Paul R. Murphy Jr. A. Michael Knemeyer Contemporary Logistics Global Edition Pearson 2018 Trang 21 95,131 167,187 203,223 263
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1
An Overview Of LOgistics
Learning Objectives 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8
Learning Objective
1.1
To discuss the economic impacts o logistics To To T o defne what logistics is To T o analyze the increased importance o logistics To T o discuss the systems and total cost approaches to logistics logistics To T o expose you to logistical relationships within the frm To T o introduce you to marketing channels To T o provide a brie overview o activities in the logistics channel channel To T o amiliarize you with logistics careers
ECONOMIC IMPACTS OF LOGISTICS
Although the logistics discipline today is vastly dierent rom what it was like when the frst edition o this book was published in the the 1970s, one thing that remains constant is the the economic impact o logistics. Beore defning what logistics is, we believe it is important to discuss the economic aspects o logistics; you might be surprised at its signifcant economic impact. From a macroeconomic perspective, Table spective, Table 1.1 presents 1.1 presents logistics costs in relation to gross domestic product (GDP) or a select group o countries. Although absolute and relative logistics logistics costs in relation to GDP vary rom country to country, logistics is most defnitely an important component in any country’s economy. economy. More speciically, speciically, logistics can play an important role in a nation’ nation’ss economic growth g rowth and development. For example, relatively high logistics costs (as a percentage o GDP) in the People’s Republic Republic o China (China) continue to restrict the country’s economic development; in particular, the high costs o highway transportation have severely severely constrained the growth o China’ China’ss e-commerce mar1 ket. In a similar ashion, the growth o e-commerce sales in India is challenged by logistical ineiciencies to include poor roads and inerior transportation transpor tation equipment.2 Apart rom the previous examples o macrolevel economic impacts, the economic economic impacts o logistics can aect individual consumers such as you. These impacts can be illustrated through the conceptt o economic utility, which is the value or useulness o a product in ulilling concep ul illing customer needs or wants. The our general types o economic utility are possession, orm, time, and place; logistics clearly contributes to time and place utilities. Possession utility reers to the value or useulness that comes rom a customer being able to take possession o a product. Possession utility can be inluenced by the payment terms associated with a product. Credit and debit cards, or example, acilitate possession utility by allowing the customer to purchase products without having to produce cash or a cash equivalent. Likewise, 1
Hua Wang, “High Logistics Cost, Toll Road and Institutional Factors Countermeasure in China,” Journal China,” Journal of Modern Accounting and Auditing , 7, no. 11 (2011): 1301–1306. 2 Sean McLain and Newley Purnell, “Indian Startups Vie to Win E-Commerce Battle,” The Wall Street Journal , October 25, 2015.
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Chapter 1 • An Overview of Logistics
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1.1 The Cost of the Business Logistics System in Relation to a TABLE 1.1 Country’ss Gross Domestic Product Country’ Country
Logistics as a Percentage of GDP
United States Brazil South Africa India People’s Republic of China Vietnam Indonesia
8.5 12.0 12.8 13.0 18.0 25.0 27.0
Various country reorts. Sources: Various Sources:
autootive leases allow custoers custoers to take ossession o a ore desirable odel than would be ossible with conventional autootive loans. Form utility reers to a roduct’s being in a or that (1) can be used by the custoer and (2) is o value to the custoer. Although or utility has generally been associated with roduction and anuacturing, logistics can also contribute to or utility utility.. For exale, to achieve roduction econoies (i.e., lower cost er unit), a sot-drink coany ay roduce thousands o cases o a certain tye o sot drink (e.g., diet cola). You’re You’re not likely to urchase diet cola by the thousands o cases (unless Through you’re having you’re a really big social butthousands rather in lotosizes, a sixor twelve-ack. allocation, logistics can event!) break the thousan ds saller o cases diet such cola as into the saller quantities that are desired by custoers. Place utility reers to having roducts available where they they are needed by custoers; roducts are oved ro oints o lesser value to oints o greater value. Continuing with the diet cola exale, lace utility is increased by oving oving the soda ro a oint o lesser value (e.g., (e.g., stored in a warehouse) to a oint o greater value (e.g., (e.g., on a suerarket shel). shel). Closely related to lace utility is time utility, which reers to having roducts available when they are needed by custoers. It is iortant to recognize that dierent roducts have dierent sensitivities to tie; three-day late delivery o erishable ites likely has ore serious consequences than three-day late delivery delivery o nonerishable ites. ites. Siultaneously achieving ossession, or, lace, and tie utility goes a long way toward acilitating—but not guaranteeing—custoer guaranteeing—custoer satisaction. Consider the exerience o a orer student who laced an online order o Val Valentine’ entine’ss Day lowers or his out-o-state girlriend. The seller acilitated ossession utility by allowing the student to ay by credit card, and a healthy arrangeent o the correct bouquet (or utility) arrived at the girlriend’s residence on Valentine’s Day (lace and tie utility). Although the seller rovided ossession, or, lace, and tiely utility, the buyer was quite unsatisied with his urchase. The roble: The greeting card that accoanied accoanied the lowers had the wrong nae or the girlriend g irlriend (but the right nae or the boyriend)!
LOGISTICS: WHAT IT IS Now that you have been introduced to select econoic iacts o logistics, it’s it’s iortant to dene what logistics is. This book adots the denition roulgated by the Council o Suly Chain Manageent Proessionals (CSCMP), one o the world’s world’s ost roinent organizations or logistics roessionals.. According to the CSCMP, roessionals CSCMP, “Logistics anageent is that art o suly chain anageent that lans, ileents, and controls the ecient, eective orward and reverse fow and storage o goods, services, and related inoration inoration between the oint o origin and the oint o consution in order to eet custoers’ requireents.” requireents.”3 3
www.csc.org/about-us/suly-chain-anageent-denitions www .csc.org/about-us/suly-chain-anageent-denitions
Learning Objective
1.2
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Part I • Overview Overview of Logistics
Let’s analyze this deinition in closer detail. First, logistics logist ics is art o suly chain anageent. We’ll talk about suly chains and suly chain anageent in greater detail in Chater 5, 5, but the key oint or now is that logistics is art o a bigger icture in the sense that suly chain anageent ocuses on coordination aong business unctions (such as arketing, roduction, and inance) within and across organizations. The act that logistics is exlicitly recognized as art o suly chain anageent eans that logistics can aect how how well (or how oorly) an individual ir—and its associated suly chain(s)—can achieve goals and objectives. The CSCMP deinition also indicates that logistics logistics “lans, ileents, and controls.” controls.” O articular iortance is the word and , which suggests that logistics should be involved in all three activities—lanning, ileenting, controlling—and not just one or two. Note that the CSCMP deinition also reers to “eicient and eective orward and reverse lows and storage.” Broadly seaking, eectiveness can be thought o as, “How well does a coany do what it says it’s it’s going to do?” For exale, i a coany roises that all orders will be shied within 24 hours o receit, what ercentage o orders are actually shied within 24 24 hours o receit? In contrast, eiciency eiciency can be thought o as how well (or oorly) coany resources are used to achieve what a coany roises it can do. For instance, soe coanies use reiu or exedited transortation services—which cost ore oney—to cover or shortcoings in other arts o their logistics systes. With resect to orward and reverse lows and storage, or any years logistics ocused only on orward lows and storage, that is, those directed toward the the oint o consution. Increasingly, Increasingly, however,, the logistics disciline has recognized the iortance however ior tance o reverse lows and storage ( reverse reverse logistics ), that is, is, those that originate at at the oint o consution. Although the ajority o the discussion in this book ocuses on orward logistics, coanies today recognize and strategic ilications o reverse logistics logistics. . Indeed,any reverse logistics continues to growthe in tactical iortance as individual coanies, and select suly chains, recognize it as an oortunity or coetitive advantage.4 One illustration o this is FedEx Cororation’s Cororation’s (a leading logistics service ser vice rovider) 2015 acquisition o GENCO GENCO,, a logistics service rovider with long-standing exertise exer tise in reverse logistics. The CSCMP deinition also indicates that logistics involves the low low and storage o “goods, services, and related inoration.” Indeed, in the conteorary business environent, logistics is as uch about the low and storage o inoration as it is about the low and storage o goods. The iortance o inoration in conteorary logistics is catured by Fred Sith, Sith, CEO and chairan o FedEx, who believes believes that “inoration about the ackage is as iortant as the ackage itsel.”5 Furtherore, an iortant conteorary logistics and suly chain axio involves the ability to substitute inoration or inventory;6 or exale, the cash register at any conteorary retailers also tracks what and when roducts are being urchased. Finally, the CSCMP deinition indicates that the urose ur ose o logistics is “to eet custoer requireents.” This is iortant or several reasons, with one being that logistics strategies and activities should be based on custoer wants and needs, rather than the wants, needs, and caabilities o anuacturers or retailers. retailers. Conteorary inoration technology acilitates an understanding o custoer wants and needs and this technology allows or real-tie interactive counication counication with custoers—a key to eeting custoer requireents. requireents. A second reason or the iortan iortance ce o eeting custoer requireents is the notion that because dierent custoers have dierent logistical needs and wants, a one-size-its-all logistics aroach (mass logistics) —in which every every custoer gets the sae tye and levels levels o logistics ser vice—will result in soe custoers custoers being overserved while others are underserved. underserved. Rather, coanies should consider tailored logistics aroaches, in which grous o custoers with siilar logistical needs and wants are rovided with logistics service aroriate to these needs and wants.7
4C.
Cliord Deee, Terry Eser, and Diane Mollenko, “Leveraging Closed-Loo Orientation and Leadershi or Environental Sustainability, Sustai nability,”” Supply Chain Management: An International Journal , 14, no. 2 (2010): 87–98. 5
Quote by Fred Sith, CEO and chairan o FedEx.
6
David Ross, Distribution Ross, Distribution Planning Planning and Control : Managing in an Era o Supply Chain Management , 3rd ed. (New York: Sringer, 2015).
Chapter 1 • An Overview of Logistics
For exale, one articular retailer ight require all its suliers to route roducts through the retailer’s distribution centers while another retailer ight require its suliers to send roducts directly to the retailer’s stores. The rinciles rin ciles in this textbook are generally g enerally alicable not only to or-roit situations, but also to governental and not-or-roit situations. Fro a governental ersective, logistics is quite gerane to the ared orces, which shouldn’t be surrising, given that logistics was irst associated with the ilitary. Consider the otential consequences o a suly chain disrution. For exale, in 2015 Russia oicially closed the Northern Distribution Network—consisting o railway and road links—that rovided a key logistics route into Aghanistan or countries that were ighting the Taliban insurgency insurgency..8 A counity ood bank rovides one exale o the relevance o logistics to not-or-roit not-or-roit situations.. As an exale, the Food Bank o New York situations York City is resonsible or delivering nearly 75 illion ounds o ood annually to ore than 1,000 ood assistance rogras such as hoeless shelters and ood antries antries.. Fro a logistical ersective, ersective, the Food Bank o New York York City is resonsible or collecting, storing, reacking, and distributing ood ro its 90,000-square-oot warehouse. warehouse.9 Furtherore, humanitarian logistics reresents an eerging alication o logistics to notor-roit situations. Briely, huanitarian logistics can be deined as the rocess and systes involved in obilizing eole, resources, skills, skills, and knowledge to hel eole who have been aected by either a natural or an-ade disaster.10 For exale, natural disasters such as a catastrohic earthquake require ood and edical sulies to be located, collected, transorted, and distributed— and sooner, rather than later. Because Because o the increasing requency (and severity) severity) o disasters over the ast 50 years, huanitarian logistics is likely to be an iortant toic into the oreseeable uture.
THE INCREASED IMPORTANCE IMPORTANCE OF LOGISTICS The oral study o business logistics, and redecessor concets such as trac anageent and hysical distribution, has existed since the second hal o the twentieth century. century. Quite rankly, rankly, ro aroxiately 1950 to 1980, liited areciation areciation was shown or the iortance o the logistics disciline. Since 1980, however, increasing recognition has been given to business logistics, in art because o treendous—an treendous—and d raid—changes in the disciline. Several key reasons or this are discussed next.
A Redction in Economic Reglation During the 1970s and 1980s, widesread reductions in econoic regulation (coonly reerred to as deregulation ) relaxed governent control o carriers’ rates and ares, entry and exit, ergers and acquisitions, and ore. These controls were articularly onerous in the U.S. U.S. transortation industry in the sense that rice coetition was essentially nonexistent, and custoers were retty uch orced to accet whatever service the carriers chose to rovide. This eant that logistics anagers had relatively little control over one o the ost iortant cost coonents in a logistics syste. Reductions in econoic regulation in the U.S. airreight, railroad, and trucking industries allowed individual carriers lexibility in ricing and service. This lexibility lexibility was iortant to logistics or several reasons. First, it rovided coanies with the ability to ileent the tailored logistics aroach discussed earlier, in the sense that coanies could seciy dierent logistics service levels, and rices could be adjusted accordingly. Second, the increased ricing lexibility allowed large buyers o transortation services to reduce their transortation costs by leveraging large aounts o reight with a liited nuber o carriers. 7
Joseh B. B. Fuller, Jaes O’Conor, O’Conor, and Richard Rawlinson, “Tailored Logistics: The Next Advantage,” Harvard Business Review 71, no. 3 (1993): 87–98. 8htt://www.silkroadreorters.co/2015/06/19/central-asia-will-iss-the-northern-distribution-network 9
www.oodbanknyc.org www .oodbanknyc.org
10
Luk N. Van Wassenhove, “Huanitarian Aid Logistics: Suly Chain Manageent in High Gear,” Journal Gear,” Journal o the Operational Research Society , 57 (2006): 475–489.
Learning Objective
1.3
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Part I • Overview Overview of Logistics
Although the receding Although receding discussion discussion has ocused ocused on lessened econoic econoic regulation regulation in the United States, it aears that deregulation has had siilar eects in other countries. For exale, lessened econoic regulation o transortation aong Euroean countries has resulted in lower rices or truck shients in these countries.11 Likewise, rivatization rivatization o coercial airorts has been ound to irove their oerational eiciency relative to governent-ow governent-owned ned and/or governent-oe governent-oerated rated airorts.12
Changes in Consmer Behavior A coon business adage suggests that “change is the only constant.” Although changes in consuer behavior are coonly the urview o the sychology and arketing discilines, such such changes have iortant logistical ilications as well. Several Several exales o changes in consuer behavior (custoized custoer, changing aily roles, and rising custoer exectations) and their ossible logistical ilications are discussed next. The customized customer signiies signiies that the custoer desires a roduct oering that is highly tailored to the custoer’ custoer’ss exact reerences. One aroach or addressing the custoized custoer is through ass custoization, which reers to the ability o a coany to deliver highly custoized roducts and services that are designed to eet the needs and wants o individual segents or custoers. Going orward, ass custoization is likely to be acilitated by advances in 3D printing (additive anuacturing), anuacturing), a rocess o aking three-diensional solid objects ro a digitized ile.13 Furtherore, the custoized custoer will not accet a “one size its all” aroach, and this eans that logistics systes ust be lexible rather than rigid. As an exale, logistics service ro viders such as FedEx and and UPS oer a variety variety o delivery otions to rosective rosective custoers; custoers; custoers can choose sae-day delivery, delivery, next-day delivery by noon, next-day delivery by the close o business, or second-day delivery by noon, aong others. As a general rule, the earlier the delivery tie, the ore exensive the transortation cost. In ters o changing amily roles , in the United States aroxiately 60 ercent o ailies with children reort that both arents work. One consequence o these dual-incoe ailies has been an increasing ehasis on the convenience associated with a aily’s aily’s grocery grocer y shoing exeriences. This convenience is aniested in various ways to include extended store hours, hoe delivery o urchased ites, and ready-to-eat/ready-to-cook ready-to-eat/ready-to-cook oods, and each o these has logistics-related ilications. With extended store hours—soe stores are now oen 24 hours—retailers ust address issues such as the otial delivery ties or relenishent trucks and when to relenish erchandise. For exale, it wouldn’t be a good idea or a 24-hour grocery store to relenish the shelves when its stores are crowded with custoers. Although hoe delivery could be convenient or the urchaser, the tie-sensitiv tie-sensitivee nature o grocery roducts eans that delivery should be ade when the urchaser is at hoe. As such, scheduling hoe deliveries to coincide with the urchaser’s urchaser’s availability is araount to avoiding dissatisied custoers custoers..14 Finally, the growth in ready-to-eat/ready-to-cook oods eans that soe ood rocessors have added high-volue cooking systes at their roduction acilities. Fro a logistics ersective,, ood rocessors continue to exerient with ackaging alternatives that will extend the ersective shel lie o ready-to-cook oods. For For exale, innovative innovative vacuu ackaging technology now allows or shel lives o u to 45 days or chilled (and not rozen) ors o icrowav icrowavable able oods.15
11
Francine LaFontaine and Laura Malaguzzi Valeri, “The Deregulation o Inte rnational Trucking in the Euroean Union: For and Eect,” Journal Eect,” Journal o Regional Economics , 35, no. 1 (2009): 19–44. 12
Tae H. Ou, Jia Yan, Yan, and Chunyan Yu, “Ownershi Fors Matter or Airort Eciency: A Stochastic St ochastic Frontier Investigation o Worldwide Airorts,” Airorts,” Journal o Urban Economics , 64, no. 2 (2008): 422–435. 13
htt://3drinting.co/what-is-3d-rinting
14
Jane Hiback, “Alternative “Alternative Retailing Strategies,” Natural Strategies,” Natural Food Food Merchandiser , August 2011, 18–19.
15
Joe Condon, “Packaging Technology Extends Chilled Shel-Lie out to 45 Days,” www www.beecentral.co//news/ .beecentral.co//news/ article/3180 , May 2013. article/3180,
Chapter 1 • An Overview of Logistics
As or rising customer expectations , it should coe as no surrise that custoer exectations tend to increase over tie, which which eans that a satisactory level o erorance in the ast ight not be considered so today. An excellent exale o rising custoer exectations is rovided r ovided by Toyota Toyota Motor Coany’s Coany’s North Aerican Parts Oerations Oerations.. In an eort to retain custoers and to reduce losing custoers to other autootive reair acilities, Toyota now oers sae-day delivery (rather than one-day delivery) o autootive arts to certain Toyota Toyota dealershis located in ajor etroolitan areas. This sae-day delivery has been acilitated by a redesign o Toyota’ oyota’ss autootive arts dis16 tribution network. In a siilar vein, online retailer Aazon now rovides sae-day delivery in a 17
nuber o U.S. cities, cities, and soe o these cities also oer one-hour delivery service .
Technological Advances Prior to the start o every acadeic year, Beloit College College in Wisconsin releases its annual Mindset Mindset list 18 that details the world view o incoing rst-year college students. The class o 2019, which assues a 1997 birthdate, is articularly noteworthy because it has never lived in a world without access to Google. Treendous Treendous technological advances during the course o your lietie—ro deskto couters to tablets, ro second-generation obile hones to ourth-generation obile hones— have rooundly infuenced business anageent and, by extension, business logistics. The ollowing aragrahs will discuss several exales o the logistical iacts o technological advances. advances. Technological advances ad vances have inluenced in luenced channel design by allowing a llowing coanies to oer an alternate distribution channel (or alternate distribution channels) to already existing channels. In soe cases, this alternate channel is direct (i.e., no interediaries between the roducer and inal custoer) in nature because the inal custoer orders directly ro the roducer rather than through an interediary. The reoval o interediaries between roducer and consuer—called disintermediation —can clearly aect the design o logistics systes in the sense that there could be changes in both the nuber and location o ixed acilities such such as warehouses and distribution centers. In addition, the logistical considerations o a retailer’s online store (e.g., orders ro nuerous custoers; orders or sall quantities) are quite dierent ro that retailer’s bricks-and-ortar bricks-and-ortar stores (e.g., orders ro a deined custoer base; orders in larger quantities). Technological Tec hnological advances can also irove irove the roductivity roductivity o the order icking rocess, which we’ll discuss discuss in greater detail in Chater 7. 7. Order icking traditionally involved aer ick tickets that listed the articular ite(s) and quantity to be icked—and not necessarily the ite’s location in a acility. Locating the ites to be icked could be quite tie-consuing, and aer icking oten resulted in icking errors in art because o illegible ick orders. Today Today,, by contrast, order icking can utilize radio requency (RF) devices, voice-directed voice-directed icking, as well as robotic icking. Although these technological icking advances are ore costly than aer icking, they can lead to substantial iroveents in icking eiciency. For exale, RF terinals can reduce ick errors by aroxiately 60 ercent coared to aer icking.19 Shient tracking rovides another exale o how technological advances have have iacted logistics anageent. When one o the authors worked or a U.S. U.S. trucking coany in the early 1980s, shient tracking was a tie-consuing, labor-intensive rocess that soeties did not yield a location or the shient in question. I we ast-orward to today, today, global ositioning systes can rovide real-tie location inoration about a shient (soeties to within 10 eet o o its exact exact location) as well as inoration about the vehicle’s teerature, huidity, huidity, and vibrations. Such inoration can be esecially iortant to haraceutical har aceutical and health-care coanies. coanies.20
16 17htt://toyotadriverseat.co/r/tds/sae-day-arts-deliveries-hel-230692.asx
htt://techcrunch.co/2015/10/22/aazon-brings-its-one-hour-delivery-service-rie-now-to-the-san-rancisco-bay-area/ htt://www.beloit.edu/indset/2019/ 19 Kristi Montgoery, “Tis or Quicker Product Picking,” Multichannel Picking,” Multichannel Merchant , Deceber/January 2012, 28–29. 20 Ian Putzger, “As Mania,” CT&L , Aril 2012, 32–33.
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Part I • Overview Overview of Logistics
Advances in Retailing Retailing in the second decade o the twenty-rst twenty-rst century is noticeably dierent than at the beginning o the twenty-rst century, century, and the dierences exeliy exeliy the iortance o eectiv eectivee and ecient logistics or retailing success. Consider or exale, so-called big-box retailers —sto —stores res with with large aount aountss o both foor sace and roducts or sale—such as Walart, Walart, Carreour, Car reour, and Dick’s Dick’s Sorting Goods. Many big-box retailers exlicitly recognize suerior logistics as an essential coonent o their cororate strategies, and because o this, their logistical ractices are oten viewed as a baroeter or eerging logistics trends. Big-box retailers have also been trendsetters with resect to environental and social issues in logistics. For For exale, two o Best Buy’s Buy’s sustainability goals or 2020 are to recycle one billion ounds o consuer goods and reduce its carbon ootrint by 20 ercent (relative to 2009 erorance).21, 22 Omnichannel retailing is a strategy that ocuses on roviding custoers a sealess shoing exerience regardless o sales channel. Retailers enable their custoers to transact within and across any contract channel (online, in-store, obile a, etc.) to enhance inoration availability and custoer exerience. Onichannel Onichannel retailing takes a nuber o dierent ors and i you have ordered soething soething online and icked it u at a bricks-and-ortar store, then you have engaged in onichannel retailing. What you ight ight not have thought thought about about in this situation situation is that the inventory inventory used to ill your your online order deletes that store’s inventory, and thus inventory visibility and accurate deand orecasting becoe essential or successu successull onichannel retailing.23
Globalization of Trade Although countries have traded with each other or thousands o years, globalization globalization’’s iact is greater today than ever beore. Consider that world trade has grown at an average annual rate o aroxiately ve ercent since 1990, including the worldwide econoic slowdown in 2008 and 2009.24 Looking orward, the annual growth in world trade between 2016 and 2020 is orecast to be between 3 and 4 ercent.25 Many actors, such as rising standards o living and ulticountry trade alliances, have contributed contributed to the growth g rowth o global trade; logistics has layed a key role, too. too. Indeed, the shiing container —a —a unior sealed reusable reusable etal box in which goods are shied—is shied—is oten chaioned as an iortant catalyst or the growth in global trade. The shiing container allows any dierent roducts to be securely transorted long distances via water transortation—iortant because long-distance water transortation is uch less exensive than long-distance air transortation. We’ll W e’ll look at intern international ational logistics in uch g reater detail in Chater 14, 14, but or now one should recognize that the international logistics created by global trade is uch ore challenging and costly than doestic logistics. With resect to challenges, the geograhic distances between buyers and sellers are oten greater (which ay translate into longer transit ties), and onitoring logistics rocesses is soeties colicated by dierences in business ractices, culture, and language. As or costs, the greater geograhic distances tend to result in higher transortation costs, and docuentation requireents can be quite costly as well. Learning Objective
1.4
THE SYSTEMS AND TOTAL TOTAL COST APPROACHES TO LOGISTICS Logistics is a classic exale o the systes aroach to business robles. robles. Fro a coanywide ersective,, the systems approach indicates that a coany’s objectives ersective objectives can be realized by recognizing the utual interdeendence o the ajor unctional areas o the r, such as arketing, roduction, nance, and logistics. One ilication ilication o the systes aroach is that the goals and objectives 21
htt://sustainability.bby.co/anageent-aroach/roduct-stewardshi
22
htt://searchcio.techtarget.co/denition/onichannel
23
htt://ultichannelerchant.co/osandulllent/warehouse/key-onichannel-success-strong-logistics-strategy- 21022014/ 24
htts://www.wto.org/english/news_e/res15_e/r739_e.ht
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htts://www.atkearney htts://www .atkearney.co/docuents/ .co/docuents/10192/5498252/Global+Econo 10192/5498252/Global+Econoic+Outlook+2015-2020ic+Outlook+2015-2020--Beyond+th -Beyond+the+ e+ New+Mediocre.d/5c5c8945-00cc-4a4-a04-ade094e90b8
Chapter 1 • An Overview of Logistics
o the ajor unctional areas should be coatible with the coany’s goals and objectives. objectives. This eans that one logistics system does not ft all companies because because goals and objectives vary ro one r to another. As such, the logistics syste o an organization that ehasizes custoer satisaction is likely dierent ro the logistics syste o an organization that ehasizes cost iniization. A second ilication ilication is that decisions ade by one unctional area should consider the otential ilications on other unctional areas. For For exale, one consequence o ursuing the arketing concet, which ocuses on satisying custoer needs and wants, is oten a arked increase in the nuber nub er o stock-keeping units (SKUs) or line ites o inventory (each dierent tye or ackackage size o a good is a dierent SKU) oered or sale by any coanies. coanies. An increased nuber nuber o SKUs rovides custoers with ore choices, which custoers oten want. Alternatively,, ro a logistics ersective Alternatively ersective,, the rolieration rolieration o SKUs creates challenges challenges such as ore ites to identiy, identiy, ore ites to store, and ore ites to track, which increases the chances o istakes—which istakes—whic h custoers don’t like. An exale o isidentiication involves involves a consuer roducts coany that istakenly assigned the same product code to to a three-ack, six-ack, and twelve-ack o a articular roduct it sold. Iagine the reaction o the custoer who ordered a three-ack o the roduct, only to receive a six-ack or a twelve-ack o it! Just as the ajor unctional areas o a ir should recognize their interdeendence, in terdeendence, so too should the various activities that corise the logistics unction (what we’ll call intraunctional logistics ). The logistics anager should balance each logistics logi stics activity to ensure that tha t none non e is stressed to the oint where it becoes detriental to others. This can be illustrated by reerring to Figure 1.1, 1.1, which indicates that business logistics is ade u o o materials management (oveent into and storage o aterials in a ir) and physical Raw materials, parts, and components
Retailers
Initial processing or creation of subassemblies
Distribution to warehouses and wholesalers
Factory
Finished goods inventory
C u s t o m e r s
Materials management
Physical distribution Business logistics
Figure 1.1 Control over the Flow of Inbound and Outbound Movements In this drawing, the circles represent buildings where inventories are Current stored, and the lines arrows represent movement performed by carriers, a stop-and-start process. thought dealswith more with flows, possibly in different volumes and at different speeds, but without the inventory standing still. The supply chain extends to both the left and right of this diagram and includes the suppliers’ suppliers and the customers’ customers.
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distribution (storage o inished roduct and oveent to the custoer). Intraunctional Intraunctional logistics attets to coordinate aterials anageent and hysical distribution in a cost-eicient anner that suorts an organization’s custoer service objectives. Materials anageent and hysical distribution can be coordinated in any ways. One way is by using the sae truck to deliver aterials and coonent arts and to ick u inished goods. Although this ay aear aear to be little ore than coon sense—and sense—and the authors believe believe that common sense is one o the keys to being an eective logistics manager —consider the case o the coany that used the sae trucking coany to deliver aterials and arts to one o its roduction lants as well as to
take inished roducts ro the acility. Unortunately, one truck would arrive early in the orning to deliver the aterials and arts, and another truck would arrive in the late aternoon to ick u the inished roducts. How could this haen? It’s quite sile: The inbound logistics grou and the outbound logistics grou were unaware that they were using the sae trucking coany—the two grous never counicated even though they worked in the sae building! Logistics anagers use the total cost approach to coordinate aterials anageent and hysical distribution in a cost-eicient anner. This aroach is built on the reise that all relevant activities in oving and storing roducts should be considered as a whole (i.e., their total cost), not individually. Use o the total cost aroach requires an understanding o cost trade-offs; i in n other words, changes to one logistics activity cause soe costs to increase and others to decrease. Iortantly,, an understanding o logistical cost trade-os recognizes that the costs Iortantly costs o certain logistical activities generally ove in oosite directions. As an exale, a decrease in transortation costs is oten associated with an increase in warehousing costs. The key to the total cost aroach is that all relevant transortation, log istical cost ites logistical i tes considered taneously when aking a decision. For exale, exedited such are as air reight,simulwill increase a coany’s transortation costs. At the sae tie, exedited transortation leads to a aster order cycle, which allows the receiving coany to hold lower levels o inventory, thus reducing both its inventory carrying carr ying costs and warehousing costs. The total cost aroach evaluates evaluates i the decreased inventory and warehousing costs are greater than the increased costs o exedited exed ited transortation.. I so, the coany ight consider using exedited transortation (assuing that transortation custoer satisaction isn’t negatively iacted), because the total logistics costs (consisting, in this exale, o transortation, inventory, and warehousing costs) are less than the total costs o the existing syste. When used in the logistics decision-aking rocess, the total cost concet aroach ors or s what is coonly called the total logistics concept . This concet is unique not because o the activities erored, but because o the integration o all activities into a uniied uniied whole that seeks to iniize iniize distribution costs in a anner that suorts an organization’ organization’ss strategic objectives. objectives. The total logistics concet can be extended to include a ir’s suliers and custoers, custoers, such as in suly chain anageent, which will be covered in Chater in Chater 5. 5. Learning Objective
1.5
LOGISTICAL RELATIONSHIPS RELATIONSHIPS WITHIN THE FIRM Fro a coanywide ersective, the syste and total cost aroaches to logistics require an understanding o logistics and its relationshis with other unctional areas. areas. Because Chater 6 is 6 is devoted secically to rocureent (urchasing), our discussion here ocuses on logistical relationshis with nance, roduction, and arketing arketing..
Finance The nance sta is oten charged with the resonsibility o allocating the r’s unds to rojects desired by thecaital variousbudgeting oerating decisions deartents. such,logistics, the nance is oten instruental instr uental in aroving thatAs aect suchdeartent as the acquisition o aterials handling equient (e.g., orklits) and ackaging equient (e.g., a shrink-wra achine). In such
Chapter 1 • An Overview of Logistics
situations, nance ersonnel ay decide between urchasing or leasing the relevant equient, assuing they have aroved the decision to acquire it. Inventory is another area where inance and logistics can interact. A basic challenge or the two areas is that the inance deartent oten easures inventory inventory in ters o its cost or value in dollars, whereas logistics tends to easure inventory inventory in ters o units. The diering diering ways o easuring inventory can create otential riction between the two grous, g rous, as illustrated in the ollowing exale. Fro a cash low ersective, the inance deartent ight reer r eer to sell two boxes o hair dryers worth $1,000 dollars than to sell 15 boxes o hair shaoo worth $900. Alternatively, Alternatively, ro a roductivity ersective ersective such as the nuber o boxes handled er worker, worker, the logistics deartent ight reer selling the 15 boxes boxes o hair shaoo rather than the two boxes boxes o hair dryers. In addition, in ties o inlation, identical ites added to inventory inventory at dierent ties eans that each unit has a dierent cost, and even though inventory levels are not aected, it akes a dierence whether an organization uses historic cost or current value as an indicator o the inventory’s inventory’s total value. Furtherore, certain ites o inventory (or exale, autoobiles and roduce, roduce, aong others) lose value over tie, and the authors have had consulting exeriences with coanies that showed a articular SKU to have a arket value o $0—while the coanies’ warehousing acilities contained several hundred units o hysical inventory o the articular SKU. SKU.
Prodction One o the ost coon interaces between between roduction and logistics involves involves the length o roduction runs. In any cases, the roduction roduction eole avor long roduction runs o individual roducts because this allows the relevant xed costs to be sread over ore units, thus resulting in a lower roduction cost er unit. Having said this, long roduction runs r uns generate large aounts o inventory, and it is oten the logistician’ logisticia n’ss resonsibility resonsibili ty to store and track the inventory inventor y. It’s generally uch easier easier to store and track 5 unit o a roduct that to store and track 500 units o the roduct. Another consideration with long roduction runs is that soeties excess inventory or articular roducts occurs because o liited (or no) deand or the. At a iniu, these roducts add to a coany’s inventory inventory carrying carr ying costs and also take u sace that could be used to store other roducts. Slow-selling (or non-selling) roducts ay also increase a coany’s handling costs, as illustrated by a situation in which orklit drivers would eriodically ove 150 rerigerators ro one warehouse area to another, just to ensure that the coany’s anagers would would not see the rerigerators sitting in the sae lace or an extended eriod o tie! You ay ay ind it diicult to believe that these 150 rerigerators were oved throughout the warehouse or nearly ive years beore anagers were alerted to the behavior. behavior. Increasing utilization o the postponement concet (the delay o value-added activities such such 26 as assebly, assebly, roduction, and ackaging until the latest ossible tie) also inluences the interace between roduction and logistics. More seciically, soe value-added activities (e.g., case acking, case labeling) that were traditionally erored at a roduction lant are now erored in warehousing acilities. acilities. As a result, warehousing acilities are adding new tyes o equient and being conigured dierently to allow seciic value-added activities to take lace.
Marketing Conteorary arketing laces a heavy ehasis on custoer satisaction, and logistics strategies can acilitate custoer satisaction by reducing the cost o roducts, which can translate into lower rices as well as bringing a broader variety o choices closer to where the custoer wishes to
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Glossary, www Glossary, www.csc.org .csc.org
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buy or use the roduct. Logistics strategies oer a unique way or a coany to dierentiate itsel aong coetitors, and logistics now oers an iortant route or any rs to create arketing sueriority.. The ollowing discussion sueriority d iscussion about the interactions between logistics and arketing ocuses on the arketing ix, soeties reerred to as the our Ps o o arketing (lace, rice, roduct, and rootion). Decisions regarding lace involve two tyes o networks networks,, naely, naely, logistics and the arketing channel (which is discussed in greater detail later in this chater). Logistics decisions PLACE DECISIONS
concern the ost eective way to ove and store the roduct ro where it is roduced to where it is sold. An eective logistics syste can rovide ositive suort by enabling the ir to attract and utilize what it considers to be the ost roductive channel and suly chain ebers. Channel ebers are requently in a osition to ick and choose which anuacturer’s anuacturer’s roducts they wish to erchandise. I a anuacturer is not consistently able to rovide a certain roduct at the right tie, in the right quantities, and in an undaaged condition, the channel ebers ay end their relationshi with the sulier or cease active rootion o the sulier’s sulier’s roduct. Fro a arketing ersective, lace decisions ay also involve new strategies or reaching custoers. A oular conteorary arketing strategy involves co-branding, which reers to an alliance that allows custoers to urchase roducts ro two or ore nae-brand retailers at one store location. Exales o co-branding co-b randing include Starbucks coee shos located within Marriott hotels, Subway restaurants located within soe Walart stores, and co-located Dunkin’ Donuts and Baskin-Robbins stores. stores. Fro a arketing ersective, co-branding oers otential custoers con venience by allowing allowing or one-storoducts. shoing27as well the well oortunity to urchase brand-nae , rather than rivate-label (rorietary), Fro a logistical ersective, onebrand-nae, decision involves roduct delivery to the articular retail locations. Should, or exale, each co-branding arty deliver its resective roducts to a articular location, or should the co-branding arties co-load vehicles to iniize the nuber o deliveries d eliveries that arrive arrive at a articular location? While the orer ight result in higher delivery costs because o ultile deliveries, deliveries, the latter requires a higher degree o coordination between the co-branding arties. ar ties. PRICE DECISIONS A key rice-related decision or arketers involves how a roduct’ roduct’ss transor-
tation costs should be relected in its selling rice, and this has roved to be a articularly vexing issue or soe online erchants. For exale, should a coany’ coany’ss selling rice relect its roduct’ roduct’ss landed cost, which reers to the rice o a roduct at the source lus transortation costs to its destination? On the one hand, a selling rice that is based on a roduct’s landed cost allows the seller to oer “ree” delivery o the roduct to rosective custoers, custoers, because the transortation costs associated with delivery are catured in the landed cost. On the other hand, a selling rice that is based on a roduct’ roduct’ss landed cost could result in a substantial increase in a roduct’s selling rice, and a higher selling rice tends to decrease buyer deand or ost roducts. One way that soe online erchants address this conundru is to require a iniu order aount (e.g., $50) to qualiy or “ree” delivery. In addition to transortation considerations, logistics anagers ay lay an iortant role in roduct ricing. They are exected to know the costs costs o roviding various levels o custoer service ser vice and thereore should be consulted to deterine the trade-os between costs and custoer service. Because any distribution costs roduce er unit savings when larger volues are handled, the logistics anager can also hel orulate the ir’ ir ’ss quantity discount ricing olicies. PRODuCT DECISIONS A nuber o otentia otentiall interac interaces es are ossibl ossiblee between arketing and
logistics in ters o roduct decisions. For For exale, as noted earlier, the arked increase in roduct oerings—which allows allows or ore custoer choice—creates logistical challenges in ters o identiication, storage, and tracking tracking.. 27
Marilyn Odesser-Torey, Odesser-Torey, “Co-Branding: Positives and Pitalls,” Pit alls,” Convenience Store Decisions , Aril 2012, 46–48.
Chapter 1 • An Overview of Logistics
Another roduct interace between arketing arketing and logistics involves the aount o articular SKUs to hold. Marketers oten reer reer to carr y higher quantities o articular ites because because this reduces the likelihood o stockouts (being out o an ite at the sae tie there is deand or or it). However, Howeve r, ro a logistics ersective, higher quantities o inventory (1) necessitate additional storage sace and (2) increase inventory carr ying costs. Product design, which is oten the urview ur view o arketers arketers,, can also have iortant ilications or logistical eectiveness and eiciency. For exale, long-necked glass beverage containers ight be ore distinctive than aluinu cans; however, however, ro a logistics ersective, long-necked bottles take u ore sace and are ore likely to be daaged than aluinu cans. In addition, arketers’ growing ehasis on oering sustainable products —roducts that eet resent needs without coroising the ability o uture generations to eet their needs—can also iact logistical decisions. Consider, or exale, air trade product products s , those that guarantee a better deal or roducers in the develoing world through air and stable rices as well as teaching aring ethods that are environentally sustainable.28 Fro a arketing ersective, custoer deand or air trade roducts, such as coee or chocolate, has resulted in soe coanies establishing distinct air trade brands.29 Fro a logistical ersective, an organization’s coitent to selling air trade roducts, such as coee or chocolate, ay result in changed sourcing requireents or the necessary raw aterials. PROMOTION DECISIONS Many rootional decisions require close coordination between arket-
ing and logistics. One iortant situation concerns the availability o highly hig hly advertised roducts, articularly when a coany is running ricing caaigns that lower the rice o certain ites. Few things are ore daagingIntoaddition, a ir’s in goodwill than beingibalances stocked outooroduct ites that are heavily rooted in a sales caaign. soe instances, suly and deand can be viewed as bait-and-switch tactics —that is, is, enticing custo custoers ers with the roises roises o a low-riced low-riced roduct, roduct, only to ind that it is unavailable, but that a higher-riced substitute roduct is readily available. Moreover, once a decision is ade to roote the introduction o a new roduct, the logistics sta assues resonsibility or having the roduct in lace on the scheduled release date—not earlier, not later. The colexity o so doing is well illustrated by looking at how Ale anages the release o new versions o the th e iPhone. Because the iPhone is anuactured in China, Ale re-urchases sace on airreight carriers such as FedEx in order to ove the devices to distribution centers in various arts o the world. In order to iniize oortunities or thet and other glitches, Ale security ersonnel will accoany the shients ro the actory loor to the dierent distribution centers. 30
MARKETING CHANNELS
Learning
Another concet that is useul in studying the arketing relationshis between and aong r s is to look at marketing channels, which reer to “a set o institutions necessary to transer the title to goods and to ove goods ro the oint o roduction to the oint o consution and, as such, such, 31 which consists o all the institutions and all the arketing arketing activities activities in the arketing arketing rocess.” rocess.” The rincial traditional institutions in the arketing channel are the anuacturer, the wholesaler, and the retailer. These channel ebers work together in several dierent channel arrangeents— ownownership channel , negotiation channel , fnancing channel , promotions channel , and logistics channel —and we’ll look ore closely at how anuacturers, anuacturers, wholesalers, and retailers r etailers interact in these ve channels. The ownership channel covers covers oveent oveent o the title to the goods, g oods, and the goods theselves ight not be hysically resent resent or even exist. I I a good is in great deand, such as a coissioned coissioned iece o art or a scarce new consuer roduct, one ight have to buy it beore it is roduced. Soeties, a roduct rod uct
Objective
28 Derek Townsend, “Fair Trade Future?” Food Future?” Food 29
SService ervice , June 2008, 27. No author, “More Chocolate Manuacturers Moving to Ethical Sourcing,” Candy Industry , Aril 2010, 10–12.
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htt://www.blooberg.co/news/2013-09-11/the-ihone-s-secret-fights-ro-china-to-your-local-ale-store.htl
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Aerican Marketing Association Dictionar y, y, www www.arketingower.co .arketingower.co
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will not be ade until there are sui suicient cient inanc inancial ial coi coitents tents;; this this is oten the case with new odels o coercial airlanes. The arty owning the good alost always has the right to trade or sell it and bears the risks and costs associated with having it in inventory. Also, while owning the good, one can use it as collateral or a loan, although this ay lace soe restrictions on its use or oveent. The negotiations channel is is the one in which buy and sell agreeents are reached. This could include transactions ace-to-ace or by telehone, e-ail, electronic data interchange, or alost any other or o counic counication. ation. In any situations, situations, no actual negotiations take lace; the rice or the roduct is stated, and one either buys at that rice or does not. In soe trades, auctions are used; in others, highly structured, organized trading takes lace, such as arkets or soe coodities. One art o the negotiations covers how activities activities in the other channels are to be handled. For exale, exale, each buying arty will seciy the oint and tie o delivery and the oint and tie o ayent. Even Even ackaging design ay ay be negotiated. (An old Henry Ford story is that suliers o soe arts were directed to shi in wooden crates built o good luber and to very exacting seciications. seciications. It turned out that the ety crates were then artially disassebled and becae loorboards in Ford Model Ts.) The inancing channel handles handles ayents or goods. More iortantly, it handles the coany’s credit. The ultile articiants in the channel have dierent inancial strengths, and oten one ust hel another to kee the entire channel alive. For exale, a newly oened retail store ay have soe o its goods laced on consignent, eaning that the wholesaler, not the store, owns the. The retailer will reiburse the wholesaler only or goods sold; the wholesaler bears nearly all the inancial risks. Soeties, in an eort to develo what it believes is a necessary new roduct line, a wholesaler will assist the anuacturer by utting u cash in advance along with an order. Alternatively Alternatively, , theand wholesaler lace large, guaranteed anuacturer can take that order to a bank use it as awill basis orareceiving a loan. order, and the anuacturer Credit is iortant to all arties in the channel, who requently receive receive or extend it, and credit becoes an integral integral art o the negotiations. negotiations. I bills are not aid aid when due or i credit is over-extended, collection becoes a inancing channel unction. unction. Indeed, a lingering atereect o the 2007–2009 econoic recession is that soe large larg e coanies are taking longer to ay their bills. More seciically, seciically, soe larger coanies now ay their bills within 90 days, as oosed to 30 to 60 days rior to the recession. While beneicial to the larger coanies, these lengthened ayent cycles negatively iact their suliers.32 The promotions channel is is concerned with rooting a new or an existing roduct, and it can be related to the inancing channel because onetary allowances allowances are oten art o the rootion eort. In addition, the rootions channel and the logistics channel are linked in several ways. ways. First, there ay be secial advertising aterials, such as couon books, loor advertising osters, or dislays, which ust be distributed with the rooted roduct. Second, soe o the cartons or consuer acks ay have secial labeling, and their laceent at retailers ust coincide with other rootional eorts. Third, because logistics ersonnel handle order rocessing, they have instantaneous records o actual sales, which which indicate the initial success o the rootional eorts. As entioned reviously, the logistics channel, its coonents, and its unctioning are the ain toics o this book. The ost signiicant contribution that the logistics channel akes to the overall channel rocess is the sorting function, which bridges “the discreancy between the assortent o goods and services generated by the roducer and the assortent deanded by the conconsuer.”33 The sorting unction has our stes, which are iortant to understanding the concet o goods lowing through the logistics channel: • Sorting out is is sorting a heterogeneous suly o roducts into stocks that are hoogeneous. hoogeneous. • Accumulating is is bringing together siilar stocks ro dierent sources. • Allocating is is breaking a hoogeneous suly into saller lots. • Assorting is is building u assortents o goods or resale, usually to retail custoers. custoers. 32
Angus Loten, “Big Custoers Are Taking Longer to Pay,” Pay,” The Wall Street Journal , June 7, 2012, B7. Aerican Marketing Association Dictionar y.
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Chapter 1 • An Overview of Logistics
These stes take lace lace between between the anuacturer and the consuer, which eans that they are erored by the wholesaler, the retailer, or secialist interediaries. In addition to the ajor actors or riary articiants in a logistics channel, any less-wellknown actors, called acilit or channel intermediaries , lay inor but essential roles. Interediaries ake acilitator ators s or the entire syste unction better and should only be used when they add value to a transaction. They sring u and lourish in areas where counications and other interactions between ajor arties are not well eshed. In international transactions, or exale, translators ay be an iortant interediary. Interediaries also unction in areas needing orderly routines, such as order rocessing, and in searching, or exale, when custoers are looking or roducts or roducers are looking or custoers. Interediaries ill niches, they are very well ocused, and they serve as buers between various channel ebers. Usually, Usually, they do not take an ownershi osition in the roducts or goods g oods being handled. The ive channels discussed discussed reviously show where interediaries unction and it. For exale, in the ownershi channel, a coon interediary is the bank or inance coany, which ay assue teorary or artial ownershi ownershi o goods as art o an ongoing transaction. Oten, this is a condition or the extension o credit. Banks routinely loan unds to all arties in a channel, aking it ossible or goods to be anuactured, arketed, arketed, and sold. Brokers, who are associated with the negotiation channel, are indeendent contractors aid to arrange a articular transaction. A broker can be used by either a buyer or seller and is oten used to arrange truck transortation or either the buyer (shier/receiver) or seller (trucker). A broker can add value or a trucker in the sense that an individual trucker believes that his or her tie is ore roitably sent driving, rather than being on the hone or Internet trying to negotiate or the next load. In a siilar ashion, a broker adds value or a shier/receiver because o the broker’s broker’s knowledge o otential transortation otions. otions. Banks and inance coanies are roinent interediaries in the inancing channel, and both arties suly the credit necessary or a deal to be inalized. For big-ticket ites, ites, such as shis or warehouses, the buyer alost always always borrows oney to inance art o the urchase. Soeties Soeties insurance is also a requireent in the agreeent, so insurance coanies ay also serve as interediaries. The rootio rootions ns channel has inter interediari ediaries es that aid with rooti rootions, ons, such as irs that design, build, and transort roduct exhibits or dislay at trade shows. Advertising agencies can handle the rearation and edia laceent o advertising aterials, and irs oten use ublic relations agencies to reresent the to the news edia. Soe coanies choose to outsource their ersonal selling unctions by hiring an interediary to rovide the with a contract sales orce. These rootion eorts eorts handled by interediaries ust be coordinated with the ir’s ir’s overall overall arketing counication activities activities.. The logistics channel has any interediaries, interediaries, and any are entioned in this book. A coonly used interediary is the reight orwarder, whose unction is to asseble sall shients into larger shients and then tender the in truckload tr uckload or rail carload quantities to truck lines or to railroads. In international logistics, interediaries abound, and ore than a hundred dierent tyes could be listed. One exale is cargo surveyors who secialize in coee; these secialists exaine and arbitrate daage clais involving shients o coee beans.
ACTIVITIES IN THE LOGISTICAL CHANNEL T To o successully aly the systes and total cost aroaches to logistics, it is essential to understand the various logistics activities. activities. Kee in ind that because one logistics syste does not t all coanies, the nuber o activities in a logistics syste can vary ro coany to coany. coany. Activities that are considered to be logistics related include, but are not liited to, the ollowing: Custoer ser vice
Deand orecasting
Facility location decisions
International logistics
Inventory anageent
Materials handling
Learning Objective
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Order anageent
Packaging
Procureent
Reverse logistics
Transortation Transo rtation anageent
Warehousing anageent
Cstomer Service There are any denitions o custoer service, such as “keeing existing custoers hay.” hay.” Custoer service involves aking sure that theatright erson receives the right roduct at the right lace at the right tie in the right condition and the right cost. Custoer service is discussed in greater detail in Chater 7. 7.
Demand Forecasting Deand orecasting reers to eorts to estiate roduct deand in a uture tie eriod. The growing oularity o the suly chain concet has roted increasing increasing collaboration aong suly chain artners with resect to deand orecasting. Such collaboration can enhance eciency by reducing overall inventory levels in a suly chain. We We discuss deand orecasting in Chater 7. 7.
Facility Location Decisions It’ It’ss oten said that the success o a retail store deends on three actors: location, location, and location. It can also be said that the success o a articular logistics syste is deendent on the location o the relevant warehousing and roduction acilities. Facility location decisions are increasingly iortant as the conguration o logistics systes is altered due to the iacts iacts o ultinational trade agreeents. Facility location decisions are covered in Chater 9. 9.
International Logistics International logistics, which reers to the logistics activities associated with goods that are sold across national boundaries, is uch ore costly and challenging than doestic logistics. We will take a closer look at international logistics in Chater 14. 14.
Inventory Management Inventory reers to stocks o goods that are aintained or a variety o uroses, such as or resale to others, as well as to suort anuacturing or assebling rocesses. When anaging inventory, logisticians need to siultaneously siultaneously consider three relevant costs—the costs—the cost o carrying (holding) roduct, the cost o ordering roduct, and the cost o being out o stock. Chater 8 8 rovides urther discussion concerning inventory anageent.
Materials Handling Materials handling reers to the short-distance oveent oveent o roducts within the connes o a acility (e.g., lant, warehouse). Materials handling considerations are resented in Chater 11. 11.
Order Management Order anageent reers to anageent o the activities that take lace between between the tie a custoer laces an order and the tie it is received by the custoer. As such, order anageent is a logistics activity with a high degree o visibility to custoers. Order anageent is discussed in Chater 7. 7.
Packaging Packaging can have both a arketing (consuer ackaging) and logistical (industrial ackaging) diension. Industrial (rotective) ackaging reers to ackaging that reares a roduct or storage and
Chapter 1 • An Overview of Logistics
transit (e.g., boxes, crates). Packaging has iortant interaces with the aterials handling and warehousing activities. Chater 11 discusses 11 discusses ackaging in conjunction with aterials handling.
Procrement Procureent reers to the raw aterials, coonent arts, and sulies bought ro outside organizations to suort a coany’s oerations. 34 Procureent’s direct link to outside organizations eans that its strategic iortance has increased as suly chain anageent has becoe ore oular. Procureent is discussed in ore detail in Chater 6. 6.
Reverse Logistics recalls, roduct daage, lack o deProducts can be returned or various reasons, such as roduct recalls, and, and custoer dissatisaction. The challenges associated with reverse logistics can be colicated by the act that returned roducts oten ove in sall quantities and ay ove outside orward distribution channels. Reverse logistics is exained in Chater 4. 4.
Transportation Management Transortation ortation can be dened as the actual hysical oveent o goods or eole eole ro one lace to Trans another, whereas transortation anageent reers to the anageent o transortation activities by a articular organization. Transortation can account or or u to 50 ercent o a r’s total logistics costs and thus reresents the ost costly logistics activity in any organizations. org anizations. Transortation Transortation considerations are discussed in Chater 12. 12. Transortation anageent is discussed in Chater 13. 13.
Warehosing Management W Warehousing arehousing reers to laces where inventory inventory can be stored or a articular eriod o tie. As noted reviously, iortant changes have occurred with resect to warehousing’s role in conteorary logistics and suly chain systes. Warehousing Warehousing is discussed in Chater 10. 10.
LOGISTICS AND SuPPLY CHAIN CAREERS The job arket or logisticians and suly chain anagers anagers continues to be strong at both the undergraduate and MBA levels. Entry-level jobs include logistics (suly chain) analyst, consultant, custoer service anager, and ulllent suervisor. Second-level Second-level ositions include international logistics anager, suly chain sotware anager, urchasing anager, transortation anager, and warehouse oerations anager.35 There are a variety o ossible career aths available and, unlike when the rst edition o this book was ublished, no glass ceiling exists or anagers with exertise in logistics or suly chain anageent. Indeed, Ti Cook headed u Ale’s suly chain beore becoing the coany’s Chie Executiv Executivee Ocer. Because o the growing iortance o logistics and suly chain anageent, a nuber o roessional organizations are dedicated to advancing the roessional knowledge o their ebers. One rationale or these roessional associations is that the state o the art is changing so raidly that roessionals ust educate and re-educate theselves on a regular basis. Several roinent roessional logistics and suly chain anageent organizations are suarized in the aendix to this chater.
34
Donald J. Bowersox, David J. Closs, and M. Bixby Cooer, Supply Chain Logistics Management (Boston: (Boston: McGraw-Hill Publishing, 2002). 35 www.csc.org www .csc.org
Learning Objective
1.8
35
36
Part I • Overview Overview of Logistics
Summary This chate chaterr intro introduced duced the toic o logis logistics, tics, which the in recent years. Systes and total cost aroaches to logistics CSCMP deines as “that art o Suly Chain Manageent were discussed, as were logistical relationshis within a ir, ir , that lans, ileents, and controls the eicient, eective with a articular ocus on various interaces between arketorward and reverse low and storage o goods, services, and ing and logistics. A short descrition o a nuber o logistics related inoration between the oint o origin and the oint activities was resented. The chater chater concluded with a brie o consution in order to eet custoers’ requireents.” requireents.” look at logistics careers. The econ econoic oic ia iacts cts o logi logistic sticss were disc discussed ussed along with reasons or the increased increased iortance o logistics
Key Terms 3D rinting Big-box retailer Co-branding Container
Landed cost Logistics Marketing channels Mass logistics
Postoneent Sorting unction Stock-keeing units (SKUs) Stockouts
Cost trade-os Disinterediation Econoic utility For utility Huanitarian logistics
Materials anageent Onichannel retailing Physical distribution Place utility Possession utility
Sustainable roducts Systes aroach Tailored logistics Tie utility Total T otal cost aroach
Questions for Discussion and Review
1.1 Did it surrise you that logistics has such an iortant econoic iact? Why or why not? 1.2 Distinguish between between ossession, or, tie, and lace
utility. 1.3 How does logistics contribute to tie and lace l ace utility? 1.4 How can a articular logistics syste be eectiv eectivee but not ecient? 1.5 How do changing atterns o consuer behavior iact logistical decisions? 1.6 How do you view the stateent “logistics is not equivalent to suly chain anageent”? 1.7 “Logistics unction has a solely rot orientation.” Evaluate this stateent. 1.8 Dierentiate between ass and tailored logistics. 1.9 What are soe ways in which which technology has iacted iacted logistics anageent? 1.10 Why is logistics an an ierative ierative coonent in retailing? retailing?
1.11 What is the systes systes aroach to roble roble solving? How is this concet alicable to logistics anageent? 1.12 Exlain what is eant by the total cost aroach to logistics. 1.13 Dene what is eant by a cost trade-o. Do you believe that this concet is workable? Why or why not? 1.14 What are several several areas in which which nance and logistics ight interace? 1.15 Discuss the ostoneent concet as it relates to the roduction and logistics interace. 1.16 What is co-bran co-branding ding and how does it aect aect logist logistical ical deci decisions? sions? 1.17 Dene what is eant by a landed cost and exlain its relevance or ricing decisions. 1.18 Briefy discuss the ownershi ownershi,, negotiations, nancing, rootions, and logistics channels. 1.19 Exlain the iortance o the sorting unction in logistics. activities that ight be art o a coany’s coany’s 1.20 Discuss ve activities logistics deartent.
