Bozarth ch12

Logistics
Chapter Objectives
Be able to:
 Describe why logistics is important and discuss the major decision areas that
make up logistics.
 List the strengths and weaknesses of the various modes of transportation and
discuss the role of multimodal solutions.
 Identify the major types of warehousing solutions and their benefits.
 Discuss the purpose of a logistics strategy and give examples of how logistics
can support the overall business strategy.
 Calculate the percentage of perfect orders.
 Calculate landed costs.
 Explain what reverse logistics systems are, and some of the unique
challenges they create for firms.
 Use the weighted center of gravity method to identify a potential location for a
business.
 Develop and then solve, using Microsoft Excel’s Solver function, an
assignment problem.
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chapter 12, Slide 2
Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Logistics
Planning, implementing, and controlling the

efficient, effective flow and storage of goods
and materials between the point of origin and
the point of consumption
Why the Increasing Interest?
• Deregulation
• Globalization
• Technological breakthroughs
• Environmental concerns
• Performance impact
Deregulation
• Transportation providers
– Elimination of artificial barriers
– Unrestricted markets
– Multimodal solutions
– Price, schedule, and terms flexibility
• Buyers have greater freedom

– Negotiate prices, terms, and conditions
– Ownership issues
BUT…
Deregulation (continued)
… with greater freedom comes new
responsibilities
Key point
Logistics has evolved from being a
“tactical” area to a “strategic” one
Globalization
(Worldwide Statistics)
Year Expenditures % GDP
1997 $5,095 Billion 13.4%
2002 $6,732 Billion 13.8%
Change +32% +3%
What is driving this activity?

Environmental Concerns
Even while certain aspects of logistics have
been deregulated, other areas are being
controlled more stringently
Fuel efficiency
Pollution
Recovery, recycling, and reuse of packaging,
containers, and products
Management Areas
 Transportation
 Warehousing (and more generally, location)
 Material handling
 Packaging
 Inventory management
 Logistics information systems
(And some would put logistics service providers

here as well!)
Logistics Decision Areas
Transportation…
– Modes
– Formats
– Pricing
Warehousing
– Consolidation
– Cross-Docking and Break-Bulk
– Hub-and-Spoke
– Inventory
Major Transportation Modes
• Highway (truck)
• Water
• Rail
• Air
• Pipeline
Modal Shares of Shipments
(within US, 1999/2002)
Mode Value (%) Tons (%) Ton Miles (%)

Highway (trucking, 80.3/86.0 58.5/67.4 28.4/28.7
parcel, postal, courier)
Water 2.5/1.1 11.1/11.1 20.4/13.6
Rail 4.8/3.7 11.2/16.1 26.7/36.8
Air 2.7/3.2 0 0.2/0.4
Pipeline 4.2/1.8 13.7/5.9 17.6/20.5
Multimodal/Unknown 5.6/5.6 5.5/5.5 6.8/6.8
Highway Mode
Strengths Weaknesses
• Flexibility to pick up and • Not the fastest
deliver where and when • Not the cheapest
needed
• Often the best balance
between cost/flexibility and
delivery reliability/speed
• Can deliver straight to the
customer (increasing)
• Can be available 24/7
Water Mode
• Highly cost effective • Limited locations
for bulky items • Relatively poor
• Works best for high delivery
weight-to-value items reliability/speed
• Most effective when • Often limited
linked into multimodal operating hours at
system docks
Air Mode
• Quickest delivery over • Often the most
longer distances expensive,
• Can be very flexible particularly on a per
when linked to pound basis
highway mode
• Works best for low
weight-to-value items
Grew 90.5% in value of goods shipped from 1993 to 2002
Rail Mode
• Highly cost effective • Limited locations, but
for bulky items better than for water.
• Can be most effective • Better delivery
when linked into reliability/speed than
multimodal system water
Increasing part of multimodal solutions, dual tracks on major routes
Question
How can businesses design

solutions that exploit the strengths
of each mode?
Technological
Breakthroughs
• Standardized containers for ease of transfer
• “Roadrailers,” etc.
• Multimodal solutions
– Ship  Truck  Train  Truck  ?
Multi-Modal Solutions
(An example)
North Carolina’s Global TransPark

