3-1 the logistics/supply chain product “logistics/supply chain managers are ‘owners’ of the...

3-1

The Logistics/Supply

Chain Product“Logistics/Supply Chain managers are ‘owners’ of the product-flow process from raw material sources to final consumers, not activity administrators.”

CR (2004) Prentice Hall, Inc.

Chapter 3

3-2

Product in the Planning Triangle


PL

AN

NIN

G

OR

GA

NIZ

ING

CO

NT

RO

LL

ING

Transport Strategy• Transport fundamentals• Transport decisions

Customer service goals

• The product• Logistics service• Ord. proc. & info. sys.

Inventory Strategy• Forecasting• Inventory decisions• Purchasing and supply

scheduling decisions• Storage fundamentals• Storage decisions

Location Strategy• Location decisions• The network planning process

PL

AN

NIN

G

OR

GA

NIZ

ING

CO

NT

RO

LL

ING

Transport Strategy• Transport fundamentals• Transport decisions

Customer service goals

•The product• Logistics service• Ord. proc. & info. sys.

Inventory Strategy• Forecasting• Inventory decisions• Purchasing and supply

scheduling decisions• Storage fundamentals• Storage decisions

Location Strategy• Location decisions• The network planning process

3-3

Product classification - Convenience goods - Shopping goods - Specialty goods - Industrial goods

The Product life cycle and Pareto's law - An empirical relationship for the 80-20 curve is

A+X

+A)X(Y=

1

where

Y = cumulative fraction of sales X = cumulative fraction of items A = constant to be determined

The constant is found by

Y-X

-Y)X(A=

1

Nature of the Product


3-4

Intro-duction Growth Maturity Decline

Sal

es v

olum

e

Time

Product Life-Cycle Curve


ABC Classification for 14 Products


Product Number

Product Rank by Salesa

Monthly Sales (000s)

Cumulative Percent of

Total Salesb

Cumulative Percent of

Total Itemsc

An ABC Classifi- cation

D-204 1 $5,056 36.2% 7.1% D-212 2 3,424 60.7 14.3 A D-185-0 3 1,052 68.3 21.4 D-191 4 893 74.6 28.6 B D-192 5 843 80.7 35.7 D-193 6 727 85.7 42.9 D-179-0 7 451 89.1 50.0 D-195 8 412 91.9 57.1 D-196 9 214 93.6 64.3 D-186-0 10 205 95.1 71.4 C D-198-0 11 188 96.4 78.6 D-199 12 172 97.6 85.7 D-200 13 170 98.7 92.9 D-205 14 159 100.0 100.0 $13,966

3-5

0

10

20

30

40

50

60

70

80

90

100

0 20 40 60 80 100Total items (%)

To

tal

sale

s (%

)

A items B items C items

Cumulative 80-20 Curve

CR (2004) Prentice Hall, Inc. 3-6

3-7

Example Suppose that in an inventory of 10 items, 15% of the itemsaccount for 80% of the sales volume. The total sales of all 10 items is$90,000 per year. How much inventory can be expected if turnover

First, find A.

0.0462=.15-.80.80)-.15(1

=A

Then, using A = 0.0462 and the first item (1/10), we project the salesvolume to be:

sales the of 71.6% or ,7156.0.10+.0462

.0462).10+(1=Y

The inventory for this item is expected to be 0.716(90,000)/8 = $8,055.

Continue for the remaining items and generate the following table.

Nature of the Product (Cont’d)

for A items = 8, B items = 5, and C items = 2?

Turnover

Total sales


Example (Cont’d)

Item(X)no.

Cumulativeitem

fraction

Projectedcumulative

salesfraction

Projectedcumulativesales (Y)

Projecteditem sales

Turnoverratio

Averageinventory

1 .10 .716 $64,440 $64,440 8:1 $8,0552 .20 .850 76,500 12,060 8:1 1,5083 .30 .907 81,630 6,630 5:1 1,3264 .40 .938 84,420 2,790 5:1 5585 .50 .958 86,220 1,800 5:1 360

6 .60 .971 87,390 1,170 2:1 5857 .70 .981 88,290 900 2:1 4508 .80 .989 89,010 720 2:1 3609 .90 .995 89,550 540 2:1 270