Chapter 1 • An Overview of Logistics
37
Suggested Readings Day,, Jaison M., Steven A. Melnyk, Mel nyk, Paul D. Larson, Edward W. Davis, Day and D. Clay Whybark. Whybark. “Huanitarian and Disaster Relie Suly Chains: A Matter o Lie and Death.” Death.” Journal o Supply Chain Management 48, 48, no. 2 (2012): 21–36. Fawcett, Stanley E. and Matthew A. Waller. “Designing the Suly Chain or Success at the Botto o the Pyraid.” Journal o Busi-
Perego, Alessandro, Sara Perotti, and Ricardo Mangiarcina. “ICT or Logistics and Freight Transortation: A Literature Review and Research Agenda.” International Journal Journal o Physica Physicall Distribution & Logistics Management 41, 41, no. 5 (2011): 457–483. Ravi, V. V. and Ravi Shankar. “Survey o Reverse Logistics Practices Practi ces in Manuacturing Industries: An Indian Context.” Benchmarking: An
ness Logistics 36, 36, no. 3 (2015): 233–239. Lin, Yong, Saara Pekkarinan, and Shihua Ma. “Service-Doinant Logic or Managing the Logistics-Manuacturing Interace: A Case Study.” Internati International onal Journal o Logis Logistics tics Management Management 26, 26, no. 3 (2015): 195–214. Lutz, Heather and Laura Birou. “Logistics Education: A Look at the Current State o the Art and Science.” Science.” Supply Chain Management: An International Journal 18, 18, no. 4 (2013): 455–467. McGinnis, Michael A., Jonathan W. Kohn, and John E. Sillan. “A Longitudinal Study o Logistics Strategy: 1990–2008.” 1990–2008.” Journal o Business Logistics 31, 31, no. 1 (2010): 217–235.
International Journal 22, 22, no. 5 (2015): 874–899. Stank, Theodore, Chad Autry, Patricia Daugherty, and David Closs. “Reiagining the 10 Megatrends That Will Revolu Revolutionize tionize Suly Chain Logistics.” Transportation Journal 54, 54, no. 1 (2015): 7–32. Tan, Vinh V. V. “Coetency “Coetency Requireents Requireents or Proessionals in LogisLogistics and Suly Chain Manageent.” Interna International tional Journal Journal o Logis Logis-tics: Research and Applications 15, 15, no. 2 (2012): 109–126. Winter, Marc and A. Michael Michael Kneeyer. Kneeyer. “Exloring the Integration o Sustainability and Suly Chain Manageent: Current State and Oortunities or Future Inquiry.” International Journal Journal o Physical Distribution & Logistics Management 43, 43, no. 1 (2013): 18–38.
CASE CASE 1.1 KIDDIELAND AND AND THE THE SUPER GYM KiddieLand is a retailer o toys located in the Midwest. Midwest. Cororate headquarters is in Chicago, and its 70 stores are located in Minnesota, Wisconsin, Michigan, Illinois, Indiana, Ohio, Iowa, and Kentucky. One distribution center is located in Colubus (or Kentucky, Indiana, Michigan, and Ohio) and one in Chicago (or Illinois, Iowa, Minne-
One orning in late January, January, while Don was reviewing the new year’s erchandising lan, he discovered that starting in March, KiddieLand would begin rooting the Suer Gy Outdoor Children’s Exercise Center. Don was articularly interested that the new set would sell or $715. In addition, the Suer Gy is ackaged in three boxes
sota, and Wisconsin). KiddieLand arkets a ull range o toys, electronic gaes, couters, and lay sets. Ehasis is on a ull line o brand-nae roducts together with selected selected ites sold under the KiddieLand brand. KiddieLand’s riary coetitors include various regional discount chains. A corehensive roduct line, aggressive ricing, and sel-service have been key to KiiddieLand’s success. Donald Hurst is KiddieLand’ KiddieLand’ss logistics anager. He is resonsible or anaging both distribution centers, or transortation anageent, and or inventory control. Don’s riary ission is to ake sure all stores are in stock at all ties without aintaining excessive levels levels o inventory.
weighing a total o 450 ounds. ounds. “Holy cow!” cow!” thought thought Don. “The largest set we have sold to date retails or $159 and weighs only 125 ounds. ounds.”” “There ust be soe istake,” thought Don as he walked down the hall to the oce o Olga Olsen, KiddieLand’ss buyer or lay sets. Olga was new to her job and dieLand’ was unusually stressed because both o her assistant assistant buyers buyers had just resigned to seek eloyent on the West Coast. As soon as Olga saw Don, she exclaied, exclaied, “Don, y y riend, I have been eaning to talk to you.” Don knew right then that his worst ears were conred. The next orning Don and Olga et with Randy Sith, Don’s transortation anager; A. J. Toth, general anager or KiddieLand’s eight Chicago stores; and Sharon ( continued continued )
38
Part I • Overview Overview of Logistics
Rabiega, Don’s assistant or distribution ser vices. Because adequate selection o buer hitches, and an additional the revious year had been unusually rotable, everyone $50 er year er store or licensing and insurance. Unortu was in a good ood because this year’s bonus was was 50 er- nately nately,, buers on the newest autos cannot accoodate cent larger than last year’s. trailer hitches.” Nevertheless, A. J. got to the oint: “You ean to “Oh, no,” oaned Olga, “we only exect to sell 5.7 tell e that we exect soebody to stu a souse, three sets er store. That eans $368 er Suer Gy or dekids, a dog, and 450 ounds o Suer Gy in a sall sedan livery livery,” ,” she continued as she unched her calculator, “and and not have a connition?” $147 in lost gross argin!” Randy chied in, “Besides, we can’t dro shi SuNext, Randy Sith suarized the second otion. er Gys ro the anuacturer to the consuer’s ad- “So ar we can get delivery within 25 iles o ost o dress because Suer Gy shis shis only in quantities o 10 our stores or $38.21 er set. Actually,” Randy continued, or ore.” “$38.21 is or delivery 25 iles ro the store. The rate Olga was now worried. “We “We can’t back out o the would be a little less or under 25 iles and about $1.50 er Suer Gy now,” she oaned. “I have already coitted ile beyond 25 iles.” KiddieLand or 400 sets, and the sring–suer lay set A. J. Toth chied in, “According to our arketing rootion went to ress last week. Besides, I a deend- research, 85 ercent o our custoers drive less than 25 ing on the Suer Gy to ake y gross g ross argin gures.” inutes to the store, so a fat ee o $40 or delivery would “What about SUVs?” asked Toth. “They ake u robably be okay.” hal the vehicles in our arking lots. Will the three ackRandy continued, “Most delivery coanies we talkages t inside the?” ed to will deliver twice weekly but not daily.” By now the scoe o the roble had becoe aarent to everyone at the eeting. At 3 p.m. Don suarized the alternatives discussed: 1. Purchase a two-wheel trailer or each store. 2. Find a local trucking tr ucking coany that can haul the Suer Gy ro the KiddieLand store to the custoer. 3. Stock the Suer Gy at the two distribution centers and have the truck that akes delivery runs to the retail stores also ake hoe deliveries. 4. Charge or delivery i the custoer cannot get the Suer Gy hoe. 5. Negotiate with the Suer Gy anuacturer to
shi directly to the custoer. Everyone agreed to eet the ollowing Monday to discuss the alternatives. On Sunday evening a recordbreaking blizzard hit Chicago. KiddieLand headquarters was closed Monday and Tuesday because o the blizzard. The grou nally et again on Wednesday Wednesday.. Don started the eeting. “Okay,” Don began, “let’s review our otions. Sharon, what did you nd out about buying trailers or each store?” “Well,” Sharon began, “the best deal I can nd is $1,800 er trailer or 70 trailers, lus $250 er store or an
Sharon continued, “The otor carrier that handles shients ro our distribution centers is a consolidator. He said that squeezing an 18-wheeler into soe subdivisions wouldn’t wouldn’t ake sense. Every tie they try tr y, they knock down a coule o ailboxes and leave leave truck tracks in soe hoeowner’s lawn.” Olga added, “I talked to Suer Gy about shiing direct to the custoer’s address, and they said orget it. Whenever they have have tried that,” Olga continued, “the cuscustoer gets two o one box and none o another.” “Well, Olga,” Don interruted, “can we charge the custoer or delivery?” Olga thought a inute. “Well, we have never done that beore, but then we Olga have never sold a“our 450-ound beore. It sounds like,” continued, choice ite is to either absorb $40 er set or charge the custoer or delivery.” “That eans $16,000 or delivery,” delivery,” she added. “One ore thing,” Don said. “I we charge or shiing, we ust include that in the coy or the sring–suer brochure.” Olga siled. “We can ake a inor insert in the coy i we decide to charge or delivery. However,” However,” she continued, “any changes will have to be ade to the age roos— and age roos are due back to the rinter next Monday.”
Chapter 1 • An Overview of Logistics
QUESTIONS 1. List and discuss the advantages and disadvantages disadvantages o urchasing a two-wheel trailer or each store to use or delivering the Suer Gys. 2. List and discuss the advantages and disadvantages disadvantages o having local trucking coanies deliver the Suer Gy ro the retail stores to the custoers. 3. List and discuss the advantages and disadvantages disadvantages o stocking Suer Gys at the distribution centers and then having the truck that akes deliveries deliveries ro the distribution center to the retail stores also ake deliveries deliveries o Suer Gys to individual custoers.
4. List and discuss the advantages and disadvantages disadvantages o charging custoers or hoe delivery delivery i they are unable to carry hoe the Suer Gy. 5. Which alternative alternative would you you reer? Why? Why? 6. Drat a brie stateent (catalog coy) to be inserted in the r’s sring–suer brochure that clearly exlains to otential custoers the olicy you recoended in question 5. 7. At the rst eeting, eeting, A. J.J. asked about about SUVs, but there was was no urther ention o the. How would you you ollow u on his query?
39
2
LOGISTICS AND INFORMATION TECHNOLOGY
LEARNING OBJECTIVES 2.1
2.2
2.3 2.4 2.5
2.6 2.7
To explain the importance o eective and efcient utilization To utilization o inormation or logistics management To T o distinguish between between the general types o inormation inor mation systems and and their logistical applications To T o review how logistics supports on-line retailing To T o illustrate how cloud computing is being used to support logistics sotware usage usage To T o report how companies are using electronic procurement procurement to drive purchasing purchasing efciency To explain how the Internet o things is aecting the inormation available to logistics To logistics managers To T o identiy contemporary inormation technology issues
The logistics disciplin disciplinee has been through many changes since the irst edition o this book was published in the mid-1970s. The irst edition, or example, primarily ocused on physical distribution management, and the corresponding cor responding deinition emphasized the movement and storage of goods. The current edition o this book, by contrast, is ocused on logistics and its role in supply chain management. Moreover, the corresponding deinition deinitio n o logistics (see Chapter 1 ) mentions the flows and storage of goods, services, and and related information . The eective and eicient utilization o inormation can be quite beneicial to logistics and supply chain management, and our o the more prominent beneits include the ollowing: Learning Objective
2.1
•
•
•
•
Greater knowledge and visibility across the supply chain, which makes it possible to replace inventory with inormation Greater awareness o customer demand via point-o-sale data, which can help improve planning and reduce variability in the supply chain Better coordination o manuacturing, marketing, marketing, and distribution through enterprise resource planning (ERP) systems Streamlined order processing and reduced lead times enabled by coordinated logistics inormation systems1
Successul implementation implementation and exploitation o the right inormation technologies is critical to maintaining competitiveness.2 Additionally, the eective and eicient use o inor mation allows organizations to simultaneously reduce their costs and improve customer satisaction in the sense 1
Stephen M. Rutner, Brian J. Gibson, Kate L. Vitasek, and Craig G. Gustin, “Is Technology Filling the Inormation Gap?” Supply Chain Management Review, March/April Review, March/April 2001, 58–63. 2
Benjamin T. Hazen and Terry Anthony Byrd, “Toward Creating Competitive Advantage with wi th Logistics Inor mation Technology,” International Journal of Physical Distribution 42, no. 1 (2012): 8–35. Distribution & Logistics Management Management 42,
40
Chapter 2 • Logistics and Information Tec Technology hnology
that organizations stock the inventory that will be demanded by customers. For example, several U.S.-based grocery chains have careully studied Hispanic consumers and learned that they place greater emphasis on resh produce than do other ethnic groups. As such, grocery stores located in heavily Hispanic areas oten stock more resh produce than do grocery stores located in other areas. Similarly,, a U.S.-base Similarly .S.-based d retailer o home goods used demographic data to localize product assortments to better align with customer tastes and was able to achieve an 18 percent revenue lit in their ashion bedding category categor y.3 Beore proceeding urther, it’s important to distinguish between data and information: “data are simply acts—recorded acts—recorded measures o certain phenomena—whereas inormation inormation is a body o acts in a ormat suitable or decision making.”4 Advances in technological hardware and sotware now allow logisticians logisticians access to abundant amounts amounts o data in relatively short short periods o time. In attempting attempting to manage these data, managers must irst determine which data are relevant or their purposes. Next the data need to be organized and analyzed; once analyzed, managers should make the appropriate decision or decisions. In today’ today’ss competitive business environment, these actions must be completed in as short a time period as possible. One contemporary issue or logisticians logisticians to consider is the emergence o what industry has termed big data —the collection o large amounts o near-real-time data collected collected through a variety o sources, such as sensors, sensors, smart phones, RF tags, and business-to-business data exchanges. exchanges. Logisticians will need to develop strategies or how they can manage the lood o data that will be available to help them manage manag e assets, increase visibility, visibility, and enhance communications across the supply chain. The opportunity will be to use use these data to sense sense changes in demand and then use use logistics activities 5
to eectively and eiciently respond to these changes. However, Howeve r, big data works hand-in-hand with analytics to provide logistics managers with actionable inormation. Logistics managers have traditionally used analytics or vehicle routing and scheduling. GPS-enabled big data telematics and route optimization have proven to provide signiicant cost savings.6 UPS, a global logistics company, uses an analytics tool called ORION (On-Road Integrated Optimization Optimizati on and Navigation) to allow its drivers to determine optimal routing in their delivery areas.7 Further, analytics can be used to improve productivity by optimizing driver behavior, vehicle routing, equipment maintenance, and uel usage.8 The next section section o this chapter will provide an overview o general types o inormation inor mation management systems that are applicable across each business business unction. In addition, examples o how these general types o inormation systems might be speciically applied in logistics management management are pro vided. This will be ollowed by an explanation o the Internet’s Internet’s inluence on logistics, logistics, and the chapter chapter will conclude with with a look at select contemporary contemporary inormation technology issues.
GENERAL TYPES OF INFORMATION MANAGEMENT SYSTEMS Proessor Steven Alter has identied six dierent types o inormation systems that are applicable to every business unction.9 These six categories, summarized in Figure 2.1, 2.1, orm the basis o this section.
3
Marshall Fisher and Ramnath Vaidyanathan, “Which Products Should You Stock?” Harvard Business Review 90, 90, no. 11 (2012): 108–118. 4
William G. Zikmund and Michael d’Amico, Marketing, d’Amico, Marketing, 7th 7th ed. (Cincinnati, OH: South-Western, 2001), p. 125.
5
Robert F. Byrne, “Driving Protable Growth with Big Data and Better Forecasts,” Supply Chain Europe 21, 21, no. 1 (2012): 40–41.
6
Victor Mayer-Schonberger and a nd Kenneth Cukier. Cukier. Big Big Data: A Revolution That Will Transorm How We Live, Work and Think Think (Boston: Houghton Miin Harcourt, 2013). 7
Mary Siegried. “Finding the Big Picture in Big Data,” Inside Supply Management , no. 1 (2014): 19–23.
8
Nada Sanders, “How to Use Big Data to Drive Your Supply Chain,” Caliornia Management Review 58, 58, no. 3 (2016): 26–48.
9
The ramework ram ework in this section is adapte d rom S. Alter, Inormation Systems, 4th Systems, 4th ed. (Upper Saddle River, NJ: Prentice Hall, 2002).
Learning Objective
2.2
41
42
Part I • Overview Overview of Logistics System type
Logistics Logisti cs exam examples ples
Office automation system: provides effective ways to process personal and organizational business data, to perform calculations, and to create documents
Spreadsheet applications to calculate optimal order quantities, facility location, transport cost minimization, among others
Communication system: helps people work together by interacting and sharing information in many different forms
Virtual meetings via computer technology Voice-based order picking
Transaction processing system (TPS): collects and stores information about transactions; controls some aspects of transactions
Electronic data interchange Automatic identification technologies technologies such as bar codes Point-of-sale systems
Management information system (MIS) and executive information system (EIS): converts TPS data into information for monitoring performance and managing an organization; provides executives information in a readily accessible format
Logistics information system
Decision support system (DSS): helps people make decisions by providing information, models, or analysis tools
Simulation Application-specific software such as warehouse management systems Data mining
Enterprise system: creates and maintains consistent data processing methods and an integrated database across multiple business functions
Logistics modules of enterprise resource planning systems
Figre 2.1 General Types Types of Information Management Systems Source: Taken Source: Taken from Steven Alter, Information Systems, 4th Systems, 4th ed. (Upper Saddle River, NJ: Prentice Hall, 2002), p. 191.
Office Automation Systems Oce automation systems provide provide eective ways to process personal and organizational business data, to perorm calculations, and to create documents.10 Included in oce automation systems are general sotware packages—word packages—word processing, spreadsheet, presentation, and database management applications—that most o you probably use in your daily lives.
The most relevant general sotware package or logisticians is the spreadsheet. Whereas early spreadsheet programs or personal computers were little more than speedy calculators, today’s spreadsheets have a multitude multitude o capabilities that allow managers to solve solve a variety o complex business problems relatively quickly and inexpensively. inexpensively. Indeed, logistics spreadsheet applications into the early 1990s tended to relect the rather limited capabilities o the existing sotware packages. For example, representative representative topics included economic order quantity (EOQ) calculations, warehouse sizing, transportation modal and carrier decisions, production planning, and center o gravity location decisions, among others. others.11 As we moved through the 1990s, increased spreadsheet capabilities allowed organizations to analyze issues that had traditionally been solved by specially designed computer programs. In this vein, the classic issue o transportation cost minimization—transporting products rom multiple sources to multiple destinations, at a minimum transportation cost—could be analyzed using spreadsheet sotware.12 10
Alter, Inormation Systems, p. Systems, p. 191. John E. Tyw Tyworth orth and William L. Grenoble, G renoble, “Spreadsheet “Spread sheet Modeling in Logistics: Advancing Today’s Educational Tools Tools,” ,” 12, no. 1 (1991): 1–25. Journal o Business Logistics 12, 11
12
Brian J. Parker and David J. Caine, “Minimizing Transportation Costs: An Ecient and Eective Approach or the Spreadsheet User,” Transport Logistics 1, 1, no. 2 (1997): 129–137.
Chapter 2 • Logistics and Information Tec Technology hnology
Today spreadsheets have developed to the point that they are able to solve or basic logistics Today optimization models. Logistics optimization models utilize spreadsheet sotware and add-ins to help logisticians make complex judgments and decisions about key logistics issues at strategic, tactical, operational, and collaborative levels. levels.13 For example, at a strategic level global consumer products company P&G uses spreadsheets with the add-in package “What’s Best” to help them make decisions regarding plant location and size decisions.14 Logistics optimization models dier rom traditional operations research in that they are typically ocused on the practical implementation instead o pure optimization. optimization.15 Thus, the use o spreadsheets provides a method or logisticians to conduct a variety o “what-i ” analyses in support o their logistics decision making.
Communication Communicatio n Systems Communication systems help help various stakeholders—employees, stakeholders—employees, suppliers, customers—work together by interacting and sharing inormation in many dierent orms.16 From a logistical perspective, the importance o well-dened and well-executed well-executed communication systems systems was highlighted by the events o September 11, 2001, especially or companies that use or provide airreight services. Because o the total shutdown o the U.S. U.S. aviation system or several days ollowing ollowing the terrorist attacks, many air shipments were diverted onto trucks, thus delaying many deliveries. As such, airreight providers such as FedEx worked everishly to inorm customers when their shipments would be arriving.17 Many advances in telecommunicatio telecommunications ns technology—such as ax machines, personal computers, electronic mail, cellular phones, tablets and smart phones, among others—have occurred since the irst edition o this book was published in the 1970s. As recently as the 1990s, 1990s, some o these technologies were considered workplace “luxuries.” Today Today,, by contrast, many o these technologies are essential or enabling the contemporary logistician to perorm peror m in the workplace. Electronic data interchange, or EDI (to be discussed in the next section), was viewed by many experts as the measuring stick or logistics inormation technology in the 1990s. By contrast, wirele wireless ss century.18 communication emerged as the measuring stick during the irst decade o the twenty-irst century. For our purposes, wireless communication reers to communication without cables and cords and includes inrared, microwave, and radio transmissions, among others. Although wireless communication communication has many logistical applications, applications, we’ll take a look at one o the more popular types, namely, global positioning systems. Global positioning systems (GPS) reer to a network o satellites that transmits signals that pinpoint the exact exact location o an object. You Y ou might be amiliar with global positioning systems in the orm o personal navigation devices that provide maps or voice instructions as you drive your automobile. Global positioning systems have have become quite valuable to the transportation component o
logistics because o high uel costs and the relentless pressure to improve eiciency and productivity. productivity. Indeed, transportation companies that have implemented global positioning systems have reported an increase in worker productivity, productivity, reduced operating costs, and improved customer relations. More speciically,, one study ound that GPS implementation allows transportation companies to recapture speciically nearly one hour per day o their drivers’ time, which which translates into labor savings o approximately $5,500 per employee. The same study also reported that GPS implementation allows companies to reduce vehicle travel travel by about 230 miles per week, or an annual uel savings o approximately 19 $52,000. 13
Michael R. Bartolacci, Larry J. LeBlanc, Yasanur Yasanur Kayikei, and Thomas A. Grossman, “Optimization Modeling Modeli ng or Logistics: Options and Implementations,” Journal Implementations,” Journal o Business Logistics 33, 33, no. 2 (2012): 118–127. 14
G. Anthes, “Modeling Magic: IT-Based Operations Research Builds Better Supply Chains at Procter & Gamble,” http:// www.computerworld.com/s/article/99484/ModelingMagic.. www.computerworld.com/s/article/99484/ModelingMagic 15
Bartolacci et al., “Optimization Modeling or Logistics.”
16 Alter,
Inormation Systems , Chapter 5.
17
Kristen S. Krause, “FedEx’ “FedEx’ss 9–11 Response,” Trac World, September World, September 9, 2002, 12–13.
18
Roger Morton, “Working without a Wire,” Logistics Wire,” Logistics Today , February 2005, 29–33.
19
Bridget McCrea, “The Golden Age o Wireless,” Logistics Wireless,” Logistics Management , October 2008, 47–50.
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Part I • Overview Overview of Logistics
Tablets, such as Apple’s iPad, are also becoming important contributors to logistics decision Tablets, making. The use o these types o consumer-grade mobile devices in an industrial setting, setting, such as a warehouse or port, port, may require the device to become “rugg “ruggedized” edized” in order to withstand withstand the conditions that exist in these locations.20 For example, Markley Enterprises, Enterprises, a manuacturer o marketing support products, uses iPads along with third-party apps to enhance the productivity o its warehouse workers, improve pick accuracy, and eliminate paperwork.21 Similarly, Cleveland-based Arhaus Furniture placed iPads in its delivery trucks, which has led to savings in paperwork costs, increased truck utilization, and improved customer service. ser vice.22 Continuing advances in hardware and sotware have resulted in dramatic cost reductions or wireless communication, co mmunication, and one implication is that tha t the technology is no longer limited to those companies with the deepest inancial resources. Moreover, hardware and sotware cost reductions have shortened the relevant investment payback period and GPS implementations can pay or themselves within one year.23
Transaction Processing Systems (TPS) A transaction processing system , or TPS, collects and stores inormation about transactions and may also control some aspects o transactions. The primary objective o a TPS is the ecient ecient processing o transactions, and to this end, organizations can choose to do batch or real-time processing. 24 With batch processing, data are collected and stored or processing at a later time, with the later time perhaps being based on schedule (e.g., process every six hours) or volume (e.g., (e.g., process once 25 transactions have accumulated) considerations. Real-time processing, not surprisingly, means that transactions are processed as they are received. Although batch processing might be somewhat out o step with the contemporary emphasis on speed and time reduction, it can be quite eective when realtime processing is not necessary. Moreover, Moreover, in comparison with real-time systems, batch processing tends to be less costly and easier or employees to learn. A prominent example o a logistics-related TPS is electronic data interchange (EDI), the computer-to-computer computer-to-com puter transmission o business data in a structured ormat. or mat. Because EDI provides or the seamless transmission o data across companies (assuming technological compatibility), it can acilitate the integration o, and coordination between, supply chain participants. Thus, irms with strong EDI links to both suppliers suppliers and customers might have a substantial advantage advantage over supsupply chain arrangements without such implementations. Common uses o EDI include invoicing, submission o purchase orders, pricing, advanced shipment notices, notices, electronic unds transer, and bill payment. EDI has a number o beneits, including including reductions in document preparation and processing time, inventory carrying costs, personnel costs, inormation loat, shipping errors, returned goods, lead times, order cycle times, and ordering costs. In addition, EDI may lead to increases in cash low low,, billing accuracy, productivity, and customer satisaction. Potential drawbacks to EDI include a lack o awareness o its beneits, high setup costs, costs, lack o standard ormats, and incompatibility o computer hardware and sotware. Despite these drawbacks and a perception that EDI is an “old” technology,25 EDI continues to be an important logistics technology tool in the twenty-irst century. Moreover, Moreover, while the Internet was viewed by some as a possible replac replacement ement or substitut substitutee or EDI, time has shown that the Internet can serve ser ve as a complement to, rather than a replacement re placement or substitute or, EDI. For example, Walmart Walmart was one o the irst companies to adopt Internet-based EDI (I-EDI) in place o Valu Valuee 20
Mary Shacklett, “Supply Chain Technology Prospects or the Warehouse,” World Trade: WT 100 25, 100 25, no. 3 (2012): 24–28.
21
Andrew K. Reese, “iPad in the Warehouse,” Warehouse,” Supply & Demand Chain Executive 11, 11, no. 3 (2010): 14–17.
22Heath E.
Combs, “Arhaus “Arhaus to Equip Trucks with iPads,” iPads,” Furniture Today 34, 34, no. 47 (2010): 34.
23
No author, “Remote Asset Management Worth the Cost,” GPSWorld , January 2009, 27.
24
Alter, Inormation Systems , Chapter 5.
25
Malcolm Wheatley, “A “A Question o Standards,” Automotive Standards,” Automotive Logistics , September/October 2008, 60–64.
Chapter 2 • Logistics and Information Tec Technology hnology
Added Network (VAN)-based (VAN)-based EDI. Importantly, Importantly, I-EDI’s I-EDI’s signiicantly lower setup setup costs than VANVAN26 based EDI make I-EDI more aordable or smaller companies, thus expanding EDI’s scope. TPS, include optical character Automatic identiication technologies technologies , another type o logistics-related TPS, recognition (which can read letters, words, and numbers), machine vision (which can scan, inspect, and interpret what it views), voice-data entry (which can record and interpret a human voice), radiorequency identiication (which can be used where there is no line o sight between scanner and label), and magnetic strips. Automatic identiication systems are an essential component in point-o-sale (POS) systems and the idea behind POS systems is to provide data to guide and enhance managerial decision making. Operationally, POS systems involve scanning Universal Product Code (UPC) labels, either by passing the product over an optical scanner or recording it with a handheld scanner. The UPC is read and recorded into a database that supplies inormation such as the product’s price, applicable taxes,, whether ood stamps can be used, and so on. T he speciic price o each product and its taxes description are also lashed on a monitor screen positioned near the counter. When all the products have been recorded, the customer receives receives veriication that lists the products purchased, the price o each article, and the total bill. Bar code scanners currently remain the most popular automatic identiication system in use. They work to integrate suppliers and customers along the supply chain because all parties read the same labels; in addition, the transer o goods between parties can be recorded by simple electronic means. Traditionally Traditionally,, laser scanners have been used to read bar codes. The scanners record inventory data and may be directly attached to a computer that uses the data to adjust inventory records and track product movement. Radio-frequency identification (RFID) technology is another automatic identiication technology that has received considerable attention in the irst part par t o the twenty-irst century. century. Conceptually,, RFID involves the use o radio requency to identiy objects that have been implanted Conceptually with an RFID tag. Operationally Operationally,, RFID consists o three components: a scanning antenna, antenna, an RFID tag (chip) that conveys the relevant data, and a transceiver that interprets the data. As an RFID tag passes within the scanning antenna’s range, the tag’s data are picked up by the scanning antenna and interpreted by the transceiver. Compared to bar codes, RFID (1) does not require clear line o sight between an object and RFID hardware, (2) can store much larger quantities o data, and (3) can oer both read and write capabilities. A major catalyst or or RFID usage in logistics was was a Walmart mandate that by January 1, 2005, its top 100 suppliers deploy RFID tags on shipments into one particular Walmart Walmart distribution center in Texas. Texa s. While this goal has not been realized, Walmart’s mandate jumpstarted a technology that had existed since the 1940s but that had not been widely used by organizations. As a result, there has been signiicant improvement in the technology and costs are coming down. The apparel and healthcare industries are approaching a critical mass o users. Many large retail companies are using RFID to track individual items o clothing and roughly 10 percent o hospitals in the United States have have 27 some orm o RFID system installed. installed. A number o beneits have been report reported ed by adopters a dopters o RFID technolog technologyy. For example, examp le, dramatic reductions (between 20 percent and 50 percent) in inventory stockouts have been reported by Walmart Walmart and some o its suppliers.28 In addition, RFID reduced the time needed to count inventory by 80 percent and improved the accuracy o inventory counts at one clothing retailer. retailer.29 Despite the potential beneits associated with RFID, various challenges must be addressed beore the technology becomes more widely used in logistics. A major drawback to more widespread RFID
26
Zhenyu Hang, Brian D. Janz, and 273–286. Mark N. Frolik, “A “A Comprehensive Examination o Internet-EDI Adoption,” Inormation 25, no. 25, 3 (2008): Systems Management 27
No author, “Will 2012 See Widespread Widespread Adoption o RFID?” RFID Journal , January/February (2012): 6–9.
28
John S. Webster, Webster, “Wall-Mart’s “Wall-Mart’s RFID Revolution a Tough Tough Sell,” Network Sell,” Network World World , September 15, 2008: 34–36.
29
Alan M. Field, “Tag, You’re You’re It!” Florida It!” Florida Shipper Shipper , October 13, 2008, 10–11.
45
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Part I • Overview Overview of Logistics
adoption involves the costs o installing the related hardware and sotware, which can range rom $100,000 or smaller companies to $20 million or larger companies. Another drawback to RFID involves privacy concerns, such as the inappropriate use o the technology.. For example, a major retailer embedded RFID chips into a particular line o cosmetic technology products, and consumers who selected selected this product rom the store shel were beamed, via webcam, to the manuacturer’s headquarters!30 Yet another drawback is that data accuracy can be lower in items with high moisture content, such as ruits and vegetables vegetables..
Management Information Systems (MIS) and Executive Information Systems (EIS) These systems convert TPS data into inormation or monitoring perormance and managing an organization, with the objective o providing managers and executives with the inormation they really need.31 To this end, a logistics information system (LIS) can be dened as “the people, equipment, and procedures to gather, sort, analyze, evaluate, and distribute needed, timely, and accurate inormation to logistics decision makers.”32 As shown in Figure 2.2, 2.2, an LIS begins with a logistics manager requesting inormation and ends with the manager receiving regular and customized reports. For logistics managers to receive needed inormation, inormation, it’s important that they be airly speciic when submitting requests. requests. For example, a logistics manager who wants inormation about a speciic warehouse or distribution center needs to request inormation on, say, “the Chicago warehouse,” rather than inormation on “corporate warehouses.” warehouses .” Timely inormation inormation would appear to be incumbent on the eectiveness and eiciency o a company’s particular LIS and timely inormation can encompass several dimensions. However, timely can can reer to the up-to-date status o inormat inormation, ion, which can be inluenced by a company’s collection and analysis procedures. Inormation collection should emphasize both internal and external sources; unortunatelyy, internal sources o logistics inormation unortunatel inor mation are not always as plentiul as desired. Indeed, research into the business value attributable to logistics discovered that “logistics measurement is happening much less requently than one might imagine.”33 External sources ocus on inormation rom
Logistics Information System DATA
Regular
Information Request from Logistics Manager
Collects
Disseminates Analyzes
and Customized Reports
Retrieves Stores
Figre 2.2 2.2 Strctre and Fnction of a Logistics Information System Source: Adapted Source: Adapted from Michael Etzel, Bruce Walker, and William Stanton,Marketing, Stanton, Marketing, 14th 14th ed. (New York: McGraw-Hill Irwin, 2007), p. 172.
30
Tom Andel, “Big Brother Brother in Aisle Five?” Paperboard Packaging , February 2006, 4.
31
Alter, Inormation Systems , Chapter 5. Adapted rom a denition o “marketing inormation inormat ion system” provided by Philip P hilip Kotler and Gar y Armstrong in Principles o Mark Marketing eting , 11th ed. (Upper Saddle River, NJ: Prentice Hall, 2006), Chapter 4. 32
33
James S. Keebler, Karl B. Manrodt, David A. Durtsche, and D. D. Michael Ledyard, Keeping Score: Measuring the Business Business Value Value o (Oak Brook, IL: Council o Logistics Management, 1999), Chapter 2. Logistics in the Supply Chain (Oak
Chapter 2 • Logistics and Information Tec Technology hnology
outside the company and include inormation about customers, competitors, and suppliers, along with inormation about economic, technological, political, legal, and sociocultural environments. Timely also can reer to how quickly managers receive the inormation requested; this is aected by each company’s retrieval and dissemination procedures. A manager’s ability to quickly receive inormation can be inluenced by technology hardware and sotware, and aster and more powerul technology has helped reduce retrieval and dissemination d issemination times. Alternatively, Alternatively, retrieval and dissemination can be slowed by hardware and sotware glitches, including incompatible hardware or sotware, power outages, system crashes, and computer viruses. vir uses. Accurate inormation inormation may also relect the eectiveness and eiciency o a company’s company’s logistics inormation system. As such, an LIS must be concerned with the nature and quality o the relevant data; or instance, although the Internet can provide access to tremendous amounts o external inormation at a very low cost, the validity o some Internet inormation is suspect. Keep in mind the GIGO —garbage in/garbage out—principle: Inormation that is erroneous, misrepresented, or unclear will likely result in poor decisions by logisticians.
Decision Support Systems (DSS) Decision support systems help help managers make decisions by providing inormation, models, or analysis 34 tools, and they can be widely applied and used by logisticians. Specic uses o DSS in logistics include, but are not limited to, vehicle routing issues, inventory control decisions, developing automatic order picking systems, and optimization models or buyer–seller negotiations. Several Several o the more prominent logistics-related DSS techniques are discussed in the ollowing paragraphs. Simulation is a technique that models a real-world system, typically using mathematical equations to represent the relationships among the system’ system’ss components. Simulation reliability is achieved by making the model as akin to the real world as possible. Although simulation can be a powerul analytic tool, a poorly constructed simulation involving bad data or inaccurate assumptions about the relationships among variables can deliver suboptimal or unworkable solutions to logistics problems. The primary advantage o simulation is that it enables the irm ir m to test the easibility o proposed changes at relatively little expense. In addition, it prevents irms rom experiencing the public embarrassment o making a major change in their logistics system that might result in a deterioration o customer service levels or an increase in total operating expense. expense. A second type o DSS, which can be broadly labeled as application-spe application-specific cific software, has been developed to help managers deal with speciic logistics processes or activities. Traditionally, application-speciic sotware oten involved involved customers purchasing a particular sotware package and then having the sotware installed (i.e., so-called “purchase and install”) on their computer(s). The
purchase and install option was (is) quite expensive in the sense that the sotware costs can approach $500,000 while implementation costs can run into the several millions o dollars. An increasingly increasingly popular popular option option or application-s application-speciic peciic sotware is on-demand software (also referred to as software-as-a-service or cloud computing), or “sotware that users access on a peruse basis instead o sotware they own own or license or installation.”35 A major advantage advantage o on-demand vis-à-vis purchase purchase and install sotware is on-demand’s on-demand’s pay-per-use model allows customers customers to avoid high capital investment costs (we’ll look more closely at on-demand sotware later in the chapter). Transportation management systems (TMS) and warehouse management systems (WMS) are two prominent examples o logistics-related application-speciic sotware. Indeed, an annual sotware survey conducted by Logistics Management magazine magazine has consistently ound that TMS and WMS sotware are the most likely applications to be purchased or upgraded. 36 Due to their importance as logistical decision support systems, we’ll we’ll take a brie look at transportation management systems and warehouse management systems. 34
Alter, Inormation Systems , Chapter 5.
35
David Hannon, “On-Demand Brings Spend Control to the Masses,” Purchasing , March 2, 2006, 40–42.
36
Bridget McCrea, “ Scrutiny Rules the Day, Day,”” Logistics Management , April 2009, 38–40.
47
48
Part I • Overview Overview of Logistics
A transport transportation ation management system is a sotware package that automates the process o building orders, tendering loads, tracking shipments, audits, and payments.37 Table Table 2.1 presents 2.1 presents a representative list o 15 tasks that might be perormed by a TMS package. Organizations that have implemented TMS sotware have reported decreases in empty vehicle miles, reduced uel consumption, and reduced transportation expenditures. The demand or TMSs continues to grow driven by several actors. actors. These actors include the ollowing: older TMS systems needing upgrades, the growth o intermodal transportation, the improvement o TMS capabilities beyond beyond just execution, the emergence o the previously described “big data,” and a desire or more holistic solutions.38 In addition, the use o a TMS is now seen as one way or an organization to improve the environmental sustainability o its logistics activities. By using the inormation provided, companies can get their reight to where and when it is needed in a more environmentally eicient manner.39 Warehouse W arehouse management systems are sotware packages that provide oversight o the storage and low o materials within a company’s company’s operations.40 Activities that can be controlled by a WMS include inventory management, product receiving, determination o storage locations, order selection processes, and order shipping. Potential beneits o a warehouse management system include dramatic reductions in data entry errors as well as dramatic reductions in the travel distances or order picking. Other beneits o a WMS include reduced operating expenses, ewer stockouts, increased inventory accuracy, and improved service to customers. Research has shown that irms that have adopted and implemented a WMS have signiicantly more eicient logistics processes than nonadopters. Adopters were ound to spend less on their overall logistics processes, processes, even though the costs costs o the WMS aected the costs o operating their warehouse. The results are largely driven driven by the increased increased visibility that is provided provided by the WMS. WMS.41 Because o the many dierent TMS and WMS options that are available to a logistics manager, it’ss important that an organization it’ org anization utilizes a sotware package that best suits its needs, as opposed to one rom a “name” provider or one that oers many unneeded options. Moreover, the installation o a TMS or WMS can cause organizational upheaval in the sense that the organization will change its established approach to managing transportation and warehousing, and current employees will need varying degrees o training to become proicient with the new system. system. TAbLE 2.1 2.1 Transportation Management Systems Task Capabili Capabilities ties Task Capability
Task Capability
Asset tracking
Carrier selection
Claims management Freight payment
Driver management Load planning
Load tendering
Order or shipment visibility
Package delivery verification
Package pickup tracking
Pickup scheduling
Rating
Real-time route reporting
Route optimization
Shipment consolidation “Transportation Management Systems Solution Selector,” Logistics Selector,” Logistics Today , September 2004, 76–80. Source: “Transportation Source:
37
Amy Zuckerman, “Transportation Management Syste ms Give Shippers Power to Make Ma ke Smarter Trucking Choices,” World Trade , January 2008, 34–38. 38Bridget
McCrea, “5 Trends Driving TMS Growth,” Logistics Growth,” Logistics Management 51, 51, no. 1 (2012): 42–44.
39
Simon Kaye, “Green Is the Color o Today’s TMS,” Material TMS,” Material Handling & Logistics 67, no. 2 (2012): 33–34. Logistics 67,
40
Dave Piasecki, “Warehouse Management Systems,” www Systems,” www.inventoryops.com .inventoryops.com..
41
Becky Partida, “WMS Can Produce Big Logistics Benets,” Supply Chain Management Review 16, 16, no. 3 (2012): 51–53.
Chapter 2 • Logistics and Information Tec Technology hnology
Data mining, which can be deined as “the application o mathematical tools to large bodies o data in order to extract correlations and rules,” rules,”42 is a DSS technique that has grown in popularity in recent years. Data mining utilizes sophisticated quantitative techniques to ind “hidden” patterns patter ns in large volumes o data; these patterns allow managers to improve their decision-making decision-making abilities as well as enhance their organization’ organization’ss competitive advantage. Although data mining has been characterized as a “ishing expedition” o sorts—in the sense o applying sophisticated quantitative quantitative techniques merely to ind relationships, whether meaningul or not—data mining, in reality, should ollow a well-deined methodology.43 Eicient data mining is dependent on data warehouses, that is, a central repository or all the relevant data collected by an organization. organizati on. Walmart, Walmart, which is acknowledged to have one o the world’s oremost data warehouses, and its vendors make extensive use o data dat a mining to improve logistical eectiveness and eiciency eicien cy.. For example, data mining has allowed Walmart to discover that when hurricanes are projected to hit the state o Florida, demand dramatically increases increases or two products, beer and Kellogg’s Pop Tarts (a toasted pastry product)! So, when a hurricane is projected to hit Florida, Walmart W almart makes makes sure that that additional stocks o beer and Pop Pop Tarts Tarts are available available in its stores there. An emerging technology that can assist logistics managers in using this increasing amount o available data is machine learning. This computer-based discipline leverages algorithms that can “learn” rom data. These algorithms use data to build and constantly update their prediction models or activities such as orecasting. A machine learning lear ning system could use indicators such as Web page visits, time on site, and social media activity to better plan logistics activities. activities.44 In addition, machine learning has been used as an early warning system or potential machine downtime. As such, machine
learning has the potential to support logistics decision making rom both a supply and demand side.
Enterprise Systems Enterprise systems, the nal general type o inormation management system to be described, create and maintain consistent data processing methods and an integrated database across multiple business unctions. 45 The most prominent example o enterprise systems is probably enterprise resource which “lets a company automate and integrate the majority o its business planning (ERP) systems, which processes, share common data and practices across the enterprise, and produce and access inormation in a real-time environment.”46 In theory theor y, ERP systems (such as those oered by Oracle and SAP) allow all prospective users access to a single database when making decisions. The attractiveness attractiveness o ERP systems comes rom their potential or lowering costs (such as inventory reductions), as well as increasing productivity and customer satisaction. Although contemporary ERP systems encompass encompass a irmwide perspective, perspective, their origins can be traced back to logistics and manuacturing in the orm o inventory control and materials requirement planning programs.47 Unlike these earlier programs, today’s ERP systems (conceptually, at least) provide an opportunity or all unctional areas within a irm to access and analyze a common database—which might not have been previously possible because (1) certain data were proprietary proprietar y to a particular unctional area and (2) o insuicient or slow computing capabilities. capabilities. One o the most requently requently mentioned shortcomings shortcomings o ERP systems involves involves the the costs o installation. It is common knowledge that ERP sotware is relatively expensive; however, the sotware is only one part o ERP implementation implementation costs. For For example, the vast amounts o data necessary or ERP systems may necessitate new or upgraded computer hardware. Other hidden or requently
42
Sam Joseph and Daniel D aniel Scuka, “AI,” Japan “AI,” Japan Inc., November 2001, 20–28. Inc., November
43
Michael S. Garver, “Try New Data-Mining Techniques,” Techniques,” Marketing News, News, September 16, 2002, 31–33.
44
Joseph Shamir, “Machine Learning: A New Tool Tool or Better Forecasting,” Supply Chain Quarterly 8, 8, no. 4 (2014): 39–42.
45
Alter, Inormation Systems, Chapter Systems, Chapter 5.
46
Joel D. Wisner, G. G. Keong Leong, and Keah-Choon Tan, Principles o Supply Chain Management: A Balanced Balanced Approach , 2nd ed. (Mason, OH: South-Western Cengage Learning, 2008), p. 507. 47
Kuldeep Kumar and Jos van Hillegersberg, “ERP Experiences and Evolution,” Commu 43, no. 4 (2000): 23–26. Communicat nications ions o the ACM 43,
49
50
Part I • Overview Overview of Logistics
overlooked costs o ERP implementation include employee training, data conversion (converting existing data into a usable and consistent ormat), integrating and testing a new system, maintenance costs, and consultant ees. Indeed, consultant ees can quickly ratchet up ERP implementation costs; there are suggestions that consultant ees may be three times more costly than the sotware itsel. 48 When all all relevant relevant costs are actored actored in, ERP installation costs can easily easily reach into the the tens tens o millions o dollars, and installation installation costs in the hundreds hundreds o millions o dollars are not out o the question. A second shortcoming is that implementation implementation o ERP systems can be a very time-consuming process. Indeed, many o the hidden costs o ERP implementation mentioned in the previous paragraph are the result o hidden time associated with ERP implementation. For instance, employee employee training, data conversion, and integrating and testing the new system all require time beyond the installation o the ERP sotware itsel. itsel. A general rule o thumb is that actual time to implement implement ERP systems may range rom two to our times longer than the time period speciied by the ERP vendor. A third th ird shortcoming o ERP systems is that t hat they initially lacked strong application-speciic logistical capabilities such as TMS or WMS. Many companies addressed this challenge by adding socalled “best o breed” (i.e., the best product o its type) logistical applications to their ERP programs, but the process associated with adding the respective sotware could be costly and timeconsuming. In recent years, however, ERP vendors have begun to provide high-quality application-speciic logistical capabilities, particularly with respect r espect to WMS.49 Given the preceding discussion on time and implementation costs, it is not surprising that some ERP installations do not go as smoothly as desired, and these ERP glitches occasionally have a logistical component to them. For example, ERP implementation problems at a leading manuacturer o home medical products caused the company to lower its revenue estimates or several several time periods. From a logistical perspective, the ERP-related problems meant that the company missed shipment deadlines, could not respond to customer inquiries, and had limited inormation about order status. The order-related problems, problems, in turn, resulted in a higher-than-normal level o returns associated with incorrect orders, and the missed shipment deadlines caused the company to spend more money or expedited transportation.50
THE INTERNET’S INFLUENCE ON LOGISTICS ubiquitous technology today, Although the Internet may appear to be a ubiquitous today, the reality is that only about 49 percent o the world’s world’s population currently uses the Internet, up rom approximately 5 percent o the world’s world’s population at the beginning o the twenty-rst century. century.51 Just as the Internet’ Internet’ss usage continues to expand during the twenty-rst century, so does its infuence on the logistics discipline. Although it issection not possible to present a comprehensive c omprehensive discussionretailing, o the cloud Internet’s i nfuence infuence on logistics, this will discuss our specic infuences—online computing, electronic procurement, the Internet Internet o things—o the Internet on the logistics discipline. Learning Objective
2.3
Online Retailing It should be noted that there are logistical similarities between online retailing and in-store retailing. For example, many logistical unctions and activities—such as transportation, warehousing, materials handling, and order management—occur in both. Likewise, both may use the same type o equipment and materials, such as bar coding and warehouse management systems. Alternatively,, meaningul dierences exist between online and in-store retailing with respect Alternatively to the execution o logistics activities. activities. For example, the orders associated with online shopping tend
48Bob
Violino, “Will a New Planning System Bust You?” Baseline You?” Baseline , June 2005, 88.
49
Bridget McCrea, “ERP: Gaining Momentum,” Logistics Momentum,” Logistics Management , November 2008, 44–46.
50
Marc L. Songini, “Faulty ERP App Results in Shortall or Medical Firm,” Computerworld , January 2, 2006, 8.
51
www.internetworldstats.com www .internetworldstats.com
Chapter 2 • Logistics and Information Tec Technology hnology
to be more plentiul and in much smaller quantities than those associated with in-store retailing. As such, online retailing requires an order management system capable o handling high volumes o orders, and it’s it’s also essential that the inormation management system be capable o correctly transmitting each order so that it can be illed in a timely ashion. In addition, because o smaller order quantities, online shopping is characterized by opencase, rather than ull-case, picking; open-case picking is acilitated by materials handling equipment, such as totes and push carts. Moreover, open-case picking necessitates that products be slotted (placed) in locations that acilitate picking eectiveness and eiciency. eiciency. Not surprisingly, online retailing’s smaller smaller order quantities have important packaging implications as well, in the sense that companies need containers—small cartons, envelopes, bags—that are well suited to holding small quantities o product.52 Some companies that engage in both online and in-store retailing choose to outsource online’s pick-and-pack pick-and-pack activities because they are so dierent than or in-store retailing.53 Two othe otherr key log logisti istical cal cons consider ideratio ations ns or onli online ne reta retailin ilingg invol involve ve tran transpor spor tati tation on and returned orders. The smaller order quantities associated with online retailing retai ling tend to avor transport companies with extensive delivery networks and expertise in parcel shipments. This, in turn, suggests that outbound shipments tend to be picked up at a loading dock by small-capacity vehicles, such as delivery vans. Moreover, many online retailers are challenged by “last-mile” considerations (those related to delivering product to the customer) such as congestion, requent stops, and return trips i the customer is not available to accept the delivery. Another emerging consideration is the use o same-day delivery o online orders. Companies such as Amazon, eBay, eBay, and Walmart Walmart are all looking at ways to oer their online customers the ability to receive their products the same day. 54 In act, Amazon is now oering a service called Prime Now in selected markets. This subscription service promises ree 2-hour delivery or a subset o their home products and 1-hour delivery rom Amazon ailiated-restaurants.55 While still in the pilot stage, the logistical implications o this strategy are immense. Although returned orders are an issue in all types o retailing, the return rates associated with online shopping tend to be much higher than with other types o retailing; one estimate suggests 10 percent return rates or traditional orms o retailing, compared to approximately 30 percent or online purchases purchases..56 Because many o these returns are rom individual customers, customers, not businesses or organizations, online retailers should attempt to make the return process as painless as possible. As such, when online customers receive their orders, they might also receive inormation on how to return the order, a return label, as well as a return container such as an envelope or bag. A relatively smooth and painless returns process not only improves return eectiveness and eiciency, but can also be an eective way way o building and maintaining customer loyalty.57 Furthermore, it’s important to noteothat a “one size itsRather, all” logistics strategy is notstrategies likely to acilitate the eectiveness eectiveness and eiciency online shopping. Rather , a variety o logistics might need to be applied, and it is important impor tant to recognize the potential trade-os associated with the dierent strategies. strategies. For example, one way o addressing the last-mile issue o customer unavailability unavailability would be to install some type o receptacle (e.g., (e.g., a drop box) or the product at the customer’s residence. However, these receptacles might not be easible or large items (such as a rerigerator), or perishable items (such as certain types o ood), or or extremely valuable items (such (such as jewelry). UPS, a global logistics provider, plans to install sel-service parcel lockers in 300 locations across the United States. This is in direct response to a research r esearch study it commissioned which indicated that 35 percent o avid on-line shoppers desire deliveries at locations with extended hours and not at their
52
Norm Saenz, Jr., “Picking the Best Practices or E-ulllment,” IIE Solutions 33, 33, no. 3 (2001): 37–40.
53
William Homan, “One-Click Shopping,” Journal Shopping,” Journal o Commerce , February 20, 2006, 22–23.
54 Tim
Parry, “Walmart “Walmart Testing Same-day Delivery Service,” Multichannel Service,” Multichannel Merchant Exclusive Exclusive Insight , October 10, 2012, 2.
55
www.amazon.com www .amazon.com
56
Saenz, “Picking the Best Practices.”
57
Tim Parry, “Many Happy Returns?” Multichannel Returns?” Multichannel Merchant , February 2006, 37.
51
52
Part I • Overview Overview of Logistics
homes.58 The challenges o implementing the appropriate logistics strategy, strategy, or strategies, or online shopping are exacerbated by the act that (1) a particular customer may require vastly dierent levels o service depending on the product ordered and (2) a particular product may require vastly dierent dierent 59 levels o ser vice depending on the customer customer ordering it. Learning Objective
2.4
Cloud Computing The previously mentioned cloud computing (an umbrella term including both on-demand sotware and sotware as a service) has experienced meteoric growth since the beginning o the twenty-rst century.. In act, the worldwide public cloud services market—where sotware, century sotware, services, or inormainor mation are shared via the Internet without the users having control over the technology inrastructure— has grown g rown signicantly. signicantly.60 There are a myriad o logistics-related applications or cloud cloud computing, including collaborative orecasting and inventory optimization, with transportation transpor tation management sys61 tems emerging as the most popular on-demand application. One reason or cloud computing’s popularity is that its pay-per-use ormula allows customers to avoid high capital investment costs, which speeds up return on investment or the sotware. In addition, because cloud computing involves operational as opposed to capital expenditures, it becomes a viable option or many companies that could not aord to purchase, install, and maintain application-speciic sotware such as transportation management systems and warehousing management systems. Moreover, the worldwide economic slowdown that began in 2007 has caused many organizations to slash their inormation technology expenditures, thus beneiting cloud-based applications. Other advantages to cloud computing include aster and less-costly installation, a smaller inormation technology sta, and regular upgrades and updates rom the sotware provider.62 As such, companies such as Red Prairie, a provider o productivity sotware, are now oering cloudbased deployment o TMSs and WMSs. WMSs.63 Although cloud cloud computing appears to be quite attractive, particularly rom a inancial perspective, it has several potential drawbacks. For example, example, the regular sotware upgrades and updates mentioned earlier can sometimes be too numerous and and too requent, and customers can struggle to keep up with them. Moreover, Moreover, cloud-based sotware allows allows or a limited amount o customization, meaning that customers need to it what they’re doing to what the sotware can achieve. 64 And, because the Internet is the primary transaction medium or cloud-based sotware, security issues such as data protection have been identiied as a key concern.
Learning Objective
2.5
Electronic Procurement Electronic uses Internet to types make o it easier, aster, lessrom expensive or procurement an organization(e-procurement) to purchase goods andthe services. The benets thatand come electronic procurement include transactional benets, compliance benets, management inormation benets, and price benets. Transactional benefts are are a measure o the benets o enhanced transactional eciency (e.g., a reduced invoice-to-pa invoice-to-payment yment time) associated with e-procurement. Compliance benefts ocus on the savings that come rom adherence to established procurement policies. Management inormation benefts encompass encompass those that result rom management inormation, inor mation, customer satisaction, and supplier satisaction levels ater implementation o electronic procurement. Price
58
http://www.dcvelocity http://www .dcvelocity.com/articles/20160701-ups-to-install-parc .com/articles/20160701-ups-to-install-parcel-lockers-at-300-locationsel-lockers-at-300-locations-by-years-end-in-pr by-years-end-in-programogramexpansion 59
Alberto Grando and Marco Gosso, “Avoiding “Avoiding the E-Commerce Trap, Trap,”” EBF , Summer 2004, 48–51.
60
Bridget McCrea, “Cloud Breakthrough,” Logistics Breakthrough,” Logistics Management 51, 51, no. 11 (2012): 36–40.
61
Bridget McCrea, “The State o On-Demand: CATCHING FIRE,” Logistics FIRE,” Logistics Management, January Management, January 2009, 43–45.
62
John Fontana, “What’s “What’s behind On-Demand’s Sotware Rise,” Rise,” Network Network World World , December 12, 2005, 1, 14.
63
David Biederman, “Supply Chains Head to the Cloud,” Journal Cloud,” Journal o Commerce 13, 13, no. 1 (2012): 186–189.
64
Hannon, “On-Demand Brings Spend Control.”
Chapter 2 • Logistics and Information Tec Technology hnology
benefts are are those that are given as the result o adopting e-procurement. For example, example, the electronic processing o invoices can save save a great deal o money in terms o postage and stationery, and these these 65 savings can be passed on to the buyer. Just as there are beneits to electronic electro nic procurement, pro curement, there are important impor tant drawbacks as well. One concern with electronic commerce in general and e-procurement in particular involves the security o inormation that is being transmitted; there is a risk that sensitive or proprietary proprietary inormation could end up in the wrong hands. Another concern is that electronic procurement can be impersonal in the sense that human interaction is replaced by computer transactions. Moreover, despite substantial hype about the potential beneits o e-procurement, one study discovered that only about 25 percent o the responding companies mandate the use use o electronic procurement. The same study study also ound a dramatic drop in user conidence with respect to having the required skills and knowledge to use e-procurement tools.66 One activity that has been greatly acilitated by electronic procurement is online reverse auctions. You might be amiliar with traditional auctions in which multiple buyers bid on a particular product, with the product being sold to the highest bidder. By contrast, in a reverse auction, a buyer invites bids rom multiple sellers, and the seller with the lowest bid is generally g enerally awarded the business. As reverse auctio auctions ns have evolved, so too have their parame parameters; ters; in some situat situations ions a buyer is exempted rom accepting the lowest bid, whereas in other situations a buyer does not have to accept any o the bids. bids.67 Buyers tend to like reverse auctions because they aim to generate low procurement prices, and the online nature o reverse auctions allows buyers to drill down to a seller’s low price very quickly. quickly.
