Chapter 3

Possession Utility

Primarily created through the basic marketing activities related to the promotion and sales of products and services. Promotion can be defined as the effort, through direct and indirect contact with the customer, to increase the desire to possess a good or benefit from a service. Marketing Activities

Salvage and Scrap Disposal

Reverse logistics systems & channels in order to effectively & efficiently dispose of containers and other scrap at the end of the distribution channel.

Return Goods Handling

Reverse logistics systems to deal w/ returned merchandise from customers.

Accounting Systems

Critical for providing appropriate cost information for analysis of alternative logistics options. Also critical for measuring supply chain tradeoffs and performance. - Logistics-related costs were not measured specifically and were often accumulated into an overhead account, which made it extremely difficult to systematically monitor logistics costs. - The recent interest in customer profitability and the related cost accounting systems such as activity-based costing (ABC) has been beneficial to improving the quality of logistics data and analyses.

What are the 4 major subdivisions logistics can be viewed as part of organizational management?

•Business Logistics •Military Logistics •Event Logistics •Service Logistics

Other Logistical Cost

•Carrying Cost - include interest expense (or the opportunity cost associated with the investment in inventory) •Risk-Related Costs - obsolescence, depreciation •Service-Related Cost - insurance, taxes •Administrative and Shipper-Related Costs - associated with managing logistics activities and personnel

Promotion

Collaborate with the logistics manager so that appropriate levels of inventory will be available for distribution to the customer. Problems can still occur, even with collaboration, because of the difficulty of forecasting the demand for a new product, but frequent interchange of information can mitigate problems, and supply chain collaboration can further improve the situation.

Short-run or Static Analysis

Concentrates on a specific point in time or level of production output.

Transportation Effect

- Cost of lost sales can be reduced by spending more on transportation service to improve customer service. - Companies can usually trade off increased transportation costs against decreased lost sales costs. - Organizations can spend more for inventory and transportation simultaneously to reduce the cost of lost sales. - Most organizations willingly do this only up to the point where the marginal savings in lost sales cost equals the marginal increment associated with the increased transportation cost.

Competitive Relationships

- Customer service can be a very important form of competition. - Price competition not only form of competition - If an organization can reliably provide customers with its products in a relatively short time period, then its customers can reduce their inventory costs

Substitutability

- Customer service is important for highly substitutable products to reduce lost sales cost. - Affects importance of customer service. - Customer service is usually more important for highly substitutable products than for products that customers are willing to wait for or back-order. - This is one reason why companies advertise their brands. They want consumers to ask for their brands, and, if their brands are temporarily not available, they would like consumers to wait until they are. - An organization wishing to reduce its lost sales cost, which is a measure of customer service and substitutability, can either spend more on inventory and/or spend more on transportation to reduce the order cycle.

Inventory Effect

- Increasing inventory costs can reduce the cost of lost sales - Organizations are usually willing to increase the inventory cost only until total costs start to increase or stated in economic terms, to the point at which the marginal savings from reducing lost sales cost equals the marginal cost of carrying additional inventory.

Special Handling Requirements

- Need for special handling (e.g. refrigeration, heating, or strapping) will usually increase warehousing, transportation, and packaging costs. - Some products might require specifically designed equipment, for example, refrigeration, heating, or strapping.

Order Cycle

- Shorter order cycles reduce the inventory required by the customer. - Directly affects inventory levels - Defined as the time that elapses from when a customer places an order until the order is received. - Includes activities such as order transmission, order receipt, order processing, order preparation (picking and packing), and order shipment. - Cost/cycle reduction can be important as price reduction

Susceptibility to Damage

- The greater the risk of damage to a product, the higher the transportation and warehousing cost. - Because of a higher degree of risk and liability associated with more fragile goods, higher are prices charged by both transportation and warehousing providers. - These providers might also charge higher prices because of measures they must take to prevent product damage.

