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9/9/19

Introduction to Operations and Supply Chain Management Fifth Edition

Chapter 8 Logistics

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Chapter Objectives (1 of 2) 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. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.

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Chapter Objectives (2 of 2) • Calculate the percentage of perfect orders • Calculate landed costs. • Explain what reverse logistics systems are and describe 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 Excel’s Solver function, an assignment problem.

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Introduction (1 of 2) • Logistics management – That part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers’ requirements. © CSCMP – Council of Supply Chain Management Professionals

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Introduction (2 of 2) • Logistics Management Activities – Transportation – Warehousing – Material handling – Packaging – Inventory management – Logistics information systems

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Why Logistics is Critical • Challenges and opportunities in managing logistics – Advances in information systems – Globalization of markets – Push toward sustainability § Sustainability – Performing activities in a manner that meets the needs of the present without compromising the ability of future generations to meet their needs. – Significant impact on delivery speed and reliability

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Logistics Decision Areas (1 of 21) • Five Transportation Modes – Highway – Water – Air – Rail – Pipeline

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Logistics Decision Areas (2 of 21) Table 8.1 Modal Shares of U.S. Domestic Freight for 2012 (% Change, 2002 – 2012) Transportation Mode

Value (Billion $)

Highway (trucking)

$10,132 (+63%)

8,060 (+3%)

1,248 (−1%)

$473 (+52%)

1,629 (−13%)

1,211 (−4%)

$302 (+238%)

576 (−15%)

193 (−32%)

$451 (+70%)

5 (29%)

6 (0%)

Rail Water Air

Tons (Millions)

Ton-Miles (Billions)

Pipeline

$543 (+264%)

636 (−7%)

Not available

Multimodal

$1,951 (+81%)

357 (+65%)

272 (+20%)

Source: U.S. Department of Transportation, National Transportation Statistics, April 2017, Washington, DC, Table 1-58, www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_transportation_statistics/html/table_01_58.html.

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Logistics Decision Areas (3 of 21) Highway • Dominates the U.S. logistics infrastructure due to: – Geographic extension of supply chains – Greater emphasis on delivery speed and flexibility • Continues to grow because it is one of the most flexible modes of transportation – Very few goods are moved without highway transportation at some point in transit

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Logistics Decision Areas (4 of 21) Highway • Has become more cost effective over time due to: – Better scheduling and use of vehicle capacity – More efficient and reliable vehicles – Increased cost competition due to deregulation • Involves different types of shipments – Direct truck – Shipment made with no stops – Less than truckload (LTL) – Smaller shipment combined with other loads

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Logistics Decision Areas (5 of 21) Water • Ideal for materials with high weight-to-value ratio, especially if delivery speed is not critical. • Examples of these materials include farm produce, timber, petroleum-based products. • Has one of the lowest ton-mile rates of any mode which helps to keep costs down.

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Logistics Decision Areas (6 of 21) Air • Ideal for customers with a low weight-to-value ratio, especially if delivery speed or delivery reliability is critical. • Is the least-used mode in terms of tons and ton-miles

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Logistics Decision Areas (7 of 21) Rail • Has characteristics similar to water transportation but is somewhat more flexible. • To accommodate growth, rail carriers have doubled the number of lines along busy corridors, changed the physical configuration of the trains, and utilized multimodal solutions.

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Logistics Decision Areas (8 of 21) Table 8.2 Strengths and Weaknesses of the Major Transportation Modes Transportation Mode

Strengths

Weaknesses

Highway

Flexibility to deliver where and when needed. Often the best balance among cost, flexibility, and reliability/speed of delivery.

Neither the fastest nor the cheapest option.

Water

Highly cost-effective for bulky items. Most effective when linked to a multimodal system.

Limited locations. Relatively poor delivery reliability/speed.

Rail

Highly cost-effective for bulky items. Can be most effective when linked to a multimodal system.

Limited locations, although less so than with water. Not as fast as highway, but improving over time.

Air

Quickest mode of delivery. Often the most expensive mode on Flexible, especially when linked to the a per-pound basis highway mode.

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Logistics Decision Areas (9 of 21) • Multimodal solution – A transportation solution that seeks to exploit the strengths of multiple transportation modes through physical, information, and monetary flows that are as seamless as possible – Roadrailer – A specialized rail car the size of a standard truck trailer that can be quickly switched from rail to ground transportation without changing the wheels.