Altern atively,, sellers are critical o reverse auctions because their primar Alternatively primaryy emphasis is low price. However, Howev er, reverse auctions can provide sellers with valuable inormation such as the number o other bidders. This can be important in the sense that a large number o bidders will likely lead to a great deal o price competition.68
Internet of Things The Internet of things (IoT) reers to the sensors and data-communication technology that is built into physical objects that enables them to be tracked and controlled over the Internet. 69 The IoT concept has been around since the early 2000s, but has recently emerged emerged as an important area o ocus or the logistics discipline. While the traditional Internet connected computers to one another, the IoT extends this connection to other types o physical objects. objects. These new connections can pro vide valuable valuable inormation and business insights that that can be used used by logistics managers to reduce costs costs and improve service. The potential beneits o the IoT extend across all types o logistics activities, activities, including such areas as warehousing, transportation, and last-mile delivery. delivery. For example, a orklit being used within a warehouse setting to move products can now be the source o valuable inormation accessed via the Internet. This orklit can be equipped with wireless connectivity, data storage, and sensors that can provide a variety o operational data about itsel and the environment it operates within. For For example, the orklit could alert a warehouse manager to potential mechanical or saety issues prior to anything occurring. The orklit could also provide enhanced visibility o inventory within the warehouse. Thus, the orklit moves moves beyond just moving a product, to become a mobile mobile inormation 70 hub that collects and processes inormation or enhanced logistics perormance. peror mance.
65
David Eakin, “Measuring E-Procurement Benets,” Government Procurement , August 2002, 6–12.
66
Maria Varmazis, “Buyers Become More M ore Selective in Online Tools Tools,” ,” Purchasing, September 15, 2005, 43–45. Purchasing, September
67
Bridget McCrea, “ Going Once, Going Twice,” Industrial Distribution, July Distribution, July 2005, 30–32.
68
Ibid.
69
Lew Manci, “7 Technology Trends Shaping Shaping the Future o Material Handling” Supply Chain Quarterly 8, 8, no. 4 (2014): 30–36.
70
Ibid.
Learning Objective
2.6
53
54
Part I • Overview Overview of Logistics
Research suggests that the IoT has the potential to generate approximately $8 trillion world wide in value over the next decade. The supply chain and logistics area is expected to contribute an estimated $1.9 trillion to this number. In particular, the IoT is expected to drive value in the supply chain and logistics disciplines through improvements in employee productivity and enhanced customer interactions.71 While the number o things connected to the Internet is expected to triple in the next ive years, this still only represents a tiny raction o all the physical objects that could ultimately be connected. Thus, the IoT is still deining the ways and the extent to which it will inluence the logistics discipline. Learning Objective
2.7
INFORMATION INFORMA TION TECHNOLOGY CHALLENGES Thus ar, this chapter has presented various various challenges associated associated with specic types o inormation technolog y. We We conclude this chapter with a discussion o several macro-level inormation inormat ion technology challenges, or those challenges challenges that might be aced regardless o the type(s) o inormation technology being utilized. One macro-level challenge is the recognition that inormation technology is a tool that that can help managers address organizational problems and is not a panacea or or a be-all/end-all solution or organizationall problems. This can be illustrated by the situation o a senior manager whose disorganizationa organization caused him to oten miss regularly scheduled meetings with various constituencies. The senior manager and his boss decided to “solve” the missed meeting problem by providin providingg the manager with a smart phone that contained a calendar detailing the time and place o his various meetings. Unortunately, the senior manager continued to miss regularly scheduled meetings because he occasionally ailed to (1) carry the smart phone with him; (2) have the smart phone turned on; and (3) upload the meeting inormation into the smart phone’s calendar. In this situation, the technological “solution” could not address—and may have actually exacerbated—the manager’s disorganization. Security concerns represent another macro-level inormation technology technolog y challenge, and these security concerns have many dimensions. For example, research indicates that inormation security is the most important technology issue that companies ace today. today.72 Moreover Moreover,, the thet o proprietary inormation or an “average” company is estimated to cost approximately $300,000 annually.73 Increasing reliance on the Internet or logistics activities such as ordering and shipment tracking makes it essential that websites are as secure as possible rom computer viruses or computer hackers that could compromise a customer’s access to those websites. Yet Y et another security concern involves the decreasing size and increasing portability o technology devices such as laptop computers, lash drives, and smart phones. These smaller technology devices are more susceptible than larger technology devices to loss or thet, and it’s important to recognize that the loss or thet o small, portable technology devices cause an organization to lose both the device and the the data stored on the device. A particularly noteworthy example involved an intern or the state o Ohio who had a laptop computer, containing personal data on approximately 1 million residents o Ohio, stolen rom her car. A third inor matio mation n techno technolog logyy challe challenge nge involves human resour resource ce issues. Impor Importantl tantlyy, people-related actors such as employee resistance resistance have been identiied as a major cause o inorma74 tion technology implementation ailure. Technology addiction, another human resource issue, is a growing concern in society. Underscoring the potential seriousness o technology addiction is whether an employer employer can be held liable or an employee’s employee’s technology addiction.
71
www.dhl.com/content/dam/Local_Images/g0 .dhl.com/content/dam/Local_Images/g0/New_aboutus/innovation/DHLT /New_aboutus/innovation/DHLTrendReport_Internet_o_things.pd rendReport_Internet_o_things.pd 72 www Paul Demery, “Sae Driving? Is Your Lap Strapped in?” Accounting in?” Accounting Technology , September 2006, 45–49.
73
Ray Zambroski, “Think Beore You Send,” Communication World, May–June World, May–June 2006, 38–40.
74
Tracey E. Rizzuto and Jennier Reeves, Reeves, “A “A Multidisciplinary Meta-Analysis Met a-Analysis o Human Barriers to Technology Implementation,” Consulting Psychology Journal: Practice and Research 59, 59, no. 2 (2007): 226–240.
Chapter 2 • Logistics and Information Tec Technology hnology
55
Summary discussed ssed key issues o logistics and inormation This chapter discu technology. Six Six general types o inormation management systems were examined, with a particular emphasis on relevant logistical applications. Topics discussed include global positioning systems, electronic data interchange, application-
The chapter also looked at the Internet’ Inter net’ss inluence in luence on logistics in terms o our issues: online retailing, cloud computing, electronic procurement, and the Internet Internet o things. A discussion o inormation technology challenges—such as the recognition that inormation technology is a tool and not
speciic sotware, and enterprise resource planning systems.
a panacea—concluded the chapter.
Key Terms Application-specic sotw sotware are Big data Cloud computing Data Data mining Data warehouses Electronic data interchange (EDI) Electronic procurement (e-procurement) Enterprise resource planning (ERP) systems
Global positioning systems (GPS) Inormation Internet o things (IoT) Logistics inormation system (LIS) Logistics optimization models Machine learning On-demand sotware (also reerred to as sotware-as-a-service)
Radio-requency identication (RFID) Reverse auction Simulation Transportation Trans portation management systems (TMS) Warehouse W arehouse management systems systems (WMS) Wireless communication communication
Questions for Discussion and Review 2.1 In what ways can inormation be helpul in logistics and supply chain management? 2.2 List the six general types o inormation i normation management systems,, and give one logistics application or each one that systems you’ve named. 2.3 Do you view the spreadsheet as the most relevant general sotware package package or logisticians? Why or why not? 2.4 How can communication systems acilitate logistics management in the atermath o situations such as terrorist
2.11 What benets are associated with with transportation management and warehouse management systems? 2.12 What is data mining? How might it be used in logistics? disadvantages o enterprise 2.13 Discuss advantages and disadvantages resource planning systems systems.. 2.14 Reer back to the logistical activities listed in Chapter 1; 1; Select one that you’re interested in and research how they have been infuenced by the Internet. Are you surprised by your ndings? Why or why not?
attacks and natural disasters? 2.5 What are some o the advances advances in telecommunications telecommunications technology that have occurred since this book was rst published? How do these advances help logistics managers? 2.6 Discuss how global positioning systems have become quite valuable in transportation transportation management. 2.7 Discuss the benets and drawbacks drawbacks o EDI. 2.8 Discuss the relationship between automatic identication technologies and point-o-sale systems systems.. companies nies hesit hesitant ant to to adopt adopt RFID RFID techn technology? ology? 2.9 Why are some compa 2.10 Discuss the importance o timely and accurate inormation to a logistics inormation system.
2.15 From a logistical perspective, perspective, what are some o the dierences between online and in-store retailing? strategy not likely to 2.16 Why is a “one size ts all” logistics strategy acilitate eective or ecient online shopping? 2.17 Discuss the advantages and disadvantages disadvantages o cloud computing. 2.18 Discuss the benets and drawbac drawbacks ks to electronic procurement. 2.19 What is the Internet o things (IoT)? How can it potentially potentially aect logistics management? technology 2.20 What are some o the macro-level inormation technology challenges that managers ace?
Suggested Readings
Bell, John E., Randy Bradley, Brian S. Fugate, and Benjamin T. Hazen. “Logistics Inormation System Evaluation: Assessing External Technology Technology Integration and Supporting Organizational Learning.” Journal o Business Logistics 35, 35, no. 4 (2014): 338–358.
Fawcett, Stanley E., Paul Osterhaus, Gregory M. Magnan, and Amydee M. Fawcett. Fawcett. “Mastering “Mastering the Slippery Slope o Technology.” Supply Chain Management Review 12, 12, no. 7 (2008): 16–25. Hazen, Benjamin T. and Terry Anthony Byrd. “Toward Creating
56
Part I • Overview Overview of Logistics
Competitive Advantage with Logistics Inormation Technology.” International Journal o Physical Distribution & Logistics Management Management 42, no. 1 (2012): 8–35. Kerr, John. “Technology “Technology Outlook: Getting by without the Big Buys.” Supply Chain Management Review 13, 13, no. 1 (2009): 14–19. Leonard, Lori N. K. and Christine Clemons. “Supply Chain Replenishment: Beore-and-Ater EDI Implementation. Implementation.”” Supply Chain Management: An International Journal 11, 11, no. 3 (2006): 225–232. Min, Hokey. Hokey. “Application “Application o a Decision Support System to Strategic Warehousing W arehousing Decisions.” Decisions.” International Journal o Physical DistribuDistribution & Logistics Management 39, 39, no. 4 (2009): 270–281. Moser, George and Peter Ward. “Which TMS Is Right or You?” Supply Chain Management Review 12, 12, no. 3 (2008): 50–56. New, Steve. “The Transparent Supply Chain.” Harvard Business Review 88, 88, no. 10 (2010): 76–82. Pearcy, Dawn H. and Larry C. Guinipero. “Using e-Procurement Applications to Achieve Achieve Integration: What Role Role Does Firm Size Play?” Supply Chain Management: An International Journal 13, 13, no. 1 (2008): 26–34.
Porter, Michael and James E. Heppelmann. “How Smart, Connected Products are Transorming Companies.” Companies.” Harvard Business 93, no. 10 (2015): 96–114. Review 93, Rai, Arun, Paul A. Pavlou, Ghiyoung Im, and Steve Du. “Interrm IT Capability Proles and Communications or Cocreating Relational Value: Evidence rom the Logistics Industry.” MIS Quarterly 36, 36, no. 1 (2012): 233–262. Sanders, Nada. “How to Use Big Data to Drive Your Supply Chain.” Caliornia Management Review 58, 58, no. 3 (2016): 26–48. Savitske,, Katrina. “Internal and External Logistics Inormation Savitske Technologies: Tec hnologies: The Perormance Perormance Impact in an International International Setting.” International Journal o Physical Distribution & Logistics Management 37, 37, no. 6 (2007): 454–468. Schoenherr, Tobias. Tobias. “Diusion o Online Reverse Auctions or B2B Procurement: An Explanatory Study.” International Journal o Operations & Production Management 28, 28, no. 3 (2008): 259–278. Shamir, Joseph. “Machine Learning: A New Tool or Better Forecasting.” Supply Chain Quarterly 8, 8, no. 4 (2014): 39–42. Tomasi, T omasi, Bill. “Inormation Without Without Borders.” Borders.” Supply Chain Quarterly 10, no. 1 (2016): 28–32.
CASE CASE 2.1 TO INVEST OR NOT TO INVEST? THAT IS THE QUESTION Dean Pallotta was president and CEO o a medium-sized particular, he had been considering a decision to invest in a rm that manuactured highly customized tiny homes (Mini) warehouse management management system (WMS) to increase his visin Toledo, Ohio. The rm had expanded rom a local Mid- ibility o the large amount o inventory in his warehouse west marke markett to a national national one, inclu including ding Southe Southern rn Caliornia Caliornia which was located next to his production plant. Transand New England. As markets had expanded, so too had portation costs were an emerging secondary concern, as sources o supply or the company, company, with major suppliers o it had become increasingly dicult to plan shipments as key building components located in Southern Caliornia, they expanded into new markets and sourced rom a larger the Pacic Northwest, and Michigan. Additionally, smaller number o suppliers. Thus, Thus, he was also intrigued about the suppliers buildingtocomponents were the potential benets(TMS). o implementing a transportation manglobe. Theodecision manuacture the located Mini inaround Ohio had agement system been made or two reasons: Dean’s ormer associates in the In response to these challenges, Dean had assemauto industry were close by in Detroit, and the largest single bled a cross-unctional team to look at some potential component o the Mini—the truck or van chassis on which technology-based solutions. The team was was made up o the rest o the home is built—was purchased rom one o himsel, Jason Jason Shea (VP o Logistics), Stephanie Zinger the U.S. light-truck makers with a plant in Michigan. (Director o Purchasing), Ethan Mathews (Plant Manager), Manager), Like others in the eld, Dean’s company actually Jason Paul (Inventory Planner), and Augie Augustson manuactured very very ew o the building components it used (W (Warehouse arehouse Manager). Some o the potential benets the to manuacture the Mini. Virtually the entire home was as- team had identied or implementing a WMS included: sembled rom components sourced rom outside vendors. 1. Enhanced productivity or warehouse labor There was, howeve however, r, a well-dened order in which the management building components could most eciently be assembled. 2. Increased visibility and traceability traceability o inventory Recently,, it had become clear to Dean that warehouse and Recently 3. Few Fewer er picking errors er rors inventory costs associated with all o the required building 4. Improved responsiveness responsiveness to the production plant components were a relatively relatively large portion o his expenses 5. Less paperwork and that they might be ripe or a substantial reduction. In
Chapter 2 • Logistics and Information Tec Technology hnology
In terms o the TMS, TMS, potential benets were considered to be: 1. Increased service to customers, particularly on the West W est Coast 2. Potential to pool inbound shipments to reduce costs 3. Potential inventory reductions rom more reliable
deliveries 4. Cash fow improvements rom enhanced reight payment 5. Improved warehouse eciency on inbound shipments In addition, several members members o the team were advocating advocati ng the idea o implemen implementing ting both technologies together so as to increase the potential to optimize both areas jointly. The argument was that these technologies tended to be implemented in silos and that the real value would be obtained by aligning them in support o overa overallll company goals. As they discussed their options, options, the team also raised
With regard to their suppli suppliers ers,, Stephani Stephaniee oten had the opportunity, in the volatile mini-motor-home market, to buy out parts and component supplies rom manuacturers that were going out o busine business. ss. Those compon components ents could be obtained at a substantial savings, with the requirement that inventory in the particular parts be temporarily increased or that purchases rom existing vendors be temporarily curtailed. She wondered how these opportunities would aect the potential benets o the technology investments. Ethan operated with the (generally tacit) assumption that there would be some deective components purchased and that there would likely be something wrong with his product when it rst came o the assembly line. For this reason, the Minis were extensively tested (Their advertising said, “We hope you’ll never do what we do to your Mini.”), as were the building components prior to installation. To the extent that only a ew o a particular type o component were were on hand or that the lead time became less certain, the interruption in the production schedule would be that much greater. It might entail expensive rush orders or replacement com-
a number o concerns. Dean was very very concerned about ponents or equally expensive downtime or the entire plant. the possible issues that might arise as he had previously Despite these concerns, Dean was painully aware worked at a company that had gone through a dicult that ignoring the warehousing and transportation probERP implementation. In particular, he had experienced lems would be a mistake. Something had to be done. While rst-hand the challenges o implementation. So, So, while the they were currently eeling the strain in the warehouse, the potential benets were exciting, exciting, the idea o embarking on transportation issues were beginning to be a bigger issue. a WMS and/or TMS implementation was daunting to the As an aid to making the decision on whether to invest invest in a team. Not only was their apprehension about the signi- WMS and/or a TMS, Dean had worked with the team to cant capital investment required to purchase the sotware, draw up a table that summarized the anticipated impacts but the potential diculty in implementing the sotware o implementing the technologies technologies (see Exhibit 2.A ). The was a major concern. In particular, they worried about the gures are based on input rom the potential technology time it would take and how the employees would react to providers, orecasts rom his marketing department, cost the changes. projections rom their IT department, and inputs rom
TMS Project
WMS Project
WMS/TMS Project
Net Benefits
$573,000
$245,000
$775,000
NPV
$409,938
$172,902
$505,243
ROI
85%
75%
76%
9
11
19
673%
590%
488%
$100,000
$50,000
$200,000
Payback Period (months) Profitability Index Upfront Costs Risk
Medium
Low
Very High
Exhiit 2.A Analysis of Potential Technology Projects
( continued continued )
57
58
Part I • Overview Overview of Logistics
the team members. As Dean reviewed the inormation in preparation or the next team meeting, he wondered what decision they should make.
QuESTIONS 1. Should theimplementing team take intothe account costs benets rom WMS?any I other so, what areor they?
2. Should the team take into account any other costs or benets rom implementing the TMS? I so, what are they? 3. What are the advantages advantages and disadvantages o implementing both technologies simultaneously? 4. I both technologies are adopted, what changes, changes, i any any,, should occur in the relationships between Pallotta’s Pallotta’s rm and his suppliers o components? His transportation
providers? Discuss. would you recommend the team decide you decide to do? Why? Why? 5. What
3
Strategic and Financial logiSticS
Learning Objectives 3.1
3.2 3.3 3.4
3.5
3.6
To understand how logistics decisions can infuence an organization’s strategic nancial To outcomes To T o review basic nancial terminology used by logistics managers To T o explain organizational nancial reporting requirements aected by logistics activities To T o employ the strategic prot model to highlight the nancial impact o logistics activities To T o consider the value o utilizing the Balanced Scorecard approach or examining the perormance o a logistics system system To T o compare some o the common perormance measures or logistics activities
As was described in Chapter 1, an 1, an eective and eicient logistics unction plays a crucial cr ucial role within most organizations. Shorter product liecycles, increasing customer expectations, technological advancements,, rising shareholder demands, and the globalization o corporate supply chains are all advancements pushing irms to develop eicient, eective, and dierentiated logistics activities.1 Research has continuously demonstrated that logistical activities can be an important consideration or achieving exceptional levels levels o customer service and ultimately contributing to irm inancial perormance.2 For example, housewares retailer Williams-Sonoma was able to signiicantly increase its proits through logistics gains rom implementing enhanced distribution accuracy programs that helped improve customer service levels and reduce inventory shrinkage.3 Management o reverse logistics logistics provides another potential way or managers to make decisions that inluence their irm’s inancial perormance. Improvements to one’s reverse logistics system could provide cost improvements and/or revenue enhancement opportunities. opportunities. Depending on the industry and product type, reverse reverse logistics costs as a percent o revenue can range between 3 and 6 percent.4 Estée Lauder (a manuacturer o cosmetics cosmetics,, skin care, and ragrances) made an investment o $1.3 million to build a system o scanners and other technologies to assist its reverse reverse logistics eorts. With respect to cost improvements, provemen ts, this system enabled enabled Estée Lauder to sharply reduce the percentage o returned goods that it dumped into landills while also providing hal a million dollars in labor cost savings. savings. In terms o revenue enhancements,, the system is a key part o a $250 million product line based on returned cosmetics. Estée enhancements Lauder collects items and then sells them to seconds stores or to retailers in developing countries.5
1
Brian S. Fugate, John T. Mentzer, and Theodore P. Stank, “Logistics Perormance: Eciency, Eectiveness and Dierentiation,” Journal of Business Logistics tion,” Journal Logistics 31, 31, no. 1 (2010): 43–62. 2Michael Tracey, Tracey, “The Importance o
Logistics Eciency to Customer Ser vice and Firm Perormance,” International Journal of Logistics Management 9, 9, no. 2 (1998): 65–81. 3
“Williams-Sonoma Prots rom Logistics Gains,” Journal Gains,” Journal of Commerce 11, 11, no. 13 (2010): 6–7.
4
Sumantra Sengupta, “10 New Ideas or Generating Value, Value,”” Supply Chain Management Review 13, 13, no. 4 (2009): 20–25.
5
Andrew O’Connell, “Improve “Improve Your Return Return on Returns,” Harvard Business Review 85, 85, no. 11 (2007): 30–34.
59
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Part I • Overview Overview of Logistics
Another example o how logistics strategy connects to corporate strategy and inancial perormance can be seen in the area o transportation. Logistics managers are adapting their approaches to transportation in response to inancial pressures caused by oil price volatility and shipping capacity constraints. In an eort to maintain proit margins, organizational leaders are considering strategic changes such as shiting rom oshoring to nearshoring; integrating consideration o the ability to ship a product into product design; and applying a lean perspective to both inventory and transportation policies.6 Each o these logistics-related logistics-related strategic decisions helps address inancial issues resulting rom today’s dynamic business environment. Developing inancial luency is a critical skill or contemporary logistics managers. Dr. Jarrod Goentzel and James Rice rom MIT provide several suggestions on areas or logistics managers to ocus on when irst developing this luency.7 T To o start, it is important importa nt to understand the inancial impact o logistics activities. activities. An understanding o the key inancial statements outlined in this chapter can serve as a starting point. Second, logistics managers need to be able to distinguish the role o proitability and turnover in creating inancial returns. This can be achieved achieved through an understanding o the strategic proit model discussed later in the chapter. Third, it is important to recognize that accounting is an inexact science. Thus, logistics mangers should work with their colleagues in accounting to understand the methods used in their company in order to understand the dependability o the inormation they are provided. Fourth, activity-based costing is challenging to implement, but oers signiicant beneits. This approach to costing is described in Chapter 7, 7, and the value or customer proiling is highlighted. Fith, it is important to recognize the nuances o invent inventory ory carrying carr ying costs. DeDetails on how to consider these costs are covered in Chapter 8. 8. Sixth, an understanding o cash lows is relevant or logistics managers. managers. The description o the Statement o Cash Flows in this chapter provides guidance. Finally, logistics managers should have an appreciation or how their activities aect working capital. As such, understanding how logistics decisions inluence inventory management, accounts receivable, and accounts payable is valuable. This chapte chapterr provides provides an overview overview o how an organizat organization ion’’s strategic strategic inan inancial cial outco outcomes mes are inluinluenced by logistics decisions. decisions. We We begin with a description o the connection o unctional logistics logistics strategy to overall corporate strategy and ultimately inancial inancial perormance. Next, a general overview o key inancial terminology will be presented. Financial reporting requirements that aect logistics managers are then described. This is ollowed by an examination o how the strategic proit model can be used to highlight how logistics activities inluence the key corporate inancial measures o net income, capital employed, and return on capital employed. The chapter concludes with a description o the Balanced Scorecard and common logistics perormance measures in the areas o transportation, warehousing, and inventory. inventory. Learning Objective
3.1
CONNECTING STRATEGY STRATEGY TO FINANCIAL PERFORMANCE A recurring theme in the logistics discipline is that an organization’s organization’s logistics capabilities need to be directly connected to objective (as opposed to subjective) rm perormance measures. In addition, this viewpoint asserts that logistics managers must continue to nd ways to eectively communicate communicate how their rm’s logistics capabilities provide value and ultimately support corporate strategy and success in nancial terms.8 In act, an international survey o manuacturing rms reported that 6
Dawn Russell, John J.J. Coyle, Kusumal Ruamsook, and Evelyn A. Thomchick, “The Real Impact o High Transportation Costs,” Supply Chain Quarterly 8, 8, no. 1 (2014): 30–36. 7
Jarrod Goentzel and James B. Rice, Jr., “Learning the Language o Finance,” Supply Chain Quarterly 9, 9, no. 2 (2015): 30–33.
8
See or example, Edward A. Morash, Cornelia L. M. Droge, and Shawnee K. Vickery, “Strategic Logistics Capabilities or Competitive Advantage and Firm Success,” Journal Success,” Journal of Business Logistics 17, 17, no. 1 (1996): 1–22; Douglas M. Lambert and Renan Burduroglu, “Measuring and Selling the Value o Logistics,” International Journal of Logistics Management 11, no. 1 (2000): 1–17; Management 11, Edward Morash, “Supply Strategies,Sum, Capabilities, and Perormance,” Perorma nce,” Transportation 41, to no.Strategic 3 (2001): 37–54; Je Journal 41, Hoi YanA. Yeung, Yeung, Willem Selen,Chain Chee-Chuong and Baoeng Huo, “Linking Financial Perormance Strat egic Orientation and Operational Priorities: An Empirical Study o Third-Party Logistics Providers,” International Journal of Physical Distribution Distribution 36, no. 3 (2006): 210–230; and Kenneth W. W. Green Jr., Dwayne Whitten, and R. Anthony Inman, “T he and Logistics Management 36, Impact o Logistics Perormance on Organizational Perormance in a Supply Chain Context,” Supply Chain Management: An 13, no. 4 (2008): 317–327. International Journal 13,
Chapter 3 • Strategic and Financial Logistics
logistics perormance was important or very important or achieving competitive advantage by almost 70 percent o the respondents.9 Strategy can be ormulated at a corporate level, a business unit level, and a unctional level. Corporate level strategy is ocused on determining deter mining the goals or the company, the types o busib usinesses in which the company should compete, and the way the company will be managed. Typically ypically,, organizations strive to create value by eectively eectively managing a portolio o businesses and ensuring that each o these businesses is inancially successul. successul. Strategy at a business unit level is primarily ocused on the products and services ser vices provided to customers and on inding ways to develop and maintain a sustainable competitive advantage with these customers.. Renowned strategist Michael Porter has identiied three generic strategies that can be pursued customers by an organization, namely, cost leadership, dierentiation, and ocus. A cost leadership strategy requires an organization to pursue activities that will enable it to become the low cost producer in an industry or a given level o quality quality.. A differentiation strategy entails an organization developing a product and/or service that oers unique attributes that are valued by customers and that the customers perceive to be distinct rom competitor oerings. Finally, a focus strategy concentrates an organization’s eort on a narrowly deined market to achieve either a cost leadership or dierentiation advantage.10 Logistics leverage can help irms achieve a competitive advantage rom each o these strategies. strategies.11 The unctional level o the organization is where logistics resides. The strategic issues at this level are related to business activities that support the achievement o the higher-level goals set by the business unit and corporation. This hiera hierarchy rchy of stra strategy tegy entails entails the unctional units o an organizaorg anization providing input into the other levels o strategy ormulation. This input could take the orm o inormation on the resources and capabilities available to the organization. Ater the corporate cor porate level and business unit strategies are developed, the unctional units must translate theses strategies into discrete action plans they must accomplish or the higher-level strategies to succeed. Functional level strategies will exist in such areas as marketing, inance, manuacturing, procurement, and logistics. Logistics strategy decisions involve issues such as the number and location o warehou warehouses, ses, the selection o appropriat appropriatee transportation modes, modes, the deployme deployment nt o inve inventory ntory,, and investments in technology that support logistics activities. In addition to being inluenced by the goals o the corporate and business unit strategies, logistics strategy is directly inluenced by strategic decisions in the unctional areas o marketing, inance, manuacturing, manuacturing, and procurement. Marketing goals in areas such as product availability, desired customer service levels, and packaging design directly inluence logistics decisions that must be made to support achievement o these goals or to provide inormation or strategy ormulation in these areas. Financial Financial hurdle rates o return may aect the decision to manage one’ one’ss own warehouse or use a third-party provider. Similarly, Similarly, a strategic decision byasmanuacturing to implement aand just-in-time would aect logistics in areas such warehousing, transportation, warehousing, inventorysystem management. In terms o thedecisions connection to procurement strategy, the decision to move rom domestic to global sourcing would naturally aect logistics activities activities such as the potential use use o new modes o transportation and port selection. With respect to logistics organizational orms, Proessors Bowersox Bowersox and Daugherty Daugherty identiied three orientations that can be used in isolation or in combination when developing a logistics strategy. These orientations include: process strategy (management o logistics activities with a ocus on cost); market strategy (management (management o logistics activities across business units with a ocus on reducing complexity or customers); and information strategy (management o logistics activities with the goal o achieving coordination and collaboration collaboration through the channel).12 These strategies have been
9
A. Harrison and C. New, New, “The Role o Coherent Supply Chain Strateg y and Perormance Management Ma nagement in Achieving Competitive Advantage: An International Survey,” Journal Survey,” Journal of Operational Research Society 53, no. 3 (2002): 263–271. Society 53, 10Michael Porter, 11
(New York: The Free Press, 1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors (New John T. T. Mentzer and Lisa R. Williams, “The Role o Logistics Leverage in Marketing Strategy,” Journal Strategy,” Journal of Marketing Channels 8, no. 3–4 (2001): 29–47. 12 Donald J. Bowersox Bowersox and Patricia J. Daugherty, “Emerging Patterns o Logistical Organization,” Journal Organization,” Journal of Business Logistics 8, no. 1 (1987): 46–60.
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ound to remain stable over time and provide a basis or meeting organizational goals. Although most irms will have a dominant orientation that represents their strategic thrust, these orms are likely to interact. The ability o the logistics unction to ultimately inluence the overall inancial inancial success o an organization organizati on is based on the ability o logistics managers to develop and implement strategies that are aligned with the overall corporate strategy. Research has shown the positive aect o this alignment o unctional level strategies with higher-level strategies on inancial perormance. 13 Speciically, logistics strategy must be designed to optimally support the requirements o the business and the corporation in order to positively aect the inancial outcomes o an organization. Thus, Th us, an appreciation or this interconnectedness interconnectedn ess and need or alignment o strategies st rategies is important or every logistics manager. As an example, omnichannel commerce is a business trend that is aecting all levels o strategy in the retail industry. An omnichannel strategy allows retail customers to order products any where, any time, and on any device, while also allowing them to take delivery when and where they want. Retailers report motivations motivations or pursuing this strategy as being driven by their their desire to increase 14 sales, increase market share, and improve customer loyalty. The ability to build a proitable omnichannel commerce system that provides this level o ordering and delivery lexibility requires support rom all business unctions, with the logistics unction providing support through transportation, warehousing, and order ulillment decisions.
BASIC FINANCIAL TERMINOLOGY
Learning Objective
3.2
Logistics managers in every organization are expected to use nancial inormation to help them make decisions, allocate resources, resources, and budget expenses. Having a basic understanding o nancial terminology is important knowledge in assisting logistics managers to ormulate intelligent questions or other unctions as well as understanding how logistical activities can help improve their company’s nancial perormance. In addition, an ability to communicate the nancial implications o logistics decisions to upper-level upper-level management is an important skill or managers to develop. Some o the more important nancial terms are described in the ollowing sections. sections.
Income Statement The income statement shows revenues, revenues, expenses, and prot or a period o time, and an example is presented in Figure 3.1. 3.1. It can also be reerred reer red to as a prot and loss statement (P&L). In general, the income statement measures the protability o the products and/or services ser vices provided by a company. company. It reports the revenues generated by company activities during a given given period o time, the expenses associated with achieving these revenues, revenues, and the prot or loss that is a result o these activities. activities. Revenues, also reerred to as sales, provide a dollar value o all the products and/or services an organization provides to their customers during a given period o time. Expenses, also reerred to as costs, provide a dollar value or the costs incurred in generating revenues during a given period o time. Logistics managers need to understand how logistics costs inluence the proits or losses being incurred by their irm so that they can make appropriate decisions. While it is not always possible or a logistics manager to directly correlate logistics service ser vice improvements with an increase in sales, there should be no doubt that superior logistics service can have a positive inluence on an organization’ organization’ss inancial perormance.
13
See or example, M. P. P. Joshi, R. Kathuria, and S. J. Porth, Porth, “Alignment o Strategic Priorities and Peror mance: An Integration o Operations and Strategic Management Perspectives,” Perspectives,” Journal 21, no. 3 (2003): 353–369; Journal of Operations Management 21, P. D. Cousins, Cousins, “The Alignment o Appropriate Firm and Supply Strategies or Competitive Advantage,” International Journal of 25, no. 5 (2005): 403–428; and Cristian Baier, Evi Hartmann, and Roger Moser, “Strategic Operations and Production Management 25, Alignment and a nd Purchasing Ecacy: An Exploratory Analysis o Their Impact on Financial Perormance,” Perormance,” Journal Journal of Supply 44, no. 4 (2008): 36–52. Chain Management 44, 14
Ben Ames, “Pursuing the Promise o Omnichannel Retailing,” Supply Chain Quarterly 9, 9, no. 4 (2015).
Chapter 3 • Strategic and Financial Logistics
Income Statement 2016 Sales Cost of goods sold Gross Margin Transportation cost Warehousing cost Inventory carrying cost Other operating costs Total operating cost Earnings before interest and taxes Interest Taxes Net Income Figure 3.1
$200,000 $130,000 $70,000 $6,000 $3,000 $1,000 $30,000
$40,000 $30,000 $11,000 $6,000 $13,000
Example Income Statement
More obvious direct correlations o logistics decisions occur across the expense expense categories o the income statement. Speciically, Speciically, cost o goods sold may be inluenced directly by procurement decisions and inbound transportation costs that are part part o a product acquisition agreement. In addition, the potential to reduce several o the operating cost categories associated with logistics can be signiicant. Because a large percentage o costs or a typical organization are driven by logistics decisions, many organizations spend considerable time ocusing on this connection between logistics and inancial perormance.15 More eicient and eective decisions in the areas o transportation, warehousing, and inventory costs oer great potential or logistics managers to directly inluence overall inancial perormance. Reerring to Figure 3.1, 3.1, a decrease in transportation, warehousing, and/or inventory costs (assuming no change in logistics service perormance) translates into lower total operating costs and higher earnings beore interest and taxes. In addition, the ability o logistics managers to do more with less in in areas such as inventory, inventory, plant, and equipment can ultimately aect the interest and tax expense categories on the income statement. As can be seen in Figure 3.1, 3.1, the ability to lower these costs will all directly to the bottom line (i.e., higher net income).
Balance Sheet The balance sheet refects the assets, liabilities, and owners’ equity at a given point in time. The balance sheet equates assets with liabilities plus owners’ equity. Assets are what a company owns and come in two temporal orms: current assets that that can be easily converted to cash (such as stock) and long-term assets that that have a useul lie o more than a year (such as a company-owned warehouse). warehouse). Liabilities are the nancial obligations a company owes to another party. Similar to assets, liabilities come in two temporal orms: current liabilities which which need to be paid in less than a year and long-term liabilities that that are due over an extended period o time. Owners’ equity is the dierence between what a company owns owns and what it owes owes at any particular particular point in time. Figure 3.2 is 3.2 is an example o a basic balance sheet. As is the case with the income statement, logistics can aect the balance sheet o an organization in several distinct ways. ways. Order cycle time, order completion rate, and invoice accuracy can inluence the speed in which one’s customers pay their invoices, thus directly aecting the cash and accounts receivables categories on the balance sheet. Clearly, inventory management decisions that raise or lower inventory levels show up in the
15
Martin Christopher, Logistics Christopher, Logistics and Supply NY: Pearson Education, 2016). Supply Chain Management, 5th Management, 5th ed. (New York, NY:
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Balance Sheet 2016 Assets Cash Accounts Receivable Inventory Total Current Assets Net Fixed Assets Total Assets Liabilities Current Liabilities Long-term Debt Total Liabilities Shareholders’ Equity Total Liabilities and Equity Figure 3.2
$20,000 $35,000 $15,000 $70,000 $80,000 $150,000 $60,000 $30,000 $90,000 $60,000 $150,000
Example Balance Sheet
inventory category. Expansion o company-owned warehouses warehouses and/or acquiring additional equipment to use in one’s warehouses will low through to the ixed assets category. In terms o liabilities, procurement’s purchase order quantities are relected in current liabilities, procurement’s and inancing options or inventory,, plant, and equipment could impact long-term debt levels inventory levels..16
Statement of Cash Flows The statement of cash flows details how an organization generates cash and where cash is used during a dened period o time. Positive Positive cash fow enables an organization to continue daily operations, make investments or growth, meet nancial obligations, and ultimately remain in business. This nancial report contains inormation rom the income statement and balance sheet, but is ormatted to highlight the sources and uses o cash in an organization’ org anization’s operations, investing, and nancing activities. Accounts payable, accounts receivable, revenue growth, gross margin, sales—general and administration, capital expenditures and inventory are all areas that aect cash fows within an organization. As such, logistics activities can have important implications or an organization’ organization’ss cash management within each o these areas. In terms o the statement o cash fows, the connections between logistics activities and cash fows occur primarily in the operating and nancing areas. Figure 3.3 is 3.3 is an example o a basic statement o cash lows. lows. Within the operations section, logistics connections related to the cash paid or inventory purchases and wages paid to warehouse personnel can be seen. Inventory sits in warehouses and ties up cash, while also draining cash through obsolescence obsolesc ence and shrinkage. In terms o inves investing ting activities, activities, both receipt or paymen paymentt o cash or logistics-related property and equipment can be identiied. Investments in private transportation leets, building or acquiring new warehouses, or purchasing new sotware to help manage logistics activities are all examples o expenditu expenditures res that require signiicant signiicant amounts o cash to inance the decision. Learning Objective
3.3
REPORTING REQUIREMENTS The Sarbanes-Oxley Act (SOX) was instituted on July 30, 2002 in response r esponse to business misconduct in the late 1990s and early 2000s. The act ocused on restoring investor condence by providing increased transparency in nancial reporting or public companies. Three primary areas where SOX has implications or logistics managers are internal controls, o balance sheet obligations, and timely reporting o material events. events. In terms o internal control, timely and accurate accounting accounting o inventory 16
Ibid.
Chapter 3 • Strategic and Financial Logistics
Statement of Cash Flows 2016 Cash Flow from Operations Net Earnings
$13,000.00
Additions to Cash Depreciation
$1,000.00
Decrease in Accounts Receivable Increase in Accounts Payable Increase in Taxes Payable Subtractions from Cash Increase in Inventory
Net Cash from Operations Cash Flow from Investing Equipment
-+
3,000.00
$14,200.00
Cash Flow from Financing Notes Payable Cash Flow for Time Period
Figure 3.3
$1,500.00 $1,500.00 $200.00
-+
5,000.00
$1,000.00 $10,200.00
Example Statement of Cash Flows
is expected. With respect to o balance sheet obligations, compliance with SOX can involve providing transparency o external relationships with suppliers to manage inventory and/or purchasing agreements. Finally, Finally, timely reporting o material events involves involves the need to provide visibility o late supplier deliveries and/or the inability o suppliers to provide the products or services that are expected to drive revenue or the organization. org anization.
STRATEGIC PROFIT MODEL17 Several general measures o perormance refect on an organization’s nancial nancial results and should be understood by logistics managers. As was discussed in the income statement section, prot is a basic nancial measure that represents the dierence between revenues and expenses. While a raw number such as prot would seem to be adequate, there are issues with reporting nancial gures without an appropriate context. Thereore, many nancial measures are reported as ratios that indicate the relationship o one number to another. Ratios provide a point o comparison and can provide management with more inormation than raw numbers alone. For example, the current ratio, which is calculated by dividing total current assets by by total current liabilities , measures how well an organization can pay its current liabilities by using only current assets. Proitability analysis is an important means o assessing logistics activities activities and proposed changes to a irm’ ir m’ss logistics system. Proitability analysis goes beyond just ocusing on logistics costs by attempting to also include the revenue eect o logistical activities. For example, example, an improved level o service provided by higher levels o saety stock should bring about about increased revenue as customers respond to improved in-stock availability. These revenue eects must be built into the analysis o logistics perormance. A common measure measure o organizational inancial success is Return Return on Investment Investment (ROI), (ROI), which can be measured by Return on Net Worth (RONW) or Return on Assets (ROA). (ROA). RONW measures the proitability o the unds that have been invested invested in the business, and is most likely likely o primary interest to investors. ROA ROA provides a more operational perspective by providing insight on how well 17
The material material in this this section section is drawn drawn rom rom Drew Stapleton, Joe B. B. Hanna, Steve Yagla, Yagla, Jay Jay Johnson, Johnson, and Dan Markussen Markussen,, “Measuring Logistics Perormance Using the Strategic Prot Model,” International Journal of Logistics Management 13, 13, no. 1 (2002): 89–107.
Learning Objective
3.4
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managers utilize operational assets to generate g enerate proits. Thus, ROA ROA becomes a key managerial tool or logistics proitability analysis. Return on assets (ROA) indicates what percentage o every dollar invested in the business ultimately is returned to the organization as proit. Logistics managers are inherently concerned with assets such as inventory and equipment used to support logistics activities. Although these types o assets will show up on the balance sheet, ROA ROA will allow managers to understand understan d how eective their organization is in using these assets to generate proit. The ormula or ROA is: ROA Net Proit Margin * Asset Turnover. The Strategic Profit Model (SPM) provides the ramework or conducting ROA analysis by incorporating revenues and expenses to generate net proit margin, as well as an inclusion o assets to measure asset turnover. Net profit margin measures the proportion o each sales dollar that is kept as proit, while asset turnover measures the eiciency o the capital employed to generate sales. Together, Together, they orm or m the basis or computing RO ROA. A. Figure 3.3 provides 3.3 provides the general ramework or how to develop a SPM to better understand how a logistics manager’s decisions can impact net proit margin, asset turnover, and ultimately, ultimately, ROA. Suppose, or example, that a logistics manager is able to eliminate some unnecessary inventory; this would reduce the value o current assets as well as total asset value. As a result, sales divided by total assets—asset turnover, would be higher, as would the organization’s return on assets. The SPM has the advantage o assisting logistics managers in the evaluation evaluation o cash lows and asset utilization decisions. It provides a way or managers to examine how a proposed change to their logistics system inluences proit perormance and RO ROA. A. However, However, it ails to consider the timing o =
cash lows, is subject to manipulation in the short-run, and ails to recognize assets that are dedicated to speciic relationships.18
Sales Gross Margin
– Cost of Goods Sold
Net Profit – /
Variable Expenses
+
Total Expenses
Sales
Fixed Expenses
X
Accounts Receivable + Other Current Assets
Figure 3.4
18
Return on Assets
Sales
Inventory +
Net Profit Margin
Current Assets
/
+
Total Assets
Asset Turnover
Fixed Assets
Strategic Profit Model
Douglas M. Lambert and Renan Burduroglu, “Measuring and Selling the t he Value o Logistics.” International Journal Journal of Logistics 11, no. 1 (2000): 1–17. Management 11,
Chapter 3 • Strategic and Financial Logistics
Logistics Connections Connections to Net Profit Margin Operationally, net prot margin is net prot divided by sales, and looking at net prot and sales as reported on the income statement suggests multiple ways in which net prot margin can be infuenced by managerial decisions. The most relevant categories or logistics managers to consider are sales, costs o goods sold, and total expenses. Sales are are the dollar value o all the products or services an organization provides to its customers customers during a given period o time. The primary inluence o logistics activities activities on sales would be through the improvement o customer service. For example, one logistics decision that could be made by an e-commerce company would be to provide overnight delivery to its customers at no cost. While this type o decision would would need to consider the cost implications implications o providing this level level o service, it would be expected expected that the the move move would would have have a positive positive inluence inluence on customer retention and sales. sales. Cost of of Goods Sold is is one category o expenses. It includes includes all the costs or materials and labor directly involved in producing a product or delivering a service. A signiicant part o this expense category is the cost o materials that are used to make a product. As such, such, logistics can inluence these costs through procurement activities (e.g., purchasing at volume discounts, reverse auctions) or through any logistics-related eiciency improvements that enable labor to be more productive (e.g., (e.g., enhanced materials handling processes on a production line). Total Expenses are are made up o the variable and ixed ixed costs that are not directly related to making the product or delivering a service. ser vice. This expense category could include logistics-related activities in areas such as transportation, warehousing, and inventory. inventory. For example, a logistics decision to reduce the number o costs less-than-truckload throughexpenses. a consolidation strategy wou would show up in the transportation category that isshipments part o variable expenses . A decision to sell a ld company-owned warehouse could could directly aect aect the ixed ixed expenses o running r unning the acility acility.. In addition to understanding the inancial eects o a logistics cost reduction, any potential cost increases should should also be analyzed. For example, a decision to increase inventory levels in response to a marketing request would increase inventory carrying costs that low low to the variable expense category.
Logistics Connections to Asset Turnover Asset turnover is computed by dividing total sales by total assets and provides inormation on the eciency o capital employed to support the business. The most relevant logistics asset is typically inventory. In addition, logistics decisions can infuence the speed at which invoices are paid as refected in accounts receivable on the balance sheet. can represent a signiicant part o an organization’s organization’s current assets. Logistics decisions Inventory can
aect all types o inventory within an organization rom raw materials, to work-in-progress inventory, to inished goods. Logistics strategy on inventory levels and stocking locations will directly inluence this category. For example, example, a decision by a retailer to move to a system o vendor managed inventory where a supplier o a product maintains control and ownership over over an inventory item can result in a signiicant reduction o the amount o inventory on an organization’s organization’s balance sheet. Similarly, Similarly, the use o premium transportation may also enable a irm to reduce lead time and ultimately reduce pipeline inventory that would show up on the balance sheet. Accounts Accou nts Rece Receivab ivable le is is the amount o money mon ey customers owe to an organization. organization . It is all the promises to pay that have not been collected yet. Logistics decisions can inluence this category by accurately communicating and completing transactions with customers. For example, a decision to invest in an EDI system that would increase invoice accuracy should enable customer payments to be received in a timely ashion. Customers that receive inaccurate invoices will tend to hold payment until these issues are worked out.
BALANCED SCORECARD The Balanced Scorecard (BSC) is a strategic planning and perormance management system used extensively in industry, government, and nonprot organizations. organ izations. It is based on the belie that management should evaluate their business rom our distinct perspectives: customers, internal business pro-
Learning Objective
3.5
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Part I • Overview Overview of Logistics
cesses, learning and growth, and nancial. Perormance Perorman ce measures are developed to address particular goals or capabilities under one o these our perspectives. For For example, rom the customer’s perspective a goal might be to provide consistent, timely supply which could entail the use o a metric such as order ll rate. Although Alth ough ther theree is is no no standa standard rd set set o o mea measur sures es that rms shou should ld empl employ oy,, using using a concis concise, e, yet com compreh prehenensive set o measures meas ures should provide an eective monitoring and management tool or an organization.19 When viewed rom a logisti logistics cs point o view view,, the BSC approach orces manage managers rs to look beyond traditional inancial measures when conducting a strategic logistics analysis. While the inancial perspective is still considered considered a good indicator o whether or not logistics strategy is being properly implemented and executed, the BSC pushes or a more holistic approach that includes the other three perspectives. perspectives. To develop an eective logistics scorecard, management irst deines the organization’ss vision and goals. Next, logistics strategies are designed to ensure achievement o this vision zation’ and the goals. These strategies are then translated into speciic tactical, perormance-enhancing activities, and, inally, appropriate measurements are established or each activity. The next section provides some common logistics measures measures that can be used in isolation or as part o a Logistics BSC. Learning Objective
3.6
LOGISTICS ACTIVITY MEASURES Perormance measures are critical or eectively managing logistics activities. A continuing challenge or logistics managers is to develop and maintain an eective set o measures to help make decisions and support the achievement o nancial success. success. As detailed in our description o the Balanced Scorecard, both nancial and nonnancial measures should be leveraged. In addition, the measures can be at a strategic, tactical, or operational level.20 While it is not possible to cover all potential logistics measures in this section, we will highlight some o the more common measures related to a ew key areas o logistics management. The section will conclude by providing some guidance on how best to design and implement a system o logistics measures in an organization. Logistics measurement systems have been traditionally designed to include inormation on ive types o perormance: (1) asset management, (2) cost, (3) customer service, (4) productivity, productivity, and 21 (5) logistics quality. Several measures are designed designed and implemented in each o these categories to manage logistics activities such as transportation, warehousing, and inventory management. Research suggests that leading-edge organizations are highly ocused on perormance measurement across these ive areas, and this serves as a platorm on which competitive position, value-adding capabilities, and supply chain integration can grow grow..22
Transportation Measures measures ocus on such things The major transportation measures things as labor, cost, equipment, energy, and transit time. The diversity o equipment types, sizes, sizes, and products carried will complicate the perormance measurement in this area o logistics. Measurements Measurements in this area include items such as return on investment (investments in transportation equipment), outbound reight costs, transportation labor productivity, on-time deliveries, and in-transit damage requency, to name a ew. Many companies have turned to using scorecards to measure and improve transportation perormance. In act, one study ound that while most o the companies they examined produced transportation scorecards monthly, Best in Class companies were twice as likely to be producing daily 19
Matthew J. Liberatore and Tan Miller, “A “A Framework or Integrating Activity-Based Costing and the Balanced Scorecard into the Logistics Strategy Development and Monitoring Process,” Journal Process,” Journal of Business Logistics 19, 19, no. 2 (1998): 131–154. 20
A. Gunasekaran, C. Patel, and E. Tirtiroglu, “Perormance Measures Mea sures and Metrics in a Supply Chain Environment,” International Journal of Operations & Production Management 21, no. 1–2 (2001): 71–87. 21Donald
Bowersox and David Closs, Logistical Closs, Logistical Management, The Integrated (New York: McGraw-Hill, 1996) Integrated Supply Chain Process (New and Donald Bowersox, Patricia Daugherty, Cornelia Droge, Dale Rogers, and Daniel D aniel Wardlow, Wardlow, Leading Edge Logistics: CompetiCompeti (Oak Brook, IL: Council o Logistics Management, 1989). tive Positioning for the 1990’s (Oak 22
Stanley E. Fawcett and M. Bixby Cooper, “Logistics Perormance Measurement and a nd Customer Success,” Industrial Marketing 27, no. 4 (1998): 341–357. Management 27,
Chapter 3 • Strategic and Financial Logistics
scorecards.23 Use o these scorecards reduced shipper complacency and enabled shippers to increase competition on lanes that led to reight cost savings.
Warehousing Measures Perormance measurement in warehousing is used to identiy design and operations options that provide benets in terms o increased speed or reduced costs. costs.24 The primary warehousing measures include such things as labor, cost, time, utilization, and administration. As was the case with transportation, the diversity warehouse types, sizes, types, and products carried will complicate the perormance measurement in thiso area. Some common macrolevel measurements ocused on warehousing include return on investment (investments (investments in warehousing acilities or equipment), warehouse order processing costs, and warehouse labor productivity. productivity. Common operational activities in a warehouse include: receiving, storage, picking, and shipping. There are a variety o metrics that could be used or each o these activities. For For receiving, measures such as volume received per man-hour, cases processed per day, or receiving dock door utilization percentage may be appropriate. appropriate. In terms o storage, measures such such as percentage o location and cube occupied, pilerage costs, or storage cost per item could be used. Cost o picking per order line, pick accuracy percentage, or order lines picked picked per hour are examples o some o the picking measures that managers could track. Finally Finally,, measures such as shipping dock door utilization percentage, cases shipped per day, day, and cost o shipping per order could be utilized.
Inventory Measures Inventory management measures tend to relate to the inventory service levels to customers as well as controlling inventory investment across an organization’s logistics system. Some common perormance measures include obsolete inventory, inventory carrying cost, inventory turnover, and inormation availability. Two Tw o organi organizational zational-level -level peror perormance mance measures directly connected to inventor inventoryy are cashto-cash cycle and gross margin return on inventory (GMROI). Cash to cash cycle looks at how long an organization’s cash is tied up in receivables, payables, and inventory. It is equal to the number o receivable days plus the number o inventory days minus the number number o payable days. In comparison, GMROI is a common metric used by retailers and distributors that examine inventory perormance based on margin and inventory turn. The ormula or GMROI is as ollows: ross ro t n o ars a es n o ars) * a es n o ar arss ver erag agee nv nven ento tory ry at os ost) t).. =
Design and Implementation of Measures25 number and types and measures to use can seem daunting to a o logist logistics manager, several Although thehave suggestions emerged rom o research to provide some guidance. Some theicskey things to consider when applying perormance peror mance measures to logistics activities include: 1. Determination o the key measures should be tailored to the individual organization and level o decision making. making. 2. Data collection and analysis are a major part o a perormance measurement system in logistics. This complexity is increased in global settings. 3. Behavioral issues should be considered when establishing and implementing a system o logistics measures. Top Top management support can help tremendously in this area. 4. Frequent communication communication and constant updating o the measures are necessary conditions or ensuring they are supporting supporting the stated goals o the organization. 23
Aberdeen Group, The Transportation Management Benchmark Report (Boston: (Boston: Aberdeen Group Inc., 2006).
24 Andrew
Johnson and Leon McGinnis, “Peror mance Measurement in the Warehousing Industr y, y,”” IIE Transactions 43, 43, no. 3 (2011): 220–230. 25
This section is based on ndings rom Ang apppa Gunasekaran and Bulent Kobu, “ Perormance Measures and a nd Metrics in Logistics and Supply Chain Management: A Review o Recent Literature (1995–2004) or Research and Applications,” Inter 45, no. 12 (2007): 2819–2840. national Journal Journal of Production Research 45,
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SUMMARY This chapter ter ocu ocused sed on the con connect nection ion betwe between en logi logiss- lows, the strategic proit model, and the balanced scorecard. Thi s chap tics strategy and an organization’s inancial perormance. The connection between inancial reporting requirements requirements and and Beginning with a discussion o the connection between cor- logistics decisions was established. Various logistics perorporate strategy and logistics strategy, the chapter provided an mance measures were presented. We also looked at some key overview o key inancial concepts as they relate to orming a considerations when implementing a perormance measurebetter understanding o how logistics decisions can inluence inancial results. The chapter also discussed key inancial tools, such as the income statement, the balance sheet, the statement statement o cash
ment system ocused on logistics activities.
Key Terms Assets Asset turnover Balanced Scorecard (BSC)
Expenses (costs) Focus strategy Income statement
Return on assets (ROA) Revenues (sales) Sarbanes-Oxley Act (SOX)
Balance sheet Cost leadership strategy Current ratio Dierentiation strategy
Liabilities Net prot margin Omnichannel strategy Owners’ equity
Statement o cash fows Strategic Prot Model (SPM)
Questions for Discussion and Review 3.1 Discuss the relationship between reverse logistics and nancial perormance. 3.2 In what ways is nancial knowledge very important or logistics proessionals? 3.3 Discuss the dierences between corporate level, business unit level, and unctional level strategies. strategies. 3.4 Discuss the cost leadership leadership,, dierentiation advantage, and ocus strategies. 3.5 Describe the three major orientations in ormulating or mulating a logistics strategy. 3.6 What are the two two key components components o an income statement? statement? 3.7 What are the three three key components components o a balance sheet? 3.8 Describe how logistics can aect the balance sheet o an organization. three key components components o the statement o 3.9 What are the three cash fows? 3.10 What are the key comp component onentss o the strat strategic egic pro prott model? model?
3.12 Discuss how logistics decisions aect asset turnover in an organization. 3.13 How does logistics strategy connect to overall corporate strategy? Is it a one-way or two-way connection? 3.14 What are some common common logistics measures measures in transportation, warehousing, and inventory management? 3.15 How do you measure Return Return on Investment (ROI) (ROI) o a logistics rm? 3.16 How do you measure gross margin return on inventory (GMROI)? 3.17 Describe the common types types o inormation included in traditional logistics measurement systems. 3.18 How might the Balanced Scorecard (BSC) approach help a logistics manager in perorming strategic analysis? 3.19 Do you think corporate cultures are relevant or designing a logistics measurement system? Why or why not? 3.20 Identiy some o the key considerations or a logistics man-
How can it be used to examine the eect o logistics decisions? 3.11 Discuss how logistics decisions aect net prot margin in an organization.
ager who is designing and implementing a logistics measurement system in his or her organization.
Chapter 3 • Strategic and Financial Logistics
71
Suggested Readings Bhatnagar, Rohit and Chee-Chong Teo. Teo. “Role o Logistics in Enhancing Competitive Advantage: A Value Chain Framework or Global Supply Chains. Chains.”” International Journal of Physical Distribution 39, no. 3 (2009): 202–226. & Logistics Management 39, Berman, Karen and Joe Knight with John Case. Financial Intelligence, Revised Edition: A Manager’s Guide to Knowing What the Numbers Really Mean (Boston: (Boston: Harvard Har vard Business School Press, 2013). Davis, Thomas S. and Robert A. Novack. “Why Metrics Matter.” Supply Chain Management Review 16, 16, no. 4 (2012): 10–17. Fawcett, Amydee M., Yao Henry Jin, Christian Hoer, Matthew A. Waller, W aller, and Vitaly Vitaly Brazhkin. “Sweating “Sweating the Assets: Assets: Asset Leanness and Financial Perormance in the Motor Carrier Industry.” Industry.” 37, no. 1 (2016): 43–58. Journal of Business Logistics 37, Fugate, Brian S., John T. Mentzer, and Theodore P. Stank. “Logistics Perormance: Eciency, Eectiveness, and Dierentiation.” Journal of Business Logistics 31, 31, no. 1 (2010): 43–62. Green Jr., Kenneth W., Dwayne Whitten, and R. Anthony Inman. “The Impact o Logistics Perormance on Organizational PerPerormance in a Supply Chain Context.” Supply Chain Management: An International Journal 13, 13, no. 4 (2008): 317–328. Hult, Thomas M., David J. Ketchen Jr., Garry L. Adams, and Jeannette A. Mena. “Supply Chain Orientation and Balanced Scorecard Perormance.” Journal of Managerial Issues 20, 20, no. 4 (2009): 526–544.
