logistics management 5 lu2
DESCRIPTION
Logistics Lecture 4TRANSCRIPT
LogisticsPPS5
Topic 2
Topic 2
Logistics managementLogistics management
LEARNING UNIT OBJECTIVES
• Explain how logistics management encompasses physical distribution; • Define “logistics management”; • Explain the objectives of logistics; • Indicate where total logistics cost can be reduced; • Illustrate the various aspects that determine customer service; • Reason about the trade-offs between reduced costs and increased customer
service; • Explain order processing and information systems as activities of logistics
management; • Discuss the modes of transport and the factors that influence the selection of
transport modes; • Explain “inventory management”; • Discuss warehousing as a logistics activity; • Discuss material handling as a logistics activity; • Explain the concept of “integrated logistics”; • Assess how logistics contribute to healthy brand practice
• Explain how logistics management encompasses physical distribution; • Define “logistics management”; • Explain the objectives of logistics; • Indicate where total logistics cost can be reduced; • Illustrate the various aspects that determine customer service; • Reason about the trade-offs between reduced costs and increased customer
service; • Explain order processing and information systems as activities of logistics
management; • Discuss the modes of transport and the factors that influence the selection of
transport modes; • Explain “inventory management”; • Discuss warehousing as a logistics activity; • Discuss material handling as a logistics activity; • Explain the concept of “integrated logistics”; • Assess how logistics contribute to healthy brand practice
Distribution vs Logistics
Logistics management – inbound and outboundPhysical distribution – what happens with outbound goods only
Logistics management – inbound and outboundPhysical distribution – what happens with outbound goods only
Materials supply
Materials supply
Materials management
Materials management
Physical distribution
Physical distribution
SuppliersInbound logistics
SuppliersInbound logistics
ManufacturingScheduling, order
processing, materials
handling etc.
ManufacturingScheduling, order
processing, materials
handling etc.
Field inventoryOutbound
logistics
Field inventoryOutbound
logistics
CUSTOMERCUSTOMER
LogisticsLogistics
Logistics and physical distribution
Physical distribution
What happens with outbound goods as they move from the organisation (M) to its Cs.
All activities re flow of these materials, components, finished goods
Materials supplyMaterials supply Materials management
Materials management
Physical distribution
Physical distribution
SuppliersInbound logistics
SuppliersInbound logistics
ManufacturingScheduling, order
processing, materials
handling etc.
ManufacturingScheduling, order
processing, materials
handling etc.
Field inventoryOutbound
logistics
Field inventoryOutbound
logistics
CC
LogisticsLogistics
Logistics and physical distribution
Materials supplyMaterials supply Materials management
Materials management
Physical distribution
Physical distribution
SuppliersInbound logistics
SuppliersInbound logistics
ManufacturingScheduling, order
processing, materials
handling etc.
ManufacturingScheduling, order
processing, materials
handling etc.
Field inventoryOutbound
logistics
Field inventoryOutbound
logistics
CC
LogisticsLogistics
Logistics and physical distribution
PLUS STRATEGIC ISSUES I.E. STRATEGIC ISSUES I.E. TOMWITOMWI
TTransportation; ransportation; OOrder processing (including information systems); rder processing (including information systems); MMaterials handling; aterials handling; WWarehousing; arehousing; IInventory management.nventory management.
