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Physical Distribution
Chapter 13
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Physical Distribution Physical Supply
goods moving from supplier to manufacturer
“inbound” Physical Distribution
goods moving from manufacturer to customers
“outbound”
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Physical Distribution
Figure 13.1 Supply chain (logistics system)
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Channels of Distribution
Any series of firms or individuals that participates in the flow of goods and services from the raw material supplier and producer to the final user or consumer.”
APICS 12th Edition Dictionary
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Channels of Distribution Company may deliver directly to
customers Use other companies or individuals
to deliver goods Intermediaries
wholesalers – agents transportation companies –
warehousers
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Distribution Channels Transaction channel
negotiate, sell, contract concerned with the transfer of
ownership (and money) Distribution channel
concerned with the delivery of goods or services
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Distribution Channels
Figure 13.2 Separation of distribution and transaction channels
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Physical Distribution Adds place value
by delivering goods to customers Adds time value
by delivering goods when customers want them
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
The Way Materials Move Depends on:
the channels of distribution being used
the types of markets served geographic dispersion number of customers
the characteristics of the product type of transportation available
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Information
Reverse Logistics
Supplier Customer
Returned Goods
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Reverse Logistics - Information
Goods are returned to supplier Information is also needed
reason / approval for the return credit information
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Reverse Logistics Green Logisitics
Return and disposal of packaging materials
Return and disposal of environmentally sensitive materials heavy metals oil
Use of reusable (returnable) packaging
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Returned Goods - Disposition
Returned to inventory Refurbished for resale Sold into alternate markets Disassembled to retrieve
components Sorted for material recovery
Valu
e
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Physical Distribution - Activities
1. Transportation
2. Distribution inventory
3. Warehouses
4. Materials handling
5. Protective packaging
6. Order processing
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Transportation Movement of goods Highest portion of distribution
costs 30 - 60%
Adds place value to the product
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Distribution Inventory Includes all finished goods
anywhere in the distribution system
Second highest cost of distribution 25 - 30%
Inventories add time value to the product
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Warehouses Used to store inventory
improved customer service transportation efficiencies
Warehouse management concerned with: site selection, number of warehouses layout and methods of receiving,
storing and retrieving goods
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Materials Handling Movement and storage of goods
within a distribution center Type of equipment used affects
the costs of operation High capital cost Tradeoff between capital cost and
operating (labor) cost
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Protective Packaging Containment, protection and
identification Packages must fit in storage
spaces and transportation vehicles item package carton pallet container
Fragile
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Order Processing
“The activity required to administratively process a customer’s order and make it ready for shipment or production.”
APICS 12th Edition Dictionary
Represents an element of time in a customer’s orderImportant part of customer serviceMay involve intermediaries
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Total Cost Concept Cost trade-off
a cost decrease in one area may incur a smaller increase in another area
Total cost consider all of the costs increases in one area are offset by
reductions in other areas Keep customer service in mind
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Total Cost Concept - Example Problem
A company normally ships a product by rail. Transport by rail costs $200, and the transit time is 10 days. However, the goods can be moved by air at a cost of $1000 and it will take one day to deliver. The cost of inventory in transit is $100 per day. What are the costs involved in the decision? Rail Air Transportation Cost $ 200 $1000Inventory Carrying Cost 1000 100Total $1200 $1100
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Global Distribution Differences in:
Distance Language Currency Measurement
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Standards ISO (International Organization for
Standardization) Geneva Switzerland
Incoterms (International Commercial Terminology)
Standard size containers
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
3PLs – Third Party Logistics Providers
Provide a wide range of logistics services Delivery Warehousing EDI Freight Forwarding Packaging
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
3PLs – Third Party Logistics Providers
Can provide the service at less cost They have the equipment and networks Can react to seasonal increase Reverse logistics
Examples: Fed Ex Kuehne + Nagel DHL
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Interfaces A bridge between:
Marketing
Production
