Logistics Management Short Answer exam 1
Logistics encompasses a relatively large number of managerial activities. Discuss five of these activities and why they are important to logistics systems.
1. Transportation involves the physical movement or flow of raw materials or finished goods and involves the transportation agencies that provide service to the firm. 2. Storage involves two closely related activities: inventory management and warehousing. A direct relationship exists between transportation and the level of inventory and 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. 3. Packaging involves the necessary packaging needed to move the product to the market. Logistics managers must analyze the trade-offs between the type of transportation selected and its packaging requirements. 4. Materials handling is important to efficient warehouse operation and concerns the mechanical equipment for short-distance movement of goods through the warehouse. 5. Order fulfillment consists of the activities involved with completing customer orders. Order fulfillment concerns the total lead time from when the order is placed to actual delivery in satisfactory condition. 6. Forecasting involves the prediction of inventory requirement and materials and parts essential to effective inventory control. 7. Production planning concerns the determination of 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 and control inventory. 8. Purchasing concerns the availability for production of needed parts, components, and materials in the right quantity, at the right time, at the right place, and at the right cost. Purchasing is included within the logistics area if it more effectively coordinates and lowers costs for the firm. 9. Customer service plays an important part in logistics by ensuring the customer gets the right product at the right time and place. 10. Logistics decisions about product availability and inventory lead time are critical to customer service. 11. Site location is concerned with creating time and place relationships between plants and markets, or between supply points and plants. Site location impacts transportation rates and service, customer service, inventory requirements, and possible other areas.
What product characteristics affect logistics costs? Discuss the effects of these characteristics on logistics costs.
A number of product-related factors affect the cost and importance of logistics. Among the more significant of these are dollar value, density, susceptibility to damage, and the need for special handling. 1. The product's dollar value typically affects warehousing costs, inventory costs, transportation costs, packaging costs, and even materials-handling costs. As the product's dollar value increases, the cost in each identified area also increases. 2. 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. Transportation providers may also charge higher prices for higher-value products since these customers may be willing to pay higher rates for transportation service. 3. Warehousing and inventory costs also increase as the dollar value of the product increases. Higher value means more working capital invested in inventory, resulting in higher total capital costs. In addition, the risk factor for storing higher-value products increases the costs of obsolescence and depreciation. Also, since the physical facilities required to store higher-value products are more sophisticated, warehousing costs increase with higher dollar value products. 4. Packaging costs also usually increase because the organization uses protective packaging to minimize potential damage to the product. An organization spends more effort in packaging a product to protect it from damage or loss if it has higher value. Finally, materials-handling equipment used to meet the needs of higher-value products is very often more sophisticated. Organizations are usually willing to use more capital-intensive and expensive equipment to speed higher-value goods through the warehouse and to minimize the chance of damage.
What are the current trends governing site selection?
A number of trends in today's logistics environment may have a significant effect on decisions involving logistics facility location. Included among these are the following: • Strategic positioning of inventories, such that fast-moving, profitable items may be located at "market-facing" logistics facilities. Slower-moving, less profitable items may be located at more regional, or national, facilities. • Aside from a general trend toward the elimination of many wholesaler/distributor operations, companies are moving to greater use of "customer-direct" delivery from manufacturing and other upstream supply chain locations. Many times, this bypasses and diminishes the need for complete networks of distribution facilities. • There is a growing use of and need for strategically located cross-docking facilities that serve as transfer points for consolidated shipments that need to be disaggregated or mixed into typically smaller shipments for delivery to individual customers. An example of this would be the consolidation of multiple-vendor shipments into full trailer loads being shipped to retail stores or points of use. Applied to inbound movements, this concept can significantly reduce the need for inbound consolidation facilities. • Due diligence for location and site selection decisions is placing great emphasis on access to major airports and/or ocean ports for import and export shipments. Greater use of providers of third-party-logistics services, who may assume part or all of the responsibility for moving a firm's products to its customers, and/or moving its inbound parts and materials to its manufacturing process. In the global setting, many of these companies are developing specialized abilities to facilitate the movements of import and export shipments
What contributions do successful supply chains make to companies?
