Logistics management 5 lu2

LogisticsPPS5

Topic 2

Logistics managementLogistics management

LEARNING UNIT OBJECTIVES

• Explain how logistics management encompasses physical distribution; • Define “logistics management”; • Explain the objectives of logistics; • Indicate where total logistics cost can be reduced; • Illustrate the various aspects that determine customer service; • Reason about the trade-offs between reduced costs and increased customer

service; • Explain order processing and information systems as activities of logistics

management; • Discuss the modes of transport and the factors that influence the selection of

transport modes; • Explain “inventory management”; • Discuss warehousing as a logistics activity; • Discuss material handling as a logistics activity; • Explain the concept of “integrated logistics”; • Assess how logistics contribute to healthy brand practice

• Explain how logistics management encompasses physical distribution; • Define “logistics management”; • Explain the objectives of logistics; • Indicate where total logistics cost can be reduced; • Illustrate the various aspects that determine customer service; • Reason about the trade-offs between reduced costs and increased customer

service; • Explain order processing and information systems as activities of logistics

management; • Discuss the modes of transport and the factors that influence the selection of

transport modes; • Explain “inventory management”; • Discuss warehousing as a logistics activity; • Discuss material handling as a logistics activity; • Explain the concept of “integrated logistics”; • Assess how logistics contribute to healthy brand practice

Distribution vs Logistics

Logistics management – inbound and outboundPhysical distribution – what happens with outbound goods only

Materials supply

Materials management

Physical distribution

SuppliersInbound logistics

ManufacturingScheduling, order

processing, materials

handling etc.

Field inventoryOutbound

logistics

CUSTOMERCUSTOMER

LogisticsLogistics

Logistics and physical distribution

What happens with outbound goods as they move from the organisation (M) to its Cs.

All activities re flow of these materials, components, finished goods

Materials supplyMaterials supply Materials management

handling etc.

logistics

LogisticsLogistics

Materials supplyMaterials supply Materials management

handling etc.

logistics

LogisticsLogistics

PLUS STRATEGIC ISSUES I.E. STRATEGIC ISSUES I.E. TOMWITOMWI

TTransportation; ransportation; OOrder processing (including information systems); rder processing (including information systems); MMaterials handling; aterials handling; WWarehousing; arehousing; IInventory management.nventory management.

The logistics process

Raw materials supplier

Raw materials supplier ManufacturerManufacturer WholesalerWholesaler RetailerRetailer CustomerCustomer

TransportTransport TransportTransport TransportTransport TransportTransport

Objectives of logistics

Costs decreaseCosts decrease Happy customersHappy customers

Improve profitabilityImprove competitive performance

Two key objectives:

Inversely related to one another – cannot accomplish both optimally – trade off between the 2 categories

Decreasing total logistics costs

1.Order processing and admin costs – writing, receiving acknowledgement and processing

2. Inventory related costs –in transit, in storage or WIP

3.Transportation costs – vary depending on mode of transport used, product and size

Trade off between the various cost factors

Improving customer service

1. Order lead time2. Dependability3. Convenience4. Inventory availability5. Factors that influence customer service levels

C expectations and reactionto stock out …

Cost-income trade-off

Competitors’ level of C-service

Tradeoffs between cost and C-service

Investment in inventory

Servicelevel

Objectives of logistics

-Order processing costs-Inventory-related costs

-Transportation costs

-Order processing costs-Inventory-related costs

-Transportation costs

Increasing customer service Increasing customer service Decreasing total logistics costs

Decreasing total logistics costs

Customer service performance levels:

-Order lead time-Dependability-Convenience

-Inventory availability

Customer service performance levels:

-Order lead time-Dependability-Convenience

-Inventory availability

Factors that influence customer service levels:

-Customer’s expectations and

reactions-Trade-offs

-Competitors

Factors that influence customer service levels:

-Customer’s expectations and

reactions-Trade-offs

-Competitors

Trade-off decisions when determining logistics objectives

Reducing total logistics costsReducing total logistics costs Increasing customer service Increasing customer service

Reduce inventory levelsReduce inventory levels

Use cheaper (but slower) forms of transport

Reduce unnecessary duplication of information

Increase inventory levelsIncrease inventory levels

Ensure quicker delivery (but by using more expensive transport)Ensure quicker delivery (but by

using more expensive transport)

Provide enough information to satisfy customers in the processProvide enough information to satisfy customers in the process

GROUP ACTIVITY

ENTERPRISE RENT A CAR CASE STUDY

TNT CASE STUDY

ACTIVITIES OF LOGISTICS

1. ORDER PROCESSINGINFORMATION SYSTEMS2. TRANSPORT3. INVENTORY MANAGEMENT4. WWAREHOUSING5. MMATERIAL HANDLING

INFORMATION SYSTEMS

• Most Shoprite stores linked by satellite to a central database and replenishment system