10 1.00 1.000 90,000 450 2:1 225 $90,000 $13,697

5

A

B

C

CR (2004) Prentice Hall, Inc. 3-8

3-9

Nature of the Product (Cont’d)


Product characteristics - Weight-bulk ratio - Value-weight ratio - Substitutability - Risk Product packaging Product pricing - F.o.b. origin - F.o.b. destination - Zone pricing - Single and uniform pricing - Quantity discounts - Deals

3-10

Effect of Weight-Bulk Ratio on Logistics Costs


Storage costs

Transportation costs

Total costs (transport + storage)

Weight-bulk ratio0

0

Logi

stic

s co

sts

as a

pe

rcen

t of

sal

es p

rice

3-11

Effect of Value-Weight Ratio on Logistics Costs



Storage costsTransportation costsLo

gist

ics

cost

s as

a p

erce

nt

of s

ales

pric

e

Value-weight ratio00

3-12

Effect of Transport Service and Inventory Level on Logistics Costs


Total costs (transport + lost sales + storage costs)

Transport costsLost sales

Storage costsLogi

stic

s co

sts

as a

per

cent

of

sale

s pr

ice

Improved transportation service00

(a)

Average inventory level00

Logi

stic

s co

sts

as a

per

cent

of

sale

s pr

ice

Total costs (transport + lost sales + storage costs)

Lost sales

Storage costsTransport costs

(b)

3-13

Effect of Product Risk on Logistics Costs


Increasing degree of risk in the product00

Logi

stic

s co

sts

as a

pe

rcen

t of

sal

es p

rice


Transport costs

Storage costs

3-14

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

3-15

Product Pricing


•Geographic pricing methods- F.o.b. pricing- Zone pricing- Single, or uniform, pricing- Freight equalization- Basing point pricing

•Incentive pricing- Quantity discounts

3-16

1. Terms of Sale: F.O.B. Origin, Freight Collect Buyer -Pays Freight Charges Buyer -Bears Freight Charges

Buyer -Owns Goods in Transit Buyer -Files Claims (If Any)

2. Terms of Sale: F.O.B. Origin, Freight Prepaid Seller -Pays Freight Charges Seller -Bears Freight Charges


3. Terms of Sale: F.O.B. Origin, Freight Prepaid and Charged Back Seller -Pays Freight Charges Buyer -Bears Freight Charges


then Collected from Buyer by Adding Amount to Invoice

4. Terms of Sale: F.O.B. Destination, Freight Collect Buyer -Pays Freight Charges Buyer -Bears Freight Charges

Seller -Owns Goods in Transit Seller -Files Claims (If Any)

5. Terms of Sale: F.O.B. Origin, Freight Prepaid (Delivered) Seller -Pays Freight Charges Seller- Bears Freight Charges


6. Terms of Sale: F.O.B. Destination, Freight Collect and Allowed Buyer -Pays Freight Charges Buyer -Bears Freight Charges


then Charged to Seller by Deducting Amount from Invoice

Freight ChargesPaid by Buyer

Freight ChargesPaid by Seller

Freight ChargesPaid by Buyer

Freight ChargesPaid by Seller

Freight ChargesPaid by Buyer...

TitlePasses to Buyer




TitlePasses toBuyer


SELLER

SELLER

SELLER

SELLER

SELLER

SELLER

BUYER

BUYER

BUYER

BUYER

BUYER

BUYER

Freight ChargesPaid by Seller...

A Variety of Pricing

Arrangements

3-17

0 200 300 400100

Quantity purchased (cases)

Logi

stic

al c

osts

($/

case

)Total per-case costs (transport + inventory + order processing and handling costs)

Per-case inventory carrying costs

Less than truckload

Rail carload

Truckload

Transport costsPer-case order processing and handling costs

Per-Case Logistics Costs as a Justification for Price Discounts


Zone 8 $147.38

Zone 7 $144.81 Zone 6

$142.43

Zone 5 $140.00

Zone 4 $138.33

Zone 3 $137.38

Zone 2 $136.31

Boston

UPS Pricing ZonesCR (2004) Prentice Hall, Inc. 3-18

3-1 the logistics/supply chain product “logistics/supply chain managers are ‘owners’ of the...

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