Module 08 LOGISTICS MANAGEMENT

The Increased Importance of Logistics

A Reduction in Economic Regulation Recognition by Prominent Non-Logisticians Technological Advances The Growing Power of Retailers Globalization of Trade

Three objectives of logistics strategy:

Cost reduction (variable costs) Capital reduction (investment, fixed costs) Service Improvement (may be at odds with the above two objectives).

Components of logistics management :

Planning
Inputs into logistics

Management actions Implementation Control

Outputs of logistics

Natural resources (land, facilities, and equipments)

Logistics management Suppliers Raw In-process materials inventory Finished goods

Customers

Marketing orientation (competitive advantage) Time and place utility Efficient movement to customer

Human resources

Logistics Activities Customer Service Demand forecasting Distribution communications Inventory control Material handling Order Processing Parts and service support Plant and warehouse site selection Procurement Packaging Return goods handling Salvage and scrap disposal Traffic and transportation Warehousing and storage

Financial resources

Information resources

Proprietary asset

To gain a better grasp of the fundamental trade-offs in logistics, logistics activities may be divided into three categories:

Production Storage Transportation

The term Resource applies to all of the factors of production, including materials (e.g., Iron, fabric, parts), equipment (e.g., machines or vehicles), energy (e.g., oil, coal, electricity) and labor.

PRODUCTION: Fundamental logistics questions are: (1) when should a resource be produced; and (2) where should a resource be produced. The when question includes the topics of aggregate resource planning, and production scheduling. The where question includes the topics of facility location and production allocation. Some of the important production questions are: (a) What outside source should be used to supply a part?

(b) Where should a new facility be built?

(c) When should a facility produce different items, taking into account: Seasonal demand patterns?

Demand uncertainty?
Cost of operating single, double, triple shifts? Labor costs?

(d) When should a firm use two or more sources for a part?

INVENTORY: Fundamental logistics questions are (1) when should a resource (material, machine or labor) be put in inventory and taken out of inventory; and (2) where should a resource be stored. The when question includes the general topics of economic-orderquantity models, safety stock models and seasonal models, and specialized topics of fleet management, and personnel planning. The where questions includes the topic of inventory echelons. Some of the important inventory questions are: (a) How much does it cost to store resources in inventory? (b) How much safety stock should be carried in inventory to prevent against running out of a resource? (c) How much inventory should be carried in order to smooth out seasonal variations in demand? (d) Where should replacement parts be stored in multi-echelon inventory system?

TRANSPORTATION: Fundamental logistics are: (1) where should resources be moved to, and by what mode and route; (2) when should resources be moved.

The where question includes the topics of terminal location, vehicle routing, and shortest path methods and network flow allocation.
The when question includes the topic of distribution rules. Some of the important questions are: (a) When should shipment be sent through terminals, and when should shipment be sent direct? (b) Which, and how many, terminals should shipments be sent through? (c) What are the best vehicle routes? (d) When should a vehicle be dispatched over a route?

Logistics - Science of managing (controlling) the movement and storage of goods (or people) from acquisition to consumption. Goods: Raw Materials Final products, and everything in between. Logistics for services & people similar to goods logistics. Ex. Police, fire, ambulance, passenger airlines, taxi cabs, etc. Movement Storage = Transportation (between locations). = Inventory, Warehousing (at locations).

Difference between acquisition and consumption is a matter of space and time. Focus: Best way to overcome space and time that separates acquisition and consumption. NOTE: Logistics does not deal with Technology of Production, such as the design of machines and vehicles and the design of finished products.

1998 CLM DEFINITION OF LOGISTICS

.is that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point-oforigin to the point-of-consumption in order to meet customers' requirements.
Council of Logistics Management, 1998; www.CLM1.org

Five Business Systems - Tightly Interconnected Within The Organization

Management Systems Strategic
Decisions Product Design Decisions Process Design Decisions

Measurement Decisions

Product Decisions Price Decisions Place (How, where, how much)

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Promotion Decisions Production Capacity Decisions Production Scheduling Decisions

Engineering Systems

Reward Decisions

Logistics Systems

Marketing Systems

Inventory Decisions

Transportation Decisions

Sourcing Decisions

Shop Floor Decisions

Manufacturing Systems

Logistics Mission [A Bill of Rights]

