ballou02 logistics supply chain strategy and planning
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Logistics/Supply Chain
Strategy and Planning
Chapter 2
“If you don’t know where you want to go, any
path will do.”
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Corporate Strategy
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Strategy is the process whereby guidelines/ plans are formulatedfor -positioning the firm to meet its objectives.
Strategy formulation begins with defining a corporatestrategy. This involves:
a. Assessing needs, strengths, and weaknesses of the 4
major components of the company:- customers- suppliers- competitors- the company itself
b. "Visioning" where counter - intuitive, unheard of, and
unconventional strategies are considered.
Corporate strategies are converted to more specific & tacticalstrategies for the various functional areas of the firm such asLogistics as like other functions.
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Corporate to Functional
Strategic Planning
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•Economic
•Regulatory
•Technological
•Competitive
External factors Corporate strategic
plan
Marketing
Finance
Manufacturing
Logistics
Functio nal strategic plans
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Logistics Strategy
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Cost reduction
Minimizing the variable cost associated with
movement & storage
Capital reduction
Minimizing the level of investment in the logistics
system or maximizing return on logistics assets
Service improvement
Increase revenues depend on the level and
differentiation of logistics service provided
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Flow of Logistics Planning
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• Facility location
• Operations strategy
• Inventory management
• Information systems
• Material handling• Traffic and transportation
• Planning and control methods
• Organization
Indiv idual Link of
Logist ics System
Business goals and
strategies
Customer service
requirements
Integrated logistics
planning
Design of integrated
logistics management
system
Overall performance
measures
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Logistics planning
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LEVELS OF PLANNING
Strategic planning
Plans for longer than one yr time period
Tactical planning
For an intermediate time horizon, usually less than
one yr
Operational planning
Short range decision making, decisions frequently
made on an hourly or daily basis
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Decisio n area Strategic Tactical Operat ional
Transportation Mode selection Seasonal equip-ment leasing
Dispatching
Inventories Location, Control policies Safety stock levels Order filling
Order
processing
Order entry, transmittal,
and processing systemdesign
Processing
orders, Fillingback orders
Purchasing Development of supplier-
buyer relations
Contracting,
Forward buying
Expediting
Warehousing Handling equipment
selection, Layout design
Space utilization Order picking
and restocking
Facility
location
Number, size, and
location of warehouses
Strategic, Tactical, and Operational Decision Making
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Logistics planning
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MAJOR PLANNING AREAS
• Customer service levels
Level of customer service provided dramatically
affects system design, ie. Low cs levels-centralized
inventory, less expensive transport options
• Facility location strategy
Number, location, size of the primary, intermediate &final stocking and sourcing facilities and relating the
current market demand to them
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Logistics planning
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MAJOR PLANNING AREAS…
• Inventory decisions
Allocating inventories (push) or pulling them to the
stocking points through replenishments are
separate strategies need careful considerations
• Transport strategy
Selection of mode, shipment size, routing andscheduling influenced by proximity of warehouses
and requirement of inventory keeping
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Logistics planning
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MAJOR PLANNING problems…
Move-store activities (top-down)
-Links- movements of goods
-Nodes-storage or hault/stop points
Information flow activities (bottom-up)
-Links- transmission of info from one geographicregion to another
-Nodes- data collection or processing points
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When to plan?
For new ventures& fo r establ ished businesses
- No distribution network currently exists.
- There has been no re-evaluation in 5 years.
- When costs are changing rapidly, especially transport &
- When markets have shifted.
- When current distribution economics encourage shifts.
-When there has been a major policy shift in logistics
such as in price,- customer service, or investment level.
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When to p lan?
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•Demand
-Existing demand & its geographic dispersion
-Disproportionate decline/ growth/ shift
•Customer service
-inventory availability, speed of delivery. Order filling
speed & accuracy
-Distribution cost is sensitive to level of customer
service
-Competitive advantage is crucial
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When to p lan?
