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The Logistics/Supply Chain Product

The Logistics/Supply Chain Product. “Logistics/Supply Chain managers are ‘owners’ of the product-flow process from raw material sources to final consumers, not activity administrators.”. Chapter 3. CR (2004) Prentice Hall, Inc. Inventory Strategy. Inventory Strategy. •. •. Forecasting.

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The Logistics/Supply Chain Product

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  1. The Logistics/Supply Chain Product “Logistics/Supply Chain managers are ‘owners’ of the product-flow process from raw material sources to final consumers, not activity administrators.” Chapter 3 CR (2004) Prentice Hall, Inc.

  2. Inventory Strategy Inventory Strategy • • Forecasting Forecasting Transport Strategy Transport Strategy • • Inventory decisions Inventory decisions • • Transport fundamentals Transport fundamentals • • Purchasing and supply Purchasing and supply • • Transport decisions Transport decisions Customer Customer scheduling decisions scheduling decisions service goals service goals • • Storage fundamentals Storage fundamentals The product The product • • ORGANIZING ORGANIZING • • Storage decisions Storage decisions CONTROLLING CONTROLLING PLANNING PLANNING • • Logistics service Logistics service • • Ord Ord . proc. & info. sys. . proc. & info. sys. Location Strategy Location Strategy • • Location decisions Location decisions • • The network planning process The network planning process Product in the Planning Triangle CR (2004) Prentice Hall, Inc.

  3. Nature of the Product CR (2004) Prentice Hall, Inc.

  4. Sales volume Intro- duction Growth Maturity Decline Time Product Life-Cycle Curve CR (2004) Prentice Hall, Inc.

  5. Product Monthly Cumulative Cumulative An ABC Product Rank by Sales Percent of Percent of Classifi - a b c Number Sales (000s) Total Sales Total Items cation D - 204 1 $5,056 36.2% 7.1% D - 212 2 3,424 60.7 14.3 A D - 185 - 0 3 1,052 68.3 21.4 D - 191 4 893 74.6 28.6 B D - 192 5 843 80.7 35.7 D - 193 6 727 85.7 42.9 D - 179 - 0 7 451 89.1 50.0 D - 195 8 412 91.9 57.1 D - 196 9 214 93.6 64.3 D - 186 - 0 10 205 95.1 71.4 C D - 198 - 0 11 188 96.4 78.6 D - 199 12 172 97.6 85.7 D - 2 00 13 170 98.7 92.9 D - 205 14 159 100.0 100.0 $13,966 ABC Classification for 14 Products CR (2004) Prentice Hall, Inc. 3-5

  6. 100 90 80 70 60 Total sales (%) 50 40 30 A items B items C items 20 10 0 0 20 40 60 80 100 Total items (%) Cumulative 80-20 Curve 3-6 CR (2004) Prentice Hall, Inc.

  7. .15(1 - .80) A = = 0.0462 .80 - .15 (1 + .0462).10 = Y = 0 . 7156 , or 71.6% of the sales .0462 + .10 Nature of the Product (Cont’d) Example Suppose that in an inventory of 10 items, 15% of the items account for 80% of the sales volume. The total sales of all 10 items is $90,000 per year. How much inventory can be expected if turnover for A items = 8, B items = 5, and C items = 2? First, find A . Then, using A = 0.0462 and the first item (1/10), we project the sales volume to be: Turnover Total sales The inventory for this item is expected to be 0.716(90,000)/8 = $8,055. Continue for the remaining items and generate the following table. CR (2004) Prentice Hall, Inc.

  8. Projected Item Cumulative cumulative Projected (X) item sales cumulative Projected Turnover Average no. fraction fraction sales (Y) item sales ratio inventory 1 .10 .716 $64,440 $64,440 8:1 $8,055 A 2 .20 .850 76,500 12,060 8:1 1,508 3 .30 .907 81,630 6,630 5:1 1,326 B 4 .40 .938 84,420 2,790 5:1 558 5 .50 .958 86,220 1,800 5:1 360 6 .60 .971 87,390 1,170 2:1 585 7 .70 .981 88,290 900 2:1 450 C 8 .80 .989 89,010 720 2:1 360 9 .90 .995 89,550 540 2:1 270 10 1.00 1.000 90,000 450 2:1 225 $90,000 $13,697 5 Example (Cont’d) 3-8 CR (2004) Prentice Hall, Inc.