The logistics process
Raw materials supplier
Raw materials supplier ManufacturerManufacturer WholesalerWholesaler RetailerRetailer CustomerCustomer
TransportTransport TransportTransport TransportTransport TransportTransport
Objectives of logistics
Costs decreaseCosts decrease Happy customersHappy customers
Improve profitabilityImprove competitive performance
Two key objectives:
Inversely related to one another – cannot accomplish both optimally – trade off between the 2 categories
Decreasing total logistics costs
1.Order processing and admin costs – writing, receiving acknowledgement and processing
2. Inventory related costs –in transit, in storage or WIP
3.Transportation costs – vary depending on mode of transport used, product and size
Trade off between the various cost factors
Improving customer service
1. Order lead time2. Dependability3. Convenience4. Inventory availability5. Factors that influence customer service levels
C expectations and reactionto stock out …
Cost-income trade-off
Competitors’ level of C-service
Tradeoffs between cost and C-service
100%
Investment in inventory
Servicelevel
Objectives of logistics
-Order processing costs-Inventory-related costs
-Transportation costs
-Order processing costs-Inventory-related costs
-Transportation costs
Increasing customer service Increasing customer service Decreasing total logistics costs
Decreasing total logistics costs
Customer service performance levels:
-Order lead time-Dependability-Convenience
-Inventory availability
Customer service performance levels:
-Order lead time-Dependability-Convenience
-Inventory availability
Factors that influence customer service levels:
-Customer’s expectations and
reactions-Trade-offs
-Competitors
Factors that influence customer service levels:
-Customer’s expectations and
reactions-Trade-offs
-Competitors
Trade-off decisions when determining logistics objectives
Reducing total logistics costsReducing total logistics costs Increasing customer service Increasing customer service
Reduce inventory levelsReduce inventory levels
Use cheaper (but slower) forms of transport
Use cheaper (but slower) forms of transport
Reduce unnecessary duplication of information
Reduce unnecessary duplication of information
Increase inventory levelsIncrease inventory levels
Ensure quicker delivery (but by using more expensive transport)Ensure quicker delivery (but by
using more expensive transport)
Provide enough information to satisfy customers in the processProvide enough information to satisfy customers in the process
vsvs
vsvs
vsvs
vsvs
GROUP ACTIVITY
ENTERPRISE RENT A CAR CASE STUDY
TNT CASE STUDY
ACTIVITIES OF LOGISTICS
1. ORDER PROCESSINGINFORMATION SYSTEMS2. TRANSPORT3. INVENTORY MANAGEMENT4. WWAREHOUSING5. MMATERIAL HANDLING
INFORMATION SYSTEMS
• Most Shoprite stores linked by satellite to a central database and replenishment system
• Every 15 minutes management knows of every sale made in that period
Activities of logistics
Order processing
Order processing TransportationTransportation Inventory
managementInventory
management WarehousingWarehousing Materials handlingMaterials handling
Task of order processing:-Order entry
- Order handling
- Order delivery
Information systems:
EDI (electronic data
interchange)
Task of order processing:-Order entry
- Order handling
- Order delivery
Information systems:
EDI (electronic data
interchange)
Modes of transport:
-Rail- Road
- Air- Pipeline- Water
- Intermodal
Selection factors:-Cost- Time
- Access- Capability- Frequency- Reliability
Modes of transport:
-Rail- Road
- Air- Pipeline- Water
- Intermodal
Selection factors:-Cost- Time
- Access- Capability- Frequency- Reliability
Objectives:-Reorder point
- EOQ- JIT
- ABC analysis
Objectives:-Reorder point
- EOQ- JIT
- ABC analysis
Functions:-Receiving
goods- Sorting goods
- Storage of goods
- Filling the order
- Dispatching
Decisions:-How many
- Types- Location
Functions:-Receiving
goods- Sorting goods
- Storage of goods
- Filling the order
- Dispatching
Decisions:-How many
- Types- Location
Objectives:-Lowest cost
- Max capacity- Minimum
handling costs- Safety- Quality service
Equipment
Objectives:-Lowest cost
- Max capacity- Minimum
handling costs- Safety- Quality service
Equipment
1. ORDER PROCESSINGCustomerCustomer
Credit department
Credit department
ManufacturingManufacturing
WarehousesWarehouses
Order handlingOrder handling
Order entryOrder entry
SuppliersSuppliers
Checks,Credit,Terms etc.
Place order Confirmation, Billing
Orderdelivery
EDI
Electronic data interchange
- Transport planning- Order processing- Production planning- Inventory levels- Account management
EDI - advantages
- Increased internal and external productivity (faster feedback; shorter lead times)
- Improved channel relationships- Increased market opportunities- Increased accuracy- Decreased paperwork and
operating costs
2. TRANSPORTATION
MODES OF TRANSPORT
RAILROAD
AIRPIPELINES
WATER INTERMODAL
Factors in selecting modes of transport
CostTime
AccessibilityCapabilityFrequencyReliability
CostTime
AccessibilityCapabilityFrequencyReliability
You want to get to the Congo with your family ….
