Tenth

Edition

CONTEMPORARY LOGISTICS
INTERNATIONAL EDITION

Paul R. Murphy, Jr.

John Carroll University

Donald R Wood
San Francisco State University

Prentice Hall
Boston Columbus Indianapolis New York San Francisco Upper Saddle River
Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto
Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo

CONTENTS
Preface 13

Parti

Overview of Logistics

19

Chapter 1 AN OVERVIEW OF LOGISTICS

20

Economic Impacts of Logistics 20

Logistics: What It Is 22
The Increased Importance of Logistics 24
A Reduction in Economic Regulation 24
Changes in Consumer Behavior 25
Technological Advances 26
The Growing Power of Retailers 26
Globalization of Trade 27
The Systems and Total Cost Approaches to Logistics 27
Logistical Relationships within the Firm 30
Finance 30
Production 31
Marketing 31
Marketing Channels 33
Activities in the Logistical Channel 35
Customer Service 36
Demand Forecasting/ 36
Facility Location Decisions 36
International Logistics 36
Inventory Management 36
Materials Handling 36
Order Management 37
Packaging 37
Procurement 37
Reverse Logistics 37
Transportation Management 37
Warehousing Management 37
Logistics Careers 37
Summary 38 Questions for Discussion
and Review 38 Suggested Readings 39
Case ,1-1 KiddieLand and the Super Gym 39
Appendix 1: Logistics Professional Organizations

41

Contents

Chapter 2 LOGISTICS AND INFORMATION TECHNOLOGY

43

General Types of Information Management Systems 44

Office Automation System 44
Communication System 45
Transaction Processing System (TPS) 46
Management Information System (MIS) and Executive Information
System (EIS) 48
Decision Support Systems (DSSs) 49
Enterprise System 53
The Internet's Influence on Logistics 54
Online Retailing 54
On-Demand Software 55
Electronic Procurement 56
Information Technology Challenges 57
Summary 58 Questions for Discussion
and Review 58 Suggested Readings 58
Case 2-1 Just-in-Time in Kalamazoo

59

Chapter 3 STRATEGIC AND FINANCIAL LOGISTICS

Connecting Strategy to Financial Performance
Basic Financial Terminology 64

62

63

Income Statement 64
Balance Sheet 65
Strategic Profit Model 66
Logistics Connections to Net Profit Margin 68
Logistics Connections to Asset Turnover 68
Balanced Scorecard 68
Common Logistics Measures 69
Transportation Measures 69
Warehousing Measures 70
Inventory Measures 70
Design and Implementation of Measures 70
Summary
and Review

70

70

Questions for Discussion

Suggested Readings 71

Case 3-1 Brant Freezer Company

71

Chapter 4 ORGANIZATIONAL AND MANAGERIAL ISSUES IN

LOGISTICS 74
v

Organizing Logistics Within the Firm 74

Organizational Structure for Logistics 75
Organizational Design for Logistics 76
Managerial Issues in Logistics 79
Productivity 79
Theft and Pilferage 82

Contents

Logistics Social Responsibility

84

Managing Reverse Logistics 85

Lessening the Impact of Terrorism on Logistics Systems 86
Summary 89 Questions for Discussion
and Review 89 Suggested Readings 89
Case 4-1 Red Spot Markets Company 90

Part II

Supply Chain M a n a g e m e n t

95

Chapter 5 THE SUPPLY CHAIN MANAGEMENT CONCEPT

Evolution of Supply Chain Management 97
Attributes Affecting SCM Implementation 99
Customer Power 101
Long-Term Orientation

101

Leveraging Technology 102

Enhanced Communication Across Organizations
Inventory Control 104
Interorganizational Collaboration

