MS3121 Fundamentals of Business Logistics

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MS3121 Fundamentals of Business Logistics
Logistics/Supply Chain managers are owners of
the product-flow process from raw material
sources to final consumers, not activity
administrators.
Topic 2 Logistics Planning
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Learning Objectives

• Discuss product characteristics
• Understand the relationship between products
  nature and logistics planning
• Define and model logistics customer service

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Product in the Planning Triangle
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Nature of the Product
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Product Life-Cycle Curve
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ABC Classification for 14 Products
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3-5
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Cumulative 80-20 Curve
3-6
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Nature of the Product (Contd)
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Effect of Weight-Bulk Ratio on Logistics Costs
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Effect of Value-Weight Ratio on Logistics Costs
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Effect of Transport Service and Inventory Level
on Logistics Costs
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Effect of Product Risk on Logistics Costs
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Reasons for Product Packaging

• Facilitate storage and handling
• Promote better utilization of transport
  equipment
• Provide product protection
• Promote the sale of the product
• Change the product density
• Facilitate product use
• Provide reuse value for the customer

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Product Pricing

• Geographic pricing methods
• - F.o.b. pricing
• - Zone pricing
• - Single, or uniform, pricing
• - Freight equalization
• - Basing point pricing
• Incentive pricing
• Quantity discounts
• The Deal

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Zone 2 136.31
Zone 3 137.38
Boston
Zone 8 147.38
Zone 7 144.81
Zone 5 140.00
Zone 6 142.43
Zone 4 138.33
UPS Pricing Zones
3-18
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Per-Case Logistics Costs as a Justification for
Price Discounts
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Example Glass Jars

• Quantity Discounts

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Customer Service in Planning Triangle
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Customer Service Defined


Customer service is generally presumed to be a
means by which
companies attempt to differentiate their product,
keep customers
loyal, increase sales, and improve profits.


Its elements are

Price
-

Product quality
-

Service
-


It is an integral part of the marketing mix of

Price
-
Customer service here

Product
-

Promotion
-
-

Physical Distribution


Relative importance of service elements

Physical distribution variables dominate price,
product, and
-
promotional considerations as customer service
considerations

Product availability
and
order cycle time
are dominant physical
-
distribution variables
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Customer Service Elements
4-4
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Common Customer Service Complaints
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Most Important Customer Service Elements

• On-time delivery
• Order fill rate
• Product condition
• Accurate documentation

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Order Cycle Time
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Components of a Customer Order Cycle
WAREHOUSE Order processing and assembly
Customer order transmittal
Transmittal of backorder items
CUSTOMER Retail outlet
Order delivery
FACTORY Order processing, assembly from stock,
or production if no stock
Express order delivery
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4-10
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Importance of Logistics Customer Service
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Service Observations

• The dominant customer service elements are
  logistical in nature
• Late delivery is the most common service
  complaint and speed of delivery is the most
  important service element
• The penalty for service failure is primarily
  reduced patronage, i.e., lost sales
• The logistics customer service effect on sales
  is difficult to determine

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Modeling a Sales-Service Relationship
Remember Revenue in ROLA
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Range of transition
Range of transition
Sales-Service Relationship
Sales
Threshold
Diminishing returns
Decline
0
0
Increasing logistics customer service level of a
supplier to the best of its competition
4-15
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Sales-Service Relationship by the Two-Points
Method
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Determining Optimum Service Levels

• Cost vs. service
• Theory
• Find the function of revenue f(SL)
• Find the function of service cost g(SL)
• Calculate the difference p(SL) f(SL) g(SL)
• Take the first-order differentiation of p(SL)
• Obtain the optimal service level SL

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Generalized Cost-Revenue Tradeoffs
Revenue
Profit maximization
Costs or sales
Logistics costs
0
0
Improved logistics customer service
4-17
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Optimizing on Service Performance Variability

• Setting service variability according to Taguchi
• A loss function of the form
• L loss in
• k a constant to be determined
• y value of the service variable
• m the target value of the service variable

Service penalty only if outside this
range?Traditional
Cost penalty, L
Missing target causes increasing penalty ? Taguchi
y
Target Service variable, m
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Optimizing on Service Performance Variability
(Contd)

• Setting the allowable deviation from the target
  service level m is to optimize the sum of
  penalty cost for not meeting the service target
  and the cost of producing the service.
• TC service penalty cost service delivery
  cost
• If the service delivery cost is of the general
  form DC A ? B(y-m), then find the optimum
  allowed deviation from the service target.

If m is set to 0, y is the optimal deviation
allowed from target
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Service Variability Example
Example Pizzas are to be delivered in 30 minutes
(target.) Pizzas delivered more than 10 minutes
late incur a penalty of 3 off the pizza bill.
Delivery costs are estimated at 2, but decline
at the rate of 0.15 for each minute deviation
from target. How much variation should be
allowed in the delivery service?
Convert fixed penalty to Taguchi-style loss curve
3
Cost penalty,
40
30
Delivery service, min
No more than 2.5 minutes should be allowed from
the 30-minute delivery target to minimize cost.
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Setting Service Levels

• Service treated as a constraint on design
• Planning for service contingencies

Measuring Service Performance

• Percent of sales on backorder
• No. of stockouts
• Percent of on-time deliveries
• No. of inaccurate orders
• Order cycle time
• Fill rate-- of demand met, of orders filled
  complete, etc.

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Service Contingencies
System Breakdown Actions

• Insure the risk
• Plan for alternate supply sources
• Arrange alternate transportation
• Shift demand
• Build quick response to demand shifts
• Set inventories for disruptions

• Product Recall Actions
• Establish a task force committee
• Trace the product
• Design a reverse logistics channel

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