Logistics: Positioning Goods in the Supply Chain

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Chapter 12

• LogisticsPositioning Goods in the Supply Chain

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Introduction to Logistics

• the process of planning, implementing, and
  controlling the efficient, effective flow and
  storage of goods, services, and related
  information from point of origin to point of
  consumption for the purpose of conforming to
  customer requirements.

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Logistics

• Purchased goods must be transported from the
  point where they originate to the place needed,
  with inventories held at a minimum amount, to
  ensure production and customer service.
• The management of inventory in motion and storage
  is called logistics.

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Council of Logistics Management

• Part of the supply chain that plans, implements,
  and controls the efficient, effective flow and
  storage of goods, services, and related
  information from the point of origin to the point
  of consumption in order to meet the customers
  requirements.

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Logistics

• Logistics - (business definition) Logistics is
  defined as a business planning framework for the
  management of material, service, information and
  capital flows. It includes the increasingly
  complex information, communication and control
  systems required in today's business environment.
  -- (Logistix Partners Oy, Helsinki, FI, 1996)

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Logistics Costs

• Logistics costs can be divided into
• - Inventory carrying cost
• - Administrative cost
• - Transportation cost (major portion of the
  total cost)

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Logistics Network Configuration

• Costs are incurred and time is required to move
  goods from raw materials to consumers.
• An important task for supply chain management is
  to determine distances and how travel will take
  place.

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Supply Chain and Logistics

• Supply chain should be emphasizing reducing costs
  and cycle time and cycle time.
• It requires efficient transportation and other
  logistics services.
• Information flow is a critical first step

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Logistics Requirements

• Logistics requires skill and knowledge in the
  field.
• Knowledge of the rules and regulations

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Logistic Activities

• Transportation
• Warehousing
• Material Handling
• Packaging
• Inventory Management
• Logistics Information Systems

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Effects of Logistics

• Logistics Accounts for 5 to 35 percent of total
  sales costs
• In North America the logistics is 10.7 per cent
  of GDP
• Logistics affects delivery, lead time, and
  location of an item

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Outsourcing Logistics Services

• Third party providers are known as 3PLs
• 3PLs can be narrow in focus or quite broad

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Logistic Strategy

• To ensure that the logistics choices are
  consistent with its overall business strategy and
  supports the performance dimension that targets
  customers value.
• Performance Dimensions
• - Quality
• - Time
• - Flexibility
• - Cost

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Logistics Network Configuration

• Costs are incurred and time is required to move
  goods from raw materials to consumers.
• An important task for supply chain management is
  to determine distances and how travel will take
  place.

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3PL Selection

• Steps to selecting a 3PL

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Owning vs. Outsourcing

• Do you have enough volume to justify a private
  logistics system?
• Would owning private logistics system limit the
  firms ability to respond to change?
• Is logistics a core competency of the firm?

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Reverse Logistics

• The flow of goods back to their producer
• Increasing in importance
• Often outsourced
• May function as asset recovery
• (products to be resold)

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Transportation

• Transportation is an important supply chain
  driver because products are rarely produced and
  consumed in the same location.
• Transportation is a significant component of the
  costs incurred by most supply chain.
• Transportation represents 10 percent of the
  GDP and employs more than 20 million people,
  accounts for 16 percent of the US employment.

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Transportation

• Any supply chains success is closely linked to
  the appropriate use of transportation.
• Shipper is the party that requires the movement
  of the product between two points in the supply
  chain.
• Carries is the party that moves or transports the
  product.

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Transportation

• Owner or operators of the transportation
  facilities
• Agencies that set transportation policies
• Transportation network as a collection of nodes
  and links.

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Transportation

• The effectiveness of any mode of transport is
  affected by equipment investments and operating
  decision by the carrier as well as the available
  infrastructure and transportation policies.

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Transportation

• Longer supply chain creates complex
  transportation system
• Long distances creates complex transportation
  system
• Many modes of transportation choices add
  complexity
• Modes are road, rail, air, ships, pipeline, and
  intermodal.
• new

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Carrier Objectives

• Objective is to ensure good utilization of its
  assets while providing customer with an
  acceptable level of service.
• The decision is affected equipment cost, fixed
  operating cost, variable operating cost, and
  price it can charge.

