Logistics McGraw-Hill/Irwin

Overview of logistics Logistics of business is big and important
The logistical value proposition The work of logistics Logistical operations Logistics integration objectives Logistical operating arrangements Flexible structure Supply chain synchronization Logistics is a 365 / 24 hour a day business. It is concerned with getting products and services where they are needed at the precise time. In this chapter we are going to talk about the following topics. Logistics of business is big and important The logistical value proposition The work of logistics Logistical operations Logistics integration objectives Logistical operating arrangements Flexible structure Supply chain synchronization

What is Logistics? Logistics is the design and administration of systems to control movement and geographical positioning of raw materials, work-in-process, and finished inventories at the lowest total cost. We will first start with a basic definition of logistics… It is the design and administration of systems to control movement and geographical positioning of raw materials, work-in-process, and finished inventories at the lowest total cost. What we are talking about is the movement of stuff at the lowest total cost.

Goal of logistics management
To satisfy customer expectations for delivery of products (or services) while minimizing the total cost Managers must support the requirements for procurement, manufacturing and customer accommodation supply chain operations So at the end of the day… what is the goal of a logistic system? The goal is to satisfy customer expectations while minimizing costs. This is easier said than done. Satisfying the customer at minimal cost is more of an art. We have the Air stations as our customers… hitting a 95% service level is our goal. The second goal is to support of purchasing, manufacturing and customer accommodations.

Logistical value proposition
Logistical value proposition consists of a commitment to key customer expectations and requirements at a minimum cost The two elements of this value proposition are Service and Cost Minimization Firms must make appropriate tradeoffs between service and cost for each of their key customers The reality of logistics is that there is a paradigm between commitment to the customer and minimum cost. Logistics can be purchased. You can have trucks of product ready at the customers door waiting for a need… but this comes at a cost. The challenge is finding the right balance.

Service benefits are created by logistical performance in 3 areas
Availability involves having inventory to consistently meet customer material or product requirements Operational performance deals with the time required to deliver a customer’s order Key metrics for this area involve delivery speed and consistency Service reliability involves the quality attributes of logistics Key to quality is accurate measurement of availability and operational performance over time There are three areas to measure the service benefits. The first is Availability… this is having the inventory to consistently meet the customer’s material requirements. In the Coast Guard we use an Availability rate of 71% for the aircraft. This is not something that is totally controlled by the product in the Coast Guard. The Availability for product is 95%, allowing 5% of the time not available for parts. The next is operational performance… this is how fast you can get the product to the customer. It is not about getting the product there fast it is about how consistently fast you get it there. With the Coast Guard, you can get your parts the next day is you call prior to the last FEDEX truck (about 4pm). This is a consistent and can be counted on by the air stations. The operational performance also needs to take into account flexibility. At times, your customer may have unusual or unexpected requests. This is often the case when aircraft breakdown in the Caribbean. It is also that your logistics system will potentially malfunction. You need to have a process to fix errors when they happen. Service reliability is the quality attributes of the logistics. You have high service reliability if you consistently meet your delivery time and have consistent availability. Good service would be a 90% availability with a 7 day ship time. This allows the customer to plan appropriately and set realistic safety stock levels.

Basic logistical service may not fit all customers
Basic logistics service describes the level of service a firm provides all established customers However, some customers require unique or special value-added services Managers must realize that customers are different and that services provided must be matched to accommodate unique requirements and purchase potential We have been talking about customer service levels… but the reality is that all customers are not created equal. Some customers need unique or special value-added services. The Coast Guard sees the oversees units as special customers. It takes a lot longer to ship items to Sitka AK than to Savannah GA. So we have to increase allowance levels at the oversea units.

