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LOGISTICS and SCMLogistics provides the bridge between production and market in terms of physical distance andtime. Key business process to create competitive advantage  Multidisciplinary  Transversal to other industriesDECISION PHASES IN SC Design and strategy: transportation modes Make or buy L...

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LOGISTICS and SCM Logistics provides the bridge between production and market in terms of physical distance and time.  Key business process to create competitive advantage  Multidisciplinary  Transversal to other industries DECISION PHASES IN SC 1. Design and strategy: transportation modes Make or buy Logistics network structure 2. SC planning: sales and operations Integrated process to balance supply and demand: the right product at the right time; avoid shortage and surplus 3. SC operations: on a weekly or daily time horizon Logistics executions to move materials and goods Logistics executions to manage data LOGISTICS PERFORMANCE MANAGEMENT Businesses must:   

Analyse potential gaps Make continuous improvements Pose the question: am I going in the right direction?

KEY ASPECTS OF LOGISTICS    

Lowest possible costs Good connection New services customers often buy services rather than products Logistics is essential because of longer and more complex SCs

LOGISTICS EVOLUTION 1. Material management and physical distribution of goods: a set of outbound activities 2. Outbound + inbound 3. Integration of business processes along the SC Current situation Materials  Flow of materials from origin to consumers  Reverse flow of information Materials + info  Reverse flow of materials (for sustainability)

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THE MISSION OF LOGISTICS: effectiveness and efficiency 7 R’s Good/service Quantity

Right

Place Time

Effective

Condition Customer Cost

Efficient

The ultimate objective is to maximise the SC value. KEY COMPONENTS 1. Customer service strategy 2. System configuration process planning 3. Planning performance measurement; key performance indicators GOOD vs CHEAP service The three attributes of a service are good, cheap and fast... but we can only pick two at a time! There will always be trade-offs (benefit of one attribute will penalize another) and we need to manage these in our decision making i.e. prioritise certain qualities. DEFINITION of SCM= integration of business processes focusing mainly on cooperation and trust. Every company can be described according to its main processes: source, make and deliver A plan is required to create value and decrease costs boost profitability THE SUPPLY NETWORK: the key focus in the SC are the customers and their requirements. The word “Supply” in SCM could be replaced with “Demand”. EXAMPLE: Ford business strategy   

Business evolution from manufacturing company to consumer oriented company SC integration and collaboration with customers and suppliers ICT adoption: increase visibility Reduce costs Co-opetition=partial collaboration with competitors to share costs (also reduces environmental impact)

WHY SCM?    

Market demand volatility Product life cycle for sustainability Product range Price

Companies need to focus on core competences and be flexible and open to variations, for example evaluating outsourcing convenience. Focus should be on creating value for customers, not just physical distribution.

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COMPETITIVE ADVANTAGE Value advantage: tailored service, reliability Cost and service leader

Service leader

Cost advantage: inventory management, capacity utilisation

Cost leader Commodity market

FACTORS DRIVING SC COMPETITION and SCM   

Complexity of SC Changing customer expectations SC disruptions require the ability of prompt reactions

SCM is affected by: 1. Personalization e.g Nike By You lets customers choose personalized products 2. Leveraging ecosystems: companies have started to cooperate in order to reduce environmental impact e.g. Dell has a CE cooperation with an NGO to reduce plastics in seas 3. Digital strategies: business alignment (decisions are taken in accordance with the company’s purpose and all actions that are carried out are relevant in achieving this purpose) SC masters: top of the rank Amazon is in the top 5 because it is one of the most efficient companies worldwide and therefore a cost leader. However, it is also a service leader: we are now used to receiving a service at a certain speed so companies compete to provide quicker than normal service and Amazon excels in that. Characteristics of world-class SC:   

Only carry out processes which are aligned to the company’s value proposition Responsive Customer driven respond to customer requirements

FOUR PILLARS: 1. 2. 3. 4.