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Logistics Decision Areas (10 of 21) • Warehousing – Any operations that stores, repackages, stages, sorts, or centralizes goods or materials. • Warehousing can be used to: – Reduce transportation costs – Improve operational flexibility – Shorten customer lead times – Lower inventory-related costs.

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Logistics Decision Areas (11 of 21) • Reducing Transportation Costs – Consolidation warehousing – A form of warehousing that pulls together shipments from a number of sources in the same geographic area and combines them into larger and more economical loads. – Cross-docking – A form of warehousing in which large incoming shipments are received and then broken down into smaller outgoing shipments to demand points in a geographic area. § Break-bulk warehousing – Incoming sources are from a single source or manufacturer. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.

Logistics Decision Areas (12 of 21) – Hub-and-spoke system – A form of warehousing in which strategically placed hubs are used as sorting or transfer facilities.

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Logistics Decision Areas (13 of 21) Figure 8.2 Consolidation Warehousing

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Logistics Decision Areas (14 of 21) Figure 8.3 Cross-Docking

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Logistics Decision Areas (15 of 21) Figure 8.5 Hub-and-spoke system at Prakston Carriers

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Logistics Decision Areas (16 of 21) • Improving Operational Flexibility – Postponement warehousing – A form of warehousing that combines classic warehouse operations with light manufacturing and packaging duties to allow firms to put off final assembly or packaging of goods until the last possible moment.

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Logistics Decision Areas (17 of 21) • Shortening Customer Lead Times – Assortment warehouses – A form of warehousing in which a wide array of goods is held close to the source of demand in order to ensure short customer lead times. – Spot stock warehouses – A form of warehousing that attempts to position seasonal goods close to the marketplace.

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Logistics Decision Areas (18 of 21) • Lowering Inventory-Related Costs – Using inventory pooling can enable firms to reduce inventory-related costs. – Consolidating safety stock for stores into one centralized location can provide same-day service to all the stores and would reduce the amount of inventory needed to protect the stores against demand surges.

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Logistics Decision Areas (19 of 21) • Logistics Information Systems – Decision support tools § Cost and travel time estimations § Simulation and optimization – Planning systems § Selecting carriers § Scheduling deliveries – Execution systems § Monitor logistics systems and identify problems before they get out of hand § RFID Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.

Logistics Decision Areas (20 of 21) • Material handling system – A system that includes the equipment and procedures needed to move goods within a facility, between a facility and a transportation mode, and between different transportation modes. • Packaging – The way goods and materials are packed in order to facilitate physical, informational, and monetary flows through the supply chain.

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Logistics Decision Areas (21 of 21) • Inventory Management – Implications for transportation: § Using slower and cheaper transportation modes will cause inventory levels within the supply chain to rise. § Using faster and more expensive transportation modes will enable firms to lower inventory levels. – Implication for warehousing: § Warehousing and inventory managers must work closely to achieve the desired business outcome.

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Logistics Strategy (1 of 7) • Logistics strategy – A functional strategy which ensures that an organization’s logistics choices are consistent with its overall business strategy and support the performance dimensions that targeted customers most value.

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Logistics Strategy (2 of 7) • Owning versus Outsourcing – Does the firm have the volume needed to justify a private logistics system? – Would owning the logistics system limit the firm’s ability to respond to changes in the marketplace or supply chain? – Is logistics a core competency for the firm? § Common carriers § Contract carriers § Third-party logistics providers (3PL)

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Logistics Strategy (3 of 7) Table 8.3 The Linkage between Key Performance Measures and Transportation and Warehousing Choices Transportation Mode Highway Air

Warehousing System None (direct ship) Assortment

Blank Delivery speed —Minimal time from order to delivery Blank Blank Mix flexibility —Support a wide range of different products/delivery needs

blank Air Highway blank

Spot stock None (direct ship) Assortment Spot stock

Highway

Assortment

Blank Blank

Air Rail Highway

Spot stock blank Postponement

Air Highway

blank None (direct ship)

Performance Dimension Delivery reliability —Deliver on time consistently Blank

Design flexibility —Support design changes/unique customer needs Blank Volume flexibility —Provide products/delivery services in whatever volume the customer needs Blank