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•Product characteristics
-characteristics like-weight, volume, value, risk can
be altered
-Can have substantial change in cost elements
•Logistics costs
-high value/ low value items
•Pricing policy
-Company pricing policy
- transfer of product title
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Logistics’ Objective
Maximize return on logistics
assets (ROLA )
AssetsCostsRevenue
ROLA
Logistics’contribution
to sales
Investment in
logistics
assets
Costs of
logisticsoperations
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Guidelines for
Logistics Strategy Formulation
Total cost concept (trade-off analysis)
-Cost conflict among various activities
-Examples of logistics cost trade-off
The total cost concept is the trade-off of all
costs that are in cost conflict with each
other and that can affect the outcome of a particular logistics decision
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Cost of
transportation
serviceInventory cost
(includes
storage and
intransit
Total cost
Rail Truck Air
C o s t , i n d o l l a r s
Transportation service
(greater speed and dependability)
A Cost Conflict in Logistics
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More Cost Conflicts
Improved customer service0 100%
(a) Setting the customer service level
C o s t
Lost sales cost
Transportation,
order processing,
and inventory
costs
Total costs
Increasing number of stocking points0
(b) Determining the number of warehouses in a logistics
system
C o s t
Transportation costs
Total costs
Inventory
costs
0
Revenue
R e v e n u e
0
Average inventory level0
(c) Setting safety stock levels
Lost sales cost
Total costs
Inventory
carrying
costs
C o s t
0Product run length and product sequencing
altenatives
(d) Setting the sequence of production runs for
multiple products
Production costs
Total costs
C o s t
0
Inventory
carryng cost
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Guidelines for
Logistics Strategy Formulation
Differentiated distribution-Not all products should be provided the same
level of customer service
-Multiple distribution strategies with differentiationmight be applicable within product line
Mixed strategy
-A pure strategy has higher costs than a mixedstrategy
-Single strategy has economic disadvantage when
product line varies substantially
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Pure vs. Mixed Strategy
C o s t
All
private
All
public
Combined
private-public
Suggested
strategy
Current
strategy
Warehouse alternatives
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Guidelines for
Logistics Strategy Formulation
Postponement
The time of shipment and the location of finalproduct processing in the distribution should be
delayed until a customer order is received
-time postponement
-form postponement Labeling, Packaging, Assembly, Manufacturing
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Guidelines for
Logistics Strategy Formulation
Shipment consolidation
-Earlier orders might be combined with orders
received later
-Smaller shipment sizes have disproportionatelyhigher transportation costs than larger ones
Product standardization
-Proliferation of product variety adds to inventory-can be used in conjunction with postponement
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Choosing the Right Supply Chain Strategy
FunctionalProducts--
Predictable
demand
InnovativeProducts--
Unpredictable
demand
Efficient
supply chain
Staple food
products
Responsivesupply chain
Electronicequipment
Low margin
High margin
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Classification of Products
Predictable/Mature Products
•Jello
•Corn Flakes
•Lawn fertilizer
•Ball point pens
•Light bulbs
• Auto replacement tires
•Some industrial chemicals•Tomato soup
Unpredictable/Introductory Products
•New music recordings
•New computer games
•Fashion clothes
• Art works
•Movies
•Consulting services
•New product offerings of existing product lines
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Efficient
supply chain
Economical production runs
Finished goods inventories
Economical buy quantities
Large shipment sizes
Batch order processing
Responsive
supply chain
Excess capacity
Quick changeovers
Short lead times Flexible processing
Premium transportation
Single order processing
Supply-
to-stock
Supply-
to-order
Choosing the Right Supply Chain Strategy
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Actions for Misclassified Products
Supply Chain
Design Type
Predictable/
Mature
Unpredictable/
Introductory
Supply-to-Stock/
Efficient
Tomato Soup If product is here
Supply-to-Order/
Responsive
If product is here Personal
Computer Models
Product Characteristic
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