Logistics and Supply Chain Management Part I An Introduction

1. Logistics and Supply Chain ManagementPart IAn Introduction ESI 4554 ISE Senior Design

2. Logistics Definition “Logistics… plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers' requirements” Council on Logistics Management

3. Logistics Definition • The flow ofmaterial, informationand moneybetween consumers and suppliers. • In 1990-96: • Freight Transportation $352, $455 Billion • Inventory Expense $221, $311 Billion • Administrative Expense $27, $31 Billion • Logistics related activity 11%, 10.5% of GNP.

4. Logistics Costs Logistics costs are estimated about 10% of sales Source: Delaney, R. - Cass Logistics Annual State of Logistics report, 2001

5. Logistics in the Manufacturing Firm • Profit 4% • Logistics Cost 21% • Marketing Cost 27% • Manufacturing Cost 48% Profit Logistics Cost Marketing Cost Manufacturing Cost

6. Logistics vs. Supply Chain Management What is the difference? • A Supply chain is the network of: • facilities (warehouses, factories, terminals, ports, stores, homes) • vehicles (trucks, trains, planes, ships) • logistics information systems connecting suppliers’ suppliers with its customers’ customers. • Logistics is: • “what happens in the supply chain” • “putting the right material in the right place at the right time“ • it provides much of the Supply Chain’s value-added.

8. Flows in a supply chain Information Product Funds Supply Chain

9. History of Logistics • Private industry starts evolving since the 1940’s. • Military were the only ones to using the term (1950’s, 60’s) • No true concept of the term in the private industry. • Companies had departments, such as material housing, warehousing, machining, etc.

10. History of Logistics Adapted from:Frazelle, Edward “Supply Chain Strategy” McGraw Hill 2002.

13. Phases of Logistics Development 1. Workplace Logistics

14. Phases of Logistics Development 1. Workplace Logistics Definition: • the flow of material at a single workstation. Objective: • to streamline the movements of an individual working at a machine or assembly line. Origins: • Principles developed by fathers of Industrial Engineering during and after WWII. • Also known as: Ergonomics.

15. Phases of Logistics Development 2. Facility Logistics

16. Phases of Logistics Development 2. Facility Logistics Definition: • the flow of material between work stations within the four walls of a facility (interworkstation, intra facility). • Facility can be a factory, terminal, warehouse, distribution center (DC). Origins: • developed in mass production assembly lines in 1950’s, 60’s and 70’s.

17. Phases of Logistics Development (Soda Manufacturer) 3. Corporate Logistics

18. Phases of Logistics Development 3. Corporate Logistics Definition: • the flow of material and information between the facilities and processes of a corporation. (inter workstation, inter-facility, intra-corporate). Objective: • Develop and maintain a profitable customer service policy while maintaining and reducing total logistics cost.

19. Phases of Logistics Development 3. Corporate Logistics

20. Supplier Wholesaler Retailer Customer Manufacturer Phases of Logistics Development 4. Supply Chain Logistics Supply chain is optimized when material, information and money flow simultaneously, in real time, and paperless. Adapted from:Frazelle, Edward “Supply Chain Strategy” McGraw Hill 2002.

21. Supply Chain Stages SC: Supplier to Consumer MC: Manufacturer to Consumer WC: Wholesaler to Consumer Supplier Wholesaler Retailer Customer Manufacturer Supplier Wholesaler Retailer Customer Manufacturer Supplier Wholesaler Retailer Customer Manufacturer SW: Supplier to Wholesaler SR: Supplier to Retailer MR: Manufacturer to Retailer

22. Phases of Logistics Development 4. Supply Chain Logistics Definition: • the flow of material, information and money between corporations (interworkstation, interfacility, intercorporate, and intrachain).

23. Phases of Logistics Development 5. Global Logistics  Definition: • The flow of material, information, and money between countries. • Connects suppliers’ suppliers with its customers’ customers internationally. • Much more complicated than domestic logistics given the many languages, laws, currencies, time zones, cultures, etc.

24. Phases of Logistics Development 5. Global Logistics

25. What Activities take place in Logistics? Activities 1. Customer Response 2. Inventory Planning & Management (IP&M) 3. Supply 4. Transportation 5. Warehousing / DC Operations Each of these requires: - Measures and Goals - Process Design - Information System Requirements - Organizational Development

26. * Logistics Activity Framework

27. * Logistics Activity Framework

28. Logistics Activities 1. Customer Response Involves: • Developing / Maintaining a Customer Service Policy* • Order Entry • Order Processing • Invoicing / Collections • Monitoring Customer Satisfaction (* the contract between the logistics organization and the customer, defining service targets, such as fill rates, response times, min. order quantities, terms and conditions for returns, etc.).

