Chapter 11 Logistics Management

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Chapter 11
Logistics Management
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Learning Objectives
11-1 Describe logistics and the six major activities of
integrated logistics management.
11-2 Estimate cost savings from transportation
consolidation.
11-3 Assess and select transportation modes.
11-4 Explain the primary functions of distribution and
fulfillment centers.
11-5 Explain the importance of packaging and materials
handling.
11-6 Discuss the logistics network design process and
apply the center-of-gravity method.
11-7 Describe the benefits of third-party logistics
service providers (3PLs).
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Learning Objective 11-1
Amazon Delivers Innovation
• Vast logistics network
• Micrologistics
• Delivering packages as quickly as possible
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Learning Objective 11-1
Logistics Management Definition
Logistics management: management of the
movement and storage of materials to meet customer
needs and organizational objectives
• Includes forward and reverse flow
• Includes flow of materials and information
• Load, offload, move, sort, and select material
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Learning Objective 11-1
The “Perfect Order”
1. Have the right products available at the right time
2. Be processed correctly and be a complete,
undamaged shipment
3. Be shipped using the method the customer wants
4. Provide an advanced shipping notification stating
when the delivery will arrive
5. Have a way for customers to track the order
during shipment
6. Be delivered on time and undamaged
7. Have the correct billing for services provided
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Learning Objective 11-1
Logistics Management
• Inbound flows: logistics managers work with supply
managers to ensure flows of materials meet firm’s
operational requirements
• Internal flows: logistics managers and other
functions within the firm work to ensure timely and
correct flows of information, products, and
materials internally, within and across the firm’s
facilities
• Outbound flows: logistics managers work with
marketing and sales managers to ensure customer
requirements are satisfied
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Activities of Integrated Logistics
Management
Figure 11-1 The Activities of Integrated Logistics
Management
Learning Objective 11-1
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Order Processing
A successful order process system ensures:
– Accuracy
– Efficiency
– Speed
Amazon’s Alexa enables electronic voice ordering.
Learning Objective 11-1
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Inventory Management
Inventory management is linked to all logistics
management decisions including:
– How much inventory of each item to hold
– In what form to hold each item (raw material,
work in process, finished good)
– How often to replenish each item
– Where in the supply chain to hold each item
Learning Objective 11-1
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Learning Objective 11-1
Transportation Management (1 of 3)
Government’s role:
• Economic regulation: entry of new carriers,
rates, and services provided
• Safety regulation: safe for carriers and
public, including increased emphasis on
security from terrorist activity
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Learning Objective 11-2
Transportation Management (2 of 3)
Transportation economics:
• Economy of scale: cost per unit of weight
decreases as shipment size increases
• Economy of distance: cost per unit traveled
decreases as distance moved increases
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Transportation Management (3 of 3)
Figure 11-2 Economies of Scale and Distance
Learning Objective 11-2
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Consolidation
Consolidation: one large shipment made of many
smaller shipments
• By market area: combine small shipments from
one shipper going to the same area
• Pooled delivery: combine small shipments from
different shippers going to the same area
• Scheduled delivery: delivery at specific times
Learning Objective 11-2
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Consolidation or Not—Example (1 of 2)
Example 11-1
A firm has orders of 12,000 lbs each of goods for
three customers. It is $15.75 per hundredweight
(cwt) to ship direct, or $10.50 per cwt for
shipments of greater than 30,000 lbs with a
$300 fee for each stop.
Should the firm consolidate the orders into one
shipment?
Learning Objective 11-2
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Consolidation or Not—Example (2 of 2)
Example 11-1
Cost of individual shipments:
$15.75 × (12,000/100) = $15.75 × 120 cwt = $1,890
total for all three shipments = 3 × $1,890 = $5,670
Consolidated shipments:
$10.50 × (36000/100) = $10.50 × 360 cwt = $3,780
including stop charge = 3 × $300 + $3780 = $4,680
Saving with consolidation = $5,670 − $4,680 = $990
Learning Objective 11-2
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Learning Objective 11-3
Transportation Mode Selection
In order to decide which mode of transportation to use to
ship an order, consider:
• Speed
– the elapsed time required to move from the point of origin to
destination
• Availability
– the ability to service any possible location
• Dependability
– the variance in the expected delivery times
• Capability
– the ability to handle any type of product and/or size of load
• Frequency
– the number of scheduled movements that can be arranged by a
shipper
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Learning Objective 11-3
Transportation Mode Selection:
Greenhouse Gas Emissions
Table 11-1 Freight Transportation Mode Greenhouse Gas
Emissions
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Learning Objective 11-3
Transportation Mode Selection:
Characteristics
Table 11-2 Characteristics of Transportation Modes
(1 = best, 5 = worst)
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Student Activity (1 of 4)
Search the Internet to find out which
transport mode produces the least damage
to products. Which one is the safest to
operate? Which one consumes the least
amount of energy? Which one is least subject
to disruptions from events such as labor
strikes or natural disasters?