Logistics embodies the effort to deliver:
the right product in the right quantity in the right condition to the right place at the right time for the right customer at the right cost

Activities and Logistics Decisions

Transportation
rate and contract negotiation mode and service selection routing and scheduling

Customer Service
determining customer wants determining customer response to service changes

Inventories
finished goods policies supply scheduling short term forecasting

Materials Handling
equipment selection equipment replacement order picking procedures

Warehousing
private vs. public space determination warehouse configuration Stock layout and dock design stock placement Cross-docking

Packaging design Order Processing

order procedure determination

Production Scheduling
aggregate production quantities sequencing and timing of production runs

Facility Location
determining location, number and size of facilities allocating demand to facilities

Logistics Planning
Decide what, when, how in three levels: Strategic long range > 1 year Tactical - < 1 year horizon Operational frequently on hourly or daily basis
Examples of Decisions Type Location Strategic #Facilities, size, location Mode Tactical Inventory positioning Seasonal Service Mix Priority rules for customers Operational Routing

Transportation

Replenishment Qty and timing Expediting orders

Order Processing (CS)

Selecting order entry system

The Logistics (Strategic) Planning Triangle

Strategy/Control system? How much? Where?

Which mode? Which carrier? Which route? Shipment size and frequency?

Where?, How many? What size? Allocation?

Transport Fundamentals
Most important component of logistics cost. Usually 1/3 - 2/3 of total cost.

Transport involves equipment (trucks, planes, trains, boats, pipeline), people (drivers, loaders & un-loaders), and decisions (routing, timing, quantities, equipment size, transport mode). When deciding the transport mode for a given product there are several things to consider: Mode price Transit time and variability (reliability) Potential for loss or damage.
NOTE: In developing countries we often find it necessary to locate production close to both markets and resources, while in countries with developed distribution systems people can live in places far from production and resources.

Routes of Goods
air

Air terminal Container terminal

bulk goods

plane

Goods at shippers
sea sea

vessel
mid-stream

Freight forwarder warehouse

pier
land land

barge
railway truck

May change transportation modes

Freight forwarder warehouse

Goods at consignees

Single-mode Service Choices and Issues

Air Rapidly growing segment of transportation industry Lightweight, small items [Products: Perishable and time sensitive goods: Flowers, produce, electronics, mail, emergency shipments, documents, etc.] Quick, reliable, expensive Often combined with trucking operations Rail Low cost, high-volume [Products: Heavy industry, minerals, chemicals, agricultural products, autos, etc.] Improving flexibility intermodal service Truck Most used mode Flexible, small loads [Products: Medium and light manufacturing, food, clothing, all retail goods] Trucks can go door-to-door as opposed to planes and trains.

Single-mode Service Choices and Issues (Contd.)

Water One of oldest means of transport Low-cost, high-volume, slow Bulky, heavy and/or large items (Products: Nonperishable bulk cargo - Liquids, minerals, grain, petroleum, lumber, etc )] Standardized shipping containers improve service Combined with trucking & rail for complete systems International trade Pipeline Primarily for oil & refined oil products Slurry lines carry coal or kaolin High capital investment Low operating costs Can cross difficult terrain Highly reliable; Low product losses

Transport Cost Characteristics

Fixed costs: Terminal facilities Transport equipment Carrier administration Roadway acquisition and maintenance [Infrastructure (road, rail, pipeline, navigation, etc.)] Variable costs: Fuel Labor Equipment maintenance Handling, pickup & delivery, taxes
NOTE: Cost structure varies by mode

Transport Cost Characteristics

Rail High fixed costs, low variable costs High volumes result in lower per unit (variable) costs Highway Lower fixed costs (dont need to own or maintain roads) Higher unit costs than rail due to lower capacity per truck Terminal expenses and line-haul expenses Water High terminal (port) costs and high equipment costs (both fixed) Very low unit costs Air Substantial fixed costs Variable costs depend highly on distance traveled Pipeline Highest proportion of fixed cost of any mode due to pipeline ownership and maintenance and extremely low variable costs

Vehicle Routing: - Separate single origin and destination: Once we have selected a transport mode and have goods that need to go from point A to point B, we must decide how to route a vehicle (or vehicles) from point A to point B. Given a map of all of our route choices between A and B we can create a network representing these choices The problem then reduces to the problem of finding the shortest path in the network from point A to B. This is a well solved problem that can use Dijkstras Algorithm for quick solution of small to medium (several thousand nodes) sized problems.