• Every 15 minutes management knows of every sale made in that period

Activities of logistics

Order processing

Order processing TransportationTransportation Inventory

managementInventory

management WarehousingWarehousing Materials handlingMaterials handling

Task of order processing:-Order entry

- Order handling

- Order delivery

Information systems:

EDI (electronic data

interchange)

Task of order processing:-Order entry

- Order handling

- Order delivery

Information systems:

EDI (electronic data

interchange)

Modes of transport:

-Rail- Road

- Air- Pipeline- Water

- Intermodal

Selection factors:-Cost- Time

- Access- Capability- Frequency- Reliability

Modes of transport:

-Rail- Road

- Air- Pipeline- Water

- Intermodal

Selection factors:-Cost- Time

- Access- Capability- Frequency- Reliability

Objectives:-Reorder point

- EOQ- JIT

- ABC analysis

Objectives:-Reorder point

- EOQ- JIT

- ABC analysis

Functions:-Receiving

goods- Sorting goods

- Storage of goods

- Filling the order

- Dispatching

Decisions:-How many

- Types- Location

Functions:-Receiving

goods- Sorting goods

- Storage of goods

- Filling the order

- Dispatching

Decisions:-How many

- Types- Location

Objectives:-Lowest cost

- Max capacity- Minimum

handling costs- Safety- Quality service

Equipment

Objectives:-Lowest cost

- Max capacity- Minimum

handling costs- Safety- Quality service

Equipment

1. ORDER PROCESSINGCustomerCustomer

Credit department

ManufacturingManufacturing

WarehousesWarehouses

Order handlingOrder handling

Order entryOrder entry

SuppliersSuppliers

Checks,Credit,Terms etc.

Place order Confirmation, Billing

Orderdelivery

Electronic data interchange

- Transport planning- Order processing- Production planning- Inventory levels- Account management

EDI - advantages

- Increased internal and external productivity (faster feedback; shorter lead times)

- Improved channel relationships- Increased market opportunities- Increased accuracy- Decreased paperwork and

operating costs

2. TRANSPORTATION

MODES OF TRANSPORT

RAILROAD

AIRPIPELINES

WATER INTERMODAL

Factors in selecting modes of transport

CostTime

AccessibilityCapabilityFrequencyReliability

CostTime

AccessibilityCapabilityFrequencyReliability

You want to get to the Congo with your family ….

3. Inventory management

Issues:1.When to order (reorder point)2.How much to order (economic order quantity)

Reorder point

Look at:

1.Order lead time

2.Usage rate

3.Safety stock

Reorder point = (Order lead time x usage rate) + safety stockReorder point = (Order lead time x usage rate) + safety stock

Other factors influencing reorder point:

1.Variance of order lead time

2.Fluctuations in C-demand3.C-service standard

Other factors influencing reorder point:

1.Variance of order lead time

2.Fluctuations in C-demand3.C-service standard

Order lead time = 5 days

Usage rate = 200 units per day

Safety stock = 300 units

What would the reorder point of certain stock item be?

200 200 200 200 200

Safety stock = 300 units that must lie there.

= 1000 units

200 200 200 200

= 800 units

200 200 200

= 600 units

200 200

= 400 units

= 200 units

= 0 units

200 200 200 200 200

= 1000 units

200 200 200 200

= 800 units

200 200 200

= 600 units

200 200

= 400 units

= 200 units1000

200 200 200 200 200

= 1000 units

Reorder point = (order lead time x usage rate) + safety stock

= (5 x 200) + 300= 1 300 units

What would the inventory stock level be if the supplier delivers one day late?

= (5 x 200) + 300= 1 300 units

100 units

= (5 x 200) + 300= 1 300 units

100 units

Be able to sketch graph on page

Economic ordering quantity

Quantity

Total costs

Carrying costs

Order processingcosts

EOQ = 2DO/IC

D = annual demand in unitsO = cost of placing orderI = inventory carrying cost as percentage of annual inventory investmentC = cost of one unit of the product

= quantity whether the sum of the inventory carrying costs and the order

processing costs are at a minimum

= quantity whether the sum of the inventory carrying costs and the order

processing costs are at a minimum

EOQ = 2DO/IC

Demand = 200 000 units = annual demand = D

Cost of placing one ORDER = R200 per order = O

Unit cost of the product = R25 = C

Inventory carrying cost is 20% of the annual inventory investment = I

EOQ = 2DO/IC

EOQ = EOQ = 2 x 200 000 x 200

25 x 0.2

EOQ = 2DO/IC

EOQ = EOQ = 2 x 200 000 x 200

25 x 0.2 = 4 000units

per order placed

OPTIMAL AMOUNT OF ORDERS

ANNUAL DEMAND

200 000

ANNUAL DEMAND

200 000

= 50 ORDERS PER YEAR

Question: When would you have a higher reorder point than usual?