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Marketing Product Promotion Place Price
Created by Physical
Distribution
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Interface with Marketing Marketing is responsible for the
transfer of ownership selling, advertising, sales promotion,
merchandising and pricing
Physical distribution is responsible for delivering the goods contributes to creating demand
prompt delivery, availability of product, accurate order filling
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Interface with Production Production requires a steady flow of
raw materials and components interruptions are very expensive
Factory location may depend on the transportation cost raw materials finished goods
Factory demand is created by distribution centers
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Transportation Costs Ways
land, water, road, space, etc over which goods are moved
may be owned by the operator (railroad tracks), operated by the government (roads, canals) or mother nature (ocean)
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Transportation Costs Terminals
Used to sort, load and unload goods connection between line-haul and
local deliveries connection between different modes
or carriers dispatching, maintenance,
administration
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Transportation Costs Vehicles
owned or leased by the carrier
Other (fixed or variable) maintenance administration fuel labor
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Transportation - Modes Rail Road Air Water Pipeline
Vary by flexibility and operating cost
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Rail Provide own ways, terminals and
vehicles large capital investment need high volume modest flexibility
Used for bulky commodities over long distances
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Road Pay for ways through taxes or tolls Provide their own terminals Vehicle cost though large, is smaller
than vehicle costs for water or rail Door-to-door service (very flexible) Used for small volume goods to
many delivery locations
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Air Uses government provided
terminals and air traffic control systems (ways)
High variable costs for fuel and operating costs
Most expensive mode Used for high value, low weight
goods over long distances
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Water Nature provides ways
canals are government controlled Carrier pays for use of terminals Carrier owns the ships Operating cost is very low Slow and not very flexible Used for low value bulk cargo over
long distances
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Pipelines Very high capital costs Operating costs are very low Not flexible! Used for high volume gases or
liquids moving from point to point
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
For Hire Carriers Common carriers
licensed to carry only certain goods available to public designated points or areas served scheduled service
Contract carriers provides specific service to a shipper
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Private Carriers Need to buy and operate their own
equipment Carry their own goods
licenses are still required Very high volume to justify
expense
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Other Transportation Agencies
Use combinations of modes Freight Forwarders Post Office Couriers
Agencies make use of load consolidation
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Transportation Cost Elements
Line haul Pickup and delivery Terminal handling Billing and collecting
Principles are the same for all modes
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Transportation Cost Elements
Figure 13.3 Shipping patterns
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Line Haul Costs Fuel, labor, depreciation Approximately the same per mile
whether full or empty
LHC = Total Line-Haul Cost Distance Travelled
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Line-Haul Costs - Example
For example, for a given commodity, the line-haul cost is $3 per mile and the distance shipped is 100 miles. The total line-haul cost is therefore, $300. If the shipper sends 50,000 pounds, the total line haul cost is the same as if 10,000 pounds were shipped. However the line-haul cost (LHC) per hundredweight (cwt) will vary.LHC50,000 lbs = $300 = $.60 per cwt
500LHC10,000 lbs = $300 = $3.00 per cwt
100
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Line-Haul Costs Total line-haul cost varies with:
cost per mile distance moved
Line-haul cost per cwt varies with: cost per mile distance moved weight moved
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Line-haul Cost - Example
For a particular commodity, the line-haul cost is $2.50 per mile. For a trip of 500 miles and a shipment of 600 cwt, what is the cost of shipping per cwt? If the shipment is increased to 1000 cwt, what is the savings per cwt?Cost600 =($2.50 x 500) / 600 = $2.083 / cwt
Cost1000 = ($2.50 x 500) / 1000 = $1.25 / cwt
Savings = $2.083 - 1.25 = $0.833 / cwt
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Increasing Weight Shipped
Truck will have a weight limitation Some products have a low density
and the truck is filled before the weight limitation is met
Therefore, nest products or ship products unassembled to increase the weight shipped
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Shipping un-assembled
Some Assembly
Required
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Shipping Cost - Example
A company ships barbecues fully assembled. The average line-haul cost is $12.50 per mile, and the truck carries 100 assembled barbecues. The company decides to ship the barbecues unassembled and can ship 500 barbecues in a truck. Calculate the line-haul cost per barbecue assembled and unassembled. If the average trip is 300 miles, calculate the savings per barbecue.