Vehicle Routing: - Multiple Origin and Destination Points

Suppose we have multiple sources and multiple destinations, that each destination requires some integer number of truckloads, and that none of the sources have capacity restrictions [No Capacity Restriction].

In this case we can simply apply the transportation method of linear programming to determine the assignment of sources to destinations.
Sources Destinations

Vehicle Routing:
- Coincident Origin and Destination: The TSP If a vehicle must deliver to more than two customers, we must decide the order in which we will visit those customers so as to minimize the total cost of making the delivery. We first suppose that any time that we make a delivery to customers we are able to make use of only a single vehicle, i.e., that vehicle capacity of our only truck is never an issue. In this case, we need to dispatch a single vehicle from our depot to n - 1 customers, with the vehicle returning to the depot following its final delivery. This is the well-known Traveling Salesman Problem (TSP). The TSP has been well studied and solved for problem instances involving thousands of nodes. We can formulate the TSP as follows:

TSP Formulation
Minimize

c x
i I j J
j J

ij ij

Subject to: xij 1, i I

x
i I

ij

1, j J U 1, U N

ij ( i , j ) E (U )

xij {0,1}, i I , j J

In the TSP formulation if we remove the third constraint set we have the simple assignment problem, which can be easily solved. The addition of the third constraint set, commonly called subtour elimination constraints, makes this a very difficult problem to solve.

Vehicle Routing: TSP, inventory routing, and vehicle routing

Traveling Salesman Problem (TSP): salesman visits n cities at minimum cost vehicle routing problem (VRP): m vehicles with capacity to deliver to n customers who have volume requirement, time windows, etc. Inventory Routing: m vehicle to delivery to n customer with time windows, vehicle and storage capacity constraints, and unspecificed amount to be delivered. Heuristics 1. Load points closest together on the same truck 2. Build routes starting with points farther from depot first 3. Fill the largest vehicle to capacity first 4. Routes should not cross 5. Form teardrop pattern routes. 6. Plan pickups during deliveries, not after all deliveries have been made.

Illustration of VRP
123
58 77 57 89 Depot 59 176 65 98 (Outlier) 125 39 29 112 88 76 50

44 90

124
115

Truck Capacity = 250 What is the minimum # of trucks we would need? Maximum?

Vehicle Routing
Find best vehicle route(s) to serve a set of orders from customers. Best route may be minimum cost, minimum distance, or minimum travel time. Orders may be Delivery from depot to customer. Pickup at customer and return to depot. Pickup at one place and deliver to another place.

Complications
Pure Pickup or Delivery Problems. Mixed Pickups and Deliveries. Pickup-Delivery Problems. Backhauls

Multiple vehicle types.

Multiple vehicle capacities.
Weight, Cubic feet, Floor space, Value.

Many Costs:
Fixed charge. Variable costs per loaded mile & per empty mile. Waiting time; Layover time. Cost per stop (handling). Loading and unloading cost.

Priorities for customers or orders.

More Complications
Time windows for pickup and delivery. Hard vs. soft Compatibility Vehicles and customers. Vehicles and orders. Order types. Drivers and vehicles. Driver rules (DOT) Max drive duration = 10 hrs. before 8 hr. break. Max work duration = 15 hrs. before 8 hr break. Max trip duration = 144 hrs.

Simple Models
Homogeneous vehicles. One capacity (weight or volume). Minimize distance. No time windows or one time window per customer.

No compatibility constraints.
No DOT rules.

VRP Solutions
Heuristics
Construction: build a feasible route. Improvement: improve a feasible route.
Not necessarily optimal, but fast. Performance depends on problem. Worst case performance may be very poor.

Exact algorithms
Integer programming. Branch and bound.
Optimal, but usually slow and applicable for small size problem Difficult to include complications.