- Unreliable suppliers- Huge variations in order lead time- Large fluctuations in C-demand

Thus, have to increase safety stocks as well … increased inventory costs …

GROUP ACTIVITY

• Logistics management worksheet

Just in time - JIT

Right products at the right quantities just when they are required.Right products at the right quantities just when they are required.

Information system

KANBAN

Concept that implies that the organisation holds LOW

inventory levels and NO SAFETY STOCK because carrying

inventory tied up working capital.

KANBAN

Coordination between producers and suppliers = essential …

Deliveries are synchronised closely.

NB RE JIT:

1. Close relations between supplier and customer

2. Attention given to quality3. Organisations must have adequate

storing facilities4. Organisations must have adequate

transport options5. Suppliers must deliver a reliable

service6. Short and reliable order lead times7. Purchasing quantities are reduced

Advantages of having JIT:

1. Lower inventory levels = reduced stock holding cost

2. Low/ no safety stock levels = reduced stock holding cost

3. If organisation and supplier have good relationships … leads to higher quality (cannot send back due to time issue)

Disadvantages of having JIT:

1. Risk of running out of stock due to late deliveries

SO – SELECTING SUPPLIERS ON FOLLOWING CRITERIA:

a) Quality of goods they provideb) Their reliabilityc) Their capabilityd) Sound financial positione) Good locationf) Stable labour force

ABC INVENTORY ANLYSIS

Determine how important each item is for organisation.

Small # of items responsible for large % investment

Most NB – 10% # items; 70% of capital investment in inventory

20% # items; 20% of capital investment in inventory

Most NB – 10% # items; 70% of capital investment in inventory

Example

The principleThe principle

Magical MenagerieThe Magical Menagerie is a magical creature shop that in addition to selling magical creatures also offers advice on animal care and health. The shop is very cramped, noisy and smelly, due to every inch being covered with cages. Among the creatures in the Magical Menagerie are enormous purple toads, a firecrab, poisonous orange snails, a fat white rabbit that can turn into a silk top hat and back, cats of every colour, ravens, Puffskeins, and a cage of sleek black rats that play skipping games with their tails.

Inventory for Magical Menagerie (Diagon Alley, London)

Inventory item Annual usage in Pounds Percentage of total inventory usage in PoundsBlack cage £37,500 31%White cage £12,000 10%Copper cage £1,000 1%Purple toad £6,500 5%Firecrab £800 1%Orange snail £1,200 1%Magical rabbit £4,000 3%Blue cat £650 1%Black cat £45,000 37%Ginger cat £1,000 1%White cat £1,000 1%Raven £7,900 6%Snake £1,000 1%Puffskein £650 1%Rat £850 1%Hamster £700 1%

£121,75031 + 37 = 68% Top 70% of capital investment10 + 5 + 6 Next 20% of capital investmentRest Last 10% of capital investment

2 out of 16 13% 3 out of 16 19% 11 out of 16 68%

How to do it nicelyHow to do it nicely

Inventory for Magical Menagerie (Diagon Alley, London)

Inventory itemAnnual usage in

Pounds

Cumulative annual usage in

Pounds

% of total inventory usage in

Pounds

Cumulative % of total inventory

usage in PoundsBlack cat £45,000 £45,000 37% 37%Black cage £37,500 £82,500 31% 68%White cage £12,000 £94,500 10% 78%Raven £7,900 £102,400 6% 84%Purple toad £6,500 £108,900 5% 89%Magical rabbit £4,000 £112,900 3% 93%Orange snail £1,200 £114,100 1% 94%Copper cage £1,000 £115,100 1% 95%Ginger cat £1,000 £116,100 1% 95%White cat £1,000 £117,100 1% 96%Snake £1,000 £118,100 1% 97%Rat £850 £118,950 1% 98%Firecrab £800 £119,750 1% 98%Blue cat £650 £120,400 1% 99%Puffskein £650 £121,050 1% 99%Hamster £700 £121,750 1% 100%

£121,750

Understand graph on page 194

WAREHOUSING

Functions of warehouses

Receiving goodsReceiving goods

Sorting goodsSorting goods

Storage of goodsStorage of goods

Filling the orderFilling the order

Dispatching of order

Warehousing decisions

How many WH neededHow many

WH needed

Types of WH

required

Types of WH

required

Location of WHs

Warehousing decisions: (1) Private warehouses

For their own logistical ops

Owned by any organisation (M, W, R)

NB to have necessary resources and expertise

Reasons for having:1.Long time / term commitment2.Special handling procedures3.Want to control design and ops within the WH

