LOGISTICS

Logistics Management

Marzenna Cichosz, Ph.D. 1

Marzenna Cichosz, Ph.D. Logistics Management

LOGISTICS

MANAGEMENT


LOGISTICS IN A COMPANY

Raw materials

supply points

Raw materialsstorage

ManufacturingFinished goods storage

Markets

Movement/Transportation

Storage

Storage

Storage

Plant 1

Plant 2

Plant 3

Warehouse

Physical supply materials management Inbound Logistics

Physical distributionOutbound Logistics

A

B

C




Warehouse

Warehouse

Marzenna Cichosz , Ph.D. Logistics Management

7Rs DEFINITION

The mission of logistics is to supply:

the right CUSTOMER

the right PRODUCT

the right QUANTITY

the right CONDITION

the right PLACE

the right TIME

the right COST


LOGISTICS DEFINITIONaccording to CSCMP

(Council of Supply Chain Management Professionals)

Logistics is the process

within the Supply Chain Management that:

plans, implements and controls

the efficient and effective

forward and reverse flow and storage of

goods, services, and related information

between the point of origin and the point of consumption

in order to meet customers requirements.


FLOW OF GOODS AND INFORMATION

Sourcing

market

Production processWarehouse

Raw materials /

components

semi-products /

Inbound logistics Production logistics

Logistics processes in

a company

Return logistics

Reusable materials / returns / disposals

Marketing logistics

Materials management

Distribution logistics

Raw materials /

components / spare

parts / semi-products /

Finished products /

semi-products /

spare parts

WarehouseDistribution

WarehouseWarehouse

Consumer

marketIn-process warehouse


PRODUCTS FLOW

WITHIN INBOUND LOGISTICS

Raw materials management

Production Inventory

Plant

warehouse

(inventory)

Production

or

operations

PlantSupplier Warehouse

Make-to-

order

Delivery according to production schedule

Delivery to warehouse

Return

Order




PROCUREMENT MODEL

SOURCING

Identifying potential suppliers

Evaluating suppliers

The optimization of suppliers base

Building strategic relationships with suppliers

Partnership improvement

CONTACTING

Defining materials requirements

Supplier selection

Offers Tenders Negotiations

Signing agreement on supplies

The efficiency improvement in procurement


Intermediaries

Final consumer

Finished

products

warehousePlant

Full-size

deliveries

Distribution

center

LTL

deliveries

Direct

deliveries

Physical distribution

Returns

PRODUCTS FLOW

WITHIN OUTBOUND LOGISTICS

Direct

deliveries

LTL

deliveries

Returns


SYSTEMS APPROACH

Goals / Objectives

- Distribution channel

- Customer service

- Inventory control

- More inventory

- Quick response to

customer orders

- Fast deliveries

- More warehouses/

more selling points

- Short production

series

- Information flow

and data analysis

- Inventory costs

- Production,

procurement

- Warehousing

- Transport

- Long production

runs

- Less inventory

- Cheap order

processing

- Less warehouses - Production

warehouses

- Low transportation

costs

ProductionFinanceMarketing and sales

CEO

Responsibilities


THE CONCEPTS OF

SYSTEMS APPROACH IN LOGISTICS

1. The concept of costs interdependences

Logistics costs are related one to each other and any changes in one cost component influence the other cost components.

2. Total cost concept

Relates to costs interdependences and emphasizes the need for reducing total cost of logistics activities,

rather than focusing on each activity in isolation. The goal is to find the alternative with the lowest total cost at the certain customer service level.

3. Avoiding sub-optimalization

It appears when minimizing the cost of one component results in the increase of the whole systems cost.


Customer service

level

Lot quantity

costs

Transportation

costs

Warehousing

costs

Order processing

and information

costs

Inventory carrying

costs

MUTUAL COSTS INTERDEPENDENCES

IN LOGISTICS


Rail Truck Airplane

Costs

USD or EUR

Means of transport

Transportation costsInventory

carrying

costs

Order processing costs

Total cost

TOTAL COST CONCEPT IN LOGISTICS




Within logistics functions / activities

Among major logistics functions

Among major functions in a firm

Among firms

COST INTERDEPENDENCES IN LOGISTICS

The different levels of analysis


THE CONCEPTS OF

SYSTEMS APPROACH IN LOGISTICS

1. The concept of costs interdependences

Logistics costs are related one to each other and any changes in one cost component influence the other cost components.

2. Total cost concept

Relates to costs interdependences and emphasizes the need for reducing total cost of logistics activities,

rather than focusing on each activity in isolation. The goal is to find the alternative with the lowest total cost at the certain customer service level.

3. Avoiding sub-optimalization

It appears when minimizing the cost of one component results in the increase of the whole systems cost.


PROFIT LEVERAGE PROVIDED BY

LOGISTICS COST REDUCTION

A SAVING OF

(assumption

Of 2% profit margin)

0,02 z

2,00 z

200,00 z

2.000,00 z

20.000,00 z

IS

EQUIVALENT TO

A SALES

INCREASE OF

1,00 z

100,00 z

10.000,00 z

100.000,00 z

1.000.000,00 z


THE LOGISTICS COST IN RELATION TO COUNTRYS GDP

USA 8.23

CANADA 8.50

JAPAN 8.95

GERMANY 9.31

POLAND 10.45

GREECE 14.48

Bowersox 2013


THE LOGISTICS COST

AS A PART OF FIRMS REVENUE

according to A.T. Kearney i ELA

1987-1993 - 30%

1993-1998 - 25%

1998-2003 - 12%


THE COSTS OF LOGISTICS LEADERSaccording to A.T. Kearney i ELA

Inventory

Administration

Warehousing

Transport

3,0%

2,3%

1,9%

2,9%

2,1%

1,6%

1,2%

1,6%

Logistics cost in

firms revenue

(in %)

