Section D: Logistics APICS All rights reserved Version 1.4 Draft 2

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1 This section is designed to Define logistics and explain its relationship to supply chain strategy Describe the interrelationship of the various logistics functions Define warehousing and sketch a brief background of its development Identify the role of warehousing in logistics and supply chain management Explain the basic criteria for deciding upon the number and location of warehouses Describe tradeoffs in determining uses of warehouse space, labor efficiency, and equipment Compare benefits and drawbacks of different types of warehouse ownership Outline warehouse operating principles Explain warehouse management systems (WMS) and information technology Describe the applications and benefits of various warehouse functions, including crossdocking, break-bulk, and mixing Outline the impact of automation on warehousing Describe the essential modes of transportation and analyze their capabilities List the objectives of transportation management Explain the goals of major transportation decision makers Explain the impact of economic factors on transportation decisions Analyze the benefits and risks of outsourcing logistics functions to third- and fourth-party logistics providers (3PL and 4PL) Describe the components of reverse logistics and explain how to profit from managing the reverse supply chain effectively Describe the impact of globalization on logistics Explain the contributions of intermediaries to export-import transactions, including foreign freight forwarders, EMCs, ETCs, NVOCCs, customs house brokers, consolidators, and export packers Outline the benefits of free trade zones (FTZs) Describe the goals, benefits, and challenges of NAFTA Explain how money crosses borders and describe the major ways of financing exportimport transactions, including letters of credit and other means Explain risk management strategies for international supply chains. All rights reserved Version 1.4 Draft 2

2 Module 2: Building Competitive Operations, Planning, and Logistics Slide Logistics is both an ancient art, originally associated with warfare, and a rapidly evolving business discipline. At the most basic level, logistics may be the various related tasks required to get the right goods into the right hands at the right time. The APICS Dictionary, 12 th Ed., defines logistics as In an industrial context, the art and science of obtaining, producing, and distributing material and product in the proper place and in proper quantities. Slide The heart of logistics, and the largest contributor to its cost, is transportation: the movement of raw materials to a processing plant; parts to a manufacturer; and finished goods to wholesalers, retailers, and customers. But getting the goods from one point to another requires performing a number of other functions related to shipment. Goods need to be packaged, loaded, unloaded, warehoused, distributed, and paid for whenever they change hands. Slide Supply chain partners must efficiently and effectively carry out these tasks to remain competitive. In an increasingly global market, this may require mastery of languages, currencies, divergent regulations, and various business climates and customs. Slide Exhibit 2-38 combines several perspectives to illustrate, graphically and in text, the broad scope of logistics. Exhibit 2-38: Logistics in the Supply Chain Source: APICS Illustrated Dictionary All rights reserved Version 1.4 Draft 2

3 The role of logistics in supply chain management Slide Defining logistics precisely presents a challenge. Everyone agrees that logistics management is (or should be) a part of supply chain management. As Douglas Long writes, Supply chain management is logistics taken to a higher level of sophistication. The exact line of demarcation between the two management systems is understandably a bit vague. In their classic text, Supply Chain Logistics Management, authors Bowersox, Closs, and Cooper include several functions that are treated outside the logistics section of this course, such as forecasting and inventory management. Earlier in this module, we covered forecasting under the heading of demand planning and inventory management as part of manufacturing planning and control. Some authorities may place inventory management and forecasting within the scope of logistics, while others may not, but all agree that inventory and forecasting must be considered when designing and managing an effective, efficient system for moving goods quickly from place to place. Logistics functions The supply chain is about moving or, transforming raw materials and ideas into products or services and getting them to customers. Logistics is about moving materials or goods from one place to another. Logistics is, in that sense, the servant of design, production, and marketing. But it is a servant that can bring added value by quickly and effectively doing its job. In this section of the course, we ll focus on the following areas of logistics management to determine their contributions to an integrated approach to logistics within supply chain management. Transportation Many modes of transportation play a role in the movement of goods through supply chains. Here we focus on the strengths and limitations of each of the major modes of transportation, including air, rail, road, water, and pipeline. Selecting the most efficient combination of these modes can measurably improve the value created for customers by cutting delivery costs, improving the speed of delivery, and reducing damage to products. Warehousing Transportation inventory is inventory that is in transit between locations (APICS Dictionary, 12 th Ed.). When inventory isn t on the move between locations, it may have to spend some time in a warehouse. Warehousing is The activities related to receiving, storing, and shipping materials to and from production or distribution locations (APICS Dictionary, 12 th Ed.). In this discussion, we ll analyze the major influences All rights reserved Version 1.4 Draft 2