Air

Assortment

Blank Cost —Minimize the cost of transportation Blank Blank

blank Rail Water Pipeline

Spot stock Consolidation Cross-docking Hub-and-spoke

Blank

Highway

blank

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Logistics Strategy (4 of 7) • Measuring Logistics Performance – The perfect order represents the timely, error-free provision of a product or service in good condition that is: § Delivered on time (according to buyer’s delivery dates) § Shipped complete § Invoiced correctly § Undamaged in transit æ total orders - orders with ³ 1 defect ö Percentage of perfect orders = 100%ç ÷ total orders è ø Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.

Example 8.4 – Bartley Company • Last year, Bartley Company experienced the following results: – 5.4 million orders processed – – – –

30,000 orders delivered late 25,000 orders incomplete 25,000 orders damaged 20,000 orders billed incorrectly

• These 100,000 failures were spread across 90,000 orders

æ 5,400,000 - 90,000 ö Percentage of perfect orders =100% ç ÷ =98.3% 5,400,000 è ø Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.

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Logistics Strategy (5 of 7) • Landed cost – The cost of a product plus all costs driven by logistics activities, such as transportation, warehousing, handling, customs fees, etc. • Freight forwarder – An agent that serves as an intermediary between an organization shipping a product and the actual carrier, typically on international shipments. • Customs broker – An agent who handles customs requirements on behalf of another firm.

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Logistics Strategy (6 of 7) • Reverse logistics system – A complete supply chain dedicated to the reverse flow of products and materials for the purpose of returns, repair, remanufacture, and/or recycling. © 2016 APICS Dictionary

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Logistics Strategy (7 of 7) • Challenges: – Firms have less control over the timing, transportation modes used, and packaging for goods flowing back up the supply chain. Reverse logistics systems often need to be designed to be more flexible and less cost efficient than forward-based systems. – Goods can flow back up the supply chain for a variety of reasons and a reverse logistics system needs to be able to sort and handle these different flows. – Forward logistics systems typically aren’t set up to handle reverse logistics flows. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.

Logistics Decision Models (1 of 6) • Weighted center of gravity method – A logistics decision modeling technique that attempts to identify the “best” location for a single warehouse, store, or plant given multiple demand points that differ in location and importance. I

åW X i

Weighted X coordinate = X *=

i

i =1 I

åW

i

i =1

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Logistics Decision Models (2 of 6)

I

åW Y

i i

Weighted Y coordinate = Y * =

i =1 I

åW

i

i= 1

where: (Xi, Yi) = position of demand point i Wi = weighting factor for demand point i

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Example 8.6 – CupAMoe’s (1 of 3) • Robbie Roberts, owner of CupAMoe’s Coffee, is trying to determine where to locate his newest distribution warehouse. Figure 8.6 Coordinate Map of Demand Locations, CupAMoe’s Coffee

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Example 8.6 – CupAMoe’s (2 of 3) • Robbie would like to locate the warehouse to minimize transportation costs and provide the best overall delivery speed to his three markets. Using the Center of Gravity Method (400,000*1 + 200, 000* 4.5+ 170, 000* 4) X* = 770,000 1,980,000 = = 2.57 770,000 (400, 000*5 + 200, 000*3 + 170, 000*1) Y* = 770,000 2,770,000 = = 3.60 770,000 Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.

Example 8.6 – CupAMoe’s (3 of 3) Figure 8.7 Suggested Warehouse Location for CupAMoe’s based on the Weighted Center of Gravity Method

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Logistics Decision Models (3 of 6) • Optimization model – A type of mathematical model used when the decision maker seeks to optimize some objective function subject to some constraints. – Objective function – A quantitative function that an optimization model seeks to optimize (minimize or maximize). – Constraint – A quantifiable condition that places limitations on the set of possible solutions. The solution to an optimization model is acceptable only if it does not break any of the constraints.

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Logistics Decision Models (4 of 6) Table 8.5 Business Problems That Can Be Addressed through Optimization Modeling: Objective Function

Constraints

Maximize profits

Limited demand, materials, and processing capabilities

Minimize delivery costs

Need to meet all demand and not exceed warehouse capacities

Minimize health care costs

Need to meet all patient demand

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