Download - Logistics Cost Reduction
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Logistics Cost Reduction Strategies
Prof.Rameshwar Dubey
Secretary
Asian Council of Logistics Management
Associate Professor
Symbiosis Institute of OperationsManagement,Symbiosis International University
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Relative Transportation Costs
Transportation costs represented 6.3% of total
U.S. GDP in 1990
Transportation costs represented over 50% oftotal U.S. logistics expenditures in 1990
Transportation accounted for 27% of total U.S.
energy use and 63% of total U.S. petroleum use in
1990
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Logistics Overview
Why has logistics become increasingly important?
Cost reduction pressures are severe
Logistics has a high impact on customer service
A strong need exists for demand and supply planningconsistency
A focus on core competencies has placed logistics in theoutsourcing spotlight
Development of IT technology supports integratedlogistics management
Government deregulation of transportation has creatednew opportunities
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Total Cost Concept
The total cost concept recognizes that an optimum cost in one area or
function may not lead to an optimum total system cost
Total cost analysis requires the management of supply chain trade-offs
Logistical activity areas that drive total logistics costs:
Customer service level costs Inventory carrying costs
Lot quantity costs
Order processing and information costs
Warehousing costs
Transportation costs
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Customer Service Measures
Order cycle lead time
Stock availability/fill rates/stockouts/back
orders/partial shipments
Record integrity
Frequency of delivery
Delivery reliability
Order tracing capability Volume flexibility
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Customer Service Measures
Invoice accuracy
Order status information
Technical support responsiveness Unscheduled service responsiveness
Speed of product feature changes
Product and service quality
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Value-added Transportation Concept
Supplier Manufacturer Customer
Inbound Outbound
Product/Info Flows
Info/Return Goods Flows
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Transportation-Related Service Elements
Speed: time-in-transit
Availability: accessible to customers when they want it
Dependability: pick-up and delivery time variability
Flexibility: adjustment to shippers needs
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Basic Modes of Transportation
Fixed Variable Traffic
costs costs compositionRail high low bulk food, mining,
heavy mfg
Motor low medium consumer goods,
medium/light mfg
Water medium low bulk food, mining,
chemicals
Air low high high-value goods,
rush shipments
Pipe high low petroleum, chemicals,
mineral slurry
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Relative Operating Characteristics
Operatingcharacteristics Rail Motor Water Air Pipe
Speed 3 2 4 1 5
Availability 2 1 4 3 5
Dependability 3 2 4 5 1
Capability 2 3 1 4 5
Frequency 4 2 5 3 1
Composite 14 10 18 16 17
1 = best, 5=worst
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Intermodal
Enables shippers to benefit from advantages ofmultiple modes of transportation
minimizes disadvantages of individual modes
Rail
Air Water
Truck
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Transportation Decision Making in an Integrated Supply Chain
Supplier Manufacturer Customer
Inbound Outbound
Decis
ionFlow
Understand total network flows
Understand individual lane flows
Understand current
carrier usage patterns
Make mode/carrierdecisions
Routing/Scheduling,
Load Planning, etc.
Strategic
Operational
Macro
Micro
DecisionScope
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Transportation Costs
Product related
density
stowability
ease or difficulty of
handling
liability
Market related
intramode/intermode competition
location of markets
nature and extent of regulation
balance/imbalance of freight traffic
seasonality of product movements domestic vs. international
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Transportation Economies
Economy of Scale
Volume/weightLTL T
L
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Transportation Economies
Economy of Distance
Distance
Tapering Principle
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Shelf Standards
Brand Consolidation
Space
Position
Proper Groupings
Price
Schematic
Housekeeping
Point of Sale
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Shelf Management Principles
Place your wines at eye level or the best position
possible. 80% increase if moved from bottom to eye level
43% increase if moved from bottom to waist level
Place your wines next to the best selling competitive
wines.
Place your wines next to wines that are priced higher
than your wines.
