Lecture 2

Different types of trade-offs:

1. Within distribution components

2. Between distribution components

3. Between company functions

4. Between company and external organizations

 Customer service
 Channels of distribution
 Supply points
 Production locations
 Depot configuration
 Depot types
 Location and size of depots
 Transport modal choice
 Third party or own
 Direct delivery
 Stock levels
 Vehicle types/sizes/numbers
 Contract hire
 Primary routes
 Delivery schedules
 Support facilities
 Design and layout
 Space allocation
 Handling methods
 Information support systems
 Monitoring procedures/order processing
 Goods receipt and checking
 Bulk storage
 Order picking
 Stock replenishment
 Load scheduling
 Stock update
 Vehicle maintenance
 Vehicle workshop activity.
• The objectives of logistics strategy are:
- Minimize cost
- Minimize investment
- Maximize customer service Logistics
•Levels of logistical planning: Strategy
- Strategic
- Tactical
- Operational

•The 4 problem areas of supply chain planning

- Customer service levels
- Facility location
- Inventory decisions
- Transportation decisions

•When to plan?
- No distribution network currently exists.
- There has been no re-evaluation in 5 years.
- When costs are changing rapidly, especially transport & inventory.
- When markets have shifted.
- When current distribution economics encourage shifts.
- When there has been a major policy shift in logistics such as in price,
customer service, or investment level.
 Corporate to Functional
Strategic Planning
Corporate
External factors
strategic plan
•Economic
•Regulatory
•Technological
•Competitive

Marketing

Manufacturing
Finance

Logistics

Functional strategic plans

 Flow of Logistics Planning
Individual Link of Business goals and
Logistics System strategies
• Facility location
• Operations strategy
• Inventory management Customer service
requirements
• Information systems
• Material handling
• Traffic and transportation Integrated logistics
• Planning and control methods planning
• Organization
Design of integrated
logistics management
system

Overall performance
measures
 Logistics’ Objective

Maximize return on logistics

assets (ROLA) Costs of
Logistics’ logistics
contribution operations
to sales

ROLA =Revenue−Costs
Assets
Investment
in logistics
assets
 Strategic, Tactical, and Operational
Decision Making
Decision area Strategic Tactical Operational

Transportation Mode selection Seasonal equip- Dispatching

ment leasing

Inventories Location, Control policies Safety stock levels Order filling

Order Order entry, transmittal, Processing

processing and processing system orders, Filling
design back orders

Purchasing Development of supplier- Contracting, Expediting

buyer relations Forward buying

Warehousing Handling equipment Space utilization Order picking

selection, Layout design and restocking

Facility Number, size, and

location location of warehouses
Six Concepts for Logistics Strategy
Formulation
• Total cost concept
Tradeoff conflicting costs at optimum
• Differentiated distribution
Not all products should be provided the same level of
customer service
• Mixed strategy
A pure strategy has higher costs than a mixed strategy
• Postponement
Delay formati on of the final product as long as possible
• Shipment consolidation
Smaller shipment sizes have disproportionately higher
transportation costs than larger ones
• Product standardization
Avoid product variety since it adds to inventory
A Cost Conflict in Logistics

Total cost
Cost, in dollars

Cost of
Inventory cost transportation
(includes service
storage and
intransit

Rail Truck Air

Transportation service
(greater speed and dependability)
Choosing the Right Supply Chain
Strategy
Functional Innovative
Products-- Products--
Predictable Unpredictable
Low margin demand demand
Efficient supply Staple food
chain products

Responsive Electronic
supply chain equipment

High margin
 Classification of Products
Predictable/Mature Products
•Corn Flakes
•Lawn fertilizer
•Ball point pens
•Light bulbs
•Auto replacement tires
•Some industrial chemicals
•Tomato soup
Unpredictable/Introductory
Products
•New music recordings
•New computer games
•Fashion clothes
•Art works
•Movies
•Consulting services
•New product offerings of
existing product lines
Choosing the Right Supply Chain Strategy
Efficient ■ Economical production runs
supply chain ■ Finished goods inventories
■ Economical buy quantities
■ Large shipment sizes
Supply-
■ Batch order processing
to-stock
Responsive ■ Excess capacity
supply chain ■ Quick changeovers
■ Short lead times
Supply- ■ Flexible processing

to-order ■ Premium transportation

■ Single order processing
 Seven Principles
of Supply Chain Management
Differentiated distribution
•Segment customers based on service needs
•Listen to signals of market demand and plan
accordingly Design to customer needs
•Develop a supply-chain-wide technology
strategy
Boundary spanning
•Customize the logistics network info. systems