GOOD: sales are consistent & property value appreciate

BAD: Fixed costs (insurance, debt, maintenance, taxes) & non-flexible (location)

Warehousing decisions: (1) Private warehouses

For their own logistical ops

Owned by any organisation (MANUFACTURER, WHOLESALER, RETAILER)

NB to have necessary resources and expertise

Reasons for having:1.Long time / term commitment2.Special handling procedures3.Want to control design and ops within the WH

GOOD: sales are consistent & property value appreciate

BAD: Fixed costs (insurance, debt, maintenance, taxes) & non-flexible (location)

Trend: own fewer private WHs --- product s must flow quicker from M to C (reducing

inventory carrying costs)

Trend: own fewer private WHs --- product s must flow quicker from M to C (reducing

inventory carrying costs)

Warehousing decisions: (2) Public warehouses

Now owned but rented

Include related distribution activities: receiving, unloading, inspecting goods, completing orders & financing.

USEFUL:

Warehousing decisions: (2) Public warehouses

Now owned but rented

Include related distribution activities: receiving, unloading, inspecting goods, completing orders & financing.

USEFUL: (1) seasonal products (2) low-volume storage needs (3) developing new markets (4) additional storage space if already have private (5) inventory levels to be maintained in many locations (6) specialise

BENEFITS related to variable costs i.e. rent space, certain services, concurrent + FLEXIBILITY

Warehousing decisions: (3) Distribution centres

Moving rather than storing …

Large and automated …

BENEFITS: C-service & product availability increased whilst order lead time = decreased

Trends: (1) use of new technology = speed and efficiency (2) less inventory --- JIT and

MRP (Materials Requirement Planning) (3) quality = NB (4) emphasis on SERVICE (5)

MATERIALS HANDING

Trends: (1) use of new technology = speed and efficiency (2) less inventory --- JIT and

MRP (Materials Requirement Planning) (3) quality = NB (4) emphasis on SERVICE (5)

MATERIALS HANDING

Materials handlingMaterials handling

Materials handling equipment

Free-flowing equipment that moves on the groundFree-flowing equipment

that moves on the groundOverhead materials handling equipmentOverhead materials handling equipment

Integrating Logistics

Order processingOrder processing

Inventory managementInventory management

TransportationTransportation

WarehousingWarehousing

Materials handlingMaterials handling

Pic: http://www.google.co.za/imgres?imgurl=http://kotaku.com/assets/resources/2007/05/wii.jpg&imgrefurl=http://kotaku.com/260840/canada-uses-wii-in-hospitals&usg=__Uk2Ojzm9fX3WGTIvKJ0uJFjGiuk=&h=918&w=1024&sz=103&hl=en&start=0&tbnid=Xc9KY1DeBLNCwM:&tbnh=111&tbnw=140&prev=/images%3Fq%3Dwii%26um%3D1%26hl%3Den%26rlz%3D1R2RNSN_enZA388%26biw%3D1003%26bih%3D539%26tbs%3Disch:1&um=1&itbs=1&iact=hc&vpx=249&vpy=215&dur=1344&hovh=213&hovw=237&tx=115&ty=123&ei=MgNZTKWKLM6WOJrv2cgJ&page=1&ndsp=16&ved=1t:429,r:7,s:0

Hmmm …

• Silo’s want to improve their own performance

• Purchasing manager: lower inventory levels = lower carrying costs

• Marketing manager: higher inventory levels = better C-service

Focus in past = internal single-organisation focus:

-Value analysis-Process improvements

-Standardisation-Technological improvements

Integrated logistics inside the Integrated logistics inside the organisationorganisation

Now: supply-chain focus:Cost management initiatives require logistics executives to adopt a series of initiatives that can have a positive impact on bottom

Integrated logistics outside the Integrated logistics outside the organisationorganisation

Now: supply-chain focus:Cost management initiatives require logistics executives to adopt a series of initiatives that can have a positive impact on bottom

Two supply chain partners working together to identify process

improvements to reduce costs across entire supply chain

Two supply chain partners working together to identify process

improvements to reduce costs across entire supply chain

Partnership forms:Partnership forms:

1. Cross-fx, cross-org teams2. Shared projects3. Info-sharing 4. Continuous inventory

replenishment systems

Partnership forms:Partnership forms:

Also:Also:- Value-engineering efforts- Supplier development- Cross-org cost-reduction efforts- Joint new product development

projects- Supply-chain redesign efforts

ResultResult

Lead times reducedLead times reduced

Improved C-serviceImproved C-service

Manage chain based on C-Manage chain based on C-responsesresponses

If not done: have to M on sales forecasts … If not done: have to M on sales forecasts … storing … inventory carrying costs … storing … inventory carrying costs …

GROUP EXERCISE

• American Swiss case study• Review questions p204• La Mercy Case Study p205

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