Micro Dimensions of Logistics

-Manufacturing -Finance -Marketing -Accounting

Dollar Value

-The product's dollar value typically affects warehousing costs, inventory costs, transportation costs, packaging costs, and even materials-handling costs. -Transportation prices reflect the risk associated with the movement of goods, and higher value products are often more susceptible to damage and loss and/or require more care in the movement. -Warehousing and inventory costs also increase as the dollar value of the product increases. Since the physical facilities required to store higher-value products are more sophisticated, warehousing costs increase with higher dollar value products -Packaging costs also usually increase because the organization uses protective packaging to minimize potential damage to the product.

Factors Affecting Cost and Importance of Logistics (Micro Dimension of Logistics)

1. Competitive Relationships 2. Order Cycle Length 3. Substitutability 4. Inventory Effect 5. Transportation Effect 6. Product-Related Factors 7. Spatial Relationships

Product Related Factors That Affect Logistics

1. Dollar Value 2. Density 3. Susceptibility to Damage 4. Special Handling Requirements

Logistics Can Positively Impact ROA In What Ways?

1. Inventory is both a current asset on the balance sheet and a variable expense on the income statement. Reducing inventory levels reduces the asset base as well as the corresponding variable expenses, thus having a positive impact on ROA. 2. Transportation and warehousing costs can also influence ROA. If an organization owns its warehouses and transportation fleet, they are fixed assets on the balance sheet. If these assets are reduced or eliminated, ROA should increase. 3. The focus on customer service can increase revenue. As long as the incremental increase in revenue is larger than the incremental increase in the cost of customer service, ROA will increase.

Logistics Interfaces with Other Areas

1. The finance area has become increasingly more important during the last decade. In fact, it will be argued in a later chapter that finance is the second language of logistics and supply chain management. The impact that logistics and supply chain management can have upon return on assets (ROA) or return on investment (ROI) is very significant. Logistics managers are also expected to justify increased investment in logistics-related assets using acceptable financial tools related to payback periods. Consequently, supply chain and logistics managers must be knowledgeable about financial metrics and standards of performance

2 Largest Cost Categories in Any Organization's logistics system

1. Transportation 2. Inventory

Robinson-Patman Act

1937 - Amended federal anti-trust laws so as to outlaw "price discrimination," whereby companies create a monopolistic network of related suppliers and vendors who give each other more favorable prices than they do others.

Customer Service

2 dimensions: 1. the process of interacting directly with the customer to influence or take the order and 2. the levels of service an organization offers to its customers. Levels play an important part in logistics by ensuring the customer gets the right product, at the right time & place. Logistics decisions about product availability & inventory lead time are critical to customer service => peace of mind.

Inventory Control

2 dimensions: assuring adequate inventory levels and certifying inventory accuracy Assuring appropriate levels of materials are available and certifying inventory accuracy => prevent stock-outs.

Service Logistics

Acquisition, scheduling, and management of facilities, assets, personnel, and materials to support and sustain a service operation or business

Order Fulfillment

Activities involved with completing customer orders. Measures the total lead time from when the order is placed to actual delivery in satisfactory quantity & condition. The four basic processes or activities of order fulfillment or lead time are: 1. order transmittal 2. order processing 3. order preparation 4. order delivery

Inventory Cost

All the expenses associated with holding goods in storage.

Warehousing Cost

Associated with the assets used to hold inventory.

Consumer Packaging = "Silent Salesperson"

At the retail level, the package can be a determining factor in influencing sales. 1. First, the consumer package has to fit into the industrial package, or the external package. The size, shape, and other dimensions of the consumer package will affect the use of the industrial package. 2. Second, the protection offered by the consumer package also concerns the logistics manager. The physical dimensions and the protection aspects of consumer packages affect the logistics system in the areas of transportation, materials handling, and warehousing. Simply stated, consumer packaging can negatively impact logistics costs (efficiency) and customer service if there is damage. Collaboration is a necessary ingredient for efficiency and effectiveness for logistics and marketing.

Procurement

Availability for production of needed parts, components, materials in the right quantity, at the right time, at the right place, and at the right cost. Transportation and inventory costs are related to the geographic location (distance) of raw materials and other needed items to meet manufacturing needs.

Military Logistics

Design and integration of all aspects of support for the operational capability of the military forces (deployed or in garrison) and their equipment to ensure readiness, reliability, and efficiency.