3. Inventory management
3. Inventory management
3. Inventory management
Issues:1.When to order (reorder point)2.How much to order (economic order quantity)
Reorder point
Look at:
1.Order lead time
2.Usage rate
3.Safety stock
Reorder point = (Order lead time x usage rate) + safety stockReorder point = (Order lead time x usage rate) + safety stock
Other factors influencing reorder point:
1.Variance of order lead time
2.Fluctuations in C-demand3.C-service standard
Other factors influencing reorder point:
1.Variance of order lead time
2.Fluctuations in C-demand3.C-service standard
Order lead time = 5 days
Usage rate = 200 units per day
Safety stock = 300 units
What would the reorder point of certain stock item be?
Order lead time = 5 days
Usage rate = 200 units per day
Safety stock = 300 units
What would the reorder point of certain stock item be?
200 200 200 200 200
Safety stock = 300 units that must lie there.
= 1000 units
Order lead time = 5 days
Usage rate = 200 units per day
Safety stock = 300 units
What would the reorder point of certain stock item be?
200 200 200 200
Safety stock = 300 units that must lie there.
= 800 units
Order lead time = 5 days
Usage rate = 200 units per day
Safety stock = 300 units
What would the reorder point of certain stock item be?
200 200 200
Safety stock = 300 units that must lie there.
= 600 units
Order lead time = 5 days
Usage rate = 200 units per day
Safety stock = 300 units
What would the reorder point of certain stock item be?
200 200
Safety stock = 300 units that must lie there.
= 400 units
Order lead time = 5 days
Usage rate = 200 units per day
Safety stock = 300 units
What would the reorder point of certain stock item be?
200
Safety stock = 300 units that must lie there.
= 200 units
Order lead time = 5 days
Usage rate = 200 units per day
Safety stock = 300 units
What would the reorder point of certain stock item be?
Safety stock = 300 units that must lie there.
= 0 units
Order lead time = 5 days
Usage rate = 200 units per day
Safety stock = 300 units
What would the reorder point of certain stock item be?
200 200 200 200 200
Safety stock = 300 units that must lie there.
= 1000 units
1000
Days
Order lead time = 5 days
Usage rate = 200 units per day
Safety stock = 300 units
What would the reorder point of certain stock item be?
200 200 200 200
Safety stock = 300 units that must lie there.
= 800 units
1000
Days
Order lead time = 5 days
Usage rate = 200 units per day
Safety stock = 300 units
What would the reorder point of certain stock item be?
200 200 200
Safety stock = 300 units that must lie there.
= 600 units
1000
Days
Order lead time = 5 days
Usage rate = 200 units per day
Safety stock = 300 units
What would the reorder point of certain stock item be?
200 200
Safety stock = 300 units that must lie there.
= 400 units
1000
Days
Order lead time = 5 days
Usage rate = 200 units per day
Safety stock = 300 units
What would the reorder point of certain stock item be?
200
Safety stock = 300 units that must lie there.
= 200 units1000
Days
Order lead time = 5 days
Usage rate = 200 units per day
Safety stock = 300 units
What would the reorder point of certain stock item be?
200 200 200 200 200
Safety stock = 300 units that must lie there.
= 1000 units
Order lead time = 5 days
Usage rate = 200 units per day
Safety stock = 300 units
What would the reorder point of certain stock item be?
Reorder point = (order lead time x usage rate) + safety stock
= (5 x 200) + 300= 1 300 units
Order lead time = 5 days
Usage rate = 200 units per day
Safety stock = 300 units
What would the reorder point of certain stock item be?
Reorder point = (order lead time x usage rate) + safety stock
= (5 x 200) + 300= 1 300 units
What would the inventory stock level be if the supplier delivers one day late?
Order lead time = 5 days
Usage rate = 200 units per day
Safety stock = 300 units
What would the reorder point of certain stock item be?
Reorder point = (order lead time x usage rate) + safety stock
= (5 x 200) + 300= 1 300 units
What would the inventory stock level be if the supplier delivers one day late?
100 units
Order lead time = 5 days
Usage rate = 200 units per day
Safety stock = 300 units
What would the reorder point of certain stock item be?
Reorder point = (order lead time x usage rate) + safety stock
= (5 x 200) + 300= 1 300 units
What would the inventory stock level be if the supplier delivers one day late?