A supply chain is boundary spanning; that is, encompassing a group of interrelated firms focused on delivering the best price or value products and services to the ultimate customer at the end of the supply chain. It was also noted that a supply chain can manage four important flows, namely, materials/products, information, financials, and demand. An important characteristic of today's world economy is the increasing regional economic integration. The globalized economy has led to multilateral trade promotion and lowered barriers to international business transactions. The best supply chains allow organizations to compete very successfully on a national, regional, and global basis.
List and discuss potential supply chain modeling pitfalls to avoid.
According to Bender, a number of common pitfalls should be avoided in designing and implementing an optimum worldwide supply chain. Recognizing these in advance should help to maximize the value to be achieved through use of appropriate mathematical techniques for supply chain network design. • Short-term horizon. Unless modeling features are designed, implemented, and used with a long-term perspective, significant suboptimization is likely to occur. • Too little or too much detail. Too little detail can make it difficult to implement results due to insufficient information; too much detail can create unnecessary complexity, making it difficult to understand the results and more difficult to implement effectively. • Thinking in two dimensions. While the use of two-dimensional maps certainly helps to provide insight into supply chain problems, the geometry of the networks may ignore cost and geographical dispersions of demand. Over significant distances, and particularly for global supply chain analyses, the curvature of the earth may distort distance calculations, in which case needed adjustments must be made. • Using published costs. Many published costs tend to represent "list" prices that need to be modified to reflect what may result after significant negotiations occur between buyers and sellers of transport services. • Inaccurate or incomplete costs. Analyses based on insufficiently accurate information lead to invalid results; inaccurate cost forecasts result in suboptimal allocations of resources, typically leading to seriously flawed strategies. • Fluctuating model inputs. Given the prevailing uncertainties in many of the relevant inputs to today's network design models, it is important to conduct sensitivity analyses to be aware of the potential wide swings in key model inputs. • Use of erroneous analytical techniques. The selected techniques and approaches should be matched with the level of precision desired; the identification of modeling objectives is an important forerunner to the selection of the techniques to be utilized. Lack of appropriate robustness analysis. Since most or all model inputs have at least an element of uncertainty, it is important to understand the consequences that could result from variation in actual behavior of key model inputs; robustness analysis can help to assure the practicality and validity of the results from the selected analyses.
Explain the underlying rationale for global trade and explain the difference between comparative and absolute advantage.
Adam Smith in his renowned treatise, THE WEALTH OF NATIONS, provided not only a rationale for a market economy based upon competition, but also advanced a rationale for trade among nations called the Theory of Absolute Advantage. Smith argued that countries would be better off if they would trade commodities where each country had an economic or cost advantage for one or more of the products that they produced. In other words, sell or trade products where they had a cost advantage and buy or trade for products where they did not have an advantage. Smith concluded that all participants in such transactions would be better off than trying to be self-sufficient. While the analysis was relatively simplistic, it was valuable advice, especially for that time period.
What is the significance of Globalization in Supply Chain Management?
Arguably, globalization is the most frequently cited change factor by business leaders, and it has replaced the post-World War II Cold War as the dominant driving force in world economics. The concept of the global marketplace or global economy has taken on new meaning for all enterprises (profit and nonprofit; small, medium, and large; products or services) and for individual consumers during the last two decades. Overall, globalization has led to a more competitively intense economic and geopolitical environment. This environment manifests itself in opportunities and threats, both economic and political. Some individuals have implied that there is no "geography" in the current global environment (figuratively speaking) or, perhaps more aptly, that time and distance have been compressed.
A number of authors have observed that traditional, hierarchical organizations have changed in the current global economy. How have organizations changed? Why have they changed? What are the impacts of those changes likely to be?
Changes have resulted in shorter product life cycles, new forms of competition and new business models. Traditional organizational structures and related business models frequently change as companies get more involved in outsourced manufacturing and some logistical activities such as transportation, warehousing, and order fulfillment. All of this impacts the supply chain and its related customer service activities. Out sourcing, off-shoring, and insourcing have become part of the lexicon of 21st century businesses, and information technology has allowed supply chains to be redesigned for more efficiency and effectiveness as well as better execution. Supply chain management has become an important, and for some organizations, even critical ingredient for their competitive strategy and success in this global environment. Companies have transformed themselves by changing their supply chains to take advantage of global opportunities. The synergism between globalization and technology, especially, has permanently changed the dynamics of the world's marketplace. This new era has and will continue to spotlight supply chains as a critical part of the ability of organizations to compete economically.