•Differentiate product closer to the customer

•Source strategically Postponement

•Adopt channel-spanning performance

measures
 Business Strategy

New Product Marketing

Supply Chain Strategy
Strategy Strategy

New Marketing
Product and Operations Distribution Service
Development Sales

Finance, Accounting, Information Technology, Human Resources

 Strategic fit:
Consistency between customer
priorities of competitive strategy
and supply chain capabilities
specified by the supply chain
strategy
Competitive and supply chain
strategies have the same goals
 Facilities
placeswhere inventory is stored,
assembled, or fabricated
production sites and storage sites
Inventory

raw materials, WIP, finished goods

within a supply chain
inventory policies
 Transportation
 moving inventory from point to point in a supply chain
 combinations of transportation modes and routes

 Information
 data and analysis regarding inventory, transportation,
facilities throughout the supply chain
 potentially the biggest driver of supply chain
performance
 Efficiency Responsiveness

Supply chain structure

Facilities Transportation Inventory Information

Drivers
Strategy
(Design)

Planning

Operation
 Cycle inventory
 Safety inventory
 Seasonal inventory
 inventory built up to counter predictable variability in
demand
 cost of carrying additional inventory versus cost of
flexible production
 Overall trade-off: Responsiveness versus efficiency
 more inventory: greater responsiveness but greater cost
 less inventory: lower cost but lower responsiveness
 Mode of transportation
Route and network selection
route: path along which a product is
shipped
network: collection of locations and routes
 In-house or outsource
Overall trade-off: Responsiveness versus
efficiency
Driver Efficiency Responsiveness

Inventory Cost of holding Availability

Transportation Consolidation Speed

Facilities Consolidation / Proximity /

Dedicated Flexibility
Information What information is best suited for
each objective
Distribution:the steps taken to move and
store a product from the supplier stage to
the customer stage in a supply chain
Distribution directly affects cost and the
customer experience and therefore drives
profitability
Choice of distribution network can achieve
supply chain objectives from low cost to high
responsiveness
Distribution network performance evaluated
along two dimensions at the highest level:
o Customer needs that are met
o Cost of meeting customer needs
Distribution network design options must
therefore be compared according to their impact
on customer service and the cost to provide this
level of service
 Elements of customer service influenced by network structure:
 Response time
 Product variety
 Product availability
 Customer experience
 Order visibility
 Returnability
 Logistics costs affected by network structure:
 Inventories
 Transportation
 Facilities and handling
 Information
Number of
Facilities

Response Time
 Hi Local FG
Mix
Regional FG

Local WIP
Cost Central FG

Central WIP

Central Raw Material and Custom production

Custom production with raw material at suppliers

Low
Low Response Time Hi
 Total Costs Related to
Number of Facilities
Total Costs
Total Costs

Facilities
Inventory
Transportation

Number of Facilities
 Manufacturer Storage with Direct Shipping
 Manufacturer Storage with Direct Shipping

and In-Transit Merge

 Distributor Storage with Carrier Delivery

 Distributor Storage with Last Mile Delivery

 Manufacturer or Distributor Storage with Consumer

Pickup
 Retail Storage with Consumer Pickup
Manufacturer Storage with
Direct Shipping
Manufacturer

Retailer

Customers

Product Flow
Information Flow
 In-Transit Merge Network

Factories

Retailer In-Transit Merge by

Carrier

Customers

Product Flow
Information Flow
Distributor Storage with
Carrier Delivery

Factories

Warehouse Storage by
Distributor/Retailer

Customers

Product Flow
Information Flow
Distributor Storage with
Last Mile Delivery

Factories

Distributor/Retailer
Warehouse

Customers

Product Flow
Information Flow
 Manufacturer or Distributor Storage
with Customer Pickup
Factories

Retailer Cross Dock DC

Pickup Sites

Customers

Customer Flow
Product Flow
Information Flow