Logistics

Design and manage necessary activities centered around transportation, inventory, warehousing, and communications. Make materials available for manufacturing and to consumers: inbound and outbound. Focus on flow of product through supply chain, with timely information driving the entire process.

Production Planning

Determining the number of units necessary to provide market coverage. The integration of production planning into logistics has become increasingly popular in large companies to effectively forecast & control inventory.

Transportation Cost

National expenditures for the movement of freight in the United States.

How does Logistics Management enable SCM?

From necessary evil to differentiator. Adds value to customer relationships: peace of mind, superior CX, loyalty. Primary marketing tool to gain and sustain competitive superiority.

Long-run or Dynamic Analysis

Examines a logistics system over a long time period or range of output.

Logistics (SCM)

Focus on integration of all business processes that add value for customers.

Storage

Involves two closely related activities: inventory management, warehousing. A direct relationship exists b/t transportation vs. the level of inventory & number of warehouses required. It is important to examine the trade-offs related to the various alternatives in order to optimize the overall logistics system. Example: If organizations use a relatively slow mode of transportation, they usually have to hold higher inventory levels and thus have more warehousing space for inventory. An organization might consider using a faster, more expensive mode of transportation to eliminate warehouse space and inventory.

Relationship between Logistics Management and Supply Chain Management

It is an extended set of enterprises from the supplier's supplier to the customer's customer. A connecting network of the logistics systems and related activities of all the individual organizations that are a part of a particular supply chain. The collective logistics systems play a role in the success of the overall supply chain. The coordination or integration of the logistics systems in a supply chain can be a challenge.

Materials Handling

Logistics managers are concerned with the movement of goods into a warehouse from a transportation vehicle, the placement of goods in a warehouse, the movement of goods from storage to order-picking areas and eventually to dock areas for transportation out of the warehouse. Important to efficient warehouse operation and relates to the mechanical equipment for short-distance movement of goods through the warehouse, e.g. overhead cranes, conveyor belts, forklifts, automated storage & retrieval systems (ASRS).

Parts and Service Support

Maintaining an adequate channel to anticipated repair needs.

Challenges with Logistics

Mange the entire logistics system in such a way that order fulfillment meets and perhaps exceeds customer expectations. Cost and service tradeoffs must be considered when evaluating customer service levels and the associated total cost of logistics, but both goals— efficiency and effectiveness—are important to an organization in today's competitive environment.

Inbound-to-Operations Logistics

Materials management to support manufacturing. Beginning, transportation, steel fabrication, transportation, parts manufacturers, transportation, warehousing, Electric Motor Manufacturer.

Place Utility

Moving goods from production points to markets WHERE demand exits. Logistics extends the physical boundaries of the market area, thus adding economic value to the goods. Logistics creates place utility primarily through transportation. Example: Moving Huggies diapers from a Kimberly-Clark manufacturing facility in Wisconsin by motor carrier to markets where consumers need these diapers creates place utility. Increases competition, which often leads to lower prices and increased profit opportunities through economies of scale.

Packaging

Needed to move the product to the market safely and securely. Logistics managers must analyze the trade-offs b/t the type of transportation selected and its packaging requirements, e.g. truck/sea container vs. air freight. Protects the product during movement and storage and includes materials such as corrugated cardboard boxes, stretch wrap, banding, bags. Example: rail or ocean transportation typically requires additional packaging expenditures because of the greater risk of damage in transit.

Event Logistics

Network of activities, facilities, and personnel required to organize, schedule, and deploy the resources for an event to take place and to efficiently withdraw after the event.

Facility Location

Optimizing the time & place relationships b/t plants & markets (outbound), or b/t supply points and plants (inbound). Site location impacts transportation rates & service, customer service, inventory requirements, and possible other areas.

Price

Organizations selling products often provide a discount schedule for larger purchase quantities. If such discount schedules relate to transportation rate discount schedules in terms of weight, then both the shipper and customer should be able to reduce total transportation cost. In some organizations, entire pricing schedules conform to various quantities that can be shipped by modes of transportation Logistics manager should be interested in the volume requirements of the price schedule because this impacts inventory requirements, replenishment times, and other aspects of customer service. An organization should consider its ability to provide sufficient volumes within an attractive price schedule. The logistics manager should be notified of pricing specials so that he or she can adjust inventory levels to meet projected demand.