What are the essential factors for economic growth and increased development of global trade flows? Why are they so important in today's global economy?
Essential factors for economic growth and increased development of global trade flows include population growth and age distribution, urbanization, land and resources, economic integration, knowledge dissemination, labor mobility, financial flows and investment in infrastructure by public and/or private sources, faster communication systems, and improved financial services for the effective flow of goods and services. These factors are the driving forces for globalization around the world and need to be discussed in order to understand the future course of global trade and development.
How does logistics add value in the economy? How does logistics add value for firms? What, if any are the differences?
Five principle types of economic utility add value to a product or service. Included are form, time, place, quantity, and possession. Generally, production activities are credited with providing form utility; logistics activities with time, place, and quantity utilities; and marketing activities with possession utility.
Why are customer service and its related strategy so important for companies operating global supply chains? Do you think that customer service is more important than lower cost to the customers?
From a customer service perspective, global markets and strategy have four important characteristics. First, companies attempt to standardize to reduce complexity, but they have to recognize that global markets need some customization. For example, in contrast to the U.S. market where large retail stores buy in volume quantities for delivery to their large warehouses, less-developed countries may have tiny retail stores that are only 80 to 100 square feet. This means deliveries of small quantities, more frequent deliveries, different packaging, etc. Customer service levels have to be adjusted for these markets in terms of delivery schedules, volumes, order fulfillment, and other areas.
Why do companies analyze their logistics systems from the perspective of nodes and links?
From a node-link perspective, the complexity of logistics systems can vary enormously. A node system might use a simple link from suppliers to a combined plant and warehouse and then to customers in a relatively small market area. At the other end of the spectrum are large, multiple-product organizations with multiple plant and warehouse locations. The complex transportation networks of the latter can include three or four different modes and perhaps private as well as for-hire transportation. The node-link perspective, in allowing analysis of a logistics system's two basic elements, represents a convenient basis for seeking possible system improvements. As has been noted, the complexity of a logistics system often relates directly to the various time and distance relationships between the nodes and the links and to the regularity, predictability, and volume of flow of goods entering, leaving, and moving within the system.
Discuss how globalization and consolidation in supply have increased complexity.
Globalization and consolidation in supply chains have increased the complexity for organizations in terms of SKUs, customer and supplier locations, transportation requirements, trade regulations, taxes, and so forth. Companies need to take steps to simplify, as much as possible, the various aspects of their supply chains. For example, the number of SKUs has expanded for many companies, which exacerbates problems for inventory management and order fulfillment. Consequently, companies have been rationalizing SKUs to eliminate the slow movers and items that do not contribute to profitability. Locations also need to be analyzed to eliminate high-cost or duplicative operations. Customer service levels need to be rationalized, as do vendors or supplier alternatives. Layers of complexity develop and may seem necessary, but organizations need to continually evaluate those areas of complexity by evaluating processes, training people, and exploiting technology.
Distinguish between the locational determinants of labor climate, and quality of life.
Location decision makers consider a number of factors in determining the labor climate of an area, region or country. Given the typically labor-intensive nature of many logistics/supply chain operations, the cost and availability of labor are major issues of concern. Other factors to be considered include the workforce's degree of unionization, skill level, work ethic, productivity, and the enthusiasm of local public officials. A particular region's or area's quality of life is difficult to quantify, but it does affect the well-being of employees and the quality of work they are expected to perform. The quality-of-life factor is more important to companies that must attract and retain a mobile professional and technical workforce capable of moving to any location. Quality of life variables include climate, housing costs, health care and environment, crime, passenger transportation, education, recreation, the arts, and economic opportunities.
Physical distribution has a special relationship to marketing. What is the nature of the relationship between logistics and marketing? Is the relationship becoming more or less important? Why?
