1-1 Logistics Management LSM 730 Dr. Khurrum S. Mughal Lecture 32

1-1

Logistics ManagementLSM 730

Dr. Khurrum S. Mughal

Lecture 32

Importance of Effective Transportation System

• Comparison of developing Vs developed countries

• Increased Competition and access– Perishable Items

• Economies of Scale– Auto Parts

• Reduced Prices– Oil and Middle East

13-2CR (2004) Prentice Hall, Inc.

6-3

Transport System Defined

CR (2004) Prentice Hall, Inc.

· Performance

- Average transit time

- Transit time variability

- Loss and damage

- Other factors including availability, capability,

frequency of movement, and various less

tangible services

· Cost

- Line haul

- Terminal/local

- Accessorial or special charges

6-4

Transport Choices


· Primary intercity carriers - Air - Truck - Rail - Water - Pipe

· Coordinated services

- Piggyback - Birdyback - Fishyback

· Small shipment carriers - UPS - Federal Express - Postal services - Bus Package Express

· Agents

- Freight forwarders - Shipper associations

· Others

- Autos - Bicycles - Taxis - Human - Electronic

6-5

Importance of Modes


By Products Hauled

· Air -- very high - valued, time sensitive products · Truck -- moderately high - valued, time sensitive

products. Many finished and semifinished goods · Rail -- low - valued products including many raw

materials

· Water -- very low - valued products moved domestically, high - valued if moved internationally

· Pipe -- generally limited to petroleum products and

natural gas

6-6

Foreign (Free) Trade Zone

Products from abroad

Products to foreign markets

No duties paid

Cus

tom

s

To domestic markets

Duties paid

Manufacturing and/or storage

Duty free zone

Products from abroad

Products to foreign markets

No duties paid

Cus

tom

s

To domestic markets

Duties paid

Manufacturing and/or storage

Duty free zone


6-7

Rate Types·Line haul rates- Class

> Freight classification of items > (National Motor Freight Classification of Selected Products)

> Rate tables of tariffs- Contract rates- Drayage (local delivery)

·Commodity and contract rates- Specific rates for given shipment sizes for specific products moving

between designated points·Special service charges- Extra charges

- Diversion and reconsignment- Stop-off privilege example

Break Weight

where:Break Weight = Weight above which the next higher weight break rate should be used for lower transport costsRateNext = Rate for next higher weight breakWeightNext = Minimum weight of next higher weight breakRateCurrent = Rate for true weight of shipment.

Question Suppose 9,000 lb. of Class 100 merchandise is to be shipped from New York to Dallas. From Table 6-4, the rate would be $52.21/cwt. However, should the shipment be priced at the next higher weight break rate of $40.11/cwt. for a lower cost?


Current

NextNext

RatexWeightRate

ht Break Weig

6-12

6-9

Stop-Off Privilege Example


Suppose 3 shipments of J=8,000 lb., K=12,000 lb., and L=10,000 lb. originating at I are to be delivered in the following way.

6-10

Private carrier costing

·Service Reliability·Short Order Cycle Times·Emergency Response Capability·Improved Customer Contact

·Costs:· Fixed Costs· Operator Costs· Vehicle Operating Costs


8-11

What’s Forecasted in the Supply Chain?

•Demand, sales or requirements

•Purchase prices

•Replenishment and delivery times


Copyright 2011 John Wiley & Sons, Inc.

The Effect of Inaccurate Forecasting

12-12


Types of Forecasting Methods• Depend on

– time frame– demand behavior– causes of behavior

12-13

8-14

What’s Forecasted in the Supply Chain?

•Spatial Vs Temporal Demand

•Lumpy Vs Regular Demand

•Derived Vs. Independent Demand


Forecasting Process

12-15

6. Check forecast accuracy with one or more measures

4. Select a forecast model that seems appropriate for data

5. Develop/compute forecast for period of historical data

8a. Forecast over planning horizon

9. Adjust forecast based on additional qualitative information and insight

10. Monitor results and measure forecast accuracy

8b. Select new forecast model or adjust parameters of existing model

7.Is accuracy of

forecast acceptable?

1. Identify the purpose of forecast

3. Plot data and identify patterns

2. Collect historical data

No

Yes


Some Forecasting Method Choices•QualitativeSurveysExpert systems or rule-based

•Historical projectionExponential smoothing

•Causal or associativeRegression analysis

•Collaborative


Demand Behavior• Trend

– a gradual, long-term up or down movement of demand• Random variations

– movements in demand that do not follow a pattern• Cycle

– an up-and-down repetitive movement in demand• Seasonal pattern

– an up-and-down repetitive movement in demand occurring periodically

12-17

Simple Moving Average

12-18

MAn =

n

i = 1

Di

nwhere

n = number of periods in the moving

averageDi = demand in

period i

3-month Simple Moving Average

12-19

Jan 120

Feb 90

Mar 100

Apr 75

May 110

June 50

July 75

Aug 130

Sept 110

Oct 90Nov -

ORDERS

MONTH PER MONTH

MA3 =

3

i = 1 Di

3

=90 + 110 + 130

3

= 110 orders for Nov

–––

103.388.395.078.378.385.0

105.0110.0

MOVING AVERAGE

8-20

Classic Time Series Decomposition Model

Basic formulation F = T S C Rwhere F = forecast T = trend S = seasonal index C = cyclical index (usually 1) R = residual index (usually 1)

Some time series data

1 2 3 4

Last year 1200 700 900 1100

This year 1400 1000 ?