  9. · Product characteristics - Weight - bulk ratio - Value - weight ratio - Substitutability - Risk · Product packaging · Product pricing - F.o.b. origin - F.o.b. destination - Zone pricing - Single and uniform pricing - Quantity discounts - Deals Nature of the Product (Cont’d) CR (2004) Prentice Hall, Inc.

  10. Logistics costs as a percent of sales price Total costs (transport + storage) Transportation costs Storage costs 0 0 Weight-bulk ratio Effect of Weight-Bulk Ratio on Logistics Costs CR (2004) Prentice Hall, Inc.

  11. Total costs (transport + storage) Logistics costs as a percent of sales price Transportation costs Storage costs 0 0 Value-weight ratio Effect of Value-Weight Ratio on Logistics Costs CR (2004) Prentice Hall, Inc.

  12. Total costs (transport + lost sales + storage costs) Logistics costs as a percent of sales price Total costs (transport + lost sales + storage costs) Logistics costs as a percent of sales price Storage costs Transport costs Transport costs Lost sales Storage costs Lost sales 0 0 0 0 Average inventory level Improved transportation service (b) (a) Effect of Transport Service and Inventory Level on Logistics Costs CR (2004) Prentice Hall, Inc.

  13. Total costs (transport + storage) Logistics costs as a percent of sales price Transport costs Storage costs 0 0 Increasing degree of risk in the product Effect of Product Risk on Logistics Costs CR (2004) Prentice Hall, Inc.

  14. Reasons for Product Packaging • Facilitate storage and handling • Promote better utilization of transport equipment • Provide product protection • Promote the sale of the product • Change the product density • Facilitate product use • Provide reuse value for the customer CR (2004) Prentice Hall, Inc.

  15. Product Pricing • Geographic pricing methods - F.o.b. pricing - Zone pricing • - Single, or uniform, pricing • - Freight equalization - Basing point pricing • Incentive pricing • - Quantity discounts CR (2004) Prentice Hall, Inc.

  16. 1. Terms of Sale: F.O.B. Origin, Freight Collect Buyer -Pays Freight Charges Title Freight Charges Buyer -Bears Freight Charges Buyer Passes to Paid by Buyer Buyer -Owns Goods in Transit Buyer -Files Claims (If Any) BUYER SELLER A Variety of Pricing Arrangements 2. Terms of Sale: F.O.B. Origin, Freight Prepaid Seller -Pays Freight Charges Title Seller -Bears Freight Charges Buyer Passes to Buyer -Owns Goods in Transit Buyer -Files Claims (If Any) BUYER SELLER Freight Charges Paid by Seller 3. Terms of Sale: F.O.B. Origin, Freight Prepaid and Charged Back Seller -Pays Freight Charges Title Buyer -Bears Freight Charges Passes to Buyer Buyer -Owns Goods in Transit Buyer -Files Claims (If Any) BUYER SELLER Freight Charges then Collected from Buyer Paid by Seller... by Adding Amount to Invoice 4. Terms of Sale: F.O.B. Destination, Freight Collect Buyer -Pays Freight Charges Title Buyer -Bears Freight Charges Passes to Buyer Seller -Owns Goods in Transit Seller -Files Claims (If Any) SELLER BUYER Freight Charges Paid by Buyer 5. Terms of Sale: F.O.B. Origin, Freight Prepaid (Delivered) Seller -Pays Freight Charges Freight Charges Title Seller- Bears Freight Charges Paid by Seller Passes to Buyer Seller -Owns Goods in Transit Seller -Files Claims (If Any) SELLER BUYER 6. Terms of Sale: F.O.B. Destination, Freight Collect and Allowed Buyer -Pays Freight Charges Title Buyer Buyer -Bears Freight Charges Passes to Seller -Owns Goods in Transit SELLER Seller -Files Claims (If Any) BUYER Freight Charges then Charged to Seller by Paid by Buyer... Deducting Amount from Invoice

  17. Total per-case costs (transport + inventory + order processing and handling costs) Less than truckload Per-case inventory carrying costs Logistical costs ($/case) Truckload Rail carload Transport costs Per-case order processing and handling costs 0 400 100 200 300 Quantity purchased (cases) Per-Case Logistics Costs as a Justification for Price Discounts CR (2004) Prentice Hall, Inc.

  18. Zone 2 $136.31 Zone 3 $137.38 Boston Zone 8 $147.38 Zone 7 $144.81 Zone 5 $140.00 Zone 6 $142.43 Zone 4 $138.33 UPS Pricing Zones 3-18 CR (2004) Prentice Hall, Inc.

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