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ISTANBUL TECHNICAL UNIVERSITY – TURKISH AIRLINES Operations & Logistics Management in Air Transportation Dr. David Gillen (University of British Columbia) & Dr. Benny Mantin (University of Waterloo) June 9-14, 2014. Logistics. Learning Objectives Key components of logistics

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Operations & Logistics Management in Air Transportation

Dr. David Gillen (University of British Columbia)


Dr. Benny Mantin (University of Waterloo)

June 9-14, 2014


Learning Objectives

  • Key components of logistics
    • Order Processing, Inventory, Transportation, Sourcing, Warehousing, Materials Handling, and Packaging, integrated through a network of facilities (warehouses and distribution centers)
  • Logistics is integral to a firm’s strategy
  • Keys to managing logistics costs
    • Inventory management
    • Transportation management
  • Supply Chain Flexibility and Synchronization
what is logistics
What is logistics?

Logistics is the design and administration of systems to control movement and spatial positioning of factor inputs (raw materials, labor, capital, energy) work-in-process, and finished inventories at the lowest total cost.

Our focus will be on inventory management and transportation management

what do we know about turkey
What do we know about Turkey

81 provinces

Bordering countries: Armenia, Azerbaijan, Bulgaria, Georgia, Greece, Iran, Iraq, Syria

Population (January 2013) 74.6 million (18th largest in the world)

Urbanization: about 72 %

Age structure: 0–14 years (26.0%); 15–64 years: (67.9%); 65 and above (6.1%)

Nominal GDP (2012) US$790.5b

GDP per capita (US$ current prices) (2012) - US$10,595.2

GDP Composition: Agriculture (9.1%); Industry (27.9%); Services (63.0%)

Public debt: 40.4 % of GDP

Labor force (2012): 26.5 million

logistics will continue its renaissance in the future
Logistics will continue its renaissance in the future
  • Information technologies will automate many of the traditionally manual logistical functions:
    • Automated port and rail operations
    • RFID tagging of materials
    • Advanced technologies for warehousing and inventory operations
  • Removal of trade barriers will continue to expand global trade and logistics
  • Outsourcing versus near-shoring
    • Implications for airlines?
logistical value proposition manufacturing service industries
Logistical value proposition-Manufacturing & Service Industries
  • Logistical value proposition consists of a commitment to key customer expectations and requirements at a minimum cost
  • The two elements of this value proposition are Service and Cost Minimization
    • Firms must make appropriate tradeoffs between service and cost for each of their key customers
service benefits are created by logistical performance in 3 areas
Service benefits are created by logistical performance in 3 areas
  • Availability involves having inventory to consistently meet customer material or product requirements
  • Operational performance deals with the time required to deliver a customer’s order
    • Key metrics for this area involve delivery speed and consistency
  • Service reliability involves the quality attributes of logistics
    • Key to quality is accurate measurement of availability and operational performance over time
cost minimization using the total cost logistics model
Cost minimization using the total cost logistics model

Traditional Cost Logistics Model

Total Cost Logistics Model

  • Focused on achieving the lowest possible cost for each individual function of logistics
    • For example, Transport the material the cheapest way possible
  • Expected lowest cost based on decisions that were cheapest for individual functions
  • Ignored the impact of cost decisions across logistics functions
  • Focused on achieving the lowest total cost across each function of logistics
  • A cost decision in one function should consider impact to costs of all other logistics functions
    • For example, Transporting material the cheapest way is slower than other choices. This requires an increase in storage cost to hold the material longer
    • Would it still be a lower cost to use the cheapest mode of transport?
different perspectives on cost minimization
Different perspectives on cost minimization

Traditional Cost Logistics Model

Total Cost Logistics Model

Minimize order processing cost+

Minimize inventory cost+

Minimize transportation cost+

Minimize warehousing, materials handling and packaging cost+

Minimize facility cost


Lowest logistics cost

Minimize (order processing + inventory + transportation + warehousing, materials handling and packaging + facility) cost