103

104

Supply Chain Facilitators 105

Barriers to SCM Implementation 106
Regulatory and Political Considerations

107

Lack of Top Management Commitment 107

Reluctance to Share, or Use, Relevant Information
Incompatible Information Systems 108
Incompatible Corporate Cultures 108
Globalization 109
Supply Chain Integration 109
Summary 110 Questions for Discussion
and Review 110 Suggested Readings 111
Case 5-1 Johnson Toy Company 111

Chapter 6 PROCUREMENT

115

Procurement Objectives 116

Supplier Selection and Evaluation 117
Supplier Development (Reverse Marketing)
Quality Issues in Procurement 119

119

Global Procurement (Sourcing) 121

Investment Recovery 122
Socially Responsible Procurement 123
Summary 124 Questions for Discussion
and Review 124 Suggested Readings 125
Case 6-1 Tempo Ltd. 125

107

96

Contents

Part III

Elements of Logistics Systems

129

Chapter 7 DEMAND MANAGEMENT, ORDER MANAGEMENT,

AND CUSTOMER SERVICE 130
Demand Management 131
Demand Forecasting Models 131
Demand Forecasting Issues 132
Order Management 133
Order Transmittal 134
Order Processing 134
Order Picking and Assembly 136
Order Delivery 137
Customer Service 138
Time 139
Dependability 139
Communication 140
Convenience 140
Managing Customer Service 141
Customer Profitability Analysis 141
Establishing Customer Service Objectives 141
Measuring Customer Service 143
Service Failure and Service Recovery 145
i
w

Summary 146 Questions for Discussion

and Review 146 Suggested Readings 147
Case 7-1 Handy Andy, Inc. 147
Appendix 7-A

149

Chapter 8 INVENTORY MANAGEMENT

151

Inventory Classifications 152

Inventory Costs 153
Inventory Carrying Costs 153
Ordering Costs 155
Trade-Off between Carrying and Ordering Costs 155
Stockout Costs 155
Trade-Off between Carrying and Stockout Costs 157
When to Order 157
How Much to Order 158
Economic Order Quantity 158
Conditions of Uncertainty 160
Inventory Flows 160
Inventory Management: Special Concerns 161
ABC Analysis of Inventory 162
Dead Inventory 162

Contents

,'

Inventory Turnover 163

Complementary and Substitute Products 164
Contemporary Approaches to Managing Inventory
Lean Manufacturing (Lean) 165
Service Parts Logistics 167
Vendor-Managed Inventory (VMI)

165

169

Summary 169 Questions for Discussion

and Review 169 Suggested Readings 170
Case 8-1 Low Nail Company

170

Chapter 9 DISTRIBUTION CENTER, WAREHOUSE, AND PLANT

LOCATION 172
The Strategic Importance of Facility Location

174

Cost Considerations 175

Customer Service Expectations 175
Location of Customer or Supply Markets 175
Determining the Number of Facilities 176
General Factors Influencing Facility Location 178
Natural Resources 178
Population CharacteristicsMarket for Goods
Population CharacteristicsLabor

179

179

Taxes and Incentives 181

Transportation Considerations 181
Proximity to Industry Clusters 182
Trade Patterns 182
Qua I ity-of-Life Considerations

184

Locating in Other Countries 185

Specialized Location Characteristics 185
Free Trade Zones 186
Finding the Lowest-Cost Location
Grid Systems 186

186

Facility Relocation and Facility Closing

189

Summary 190 Questions for Discussion

and Review 190 Suggested Readings 191
Case 9-1 Aero Marine Logistics 191

Chapter 10 WAREHOUSING MANAGEMENT

195

Public, Private, Contract, and Multiclient Warehousing

Public Warehousing 198
Private Warehousing 199
Contract Warehousing 200
Multiclient Warehousing 200

197

10

Contents

Design Considerations in Warehousing

General Considerations
Trade-Offs

201

201

201

Fixed versus Variable Slot Locations for Merchandise 202

Build Out (Horizontal) versus Build Up (Vertical)