4 Module 2: Building Competitive Operations, Planning, and Logistics on the costs of warehousing, with a special emphasis on how to determine the most cost-effective number, location, and capacity of warehouses. We ll also cover materials handling inside the warehouses and touch briefly on the role of information technology in reducing the costs of warehousing. (Module 4 will provide more comprehensive coverage of these and other aspects of technology.) Third- and fourth-party logistics Like other aspects of supply chain management, the various logistics functions can be outsourced to firms that specialize in some or all of these services. Third-party logistics providers (3PLs) actually perform or manage one or more logistics services. Fourth-party providers (4PLs) take over the entire logistics function for an organization and coordinate the combination of divisions or subcontractors necessary to perform the specific tasks involved. This growing trend incorporates the supply chain management philosophy of concentrating on core competencies and partnering with other firms to perform in areas outside your competence. Reverse logistics (or the reverse supply chain) Another growing area of supply chain management is reverse logistics, or how best to handle the return, reuse, recycling, or disposal of products that make the reverse journey from the customer to the supplier. This business can be handled at a loss, or it can actually become a profit center. Global logistics and export-import transactions Many issues of transportation, storage, and payment have become increasingly complex as supply chains extend across more national boundaries. Here we ll look at some of the challenges a supply chain manager must be able to meet successfully in the export-import trade. Logistics goals and strategies Slide At the highest level, logistics shares the goal of supply chain management: to meet customer requirements. Bowersox and Closs describe six specific logistics goals that are also accepted by other authorities: Rapid response to changes such as new developments in the market or in a particular customer s needs Minimum variance in matters such as delivery times Minimum inventory to keep expenses down Consolidation of movement by aggregating smaller shipments into larger ones All rights reserved Version 1.4 Draft 2

5 High quality in logistics service as well as in products Life cycle support, including the ability to handle repairs, reuse, recycling, or disposal as well as product delivery An effective logistics strategy depends upon the following tactics: Coordinating functions (transportation management, warehousing, packaging, etc.) to create maximum value for the customer Integrating the supply chain Substituting information for inventory Reducing supply chain partners to an effective minimum number Pooling risks We ll analyze each of these tactics. Coordinating functions Logistics can be viewed as a system made up of interlocking, interdependent parts. From this perspective, improving any part of the system must be done with full awareness of the effects on other parts of the system. Before the advent of modern logistics management, however, the various operations contributing to the movement of goods were usually assigned to separate departments or divisions, such as the traffic department. Each area had its own separate management and pursued its own strategies and tactics. Decisions made in any one functional area, however, are very likely to affect performance in other areas, and an improvement in one area may very well have negative consequences in another unless decisions are coordinated among all logistics areas. Adopting more efficient movement of goods, for example, may require rethinking the number and placement of warehouses. Different packaging will almost certainly affect shipping and storage. You may improve customer service to a level near perfection, but incur so many additional expenses in the process that the company as a whole goes broke. You need a cross-functional approach in logistics, just as you do in supply chain management as a whole. Teams that cross-function are also very likely to cross company boundaries in a world of international supply chains with different firms focused on different functions. The overall goal of logistics management is not better shipping or more efficient location of warehouses, but more value in the supply network as measured by customer satisfaction, return to shareholders, etc. There is no point, for instance, in raising the cost of shipping thus, the price to the customer to make deliveries faster than the customer demands. Paying more to have a computer today rather than tomorrow may not be a tradeoff customers want to make. All rights reserved Version 1.4 Draft 2