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Shipping Cost - ExampleLine-haul costassembled = $12.50/100 =$0.125 / bbq / mile
Line-haul cost unassembled = $12.50/500 =$0.025/ bbq/mile
Savings per mile = $0.125 - 0.025 = $0.10 / bbq / mile
Trip savings = 300 miles x $0.10 / bbq/mile
=$30 per barbecue
probably worth thecost of assembly
at the buyer’s
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Pickup and Delivery Costs Depends on time spent (not
distance) Charged for each pickup
Therefore, consolidate multiple shipments to avoid many trips
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Terminal Handling Cost depends on how many times
the shipment must be handled Full truckloads (TL) go directly to
the customer Less than truckloads (LTL) must be
sent to a terminal, sorted and consolidated
Therefore, consolidate shipments into fewer parcels
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Billing and Collecting Costs of paperwork Costs of invoicing
Therefore, reduce the number of pickups and pieces shipped (consolidating)
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Total Transportation Costs Line-haul + pickup and delivery + terminal
handling + billing and collecting To reduce costs:
increase the weight shipped (line-haul cost) reduce the number of pickups (pickup and
delivery cost) decrease the number of parcels (terminal
handling costs) consolidate shipments (billing and collecting
costs)
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Distance Versus Cost of CarriageTota
l C
ost
Distance
Fixed Cost: pickup, and deliveryterminal handling, billing and collecting
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Rate Charged - Other Factors
Value - to cover carrier’s liability Density - can affect the total
weight shipped Perishability - may require special
equipment i.e. refrigeration Packaging - to reduce the risk of
damage and breakage
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Warehousing
Plant warehouses Regional warehouses Local warehouses Wholesalers Public warehouses
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Warehousing - Services General warehouse
storage and protection of goods need to minimize handling and
movement Distribution warehouse
goods are received in large volumes goods are then sorted and consolidated
into customer orders concerned with throughput
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Role of Warehouses
Transportation consolidation
Product Mixing
Service
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Transportation Consolidation Reduces transportation costs Truckload (TL) shipments to
warehouse Less than truckload (LTL) shipments to
local customers “Break-bulk”
breaking down large shipments from factories into small shipments for local buyers
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Product Mixing Avoids many small LTL shipments Customers want a mix of products
often from different manufacturers or locations
The distribution center can assemble many small items into one shipment
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Service Local distribution centers can
improve customer service by being close to the customer
Faster response time Improved variety of products May add value
e.g. customer specific labelling
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Product Mixing
Figure 13.6 Product mixing
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Warehousing and Transportation Costs
Number of customers Geographic distribution
of customers Customer order size Number and location of
plants and distribution centers
CustomerService
$
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Warehousing and Transportation Costs - Example Problem
A plant located in Toronto is serving customers in the Boston area. If they ship direct to customers most shipments will be LTL. However if they locate a distribution center in Boston they can ship TL to the warehouse and LTL from the warehouse to the local customers. Costs are as follows:Plant to customer (LTL) = $100 / cwtPlant to distribution center (TL) = $50 / cwtDistribution center = $10 / cwtDistribution center to customer (LTL) = $20 / cwt
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Warehousing and Transportation Costs - Example Problem
Costs if a distribution center is used:TL Toronto to Boston = $50 per cwtDistribution center costs = $10 per cwtLTL Boston area = $20 per cwtTotal cost = $80 per cwt
Savings per cwt = $100 - $80 = $20 per cwt
Annual savings at 10,000 cwt = $20x10,000 = $200,000
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Market Boundaries
The line between two methods of distribution where the laid down cost is the same.
Deciding which customers should be served from which location
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Laid-down cost (LDC)
“The sum of the product and the transportation costs. The laid-down cost is useful in comparing the total cost of a product shipped from different suppliers from a customer point of view”
APICS 12th Edition Dictionary
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Laid-down Costs - Example Problem
Syracuse is 300 miles from Toronto. The product cost is $10 per cwt, and the transportation cost is $0.20 per mile. What is the laid down cost per cwt?
LDC = Product cost +(trans’n cost per mile x distance)
= $10 + ($0.20 x 300) = $70 per cwt
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Market Boundary - Example Problem
Figure 13.7 Market boundary
MarketBoundary
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Market Boundary - Figure 13.7
In the example, the distance between A and B is 100 miles. If we let the distance from A to Y be X miles, then the distance from B to Y is (100 - X) miles. Assume supply A is the factory and B is a distribution center. Assume the product cost from A is $100 and from B is $110 which includes inventory and TL costs to the distribution center. LTL costs are $.40 per unit per mile from either location.