Logistics is sometimes referred to as the other half of marketing. The rationale for this definition is that the physical distribution or outbound side of an organization's logistics system is responsible for the physical movement and storage of products for customers and thus plays an important role in selling a product. In some instances, physical distribution and order fulfillment might be the key variables in selling a product; that is, the ability to provide the product at the right time to the right place in the right quantities might be the critical element in making a sale. Today, logistics is related to all four Ps of marketing—price, product, promotion, and place. 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. As a result, many organizations 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. Organizations in such industries as food, chemicals, pharmaceuticals, and technology have reported considerable success with this strategy to improve efficiency and effectiveness.
Discuss how Performance Measurement can affect Supply Chain Management.
Most organizations have measures of performance or metrics in place to analyze and evaluate their efficiency and progress over different time periods. Sometimes, such measures are used for setting baseline performance objectives or expected outcomes, for instance, orders filled and shipped per day. Measurement is important, and at this juncture, it is important to recognize that lower-level metrics in an organization must connect directly to the high-level performance measures of the organization and the supply chain, which are usually net profit, return on investment, or assets and cash flow. In some instances, metrics are set that appear logical for the subunit of the organization but are suboptimal for the overall organization or supply chain. For example, the warehouse manager who is measured by the cost per cubic foot of units stored will be motivated to fill the warehouse to the ceiling.
What is meant by the current description of the global economy that "time and distance have been compressed"? Do you agree? What has been the impact of this compression?
One can hardly dispute that the exponential rise and evolution of information technology, boundary spanning trade agreements, advances in transportation medium capabilities/capacities (better shipping, better over-ground transportation, access to ports and shipping lanes, etc.), and reduced product life cycles, along with many other factors, have combined to relatively "compress" time and distance when compared to business models of yesteryear. Whereas a customized personal computer may have taken weeks to build and ship in the mid-90s, an accepted standard due to lack of available alternative, can now reach the customer in a matter of days, if not hours. It can be argued that supply chains help to establish the limits of what is competitively possible in the market. In other words, the cost and value at the end of the supply chain help determine a firm's ability to compete in a global marketplace. Good supply chains are business power and good supply chain managers are continually pushing the limits of their supply chains to be viable in both domestic and global markets. Operating globally has become easier to accomplish due to advances in information/communications technology, as noted above, and the continuing improvement of specialists such as UPS, FedEx, DHL, etc., which can provide global supply chain services at a very reasonable cost. A growing number of specialists and continuing improvements in information technology/communications are contributing to the flattening of the world. Obviously, large global companies are also contributing to this phenomenon. It is safe to conclude supply chains and supply chain management play an important role in the global economy and have helped to push the growth and success of companies that do "supply chaining" very well. Reduced order cycle time, for example, has become an important part of supply chain management since it can lead to lower inventory levels for customers, improved cash flow, lower current assets, and accounts receivable. Conversely, the increased length and complexity of the supply chain make it more difficult to achieve shorter lead times. Global supply chains impact all with lower prices, increased array of products, and convenience (read 24/7, one-stop shopping, etc.), but are not without challenges.
Briefly describe the six major steps that are recommended for a logistics network design process.
Step 1: Define the Logistics/Supply Chain Network Design Process Step 2: Perform a Logistics/Supply Chain Audit Step 3: Examine the Logistics/Supply Chain Network Alternatives Step 4: Conduct a Facility Location Analysis Step 5: Make Decisions Regarding Network and Facility Location Step 6: Develop an Implementation Plan
Describe the concept of an "integrated supply chain" that begins with the supplier's supplier and ends with the final consumer.
Supply chain management can be viewed as a pipeline or conduit for the efficient and effective flow of products, materials, services, information, and financials from the supplier's suppliers through the various intermediate organizations or companies out to the customer's customers, or a system of connected networks between the original vendors and the ultimate final consumer. The extended enterprise perspective of supply chain management represents a logical extension of the logistics concept, providing an opportunity to view the total system of interrelated companies for increased efficiency and effectiveness.
Explain the relationship between logistics and supply chain management?