6 Module 2: Building Competitive Operations, Planning, and Logistics Integrating the supply chain Getting a still-warm pizza delivered in less than 20 minutes, however, might be worth a premium price (and a tip). Fast delivery, in other words, is not an end in itself, and the same is true of any aspect of logistics or supply chain management. Integrating the supply chain requires taking a series of steps when constructing the logistics network. In a dynamic system, steps may be taken out of order and retaken continuously in pursuit of quality improvements; the following list puts the steps in logical order. 1. Locate in the right countries. Identify all geographic locations in the forward and reverse supply chains. Analyze the forward and reverse chains to see if selecting different geographic locations could make the logistics function more efficient and effective. (Not all countries are equal in terms of relevant concerns such as infrastructure, labor, regulations, and taxes.) 2. Develop an effective export-import strategy. Determine the volume of freight and number of SKUs (stockkeeping units) that are imports and exports. A stockkeeping unit is (1) An inventory item. (2) In a distribution system, an item at a particular geographic location. (APICS Dictionary, 12 th Ed.). Decide where to place inventory for strategic advantage. This may involve deciding which borders to cross and which to avoid when importing and exporting as well as determining where goods should be stored in relation to customers. Both geographic location and distance from the customer can affect delivery lead times. 3. Select warehouse locations. Determine the optimal number of warehouses. Calculate the optimal distance from markets. Establish the most effective placement of warehouses around the world. 4. Select transportation modes and carriers. Determine the mix of transportation modes that will most efficiently connect suppliers, producers, warehouses, distributors, and customers. Select specific carriers. 5. Select the right number of partners. Select the minimum number of firms freight forwarders and 3PLs or a 4PL to manage forward and reverse logistics. All rights reserved Version 1.4 Draft 2

7 6. Develop state-of-the-art information systems. Reduce inventory costs by more accurately and rapidly tracking demand information and the location of goods. Substituting information for inventory Physical inventory can be replaced by better information in the following ways: Use postponement centers. Avoid filling warehouses with the wrong mix of finished goods by setting up postponement centers to delay product assembly until an actual order has been received. Track inventory precisely. Track the exact location of inventory by using bar codes and RFID (radio frequency identification) with GPS (global positioning systems). Keep inventory in transit. It s possible to reduce systemwide inventory costs by keeping inventory in transit. (A trailer, railcar, or barge can be considered a kind of mobile warehouse. More about that later in the section on transportation.) Rolling inventory should be closely tracked by GPS to facilitate rapid adjustments if a shipment is delayed or lost or if a customer changes an order at the last minute. Don t wait in line at customs. Reduce the time spent in customs by clearing freight while still on the water or in the air. Mix shipments to match customer needs. Match deliveries more precisely to customer needs by mixing different SKUs on the same pallet and by mixing pallets from different suppliers. Reducing supply chain partners to an effective number Though you have to watch out for tradeoffs in effectiveness when reducing the number of logistics partners, you can generally increase efficiency by doing so. If possible, look for an entire echelon you can do without such as all the wholesale warehouses or factory warehouses (see Exhibit 2-39 on the next page). The more partners there are in the chain, the more difficult and expensive the All rights reserved Version 1.4 Draft 2

8 Module 2: Building Competitive Operations, Planning, and Logistics chain is to manage. Handoffs among partners cost money and eat up time. Having many partners means carrying more inventory. Reducing the number of partners can reduce operating costs, cycle time, and inventory holding costs. There is, however, some lower limit below which you create more problems than you solve. If you eliminated all partners other than your own firm, you d be back to the vertical integration strategy pursued in a simpler marketplace during the early 20 th century by U.S. automaker Henry Ford when his company controlled everything from rubber tree plantations through dealerships. Exhibit 2-39: Costs of Multiple Echelons Source: APICS Illustrated Dictionary Pooling risks Pooling risks is a method of reducing stockouts by consolidating stock in centralized warehouses. The risk of stockouts increases as supply chains reduce the safety stock held at each node and move toward Just-in-Time ordering procedures. With every entity attempting to keep inventory costs down in this manner, the risk of stockouts rises if buying exceeds expectations. Statistically speaking, when inventory is placed in a central warehouse instead of in several smaller warehouses, the total inventory necessary to maintain a level of service drops without increasing the risk of stockouts. An unexpectedly large order from any one customer will still be small in relation to the total supply available. Risk pooling also works with parts inventories. By using a central warehouse to hold parts common to many products, a supply network can reduce storage costs and the risks of stockouts that would be experienced in smaller, decentralized warehouses. All rights reserved Version 1.4 Draft 2

9 There are tradeoffs to consider. Because the central warehouse may be further away from some production facilities than the smaller warehouses would be, lead times and transportation costs are likely to go up. Again, logistics has to be managed from the point of view of improving the value of the overall system, not just one part of the system. All rights reserved Version 1.4 Draft 2

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