Quarter


Moving Average• Naive forecast

– demand in current period is used as next period’s forecast• Simple moving average

– uses average demand for a fixed sequence of periods– stable demand with no pronounced behavioral patterns

• Weighted moving average– weights are assigned to most recent data

12-21


Regression AnalysisBasic formulation

F = o 1X1 2X2 … nXn

Example

Bobbie Brooks, a manufacturer of teenage women’s clothes, was able to forecast seasonal sales from the following relationship

F = constant 1(Time) 2(consumer debt ratio) + 3(no. nonvendor accounts)


Collaborative Forecasting

• Demand is lumpy or highly uncertain• Involves multiple participants each with a

unique perspective—“two heads are better than one”

• Goal is to reduce forecast error• The forecasting process is inherently

unstable


Managing Highly Uncertain Demand

·Delay forecasting as long as possible

·Prioritize supply by product’s degree of uncertainty (supply to the more certain products first)

·Apply the principle of postponement to the most uncertain products (delay committing to a final product form until an order is received)

·Create flexible supply to changing demand (alter capacity and output rates through subcontracting, computer technology, multi-purpose processes, etc.)

·Be able to respond quickly to uncertain demand levels


What are Inventories?•Finished product held for sale•Goods in warehouses•Work in process•Goods in transit•Staff hired to meet service needs•Any owned or financially controlled raw material, work in process, and/or finished good or service held in anticipation of a sale but not yet sold

9-26

Reasons for Inventories•Improve customer service- Provides immediacy in product availability

•Encourage production, purchase, and transportation economies- Allows for long production runs (buffer against demand fluctuations)- Takes advantage of price-quantity discounts- Allows for transport economies from larger shipment sizes

•Act as a hedge against price changes- Allows purchasing to take place under most favorable price

terms•Protect against uncertainties in demand- Provides a measure of safety to keep operations

running when demand levels and lead times cannot be known for sure

•Act as a hedge against contingencies- Buffers against such events as strikes, fires, and

disruptions in supply


Reasons Against Inventories

•They consume capital resources that might be put to better use elsewhere in the firm

•They too often mask quality problems that would more immediately be solved without their presence

•They divert management’s attention away from careful planning and control of the supply and distribution channels by promoting an insular attitude about channel management

9-28

•Pipeline- Inventories in transit

•Speculative- Goods purchased in anticipation of price increases

•Regular/Cyclical/Seasonal- Inventories held to meet normal operating needs

•Safety- Extra stocks held in anticipation of demand and lead time

uncertainties•Obsolete/Dead Stock- Inventories that are of little or no value due to being out of date,

spoiled, damaged, etc.

Types of Inventories


•Pull- Draws inventory into the stocking location- Each stocking location is considered independent- Maximizes local control of inventories

•Push- Allocates production to stocking locations based on overall demand- Encourages economies of scale in production

•Just-in-time- Attempts to synchronize stock flows so as to just meet demand as

it occurs- Minimizes the need for inventory

Inventory Management Philosophies


•Supply-Driven- Extensive Forecasting needed- All supply must be accepted and processed- Inventories are controlled through demand

•Aggregate Control- Classification of items:

› Groups items according to their sales level based on the 80-20 principle

› Allows different control policies for 3 or more broad product groups

Inventory Management Philosophies (Cont’d)


Costs Relevant to Inventory Management

•Procurement Costs

•Carrying costs

•Out-of-stock costs

9-32

Inventory Management ObjectivesGood inventory management is a careful balancing act between stock availability and the cost of holding inventory.

Customer Service , i.e., Stock Availability

Inventory Holding costs

•Service objectives- Setting stocking levels so that there is only a specified

probability of running out of stock•Cost objectives- Balancing conflicting costs to find the most economical

replenishment quantities and timing


Inventory’s Conflicting Cost PatternsCo

st

Replenishment quantity

Stockout cost

Procurement cost

Carrying cost

Total cost Minimum costreorder quantity

CR (2004) Prentice Hall, Inc. 9-16

11-34

The Storage SystemExcept where customer service is a concern:

Storage is an economic convenience, not a necessity

Reasons for storage

· Transportation and production costs can be reduced

· Better coordination of supply and demand

· Storage can be an integral part of the production process

· Storage may enhance sales

Storage Functions

· Holding

· Consolidation

· Break-bulk

· Mixing (merge-in-transit)


The Storage System (Cont’d)

Storage Space Alternatives

· Ownership · Leasing · Rental · In- transit

Note Storage functions are performed in an attempt to reduce transportation, production, and purchasing costs, which justify their added expense.