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Topics
Introduction
Transportation Infrastructure
Transportation Management
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Introduction
Importance of Transportation
Value-added Role of Transportation
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Transportation Role in Value Attainment
Process
Critical element of structure, capacity, and
movement decisions Both between supply chain members and intra-
organizational
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Transportation Infrastructure
Modal Characteristics
Changing Environment
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Distribution of U.S. Intercity Freight
(% of ton-miles)
Rail Motor Water Air Pipe
1980 38% 22% 17% .2% 24%
1990 37% 26% 16% .2% 20%
Average Revenue per Ton-Mile
1980 $2.8 $18.0 $.77 $46 $1.01990 $2.7 $24.4 $.75 $140 $1.4
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Changing Transportation Environment
Deregulation
Time-based competition
Expanding geographic coverage
Information technology
Social and environmental concerns
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Selected Results of the Changing Environment
Economic Impact
Increased competition in individual markets - both
within modes and between modes
More efficient carrier operations - less interlining, more
direct routing, efficient pricing
Transportation costs declined in real terms and as
percent of GDP Transportation service quality improved
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Selected Results of the Changing Environment
Industry Impact
Consolidation in rail, air and LTL trucking
Proliferation of TL carriers
Strong growth in regional trucking - networks
TL growing faster than LTL
Air freight growth
Intermodal growth: rail-truck, air-truck, rail-ship
Growth of one-stop shopping - 3PL
Private fleet conversion
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Selected Results of the Changing Environmen
Market Impact
Demand for fast, dependable, responsive service at
lower cost
Demand for a broader range of services to integratesupply chain functions
Core carrier concept - interdependence between
shipper-carrier Customized price/service packages/contracts
Relational view of transportation as a value-added
service
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Transportation Management
Network Freight Flows: Macro-Decisions
Micro-Decisions
Information Systems Support
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Network Freight Flows: A Fully Integrated
Approach
Managing Inbound-Outbound flows in an optimalmanner requires firm to have a good handle onthe entire logistics process
Traditionally view transportation in a vacuum--need to look at it in the context of the totallogistics system
Greatest improvement opportunities lie in
integrating transportation with other logisticsfunctional areas such as purchasing, inventorycontrol, forecasting and production scheduling
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Approach to Analysis
1 Analyze lane densities/frequencies: whatopportunities emerge for:
inbound/outbound consolidation
vehicle consolidation temporal consolidation
network consolidation - cross dock potential
(hub and spoke systems)
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Approach to Analysis (cont.)
2 ) Once opportunities for consolidation are visible,
make mode/carrier selection based onservice/cost mix
Given similar service, are rates better on 1
mode/carrier than another?
Does any mode/carrier have relative strengths in a
particular lane?
Any backhaul opportunities?
3 ) If so, look to consolidate loads on mode/carrierwith best cost structure - assign private fleet to
most costly routes
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Consolidation Opportunities
Inbound-Outbound flow consolidation: look for
opportunities to combine inbound/outbound
freight
Vehicle consolidation: use one vehicle/multi stopsfor LTL volumes vs. one shipment to each
Temporal consolidation: hold orders until large
volume shipment possible
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Suggested Analyses
Network flows
Lane densities, frequencies, consistency
Freight distribution by mode, carrier
Consolidation opportunities
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Nodes and links in a Logistics System
(W=warehouse, P=plant, M=market)
M M
M W
P W P
M W W
W P W
M W P M
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Lane Densities
Volume on a weekly basis
Consistency of volume
Volume + Consistency = Rate bargaining power
Identify LTL freight consolidation opportunities
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Inbound-Outbound Lane Densities
Site State In # Avg Wt Out # Avg Wt
DC 1 CA 135 2024 592 989
DC 2 CA 110 625 465 654
DC3 CA 125 1690 572 1005
DC1 AZ 2 228 28 444
DC2 AZ 7 502 9 484
DC3 AZ 1 1135 36 622
DC1 NM 0 0 44 462
DC2 NM 0 0 42 418
DC3 NM 0 0 89 517
DC1 TX 598 971 1975 957
DC2 TX 911 3147 2125 693
DC3 TX 1631 1619 1368 1716
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Mode/Carrier Profile Analysis
Understand freight distribution among carriers by state
Identify potential for core carrier concept
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Summary
Identify:
