Logistics

Chapter Objectives
Be able to:
Describe why logistics is important and discuss the major decision areas that
make up logistics.
List the strengths and weaknesses of the various modes of transportation and
discuss the role of multimodal solutions.
Identify the major types of warehousing solutions and their benefits.
Discuss the purpose of a logistics strategy and give examples of how logistics
can support the overall business strategy.
Calculate the percentage of perfect orders.
Calculate landed costs.
Explain what reverse logistics systems are, and some of the unique
challenges they create for firms.
Use the weighted center of gravity method to identify a potential location for a
business.
Develop and then solve, using Microsoft Excels Solver function, an
assignment problem.
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 2

Logistics

Planning, implementing, and controlling the

efficient, effective flow and storage of goods
and materials between the point of origin and
the point of consumption

Why the Increasing Interest?

Deregulation
Globalization
Technological breakthroughs
Environmental concerns
Performance impact

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 4

Deregulation
Transportation providers

Elimination of artificial barriers

Unrestricted markets
Multimodal solutions
Price, schedule, and terms flexibility

Buyers have greater freedom

Negotiate prices, terms, and conditions
Ownership issues

BUT
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 5

Deregulation (continued)
with greater freedom comes new
responsibilities
Key point
Logistics has evolved from being a
tactical area to a strategic one

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 6

Globalization
(Worldwide Statistics)
Year

Expenditures

% GDP

1997

$5,095 Billion

13.4%

2002

$6,732 Billion

13.8%

Change

+32%

+3%

What is driving this activity?

2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 7

Environmental Concerns
Even while certain aspects of logistics have
been deregulated, other areas are being
controlled more stringently
Fuel efficiency
Pollution
Recovery, recycling, and reuse of packaging,
containers, and products
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 8

Management Areas
Transportation
Warehousing (and more generally, location)
Material handling
Packaging
Inventory management
Logistics information systems
(And some would put logistics service providers
here as well!)
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 9

Logistics Decision Areas

Transportation
Modes
Formats
Pricing

Warehousing
Consolidation
Cross-Docking and Break-Bulk
Hub-and-Spoke
Inventory
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 10

Major Transportation Modes

Highway (truck)
Water
Rail
Air
Pipeline
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 11

Modal Shares of Shipments

(within US, 1999/2002)
Mode

Value (%)

Tons (%)

Ton Miles (%)

80.3/86.0

58.5/67.4

28.4/28.7

Water

2.5/1.1

11.1/11.1

20.4/13.6

Rail

4.8/3.7

11.2/16.1

26.7/36.8

Air

2.7/3.2

0.2/0.4

Pipeline

4.2/1.8

13.7/5.9

17.6/20.5

Multimodal/Unknown

5.6/5.6

5.5/5.5

6.8/6.8

Highway (trucking,
parcel, postal, courier)

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 12

Highway Mode
Strengths

Weaknesses

Flexibility to pick up and

deliver where and when
needed
Often the best balance
between cost/flexibility and
delivery reliability/speed
Can deliver straight to the
customer (increasing)
Can be available 24/7

Not the fastest

Not the cheapest

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 13

Water Mode
Strengths

Weaknesses

Highly cost effective

for bulky items
Works best for high
weight-to-value items
Most effective when
linked into multimodal
system

Limited locations
Relatively poor
delivery
reliability/speed
Often limited
operating hours at
docks

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 14

Air Mode
Strengths

Weaknesses

Quickest delivery over Often the most

longer distances
expensive,
particularly on a per
Can be very flexible
pound basis
when linked to
highway mode
Works best for low
weight-to-value items
Grew 90.5% in value of goods shipped from 1993 to 2002
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 15

Rail Mode
Strengths

Weaknesses

Highly cost effective

for bulky items
Can be most effective
when linked into
multimodal system

Limited locations, but

better than for water.
Better delivery
reliability/speed than
water

Increasing part of multimodal solutions, dual tracks on major routes

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 16

Question

How can businesses design

solutions that exploit the strengths
of each mode?

Technological
Breakthroughs
Standardized containers for ease of transfer
Roadrailers, etc.
Multimodal solutions
Ship Truck Train Truck ?

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 18

Multi-Modal Solutions
(An example)

North Carolinas Global TransPark

2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 19

Global TransPark
15,700 acres at full development with two
parallel runways of 11,500 feet and 13,000
feet
Integrated air, rail, road, and nearby sea
transportation capabilities
Free trade zone status

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 20

Justification for Such a Facility

Shift from domestic to global economies
Emergence of just-in-time, flexible and agile manufacturing practices
requiring sophisticated logistics solutions
The rapid growth of distribution via air freighters (roughly four times
the growth rate of passenger service by the airlines)
The need to use air cargo, shipment by sea, and delivery by trucks
and trains in an overall distribution system
The need for a commercial distribution hub in the Eastern United
States that can reach more than 60 percent of the nations population
overnight and also provide a gateway to global markets.
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 21

Warehousing

Any operation that stores,

repackages, stages, sorts, or
centralizes goods or materials

New View
Warehousing a key piece of logistics strategy
J. B. Hunt
Lowes

More than just storage

Warehousing Distribution Centers

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 23

Warehousing Benefits
Economic benefits:
Accrue directly to company
Must consider total system costs

Service benefits:
Support customer service needs
May or may not reduce costs

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 24

Consolidation

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 25

Example 1
Customer

Shipment

Weight

Venetian Artist
Supply

100 boxes, artist

supplies

3,000 lbs.

