Logistics Management LSM 730 Lecture 11 Dr. Khurrum S. Mughal

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.”

Product in the Planning Triangle 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

Nature of the Product Product classification Consumer Products Convenience goods Shopping goods Specialty goods Industrial goods

Product Life-Cycle Curve Intro- duction Growth Maturity Decline Sales volume Time

Cumulative 80-20 Curve 10 20 30 40 50 60 70 80 90 100 Total items (%) 10 20 30 40 50 60 70 80 90 100 Total items (%) Total sales (%) A items B items C items 3-6

Nature of the Product (Cont’d) · 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

Effect of Weight-Bulk Ratio on Logistics Costs Storage costs Transportation costs Total costs (transport + storage) Weight-bulk ratio Logistics costs as a percent of sales price

Effect of Value-Weight Ratio on Logistics Costs Example: Coal, Iron Ore Vs Electronic Equipment Total costs (transport + storage) Storage costs Transportation costs Logistics costs as a percent of sales price Value-weight ratio

Effect of Transport Service and Inventory Level on Logistics Costs (Substitutability) Total costs (transport + lost sales + storage costs) Transport costs Lost sales Storage costs Logistics costs as a percent of sales price Improved transportation service (a) Average inventory level (b)

Effect of Product Risk on Logistics Costs Increasing degree of risk in the product Logistics costs as a percent of sales price Total costs (transport + storage) Transport costs Storage costs

Reasons for Product Packaging 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

Product Pricing Geographic pricing methods F.o.b. (free on board) pricing F.o.b. factory price F.o.b. delivery price - Zone pricing - Single, or uniform, pricing - Freight equalization - Basing point pricing Incentive pricing - Quantity discounts

Product Pricing Geographic pricing methods F.o.b. (free on board) pricing F.o.b. factory price F.o.b. delivery price - Zone pricing - Single, or uniform, pricing - Freight equalization - Basing point pricing Incentive pricing - Quantity discounts

A Variety of Pricing Arrangements 1. Terms of Sale: F.O.B. Origin, Freight Collect Title Buyer -Pays Freight Charges Passes to Buyer Freight Charges Buyer -Bears Freight Charges Paid by Buyer Buyer -Owns Goods in Transit Buyer -Files Claims (If Any) SELLER BUYER A Variety of Pricing Arrangements 2. Terms of Sale: F.O.B. Origin, Freight Prepaid Title Seller -Pays Freight Charges Passes to Buyer Seller -Bears Freight Charges Buyer -Owns Goods in Transit Buyer -Files Claims (If Any) SELLER BUYER Freight Charges Paid by Seller 3. Terms of Sale: F.O.B. Origin, Freight Prepaid and Charged Back Seller -Pays Freight Charges Title Passes to Buyer Buyer -Bears Freight Charges Buyer -Owns Goods in Transit Buyer -Files Claims (If Any) SELLER BUYER Freight Charges then Collected from Buyer Paid by Seller... by Adding Amount to Invoice 4. Terms of Sale: F.O.B. Destination, Freight Collect Buyer -Pays Freight Charges Title Passes to Buyer Buyer -Bears Freight Charges Seller -Owns Goods in Transit Seller -Files Claims (If Any) SELLER BUYER Freight Charges Paid by Buyer 5. Terms of Sale: F.O.B. Origin, Freight Prepaid (Delivered) Freight Charges Title Seller -Pays Freight Charges Paid by Seller Passes to Buyer Seller- Bears Freight Charges Seller -Owns Goods in Transit Seller -Files Claims (If Any) SELLER BUYER 6. Terms of Sale: F.O.B. Destination, Freight Collect and Allowed Title Buyer -Pays Freight Charges Passes to Buyer Buyer -Bears Freight Charges Seller -Owns Goods in Transit SELLER BUYER Seller -Files Claims (If Any) then Charged to Seller by Freight Charges Deducting Amount from Invoice Paid by Buyer...

UPS Pricing Zones Zone 2 $136.31 Zone 3 $137.38 Boston Zone 8 $147.38 3-18