Note Storage functions are performed in an attempt to reduce transportation, production, and purchasing costs, which justify their added expense.

Consolidation warehouse

A

A B C D

B

C

D

Manufacturer A

Manufacturer B

Manufacturer C

Manufacturer D

10,000 lb.

8,000 lb.

15,000 lb.

7,000 lb.

40,000 lb.

Customer

Consolidation Warehouse

Similar to a merge-in-transit facility

11-6


Distribution warehouse

Manufacturer Customer B

Customer C

Customer A

Low rate TL shipment

LTL

LTL

LTL

Distribution, Break Bulk, or Pool Point Warehouse

Warehouse may or may not hold inventories

11-7


Space Comparison

Ownership alternative

•Less expensive under high utilization•High degree of control over operations•Benefits of real estate ownership•Space may be converted to uses other than storage

Rental alternative

•No fixed investment•Lower cost under seasonal or low utilization of an owned facility•Location flexibility


The Materials Handling SystemMaterials Handling Functions

· Loading and unloading

· Movement to and from storage

· Order filling

Materials - Handling Considerations

· Load unitization

· Space layout

· Storage equipment

· Movement equipment


A Low Throughput, Holding Warehouse

Semipermanentstorage bay Product

Inbound andoutbound


Semi-permanent storage bay

Product

Order picking and product mixing bays

Inbo

und

Out

boun

d

A

B

C

D

C AReplenishment

Order-picking route

A High Throughput, Distribution Warehouse

11-13


Storage/Handling Systems

· Manual handling system

· Forklift truck-pallet system

· Conveyorized system

· Automated storage and retrieval system

11-43

Semipermanent storage bay Product

Inbound and outbound

A

B

C Order-picking route

Order PickingArea System



Semipermanent storage bay

Product

Order picking and product mixing bays

Inbo

und

Out

boun

d

A

B

C

D

C A

Replenishment

Order-picking route

Order PickingModified Area System

11-16

11-45

Shipping and ReceivingO

utgo

ing

load

s

Inco

min

g lo

ads

Audit spurfor loadchecking

To auxiliarystorage areas

Automated cranestorage and orderpicking

An Automated Warehouse



Economics of Storage/Handling Alternatives

Private warehousing,automated handling

Publicwarehousing

Private warehousing,pallet-forklift truckhandling

Leased warehousing

a b c d

Cost

to c

ompa

ny, $

Annual system throughput, cwt.0

a Economical range for public warehousing.b Economical range for leased warehousing, manual handling.c Economical range for private warehousing, pallet-forklift truck handling.d Economical range for private warehousing, automated handling.


Virtual Warehousing•Don’t hold all inventories needed for sale in company’s warehouse•Ship selected items directly from suppliers•Reduces investment in inventories•Requires a first-rate order management system•May require sharing critical information with vendors


Activity Fragmentation in the Supply Chain

PresidentPresident

MarketingMarketing FinanceFinance OperationsOperations

•Distribution channels•Customer

service•Field

inventories•Revenue

•Cost of capital•ROI•Inventory

carrying costs

•Supply alternatives

and supply costs•Warehousing•Purchasing•Transportation

Responsibilities

15-4


Activity Fragmentation in the Supply Chain (Cont’d)

PresidentPresident

MarketingMarketing FinanceFinance OperationsOperations

•More inventory•Frequent &

short production runs•Fast order

processing•Fast delivery•Field

warehousing

•Less inventory

•Cheap order processing

•Less warehousing

•Long production runs

•Lowest cost routing•Plant warehousing

Objectives

15-5

15-50

Activity Fragmentation in the Supply Chain (Cont’d)

Reasons for fragmentation•Lack of understanding of key cost tradeoffs•Traditions and conventions•Other areas considered to be more important to the firm than logistics•Organization structure can be in an evolutionary state

Benefits of fragmentation elimination•Encourages important cost tradeoffs to be effected•Focuses on an important, defined area by top management•Sets the structure within which control can take place