10,1%

6,5%

- 36%

- 30%

- 30%

- 37%

- 45%




THE AVERAGE COSTS AND UTILITIES

CREATED BY MAIN FIRMS FUNCTIONS

Profit

Logistics cost

Marketing cost

Productioncots

4 c

27 c

21 c

48 c

1 $ sales

Place and time utilityRefers to having product available where and when they are needed by customers

Possession utilityrefers to the value that comes from a customer being able to take possession of product

Form utilityrefers to a products being in a form that can be used by the customer and is of value to the customer

- Douglas M.. Lambert, James R. Stock, 1982 Marzenna Cichosz , Ph.D. Logistics Management

LOGISTICS AS A TOOL FOR

COMPETITIVE ADVANTAGE

Customer service

level

Cost reduction and

optimization


LOGISTICS AND FIRMS PROFIT

Sales Customer service Revenue

Purchasing

Cost of goods sold

Production scheduling

Minus

Order processing

Transport

Administrative cost Warehousing Logistics costs

Inventory management

Packaging

Promotions

Financial cost Inventory

Leasing

Logistics inputin profit

Revenue, costs Logistics variables

- Martin Christopher, 1986


LOGISTICS AND A BALANCE SHEET

The balance sheet position Logistics variables

Fixed assets Distribution centers and equipmentMeans of transport

Inventory Inventory policy and managementand customer service level

Accounts receivable Order cyclePercentage of fulfilled orders

Cash Invoicing with no mistakes

Shareholders equityFinancial options for warehouses

Long-term liabilities

Current liabilities Purchasing policy

ASSETS

LIABILITIES


1.500.000 PLN

300.000 PLN

100.000 PLN

400.000 PLN

100.000 PLN

100.000 PLN

2.000.000 PLN

500.000 PLN

100.000 PLN

2.000.000 PLN

2.000.000 PLN

10%

1.000.000 PLN

5%

2

400.000 PLN

600.000PLN

400.000 PLN

Sales

Cost of goods sold

Variable cost

Fixed expenses

Inventory

Accounts receivable

Other current assets

Gross margin

Total expenses

Current assets

Fixed assets

Total assets

Sales

Sales

Net profit

Net profit margin

Asset turnover

R O A

Net profitNet sales

Net salesTotal assets

-

+

+

+

-

+

( )

)(

ROA STRATEGIC PROFIT MODEL


1.500.000 PLN

300.000 PLN

100.000 PLN

100.000 PLN

100.000 PLN

2.000.000 PLN

500.000 PLN

100.000 PLN

2.000.000 PLN

2.000.000 PLN

5%

400.000 PLN

400.000 PLN

Sales

Cost of goods sold

Variable cost

Fixed expenses

Inventory

Accounts receivable

Other current assets

Gross margin

Total expenses

Current assets

Fixed assets

Total assets

Sales

Sales

Net profit

Net profit margin

Asset turnover

R O A

Net profitNet sales

Net salesTotal assets

-

+

+

+

-

+

( )

)(

ROA STRATEGIC PROFIT MODEL (2)

300.000 PLN

500.000PLN

900.000 PLN

2,22

11,11%




MANAGEMENT

- D. Lambert, J. Stock, 1999

COMPONENTS OF LOGISTICS

MANAGEMENT

Input

Natural

resources

(land, facilities,

and equipment

Human

resources

Financial

resources

Planning Implementation Control

Logistics management

Logistics activities

Output

Competitive

advantage

(marketing

orientation)

Efficient

movement

to customer

Proprietary

asset

Finished

goodsRaw

material

In-process

inventoryServices

Information

resources

Time and place

utility

Customer service

Demand forecasting

Inventory control

Material handling

Order processing

Parts and service support

Plant and warehouse selection

Procurement

Packaging

Return goods handling

Traffic and transportation

management

Warehousing and storage


RELATIONSHIPS

PRODUCTION LOGISTICS MARKETING

LOGISTICS

The examples of

activities:

1. Transport

2. Inventory

carrying 3. Order

processing zlecenia

4. Warehousing

5. Manipulations manipulacyjne

PRODUCTION

The examples of

activities:

1. Quality control

2. Production

planning

3. Capacity

planning

5. Organizing HR

6. Standarization

MARKETING

The examples of

activities:

1. Promotion

2. Market research

3. Product - mix

4. Sales

Common

activities:

1. Production

planning

2. Plant location

COMPANY

Common

activities:

1. Customer service

2. Pricing

3. Packaging

4. Selling

points location


What logistics is about

The systems and total cost approaches

Logistics as a competitive advantage tool

Logistics and firms profit / ROA / balance sheet

The increasing role of logistics

Key logistics activities

POINTS TO REMEMBER




SUPPLY CHAIN

MANAGEMENT


THE EVOLUTION OF LOGISTICS

Disintegration

(1960)

Forecasting

Purchasing

Resource planning

Production planning

Work-in-process inventory

Warehousing

Materials manipulation

Packaging

Finished goods inventory

Distribution planning

Order processing

Transport

Customer service

Integration(1980)

Materials

Management

Physical

distribution

Full integration

(2000)

Logistics

Supply

Chain


EXTERNAL DRIVERS OF CHANGE

Barriers in the improvement of production and marketing functions within company

Changes in consumer behavior

Products proliferation

Change in holding inventory

The increase of transportation costs and a reduction in economic regulation (deregulation)

Technological advances

Globalization of trade


Suppliers

- John J. Coyle, Edward J. Bardi, C. John Langley Jr.

Producers Wholesellers Retailers Customers

Information flow

Product flow

Cash flow

SUPPLY CHAIN MANAGEMENT


An integrated philosophy to manage the total flow

within a distribution channel from supplier to ultimate

customer (Cooper & Ellram)

A strategic concept that involves understanding and

managing the sequence of activities from supplier to

customer that add value to the product supply pipeline(Battaglia & Tyndall)

A network of companies that works together to provide

a product or service for end-use market(Goldsby)

SUPPLY CHAIN DEFINITIONS


SCM encompasses the planning and management

of all activities involved in sourcing and procurement, conversion,

and all logistics management activities.