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Transportation Modes

• U.S. Commercial Freight Activity by
  Transportation Mode

Truck is the largest mode. Air is fastest growing
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Road Transport

• Trucking consist of two major segments
• FTL (Full truckload) is the cheapest.
• LTL (Less than truckload) costs more.
• Truck is most commonly used cargo mode
• Most goods transportation ends with a truck
  delivery
• Most flexible mode of transportation
• 64 percent of U.S. commercial freight by value
  and 58 percent by weight is moved by truck.

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Road Transportation

• Trucking is most expensive than rail
• Door-to-door shipment
• Shorter delivery time
• No transfer required between pickup and delivery

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Full Truck Load (FTL)

• Low Fixed cost
• Fewer Trucks
• Economies of Scale
• Good for transportation between factories and
  warehouses (manufacturer and suppliers)

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Less Than Truck Load (LTL)

• Small load
• Cheaper
• Consolidate package

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Air

• If speed is required, use air
• Cost is very high and should be used in emergency
• Long distance may require air transportation
• Cost can be justified by reducing lead time,
  reliable delivery, and quick cash recovery (sell
  product quickly)
• new

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RAIL

• Carried 4 percent shipment b value, and 12
  percent by weight and more tan 25 percent of
  total ton-miles.
• Higher fixed cost in cars and locomotives
• Price is structured and heavy load make it
  economical
• Ideal for very heavy, low-value shipments (coal).

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Rail Transport

• Less flexible than truck. But less costly over
  long distances.
• Takes longer than truck
• Trend is toward specialty wagons (railcar).
• Can provide specialty wagon such as
• - Hopper wagon for bulk powder products
• - Flat wagon for steel and equipment
• - tanker wagon for liquid
• - car wagon for automobile
• for different products. Road trailer can
  be easily changed to truck trailer.
• Double stacking (containers are stacked on
  railcars) is becoming more common.

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MARINE TRANSPORTATION

• Limited to certain areas
• Inland waterway (rivers)
• Coastal water
• Large load and low cost

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Marine Transport

• Breakbulk ships (goods packed in boxes, crates,
  or cartons) carry loose freight. This makes
  loading and unloading easy.
• Containerships carry containers.
• Faster loading and unloading
• Easy transfer to rail or truck

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Pipeline

• Least flexible, only used for specialized product
  e.g. gas, water or oil.
• Often used to transport between isolated areas
• High initial investment, but low operating costs

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Intermodal Transport

• At least two different modes are used, e.g.
  Marine/rail, rail/road, marine/road,
  marine/rail/road, etc.
• Integrated transport carriers use whatever is
  best
• Customer doesnt have to deal with modes and is
  given total cost up front
• Utilizes containerized shipping.

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Integrated Transportation

• Integrate transportation decisions with inventory
  and warehousing, order management, forecasting,
  and production planning.
• Combination of modes that best suite the product
  from origin to destination,
• Only costs are negotiated and the choice of modes
  is made by providers.

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Implications of Strategy
Performance
Transportation Warehousing Dimension
Mode System
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Implications of Strategy
Performance
Transportation Warehousing Dimension
Mode System
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Buyer/Seller Responsibility

• Who pays for products transportation
• Who bears the risk and when risk passes
• In international transaction the transportation
  terms as well as the sale price are negotiated.
• International Commercial terms (Incoterms)
  defined the terms for transportation.
• - international carriage not paid by the
  seller
• - international carriage paid by the seller
• - arrival at stated destination

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Origin

• EXW Ex Works Means that the seller delivers
  when they place the goods at the disposal of the
  buyer at the sellers premises or some named
  place, not cleared for export and not loaded on a
  vehicle.

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Incoterms International Carriage Not Paid By the
Seller

• FCA stands for Free Carrier. The seller delivers
  the goods, cleared for export, to the carrier the
  buyer specifies, at a named location, not loaded.
  The sellers responsibility is fulfilled when he
  delivers the goods to the carrier.
• FAS means Free Alongside Ship. The seller
  delivers when the goods are placed alongside the
  vessel at the named port of shipment. This is
  specifically used for ocean shipments that arent
  containerized.
• FOB stands for Free on Board. FOB means that the
  seller delivers when the goods pass the ships
  rail at the named port of shipment. The buyer is
  responsible for costs and risks as soon as the
  goods pass the ships rail.