Lowest total logistics cost

components of tlc
Components of TLC

TLC (Q, r: T, ST) = RDi + (UCTDi/365) + (SDi/Q) + (QCI/2) + rIC + K(Di/Q) N(Z)S1


TLC = total logistics cost

R = Transportation Rate per Unit between Origin and Destination

D = Annual Demand for some good ‘i’

U = Carrying Cost of In-transit Inventory

C = Value per Unit

T = Transit Time of Transportation Alternative

S = Fixed Ordering Cost per Order

Q = Order Quantity

I = Carrying Cost of Warehoused Inventory

r = Safety Stock

K = Stockout Cost per Unit

N(Z) = Unit Loss Integral

S1= Standard Deviation of Demand During Transit Time

ST = Standard Deviation of Demand During Lead Time

  • Transportation is the operational area that geographically moves and positions inventory
  • There are three basic ways to satisfy transportation requirements
    • Operate a private fleet of equipment
    • Contract with dedicated transport specialists
    • Engage carriers that provide different transportation services as needed on a per shipment basis
measuring costs
Measuring Costs

Cost Structure

Accounting Costs

Variable costs




Fixed costs









Opportunity cost-forgone sales

  • Costs vary with factor prices, productivity & output
  • Scale economies
  • Scope economies
  • Utilization economies
  • Density economies
  • Agglomeration economies
  • Value of time/reliability

Concept to ‘Willingness to Pay’

Unit cost or average cost pricing

Cost plus pricing

Incremental cost pricing

Differential Pricing (special case of Ramsey pricing)

Non-linear pricing and two-part tariffs

Bundling and unbundling

logistical integration requires achieving six objectives simultaneously
Logistical integration requires achieving six objectives simultaneously
  • Responsiveness
  • Variance reduction
  • Inventory reduction
  • Shipment consolidation
  • Quality
  • Life cycle support
example situations for flexible logistics structure
Example situations for flexible logistics structure

The customer-specified delivery facility might be near a point of equal logistics cost or equal delivery time from two different logistics facilities

The size of a customer’s order creates improved logistical efficiency if serviced through an alternative channel arrangement

Decision to use a selective inventory stocking strategy

Agreements between firms to move selected shipments outside the established echeloned or direct arrangements

Co-opatition (Cooperation & Competition)

supply chain synchronization
Supply chain synchronization
  • Supply chain synchronization is the operational integration of multiple firms across a supply chain
    • Seeks to coordinate the flow of materials, products and information between supply chain partners to reduce duplication of effort
    • Seeks to reengineer internal operations of individual firms to leverage overall supply chain capability
the logistics performance cycle is the basic unit of supply chain design and operational control
The logistics performance cycle is the basic unit of supply chain design and operational control
  • The performance cycle represents elements of work necessary to complete the logistics related to customer accommodation, manufacturing or procurement
  • A performance cycle consists of the following elements
    • Nodes
    • Links
    • Inventory
      • Base stock
      • Safety stock
    • Input and output requirements
performance cycle uncertainty
Performance cycle uncertainty
  • Major objective of logistics in all areas is to reduce performance cycle uncertainty
  • Operational variance is randomly introduced during the cycle through
    • The structure of the performance cycle itself
    • Operating conditions
    • The quality of logistical operations
total time to complete the customer delivery cycle is based on each task within the cycle
Total time to complete the customer delivery cycle is based on each task within the cycle

Figure 2.8 Performance Cycle Uncertainty


Frank Wheeler, Revolutionary

Knowing what you've got,

Knowing what you need,

Knowing what you can live without –

That’s inventory control.