Logistics Matrix Organization

Tra ffic& w areh ou s in g

C u s tom erservice

S a lesfo recas itn g

M a rke tin g

In ven to rym an ag em en t

A ccou n tin g& in fo rm ation

p rocess in g

F in a n ce

P rod u c tionsch ed u lin g

Q u a lityassu ran ce

P u rch as in g& m ate ria ls

m an ag em en t

P ro d u c tio n

P re s id e n t

Fun

ctio

nal a

utho

rity

Project authorityLogistics\SC coordinator

Tra ffic& w areh ou s in g

C u s tom erservice

S a lesfo recas itn g

M a rke tin g

In ven to rym an ag em en t

A ccou n tin g& in fo rm ation

p rocess in g

F in a n ce

P rod u c tionsch ed u lin g

Q u a lityassu ran ce

P u rch as in g& m ate ria ls

m an ag em en t

P ro d u c tio n

P re s id e n t

Fun

ctio

nal a

utho

rity

Project authorityLogistics\SC coordinator

15-8


Formalized, Centralized Organization

Vice-presidentFinance

Vice-presidentOperations

ManagerProcurement

ManagerWarehousing andmaterials handling

ManagerOrder processing

and customerservice

ManagerTransportationand packaging

ManagerInventory and

productionscheduling

Vice-presidentLogistics

Vice-presidentMarketing

Chiefexecutive

officer

The Cold Chain

Which are most sensitive to heat?

Which do you never want to freeze?

(OPV, Measles, MR, MMR, BCG can be frozen, but not diluents)

Do Not

Freeze

Cold Chain Equipment & Logistics

• Refrigerators/Freezers– Generators/ Voltage Stabilizers

• Cold Boxes• Vaccine Carriers (Foam Pad)• Ice Packs

Check condition every time you visit a facility!

Ice Lined Refrigerators (ILRs)

Can maintain temperature for 16 hours without power if operate w/power continuously for at least 8 hours a day!

Cold Boxes

•Insulated for short–term use: 2-7 days

•Used in campaigns or when refrigerator out of order

•Consideration for use and storage capacity, outside temperture, available transport

Vaccine Carriers and Ice Packs

Temperature monitoring chart for facilities

The Agility Advantage

Agility in Pakistan

62

Agility in Pakistan

21 Locations, Headcount: 680 &

Warehouses at all major cities

KARACHI

ISLAMABAD

LAHORE

Sialkot

Faisalabad

Gujranwala

Bahawalpur

Peshawar

Abbottabad

SahiwalMultanQuetta

Hyderabad

Sukkur

Sargodha

Head Office

Branch Office

Regional Office

Kohat

Mardan

D.I.Khan

Torkham

Case Study

Platform for METRO Pakistan

64

– Total Area 21,000 sq-ft

– Covered Area 6,000 sq-ft

– Open Area 15,000 sq-ft

– Freezer Area 400 sq-ft, 5-7C

– Freezer Area 400 sq-ft, 12-15C

– Processing Hall 1000 sq-ft, 18-22C

– Dry Area 500 sq-ft, room temp.

64

Agility in Pakistan - F&V Platform

Sharaqpur Warehouse

Temperature Controlled Area

Services Offered

Offering unique fruit & vegetable processing service to a modern retail chain. Receiving goods from the farmers, quality check, weighment, pre-cooling, washing, grading, packaging, labeling, bar coding &and transportation in a temperature controlled vehicle to the retail stores in Lahore & Islamabad.

McDonald’s E-Procurement

Place Orders Supply Received

E-MAC Digital

Global Franchises

Suppliers Logistics

McDonald’s Logistics INBOUND LOGISTICS

• It is the movement of materials from suppliers and vendors into production processes and storage facilities.

• Based on the demand forecast, Manager orders the Venus Distributors on daily basis.

• Venus Distributors stores all the raw materials, in its own cold stores and delivers only one-day material to the restaurant.

• Venus Pakistan established its dedicated McDonalds Logistics Operations in 1997.

• It also received the DQMP (Distribution, Quality, and Management Process) Certification from McDonalds USA Audit Team.

• Some branch has its own cold storage facility, which is used to store the daily-procured raw material.

McDonald’s Logistics INBOUND LOGISTICS

• There are only two products buns and Cokes, which are sent directly to the restaurants.

• Venus Pakistan has full-fledged facilities to pack locally manufactured products in sachets such as sugar, tomato ketchup.

McDonald’s Logistics

COLD CHAIN LOGISTICS• A cold chain is a temperature-controlled supply chain.

• It is used to extend and ensure the shelf life of products such as fresh agricultural produce, processed food.

McDonalds’ entire network supply-chain consists of movement

of goods through a cold chain

An interesting and innovative feature of this cold chain is that the same truck can carry products at different temperatures

ranging from:

• Frozen products at -18C to -25C• Chilled products from 1C-4C • Dry products at ambient temperatures

McDonald’s Logistics OUTBOUND LOGISTICS• Outbound logistics is the process related to the storage and movement

of products from the end of the production line to the users end.

• When customers enter the restaurant, they go to the counter, give their order, which they are served within a single minute.

Documents

1-1 Logistics Management LSM 730 Dr. Khurrum S. Mughal Lecture 32