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Incoterms International Carriage Paid By the
Seller

• CFR designates Cost and Freight. The seller is
  responsible for the cost and fright required to
  bring the goods to the named destination, but the
  buyers is responsible for the risks when the
  goods pass the ships rail in the port of
  shipment.
• CIF means Cost, Insurance, and Freight. This is
  the same a CFR, except that the seller is
  responsible for insurance against loss or damage.
  
• CPT stands for Carriage Paid To. The seller is
  responsible for the cost of freight to the named
  destination. The risks associated with loss,
  damage, or cost increases becomes the buyers
  when the goods have been delivered to the custody
  of the first carrier.
• CIP stands for Carriage and Insurance Paid To.
  This is the same as CPT, except the seller is
  responsible for transport insurance against loss
  or damage.

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Incoterms Arrival at Stated Destination

• DAF stands for Delivered at Frontier. DAF means
  that the sellers responsibility stops when the
  goods have arrived at the frontier, but before
  the customs border of the country specified in
  the contract.
• DES stands for Delivered Ex Ship. DES means that
  the sellers responsibility ends upon placement
  of the goods at the disposal of the buyer on
  board the ship at the named port of destination.
• DEQ stands for Delivered Ex Quay. DEQ means that
  the sellers obligation is fulfilled when the
  goods are made available on the quay (wharf) to
  the buyer at the named port of discharge.
• DDU stands for Delivered Duty Unpaid. DDU means
  that the sellers responsibility goes up to the
  point when the goods have been made available to
  the buyer at the named place in the country of
  importation. The buyer has to pay all duties,
  taxes, and customs charges required for
  importation.
• DDP stands for Delivered Duty Paid. DDP is like
  DDU in that the sellers obligation ends when the
  goods have been made available to the buyer at
  the named place in the country of importation.
  However, the seller is responsible for all
  duties, taxes, and customs charges.

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Warehouses

• As product moves form supplier to customer, there
  may be a need for a storage.
• Storage could be provided by supplier, retailer,
  or 3PL.
• Warehouse may be used to reduce cost, reduce
  response time, increase variety of product, and
  handle emergency.

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Warehousing

• Distribution Strategies

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Direct Shipment

• Shipping directly from manufacturer to retailer
• Eliminates warehouse costs
• Probably wont take advantage of FTL
  transportation savings.
• High inventory level needed

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Consolidation Warehousing

• Storage in warehouse, then shipped.
• More likely to use FTLs
• Risk pooling benefits of reduced inventory in
  system
• Used in combination with postponement (delays the
  commitment of products to final configuration.
  Packaged to meet needs of different customers.)

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Cross-Docking

• Continuous shipment from suppliers to warehouses
  where goods are redirected and delivered to
  customers.
• Most sophisticated system. Require close
  communication between supplier and retailer.
• Require reliable forecast
• High cost, but very efficient
• Used by high-volume retailers like Wal-Mart and
  Dollar General
• FTL bulk shipments to cross-dock center, then FTL
  mixed loads to retailers

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Warehouse Location Decisions

• Center-of-gravity method used for locating a
  distribution center among warehouses or retail
  stores.
• Finds the most central location for the DC by
  calculating the X and Y coordinates that minimize
  transportation costs.
• Considers distance between the DC and warehouses
  or stores as well as the number of shipments
  necessary between them

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Location Decision-Making TechniquesCenter-of-Grav
ity Method
where Cx X coordinate of the center of
gravity Cy Y coordinate of the center of
gravity dix X coordinate of the ith
location diy Y coordinate of the ith
location Vi Volume of goods moved to or from
the ith location
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Information Technology

• Radio Frequency Identification (RFID)
• Each tag has a unique identifier that uses the
  electronic product code (EPC) format.

Exhibit 12.12 EPC Format
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Information Technology

• Radio Frequency Identification (RFID)
• RFID tags emit a signal that can be read at a
  distance.
• The signal contains a unique identifier that can
  be read by a reader
• Information about the item can be stored on a
  host computer
• RFID can be used to aid in inventory counts,
  security, product tracking, etc.