Responsiveness Reliability Resilience (capability of dealing with the unexpected) Relationships

Companies are moving away from the “one size fits all” strategy, which only works for the commodity market. Instead different approaches and strategies must be taken among different companies but also within a single company (different customer segments) 3

STEPS TO SC EXCELLENCE 1. 2. 3. 4. 5.

Understanding market segmentation customer requirements Value proposition and operation strategy Align SC and logistics management with value proposition Reduce complexity as much as possible Make use of performance metrics to ensure maximum performance

SUPPLY CHAIN STRATEGY Companies want to develop a competitive strategy.   

Product/service development strategy portfolio of new product or service Marketing and sales market segmentation and promotion SC material procurement, transportation and distribution

All three strategies are needed in combination to achieve competitiveness. There must be consistency between SC and competitive strategies. How? STRATEGIC FIT: customer priorities and SC capabilities need to be matched by:  

Understanding customer uncertainty Understanding SC capability

SC Capabilities: Responsiveness to demanded quantity, lead times, variety and innovation; high service level (speed and quality)

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Efficiency low costs, minimal inventory and low pricing margins; lower quality

LEAN vs AGILE strategies No surplus

Speed => ability to respond rapidly to unpredictable changes This is not a company concept, it is from one end of the SC to the other because if a company is agile but the one carrying out the next step in the SC isn’t the first company’s agile response will not reach the market.

Best for unpredictable environments with high demand for variety For high volumes and low variety

decoupling point  where product flow changes from “Push” to “Pull” (order-driven and forecast-driven activities meet)

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TRENDS IN LOGISTICS AND SCM Logistics are changing because of: changing macro-economic trends Change in perception of logistics by digital consumers   

More technological and intelligent More complex and risky Client-oriented (B2C)

NEW CUSTOMERS…the millennials This calls for new distribution channels = direct channels (drop-shipping) and less intermediate channels TRENDS 1-10 1. Cost pressure 2. Digitalization of business processes 3. Transparency in SC 4. Individualization 5. Rising complexity 6. Networking and collaboration 7. Automation 8. Demand fluctuations 9. Staff shortage 10. Sustainability concerns

High- very high relevance

High relevance

RISKS to global logistics and SC    

Product disruption Product and quality failure Political unrest Environmental disruption  natural disasters are posing an increasing risk, especially hydrological disasters.

Other causes of SC vulnerability:     

IT or telecommunication outage Cyber attack and data breach Transport network disruption Outsourcer failure Changing laws and regulations

AUTOMATION IN LOGISTICS: lower costs in automation offers new opportunities Robots: 1. Industrial high peripherals and engineering costs + project management costs 2. Basic collaborative intermediate engineering and management costs 3. Smart no management costs EXAMPLE: Autonomous vehicles- platooning

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Current Challenges:    

Automation of processes Use of data for collaboration across the chain Structural changes due to autonomous vehicles Substitution of flows: imported volume 3D printing

Data-driven and digital SC

SUSTAINABILITY: the need to go Green Sustainable logistics: SDGs 3.Good health mobility services 7.Affordable and clean energy energy efficiency. Alternative fuels 9.Industry, innovation and infrastructure smart transport infrastructure 11.Sustainable cities and communities clean air mobility 13.Climate action GHG assessment, LC analysis SC DECISIONS IMPACTING FOOTPRINT 1. 2. 3. 4. 5.

Design materials, packaging, opportunities for reuse and recycle Source location of suppliers, social and ethical issues, “Food miles” Make energy efficiency, reduce waste and pollution Deliver network configuration, transport modes Return reuse logistics, end-of-life management, closed-loop SC

SC NETWORK DESIGN FRAMEWORK:

Configuration = localization of source, make and deliver phases

Strategy = defining responsiveness, efficiency and resilience of SC (preparation to unexpected risks) defining number of levels Logistics netw and number + location of deposit points MODELS:

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1. Local/local: low complexity SC, cost efficiency, lean thinking e.g. beverage industry 2. Global manufacturing/local sourcing: global brand with local roots, competitive advantage from local sources e.g. Made in Italy food products that are exported 3. Local manufacturing/global sourcing: downstream operations in each specific area, e.g. sugar (commodity good) 4. Global/global: global sourcing and delivery e.g. coffee DISTRIBUTION SYSTEM: all the steps taken to move a product from supplier to customer. Customer needs must be satisfied at the lowest cost possible LOGISTICS CHANNEL = PHYSICAL NETWORK  all resources and structures from manufacturer to customer Node=warehouse, transit point (no inventory) Arc=connection between network nodes STRATEGIC DECISIONS: 1. 2. 3. 4. 5.