Global TransPark
• 15,700 acres at full development with two

parallel runways of 11,500 feet and 13,000
feet
• Integrated air, rail, road, and nearby sea
transportation capabilities
• Free trade zone status
Justification for Such a Facility
 Shift from domestic to global economies
 Emergence of just-in-time, flexible and agile manufacturing
practices requiring sophisticated logistics solutions
 The rapid growth of distribution via air freighters (roughly four times
the growth rate of passenger service by the airlines)
 The need to use air cargo, shipment by sea, and delivery by trucks
and trains in an overall distribution system
 The need for a commercial distribution hub in the Eastern United
States that can reach more than 60 percent of the nation’s
population overnight and also provide a gateway to global markets.
Warehousing
Any operation that stores,

repackages, stages, sorts, or
centralizes goods or materials
New View
Warehousing a key piece of logistics strategy
– J. B. Hunt
– Lowe’s
• More than just storage
– “Warehousing”  “Distribution Centers”
Warehousing Benefits
Economic benefits:
Accrue directly to company
Must consider total system costs
Service benefits:
Support customer service needs
May or may not reduce costs
Consolidation
Small shipments in ...
Warehouse
Large economical shipments out ...
Example 1
Customer Shipment Weight
Venetian Artist 100 boxes, artist 3,000 lbs.

Supply supplies
Kaniko 100 PC printers 3,000 lbs.
Ardent Furniture 10 dining room sets 4,000 lbs.
•Dedicated truck from Los Angeles to Atlanta: $2,000

•Cost to run consolidation warehouse: $9 per hundred-weight
•Local delivery in Atlanta: $200 per customer
Cost Benefits of Consolidated
Warehousing
Warehousing costs 10,000 lbs × $9/100 lbs = $900
Cost of one truck to Atlanta $2,000
Delivery to final customer 3 customers × $200 = $600
Total: $3,500
How does this compare to the cost of separate

dedicated shipments?
What about truck utilization (assume 3 trucks

hold 60,000 lbs.)
Cross-Docking
Large economical shipments in ...
Warehouse
Small shipments out ...
What about supply / demand mismatches?
Break-Bulk
Like cross-docking, but usually refers to a single
source
Plant A
Warehouse
Customer Delivery
Example 2
• Manufacturer  Customers
• 500 lb. average order size
• Direct shipments:
$7.28 per hundred-wt.
$7.28 × 5 = $36.40
• > 20,000 lbs: $2.40 per hundred-wt.
• Local delivery: $1.35 per hundred-wt.

Insight:
If we can run a warehouse for less than:
5 × ($7.28 – $2.40 – $1.35) = $17.65/500 lbs.
Or
$17.65 / 5 = $3.53 per hundred-weight
we should do it.
Hub-and-Spoke Systems
A
To Los Angeles
A C
Syracuse
A B
B
Phoenix
B
To El Paso
Postponement
Coca Cola syrup Customer A

Bulk food products, Postponement
paints, etc.
Assembly, Customer B
Packaging,
 high volumes Labeling, etc.
 containers Customer C
Minimizes risk
Minimizes inventory (how?)
Warehousing Service
Benefits:
Spot stock
Assortment
Spot Stock
Region
1
Region
Manufacturer Warehouse 2
or Centralized
Source
Region
Time sensitive, seasonal items 3
Often temporary, public storage
Assortment
Broad product line and good inventory
control key to success
Supplier E Customer A
Assortment
Warehouse
Supplier F Customer B
Supplier G
Customer C
Supplier H
Customer D
Information Systems
• Decision support tools
– Real-time simulation and optimization
– Location selection
– Cost estimations
• Precise coordination of multimodal solutions
• Execution systems
– Global positioning systems
– Bar-coding applications
– RFID on the horizon as replacement (NYK Logistics)
Material Handling and
Packaging
What are the typical marketing

criteria?
Unitization
• Unit loads
– Transport and handling efficiencies
• Non-rigid containers
– pallets and unit load platforms
– ropes, steel, shrink and stretch wrap
• Rigid containers
– Maximum protection (Viper windshield frame)
– Standard sizes?
– Recycling?
Packaging Implications
• Transportation
– Class segmentation
– Damage protection
• Material handling and warehousing