100 units
Be able to sketch graph on page
187
Be able to sketch graph on page
187
Economic ordering quantity
Cost
Quantity
Total costs
Carrying costs
Order processingcosts
EOQ
EOQ = 2DO/IC
D = annual demand in unitsO = cost of placing orderI = inventory carrying cost as percentage of annual inventory investmentC = cost of one unit of the product
= quantity whether the sum of the inventory carrying costs and the order
processing costs are at a minimum
= quantity whether the sum of the inventory carrying costs and the order
processing costs are at a minimum
EOQ = 2DO/IC
Demand = 200 000 units = annual demand = D
Cost of placing one ORDER = R200 per order = O
Unit cost of the product = R25 = C
Inventory carrying cost is 20% of the annual inventory investment = I
EOQ = 2DO/IC
Demand = 200 000 units = annual demand = D
Cost of placing one ORDER = R200 per order = O
Unit cost of the product = R25 = C
Inventory carrying cost is 20% of the annual inventory investment = I
EOQ = EOQ = 2 x 200 000 x 200
25 x 0.2
EOQ = 2DO/IC
Demand = 200 000 units = annual demand = D
Cost of placing one ORDER = R200 per order = O
Unit cost of the product = R25 = C
Inventory carrying cost is 20% of the annual inventory investment = I
EOQ = EOQ = 2 x 200 000 x 200
25 x 0.2 = 4 000units
per order placed
OPTIMAL AMOUNT OF ORDERS
=
ANNUAL DEMAND
EOQ
OPTIMAL AMOUNT OF ORDERS
=
ANNUAL DEMAND
EOQ
=
200 000
4 000
OPTIMAL AMOUNT OF ORDERS
=
ANNUAL DEMAND
EOQ
=
200 000
4 000
= 50 ORDERS PER YEAR
Question: When would you have a higher reorder point than usual?
Question: When would you have a higher reorder point than usual?
- Unreliable suppliers- Huge variations in order lead time- Large fluctuations in C-demand
Thus, have to increase safety stocks as well … increased inventory costs …
GROUP ACTIVITY
• Logistics management worksheet
Just in time - JIT
Right products at the right quantities just when they are required.Right products at the right quantities just when they are required.
Information system
KANBAN
Concept that implies that the organisation holds LOW
inventory levels and NO SAFETY STOCK because carrying
inventory tied up working capital.
KANBAN
Coordination between producers and suppliers = essential …
Deliveries are synchronised closely.
NB RE JIT:
1. Close relations between supplier and customer
2. Attention given to quality3. Organisations must have adequate
storing facilities4. Organisations must have adequate
transport options5. Suppliers must deliver a reliable
service6. Short and reliable order lead times7. Purchasing quantities are reduced
Advantages of having JIT:
1. Lower inventory levels = reduced stock holding cost
2. Low/ no safety stock levels = reduced stock holding cost
3. If organisation and supplier have good relationships … leads to higher quality (cannot send back due to time issue)
Disadvantages of having JIT:
1. Risk of running out of stock due to late deliveries
SO – SELECTING SUPPLIERS ON FOLLOWING CRITERIA:
a) Quality of goods they provideb) Their reliabilityc) Their capabilityd) Sound financial positione) Good locationf) Stable labour force
ABC INVENTORY ANLYSIS
Determine how important each item is for organisation.
Determine how important each item is for organisation.
Small # of items responsible for large % investment
Small # of items responsible for large % investment
ABC
AA
BB
CC
Most NB – 10% # items; 70% of capital investment in inventory
Most NB – 10% # items; 70% of capital investment in inventory
20% # items; 20% of capital investment in inventory
20% # items; 20% of capital investment in inventory
70% # items; 10% of capital investment in inventory
70% # items; 10% of capital investment in inventory
ABC
AA
BB
CC
Most NB – 10% # items; 70% of capital investment in inventory
Most NB – 10% # items; 70% of capital investment in inventory
20% # items; 20% of capital investment in inventory
20% # items; 20% of capital investment in inventory
70% # items; 10% of capital investment in inventory
70% # items; 10% of capital investment in inventory
Example
The principleThe principle
Magical MenagerieThe Magical Menagerie is a magical creature shop that in addition to selling magical creatures also offers advice on animal care and health. The shop is very cramped, noisy and smelly, due to every inch being covered with cages. Among the creatures in the Magical Menagerie are enormous purple toads, a firecrab, poisonous orange snails, a fat white rabbit that can turn into a silk top hat and back, cats of every colour, ravens, Puffskeins, and a cage of sleek black rats that play skipping games with their tails.