Cost minimization using the total cost logistics model
Traditional Cost Logistics Model Total Cost Logistics Model Focused on achieving the lowest possible cost for each individual function of logistics For example, Transport the material the cheapest way possible Expected lowest cost based on decisions that were cheapest for individual functions Ignored the impact of cost decisions across logistics functions Focused on achieving the lowest total cost across each function of logistics A cost decision in one function should consider impact to costs of all other logistics functions For example, Transporting material the cheapest way is slower than other choices. This requires an increase in storage cost to hold the material longer Would it still be a lower cost to use the cheapest mode of transport? The next thing we are going to talk about cost minimization. We have mentioned this before you are looking to reduce the total costs. First we will look at the traditional model: The focus is on reducing each components costs. Ignore cost decisions across logistics functions. Next we will look at the total cost logistics model Look at the lowest total cost. For example… the decision to ship slower means that you need to hold more inventory (increasing storage cost). Lets look at an example…

Example of evaluating alternatives to find lowest total cost
Compare two alternative shipping carriers to move a shipment of electronic chips Value of shipment = $25,000.00 Faster shipping is generally more expensive than slower shipping Carrier 1 costs $250 to ship Carrier 2 costs $20 more but delivers 1 day faster Product in transit is a form of inventory Holding costs for shipment is 40% of value per year No other cost differences across remaining logistics functions Here is your first class example… You are looking to see which of the two carriers you want to use to ship the electronic chip. Lets look at it from the traditional model (where you are the transportation manager). In this example you are just looking at minimizing transportation costs. The cost for carrier #1 is $250 to ship. The cost for carrier #2 is $270 to ship. Your boss would be happy that you saved the company $20 a shipment. But is that the best choice? 9

Compare two alternative shipping carriers to move a shipment of electronic chips Value of shipment = $25,000.00 Faster shipping is generally more expensive than slower shipping Carrier 1 costs $250 to ship Carrier 2 costs $20 more but delivers 1 day faster Product in transit is a form of inventory Holding costs for shipment is 40% of value per year No other cost differences across remaining logistics functions Daily holding cost = (annual holding cost x product value)/365 Now lets look at it from a total cost perspective. The daily holding cost is (annual holding cost * product value)/365 We know that the holding cost for this product is 40% so .40 * 25,000 = $27.50 So the first carrier is actually costing the company The second carrier is costing the company 270. 10

Traditional Cost Method Minimize transportation cost Compare 1st carrier at $250 vs. 2nd carrier at $270 Decision is to use 1st Carrier to save $20 Total Cost Method Minimize total of transportation and inventory cost Compare 1st carrier at $250 + $27.40 = $ vs. 2nd carrier at $270 Decision is to use 2nd Carrier since it is a lower total cost Daily cost of holding product = x /365 Annual holding cost Product value = (.40 x $25,000)/ 365 = $27.40

Logistics includes these major functions of work
Order Processing Inventory Transportation Warehousing, Materials Handling, and Packaging Integrated through a network of facilities E.g. warehouses and distribution centers There are many functions that make up the world of logistics. We are going to talk about each of them: Order Processing Inventory Transportation Warehousing, Materials Handling, and Packaging Integrated through a network of facilities

Integrated logistics framework
Goal is to achieve customer satisfaction at the lowest Total Cost Decisions in one functional area will impact cost of all others We integrate the logistical functions into a coherent framework starting with the customer (Order processing) and ending with the customer (Transportation and Delivery) Before we talk about each of the areas… I need to remind you that none of the topics are really separate. Logistics is extremely integrated. Every decision you make sends rippling effects to the other areas. You need an integrated plan that starts with the customer and ends with the customer (specifically the order and the delivery)

The five functions of logistical work are interrelated
Here is a visual representation of the interrelation of the five functions. If you look you will see that the middle rectangle is not one of the functions, but a title. Each of the five functions are connected. We will start by talking about the order process. Figure 2.1 Integrated Logistics

Order processing Order processing is the transmission of customer requirements to the supply chain Accurate information is needed to achieve superior logistical performance Responsive supply chains require accurate and timely information about customer purchase behavior Fast information flow enables improved work balancing Order processing is something that most everyone in the class is familiar with. It is the transmission of the customers requirements. Everyone has placed an order at a restaurant.