Kaplan, Robert S. and David P. Norton. The Balanced Scorecard: Translating Strategy into Action (Boston: (Boston: Harvard Business School Press, 1996). Lambert, Douglas M. and Renan Burduroglu. “Measuring and Selling the Value o Logistics. Logistics.”” International Journal Journal of Logistics Management 11, 11, no. 1 (2000): 1–17. Keebler, James S. and Richard E. Plank. “Logistics Perormance Measurement in the Supply Chain: A Benchmark.” Benchmarking: An International Journal 16, 16, no. 6 (2009): 785–798. Neely, Andy. Business Performance Measurement: Unifying Theory and Integrating Practice , 2nd ed. (Cambridge, UK: Cambridge University Press, 2007). Slone, Reuben E., John T. Mentzer, and J. Paul Dittmann. “Are You the Weakest Link in Your Company’s Supply Chain?” Harvard Business Review 85, 85, no. 9 (2007): 116–127. Srinivasan, Mahesh and Akhilesh Chandra. “Assessing the Impact o Sarbanes-Oxley Act on the Logistics Industry: An Exploratory Study.” Transportation Journal 53, 53, no. 1 (2014): 44–78. Stapleton, Drew, Joe B. Hanna, Steve Yagla, Jay Johnson, and Dan Markussen. “Measuring Logistics Perormance Using the Strategic Prot Model.” International Journal of Logistics Management 13, 13, no. 1 (2002): 89–107.
CASE CASE 3.1 BRANT FREEZER COMPANY COMPANY Located in Fargo, North Dakota, the Brant Freezer Company manuactures industrial reezers. These reezers come in one size and are distributed through public warehouses in Atlanta, Boston, Chicago, Denver, Los Angeles, Portland, and St. Louis. In addition, someJoaquin space is(J.used in the company’s Fargo warehouse. Young Q.) Brant, with a resh MBA degree rom the University o South Alabama, returned to the amily rm, where he had once worked during summers. summers. On his rst day day o work, J. Q. Q. met with his ather. His ather complained that they were being “eaten alive” by warehousing costs. The rm’s controller drew up a budget each year, and each warehouse’s monthly activity (units shipped) and costs were tallied. Exhibit 3.A shows 3.A shows actual 2016 gures or all warehouses, plus actual gures or the rst ve months o 2017. Projected 12-month 2017 budgets and shipments are also included. Exhibit 3.B shows 3.B shows the Income Statement or 2016. Exhibit 3.C 3.C is the 2016 Balance Sheet. I you are amiliar with Excel or other spreadsheet sotware, you might try using it to answer the ollowing questions.
QUESTIONS 1. When comparing perormance during the rst rst ve months o 2017 with perormance in 2016, which which warehouse shows the most improvement? 2. When comparing perormance during the rst rst ve months o 2017 with perormance in 2016, which which warehouse shows the poorest change in perormance? 3. When comparisons are made among all eight warehouses, warehouses, which one do you you think does the best job or the Brant Brant Company? What criteria did you use? Why? 4. J J.. Q. Q. is aggressive and is going to recommend that his ather cancel the contract with one o the warehouses and give give that business to a competing warehouse in the same city. city. J.. Q. J Q. eels that when when word o this gets around, the other warehouses they they use will “shape up. up.”” Which o the seven should J. Q. recommend be dropped? Why? 5. The year 2017 2017 is nearly hal over. J.J. Q. Q. is told to determine determine how much the rm is likely to spend or warehousing at each o the eight warehouses or the last six months in 2017. Do his work or him. 6. When comparing the 2016 2016 gures gures with the 2017 2017 gures gures shown in the table, the amount budgeted or each
( continued continued )
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Part I • Overview Overview of Logistics
warehouse in 2017 was was greater than actual actual 2016 costs. How How much o the increase is caused by by increased volume volume o business (units shipped) and how much by infation? 7. Use the 2016 Income Statement and Balance Sheet to complete a Strategic Prot Model or J. Q.
8. Holding all other inormation inor mation constant, what would be the aect on ROA ROA or 2017 i warehousing costs declined 10% rom 2016 levels?
2016 Figures Units Shipped
2017 Figures
Warehouse Costs
Units Shipped
Warehouse Costs
12 Months 5 Months 12 Months 5 Months Projected Actual Budgeted Actual Costs through Jan.–Dec. through 12 Months 5 Months 12 Months through Jan.–Dec. May 31 May 31 Jan.–Dec. May 31 Jan.–Dec. May 31 Atlanta
17,431
4,080
156,830
35,890
18,000
4,035
178,000
40,228
Boston
6,920
3,061
63,417
27,915
7,200
3,119
73,000
29,416
Chicago
28,104
14,621
246,315
131,618
30,000
15,230
285,000
141,222
Denver Fargo
3,021 2,016
1,005 980
28,019 16,411
8,600* 8,883
3,100 2,000
1,421 804
31,000 17,000
14,900 9,605
16,491
11,431
151,975
109,690
17,000
9,444
176,000
93,280
Portland
8,333
4,028
73,015
36,021
9,000
4,600
85,000
42,616
St. Louis
5,921
2,331
51,819
23,232
8,000
2,116
56,000
19,191
a
Los Angeles
Exhibit 3.A Brant Freezer Warehouse Warehouse Performance a
Denver warehouse closed by strike March 4–19, 2016.
Income Statement 2016 Sales Cost of goods sold
$4,003,450 $937,000
Gross Margin Transportation cost Warehousing cost Inventory carrying cost Other operating costs Total operating cost
$3,066,450 $657,322 $735,982 $567,987 $345,876 $2,307,167
Earnings before interest and taxes Interest Taxes
$759,283 $110,000 $69,000
Net Income
$580,283
Exhibit 3.B
Brant Freezer Company Income Statement
Chapter 3 • Strategic and Financial Logistics
Balance Sheet 2016 Assets Cash Accounts Receivable Inventory Total Current Assets
$706,034 $355,450 $1,590,435 $2,651,919
N xessdeA ToettaFl iA tsssets
$3$,8 40 53 4,,0 95 76 5
Liabilities Current Liabilities Long-term Debt Total Liabilities
$1,678,589 $398,060 $2,076,649
Shareholders’ Equity
$1,378,326
Total Liabilities and Equity
$3,454,975
Exhibit 3.C Brant Freezer Company Balance Sheet
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4
OrganizatiOnal and Managerial issues in lOgistics
Learning Objectives 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8
To explain organizational structure or logistics To To T o compare traditional and contemporary organizational design or logistics To T o identiy productivity issues and improvement eforts in logistics To T o discuss quality issues in logistics To T o report on programs designed to lessen the impact o terrorism on logistics systems To T o describe ways to manage thet and pilerage To T o review the concept o logistics social responsibility To T o articulate logistics issues associated with complexity
This chapter ocuses on organizational and managerial issues issues in logistics, logistics, and, with respect respect to organizational issues, the degree to which logistics activities are ragmented or uniied can play a key role in determining an organization’s logistical eectiveness and eiciency. eiciency. Likewise, logistical eectiveness and eiciency can be enhanced by successully addressing the wide variety o managerial issues aced by today’s logistician. This chapter irst looks at organizing logistics within the irm, with a speciic ocus on organizational structure or logistics as well as organizational design or logistics. The chapter also looks at select managerial issues in logistics, with a particular emphasis on productivity, quality, risk, sustainability, and complexity.
Learning Objective
4.1
ORGANIZING LOGISTICS WITHIN THE FIRM
The organization o logistics activities within a rm depends on a number o actors, including the number and location o customers, as well as an organization’s organization’s size, among others.1 For example, the number and location o customers might inuence whether a rm adopts a centralized or decentralized logistics organization (to be more ully discussed in the “Organizational Structure or Logistics” section that ollows). A company’s company’s size might inuence the organizing o logistics activities in the sense that there are limitations in the degree o specialization o managerial talent in small rms. In such situations, one consideration in organizing might be to even out the workloads o each manager. Thus, one manager might have transportation-related responsibilities, another manager might be responsible or ordering and inventory management, and a third manager might be assigned warehousing responsibilities. responsibilities. It’s not possible to present a comprehensive description o the many organizational topics associated with logistics. As a result, we’ll ocus on two key organizational topics, namely, organizational structure or logistics and organizational design or logistics.
1
Logistics
David J. Bloomberg, Stephan LeMay, and Joe B. Hanna, Logistics (Upper (Upper Saddle River, NJ: Prentice Hall, 2002).
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Chapter 4 • Organizational and Managerial Issues in Logistics
Organizational Structure for Logistics Orgniztionl structure ocuses on how work roles nd dinistrtive echniss re llocted in n eort to integrte nd control work.2 Tw Two o bsic orgniztionl structures str uctures re ssocited with logistics, nely, rgented nd unied. In fragmented logistics structure, logistics ctivities re nged in ultile dertents throughout n orgniztion. org niztion. For exle, cony ight ssign outbound trnsorttion, dend orecsting, wrehousing ngeent, nd custoer service to the rketing dertent, wheres rocureent, inbound trnsorttion, ckging, nd terils hndling ight be the resonsibility o the nucturing dertent. A rgented logistics structure ight lso see order ngeent under the control o the ccounting dertent, nd inventory ngeent ight be under the usices o the nnce dertent. Although the exle in the revious rgrh r grh suggests logistics ctivities tht re sred cross our distinct dertents, rgented logistics structure cn coe in ll shes nd sizes. In rgented structure, str ucture, it’s it’s ossible or the vrious logistics ctivities to be nged in two, three, our, or ore dertents. Likewise, lthough our exle ssigns rticulr logistics ctivities to certin dertents, there is no estblished telte or which logistics ctivities re ssigned to which dertents. d ertents. For exle, n orgniztion ight divide inventory ngeent into three ctegories—rw terils, work-in-rocess, nd inished goods; rw terils nd work-in-rocess inventories ight be nged by the nucturing dertent, wheres inished goods inventory ight be the urview o the rketing dertent. One roble with rgented logistics structure is tht becuse logistics ctivities re scttered throughout the ir, they likely rein subservient to the objectives o the dertent (e.g., rketing, nucturing) in which they re housed. Moreover, becuse eective eective nd eicient logistics is redicted on high degree o coordintion ong logistics ctivities, ctivities, such coordintion cn becoe diicult when the logistics ctivities re sred throughout n orgniztion. In unified logistics structure, ultile logistics ctivities re cobined into, nd nged s, single dertent. The uniied structure cn be urther clssiied bsed on the nuber nd tye o ctivities ssigned to the dertent. A bsic uniied logistics structure ight hve hve resonsibility or trnsorttion, inventory ngeent, nd wrehou wrehousing. sing. A ore rogressive uniied structure would include these bsic ctivities lus severl dditionl logistics ctivities such s order ngeent nd custoer service. An dvnced uniied structure would include both the bsic nd rogressive ctivities, long with severl other logistics ctivities such s dend orecsting nd rocureent. Regrdless o how ny, ny, or wht tye, o logistics ctivities re nged, the uniied logistics structure should be better ositioned thn the rgented structure to chieve coordintion cross the vrious ctivities. For exle, eicient nd ccurte couniction ong inbound nd outbound trnsorttion, wrehousing, inventory ngeent, rocureent, nd so on should be cilitted when they re cobined into one dertent. der tent. Indeed, so-clled leding-edge logistics conies—irs with deonstrbly suerior logisticl cbilities—exhibit dierent logistics orgniztionl structures thn do other orgniztions. For exle, leding-edge orgniztions re ore likely to use uniied, s oosed to rgented, logistics orgniztionl structure. In ddition, leding-edge conies tend to nge ore tyes o logistics ctivities thn do other conies, conies, including less-trditionl logistics ctivities such s dend orecsting nd rocureent.3 An iortnt ior tnt issue in ters ter s o orgniztionl structure str ucture is whether the logistics dertent der tent should be centrlized or decentrlized. A centralized logistics organization ilies tht the cony intins single logistics dertent tht dinisters the relted ctivities or the entire cony ro the hoe oice. A decentralized logistics organization, in contrst, ens tht
2
J. Child, “Orgniztionl Structure, Environent nd Perornce: The Role o Strtegic Choice,” Sociology 6, 6, no. 1 (1972): 1–22. 3
Donld J. Bowersox, Ptrici J. Dugherty, Corneli Dröge, Dle B. Rogers, nd Dniel Wrdlow, Leading Edge Logistics: (Ok Brook, IL: Council o Logistics Mngeent, 1989). Competitive Positioning or the 1990s (Ok
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Part I • Overview Overview of Logistics
logistics-relted decisions re de sertely t the divisionl or roduct grou level nd oten in dierent geogrhic regions. There re dvntges dvntges to both roches, roches, with riry dvntge dvntge o centr centrlizt liztion ion being its reltive eiciency eiciency, wheres riry dvntge o decentrliztion is its custoer resonsiveness. resonsiveness. Centrliztion llows n orgniztion to tke dvntge o the cost svings tht cn rise ro voluecreting oortunities. Suose, or exle, tht n orgniztion hs ive distribution cilities tht nnully generte 100,000 ounds o outbound reight, or totl outbound volue o 500,000 ounds. A centrlized logistics orgniztion orgniztion should be ble to chieve lower lower trnsorttion rtes or 500,000 ounds o volue thn the individul cilities could ech chieve chieve or 100,000 ounds o volue. Advoctes o decentrliztion question the bility o centrlized logistics unit to rovide the required levels o custoer resonsiveness. resonsiveness. Indeed, the conteorry rketlce is de u o heterogeneous custoers who ren’t necessrily well served by centrlized logistics rctices. For instnce, n orgniztion with ixture o consuer nd business-to-business business-to-business roduct lines ight beneit ro decentrliztion becuse o diering logisticl requireents o consuer con suer nd business-to-business segents. segents. Likewise, ny globl irs need to decentrlize oertions becuse o geogrhic nd tie distnces ro the hoe oice. As n exle, the tie dierence between the United Sttes nd Chin (t lest 12 hours deending on one’s loction in the United Sttes) doesn’t redily lend itsel to tiely resolution o issues i nged under centrlized roch. Another iortnt ior tnt issue in logistics orgniztion org niztion structure str ucture is the job title or cororte rnk (e.g., nger, director, vice resident, chie) o the to logistics erson; indeed, one ttribute o leding-edge orgniztions is tht logistics tends to be heded by senior-level (vice resident, chie ) ersonnel.4 Although in recent yers logistics hs ssued greter iortnce ior tnce in ny orgniztions in the sense tht the to logistics erson holds vice resident title, to dte logistics hs generlly been excluded ro holding “C-level” position, which reers to cororte oicers such s chie chie executivee oicer (CEO), chie oerting oicer (COO), or chie inncil oicer (CFO). In other executiv words, there re ew conies co nies in which erson holding the osition o chie logistics oicer (CLO) leds the logistics unction. One excetion is Green Mountin Coee Rosters, leder in secilty coee nd coee kers. Driven by the colexity o its ultichnnel business, it hs estblished CLO or their orgniztion. Siilrly, retiler Trget Corortion estblished n Executivee Vice President, Chie Suly Chin nd Logistics Oicer to led its lnning, distribution, Executiv nd trnsorttion s rt o its suly chin trnsortion. Learning Objective
4.2
Organizationall Design for Logistics5 Organizationa Orgniztionl is uch broder thn the ilir oconcerned boxes ndwith linesissues tht detil ing reltionshisdesign in n orgniztion. Orgniztionl designseries is lso such reorts who kes work-relted decisions nd the rorite couniction chnnels between workers nd ngers, ong other things. Brodly seking, seking, three riry tyes o orgniztionl design re used: hierrchicl (lso clled unctionl), trix, nd network. Hierrchicl, or unctionl, orgniztionl design hs its oundtions in the cond-nd-control ilitry orgniztion, where decision king nd couniction oten ollow to–down low. One dvntge to hierrchicl design is lexibility lexi bility in exercising cond in the sense tht no one nger leds ore thn “liited” nuber (e.g., 10, 20, 25) o eloyees. In ddition, ech eloyee reorts to one, nd only one, suervisor. One disdvntge o hierrchicl design is tht societl chnges, such s indi vidulit vidu lityy nd nd ques question tioning ing uth uthorit orityy, re re not not esily esily cco ccoo odte dted d in co cond nd nd nd contr control ol hil hiloso osohy hy.. In trix design, one eloyee ight hve cross-unctionl resonsibilities. For exle, the ctegory nger o sll linces t rticulr orgniztion ight reort to logistics, rketing, nd roduction executives, nd this nger would hve resonsibility or the roduction, 4
Ibid.
5
Much o the teril in this section is drwn ro G. Bruce Friesen, “Orgniztion Design or the 21st Century,” Consulting to Management 14, no. 3 (2005): 32–51.
Chapter 4 • Organizational and Managerial Issues in Logistics
rketing, nd logistics o sll linces. linces. One dvntge o this design is tht the ctegory nger (such s the sll lince nger in our exle) cn be very resonsive to custoer requireents.. One disdvntge is tht trix orgniztion requireents org niztion tends to cost ore to oerte becuse incresing nubers o ngeril-lev ngeril-level el eloyees re necessry in corison to hierrchicl orgniztion. Both the hierrchicl nd trix ors o orgniztion re well suited or environents dointed by costly inortion nd restricted couniction—constrints tht hve been lessened by the Internet nd vilbility o big dt. Moreover, hierrchicl hierrchicl nd trix orgniztions lourish when there re liited nuber o decision lterntives s well s liited tie constrints on king decision. However, the conteorry business environent is incresingly chrcterized by yrid o decision lterntives nd shorter tie windows or king decisions. To To this end, network orgniztion design ttets to crete n orgniztion org niztion tht is resonsive to the reters o the conteorry business environent. environent. A key ttribute o network orgni orgniztionl ztionl design is shit ro unction to rocess. In unctionl–hierrchicl hilosohy, roducts nd rocesses were divided into esy-to-colete tsks. A rocess hilosohy, by contrst, ocuses on cobining tsks into value-creating products and activities. For exle, eective nd eicient order ngeent is rocess designed to roduce stisied nd loyl custoers, custoers, nd order ngeent consists o nuber o dierent tsks such s order receit, order entry entr y, credit check, order trige, order icking, nd so on. It’s only when these tsks work in concert tht vlue is creted. The network orgniztion’ org niztion’ss ehsis on rocess nd vlue cretion hs iortnt i ortnt ilictions or orgniztionl design. Becuse rocesses nd vlue cretion tend to be custoer ocused, orgniztionl design should cilitte n orgniztion’s interction with its custoers. For exle, one wy to cilitte custoer interction is to ove decisions s close s ossible to the oint t which ction is required, which requires eowering lower-level lower-level eloyees nd ngers with the uthority to ke decisions. You You should recognize tht the concet o worke workerr eowerent is directly oosed to the seciictions o hierrchicl orgniztionl design. Moreover,, ro logistics ersective, network orgniztionl design is niested in ters Moreover o relevncy relevncy,, resonsiveness, nd lexibility lexibility.. Relevancy , which reers to stisying current nd eerging custoer needs, cn be cilitted by develoing utully beneicil reltionshis with key custoers; t iniu, these reltionshis should rovide rovide n understnding o custoer needs nd wnts. Responsiveness relects the degree to which n orgniztion cn ccoodte unique or unlnned custoer requests; resonsiveness cn be chieved when the rorite decision kers re rovided with both relevnt inortion nd the uthority to ddress unique or unlnned requests. Flexibility , which cn be deined s n orgniztion’s bility to ddress unexected oertionl situtions, is redicted on voiding erly coitent coitent to n irreversible course o ction. One exle o logistics lexibility would be the ostoneent o ssebly, lbeling, nd so on until exct custoer requireents re known.6
MANAGERIAL ISSUES IN LOGISTICS The logistics disciline w would ould be reltively reltively esy i it entiled sily orgnizing logistics syste nd then utting it into oertion. However, well-run conies recognize tht logistics systes ust not only be orgnized, but they ust lso be nged. Although the reining chters will discuss ngeril issues ssocited with rticulr logistics ctivities (e.g., rocureent-secic ngeril issues, wrehousing-secic wrehousing-secic ngeril issues, nd so on), the ollowing sections will ocus on overrching ngeril issues ecting logistics ngers tht re not ctivity secic.
6
Donld J. Bowersox, Dvid J. Closs, nd Theodore P. Stnk, 21st Century Logistics: Making Supply Chain Integration a Reality (Ok (Ok Brook, IL: Council o Logistics Mngeent, 1999), Chter 3.
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Part I • Overview Overview of Logistics
Learning Objective
4.3
Productivity Productivity is n iortnt ngeril issue becuse it rovides insight into the efciency (or ineciency) with which cororte resources re being utilized. At bsic level, productivity cn be dened s the ount ount o outut divided by the ount o inut. An understnding o this reltionshi leds to the recognition tht there re three wys to irove roductivity—reduce roductivity—reduce the ount o inut while holding outut constnt, increse the ount ount o outut while holding inut constnt, or increse outut while t the se tie decresing inut or t lest not llowing inut to increse bove the rte tht outut is going u. Understnding the three wys to irove roductivity is iortnt to the logistics nger becuse severl logistics ctivities, rticulrly wrehousing nd trnsorttion, re hevily deendent on hun lbor. For roductivity uroses, hun lbor is considered n inut (i.e., workers receive wges or slries), nd ost huns re resistnt to roductivity suggestions tht ocus on reducing their wges or slries (i.e., inut). As such, roductivity iroveent eorts in logistics re oten directed towrd increasing the amount o output while holding holding input constant. Moreover,, in soe geogrhic loctions logistics oerting eloyees (e.g., Moreover (e.g., wrehouse workers, truck drivers) re unionized, nd the union contrcts cn rovide chllenge to iroving roductivity. This is becuse union work rules re oten very seciic in the sense tht job descritions sell out in excting detil the resonsibilities ssocited with rticulr job. Thus, i n order icker’ss orklit were to lunction, the order icker ight be rohibited ro reedying the sitution er’ becuse orklit reirs re the resonsibility resonsibility o nother grou o workers workers.. Although detiled job seciictions hel crete dditionl eloyent oortunities, the reltive reltive lck o worker lexibility cn otentilly hinder roductivity by incresing inuts (e.g., dditionl workers, hence dditionl lbor costs) while lso decresing outut. For exle, the order icker with the lunctioning orklit y hve to dely order icking until the orklit is reired or nother orklit becoes vilble or use. Mny wrehousing cilities hve clerly rticulted work rules tht serve nuber o uroses, the ost iortnt o which is to kee the workorce in generl, nd individul eloyees eloyees in rticulr, ro engging in unroductive nd otentilly unse ctivities ctivities.. It’s sily not enough to hve set o clerly rticulted work rules—to be eective, eective, the work rules ust be enorced. Another chllenge cing logistics ngers is the rising lbor costs o their logistics oerting eloyees due to incresing uwrd ressure ressure on wge levels. Whether s result o ederl iniu wge increses, diiculty in ttrcting tlent, or by their own choice to rise eloyee slries, conies re seeing n eerging uwrd trend on wge levels. In resonse, logistics ngers re constntly looking or wys to increse roductivity within their wrehouses through innovtion. While this innovtion cn tke tke ny ors, the introduction o technology is coon roch. For exle, Wlrt, Wlrt, the world’ world’ss lrgest retiler, hs begun testing drones within its wrehouses s otentil solution to enhnce wrehouse roductivity. roductivity. While Wlrt eloyees now nully scn llets using hnd-held technology, drones re being evluted s wy to reduce the lbor requireents in this setting. Drones re ble to tke u to 30 iges er second to insect inventory nd lbeling. Thus, Thus, this technology could eror eror the ount o work in single dy tht currently tkes onth using trditionl eloyees. While these drones would still require n eloyee to oerte the, the overll nuber o eloyees in the wrehouse could be reduced. A distinction needs to be de between wrehousing wrehousing nd trucking when discussing the ngeent o lbor roductivity in logistics. In wrehousing, wrehousing, suervisors suer visors cn be hysiclly resent nd re exected to be on to o nerly ny sitution. When worker in wrehouse lls behind schedule, it is usully noticed reltively quickly, quickly, nd corrective ction cn be tken in tiely shion. However, once on the rod, truck drivers re reoved ro iedite suervision, nd their work becoes ore diicult to evlute. Truck drivers cn ll behind schedule or be delyed or vriety o resons such s tric conditions, bottleneck t loding dock, or erhs too uch tie socilizing with ellow drivers t rticulr truck sto. Tyiclly, nger hs little choice but to ccet the driver’s exlntion or the dely. As such, it is necessry to hve control
Chapter 4 • Organizational and Managerial Issues in Logistics
echniss so tht drivers who oten encounter uncontrollble delys (e.g., tric conditions) cn be distinguished ro those who encounter controllble delys (e.g., socilizing with ellow drivers). As ws the cse in wrehousin wrehousing, g, technolo technologicl gicl consider considertions tions ly n incresi incresingly ngly iortnt role in nging truck drivers nd their roductivity. For exle, soe irs hotogrh or videote drivers king ickus t their loding docks. Moreover, ctivity ct ivity cn be recorded by tr uck nd roduces continuous, continuous, tied tachograph, recording instruent tht is instlled inside truck record o the truck, its seed, nd its engine seed. Fro Fro the inortion on tchogrh chrt, one cn tell how eiciently the truck nd driver re being used. I the driver works on regulr route, it y be ossible to rerrnge the stos so tht the driver cn void res o tric congestion. Bd driving hbits, such s high highwy seeds nd excessive engine idling, cn lso be detected. In cse o n ccident, tchogrh chrt is invluble in reorting nd exlining wht occurred just rior to the crsh. The interces involving wireless counicti counictions, ons, globl osition ositioning ing systes (GPS), nd grhicl inortion systes (GIS) oer treendous technology-relted oortunities to irove driver roductivity. roductivity. Globl ositioning systes use stellites tht llow conies to coute vehicle osition, velocity, velocity, nd tie, wheres grhicl g rhicl inortion systes llow conies to roduce digitl s tht cn drill down to site-seciic sects such s bridge heights nd custoer loctions. GPS nd GIS re evolving towrd sitution in which instnt udtes cn be rovided to GIS dtbses—dt tht cn be leverged to rovide rel-tie route lnning tht cn direct drivers wy ro ccidents nd other tric bottlenecks. While the use o technology oers otentil otentil roductivity enhnceent, logistics ngers should be wre tht there is colex reltionshi between orl technology-bsed controls nd ir erornce. For exle, reserch hs shown tht electroniclly onitoring truck drivers cn result in both ositive nd negtive orgniztionl outcoes.7 Tec Technology hnology by itsel does not irove ir erornce, it is ore bout how rticulr r ticulr technology is used to enhnce roductivity. roductivity. The reserch indictes tht the ost eicient wy to irove erornce is to cobine high level o rocess control (e.g., drivers sel-reorting their work) with high level o ctivity control (e.g., ororlized scheduling o driver’s work) or high level o technology control (e.g., electronic driver onitoring). As such, logistics ngers ust be creul to use technology roritely to chieve desired worker roductivity enhnceents in their seciic contexts. Thus r this section hs ocused only on worker roductivity, roductivity, but sset roductivity is lso n iortnt considertion or logistics ngers. One sset-relted roductivity concern involves sce utiliztion, or the ercent o vilble sce tht’s tht’s ctully being used. Excess capacity, or unused vilble vilble sce, cn be unroductive becuse it y result in the urchse o dditionl equient or cilities— sitution tht dds to costs (inut) but not necessrily to outut, thus resulting in lower roductivity. roductivity. Consider the exle o cony tht built n roxitely 700,000-squre-oot wrehouse s relceent or sller storge cility. A review o the new wrehouse one yer ter its oening reveled tht only 55 ercent o the vilble sce ws ctully being utilized, nd the cony concluded (reluctntly) tht it could hve stisied current nd uture dend with 450,000-squre-oot cility. The 700,000-squre-oot cility cused the cony to urchse dditionl rel estte, incur higher construction costs, nd incur higher terils hndling costs (in the or o storge rcks nd orklits) when cored to 450,000-squre-oot cility. cility. Fro ngeril ersective, the 700,000-squre-oot cility hndled the se ount o roduct (outut), t higher cost (inut), s could 450,000-squre-oot-cility—thus resulting in decresed roductivity. In resonse to the issue o excess ccity c city,, one trend is the concet owrehouse sharing economy , which entils n orgniztion king theireerging unused resources (e.g., excess 7
Json W. Miller, John P. Sldnh, C. Shne Hunt, nd John E. Mello, Mello, “Cobining Forl Controls to Irove Fir Perornce,” Journal o Business Logistics 34, nce,” Journal 34, no. 4 (2013): 301–318.
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sce, unused triler sce) vilble to other orgniztions. Conies re inding tht strtegic shring cn result in incresed revenues, enhnced utiliztion o ssets, nd svings ro reduced need to ke citl investents. Crgotic is n Internet-bsed cony tht is suorting eorts to shre logistics ssets. The cony ws estblished in resonse to oertionl chllenges ssocited with locl truck ccity in lrge rkets. Its web-bsed syste nd obile s enble truckers nd shiers in the Los Angeles, New York, nd Sn Frncisco rkets to ore eiciently utilize ccity nd enhnce roductivity o ssets.8 Crgotic strives to rovide n Uber-like solution or drivers o reight nd those nerby tht need to ove their roducts. On verge, verge, Crgotic Crgo tic shient involves 1 ton o reight oving 20 iles or bout $145. Crgotic kes its oney by chrging 20 ercent coission. 9 A second sset-rel sset-relted ted roductivi roductivity ty concern ocuses on iroving the outut ro existing ssets. Southwest Airlines, or exle, is ble to ly ore tri segents er dy with its irlnes thn ny o its coetitors becuse Southwest’ Southwest’ss lnes send less tie rked t irort iror t gtes. Another wy o iroving the outut ro existing ssets involves extending their revenuerevenueroducing liesn. For exle, exle, one o the uthors worked or trucking cony tht regulrly utilized 25-yer-old trctors to serve certin custoers. Fro one ersective, the 25-yer-old trctors were extreely roductive roductive in the sense tht ully derecited sset ws generting revenues. Hving sid this, the 25-yer-old trctors lcked certin sety etures ound on newerodel trctors, incurred higher intennce costs, nd were less uel-eicient thn newer-odel trctors. Learning Objective
4.4
Quality Logistics service quality reltes to r’s bility to deliver roducts, terils, nd services without deects or errors to both internl nd externl custoers.10 However, it is iortnt tht we oertionlize “qulity” beore beginning our descrition o logistics service qulity. qulity. Consider tht the Aericn Society o Qulity Qulity,, which bills itsel s the world’s world’s leding ebershi orgniztion ocused on qulity, notes tht qulity is subjective ter. 11 Ech erson will hve his or her own denition. Although there re soewht stringent denitions o qulity qulity,, such s roduct or service tht is ree ro deects, deciencies, or errors, we will tke ore exible roch nd dene qulity s conornce to utully greed uon requireents requireents.. The issue o qulity in logistics oten reresents delicte blncing ct or the involved involved orgniztions. Tht is, is, i n orgniztion rovides logistics services o inerior qulity when delivering delivering its roducts, it runs the risk o lowering the custoer’s erceived vlue vlue o the seller’s seller’s roduct. I n
orgniztion rovides higher levels logistics service thn its without custoernvlues or requires, y be ying or soething tht isonot needed. This qulity incresed cost ssocited erce-it tion o vlue cn ect the coetitiveness coetitiveness o ir’ ir ’ss oering. In short, orgniztions designing their logistics service oerings ust understnd issues o qulity nd strive to tch the qulity levels o the logistics services they rovide with the execttions o their custoers nd the coetitive lndsce in which they oerte. Tody T ody,, vendors re exected to hve qulity rogrs, nd ny hve h ve worked or yers to chieve good reuttion or qulity. One wy or vendors to convince otentil buyers tht they re coitted to qulity is through rogr known s ISO (Interntionl Stndrds Orgniztion) 9000 certiiction. ISO 9000 is set o generic stndrds used to docuent, ileent, nd deondeonstrte qulity ngeent nd ssurnce systes. Alicble to nucturing nd service industries, these stndrds re intended to hel conies build qulity into every core rocess in ech 8
www.crgotic.co www.crgotic.co www.lties.co/business/l--crgotic-20140927-stor www .lties.co/business/l--crgotic-20140927-stor y.htl
9
10
E.A. Morsh, C. Droge, nd S. Vickery, “Strtegic Logistics Cbilities or Coetitive Advntge nd Fir Success,” 17, no. 1 (1996): 1–22. Journal o Business Logistics 17, 11
www.sq.org www .sq.org
Chapter 4 • Organizational and Managerial Issues in Logistics
dertent. Firs deonstrting coitent to qulity through trining, reviews, nd continuous iroveent cn receive ISO 9000 certiiction. Ater chieving ISO 9000 certiiction, orgniztions re udited ech yer nd cn be recertiied every three yers. Aong logistics ngers, ISO 9000 certiiction is credited with incresing custoer service, ser vice, iroved order ccurcy, ccurcy, nd enbling 12 enhnced costs nlysis. Another qulity-r qulity-relted elted concet or rctice relevnt or logisti logistics cs nger ngers, s, known s Six businesss errors. Those who reeber the norl Sigma, ehsizes the virtul eliintion o busines distribution (curve) ro their sttistics clss will recll tht sigs re relted to stndrd devitions ro the en. The higher the nuber o devitions included, the ore re under the norl curve tht is covered. In the cse o Six Sig, or six stndrd devitions, the re covered is 99.99966 ercent, leving tiny re, .00034, uncovered. More seciiclly, the Six Sig roch suggests tht there will be 3.4 deects, deiciencies, or errors er one illion oortunities—obviously very high stndrd. These stndrds cn be lied to vrious logistics ctivities such s order cking. Fro North Aericn ersective ersective,, Six Sig begn to chieve widesred ccetnce—nd dotion—during the id-1990s. A worldwide Six Sig study indicted tht only bout 10 ercent o the resonding orgniztions hd estblished structured erornce iroveent rogr rior to 1995. This se study lso ound tht the ost signiicnt beneits ro Six Sig hve been reduced costs, reduced errors nd wste, nd reduced cycle tie, wheres the key drwbcks hve involved overcoing business culturl brriers, investing the required resources (both hun nd oney), nd gining to ngeent coitent.13 Whilee trd Whil trditio itionll nllyy seen s rivl init inititive itives, s, the inte integr grtio tion n o Six Sig with the Len roch, so-clled Lean Six Sigma, is n re o incresed ocus within ny conies. Len Six Sig integrtes the gols nd ethods o these two roches in ursuit o qulity qulity.. Wht sets Len Six Sig rt ro its individul coonents is the recognition tht orgniztions cnnot ocus only on qulity or seed. There needs to be n orgniztionl ocus on iroving qulity s it reltes to resonsiveness. Hlliburton, n oilield services rovider, hs ileented Len Six Sig concets both internlly s well s ushing the concet out to its suliers in n eort to better lign its suly bse with Hlliburton’s incresing dend nd suly execttions. 14 LenCor, third-rty logistics cony, hs used Len Six Sig tools with its clients s rt o its eorts to develo culture o continuous iroveent.15 LenCor not only uses these tools or enhncing the logistics services it rovides, but it lso conducts trining in Len Six Sig tools or its client’s eloyees. Another qulity-relted inititive is the Malcolm Baldrige National Quality Award, which ws estblished estblished in the lte 1980s to recognize U.S. U.S. orgniztions or their chieveents chieveents in qulity nd erornce. Initilly only nucturers, services, nd sll businesses were eligible or this wrd, but eligibility ws exnded to include helth cre nd eductionl institutions in the lte 1990s. Reserch hs shown tht severl ctors included in the Bldridge critieri re iortnt to the iroveent o logistics rocesses.16 The Bldrig e Qulity Awrds, which re restric restricted ted to org orgniztio niztions ns hedqur tered in the United Sttes, require interested rties to subit orl or l liction tht is evluted by coittee lrgely de u o rivte-secto rivte-sectorr exerts in business nd qulity. qulity. Alictions re evluted or chieveent nd iroveent cross seven ctegories: business results; custoer nd rket ocus; hun resource ocus; ledershi; esureent, nlysis, nd knowledge ngeent; rocess
12
Pul D. Lrson nd Stehen G. Kerr, “ISO nd ABC: Coleents or Coetitors?” International Journal Journal o Logistics ManageManage 13, no. 2 (2002): 91–100. ment 13, 13“Exclusive Worldwide Worldwide Six Sig Survey Revels . . . ” Business ” Business Credit , October 2005, 48–51. 14 Willi Atkinson, “Hlliburton Pushes Len Six Sig to Its Suly Bse,” Purchasing 138, 138, no. 3 (2009): 18–20. 15 www.lencor.co www .lencor.co 16 Ronld D. Anderson, Roger E. Jern, Jern, nd Michel C. Cru, “Qulity Mngeent Mnge ent Inuences on Logistics Perornce,” 34, no. 2 (1998): 137–148. Transportation Research—Part E 34,
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ngeent; nd strtegic lnning.17 Iortntly, orgniztions tht choose not to ly or Bldrige Awrd cn use these seven ctegories s telte or evluting the qulity o current nd rosective suliers. There re substntive substntive dierences between ISO ISO 9000 nd the Bldrige Bldrige Awrd; Awrd; ISO 9000 9000 essentilly llows n orgniztion to deterine i it colies with its seciic qulity syste. syste. In contrst, the Bldrige Awrd is ore hevily ocused on the ctul results ro qulity syste s well s on continuous iroveent.18 The Bldrige Awrd lso tends to be ore externlly ocused in the sense tht orgniztions benchrk theselves ginst orgniztions ro outside their rticulr industry. Learning Objective
4.5
Risk Logistics systes re colex networks o conies nd ctivities tht re constntly exosed to otentil unredictble disrutions. Risk cn be viewed s suscetibility to disrutions tht could led to loss or r, nd this risk cn tke vriety o ors s it reltes to the ngeent o logistics ctivities. For exle, regulrly occurring risks involve things such s vribility in dend or the otentil or dged shient, wheres ctstrohic risks such s erthqukes or terrorist ttcks cn lso unexectedly ect logistics syste. 19 The Logistics Uncertainty Pyramid Model hs been estblished to identiy sources o uncertinty tht cn ect the risk exosure or logistics ctivities.20 The odel identies severl tyes o uncertinty including shier, custoer, crrier, control systes, nd externl. The odel cn hel logistics ngers structure their exintion o otentil risks tht could inuence their rs’ logistics systes. While sce liittions restrict us ro discussing ll otentil risks tht could rise in these res o uncertinty, we we will describe one oertionl risk nd one ctstrohic risk in greter detil. The reinder o this section will ocus on two risks tht cn ict logistics ctivities in r, nely, terroris nd thet/ ilerge. Terroris Te rroris cn be viewed viewed s n illegl use o, or thret o, orce or violence violence de by grou or n individul ginst erson, cony, cony, or soeone’s soeone’s roerty with gol o encing the trget, 21 oten grounded in olitics or ideology. Although terroris is oten viewed by the edi through oliticl or ideologicl lens, it cn hve iortnt ilictions or coerce nd or nging logistics systes. It’s no exggertion to stte tht the terrorist ttcks in the United Sttes on Seteber 11, 2001, were deining oent tht brought terroris considertions to the oreront o logistics ngeent. The Seteber 11 terrorist ttcks hve rooundly icted logistics rctices on worldwide bsis , nd rocesses, rocesses , rocedures, nd ctivities tht tht ight hve hv e been given given inil ttention rior tobsis, Seteber 11 re now viewed ro n entirely dierent ersective. Consider the storge nd trnsort o hzrdous terils, which which rior to Seteber 11 were ririly nged ro sety ersective. Although sety reins n iortnt ersective, the storge nd trnsort o hzrdous terils in tody’s tody’s world re lso nged with n eye to otentil terrorist considertions. For exle, there re continuing eorts to reroute ril shients o hzrdous terils—becuse o terror concerns—wy ro jor U.S. U.S. oultion centers, nd ocengoing etroleu tnkers hve the otentil to be used s obile bobs.
17
www.qulity.NIST www .qulity.NIST.gov .gov
18
Ibid.
19
A. Michel Kneeyer, Wlter Zinn, nd Cuneyt Eroglu, “Proctive Plnning or Ctstrohic Events in Suly Chins,” 27, no. 2 (2009): 141–153. Journal o Operations Management 27, 20
V.. Snchez-Rodrigues, D. Stntchev V Stntchev,, A. Potter, Potter, M. M. Ni, nd A. Whiteing, “Estblishing Trnsort Oertion Focused Focused Uncertinty Model or the Suly Chin,” International Journal o Physical Distribution 38, no. 5 (2008): Distribution & Logistics Management 38, 388–411. 21
Terroris. The American Heritage[[00AE]] ro Dictionry.co Heritage[[00AE]] Dictionary o the English Language, 4th Language, 4th ed. (n.d.). Retrieved ro Dictionry.co website: htt://dictionry.reerence.co/browse/terroris
Chapter 4 • Organizational and Managerial Issues in Logistics
One resonse to the Seteber 11 ttcks involved involved the cretion o new ederl gency in the U.S., U.S., the Dertent o Hoelnd Security (DHS); two o its jor is re to revent terrorist ttcks in the United Sttes s well s to reduce the vulnerbility o the United Sttes to terroris. A totl o 22 serte U.S. U.S. governent entities were incororted into the DHS, with the Trnsorttion Security Adinistrtion Adinistrtion (TSA) nd Custos nd Border Protection (CBP) being two two o the ost iortnt ro logistics ersective. ersective. The Trnsorttion Security Adinistrtion is resonsible or the security o the U.S. U.S. trnsorttion syste. You ight be ilir with the TSA becuse it is the gency tht conducts the ssenger screening t U.S. U.S. coercil irorts. The TSA lso lys nuber o roles with resect to reight security, such s using dogs to screen irreight. In ddition, the TSA ws resonsible or develoing Transportation Worker Identification Credential (TWIC), which is coon credentil used to identiy workers workers cross ll odes o trnsorttion. One o the key ttributes o TWIC is tht the corresonding crd contins both ersonl nd bioetric bioetric dt, with the bioetric dt being used to exclude certin workers ro secure res t orts nd terinls. The TWIC rogr bece ully oertionl in erly 2009, nd while ileenttion hs been reltively sooth, severl robles, such s lengthy rocessing tie or credentils, hve surced. 22 In 2014, the U.S. House o Reresenttiv Reresenttives es ssed the Essentil Trnsorttion Worker Identiiction Credentil Assessent Act tht would require TWIC to undergo underg o n indeendent ssessent o how well the rogr is working s well s identiying otentil lterntive lter ntive technologies. technologies. Custos nd Border Protection is resonsible or securing U.S. borders to rotect the Aericn eole nd the U.S. econoy. econoy. One key CBP unction is insecting crgo, nd nuber o high-roile CBP inititives hve hve ected the ngeent o logistics systes. systes. The Trde Act o 2002, which required subission subission o dvnced electronic dt on ll shients entering entering nd leving the United Sttes, is ied t identiying high-risk shients tht ight threten U.S. sety nd security. Tble security. Tble 4.1 surizes 4.1 surizes the niest ties or inbound nd outbound shients involving ir, ril, wter, nd truck. TAbLE 4.1 4.1 Timeline for Presenting Presenting Electronic Electronic Advance Advance Manifest Manifest Information Inbound to the United States Mode
Timeline
Airr and Ai and cour courie ierr
Four hours Four hours pri prior or to to arriv arrival al in in the the Unit United ed Sta States tes,, or “w “whe heel elss up” up” from from cert certai ain n nearby airports
Rail
Two hours prior to arrival at a U.S. port of entry
Ocea ean n vess sse el
24 hou ourrs pri rio or to lading at for ore eign port
Truck
Free an and Se Secure Tr Trade (FAST): 30 30 mi minutes pr prior to to ar arrival in th the Un United St States; non-FAST: one hour prior to arrival in the United States
Outbound from the United States Mode
Timeline
Airr and Ai and cou couri rier er
Two ho hours urs pri prior or to to sche schedu dule led d depa departu rture re fr from om the Un Unit ited ed Sta States tes
Rail
Two hours prior to the arrival of the train at the border
Ocea Oc ean n ves vesse sell
24 ho hour urss pri prior or to de depa part rtur ure e fro from m U. U.S. S. po port rt wh wher ere e car cargo go is la lade den n
Truck
One hour prior to the arrival of the truck at the border
Erlind Byrd, “Rules or Iroving Crg o Security,” Security,” Customs and Border Pr otection Today, Mrch Source: Erlind Source: Today, Mrch 2004.
22
R. G. Edonson, “TWIC’s Forgotten Few,” Journal Few,” Journal o Commerce , Aril 20, 2009, 20.
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Part I • Overview Overview of Logistics
In rticulr, ocengoing continers destined or the United Sttes re receiving uch greter scrutiny scruti ny tody thn rior to Seteber 11. One o the things lerned ler ned ter the 2001 terrorist ttcks ws tht reltively sll ercentge o continers tht rrived rr ived t U.S. U.S. orts ws scnned to lern bout their ctul contents. This lred soe U.S. legisltors, nd the result ws series o roosls tht culinted in legisltion requiring 100 ercent scnning o U.S.-bound continers by 2012. This scnning, which is to be done rior to continer being loded onto shis t non-U non-U.S. .S. orts, hscurrently the otentil to be quite to interntionl trde becuse becus e nuber nondoestic orts do not hve thedisrutive technology required to insect continers. Theseoorts would hve to cquire nd instll the relevnt scnning technology (which is quite exensive), discontinue sending continers to the United Sttes, or route continers through other nondoestic orts tht re equied with the relevnt technology. However, However, in erly 2009, the DHS suggested sug gested tht the 2012 scnning dedline robbly would not be chieved, chieved, in rt becuse o diiculties in chieving greeents with ll nondoestic orts tht shi continerized crgo to the United Sttes. 23 This rediction turned out to be true. As o id-2016, id -2016, the gol o chieving 100 ercent scnning ws still beyond rech o the DHS. One big issue ws how to del with trnsshients, where continers scnned t oreign origin ort were then oloded t secondry oreign ort rior to rriving in the United Sttes. This interedite ste introduced otentil or tering with the continer. The DHS hs begun to look outside outside o its gency or rivte solutions to the exensive exensive nd colex roble o eeting the 100 ercent insection ndte. ndte. Another Anoth er exl exlee o the CBP’s ehs ehsis is on cont contineri inerized zed shi shients ents is the Container Security Initiative (CSI), n greeent g reeent in which soe o the world’s world’s orts gree g ree to llow U.S. U.S. custos gents to identiy nd insect high-risk continers bound or the United Sttes beore they re loded onto shis. Aroxitely 60 interntionl orts, including such jor orts s Hong Kong, Singore, Shnghi, nd Rotterd, currently rticite in the CSI. One o the best-known CBP rogrs encted since Seteber 11 is the Customs Trade Partnership Against Terrorism (C-TPAT), in which ublic (CBP) nd rivte (e.g., retilers nd nucturers) orgniztions work together to revent terroris ginst the United Sttes through iorts nd trnsorttion. Privte orgniztions ly to Custos nd Border Protection or C-TPAT C-TP AT certiiction, nd the rocess involves deonstrting tht orgniztions org niztions hve iroved the hysicl security o their continerized shients s well s the bility to trck eole who hve ccess to the continerized shients. Although the governent-rovided beneits to C-TP C-TPAT AT certiiction include ewer security security insections o inbound continers long with ster rocessing tie through Custos, ny conies hve discovered tht the C-TPAT C-TPAT rocess hs lso led to reduction in crgo thet, ilerge, nd loss.24 As i logistics ngers ren’t otentilly otenti lly overwheled overwhel ed by TWIC, CSI, C-TPAT, C-TPAT, nd other terroris-relted cronys, cronys, Custos nd Border Protection is lso resonsible or ileenting nd enorcing the Importer Security Filing (ISF) rule, lso known s 10 + 2, wh whic ich h wen wentt into eect in erly 2009. The 10 + 2 oniker reers reers to the ct tht iorters re required required to ile 10 ieces o inortion (e.g., country country o origin; nucturer’ nucturer’ss ne nd ddress), nd crriers two ieces o inortion (e.g., vessel vessel storge ln), beore crgo is loded t non-U.S. non-U.S. wter orts. The initil eedbck eedbck on 10 + 2 suggests tht tht while erroneous erroneous ilings ilings hve hve declined declined ro 30 ercent to less thn 5 ercent, soe iorters struggle to get tiely, ccurte, nd colete inortion or their 10 required ieces o inortion. In ddition, iorters re concerned with the costs o 10 + 2 colince, which cn cn include the cost o ugrding their inortion systes systes,, ;
;
;
;
23
R. G. Edonson, “DHS’s New Boss,” Journal Boss,” Journal o Commerce , Mrch 9, 2009, 16.
24
Christine Blnk, “Cruise through Custos,” Multichannel Custos,” Multichannel Merchant Merchant , August 2006, 46–47.
Chapter 4 • Organizational and Managerial Issues in Logistics
the ctul cost o iling the 10 ieces o inortion, nd otentil onetry enlties or or erroneous 25 inortion or ilure to ile the inortion. Theft (steling), which cn be deined s the the tking nd reoving o ersonl roerty with 26 the intent to derive the rightul owner o it, is nother logistics risk issue tht conronts ny ngers. Unortuntely, Unortuntely, it is oten diicult to ccurtely quntiy the ict o thet, in rt becuse soe conies re hesitnt to reort these dt becuse reorted thet serves s direct evidence o logistics syste shortcoing. Hving sid this, necdotl evidence suggests tht crgo thet 27
incresed s U.S. U.S. econoic conditions begn to deteriorte in lte 2007. You Y ou ight be wondering wondering why why logisticins would be concerned bout thet, thet, rticulrly becuse ny orgniztions crry insurnce to coenste theselves theselves in cses o thet. However, However, even though insurnce y reiburse n orgniztion or the rket vlue o the stolen ites, the tie nd costs (e.g., docuenttion) ssocited with thet tend not to be covered by insurnce. A second logisticl concern is tht thet results in the lnned low o goods being interruted interr uted nd cn led to stockouts. In ddition, thet cn ctor into the cility loction decision in the sense tht soe orgniztions will void locting their cilities in res chrcterized by high crie rtes. 28 It’s lso ossible or the stolen roducts to reer in the rket t lower rice to coete with roducts tht hve oved through trditionl chnnels. chnnels. Indeed, there re suggestions sugg estions tht roxitely 2 ercent o the roducts vilble on Internet uction sites re ctully stolen goods.29 Schneider, ull trucklod ir hedqurtered in Green By, Wisconsin, hs been very successul in reducing the ount o crgo thet tht occurs in the ore thn 3 illion lods they ove ech yer. Schneider utilizes cobintion o ultile technologies, technologies, rocedures, nd driver trining to chieve n lost erect record o thet voidnce. voidnce. According to trucking industry reserch, 890 lods were lost in 2015 by trucking irs t n verge cost o $185,297 er incident. A jor sect o Schneider’ Schneider’ss roch towrd voiding voiding these tyes o incidents hs been through trining during the on-bording rocess or new drivers, couniction with drivers regrding loctions nd tyes o thets bsed on dt nlysis, nd systetic systetic re-trining o their drivers bsed on the eergence 30 o new thet revention techniques. techniques. Pilferage, which reers to eloyee thet, cnnot be eliinted, nd both wrehousing nd trnsorttion oertions re esecilly vulnerble to ilerge. Mnging ilerge cn be chllenging or the logistics nger, nd the nging begins with the hiring rocess. In ct, one o the best wys to nge ilerge is to void void hiring eole who re redisosed to stel, such s eole with credit, lcohol, or drug robles. Soe orgniztions utilize sychologicl tests s rt o the hiring rocess in n eort to identiy rosective eloyees who ight iler. Orgniztions cn better nge ilerge i they hve clerly rticulted nd enorced ilerge-relted olicies. To this end, exerts recoend tht the best ilerge olicy should be bsed on zero tolernce becuse robles inevitbly rise or those conies tht tolerte “sll ount” o ilerge. For exle, there y be disgreeent in ters o how to oertionlize “ount”—re we concerned with the nuber o units unit s or the dollr vlue o ites? Once this hs been estblished, then wht is ent by “sll”—does, sy, ive units or $75 quliy s “sll”? Quite sily, zero-tolernce olicy ens tht ilerge exceeding zero units or zero dollrs is unccetble.
25
;
R. G. Edonson, 10 + 2
=
Now, Journal o Commerce , June 1, 2009, 10–13.
26
www.-w .-w.co/dictionry .co/dictionry 27 www
Brry Trne, “Into Thin Air,” World Trade , Seteber 2008, 50–52.
28
Perry A. Trunick, “To “To Ctch T hie,” hie,” Logistics July 2005, 35–40. Logistics Today, Today, July
29
Juli Kuzeljevich, “The Seven Dedly Sins in Wrehouse Wrehouse Security,” Security,” Canadian Transportation & Logistics, Aril Logistics, Aril 2006, 44.
30
www.trucknews.co/security/schneider-sys-ner-z www .trucknews.co/security/schneider-sys-ner-zero-crgo-thet-incidents-2015/100 ero-crgo-thet-incidents-2015/1003072884 3072884
Learning Objective
4.6
85
86
Part I • Overview Overview of Logistics
One o the ost eective eective ethods ethods o rotectin rotectingg goods ro thet or ilerge is to kee the oving through the syste. Goods witing in wrehouses, in terinls, or to cler custos re ore vulnerble to thet thn goods tht re oving. No list o ethods or rotecting goods is colete; deterined thieves re likely to overcoe lost ny segurd lced in their wy. However,, ew suggestions re oered here, inly to relect the bredth o esures tht ight However be tken: • Decls re required or utos in eloyee rking lots, nd noneloyees y be required to
• •
• •
rk in designted res s well s to register with cony recetionist. This kes it ore diicult or outsiders to ccess n orgniztion’ org niztion’ss cilities. Forklits in wrehouses re locked t night, king it diicult d iicult to rech high ites or to ove hevy ites. Sels (sll wirelike devices tht once closed cnnot be reoened without breking) re used ore nd ore, with distchers, drivers, nd receiving ersonnel ll resonsible or recording the sel nuber nd insecting its condition. Figure 4.1 shows 4.1 shows sel used or continer doors. Electronic tgs or stris re ebedded in roducts t the tie o their nucture, nucture, nd they cn ctivte lrs t wrehouse or retil store doors. Orgniztions should tke roctive roch to thet; witing until thet reches “unccetble” levels ight en tht certin dysunctionl behvior hs been eritted or so long tht it hs coe to be viewed s tyicl or ccetble.
• Exerts suggest tht conies should cilitte n eloyee’s eloyee’s bility to reort reor t thet nd other berrnt behvior, such s through hotline tht gurntees nonyity s well s rotection ro otentil retlition or retribution. • Pick, ck, nd shiing rocesses or excetionlly exensive ites should be tilored to reduce oortunities or ilerge. For exle, one cony requires ultile wrehouse eloyees to jointly ick the luxury writing instruents ordered by custoers.
Figure 4.1 Shipping Container Locking Handle with a Uniquely Numbered Customs Seal. Source: Philip Cridland/Alamy Stock Photo
Chapter 4 • Organizational and Managerial Issues in Logistics
Note tht ny o the receding suggestions re coon sense in nture (e.g., decls, locked orklits); indeed, coon sense is viewed s bsic oundtion or controlling thet. Iortntly, coonsense roches to syste security re oten no cost, or low cost, in nture.31 The discuss discussion ion to this oint hs been rir ririly ily ocused on doest doestic ic thet nd iler ilerge. ge. When good goodss ove in i n internt int erntionl ionl coerce, rti rticulrl culrlyy by shi, sh i, they re uch ore vulnerv ulnerble to thet nd ilerge. Pircy ttcks on shis hve becoe jor concern in the twenty-irst century, nd unlike the soewht ronticized irtes o ovies nd literture who wore eye tches nd crried swords, weons. conteorry irtes use seedbots,20 srt hones, globl ositioning systes, nd utotic weons . In ddition, roxitely ercent o ll irte ttcks in recent yers hve involved involved etroleu tnkers, tnkers, which is o concern becuse o the otentil or n environentl ccident s well s the ct tht tnkers could be used s bobs in terrorist ttck. To T o underscore the seriousness o irte i rte ttcks or tody’s tody’s logistics nger, the Internti Interntionl onl Mritie Bureu, Bureu, n r o the Interntionl Chber Chber o Coerce Coerce,, reorted 240 irte ttcks worldwide in the irst six onths o 2009 cored to 114 irte ttcks during the se tie eriod in 2008.32 Much o the 2009 increse ws due to surge in irte ttcks o the Solin cost, nd ngeril resonses to these ttcks included outrunning the irtes, rerouting vessels wy ro Soli, vehicle vehicle escort services, serv ices, nd red roessionls. The cost o these resonses to irte ttcks—j ttcks—just ust or Soli—hs been estited t roxite roxitely ly $500 million annually !33 While the nuber o ttcks hs decresed dec resed ro this t his 2009 ek, ek , ircy continues co ntinues to be concern concer n or logistics ngers. In resonse, the Interntionl Chber o Coerce rovides wide rnge o services to hel conies ddress ddress this issue (e.g., (e.g., trining, on-line s o irte 34 ctivity).
