physical distribution chapter 13. introduction to materials management, 7 th edition arnold,...

Physical Distribution

Chapter 13

Introduction to Materials Management, 7th EditionArnold, Chapman, Clive

© 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458.

All Rights Reserved.

Physical Distribution Physical Supply

goods moving from supplier to manufacturer

“inbound” Physical Distribution

goods moving from manufacturer to customers

“outbound”




Physical Distribution

Figure 13.1 Supply chain (logistics system)




Channels of Distribution

Any series of firms or individuals that participates in the flow of goods and services from the raw material supplier and producer to the final user or consumer.”

APICS 12th Edition Dictionary




Channels of Distribution Company may deliver directly to

customers Use other companies or individuals

to deliver goods Intermediaries

wholesalers – agents transportation companies –

warehousers




Distribution Channels Transaction channel

negotiate, sell, contract concerned with the transfer of

ownership (and money) Distribution channel

concerned with the delivery of goods or services




Distribution Channels

Figure 13.2 Separation of distribution and transaction channels




Physical Distribution Adds place value

by delivering goods to customers Adds time value

by delivering goods when customers want them




The Way Materials Move Depends on:

the channels of distribution being used

the types of markets served geographic dispersion number of customers

the characteristics of the product type of transportation available




Information

Reverse Logistics

Supplier Customer

Returned Goods




Reverse Logistics - Information

Goods are returned to supplier Information is also needed

reason / approval for the return credit information




Reverse Logistics Green Logisitics

Return and disposal of packaging materials

Return and disposal of environmentally sensitive materials heavy metals oil

Use of reusable (returnable) packaging




Returned Goods - Disposition

Returned to inventory Refurbished for resale Sold into alternate markets Disassembled to retrieve

components Sorted for material recovery

Valu

e




Physical Distribution - Activities

1. Transportation

2. Distribution inventory

3. Warehouses

4. Materials handling

5. Protective packaging

6. Order processing




Transportation Movement of goods Highest portion of distribution

costs 30 - 60%

Adds place value to the product




Distribution Inventory Includes all finished goods

anywhere in the distribution system

Second highest cost of distribution 25 - 30%

Inventories add time value to the product




Warehouses Used to store inventory

improved customer service transportation efficiencies

Warehouse management concerned with: site selection, number of warehouses layout and methods of receiving,

storing and retrieving goods




Materials Handling Movement and storage of goods

within a distribution center Type of equipment used affects

the costs of operation High capital cost Tradeoff between capital cost and

operating (labor) cost




Protective Packaging Containment, protection and

identification Packages must fit in storage

spaces and transportation vehicles item package carton pallet container

Fragile




Order Processing

“The activity required to administratively process a customer’s order and make it ready for shipment or production.”


Represents an element of time in a customer’s orderImportant part of customer serviceMay involve intermediaries




Total Cost Concept Cost trade-off

a cost decrease in one area may incur a smaller increase in another area

Total cost consider all of the costs increases in one area are offset by

reductions in other areas Keep customer service in mind




Total Cost Concept - Example Problem

A company normally ships a product by rail. Transport by rail costs $200, and the transit time is 10 days. However, the goods can be moved by air at a cost of $1000 and it will take one day to deliver. The cost of inventory in transit is $100 per day. What are the costs involved in the decision? Rail Air Transportation Cost $ 200 $1000Inventory Carrying Cost 1000 100Total $1200 $1100




Global Distribution Differences in:

Distance Language Currency Measurement




Standards ISO (International Organization for

Standardization) Geneva Switzerland

Incoterms (International Commercial Terminology)

Standard size containers




3PLs – Third Party Logistics Providers

Provide a wide range of logistics services Delivery Warehousing EDI Freight Forwarding Packaging




3PLs – Third Party Logistics Providers

Can provide the service at less cost They have the equipment and networks Can react to seasonal increase Reverse logistics

Examples: Fed Ex Kuehne + Nagel DHL




Interfaces A bridge between:

Marketing

Production




Marketing Product Promotion Place Price

Created by Physical

Distribution




Interface with Marketing Marketing is responsible for the

transfer of ownership selling, advertising, sales promotion,

merchandising and pricing

Physical distribution is responsible for delivering the goods contributes to creating demand

prompt delivery, availability of product, accurate order filling




Interface with Production Production requires a steady flow of

raw materials and components interruptions are very expensive

Factory location may depend on the transportation cost raw materials finished goods

Factory demand is created by distribution centers




Transportation Costs Ways

land, water, road, space, etc over which goods are moved

may be owned by the operator (railroad tracks), operated by the government (roads, canals) or mother nature (ocean)




Transportation Costs Terminals

Used to sort, load and unload goods connection between line-haul and

local deliveries connection between different modes

or carriers dispatching, maintenance,

administration




Transportation Costs Vehicles

owned or leased by the carrier

Other (fixed or variable) maintenance administration fuel labor




Transportation - Modes Rail Road Air Water Pipeline

Vary by flexibility and operating cost




Rail Provide own ways, terminals and

vehicles large capital investment need high volume modest flexibility

Used for bulky commodities over long distances




Road Pay for ways through taxes or tolls Provide their own terminals Vehicle cost though large, is smaller

than vehicle costs for water or rail Door-to-door service (very flexible) Used for small volume goods to

many delivery locations




Air Uses government provided

terminals and air traffic control systems (ways)

High variable costs for fuel and operating costs

Most expensive mode Used for high value, low weight

goods over long distances




Water Nature provides ways

canals are government controlled Carrier pays for use of terminals Carrier owns the ships Operating cost is very low Slow and not very flexible Used for low value bulk cargo over

long distances




Pipelines Very high capital costs Operating costs are very low Not flexible! Used for high volume gases or

liquids moving from point to point




For Hire Carriers Common carriers

licensed to carry only certain goods available to public designated points or areas served scheduled service

Contract carriers provides specific service to a shipper




Private Carriers Need to buy and operate their own

equipment Carry their own goods

licenses are still required Very high volume to justify

expense




Other Transportation Agencies

Use combinations of modes Freight Forwarders Post Office Couriers

Agencies make use of load consolidation




Transportation Cost Elements

Line haul Pickup and delivery Terminal handling Billing and collecting

Principles are the same for all modes




Transportation Cost Elements

Figure 13.3 Shipping patterns




Line Haul Costs Fuel, labor, depreciation Approximately the same per mile

whether full or empty

LHC = Total Line-Haul Cost Distance Travelled




Line-Haul Costs - Example

For example, for a given commodity, the line-haul cost is $3 per mile and the distance shipped is 100 miles. The total line-haul cost is therefore, $300. If the shipper sends 50,000 pounds, the total line haul cost is the same as if 10,000 pounds were shipped. However the line-haul cost (LHC) per hundredweight (cwt) will vary.LHC50,000 lbs = $300 = $.60 per cwt

500LHC10,000 lbs = $300 = $3.00 per cwt

100




Line-Haul Costs Total line-haul cost varies with:

cost per mile distance moved

Line-haul cost per cwt varies with: cost per mile distance moved weight moved




Line-haul Cost - Example

For a particular commodity, the line-haul cost is $2.50 per mile. For a trip of 500 miles and a shipment of 600 cwt, what is the cost of shipping per cwt? If the shipment is increased to 1000 cwt, what is the savings per cwt?Cost600 =($2.50 x 500) / 600 = $2.083 / cwt

Cost1000 = ($2.50 x 500) / 1000 = $1.25 / cwt

Savings = $2.083 - 1.25 = $0.833 / cwt




Increasing Weight Shipped

Truck will have a weight limitation Some products have a low density

and the truck is filled before the weight limitation is met

Therefore, nest products or ship products unassembled to increase the weight shipped




Shipping un-assembled

Some Assembly

Required




Shipping Cost - Example

A company ships barbecues fully assembled. The average line-haul cost is $12.50 per mile, and the truck carries 100 assembled barbecues. The company decides to ship the barbecues unassembled and can ship 500 barbecues in a truck. Calculate the line-haul cost per barbecue assembled and unassembled. If the average trip is 300 miles, calculate the savings per barbecue.