I’m also guessing that everyone has ordered something and been surprised by the actual results.

Order processing Order processing is the transmission of customer requirements to the supply chain Accurate information is needed to achieve superior logistical performance Responsive supply chains require accurate and timely information about customer purchase behavior Fast information flow enables improved work balancing To have superior supply chain performance you need accurate information. Additionally you want to have accurate and timely of the processed order. We have all had restaurants that missed the mark on one or both items.

Inventory Inventory requirements of a firm are directly linked to the facility network and the desired level of customer service Inventory strategy seeks to achieve the desired customer service with the minimum inventory commitment Inventory strategy is based on a combination of Core customer segmentation Product profitability Transportation integration Time-based performance Competitive performance The next of the five areas is inventory. Inventory is very closely tied to your facility network and the customer service level required. The facility network is the number and locations of your warehouses and the service level is how often do you want to not have the part requested available.

Inventory You have inventory to meet the customers demand.
But the reality is that you want to meet the customer demand with the lowest possible inventory level. Inventory is money. The money sitting in a warehouse could be used on much better things. The question is how to find the right product mix. The Pareto principle, or 80/20, rule helps answer the question of what to stock. The rule is that 20% of you product make 80% of your money. Clearly you want to make sure you stock the 20% items. It would not be wise to stock a lot of low profit , low volume items. Especially if the items are expensive.

Inventory Inventory requirements of a firm are directly linked to the facility network and the desired level of customer service Inventory strategy seeks to achieve the desired customer service with the minimum inventory commitment Inventory strategy is based on a combination of Core customer segmentation Product profitability Transportation integration Time-based performance Competitive performance The actual inventory strategy is based on a combination of five factors. Core customer segmentation: You want to make sure you meet the needs of your core customers. Product profitability: You better carry the items that are driving the companies profits. Transportation integration: You better understand that transportation rates are based on volume and shipment size and order appropriately. You want to consolidate appropriately. Time based performance: The inventory is directly related to the shipment speed. If you can get stuff quickly (i.e. a day from the manufacture) then there is no need for inventory. If it takes a long time, then you need more of the product. Competitive performance: You are competing for your customer business.. You want to carry items that will make you successful in that arena.

Transportation Transportation is the operational area that geographically moves and positions inventory There are three basic ways to satisfy transportation requirements Operate a private fleet of equipment Contract with dedicated transport specialists Engage carriers that provide different transportation services as needed on a per shipment basis The third area we are going to talk about is transportation. I’m sure that everyone understands that transportation is geographically moving the product from one location to another.

Transportation Cost Speed Consistency
If you want to measure transportation performance you primarily look at three factors: cost, speed and consistency. The cost is literally the payment for shipment between two locations. Remember that the cheapest transportation cost does not necessarily relate to the cheapest total cost. Speed is how far the product is moved from the two positions. The inventory can not be used while it is being transportated, so there is a strong desire to quickly transport product. As you can guess… it more expensive to ship the product quicker. (Click link to see intermodel shipping … both truck and rail) The last aspect is consistency. The consistency aspect is extremely important to supply chains. The level of consistency is related to the dependability of the transportation. If you have a shipping company with a bunch of old broken down trucks it is possible that your shipment could be delayed. This could impact your business it you order for just in time delivery.

Transportation There are three basic ways to satisfy transportation requirements Operate a private fleet of equipment Contract with dedicated transport specialists Engage carriers that provide different transportation services as needed on a per shipment basis There are three ways to meet your transportation requirments… One: buy a lot of truck and own and operate a fleet Two: Contract out the business you need from a third party… full truck Three: Contract out the business you need, on a per shipment basis… just move orders.