Number Of echelons Number of warehouses per echelon Warehouse location Type, dimension, automation In-house or outsourcing?

PROBLEM: there will always be trade-off i.e. some quantity, quality or property is lost in order to gain in other aspects. A company’s focus is on responsiveness and efficiency which depend on three main drivers: inventory, service and transportation. Only two out of the three can be maximized, one must be slightly compromised. The objective is to achieve Efficiency minimize transportation, inventory, warehousing and other costs and Effectiveness max service level

FACTORS AFFECTING NETWORK DESIGN 1. Product features: density (bulky vs heavy goods) transportation costs; unit value (per kg) if high, incidence of transport cost is low and more expensive modes can be used (I must consider service level:how quickly to I want to reach my customer?) 2. Demand profile: temporal seasonability of demand needs optimization of warehouse costs (e.g. chocolate industry has higher demand during festiviti Geographical distribution influences location of warehouses (market share by region is not the same as national average) 3. Service level: response time, product variety and availability (probability of having product in stock when the customer orders it), order visibility (tracking order) managing information flow, reproducibility, customer experience (ease of order placement)

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TYPES OF NETWORKS 1. Direct shipping: centralization of inventory; lower facility costs Used for high value goods with unpredictable demand because it gives the possibility of customization until after order has been placed Disadvantages: transportation costs, long response time (a good information infrastructure is needed), multiple partial shipments form different sources more complicated receiving phase for customer 2. 1-echelon network: central warehouse(s) = level of inventory (can be multiple but always vertical) ROLE OF WAREHOUSES: Product mixing from different suppliers customers can receive different orders M=suppliers simultaneously Lower response time N=customers Optimization of transport (less arcs)

DirectMxN arcs 1-echelon M+N arcs

The number of central warehouses depends on the desired response time:  

1 CW only some areas are served quickly 2 CW lower response time for more customers

Affected by geographical demand Different companies have different reasons for using central warehouses: EXAMPLES 1. Bassetti: wide product range, medium to high value. Response time is low and orders are not frequent CW mainly for product mixing 2. 3M: high product range, lower product value than Bassetti, very high number of customers (100000) 1-echelon SC for transport optimization (response time is also benefited) 3. Reckitt Beckinser: smaller product range and value, tight response time (3-5 days) rely on CW when suppliers are not reliable

3. 2-echelon network: CW + local warehouses 2 levels of inventory

Example: Ferrero has 15 regional warehouses

Higher service level (even closer to final customer) Local distribution transport optimization 4. 2-echelon + transit point Storage phase; no inventory (NOT an extra ehelon). It aims at optimizing transport through cross-stocking activities=sorting CROSS SORTING: Inbound truck product is “broken down” (sorted) delivery PRE-ALLOCATED SHIPMENT: products are allocated to different shipments for different customers

How many warehouses?  

Decide customer needs to be met Try to meet needs at the lowest possible cost

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Costs to consider    

Primary transportation Secondary distribution Inventory Warehousing and handling

Primary transportation: More warehouses full truck load costs remain the same, but when loads are not full anymore (as N increases) shipment size decreases higher unit transport rates transport cost increases Local distribution costs (regional warehouses): smaller distances between warehouses and customers more daily deliveries + delivery area grows and number of vehicles decreases costs decrease Inventory costs: only safety inventory is affected by the number of warehouses (safety stock=for unpredictable demand) Rule of √N: costs increase with N

Warehousing and handling: the handling cost per unit remains the same unless there is a change in configuration of the warehouse (e.g automation) which happens for economies of scale. We can set a number of warehouses that defines an upscale of the economy and therefore a change in configuration, which results in handling costs following a step profile as N increases. TOTAL COSTS

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PHYSICL DISTRIBUTION IN THE FMCG SC Main channels: large retail chains, small/medium retailers, shops, wholesalers, discounts, e-commerce The Italian industry Compared to other European countries Italy has a large number of sales points per 1000 inhabitants. Unlike England, Germany, Spain and France where a few retail chains have over 50% of the market share, in the market is shared among more players, the leading retail chain being Coop with 14% of the market share.

