costs Deciding on number of stocking points considering Inventory vs transportations costs Vs Customer service level

A Cost Conflict in Logistics

Six Concepts for Logistics Strategy Formulation Total Cost Concept Tradeoff analysis Tradeoff conflicting costs at optimum Examples: At higher level of customer satisfaction Cost of lost sales vs Inventory Carrying Costs

A Cost Conflict in Logistics

Six Concepts for Logistics Strategy Formulation Total Cost Concept Tradeoff analysis Tradeoff conflicting costs at optimum Examples: In case of Multi-product scheduling Increase in Inventory costs with change in production sequence

A Cost Conflict in Logistics

Six Concepts for Logistics Strategy Formulation Total Cost Concept Tradeoff conflicting costs at optimum Application Manufacturer of Marine Products Warehouse in St. Louis Vs Chicago to minimize transport cost Different results when inventory costs were considered

Six Concepts for Logistics Strategy Formulation Differentiated distribution Not all products should be provided the same level of customer service Products to be delivered directly to customers Vs delivered from warehouses Customer ordering in high volumes might be served directly Fast Moving Items in field warehouses, medium in fewer regional locations, slow moving items in centralized locations Application: Chemical company manufacturing metal coating products for preventing corrosion Truck loads and top 10 percent of total volume shipped directly Remainder from two warehouses and plant Saved 20% of total distribution costs

Six Concepts for Logistics Strategy Formulation Mixed strategy A pure strategy has higher costs than a mixed strategy Administrative ease in pure strategy along with economies of scale When products differ in cube, weight, order size, sales volume, and customer service level Application Retailer of prescription drugs with six ware houses New facility to support Pittsburgh Warehouse costing $7 Million

Pure vs. Mixed Strategy

Six Concepts for Logistics Strategy Formulation Postponement Delay formation of the final product as long as possible Avoid shipping of goods in anticipation of when demand will occur (time postponement) Avoid creating the form of the product in anticipation of that form (form postponement)

Six Concepts for Logistics Strategy Formulation Postponement Application JCPenny by filling orders on demand from relatively few warehouses Dell computers practices Form postponement Sherwin-Williams has variety of paint colors but practices form postponement