202

Order-Picking versus Stock-Replenishing Functions 202

Two-Dock versus Single-Dock Layout

203

Conventional, Narrow, or Very Narrow Aisles 203

Paperless Warehousing versus Traditional Paper-Oriented
Warehousing Operations 203
Other Space Needs 203
Warehousing Operations

204

Warehousing Productivity Analysis 204

Safety Considerations
Hazardous Materials

205
207

Warehousing Security 208

Cleanliness and Sanitation Issues 210
Summary 210 Questions for Discussion
and Review 211 Suggested Readings 211
Case 10-1 Minnetonka Warehouse

211

Chapter 11 PACKAGING A N D MATERIALS HANDLING

'
Product Characteristics 214
Packaging Fundamentals 215

213

Promotional and Protective Functions of Packaging 216

Package Testing and Monitoring
Labeling

217

219

Issues in Packaging

221

Environmental Protection

221

Metric System 222

Identifying Packaging Inefficiencies 223
Packaging's Influence on Transportation Considerations
Unit Loads in Materials Handling
The Unit Load Platform

225

227

Beyond the Unit Load 228

Materials Handling 229
Materials Handling Principles 231
Materials Handling Equipment

232

Summary 232 Questions for Discussion

and Review 233 Suggested Readings 233
Case 11-1 Let There Be Light Lamp Shade Company

234

224

Contents

Chapter 12 TRANSPORTATION

235

Overview of Transportation Infrastructure

Transportation Modes 237
Airfreight

236

238

Motor Carriers 239

Pipelines 241
Railroads 241
Water 242
Intermodal Transportation 243
Transportation Specialists 246
Transportation Regulation 248
Environmental Regulation

248

Safety Regulation 248

Economic Regulation 249
Legal Classification of Carriers 250
Summary 252 Questions for Discussion
and Review 252 Suggested Readings 252
Case 12-1 HDT Truck Company

253

Chapter 13 TRANSPORTATION MANAGEMENT

Rate (Pricing) Considerations
Rate Determination 258

257

258

Rate and Service Negotiations 264

Modal and Carrier Selection 266
Documentation 267'
Bill of Lading 267
Freight Bill

269

Freight Claims 270

Making and Receiving Shipments

271

Consolidating Small Shipments 271

Demurrage and Detention 273
Routing 274
Tracing and Expediting 275
Transportation Service Quality 276
Summary 277 Questions for Discussion
and Review 277 Suggested Readings 277
Case 13-1 Chippy Potato Chip Company

Chapter 14 INTERNATIONAL LOGISTICS

278

279

Macroenvironmental Influences on International Logistics

Political Factors 280
Economic Factors 283
Cultural Factors 284

280

11

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Contents

International Documentation
Terms of Sale 287

286

EXW (Ex-Works) 287

FCA (Free Carrier) 287
FAS (Free Alongside Ship) 288
FOB (Free on Board) 288
CFR (Cost and Freight) 288
CPT (Carriage Paid To) 288
CIF (Cost, Insurance, and Freight) 288
CIP (Carriage and Insurance Paid To) 288
DES (Delivered Ex Ship) 288
DEQ (Delivered Ex Quay) 288
DAF (Delivered at Frontier) 289
DDP (Delivered Duty Paid) 289
DDU (Delivered Duty Unpaid) 289
Methods of Payment 289
International Trade Specialists 290
International Freight Forwarders 291
Nonvessel-Operating Common Carriers 292
Export Management Companies

292

Export Packers 294

Transportation Considerations in International Logistics 295
Ocean Shipping 295
Shipping Conferences and Alliances 297
International Airfreight 298
Surface Transport Considerations 298
International Trade Inventories 300
Logistics Performance Index 301
Summary 302 Questions for Discussion
and Review 302 Suggested Readings 303
Case 14-1 Nurnberg Augsburg Maschinenwerke (N.A.M.) 303
Glossary 307
Name Index 315
Subject Index 319