Magical MenagerieThe Magical Menagerie is a magical creature shop that in addition to selling magical creatures also offers advice on animal care and health. The shop is very cramped, noisy and smelly, due to every inch being covered with cages. Among the creatures in the Magical Menagerie are enormous purple toads, a firecrab, poisonous orange snails, a fat white rabbit that can turn into a silk top hat and back, cats of every colour, ravens, Puffskeins, and a cage of sleek black rats that play skipping games with their tails.
Inventory for Magical Menagerie (Diagon Alley, London)
Inventory item Annual usage in Pounds Percentage of total inventory usage in PoundsBlack cage £37,500 31%White cage £12,000 10%Copper cage £1,000 1%Purple toad £6,500 5%Firecrab £800 1%Orange snail £1,200 1%Magical rabbit £4,000 3%Blue cat £650 1%Black cat £45,000 37%Ginger cat £1,000 1%White cat £1,000 1%Raven £7,900 6%Snake £1,000 1%Puffskein £650 1%Rat £850 1%Hamster £700 1%
£121,75031 + 37 = 68% Top 70% of capital investment10 + 5 + 6 Next 20% of capital investmentRest Last 10% of capital investment
2 out of 16 13% 3 out of 16 19% 11 out of 16 68%
How to do it nicelyHow to do it nicely
Inventory for Magical Menagerie (Diagon Alley, London)
Inventory itemAnnual usage in
Pounds
Cumulative annual usage in
Pounds
% of total inventory usage in
Pounds
Cumulative % of total inventory
usage in PoundsBlack cat £45,000 £45,000 37% 37%Black cage £37,500 £82,500 31% 68%White cage £12,000 £94,500 10% 78%Raven £7,900 £102,400 6% 84%Purple toad £6,500 £108,900 5% 89%Magical rabbit £4,000 £112,900 3% 93%Orange snail £1,200 £114,100 1% 94%Copper cage £1,000 £115,100 1% 95%Ginger cat £1,000 £116,100 1% 95%White cat £1,000 £117,100 1% 96%Snake £1,000 £118,100 1% 97%Rat £850 £118,950 1% 98%Firecrab £800 £119,750 1% 98%Blue cat £650 £120,400 1% 99%Puffskein £650 £121,050 1% 99%Hamster £700 £121,750 1% 100%
£121,750
Understand graph on page 194
WAREHOUSING
Functions of warehouses
Receiving goodsReceiving goods
Sorting goodsSorting goods
Storage of goodsStorage of goods
Filling the orderFilling the order
Dispatching of order
Dispatching of order
Warehousing decisions
How many WH neededHow many
WH needed
Types of WH
required
Types of WH
required
Location of WHs
Location of WHs
Warehousing decisions: (1) Private warehouses
For their own logistical ops
Owned by any organisation (M, W, R)
NB to have necessary resources and expertise
Reasons for having:1.Long time / term commitment2.Special handling procedures3.Want to control design and ops within the WH
GOOD: sales are consistent & property value appreciate
BAD: Fixed costs (insurance, debt, maintenance, taxes) & non-flexible (location)
Warehousing decisions: (1) Private warehouses
For their own logistical ops
Owned by any organisation (MANUFACTURER, WHOLESALER, RETAILER)
NB to have necessary resources and expertise
Reasons for having:1.Long time / term commitment2.Special handling procedures3.Want to control design and ops within the WH
GOOD: sales are consistent & property value appreciate
BAD: Fixed costs (insurance, debt, maintenance, taxes) & non-flexible (location)
Trend: own fewer private WHs --- product s must flow quicker from M to C (reducing
inventory carrying costs)
Trend: own fewer private WHs --- product s must flow quicker from M to C (reducing
inventory carrying costs)
Warehousing decisions: (2) Public warehouses
Now owned but rented
Include related distribution activities: receiving, unloading, inspecting goods, completing orders & financing.