– Storage requirements
– Unitization
– Container recycling
– Ease of handling
Questions
What are the strengths and weaknesses of

each?
How does the choice of format tie into the
business strategy?
The Evolution of Logistics
Strategy
From functional silos to strategic

positioning
Logistics Strategy Choices
Performance Dimension Transportation Mode Warehousing System
Delivery Reliability Highway, Air Direct Ship, Assortment,
Spot Stock
Delivery Speed Air, Highway Direct Ship, Assortment,
Spot Stock
Mix Flexibility Highway, Air, Rail Assortment, Spot Stock
Design Flexibility Highway, Air Postponement
Volume Flexibility Highway, Air Direct Ship, Assortment,

Spot Stock
Cost Rail, Water, Pipeline, Consolidation, Cross-
Highway Docking, Hub-and-Spoke
Who “Owns” Logistics?
Organization
Strategy
Marketing Logistics Operations Financial

Strategy Strategy Strategy Strategy
Executive-level of representation
Difficult goal of functional integration
Organizational question: Who really ‘owns’ logistics?
Transportation?
Marketing?
Operations?
Owning Versus Outsourcing
• Does the firm’s volume justify a private
system?
• Would ownership limit firm’s ability to
respond to marketplace changes?
• Is logistics a core competency?
• Are outsource capabilities are available?
Kellogg logistics strategy example in text
Transportation “Outsources”
• Common (public) carriers
– Published rates and schedules
– “Nondiscriminatory” pricing
– Increased flexibility to partner
• Contract carriers
– Service for select customers
– Unlimited number of customers
• Third-Party Logistics Providers (3PLs)
– Service firms specializing in logistics for other
companies
Warehouse Ownership
Issues
Public Contract Private
Cost structure EOS EOS ???
Financial flexibility High Moderate Low
Location flexibility High Moderate Low
Managerial control Less Varies Highest
Expertise High High ???
Question:
When would it make sense to

combine private and public
ownership?
Measuring Performance
• Perfect Order
– Delivered on time
– Shipped complete
– Invoiced correctly
– Undamaged in transit
• Landed Costs
– Packing
– Insurance
– Customs, other fees
– Warehousing
– Transportation
– Documentation (Redwing Automotive Example)
Reverse Logistics Systems
• Customer returns
– Warranty failures
– Incorrect or damaged orders
• Repair and remanufacture process
support
• Recycling (increasing importance!)
Generally independent systems because of low volume

and mix complexity
Logistics Decision Models
• Weighted Center of Gravity Method

• Optimization
• Assignment Problem
Weighted Center of Gravity
A method to determine best location for central warehouse
from n demand points.
– Requires position of each demand point (Xi, Yi)
– Requires weight of each demand point (Wi), based on importance,
demand volume, market strategy, etc.
n
 Wi X i
Weighted X coordinate  X  i 1n *
 Wi
i 1
n
 WiYi
Weighted Y coordinate  Y  i 1n *
 Wi
i 1
CupAMoe’s Coffee
6
(1,5)
5
Capital City
4
(Pop. 400,000) CupAMoe’s
Springfield
(Pop. 200,000)
(2.57,3.6)
Y 3
(4.5,3)
2
Shelbyville
(Pop. 170,000)
1
(4,1)
0
0 1 2 3 4 5 6
X
Optimization
• Requires an objective function to be maximized or minimized.
• Decision variables — values to be manipulated to affect
outcome of objective function
• Constraints — limits set on range of decision variables to be
used or on other aspects of the solution possible
For Example:
Assignment Problem
• Specialized optimization model.
• Decision variables are the shipment quantities
• Known values are demand, capacity, and shipping cost
between warehouses
• Constraints:
– Sum of shipments from a warehouse cannot exceed its capacity
– Sum of shipments to meet demand must be greater than or equal to the
demand
– Sum of shipments from each warehouse must be greater than or equal to
zero
(Flynn Boot Company Excel example in text)
Case Study in Logistics
Just-In-Time Shipping
Supplemental Slides on
Transportation Costs and Factors
Pricing, Distance, Economic

Factors
Pricing Transportation
Services
•Economic factors
–Pricing versus distance
–Price/pound versus density
–Stowability, handling, and liability
–Market factors
•Ratings
–Goods classification
–Class index
Economic Factors I
Price
… why the “tapering principle”?
Distance
Price/pound
Density
Economic Factors II
Stowability, handling, and liability
versus
Economic Factors III
Market factors
What might this include?
West East
Coast, Coast,
USA USA
Ratings
Translating economic factors into

actual prices
Ratings (a simplified view)
• Goods classification
– Perishability, stowability, handling,
etc.
• Class index?
– From 35 - 400
– “average product” = 100
– Based on expected transportation
costs
Determining Transportation
Rates
• Rate Determination
– By weight (Less-than-truckload shipment)
– By distance (truckload shipments)
Minimum charges and surcharges
• Exceptions to the rule