Opportunities to achieve balanced flows - obtain lowe
rates for providing loads both ways
Significant volumes for rate negotiation
Vehicle/temporal consolidation opportunities
Advantages of reducing number of carriers
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Mode/Carrier Selectionstep 1
step 2
Modal Choice
basic mode Specific Carrier step 3
intermodal legal type Transportindividual carrier provider
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Transportation Pricing
Function of:
cost-of-service
value-of-service
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Prices and Volume
Per pound costs will decrease over volume/weight
Weight of load
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Price and Density
Assuming no weighing out, denser products use
space better
Product Densitycotton steel
Priceperpoun
d
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Transportation Cost Structures
Variable: costs vary with services or volume:
line-haul costs of fuel, labor and maintenance
handling
pickup and delivery
Fixed: constant regardless of activity
Facilities, equipment and administration
Joint: hand-in-hand costs -- unavoidable
Example: the backhaul move
Common: shared costs (overhead)
need for Activity-based costing
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Pricing Structures
Cost-of-service: cost plus method
Value-of-service: market based method
Combination: a middle of the road approachusing cost (minimum) and value (maximum)
Net Rate Pricing: All-inclusive prices specific tocustomers needs (not discount-based)
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Limits on Rates
maximum value of service demand
rate level
minimum cost of service supply
fully allocated
average variable
out-of-pocket
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Routing and Scheduling
Goals:
find best path a vehicle should follow through networksof roads, rail lines, shipping lanes, and air routes
determine best pattern for stops, multi-vehicle use,driver layovers, time of day restrictions
Benefits:
greater vehicle utilization
improved and more responsive customer service
reduced transportation expenses
reduced capital investment in equipment
/
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Principles for Good Routing/Scheduling
load trucks with deliveries for customers closest to eachother
stops on individual days arranged together
start routes with farthest stops first
circular routes - dont cross paths
use largest vehicles first if can be filled
mix pickups in with deliveries, not at end
if one stop far from other, use other truck
avoid narrow stop time windows, or handle separately
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What Is Contract Logistics?
It is a very confusing term because there are so many
different descriptions of what it really is.
Contracting out the entire distribution functionand the related information function
Subcontracting specific logistics activities to a
third-party specialist service provider.
A wide range of practices fall under these definitions
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Services Provided by Third-party Logistics
Providers
Transportation
Warehousing
Information management
Human resources
Management
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Two Types of Providers
Asset-based
Own their own warehousing, transportation,
computer systems, etc.
Data-based
essentially asset free companies who sell logisticsmanagement capability through their computer
systems and managerial skill
There is frequently a bias against asset-basedproviders
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Categories of Services Available
Exclusive Service Provider-devotes all resources to a
single client
Consortium Service Provider-provides services to asmall group of clients
Specialist Provider-provides services for products or
clients who have specialized needs
National/Multinational Provider-provides services to
many clients throughout the world
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Business Drivers
Stick to the knitting
Vertical disintegration
How to do more, with less
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Changing Business Environment
Debt reduction unleveraging
Strategic focus of ...
Financial resources
Human resources
Information technology
Competition
Faster (agility)
Better (quality)
Cheaper (low cost provider)
Investment
Rationing
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Advantages/Disadvantages
Less asset investment, redeploy capital
Lower operating cost (service provider
has economies of scope and scale)
Time lag between increased costs
and changing rates
More attention for core business
Gather missing management
knowledge
Provide higher service level
Increased flexibility
Entry mode to new markets
Flexibility as environment changes
Switching costs
Possible higher operating
costs
Less direct customer contactDependency
Loss of control
Information Systems Support
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Information Systems Support
Network analysis
Electronic Data Interchange
Freight rate maintenance and auditing
Routing and scheduling
Administration
Produce/track bill of lading for each shipment
Automated bills of lading
Automate shipment data files
Carrier evaluation