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

2. 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).

3. 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.

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

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

6. 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

7. 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.

8. 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.

9. ABC Classification Example: 8 Products
Sales Cumulative Cumulative
Product ($x1000) % of Sales % of Sales % of Items % of Items Class P P P Q P Q Q P
Given

10. ABC Classification Example
Sales Cumulative Cumulative
Product ($x1000) % of Sales % of Sales % of Items % of Items Class P P P Q P Q Q P
Total Sales = 2000
Calculate

11. ABC Classification Example
Sales Cumulative Cumulative
Product ($x1000) % of Sales % of Sales % of Items % of Items Class P P P Q P Q Q P
Total Sales = 2000
50% 0%
100%
Cumulative % of Sales
80-20 Curve
Cumulative % of Items

12. ABC Classification Example
Sales Cumulative Cumulative
Product ($x1000) % of Sales % of Sales % of Items % of Items Class P P P Q P Q Q P
Total Sales = 2000
Determine

13. ABC Classification Example
Sales Cumulative Cumulative
Product ($x1000) % of Sales % of Sales % of Items % of Items Class
P A P P Q P Q Q
P C
Total Sales = 2000
Determine

14. ABC Classification: Example
Sales Cumulative Cumulative
Product ($x1000) % of Sales % of Sales % of Items % of Items Class
P A
P A
P B
Q B
P C
Q C
Q C
P 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

15. 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?

16. 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

17. 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) =
X=0.30; Y= 0.75
Y =
( )X X =
( )0.2 =
A items: X = 0.20
A: 63.6% of sales
A+B items: X = 0.50 Y = 0.875
B items alone: Y = = B: 23.9% of sales
C items: Y = = C: 12.5% of sales
ANSWER

18. 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 =

19. 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 =

20. 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) =
X=0.30; Y= 0.75
A items: X = 0.25 Y = % of sales
0.70x
Average Inventory =
= $350,000 10

21. Average Inventory Example - continued
A items: X = 0.25 Y = % of sales
0.70x /10 = $350,000 inventory
A+B items: X = 0.55 Y = 0.895
B items alone: Y = = % of sales
0.195x /5 = $195,000 inventory
C items: Y = = % of sales
0.105x /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).

22. 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

23. 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.

24. Density Example Need to ship:
60,000 lbs of 20 lbs/ft3 = 3,000 ft3
6,000 lbs of light 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)

25. 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.

26. 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.

27. 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.

28. 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.

29. 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.