Importantly, it also includes

coordination and collaboration with channel partners,

which can be suppliers, intermediaries, third-party service

providers, and customers.

In essence, SCM integrates supply and demand management

within and across companies.

SUPPLY CHAIN DEFINITIONSaccording to CSCMP




1

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Tier 3

Suppliers

Tier 2

Suppliers

Tier 1

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Tier 3

Customers

Tier 2

Customers

Tier 1

Customers

Focal company Members of the Focal Companys Supply

Chain

SUPPLY CHAIN NETWORK STRUCTURE

FOR A MANUFACTURER


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SuppliersTier 3

Customers

Tier 2

Customers

Tier 1

Customers


Chain


FOR A RETAILER



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2

n

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1

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1

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Tier 3 to Initial

Suppliers

Tier 2

Suppliers

Tier 1

Suppliers

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Tier 3

customers /

End-customers

Tier 2

Customers

Tier 1

Customers

Focal company

Members of the Focal Companys Supply Chain

Non-members of the Focal Companys Supply Chain

Managed Process Links

MonitoredProcess Links

Not-managed Process Links


PARTNERSHIP WITHIN SC


TYPICALLY COMPETITORS BUY FROM THE SAME

SUPPLIERS AND SELL TO THE SAME CUSTOMERS

1

2

n

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n

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Tier 3 to Initial

Suppliers

Tier 2

Suppliers

Tier 1

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n

Tier 3

customers /

End-customers

Tier 2

Customers

Tier 1

Customers

Colgate

P&G

Unilever


COMPARISION OF KEY CHARACTERISTICS

Factor Traditional system Supply Chain

Inventory management Firm focused Pipeline coordination

Inventory flows Interrupted Seamless / visible

Cost Firm minimized Landed cost

Information Firm controlled Shared

Risk Firm focused Shared

Planning Firm oriented Supply chain team approach

Interorganizational Firm focused on low cost Partnership focused on relationships koszty przedsibiorstwa landed cost

- J. Coyle, E. Bardi, C. J. Langley Jr., 1996




Supply Chain Management is the integration of

key business processes from end users through

original suppliers that provides products, services,

and information that add value for customers and

other stakeholders.

DRIVING LOGISC FOR SCM

- The Global Supply Chain Forum, OSULambert, 2013


LogisticsMarketing

Finance

Tier 2Supplier

Consumer/End user

Manufacturer

Information Flow

Purchasing

Production

Tier 1Supplier Customer

R&D

PRODUCT FLOW

CUSTOMER RELATIONSHIP MANAGEMENT

CUSTOMER SERVICE MANAGEMENT

ORDER FULFILLMENT

MANUFACTURING FLOW MANAGEMENT

SUPPLIER RELATIONSHIP MANAGEMENT

PRODUCT DEVELOPMENT AND COMMERCIALIZATION

DEMAND MANAGEMENT

RETURNS MANAGEMENT

GLOBAL SUPPLY CHAIN FORUM MODEL


Customer Relationship Management provides the structure for how relationships with

customers are developed and maintained, including PSAs between firm and its customers.

Supplier Relationship Management provides the structure for how relationships with

suppliers are developed and maintained, including PSAs between firm and its suppliers.

Customer Service Management provides the firms face to the customer, including

management of PSAs, and provides a single source of customer information.

Demand Management provides the structure for balancing the customers requirements

with supply chain capabilities.

Order Fulfillment includes all activities necessary to define customer requirements,

design the logistics network, and fill customer orders.

Manufacturing Flow Management includes all activities necessary to obtain and manage

manufacturing flexibility in the supply chain and move products through the plants.

Product Development and Commercialization provides the structure for developing and

bringing to market new products jointly with customers and suppliers.

Returns Management includes all activities related to returns, reverse logistics,

gatekeeping, and avoidance.

SUPPLY CHAIN PROCESSES


Processes are led by cross-functional teams.

Each process integrates suppliers and customers.

CRM and SRM are key linkages in the supply chain.

Relationships with customers and suppliers are tailored to the

specific needs of the parties involved. The impact of actions

on either side of the relationship can be measured and

tracked to bottom-line performance.

SCM is a team sport and there is equity in relationships.

KEY POINTS TO THIS VIEW OF SCM


2. What processes should be linked

with each of these key supply chain

members?

1. Who are the key supply chain members

with whom to link processes?

3. What level of integration and

management should be applied for each

process link?

Supply Chain ManagementProcesses

Supply ChainNetwork Structure

Supply ChainManagementComponents

Lambert, Cooper, Pagh, 1998

SUPPLY CHAIN MANAGEMENT:

KEY DECISONS


What is SCOR?