NETWORK OPTIMIZATION Tools for network configuration and optimization:    

Capacity allocation Facility location Site selection = optimal location Facility location and capacity allocation (combined)

1. CAPACITY ALLOCATION: Allocation of resources is decided using linear programming The transportation problem: capacity of transportation in carrying goods. The aim is to define the optimal allocation of flows between source and sink nodes. Objective: optimal amount to ship Minimal cost

Subject to constraints on available capacity and customer demand Obj. Function (e.g NPV to be maximized

Linear programming elements:

Decision variables Constraints: restrict the range of feasible solutions

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more on slide session 6

Eco-efficient supply chain network design: from distribution activities I can minimize CO 2 emissions or costs; but the best solution is to minimize both by finding a good trade-off (eco-efficient model). In the next example there are 18 possible transit points but they can activate only 17 (reduction of costs and co2 emission); if only 8 activated (high reduction on co2 but more distribution costs because transortation is not optimal.) The optimal number is 16.

Remember that the range of variation of the overall distribution cost is more limited compared to the range of variation of the CO2 emissions.

2- Facility location: Finding a good location is a process based on two main steps:  the determination of the geographical position of the warehouse  the review of the results derived from the quantitative techniques by taking into account more specific factors (centre of gravity)

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DEMAND PLANNING Strategy: Priority is always the customer. Levers to manage: Forecast (matching supply and demand), inventory (to be optimized) and responsiveness. Aim: shifting efficiency frontiers same service at a lower cost OR same cost and higher quality service

TRENDS AFFECTING DEMAND PLANNING 1. Uncertainty: especially at the beginning of a product’s life cycle (no data)  this should be incorporated in production planning and error must be accounted for 2. Variety of product: the demand for each single variant is difficult to predict 3. Volatility: it’s difficult to make forecasts based on historical data if it was volatile

4. Short product life cycle: it’s easier to forecast in the maturity stage, which is nowadays shortening. Globalization When we are in the growth p Continuous change in requirements ucts in the market could greatly affect the demand for our product.

PLANNING PROCESS Why do we need forecasts? We could rely on agility and responsiveness BUT the time needed to project, assemble and deliver new products is ften longer than the time that customers are prepared to wait, depending on lead times: Engineer to order enough time for procurement, assembly and delivery activitie => no forecast needed Make-to-order forecasts needed for raw materials, which must be available when order is placed Make-to-stock forecast on finished goods since onshelf availability is a key performance indicator (e.g FMCG industry )

ORDER vs FORECAST 14

Different strategies may be adopted depending on how far in the SC we are: companies should be as lean as possible until the decoupling point, then switch to agile.

Push processes: manager must plan level of activity Pull processes: plan available capacity

FORECASTING DIMENSIONS- what to forecast 1. Product 2. Time bucket 3. Geographical Forecast accuracy increases if any of the three aggregation levels increases, while it decreases if the time horizon increases.

Different functions of a company require different levels of aggregation for their forecasts, for example logistics needs the lowest possible level (SKU for product) in order to plan inventory, transportation and delivery.

How can the differences between forecast needs within a company be managed? The answer is in Metzger’s 3 C’s: 1. Communication data and information sharing 15

2. Coordination scheduled forecast meetings 3. Collaboration interaction between different function to achieve a common goal

4 Approaches: 1. Independent: disconnection between players none of the C’s is applied 2. Concentrated: there is one function leading the process which tends to be prioritized the owner of this function could distort

the process 3. Negotiated: each function performs...