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Information Technology

• Potential RFID Applications

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Information Technology

• Global Positioning systems
• Determine precise locations using satellites.
• Used to monitor vehicle locations
• Estimate arrival times
• Update customers on delays
• Increase security

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Logistics Costs

• Landed Cost computations
• Convert all logistics-related costs to a per unit
  basis for comparison

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Supply Chain and Information Technology

• Widespread implementation of enterprise resource
  planning (ERP) systems offers the promise of
  homogeneous, transactional databases that will
  facilitate integration of supply chain
  activities.
• Examples of ERP SAP, Oracle, and PeopleSoft.
• To effectively apply IT, a company must use its
  transactional and analytical information.

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Information Technology

• Transactional Database keeping record of all
  business transactions
• Analytical Process Ability to evaluate large
  numerical databases in helping manager identify
  optimal option. Analysis not only must evaluate
  each option but also compare multiple option to
  suggest a best option.

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Transactional VS. Analytical IT

• Transactional IT deals with acquiring, managing,
  and communicating raw data of the companys
  supply chain and compilation and dissemination of
  reports summarizing these data.
• Analytical IT deals with evaluating supply chain
  options using descriptive and optimization
  models.
• - Description models forecast and cost
  models.
• - Optimization models Linear programming,
  decision models, project
  management.

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Internet Enabled 4PL A Case Study
Padraic Allen
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Two Trends Facing Supply Chain Managers Today

• eCommerce the internet can offer true
  integration the Cornerstone of Supply Chain
  Management
• Outsourcing organisations are outsourcing
  non-core competencies

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The Supply Chain Challenge
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eBusiness Supply Chain Management
One area where the payback from e-Business can be
substantial is in the integration of the supply
chain
The B2B Frenzy is all about the Supply Chain
AMR Research
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Outsourcing

• Listed by Harvard Business Review as one of the
  most important management concepts of the past 75
  Years
• Means of increasing performance of non-core
  supply chain activities
• Fourth Party Logistics is the evolution of supply
  chain outsourcing

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The key benefit of 4PL is that of increasing
shareholder value

• -Benefits of 4PL
• 4PL provider maintains primary accountability
  and quality within the arrangement
• 4PL has the overarching responsibility for
  supply chain performance
• 4PL should be able to impact the entire supply
  chain increasing revenue, lowering costs,
  reducing working capital and fixed capital

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4PL Operating Models

• The 4PL environment has three primary operating
  models
• The Synergy Plus Model
• The Solution Integrator Model
• The Industry Integrator Model

Note 4PL is a trademark of Accenture
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4PL Operating Models

• The Synergy Plus Model - relies on a working
  relationship between the 4PL Organisation and a
  3PL Company. Both the 4PL and the 3PL partner to
  market supply chain solutions which capitalise on
  the capabilities and market reach of both. The
  4PL offers a broad range of services to the Third
  Party Logistics Provider including technology,
  supply chain strategy skills and program
  management.

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4PL Operating Models

• The Solution Integrator Model - focuses on the
  strength of the 4PL as an individual organisation
  which manages a comprehensive supply chain
  solution for a single client. This arrangement
  encompasses the resources of the 4PL with a
  selection of complementary service providers,
  chosen by the 4PL, to establish a best fit
  integrated solution for the client company.

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4PL Operating Models

• The Industry Innovator Model - is the most
  complex operating model within the 4PL
  environment but also the most rewarding. Within
  this model,a 4PL organisation develops and runs a
  supply chain solution for multiple industry
  players with a focus on synchronization and
  collaboration.

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What is the Industry Innovator Model?

• The Industry Innovator is an integrated eCommerce
  based range of outsourced supply chain functions
  that act as a highly efficient path for enabling
  the transfer of product from suppliers to buyers.
• An individual company in each industry will have
  slightly different supply chain needs, but there
  should be similarities within an individual
  industry.
• Although the model looks similar to a
  marketplace, it could in fact be a series of
  one-to-many relationships pushed through one
  Market site on the web.

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Typical Supply Chains
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Inefficient and Clogged with inventory!
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Supply Chain Re-engineering for a Single Company
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Supply Chain Re-engineering for an Entire
Industry
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Internet Enabled 4PL A Case Study
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iTooling.com

• iTooling.com was conceptualised as an Industry
  Innovator 4PL. It was developed for the
  industrial tooling sector with an initial focus
  on cutting tools.