18

Customer processesS

upplier processes Supply Chain

Customer processesS

upplier processes Supply Chain

Process, arrow indicates material flow direction

Process, no material flow Information flow

DeliverMakeSource

ReturnReturn

Plan

SCOR is a supply chain

process reference model

containing over 200 process

elements, 550 metrics, and

500 best practices including

risk and environmental

management

Organized around the five

primary management

processes of Plan, Source,

Make, Deliver and Return

Developed by the industry

for use as an industry open

standard - Any interested

organization can participate

in its continual development

18




SCOR Processes

Five Levels of Decomposition

Level 1 Level 2 Level 3 Level 4 Level 5

Scope Configuration Activity Workflow Transactions

Differentiates

Business

Differentiates

Complexity

Names Tasks Sequences Steps Links

Transactions

Defines Scope Differentiates

Capabilities

Links, Metrics,

Tasks and

Practices

Job Details Details of

Automation

Sets Strategy First Tier

Diagnostics

Second Tier

Diagnostics

Industry or

Company Specific

Technology

Specific

19

AMR 2009 - SCC & SCOR Executive Overview

S1

Source

Stocked Product

Supply-Chain

Source

S1.2

Receive Product

Standard SCOR definitions Company/Industry definitions

EDI

XML



Speed / Time / Responsiveness

Quality / Reliability

Asset productivity

Customer Satisfaction / Relationships

STRATEGIC CHANGES IN SUPPLY CHAIN


End-customers

become more

knowledgeable

about product

Lean supply chain

Agile supply chain

1980s

1990s

Efficiency, cost

Responsiveness

Focus

LEAN VS. AGILE SUPPLY CHAIN

CONCEPTS


Transportation

Motion

Waiting

Processing

Inventory

Defects

Overproduction

7 WASTES OF PRODUCTIONLEAN MANUFACTURING


Distinguishing attributes Lean supply Agile supply

Typical products Commodities Fashion goods

Marketplace demand Predictable Volatile

Product variety Low High

Product life cycle Long Short

Customer drivers Cost Availability

Profit margin Low High

Dominant costs Physical costs Marketability costs

Stockout penalties Long-term contractual Immediate and volatile

Purchasing policy Buy materials Assign capacity

Information enrichment Highly desirable Obligatory

Forecasting mechanism Algorithmic Consultative


CONCEPT (2)





CONCEPT (3)

Characteristic Lean Agile

Logistics focus Eliminate waste Customers and markets

Partnerships Long-term, stable Fluid clusters

Key measureOutput measure such as

productivity and cost

Measure capabilities, and

focus on customer

satisfaction

Process focusWork standardization,

conformance to standards

Focus on operator self-

management to maximize

autonomy

Logistics planning Stable, fixed period Instantaneous response


LOGISTICS VS.


P. Larson, A. Halldorsson, 2004

Logistics

SCM

Logistics

SCM

Logistics

SCM

Logistics SCM

Traditionalist Relabeling

Unionist Intersectionist

2015-03-22

1


SUPPLY CHAIN

MAPPING

Capturing Supply Chain Structure


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Suppliers

Tier 2

Suppliers

Tier 1

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Tier 3

Customers

Tier 2

Customers

Tier 1

Customers


Chain


FOR A MANUFACTURER


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Suppliers

Tier 2

Suppliers

Tier 1

SuppliersTier 3

Customers

Tier 2

Customers

Tier 1

Customers


Chain


FOR A RETAILER


THE IMPORTANCE OF KNOWING

SUPPLY CHAIN STRUCTURE

The supply chain map provides the firm with a

perspective one thats critical to understanding

where the business fits in the supply chain, and

where its suppliers and customers, respectively, fit.

Integration of business processes cannot take place

without this perspective.



Important structural aspects:

The members of the supply chain

Primary members

Supporting members

Structural dimensions of the supply chain

Horizontal structure (number of tiers: short / long)

Vertical structure (depth within each tier)

Horizonatl pozition (channel position)


MAP YOUR SUPPLY CHAIN

Position your organization as a focal company of your supply

chain. Who are your immediate suppliers and customers?

What types of relationships do you have with these outside

entities? Are they intimate/intense or casual/laid-back?

What is your relative influence in these relationships? Where

do you need more influence?

What are the physical flows that support these relationships?

(supply points, your locations, customer locations)

Are there non-member (competitor) links that concern you?




CUSTOMER SERVICE


In the 20th century

competitive advantage

was delivered by

products and brands

In the 21st century

competitive advantage is

delivered by customer

and information

DEMAND-DRIVEN SUPPLY CHAINS


1. Get the customer.

2. Keep the customer.

3. Grow the customer.

THE GOALS FOR

THE 21st CENTURY COMPANY


VALUE FOR CUSTOMER

VALUE

Perception of benefits

Total cost of ownership

rdo: M. Christopher


Physical

Product

(core)

Marketing Product

Augmented Product

(additional benefits)

Instructions

Credit

Warranty

Service points

availability

Brand

Model

Quality

Price

Package

Terms of

ordering

Delivery

Post-delivery

Service

Lo

gis

tics

Source: M. Ciesielski


MARKETING LOGISTICS MANAGEMENT

Product

Price Promotion

Transport

Purchasing

Inventory

Management

Warehousing

Customer Service

Place / Distibution

Customer Service

Logistics -

FulfillingDemand

Order Fulfillment and IT

Marketing -

GeneratingDemand




The ability of logistics management to satisfy users

in terms of time, dependability, communication , and

convenience.

The set of measurements; actual performance on

particular parameters, such as the ability to ship

complete orders for 98 percent of orders received

within 24-hour period.

Part of the overall corporate philosophy.

CUSTOMER SERVICE DEFINITIONS


CUSTOMER SERVICE

1. Time (order cycle lead time)

2. Dependability (accountability)

Cycle time

Safe delivery

Correct orders

3. Communication (information exchange)

4. Convenience (logistics service level must be flexible to all channels, segments of customers)


PRETRANSACTION

ELEMENTS:

A written statement of

customer service policy

Customers provided

with a written statement

of policy

Organization structure

System flexibility

Management services

(instructions, manuals)

TRANSACTION

ELEMENETS:

Stockout level

Order information

availability

Consistency of order cycle

Special handling of

shipments

Transshipments

Order convenience

Product substitutes

POSTTRANSACTION

ELEMENTS:

Installations, warranty,

repairs and service parts

Product tracking

Customer complaints,

claims, and returns

Product replacement

Customer Service

Elements of CUSTOMER SERVICE


Former service level

0 1 2 3Number of acceptable substitutes

100%

90%

80%

70%

60%

Product

availability increase

from 70% to 97%

Service levelwith substitutes

Customer Service Level

vs. The Number of Substitutes


Product availability (% available in base units)

Stockouts frequency

Fill rate

Orders shipped completly

Back orders

Order cycle time (in time units and variation from

standard)

Speed

Consistency

Flexibility (respose time to special requests)

Measurements of Customer Service


On-time delivery

In-full (orders received completly)

Damage free

Error free (orders filled accurately, orders billed accurately)

.97 x .97 x .97 x .97 = 88.5%

The Perfect Order / OTIF




Customer Reactions to Stockouts

Cost / Revenue Trade-offs

ABC Analysis / Paretos Law

The Customer Service Audit

How to establish a desirable

Customer Service Level?