Warehousing, materials handling and packaging
These work activities are integral parts of other logistical functions Inventory typically needs to be warehoused at selected times during the logistics process Transportation vehicles require materials handling for efficient loading and unloading Individual products are most efficiently handled when packaged together into shipping cartons Effective integration of these functions facilitates the speed and overall ease of product flow throughout the logistical system The three topics discuss (order processing, inventory, and transportation) are interrelated to a degree, but our next topic is extremely interrelated. The topic is warehousing, material handling and packaging. If you hold a lot of inventory… you need a bigger warehouse. The warehouse is just a location to hold inventory. It can be one warehouse or many throughout the nation or world. The material handling process is the method of moving the product. This is closely tied to packaging. The handling can be completed with automated devices or manually. The goal is to handle the product as little as possible. Everytime you touch it there is a possibility to damage the product and manhours are expended. The packaging is normally designed to assist with the handling process. If you were trying to move twelve soda cans, you would find it is easier in 12pack form than individually. It is best to ship as one large package than a multitude of small individual products. The material handing and packaging help facilitate speed and ease of product flow to the consumer.

Facilities network The number, size and geographical relationship of facilities used to perform logistical operations directly impacts customer service capability and cost Types of facilities in the logistics network include Manufacturing plants, warehouses, cross-dock operations and retail stores The last category is the facility network. As I mentioned earlier, the network is the location of all of your manufacturing and warehouse locations. The design of a network requires careful consideration of geographical variations. If you are selling fishing equipment for commercial fleets, you would want to make sure that your warehouses are near locations with high populations of fisherman. If 40% of you customers are in the Gulf… then Houston would be a great warehouse location. Seattle would not be the best choice. It gets more complex if your manufacturing facility is in Seattle. Is the extra cost of warehouse worth the increase customer service. The reality is that a company has to continually examine and modify their facility network to meet changes to the supply and demand. If the original fishing business was in the North West and has now moved to the Gulf… what are you doing to service those customers.

Logistical Operations
Inventory Flow Information Flow For logistical operations to function properly there must be a proper flow of both inventory and information.

The scope of integrated logistical operations
As we look at this graph you can see the company … which is the area in the grey. The company that you are involved with need to coordinate the information and inventory flow from the suppliers to your customers. Figure 2.2 Logistical Integration

Inventory flow Managers must be concerned with the movement and storage of inventory in 3 major forms Materials Work-in-process Finished products Logistical operations should add value by moving inventory when and where needed Materials and components gain value at each step of their transformation into finished inventory Lets first talk about Inventory flow.. Inventory is basically in three forms: raw materials, work-in-process, and finished products. If you look at the three ways to manage inventory you will see… First in first out, last in first out, and weighted average. We will look at each from an accounting perspective…

The 3 areas of the value-added logistic process
Customer accommodation is the movement of finished product to customers Manufacturing support concentrates on managing work-in-process inventory as it flows between stages of manufacturing Procurement is concerned with purchasing and arranging inbound movement of materials, parts, and/or finished inventory from suppliers into manufacturing or assembly plants, warehouses or retail stores The logistics process can be broken down into 3 value added processes: The first is customer accommodation: this is getting the product to the customer. Customer accommodation is commonly called customer relation management. The next is manufacturing support: this the process of getting the raw materials turned into a final product. In the past all raw materials showed up at the manufactures door… and a week later the final product popped out. Now different parts are made all over the place and assembled at different plants. The logistics chain must support this. The last value added process is the procurement process: Procurement is the same thing as purchasing or buying… it is the purchasing of material that are coming inbound to the manufacturing site. All three areas overlap… but they are all equally important to the logistics process.

Information flow Information flow identifies specific locations within a logistical system that have requirements Information also integrates the three operating areas Information facilitates coordination of planning and control of day-to-day operations Logistical information has two major components Planning / coordination information Operational information needed to complete work The next are to discuss is the information flow. Information flow in the world of logistics is based in three features: Direct requirements for movement regarding size, inventory availability, and urgency. Without accurate information… nothing can happen. The two major components are the planning and coordination information and the operational communication (needed for day-to –day work).

