logistics cost reduction

7/31/2019 Logistics Cost Reduction

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Logistics Cost Reduction Strategies

Prof.Rameshwar Dubey

Secretary

Asian Council of Logistics Management

Associate Professor

Symbiosis Institute of OperationsManagement,Symbiosis International University


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Relative Transportation Costs

Transportation costs represented 6.3% of total

U.S. GDP in 1990

Transportation costs represented over 50% oftotal U.S. logistics expenditures in 1990

Transportation accounted for 27% of total U.S.

energy use and 63% of total U.S. petroleum use in

1990


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Logistics Overview

Why has logistics become increasingly important?

Cost reduction pressures are severe

Logistics has a high impact on customer service

A strong need exists for demand and supply planningconsistency

A focus on core competencies has placed logistics in theoutsourcing spotlight

Development of IT technology supports integratedlogistics management

Government deregulation of transportation has creatednew opportunities


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Total Cost Concept

The total cost concept recognizes that an optimum cost in one area or

function may not lead to an optimum total system cost

Total cost analysis requires the management of supply chain trade-offs

Logistical activity areas that drive total logistics costs:

Customer service level costs Inventory carrying costs

Lot quantity costs

Order processing and information costs

Warehousing costs

Transportation costs


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Customer Service Measures

Order cycle lead time

Stock availability/fill rates/stockouts/back

orders/partial shipments

Record integrity

Frequency of delivery

Delivery reliability

Order tracing capability Volume flexibility


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Customer Service Measures

Invoice accuracy

Order status information

Technical support responsiveness Unscheduled service responsiveness

Speed of product feature changes

Product and service quality


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Value-added Transportation Concept

Supplier Manufacturer Customer

Inbound Outbound

Product/Info Flows

Info/Return Goods Flows


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Transportation-Related Service Elements

Speed: time-in-transit

Availability: accessible to customers when they want it

Dependability: pick-up and delivery time variability

Flexibility: adjustment to shippers needs


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Basic Modes of Transportation

Fixed Variable Traffic

costs costs compositionRail high low bulk food, mining,

heavy mfg

Motor low medium consumer goods,

medium/light mfg

Water medium low bulk food, mining,

chemicals

Air low high high-value goods,

rush shipments

Pipe high low petroleum, chemicals,

mineral slurry


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Relative Operating Characteristics

Operatingcharacteristics Rail Motor Water Air Pipe

Speed 3 2 4 1 5

Availability 2 1 4 3 5

Dependability 3 2 4 5 1

Capability 2 3 1 4 5

Frequency 4 2 5 3 1

Composite 14 10 18 16 17

1 = best, 5=worst


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Intermodal

Enables shippers to benefit from advantages ofmultiple modes of transportation

minimizes disadvantages of individual modes

Rail

Air Water

Truck


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Transportation Decision Making in an Integrated Supply Chain

Supplier Manufacturer Customer

Inbound Outbound

Decis

ionFlow

Understand total network flows

Understand individual lane flows

Understand current

carrier usage patterns

Make mode/carrierdecisions

Routing/Scheduling,

Load Planning, etc.

Strategic

Operational

Macro

Micro

DecisionScope


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Transportation Costs

Product related

density

stowability

ease or difficulty of

handling

liability

Market related

intramode/intermode competition

location of markets

nature and extent of regulation

balance/imbalance of freight traffic

seasonality of product movements domestic vs. international


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Transportation Economies

Economy of Scale

Volume/weightLTL T

L


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Transportation Economies

Economy of Distance

Distance

Tapering Principle


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Shelf Standards

Brand Consolidation

Space

Position

Proper Groupings

Price

Schematic

Housekeeping

Point of Sale


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Shelf Management Principles

Place your wines at eye level or the best position

possible. 80% increase if moved from bottom to eye level

43% increase if moved from bottom to waist level

Place your wines next to the best selling competitive

wines.

Place your wines next to wines that are priced higher

than your wines.