CUSTOMER REACTION TO STOCKOUTS

DATA:Profit margin - 15%

IRR - 10% annually

Average order - 2000 z

Average annual sale - 4000 z annually/customer

Number of customers - 1000

Order cycle - 1 month

Out of 100 non-served customers:

90 will order next month (they will wait)

9 resigned (this time they buy from competitors)

1 definitely resigned

2000 z * 10%(1/12) = 16,67 z * 0.90 = 15,00 z

2000 z * 15% = 300,00 z * 0,09 = 27,00 z

(4000 z * 15%)/10% =6000,00 z * 0,01 = 60,00 z

15,00 z + 27,00 z + 60,00 z = 102,00 z / 1 customer


Maximum

Sales increase thanks tocustomer service improvement

Customer Service Level

Cost or Sales Increase

Cost of service improvement

(e.g. w $ / z)

83 % 86 % 89 % 92 % 95 %

Cost vs. Revenue Trade-offs

Logistyczna obsuga klienta Dr Marzenna Cichosz

Cost vs. Revenue Trade-offs (2)


Share of Share of

product line profit

Product A 10% 70%

Product B 20% 15%

Product C 30% 10%

Product D 40% 5%

ABC Customer Analysis


ProductCustomer

Classification

I

II

III

IV

V

A B C D

1 2 6 10

3 4 7 12

5 8 13 16

9 14 15 19

11 17 18 20

Priority

RangeIn-stock

AvailabilityOrder cycle

time (hr)

Order

Completness

1 - 5

6 - 10

11 - 15

16 - 20

100,0%

97,5%

95,0%

90,0%

48

72

96

120

99%

97%

95%

93%

ABC Analysis / Paretos Law (3)




DIRECT CLIENT PROFITABILITY (DCP)BASED ON ACTIVITY BASED COSTING

Gross Sales 100.000

- discounts 10.000

Net Sales 90.000

- Cost of goods sold 20.000

Contribution margin 70.000

Marketing and sales costs:

- Telephones 3.000

- Promotions 1.000

- Merchandising 3.000

7.000

Distribution costs:

- Order Processing 500

- Warehousing 600

- Inventory 700

- Transport 2.000

- Packaging 300

- Damages 500

4.600

Customer gross profitability 58.400

Other costs of the client:

- Trade credit 1.500

- Returns 500

2.000

Net customer profitability (DCP) 56.400

ProtectCost

engineer

Build Danger

zone

Cost of service

Net sales value of customer

account

Low High

Low

High

DCP MatrixDCP MatrixDCP MatrixDCP Matrix


1 2 3 4

5

Satisfaction

Loyalty

100%

80

60

40

20

Defection zone

Afection zoneAPOSTOL

Terrorist

Source: HBS

Customer Satisfaction


95

8481

85 90

75

45 45

85

35

PR agency

Inssurance

Car Services

Bank

Creditcard

companies

IndustrialDistribution.

IndustrialLaundry

Life Inssurance

Office Real Estate

Software Designer

Publishers

%

40

Source: Bain & Co.

Impact of increasing customer loyalty by

5%


AnnualCustomerProfit

Year

Base profit

Price premium

Cost of aquisition

Increased purchases

Reduced operating

costs

Refferals / Apostol

0 1 2 3 4 5 6 7

Why loyal customers are more

profitable?




INVENTORY

MANAGEMENT


INVENTORY / STOCK

Materials in a supply chain or in a segment of a

supply chain, expressed in quantities,

locations and/or values, not used at present,

but kept for the future use (consumption / sale)

ELA Terminology


INVENTORY CLASSIFICATIONBY TYPE AND POSITION IN THE SC

Deliveries Production Distribution

Raw materials

and components

Raw materials

and components

Finished

products

Consumer

goods

Work-in-progress Work-in-progress

Auxillary materials, spare parts


Cycle stock refers to inventory that is needed to satisfy

normal demand during the course of an order cycle.

Safety or buffer stock is held in excess to cycle inventory

because of uncertainty of demand and lead times.

In-transit stock is inventory that is en route between various

fixed facilities in a logistics system such as a plant,

warehouse, or store.

Speculative stock refers to inventory that is held for several

reasons, including seasonal demand, projected price

increases, and potential shortages of a product.

Seasonal stock is the form of speculative stock that involves

the accumulation of inventory before season begins in order

to maintain a stable workforce and production runs.

INVENTORY CLASSIFICATIONBY THE REASONS FOR KEEPING


INVENTORY CLASSIFICATIONBY THE REASONS FOR KEEPING (2)

AverageInventory

(300)

500

10 20 30 40 50 600

Inventory

100SafetyStock(100)

Days

Max

Min

CycleStock(200)

Order Arrival

Replenishment Time / Campaign Interval

Order Placement

Order Quantity

(400)


INVENTORY CLASSIFICATIONBY THE REASONS FOR KEEPING (4)

500

300

10 20 30 40 50 600

Inventory

100SafetyStock(100)

Days

Max

Min

Order Arrival

Replenishment Time / Campaign Interval

Order Placement

Order quantity

(00)




Fast moving (rotating) stock

Slow moving (rotating) stock

Not moving (rotating) stock

Obsolete stock (out-of-date) or dead stock

Emergency stock

INVENTORY CLASSIFICATIONBY ROTATION


IS IT GOOD OR BAD TO HAVE INVENTORY?

GOOD

Guarantees a continuous

access to all kinds of goods

when supplies are

discontinues

Guarantees access to goods in

periods when they are not

available

Ensures required service level

compensating random

variations of demand

Ensures required service level

compensating delays of

deliveries

BAD

Takes space (warehouses)

Costs money (capital, space,

losses); carrying stock may

cost annually up to 30% of

inventory value


Carrying cost is the expense associated with maintaining inventory.

Carrying cost = annual inv. carrying cost % x avarage inventory

value

Ordering cost is associated with ordering or acquiring the inventory.

It embraces direct costs such as clerical personnel, data transmission,

preparing invoices, receiving payment as well as the indirect cost such

as managerial cost.