Sustainaility Logistics hs n inherent connection to sustinbility sustinbility.. A coon denition o sustinbility centers on the concet o the “trile botto line,” which ws ws introduced in the id-1990s nd reers to the interction o socil, environentl, environentl, nd econoic diensions. While ost ttention to dte hs ocused on the environentl diension, the socil nd econoic diensions re lso criticl to consider.35 As such, this section will discuss logistics socil resonsibility s well s environentl issues ssocited with reverse logistics. The environentl diension, while not seciclly exined, underlies ngeril decisions in both o these res. res. In order to be truly sustinble, logistics ngers ust consider the econoic ict o their sustinbility-relted sustinbility-relted decisions on their r’s botto line. The socil resonsibility concet suggests sug gests tht n orgniztion’s obligtions trnscend urely econoic considertions such s roit xiiztion. While the cororte socil resonsibility concet hs existed since the erly 1970s, 1970s, the concet o logistics social responsibility, or cororte socil resonsibility issues tht relte directly to logistics, 36 did not eerge until the id-1990s. Potentil logistics socil resonsibility diensions include the environent, ethics, diversity, sety,, hilnthroy, nd hun rights, ong others, nd yrid ctivities or rctices cn be used sety to ssess ech o these diensions. In ters o the environent, or exle, exle, orgniztions ight
31
Michel Ily, I ly, “O-Highwy Robbery,” Robbery,” Of-Road Business , Noveber 2005, 55–57.
32
www.ics-ccs.org www .ics-ccs.org
33
Robert R. Fru, “Dnger t Se,” Journal Se,” Journal o Commerce , Februry 16, 2009, 20–24.
34 www www.icc-ccs.org .icc-ccs.org 35
Mrc Winter nd A. Michel Kneeyer, “Exloring the Integrtion o Sustinbility nd Suly Chin Mngeent—Current Stte nd Oortunities or Future Inquiry,” Internation 43, no. 1 (2013). International al Journal o Physical Distribution Distribution & Logistics Management 43, 36
Crig R. Crter nd Mrinne M. Jennings, “Logistics Socil Resonsibility: An Integrtive Frework,” Journal Frework,” Journal o Business Logistics 23, no. 2 (2002): 145–180.
Learning Objective
4.7
87
23, no. 2 (2002): 145 180. Logistics 23,
88
Part I • Overview Overview of Logistics
ocus on reusing nd recycling roducts, reducing the ount o ckging, iroving energy eiciency,, nd reducing vrious tyes o ollution. Ethicl considertions include iroerly shring ciency inortion, s well s bribes nd git giving, wheres diversity ight evlute the use o inority nd ele suliers. Sety-relted ctivities or rctices include the se oveent nd storge o roducts, rticulrly those o hzrdous nture, reventive reventive vehicle intennce, intennce, nd roer worklce equient (e.g., hrdhts, hrd hts, goggl g oggles). es). Philnthro Philnthroic ic logistics ctivities ight include the dontion o excess or obsolete inventory to chritble orgniztions, nd swetsho lbor continues to be Energy reeinent hun considertion. eiciency is rights roinent logistics socil resonsibility issue or ny orgniztions, nd we’ll tke closer look t energy eiciency in the ollowing rgrhs. rg rhs. Wrehousing Wrehousing nd trnsorttion reresent two logistics ctivities where ost energy costs occur nd where energy-sving esures should be ocused. For instnce, design, lighting, nd rooing reresent three ossible energy control res in wrehousing. With resect to design, cilities ight be ositioned so tht dock doors ren’t ren’t lced on the north side o building (dt indicte tht cold winds tend to blow ro the north). Lighting rovides vriety o oortunities or nging energy consution; skylights, lrge windows tht incororte solr energy, nd high-eiciency lighting cn reduce electricity usge between 20 nd 60 ercent. In ddition, high-eiciency lighting generlly rovides better lighting qulity, nd thus otentilly iroves worklce sety (nother logistics socil resonsibility issue). Rooing, which tends to be the lrgest exosed surce o wrehouse cility, cility, is oten overlooked s n re or energy control. White roo teril, or exle, tends to relect sun-generted sun-generted het, while drker roo colors such s blck nd gry tend to bsorb sun-generted het, which cuses incresed electricity consution to cool the interior res o wrehouse. Moreover, Moreover, soe wrehousing cilities re being designed with grss roos, which lower energy consution during the suer onths. Trnsorttion is second logistics ctivity in which considerb considerble le energ energyy svings cn tke lce, rticulrly becuse trnsorttion is riry consuer o energy energ y. Indeed, trnsorttion ccounts or roxitely two-thirds two-thirds o ll etroleu consution in the United Sttes. As result, ny trnsorttion roviders re ctively serching or wys to reduce their uel consution, which in turn will reduce their uel costs. The U.S. Environentl Protection Agency’s Srt Wy W y Trnsort Prtnershi, Prtnershi, estblished in 2004, hels conies ddress environentl chllenges such s uel consution. Results hve been roising, s illustrted by Kohl’s Dertent Stores, which whi ch hs red uce uced d e ety ty tr truck uck ove oveen ents ts by ne nerly rly 4 il illio lio n il iles es sin since ce joi joinin ningg the 37 rtnershi. You Y ou ight be surrised to lern tht the nnul cost o reverse logistics, which reers to the rocess o nging return goods, exceeds $100 billion in just the United Sttes. In ddition, reverse logistics cn be our to ive ties ore exensive thn orwrd logistics nd the reverse logistics rocess cn tke 12 ties s ny stes (e.g., ssessing the returned roduct nd reiring the returned roduct) s the orwrd logistics rocess.38 The reverse logistics rocess ocuses on three criticl ctors: (1) why roducts re returned, retur ned, (2) how to otiize reverse logistics, nd (3) whether reverse logistics should be nged internlly or outsourced to third rty rty..39 With resect to the irst ctor, roducts re returned or vriety o resons, such s the custoer king n error in ordering or the shier king n error er ror when illing n order. Goods y lso be returned becuse o roduct recll, which occurs when hzrd or deect is discovered in nuctured or rocessed ite, nd its return is ndted by governent gency.
37
Mrinne Wilson, “Green Trnsort,” Chain Store Age , Jnury 2009, 55.
38
Dvid Blnchrd, “Moving Ahed by Mstering the Reverse Suly Chin,” Industry Week, Week, June 2009, 58–59.
39
John Pul Quinn, Are There Ever Any Hy Returns? Logistics Management, June Management, June 2005, 63 66.
Chapter 4 • Organizational and Managerial Issues in Logistics
The second ctor in nging returned goods, otiizing reverse logistics, involves nuber o strtegic nd tcticl considertions. considertions. One bsic decision concerns the design o the reverse logistics syste, such s whether return oertions should be incororted into existing wrehousing nd roduction cilities. I so, how will returned roducts be segregted ro other roducts in n eort to reduce loss o returned roduct, to revent ixing returned nd nonreturned goods, nd to revent returned roducts ro istkenly istkenly being shied out o the rticulr cility?40 Otiizing reverse logistics is incubent on goods being creully counted nd the rorite recordsto(e.g., ccounting, inventory) being djusted. Ater returned ite hs been received, it is iortnt evlute the ite in ters o series o questions: • • • • • • •
Is the roduct dged nd unslble, or cn it be reurbished nd resold? Ws W s it returned s rt o n overstock overstock rrngeent with retiler? Is it roduct tht is being reclled? Is the ite in n unoened ckge tht cn go into inventory or iedite resle? Does the ite need to undergo secil testing? Wht is the ite’s worth? How do the cony’s cony’s returned goods olicies ly to this ite?41
The scoe o the receding questions indictes indictes tht returned goods should not be nged nged s n terthought. This leds directly to the third criticl ctor in nging reverse logistics—whether reverse logistics should be nged internlly or outsourced to third rty. I cony decides to internlly nge returned retur ned goods, there ust be recognition tht one or ore eloyees will hve returned goods s their riry, i not only, job resonsibility. resonsibility. Becuse reverse logistics cn be so dierent (e.g., (e.g., irregulr low o roduct, sll shients) ro orwrd logistics, logistics, the outsourcing o 42 reverse logistics continues to grow in oulrity oulrity..
Complexity The degree o colexity in logistics syste is lrgely unction o the dynic, globl, diverse, nd highly uncertin nture o reltionshis nd ctivities tht re involved in tody’s tody’s business environent. Logistics ngers re incresingly ced with the chllenge o nging this colexity both within their rs nd cross the network o reltionshis tht exist in their suly chin. The incresed dt chllenges, decision-king vribility, nd reltionshi intriccy ose difcult situtions or logistics ngers. While sce liittions will liit us ro exining ll o the vrious niesttions o colexity in logistics systes, systes, we will tke look t soe o the ost relevnt tyes ecting logistics king. Seciclly, Seciclly , we will exlore the role o network colexity, colexity, rocess colexity colexity, , nddecision rnge colexity on logistics ctivities. Network complexity reers reers to the growing nuber o nodes nd the ssocited chnges to the links in logistics systes. For exle, decision to outsource nucturing ctivities to country like Chin will necessrily increse the colexity o logistics ctivities ssocited with nging the low nd storge o terils nd inortion ro this cility. New odes, odes, new crriers, custos issues, nd exchnge exchnge rte considertions re only ew exles o how logistics ctivites re ected by this chnge. In ddition, with the incresed use o outsourcing over the st decde, n ssocited increse in network colexity hs occurred. Oten, ngers hve been overly inluenced by the roise o otentil lbor cost svings without ully considering the incresed logistics costs tht result ro this ore disersed network. As lbor rtes hve incresed, this recition hs begun to eerge.
40
Ibid.
41
Ibid.
42
Learning Objective
4.8
89
Bob Trebilcock, Outsourcing Reverse Logistics, Logisti cs, Modern Materials Handling , June 2008, 18 20.
90
Part I • Overview Overview of Logistics
Process complexity centers centers on the hhzrd develoent o rocesses, dditions nd odiicodiictions to rocesses over tie, nd/or chnging rocess requireents. For exle, tke logistics rocess ssocited with ick nd ck oertions in wrehouse environent. Logistics ilictions o incresed rocess colexity could eerge eerge due to n incresed ount o tie required to ick n order resulting ro chnges in the nuber o stes or chnges in the hndling requireents tht the wrehouse worker needs to colete. These chnges could be cused by sety, regultory, or even custoer considertions. Range complexity centers continue centers ontothe ilictions with the incresingwith incresing nuber roducts tht ost conies ce in n eortssocited to dierentite theselves theiro custoers. This so-clled issue o stock-keeing unit (SKU) (SKU) roliertion will tyiclly result in incresed levels o inventory nd wrehousing costs. costs. In ddition, the bility to relize scle econoies in res o trnsorttion nd rocureent could lso be ected by this tye o colexity colexity.. Logistics ngers ust work not only to reduce the colexity they ce but lso to counicte the costs o incresed colexity to the ir.
Summary A diverse set o orgniztion orgniztionl l nd ngeril issues ect tody’s logisticins. The chter begn by exining how logistics is orgnized within ir, with seciic ocus on orgniztionl structure nd design roches.
The chter concluded by looking t generl ngeril issues cing logistics ngers. These issues included roductivity concerns, qulity ngeent, risk considertions, sustinbility concerns, nd colexity ngeent.
KEY TERMS “C-level” osition Centrlized logistics orgniztion Continer security inititive (CSI) Custos Trde Prtnershi Aginst Terroris (C-TP (C-TPAT) AT) Decentrlized logistics orgniztion Excess ccity Frgented logistics structure Iorter security ling (ISF) rule
ISO 9000 Len Six Sig Logistics service qulity Logistics socil resonsibility Logistics uncertinty yrid odel Mlcol Bldrige Ntionl Qulity Awrd Pilerge Productivity
Reverse logistics Shring econoy Six Sig Tchogrh Tc hogrh Thet Trnsorttion Trns orttion worker identiction identiction credentil (TWIC) Unied logistics structure
Questions for Discussion and Review severl issues tht inuence the orgniztion o 4.1 Discuss severl logistics ctivities within r. 4.2 Core nd contrst the rgented nd unied logistics orgniztionl structures str uctures.. 4.3 Wht re the dierences dierences between between centrlized centrlized nd decendecentrlized logistics dertent?
4.6 Dene wht is ent by roductivity nd discuss the wys in which roductivity cn be iroved. 4.7 In wht wys cn unionized workorce be chllenge to iroving worker roductivity? 4.8 How ight GPS, GIS, nd Tchogrh be used to irove truck driver roductivity?
4.4 Describe the hierrchicl nd trix orgniztionl design. 4.5 Fro logistics ersectiv ersective, e, how is network orgniztionl design niested in ters o relevncy relevncy,, resonsiveness, resonsiveness, nd exibility?
4.9 Wht re soe otentil otentil chllenges to iroving iroving roductivroductivity by getting ore outut ro existing ssets? 4.10 How ight ISO nd six-sig concets hel to irove service qulity in logistics oertions?
Chapter 4 • Organizational and Managerial Issues in Logistics
91
4.11 How ight r use the logistics uncertinty yrid odel or better logistics erornce? 4.12 Wht re soe o the rogrs in your your country to revent terroris through iorts nd trnsorttion chnnels? 4.13 Discuss the resons why logisticins ight be concerned with thet. 4.14 How cn logistics ngers ttet to control ilerge?
ter returned ite hs 4.16 Wht questions should be sked ter been counted nd recorded? 4.17 Discuss how reverse logistics ight be considered s n rorite ileenttion o logistics socil resonsibility. resonsibility. 4.18 How cn wrehouses wrehouses control their energy usge in ters o design, lighting, nd roong considertions? 4.19 Wht sety sects sects should be considered considered under logistics socil resonsibility?
4.15 Exlin why ircy ttcks on shis re otentilly serious issue or tody’s logistics nger.
4.20 Wht re the jor cuses o colexities in logistics syste?
Suggested Readings Peter eter A. Slzrulo, Slzrulo, nd W. Rocky Newn, Ashenbu, Bryn, P “Orgniztionl Structure, Entrereneuril Orienttion nd Trit Preerence in Trns Trnsorttion orttion Brokerge Firs.” Journal o Supply 48, no. 1 (2012): 3–23. Chain Management 48, Cntor, Dvid E. “Worklce Sety in the Suly Chin: A Review o the Literture nd Cll or Reserch.” Reserch.” Interna International tional Journal Journal o Logistics Management 19, 19, no. 1 (2008): 65–83. Dugherty, Ptrici J., Hozhe Chen, nd Bruce G. Ferrin, “OrgniInternational ztionloStructure nd Logistics Innovtion.” Journal Logistics Management 22,Service 22, no. 1 (2011): 26–51. Ekwell, Dniel. “The Dislceent Eect in Crgo Thet.” International Journal o Physical Distribution Distribution & Logistics Management 39, 39, no. 1 (2009): 47–62. Goldsby, Thos J. nd Robert O. Mtichenko. Lean Six Sigma Logistics: Strategic Strategic Development to Operational Operational Success (Boc (Boc Rton, FL: J.. Ross Publishing, J Publishing, 2005). 2005). Krsk, Jes nd Brin Wilson. “Mritie Pircy in Est Aric.” Journal o International Afairs 62, 62, no. 2 (2009): 55–68. Kur, Seer nd Jnis Verruso. “Risk Assessent or the Security o Inbound Continers t U.S. U.S. Ports: A Filure, Mode, Eects, nd Criticlity Anlysis Aroch.” Transportation Journal 47, no. 4 (2008): 26–41. Mloni, Michel J. nd Michel E. Brown. “Cororte Socil Resonsibility in the Suly Chin: An Aliction in the Food
Industry.” Journal o Business Ethics 68, 68, no. 1 (2006): 35–52. McKinnon, Aln, Shron Cullinne, Michel Browne, nd Anthony Whiteing. Green Logistics: Improving the Environmental Envir onmental Sustainability o Logi Logistics stics (London: (London: Kogn Pge, 2010). Miller, Json W., John P. Sldnh, C. Shne Hunt, nd John E. Mello. “Cobining Forl Controls to Irove Fir Perornce.” Journal o Business Logistics 34, 34, no. 4 (2013): 301–318. Morgn, Tyler R., Robert G. Richey, Jr., nd Chd Autry. “DevelInternational Journal oing Reverse Logistics Coetency.” o Physical Distribution & Logistics Management 46, 46, no. 3 (2016): 293–315. Pettit, Tiothy J., Joseh Fiksel, nd Keely L. Croxton. “Ensuring Suly Chin Resilience: Develoent Develoent o Concetul Fre work.”” Journal o Business Logistics 31, work. 31, no. 1 (2010): 1–21. Snchez-Rodrigues, Vsco, Andrew Potter, nd Mohed M. Ni. “Evluting the Cuses o Uncertinty in Logistics Oertions.” Oertions.” International Journal o Logistics Management Management 21, 21, no. 1 (2010): 45–64. Schneider, Len, Crl Mrcus Wllenburg, nd Sebstin Fbel. “Ileenting Sustinbility on Cororte nd Functionl Level.” International Journal o Physical Distribution & Logistics Management 44, 44, no. 6 (2014): 464–493. Whiteld, Gwendolyn Gwendolyn nd Robert Robert Lnderos. Lnderos. “Sulier Diversity Diversity Eectiveness: ective ness: Does Orgniztionl Culture Relly Mtter?” Journal o Supply Chain Management Management 42, 42, no. 4 (2006): 17–29.
CASE CASE 4.1 Red Spot Markets Company Robert Ester, Red Sot’s distribution nger, is rer e The Red Sot Mrkets Cony oertes chin o grocery stores in New Englnd. It hs grocery distribution sonsible or oertions t the Newburgh nd Providence center in Providence, Rhode Islnd, ro which deliveries distribution centers. By industry stndrds, both centers re de to stores s r north s Lowell, Msschusetts, Msschusetts, s were irly efcient. However, o the two, the Providence r west s Wterbury, Wterbury, Connecticut, nd s r northwest s center lgged in two iortnt res o control: worker Sringeld, Msschusetts. No stores re locted beyond roductivity nd shrinkge. Wrehouse equient nd the two northernost oints in Msschusetts. Stores to the west re sulied by grocery wrehouse locted in Newburgh, New York. The Providence grocery distribution center sulies 42 Red Sot retil stores.
work rules were the se or both the Newburgh nd Providence centers, yet the throughut er worker hour ws 4 ercent higher or or the Newburgh cility. cility. Shrinkge, exressed s ercentge ercentge o the wholesle vlue vlue o goods
( continued continued )
92
Part I • Overview Overview of Logistics
hndled nnully, ws 3.6 ercent or the Newburgh cenIn the wrehouse, Bigelow ws nturl leder. He ter nd 5.9 ercent or the Providence center. Jrvis Json would would hve been suervisor excet or his inbility to hd been nger o the Providence distribution center count nd his sotty ttendnce record on Mondy ornor the st three yers nd, t gret eort, nged to ings. On Mondys, the dy tht the wrehouse ws the businrrow the g between the erornce erornce rnkings o the est becuse it hd to relenish the stores’ weekend sles, two Red Sot cilities. Lst week he requested n iedi- Bigelow ws groggy, tired, nd irritble. On Mondys, he te nd Ester rrnged hi to becoe woul d soeties hide by loding orkli orklit t with the ressignent, rketing nger or the Bostonor re, which would would lets, bcking into ny ety by, nd lowering thethree lletslin involve suervising the oertions o 11 Red Sot rkets. rkets. osition (which hid the lit truck ro view), nd he would The trnser involved involved no increse in y. y. ll slee. The rest o the week Bigelow ws hy, hy, enEster needed new nger or the Providence thusistic, nd hrdworking. Indeed, it ws he who set the distribution center, nd he icked Fred Fosdick or the ce o work in the wrehouse. When he elt good, things tsk. Fosdick grduted ro lesser Ivy Legue college, hued; when he ws not eeling well or ws bsent, work where he jored in in business business with concentrtion concentrtion in logis- drgged. tics. He hd been with Red Sot or two yers nd hd rer“Wht did Bigelow Bigel ow do to Json?” Fosdick sked Ester. Ester. rnged the entire delivery route structure so tht two ewer “Well, “W ell, s I understnd it,” resonded Ester, “bout trucks were needed. As rt o this ssignent, he lso two weeks go Json decided tht he hd hd it with Bigconverted the entire syste to one o unit lods, which elow nd so he susended hi on Mondy orning ent everything loded on, or unloded ro, Red Sot ter Bigelow showed u lte, still bdly hung over. It ws truck ws on llet. Fosdick ws ilir with the oer- nerly noon, nd he told Bigelow to sty o the reises tions o both the Providence nd Newburgh centers. centers. He nd to le grievnce with his union sho stewrd. He hs been in ech cility t lest 50 dierent ties. In d- lso told Bigelow tht he hd been docuenting d ocuenting Bigelow’s Bigelow’s dition, he sent two weeks t the Providence center when Mondy erornce—or nonerornce—or the st the loding docks were redesigned to ccoodte llet six onths nd tht Red Sot hd grounds enough to re loding. Fosdick ws surrised tht Json hd requested his Bigelow i it so chose. He told Bigelow Bigelow to go hoe, sober ressignent to slot tht did not involve n uwrd ro- u, nd coe bck on Tuesdy when they would discuss otion. Tht ws his rst question to Ester ter Ester the length o his susension. Bigelow wlked wlked through the sked whether he ws interested in the Providence ssign- distribution center on his wy out, nd I’ sure Json elt ent. he hd control o the tter.” tter.” “I’ sorry you strted with tht question,” sid Es“However,” “Howev er,” continued Ester, “by bout one o’clock, ter to Fosdick. “Now we’ll hve to tlk bout the trouble- Json relized he hd work slowdown on his hnds. Pllet soe sects o the ssignent rst, rther thn the osi- lods o bottled goods were being droed, two orklits tive ones. To To be rnk, Fred, one o the union eloyees collided, nd one lit truck ulled over over the corner o tuthere de so uch trouble or Json, he couldn’t stnd it.” bulr steel rck. At 4:00 p.m. quitting tie, there were still “Who’s the troubleker?” sked Fosdick. three trucks to be loded; usully they would hve derted “To Bigelow,” Bigelow,” ws Ester’s nswer. by 3:30. Rther thn y overtie, Json let the workorce Fosdick reebered Bigelow ro the ties he go hoe, nd he nd the suervisor loded the lst three hd been t the Providence center. Thos D. Bigelow trucks.” ws nickned T. D. since his dys s locl Providence “On Tuesdy, Bigelow did not show u, nd the high school ootbll str. Fosdick reclled tht during work slowdown got worse. In ddition, retil stores were honbreks on the loding dock, Bigelow nd soe o o the other ing with colints bout ll the errors er rors in their orders. To workers would toss round elons s though they were to it o, t the Roxbury store, when the triler door ws ootblls. Only once did they dro elon. Fosdick re- oened, the triler contined nothing but ety llets. clled hering the story tht Bigelow hd received severl Tuesdy Tuesdy night soebody turned o the switches on the oers o thletic scholrshis when he grduted ro bttery chrgers or ll the lit trucks, so on Wednesdy, high school. His best oer ws ro southern school, nd the lit-truck btteries were dying ll dy dy.. I got g ot involved behe cceted it. Desite the ct tht the college rovided cuse o ll the colints ro the stores. On Wednesdy Wednesdy, secil tutor or ech clss, Bigelow unked out t the end Json got y erission erission to y overtie, overtie, nd the lst outo his rst seester nd ce bck to Providence, where going tr truck uck did not leve until 7:00 p.m. In ddition we hd he got job in the Red Sot wrehouse. to y overtie t soe o our retil stores becuse the
Chapter 4 • Organizational and Managerial Issues in Logistics
workers there were witing or the trucks tr ucks to rrive. r rive. While I ws tlking to Json tht ternoon, he indicted tht he hd red Bigelow.” Ester lit his cigr nd continued, “On Wednesdy, I decided to go to Providence ysel, inly to tlk to Json nd to deterine whether we should close down the
He ws in bd she nd the distribution center ws in bd she, so I hd the oening in the Boston re nd I let hi hve it. Actully, right now he nd his ily re vctioning soewhere in Estern Cnd. He needs the rest.” Fosdick ws ws beginning to eel sorry sor ry tht he knew ll the detils, but he ersisted. “Then wht?” he sked Ester.
Providence center nd try to serve ll our stores stores out o Newburgh. This would hve been exensive, but Providence ws becoing too unrelible. In ddition, we hd big weekend coing u. When I showed u in Providence, Json nd I hd brekst together in y hotel roo Thursdy orning, nd he told e retty uch the se thing I’ve been telling you. He sid he knew Bigelow ws behind ll the disrution nd tht tody, Thursdy, would be crucil. I’ve never seen Json looking so nervous. Then we drove to the distribution center. Even ro distnce, I could tell things were oving slowly. The rst echelon o outgoing trucks, which should hve hve been on the rod, ws still there. Another 20 o our trucks were witing to be loded. On the other end o the building, you could see long line o rriving trucks witing to be unloded; usully there ws no line t ll. I knew tht our suliers would strt colining becuse we hd estblished estblished schedscheduled unloding ties. However, However, I decided not to sk Json whether he hd begun receiving hone clls ro the.” “Inside the center, the slowdown ws in eect. Littruck oertors who usully zied by ech other would now sto, turn o their engines, disount, nd creully wlk round round ech other’ other’ss trucks to ensure there there ws roer clernce.. Stised o this, they would then ount, strt clernce their engines, nd send n inordinte ount ount o tie otioning to ech other to ss. This ws only one exle. When we got to Json’s Json’s ofce, he hd essge to hone Ed Meyers, our locl ttorney in Providence, who hndles uch o our lbor reltions work there. He clled Meyers nd ws uset by the discussion. Ater he hung u, he told e tht Meyers hd been served ers by the union’s ttorney, chrging tht Wednesdy’s Wednesdy’s ring o Bigelow ws unjustied, inly becuse no rovble grounds existed tht Bigelow ws behind the slowdown. Meyers ws ngry becuse, in ring Bigelow on Wednesdy, Json y hve lso blown the susension o Bigelow on Mondy. Mondy. Json nd I strted tlking, even rguing. I tlked so uch tht y cigr went out,” sid Ester, “so I sked Json, who ws sitting behind his desk, or tch. He didn’t crry tches but looked inside his center desk drwer or one. He gsed,
“Well, I took over running the distribution center. I honed Meyers gin, nd he nd I hd lunch. He thought tht Json hd blown the cse ginst Bigelow nd tht we should tke hi bck. So on Fridy, Meyers, Bigelow, the union ttorney, the sho stewrd, Bigelow’s suervisor, nd I et. Json, o course, ws not there. It ws lesnt eeting. Everything got bled on oor Json. I did tell Bigelow tht we would be docuenting his erornce nd wnted hi to know tht Json’s successor, ening you, ws under y instructions to tolerte no nonsense. Bigelow ws so lesnt tht dy tht I could not igine hi in the role o troubleker. troubleker. The zing thing ws tht, when he went out into the center to resue work, loud cheer went u nd ll the drivers strted blowing their lit-truck horns. For oent, I ws rid ll the btteries would run down gin. g in. But I ws wrong. They were lin hy to see Bigelow bck. You know, the slowdown ws still in eect when Bigelow wlked onto the oor. I’d sy it ws 10:00 a.m. nd they were n hour behind. Well, Well, let e tell you wht hened. They went to work! By noon we were bck bck on schedule, nd by the end o the shit we were were hl-hour hed o schedule. In ct, ct, the lst hl-hour ws sent strightening u ny o the bins tht hd hd been delibertely disrrnged during the slowdown. I tell you, To T o Bigelow does set set the work ce ce in tht wrehouse!” wrehouse!” “So wht do you suggest I do t the center?” sked Fosdick. “Well, the key is getting long with Bigelow. Tlk to Meyers bout the kind o records you should kee in cse you decide to ove ginst Bigelow. Be sure to consult with Meyers beore beore you do nything irreversible. Frnkly Frnkly,, I don’t know whether Bigelow will be roble. We never hd trouble with hi tht I knew bout beore Json ws there. According to Bigelow nd the union ttorney ttorney,, Json hd it in or Bigelow. Bigelow. I I were you, I’d tke it esy with Bigelow nd other lbor robles. See wht you cn do insted bout the inventory shrinkge.” On the next Mondy orning, Fosdick showed u t the Providence distribution center. Ater gingerly looking in ll his desk drwers, drwers, he hd brie eeting with his suervi-
nd I didn’t know wht ws the tter. He got u, looking sick, nd wlked wy wy ro his desk. He sid tht ded rt hd been let in his desk drwer, nd he wnted trnser.
sors nd then wlked out to eet the entire workorce on one-to-one bsis. Mny reebered Fosdick ro his erlier visits to the cility. Becuse it ws Mondy orning,
93
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94
Part I • Overview Overview of Logistics
he hd not exected to encounter Bigelow, who ws resent, cler-eyed, lert, nd enthusistic. Bigelow ws hy to see Fosdick nd shook his hnd wrly. Bigelow then excused hisel, sying he hd to return to work. The truck distcher sid tht the workorce workorce ws hed o schedule gin: It ws 11:00 a.m., nd they were bout 15 inutes
Bigelow ws king hisel hisel lrge sndwich when he sw Fosdick roch. “Don’t get utight,” he sid to Fosdick. “You’ve “You’ve just coe cross one o the noncontrct ringe benets o working t the Red Sot Providence Providence distribution center. My I ke you sndwich?”
hed. Fosdick returned to his ofce, nd there ws hone essge ro Ed Meyers. Meyers sked to ostone their luncheon or tht dy until Tuesdy noon. Then Robert Ester clled to sk how things were going goi ng on Fosdick’s Fosdick’s rst dy. Ester ws lesed tht things were going soothly. It ws lunchtie. Fosdick decided to wlk to sll cé where he hd eten t other ties. It ws two blocks ro the distribution center nd on the side wy ro the ofce. So he wlked through the center, which ws quiet since it ws closed down or lunch. He wlked by the eloyees’’ lunchroo nd herd the norl sounds o 50 loyees eole eting nd tlking. Just outside the lunchroo ws one lit truck with n n ety wooden llet on it. As Fosdick wtched, wtche d, one o the stock clerks ce out o the lunchroo with n oened cse o sweet ickles ickles ro which three jrs hd been tken. Next ce nother stock clerk with n oened crton o ustrd ro which which two bottles bottles hd been reoved. One o the clerks suddenly sw Fosdick nd sid wekly, “We tke these oened cses to the dged erchndise roo.” Fosdick went into the lunchroo. There, on the center tble were were cses o cold et, cheese, cheese, sot drinks, yonnise, nd bred. All hd been oened nd rtilly etied to rovide the workers’ lunches.
QUESTIONS 1. How should Fosdick resond to the iedite sitution? 2. Wht controls, o the tyes discussed discussed in this chter, chter, ight hve been used by Red Sot Mrkets to reduce or eliinte the robles discussed in the cse? should Fosdick Fosdick tke to control the 3. Wht longer-rnge stes should oertions o the Providence distribution distribution center? should Fosdick Fosdick tke to irove the the 4. Wht longer-rnge stes should Providence distribution center’s roductivity? 5. Wht longer-rnge stes cn cn Fosdick Fosdick tke to reduce the distribution center’s center’s high rte o shrinkge? 6. Assue tht Fosdick Fosdick decides decides tht the rctice o ree lunches ro the oened cses o goods ust be stoed. Develo nd resent the rguents he should give in
eeting with the union sho stewrd. insted, 7. (This is continution o Question 6.) Assue, insted, tht you re the union sho stewrd. Develo nd resent your rguent tht the ree lunches reresent long-stnding eloyee benet enjoyed by the distribution center’s eloyees nd tht ngeent’s ngeent’s ttet to sto the is brech o n unwritten contrct nd will be resisted. 8. Much o the sitution described in the cse sees to evolve evolve round the ersonlity ers onlity o T. D. Bigelow. How should he be treted? Why?
7
DemanD management, OrDer management, anD CustOmer serviCe
Learning Objectives 7.1 7.2 7.3 7.4
To explain demand management and demand orecasting models To models To T o examine the order cycle cycle and its our components To T o understand the our dimensions o customer service as they pertain to logistics logistics To T o amiliarize you you with select managerial managerial issues associated with with customer service
This chapter discusses two two key issues: (1) how how an organization determines what the customer wants wants and (2) how an organization acilitates the customer getting what is wanted. We will analyze these issues in terms o demand management (how an organization determines what the customer wants) along with order management and customer service (how an organization acilitates the customer getting what is wanted). Demand management is important because eective and eicient supply chains have learned to match both supply and demand; ailure to do so can result in oversupply (more supply than demand) or undersupply (less supply than demand) o products products.. Oversupply likely means higher than desired inventory costs, whereas undersupply can mean a dissatisied—or even lost—customer. Order management and customer service begin where demand management ends. The ability to determine that the customer wants, say, say, a black shovel, is nice, but is the customer able to communicate this desire to an organization? Once the customer’ customer’ss desire or a black shovel is communicated to an organization, is the organization able to ulill this desire? Although these might seem like basic, commonsense questions, questions, reality may be quite dierent. Indeed, one lesson learned in the early years o online retailing was that many companies were quite good at understanding and stimulating customer demand as well as receiving orders associated with the demand. Unortunately Unortunately,, some o these companies were ar less adept at processing these orders; orders arrived late (i they arrived at all), arrived incomplete, and arrived with incorrect product(s). Not surprisingly, these ulillment shortcomings caused a great deal o customer dissatisaction, which which explains why some early online retailers (e.g., etoys.com (e.g., etoys.com ) are no longer in business. business. Learning Objective
7.1
DEMAND MANAGEMENT
Demand management can be dened as “the creation across the supply chain and its markets markets o a 1 coordinated ow o demand.” A key component in demand management is demand (sales) orecasting, which reers to an efort to project uture demand. Without question, demand orecasting is helpul in make-to-stock situations situations (when nished goods are produced prior to receiving a cus-
tomer order). However, demand orecasting can also be helpul in make-to-order situations (when nished goods are produced ater receiving a customer order). Make-to-order situations generally involve some combination combination o standard and custom components, and orecasting could be quite
1
John T. T. Mentzer, “A “A Telling Fortune,” Fortune,” Industrial Engineer, April Engineer, April 2006, 42–47.
130 13 0
Chapter 7 • Demand Management, Order Management, and Customer Service Service 131
helpul h elpul in projecting the standard components needed. For example, although a computer manuacturer might not be able to orecast the exact conguration conguration o each order or computers that it receives,, the manuacturer might be able to orecast the percentage ceives percentage o orders or laptop and tablet computers (i.e., standard components). Entire books are devoted to demand orecasting, and space limitations preclude a comprehensive discussion o the topic in this text. Rather, we will oer an overview overview o demand orecasting so the reader can understand orecasting’s orecasting’s role in determining what the customer wants. wants.
Demand Forecasting Models2 hree basic type typess o orecasting orecasting mode models ls are are (1) (1) judgmental, (2) time series, and (3) cause and ef The tthree fect. Judgme Judgmental ntal foreca forecasting sting involves using judgment or intuition and is preerred in situations where there is limited or no historical data, such as with a new product introduction. Judgment orecasting techniques include surveys and the analog technique, among others. With survey orecasting, questionnaires (surveys) are used to learn about customer preerences and intentions. intentions. A strong understanding o survey design and population sampling methodologies is necessary in survey sur vey orecasting, and you should recognize that customer intentions don’t always translate into actual behavior. Analog orecasting in volves volv es determi determining ning an analo analogg (sim (similar ilar item) to the item being orec orecast ast and then usin usingg the analo analog’ g’ss deman demand d history as a basis or the relevant orecast. A key challenge is selecting the appropriate analog to use. An underlying assumption o time series forecasting is that uture demand is solely dependent on past demand. For example, i this year’s year’s sales were 7 percent higher than last year’s sales, a time series orecast or next year’s sales would be this year’s sales plus 7 percent. Time series orecasting techniques include, but are not limited to, simple moving averages and weighted moving averages. The simple moving average is calculated by summing the demand across dierent time periods and then dividing by the number o time periods. Because Because each time period is assigned the same importance (weight), the simple moving average may not adequately relect recent upturns or downturns in demand. To address this shortcoming, the weighted moving average technique assigns greater importance (weight) to the more recent data. The dierences in orecasted demand between the simple and weighted moving averages can be seen in the example in Table in Table 7.1. 7.1. Cause-and-effect forecasting (also reerred to as associative orecasting) assumes that one or more actors are related to demand and that the relationship between cause and eect can be used to estimate uture demand. In many western countries, or example, there tends to be an inverse relationship between the level o interest rates and the consumers’ ability to buy a house (e.g., as interest rates increase, housing sales tend to decrease). Examples o cause-and-eect cause-and -eect orecasting include simple and multiple regression;demand in simple regression,on demand dependent whereas in multiple mult iple regression, is dependent two or is two more variableson variables. . only one variable, TABLE 7.1 Forecast Example Using the Simple and Weighted Moving Average Average Techniques Techniques Tim Ti me pe pei iod od (1 (1))
Dema De mad d Simple Moig Pojected Weighted Pojected (2) Aeage Demad Moig Aeage Demad Weightig (4; 2 : 3) Weightig (6; 2 : 5) Facto (3) Facto (5)
2
Last month
250
.25
62.5
.40
100
Two months ago Three months ago Four months ago Forecast
230 200 180
.25 .25 .25
57.5 50 45 215
.30 .20 .10
69 40 18 227
The discussion o demand orecasting models is drawn rom Chaman L. Jain, Jain, “Benchmarking Forecasting Forecasting Models,” Models,” Journal o 24, no. 4 (2005/2006): (2005/2006 ): 9–10, 12 as a s well as Joel D. Wisner, G. G. Keong Leong, and Keah-Choon Tan, Principles Business Forecasting Forecasting 24,
4th ed., (Boston: Cengage Learning, 2016), Chapter 5. o Supply Chain Management: Management: A Balanced Approach, Approach, 4th
132 Part III • Elements of Logistics Logistics Systems
Demand Forecasting Issues It’ It’ss important to recognize that the selection o a orecasting technique (or techniques) techniques) depends on a variety o actors, such such as the situation at hand, orecasting costs in terms o time and money, money, and the accuracy o various orecasting techniques. techniques. With respect to the situation at hand, as pointed out earlier, judgmental orecasting is appropriate where there is little or no historical data available available.. Managers should also understand the time and monetary costs associated with each particular orecasting technique. Survey research, research, for example, can require quite a bit of both money and time, depending on the media (i.e., mail, telephone, electronic, in-person) used to collect and analyze the data. For example, in-person surveys can take a great o time to complete and can be quite expensive (e.g., compensation costs o the researcher who conducts in-person in-person surveys). Forecasting accuracy reers to the relationship between actual and orecasted demand, and accuracy can be aected by various considerations. considerations. One o the challenges with the analog technique is selecting the appropriate analog, because an inappropriate selection will reduce orecast accuracy. accuracy. For instance, when a movie studio releases a sequel to a previously successul motion picture, a orecasting analog based on the initial release will likely generate a dierent revenue estimate than a orecasting analog based on the perormance patterns o sequels to other movies—and movies—and one analog will be more accurate accurate than the other. other. Forecast accuracy can have important logistical implications, as illustrated at Lighthouse Foods,, where improved orecasting resulted in substantial reductions Foods reductions in the amount o inished goods inventory. More speciically, speciically, Lighthouse used to carry nearly twice as much inventory as actually needed for certain stockkeeping units (SKUs) because of inaccurate demand forecasts for those items.3 Up to this point, we have treated demand orecasting as a discrete entity in the sense that each supply chain member generates its own demand orecasts. You may recall that Chapter 1 1 briely mentioned the collaborative planning, forecasting, and replenishment (CPFR) concept, in which supply chain partne partners rs share planning and orecastin orecastingg data to better match up supply and demand. Conceptually, Conceptually, CPFR suggests sug gests that supply chain partners will be working rom a collectively agreed-to single demand orecast number as opposed to each member working o its own demand orecast projection. CPFR also suggests that supply chain partners will be working rom a collectively agreed-to order orecast , which considers both orecasted demand and current inventory levels. levels.4 A great deal o demand orecasting currently currently involves involves the use o computer sotware packages. Although this sotware can provide ast and detailed data, sotware packages should not be viewed as a panacea to an organization’s organization’s demand orecasting. For example, enterprise resource planning (ERP) systems conceptually should lead to mucherrors lower orecasting errors. thecompanies Grocery Manuacturers Association ound orecasting that averaged more thanHowever, 20% among that had implemented ERP-based orecasts.5 It is important to keep in mind that no sotware package—regardless o its sophistication and cost—is capable o totally eliminating orecast errors. errors. Leaig Objectie
7.2
ORDER MANAGEMENT Order management reers to management o the various activities associated associated with the order cycle; the order cycle (which can also be reerred to as the replenishment cycle or lead time) reers to the time rom when a customer places an order to when the goods are received. In recent years, some organizations have expanded the order management concept to include the length o time it takes an organization to receive payment or an order, or what is called the order to cash cycle.
3
Carol Casper, “Demand Planning Comes o Age,” Food Age,” Food Logistics Logistics , January/February 2008, 19–24.
4
Je Vandeusen Vandeusen and John Mello, “A “A Roadmap to Implementing CPFR,” Foresight CPFR,” Foresight : The International Journal o Applied Forecasting Forecasting , Spring 2014, 8–12.
5
Kevin T. Higgins, “Forecasting to Believing,” Food Believing,” Food Engineering Engineering , October 2009, 57–64.
Chapter 7 • Demand Management, Order Management, and Customer Service Service 133
Beore proceeding to a detailed discussion o the order cycle, several points should be made. made. First, the order cycle should be analyzed not only in terms o total cycle time but in cycle time variability (reliability) as well. Just as longer order cycles necessitate increased levels o inventory inventory,, so, too, does greater cycle time variability require require additional levels o inven inventory tory (regardless o cycle time length). Consider the U.S. U.S. railroad, which analyzed transit times on one of its origin–destination pairs located approximately 400 miles apart. The railroad discovered an average transit time o 8 days, with a minimum o 3 days and a maximum o 28 days, and the railroad’s railroad’s customers coped with the erratic 6
transit Atimes by holding to avoid out-o-stock situations. second point isadditional that order inventory management has been prooundly aected by advances advances in inormation systems. For example, example, one of this book’s authors worked worked in the U.S. U.S. trucking industry industr y in the early 1980s. Back then i a customer telephoned to learn about a shipment’s status, status, a very manual— and, unortunately, a time-consuming (at a minimum, the phone call had to be answered) and not always successul—shipment successul—shipment tracking process was initiated. Today, Today, by contrast, that same customer doesn’t have to place a telephone call; rather, the customer can use a shipment tracking application (app) on her/his smartphone smar tphone to learn about a shipment’s status. status. Wee view the order cycle as consisting o our components or stages: order transmittal, order W processing, order picking and assembly, and order delivery. delivery. Each o the our components will be discussed below.
Order Transmittal Order transmittal reers to the time rom when the customer places an order until the seller receives the order. In general, there are ve possible ways to transmit orders: in person, by mail, by telephone, by acsimile (ax) machine, and electronically. electronically. Each method o order transmittal has advantages and disadvantages, and each each perorms dierently with respect to the cost o ordering, the time to order, the potential or order errors, and ordering convenience. For example, in-person orders greatly reduce the potential or order errors, i or no other reason than that the order can be physically inspected prior to being accepted. However, in-person ordering isn’t always always convenient (or practical) in situations where the supplier is geographically distant. Although ordering by mail might be more convenient convenient than in-person ordering, mail mail is considered to be a relatively slow orm o order transmittal, and there are occasions when the order never reaches the intended destination (lost in the mail). Ordering by telephone can be relatively ast and convenient, but order errors may not be detected until the order is delivered. You may have placed a telephone order or home delivery o a large pepperoni pizza, only to be delivered a small mush-
room pizza! Both acsimile and electronic ordering are techniques that have emerged over the past 30 years, and both have had immense impacts on the order transmittal process. The ax can be ast, convenient, and unlike the telephone, provides hard copy documentation o an order. However, However, the seller’s ax machine can be cluttered with junk (unwanted) axes, and the quality o the ax transmission can result in hard-to-read orders—which orders—which increases the chances o order errors in the orm o incorrect product or incorrect quantity. Electronic ordering, which includes EDI, the Internet and mobile technology, can be ast, convenient, and accurate, particularly those orders involving scanners and bar codes. Concerns with ordering via the Internet and mobile technology include the security o the inormation being transmitted (particularly with respect to payment inormation) and the potential loss o privacy (due to cookies and tracking sotware).
Order Processing Order processing reers to the time rom when the seller receives an order until an appropriate location (such as a warehouse) is authorized to ll the order. ord er. Advances in technology have allowed most rms to computerize many aspects o their order processing systems. For instance, order orms,
6
Judy A. Perry, “Who’s Watching Watching the Numbers That Count?” Railway Age , May 2005, 10.
134 Part III • Elements of Logistics Logistics Systems
whether printed or in computer ormat, are designed so that the use o computers by both the customer and the vendor is facilitated. Similarly, the billing of customers is increasingly done through computerized and electronic networks networks.. Figure 7.1, 7.1, which presents an order processing lowchart, highlights the many distinct order processing activities. Typical order processing activities include checking an order or completeness and accuracy, checking the buyer’s ability to purchase, entering the order into the system, crediting a salesperson with a sale, recording the transaction, determining inventory location, and arranging or outbound transportation. Although some o the activities must must be perormed sequentially (e.g., an order can’t be transported until a company knows rom which location(s) it will be illed), some might be perormed simultaneously (e.g., crediting a salesperson with a sale and recording the transaction). Note that one way to reduce order cycle time is to identiy activities that can be perormed simultaneously and then perorm the relevant activities simultaneously, rather than sequentially. An underst understanding anding o the various order processi processing ng activitie activitiess is only a irst step, however. Companies dier in their approaches to managing order processing and its activities, and these dierent approaches can have important implications or order cycle eectiveness and eiciency as well as or or customer satisaction. satisaction. We’ll We’ll highlight dierent managerial approaches by by discussing three order processing activities—order receipt, order triage, and the location(s) used to ill an order—in the ollowing paragraphs. With respect to order receipt, Figure 7.1 indicates 7.1 indicates that incoming orders can be divided into categories, one category or EDI orders that are allowed to bypass checking or completeness and accuracy and one category or all other orders. It could be argued that all orders, regardless o transmission method, should be checked or completeness and accuracy; incomplete or inaccurate orders can negatively aect customer satisaction and increase costs associated with addressing order irregularities. However, checking all orders or completeness and accuracy adds costs and time to the order cycle. Alternatively, companies might structure the order receipt unction to relect historical trends on order completeness and accuracy. Under this scenario, order transmission methods that consistently exhibit superior completeness and accuracy would bypass the order check activity. activity. Figure 7.1 also 7.1 also contains an order triage activity. The triage concept is oten associated with the medical ield and reers to classiying classiying patients in terms o the severity o their illness or malady; the classiication allows doctors to prioritize which patients should be attended to beore others. Similarly, order triage reers to classiying orders according to pre-established guidelines so that a company can prioritize how orders should be illed. However, not all companies prioritize orders, and those that do must decide the attribute(s) used to prioritize (e.g., irst in, irst served; customer longevity; customer sales). Although there is no one right attribute to use or order prioritization, you should recognize that the chosen attribute(s) are likely to delight some customers (those that exhibit the chosen attribute) and disappoint other customers. Another key order processing decision (see Figure 7.1 ) involves determining the location(s) lo cation(s) rom which an order is to be illed. As was the case with order triage, companies should have clear, consistently applied rules to help in making this decision, but there are companies that decide which acility to use on an order-by-order basis—which can lead to inconsistent order cycle time and cost. A commonsense approach would be to ill an order rom the acility location that is closest to the customer, with the idea that this should generate lower transportation costs as well as a shorter order cycle time. Alternatively, Alternatively, an order could be illed rom the acility location that currently has the largest amount o requested product; this likely would increase both order cycle time and transportation cost, but it could help the seller by reducing excess inventory at a particular location.
Order Picking and Assembly Order picking and assembly is the next stage o the order management process, and it includes all activities rom when an appropriate location (such as a warehouse) is authorized to ll the order until
goods are loaded aboard an outbound carrier. Although order picking and assembly is sometimes
Chapter 7 • Demand Management, Order Management, and Customer Service Service 135
g n i J k & c u r W T
s g t n n i e p p m i u k h c c o s o o d D t
I D E a i v t n e s N S A ; r l i l i e r b d r a c n a t o t g n e i n m d a p l i h f S o
h s i n i F e c i o v n i l i a M
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? d e ? r s i u u o q d e r r a e z r a h a c o l a g i r a c e c p s S I
g n s e i g p d p r a d i h h A s c
r y i e t i t r o r N a c
t d n n a l e m k e i p c a b a h P l s
s t n g e d n i n p e p m u m i c A h s d o
s s e n e r t e e l y f p d r i r m o V e c o f o
s t n g e n e r i m a p p p u c e i r o h P s d e n e i c m n a r s r e t u d e e s e n e D i n d n o i o t e a n m i g d i n m i l r o p e t p s n e i D h s o c
s d r d o n a c e y r c e e s l n y i r u a n c o t o p n e e e h n r o e w c r c t s e a e v e i n R d b w i
l s e v e l o w t k e n n c o o t e t i s l u c e d r u e o d t h s c o r S p e r
r e k c d i P r o s g n n i o i l t l fi c u r r o t s f n ) i s ( e e e s s n u u i s i o m ; h r r e e e t e r a d D w r o
r t s e i l d r g o i n t k n i c r i P p
t n i o s d e s e r r l a e C s p
e e r c a i p e o v r n P i l a s d i d n e c n r o m a n c e A fi r
e k c s a t o h s c r h o u t i p s s n r e e e l u d s r s o p e I r
y r s o d t t s r n u j e o d v e n c A i r
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r e e g d r a O i t r
s r e d r o I D E
c ffi a r T
e s u o h e r a W
s s f e n i t e c t e e r l p r o c y m ; r o c r e a s y d f r s i o e r c e f e V o n
s r e h s d i r l f o b o a e k t c s l a E fi b
s e ’ n r i e m r m i o t e t d t e e s D u c r c
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136 Part III • Elements of Logistics Logistics Systems
overlooked because neither activity is very glamorous, order picking and assembly oten represents the best opportunity to improve the eectiveness and efciency o an order cycle; order picking and assembly can account or up to two-thirds o a acility’s acility’s operating cost and time. Importantly,, the eectiveness and eiciency o order picking and assembly can oten be Importantly improved without large expenditures. For example, one low-cost method to improve eectiveness and eiciency is to analyze order pickers’ travel time, in part because travel time oten accounts or more than 50% o order picking hours. One way to reduce travel time involves combining several several small orders into one larger order so that the order picker can make one pick trip rather than several pick trips.7 Another low-cost suggestion or improving the eectiveness and eiciency eiciency o the pick process is to match the picker to the order being picked. For example, an order consisting o ragile items might be assigned to a picker who exhibits a low percentage o damaged picks.8 Order picking and assembly has been greatly aected by advances in technology such as handheld scanners, radio-requency identiication (RFID), and voice-based order picking. Voice-based order picking reers to the use o speech to guide order-picking activities. activities. Early voice-based picking systems were characterized by high adoption costs, poor voice quality, and systems that were easily disrupted by other noises. Contemporary voice-based systems, by contrast, are less costly, are more powerul, have better voice quality, quality, and are less cumbersome or workers to use. Beneits o voicebased systems include improved productivity, productivity, ewer pick errors, er rors, and minimal training time or work9 ers to learn how to utilize the technology technolog y. Another order picking technique that has grown in popularity in recent years years is pick-to-light technology, in which orders to be picked are identiied by lights placed on shelves or racks. Pick-toPick-tolight systems simpliy the pick process because the worker simply ollows the lights rom pick to pick, as opposed to the worker having to igure out an optimal picking picking path. The combination o pick-to-light and voice-based picking can yield impressive operational improvements; or example, a cosmetics company that utilizes both technologies reported that workers could pick seven times as many orders per hour as prior to the technology adoption—while order accuracy improved by 50%.10
Order Delivery The nal phase o the order cycle is order delivery, which reers to the time rom when a transportation carrier picks up the shipment until it is received by the customer. You will learn more about transportation in Chapters 12 and 12 and 13, 13, so our discussion here will look at several key issues that can impact the eectiveness or efciency o order delivery. delivery. thenumber edition o this published the 1970s, transportation car riers procarriers vided When a limited nuirst mber o options in book terms was o transit times,inand times, an d shippers thus had to incorporate the rather inlexible transit times into calculations o the length o an order cycle. For For example, in the late 1970s, “next-day delivery” meant that a shipment would arrive sometime during the next business day—the customer could not request a speciic delivery time. Today, by contrast, a customer can choose several next-day delivery options, such as delivery by 12 noon and delivery by 4:30 p.m. Another key order delivery issue is that a number o shippers are emphasizing both elapsed transit time as well as transit time reliability (variability), which is important because increases in order cycle variability translate into higher inventory levels. To this end, more buyers are utilizing delivery appointments that contain delivery windows, or the time span within which an order must arrive. Although some delivery windows are one hour in length, other windows are as narrow as
7
http://www.supplychain247.com/article/5_ways_to_improve_order_picking_productivity/MWPVL_International
8
Andre Siepenkort, Matthew Stinson, and Stefan Gerlach, “Match Order to Picker for Better Eciency,” Eciency,” Material Material Handling Handling and Logistics , May 2012, 30–32. 9
Bridget McCrea, “State of Voice: Voice Voice Hits Its Stride,” Logistics Stride,” Logistics Management , July 2015, 52–57.
10
Josh Bond, “Light-Directed Activities: Order Fulllment at the Speed You Need,” Modern Need,” Modern Materials Handling , May 2013,
32–39.
Chapter 7 • Demand Management, Order Management, and Customer Service Service 137
15 minutes. So, So, if a carrier has a 9:00 a.m. appointment with a 15-minute delivery window, window, it must arrive no later than 9:15 a.m. Otentimes, ailure to meet the relevant delivery window means that the carrier must wait or the next open delivery time—which might not be until the end o the day. day. A third key order delivery issue involves involves transportation carriers revamping revamping their operations to provide aster transit times to customers. For example, 500 miles traditionally served as the maximum range or overnight service ser vice in the tr ucking industry. industry. In recent years, by contrast, the maximum range or overnight service by truck tr uck has been pushed to between 600 and 700 miles. This expanded coverage allows customers to shit shipments rom air to truck—an important consideration because truck transportation is less costly than air transportation.
CUSTOMER SERVICE Customers are important to organizations, and organizations that view customers as a “nuisance” may not last very ver y long in today’ today’ss highly competitive business environment. Consider several metrics associated with unhappy customers. A requently cited metric is that it costs approximately ve times as much to develop a new customer as it does to retain an existing one. In addition, approximately 95% o unhappy customers do not communicate their unhappiness to the responsible organization and they won’t return as customers—but they will tell nine people about their unhappiness.11 Quite simply,, it’s easier or an organization to keep an existing customer than to acquire new customers. To simply To this end, customer service strives to keep customers happy and creates in the customer’s mind the perception o an organization with which it is easy to do business. business. Customer service can be an excellent competitive competitive weapon. It is more diicult or competitors to imitate than other marketing mix variables such as price and promotion. Nordstrom’s (a high-end retailer) has a long-standing reputation or excellent customer service, and this customer ocus oten leads Nordstrom’s Nordstrom’s to do things that competitors cannot or will not match. For example, example, one o the authors was shopping at a Nordstrom’s and ound a belt that he liked, but the store didn’t have the correct size in stock. Several days later, the author received a telephone call from a Nordstrom’s salesperson indicating that the desired belt was available or purchase at the local store. The salesperson had located the belt at another Nordstrom’s and had the belt expedited—via air reight —to the local store. With a retail value o approximately $45, it’s it’s likely that this particular Nordstrom’s lost money on this purchase. It’s It’s a reasonable assumption, however, however, that ew other retailers would copy Nordstrom’ss behavior in servicing the customer Nordstrom’ customer.. Macroenvironmental changes, such as globalization and advances in technology, are causing organizations and individuals to demand higher levels o customer service. As was pointed out in Chapter 1, 1, customer expectations continue to increase ov over er time; i the associated perormance (ser vice) levels ail to keep up, then customer dissatisaction is a likely outcome. In addition, as emphasized in this chapter, reliable service enables a irm to maintain a lower level o inventory inventory,, especially o saety stocks, stocks, which produces lower inventory holding costs. Third, in an increasingly automated and computerized world, the relationships between customers and vendors can become dehumanized. This situation is both rustrating and ineicient rom the customer’s viewpoint. The irm that can oer a high level o customer service, especially on a personal basis, will ind that it has a powerul sales advantage in the marketplace. Furthermore, the increased use o vendor quality-control programs necessitates higher levels o customer service. In recent years, many irms, especially retailers and wholesalers, wholesalers, have become more inventory conscious. This emphasis has resulted r esulted in computer-assisted analysis to identiy vendors that consistently give either good or bad levels o service. In the past, with manual systems, repeated and serious customer service errors occurred beore a vendor’s activities were singled out or corrective action. Today, Today, these actors are automatically programmed into computers, and companies are able to closely monitor the quality o service they receive rom each vendor.
Leaig Objectie
7.3
11
Jessica Tremayne, Tremayne, “The Science of Service,” Smart Business Cleveland , March 2009, 61–66.