LDCA = LDCB
100 + 0.40X = 110 + 0.40(100 - X) X = 62.5 miles
Customers within 62.5 miles from the factory A, ship direct. The rest of the customers, ship from the distribution center B.
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Market Boundary - Example Problem
The distance between Toronto and Boston is about 500 miles. Given the cost structure in the previous example, calculate the location of the market boundary between Toronto and Boston. Assume the product cost at Toronto is $10 per cwt.Product cost at Boston = product cost at Toronto
+ TL transportation + handling costs
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Market Boundary - Example Problem
Product cost at Boston= product cost at Toronto + TL transportation + handling= $10 + $50 + $10 = $70
LDCT = LDCB
$10 + $0.20X = $70 + $020(500 - X) 0.4X = 160 X = 400
The market boundary is 400 miles from Toronto or 100 miles from Boston. Ship orders direct within 400 miles from Toronto. Closer to Boston ship from Distribution Center in Boston.
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Effect of Adding More Warehouses
As more distribution centers are
added:
TL shipments to DC’s will increase
LTL costs to customers will decrease
Total cost of transportation will
decrease
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Effect of Adding More Warehouses
Figure 13.8 Transportation cost versus number of warehouses
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Packaging Identifies product
may be part of marketing promotion size, description, date of manufacture
Contains and protects the product movement environment
Contributes to distribution efficiency handling in larger quantities
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Packaging Primary package
holds the product for the consumer e.g. a box of cereal
Secondary package contains small products for distribution e.g. a corrugated carton
Unit load e.g. a pallet
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Unitization
“In warehousing, the consolidation of several units into larger units for fewer handlings.”
APICS 12th Edition Dictionary
ContainerBox Pallet
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
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Pallets Standard sizes
e.g. 48”x40”x4” (grocery) Sized to fit into further unitized
loads e.g. railcar, truck, container
Handled by fork lift trucks
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Materials Handling
Objectives: Increase the cube utilization
use as much height as possible keep aisles to minimum
Improve operating efficiency increase the load per move
Improve speed of response
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Equipment Conveyors
move in a fixed route, consume space need high volumes
Industrial trucks can move anywhere in the plant do not consume fixed space
Cranes and hoists make use of overhead space
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Pallet Position Plan
Figure 13.10 Railcar and trailer pallet position plan
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
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All Rights Reserved.
Multi-Warehouse System+ Transportation costs+ Inventory-carrying cost+ Warehousing costs+ Materials handling costs+ Packaging costs= Total system cost
System service capability
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Transportation Costs TL shipments will be made over
long distances LTL shipments to customers will be
shorter Total costs decrease with more
warehouses diminishing effect as more
warehouses are added
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Inventory-Carrying Cost Inventory
order quantity - stays the same safety stock
increases with the number of warehouses varies with the square root of the change
SSnew = SSold Previous # of warehouses
New # of warehouses
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Inventory Carrying Costs A company is considering adding a warehouse.
For an item with an average demand of 1000 units each warehouse will have a demand of 500 units.
The safety stock in one warehouse was 100 units for a service level of 90%. What is the new safety stock?
SS = 100 x 500 = 71 units (in each warehouse)
1000
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Warehousing Costs
+ Space for additional inventory
+ Duplication of non-storage space
offices, washrooms, lunchrooms
+ Duplication of support staff
supervisory, clerical, support
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Materials Handling Costs Number of units handled will
remain the same As number of warehouses
increase, the size of the loads handled will decrease
Handling of non-unitized loads increases costs
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Packaging Costs Per unit costs remain the same
Total costs increase with inventory
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Total System Cost
Figure 13.11 Total system cost
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
System Service Capability
Customer service (speed of delivery) improves with more distribution centers
diminishing effect as more DC’s are added
Must consider cost of service with total
system cost
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
System Service Capability
Figure 13.12 Estimate of market reached versus number of warehouses
Introduction to Materials Management, 7th EditionArnold, Chapman, Clive
© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
System Service Capability
3 distribution centers provide the lowest total system cost
Figure 13.13 Cost versus number of warehouses