Raw Materials & Component Parts

Replacement parts, tools & supplies


Goods in transit to warehouses or customers

Finished Products

Definition: The stock of any item or resource used in an organization

importance of inventory management
Importance of Inventory Management
  • ... by 1990 Wal-Mart was already winning an important technological war that other discounters did not seem to know was on. “Wal-Mart has the most advanced inventory technology in the business and they have invested billions in it”. (New York Times, Nov. 95)
  • Kmart increased its inventories to $8.3 billions in the third quarter of 2001 with an expectation of more shoppers. “But higher sales never materialized, leading to a disastrous holiday selling season.” Kmart filed for bankruptcy on Jan. 22. (Business Week, Mar. 02)
importance of inventory management more recent news
Importance of Inventory ManagementMore Recent News
  • SanDisk suspends production as inventories pile up for makers of computers, cell phones, and TVs … (Business Week, Dec. 08)
  • Natural-gas futures soared 15% Thursday after U.S. inventory data slightly eased concerns about the possibility of a storage glut (Wall Street Journal, Sept. 11, 09)
  • Fruit growers were blessed with excellent weather this year. But that hasn’t translated into a great year for the province’s cherry and blueberry growers, as a bumper crop has flooded the market and pushed down prices. (The Vancouver Sun, Aug. 09)
  • The Ford assembly plant in Oakville and 3,000 workers will remain idle this week because of a parts shortage from a supplier in India. (Toronto Star, Oct. 27, 09)
why should you hold inventory
Why should you hold inventory?

Predictable Variability

Seasonal Inventories

What are some of the inventories that you have?

Unpredictable Variability

Safety Stock

Economies of Scale

Cycle Stock

Why do you have these inventories?

Transportation times / Flow times

Pipeline Inventories

Other: Strategic / Speculative / etc.

why should you not hold inventory
Why should you nothold inventory?
  • Inventory increases certain costs such as
    • Carrying cost
    • Cost of customer responsiveness
    • Cost of diluted return on investment
    • Large-lot quality cost
    • Cost of production problems, etc.
  • The Sea of Inventory

Inventory hides problems …

how much inventory should you hold
How much inventory should you hold?
  • Trade-off #2

Trade-off #1

inventory classification
Inventory Classification

A classification to help manage inventories better

(The above percentages are approximate)

motivation atm
Motivation: ATM

How much cash do you take out from ATM?

Why not more or less?

economic order quantity eoq
Economic Order Quantity (EOQ)
  • Assumptions
    • Known annual demand, constant demand rate
    • No uncertainty

The Economic Order Quantity (EOQ) balances


Usually, H = iC.

cycle stocks tradeoff between fixed costs and holding costs
Cycle Stocks: Tradeoff between fixed costs and holding costs


Demand rate


on hand








Profile of Inventory Level over Time

example the south face
Example: “The South Face”

Thus, H = iC = (0.25)*($200) = $50 per unit-year

  • What order size (Q) would you recommend for The South Face?

Some facts about The South Face retail shop

the south face

Inventory Profile:

# of jackets in

inventory over time.



D = Demand rate

Time t

The South Face




cost minimization goal
Cost Minimization Goal

Annual Cost

Total Cost

Lowest Annual Cost

Inventory holding cost

Ordering Costs

QO (optimal order quantity)

Order Quantity (Q)

economic order quantity the south face
Economic Order Quantity:The South Face
  • What is the optimal order quantity?
  • How many times would you place orders per year, i.e., frequency of ordering?
  • What is the time duration between successive orders (this is also called the cycle time or reorder interval)?
eoq and sensitivity analysis
EOQ and Sensitivity Analysis

What happens to the cost and optimal quantity as the parameters change?

managerial implications of eoq
Managerial Implications of EOQ
  • Cost curve is almost “flat” near the optimal point
    • Use the EOQ formula, but do not worry about making minor adjustment to get a number that is “more realistic” for your organization
  • The flatness of the cost curve implies that the EOQ figure is “robust”
    • Estimating holding cost is usually difficult
    • The EOQ formula guarantees that the “optimal” order quantity is not very sensitive to errors in estimation
managerial challenges how to reduce the eoq inventory
Managerial ChallengesHow to reduce the EOQ inventory?

