2-1 Logistics/Supply Chain Strategy and Planning Chapter 2 “If you don’t know where you want to go, any path will do.” CR (2004) Prentice Hall, Inc.

2-2 Chapter 2: Strategy & Planning n Logistics Strategies. n Logistics Decisions. n 6 Fundamental Concepts: –Total Cost & Tradeoffs. –Consolidation & Economies of Scale. –Differentiation. –Mixed Strategy. –Postponement. –Standardization.

2-3 Strategies Corporate Strategy: –Market share, Market position. –Growth, Profit, etc. Logistics Strategy: –Maximize profit, Minimize cost. –Maximize return on investment. –Service/Quality.

2-4 Corporate Strategy CR (2004) Prentice Hall, Inc.  Strategy is the process whereby plans are formulated for positioning the firm to meet its objectives.  Strategy formulation begins with defining a corporate strategy. This involves: a. Assessing needs, strengths, and weaknesses of the 4 major components: - customers - suppliers - competitors - the company itself b. "Visioning" where counter-intuitive, unheard of, and unconventional strategies are considered.  Corporate strategies are converted to more specific strategies for the various functional areas of the firm such as logistics.

2-5 Corporate to Functional Strategic Planning CR (2004) Prentice Hall, Inc. Economic Regulatory Technological Competitive External factors Corporate strategic plan Marketing Finance Manufacturing Logistics Functional strategic plans

The Logistics/SC Mission

2-7 Logistics’ Objective Maximize return on logistics assets (ROLA) Logistics’ contribution to sales Investment in logistics assets Costs of logistics operations CR (2004) Prentice Hall, Inc.

2-8 Logistics Strategy  The objectives of logistics strategy are: - Minimize cost - Minimize investment - Maximize customer service  Levels of logistical planning: - Strategic - Tactical - Operational  The 4 problem areas of supply chain planning - Customer service levels - Facility location - Inventory decisions - Transportation decisions  When to plan? - No distribution network currently exists. - There has been no re-evaluation in 5 years. - When costs are changing rapidly, especially transport &inventory. - When markets have shifted. - When current distribution economics encourage shifts. - When there has been a major policy shift in logistics such as in price, customer service, or investment level. Recall the logistics strategy triangle Use ROLA

2-9 Flow of Logistics Planning CR (2004) Prentice Hall, Inc. Facility location Operations strategy Inventory management Information systems Material handling Traffic and transportation Planning and control methods Organization Individual Link of Logistics System Business goals and strategies Customer service requirements Integrated logistics planning Design of integrated logistics management system Overall performance measures

2-10 Chapter 2: Strategy & Planning n Logistics Strategies. n Logistics Decisions. n 6 Fundamental Concepts: –Total Cost & Tradeoffs. –Consolidation & Economies of Scale. –Differentiation. –Mixed Strategy. –Postponement. –Standardization.

2-11 Location InventoryTransportation Decision Areas Where?, How many? What size? Allocation? Strategy/Control system? How much? Where? Which mode? Which carrier? Which route? Shipment size and frequency?

Decision areaStrategicTacticalOperational TransportationMode selectionSeasonal equip- ment leasing Dispatching InventoriesLocation, Control policiesSafety stock levelsOrder filling Order processing Order entry, transmittal, and processing system design Processing orders, Filling back orders PurchasingDevelopment of supplier- buyer relations Contracting, Forward buying Expediting WarehousingHandling equipment selection, Layout design Space utilizationOrder picking and restocking Facility location Number, size, and location of warehouses Strategic, Tactical, and Operational Decision Making CR (2004) Prentice Hall, Inc. 2-7

2-13 Chapter 2: Strategy & Planning n Logistics Strategies. n Logistics Decisions. n 6 Fundamental Concepts: –Total Cost & Tradeoffs. –Consolidation & Economies of Scale. –Differentiation. –Mixed Strategy. –Postponement. –Standardization.

2-14 Total Cost & Tradeoffs. Consolidation & Economies of Scale. Differentiation. Mixed Strategy. Postponement. Standardization. Concepts for strategy formulation

2-15 A Cost Conflict in Logistics CR (2004) Prentice Hall, Inc.

More Cost Conflicts CR (2004) Prentice Hall, Inc. 2-10

Consolidation & Economies of Scale n Larger amounts cost less per unit to move store, process, order, etc. –Use larger vehicles and larger loads to reduce transportation cost. –Purchase in larger quantities to get lower prices. n But, must consider tradeoffs: –Larger orders and larger loads imply greater inventory costs.

Differentiation n Not all products and customers should be treated the same. –Identify most important products & customers. –Treat them better!

Mixed Strategy n A mixture of transportation and inventory options is usually best. –Use air, rail and truck transportation as appropriate. –Use public and private warehousing as appropriate.

2-20 Pure vs. Mixed Strategy CR (2004) Prentice Hall, Inc.

Postponement n Delay finishing and shipping the product until it is ordered. –Prevents unneeded transportation and inventory. –Reduces obsolete inventory. –Examples: Dell computer, paint sales.

Standardization n Standard (interchangeable) parts and less product variety reduce costs. –Interchangeable parts and modularity reduce inventory and transportation. –Modularity and postponement can provide product variety.

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2-24 Choosing the Right Supply Chain Strategy Functional Products-- Predictable demand Innovative Products-- Unpredictable demand Efficient supply chain Staple food products Responsive supply chain Electronic equipment Low margin High margin CR (2004) Prentice Hall, Inc.

2-25 Efficient supply chain n Economical production runs n Finished goods inventories n Economical buy quantities n Large shipment sizes n Batch order processing Responsive supply chain n Excess capacity n Quick changeovers n Short lead times n Flexible processing n Premium transportation n Single order processing Supply- to-stock Supply- to-order Choosing the Right Supply Chain Strategy

2-26 Actions for Misclassified Products Supply Chain Design Type Predictable/ Mature Unpredictable/ Introductory Supply-to-Stock/ Efficient Tomato SoupIf product is here Supply-to-Order/ Responsive If product is herePersonal Computer Models Product Characteristic CR (2004) Prentice Hall, Inc.

2-27 Seven Principles of Supply Chain Management Segment customers based on service needs Listen to signals of market demand and plan accordingly Develop a supply-chain-wide technology strategy Customize the logistics network Differentiate product closer to the customer Source strategically Adopt channel-spanning performance measures Source: Accenture Consulting Differentiated distribution Design to customer needs Postponement Boundary spanning info. systems CR (2004) Prentice Hall, Inc.