Ordering cost = # of orders per year x ordering cost per order

Stockout cost is an estimated cost or penalty for stockout. It involves

an understanding of customers reaction to a company being out of

stock when customers want to buy an item.

INVENTORY COSTS


Capital cost (opportunity cost) is the interest on the money used to

buy the inventory, or the interest lost from other potential investments

that were forgone to buy inventory.

Capital cost = annual min. rate of return % x total investment in inventory

Storage space costs are calculated by multiplying the cost per cubic

meter (i.e. the space occupied) with the amount of time the inventory is

stored. Storage costs can also be measured in terms of weight.

Inventory service costs include costs of insurance and taxes.

Insurance cost is an expense based upon estimated risk or loss over

time. Loss risk depends on the product and the facility storing the

product.

Inventory risk costs are those costs associated with the

obsolescence, shrinkage, deterioration, and damage of inventory.

INVENTORY CARRYING COSTS


INVENTORY CARRYING COSTS (2)

Element Average percent Percent range

Cost of money 15% 5 40%

Taxies 1% 0.5 2%

Insurance 0.05% 0 2%

Obsolescence 1.2% 0.5 2%

Storage 2% 0 4%

TOTAL 19.25% 9 50%

D.J. Bowersox, D.J. Closs, M.B. Cooper


KEY INVENTORY DECISIONS

What to order (ABC/XYZ Analysis)

When to order (ROP re-order point)

How much to order (EOQ Economic Order

Quantity)

Inventory control

MRP Materials Requirements Palnning

DRP Distribution Resources Planning




WHAT TO ORDER

ABC Analysis of Inventory

determines the importance

of items and the level of

controls placed on the item

A very important, high

value items

B less important items

(intergroup items)

C marginally important

items.

XYZ Analysis of Inventory

based on usage variation,

the volume of customer

demand or turnover

X fast moving

Y slow moving

Z non-moving


ABC / XYZ ANALYSIS

A B C

X High valueFast movingMedium value

Fast moving

Low value

Fast moving

Y High valueSlow movingMadium value

Slow moving

Low value

Slow moving

Z High valueNon-movingMedium value

Non-moving

Low value

Non-moving


WHEN TO ORDER

RE-ORDER POINT (ROP)

AverageInventory

(300)

Order Quantity

(400)

500

300

10 20 30 40 50 600

Inventory

100SafetyStock(100)

Days

Max

Min

ReorderPoint(200)

Re-order point level of inventory at which a replenishment order is placed


ROP = D x RC under certainty

ROP = (D x RC) + SS under uncertainty

Where: D average daily demand in units

RC average length of replenishment cycle

(lead time)

SS safety stock

WHEN TO ORDER

RE-ORDER POINT (ROP) CALCULATIONS (2)


HOW MUCH TO ORDER

ECONOMIC ORDER QUANTITY (EOQ)

Size of order

Orderingcost

Inventory carrying cost

Total cost

Lowesttotal cost

(EOQ)

Annual cost

EOQ Deals with calculating the proper order size with respect to two costs Costs of carrying the inventory Costs of ordering the inventory

EOQ Determines the point at which the sum of carrying costs and ordering costs is minimized, or the point at which carrying costs equal ordering costs


S the ordering cost (in dollars per order),

D annual demand (in number of units),

i annual inventory carrying cost (as a percentage of product cost or value),

C average cost or value of one unit of inventory

HOW MUCH TO ORDER





Excersise

If the monthly demand

volume is 200 units, unit

value at cost is 5 USD,

annual inventory carrying

cost is 20% and ordering

cost is 19 USD per order,

how much should company

order? And how often

should it be ordered?

The answer

# of deliveries = D / EOQ

How often = 365 / # of deliveries

HOW MUCH TO ORDER



ASSUMPTIONS:

All demand is satisfied

Rate of demand is continuous, constant, and known

Replenishment performance cycle is constant and known

There is a constant price of product that is independent of order

quantity or time

There is an infinite planning horizon

There is no interaction between multiple items of inventory

No inventory in-transit

No limit is placed on capital availability.

HOW MUCH TO ORDER



INVENTORY CONTROL

Inventory turnover measures the speed inventory can be sold in

a year.

! "# ##" # ! "$!

Days of supply means the number of days supply a company

holds as on-hand inventory that can be used to fulfill orders.

%&'

Average aggregate inventory includes raw materials, work-in-

process inventory, and finished goods inventory a company holds

for the year. It is generally expressed in dollar / euro / zloty value. To

count it company has to value it at cost.


MRP SYSTEM

Master

production plan

MRP

program

Customer

orders

Bill of

materials file

Inventory

status file

Outputs and

reports

Demand

forecast

MRP I materials requirements planning

MRP II manufacturing resouces planning


BILL OF MATERIAL FOR PRODUCT T

TTT

U(2) V(3)

W(1) W(2)X(2) Y(2)


SIMPLE MASTER PRODUCTION PLAN

X - lead time:

1week

Y lead time:

1week

400

400

600

600

Tydzie

100

100Order placement

T lead time:

1 week

U lead time:

2 weeks

V lead time:

2 weeks

W lead time:

3 weeks

Order fulfillment

200

200

300

300

800

800

1 2 3 4 5 6 7

Order fulfillment

Order placement

Order placement

Order placement

Order placement

Order placement

Order fulfillment

Order fulfillment

Order fulfillment

Order fulfillment




MATERIALS REQUIREMENTS PLANNING

Boversox, Closs: Logistical Management, 2013.

Module 1

Part A

Module 2

Part B Part C Part D Part E

Raw materials

Assembly operation

MRP is driven by a production schedule. Generally it operates in a dependent

demand situations.


DISTRIBUTION REQUIREMENTS PLANNING

Local

warehouse A

Regional

warehouse

Plant

warehouse

RETAILERS / CUSTOMERS

Direct

warehouse

Local

warehouse B

Boversox, Closs: Logistical Management, 2013.

