Chapter 2 Logistics strategy and planning

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Chapter 2 Logistics strategy and planning

• Focused on planning and the decision making that
  leads to good logistics plans that contribute to
  the financial goals of the firm.

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Objectives of the firm
Visioning process
Definitive plans
Corporate strategy
Functional strategy
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Four components of strategy

• Customers
• Suppliers
• Competitors
• Company

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Corporate strategy

• The corporate strategy drives the functional
  strategies since they are contained within the
  former, as shown in Figure 2-1.

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Corporate strategy

• Box 2.1 example
• Xeror to be No. 1 in field service
• Star Kist Food supply-side strategy, marketing
  and logistics responded with their plan to
  control the potential excess inventories.

Logistics strategy

• Three objectives
• cost reduction ?warehouse location, transport
  modes
• capital reduction ?shipping directly, public
  warehouse
• service improvement

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Logistics strategy

• Box 2.2 example

• Office machine company Traditionally,
  technicians were assigned from a service center
  to the customer repair site.
• Improve ? when a machine broke down a
  replacement machine would be sent to the customer
  and the broken machine sent to the service center
  for repair.
• See figure 2-2, flow of logistics planning.

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Logistics strategy
Flow of Logistics Planning
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• ?????(Just-in-Time, JIT)???????(Quick-Response
  System, QR)
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• EDI, VAN
• ??????(Cross-Docking)

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• ???????( Third Party Logistics)

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Logistics planning

• 1.Level of planning
• Strategic planning usually more than one year.
• Tactical planning usually less than one year.
• Operational planning is short-range decision
  making.
• See table 2-1, examples of strategic, tactical
  and operational decision making.

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• Table 2-1, Examples of strategic, tactical and
  operational decision making.

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Logistics planning

• 2. Major planning areas
• Four major problem areas
• a.  customer service levels
• b.  facility location
• c.  inventory decisions
• d.  transportation decisions
• See Figure 2-3, the triangle of logistics
  decision making.

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3. Conceptualizing the logistics planning
problem
Links the links of the network represent the
movement of goods between various inventory
storage points. Nodes the storage points
retail stores, warehouse, factories or
vendors. Logistics system include product flow
and information flow.
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affect
affect
Order cycle time inventory levels
customer service.
4  when to plan a.  logistics system not
exist. b.  to modify the existing system. (1) 
Demand (2)  Customer service includes inventory
availability, speed of delivery, and
order-filling speed and accuracy. (3)  Product
characteristics Ex product weight, volume
(cube), value and risk. (4)  logistics
costs a.total cost. b.to improve the logistics
system. (5)  Pricing policy Ex f.o.b factory
price vs. delivered price.
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Guidelines for strategy formulation

• 1.Total cost concept
• 2.Differentiated distribution
• 3.Mixed strategy
• 4.Postponement
• 5.Consolidation
• 6.Standardization

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Total cost concept

• Trade-off analysis is the recognition that cost
  patterns of various activities of the firm
  frequently display characteristics that put them
  in conflict with one another.

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• Transportation service characteristics
  Transportation cost vs. Inventory cost.
• The best economic choice occurs at the point
  where the sum of both costs is lowest. (dashed
  line)

(a)setting the customer service level

• improved customer service level will reduce lost
  sales cost.
• improved service usually means that more must be
  paid for transportation, order processing and
  inventories.

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(b)Determining the number of warehouses in
a logistics system.
When the number of stocking points is increased
(1) transportation costs decline. (2) inventory
costs rise.
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(c) Setting safety stock levels
When safety stock is increased (1) customer
service ? (2) inventory carrying cost ? (3) lost
sales cost ? (4) transportation costs remain
relatively unaffected.
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(d) Setting the sequence of production runs for
multiple products
As the production sequence is changed. 1.inventory
carrying cost ? (mass production) 2.production
costs ? (setup times ? changeover cost ?)
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Box 2.4 Application

• Marine products manufacturer constructing a
  warehouse in St. Louis
• Consider transportation costs minimize
• Consider inventory costs minimize
• Constructing warehouse in Chicago.
• Final, the partially constructed warehouse and
  move the inventory to Chicago

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Differentiated distribution

• Not all products should be provided the same
  level of customer service.
• Different customer service requirement, different
  product characteristics, and different sales
  levels.
• Inventory location.
• Transportation rate (vehicle load volumes)
• Sales volume.

• Fast-moving items ? forward locations in the
  distribution channel.
• Medium volume items ? in fewer regional
  locations.
• Slow moving items ? centralized stocking points
  such as plants.

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Differentiated distribution

• See Box 2.5 application.
• A small specialty chemical company.
• All products were produced at a single location.
• All large customer orders (top 10 of the
  companys volume), will to be shipped direct to
  customers from the plant.
• Other small shipment sizes, were to be shipped
  out of two strategically located warehouse.
• Saved 20 distribution costs.

• Others
• Regular customer orders regular distribution
  channel might be to fill orders from warehouses.
• Back orders out-of-stock, a backup distribution
  might be to fill orders from secondary stocking
  points.

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Mixed strategy

• The concept of a mixed strategy is similar to
  that of differentiated distribution.
• See Box 2-6 application.
• Drug retailer Six warehouses was used to service
  about 1000 stores.
• Strategy

1.Private warehouses and trucks to provide high
levels of service to the stores. 2.Use some
public (for rent) warehouse space, could offer
lower total costs.
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Mixed strategy
A total cost curve for single and mixed
warehousing strategies.
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Postponement

• The time of shipment and the location of final
  product processing in the distribution of a
  product should be delayed until a customer order
  is received.
• Ex Dell computer corporation, practices form
  postponement by configuring microcomputer system
  to customer order from available options.

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Postponement type
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Postponement is favored when the following
characteristics appear to be present

• Technology process characteristics
• Product characteristics
• Market characteristics

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Consolidation

• Creating large shipments from small ones.
• Ex customer orders arriving at a warehouse might
  be combined with orders received at a later time
  period.

• Box 2.9 application
• A firm had a master warehouse in the Rochester,
  NY.
• The merchandise consisted of many items purchased
• in small quantities from thousands of
  vendors
• Established consolidation terminals in major
  vendor
• regions.

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Standardization

• Standardization in production is created by
  interchangeable parts, modularizing product, and
  labeling the same products under different brand
  names.
• Ex Clothing manufacturers do not attempt to
  stock exact sizes that many customers require,
  but alter standard sizes to fit.

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Concluding comments
Goals 1.cost reduction 2.capital
reduction 3.service improvement Four key
areas 1.customer service 2.location 3.inventories
4.transportation
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