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Logistics/Supply Chain Strategy and Planning

If you dont know where you want to go, any path will do.

Chapter 2
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Corporate Strategy
Strategy is the process whereby plans are formulated for
positioning the firm to meet its objectives.

Strategy formulation begins with defining a corporate

strategy. This involves: a. Assessing needs, strengths, and weaknesses of the 4 major components: - customers - suppliers - competitors - the company itself b. "Visioning" where counter -intuitive, unheard of, and unconventional strategies are considered.

Corporate strategies are converted to more specific

strategies for the various functional areas of the firm such as logistics.
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The objectives of logistics strategy are:

- Minimize cost - Minimize investment - Maximize customer service

Levels of logistical planning:

- Strategic - Tactical - Operational


Logistics Strategy

The 4 problem areas of supply chain planning

- Customer service levels - Facility location - Inventory decisions - Transportation decisions

Recall the logistics strategy triangle

When to plan?
- No distribution network currently exists. - There has been no re-evaluation in 5 years. - When costs are changing rapidly, especially transport & inventory. - When markets have shifted. - When current distribution economics encourage shifts. - When there has been a major policy shift in logistics such as in price, 2-3 customer service, or investment level.

Corporate to Functional Strategic Planning

External factors Corporate strategic plan

Economic Regulatory Technological Competitive


Finance Logistics

Functional strategic plans

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Flow of Logistics Planning

Individual Link of Logistics System Business goals and strategies

Facility location Operations strategy Inventory management Information systems Material handling Traffic and transportation Planning and control methods Organization

Customer service requirements

Integrated logistics planning

Design of integrated logistics management system

Overall performance measures

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Logistics Objective
Maximize return on logistics assets (ROLA) Costs of

ROLARevenueCosts Assets
Investment in logistics assets
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Logistics contribution to sales

logistics operations


Strategic, Tactical, and Operational Decision Making

Decision area Strategic Transportation Mode selection Tactical Seasonal equipment leasing Operational Dispatching

Inventories Order processing

Location, Control policies Safety stock levels Order filling Order entry, transmittal, and processing system design Development of supplier- Contracting, buyer relations Forward buying Space utilization Processing orders, Filling back orders Expediting


Warehousing Handling equipment selection, Layout design Facility location Number, size, and location of warehouses

Order picking and restocking

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Six Concepts for Logistics Strategy Formulation

Total cost concept

Tradeoff conflicting costs at optimum

Differentiated distribution
Not all products should be provided the same level of customer service

Mixed strategy
A pure strategy has higher costs than a mixed strategy

Delay formation of the final product as long as possible

Shipment consolidation
Smaller shipment sizes have disproportionately higher transportation costs than larger ones

Product standardization
Avoid product variety since it adds to inventory

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A Cost Conflict in Logistics

Cost, in dollars

Total cost

Inventory cost (includes storage and intransit

Cost of transportation service


Truck Transportation service (greater speed and dependability)


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More Cost Conflicts

Revenue Total costs Total costs Transportation, order processing, and inventory costs Lost sales cost 0 0 Improved customer service 100% 0

Inventory costs Transportation costs Increasing number of stocking points 0

(a) Setting the customer service level

(b) Determining the number of warehouses in a logistics system

Total costs

Total costs


Inventory carrying costs Lost sales cost 0 0 0 Average inventory level Production costs


Inventory carryng cost

Product run length and product sequencing altenatives (d) Setting the sequence of production runs for multiple products

(c) Setting safety stock levels




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Pure vs. Mixed Strategy

Current strategy


Suggested strategy

All private

Combined private-public Warehouse alternatives

All public

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Choosing the Right Supply Chain Strategy

Functional Products-Predictable demand Staple food products Innovative Products-Unpredictable demand

Low margin

Efficient supply chain Responsive supply chain

High margin
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Electronic equipment

Classification of Products
Predictable/Mature Products Unpredictable/Introductory Products

Jello Corn Flakes Lawn fertilizer Ball point pens Light bulbs Auto replacement tires Some industrial chemicals Tomato soup

New music recordings New computer games Fashion clothes Art works Movies Consulting services New product offerings of
existing product lines

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Choosing the Right Supply Chain Strategy

Efficient supply chain Economical production runs Finished goods inventories Economical buy quantities Large shipment sizes Batch order processing

Responsive supply chain


Excess capacity Quick changeovers Short lead times Flexible processing Premium transportation Single order processing


Actions for Misclassified Products

Product Characteristic
Supply Chain Design Type Supply-to-Stock/ Efficient Supply-to-Order/ Responsive Predictable/ Mature Tomato Soup If product is here Unpredictable/ Introductory If product is here Personal Computer Models

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Seven Principles of Supply Chain Management

Differentiated distribution

Segment customers based on service needs Listen to signals of market demand and plan
accordingly Design to customer needs Develop a supply-chain-wide technology Boundary spanning strategy info. systems Customize the logistics network Differentiate product closer to the customer Postponement Source strategically Adopt channel-spanning performance measures
Source: Accenture Consulting
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