DRP is driven by supply chain demand (independent demand where uncertain

customer requirements drive inventory requirements).


CONTEMPORARY APPROACHES TO

MANAGING INVENTORY

Lean Manufacturing

Focuses on the elimination of waste and

the increase of speed and flow

Identifies seven major sources of waste

including inventory

Just-in-time (JIT) is one of the best known

lean inventory practices

Copyright 2015 Pearson Education, Inc.



MANAGING INVENTORY

Lean Manufacturing

Just-in-time (JIT)

Seeks to minimize inventory by reducing (or

eliminating) safety stock while having the

required amount of materials arrive at the

production location at the exact time they are

needed


8-28



MANAGING INVENTORY

Service Parts Logistics

Involves designing a network of facilities to

stock service parts:

Deciding upon inventory ordering policies

Stocking the required parts

Transporting parts from stocking facilities to

customers

Source: Mehmet Ferhat Candas and Erhat Kutanoglu, Benefits of Considering Inventory

in Service Parts Logistics Network


8-29Marzenna Cichosz , Ph.D. Logistics Management


MANAGING INVENTORY

Vendor-Managed Inventory (VMI)

Size and timing of replenishment orders

are the responsibility of the manufacturer

Allows manufacturers to have access to a

distributors or retailers sales and

inventory data

Benefits include reduced inventories, fewer

stockouts and improved customer retention


8-30




WAREHOUSING

MANAGEMENT


WAREHOUSING FUNCTIONS

Storing goods

Moving goods

Receiving

Put-away

Order picking / selection

Shipping

Transferring information


THE ROLE OFWAREHOUSINGECONOMIC BENEFITS

Consolidation

Deconsolidation / Break-bulk


THE ROLE OFWAREHOUSING (2)

ECONOMIC BENEFITS SORTING

Max 24 hours


THE ROLE OFWAREHOUSING

CROSS-DOCKING


THE ROLE OFWAREHOUSING (3)

SERVICE BENEFITS

Source: D.J. Bowersox, D.J. Closs, M.B. Cooper, J.C. Bowersox, Supply Chain Logistics Management, The McGraw-Hill, Boston 2013.

https://www.youtube.com/watch?v=NRi6xXMcFII




THE CHANGING ROLE OF AWAREHOUSE


THE CHANGING ROLE OF THE WAREHOUSE (2)

Time

Traditional Stocking

Warehouse

Distribution Centers

(DCs)

Fulfillment Centers

(FCs)

Receiving

Put-away

Storage operations

Picking

Packing

Shipping

Scheduled cross-docking

Special handling

Kitting operations

Returns handling

Simple postponed

manufacturing steps

Other value-added services

Dynamic cross-docking

Mixed-mode fulfillment

Multi-channel including on-

line fulfillment

Distributed Order

Management (DOM)

Green operations (e.g.

end-of-product line

disposition, recycling, and

reclamation)


WAREHOUSING AND LOGISTICS FUNCTIONS

Customer

service level

Customer

service level

Lot quantity

costs

Lot quantity

costs

Transportation

costs

Transportation

costs

Warehousing

costs

Warehousing

costs

Order processing

and information

costs

Order processing

and information

costs

Inventory

carrying costs

Inventory

carrying costs


Ownership (private vs. public)

Number and size of warehouses in the logistics

system (centralized vs. decentralized)

Warehouse location

Product mix

Warehouse design and layout

Warehouse Management Systems (WMS)

Security

BASIC WAREHOUSING DECISIONS


PRIVATE VS. PUBLICWAREHOUSE

Total cost

Volume of products

Private warehouse

Public warehouse


MAIN PUBLICWAREHOUSING LOCATIONS

IN POLAND




TYPES OF PUBLICWAREHOUSES

Standard

Existing warehouses

New-built warehouses (Pre-Let)

Customized (BTS = Built-to-Suit)

Customer determines the requirements (e.g. location




FACILITY LOCATION FACTORS

Location of Customer or Supply Markets

Customer service expectations

Cost considerations (construction and operations)

Transport infrastructure availability

Number and qualifications of potential workforce

Local authority approach to investors

Transport services availability

Congestion

Region safety (free of flood, earthquakes, etc.)


BLUE BANANA


THE RULES OF AWAREHOUSE DESIGN

Use one store facility where possible

Move goods in a straight line or direct flow of goods

into and out of the warehouse

Use efficient materials handling equipment and

operations

Use an effective storage plan in the warehouse

Minimize aisle space within the constraints that

products and materials handling equipment impose

Use maximum buildings height (buildings cubic

capacity) by e.g. installing racks, using forklift trucks

https://www.youtube.com/watch?v=J_acTN2etSk


WAREHOUSE EFFECTIVE LAYOUT


RF Scanners (wireless handling equipment coordinated

by IT to provide operator with directions and control in

real time)

Voice picking

RFID tags

Automated guided vehicles

Pick-to-light

Pack-to-light

WAREHOUSE SEMIAUTOMATED AND

AUTOMATED SYSTEMS


WAREHOUSE MANAGEMENT SYSTEM WMS




TRANSPORTATION

MANAGEMENT


MANAGEMENT

- D. Lambert, J. Stock, 1999

COMPONENTS OF LOGISTICS

MANAGEMENT

Input

Natural

resources

(land, facilities,

and equipment

Human

resources

Financial

resources

Planning Implementation Control

Logistics management

Logistics activities

Output

Competitive

advantage

(marketing

orientation)

Efficient

movement

to customer

Proprietary

asset

Finished

goodsRaw

material

In-process

inventoryServices

Information

resources

Time and place

utility

Customer service

Demand forecasting

Inventory control

Material handling

Order processing

Parts and service support

Plant and warehouse selection

Procurement

Packaging

Return goods handling

Traffic and transportation

management

Warehousing and storage


TRANSPORTATION AND LOGISTICS FUNCTIONS

Customer

service level

Customer

service level

Lot quantity

costs

Lot quantity

costs

Transportation

costs

Transportation

costs

Warehousing

costs

Warehousing

costs

Order processing

and information

costs

Order processing

and information

costs

Inventory

carrying costs

Inventory

carrying costs


TRANSPORTATION MANAGEMENT

Make or buy decision

Fleet Management

Traffic Management

Selecting a carrier

Negotiating with carriers

Reducing the number of carriers

Consolidating shipments

Tracking, expediting, and drive hours administration, monitoring

service quality and auditing and claim administration

Documentation

Transportation Management Systems (TMS)

