ENGR 3210 Fundamentals of Logistics Engineering

1. ENGR 3210 Fundamentals of Logistics Engineering Class 3 August 30, 2002

2. 2 In our last meeting We discussed: How planning is important for any organization The basics of strategic planning How planning for the Logistics function fits into a corporate setting Today we will discus when to alter the supply chain and introduce some broad concepts important to Logistics System Design

3. 3 Designing the Logistics System Seldom do you design a Logistics System from scratch Most enterprises have some sort of logistics system in place In most cases the Logistics Engineer will be planning to implement Logistic System Improvements A decision must be made to alter the Logistics System - - But when is it appropriate?

4. 4 Some guidelines for when to look at the network (Are modifications in order?) Demand, volume / location changes occur Customer service level or need changes due to competition or strategic initiative Product characteristics change / new products Pricing policy or costs change Usually this means that the responsibility for certain logistics activities shift between the buyer and the seller

5. 5 Strategy Related Concepts A number of logistics concepts are applied in strategy decisions and are introduced here. Total logistics cost (the basis of comparing alternative strategies) Broad classes of Logistics and business operation Strategy Differentiated distribution Mixed strategy Postponement Consolidation Standardization

6. 6 Total Cost Strategy Goal: trade off one cost for another to achieve the lowest total. Central idea: the marginal increase of one cost produces a larger marginal decrease in other costs. Benefit: Total cost models force identification of relationships and focus attention on conflicting logistics goals.

7. 7 Put more simply: The design of Logistics Systems involve many trade-offs By looking at the total costs of the entire Logistics System you can measure the increase in some costs and the decrease in others for a given system scenario

8. 8 Total Cost Elements What goes into the total cost of a logistic system? Transportation and warehouse costs Order processing costs Lot quantity costs: setup, scrap, etc. Inventory carrying costs Capital costs Cost of complaints Damage, obsolescence, returns, inspection Cost of lost sales and customers Decreasing one may increase the other

9. 9 Transportation Cost Tradeoff Example

10. 10 Order Quantity Cost Tradeoff Example

11. 11 How do you solve for the optimal order quantity in a problem like this?

12. 12 Issues with Total Cost SCM focus:examine the system cost. It is difficult to model supplier costs, carrier costs, customer costs, etc. Question becomes: where do we set boundaries for the cost analysis and how to set priorities (80/20 rule)? Identify the areas that can be controlled and have a direct impact on customer value. Ignore inconsequential costs. (More on 80/20 analyses next week)

13. 13 However in selecting the best course of action (the best logistics system design) one would attempt to minimize total logistics costs!

14. 14 Design the system to get to the minimum point of the Total Cost Curve

15. 15 Strategy Related Concepts A number of logistics concepts are applied in strategy decisions. Examples: Total logistics cost Differentiated distribution Mixed strategy Postponement Consolidation Standardization

16. 16 Differentiated Distribution Strategy All products, services, or customers are not the same. Therefore the level of logistics support should differ based on the product, customer, etc. Some products / customers may be suitable for warehouse distribution, others may ship from the factory directly. Volume is often a differentiator but others may be appropriate. (spare parts, back orders, etc.)

17. 17 Mixed Strategy Mixed logistics strategy is similar to differentiation but it mixes strategies in a particular logistics area. The focus is to take advantage (by plan) of the savings that are available by using different strategic approaches. Strategic approaches: Public vs Private warehousing or transportation fleet Modal choices for transport Direct shipment vs. distribution center system

18. 18 The difference between Mixed and Differentiated is fuzzy Mixed (Application Box 2.6): Use a combination of public and private warehouses. Mixed: Use truck load shipping for Product X orders under a certain volume and train otherwise. (Is this different than Box 2.5?) Differentiated: Product A is a high margin luxury product and can sustain stock outs where B is a commodity and cannot have a stock out. Mixed: Ship direct from the plant for customers within 150 miles, otherwise use distribution center system.

19. 19 Postponement Strategy A postponement strategy delays investment, commitment, or expenditure (transportation choice, production, etc.) until the last possible moment. Examples: Select shipping mode when you are aware of all orders required in next 2 weeks. Select the production site as plant with the largest raw material inventory at time when production must begin (to meet lead time). Paint mixing is the classic example of postponement It is the opposite to a make or ship to forecast.

20. 20 Types of Postponement Strategy Form Postponement: Labeling: branded and generic versions Packaging: seasonal, regional, size variation Assembly: assembled/ disassembled, multiple product variations Manufacturing: high sales fluctuation items Time Postponement production schedule, inventory refill, raw materials, transportation mode selection

21. 21 When Postponement is Attractive / Possible Technology / Process: plant operations can be decoupled, simple customization, modular product design Product: specific variations / peripherals, many common components, short-reliable supplier lead times Market: short life cycles, high sales fluctuations, varied customer needs.

22. 22 Consolidation Strategy Consolidation tries to create large shipments (orders) from several small ones. Based on the cost differences for transportation and product handling technologies Truckload rates are more economical than LTL rates Container handling more economical than individual piece handling Possible to integrate with other strategies like postponement. Tactics: quantity discounts, discourage early shipments, full container incentives

23. 23 Standardization Strategy Many customers want specialized products. Standardization addresses how to achieve this with as much consistency (overlap) as possible: Lexus - Toyota? Audi - VW? Generics different from branded? Considerations: interchange of parts, minor modifications to a base, brand extensions

24. 24 These are broad classes of Logistics strategy Differentiated distribution Mixed strategy Postponement Consolidation Standardization You evaluate which is “best” by comparing the Total Logistics Costs of alternates

25. 25 Logistics / SCM Strategy Summary Logistics planning must be an integral part of corporate/organizational strategy Logistic strategy may focus on improving cost, reducing investment, or improving service. Planning areas include: customer service, inventory, transportation / location, information There are broad classifications of Logistics Strategy Selection of the best strategy should be based on the lowest Total Logistics Cost of the alternatives

26. 26 Next Week Chapter 3 “The Logistics Product” Do some thinking on your research topic Proposals are due on Sept 13th