1

12. OUTBOUND LOGISTICS

Although companies cannot afford to neglect their inbound logistics systems, many companies focus
more upon outbound systems because of the costs involved and because managing the outbound
system well make it easier to achieve and sustain market share.

The current emphasis upon reducing cycle times and developing pull inventory systems and flexible
manufacturing makes it even more critical that the inbound and outbound systems be coordinated. It
is almost impossible in todays environment to manage inbound and outbound systems in the same
company as separate processes.

Inbound and outbound systems share some common activities, such as transportation, inventory,
warehousing, and materials handling. However, like inbound systems, outbound systems have some
activities that are unique or deserve special emphasis, such as customer service and channels of
distribution.

12.1. CHANNELS OF DISTRIBUTION
A channel of distribution is one is one or more companies or individuals who participate in the flow of
goods and services from the producer to the final user of consumer. Many companies use other
companies or individuals to distribute some or all of their products to the final consumer.

When we stop at a supermarket to pick up a pack of Arnotts Tim Tam, a tube of Colgate toothpaste,
and a can of Campbells soup, we are buying a relatively small quantity of several companies
products. We do not want to visit three different shops to purchase these products, and Arnotts and
other manufacturers do not want to operate their own stores in proximity to every possible buyer.

So for cost efficiencies and customer convenience, Arnotts sells in large quantities to other
companies who can get the product to a location convenient for the customer more efficiently than
Arnotts could. That is, these companies leverage costs through the volume of several product lines.
This does not mean that Arnotts may not sell directly to some users or customers. Large restaurants,
hospitals, schools, military installations, large chains, and other organisations that purchase in large
quantities may actually buy directly from Arnotts.

Most consumers, however, purchase Arnotts Potato chips or Tim Tam from other company, usually
a retail store. The retail store may buy from a wholesaler or broker, and so on.
Certain companies only sell directly to their ultimate customers. Boeing Aircraft Corporation is an
example. However, many companies sell some part of their product line through distribution

2
channels.

An important point here is that the channel company such as Kmart, Coles or Toys R Us is the
manufacturers real customer. Therefore, a manufacturer discussing customer service is usually
talking about some retailer, not about an individual customer.

The successful retailers have based much of their efficiency upon good logistics systems. Wal-Mart is
frequently lauded in logistics circles for its efficiencies in warehousing, transportation, materials
handling, and other logistics process. The new retailers understand the importance of good logistics
and know that it gives them business power. Sears Merchandise Group has hired Gus Pagonis, the
retired three-star general and logistics hero of the Persian Gulf War, who managed that 7,000-mile
supply chain. He has been brought in to reengineer the logistics system at Sears and has already made
major strides in this direction.

IKEA, the Swedish furnishings company, is another example of a super retailer who has expanded
into a giant enterprise with efficient logistics and good business acumen. IKEA has grown from a
small Swedish mail-order operation to the largest retailer of home furnishings in the world, with over
100 stores and revenues near $5 billion. Its logistics operation is the featured centrepiece of its global
business system, with a network of fourteen warehouses that link to point-of-sales data in all the
stores. The warehouse operates as logistical control points, consolidation centres, and transit hubs.
They play a proactive part in the integration of supply and demand, decreasing the need to provide
storage for production runs, anticipate retail demand, and eliminate storage.

12.2. CUSTOMER SERVICE
The Logistics/Marketing Interface
Defining Customer Service
Elements of Customer Service
Performance Measures for Customer Service


12.3. INTERNET
This international computer network connects hundreds of millions of companies and people around
the world. Internet technology enables integration of traditional internal information systems as well
as enhancement of communication among organizations. Internet-based systems tie together global
design, manufacturing, delivery, sales, and after-service activities.


3
The internet has reshaped how business thinks about delivering value to its customer, interacting with
suppliers, and managing its employees. A prime benefit is speed, with managers able to make
decisions with better information much more quickly than in the past. Here are just a few examples of
its applications:
Customer visiting www.dell.com can configure, price, and order computer systems 24 hours a
day, 7 days a week. They can get current order status and delivery information and have online
access to the same technical reference materials used by Dell telephone-support teams.
Integrated Technologies Ltd., a British manufacturer of medical diagnostic equipment, exchange
3-D design models in real time with clients in Europe through a password-secured site on the
market. This practice allows customers not only to review the technical aspects of products but
also to do more sophisticated analysis-like simulations of stress, or flow through a valve.
Fast-food restaurants, like Burger King, are installing remote tracking systems. Managers can
now check the time clock, review cash-register sales, or monitor refrigerator temperatures over
the Internet.


