Logistics Cost Part II

1. Logistics Cost Part II Professor Goodchild Spring 11

2. Cumulative Number of Items Diagram Production (rate D’) shipments cumulative number of items An item is a fixed quantity of infinitely divisible quantity (e.g. person, parcel, case of beer) H tm Consumption (D’) arrivals time Consider units on area

3. Cumulative Number Diagram • Good for one origin/one destination problems • Identify production and consumption rates • Items waiting to be shipped • Shipment times • Shipment sizes • Items waiting to be consumed • Total wait time from production to consumption (if FIFO) • Headway (H) • Travel time • Units • Storage space proportional to max accumulation is D’H

4. Inventory Cost • Captures time-value of holding product • Perishability, theft, opportunity cost of cash, insurance, shrinkage, obsolescence • Usually 10-15% for electronics • Value of good*interest rate*time

5. Exercise Fuel economy: 10 mpg Driver wages: $15/hour Ignore depreciation of vehicle, insurance Speed of vehicle: 25 mph Price of fuel: $2.50 per gallon Value of goods in a truck: $100,000 Interest rate: 6% per year Time spent at DC: 3 days Handling cost at DC: $50 per truck Ignore rent, operating cost of DC Calculate one way transportation cost and one way inventory cost. 60 miles 100 miles 100 miles DC 40 miles 50 miles 50 miles 100 miles

6. Cost Comparison

7. Hypothetical curves Minim cost shipment frequency total transportation cost inventory Shipment frequency We will identify the optimal when we talk about distribution systems

8. Network Structures • Trade-off inventory cost and transportation cost • Best choice depends on qualities of product, customer demand, and network • Milk-run • Hub and spoke (distribution center) • Direct Shipping

9. warehouse crossdocks • No DC cost • Reduce lead times • Higher transportation expense • Good if fully loaded trucks or timely goods • Store goods to pool inventory risk • Trade-offs in size as more demand can be pooled, but then farther from destination • Not stored for a significant length of time • Sorted, consolidated, shipped out directly • Use different containers • Requires high volume

10. Exercise Inventory Pooling What is the inventory held in the system without the distribution center? What is the inventory held in the system with the distribution center? 60 miles 100 miles 100 miles DC 40 miles 50 miles 50 miles 100 miles

11. Inventory Aggregation Calculate number required on hand if held at 3 stores, central facility. Online retailers as well as traditional retailers Typically increases transportation cost (think outbound, but who pays?)

12. Inventory Management • Improve service level • Reduce logistics cost • Cope with randomness and seasonality • Speculate on price • Overcoming inefficiencies in managing the logistics system

13. Distribution Systems Prof. Anne Goodchild Spring 2010

14. Distribution systems • One to one • One to many • Many to one • Many to many

15. 1-1 Distribution Examples • Port to rail head drayage • Small in scale and/or scope • Decisions: • Shipment frequency • Route (this is typically a function of the network and travel times) • Shipment times

16. 1-1 Distribution • Constant demand • Trade-off inventory and transportation cost: z=minv{(ch/D’)v+cf/v}, s.t. v<vmax • cf: fixed transportation cost • ch: holding cost • v*=sqrt{cfD’/ch}

17. EOQ (economic order quantity) • z=minv{Av+B/v+C} • v*=sqrt{B/A} • z*=2sqrt{AB} • If v*>vmax use v=vmax • v* makes both of the terms in the objective function equal (motion cost = holding cost)

18. Lot Size problem with Variable Demand • D(t) gives cumulative number of items demanded between 0 and t • D’(t) is variable demand rate • Seek the set of times when shipments are to be received and the shipment sizes that will minimize sum of motion plus holding costs over some time period • With an infinite time horizon and constant demand this is the EOQ problem just discussed

19. When holding cost close to rent • Variable demand • Inventory cost negligible (big, cheap items) • Increases with maximum inventory accumulation • Recall motion cost independent of shipment sizes and times (only dependent on total amount moved or average) • Thus we want to choose times and sizes to minimize holding cost • V*= D(tmax)/n, all equal minimizes cost • cost/time=crD(tmax)/n+cfn/tmax, find n by minimizing

20. When rent is negligible • Small, expensive items • Simple expression cannot be obtained unless D(t) varies slowly with t (CA method) • Use numerical solution (e.g. dynamic programming)

21. One to Many Distribution • Movement of containers from the port to landside destinations • Delivery systems • Decisions: • Network structure • Fleet size (VRP and TSP) • Shipment frequency • Use of an intermediate facility (minimizing logistics cost)

22. Many to one distribution • Export containers being delivered to a marine port • Collection systems • The same analytical methods can be used as with one to many distribution • Decisions: • Network structure • Fleet size • Shipment frequency • Use of an intermediate facility

23. Many to Many Distribution • Global distribution of marine containers • Collection and distribution systems • Decisions: • Network structure • Coordination of inboundand outbound shipments

24. Many to many distribution • The problem can often, and should often, be broken down into pieces • Inbound logistics (many to one) • Outbound logistics (one to many) • Be mindful of who is responsible for cost within the supply chain • Most supply chains are not operated by the same entity • Use terminals to consolidate some of the flow

25. Transshipment

26. Transshipment 1 Reduce line-haul cost through consolidation

27. Transshipment Influence area 2 1 2 Introduce levels of transshipment terminals These can be used on the collection side or the distribution side Consider the use of tiered airports in a hub and spoke system

28. Influence Areas total outbound Cost per item delivered inbound terminal Size of influence area

29. Themes • Scale • What part of the logistics system will you consider? • Typically determined by ownership and operating units but it depends on your goals • Consistency • Logistics systems are more manageable