138 Part III • Elements of Logistics Logistics Systems
We’ve talked at some length about We’ve about customer service, but we’ve yet yet to oer a ormal deinition o it. Keeping in mind that there are myriad myriad customer service deinitions, or our purposes customer service will be deined as “the ability o logistics management to satisy users in terms o time, dependability, communication, and convenience.”12 Let’ Let’ss take a closer look at each o these our dimensions o customer service.
Time Time reers to the period between successive events, events, and clearly the order cycle is an excellent example o the time dimension o customer service. At the risk o sounding redundant, many businesses today are looking to reduce order cycle times—longer cycle times translate into higher inventory requirements. Moreover, some customers now expect nearly instantaneous gratication—which explains why Amazon continues to add to the number o locations where it oers one-hour delivery or or online orders.
Dependability Dependability reers to the reliability o the service encounter. It consists o three elements, namely namely,, 13 consistent order cycles, sae delivery, and complete delivery. Our earlier discussion discussion o the order cycle highlighted the importance o consistency (reliability/dependability)—inconsistent (reliability/dependability)—inconsistent order cycles necessitate higher inventory requirements. And although order cycle time is important, an increasing number o companies are trading o order cycle speed or order cycle consistency. consistency. More specically, these companies are willing to accept a slower order cycle so long as it exhibits a high level o consistency consistency.. Safe delivery brings loss and damage considerations into play. Product can be lost or damaged damag ed or a multitude o reasons, but the reasons are rather immaterial immaterial to a customer—a lost or damaged product can cause a variety o negative ramiications or a customer, such as out-o-stock situations. situations. Order fill rate, or the percentage o orders that can be completely and immediately illed rom existing stock, is one way o measuring the completeness o delivery delivery.. As is the case with loss and damage, incomplete deliveries result in negative neg ative customer ramiications, such as out-o-stock situations. It is unlikely that loss and damage can ever be totally eliminated; because orders are picked and assembled, they are handled—and every time product is handled it provides opportunities or loss or damage. However, However, the seller may be able to minimize the number o times an order is handled, perhaps by redesigning the order pick process. process. And, even i an organization has highly accurate demand orecasting, it’s it’s unlikely that it will be able to achieve a 100 percent ill rate (i.e., all incoming orders are illed completely). Consider the situation o the McDonald’s McDonald’s restaurant where two people walked in and placed a take-out order or 142 Egg McMuins ! Although the restaurant was successully able to ill this order (but not beore ensuring that the two customers could pay or it), the inventory needed to ill it meant that a lot o other orders or Egg McMuins went unilled, at least until the next scheduled delivery o oodstus oodstus..
Communication Efective communication communication should be a two-way exchange between seller and customer, with the goal o keeping both parties inor med. Moreover, eective eective communication requires that the correct parties par ties be involved in the process; i a customer has a logistics-related question, then the customer should be communicating with someone with logistics expertise. Moreover, customer service can be enhanced hance d i complete inormation is is exchanged between the participants; a delivery address can be helpul, but detailed characteristics o the delivery address would be even more helpul, as illustrated by the case o the transportation company that was responsible responsible or delivering delivering a $750,000 shipment o com12
Roger A. Kerin, Steven W. W. Hartley, and William Will iam Rudelius, Mark Rudelius, Marketing eting , 10th ed. (Boston: McGraw-Hill Education, 2011), Chapter 16.
13
Ibid.
Chapter 7 • Demand Management, Order Management, and Customer Service Service 139
puter racks. What the transportation company didn’t nd out—until it actually made the delivery— was that the customer customer was located on the seventeenth oor o an ofce building in the central business district o a major city. city. Because neither the transportation company nor the ofce building had the appropriate equipment to acilitate the shipment’s handling, the delivery had to be delayed until the proper equipment could be located and brought to the building.14 Two-way Tw o-way communication between seller and customer has certainly beneited rom technological advances such as cell phones, smart phones, and the Internet. These technological advances allow or less costly and more requent contacts between the two parties. However, However, technology such as text messaging and the Internet can depersonalize the communication process, which is why periodic telephone interaction and even ace-to-ace contact between seller and customer are recommended.15 You should recognize that ace-to-ace personal communication is an essential part o conducting business in some cultures.
Convenience The conv convenience enience component component o customer service service ocuses on the ease o doing business with a seller. Having said this, dierent dierent customers may have have dierent perceptions o the “ease o doing business” concept. For example, or a college student the “ease o doing business” with a bank might mean access to automatic teller machines, whereas or a small business owner it might mean bank tellers who specically ocus on commercial deposits and withdrawals. withdrawals. As such, sellers should should have an understanding o their customer segments and how each segment views the “ease o doing business.” Moreover,, rom the seller’ Moreover seller’ss perspective, certain costs may be associated with convenience; or example, there may be a charge or pizza that’s delivered to your residence or workplace (or “ree delivery areas” might be very limited in geographic coverage). As a result, sellers must assess the extent to which their customers are willing to pay or convenience. For example, allowing customers customers to electronically arrange arrang e their own travel (e.g., computer, tablet, smart phone) is quite cost-eective or airlines in that the costs o processing an electronic ticket are extremely low relative to involving an airline sales agent in the process. As a result, customers who arrange their travel by telephoning an airline’ss customer service agent can be charged a ee or talking to the service agent airline’ ag ent (a service that or many years was “ree” to the customer). The convenience dimension also plays a key role in a consumer’ consumer’ss purchasing decision. Today’ Today’ss consumer likes to have multiple purchasing options at her/his disposal and organizations have responded by developing multichannel marketing systems, i.e., separate marketing channels to serve customers. A retailer, or example, can acilitate customer purchasing with bricks-and-mortar stores (one channel) as systems well as with a website (another channel). The convenience dimension in multichannel marketing can be seen with omnichannel retailing—where a customer might place an order online and then pick up the order at a bricks-and-mortar store.
MANAGING CUSTOMER SERVICE In addition to understanding what customer service is, the logistician aces multiple managerial considerations with customer service. The remainder o this chapter will discuss our specic considerconsiderations—establishing customer service objectives; measuring customer service; customer protability analysis; and service ser vice ailure and recovery.
Establishing Customer Service Objectives Because customer service standards can signicantly aect a rm’s overall sales success, establishing goals and objectives is an important management decision. Goals tend to be broad, generalized 14
John Paul Quinn, “How to Avoid Communication Breakdowns,” Breakdowns,” Logistics Logistics Management , April 2006, 37–41.
Leaig Objectie
7.4
15
Ibid.
140 Part III • Elements of Logistics Logistics Systems
sstatements tatements regarding the overall results that the rm is attempting to achieve. Unortunately, some rms’ statements o customer service goals are couched in platitudes lacking specic objectives speciying how the goals are to be achieved. This is a serious problem because i the customer ser vice objectives or standards are not stated in specic terms, they may may be ignored or be too vague to provide any real guidance to operating personnel. Objectives,, the means by which goals Objectives g oals are to be achieved, state certain minimum requirements and are more speciic than goals. g oals. One suggestion is that objectives should be “SMART ,” ,” that is, speciic , measurable , achievable , realistic , and timely . Consider, or example, an objective to reduce order picking errors rom 5 to 2 percent within a 12-month time period. This T his objective is speciic in the sense that the degree o improvement (5 percent to 2 percent reduction) is clearly stated and the objective can be measured by comparing order pick errors across time. It’s It’s not clear, however, however, i this objective is achievable, realistic, and timely. For example, how will the reduction in pick errors be achieved? Will the company company be orced to hire additional personnel to check check the picked orders? Will the current current order picking process need to be restructured, perhaps through the addition o new technology? Can new personnel be hired and trained and can new technology be purchased, installed, and be operational within 12 months? Is the improvement in customer service (i.e., rom 5 percent order picking errors to 2 percent order picking errors) worth the additional costs necessary to achieve the improvement? A central element in establishing customer servic servicee g oals and objectives is deter determining mining the customer’s viewpoint. This means asking customers or their insights about customer service. For example, what services would the customer like to receive that presently are not available rom the seller? What services do customers view as the most important? How well does the seller currently provide what the customer wants? What could be improved? Because customer service is a competitive tool, it is also important to learn lear n how the customer evaluates the service levels o competing sellers. Many companies companies evaluate their service perormance through benchmarking , which reers to a process that continuously identiies, understands, and adapts outstanding processes ound inside and outside an organization. Well-run organizations benchmark not only against competitors (where possible) but against best-in-class organizations as well. For maximum results, results, organizations should engage engag e in perormance benchmarking benchmarking , which compares quantitative perormance (e.g., (e.g., ill rate perormance), peror mance), as well as process benchmarking , which is qualitative in nature and compares speciic processes (e.g., how organizations achieve their ill rates). From a managerial perspective, perormance benchmarking identiies gaps in a desired result while process benchmarking provides inormation as to why the gaps exist. The nature o the product also aects aects the level o the customer customer service that that should be oered. oered. Substitutability,, which refers to the number of products from which a firm’s customers can choose Substitutability to meet their needs, is one aspect. I a irm has a near monopoly on an important product (i.e., ew substitutes are available), available), a high level o customer service is not required because a customer who needs the product will buy it under any reasonable customer service standard. However, i many products can perorm the same task, then customer service standards become important rom a competitive marketing point o view view.. Another product-related consideration when establishing customer service goals and objectives is where the product is in its product lie cycle. A product just being introduced needs a dierent kind o service support than one that is in a mature or declining market stage. When introducing introducing a new product, companies want to make sure that there is suicient supply o it to meet potential customer demand, and so companies might use expedited transportation to protect against out-ostock situations. It is ar less likely that the same company would use expedited transportation to
guard against an out-o-stock situation with a product in the decline phase o the product lie cycle. Establishing minimum acceptable order sizes is an ever-present customer service problem because many customers want to order smaller quantities at more requent intervals. Orders o decreasing size make diminishing (and eventually negative) contributions to proits. In any particular par ticular
marketing situation, detailed analysis is needed regarding both why small orders are placed and the
Chapter 7 • Demand Management, Order Management, and Customer Service Service 141
possible reactions o existing customers to a new policy that requires either a larger minimum order size or a surcharge on small orders to oset losses. losses. Online and catalog retailers sometimes require a minimum monetary order (e.g., $75) in order or customers to qualiy or “ree” shipping.
Measuring Customer Service Grandiose statements and platitudes regarding a rm’s level o customer service represent little more than rhetoric unless the customer service standards to support suppor t them are actually implemented. To To accomplish this, a systematic program o measurement and control is required, because you can’t can’t manage what you can’t measure . Control is the process o taking corrective action when measurements indicate that the goals and objectives o customer service are not being achieved. Measurement Measurement by itsel is merely wasted time and eort i no action is taken based on the eedback received. The actions taken ater deciencies have been identied can lead to an eective and efcient customer service program. prog ram. Several key issues are associated with measuring customer service, one of which involves involves determining the data d ata sources to be used. Ideally, an organization might want to collect measurement data rom both internal and external sources. With respect to internal sources, an organization might audit credit memos, which are the documents that must be issued to correct errors in shipping and billing. Comparing them with the volume volume o error-ree activity gives gives a measure o relative activity activity accuracy in perormance. External measurement data can be collected rom customers, and a key managerial issue involves the amount o data to be collected rom customer surveys. While customers tend to be more likely to respond to shorter surveys, shorter surveys, by deinition, provide lesser amounts o useable data. A second key key issue associated with customer service service measurement is determining what actors to measure. Some firms choose those aspects of customer service that are the easiest to measure, which isn’t necessarily a good idea because aspects that are diicult to measure may provide better insights into customer likes and dislikes. Some firms choose those aspects of customer service that they believe are most important, which isn’t necessarily a good idea either because these aspects might be relatively r elatively unimportant rom the customer’ customer’ss perspective. Because so many potential customer service measurements exist, it is not possible to provide a simple list that would be applicable across the board. At a minimum, the measures should be consistent with the our dimensions o customer service—time, service—ti me, dependability, communication, and convenience—discussed earlier in this chapter. Table chapter. Table 7.2 provides 7.2 provides representative customer service measures or each o these our dimensions. In addition, the metrics that are chosen should be relevant and important rom the customer’s customer’s perspective. While the ollowing example seem the proverbial “no brainer,” the call center that measured customer customer servicemight in terms o like the length o customer calls, withconsider calls, shorter call lengths preerred to longer call lengths. As such, the call center singled out a particular par ticular employee or “improvement” because her call times were much much longer than those o other call center employees. TABLE 7.2 Select Customer Service Measures Cust sto ome Se Se iice Dimesio
Measue
Time
Order cycle time Inquiry response time
Dependability
Perfect order On-time delivery
Communication
Customer complaints Order status information
Convenience
Returns process
Response to emergency situations
142 Part III • Elements of Logistics Logistics Systems
Additional research indicated that this “laggard” employee was actually actually the most eective employee when when measured in terms o the number o customer problems solved per day. day. In short, the call center’s primary customer service metric—the time length o customer calls—was dierent dierent rom the cus16 tomer’ss primary customer service metric—solving the problem at hand. tomer’ Although customer service must must be measured measured i it is to be managed, organizations should resist the tendency to “measure everything that moves.” Excessive measurement can strain an organization because it requires requires the collection o tremendous amounts amounts o data, and once collected, the data must must be analyzed. This can result in “analysis paralysis,” or the idea that so much time is required or analysis that there’s little, i any, time let to make decisions based on the data. Rather, Rat her, organizations organizati ons should utilize a limited number o meaningul and relevant relevant metrics; and it is possible or organizations to use only one customer customer service metric, as illustrated in the previous paragraph’s call center anecdote.
Customer Profitability Analysis Customer profitability analysis (CPA) reers to the allocation o revenues and costs to customer segments or individual customers to calculate the protability o the segments or customers. Customer protability analysis suggests that dierent customers (segments) consume diering amounts and types o resources; or example, some customers might require telephone-based communication with an organization, whereas other customers are able to communicate electronically with an organization. Customer proitability analysis explicitly recognizes that all customers are not the same, and some customers are more valuable than others to an organization. CPA can be used to identiy dier-
ent groups o customers rom a proitability perspective, and such a grouping can better help in allocating an organization’s resources. One suggested classiication, or example, divides customers into our groups (high revenues/high costs; high revenues/low costs; low revenues/high costs; low revenues/low costs); “high revenues/low costs” represents the most attractive customers while “low revenues/high costs” represents the least attractive att ractive customers.17 From a resource allocation perspective, an organization should pursue dierent logistical approaches or dierent customer groups. With respect to product selection, or example, an organization might provide a substantial number o product oerings or “high revenues/high costs” customers (sometimes reerred to as “demanding customers”18 ), whereas whereas limited limited product oeri oerings ngs might might be provide provided d to “low “low reven revenues/lo ues/low w costs” costs” customer customers. s. Thorough customer proitability proitability analysis only works i it is grounded in activity-based costing in the sense that activity-based costing suggests that dierent products are characterized by dierences in the amount and types o resources consumed. consumed. ( Appendix 7A provides a closer look at activity-based costing.) costing.) Consider the experience o a specialty distributor o luid-related products that activity-based costingapproximately as the oundation its customer proitability analysis program.established The distributor, which served 2,000ocustomers prior to initiating customer proitability analysis, learned that 150 customers accounted or 90% o company proits. In addition, the customer proitability analysis identiied over 1,000 unproitable customers and the distributor no longer does business with them.19
Service Failure and Recovery Regardless o how well run an organization is, some situations will occur in which actual perorperormance does not meet the customer’ customer’ss expected performance (i.e., a service failure). Service failure has emerged as a prominent business issue in recent years, in part because organizations have learned that customers can easily become disaected. For example, it has been estimated that poor customer experiences cost U.S. U.S. business in excess of $40 billion per per year.20 From a logistics perspective, service 16No author, 17
“Mistaken Metric s,” T&D , February 2009, 88. Lynette Ryals, “Managing Customers Protably, Protably,”” Credit Control , 32, nos. 3 and 4 (2011): 37–42.
18
Ibid.
19
Victoria F. Kickham, Staying Focused on Hose, Industrial Distribution , October 2008, 22 25. http://www.newvoicemedia.com/blog/the-multibillion-dollar-cost-o-poor-customer-service-inographic/
20
Chapter 7 • Demand Management, Order Management, and Customer Service Service 143
ailure is particularly relevant to the order cycle; examples o order-related service ailures include lost delivery, late delivery, early delivery, damaged delivery, and incorrect delivery quantity, among others. Given that service ailures are inevitable, organizations will be aced with service recovery decisions. For our purposes, pur poses, service recovery will reer to a process or returning a customer to a state o satisaction ater a service or product has ailed to live up to expectations. expectations. Excellent response to a service ailure can sometimes result in the service recovery paradox, in which a customer holds the responsible company in higher regard ater ater the service recovery than i a service ailure had not occurred in the irst place. In addition, service recovery can also result in a better perorming peror ming organization in the sense that an organization can learn rom ailure and then implement processes and policies to lessen the occurrence o uture service ailures. ailures.21 There is no set ormula or service recovery recovery,, in part part because each each service ailure ailure is unique in its impact on a particular customer. Having said this, there are general guidelines or dealing with ser vice recovery, and it is important to recognize that these guidelines may not only assuage the customer but also result in an organization improving its operations.22 For example, one recovery guideline is air treatment or customers. In the logistics discipline, one example o air treatment involves service guarantees by transportation companies; i a shipment misses various various delivery parameters (e.g., on time, undamaged), then customers might receive a ull reund (or aren’t billed or the transportation). Besides reducing customer risk, many transportation companies that have implemented service guarantees have improved relevant aspects o their perormance such as on-time delivery, which has meant a decrease in the amount amount o payouts or deicient deicient service.
Summary Demand management deals with determining what customCustomer service was the third major topic addressed ers want, and a key component involves demand orecasting. in this chapter. The our dimensions o customer service— ser vice— The chapter discussed basic demand orecasting orecasting models along time, dependability, communication, and convenience— convenience—were were with select orecasting orecasting issues such such as cost and accuracy accuracy.. discussed. The chapter also looked at managing customer ser The chapter also looked at order management and the vice, with a speciic ocus on establishi establishing ng customer servi service ce order cycle, which reers to the period o time rom when the objectives objectives,, measuring customer service, customer proitability order is placed until it is receive received. d. Four components o an analysis, and service ailure and service recovery. order cycle—order transmittal, order processing, order picking and assembly, and order delivery—were identiied and discussed in some detail.
Key Terms Activity-based costing (ABC) Benchmarking Cause-and-eect orecasting Collaborative planning, orecasting and replenishment (CPFR) Customer protability analysis (CP (CPA) A) Customer service Demand management Judgmental orecasting orecasting
21
Make-to-order Make-to-stock Multichannel marketing systems Order cycle Order delivery Order ll rate Order management Order picking and assembly Order processing
Order to cash cycle Order transmittal Order triage Pick-to-light technology Service recovery Service recovery paradox Time series orecasting orecasting Voice-based V oice-based order picking
Robert Johnston and Stefan Michel, “Three Outcomes of Service Recovery,” International Journal o Production and Operations Operations Management, 28, no. 1 (2008): 79–99. Management,
Management , 28, no. 1 (2008): 79 99. 22
Gail Scott, “Service Recovery,” Healthcare Executive , January/February 2009, 44–47.
144 Part III • Elements of Logistics Logistics Systems
Questions for Discussion and Review
7.1 What is the relationship relationship between demand demand management, management, order management, and customer service? 7.2 Discuss the three basic demand orecasting models. 7.3 Discuss several demand orecasting issues. 7.4 Dene and describe the order cycle. Why is it considered an
important aspect o customer service? 7.5 What are some causes o order cycle cycle variability? What are the consequences o order cycle variability? variability? 7.6 List the various methods o order transmittal and discuss relevant characteristics characteristics o each. 7.7 What are some advantages and disadvantages to checking checking all orders or completeness and accuracy? 7.8 Dene order triage and explain how it can aect order processing. 7.9 Discuss how the eectiveness eectiveness and efciency o order processing can be improved without large expenditures. expenditures. 7.10 What is pick-to-light technology technology,, and how can can it improve improve order picking? 7.11 Discuss the order delivery delivery stage o the order cycle. 7.12 How can customer service act as a competitive weapon? weapon?
7.13 How are macroenvironmental actors causing organizations and individuals to demand higher levels o customer service? 7.14 List and discuss the three elements o the dependability dimension o customer service. service. 7.15 What are some advantages advantages and disadvanta disadvantages ges o technological advances designed to acilitate buyer–seller communications? 7.16 What is customer protability protability analysis and and how might it be used in logistics? 7.17 Dene and explain how organizations might engage in benchmarking. 7.18 How do characteristics such as substitutability and product lie cycle stage inuence the development development o customer service goals and objectives? 7.19 Describe some o the key issues associated with measuring measuring customer service. 7.20 What is meant by service recovery? recovery? How is it relevant relevant to logistics?
Suggested Readings Diaz, Angel, Bjorn Claes, and Luis Solis. “Benchmarking “Benchmarking Logistics and Supply Chain Practices in Spain.” Supply Chain Forum: An International Journal 12, 12, no. 2 (2011): 82–90. Eroglu, Cuneyt and A. Michael Knemeyer. Knemeyer. “Exploring the Potential Eects o Forecas Forecaster ter Motivational Orientation and Gender on Judgmentall Adjustments of Statistical Forecasts.” Judgmenta Forecasts.” Journal o Business Logistics 31, 31, no. 1 (2010): 179–195. Forslund, Helena. Helena. “The Size of a Logistics Performance MeasureMeasurement System.” F Facilities acilities 29, 29, nos. 3 and 4 (2011): 133–148. Jain, Chaman L. and Mark Covas Covas.. “Six Rules Rules for Eective Eective Demand Demand Planning in a Volatile Economy.” Journal o Business Forecasting Forecasting 29, 29, no. 2 (2010): 4–13. Kavanaugh, Shayne and Darrell Williams. Williams. “Making the Best Use of Judgmentall Forecasting. Judgmenta Forecasting.”” Government Finance Review December December (2014): 8–16. Marchet, Gino, Marco Melacini, and Sara Perotti. “Investigating “Investigating Order Picking Adoption: A Case-Study-Bas Case-Study-Based ed Approach.” International Internat ional Journal Journal o Logis Logistics tics : Research & Applications 18, 18, no. 1 (2015): 82–98. Ramanathan, Usha, Angappa Gunasekaran, and Nachiappan SubSub ramanian. “Supply Chain Collaboration Performance Metrics:
A Conceptual Framework. Framework.”” Benchmarking: An International International Journal 18, no. 6 (2011): 856–872. Schulze, Manuel, Stefan Seuring, and Christian Ewering. “Apply “Apply ing Activity-Based Costing in a Supply Chain Environment.” International Internation al Journal o Production Economics Economics 135, 135, no. 2 (2012): 716–725. Sewell, Graham, James R. Barker, and Daniel Nyberg. “Working under Intensive Surveillance: When Does ‘Measuring Everything That Moves’ Become Intolerable?” Intolerable?” Human Relations 65, 65, no. 2 (2012): 189–215. Thomas, Rodney W., W., Terry L. Esper, and Theodore P. P. Stank. “Coping with Time Pressure in Interrm Supply Chain ReRe lationships.” Industrial Marketing Management 40, 40, no. 3 (2011): 414–423. Vandeusen, Vand eusen, Je Je and John John Mello. “A Roadmap Roadmap to Implementing CPFR.” Foresight : The International Journal Journal o Applied Forecasting Forecasting June (2014): (2014): 8–12. 8–12. Wu, Wann-Yih, Wann-Yih, Ya-Chung Ya-Chung Hou, Chen-Su Fu, and Chi-Ya Chi-Ya Chang. “Identifying Failure Recovery Recovery Strategies for Paper Industrial Suppliers.” Industrial Marketing Management 42, 42, no. 8 (2013): 1233–1244.
Chapter 7 • Demand Management, Order Management, and Customer Service Service 145
CASE CASE 7.1 SUPERAUTO SPARE SPARE PARTS PARTS SERVICES Peng Zhang is a project manager with SuperAuto Ltd., a large automobile manufacturer based in Shanghai, China. Three years ago, he led a project to outsource spare parts management to DailyFreight Ltd., a thirdparty logistics provider. Outsourcing Outsourcing is the practice o transerring specic processes rom in-house to a third party.. It involv party involves es a change o process ownership. ownership. In Peng Zhang’s project, the outsourced processes included spare parts inventory management, receiving spare parts orders rom dealers, and dispatching orders to dealers. Yun Li, the vice president pre sident o customer servic s ervices, es, recently asked Zhang to assess the impact o the outsourcing arrangement on customer service quality. In the service level agreements (SLAs), DailyFreight needs to meet an availability availability rate o 95% o spare parts orders. DaiDailyFreight marks up 10% on SuperAuto’s sales prices to cover the inventory nancing, transportation, and administrative costs. The demand or spare parts is sporadic and urgent. Before the outsourcing, all the authorized 3S (sales, serser vices, and and spare parts) dealers of SuperAuto ordered spare parts directly from SuperAuto, which dispatched available spare parts from its national warehouse in Shanghai the next day using a courier service. The courier has a delivery lead time o one day to major cities and two days days to the rest of China. SuperAuto has over 100 authorized dealers across the country. It was a huge administrative burden or SuperAuto to manage the small quantity of spare parts ororders, which were highly unpredictable. Dealers complained
When Peng Zhang accepted the task rom Yu Yun n Li, he thought it would be simple—apparently all parties involved in the outsourcing arrangement were better o. He ollowed the routine procedure o conducting a random survey among all the stakeholders involved by phone. However, he was shocked as he spoke to some vehicle owners: they were very angry about their dealer experiences. They complained that their local authorized dealer had asked them to replace expensive components that were still in a good condition, just to make more prot. When asked how they had discovered the dishonesty o a dealer, some vehicle owners said that their view was based on their experience and knowledge. A ew vehicle owners had taken their SuperAuto cars to an independent inspection agency,, where the dishonesty was proved. These angry agency angr y vehicle owners said that they would never visit a SuperAuto authorized dealer again, nor would they consider buying another SuperAuto vehicle. This was very troubling for Peng Zhang, although the problem that suraced did not all within the scope o the task assigned to him by Yun Yun Li. When Zhang started to ring dealers, he got a mixed response. For the requently used spare parts, all dealers acknowledged the benets o aster delivery delivery and reduced reight cost. However, dealers complained that DailyFreight oten ran out o stock o some slow-moving slow-moving items. items. Consequently, the dealers had to wait many more days, which delayed the xing o vehicles vehicles.. Also, some dealers complained that DailyFreight was not proessional in handling deliveries. Sometimes a DailyFreight driver might throw a
that the courier service sometimes cost more than the spare parts shipped. In the outsourcing arrangement, DailyFreight orders spare parts in bulk from SuperAuto and owns spare parts at its seven regional warehouses at strategic locations in China. Dealers order spare parts rom DailyFreight and expect a next-day delivery rom DailyFreight’s regional warehouse. Immediately ater the implementation o outsourcing, many dealers praised the service model as they got spare parts aster and paid a lower reight rate due to a reduced transportation distance. SuperAuto’s logistics dedepartment was also very happy with the ease o processing bulk purchase orders in the outsourcing arrangement. Be-
parcel on a working desk in a rush, without even speaking to or inorming anybody at a dealer’s premises. premises. Zhang tried to probe into the possibility o deceitul diagnosis by the dealers or unnecessary replacement o expensiv expensivee components. However, all the surveyed dealers denied this. Lastly, Zhang called the account manager at DailyFreight who oversaw the services to SuperAuto and its dealers. He did not give a direct d irect answer when asked whether DailyFreight was not keeping a sufcient stock o slowmoving spare parts. He was condent that DailyFreight met the 95% SLA. He promised to email the statistics of orders and delivery lead times. Somehow, Somehow, totally unexpect ed by Zhang, he complained about the cost o nancing
cause of to the overwhelmingly positive feedbac feedback, k, SuperAuto decided discontinue its annual dealers’ reresher training on spare parts services, ser vices, given that it was no longer directly supplying spare parts to dealers.
spare inventories andto proposed up be parts increased rom 10% 20%. that the price markZhang reported his ndings to Li. A day later, Li called him to join a meeting with Fei Wang, the dealer
( continued continued )
146 Part III • Elements of Logistics Logistics Systems EXHIBIT 7. A Spae Pats Seices Seices Feedback Fom
vEHICLE OWnEr DETAI DETAILS LS Name* Email* Telephone* Mailing Address City & Province Zip Code vEHICLE DETAI DETAILS LS Model Number* Year of purchase* purchase * SErvICE DETAILS Dealer Name* Cause of the Service* Rate the Service on a scale of 1-5 (1-Very Dissatisfied; 5-Very Satisfied)*
Other Feedback *Mandatory Field
relationship manager, YuHe Chen, theZhang, logistics manager. “I’mrom terribly sorry, sir,”has said Feitold Wang, his Fei Wang Wang looked very and upset. asked “Could you eyes away Li. “Nobody ever us. .turning . . Perhaps provide me with a list o dishonest dealers? I am going to we shouldn’ shouldn’tt have stopped our annual dealers’ reresher be very tough with them!” training. We We used to emphasize our zero tolerance o dis“Sorry, I cannot give you a list,” replied Zhang. “I can honesty in the training. training.”” only give you the names names o the ew dealers said to be “No excuses, please,” please,” said Li, proceeding to give indishonest by the vehicle owners I surveyed. My telephone structions: “You three, please nd out which dealers are survey was not meant to investigate investigate into the integrity o dishonest. You also need to come up with an eective prodealers. I randomly rang just 30 vehicle owners. We have cedure to continuously monitor and manage other dealers over 300,000 customers!” to ensure that they act with integrity in serving vehicle “It is not enough to be just tough with them—we owners. Furthermore, please review the SLAs with Dailyneed to re them! How can we still trust these people? Freight to see i any revisions are necessary.” necessary.” They have caused caused a huge damage to our reputation. I wish wish Ater Li let the meeting room, Wang, Zhang, and I had the time to take them to court!” said a urious Yun Yun Li. Chen discussed how to conduct a large-scale survey o “Fei Wang, why did you have no idea about such a serious vehicle owners to identiy possible dishonest dealers. problem?” Chen showed the others an old spare parts services ser vices survey
Chapter 7 • Demand Management, Order Management, and Customer Service Service 147
orm ( Exhibit Exhibit 7 ). ). The orm had been used ten years ago or a mail survey.
QUESTIOnS 1. Does SuperAuto have a customer service problem? Why or why not? 2. Based on the reports o some vehicle owners, owners, it is apparent that some dealers have an integrity issue. Why has Super- Super- Auto not been been aware o o the issue? 3. Does the spare parts outsourcing arrangement have any negative implications implications or the quality o spare parts services oered to vehicle owners? I yes, why?
4. Assuming DailyFreight’ DailyFreight’ss claim on meeting meeting SLAs is true, what possible revisions revisions should be made to the outsourcing outsourcing SLAs? Why? 5. What revisions may may be made to the old spare parts services feedback form to help SuperAuto collect customer informainforma tion or continuously monitoring and managing the perormance o dealers in the uture? Why? Why? 6. Is it too late for SuperAuto to attempt service recovery with vehicle owners owners who were were cheated cheated by dishonest dealers? Why or why not? 7. What lessons can we we learn from the SuperAuto SuperAuto case case for managing customer service quality in outsourcing?
8
Inventory ManageMent
Learning Objectives 8.1 To To learn about the ways ways that inventory inventory can be classied 8.2 T To o discuss inventory inventory costs and the trade-os that exist among them To o identiy when to order and how much much to order, with with a particular emphasis on the eco8.3 T nomic order quantity 8.4 T To o dierentiate the various various inventory inventory fow patterns 8.5 T To o discuss special concerns with inventory management 8.6 T To o identiy several several contemporary approaches to managing managing inventory
pur poses, the most Inventory reers to stocks o goods and materials that are maintained or many purposes, common being to satisy normal demand patterns. In production and selling processes, inventories serve as cushions to accommodate the act that items arrive in one pattern and are used in another pattern. For example, i you eat one egg a day and buy eggs by the dozen, every 12 days you would would buy a new container o eggs, and the inventory o eggs remaining in your rerigerator would decline decline at the rate o one egg per day. Inventory management is a key component in logistics and supply chain management, in part because inventory decisions are oten a starting point, or driver, or other business activities, such as warehousing, warehous ing, transportation, transportation, and materials materials handling handling.. Moreover Moreover,, dierent dierent organizational unctions can have dierent inventory management objectives. Marketing, or example, tends to want to ensure that suicient inventory is available or customer demand to avoid potential stockout situations—which translate into higher inventory levels levels.. Alternatively, Alternatively, the inance group g roup generally seeks to minimize the costs associated with holding inventory, inventory, which translates into lower inventory levels. As i managing these seemingly conlicting objectives within one organization isn’t challenging enough, supply chains are made up o multiple organizations—each o which may have its own own distinct inventory management philosophy. philosophy. Indeed, each link in the supply chain may preer having other links maintain the inventory. Organizations strive or the proper balance (i.e., right amount) o inventory inventory,, but achieving the proper balance can be quite diicult because because o the trade-os between inventory inventory carrying cost and stockout cost, both o which will be discussed in greater g reater detail later in this chapter. More speciically, speciically, holding high levels o inventory (overstock) (overstock) result in high inventory carrying costs and low (or no) stockout costs. costs. Alternatively, Alternatively, holding low levels o inventory result in low inventory carrying carr ying costs and some (high) stockout costs. It is important to note here that inventory carries its greatest cost ater value has been added through manuacturing and processing. Finished goods g oods inventories are, thereore, much more expensive to hold than raw materials or work in progress. prog ress. Carrying costs or inventories can be signiicant, and the return on investment to a irm or the unds it has tied up in inventory should be as high as
the return it can obtain rom other, equally risky uses o the same unds. 148 14 8
Chapter 8 • Inventory Management 149
This chapter begins with a brie look at various classiications o inventory inventory,, ollowed by a discussion o inventory costs. Next we examine examine when to order inventory and how much inventory to order. This chapter also looks at inventory lows and special concerns with inventory and concludes by discussing several contemporary issues with managing inventory inventory..
INVENTORY CLASSIFICATIONS
Learnng Ojetve
8.1
Learnng Ojetve
8.2
It is important to understand the various classications o inventory because the classication can inuence the way that inventory is managed. Inventory generally exists to satisy demand and can be classied as cycle (base) stock, saety (buer) stock, pipeline (in-transit) stock, or speculative stock. Each type is explained in the ollowing paragraphs. Cycle, or base, stock reers reers to inventory that is needed to satisy normal demand during the course o an order cycle. With respect to the egg example at the beginning o this chapter, one dozen (12) eggs represents the cycle stock—we use one egg eg g per day, and we buy eggs every 12 days. Recall that Chapter 7 indicated 7 indicated that order cycle times continue to decrease in length, meaning that the associated levels o cycle stock continue to decrease as well. Safety, or buffer , stock reers reers to inventory that is held in addition to cycle stock to guard against uncertainty in demand or lead time. For example, uncertainty in demand could come rom the act that you occasionally decide to make a three-egg omelet as opposed to eating one egg per day.. As an example o lead-time uncertainty, day uncer tainty, you may may sometimes buy eggs every ever y 14 days, rather than every In both cases,levels a ewoextra eg gs would eggs thatlevels you won’t won’ t run stock. out o eggs. As pointed out12indays. Chapter 7, higher 7, uncertainty leadensure to higher o saety is inventory that is en route between various ixed acilities in a Pipeline, or in-transit , stock is logistics system such as a plant, warehouse, or store. Pipeline inventory is represented here by eggs that are in transit between a chicken arm and, say, say, a ood wholesaler’s wholesaler’s distribution center or between the retail store and your kitchen. reers to inventory that is held or several reasons, including seasonal Speculative stock reers demand, projected price increases, and potential shortages o product. For example, the act act that eggs are associated with Easter (e.g., Easter egg rolls, colored eggs) tends to cause an increase in demand or them prior to the Easter holiday. Although Althoug h inventory inventory generally generally exists exists to satis satisyy demand, demand, in some some situations situations inven inventory tory is carried carried to stimulate demand, also known as psych psychic ic stock stock . This type o inventory is associated with retail stores, stores, 1 and the general idea is that customer purchases are stimulated by inventory that they can see. This concept helps explain, in part, why some retailers stock huge amounts o certain merchandise.
INVENTORY COSTS Y You ou might remember remember the basic accounting equation equation that assets are equal to to liabilities plus stockholder’ss equity. er’ equity. The managerial signicance o the accounting equation is that assets must be paid or in some manner; quite simply, simply, assets cost money , which means that inventory costs money. Not only does inventory appear as an asset on company balance sheets, but inventory inventory tends to be one o the largest assets (in terms o dollar value) on the balance sheets. As such, such, it’s important or logisticians to have have an understanding o inventory costs. costs. The data in Table 8.1 oer 8.1 oer insights about the absolute and relative magnitude o inventory costs in the United States between 2010 and 2014. From an absolute perspective, perspective, Table 8.1 8.1 indicates that the value o business inventory ranged between $2.1 trillion and $2.5 trillion between 2010 and 2014. In relative terms, inventory costs between 2010 and 2014 represent approximately one-third o total logistics costs. costs.
1
Paul D. D. Larson and Robert A. DeMaris, “Psychic Stock: An Independent Variable Category o Inventory,” Inventory,” International Journal o Physical Distribution & Logistics Management , 20, no. 7 (1990): 27–37.
150 Part III • Elements of Logistics Logistics Systems
We will take a closer look at three inventory costs—carrying We costs—carrying cost, ordering cost, and stockout stockout cost— that should actor into an organization’s inventory management policy. The logistics manager must understand both the nature o each o these costs as well the trade-os trade-os among them.
Inventory Carrying Costs A prominent concern involves the costs associated with holding inventory, which which are reerred to as inventory carrying (holding) costs. In general, inventory carrying costs are expressed in percentage terms, and this percentage is multiplied by the inventory’s value. The resulting number represents the dollar value associated with holding the particular inventory. As an example, reerring to Table 8.1, 8.1, when the value o business inventory in 2010, $2064 billion, is multiplied by the carrying cost in 2010, 19.2%, the relevant carrying carr ying costs are $396 billion. Not surprisingly, surprisingly, an increase or decrease d ecrease in the carrying carr ying cost percentage will aect the relevant inventory expense. Generally speaking, companies preer to carry lower inventory as the carrying cost percentage increases, in part because there is greater risk (e.g., obsolescence) to holding the inventory.. As a result, the determination o a carrying cost percentage should be quite important or inventory many companies. However, However, the reality is that many companies don’t know their actual inventory carrying costs. Rather, many many companies simply assign carrying costs as 25% o the value o their inventory—and this 25% igure has been used since the mid-1950s mid-1950s..2 Table Table 8.1 suggests that U.S. U.S. inventory carrying costs since 2010 consistently have been between 19% and 20%. Inventory carrying costs consist o a number o dierent components (see (see Table Table 8.2 ), and the importance o these actors can vary rom product to product. For example, perishable items such as dairy products, meat, and poultry are oten sold with expiration dates, causing them to have little or no value ater a certain date. By contrast, a box o lead pencils loses its value much more slowly slowly through time. These two examples illustrate the obsolescence category category o inventory carrying costs and reer to the act that products lose value through time. Note that some products (e.g., perishables) lose their value much more quickly than others (e.g., pencils). Inventory shrinkage is another component o inventory carrying cost and reers to the act that more items are recorded entering than leaving warehousing or retailing acilities. Thet—both by employees and customers accounts or a majority o inventory shrinkage. Moreover, Moreover, despite tremendous advances in technology technolog y, administrative error, such as inaccurate inventory counts when receiving shipments, continues to account or approximately 10% o inventory shrinkage.3
TABLE 8.1 Magnitude of Inventory Costs
Year
Value of busness inventory ($ llon)
inventory carryng cost (%)
inventory carryng cost ($ llon)
Total Logsts cost ($ llon)
inventory as a perentage of Total Logsts cost
2010
2064
19.2
396
1211
32.7
2011
2184
19.1
418
1282
32.6
2012
2269
20.1
457
1354
33.8
2013
2459
19.1
469
1410
33.3
2014
2495
19.1
476
1450
32.8
Logi stics Report, various years, prepared by Rosalyn Wilson or the Council o Supply Chain ManSources: Annual State o Logistics Sources: agement Proessionals ( www www.cscmp.org .cscmp.org )
2
See L. P. Alord and John R. Bangs (eds.), Production Handbook (New Handbook (New York: Ronald, 1955).
3
David Bennett, “Managing Loss Prevention,” Convenience Store Decisions , August 2014, 56, 58.
Chapter 8 • Inventory Management
TABLE 8.2 Components of Inventory Carrying Cost Obsolescence costs Inventory shrinkage Storage costs Handling costs Insurance costs Taxes Interest costs
Another component o inventory carrying carr ying costs, storage costs , reers to those costs associated with occupying space in a plant, storeroom, or warehousing acility. Some products produ cts have very specialized storage requirements; ice cream, or example, must be stored at a temperature below –20 degrees Fahrenheit. You should recognize that specialized storage requirements, such as rerigeration, result in higher storage costs. Handling costs , another component o inventory carrying carr ying costs, involve the costs o employing sta to receive, store, retrieve, retrieve, and move inventory. inventory. Note that specialized storage requirements may also increase handling costs; a rerigerated warehouse requires workers to wear gloves, gloves, head coverings, coverings, and coats to protect them rom the cold temperatures. temperatures. Insurance costs, which costs, which insure inventory against ire, lood, thet, and other perils, are another component o inventory carrying costs. Insurance costs are not uniorm across products; diamonds, or example, are more costly to insure than shampoo. Taxes represent represent yet another component component o inventory carrying costs, and they are calculated on the basis o the inventory on hand on a particular date; considerable eort is made to have that day’s day’s inventory be as low as possible. Finally, Finally, interest costs take into account the money that is required to maintain the investment in inventory. In the United States, the prime rate o interest has traditionally provided a convenient convenient starting point when estimating the interest charges associated with maintaining inventory. Some inventory items have have other types o carrying costs because o their specialized nature. Pets and livestock, or example, must be watered and ed. Tropical ish must be ed and have oxygen added to the water in which they are kept. Another cost, although it is generally excluded rom carrying cost, is opportunity cost—the cost o taking a position in the wrong materials. This can be an issue or those companies that engage in speculative inventory. Opportunity costs are also incurred by irms that hold too much inventory in reserve or customer demand.
Ordering Costs Ordering costs reer to those costs associated with ordering inventory, such as order costs and setup costs. Order costs include, include, but are not limited to, the costs o receiving an order (or example, the wages o a person who takes orders by telephone), conducting a credit check, veriying inventory availability, entering orders into the system, preparing invoices, receiving payment. Note that a number o the ordering costs involve involve the order transmittal and order processing components o the order cycle. Setup costs are those necessary to modiy production processes pr ocesses to make the products to satisy particular orders.
Trade-Off Between Carrying and Ordering Costs The trade-of that eexists xists between carrying and ordering costs is that they respond respond in opposite ways to the number o orders or size o orders. That is, is, an increase in the the number o orders leads to higher order costs and lower carrying costs. We’ll illustrate this trade-of with a mathematical example, but beore doing so it is necessary to understand how to calculate ordering costs and carrying costs. Ordering cost can be calculated by multiplying the number o orders per year times the order-
151
ing cost per order. order. Because o the assumption o an even outward low o goods, inventory inventory carrying costs are applied to one-hal o the order size, a igure that represents the average inventory. inventory. Average
152 Part III • Elements of Logistics Logistics Systems
inventory is multiplied by the the carrying costs o the inventory (expressed as a percentage percentage o the dollar value). Suppose weekly demand is 100 units, order cost per order is $80, the value o an item is $50 and carrying cost is 20% o the value o an item. I we place one order per year or the product, product, ORDERING COST
=
number o orders per year (1) times ordering cost per order ($80),
or ORDERING COST
=
=
1 times $80
=
$80
average inventory ((100 times 52)/2) times carrying costs (value o the product ($50) times carrying cost (.20)),
or CARRYING COST
=
2,600 times $10
=
$26,000
Alternatively,, look what happens Alternatively happens to ordering and carrying costs i we place one one order per week: week: CARRYING COST
=
=
orr ers t mes $ o
per or er, or $4,1
average inventory (50) times carrying cost ($10), or $500.
Stockout Costs I avoiding oversupply oversupply were the only problem associated with inventories, the solution would be relatively simple: Store ewer items. items. However, not having enough items can be as bad as, and sometimes worse than, having having too many items. items. Such costs can accrue during stockouts stockouts,, when customers demand items that aren’ aren’tt immediately available. Although calculation o stockout costs can be diicult and inexact, it is important or organizations to do so because such knowledge can be beneicial when determining how much inventory to hold, keeping in mind that a trade-o must be balanced between inventory inventory carrying carr ying costs and stockout costs. Stockout costs, or estimating the costs or penalties or a stockout, involve an understanding o a customer’s customer’s reaction to a company being out o stock when a customer wants wants to buy an item. Consider the ollowing customer responses to a particular stockout situation. How should they be evaluated? 1. The customer says, says, “I’ll be back,” back,” and this proves proves to be so. so. 2. The customer says, says, “Call me when it’s it’s in.” 3. The customer buys a substitute product that yields a higher proit proit or the seller. seller. 4. The customer buys a substitute product that yields a lower lower proit or the seller. seller. 5. The customer places an order or the item that is out o stock (a back order ) ) and asks to have the item delivered when it arrives ar rives.. 6. The customer goes to a competitor competitor only or this purchase. purchase. 7. The customer goes to a competitor competitor or this and all uture purchases. purchases. Clearly, each o these situations has a dierent cost to the company experiencing a stockout. Clearly, For example, the loss in situation 1 is negligible because the sale is only slightly delayed. The outcome rom situation 2 is more problematic in that the company doesn’t know whether the customer will, in act, return. Situation 7 is clearly the most damaging, because the customer has been lost or good, and it’s necessary necessary to know the cost o developing a new customer to replace the lost customer. customer. As pointed out in Chapter 7, 7, a commonly used guideline is that it costs ive times as much to acquire a new customer as it does to retain an existing one.
To illustr To illustrate ate the calculati calculation on o stockout costs, assume or simplici simplicity’s ty’s sake sa ke that customer responses to a stockout can be placed into three categories: delayed sale (brand loyalty), lost sale
Chapter 8 • Inventory Management 153
TABLE 8.3 Determination of the Average Cost of a Stockout Alternative
1. Brand-loyal customer
Loss
Average cost
$ 00.00
.10
$ 00.00
37.00
.25
9.25
1,200.00
.65
780.00
1.00
$789.25
2. Switches and comes back 3. Lost customer
probability
Average cost of a stockout These are hypothetical gures or illustration.
(switches and comes back), and lost customer. Assume urther that, over time, o 300 customers who experienced a stockout, stockout, 10 percent percent delayed the sale, 25 percent percent switched and came back, but the the remaining 65 percent were lost or good (see Table (see Table 8.3 ). The probability o each event taking t aking place can be used to determin determinee the average cost o a stockout. More speciically, as illustrated in Table in Table 8.3, 8.3, each probability is multiplied by the respective loss to yield an average cost per event. These average costs are then summed, and the result is the average cost per stockout. A delayed sale is virtually virtu ally costless because the customer is brand loyal and will purchase the product when it becomes available. The lost sale alternative results in a loss o the proit that would have been made on the customer’s purchase. purchase. In the lost customer situation, the customer buys a competitor’s product and decides to make all uture purchases rom that competitor; the relevant cost involved is that o developing a new customer. Having an understanding o how to calculate stockout costs highlights highlights several key managerial issues. As a general rule, the higher the average cost o a stockout, the better it is or the company to hold some amount o inventory (saety stock) to protect against stockouts. stockouts. In addition, the higher the probability o a delayed sale, the lower the average average stockout costs—and the lower the inventory that needs to be held by a company. For For example, i we switch the probabilities in Table 8.3 or brand loyalty and lost customer (i.e., brand loyal probability is .65, lost customer probability is .10), then the average cost o a stockout becomes $129.25 (as opposed to Table to Table 8.3’s 8.3’s $789.25).
Trade-Off Between Carrying and Stockout Costs The trade-of between carr carrying ying and stockout costs is that both move in opposite directions— higher inventory inventory levels (hence higher inventory inventory carrying carr ying costs) result in lower chances chances o a stockout (hence lower stockout costs). One way to illustrate this relationship is to look at the trade-ofs between levels levels o saety stock and the number o stocko stockouts uts prevented, as illustrated illustrated in Table in Table 8.4. 8.4 . In this example, we assume that inventory inventory can only be ordered in multiples o 10 and that each unit o inven inventory tory is valued at $480 with carrying costs o 25 percent. As a result, the incremental incremental carrying costs o moving rom 0 units o saety stock stock to 10 units o saety stock stock are (10 * $480) * .25, or $1,200. Likewise, Likewise, the incremental incremental carrying costs o moving rom 10 to 20 units o saety stock are $1,200. This example also assumes that the various levels o saety stock prevent pr event a certain number o stocko stockouts. uts. For For example, holding 10 units o saety stock or an entire year allows allows the irm to prevent 20 stockouts; moving rom 10 units to 20 units o saety stock allows 16 additional orders to be illed. Using an average average cost per stockout o $400, a saety stock o 10 units allows the irm to prevent 20 stockouts, which saves the irm $8,000 ($400 * 20). The savings o $8,000 is much greater than the additional carrying costs o $1,200, so the irm wants to hold at least least 10 units o saety stock. Twenty Twenty units o saety stock result in $1,200 o additional carrying costs, whereas the additional stockout costs avoided are $6,400 (16 * $400). According to the data in in Table Table 8.4 8.4,, the
optimum quantity o saety stock is 70 units. At this point, the cost o 10 additional units o inventory is $1,200, and $1,200 is saved in stockout costs.
154 Part III • Elements of Logistics Logistics Systems TABLE 8.4 Determination of Safety Stock Level
Numer of Unts of Safety Stok
Learnng Ojetve
8.3
Addtonal 25% Annual Total Value of Safety Stok carryng inremental ($480 er Unt) cost Safety Stok
Addtonal Orders Flled
Stokout costs Avoded
10
$ 4,800
$1,200
$1,200
20
$8,000.00
20
9,600
2,400
1,200
16
6,400.00
30
14,400
3,600
1,200
12
4,800.00
40
19,200
4,800
1,200
8
3,200.00
50
24,000
6,000
1,200
6
2,400.00
60
28,800
7,200
1,200
4
1,600.00
70
33,600
8,400
1,200
3
1,200.00
WHEN TO ORDER AND HOW MUCH TO ORDER A key issue with respect to inventory management involves the determination o when product should be ordered; one could order a xed amount o inventory ( fixed fixed order quantity system ), or orders placed at xed interwhile vals ( fixed fthe ixed order interval system ).or Inexample, a xed order quantity system,can thebe time interval may time uctuate order size stays constant; a store might always order 200 cases o sot drinks. Its rst order might be placed on January 3, a second order placed on January 6 (three-day interval), with a third order placed on January 11 (ve-day interval). By contrast, in a xed order interval system, the time interval is constant, but the order size may uctuate. For example, example, suppose a man goes grocery gr ocery shopping with his wie every Sunday. Sunday. Although the time interval or shopping is constant at seven days, the shopping list (inventory requirements) diers rom week to week. There needs to be a reorder (trigger) point (i.e., the level o inventory at which a replenishment order is placed) or there to be an eicient ixed order quantity system. Reorder points (ROPs) are relatively easy to calculate, particularly under conditions o certainty; a reorder point is equal to the average daily demand (DD) in units times the length o the replenishment cycle (RC): ROP
=
DD * RC
Suppose, or example, that average daily demand is 40 units, and the replenishment cycle is 4 days. The reorder point in this example is 40 * 4, or 160 units; in other words, when the inventory level reaches 160 units, a reorder is placed. The reorder point under conditions o uncertainty can be calculated in a similar manner; the only modiication involves including a saety stock (SS) actor: ROP
=
(DD * RC) + SS
Continuing with the previous example, suppose suppose that the company decides to hold 40 units o saety stock. The reorder point becomes (40 * 4) + 40, or 200 units. The act that a ixed order quantity system works best when there is a predetermined reorder point indicates that this system requires relatively relatively requent, i not constant, monitoring o inventory levels.. Under a ixed order quantity system, i sales start to increase, the reorder point will be reached levels more quickly, and a new order will automatically be placed. In most ixed order interval systems, by contrast, inventory levels are monitored much less requently—oten just beore the scheduled order time. The inrequency o inventory monitoring makes the ixed interval system much more susceptible to stockout situations, and one is more likely to see higher levels o saety stock in a ixed
interval system. It’s entirely possible that a company could have some o its inventory under a ixed order quantity system, whereas other inventory uses a ixed order interval system.
Chapter 8 • Inventory Management 155
Economic Order Quantity A long-standing issue in inventory management concerns how much much inventory inventory should be ordered at a particular time. The typical inventory order size problem, reerred to as the economic order quantity (EOQ), deals with calculating the proper order size with respect to two costs: the costs o carrying the inventory and the costs o ordering the inventory. inventory. The EOQ determines the point at which the sum o carrying costs and ordering costs is minimized, or the point at which which carrying costs equal ordering costs. More specically, specically, “The economic order quantity (EOQ) is the quantity o product that will minimize your total costs o inventory per piece.”4 The nature o carrying costs and ordering costs are presented in Figure 8.1. 8.1. The basic EOQ model model is grounded in the ollowing ollowing assumptions: 1. 2. 3. 4. 5. 6. 7. 8.
A continuous, continuous, constant, and known known rate o demand A constant and known replenishment or lead time A constant purchase price that is independent o the order quantity All demand is satisied satisied (no stockouts are allowed) No inventory in transit Only one item in inventory or no interaction between inventory items An ininite planning horizon Unlimited capital availability availability..
Mathematically, the EOQ can be calculated in two ways; one presents the answer in dollars, the other in units. In terms o dollars, suppose that $1,000 o a particular item is used each year, year, the order costs are $25 per order submitted, and inventory carrying costs are 20 percent. The EOQ can be calculated using this ormula: EOQ
=
AB/C /C 2 2 AB
Fgure 8.1 Determnng EOQ Usng a Grah 4
Jon Schreibeder, “Inventory “Inventory Management 101,” 10 1,” Electrical 90, no. 5 (2009): 52–53, 56. Electrical Wholesaling 90,
156 Part III • Elements of Logistics Logistics Systems
Where
=
t e most econom c or er s ze, n o ars
A
=
annual usage, in dollars
B
=
administrative costs per order o placing the order
C
=
carrying costs o the inventory (expressed as an annual percentage o t e nv nventory o ar va ue)
Thus: EOQ
=
2 2 * 1,000 * 25/.20
=
250,000 2 250,000
=
$500 order size
Altern atively, the EOQ can be calculated in terms o the number o units that should be Alternatively, ordered. Using the same inormation as in the previous example, and assuming that the product has a cost o $5 per unit, the relevant ormula is EOQ
=
2 2 DB/IC
Where EOQ
=
the most economic order size, in units
=
D B C
=
=
annual demand, in units (200 units; $1,000 value o inventory/$5 value per unit) administrative costs per order o placing the order carrying costs o the inventory (expressed as an annual percentage p ercentage o the inventory’s dollar value)
I
=
dollar value o the inventory, per unit
Thus: EOQ
=
2 2 * 200 * 25/.20 * 5
=
10,000/1 2 10,000/1
=
100 units
Although we’ve calculated EOQs, EOQs, how do we know that the answers answers are correct? Because the EOQ is the point where carrying costs equal ordering costs, we need to calculate both o these costs (see Table (see Table 8.5 ). Recall that we calculated $500 (100 units) to be the EOQ. As shown in Table in Table 8.5, 8.5, a $500 order size means that we’ll be ordering twice per year; the corresponding ordering costs are $50. Average Average inventory or a $500 order size is $250, meaning that our carr ying costs are $50. Thus, we’ve proven proven that at an order size size o $500, our ordering costs costs and carrying costs are equal. equal. Table Table 8.5 presents the total cost calculations or several other order sizes. Note that ordering costs equal carrying costs at the EOQ and that the total cost (i.e., sum o ordering costs and carrying carr ying costs) is minimized as well.