Learning Objective 11-3
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Learning Objective 11-3
Trucking Industry: Three Segments
• Truckload (TL)
– carriers generally carry only full trailers of freight
– trucks can be routed directly from the shipper to the
customer
• Less-than-truckload (LTL)
– carriers usually move loads of less than 15,000 pounds
– carriers experience relatively higher fixed costs because of
the need to stop at a terminal for load consolidation
– typically pay higher marketing costs because they want to
generate full loads
– dominated by a few large carriers
• Specialty carriers
– include package haulers such as FedEx and United Parcel
Service (UPS)
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Carrier Types
Value Density: ratio of value to weight, often
determines the type of carrier used
• Common: provide service to the public with
published rates
• Contract: provide service only to select,
contracted customers
• Private: firm owns its own equipment
Learning Objective 11-3
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Transportation Service Selection (1 of 3)
1. Cost related to the transportation itself
2. Cost of inventory while in transit
3. Service requirements related to speed, availability,
and so on
Learning Objective 11-3
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Transportation Service Selection (2 of 3)
Example 11-2
A firm must ship a 10-lb parcel of 30 items valued at
$500 each a distance of 1,000 miles. Transportation
options are 8-day ground for $50 or 2-day air for
$90. Holding cost is 20 percent of product value.
How should the firm ship its product?
Learning Objective 11-3
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Transportation Service Selection (3 of 3)
Example 11-2
Total cost = In-transit holding cost + Freight cost
In-transit holding cost = days in transit/365 × Shipment
value × Annual inventory carrying cost percentage
Ground:
= [(8 days/365) × $15,000 × .2] + $50.00 = $115.74
Air:
= [(2 days/365) × $15,000 × .2] + $90 = $106.44
Learning Objective 11-3
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Learning Objective 11-3
Student Activity (2 of 4)
Rework the transportation cost analysis in
Example 11-2 given all the same parameters,
except that the 30 watches are now valued at
only $50 each. Why is ground service now the
best choice?
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Distribution/Fulfillment Management—
Primary Functions of Distribution Centers
Stockpiling
• the storage of inventory in warehouses to protect
against seasonality either in supply or demand
Production support
• dedicated to storing parts and components needed
to support a plant’s operations
Break-bulk, warehouse consolidation, and crossdocking
• splitting the shipment into individual orders and
arranging for local delivery to customers
Learning Objective 11-4
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Break-Bulk, Warehouse Consolidation,
and Cross-Docking Operations
Figure 11-3 Break-Bulk, Consolidation, and CrossDocking Operations
Learning Objective 11-4
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Distribution/Fulfillment Management—Break-Bulk,
Warehouse Consolidation, and Cross-Docking
• Break-bulk: splitting the shipment into individual
orders and arranging for local delivery to customers
• Consolidation: combining shipments from a
number of sources into one larger shipment going
to a single location
• Cross-docking: combines break-bulk and
warehouse consolidation activities
Learning Objective 11-4
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Distribution/Fulfillment Management
• Reverse Logistics:
– Material moves upstream in the supply chain
– Especially important in online retail
• Value-Added Services: providing additional
value to the customer, such as postponement
(www.zappos.com)
Learning Objective 11-4
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Distribution/Fulfillment Management—
Primary Process Activities
Warehouses must perform a variety of operations on
a daily basis:
• Receiving and unloading
• In-storage handling
• Storage
• Order picking and packing
• Staging
• Shipping
Learning Objective 11-4
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Student Activity (3 of 4)
Contact a company that has a warehouse
operation nearby (it may be that your college or
university has a facility). Arrange for a tour of the
warehouse. Ask the manager about the different
functions the facility performs (consolidation,
break-bulk, etc.) for the organization.