Kaniko

100 PC printers

3,000 lbs.

Ardent Furniture

10 dining room sets

4,000 lbs.

Dedicated truck from Los Angeles to Atlanta: $2,000

Cost to run consolidation warehouse: $9 per hundred-weight
Local delivery in Atlanta: $200 per customer
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 26

Cost Benefits of Consolidated

Warehousing
Warehousing costs

10,000 lbs $9/100 lbs =

Cost of one truck to Atlanta

Delivery to final customer

$900
$2,000

3 customers $200 =

$600

Total:

$3,500

How does this compare to the cost of separate

dedicated shipments?
What about truck utilization (assume 3 trucks
hold 60,000 lbs.)
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 27

Cross-Docking

What about supply / demand mismatches?

2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 28

Break-Bulk
Like cross-docking, but usually refers to a single
source

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 29

Example 2
Manufacturer Customers
500 lb. average order size
Direct shipments:
$7.28 per hundred-wt.
$7.28 5 = $36.40
> 20,000 lbs: $2.40 per hundred-wt.
Local delivery: $1.35 per hundred-wt.
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 30

Insight:
If we can run a warehouse for less than:
5 ($7.28 $2.40 $1.35) = $17.65/500 lbs.
Or
$17.65 / 5

= $3.53 per hundred-weight

we should do it.
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 31

Hub-and-Spoke Systems

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 32

Postponement
Coca Cola syrup
Bulk food products,
paints, etc.
high volumes
containers

Customer A
Postponement
Assembly,
Packaging,
Labeling, etc.

Customer B
Customer C

Minimizes risk
Minimizes inventory (how?)
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 33

Warehousing Service
Benefits:

Spot stock
Assortment

Spot Stock
Region
1
Region
2

Time sensitive, seasonal items

Often temporary, public storage

Region
3

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 35

Assortment
Broad product line and good inventory
control key to success
Customer A

Supplier F
Supplier G
Supplier H

Assortment
Warehouse

Supplier E

Customer B
Customer C
Customer D

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 36

Information Systems
Decision support tools
Real-time simulation and optimization
Location selection
Cost estimations

Precise coordination of multimodal solutions

Execution systems
Global positioning systems
Bar-coding applications
RFID on the horizon as replacement (NYK Logistics)
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 37

Material Handling and

Packaging

What are the typical marketing

criteria?

Unitization
Unit loads

Transport and handling efficiencies

Non-rigid containers

pallets and unit load platforms

ropes, steel, shrink and stretch wrap

Rigid containers

Maximum protection (Viper windshield frame)

Standard sizes?
Recycling?

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 39

Packaging Implications
Transportation
Class segmentation
Damage protection

Material handling and warehousing

Storage requirements
Unitization
Container recycling
Ease of handling

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 40

Questions

What are the strengths and weaknesses of

each?
How does the choice of format tie into the
business strategy?

The Evolution of Logistics

Strategy
From functional silos to strategic
positioning

Logistics Strategy Choices

Performance Dimension

Transportation Mode

Warehousing System

Delivery Reliability

Highway, Air

Direct Ship, Assortment,

Spot Stock

Delivery Speed

Air, Highway

Direct Ship, Assortment,

Spot Stock

Mix Flexibility

Highway, Air, Rail

Assortment, Spot Stock

Design Flexibility

Highway, Air

Postponement

Volume Flexibility

Highway, Air

Direct Ship, Assortment,

Spot Stock

Cost

Rail, Water, Pipeline,

Highway

Consolidation, CrossDocking, Hub-and-Spoke

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 43

Who Owns Logistics?

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 44

Owning Versus Outsourcing

Does the firms volume justify a private
system?
Would ownership limit firms ability to
respond to marketplace changes?
Is logistics a core competency?
Are outsource capabilities are available?
Kellogg logistics strategy example in text
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 45

Transportation Outsources
Common (public) carriers
Published rates and schedules
Nondiscriminatory pricing
Increased flexibility to partner

Contract carriers
Service for select customers
Unlimited number of customers

Third-Party Logistics Providers (3PLs)

Service firms specializing in logistics for other
companies
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 46

Warehouse Ownership
Issues
Public

Contract

Private

Cost structure

EOS

EOS

???