12.4. E-COMMERCE
E-commerce is the use of computer networks, primarily the internet, to buy and sell products and
services, and to exchange information. The result of e-commerce is a great range of fast, low-cost
electronic services.

The business applications are evident across business activities, from tracking consumer behaviour in
marketing functions, to collaboration on product design in production functions, to speeding
transactions in accounting functions. Former IBM chairman Louis Gerstner believes e-commerce is a
whole new way of doing business and describes it as all about cycle time, speed, globalization,
enhanced productivity, reaching new customers, and sharing knowledge across institutions for
competitive advantage,

E-COMMERCE DEFINITIONS
B2B (business-to-business) this implies that both sides of the transaction are businesses, nonprofit
organizations, or governments,
B2C
C2C
C2B



4
12.5. INVENTORY TRACKING
FedExs pioneering efforts at tracking packages from pickup to delivery have shown the way for
logistics managers to do the same for their shipments and inventory. Surely if FedEx can track
millions of documents each day worldwide, logistics managers in other firms can also do so. The
tools of e-commerce, including the discipline of data collection, bar-code technology, radio
frequency, and electronic communications to track inventory in transit, on the shop floor, and in the
warehouse are now perfected and available to the resourceful logistics manager.
Ford has hired UPS to track vehicles as they move from factory to dealers. Tracking cars and trucks
has been an embarrassingly inexact science for years. Fords tracking system is expected to track
more than 4 million Ford cars and trucks each year. Using bar codes and the Internet, dealers are able
to log onto the Web site and find out exactly where the vehicles they have ordered are in the
distribution system. As logistics managers move to an era of mass customization, with each customer
ordering exactly the car he or she wants, customers will expect to know where their car is and exactly
when they can pick it up. The Internet and e-commerce can provide this service and do so
economically.


12.6. INVENTORY REDUCTION
WAREHOUSING FOR E-COMMERCE
The new e-commerce warehouse is run not by the producer but by the logistics vendor. As the case
study shown below, In E-Commerce, Pass-Through Facilities Replace Warehouses suggests, it is
less a warehouse than a pass-through facility. Working with United Parcel Service, Nike, Inc. uses
such a facility in Louisville, Kentucky, to handle online orders. And FedExs warehouse park next to
the airport in Memphis can receive an order after a store closes for the evening and locate, package,
and ship the merchandise that night. Delivery is guaranteed by 10 A.M. the next day.

IN E-COMMERCE, PASS-THROUGH FACILITIES REPLACE WAREHOUSES
The two buildings spread themselves over 160,000 square feet more than two football fields on
the south side of Portland, Oregons airport. As an answer to a vexing issue in e-commerce, namely,
actually delivering the goods ordered, these pass-through facilities (formerly called warehouses)
help make the product available. For e-commerce retailers, selling an item online is the easy part:
getting it quickly to the customer is a lot trickier.

A pass-through facility is conceived of less as a holding area than as a transaction hub. The massive,
automated conveyors and storage equipment are intended to speed orders in and out. Targeted by

5
corporations that deal with high volume and quick delivery, customers include integrators such as
UPS, Emery, DHL, and FedEx, as well as freight forwarders, logistics companies, and airlines.

The buildings in a pass-through facility are configured to make it easy for loading equipment to
manoeuvre. With direct access to taxiways, four 747s and 68 large trucks are able to load and unload
at the Portland buildings at the same time. The closer you can get your product to the air cargo
centre, the quicker your delivery time. The only way e-commerce is going to compete effectively
with local retailers is if a customer logs on and orders something, and they can get it in a day, says
Steven Bradford, VP of the facilitys developer, Trammell-Crow.

Sources: New York Times (January 23, 2000): B-3; Transportation & Distribution (January 2000):
42-52; and Consulting-Specifying Engineer (June 2000): 30-34.


JIT DELIVERY FOR E-COMMERCE
J ust-in-time systems in manufacturing are based on the premise that parts and materials will be
delivered exactly on time. Electronic commerce can support this goal by coordinating the suppliers
inventory system with the service capabilities of the delivery firm.