The concepts of supply chain management and logistics must be compared or, more appropriately, related to each other. Supply chain management is defined using a pipeline analogy with the start of the pipeline representing the initial supplier and the end of the pipeline representing the ultimate customer. In other words, it was an extended set of enterprises from the supplier's supplier to the customer's customer. Another perspective on supply chain management is to view it as a network of the logistics systems and related activities of all the individual organizations that are a part of a particular supply chain. The individual logistics systems obviously play a role in the success of the overall supply chain. The coordination or integration of the logistics systems in a supply chain is a challenge; no logistics system operates in a vacuum. For example, the inbound part of a manufacturer's logistics system interfaces with the outbound side of the supplier's logistics system. The outbound portion of the manufacturer's logistics system interfaces with the inbound side of its customer's logistics system.
Define and discuss the Grid Technique, including its advantages and disadvantages.
The grid technique is a simplistic, but well-known, heuristic approach to help companies with multiple markets and multiple supply points determine a least-cost facility location. Essentially, the grid technique attempts to determine a fixed facility (such as a plant or distribution center) location that represents the least-cost center for moving inbound materials and outbound product within a geographic grid. The technique determines the low-cost "center of gravity" for moving raw materials and finished goods. This technique assumes that the raw materials sources and finished goods markets are fixed and that a company knows the amount of each product it consumes or sells. The technique then superimposes a grid upon the geographic area containing the raw materials sources and finished goods markets. The grid's zero point corresponds to an exact geographic location, as do the grid's other points. Thus, the company can identify each source and market by its grid coordinates. The technique defines each source and market location in terms of its horizontal and vertical grid coordinates, and performs mathematical computations to find the ton-mile center. This equation will generate the least-cost location if transportation rates for raw materials and finished goods are the same. But transportation rates vary among commodities, and the ton-mile center equation does not reflect differences in the costs of moving commodities. The transportation rate pulls the location toward the location of the commodity with the higher rate. The higher rates of finished goods will draw the least-cost location toward the finished goods market and thereby reduce the distance the company moves these higher-rated goods. This will increase the distance the company transports lower-rated raw materials. Thus, the analysis must be refined to incorporate the transportation rates of different products. The grid technique's strengths are in its simplicity and its ability to provide a starting point for location analysis. Computationally, the technique is relatively easy to use. A company can generate the necessary data from sales figures, purchase records, and transportation documents (either the bill of lading or the freight bill). More exact market and source location coding is possible, as is modifying the rate-distance relationship quantification. A computer can easily handle such refinements. The grid technique also provides a starting point for making a location decision. Although transportation cost is not the only locational determinant, use of the grid technique can help at the early stage in the network design process by helping the decision maker to focus on an area or areas that are logistically advantageous. The grid technique has limitations that the decision maker must recognize. First, it is a static approach, and the solution is optimum for only one point in time. Changes in the volumes a company purchases or sells, changes in transportation rates, or changes in raw materials sources or market locations will shift the least-cost location. Second, the technique assumes linear transportation rates, whereas actual transportation rates increase with distance but less than proportionally. Third, the technique does not consider the topographic conditions existing at the optimum location; for example, the recommended site may be in the middle of a lake. Fourth, it does not consider the proper direction of movement; most moves occur along a straight line between two points, not "vertically" and then "horizontally."
The Pharmaceutical industry has been challenged in recent years. It is still an important part of the economy but it needs to make changes in its supply chains and related activities to be more competitive and financially viable in the 21st century. Discuss three of those changes.
There is a glaring need for managing the supply chains in the Pharmaceutical industry more efficiently and effectively along with better execution. Discussion with key executives noted a need to change their strategy from a push approach to a pull strategy. The push approach has led to overstocks of some SKU's and stock-outs of others with consequent higher inventory costs and perhaps lost sales. There is also a need for their supply chains to be more responsive to demand "signals" in a timely manner. Another needed change is more collaboration with suppliers, customers, and logistics service providers. In the past, Pharmaceutical companies could essentially dictate and control what happened in their supply chains. Participants in the supply chain were usually not considered to be "partners" or needed collaborators. Valuable information and potential innovations were probably squandered along the way. As has been pointed out in recent years, supply chain collaborators and partners often provide half or more of the innovative changes that lower cost and/or improve service. Another need is for improved information flow and management as well as more visibility along the supply chain. This is a necessary ingredient for improved decisions in logistics and transportation. Too frequently, data has been incomplete or incorrect resulting in higher cost and/or ineffective customer service. Timely and accurate information flow is important and is a necessary part of improving Pharmaceutical supply chains and the financial viability of the industry.