APPLICATIONS OF VRP
The VRP is applicable in many practical situations directly related to
the physical delivery of goods such as distribution of petroleum products, distribution of industrial gases, newspaper deliveries, delivery of goods to retail store, garbage collection and disposal, package pick-up and delivery,

milk pick-up and delivery, etc.

the non-movement of goods such as picking up of students by school buses,

routing of salesmen,
reading of electric meters, preventive maintenance inspection tours, employee pick-up and drop-off , etc.

Is it different from SCM?

Not really!
Supply Chain Management deals with the management of materials, information, and financial flows in a network consisting of suppliers, manufacturers, distributors, and customers. (Stanford Supply Chain Forum) So, Logistics and Supply Chain are equivalent terms.

A List of Approaches in Log. Man.

Just in Time Inventory Vendor Managed Inventory Quick Response Collaborative Planning, Forecasting, and Replenishment Outsourcing / 3PLs Cross-docking / Flow Through Centers Build to Order SC Visibility Software Internet / EDI Collaborative Transportation Management Auctions / Exchanges Merge - In - Transit Partnerships / Alliances

Cross Docking
a logistics activity that attempts to reduce costs and total lead time.

breaks down received items on the loading dock and immediately matches them with outgoing shipment requirements, instead of stocking the items in warehouse locations and returning to pick for orders at a later time.

Cross Docking
eliminates the need to place inventory in storage. This can mean moving pallets across the docking areas (hence the name) for loading onto delivery vehicles.

Cross Docking
Crossdocking essentially eliminates the inventoryholding function of a warehouse while still allowing it to serve its consolidation and shipping functions.
The idea is to transfer incoming shipments directly to outgoing trailers without storing them in between.

Cross Docking
In a traditional warehouse, goods are received from vendors and stored in devices like pallet racks or shelving.
When a customer (e.g., the consumer or perhaps a retail outlet) requests an item, workers pick it from the shelves and send it to the destination.

Cross Docking
In a crossdock, goods arriving from the vendor already have a customer assigned, so workers need only move the shipment from the inbound trailer to an outbound trailer bound for the appropriate destination.
The already part should make you think of information system requirements--a chief obstacle to implementing crossdocking successfully.

Cross Docking(classification)
One way to classify crossdocking operations is according to when the customer is assigned to an individual pallet or product. In pre-distribution crossdocking, the customer is assigned before the shipment leaves the vendor, so it arrives to the crossdock bagged and tagged for transfer. In post-distribution crossdocking, the crossdock itself allocates material to its stores.

Cross Docking(classification)
Pre-distribution is definitely more difficult to implement because the vendors of the crossdock must know which customers of the crossdock need what before they send the shipment.
This involves quite a bit of information transfer, system integration, and coordination.

For a distributor with hundreds of vendors, the problem is big, big, big!

Logistics Experience will be different from one sector to another

Textiles
speed and variety due to seasonality concerns

Retailing (FMCG)
prevents stores from having empty shelves or shelves with overstocks Frozen storage and transportation

Health
hygienic, have limited shelf life, require special storage conditions and entertain high inventory risks

Automotive
just in time (JIT), delivering parts from thousands of kilometers, special packaging

Fuel and Petroleum Transportation

very special tanker security systems

What is Intermodal (Combined) Transport?

It is a transport method that more than one transport mode is used for the same transport container. The process can also be defined as a transportation method where transport mode changes for the same transport container or land vehicle, but the goods themselves are not handled during these changes.

What is Intermodal (Combined) Transport?

In other words, it is a transport method that integrates advantages of different transport modes. In intermodal transport, the aim is to achieve an effective combination of cost, delivery time and service quality.

What is Milk Run Distribution?

It is the combination of shipments from multiple vendors in close geographic proximity into one shipment received by the customer,
normally done for a defined route on a recurring basis.

What is Milk Run Distribution?...

What is a Freight Forwarder?

An independent business that handles export/import shipments for a fee.
A freight forwarder is among the best sources of information and assistance on export regulations and documentation, shipping methods, and foreign import regulations.

Forwarder assembles, collects and consolidates less-thantruckload (LTL) freight .

What is a Freight Forwarder?...

The freight forwarder does not actually carry the cargo or conduct business for the ship. It is an intermediary between carrier and owner of goods being transported.

The forwarding agent assists the exporter in finding the most economic and efficient methods of transporting and storing cargo.