TABLE 8.5 EOQ Cost Calculations
Numer of Orders er Year
Order Sze ($)
Orderng cost ($)
carryng cost ($)
Total cost (Sum of Orderng and carryng cost ($))
1
1,000
25
100
125
2
500
50
50
100
3
333
75
33
108
4
250
100
25
125
5
200
125
20
145
Chapter 8 • Inventory Management 157
Conditions of Uncertainty Y You ou should recognize that organizations rarely, i ever, are lucky enough to manage inventories in an environment characterized by certainty or all eight o the EOQ assumptions presented above. above. Consider, or example, how an unexpected event might impact the continuous, constant, and known rate o demand assumption. An excellent illustration involves involves the 2016 deaths o singer-songwriters David Bowie and Prince; there was a tremendous tremendous surge in the sales o their recorded music in the weeks immediately immediately ollowing their deaths. deaths. Because the contemporary business world is characterized by a great deal o uncertainty uncertainty,, the basic EOQ model can be modiied to account or one or more conditions o uncertainty uncertainty.. For example, an economic order quantity can be calculated under under conditions o demand uncertainty, under conditions o lead time uncertainty, uncertainty, or under conditions o demand and lead lead time uncertainty uncertainty.. These and other modiication modiicationss increase i ncrease the mathematical complexity in calculating an economic order quantity and because o this mathematical complexity are beyond beyond the scope o this text.5
INVENTORY FLOWS The gures rom the xed order quantity (e.g., (e.g., EOQ) and the saety stock calculations calculations can be used to develop an inventory ow diagram, which graphically depicts the demand or, and replenishment o, inventory. Figure 8.2 8.2 presents an illustration o inventory ow based on the ollowing assumptions: an EOQ o 120 units, saety stock stock o 60 units, average average demand o 30 units per day, day, and a replenishment or order cycle o 2 days. Further, the beginning inventory is equal to the saety stock plus the EOQ + 1 1 ). Recall Recall rom rom earlier earlier in this this chapter chapter that that the the reorder reorder point can can be calcula calculated ted as a y eman * rep en s ment cyc e) + sa ety stoc stock), k), or * ) + ) 1 un ts ts . As shown in Figure 8.2, 8.2, 180 units o inventory are available or or sale at the beginning o day 1 (point A). The daily demand o 30 means that 150 units are available available or sale at the the beginning o day 2, and 120 units are available at the beginning o day 3. Because 120 units represent the reorder point (point B), an order is placed at the beginning o day 3. Because saety stock stock is not to be used under normal circumstances, reordering at 120 units means that 60 units (saety stock) will be on
=
=
Fgure 8.2 inventory Flow Dagram
Learnng Ojetve
8.4
5
A number o supply chain management textbooks contain detailed examples o the EOQ modied or various conditions o uncertai uncertainty nty..
158 Part III • Elements of Logistics Logistics Systems
hand 2 days later when the EOQ arrives. The EOQ o 120 units arrives at point C, and then total inventory increases to 180 units at point D. The rate o sales doubles to 60 beginning on day 5, the reorder point is hit at 120 units at the beginning o day 6 (point E), and another order is placed. Demand continues continues at 60 units on day 6, meaning that the regular inventory is exhausted, and at point F the saety stock is starting to be used. Demand is also 60 on day 7, leaving us with no inventory inventory (point G) at the end o day 7. The EOQ arrives beore opening on day 8, boosting the inventory to 120 units (point H), which is also the reorder point. Beginning on day 8, the demand settles back to 30 units per day. day. Continuing with Figure 8.2, 8.2, rom point H, inventory is depleted 30 units on day 8 and 30 more on day 9, leaving the inventory at 60 (point I). The inventory ordered on day 8 arrives prior to opening on day 10, meaning that we have 180 units in stock at the beginning o day 10 (point J). On days 10 and 11, 30 units are demanded; inventory is thus 120 units (point K), and another reorder is placed at the beginning o day 12. Demand is 30 units on days 12 and 13, and inventory has reached 60 units (point L). However, because o a transportation tran sportation delay, the replenishment cycle is 3 days instead o 2, and instead o arriving at the beginning o day 14, it arrives at the beginning o day 15. Day 14’s 14’s demand o 30 units will be satisied rom saety stock (point M), and the EOQ arrives shortly thereater. The inventory low example presented in Figure 8.2 illustrates 8.2 illustrates that saety stock can act as a saeguard against two problem areas: an increased rate o demand and a longer-than-normal replenishment cycle. This example also illustrates that when a ixed order quantity system such as an EOQ is used, the time between maybetween vary. Asorders long aswas demand was normal, at 30 units the replenishment cycle took 2 days,orders the time 4 days. However However, when salesand doubled to 60 units per day, the time between orders ell to 2 days. As noted earlier in this chapter, one requirement or the utilization o a ixed order quantity system is that the level o inventory must constantly be monitored; when the reorder point is hit, the ixed order quantity is ordered. With continuing technological advances, many irms have the capability to constantly monitor their inventory and hence have the option o using a ixed order quantity system such as the EOQ. A reorder point or each item can be established electronically so it can indicate when the stock has been depleted to the point where a new order should be placed. Increasingly,, these orders are transmitted electronically. Increasingly electronically. Learnng Ojetve
8.5
INVENTORY MANAGEMENT: MANAGEMENT: SPECIAL CONCERNS The up toFor thisexample, this point illustrates illus concerning inventory inventory management are otendiscussion hard to make. it trates might that seemgeneralizations like a good g ood idea or a company to strive or minimizing stockouts, except that to actually accomplish this might require inordinately large saety stocks. Alternatively,, a xed order interval policy might be attractive Alternatively attractive because o its simplicity simplicity (e.g., (e.g., an order is placed every 7 days); however, irregular demand patterns could create either stockouts or overstocks under such a policy. policy. Because o difculties in generalizing about inventory management, what ollows is a discussion o select actors that organizations might ace when managing inventories.
ABC Analysis of Inventory inventory, which can be applied in several dierent ways, recognizes that invento ABC analysis of inventory ries are not o equal value to a rm and that, as a result, all inventory should not be managed in the same way. way. An individual rm may stock hundreds or thousands o items, and it is a real challenge to determine the relative importance o each item. One common rule o thumb, the 80/20 rule, is
that 80 percent o a company’s company’s sales come rom 20 percent o its products (conversely, (conversely, 20 percent o sales come rom 80 percent percent o products). From a managerial perspective, perspective, this suggests that the primary ocus should be on the 20 percent percent o products that generate the 80 percent o sales. For
example, it might not be in a company’s company’s best interest to store very slow moving inventories in all its warehousing acilities; acilities; doing so increases inventory inventory carrying costs.
Chapter 8 • Inventory Management 159
Measures that can be used to determine ABC status include sales volume in dollars, sales volume in units, the astest-selling items, item proitability proitability,, or item importance. impor tance. For example, with respect to item importance, a irm ir m supplying medicine to hospitals might need to stock certain cer tain items because they are critically important. Thus, Thus, in terms o item importance, ABC might be operationalized as ollows: A items could be the ones with the highest criticality, B items could be those with moderate criticality, and C items could have low criticality. Similar approaches could be applied to other measures o ABC status such as sales volume in dollars and item proitability. proitability. One issue with ABC analysis involves involves a determination o what percentage o items should be classiied as A, B, and C, respectively. respectively. Although there are no right or wrong answers or percentages in this classiication scheme, it’s it’s important to recognize that either too high or too low a percentage o A items may reduce the potential eiciencies to be gained rom this classiication technique. A second issue with ABC analysis involves how it can be used by managers. manag ers. One use is that ABC analysis can determine stocking patterns in warehousing acilities. For example, one company achieved a 25 percent space reduction in its logistics network by locating saety stock at only one warehousing acility. acility.6 In addition, ABC analysis could be used to determine how requently inventory gets g ets monitored; A items might be checked daily (or, increasingly, increasingly, hourly), B items weekly, and C items monthly.
Dead Inventory Some companies have added a ourth category, D, to ABC analysis. D stands or either “dogs” or dead inventory (dead stock), which reers to product or which there are no sales during a 12-month period. Organizations occasionally resort to seemingly desperate measures to manage their dead inventory. Consider the organization with a storage acility located next to a river that ooded on a seasonal basis. During one particularly rainy year, year, the organization placed all o its dead stock on a deck attached to the storage acility—and discovered discovered one day that the dead stock had been carried 7 away by rising oodwater rom the river. Companies can also throw away dead inventory, i or no other reason than to ree up space in a warehousing acility. acility. A well-known example o this behavior involved Atari, a video game maker, which in 1983 dumped between 10 and 20 trailerloads trailerloads o video games at a New Mexico landfll ! ! However, However, such behavior should only be a last resort, because in so doing a company is, in eect, throwing away money. Dead inventory increases inventory carrying carr ying costs and takes up space in warehousing acilities, and a structured process should be in place or managing it. For example, because dead inventory has oten been associated with overproduction o items that customers don’t want want (or need), one suggestion would be to make items to order, as opposed to make items to stock. However, an increasing source o dead inventory involves special, highly customized orders that never end up with the customer, perhaps because the customer no longer wants wants or needs the product. Suggestions or dealing with this situation include partial (or ull) prepayment by the customer as well as a noreturn policy policy..8 Companies might also market their dead stock more aggressively, perhaps through drastic price reductions or bunching it with more attractive merchandise. Companies might also attempt to sell their dead inventory to companies that specialize in selling such items. items. Internet sites are available that specialize in selling o dead stock (e.g., (e.g., deadstockbroker.com deadstockbroker.com ) ).. Some dead items can be donated to charitable causes; or example, grocery items that haven’t been sold by their expiration dates are sometimes donated to local ood banks. In some countries, such as the United States, States, donations o dead inventory to charitable organizations allow businesses to qualiy or ederal income tax deductions. Other advantages to
6
Mary Aichlmayr, “The Quick, the Dead, and the Slow Movers,” Transportation & Distribution , February 2002, 38–42.
7
Jason Bader, “Distributor Power Power Tools: Tools: The Inventory Obituary,” Doors Obituary,” Doors and Hardware Hardware , March 2007, n.p.
8
Scott Stratman, “Special Orders,” Electrical Orders,” Electrical Wholesaling , May 2006, 52–53.
160 Part III • Elements of Logistics Logistics Systems
donating dead stock include allowing an organization org anization to ocus on its better selling products, reeing up warehousing space, and eliminating the challenges o managing problematic products.9
Inventory Turnover inventory is sold in a one-year period, and Inventory turnover reers to the number o times that inventory can be calculated by dividing the cost o goods sold by the average inventory, inventory, where average inventory is the sum o beginning and ending inventory divided by by 2. For example, example, suppose the cost o goods sold is $675,000, beginning inventory is $200,000, and ending inventory is $250,000. The inventory turnover or these data is: COST OF GOODS SOLD ($675,000) ÷ AVERAGE INVENTORY [($200,000 + $250,000) ÷ 2], or $675,000 ÷ $225,000, which equals 3. Although there is no optimal inventory inventory turnover ratio, inventory inventory turnover igures can provide important insights about an organization’s organization’s competitiveness and eiciency. eiciency. Thus, a particular organization can compare its turnover igures igures to those o direct competitors or other organizations with “desirable” turnover ratios. With respect to eiciency eiciency,, low turnover indicates that a company is taking longer to sell its inventory inventory,, perhaps because o product obsolescence or pricing problems.10 By contrast, high turnover may signal low inventory levels, which can increase the chance o product stockouts. stockouts. Despite this, most organizations org anizations today strive to increase their inventory turnover. One way to do this is by reducing average inventory. Although reducing average inventory is easier said than done, you should recognize that an understanding o two concepts discussed earlier in this section, ABC analysis and dead inventory, inventory, can help reduce average inventory. inventory. For example, eliminating some or all o a company’s dead inventory automatically reduces both beginning and ending endin g inventory—hence average inventory is also reduced. The inventory inventory turnover turnover concept concept provides provides an excellent example o trade-os involving involving multiple multiple organizational unctions such as inance, logistics, and marketing. One illustration o these trade-os is provided by used-car dealers, who must balance price (marketing), proit (inance), and inventory turnover (logistics). As an example, the used-car dealer that decides to maximize average proit per vehicle will likely likely charge a higher price or each vehicle, vehicle, and the higher price might result result in a longer 11 selling time, hence slower inventory turnover, or each vehicle.
Complementary and Substitute Products takes a rather This book takes rather narrow view o complementary products and denes them as inventories that can be used or distributed together, such as razor blades and razors. These products may only intensiy the pressures on retailers or wholesalers concerned with inventory maintenance. For example, consider the ollowing dilemma: “So many complementary items exist or cooking meat and sh that you’ll never be able to display them in the same section (o the store).” Possible complemencomplementary products or the meat and sh section include cheeses cheeses,, seasonings, skewers, skewers, skillets, and wines, 12 among others. Another issue associated with complementary products involves the amount o inventory to be carried. Purchasing a canister vacuum cleaner, or example, generally means that a customer will periodically need to buy replacement bags or the canister. As such, the canister bags might be slow
9
Emily Collins, “Turn Dead Inventory into Dollars,” Material Dollars,” Material Handling Management Management , December 2008, 75–76.
10
“‘Turns’ or the Better—Inventory Turns Impact Prots and Stock Prices,” Dow Prices,” Dow Theory orecasts 58, 58, no. 4 (2002), 1, 4.
11
David Rug gles, “Turn, Baby, Turn,” Ward’s Dealer Business , November 1, 2011, 23–24.
12
James Mellgren, “Category Complements: Increasing Specialty Specia lty Food Sales,” Sales,” Gourmet Retailer, June Retailer, June 2006, 38–44.
Chapter 8 • Inventory Management 161
sellers, and some might argue that the bags should be dropped in avor o aster-mo aster-moving ving products. Others, however, however, would would point out that the sale and display o these bags is necessary to support the sale o canister vacuums. vacuums. Substitute products reer to products that can ill the same need or want as another product. The substitutability can occur at a speciic speciic product level (e.g., (e.g., one brand o cola is viewed as a substitute or another brand o cola), or it can occur across product classes (e.g., potatoes may may be viewed as a substitute or rice). As pointed out previously in this chapter, knowledge o substitutability has important implications with respect to stockout costs and the sizes o saety stocks to be maintained. Thus, i a consumer has little hesitation in making substitutions, there would appear to be minimal penalties or a stockout. However, a point may be reached where customers become suiciently annoyed at having to make substitutions that they decide to take their business elsewhere. Because o the many possibilities or substitutability, substitutability, many grocery chains target in-stock rates o 95 percent or individual stores so that suicient substitutes exist or a customer to purchase a substitute item rather than go to a competing store. Moreover,, some substitute product decisions are much more challenging than others. Consider, Moreover or example, some o the issues that hospitals conront with respect to substitute products: • • • •
What saety risks does a substitute product product pose or patients and and hospital sta? Is the substitute product compatible with current equipment? How will inormation about the substitute product be communicated to hospital sta ? How do a patient’s insurance requirements impact the ability to use a substitute product?13
It’s also important that companies have a thorough understanding o substitution patterns. For example, in many cases, substitutions are two-way, two-way, meaning that i brand A is substitutable or brand B, then brand B is substitutable or brand A. In some situations, however, one-way relationships exist; a bolt 7/16 inch in diameter could be used in place o a bolt that is 1/2 inch in diameter, but the reverse may not hold.
CONTEMPORARY ISSUES WITH MANAGING INVENTORY Much o what has been discussed to this point represents traditional thinking about about inventory management. Although traditional thinking about inventory continues to be relevant, this chapter concludes with a look at three contemporary issues with managing inventory—lean manuacturing, ser vice parts logistics, and vendor-managed inventory inventory..
Lean Manufacturing Manufacturing Broadly speaking, lean manufacturin manufacturing g (also reerred to as lean ) ocuses ocuses on the elimination elimination o waste and the increase in speed and ow ow.. The lean manuacturing approach identies seven major sources o waste, one o which is inventory. inventory. Just-in-time (JIT) is one o the best known lean inventory practices. We will take a closer look at JIT in the paragraphs that ollow. From an inventory perspective, the Just-i Just-in-tim n-time e (JIT) approach approach seeks to minimize inventory by reducing (i not eliminating) saety saety stock, as well as by having the required amount o materials arrive at the production location at the exact time that they are needed. Although the JIT approach is generally associated with inventory management because o its ocus on minimizing inventory, inventory, the consequences o JIT actually go ar beyond inventory inventory management. The JIT approach has a number o important implications implications or logistical eiciency, eiciency, one o which is that suppliers must deliver deliver highquality materials to the production line; because o JIT’ JIT’ss emphasis on low (no) saety stock, deective materials result in a production line shutdown. Improved product quality rom suppliers can be acilitated by looking at suppliers as partners, as opposed to adversaries, in the production process.
Learnng Ojetve
8.6
13
Colleen Cusick, “Successul Substitutions Are a Product o Good Communication,” Material Communication,” Material Management in Health Care , March 2008, 28–31.
162 Part III • Elements of Logistics Logistics Systems
JIT emphasizes minimal inventory levels, and an d as a result, customers tend to place smaller, more requent orders. As such, it is imperative imperative that suppliers’ order systems be capable o handling an increased number o orders in an error-ree ashion. In addition, because the transit-time reliability tends to decrease with distance, suppliers need to be located relatively close to their customers. The combination o smaller, more requent requent shipments and close close supplier location means that trucking is an important mode o transportation in the JIT approach. As such, production and distribution acilities should be designed to support truck shipments—that is, there should be truck docks to acilitate product loading and unloading. Although this may appear to be the proverbial “no-brainer,”” consider the case o a U.S. “no-brainer, U.S. manuacturer manuacturer that designed a state-o-the-art distribution acility to be served by rail, only to switch to a JIT approach, thus making the new acility totally worthless.. In act, some companies involved in JIT have designed their production acilities so that worthless trucks can drive inside them, thus bringing the product that much closer to the actual production point. Figure 8.3 8.3 shows a truck trailer that opens on its side or rapid discharge o parts or JIT inventory management. Other examples o lean inventory include Eicient Consumer Response Response (ECR), which is associated with the grocery and beverage industries, and Quick Response (QR), which is associated with the apparel industry. Where JIT tends to encompass movement o materials and component parts rom supplier to producer, ECR and QR tend to ocus on product movement rom manuacturer to retailer.
Fgure 8.3 Traler That Oens on the Sde and is Used for Rad Dsharge of parts Blain/Fotolia.
Source: Photo
courtesy of Max
Chapter 8 • Inventory Management 163
Although lean is an important concept in contemporary contemporary logistics, a conluence o events suggests that organizations should careully consider the potential trade-os beore adopting a lean philosophy. More speciically, the lean philosophy was conceived and nurtured in an environment—local or regional sourcing, ewer man-made or natural disasters, to name two actors—ar dierent rom today’s environment. For example, today’s emphasis on global sourcing translates into longer and more erratic transit times, in part because many shipments are moving by water transportation (which is a slow orm o transporta transportation); tion); longer and more erratic er ratic transit times don’t align very well with lean’s lean’s emphasis on shipments that arrive exactly when needed. With respect to man-made natural disasters, the August 2015 explosion at China’s China’s Port o Tianjin Tian jin caused tremendous supply chain disruptions— lost inventories, delayed shipments, rerouted shipments—that are antithetical to the lean philosophy.
Service Parts Logistics Service parts logistics involves designing designing a network o acilities to stock service parts, deciding upon inventory ordering policies, stocking the required parts, and transporting parts rom stocking acilities to customers.14 Long viewed as an aterthought or—even worse—as a nuisance, service parts logistics has gained greater attention and appreciation in recent years. years. One reason or this is that the customer expectations associated associated with service parts logistics continue to increase, particularly in the automotive industry where the maximum customer customer wait time or repair or replacement parts is one day.15 Another reason or increased emphasis on service parts par ts logistics is that tepid worldwide economic economic conditions result in some organizations repairing, rather than replacing, aging or deectiv deectivee equipment. Service parts logistics creates a variety o potential challenges challenges or logisticians; one challenge is that it can be extremely diicult to orecast the demand or the necessary parts. For example, although companies might have some knowledge about the repair parts needed or routine or preventive maintenance o products products,, it is virtually impossible impossible to orecast when the product might break down or ail. The diiculties in orecasting demand lead to challenges with respect to which parts to carry, car ry, the appropriate stocking levels or the parts that are carried, and higher inventory levels, among others. 16 Another challenge involves the number o warehousing acilities that should be used in ser vice parts logistics. One possibility is to locate the parts at numerous warehousing acilities. This allows the parts to be airly close to potential customers, and in emergency situations, where time is o the essence, this can be critical to customer satisaction. Alternatively, Alternatively, the parts could be located at one centralized acility; although this would require use o premium transportation or some shipments, this cost can be oset by the inventory cost savings that result rom inventory being held in only one acility.
These and other challenges challenges have led some organizations to outsource their service service parts logistics to companies that specialize in this area. For example, UPS, oten thought o as a specialist in the delivery o small packages, has expertise expertise in service parts logistics that oers our distinct services to prospective customers—critical customers—critical order ulillment; reverse logistics; network and parts planning; test, repair, and reurbish.17 This discussion o service parts logistics oers an opportunity oppor tunity to point out the importance impor tance o inormal considerations when managing inventories and making logistics-related decisions. Some years ago, the owner o an automotive parts distributor became concerned about the amount o inventory his company was holding. A visit to the distributor’s storage acility revealed that it was literally overrun with oil ilters rom one particular par ticular manuacturer. manuacturer. This one brand o oil ilters accounted or approximately 20 percent o the acility’s acility’s total inventory, inventory, a igure ar higher than the brand’ss actual demand. brand’
14
Mehmet Ferhat Candas and Erhat Kutanoglu, “Benets o Considering Inventory in Service Parts Logistics Network Design Problems with Time-Based Service Constraints,” IIE Transactions 39, 39, no. 2 (2007): 159–176. 15
Anthony Coia, “The Replacement Fillers,” Automotive Fillers,” Automotive Logistics , September–October 2008, 28–32.
16
Lisa Harrington, “Getting Service Parts Logistics Up to Speed,” Inbound Logistics, November Logistics, November 2006, 72–79.
17
www.ups-scs.com/logistics/postsales.html www .ups-scs.com/logistics/postsales.html
164 Part III • Elements of Logistics Logistics Systems
At irst glance, the solution seemed clear: Reduce the inventory o oil ilters to a level more in line with demand. However, there was a reason or the high inventory o oil ilters: The oil ilter manuacturer sponsored annual contests that oered all-expenses-paid trips or two to attractive vacation locations such as Hawaii, and the trips were awarded based on the amount o o oil ilters purchased in a particular time rame. Because the distributor’s spouse had become quite ond o these annual trips, each each year the owner placed very large orders or that particular brand o oil ilters, despite that act that they weren’t needed. As a result, the “obvious” solution to the problem— reducing the inventory o oil ilters—wasn’t ilters—wasn’t easible because the owner wanted to please his spouse. In this situation, personal considerations were more important than proessional ones. You must recognize that personal considerations oten play a very important role when making decisions in amily-run businesses businesses..
Vendor-Managed Inventory In traditional inventory management, the size and timing o replenishment orders are the responsibility o the party using the inventory, such as a distributor or a retailer. Under vendor-managed inventory (VMI), by contrast, the size size and timing o replenishment re plenishment orders are the responsibility o the manuacturer . Operationally, VMI allows manuacturers to have access to a distributor’s or retailer’s sales and inventory data, and this access is accomplished electronically by electronic data interchange (EDI) or the Internet. Although VMI is oten associated with consumer products, it also has been applied to industrial products such as airplanes, construction equipment, asteners (e.g., bolts, screws), and heating and cooling systems, among others. VMI represents a huge philosophical shit or some organizations in the sense that they are allowing another party to have control over their inventories. This is a situation that necessitates tremendous trust on the part o distributors and retailers because because o the potential or unscrupulous manuacturers to abuse the system by pushing unneeded inventories onto downstream parties. One potential beneit to VMI is better inventory management in the sense that vendors might be more proicient than their customers at managing inventories. VMI oten leads to ewer stockouts. VMI can allow vendors to do a better job o supplying their customers because VMI gives gives vendors 18 more control over when and how inventory is shipped to customers. Alternatively, one drawback to VMI is inadequate data sharing between the relevant relevant parties, in part because o trust and control concerns. In addition, organizations that adopt VMI must recognize that the process will not produce immediate beneits and that its adoption will likely result in some errors in the short run. r un.19
Summary Inventory is a key component in logistics because inventory The chapter also addressed when to order inventory, inventory, as decisions are oten a starting point or other business activi- well as how much inventory to order. We learned lear ned that reorties. The chapter began with a look at the various classiica- der points signiy stock levels at which a new order should tions o inventory inventory,, ollowed by a discussion o inventory be placed. With respect to how much to order, the economic costs. When deciding what levels levels o inventories to maintain, order quantity (EOQ) minimizes ordering costs and inventory companies try to minimize the costs associated with both too carrying costs. much and too little inventory. Too much inventory leads to The chapter looked at special concerns associated with high inventory carrying costs; too little inventory can lead to inventory management, including ABC analysis and inventory stockouts and the associated stockout costs. The worst out- turnover. We We learned that an understanding o ABC analysis come o a stockout is to lose both a sale and all uture busi- can help organizations increase their inventory turnover. The ness rom the customer. chapter concluded with a discussion discussion o several contemporary issues associated with managing inventory.
18
http://ramproducts.com/advantages-disadvantages-vendor-managed-inventory/
19
Paul Evanko, “Vendor-Managed Inventory,” Inventory,” HV HVACR ACR Distribution Dis tribution Business , December 2010, 32, 34–35.
Chapter 8 • Inventory Management 165
Key Terms ABC analysis o inventory Back order Complementary products Cycle (base) stock Dead inventory (dead stock) Economic order quantity (EOQ) Fixed order interval system Fixed order quantity system
Inventory Inventory carrying (holding) costs Inventory shrinkage Inventory turnover Just-in-time (JIT) approach Lean manuacturing (lean) Ordering costs Pipeline (in-transit) stock
Psychic stock Reorder (trigger) point Saety (buer) stock Service parts logistics Speculative stock Stockout costs Substitute products Vendor-managed V endor-managed inventory inventory (VMI)
Questions for Discussion and Review 8.1 How might dierent organizational unctions have dierent inventory management objectives? 8.2 What makes it difcult or managers to achieve achieve the proper balance o inventory? 8.3 Distinguish among cycle, saety, pipeline, and speculative stock.
8.12 Dene what is meant by dead inventory. inventory. What are several ways to manage it? 8.13 In what ways can inventory turnover tur nover provide important insights about an organization’s competitiveness competitiveness and efciency? 8.14 Discuss some o the managerial challenges that
8.4 Dene what is meant by inventory carrying costs and list its primary components components.. 8.5 What are ordering costs? What is the tradeo between between inventory carrying costs and ordering costs? costs. How can 8.6 Discuss the concept o stockout costs. stockout costs be calculated? 8.7 Distinguish between a xed order quantity and a xed order interval system. Which one generally requires more saety stock? Why? 8.8 Explain the logic o the EOQ model. 8.9 What assumptions are associated with the EOQ model? 8.10 How can inventory ow diagrams be useul to a logis-
complementary products present. 8.15 What are substitute items? items? How might might they aect saety stock policies? 8.16 How might a hospital’s decisions regarding substitute products dier rom a supermarket’ supermarket’ss decisions regarding substitute products? g o ar beyond 8.17 How do the consequences o JIT go inventory management? careully consider potential 8.18 Why should organizations careully trade-os beore adopting a lean philosophy? 8.19 Discuss some challenges that service parts logistics creates or logistics managers. 8.20 How does vendor-managed inventory dier rom
tics manager? 8.11 Discuss what is meant by ABC analysis o inventory inventory.. Name several measures that can determine ABC status.
traditional inventory management?
Suggested Readings Ettouzani, Youmas, Nicola Yates, and Carlos Mena. “Examining Retail On Shel Av Availability: ailability: Promotional Impact and Call or Research.” Internat International ional Journal Journal o Physical Distribution & Logistics Management 42, 42, no. 3 (2012): 213–243. Farooquia, Parveen and M. Nasir Khan. “Returning to Roots or Reducing Inventory Inventory Costs in SMEs: A Case o Indian Lock Industry.” Journal o Enterprising Culture C ulture 18, 18, no. 3 (2010): 315–330.
Gupta, Sandeep and Charanyan Iyengar. “The Tip o the (Inventory) Iceberg. Iceberg.”” Supply Chain Management Review 18, 18, no. 2 (2014): 28–35. Leeuw,, Sander de, Matthias Holweg, and Geo Williams. Leeuw “The Impact o Decentralized Control on Firm-level Inventory: Evidence rom the Automobile Industry.” Industry.” International Journal o Physical Distribution & Logistics ManManagement 41, 41, no. 5 (2011): 435–456. Schulz, John R. “Embracing the Capriciousness o Variabi Variabill-
Gebauer, Heiko, Gunther Kuzca, and Chenzi Wang. “Spare Parts Logistics or the Chinese Market.” Benchmarking: An 18, no. 6 (2011): 748–768. International Journal 18,
ity.” Perormance Improvement 54, 54, no. 9 (2015): 6–10. Stanger, Sebastian H.W., Richard Wilding, Nicky Yates, and Sue Cotton. “What Drives Perishable Inventory Manage-
166 Part III • Elements of Logistics Logistics Systems
ment Perormance? Lessons Learnt rom the UK Blood Supply Chain.” Supply Chain Management: An International 17, no. 2 (2012): 107–123. Journal 17, Williams, Sean Sean P. P. “Demystiying Inventory Inventory Optimization.” Optimization.” Supply Chain Management Review 19, 19, no. 2 (2015): 24–30. Yu-Lee, YuLee, Reginald T. T. “Proper Lean Accounting: Eliminating Eliminating
CASE CASE 8.1 LOW NAIL COMPANY COMPANY short-term -term investments at a Ater making some wise short race track, Chris Low had some additional cash to in vest in a business. The most promising oppor tunity at the time was in building supplies, so Low bought a business that specialized in sales o one size o nail. The annual volume o nails was 2,000 kegs, and they were sold to retail customers in an even ow. Low was uncertain how many nails to order at any time. Initially, only two costs concerned him: order-processing costs, which were $60 per order without regard to size, and warehousing costs, which were $1 per year per keg space. This meant that Low had to rent a constant amount o warehouse space or the year, and it had to be large enough to accommodate an entire order when it arrived. Low was not worried about maintaining saety stocks, mainly because the outward ow o goods was so even. Low bought his nails on a delivered basis.
QUESTiONS 1. Using the EOQ methods outlined in the text, how many kegs o nails should Low order at one time? time?
Waste Isn’t Waste Isn’t Enough; You You Have to Reduce Inputs Inputs to Save Save Money.” Industrial Engineer 43, 43, no. 10 (2011): 39–43. Zvirgzdina, Rosita, Iveta Linina, and Ve Velga lga Vevere. “Efcient Consumer Response (ECR) Principles and Their Application in Retail Retail Trade Trade Enterprises in Latvia.” Latvia.” European Integration Studies 9 9 (2015): 257–264.
Low’ss 2. Assume all conditions in question 1 hold, except that Low’ supplier now oers a quantity quantity discount in the orm o absorbing all or part o Low’ Low’ss order-processing costs. costs. For orders o 750 or more kegs kegs o nails, the supplier will absorb absorb all the order-proces order-processing sing costs; or orders between 249 and 749 kegs, the supplier will absorb hal. What is Low’s new EOQ? (It might be useul to lay out all costs in tabular orm or m or this and later l ater questions.) questions.) Temporarily orarily,, ignore your work on question 2. Assume Assume that 3. Temp Low’ss warehouse oers to rent Low space on the basis o Low’ the average number number o kegs Low will have have in stock, rather than on the maximum number o kegs Low would would need room or whenever a new shipment arrived. The storage charge per keg remains the same. Does this change the answer to question 1? I so, what is the new answer? 4. Tak Takee into account the answer to question question 1 and the the supplier’ss new policy outlined in question 2 and the plier’ the warehouse’s new policy in question 3. Then determine Low’s new EOQ. Temporarily orarily,, ignore your work on questions 2, 3, and 4. 5. Temp Low’s luck at the race track is over; he now must borrow money to nance his inventory o nails. Looking at the situation outlined in question 1, assume that the wholesale cost o nails is $40 per keg and that Low must pay interest at the rate o 1.5 percent per month on unsold inventory. inventory. What is his new EOQ? 6. Taking into into account all the actors actors listed in questions questions 1, 2, 3, and 5, calculate Low’s Low’s EOQ or kegs o nails.
10
Warehousing ManageMent ManageMent
Learning Objectives 10.1 10.2 10.3 10.4
To discuss the role o warehousing in a logistics system To To T o learn about public, private, contract, and multiclient multiclient warehousing To T o analyze select considerations when designing warehousing acilities To T o examine some prominent operational issues in warehousing
A recurring theme in previous chapters has been the changing nature o the logistics discipline and the individual unctions that comprise it. In the systems approach approach o logistics, changes to one unction aect other unctions as well. Indeed, many o the changes described in previous chapters— such as electronic ordering, acility consolidation, and lean inventories—have inventories—have especially aected warehousing management. Many well-run companies today view warehousing as a strategic consideration—and thus a potential source o competitive advantage. advantage. For example, the continuing continuing growth o e-commerce is causing some companies to shit away rom warehousing’s traditional cost ocus to an emphasis on customer satisaction in terms o rapid, and correct, order ulillment.1 This chapter begins with an overview that deines what is meant by warehousing and discusses the role o warehousing in a logistics system. This is ollowed ollowed by analysis o public, private, private, contract, and multiclient warehousing. Next comes a section devoted to design considerations in warehousing, with particular attention to trade-os in design considerations. The chapter concludes with an examination o some key operational issues in warehousing, such as productivity, saety, saety, and security. Learning Objective
10.1
THE ROLE OF WAREHOUSING IN A LOGISTICS SYSTEM
Warehousing, which reers to “that part o a rm’s logistics system that stores products (raw materials, parts, goods-in-process, goods-in-process, nished goods) at and between points o origin and point o consump2 tion,” and transportation are substitutes or each other, with warehousing having been reerred to as “transportation at zero miles per hour.” Figure 10.1, 10.1, which presents an example o the trade-of between warehousing and transportation, indicates that placing a warehousing acility between the between producer and customers adds a new layer o costs (those associated with warehousing) warehousing) into the system. Moreover, the warehousing acility generates shorter-haul transportation routes (rom the producer to the acility; rom the acility to the customers); as a general rule, short-haul transportation tends to be more costly per mile than long-haul transportation. However, However, the increased costs o short-haul transportation may be ofset by lower transportation costs per unit o weight associated with volume shipments.
1
Mary Shacklett, “The 21st Century Warehouse,” World Trade , March 2011, 18–25.
2
Douglas M. Lambert, James R. Stock, and Lisa M. Ellram, Fundamentals Ellram, Fundamentals of Logistics Management (New (New York: Irwin McGrawHill, 1998), Chapter 8.
186 18 6
Chapter 10 • Warehousing Management 187
Retailer A
Transportation Producer
Transportation
Retailer B
Transportation Retailer C
Direct from producer to retailer: longer-haul transportation
Transportation Producer
Transportation (volume shipment)
Warehousing facility
Transportation
Retailer A
Retailer B
Transportation Retailer C
Figure 10.1 Adding a Warehousing Facility: Shorter-Haul Transportation Transportation
I the introduction o warehousin warehousingg into a supply chain simply shits business costs across various logistics activities, then why is warehousing desirable? A key reason or warehousing is because patterns o production and consumption do not coincide, and warehousing serves to match dierent rates or volumes o low low.. Canned ruits and vegetables are examples o one extreme in which production occurs during a relatively short period, but sales are spread throughout the year. The other extreme—sales concentrated concentrated in a relatively short time period, steady production rates throughout the year—is more likely to be addressed by having the production occur closer to the demand period. Sometimes, Sometim es, larger quantities quantities o goods are purchased purchased than can be consumed in a short period o time, and warehousing space is needed to store st ore the surplus product. This T his can occur or several reasons, such as guarding against anticipated scarcity or to beneit rom a seller’s advantageously priced deal. Much o the preceding discussion could be viewed as a market-oriented approach to warehousing. However, warehousing management can also be relevant to production and raw materials considerations. For For example, an automobile manuacturer might purchase extra amounts o steel in response to anticipated steel shortages. shor tages. Moreover,, warehousing acilitates the regrouping function in a supply chain. This unction, Moreover which involves rearrangi r earranging ng the quantities and assortment o products as they move through thr ough the supply chain, can take our orms—accumulating (also reerred to as bulk-making), allocating (also reerred to as bulk-breaking), assorting , and sorting out. Accumulating and allocating reer to adjustments associated with the quan quantity tity o product product,, whereas assorting and sorting out reer to adjustments associated with product assortment. Thus, accumulating involves bringing together similar stocks rom dierent sources, as might be done by a department store that buys large larg e quantities o men’ men’ss suits rom several dierent producers. Allocating, by contrast, involves breaking larger quantities into smaller quantities. Continuing with our suit example, whereas the department store might buy 5000 suits in size 42 short, an individual store might only carry car ry 15 or 20 suits in this size. Assorting Assorti ng reers to building up a variety o dierent d ierent products or resale to particular customers. Our department store example might want to supply individual stores with a number o dierent suit sizes (e.g., size 36, size 38, size 40, etc.) and styles (e.g., two-button suits, three-button suits, etc.). Sorting out reers to “separating products into grades and qualities desired by dierent target markets.”3 For example, a department store chain may sell $1,000 men’s suits only in stores located in highincome areas, whereas $600 men’s suits might be the highest priced suit sold in less-aluent areas.
3
William D. Perreault, Jr., Joseph P. Cannon, and E. Jerome McCarthy, McCarthy, Basic Basic Marketing, 16th Marketing, 16th ed. (New York: McGraw-Hill Higher Education, 2008), Chapter 11.
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Warehousing can Warehousing can be provided by by warehouses, warehouses, distribution centers, centers, ulillment centers, or crossdocking acilities. Warehouses emphasize the storage o products, and their primary purpose is to maximize the usage o available storage space. space. Distribution centers emphasize the rapid movement o products through a acility, acility, and thus they attempt to maximize throughput (the amount o product entering and leaving a acility in a given time period). Fulfillment centers represent a special type o distribution center that is ocused on e-commerce orders. The increased emphasis on time reduction in supply chains has led to the growth g rowth o crossdocking, which can be deined as “the process o receiving product and shipping it out the same day or overnight without putting it into storage.”4 Indeed, the length o time a product is in a acility is one actor that dierentiates distribution centers and cross-docks, with 24 hours (or less) o storage time oten being used to dierentiate a cross-dock acility rom a distribution center. Key beneits to cross-docking include improved service by allowing products to reach their destinations more quickly as well as reduced inventory carrying costs rom less saety stock because o aster product delivery.5 The experiences o Saks Inc., an upscale retail department store, illustrate illustrate some o the potential beneits o cross-dockin cross-docking. g. For example, example, it takes just seven minutes to move a carton rom the inbound dock to an outbound trailer at the Saks cross-dock acility. Moreover, on a daily basis the Saks cross-dock can handle our times as much much product, with one-hal the labor, o its predecessor acility; in other words, the cross-dock acility is approximately eight times as productive as its predecessor.6
Because cross-docking is predicated on time reduction, the design o cross-dock acilities is an important consideration. More speciically, cross-docks emphasize extremely rapid product movement, and they should be designed with a minimal amount o storage space and truck doors on two or more sides.7 Figure 10.2 shows 10.2 shows an “I-shaped” cross-dock design—rectangular, long, and as nar8 row as possible. Other possible cross-dock designs include “H,” “L,” “T,” “U,” and “E,” and their applicability depends on the spatial coniguration o the land used to build the cross-dock as well as the number o docks to be used.9 Learning Objective
10.2
PUBLIC, PRIVATE, CONTRACT, AND MULTICLIENT WAREHOUSING In addition to understanding the distinctions among warehouses warehouses,, distribution centers, and cross-dock acilities, organizations must must decide the proper mix in terms o owning (private warehousing) warehousing) or renting (public, contract, multiclient warehousing) warehousing space. Because companies have dierent strategies, and objectives, objectiv es, thereanother is no correct mix o owning or renting. Thus,warehousing, Thus, one organization might use goals, only public warehousing, organization might use only private and a third organization might use a mix o public, private, private, contract, and multiclient warehousing. warehousing. Each has distinct characteristics that might be either attractive or unattractive to potential users. These characteristics are discussed in the ollowing sections.
Public Warehousing Public warehousing serves (is supposed to serve) all legitimate users and has certain responsibilities to those users. Public warehousing requires no capital investment on the user’s part, which can certainly be an important consideration when the cost o borrowing money (interest rates) is high.
4
No author, “2008 Cross-Docking Trends Report,” Saddle Creek Corporation, 2008.
5Mike DelBoro, “Cross-Docking Rediscovered,” Material Rediscovered,” Material 6
Handling & Logistics , May 2011, 34–37. Handling
Connie Robbins Gentry, “Distribution Utopia,” Chain Store Age, November Age, November 2005, 70–72.
7
7
DelBoro, “Cross-Docking Rediscovered,” May 2011.
8
Maida Napolitano, Making Napolitano, Making the Move to Cross-Docking (Oak (Oak Brook, IL: Warehousing Education and Research Council, 2000).
9
Jan Van Boelle, Boelle, Paul Valckenaers, Valckenaers, and Dirk Cattrysse, “Cross-Docking: State o the Art,” Omega , 40, no. 6 (2012): 827–846.
Chapter 10 • Warehousing Management 189
Facility should be as narrow as possible
RECEIVING DOORS
SHIPPING DOORS
Figure 10.2 Ideal Facility for Pure Supplier Consolidation (Full Pallet Movement) by permission of the Warehousing Education and Research Council.
Source: Reprinted
With public warehousing, the user rents space as needed, thus avoiding avoiding the costs o unneeded space. A related advantage is that users should have have a airly exact determination o their warehousing costs costs because publicwarehousing warehousingcan space to be rented on a month-to-month basis.other parties have Public alsotends be attractive to prospective users because the responsibility or personnel decisions and regulatory issues. Warehousing Warehousing is one o two major sources o labor in logistics (the other is transportation), and warehousing employees can be unionized, thus adding to the managerial challenges. At a minimum, when using public warehousing the recruitment, selection, compensation, motivation, and evaluation o warehousing employees employees are the responsibility o the warehousing company and not the customer customer (user). With respect to regulatory issues, warehousing labor saety practices in the United States are monitored by the Occupational Safety and Health Administration (OSHA) . From a managerial perspective,, because OSHA standards are complex and lengthy, perspective lengthy, it can be quite costly and challenging to comply with OSHA regulations. It is worth pointing out that in recent years warehousing in the United States has been subjected to closer OSHA scrutiny because warehousing has been classiied as a high-hazard workplace.10 As was the case with personnel decisions, when using public warehousing, regulatory issues are the responsibility o the warehousing provider and not the warehousing customer.
10
No author, “OSHA Announces FY 2010 Inspection Plan Pla n to Target Industries with High Injury Rates,” HR Focus , December 2010, 11.
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Part III • Elements of Logistics Systems
Public warehousing oers more locational lexibility than do company-owned acilities, and this can be important when a company is entering new markets. For example, an organization may want to start o slowly in new markets or may be uncertain how well its products will be received in these markets. Public warehousing can provide storage services in these markets without an over whelming capital commitment. commitment. Public warehousing may provide a number o specialized services that are not available rom other sources. For example, public warehousing is heavily involved in such value-added services as repackaging larger shipments into retail-size quantities and then shrink-wrapping them, assisting in product recalls, and doing price marking, product assembly, assembly, and product testing. Perhaps the biggest drawback to public warehousing is the potential lack o control by the user. For example, sometimes public warehousing does not have the space availability required by a particular user. And even i space is available, users may have have little say in where their goods are stored—they may be placed wherever space is available, available, which may result in part o a user’s user’s inventory being stored in one area and the remainder in another. Moreover, some public warehousing is not open 24 hours a day, day, meaning that prospective users may not be able to access their products as needed or that users may need to tailor their operations to it those o the public warehouse.
Private Warehousing Private warehousing is owned by the rm r m storing goods in the acility. Private Private warehousing generates high xed costs and thus should only be considered by companies dealing with large volumes o inventory inventory.. In so doing, the high xed costs can be spread out over more units o inventory inventory,, thus reducing the cost per unit o storage. The largest users o private warehousing warehousing are retail chain stores; they handle large volumes o merchandise on a regular basis. In addition to large volumes, private warehousing warehousing also tends to be easible when demand patterns are relatively stable. Fluctuating demand patterns could at times lead to insuicient storage space or product, in which case the company might need to use public warehousing as a supplement, thus increasing total warehousing costs. At other times, by contrast, there could be too much space (excess capacity), which costs money as well. Assuming both suicient demand volume volume and stability o demand, private warehousing oers potential users a great deal o control over their storage needs. For For example, the storage acility can be constructed to the user’s speciications, speciications, which is a particularly attractive eature when a company has unique storage or handling requirements requirements,, as is the case with steel beams and gasoline. Moreover, in private warehousing, companies can control product placement with a acility; some products, or
example, should not be stored on the loor. Another aspect o control is that private warehousing oers access to products when an organization needs (or wants) them, as opposed to an organization having to tailor its activities to match a public acility’ acility’ss operating hours. Private warehousing is also characterized by several important drawbacks, including the high ixed cost o private storage and the necessity o having high and steady demand volumes. volumes. In addition, a high-ixed-cost alternative such as private warehousing becomes less attractive in times o high interest rates because it is more costly to secure the necessary inancing to build or lease the acility (to be air, interest rates in some nations, such as the United States, have been relatively low in recent years). Private warehousing may also reduce an organization’s lexibility in responding to changes in the external environment. For example, companies that utilize private warehousing are susceptible to changing demand patterns, such as those experienced with the passage o multicountry trade alliances. Likewise, organizational lexibility can be aected by mergers with, or acquisitions o, other companies, as illustrated by the caseacilities. o a multibillion-dollar companyacilities that acquired competitor’s competitor’s production and private warehousing Although the production addedamuch-needed manuacturing capacity, capacity, the warehousing acilities were largely redundant in nature. Yet the acquiring
company had little choice but to continue operating them because o substantial penalties (e.g., (e.g., labor compensation) that would have been incurred i the acilities were closed.
Chapter 10 • Warehousing Management 191
Contract Warehousing Organizations historically had two choices with respect to renting or owning warehousing acilities— public (renting) and private (owning). In the early 1990s contract warehousing (also reerred to as third-party warehousing or dedicated warehousing ) emerged as a second option or renting warehousing space. Although contract warehousing has been dened in a number o dierent ways, ways, in this text it reers to “a long term, mutually benecial arrangement which provides unique and specially tailored warehousing services11exclusi exclusively toperspective, one client, where thewarehousing vendor and client the risks associated and withlogistics the operation.” Fromvely a cost contract tends share to be less costly than private warehousing but more costly than public warehousing. Contract warehousing is a preerred alternative or many organizations because it simultaneously mitigates the negative aspects and accentuates the positive aspects aspects o public and private warehousing. More speciically, contract warehousing allows a company to ocus on its core competencies (what it does best), with warehousing management provided by experts—experts who solely ocus on the client’s needs and wants.12 In addition, contract warehousing potentially oers the same degree o control as private warehousing warehousing because key speciications can be included in the contract. For example, i a certain product should not be stored on the loor, then this can be explicitly relected in the particular contract. With respect to changes in the the external environment, contract warehousing warehousing is viewed as as more lexible than private warehousing but less so than public warehousing. This lexibility depends in part par t on the length o the contract; as the contract length increases, the lexibility to respond to change decreases. Three- to ive-year contracts appear to allow suicient time or the warehousing provider to learn the client’s business while allowing the client some lexibility in case the agreement ails to produce acceptable results.
Multiclient Warehousing warehousing sing alternative, alternative, multiclient warehousing, which mixes attributes o contract and Another warehou public warehousing, has become popular in recent years. For example, where contract warehousing is generally dedicated to just one customer and public warehousing may be used by any number o customers, a limited number o customers (at least two, two, but generally no more than one dozen) utilize a multiclient acility. In a similar ashion, the services in a multiclient acility are more dierentiated than those in a public acility, but less customized than would be ound in contract warehousing. warehousing. Furthermore, where public warehousing services are purchased on a month-to-month basis, multiclient warehousing aretopurchased through contracts thatsuicient cover at volume least one year. Multiclient acilities can beservices attractive organizations that (1) don’t have to build their own storage acilities; (2) don’t have suicient volume to justiy using contract warehoushing; (3) have regular, but not continuous, need or specialized equipment or services; (4) can beneit rom working with with other companies companies that have have similar needs or requirements requirements (e.g., (e.g., shared shared transportation to 13 common locations).
DESIGN CONSIDERATIONS IN WAREHOUSING General Considerations Considerations One o the best pieces o advice with respect to the design design o warehousing acilities acilities is to use common sense, as illustrated by the businessperson who was convinced that warehouses were bland, 11
Warehousing Education and Research Council, Contract Warehousing: How It Works and How to Make It Work Efectively (Oak (Oak Brook, IL: Author, 1993).
Learning Objective
10.3
12
John R. Johnson, “Bigger and Better,” Warehousing Management, October 2000, 22–25. Management, October
13
John Peters, “Multiclient versus Dedicated Distribution Center: Which Model Better Fits Your Business?” blog.ryder.com, Business?” blog.ryder.com, July 10, 2013.
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boring, b oring, and visually unappealing. He decided to build a more aesthetically pleasing acility and designed a warehouse with black oors, reasoning that black oors would stand out compared to the oors in many other warehouses. Although the black loor was certainly ce rtainly eye-catching, it was an unmitiga unmitigated ted disaster in part because the loor showed more dirt than comparable acilities. Moreover, the black loor was extremely slippery—meaning that orklits had a harder time stopping (some actually crashed into the walls!), and warehouse workers were more prone to alling. This anecdote provides an excellent example o orm triumphing over unction or style triumphing over substance. From a commonsense perspective, the primary design consideration should be the acility’s unction—be it longterm storage or product movement—in the relevant logistics system, with aesthetics a secondary consideration. One commonsense piece o advice is that prior to designing a warehousing acility, acility, the quantity and character o goods g oods to be handled must be known. Indeed, one o the early challenges o online commerce or bricks-and-mortar organizations was that many o them attempted to ulill online orders through warehousing acilities largely designed to supply retail store locations. In contrast, the design o ulillment centers should explicitly incorporate key attributes o online commerce, to include small order sizes, the necessity to store limited quantities o many SKUs, intense peaks in demand (e.g., holidays), and same-day (same-hour) ulillment, among others.14 A second commonsense piece o design advice is that it is important or an organization to know the purpose to be served by a particular acility because the relative emphasis placed on the storage and distribution unctions aects space layout. As such, such, a storage acility with low rates o product turnover should be laid out in a manner that maximizes utilization utilization o the cubic capacity o the storage acility. Alternatively, a acility that emphasizes rapid product movement with limited time in storage should be conigured to acilitate the low o product into and out o it.
Trade-offs Trade-os must be made among among space, space, labor, labor, and mechanization with respect respect to warehousing design. Trade-os must Spaciousness may not always be advantageous because the distances that an individual or machine must travel in the storing and retrieving unctions are increased. Moreover, unused space is excess capacity,, and we know that excess capacity costs money. Alternatively, capacity Alternatively, cramped conditions can lead to such inefciencies as the product damage that can be caused by orklit puncture and movement bottlenecks caused by insufcient aisle width, to name but two. Beore layout plans are made, each item that will be handled should be studied in terms o its speciic physical handling properties, the volume and regularity o movement, the requency with which it is picked, and whether it is ast or slow moving compared to other items. Many trade-os are inevitable when designing the structure as well as the arrangement o the relevant storage and handling equipment. Several o these trade-os are discussed in this section. These trade-os are oten more complex than they appear because individual individual trade-os are not independent o one another. Although there may not be “right” or “wrong” answers with respect to warehousing design, an understanding o the various trade-os might help managers make more eicient, as opposed to less eicient, decisions.
Fixed versus Variable Slot Locations for Merchandise You You might remember rom Chapter 7 that 7 that order picking and assembly represents the best opportunity to improve the eectiveness eectiveness and efciency o the order cycle. One possible way to improve the eectivenesss and efciency o order picking and assembly involves guring out where to store (slot) eectivenes product in a warehouse or distribution center. For example, velocity slotting is a popular strategy
14
Kelly Reed, “Five Facility Design Principles or E-commerce Order Fulllment,” Distribution Center Management , August 2013, n.p.
Chapter 10 • Warehousing Management 193
that slots the most requently picked items in the most accessible location; velocity slotting generally reduces an order picker’s travel distance.15 A well-thought-out slotting plan can reduce labor costs, costs, increase pick and replenishment ei16 ciencies, and increase order accuracy. To this end, organizations need to understand the attributes o ixed and variable slot locations or merchandise. merchandise. With a fixed slot location, each SKU has one or more permanent slots assigned to it (think o a parking garage that assigns particular parking spaces to certain individuals). This can provide stability in order picking in the sense that the company should always know where a speciic SKU is located. However, this may result in low space utilization, particularly with seasonal products. Alternatively,, a variable slot location involves empty storage slots being assigned to incom Alternatively ing products based on space availability. availability. One example o variable slot location is the closest available storage position, with “closest” deined as the shortest travel time to an entrance or exit point. Although variable slot location generally results in more eicient space utilization, rom an order picking perspective it requires a near-perect inormation system because there must be lawless knowledge o each product’s product’s location.
Build Out (Horizontal) versus Build Up (Vertical) A ggeneral eneral rule o thumb is that it’s cheaper to build up than build out; building out requires more land, which can be quite expensive, particularly in certain geographic locations. As an illustration, during 2015 a 1.5-acre land parcel in London, England was priced at £25,000,000!17 Alternatively, although building costs decline on a cubic-oot basis as one builds higher, warehousing equipment costs tend to increase.
Order-Picking versus Stock-Replenishing Functions Organizations must decide whether workers who pick outgoing orders and those who are restocking storage acilities should work at the same time or in the same area. Although the latter scenario may result in ewer managerial personnel being needed, it may also lead to congestion within the acility due to the number o workers workers.. One suggestion to reduce congestion is or order pickers and stock replenishers to use dierent aisles or their respective activities—again, this requires a very good inormation system to identiy where a given employee is at any time.
Two-Dock versus Single-Dock Layout A two-dock lay layout out generally has receiving docks on one side o a acility and shipping docks on the other side, with goods moving between them. In a one-dock system, each and every dock can be used or both shipping and receiving, typically receiving product at one time o the day and shipping it at another time. Viewed rom overhead, the goods move in a U-shaped rather than a straight conguration. This alternative reduces the space needed or storage docks, but it requires carriers to pick up and deliver at specic times. In addition, this alternative may also result in an occasional mix-up in that received product is sometimes reloaded into the vehicle that delivered it.
Conventional, Narrow, or Very Narrow Aisles Aisle width might seem like an arc arcane ane issue until you realize realize that as aisle space increases, increases, the storage capacity o a acility decreases. For example, example, narrow aisles (dened as between 9.5 eet and 12 eet wide) can store 20% to 25% more product than conventional aisles (more than 12 eet wide), while very narrow aisles (dened as less than 8 eet) can store 40% to 50% more product than 15
Bryan Jensen, “Racing Past Velocity: Slotting Your Facility to Optimize Order Picking,” HVACR Distribution Business ,
December 2012, 26–28. 16
Paul Hansen and Kelvin Kelvi n Gibson, “Eective Warehouse Slotting,” The National Provisioner , May 2008, 90–94.
17
http://www.rightmove.co.uk/property-or-sale/London/land.html
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cconventional onventional aisles.18 However, it is easier to operate mechanical equipment in wider aisles and wider aisles reduce the chances o accidents and product damage. Narrower aisles require specialized storage and handling equipment, such as narrow nar row aisle (very narrow aisle) lit trucks, tr ucks, which are capable o simultaneously moving both vertically and horizontally. horizontally. This specialized equipment is noticeably more expensive than t han traditional lit trucks, and it is not unusual or specialized lit trucks to cost twice as much as traditional lit tr ucks ucks.. However, However, specialized 19 lit trucks can be twice as productive as traditional lit trucks.
Degree of Warehouse Automation The degree o automation is another important consideration in warehousing design. For our purposes warehouse automation will reer to utilizing mechanical or electronic devices to substitute or human labor. Examples o warehouse automation include narrow aisle orklits, automated automated guided vehicles, automated storage and retrieval systems, radio requency identication, and robotic picking, among others. Although warehouse automation oers the potential to reduce labor costs and to improve warehouse productivity, it is important or managers to ensure that the automation results in noticeable improvement in warehousing eectiveness and efciency. To To this end, an organization org anization should rst assess whether it is ready or automation, because automation can be complex, expensive, and disruptive to day-to-day operations. operations. I an organization is ready or automation, then it’s important to evaluate how the automation will support the organization’ org anization’s logistics system.20
Other Space Needs Although many would assume that the primary role o warehousing involves the storage o product, it is not uncommon or a warehousing acility to operate with only 20 percent o o the space being oc21 cupied by product. Because every warehousing acility sets aside areas or nonstorage activities, it’s it’s important to know about them. These nonstorage activities include, but are not limited to, the ollowing: an d operators can wait while their equipment is loaded or 1. An area where transport drivers and unloaded 2. Staging, or temporary storage, areas or both incoming and outgoing merchandise 3. Employee washrooms, lunchrooms, and the like 4. Pallet storage and repair acilities (Facilities that receive unpalletized materials but ship on pallets may require a pallet-assembly operation.) 5. Oice space, including an area or the necessary computer systems 6. An area desi designed gned to stor storee dama damaged ged merch merchandi andise se that is awaiti awaiting ng insp inspecti ection on by claim representatives 7. An area to salvage salvage or repair damaged merchandise 8. An area or repacking, labeling, labeling, price marking, and so on 9. An area or accumulating accumulating and baling waste waste and scrap 10. An area or equipment storage and maintenance (For example, ex ample, battery-powered lit trucks need to be recharged on a regular basis.) 11. Specialized storage or hazardous items, high-value items, warehousing supplies, or items needing other specialized handling (such as a reezer or rerigerated space) 12. A returned or recycled goods processing area
18
Mary Aichlmayr, “Narrow-Aisle: Form Follows Lit-Truck Function,” Material Function,” Material Handling Handling Management , June 2009, 18–20.
19
Josh Bond, “Avoiding “Avoiding a Tight Spot in Narrow Aisles,” Aisles,” Modern Materials Handling , September 2015, 12.