Shipping Cost - ExampleLine-haul costassembled = $12.50/100 =$0.125 / bbq / mile

Line-haul cost unassembled = $12.50/500 =$0.025/ bbq/mile

Savings per mile = $0.125 - 0.025 = $0.10 / bbq / mile

Trip savings = 300 miles x $0.10 / bbq/mile

=$30 per barbecue

probably worth thecost of assembly

at the buyer’s




Pickup and Delivery Costs Depends on time spent (not

distance) Charged for each pickup

Therefore, consolidate multiple shipments to avoid many trips




Terminal Handling Cost depends on how many times

the shipment must be handled Full truckloads (TL) go directly to

the customer Less than truckloads (LTL) must be

sent to a terminal, sorted and consolidated

Therefore, consolidate shipments into fewer parcels




Billing and Collecting Costs of paperwork Costs of invoicing

Therefore, reduce the number of pickups and pieces shipped (consolidating)




Total Transportation Costs Line-haul + pickup and delivery + terminal

handling + billing and collecting To reduce costs:

increase the weight shipped (line-haul cost) reduce the number of pickups (pickup and

delivery cost) decrease the number of parcels (terminal

handling costs) consolidate shipments (billing and collecting

costs)




Distance Versus Cost of CarriageTota

l C

ost

Distance

Fixed Cost: pickup, and deliveryterminal handling, billing and collecting




Rate Charged - Other Factors

Value - to cover carrier’s liability Density - can affect the total

weight shipped Perishability - may require special

equipment i.e. refrigeration Packaging - to reduce the risk of

damage and breakage




Warehousing

Plant warehouses Regional warehouses Local warehouses Wholesalers Public warehouses




Warehousing - Services General warehouse

storage and protection of goods need to minimize handling and

movement Distribution warehouse

goods are received in large volumes goods are then sorted and consolidated

into customer orders concerned with throughput




Role of Warehouses

Transportation consolidation

Product Mixing

Service




Transportation Consolidation Reduces transportation costs Truckload (TL) shipments to

warehouse Less than truckload (LTL) shipments to

local customers “Break-bulk”

breaking down large shipments from factories into small shipments for local buyers




Product Mixing Avoids many small LTL shipments Customers want a mix of products

often from different manufacturers or locations

The distribution center can assemble many small items into one shipment




Service Local distribution centers can

improve customer service by being close to the customer

Faster response time Improved variety of products May add value

e.g. customer specific labelling




Product Mixing

Figure 13.6 Product mixing




Warehousing and Transportation Costs

Number of customers Geographic distribution

of customers Customer order size Number and location of

plants and distribution centers

CustomerService

$




Warehousing and Transportation Costs - Example Problem

A plant located in Toronto is serving customers in the Boston area. If they ship direct to customers most shipments will be LTL. However if they locate a distribution center in Boston they can ship TL to the warehouse and LTL from the warehouse to the local customers. Costs are as follows:Plant to customer (LTL) = $100 / cwtPlant to distribution center (TL) = $50 / cwtDistribution center = $10 / cwtDistribution center to customer (LTL) = $20 / cwt




Warehousing and Transportation Costs - Example Problem

Costs if a distribution center is used:TL Toronto to Boston = $50 per cwtDistribution center costs = $10 per cwtLTL Boston area = $20 per cwtTotal cost = $80 per cwt

Savings per cwt = $100 - $80 = $20 per cwt

Annual savings at 10,000 cwt = $20x10,000 = $200,000




Market Boundaries

The line between two methods of distribution where the laid down cost is the same.

Deciding which customers should be served from which location




Laid-down cost (LDC)

“The sum of the product and the transportation costs. The laid-down cost is useful in comparing the total cost of a product shipped from different suppliers from a customer point of view”





Laid-down Costs - Example Problem

Syracuse is 300 miles from Toronto. The product cost is $10 per cwt, and the transportation cost is $0.20 per mile. What is the laid down cost per cwt?