Transportation and Sustainability


Air

Motor carrier (truck)

Rail

Water

Pipeline

TRANSPORTION MODES


TRANSPORTION MODES

The attractiveness of a particular mode depends on the following attributes:

Cost

Speed

Reliability

Capability/Capacity

Dependability

Flexibility

Source: Drawn from David J. Bloomberg, Stephen LeMay, and Joe B. Hanna, Logistics (Upper Saddle River, NJ: Prentice Hall, 2002), Chapter 7.




AIRFREIGHT

Generally the fastest mode for shipment

Expensive

Best suited for high-value, lower-volume, urgent,

perishable or time-specific deliveries

Dimensional weight used for rates

Reliability is problematic due to delays caused by:

Weather (fog, snow, thunderstorms)

Congestion and resultant delays with air passenger

transportation (belly freight)


MOTOR CARRIERS / TRUCK

Primary advantage is flexibility

Cost is generally lower when compared to airfreight

LTL (Less-than-truckload) vs. TL (Truckload)

LTL (50 to 7,000 kg and less than 2.5 to 8.5 m)

Average LTL (600 kg and size of pallet)

LTL trucks carry shipments from many shippers

Process (shipments move through terminals)

TL (focus on shipments larger than 7000 kg)

TL are close to the amount that would physically fill a truck

trailer

Process (shipments tend to move directly from the shippers

location to the consignees location)


RAILROAD

Polish rail transport is dominated by PKP Cargo

Domination limits service and pricing options

Neither best or worst on any of the six attributes

Superior to air, motor, pipeline but inferior to water

when transporting different kinds of products

Less flexibility than motor, but more when compared to

air, water, and pipeline

Faster than pipeline and water, but slower than air and

truck

Less expensive than air and motor, but more expensive

than pipeline and water


WATER

(DEEPWATER AND INLAND)

Relatively inexpensive

Focus on lower value bulk commodities

handled by mechanical means

Many different kinds of products can be

carried

Carry greater volumes than rail or truck

Slow average speeds

Somewhat unreliable


INLAND WATER TRANSPORT IN EUROPE

Danube

Rhone

OderElbeRhine

Seine

Loire


THE MAIN SEA ROUTS




PIPELINE

Only mode without vehicles

No need for vehicle operators

Most reliable mode

Tend to be the slowest mode

Accommodates only liquid, liquefiable or gaseous

products

Capable of transporting large product volumes

High fixed costs, but relatively low cost per unit due to

large product volume


PIPELINE SYSTEM IN EUROPE


SPECIALIZED

TRANSPORTATION SERVICES

Intermodal transportation

Package services

(CEP Courier Express and Parcel)


INTERMODAL TRANSPORTATION

Refers to transportation when using a

container or other equipment that can be

transferred from the vehicle of one mode to the

vehicle of another mode without the contents

being reloaded or disturbed

Two or more modes are employed to utilize

advantages of each while minimizing their

disadvantages


Rail

Truck

Water Pipeline

Air

BirdybackPiggyback

Fishyback

INTERMODAL TRANSPORTATION


CONTAINER

Large reusable steel boxes used for

intermodal shipments1

Provide significant reduction in freight

handling costs

Are interchangeable among rail, truck, and

water carriers

1http//en.wikipedia.org/wiki/Shipping_containers.




CONTAINER


CONTAINER


The business model of the courier, express and

parcel sector

Small package (up to 31.5 kg or 70 lb. per package)

Door-to-door service

Personal supervision of courier

Fast transports with express services (e.g., fixed

delivery times)

Shipment of standardized packages

Hub & spoke transfer

COURIER EXPRESS PARCEL SERVICES


CEP MARKET CONTEMPORARY POSITIONS

Regional/

local

National

European

Global

Documents Packages Pallets LTL

Couriers

Posts

Logistics Service Providers

Air carriers

Integrators

Package

operators


TRANSPORTATION SERVICE MARKET

PARTICIPANTS

Consignee (buyer of transportation services)

Shipper (a seller of transportation services, sometimes

called consignor)

Carriers (performer of transportation services)

Agents (such as freight forwarders, shipper

associations, or brokers that facilitate carrier and

customer matching)

Government

Internet


3RD PARTY LOGISTICS (3PL)

3PL is outsourcing all or much of a companys logistics

operations to a specialized company. Every company

that offers some kind of logistics service for hire calls itself

a 3PL. Preferably, these services are integrated, or

bundled, together by the provider.

Services they provide are: transportation, warehousing,

cross-docking, inventory management, packaging, and

freight forwarding.

Third-party logistics providers are: freight forwarders,

courier companies, and other companies integrating and

offering subcontracted logistics and transportation services.

K. Vitasek, SCM. Terms and Glossary,Aug. 2013, www.cscmp.org, p. 195.




4RT PARTY LOGISTICS (4PL)

4PL organization is often a separate entity established

as a joint venture or long-term contract between a

primary client and one or more partners

4PL organization acts as a single interface between

the client and multiple logistics service providers

All aspects (ideally) of the clients supply chain are

managed by the 4PL organization

It is possible for a major third-party logistics provider to

form a 4PL organization within its existing structure

K. Vitasek, SCM. Terms and Glossary,Aug. 2013, www.cscmp.org, p. 86.


LOGISTICS SERVICE MARKET EVOLUTION

C. Cabdoi, Fourth Party Logistics Market: A European Perspective, Dec. 2003, www.frost.com

LOGISTICS

Documents

right costmarzenna cichosz

procurementmarzenna

right customer

right condition

right place

right quantity

right time

right product