Shipment consolidation Quality Life cycle support
Logistical integration requires achieving six objectives simultaneously Responsiveness Variance reduction Inventory reduction Shipment consolidation Quality Life cycle support Next we are going to talk about is the 6 objectives of the logistics integration… they include: Responsiveness Variance reduction Inventory reduction Shipment consolidation Quality and Life cycle support.

Responsiveness Firm’s ability to satisfy customer requirements in a timely manner The companies ability to satisfy customer requirements in a timely manner is responsiveness. In a responsive system, inventory is not deployed until the customer commits. There must be support in place (such as transportation and inventory availability) to meet this commitment.

Variance Reduction Variance results from failure to perform any expected facet of logistical operations as anticipated. The book states that variance is from failure to perform an expected facet of the logistics operation as anticipated. I’m going to say that variance is actually deeper than a failure. Variance is a natural issue… different people work at different rate. Natural occurrences happen that delay operations that are not specifically failures. Either way, the goal is to reduce variance as much as possible. If you know that you can produce a product in 2 working days 90% of the time and you know you can ship the product in 1 working day 95%... You can feel comfortable telling your customer that it will be there in 3 working days. If the numbers were 99.9 and 99.9 they you could feel even more comfortable with the promise.

Inventory Reduction An integrated logistic system must control asset commitment and turn velocity The next objective is inventory reduction. The goal is to control asset commitment and turn velocity. Asset commitment is the financial value of the deployed inventory. i.e. do not have lots of inventory just sitting around, just to have it sit around. Make sure you have a need for the inventory. Turn velocity is the rate that the inventory is turned over time. For example you could say that you turn your inventory 5 times a year. That would mean that the inventory comes and goes 5 times a year. There is benefit to having inventory… there are economies of scales in both manufacturing and procurement. That must be balanced with the excess inventory.

Shipment Consolidation
Shipment consolidation end goal is reduction of transportation costs. Over 60% of every logistics dollar is spent on transportation. You want to consolidate small shipments for transportation. This usually take innovative programs that use multifirm coordination to optimize the shipment consolidation process. Sometime you have to delay shipment for consolidation reasons, again all decisions must be balanced for the lowest total cost.

Quality A fundamental operational objective is continuous quality improvement Continuous quality improvement is a common goal for all operations. TQM (Total Quality Management) is a major initiative. Logistics is something that must be done proprely the first time. If the product is late… it may become relatively worthless. (Missing a Christmas delivery of Ham). Logistics is something that is very difficult to get a zero-defect order-to-delivery rate, but that is a common metric. Logistics is performed under challenging conditions all over the world in day or night, all with out direct supervision.

Life Cycle Support The logistics support for the life of the product.
Few items are sold without the guarantee that the product will perform. So at times the logistics flow must be reversed, to bring the product back to the manufacture. Some products must be management from cradle to grave, so the logistics support must contain some type of aftermarket services, product recall services and eventually disposal efforts.

Logistical operating arrangements
All logistical arrangements share two common characteristics They are designed to manage inventory The range of logistics alternatives is limited by available technology Three widely utilized structures are Echelon (traditional) is a linear flow from origin to destination through buffers or warehouses/distribution centers Direct is designed to ship products directly to customer’s destination from one or a limited number of centrally located inventories Combined is a combination of Echelon and Direct, depending on the product, market, or customer The next topic is logistics operating arrangements. A companies logistical arrangements are the way that they plan to manage their inventory and what technology they are going to use to help. There are three widely used structures to help with the arrangements. The first is Echelon… this is a linear flow from origin to destination through buffers or distribution centers.

Figure 2.3 Echelon Structured Logistics
Here is a visual of the echelon structure. The suppliers send the product to a distribution plant. The next level in the chain is a distribution or consolidation warehouse. This can either combine into bigger products or breakdown products into smaller products. This product then can move to a wholesale or distribution center… then retailer then to the customer.