Business Logistics

Part of the supply chain that plans, implements, and controls the efficient, effective, flow and storage of goods, services, and related information from point of origin to point of consumption in order to meet customer requirements.

Transportation

Physical movement or flow of raw materials to finished goods; involves the transportation agencies that provide service to the firm. Important activity in the logistics system and is often the largest variable logistics cost.

Logistics Management

Planning, implementing, and controlling the efficient and effective flow and storage of products and information from the point of origin to consumption to meet customers' needs and wants. Encompasses logistics systems not only in the private business sector but also in the public/government and nonprofit sectors.

Outbound-to-Operations Logistics

Plant distribution to support marketing. Electric Motor Manufacturer, transportation, warehousing, distributor, transportation, warehousing, CUSTOMER.

Forecasting

Predicting inventory requirement, materials and parts essential to effective inventory control. Develop inventory forecasts in conjunction with manufacturing scheduling and marketing forecasts of demand to assure that proper inventory levels are maintained to meet customer requirements.

Relationship Between Logistics and Marketing Mix (4)

Price, Product, Promotion, Place (Recent Trends)

Declining Trends for Logistics Relative to GDP

Started in the early 1980s and was related to the deregulation of transportation, which permitted much more flexibility for shippers to purchase transportation services and allowed more flexibility for carriers to adjust their freight rates and service in response to competition. A second factor contributing to the trend has been the improved management of inventory levels with more attention being focused on inventory investment and the technology available to managers to make more effective inventory decisions. Finally, the focus by many organizations on cash flow resulted in more emphasis on inventory turnover.

Logistics (Council of SCM Professionals)

That part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from point of origin to point of consumption in order to meet customer requirements.

Place

The distribution channel selection and involves both transactional and physical distribution channel decisions. Marketers typically become more involved in making decisions about marketing transactions and in deciding, -Example: whether to sell products to wholesalers or to deal directly with retailers. From the logistics manager's perspective, such decisions can affect logistics system requirements. -Example: wholesalers purchase in larger quantities with more predictably and consistency, thus lowering their service cost.

Time Utility

The economic value added to a good or service by having it at a demand point at a specific time when it is needed. Important today because of the emphasis on reducing lead time and minimizing inventory levels through logistics-related strategies to improve cash flow. Example: Having heavily advertised products and sale merchandise available in retail stores at the time promised in the advertisement or being able to supply products when there is an emergency are good examples of time utility. Logistics Activity

Spatial Relationships

The location of fixed points in the logistics system with respect to demand and supply points are very important to transportation costs. - The distance factor or spatial relationships may affect logistics costs in ways other than transportation costs. For example, a firm located far from one or more of its markets might need to use a market-oriented warehouse to make customer deliveries in a satisfactory time period. - Therefore, distance can add to warehousing and inventory carrying costs. - For many organizations, warehouse location decisions are made based on distance to market, distance from suppliers, and access to transportation.

Logistics in the Firm: The Micro Dimension

The micro dimension of logistics examines the relationships between logistics and other functional areas in an organization—marketing, manufacturing or operations, finance and accounting, and others. Focuses on processes that cut across traditional functional boundaries, particularly in today's environment with emphasis on the supply chain.

Recent Trends

The most significant trend is that marketers recognize the strategic value of place in the marketing mix and the increased revenues and customer satisfaction that might result from excellent logistics service. Many organization have recognized customer service as the interface activity between marketing and logistics and have aggressively and effectively promoted customer service as a key element of the marketing mix.

Dimensions and Roles of Logistics Systems

The outbound part of a manufacturer's logistics system interfaces with the inbound side of its customer's logistics system. SCM encompasses logistics and its relationship to the supply chain.