Learning Objective 11-4
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Materials Handling and Packaging
• Handling material increases costs and risk of
damage
• Packaging can decrease handling costs and risk
of damage
– Containerization or Unitization: filling or
creating a larger container from smaller ones
– Automated Storage and Retrieval Systems:
robots that get, move, and put away material
– RFID: electronic tracking of material
Learning Objective 11-5
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Logistics Network Design
• Logistics network design determines:
– Number and location of operations facilities
– How customers will be served
– Where inventory will be held
– Which transportation modes will be used
• Cost-to-service trade-off: as service levels increase,
typically so do costs
• Cost-to-cost trade-off: increasing the cost of one
logistics activity reduces the cost another
• Total landed cost: sum of all product- and logisticsrelated costs
– Country costs of manufacturing
– Cost in transit to country of sale
– Cost within country of sale
Learning Objective 11-6
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Network Design—Transportation Cost
Number of locations is determined by balancing
inbound and outbound transportation costs
Figure 11-4 Transportation Cost Related to Number of
Warehouse Locations
Learning Objective 11-6
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Network Design—Total Network Cost
Figure 11-5 Total Network Cost
Learning Objective 11-6
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Facility Location
• Most impact on supply chain operations
• Multiple factors to consider
– Labor
– Proximity to suppliers and customers
– Cost of land and construction
– Taxes, incentives, and regulations
– Transportation infrastructure
– Quality of life for employees
– Supply chain risk
Learning Objective 11-6
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Total Landed Cost
• Managers need to develop a location
strategy that minimizes a product’s total
landed cost
• Total landed cost: the sum of all productand logistics-related costs
– Costs within each country of manufacture
– Costs in transit from country of manufacture to
country of sale
– Costs within the country of sale
Learning Objective 11-6
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Network Design—Facility Location
Center-of-Gravity Method: finds the lowest-cost
location based on demand and distance, using X and Y
coordinates to define a geographic position
X =
Di
Xi
i
∑
Di
i
∑
Y =
Di
Yi
i
∑
Di
i
∑
Di = Demand at location i
Xi = X coordinate at location i
Yi = Y coordinate at location i
Learning Objective 11-6
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Network Design—Facility Location: Steps
Using the Center-of-Gravity Method (1 of 3)
Example 11-3
1. Position the demand locations on a map with X
and Y coordinates.
2. Determine the amount of demand at each
location.
3. Compute the weighted averages for X and Y
coordinates using the formula below:
∑
∑
i
i
i i
D
i
D X
X 
∑
∑
i
i
i i
D
i
DY
Y 
Learning Objective 11-6
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Network Design—Facility Location: Steps
Using the Center-of-Gravity Method (2 of 3)
Figure 11-6 Coordinate Locations of Markets and Their Center of
Gravity
Di = Demand at location i
Xi = X coordinate at location i
Yi = Y coordinate at location i
Learning Objective 11-6
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Network Design—Facility Location: Steps
Using the Center-of-Gravity Method (3 of 3)
Example 11-3
Figure 11-6 Coordinate Locations of Markets and Their
Center of Gravity
Learning Objective 11-6
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Network Design—Facility Location: Steps Using
the Center-of-Gravity Method—Example (1 of 2)
Example 11-3
Suppose, given the locations plotted in Figure 11-6,
we determine the following information:
Learning Objective 11-6
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Network Design—Facility Location: Steps Using
the Center-of-Gravity Method—Example (2 of 2)
Example 11-3
∑
∑
i
i
i i
D
i
D X
X  ∑
∑
i
i
i i
D
i
DY
Y 
X
*
=
20(200,000) +95(100,000) +60(500,000)
200,000+100,000+500,000
=
43,500,000
800,000
=54.5
Y
*
=
90(200,000) +75(100,000) +30(500,000)
200,000+100,000+500,000
=
40,500,000
800,000
=50.6
Learning Objective 11-6
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Center-of-Gravity Method Assumptions
1. There are straight-line distances between all
locations
2. The amount of demand is a good proxy measure
of transportation cost, which is not always true
3. Qualitative factors such as supply chain risk,
labor availability, and incentives are not
considered
Learning Objective 11-6
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Third-Party Logistics Service Providers
• Third-party logistics service providers
(3PLs): companies that provide transportation,
distribution, inventory management, packaging,
and international freight forwarding services.
– IT capabilities are essential for 3PLs
 Blockchain
Learning Objective 11-7
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Student Activity (4 of 4)
Search the Internet to find examples of
blockchains that are being developed in
various industries.
Learning Objective 11-7
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Logistics Management Summary
1. Logistics management provides for the flow of
material and information between suppliers,
producers, and customers.
2. Meet customer needs at lowest landed cost.
3. Includes six major decision areas.
4. Economies of scale and distance impact costs.
5. Five transportation modes.
6. Many functions of distribution centers.
7. Network design and facility location impact costs
and customer service.
8. 3PL providers are increasingly being utilized.

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