– Seasonal commodities
– FAK (freight of all kinds)
Example 1
Shipping 800 lbs of glass slides from Atlanta, GA
to Lansing, MI
… Looking at a rate classification guide
Item Articles Class - LTL Class – TL Minimum TL

Shipment Shipment Weight
86770 Glass, microscopical 70 40 3,600 lbs.
slide or cover, in
boxes
Specific Rates for Shipments
FROM Atlanta TO Lansing
Rates express $ charged per hundred-weight
Rates fall as rate class falls and volume increases
Rate Class < 500 lbs 500 to 1,000 1,000 to 30,000

lbs lbs
200 $98.37 $61.97 $17.00
100 $52.62 $43.68 $9.22
70 $40.48 $33.59 $8.10
Result
• $33.59 × 8 = $268.72 shipping cost
• Key points
– Classification tables standardized, BUT
– Rate tables vary by transportation provider
– Real-time updating of provider tables
Example 2
• 3 Shipments of Class 100 to Lansing:
– 5,000 lbs., 10,000 lbs., 7,000 lbs.
• Different stops in Lansing
• Can consolidate, but extra $100 for two

additional stops
• What to do?
What to Do?
Separate shipments at Consolidated shipments at
costs below: costs below:
50×$18.94 = $947 220×$9.22 = $2,028
100×$14.74 = $1,474 Additional

drop-off
70×$18.94 = $1,326 charges: $100
$3,747 $2,128
Key Points
• Choosing a mode
– Five choices
– Speed? Cost? Flexibility?
• Choosing a format
– Flexibility versus control
• Controllable factors affecting cost

– Density, stowability, packaging, and
containerization

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Logistics

Planning, implementing, and controlling the

• Buyers have greater freedom

1997 $5,095 Billion 13.4%

2002 $6,732 Billion 13.8%

Change +32% +3%

What is driving this activity?

(And some would put logistics service providers

Mode Value (%) Tons (%) Ton Miles (%)

Increasing part of multimodal solutions, dual tracks on major routes

How can businesses design

North Carolina’s Global TransPark

• 15,700 acres at full development with two

Any operation that stores,

Small shipments in ...

Large economical shipments out ...

Venetian Artist 100 boxes, artist 3,000 lbs.

Ardent Furniture 10 dining room sets 4,000 lbs.

•Dedicated truck from Los Angeles to Atlanta: $2,000

How does this compare to the cost of separate

What about truck utilization (assume 3 trucks

Small shipments out ...

What about supply / demand mismatches?

• 500 lb. average order size

• > 20,000 lbs: $2.40 per hundred-wt.

• Local delivery: $1.35 per hundred-wt.

If we can run a warehouse for less than:

5 × ($7.28 – $2.40 – $1.35) = $17.65/500 lbs.

$17.65 / 5 = $3.53 per hundred-weight

Coca Cola syrup Customer A

What are the typical marketing

• Material handling and warehousing

What are the strengths and weaknesses of

From functional silos to strategic

Design Flexibility Highway, Air Postponement

Volume Flexibility Highway, Air Direct Ship, Assortment,

Marketing Logistics Operations Financial

Kellogg logistics strategy example in text

Cost structure EOS EOS ???

Financial flexibility High Moderate Low

Location flexibility High Moderate Low

Managerial control Less Varies Highest

Expertise High High ???

When would it make sense to

Generally independent systems because of low volume

• Weighted Center of Gravity Method

Pricing, Distance, Economic

… why the “tapering principle”?

Translating economic factors into

• Exceptions to the rule

… Looking at a rate classification guide

Item Articles Class - LTL Class – TL Minimum TL

Rate Class < 500 lbs 500 to 1,000 1,000 to 30,000

70 $40.48 $33.59 $8.10

• Different stops in Lansing

• Can consolidate, but extra $100 for two

50×$18.94 = $947 220×$9.22 = $2,028

100×$14.74 = $1,474 Additional

• Controllable factors affecting cost

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