Macro Perspective of Logistics

The overall cost of logistics on a macro basis increases with growth in the economy. In other words, if more goods and services are produced, total logistics costs will increase. To determine the efficiency of the logistics system, the total logistics costs need to be measured in relationship to gross domestic product (GDP), which is a widely accepted barometer used to gauge the rate of growth in the economy. The reduction in logistics cost as a percent of GDP has resulted from a significant improvement in the overall logistics systems of the organizations operating in the economy. This reduction in relative cost allows organizations to be more competitive since it directly impacts the cost of producing goods. It can be argued that the turnaround that occurred in the U.S. economy in the early 2000s was due in part to the reduction in relative logistics costs

Logistics Interfaces with Marketing

The rationale for this strong relationship is that physical distribution, or the outbound side of an organization's logistics system, plays an important role in the sale of a product. In some instances, order fulfillment may be the key variable in the continuing sales of products; that is, the ability to provide the right product at the right time to the right place in the right quantities and the right cost can be the critical element in making a sale.

Quantity Utility

The utilities of when and where must be accompanied by how much. Delivering the proper quantities of an item to where it is demanded provides quantity utility. Logistics must deliver products at the right time, to the right pace, and in the right quantities to add utility and economic value to a product. All three are obviously interrelated. Example: assume that General Motors will be assembling 1,000 automobiles on a given day and is using a JIT inventory strategy. This will require that 5,000 tires be delivered to support the automobile production schedule. Assume that tire supplier only delivers 3,500 tires on time at the correct location. Even though when and where utilities are created, the how much utility is not. Thus, GM will not be able to assemble the 1,000 cars as planned. Logistics Activity

Form Utility

The value added to the goods through a manufacturing or assembly process. Results when raw materials or components are combined in some predetermined manner to produce a finished product. Example: When Dell combines components along with software to assemble a computer to a customer's specifications. The process of combining these different components represents a change in the product form that adds value to the finished product. Production/Manufacturing

Product

Their size, shape, weight, packaging, and other physical dimensions affect the ability of logistics and supply chain systems to move and store the new products. The physical dimensions of products affect the utilization and costs of warehousing and transportation systems such as equipment needed, damage rates, storage ability, use of materials-handling equipment such as conveyors and pallets, industrial packaging.

Density

Weight/space ratio affects transportation and warehousing costs. As density increases for a product, its transportation and warehousing costs tend to decrease. - When establishing their prices, transportation providers consider how much weight they can fit into their vehicles, since they quote their prices in dollars and cents per hundred pounds. - Therefore, on high-density items, providers can charge a lower price per hundred pounds because they can fit more weight into their vehicle.

Logistics Interfaces with Manufacturing or Operations

•Length of Production Time - The current trend toward "pull" systems where the product is "pulled" in response to demand as opposed to be "pushed" in advance of demand necessitates such flexibility. This practice lowers inventory levels, which can lower total logistics costs even though production costs may increase. •Minimizing the Inventory Impact of Seasonal Products - To minimize manufacturing cost and potential stock outs, production managers usually produce in advance of the holiday or event. This strategy requires accumulating inventory and the associated costs. The manufacturing cost savings should be traded off against the inventory costs and other related benefit or costs. •Inbound Side of Production - The logistics manager should ensure that available quantities of raw materials and components are adequate to meet production schedules yet are conservative in terms of inventory carrying costs. Because of the need for this type of coordination, many organizations today have shifted the responsibility for production scheduling from manufacturing to logistics. •Industrial Packaging - The principal purpose that industrial packaging serves is to protect the product from damage. This is distinct from whatever value the consumer packaging might have for marketing or promotional reasons. Management of global supply chains is intensifying the importance of the need for collaboration between logistics and production.

Areas included in Logistics

•Packaging •Warehouse/DC management •Parts and service support •Plant/warehouse site selection •Production scheduling

What are the 5 principal types of economic utility? (value-added roles of logistics)

•Time •Form •Possession •Quantity •Place

Key Logistics Activities

•Transportation •Storage •Industrial Packaging •Materials Handling •Inventory Control •Order Fulfillment •Demand Forecasting •Production planning and scheduling •Procurement •Customer Service •Plant and Warehouse Site Location •Parts and Service Support •Return Goods Handling •Salvage and Scrap Disposal

Understanding of Logistics Cost - 3 major categories

•Warehousing Cost •Inventory Cost •Transportation Cost •Other Cost