Explain how today's consumers are empowered and how they impact Supply Chain Management.
Today's consumers are more enlightened and educated, and they are empowered more than ever by the information that they have at their disposal from the Internet and other sources. Their access to supply sources has expanded dramatically beyond their immediate locale by virtue of catalogs, the Internet, and other media. They have the opportunity to compare prices, quality, and service. Consequently, they demand competitive prices, high quality, tailored or customized products, convenience, flexibility, and responsiveness. They tend to have a low tolerance level for poor quality in products and services. Consumers also have increased buying power due to higher income levels. They demand the best quality at the best price and with the best service. These demands place increased challenges and pressure on the various supply chains for consumer products.
What is the role of Transportation Management in connection with Supply Chains?
Transportation can be viewed as the glue that makes the supply chain model function. The critical outcomes of the supply chain are to deliver the right product, at the right time, in the right quantity and quality, at the right cost, and to the right destination. Transportation plays an important role in making these "rights" happen. Another aspect of the importance of transportation is related to some of the strategies that are being used by companies to remain competitive in today's economy—for example, just-in-time inventory, lean logistics and manufacturing, and scheduled deliveries. The challenge has been exacerbated by economic changes among transportation providers; shortages of drivers, higher fuel costs, and changes in driver hours regulations have led to what some individuals have called a transportation crisis or the "perfect storm." Transportation has gone from being a readily available commodity to potential users, especially in the 1990s, to today where transportation is scarce in some market areas.
Define the principles of tapering rates, blanket rates, and commercial zones and the implication of each on location selection.
Transportation rates increase with distance but not in direct proportion to distance. This tapering-rate principle results from the carrier's ability to spread certain fixed shipment costs, such as loading, billing, and handling, over a greater number of miles. As noted by Edgar M. Hoover, a tapering rate in a one-source, one-market situation pulls the location to either the source or the market but not to a point in between. A noted exception to the preceding rate structure is the blanket rate. The blanket rate does not increase with distance; it remains the same from one origin to all points in the blanket area. The carriers establish such rates to ensure a competitive price for a product in a given area, thereby ensuring demand for the product and its transportation. An example of a blanket rate would be the same rate on wine traveling from the West Coast to all points east of the Rocky Mountains, enabling the West Coast wine to compete with imported wines entering the East Coast. The blanket rate eliminates any transportation cost advantage or disadvantage that companies associate with a given location. The blanket rate, then, is a mutation of the basic rate-distance relationship that eliminates the transportation rate as a locational determinant; it is the exception rather than the rule in transportation rates. A specific blanket area is the commercial zone, the transportation definition of a particular city or town. It includes the municipality itself plus various surrounding areas. The commercial zone rates that carriers quote to a particular town or city also apply to points in the surrounding area within the commercial zone. The commercial zone's locational impact appears near the end of the location decision process when a company selects a specific site. If the specific site is beyond the limits of a municipality's commercial zone, rates that apply to the city do not apply to the site. Also, a site outside the commercial zone reduces carrier availability, especially the availability of motor carriers that define their operating scopes in terms of point-to-point operations.
The text mentions four subdivisions of logistics. Pick one, define, and discuss.
• Business logistics: That part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, service, and related information from point of origin to point of consumption in order to meet customer requirements. • Military logistics: The 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. • Event logistics: The 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. • Service logistics: The acquisition, scheduling, and management of the facilities, assets, personnel, and materials to support and sustain a service operation or business. All four subdivisions have some common characteristics and requirements such as forecasting, scheduling, and transportation, but they also have some differences in their primary purpose. All four, however, can be viewed in a supply chain context; that is, upstream and downstream other organizations play a role in their overall success and long-run viability.
