After studying this chapter you will be able to understand: Six concepts for logistics strategy formulation, Total cost concept, differentiated distribution, mixed strategy, postponement, shipment consolidation, product standardization,...
Logistics Management LSM 730 Lecture Dr Khurrum S Mughal 1-1 Logistics/Supply Chain Strategy and Planning “If you don’t know where you want to go, any path will do.” 2-2 Six Concepts for Logistics Strategy Formulation • Total Cost Concept – • Differentiated distribution – • Not all products should be provided the same level of customer service Mixed strategy – • Tradeoff conflicting costs at optimum A pure strategy has higher costs than a mixed strategy Postponement 1-3 Six Concepts for Logistics Strategy Formulation • Total Cost Concept – Tradeoff analysis – Tradeoff conflicting costs at optimum – Examples: • Direct cost of Transport Service vs Indirect cost of inventory levels 1-4 C o s t, in d o lla rs A Cost Conflict in Logistics Total cost Cost of transportation service Inventory cost (includes storage and intransit Rail Truck Air Transportation service (greater speed and dependability) 2-5 Six Concepts for Logistics Strategy Formulation • Total Cost Concept – Tradeoff analysis – Tradeoff conflicting costs at optimum – Examples: • Higher level of customer service resulting in less lost sales Vs • Cost of inventories, transportation and order processing 1-6 A Cost Conflict in Logistics 2-7 Six Concepts for Logistics Strategy Formulation • Total Cost Concept – Tradeoff analysis – Tradeoff conflicting costs at optimum – Examples: • • • When customers purchase in small quantities and inventory is replenished in large quantities Out Bound inventory transport cost exceeds inbound transport costs Deciding on number of stocking points considering – Inventory vs transportations costs 1-8 A Cost Conflict in Logistics 2-9 Six Concepts for Logistics Strategy Formulation • Total Cost Concept – Tradeoff analysis – Tradeoff conflicting costs at optimum – Examples: • At higher level of customer satisfaction – Cost of lost sales vs Inventory Carrying Costs 1-10 A Cost Conflict in Logistics 2-11 Six Concepts for Logistics Strategy Formulation • Total Cost Concept – Tradeoff analysis – Tradeoff conflicting costs at optimum – Examples: • • In case of Multi-product scheduling Increase in Inventory costs with change in production sequence 1-12 A Cost Conflict in Logistics 2-13 Six Concepts for Logistics Strategy Formulation • Total Cost Concept – • Tradeoff conflicting costs at optimum Application – Manufacturer of Marine Products • • Warehouse in St Louis Vs Chicago to minimize transport cost Different results when inventory costs were considered 1-14 Six Concepts for Logistics Strategy Formulation • Differentiated distribution – Not all products should be provided the same level of customer service • – Products to be delivered directly to customers Vs delivered from warehouses – Customer ordering in high volumes might be served directly – Fast Moving Items in field warehouses, medium in fewer regional locations, slow moving items in centralized locations Application: Chemical company 1-15 Six Concepts for Logistics Strategy Formulation • Mixed strategy – A pure strategy has higher costs than a mixed strategy – Administrative ease in pure strategy along with economies of scale – When products differ in cube, weight, order size, sales volume, and customer service level – Application • Retailer of prescription drugs with six1-16 ware houses Pure vs Mixed Strategy Cost Current strategy All private Suggested strategy Combined private-public All public Warehouse alternatives 2-17 Six Concepts for Logistics Strategy Formulation • Postponement – Delay formation of the final product as long as possible – Avoid shipping of goods in anticipation of when demand will occur (time postponement) – Avoid creating the form of the product in anticipation of that form (form postponement) 1-18 Six Concepts for Logistics Strategy Formulation • Postponement – Application • • • JCPenny by filling orders on demand from relatively few warehouses Dell computers practices Form postponement Sherwin-Williams has variety of paint colors but practices form postponement 1-19 ... of stocking points considering – Inventory vs transportations costs 1 -8 A Cost Conflict in Logistics 2-9 Six Concepts for Logistics Strategy Formulation • Total Cost Concept – Tradeoff analysis... Examples: • • In case of Multi-product scheduling Increase in Inventory costs with change in production sequence 1-1 2 A Cost Conflict in Logistics 2-1 3 Six Concepts for Logistics Strategy Formulation... customer satisfaction – Cost of lost sales vs Inventory Carrying Costs 1-1 0 A Cost Conflict in Logistics 2-1 1 Six Concepts for Logistics Strategy Formulation • Total Cost Concept – Tradeoff analysis