USEFUL:
Warehousing decisions: (2) Public warehouses
Now owned but rented
Include related distribution activities: receiving, unloading, inspecting goods, completing orders & financing.
USEFUL: (1) seasonal products (2) low-volume storage needs (3) developing new markets (4) additional storage space if already have private (5) inventory levels to be maintained in many locations (6) specialise
BENEFITS related to variable costs i.e. rent space, certain services, concurrent + FLEXIBILITY
Warehousing decisions: (3) Distribution centres
Moving rather than storing …
Large and automated …
BENEFITS: C-service & product availability increased whilst order lead time = decreased
Trends: (1) use of new technology = speed and efficiency (2) less inventory --- JIT and
MRP (Materials Requirement Planning) (3) quality = NB (4) emphasis on SERVICE (5)
MATERIALS HANDING
Trends: (1) use of new technology = speed and efficiency (2) less inventory --- JIT and
MRP (Materials Requirement Planning) (3) quality = NB (4) emphasis on SERVICE (5)
MATERIALS HANDING
Materials handlingMaterials handling
Materials handling equipment
Materials handling equipment
Free-flowing equipment that moves on the groundFree-flowing equipment
that moves on the groundOverhead materials handling equipmentOverhead materials handling equipment
Integrating Logistics
Order processingOrder processing
Inventory managementInventory management
TransportationTransportation
WarehousingWarehousing
Materials handlingMaterials handling
Pic: http://www.google.co.za/imgres?imgurl=http://kotaku.com/assets/resources/2007/05/wii.jpg&imgrefurl=http://kotaku.com/260840/canada-uses-wii-in-hospitals&usg=__Uk2Ojzm9fX3WGTIvKJ0uJFjGiuk=&h=918&w=1024&sz=103&hl=en&start=0&tbnid=Xc9KY1DeBLNCwM:&tbnh=111&tbnw=140&prev=/images%3Fq%3Dwii%26um%3D1%26hl%3Den%26rlz%3D1R2RNSN_enZA388%26biw%3D1003%26bih%3D539%26tbs%3Disch:1&um=1&itbs=1&iact=hc&vpx=249&vpy=215&dur=1344&hovh=213&hovw=237&tx=115&ty=123&ei=MgNZTKWKLM6WOJrv2cgJ&page=1&ndsp=16&ved=1t:429,r:7,s:0
TOMWI
Hmmm …
• Silo’s want to improve their own performance
• Purchasing manager: lower inventory levels = lower carrying costs
• Marketing manager: higher inventory levels = better C-service
Focus in past = internal single-organisation focus:
-Value analysis-Process improvements
-Standardisation-Technological improvements
Integrated logistics inside the Integrated logistics inside the organisationorganisation
Now: supply-chain focus:Cost management initiatives require logistics executives to adopt a series of initiatives that can have a positive impact on bottom
line
Integrated logistics outside the Integrated logistics outside the organisationorganisation
Now: supply-chain focus:Cost management initiatives require logistics executives to adopt a series of initiatives that can have a positive impact on bottom
line
Integrated logistics outside the Integrated logistics outside the organisationorganisation
Two supply chain partners working together to identify process
improvements to reduce costs across entire supply chain
Two supply chain partners working together to identify process
improvements to reduce costs across entire supply chain
Integrated logistics outside the Integrated logistics outside the organisationorganisation
Partnership forms:Partnership forms:
1. Cross-fx, cross-org teams2. Shared projects3. Info-sharing 4. Continuous inventory
replenishment systems
Integrated logistics outside the Integrated logistics outside the organisationorganisation
Partnership forms:Partnership forms:
Also:Also:- Value-engineering efforts- Supplier development- Cross-org cost-reduction efforts- Joint new product development
projects- Supply-chain redesign efforts
Integrated logistics outside the Integrated logistics outside the organisationorganisation
ResultResult
Integrated logistics outside the Integrated logistics outside the organisationorganisation
ResultResult
Lead times reducedLead times reduced
Improved C-serviceImproved C-service
Manage chain based on C-Manage chain based on C-responsesresponses
If not done: have to M on sales forecasts … If not done: have to M on sales forecasts … storing … inventory carrying costs … storing … inventory carrying costs …
GROUP EXERCISE
• American Swiss case study• Review questions p204• La Mercy Case Study p205