Logistical operating arrangements
All logistical arrangements share two common characteristics They are designed to manage inventory The range of logistics alternatives is limited by available technology Three widely utilized structures are Echelon (traditional) is a linear flow from origin to destination through buffers or warehouses/distribution centers Direct is designed to ship products directly to customer’s destination from one or a limited number of centrally located inventories Combined is a combination of Echelon and Direct, depending on the product, market, or customer The next option is direct… There is no need for a graph. It is just a direct shipment from the a centrally located inventory to the customer. Direct distribution typically uses expeditied services of premium transport combined with information technology to rapidly process customer orders.

Figure 2.4 Combined Echelon and Direct Delivery
The last option is a combined delivery structure. It has the standard echelon process, but also has the ability to direct ship from any location. With this structure you coul dhave slower moving parts at the manufacture location and the faster moving parts at the retailer location.

Flexible structures are programs to service customers using alternatives
Flexible operations are preplanned contingency strategies to prevent logistical failures For example, a warehouse is out of an item so a contingency policy assigns the total order to another warehouse The structure appears the same as a combined arrangement, but with the ability to change the logistical structure to suit the service need Different approaches for different situations Very common with “factory-less” companies like Nike and Best Buy The combined structure is an example of a flexible system. The ability to have flexible structure is important to a logistic system. These preplanned contingencies help prevent logistical failures. A simple example is if the west coast warehouse is out of an item, then any future orders are sent to the east coast warehouse. This can be something that is part of the information system or manually completed.

Example situations for flexible logistics structure
The customer-specified delivery facility might be near a point of equal logistics cost or equal delivery time from two different logistics facilities The size of a customer’s order creates improved logistical efficiency if serviced through an alternative channel arrangement Decision to use a selective inventory stocking strategy Agreements between firms to move selected shipments outside the established echeloned or direct arrangements We will talk about some situations where it is important to have flexible logistics structure.

The customer-specified delivery facility might be near a point of equal logistics cost or equal delivery time from two different logistics facilities The first is when a customer is at an equal spot between two logistic facilities. It is important to have a system than utilizes system capacity by balancing workloads while protecting customer service levels. Customer

The size of a customer’s order creates improved logistical efficiency if serviced through an alternative channel arrangement The next is the size of a particular customers order. A particular order is too large or too small, compared to most orders to go through traditional transportation channels. i.e. instead of using FEDEX which you do for small order, actually contract with a 3rd party to ship a truckload to the customer.

Decision to use a selective inventory stocking strategy The next flexible logistics structure is the ability to stock certain types of inventory at particular locations. The master facility may stock everything, but the satellite facilities may only stock the things that move the most. They would have to direct ship from the master facility and local facility. The company would have to decide if they want to split the shipments, or consolidate customer orders for same time delivery.

Agreements between firms to move selected shipments outside the established echeloned or direct arrangements The last example is movement of shipments outside established echelon or direct arrangements.

Supply chain synchronization
Supply chain synchronization is the operational integration of multiple firms across a supply chain Seeks to coordinate the flow of materials, products and information between supply chain partners to reduce duplication of effort Seeks to reengineer internal operations of individual firms to leverage overall supply chain capability We have been talking about synchronizing the supply chain within one firm… the situation gets even more difficult when you try to synchronize the supply chain within multiple firms. You need to coordinate the flow of materials, product and information with your partners with the minimal about of duplications. You will also need to reengineer your operations within the to overall supply chain capability. In the end you want to reduce your inventory dwell time.

The logistics performance cycle is the basic unit of supply chain design and operational control
The performance cycle represents elements of work necessary to complete the logistics related to customer accommodation, manufacturing or procurement A performance cycle consists of the following elements Nodes Links Inventory Base stock Safety stock Input and output requirements The elements of work necessary to complete logistics is called the performance cycle. The cycle consists of a number of elements… Nodes, links, Inventory and input/output requirements.

Performance Cycle Base Stock Safety Stock
We are looking at two components of the inventory system… the base stock and safety stock. The base stock is commonly called the order-up-to-level. It is a full amount of stock. The safety stock is in place to protect against demand and lead time variance. Safety Stock

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