Reduce the set-up cost

Re-evaluate sources of fixed costs, and find ways to reduce, spread-out, or eliminate these costs



Ia. The Growth of Logistics and Its Role in the Economy

A. What is Logistics?

B. History of Logistics

C. Role of Logistics in the Economy

D. Why Logistics is gaining in importance

Ib. The Integrated Logistics Management Concept

A. Definition

B. Logistics is concerned with questions about inventories

D. Strategic profit analysis

Ic. Logistics As An Element of Corporate Strategy

A. A Few Logistics Facts

B. Corporate Leverage From Logisitics

C. Product Strategy: Innovation Phase

D. Product Strategy: Cost Leadership Phase

E. Product Line (Customer Service) Strategies


Id. Distribution Channels

A. Channels: Definition, Types, Functions

B. Integrated Channel Concept

C. Some Logistical Implications

Ie. Customer Service

A. Defining Customer Service

B. Measuring Customer Service

C. Relationship of Customer Service to Marketing

D. Optimizing Customer Service

E. Stockouts

F. Stockout Costs

G. ABC Analysis

If. International Logistics

A. Importance of International Logistics

B. International Strategies

C. Some Additional Considerations



IIa. Inventory Management ‑ Introduction

A. Financial Impact

B. Reasons for Holding Inventory

C. Types of Inventory

D. Example of Financial Impact

IIb. Inventory ‑ Carrying Costs

A. General

B. Capital Costs

C. Other Costs

D. Annual Inventory Costs

E. Valuing Inventory (i.e. Value on Balance Sheet)

F. Why Inventory Costs are Often Misstated

IIc. Inventory ‑ Management Under Certainty (EOQ)

A. Basic Inventory Cycle

B. Ordering Costs

C. Effect of Decrease in Cycle Time

D. Total Costs

E. Optimum Quantity to Order

F. Quantity Discounts

G. Other Cases


IId. Inventory ‑ Uncertainty

A. Calculating Safety Stocks

B. Example of Safety Stock Calculations

C. The Flip Side: Reducing Cycle Variability for Your Customers

D. Appendix Derivation of Formula for σc

IIe. Inventory ‑ Control

A. Stock Control Methods

B. Inventory System Design

C. Fixed Order Point

D. Fixed Order Interval

E. Transport Choice Case

F.Items covered in readings, not in lectures

G.Postscript: Inventory, Production, Marketing, Finance

IIf. International Shipping

A. Importance


C.Demand - Shippers (Two main market segments)

D.Supply - Shipping Carriers/Owners

E.Freight Rates


IIg. Transport ‑ Modes and Service Characteristics

A. Mode Characteristics

B. Costs

C. Rate-Service Tradeoff

IIh. Transportation: Consolidation

A. Types of Consolidators

B. Reasons for Consolidation

C. Types of Consolidation

D. Typical LTL Routing

E. Containers

IIi. Transportation: Traffic Management

A. Traffic Management Functions

B. Deregulation

C. Negotiations

D. Private Versus Public Carriage


IIj. Warehousing

A. Functions of Warehousing

B. Types of Warehouses

C. Optimal Number of Warehouses

D. Optimal Size of Warehouse

E. Stock Location Methods

F. Order Picking Design

G. Public versus Private Warehouse Choice

H. A Note on Warehouse Costs

IIk. Facility Location

A. Two Types of Locational Decisions

B. Transport Cost Models

C. Other Locational Decisions

D. Tactical Location Considerations


IIl. Packaging

A. The Two Functions of Packaging


C.Packaging Materials

D. Some Packaging Problems/Solutions

E. Where/When Should Packaging Be Added?

IIm. Purchasing

A. Introduction

B. Forward Buying

C. Other Aspects of Purchasing

IIn. Materials Management

A. Introduction

B. Materials Requirement Planning (MRP)

C. Manufacturing Resource Planning (MRP II)


IIo. Total Quality Management

A. Introduction

B. TQM versus Traditional Approach

C. Employee motivation

D. Examples

IIp. Just-in-Time Systems

A. Just-In-Time-System

B. Manufacturing Resource Productivity (MRP III)

IIq. Production Systems

IIr. Distribution Requirements Planning

A. Distribution Requirements Planning (DRP)

IIs. Order Processing

A. The Order Cycle

B. The Order Processing System

C. Impact on Logistics

D. Implications of Advanced Order Processing Systems