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Topics

Introduction

Transportation Infrastructure

Transportation Management


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Introduction

Importance of Transportation

Value-added Role of Transportation


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Transportation Role in Value Attainment

Process

Critical element of structure, capacity, and

movement decisions Both between supply chain members and intra-

organizational


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Transportation Infrastructure

Modal Characteristics

Changing Environment


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Distribution of U.S. Intercity Freight

(% of ton-miles)

Rail Motor Water Air Pipe

1980 38% 22% 17% .2% 24%

1990 37% 26% 16% .2% 20%

Average Revenue per Ton-Mile

1980 $2.8 $18.0 $.77 $46 $1.01990 $2.7 $24.4 $.75 $140 $1.4


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Changing Transportation Environment

Deregulation

Time-based competition

Expanding geographic coverage

Information technology

Social and environmental concerns


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Selected Results of the Changing Environment

Economic Impact

Increased competition in individual markets - both

within modes and between modes

More efficient carrier operations - less interlining, more

direct routing, efficient pricing

Transportation costs declined in real terms and as

percent of GDP Transportation service quality improved


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Selected Results of the Changing Environment

Industry Impact

Consolidation in rail, air and LTL trucking

Proliferation of TL carriers

Strong growth in regional trucking - networks

TL growing faster than LTL

Air freight growth

Intermodal growth: rail-truck, air-truck, rail-ship

Growth of one-stop shopping - 3PL

Private fleet conversion


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Selected Results of the Changing Environmen

Market Impact

Demand for fast, dependable, responsive service at

lower cost

Demand for a broader range of services to integratesupply chain functions

Core carrier concept - interdependence between

shipper-carrier Customized price/service packages/contracts

Relational view of transportation as a value-added

service


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Transportation Management

Network Freight Flows: Macro-Decisions

Micro-Decisions

Information Systems Support


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Network Freight Flows: A Fully Integrated

Approach

Managing Inbound-Outbound flows in an optimalmanner requires firm to have a good handle onthe entire logistics process

Traditionally view transportation in a vacuum--need to look at it in the context of the totallogistics system

Greatest improvement opportunities lie in

integrating transportation with other logisticsfunctional areas such as purchasing, inventorycontrol, forecasting and production scheduling


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Approach to Analysis

1 Analyze lane densities/frequencies: whatopportunities emerge for:

inbound/outbound consolidation

vehicle consolidation temporal consolidation

network consolidation - cross dock potential

(hub and spoke systems)


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Approach to Analysis (cont.)

2 ) Once opportunities for consolidation are visible,

make mode/carrier selection based onservice/cost mix

Given similar service, are rates better on 1

mode/carrier than another?

Does any mode/carrier have relative strengths in a

particular lane?

Any backhaul opportunities?

3 ) If so, look to consolidate loads on mode/carrierwith best cost structure - assign private fleet to

most costly routes


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Consolidation Opportunities

Inbound-Outbound flow consolidation: look for

opportunities to combine inbound/outbound

freight

Vehicle consolidation: use one vehicle/multi stopsfor LTL volumes vs. one shipment to each

Temporal consolidation: hold orders until large

volume shipment possible


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Suggested Analyses

Network flows

Lane densities, frequencies, consistency

Freight distribution by mode, carrier

Consolidation opportunities


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Nodes and links in a Logistics System

(W=warehouse, P=plant, M=market)

M M

M W

P W P

M W W

W P W

M W P M


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Lane Densities

Volume on a weekly basis

Consistency of volume

Volume + Consistency = Rate bargaining power

Identify LTL freight consolidation opportunities


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Inbound-Outbound Lane Densities

Site State In # Avg Wt Out # Avg Wt

DC 1 CA 135 2024 592 989

DC 2 CA 110 625 465 654

DC3 CA 125 1690 572 1005

DC1 AZ 2 228 28 444

DC2 AZ 7 502 9 484

DC3 AZ 1 1135 36 622

DC1 NM 0 0 44 462

DC2 NM 0 0 42 418

DC3 NM 0 0 89 517

DC1 TX 598 971 1975 957

DC2 TX 911 3147 2125 693

DC3 TX 1631 1619 1368 1716


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Mode/Carrier Profile Analysis