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Brief Profile of the Industry

• Customers Aerospace, Automotive, Job Shops,
  etc.
• 19Bn Worldwide Market (Roughly 1/3 in each
  region US, Europe Asia)
• Small form factor
• Relatively high value
• Consumable Frequent repeat buying
• Many suppliers Very fragmented

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Background

• The industrial tools market is one of the most
  fragmented and agency locked markets in the world
  today.
• The route from manufacturer to customer is
  characterised by the involvement of many
  intermediaries, several hand-offs and multiple
  inventory holding points.
• The belief was that there is minimal value added
  by these intermediaries and the consequence of
  their involvement is additional touches,
  increased customer cost and an erosion of
  manufacturers margin.
• It was felt that there was an outstanding
  opportunity to totally simplify the supply chain
  and in doing so reduce the cost and significantly
  improve the buying experience for the customer.

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Supply Chain
Typical Supply Chain
Global Manufacturers
Regional Distributor
Country Wholesaler


Cost !
Touches !
Time !
Local Agent
Customer
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Supply Chain Future
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Strategy

• Partner with quality brand manufacturers of
  selected industrial tools.
• Create a multi brand carrying internet site to
  allow customers a full catalog view of the
  selected products and pricing.
• Manage the customer relationship and the
  fulfillment process and this would become a core
  competence of the company.
• Partner with strategically positioned logistics
  providers capable of meeting or exceeding
  customers response expectations.

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Strategy (Continued)

• Hub inventory at the logistics sites calculated
  to achieve a defined customer fill rate
• Take ownership of the product only when it is
  being picked for a customer order and
  aggressively manage the cash conversion cycle
• Primarily trade on-line and actively encourage
  customers to do so but this will be supplemented
  by call center support
• Work on an agreed service fee calculated to cover
  iTOOLING.coms costs and achieve target profit

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Hubbing Animation
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Benefits- Win, Win
Manufacturer
Customer

• Product Choice Comparison
• Best Price Available
• Improved Purchasing Experience
• Simple / Transactional Cost Savings
• Improved Customer Service
• Technical Support available 24/7
• One Stop Shop for Industry

• Real Time Demand Information
• Online without being in direct
• competition with existing channels
• Forecasting Data Available
• Distribution Coverage
• Product Feedback
• Improved Manufacturers Margin

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iTOOLING.com Profit
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But.

• Industry was not ready for radical change
• Manufacturers feared increased competition and
  even less opportunity for differentiation
• Intermediaries proved to be more valuable than
  anticipated and in fact held a lot of power in
  the chain

These lessons were not unique to the Tooling
industry!
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Where to next?

• How Could We ?
• Continue to engage the Intermediaries
• Overcome the Manufacturers fears
• And Still Achieve Supply Chain Efficiencies

• Conclusion
• By moving From Revolution to Evolution

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Mfg A
Mfg B
Mfg B
Mfg C
Mfg D
Mfg E
A.S.P. Charge
Supply Inventory Management
On-line Web Presence
Order Fulfilment
Dist A Business as usual with reduced inventory
Invoicing Billing
Dist B On-line presence reduced inventory
Sell Direct
Dist C Added value sales agent. On line
presence, sources product provides technical
support
eMarkets
No Dist Manufacturer Website or Large Customer
Exchange, MRO or other marketplace (Covisint?)
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Integrated M3 Cataloging Technology 4PL Mgmt.
The Information Conduit
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iTooling.com Value Proposition
Software Partner Catalogs, ASP, Back Office,
eCommerce Platform
ASP Model
Fee Based
Channel Type A
Technical Business Implementation
Manufacturer
Channel Type B
Manufacturer
iTooling.com
Partner Relationship Management
Communicate Consult
Manufacturer
Channel Type C
Design Manage Processes
Manufacturer
Channel Type D
Standard Software Interface to 3PL Partners
Variable Model
Cost Mgmt. Fee
3PL Partners Tracking, Delivery, Inbound
Manage Hubs, Reports,
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Conclusions

• The story continues
• There are still tremendous efficiencies to be
  achieved in Supply Chains
• Despite the bad press, eBusiness is happening now
  and is a major force in achieving these savings
• The path will be more an evolution than a
  revolution as first expected