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.
 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
 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
 Deregulation (continued)
with greater freedom comes new
responsibilities

Key point
Logistics has evolved from being a
tactical area to a strategic one
 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?

 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
 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!)
 Logistics Decision Areas
Transportation
Modes
Formats
Pricing
Warehousing
Consolidation
Cross-Docking and Break-Bulk
Hub-and-Spoke
Inventory
 Major Transportation Modes
Highway (truck)

Water

Rail

Air

Pipeline
 Modal Shares of Shipments
(within US, 1999/2002)

Mode Value (%) Tons (%) Ton Miles (%)

Highway (trucking, 80.3/86.0 58.5/67.4 28.4/28.7
parcel, postal, courier)
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 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 Mode
Strengths Weaknesses
Flexibility to pick up and Not the fastest
deliver where and when Not the cheapest
needed
Often the best balance
between cost/flexibility and
delivery reliability/speed
Can deliver straight to the
customer (increasing)
Can be available 24/7
 Water Mode
Strengths Weaknesses
Highly cost effective Limited locations
for bulky items Relatively poor
Works best for high delivery
weight-to-value items reliability/speed
Most effective when Often limited
linked into multimodal operating hours at
system docks
 Air Mode
Strengths Weaknesses
Quickest delivery over Often the most
longer distances expensive,
Can be very flexible particularly on a per
when linked to pound basis
highway mode
Works best for low
weight-to-value items
Grew 90.5% in value of goods shipped from 1993 to 2002
 Rail Mode
Strengths Weaknesses
Highly cost effective Limited locations, but
for bulky items better than for water.
Can be most effective Better delivery
when linked into reliability/speed than
multimodal system water

Increasing part of multimodal solutions, dual tracks on major routes

 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 ?
 Multi-Modal Solutions
(An example)

North Carolinas Global TransPark

 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
 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.
 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
 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
Consolidation
 Example 1
Customer Shipment Weight

Venetian Artist 100 boxes, artist 3,000 lbs.

Supply supplies
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
 Cost Benefits of Consolidated
Warehousing
Warehousing costs 10,000 lbs $9/100 lbs = $900
Cost of one truck to Atlanta $2,000
Delivery to final customer 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.)
 Cross-Docking

What about supply / demand mismatches?

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

 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.
Hub-and-Spoke Systems
 Postponement

Coca Cola syrup Customer A

Bulk food products, Postponement
paints, etc.
Assembly, Customer B
Packaging,
high volumes Labeling, etc.
containers Customer C

Minimizes risk
Minimizes inventory (how?)
Warehousing Service
Benefits:

Spot stock
Assortment
 Spot Stock

Region
1

Region
2

Region
Time sensitive, seasonal items 3
Often temporary, public storage
 Assortment
Broad product line and good inventory
control key to success

Supplier E Customer A

Assortment
Warehouse
Supplier F Customer B

Supplier G
Customer C
Supplier H
Customer D
 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)
 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?
 Packaging Implications
Transportation
Class segmentation
Damage protection

Material handling and warehousing

Storage requirements
Unitization
Container recycling
Ease of handling
 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
Delivery Reliability Highway, Air
Delivery Speed Air, Highway
Mix Flexibility Highway, Air, Rail
Warehousing System
Direct Ship, Assortment,
Spot Stock
Direct Ship, Assortment,
Spot Stock
Assortment, Spot Stock

Design Flexibility Highway, Air Postponement

Volume Flexibility Highway, Air Direct Ship, Assortment,

Spot Stock
Cost Rail, Water, Pipeline, Consolidation, Cross-
Highway Docking, Hub-and-Spoke
Who Owns Logistics?
 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

 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
 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 ???

 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)
 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
 Logistics Decision Models

Weighted Center of Gravity Method

Optimization
Assignment Problem
 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

n
W i Yi
Weighted Y coordinate Y i 1n*

Wi
i 1
CupAMoes Coffee
 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:
 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)
Case Study in Logistics

Just-In-Time Shipping