FedEx has a short but successful history of using the Internet for online tracking in the world of
e-commerce. In 1996 the firm launched FedEx InterNetShip, which within 18 months had 75,000
customers. A FedEx.com customer today can compute shipping costs, print labels, adjust invoices,
and track package status all on the same Web site. (FedEx, by the way, saves $3 for each inquiry made
via the Web compared with a phone call). FedEx also plays a core role in other firms logistics
processed. In some cases, FedEx runs the server for retailer Web site. In other cases, such as for Dell
Computer, it operates warehouse that pick, pack, test, and assemble products, then handle delivery
and even customs clearance. FedExs B2B service, called Virtual Order, integrates different
companies Web catalogs and customer orders for Dell. FedEx then fulfils orders and delivers them
via its fleet of trucks and planes. FedEx is effectively demonstrating that an e-commerce service
company can economically manage complex transactions for other companies.


12.7. LOGISTICS IMPROVEMENTS
COORDINATED PICKUP AND DELIVERY
FedEx maintains a unified view of the data residing in different parts of its network so it can better
track and coordinate orders for its end customer. This led the firm to the new model of coordinated
pickup and delivery. It works like this: Cisco and FedEx established an alliance in which FedEx picks

6
up and delivers Cisco components where needed, when needed. E-commerce allows FedEx to know
where each piece of Ciscos shipments is headed and when it will be ready for shipment. FedEx then
delivers the items precisely when and where they are needed for assembly and installation. FedEx
merges the orders in transit. The components never go to a warehouse. The economies are found in
the reduction of in-transit inventory and having the components present when needed no sooner and
no later. The amount of time items are in the distribution system is reduced, as is the quality of items
in the system. These techniques are shrinking delivery and installation time while reducing costs.

12.8. LOGISTICS MANAGEMENT
The purpose of logistics management is to obtain efficiency of operations through the integration of
all material acquisition, movement, and storage activities. When transportation and inventory costs
are substantial on the input and output sides of the production process, an emphasis on logistics may
be appropriate. When logistics issues are significant or expensive, many firms opt for outsourcing the
logistics function.

COST OF SHIPPING ALTERNATIVES
The longer a product is in transit, the longer the firm has its money invested. But faster shipping is
usually more expensive than slow shipping.

EXAMPLE 1
A shipment of new connectors for semiconductors needs to go from Melbourne to Singapore for
assembly. The value of the connectors is $1,750.00 and holding cost is 40% per year. One airfreight
carrier can ship the connectors 1 day faster than its competitor, at an extra cost of $20.00.
(a) Calculate the daily holding cost
(b) Which carrier would you decide on?


LOGISTICS, SECURITY, AND JIT
Since the September 11, 2001, terrorist attacks, supply chains have gotten more complex and can be
expected to become even more so. However, technological innovations in the supply chain are
improving logistics, security, and J IT. Technology is now capable of knowing truck and container
location, content, and condition. New devices can detect whether someone has broken into a sealed
container and can communicate that information to the shipper or receiver via satellite or radio.
Motion detectors can also be installed inside containers. Other sensors can record interior data
including temperature, shock, radioactivity, and whether a container is moving. Tracking lost

7
containers, identifying delays, or just reminding individuals in the supply chain that a shipment id on
its way will help expedite shipments. Improvements in security may aid J IT, and improvements in J IT
may aid security both of which can improve supply-chain logistics.


Exercise 1:
Your options for shipping $100,000 of machine parts from Baltimore to Kuala Lumper, Malaysia are
(a) a ship that will take 30 days at a cost of $3,800, or (b) truck the parts to LA and then ship at a total
cost of $4,800. This will take 20 days. You are paid via a letter of credit the day the parts arrive. Your
holding cost is estimated at 30% of the value per year.
(a) Which option is more economical?
(b) What customer issues are not included in the data presented?
(c) If you have the third option that costs only $4,000 and also takes 20 days, what is your most
economical plan?


Exercise 2:
MaxiFast Shipping is the logistics vendor for Meticulous Manufacturing Company in Gundagai.
Meticulous has daily shipments of a power-steering pump from its Gundagai plant to an auto
assembly line is Brisbane. The value of the standard shipments is $250,000. MaxiFast Shipping has
two options: 1) its standard 2-day shipment or 2) a subcontractor who will drive overnight with an
effective delivery of 1 day. The extra driver costs $175. Meticulouss holding cost is 35% annually
for this kind of inventory.
(a) Which option is more economical?
(b) What production issues are not included in the data presented?