29. * Logistics Activity Framework

30. Logistics Activities 2. Inventory Planning & Management Goal: • determining / maintaining the lowest inventory levels possible that will meet Customer Service Policy requirements. Involves: • Forecasting • Order Quantity Engineering • Replenishment planning • Inventory deployment

31. * Logistics Activity Framework

32. Logistics Activities 3. Supply Goal: • Minimize total acquisition cost (TAC) while meeting availability, response time and quality requirements Involves: • Developing / Maintaining a Supplier Service Policy • Sourcing (of supplies) • Supplier integration • Purchase Order processing • Buying and Payment

33. * Logistics Activity Framework

34. Logistics Activities 4. Transportation Links sources of supply with customers. Goal: • Link all pick-up and deliver-to points within the response time requirements and transportation limitations at the lowest possible cost. Involves: • Network design & optimization • Shipment Management • Fleet and Container Management • Carrier Management • Freight Management

35. * Logistics Activity Framework

36. Logistics Activities 5. Warehousing (DC Operations) Goal: • To minimize the cost of labor, space and equipment in the warehouse while meeting cycle time and shipping accuracy and storage capacity requirements. Involves: • Receiving • Putaway • Storage • Order Picking • Shipping

37. Logistics involves Optimization Optimization is a key ingredient in Logistics Master Planning In general, we optimize: - Customer Service Policy (CSP) - purchase order quantities - product sources (which one is best) - location of DCs - product placement in the warehouse

38. Logistics involves Optimization Example If we want to optimize CSP, we would address the Total Logistics Costs ( = inventory cost + response time cost + lost sales cost) MIN Total Logistics Costs Subject to • Inventory Availability > Customer Service Inventory Target • Response time < Customer Service Response time Target

39. Logistics Activity Profiling and Data Mining What is Data Mining? • The process of automatically searching large volumes of data for patterns using tools such as classification, association rule mining, clustering, etc.. • A class of database applications that look for hidden patterns in a group of data that can be used to predict future behavior. • True data mining software doesn't just change the presentation. • Actually discovers previously unknown relationships among the data.

40. Logistics Activity Profiling and Data Mining What is Profiling? Definition The systematic analysis of item and order activity used to: · quickly identify root cause of material/information flow problems. · Identify opportunities for improvement. · Provide basis for decision making. · First step in logistics master planning.

41. Logistics Activity Profiling and Data Mining What is a Profile? • A snapshot or picture of an aspect of a logistics activity. • Many different profiles will be needed to fully characterize and re-engineer the logistics enterprise. • Provides basis for decision making. • First step in logistics master planning.

42. Logistics Activity Profiles Flow of Material Flow of Information Flow of Money 1. Customer Response √ √ √ 2. Inventory Planning & Management (IP&M) √ √ √ 3. Supply √ √ √ 4. Transportation √ √ √ 5. Warehousing √ √ √ Logistics Activity Profiling and Data Mining What is a Logistics Activity Profile? Definition The compilation of profiles for flow of material, information and money for each of the major logistics activities.

43. Logistics Activity Profiling and Data Mining Result: Five basic sets of activity profiles 1. Customer Activity Profile (CAP) 2. Inventory Activity Profile (IAP) 3. Supply Activity Profile (SAP) 4. Transportation Activity Profile (TAP) 5. Warehouse Activity Profile (WAP)

44. Logistics Activity Profiles Result: Typically a profile will exist for the activity, the item, and the activity-item pair (and many other relevant ones). Examples: • Customer Sales Activity Profile • Item Sales Activity Profile • Customer - Item Sales Activity Profile • Supplier Activity Profile • Item Purchasing Activity Profile • Supplier - Item Purchasing Activity Profile

45. Logistics Activity Profiling and Data Mining What are Segments? Segments represent and classify something according to some criteria into A, B, C (usually) or more groups. Example: Customers and Items sold Customer Segments (typical) • A Category: the top 5% of customers • B Category: the next 15% of customers • C Category: the bottom 80% of customers Item Segments (typical) • A Category: represents 80% of sales • B Category: represents 15% of sales • C Category: represents 5% of sales

46. Item Category A – 80% of Sales B – 15% of Sales C – 5% of Sales Customer Category A – Top 5% AA AB AC B – Mid 15% BA BB BC C – Bottom 80% CA CB CC Example: Customer – Item Sales Activity Profile

47. Logistics Activity Profiling and Data Mining What are Segments? • Segments are a type of classification system. • The more you know about your customers, the more likely you will offer the right product’ at the right time and the right place, and the right price. • Pareto Principle: 80% of your sales & profits come from 20% of your customers. • Create A, B, C, D segments • A: Customers deliver largest portion of revenue • B: Close second, followed by C and D. • Recognize each group’s characteristics.

48. Logistics Activity Profiling and Data Mining Fine tune each Segment (A, B, C, D Customers) • How many products/services do they buy? • Purchase frequency? • Type of business? • Profitability of each transaction? • Payment promptness? • Cost of the service? • Referrals provided?

49. Logistics Activity Profiling and Data Mining Once Segments are fine tuned & sub classified, plan to promote customers from one category to the next highest: Ex. from C to B, from B to A An “A” customer is the hardest to replace. Need replacements in case customers go “elsewhere”. If you loose an “A” customer, promote a good “B” customer to replace it.

50. Logistic Activity Profiles What does each profile tell us? 1. Customer Activity Profile (CAP): • illustrates sales activity by customer and by item. • captured in terms of dollars, # of orders, # of order lines, units, weight, cube, truckloads, pallets and cases. • different items and customers create different level / type of logistics • logistics strategy must reflect unique logistics requirements of each customer – item combination.