Financial flexibility

High

Moderate Low

Location flexibility

High

Moderate Low

Managerial control

Less

Varies

Highest

Expertise

High

High

???

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 47

Question:

When would it make sense to

combine private and public
ownership?

Measuring Performance
Perfect Order

Delivered on time
Shipped complete
Invoiced correctly
Undamaged in transit

Landed Costs

Packing
Insurance
Customs, other fees
Warehousing
Transportation
Documentation

(Redwing Automotive Example)

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 49

Reverse Logistics Systems

Customer returns
Warranty failures
Incorrect or damaged orders

Repair and remanufacture process

support
Recycling (increasing importance!)
Generally independent systems because of low volume and
mix complexity
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 50

Logistics Decision Models

Weighted Center of Gravity Method
Optimization
Assignment Problem

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 51

Weighted Center of Gravity

A method to determine best location for central warehouse
from n demand points.
Requires position of each demand point (Xi, Yi)
Requires weight of each demand point (Wi), based on importance,
demand volume, market strategy, etc.
n

Wi X i

Weighted X coordinate X i 1n
*

Wi

i 1

W i Yi

Weighted Y coordinate Y i 1n
*

Wi

i 1

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 52

CupAMoes Coffee

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 53

Optimization
Requires an objective function to be maximized or minimized.
Decision variables values to be manipulated to affect
outcome of objective function
Constraints limits set on range of decision variables to be
used or on other aspects of the solution possible
For Example:

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 54

Assignment Problem
Specialized optimization model.
Decision variables are the shipment quantities
Known values are demand, capacity, and shipping cost
between warehouses
Constraints:
Sum of shipments from a warehouse cannot exceed its capacity
Sum of shipments to meet demand must be greater than or equal to the
demand
Sum of shipments from each warehouse must be greater than or equal to
zero
(Flynn Boot Company Excel example in text)
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 55

Case Study in Logistics

Just-In-Time Shipping

Supplemental Slides on
Transportation Costs and Factors

Pricing, Distance, Economic

Factors

Pricing Transportation
Services
Economic factors
Pricing versus distance
Price/pound versus density
Stowability, handling, and liability
Market factors

Ratings
Goods classification
Class index
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 58

Price

Economic Factors I
why the tapering principle?

Price/pound

Distance

Density
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 59

Economic Factors II
Stowability, handling, and liability

versus

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 60

Economic Factors III

Market factors
What might this include?
West
Coast,
USA

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

East
Coast,
USA

Chapter 12,
Slide 61

Ratings

Translating economic factors into

actual prices

Ratings (a simplified view)

Goods classification
Perishability, stowability, handling,
etc.

Class index?
From 35 - 400
average product = 100
Based on expected transportation
costs
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 63

Determining Transportation
Rates
Rate Determination
By weight (Less-than-truckload shipment)
By distance (truckload shipments)
Minimum charges and surcharges

Exceptions to the rule

Seasonal commodities
FAK (freight of all kinds)

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 64

Example 1
Shipping 800 lbs of glass slides from Atlanta, GA
to Lansing, MI
Looking at a rate classification guide
Item

Articles

Class - LTL
Shipment

Class TL
Shipment

Minimum TL
Weight

86770

Glass, microscopical
slide or cover, in
boxes

70

40

3,600 lbs.

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 65

Specific Rates for Shipments

FROM Atlanta TO Lansing
Rates express $ charged per hundred-weight
Rates fall as rate class falls and volume increases
Rate Class

< 500 lbs

500 to 1,000
lbs

1,000 to 30,000
lbs

200

$98.37

$61.97

$17.00

100

$52.62

$43.68

$9.22

70

$40.48

$33.59

$8.10

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 66

Result
$33.59 8 = $268.72 shipping cost
Key points
Classification tables standardized, BUT
Rate tables vary by transportation provider
Real-time updating of provider tables

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 67

Example 2
3 Shipments of Class 100 to Lansing:
5,000 lbs., 10,000 lbs., 7,000 lbs.

Different stops in Lansing

Can consolidate, but extra $100 for two
additional stops
What to do?
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 68

What to Do?
Separate shipments at
costs below:

Consolidated shipments at
costs below:

50$18.94

220$9.22 = $2,028

= $947

100$14.74 = $1,474
70$18.94

= $1,326
$3,747

Additional
drop-off
charges:

2008 Pearson Prentice Hall --- Introduction to Opera

tions and Supply Chain Management, 2/e --- Bozarth and

$100
$2,128
Chapter 12,
Slide 69

Key Points
Choosing a mode
Five choices
Speed? Cost? Flexibility?

Choosing a format
Flexibility versus control

Controllable factors affecting cost

Density, stowability, packaging, and
containerization
2008 Pearson Prentice Hall --- Introduction to Opera
tions and Supply Chain Management, 2/e --- Bozarth and

Chapter 12,
Slide 70