Understand freight distribution among carriers by state

Identify potential for core carrier concept


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Summary

Identify:

Opportunities to achieve balanced flows - obtain lowe

rates for providing loads both ways

Significant volumes for rate negotiation

Vehicle/temporal consolidation opportunities

Advantages of reducing number of carriers


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Mode/Carrier Selectionstep 1

step 2

Modal Choice

basic mode Specific Carrier step 3

intermodal legal type Transportindividual carrier provider


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Transportation Pricing

Function of:

cost-of-service

value-of-service


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Prices and Volume

Per pound costs will decrease over volume/weight

Weight of load


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Price and Density

Assuming no weighing out, denser products use

space better

Product Densitycotton steel

Priceperpoun

d


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Transportation Cost Structures

Variable: costs vary with services or volume:

line-haul costs of fuel, labor and maintenance

handling

pickup and delivery

Fixed: constant regardless of activity

Facilities, equipment and administration

Joint: hand-in-hand costs -- unavoidable

Example: the backhaul move

Common: shared costs (overhead)

need for Activity-based costing


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Pricing Structures

Cost-of-service: cost plus method

Value-of-service: market based method

Combination: a middle of the road approachusing cost (minimum) and value (maximum)

Net Rate Pricing: All-inclusive prices specific tocustomers needs (not discount-based)


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Limits on Rates

maximum value of service demand

rate level

minimum cost of service supply

fully allocated

average variable

out-of-pocket


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Routing and Scheduling

Goals:

find best path a vehicle should follow through networksof roads, rail lines, shipping lanes, and air routes

determine best pattern for stops, multi-vehicle use,driver layovers, time of day restrictions

Benefits:

greater vehicle utilization

improved and more responsive customer service

reduced transportation expenses

reduced capital investment in equipment

/


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Principles for Good Routing/Scheduling

load trucks with deliveries for customers closest to eachother

stops on individual days arranged together

start routes with farthest stops first

circular routes - dont cross paths

use largest vehicles first if can be filled

mix pickups in with deliveries, not at end

if one stop far from other, use other truck

avoid narrow stop time windows, or handle separately


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What Is Contract Logistics?

It is a very confusing term because there are so many

different descriptions of what it really is.

Contracting out the entire distribution functionand the related information function

Subcontracting specific logistics activities to a

third-party specialist service provider.

A wide range of practices fall under these definitions


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Services Provided by Third-party Logistics

Providers

Transportation

Warehousing

Information management

Human resources

Management


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Two Types of Providers

Asset-based

Own their own warehousing, transportation,

computer systems, etc.

Data-based

essentially asset free companies who sell logisticsmanagement capability through their computer

systems and managerial skill

There is frequently a bias against asset-basedproviders


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Categories of Services Available

Exclusive Service Provider-devotes all resources to a

single client

Consortium Service Provider-provides services to asmall group of clients

Specialist Provider-provides services for products or

clients who have specialized needs

National/Multinational Provider-provides services to

many clients throughout the world


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Business Drivers

Stick to the knitting

Vertical disintegration

How to do more, with less


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Changing Business Environment

Debt reduction unleveraging

Strategic focus of ...

Financial resources

Human resources

Information technology

Competition

Faster (agility)

Better (quality)

Cheaper (low cost provider)

Investment

Rationing


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Advantages/Disadvantages

Less asset investment, redeploy capital

Lower operating cost (service provider

has economies of scope and scale)

Time lag between increased costs

and changing rates

More attention for core business

Gather missing management

knowledge

Provide higher service level

Increased flexibility

Entry mode to new markets

Flexibility as environment changes

Switching costs

Possible higher operating

costs

Less direct customer contactDependency

Loss of control



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Network analysis

Electronic Data Interchange

Freight rate maintenance and auditing

Routing and scheduling

Administration

Produce/track bill of lading for each shipment

Automated bills of lading

Automate shipment data files

Carrier evaluation

logistics cost reduction

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