LDC = Product cost +(trans’n cost per mile x distance)

= $10 + ($0.20 x 300) = $70 per cwt




Market Boundary - Example Problem

Figure 13.7 Market boundary

MarketBoundary




Market Boundary - Figure 13.7

In the example, the distance between A and B is 100 miles. If we let the distance from A to Y be X miles, then the distance from B to Y is (100 - X) miles. Assume supply A is the factory and B is a distribution center. Assume the product cost from A is $100 and from B is $110 which includes inventory and TL costs to the distribution center. LTL costs are $.40 per unit per mile from either location.

LDCA = LDCB

100 + 0.40X = 110 + 0.40(100 - X) X = 62.5 miles

Customers within 62.5 miles from the factory A, ship direct. The rest of the customers, ship from the distribution center B.





The distance between Toronto and Boston is about 500 miles. Given the cost structure in the previous example, calculate the location of the market boundary between Toronto and Boston. Assume the product cost at Toronto is $10 per cwt.Product cost at Boston = product cost at Toronto

+ TL transportation + handling costs





Product cost at Boston= product cost at Toronto + TL transportation + handling= $10 + $50 + $10 = $70

LDCT = LDCB

$10 + $0.20X = $70 + $020(500 - X) 0.4X = 160 X = 400

The market boundary is 400 miles from Toronto or 100 miles from Boston. Ship orders direct within 400 miles from Toronto. Closer to Boston ship from Distribution Center in Boston.




Effect of Adding More Warehouses

As more distribution centers are

added:

TL shipments to DC’s will increase

LTL costs to customers will decrease

Total cost of transportation will

decrease




Effect of Adding More Warehouses

Figure 13.8 Transportation cost versus number of warehouses




Packaging Identifies product

may be part of marketing promotion size, description, date of manufacture

Contains and protects the product movement environment

Contributes to distribution efficiency handling in larger quantities




Packaging Primary package

holds the product for the consumer e.g. a box of cereal

Secondary package contains small products for distribution e.g. a corrugated carton

Unit load e.g. a pallet




Unitization

“In warehousing, the consolidation of several units into larger units for fewer handlings.”


ContainerBox Pallet




Pallets Standard sizes

e.g. 48”x40”x4” (grocery) Sized to fit into further unitized

loads e.g. railcar, truck, container

Handled by fork lift trucks




Materials Handling

Objectives: Increase the cube utilization

use as much height as possible keep aisles to minimum

Improve operating efficiency increase the load per move

Improve speed of response




Equipment Conveyors

move in a fixed route, consume space need high volumes

Industrial trucks can move anywhere in the plant do not consume fixed space

Cranes and hoists make use of overhead space




Pallet Position Plan

Figure 13.10 Railcar and trailer pallet position plan




Multi-Warehouse System+ Transportation costs+ Inventory-carrying cost+ Warehousing costs+ Materials handling costs+ Packaging costs= Total system cost

System service capability




Transportation Costs TL shipments will be made over

long distances LTL shipments to customers will be

shorter Total costs decrease with more

warehouses diminishing effect as more

warehouses are added




Inventory-Carrying Cost Inventory

order quantity - stays the same safety stock

increases with the number of warehouses varies with the square root of the change

SSnew = SSold Previous # of warehouses

New # of warehouses




Inventory Carrying Costs A company is considering adding a warehouse.

For an item with an average demand of 1000 units each warehouse will have a demand of 500 units.

The safety stock in one warehouse was 100 units for a service level of 90%. What is the new safety stock?

SS = 100 x 500 = 71 units (in each warehouse)

1000




Warehousing Costs

+ Space for additional inventory

+ Duplication of non-storage space

offices, washrooms, lunchrooms

+ Duplication of support staff

supervisory, clerical, support




Materials Handling Costs Number of units handled will

remain the same As number of warehouses

increase, the size of the loads handled will decrease

Handling of non-unitized loads increases costs




Packaging Costs Per unit costs remain the same

Total costs increase with inventory




Total System Cost

Figure 13.11 Total system cost




System Service Capability

Customer service (speed of delivery) improves with more distribution centers

diminishing effect as more DC’s are added

Must consider cost of service with total

system cost





Figure 13.12 Estimate of market reached versus number of warehouses





3 distribution centers provide the lowest total system cost

Figure 13.13 Cost versus number of warehouses

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