20
Bridget McCrea, “7 Ste ps to Take beore You Install an Automated Warehouse System,” Modern System,” Modern Materials Handling , September 2015, 8–11. 21
http://www.ioptimizerealty.com/2012/12/21/measuring-utilization-warehouse/
Chapter 10 • Warehousing Management 195
When designi designing ng warehous warehousing ing acilit acilities, ies, it is also also important to keep in mind mind external external space-r space-related elated needs, which unortunately are sometimes overlooked. These include areas or vehicles waiting to be loaded and unloaded, space or vehicle maneuvering (e.g., turning, backing up), and employee parking.
WAREHOUSING OPERA OPERATIONS TIONS Because operating a warehousing acility has many acets, efcient and eective warehousing management can be an exacting task. Workorce motivation motivation can be difcult because o the somewhat repetitive nature o the work. It can also be strenuous and physically demanding, demanding, and on occasion warehousing acilities can be dangerous places. Some o the more signicant operational issues are discussed in the ollowing sections.
Warehousing Productivity Analysis Recall rom Chapter 4 4 that productivity is a measure o output divided by input, and although a number o dierent productivity metrics can be used to assess warehousing productivity, productivity, not all are relevant to all kinds o acilities. Representative Representative measures o warehousing productivity include include cases shipped per person, product lines shipped per person, pallets shipped per person, average warehouse capacity used, and orklit capacity used, among others. These and other productivity metrics can be utilized to provide comparisons within an organization over time. In addition, externalmetrics data may beanalyzed. availableSuppose, that can or be used or that benchmarking purposes depending on the relevant being example, the cases picked and shipped per hour at a particular par ticular warehouse increased rom 72 to 84 over a two-year period. Although this represents a 16.7 percent ([84 - 72]/72) productivity improvement over the two years, the 84 cases per hour might be viewed much dierently when compared to warehousing industry data that shows a median o 100 cases picked and shipped per hour and a best practice metric o more than 250 cases picked and shipped per hour.22 It is important to recognize that increases in warehousing productivity do not always require signiicant investment in technology or mechanized or automated equipment. For example, one suggestion or improving warehousing productivity involves involves a review o existing procedures and practices to identiy the tasks that are creating the largest ineiciencies and then developing methods to reduce or eliminate the ineiciencies without adding to or upgrading present technology or equipment. Organizations can also examine their acility layouts; long horizontal runs r uns and requent backtracking could be symptoms o layout problems. Something as basic as adding cross aisles could reduce the length o horizontal runs as well as the length o backtracking backtracking.. Another low cost suggestion or improving warehousing productivity productivity is to play music, music, i conditions permit; research suggests that worker productivity increases when music is playing.23
Safety Considerations Considerations W Warehousing arehousing acilities can be dangerous places to work. In the United States, or example, orklits account or one o o eve every ry six workplace workplace deaths.24 Figure 10.3 provides 10.3 provides a listing o workplace saety isissues, and many o these saety issues, such as alls and bodily reaction, are associated with warehousing acilities. You should recognize that many suggestions or dealing with warehousing saety are commonsense—and low cost—in nature. nature. Consider, or example, several o the Occupational Saety and Health Administration’s (OSHA) suggestions to improve warehouse saety: “prohibit ‘dock jumping’ (jumping rom dock plate to dock plate) by employees;” “prohibit stunt driving (o orklits) and horseplay;” “keep oors clean and ree o slip and trip hazards.”25 22
Karl B. Manrodt and Kate L. Vitasek, “DC Measures 2012,” WERC Watch, Spring Watch, Spring 2012.
Learning Objective
10.4
23
John Tuts, Tuts, “9 Tips or Improving Warehouse Warehouse Productivity,” Productivity,” Multichannel Merchant Merchant Executive Insight , March 6, 2012, 1.
24
Eric Scharski, “Want a Saer Warehous Warehouse? e? Start with Forklit Users,” Food Users,” Food Logistics Logistics , January/February 2015, 36–41.
25
www.osha.gov/Publications/3220_Warehouse.pd www .osha.gov/Publications/3220_Warehouse.pd
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Part III • Elements of Logistics Systems Overexertion1
Top 10 Causes of Disabling Injuries in 2010
$13.61 26.8%
($ in Billions)
Fall on same level $8.61 $7.94 16.9% 15.8%
Bodily Reaction2 $5.78 $5.35 11.4% 10.7%
Fall to lower level Struck by object3 $5.12 10.0% $4.10 8.0%
Struck against Repetitive object motion $2.11 4.1%
Caught in/ Assault/ Highway Compressed Violent act incident by $0.64 $1.99 $1.79 1.3% 3.9% 3.5%
$2.02 4.0%
1 Overexertion – Injuries from excessive lifting, pushing, pulling, holding, carrying, throwing 2 Bodily reaction – Injuries from bending, climbing, reaching, standing, sitting, slipping or tripping 3 Struck 4 Struck
by object – Such as a tool falling on a worker from above against object – Such as a worker walking into a door 5 Repetitive motion – Injuries due to repeated stress or strain
Real Cost* of the Most Disabling Injuries 1998–2010
46
45.6
Real Growth Trends 1998–2010 44
(Percent change by category) Fall on same level
42.3%
Bodily reaction
Fall to lower level
3.7%
–5.7%
Overexertion
–8.5% –11.5% –15.2% –27.9% –39.7%
10.1%
43.4
42.8 42
41.5
17.6%
Assault/Violent Assault/Viole nt act
without falling
40
s n o i l l i B $
40.0
40.0
39.2
38.5
38
Struck by object Struck against object
37.8
37.1
37.2
36
35.. 4 35 35 35.. 4 34
Caught in/Compressed by Highway incident Repetitive motion
32 8 9 9
9 9 9
0 0 0
1 0 0
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5 0 0
6 0 0
7 0 0
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9 0 0
0 1 0
1
1
2
2
2
2
2
2
2
2
2
2
2
*Inflation adjusted for 1998 $
Figure 10.3 Workplace Safety Issues for Safety, August 30, 2012.
Source: Reprinted
with permission of Liberty Research Institute
Warehousing saety can be inluenced Warehousing inluenced by by governmental governmental regulations. regulations. In the United United States, States, saety saety standards have been set or warehousing equipment and operations, and OSHA inspectors make requent visits to industrial workplaces to ensure regulatory compliance. Forklit operations and equipment have received received particular attention rom OSHA OSHA in part because o the number o deaths and injuries associated with them. For example, only trained and certiied warehousing employees are permitted to operate a orklit and orklit operators must be recertiied every three years. Warehouse W arehouse saety considerations all into three primary primar y categories—employee, property, and 26 motor vehicles —and we will discuss d iscuss each o these in the paragraphs that ollow ollow.. With respect to employee saety , consider one warehousing proessional’s 27 advice: “It costs more to recruit, train, and replace a worker than to provide a sae environment.” Workers can be injured due to improper
26
Joe Nowlan, Saety Doesn’t Doesn’t Have to Hurt Your Your Budget,” Industrial Distribution , January 2008, 25–27.
27
Don High In, “Getting a Lit rom Saety,” by Ed Engel,” Warehousing Management, January–February 2001, 5.
Chapter 10 • Warehousing Management 197
liting procedures, trying to carry carr y too heavy a load, ailing to observe proper hand clearances, and the like. Back and shoulder injuries are the most requent among warehousing personnel; back support belts and braces are becoming more widely used, but they are only o value i workers also receive receive adequate training in how to saely lit various loads. Property . Warehousing Warehousing acilities generate large volumes o waste materials, materials, such as empty cartons, steel strapping, and broken pallets, as well as wood and nails used or crating and dunnage (material that is used to block and brace products inside carrier equipment to prevent the shipment rom shiting in transit and becoming damaged). The various waste materials must be properly handled because they pose threats to employee saety and may also be ire hazards. Moreover,, even with the best o practices, some goods that are received, stored, and shipped Moreover will be damaged. Special procedures must be established or handling broken or damaged items, i only rom the standpoint o employee saety. saety. A broken bottle o household ammonia, or example, results in three hazards: noxious umes, broken glass, and a slippery loor. loor. Aerosol cans pose hazards that are aected by the product in the cans. For example, cans o shaving cream cause little problem in ires because i they explode, the shaving cream serves to extinguish the ire; that is not the case with aerosol cans containing paints paints or lacquers, lacquers, and such cans are oten kept kept in special cages because in a ire they might become burning projectiles. Indeed, ires are a constant threat in warehousing, in part because many materials used or packaging are highly lammable. In addition, although plastic pallets last longer, are cleaner, and are less likely to splinter than wooden pallets, plastic pallets tend to be a greater g reater ire risk. High-rise acilities are more susceptible to ires because the vertical spaces between stored materials serve as lues and help ires burn. You should recognize that warehouse ires may result in substantial property damage as well as injury or death, as illustrated by the 2015 explosions at the Port o Tianjin (China). The explosions, which started with an initial explosion (and ire) at a warehouse that illegally stored thousands o tons o hazardous products, killed more than 100 people and and cost insurance compa28 nies approximately $2 billion. A 2016 20 16 report re port by the Nation National al Fire Fi re Protecti Pr otection on Associa A ssociation tion indic indicated ated that U.S. warehouses ware houses averaged approximately 1,200 ires per year between 2009 and 2013. The report indicated that the two most common causes o warehousing ires between 2009 and 2013 were those that were intentionally set and those caused by electrical distribution and lighting equipment. Moreover, the 2016 report indicated that the number o warehousing ires decreased by approximately 75% between the early 1980s and 2013. 29 Many warehousing ires can be prevented by common sense; lammable products, or example, should not be stored near heat sources (such as space heaters). Motor vehicles . We mentioned earlier that orklit operations and equipment have been a particular ocus o governmental saety regulations. Indeed, in the United States approximately 85 employees are killed and there are approximately 35,000 serious injuries each year while operating orklits; approximately 40% o deaths are caused by an operator being crushed cr ushed by a orklit tipping over.30 An annual National Forklit Saety Day began in 2014 as an eort to provide greater awareness o sae orklit practices as well as to encourage saer operator behavior. There are other vehicle-related saety consideration considerationss in warehousing; or example, tractortrailer drivers who are backing into loading/unloading docks should utilize a lookout person to alert the driver about employees who might be walking behind the vehicle. Moreover, wheel chocks— hard-rubber wedges that are inserted under truck tires—can guard against intentional or unintentional trailer movements movements..31
28
Patrick Burnson, “Resilience Requires Transparency Transparency,” ,” Logistics Logistics Management , January 2016, 64.
29
Richard Campbell, Structure Fires in Warehouse Properties (Quincy, (Quincy, MA: National Fire Protection Association, January 2016).
30
http://orklitsystems.com/national-orklit-saety-day-is-june-10th/
31
Nowlan, “Saety Doesn’t Have to Hurt Your Budget.”
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Part III • Elements of Logistics Systems
Hazardous Materials Hazardous materials (hazmat) oten receive special attention rom logistics managers because o the injuries, death, and property damage they can cause. Broadly speaking, hazardous materials can negatively impact the health and/or saety saety o the general public. Examples o hazardous materials include explosives, ammable liquids, and ammable solids. Government regulations oten require that shipping documents indicate the hazardous nature o the materials being transported. Warehouse employees should note these warnings when receiving materials and similarly should include such warnings on outbound outbo und shipping documents when materials leave warehouses. Many countries also require organizations to create a saety data sheet (SDS) or each hazardous product to be stored in a acility. The SDS contains inormation about the physical and health hazards associated with a particular product as well as inormation about its proper storage.32 Hazmat experts generally agree that the applicable regulations should only provide a starting point or proper storage o hazardous materials, in part because or some situations no regulations exist. These experts urther suggest that hazmat storage can be managed eectively by answering our questions: What material material is being stored? Why is is it being stored? Where is is it being stored? How is is 33 it being stored? A number o design elements must also be considered with the storage o hazardous materials. Buildings that store hazmat oten have specially constructed areas so that materials can be contained in the case o an accident. Likewise, these acilities may may have walls and doors that can withstand several hours o intense ire. It is also important or a hazmat storage acility to have proper sprinkling systems as well as excellent ventilation.
Warehousing Security Interest in providing building security or warehouses and other distribution acilities is a primary concern or many organizations organ izations because, according to FreightWatch International, a company that specializes in logistics security, “Freight at rest is reight at risk.”34 Potential threats to warehousing security include thet, pilerage, heat and humidity, vandalism, re, and loss o electricity electricity,, among others.35 These threats can present a number o negative consequences such as lost sales and revenues, revenues, additional costs to enhance security, the time and costs to le the appropriate claims, and potential danger to the public. p ublic. Some o these consequences consequences were well illustrated illustrated in the high-proi high-proile le thet o nearly $80 million in pharmaceuticals rom a Connecticut warehouse in 2010. The pharmaceutical manuacturer instituted an immediate review o its it s warehouse security processes and procedures and began implementing stringent (and most In (e.g., addition, pharmaceuticals that are sold outsidemore o traditiona traditional l channels cancostly) createsecurity potentialpractices. saety risks (e.g ., lack o rerigeration rerigerati on could contaminate some pharmaceuticals) and the revenues rom such sales are not realized by the manuacturer. And although the pharmaceuticals stolen rom the Connecticut warehouse were eventually recovered, they became evidence in criminal and civil lawsuits and will be destroyed at the conclusion o all relevant legal proceedings—which means no revenues rom their sale or the manuacturer.36 Warehousing W arehousing security security ocuses on two primary issues, issues, namely, namely, protecting products and preventing their thet, and warehousing security can be enhanced by ocusing on people, acilities, and processes. In terms o people, one area o ocus should be the hiring process or warehousing warehousing workers; workers; a starting point might be determining whether an individual acility even has a ormal or mal hiring process.
32
Maureen Brady, “Sae, Segregated and Secure: Are Your Hazardous Chemicals Properly Constrained?” Industrial Saety & Hygiene News , June 2012, 46. 33
Todd Nighswonger, Nighswonger, “Are “Are You Storing Hazardous Materials Saely?” Occupational Hazards, June Hazards, June 2000, 45–47.
34
FreightWatch, US Cargo Thet: A Five-Year Five-Year Review , April 2011.
35
Linda Pohle, “What to Do with a Warehouse Warehouse,” ,” SDM: Security Distribution and Management , September 2008, 64–70.
36
Diane Ritchey, “The $80 Million Thet,” Security: Solutions or Enterprise Security Leaders , July 2012, 20–24.
Chapter 10 • Warehousing Management 199
One commonsense suggestion when hiring warehousing workers workers is not to hire people who might be predisposed to thet (e.g., individuals with substance abuse problems). In terms o a acility’s acility’s ocus, experts experts recommend a combination o overt and covert surveillance methods. With respect to the ormer, electronic devices such as closed-circuit television systems can be helpul, particularly i they are monitored on a regular basis. basis. One type o covert surveillance involves unannounced security audits that ocus ocus on shortages or overages o particular 37 products. You should recognize recognize that there is virtually no limit to the sophistication or cost o devices and techniques that can be used to monitor warehousing security. security. Having said this, the more sophisticated security devices also tend to be more expensive, and organizations need to weigh the trade-o o whether the devices’ beneits exceed exceed their costs. In terms o processes to improve warehousing warehousing security, security, the more times a shipment is handled, the greater the opportunities or loss or damage. Thus, T hus, logisticians would do well to reduce the number o times an individual shipment shipment is handled. Table handled. Table 10.1 10.1 highlights some possible shortcomings in warehousing security security..
Cleanliness and Sanitation Issues At rst glance glance,, cleanliness and sanitation might seem like issues that are more relevant relevant to, to, say, say, restaurants and hospitals than to warehousing operations. However, However, warehousing cleanliness and sanitation are o paramount importance in many industries, industries, such as the oodservice industry where clean and sanitary warehouses reduce the likelihood o oodborne illnesses. Moreover, Moreover, clean and sanitary warehousing acilities can have a positive impact on employee saety, saety, morale, and productivity while also 38 reducing employee turnover. Fortunately, warehouse cleanliness and sanitation are not predicated on complex theories or costly technology, but rather on common sense and diligence. For example, a leading provider o industrial cleaning equipment suggests that a company develop a schedule to clean its warehouse on a regular basis—and stick to the schedule. In addition, a company can instill a culture that ocuses on warehouse cleanlines cleanlinesss and that requires employees to clean up upon inishin inishingg a parti particular cular task. Another suggestion is to create teams o two or three people and assign each team team a speciic cleaning cleaning task. Rather than cleaning an entire warehouse, the teams can be assigned to one o our quadrants in order to make the task seem more manageable.39
TABLE 10.1 10.1 Possible Shortcomings in Warehousing Security Shortcoming
Comment
Making it too easy for dock personnel to work in collusion with truck drivers
Fewer than 5% who commit crimes are prosecuted
Relying on on sa safeguards th that si simply do don’t wo work
Security ca cameras ar aren’t al always tu turned on on
Approach to theft is too reactive
Don’t wait until theft reaches an “unacceptable” level
Not weedi weeding ng out out on-th on-the-j e-job ob subst substance ance abus abusers ers or or deale dealers rs
Approximat Approxi mately ely 90% of drug drug users users eit either her stea steall or deal to support their habit
Not checking your checkers on a frequent basis
They may become complacent
Nott maki No making ng itit easy easy to to repo report rt the theft ft and and subs substan tance ce abus abuse e
Outso Ou tsour urci cing ng the the repo reporti rting ng may may be be more more ef effec fectiv tive e
Hiring high-risk employees
An ounce of prevention is worth a pound of cure
Julia Kuzeljevich, “The Seven Deadly Sins in Warehouse Security,” Security,” Canadian Transportation & Logistics, April 2006, 44. Source: Julia Source: Logistics, April
37
Maria Homan, “Eight Ways to Prevent Cargo Thet,” Food Thet,” Food Logistics , July 2011, 5.
38
Ned Bauho, “Keeping It Clean,” Beverage Clean,” Beverage World , July 2007, 77. http://www.sweeperland.com/how-to-clean-warehouse.html
39
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Part III • Elements of Logistics Systems
Summary chap ter ocused on warehousing, This chapter warehousing , the storage o inventories or varying periods o time. We We began with a discussion o why warehousing warehousing exists in a logistics system. A key reason or warehousing is that production and consump-
provided to one client on a long-term basis. Multiclient warehousing, a relatively new alternative, alternative, is a mixture o public and contract warehousing warehousing.. Variouss design considerations are relevant to warehous Variou
tion may not coincide, warehousing canthe help smooth out imbalances between and them. We discussed dierences among warehouses, distribution centers, and cross-docking acilities. Wee also examined public, private, contract W contract,, and multiclient warehousing. Public warehousing managers have a number o established duties regarding the care o goods, g oods, and customers pay only or the space that is actually used to store their products. Private warehousing is owned by the irm using such acilities, and it is best used when an organization has large and steady demand patterns. Contract warehousing involves specially tailored warehousing services that are
ing, trade-os among them. sFor example, decision to buildwith up or out can aect a acility’s acility’ utilization o alabor, mechanization, and automation. Similarly, organizations that preer a ixed slot location or merchandise may have to build larger acilities to have a suicient number number o storage slots. The chapter concluded with an examination o some key issues in warehousing operations. The material in this section emphasized that commonsense, low-cost approaches can acilitate eective eective and eicient management o warehousing operations. For example, warehousing saety could be enhanced i employees rerain rom jumping rom one dock plate to another.
Key Terms Accumulating (bulk-making) (bulk-making) Allocating (bulk-breaking) Assorting Contract warehousing Cross-docking Distribution centers Dunnage Fixed slot location
Fulllment centers Hazardous material(s) Multiclient warehousing Occupational Saety and Health Administration (OSHA) Private warehousing Public warehousing Regrouping unction
Sorting out Throughput Variable Variab le slot location Velocity V elocity slotting Warehouse W arehouse automation Warehouses W arehouses Warehousing W arehousing
Questions for Discussion and Review 10.1 Why does warehousing warehousing exist in a supply chain? 10.2 Explain the our ways that warehousing acilitates the regrouping unction. 10.3 Discuss the reasons or the popularity o cross-docking operations in contemporary logistics. 10.4 Discuss the disadvantages to public warehousing. 10.5 What are the advantages advantages and disadvanta disadvantages ges o private warewarehousing? 10.6 Discuss why contract warehousing is a preerred alternative or many organizations. 10.7 When might a multiclient multiclient warehousing warehousing arrangement be appropriate or a company? 10.8 Explain how common sense sense can be helpul in terms o
10.12 Explain the relevance o aisle width in warehouse design. 10.13 What are some o the prominent examples o warehouse automation according to the chapter? What are the pros and cons o warehouse automation? automation? 10.14 What are some potential potential nonstorage space needs that might impact warehousing design? 10.15 How can warehousing productivity be improved without signicant investment in technology or equipment? 10.16 Discuss with the help o an example how governmental regulations have inuenced warehousing saety in your country. 10.17 Discuss how res are a constant threat in warehousing warehousing.. 10.18 What is a hazardous material? What design design elements should
warehousing design. design. 10.9 In terms o warehousing design, design, give examples examples o trade-os
be considered when storing hazardous materials? 10.19 What are the potential potential threats to warehousing warehousing security security and
involving space, labor, and mechanization. 10.10 Distinguish between xed and variable slot locations. How might they aect warehousing design? 10.11 What are the major major characteristics characteristics o single-dock layouts? layouts?
what can be their their consequences? 10.20 How are cleanliness and sanitation relevant to warehousing operations?
Chapter 10 • Wa Warehousing rehousing Management
201
Suggested Readings Battina, Daria, Alessandro Persona, and Fabio Sgarbossa. “Innovative Real-Time System to Integrate Ergonomic Evaluations into Warehouse W arehouse Design and and Management.” Management.” Computers & Industrial Engineering 77 77 (2014): 1–10. Davarzani, Hoda and Andreas Norrman. “Toward a Relevant Agenda or Warehousing Warehousing Research: Research: Literature Literature Review Review and PracPractitioners’ Input.” Logistics Research 8, 8, no. 1 (2015): 1–18. Dhooma, José and Peter Baker.” An Exploratory Framework or Energy Conservation Conser vation in Existing Warehouses.” Warehouses.” International Journal of Logistics: Research Research & Applications 15, no. 1 (2012): 37–51. Faber, N., M.B.M. de Koster, and A. Smidts. “Organizing Warehouse Management.” International Journal of Operations & Production Management 33, 33, no. 9 (2013): 1230–1256. Franklin, Rod and Stean Spinler. “Shared Warehouses: Sharing
Risks and Increasing Eco-Efciency.” International Commerce Review 10, 10, no. 1 (2011): 22–31. Holmola, Olli-Pekka and Harri Lorentz. “W “Warehousing arehousing in Northern Europe: Longitudinal Sur vey Findings.” Industrial Management & 111, no. 3 (2011): 320–340. Data Systems 111, Mangano, Guilio and Alberto De Marco. “The Role Role o Maintenance and Facility Management in Logistics: A Literature Review.” Facilities F acilities 32, 32, nos. 5 and 6 (2014): 241–255. Osyk, Barbara A., B. S. Vijayaraman, Manesh Srinivasan, and Asoke Dey. “RFID Adoption and Implementation in Warehousing.” Management Research Review 35, 35, no. 10 (2012): 904–926. Van Belle, Jan, Jan, Paul Valckenaer Valckenaers, s, and Dirk Dirk Cattryse. “Cross “Cross Docking: State o the Art.” Omega 40, 40, no. 6 (2012): 827–846.
CASE
CASE 10.1 FRESH PRODUCE CROSS-DOCKING FACILITY FACILITY Kevin Chong is the logistics logistics manager o a resh produce retailer in Singapore. As a ast-paced society, Singapore demands a very quick turnaround in many logistics operations. Kevin is undertaking a project to implement crossdocking at the retailer’s current distribution center at Tanjongg Pagar, Tanjon Pagar, to to substantially substantially reduce the throughput throughput time. The distribution center replenishes all o the retailer’s outlets across the island country, 24 hours a day, 7 days a week. On an average, reeer containers arrive rom overseas randomly at the rate o a twenty-oot equivalent equivalent unit (TEU) every two hours, hours, with a deviation o plus or minus one. Due to the uncertainty at customs clearance, Kevin does not have control over the inbound containers’ exact arrival time. Whenever a container arrives ar rives,, the cross-docking operations will need to quickly unload the goods, break bulk, sort, pick, and then load the goods onto outbound trucks. Kevin is evaluating cross-docking equipment systems. His primary concerns are the operating costs and the perishability loss o resh produce. To To simpliy the decision making, it is estimated that a TEU container o goods g oods loses $500 per hour due to the perishable nature o resh produce. The speed o cross-docking operations does not aect the average waiting time or outbound delivery. delivery. Kevin is evaluating the ollowing our equipment systems proposed by dierent vendors: 1.
A manual system system that costs $400 and and 110 minutes to cross-dock a TEU
3.
4.
shelves or racks) that costs $600 and 100 minutes to cross-dock a TEU A system system aided by pick pick-to-to-voi voice ce tech technology nology (the orde orderr pickers use a headphone and a microphone to communicate with a computerized system to pick orders) that costs $800 and 90 minutes to crossdock a TEU A semi-automated semi-aut omated system sy stem that costs $1,000 $1, 000 and 80 minutes to cross-dock a TEU
The times given above are average gures because the actual times taken could vary. The costs are all inclusive, including equipment depreciation, equipment running, supporting laborand costs. are assumed simplications in theand costs given above the There costs are to be at throughout the time. Kevin needs to estimate how much time it will take or goods to ow through the cross-docking operations in each equipment system. He can then calculate the perishability loss on the basis o the throughput time. Kevin recalls rom college that queueing queueing theory might be applicable to such a problem. Essentially Essentially, the theory o queueing deals with the trade-os in a waiting line. Given a processing capacity, capacity, there is oten a waiting line in ront o a server due to the randomness in order arrivals and processing times. There is a cost, could be tangible or intangible, associated with keeping customers/goods waiting. Investments in the processing capacity can speed up the process and reduce the waiting times. However, an organization needs to
2.
A system aided by by pick-to-light technology technology (the orders to be picked are identied by lights placed on
nd out the optimal capacity level to minimize the total cost, which whic h incl includes udes both the capa capacity city cost and the cost o waiting. waiting.
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Part III • Elements of Logistics Systems
Use a sotware package that enables you to perorm queueing analysis. Note that an M/M/1 queueing model assumes a single server, exponential arrival and service times, rst come rst served queueing rule, unlimited queue length, and innite calling population. In the situation described above, above, the number o servers is always 1, although diferent equipment systems vary vary in terms o operating costs and cross-docking speed.
For each o the our equipment systems, what is the probability that an inbound TEU can be unloaded immediately upon arrival? 4. Which o the our equipment equipment systems incurs the the lowest lowest total total cost to the retailer? It is assumed that the retailer bears all the costs associated with perishability loss. The total cost involves
3.
6.
QUESTIONS 1.
2.
For each o the our equipment systems, calculate the expected number o inbound TEUs waiting in the queue or cross-docking. For each o the our equipment systems, calculate the expected time o an inbound TEU in the queue, that is, the expected time a TEU must wait in line to be unloaded.
operating costs and perishability perishability loss o resh produce. is the capacity utilization rate o each o the our equipment systems? Kevin is also considering a ully automated system proposed by another vendor. The vendor believes that its ully automated system can set a record by taking only 70 minutes to cross-dock an inbound TEU TEU.. However, this system’ system’ss operating costs will be much higher than those o the other equipment systems, averaging $2,000 per TEU TE U. Based on the total cost to the retailer, would you recommend that Kevin go or this ully automated system?
5. What
12
TransporTaTion
Learning Objectives 12.1 To To compare and contrast transportation inrastructures in several countries 12.2 T To o identiy the ve modes o transportation and learn about their respective characteristics To o discuss intermodal transportation 12.3 T 12.4 T To o describe several types o transportation specialists 12.5 T To o explain how diferent types o regulation impact transportation 12.6 T To o identiy the legal classication o transportation carriers
Transportation, which can be deined as the actual, physical movement o goods and people Transportation, between two points, is pivotal pivotal to the successul operation o any supply chain because it carries the goods, literally, as they move along the chain. Transportation inluences, or is inluenced by, the logistics activities discussed in previous chapters chapters.. These include: irm’s ’s plants, warehouses, 1. Transportation costs are directly aected by the location o the irm vendors, retail locations, locations, and customers. customers. 2. Inventory requirements are inluenced by the mode o transport used. High-speed, high-priced transportation systems require smaller amounts o inventories in a logistics system, system, whereas slower, less-expensive less-expensive transportation requires larger amounts o systemwide inventory. inventory. 3. The transport mode selected inluences the packaging required, and carrier classiication rules dictate package choice. 4. The type o carrier used dictates a manuacturing plant’ plant’ss materials handling equipment, such as loading and unloading equipment and the design o the receiving and shipping docks. docks. 5. An order-man order-management agement philosop philosophy hy that encourag encourages es maximum consolida consolidation tion o shipment shipmentss between common points enables a company to give larger shipments to its carriers and take advantage o volume discounts. discounts. 6. Customer service goals inluence the type and quality o carrier and carrier service selected by the seller. This chapter begins with a brie look at the transp transporta ortation tion inra inrastru structure cture in various countr countries ies throughout the world. This is ollowed by a thorough discussion o the ive dierent types, or modes, o transportation: air, motor carrier (truck), (tr uck), pipeline, rail, and water (listed in alphabetical order). The chapter also discusses intermodal transportation and transportation specialists and concludesIn with an examination transportation regulation and the legal texts, classiication o carriers. keeping with past o practice in this and other basic logistics texts , the discussion o trans-
portation will primarily be presented rom the perspective o the United States and will primarily ocus on domestic (within the U.S.) transportation. Having said this, readers should recognize that an individual country’s topology, economy, inrastructure, and other macroenvironmental actors could result in a dierent transportation system rom that ound in the United States. Moreover, 222 22 2
Chapter 12 • Trans Transportation portation 223
the globalization o the world’s world’s economy means that an increasing increasing number o shipments are being transported between multiple countries (international transportation), a topic that will be discussed in Chapter 14. 14. Learning Objective
COMAPARING AND CONTRASTING TRANSPORTATION INFRASTRUCTURE Because many readers o this text reside outside the United States, we believe believe it would be helpul to present a brie comparison o the transportation inrastructure that exists in ve highly populated populated countries located on various continents. These inrastructure data, shown in Table in Table 12.1 12.1,, indicate wide disparities in the various inrastructures; at a minimum, a lack o inrastructure makes it dicult to use that mode in domestic (within-country) transportation. The relevant inrastructure statistic or air transportation transportation in Table in Table 12.1 12.1 is the number o paved runways over 3,047 meters (approximately 10,000 eet). This length is signiicant because a 10,000oot runway has generally been viewed as adequate or accommodating the largest existing widebody aircrat; wide-body aircrat are essential to long-haul international movements movements o both reight and passengers. According to Table to Table 12.1, 12.1, the United States by ar has the most airports with paved runways o at least 10,000 eet, an indication that the United States is well positioned to participate in long-haul international movements. Although China currently reports over 70 airports with 10,000 oot runways, this number is expected to increase because the country plans to construct nearly 40 new commercial airports by 2020. The inrastructure statistics or highway, highway, pipeline, and water, presented in kilometers (1 kilometer is equivalent to approximately .62 miles), provide some interesting indings. For example, although Brazil and China are approximately the same geographic size, China currently has about 16 times more paved highway kilometers than Brazil. (It’s worth noting that China has added over 1,800,000 kilometers o paved highways since 2010.) The data also indicate that oil pipelines are much more prevalent in the United States, and that China has much more extensive inland water ways,, relative to the our other countries ways countries listed in Table in Table 12.1 12.1.. The Table The Table 12.1 12.1 inormation on rail gauge (the distance between the inner sides sides o two parallel rail tracks) is also enlightening. The United States uses only one size—standard—rail gauge (1.435 meters) in its rail inrastructure. Brazil and China, by contrast, use broad gauge (1.676 meters), standard gauge, and narrow narrow gauge (1.000 meter) in their rail inrastructure, whereas Nigeria primarily uses narrow gauge rail—with Nigeria’s narrow gauge measured at 1.067 meters rather than 1.000 TAblE 12.1 12.1 Infrastruct Infrastructure ure Statistics in Several Countries Brazil Aira Highway (paved) Pipeline (oil) Broad gauge (1.676 meters) rail Standard gauge (1.435 meters) rail Narrow gauge (1.000 meter) rail Water (inland)
China
Germany
Nigeria
United States
7 71 212,798 km 3,453,890 km
14 10 189 645,000 km 28,980 km 4,304,715 km
4,831 km 5,822 km
23,072 km 100 km
2,826 km
4,441 km
240,711 km
194 km
190,000 km
43,209 km
293 km
293,564 km
23,341 km
670 km
220 km
3,505 kmb
50,000 km
110,000 km
7,467 km
8,600 km
41,009 km
12.1
a
Number o paved runways over 3,047 meters (approximately 10,000 eet). gauge 1.067 meters www.cia.gov , 2016. Source: The World Factbook, Source: Factbook, www.cia.gov b
=
224 Part III • Elements of Logistics Logistics Systems
meter. The data on rail gauge are important because nonuniorm rail gauge within a country, or between neighboring countries, means that shipments moving by rail will need to be transerred rom one vehicle to another, which adds to both delivery time and costs. For example, China and India share a common border; while China primarily uses standard rail gauge, India, by contrast, primarily uses broad rail gauge.1
Learning Objective
12.2
TRANSPORTATION MODES Each of the ve modes modes of transportation exists because of certain attributes that provide one or more advantages over over the other modes o transportation. transpor tation. The attractiveness attractiveness o a particular mode 2 depends on the ollowing attributes: • • • • • •
Cost (price that a carrier charges to transport a shipment) Speed (elapsed transit time rom pickup to delivery) Reliability (consistency (consistency o delivery) Capability (amount o dierent types o product that can be transported) transported) Capacity (volume that can be carried at one time) Flexibility (ability to deliver the product to the customer)
It is important to recognize that public policy can aect a mode’s perormance on these attributes. Railroads, or example, were the dominant mode, as measured by ton miles (the number number o tons multiplied by the number o miles transported) transpor ted) and revenues, in the United States rom the nineteenth century through the middle part par t o the twentieth century. However, the development o the U.S. U.S. Interstate Highway System allowed allowed motor carriers to improve their speed, reliability, and lexibility,, and although railroads still have the largest share o ton miles, motor carriers now account lexibility or the majority o reight revenues. revenues. From a public policy perspective, construction costs o the Interstate Highway System were primarily paid or by the U.S. U.S. government (90 percent), with the remaining construction costs paid or by state governments. This unding by both the ederal and state governments g overnments is signiicant because U.S. railroads have been responsible or the construction costs o their track systems, whereas rail construction costs in other nations are oten covered by the national government. g overnment. As such, the U.S. U.S. railroads have a substantial cost disadvantage relative to motor carriers, and this cost disadvantage must be captured in railroad pricing practices. Wee will take a rather detailed look at each W each o the ive modes modes in this section. The discussion will be presented alphabetically by mode, beginning with airreight.
Airfreight When one thinks o air transportation, one immediately thinks o speed, particularly on the line-haul (terminal-to-terminal movement o reight or passengers); modern jet aircrat are capable o traveling between 500 and 600 miles per hour, a speed that ar exceeds any other orm o transportation. Indeed, air is generally the astest mode o transportation or shipments exceeding 600 miles miles although some motor carriers now oer overnight service o between 600 and 700 miles. However, Howev er, air transportation is a quite expensive orm o transportation, and the line-haul cost o airreight service is regarded as its primary primar y disadvantage; many companies simply cannot aord aord to have their shipments travel by air. Moreover, because most shippers and consignees (receivers o reight) are not located at an airport, this requires transportation rom the shipper to the origin airport as well as rom the destination airport to the consignee. This accessorial service (transportation service that is supplemental to the line-haul) adds to both transportation costs and transit time
1
www.cia.gov .cia.gov , 2016 The World Factbook, Factbook, www
2
Drawn from David J. Bloomberg, Stephen LeMay LeMay,, and Joe B. Hanna, Logistics Hanna, Logistics (Upper (Upper Saddle River, NJ: Prentice Hall, 2002), Chapter 7.
Chapter 12 • Trans Transportation portation 225
and also increases the number o times a shipment is handled (thus increasing handling costs and the opportunities or loss and damage). Unlike other orms o transportation, the great majority o airreight is carried in the reight compartments o passenger airplanes (so called belly reight). This belly reight limits the capacity capacity available or air shipments and is particularly par ticularly problematic with respect to narrow-body narr ow-body (single-aisle) aircrat. For example, a United Airlines narrow-body Boeing 737-900 oers approximately 1,825 cubic eet o belly space, whereas a United Airlines wide-body Boeing 777-200 777-200 oers approximately 6,925 cubic eet o belly space.3 However, wide-body aircrat devoted to all-cargo service have impressive carrying capacity; the latest version o an all-cargo Boeing 747 can carry approximately 155 tons o reight. The cost, speed, and capacity attributes attributes mean that, or the most part, airreight is best suited to high-value, lower-volume products that are o a perishable nature or otherwise require urgent or time-speciic delivery. delivery. Airreight rates discourage bulky cargo and use dimensional weight (also called dim weight), which considers a shipment’s shipment’s density (the amount o space occupied in relation to actual weight) to determine a shipment’s billable weight.4 Examples of products that move by air include: • • • • • • • • •
Auto parts and accessories accessories Cut lowers and nursery stock Electronic or electrical equipment, such as cell phones and iPods iPods Fruits and vegetables Machinery and parts Metal products Photographic equipment, parts, and ilm Printed matter Wearing W earing apparel
The reliability o airreight is somewhat problematic. On the one hand, air’ air’ss tremendous speed relative to the other modes oers the potential to “make up lost time” that isn’t possible with the other modes. Alternatively, because so much airreight is belly reight, the increasing congestion and resultant delays associated with air passenger transportation mean congestion and delays or airreight. Moreover, weather conditions such as og, snow snow,, and thunderstorms can have an adverse effect on the reliability of airfreight transportation. Indeed, FedEx located its first (and still primary) air cargo hub in Memphis, Tennessee, Tennessee, in part because Memphis rarely experiences oggy og gy conditions.
Motor Carriers U.S. highway system is the Interstate Highway System (its ormal name is the The backbone o the U.S. Dwight D. D. Eisenhower System of Interstate and Defense Highways), which was approved by federal legislation in 1956. This nearly 47,000-mile, high-speed, limited-access highway system has had a proound impact on economic development in the United States. From a logistics perspective perspective,, many companies began to locate manuacturing, assembly, assembly, and distribution acilities in close proximity to interstate highways. highways. Indeed, accessibility to highways consistently ranks as the most important actor in annual surveys o corporate location decisions.5 The most important business user o the highway system is the motor carrier (trucking) indusindustry. One way way o classiying motor carriers is according to whether they carr y less-than-truckload (LTL) or truckload (TL) traffic. Less-than-truckloa Less-than-truckload d (LTL) shipments range rom about 150 to 10,000 pounds; they are oten too big to be handled manually, yet they do not ill an entire truck. Trucks that carry LTL freight have have space for and plan to carry carr y shipments of many other customers
3
Data derived rom www rom www.unitedcargo.com/shipping .unitedcargo.com/shipping
4
http://www.ups.com/content/us/en/resources/ship/packaging/dim_weight.html?srch_pos=1&srch_phr=dim+weight
5
29th Annual Survey of Corporate Executives: A Realignment Realignment of Location Priorities
226 Part III • Elements of Logistics Logistics Systems
simultaneously. Unlike TL carriers, LTL carriers operate through a system of terminals (a acility simultaneously. where reight is shited between vehicles), and rom each terminal small trucks tr ucks go out to customers, delivering and picking up shipments. These shipments are then taken to a terminal, where they are loaded aboard line-haul trucks, tr ucks, which are driven to a terminal near the reight’ reight’ss destination. The goods are unloaded rom the line-haul carrier, move through the terminal, and are loaded aboard a small truck for local delivery. Prominent LTL carriers include ABF Freight, FedEx Freight, UPS Freight, and YRC Freight. Truckload (TL) carriers ocus on shipments o greater than 10,000 pounds, and although the exact weight depends on the product, it is close to the amount that would physically ill a truck trailer. For glassware, this might be 18,000 pounds; or canned goods, it might be 40,000 pounds. Although TL traffic may involve involve only one customer, customer, it is possible that large shipments (greater than 10,000 pounds) rom several customers can be consolidated into a truckload shipment. Whereas LTL shipments are routed through terminals, ter minals, TL shipments tend to move directly from the shipper’s location to the consignee’s location. Prominent TL carriers include J.B. Hunt, Schneider National, Swift Transportation, and Werner Enterprises. Although LTL companies tend to be limited in the type of freight that they haul—primarily dry freight such as apparel, books, and greeting cards, among others—TL companies can carry a plethora o reight types. These include, but are not limited to, dry reight, oodstus, rerigerated products, liquid products, animals and livestock, automobiles, and steel. Overall, although motor carriers have the ability to haul many dierent kinds o reight, their capacity is limited by highway weight and size (width, length) restrictions. restrictions. For example, motor motor carriers using using the Interstate Interstate Highway Highway System are limited to a maximum gross vehicle weight o 80,000 pounds. With respect to size considerations, truck trailers can be a maximum o 102 inches wide; the maximum length or tractor– trailer combinations varies rom state to state. You should recognize that some countries do not have size and weight restrictions or motor carriers. Although U.S. U.S. motor carriers can travel wherever there are roads, their length o haul is mitigated by several actors, such as speed limits and hours-o-service (HOS) rules. HOS rules have been the subject o constant legislation and litigation in the United States since the beginning o the twenty-irst century, century, and rather than tr ying to articulate the relevant rules, suice it to say that— unlike automobile drivers—truck drivers—truck drivers are limited in terms o the number o hours that can be driven in a 24-hour period, as well as the number o hours that can be driven in a one-week period. Both HOS and highway speed limits have long been justiied on the basis o saety concerns, and several states (e.g., Caliornia, Oregon, Washington) mandate a two-tier speed limit policy in which maximum speed speed or motor motor is lower loprocess wer than automotivethe automotive vehicles. vehicles. Having saidspeed this, severalthe U.S. U.S. states have eliminated, orcarriers are in the oor eliminating, lower maximum limit or truckers, which could potentially increase motor carriers’ length o haul. Readers should recognize that each country may have its own hours o service rules or motor carrier car rier operators as well as its own speed limits. limits. Canada, or example, example, has dierent hours o service rules depending on whether one is driving north nor th or south o 60 degrees north nor th latitude. In addition, 120 kilometers per hour (approximately 75 miles per hour) is the maximum speed limit in Canada’s British Columbia province, compared to 100 kilometers per hour in the province o Ontario. Without question, the primary advantage or motor carriers is lexibility lexibility,, or the ability to deliver deliver the product to the customer (or where the customer has relatively easy access to it). For example, i you bought this textbook at your university’s bookstore, this book was delivered there by some type of motor carrier, perhaps an LTL LTL carrier. If you bought this textbook from an online site, then it was most likely delivered to your residence by a truck, perhaps a small package tr uck. Indeed, a longtime slogan o the American Trucking Trucking Associations (a trade group that represents motor carrier interests) was, “I you have it, it moved moved by truck.” truck.”
As was the case with airreigh airreight, t, weather considerat considerations ions also aect the reliabili reliability ty o motor carrier delivery, and relevant weather considerations include ice, og, snow, looding, and high winds (which can aect bridge crossings). The reliability o motor carrier service is also aected by highway congestion, which is caused by increased travel demand, weather, roadway incidents (e.g.,
Chapter 12 • Trans Transportation portation 227
disabled vehicle, accident), and construction. Highway congestion tends to be most severe in major metropolitan areas and is not likely to be alleviated by additional highway construction. Rather, technology-based approaches, such as intelligent transportation systems and computer routing sotware that actors in congestion, are being used to deal with road congestion. Although the cost o motor carrier service is lower than or airreight, motor carriers tend to be more costly than the remaining modes o transportation. Moreover, there can be signiicant cost variation depending on the type of motor carrier service that is purchased. purchased. Expedited trucking, such as provided by Panther Transportation and FedEx Custom Critical, tends to have the highest cost, whereas truckload transportation tends to have the lowest lowest cost. These cost variations variations highlight the importance importance o understanding the trade-os trade-os between logistical activities that have been discussed throughout the text. For example, suppose an organization manufactures 8,000 pounds of cat litter per day. The company could have one 8,000-pound LTL shipment each day, day, or the company could accumulate ive days o cat litter into one 40,000-pound TL shipment. This would would be done to take advantage of the lower TL rate per hundredweight; hundredweight; how ever, to receive the lower TL rate, the company will need to hold an inventory of cat litter, thus increasing inventory and storage costs.
Pipeines Pipelines are a unique mode o transportation because it is the only one without vehicles, and this is signicant or several reasons. First, there is no need or vehicle operators, an important consideration given that some vehicle operators, such as airplane pilots and ship captains, can achieve annual compensation in excess o $200,000. In addition, vehicle operators sometimes engage in work stoppages (e.g., strikes) strikes) and can be the cause o accidents. The lack o vehicles also means that pipeline transportation is one way; other modes have two-way transportation, a ronthaul and a backhaul. The backhaul is oten a signicant source o excess capacity, capacity, or unused available space. Pipelines’ Pipeline s’ lack o vehic vehicles les means that it is the most reliable orm o transportat transportation ion in part because there aren’t vehicle-related disruptions (such as accidents), and pipelines are virtually unaected by adverse weather conditions. Having said this, pipelines tend to be the slowest orm o transportation; the lack o vehicles means that the relevant product needs to be orced through the pipeline, oten by pumping stations. The slow speed or pipelines is signiicant because this increases overall transit times and thus necessitates additional inventory in the logistics system. From a capability perspective, pipelines are quite limited in the sense that products must be liquid, liqueiable, or gaseous in nature. Indeed, pipelines are probably best known or transporting petroleum products, and petroleum pipelines are characterized as either crude oil or product pipelines. Gathering lines, which are 6 inches or smaller in diameter, start at each well and carry crude oil to concentration points. Trunk lines carry carry crude oil rom gathering-line concentration points to the oil reineries. Their diameter varies rom 3 to 48 inches; 8- to 10-inch pipe is the most common size. Product pipelines carry products such as gasoline or aviation uel rom the reineries to tank arms (storage tanks) located nearer to customers. These products are stored at the tank arms and then delivered to customers by truck or by rail, an indication that pipelines have limited delivery lexibility. Slurry systems allow bulk commodities to become liqueiable by grinding the solid material to a certain particle size, mixing it with a liquid to orm a luid muddy substance, pumping that substance through a pipeline, and then decanting the liquid and removing it, leaving the solid material. Although water is the most common liquid used in slurry systems, other liquids, such as methanol, can be used. The Black Mesa pipeline, which transports pulverized coal rom northern Arizona to an electric-generating station, is probably the best-known slurry pipeline currently in operation; other slurry pipelines in current operation transport phosphate, limestone, copper concentrate, and iron
concentrate. Although pipelines tend to have limited capabilities with respect to the products that can be transported, pipelines are capable o transporting very large product volumes. volumes. For example, the
228 Part III • Elements of Logistics Logistics Systems
48-inch Trans-Alaska Trans-Alaska pipeline, which is 789 miles long, has a discharge capacity o two million barrels o oil per day. Moreover, Moreover, pipelines are quite costly to construct and thus have high ixed costs; however, because these ixed costs can be spread over rather large capacities, pipelines oer their users a relatively low cost per unit.
Rairoads Although more than 550 reight railroads operate in the United States, over 90 percent o the rail industry’s revenues revenues and ton-miles are accounted or by the seven Class I (2015 revenues o approximately $450 million) reight railroads.6 Moreover, the U.S. railroad industry is dominated by our reight carriers, the Burlington Northern (BN), CSX, Norolk Southern (NS), and Union Pacic (UP); the BN and UP dominate rail reight transportation west o the Mississippi River, River, whereas CSX and NS have a similar position east o the Mississippi River. River. This level o market concentration concentration and domination is not ound ound in the other modes, modes, and rom a practical perspective it can create limited service and pricing options or potential customers. One possible maniestation o limited service options might be seen in the railroads’ r ailroads’ rather uneven reliability in recent years, some o which can be linked to adverse weather conditions. conditions. In recent years, major U.S. U.S. railroads have dealt with blizzards, record-setting cold temperatures, severe looding, and tornadoes that have damaged many miles o rail track and caused signiicant transit time delays. U.S. reight railroads present an intriguing paradox in the sense that they are not either the “best” or “worst” on any o the six attributes (capability, capacity, capacity, cost, lexibility, reliability, reliability, speed) that we’re using as a basis o comparison or the ive transport modes. For example, although reight railroads have the potential to transport many dierent dierent kinds o products (capability), they tend to transport lower-value, high-volume shipments o bulk-type commodities such as coal, chemicals, arm products, and nonmetallic minerals. Having said this, this, the growth o intermodal transportation (which will be more ully discussed later in the chapter) has given railroads access to manuactured and packaged products, which tend to be higher value. Overall, railroads are superior to air, motor, and pipeline, but inerior to water, water, in terms o their ability to transport dierent kinds o products. Similarly,, rails possess less lexibility (ability to deliver the product to the customer) than motor Similarly carriers, unless the customer is located on a rail line or has a rail siding (a track that runs rom a main line to a particular par ticular acility). However, However, rails generally have greater lexibility than air, water, and pipeline. In terms o the volume that can be carried at any one time (capacity), rails are superior to air and motor, but not as good as pipeline or water. Boxcars (used to carry general reight), hopper cars (used to carry products like coal and minerals), and tank cars (used or liquid or liqueiable products) have usable carrying capacities o approximately 110 tons. tons. Although this dwars the 25-ton capacity o a typical truck trailer, trailer, consider that the carrying carrying capacity o one dry bulk barge (latboard boat used to transport heavy products) is about 1,750 tons.7 Freight railroads are also right in the middle o the ive modes when it comes to cost (price that a carrier charges to transport a shipment) and speed (elapsed transit time rom pickup to delivery) considerations. Although railroads are less expensive than air and motor, they are more expensive than pipeline and water. Alternatively, railroads are aster than both pipeline and water, but slower than air and truck.
Water Freight moves by water on the Great Lakes, using vessels called lake freighters (lakers), as well as on inland waterways, using barges. Waterborne commerce also moves via oceangoing vessels between the mainland states (Lower 48) and Alaska, Hawaii, and Puerto Rico. Our discussion will focus on the
6
www.aar.org www .aar.org
7
Center or Ports and a nd Waterways, Waterways, A Modal Comparison o Domestic Freight Transportation Eects on the General Public (College (College Station, TX: Texas Transportation Institute, 2009).
Chapter 12 • Trans Transportation portation 229
inland waterways, waterways, primarily rivers, which which are dredged to a depth o nine eet—the minimum depth required or most barges. Although minimum dredging depths might appear to be a rather mundane topic, it is actually quite important in the sense that inland water transportation is somewhat unreliable due to weather-rela weather-related ted conditions such as drought d rought and icing. Drought creates problems because when water levels drop below acceptable levels, barges are orced to reduce their loads, or barge barg e traic might be halted altogether, situations that require alternate means o transportation. During 2012, or example, drought conditions closed closed an 11-mile stretch o the Mississippi, costing barge operators approximately $1 million per day. day.8 Flooding is another weather-related weather-related consideration that can aect the reliability o inland water transportation. For example, severe severe looding caused parts o the Mississippi River to be closed closed to barge transportation in late 2015 and early 2016. Icing is a problem in northern states such as Minnesota and Wisconsin; the ice closes the rivers and prevents year-round operation. Because o this, customers can stockpile inventories in the all to last through winter months or can use alternate methods o transportation. However, Howeve r, not all o the unreliability associated with U.S. U.S. inland water transportation is weather related. More speciically speciically,, the waterwa waterways’ ys’ lock system system (a lock raises or lowers barges so they can meet the river’s level as they move upstream or downstream) also contributes to transport unreliability. Many locks on the U.S. inland waterway system are quite old, with some locks dating to the 1930s, and their maintenance needs tend to increase as a unction o age. With preventive maintenance maintenance o locks currently the exception rather than the rule, when a lock malunctions the related repairs can take months to complete—a situation with potentially adverse consequences or shippers and barge operators.9 Inland water transportation in the United States is also characterized by slow average speeds o approximately six miles per hour. It should be noted that transit times will be aected by the direction o travel; upstream movements movements that go against the prevailing current will be slower than downstream movements. movements. In addition, inland waterwa waterways ys can be circuitous in nature, which can add to transit time. And, as previously pointed out, transit times may be extended because o lock-related maintenance considerations. In terms o positive attributes, attributes, inland water transportation is relatively inexpensive to users. At one time, inland water transportation was considered to be the least expensive orm o transportation, but uel taxes that were imposed on inland water transportation in the 1980s permitted pipelines to become the least expensive mode. Nevertheless, inland water transportation is quite inexpensive when compared to rail and motor carrier transportation. As a general guideline, on a ton-mile basis, rail costs are approximately two to three times as high as inland water carriers, whereas truck costs are approximately 20 to 30 times higher than inland water carriers. Although inland water carriers tend to ocus ocus on lower-v lower-value alue bulk bulk commodities commodities that can be handled by mechanical means such as pumps, scoops, and conveyors, conveyors, many dierent kinds o products can be carried. The predominant commodity moved by barge is petroleum and petroleum-related products, ollowed by coal. Other products that move extensively in the inland waterway system include ood and arm products, industrial chemicals, and minerals and stone. And, as pointed out in the previous section, inland water carriers can carry car ry much greater volumes than can rail and tr uck.
INTERMODAl TRANSPORTATION W Wee have discussed each mode as i each acts in isolation rom the others, but in an increasingly global economy, multiple modes are used to transport a shipment rom its origin to its destination. For purposes,that intermodal transportation to transportation a container or otherour equipment can be transerred rom reers the vehicle vehicle o one modewhen to theusing vehicle o another
Learning Objective
12.3
8
Josh Sanburn, “As “As Barges Sit Idle along the Mississippi, the Economic Costs Grow,” Grow,” business.time.com business.time.com,, August 22, 2012.
9
www.mvs.usace.army www .mvs.usace.army.mil/oodght/L-D/LD21.pdf .mil/oodght/L-D/LD21.pdf
230 Part III • Elements of Logistics Logistics Systems End loading fully enclosed
Ventilated Side loading fully enclosed
Refrigerated
Open top
Liquid bulk Open top hard top
Flat bulk
Figure 12.1 12.1 Various Types of Intermodal Surface Containers Source: Ports of the World, 14th edition, CIGNA Property & Casualty Companies.
mode without the contents being reloaded or disturbed.10 With intermodal transportation, two or more modes work closely together in an attempt to utilize the advantages o each mode while at the same time minimizing their disadvantages. For example, a company might use piggyback transportransportr uck trailer-on-fatcar or container-on-fatcar, container-on-fatcar, to take advantage o rail’ rail’ss low tation, that is, either truck transportation costs on the line-haul along with truck’ tr uck’ss ability to provide door-to-door service. As evident in our deintion, the container is an important impor tant type o equipment in intermodal transportation. Containers are moved by mechanical devices such as container cranes, and companies need only handle a container and not the reight inside it—thus providing a dramatic reduction in reight handling costs. Because the container is interchangeable among rail, truck, and water carriers, containers can be used in intermodal applications and provide the advantages oered by each o several modes. modes. Both ocean carriers and railroads have developed methods o handling multiple containers at one time, thereby reducing the number o individual liting and storage moves. Containers are generally 8 eet wide, 8 eet high, and between 10 and 53 eet long. Most containers are dry-cargo boxes, although some are insulated and come with temperature-controlling devices. Specialized intermodal containers are also available that carry tanks or holding liquids or gases as well as containers that hold insulated or rerigerated cargo. Figure 12.1 12.1 shows several dierent types o containers. Air reight containers, oten reerred to as unit load devices (ULDs), are constructed constructed o lightweight metals and come in dierent sizes. Unlike the containers in Figure 12.1 12.1, air freight ULDs have somewhat irregular shapes, dictated by the contours o the uselage into which they must it. Although intermodal containers can range between between 10 and 53 eet eet in length, length, a commonly commonly used metric is twenty-foot equivalent unit (TEU), which stands or 20-oot equivalent unit. Volumes of intermodal traffic are commonly expressed as so many TEUs, meaning meaning they would fill that many
of intermodal traffic are commonly expressed as so many TEUs, meaning meaning they would fill that many 10
This denition comes rom Barton Jennings and a nd Mary C. Holcomb, “Beyond Containerization: The Broader Concept o Intermodalism,” Transportation Journal 35, 35, no. 3 (1995): 5–13.
Chapter 12 • Trans Transportation portation 231
20-foot containers. Water Water ports, for example, are often ranked in terms of the number of TEUs that are handled in a particular par ticular period of time. Likewise, Likewise, containerships are measured by the number of TEUs that can be carried, and containership capacity continues to increase over time. Consider that in the year 2000—a time when many o today’ today’ss college undergraduates were younger than five years of age—the largest capacity containership was approximately 8,000 TEUs. By contrast, Mediterranean Shipping Company, a major ocean transportation company, began operating three 19,224 TEU vessels vessels during 2015. Not only did the container revolutionize reight handling, it also spurred cooperation between various modes to develop more eective and eicient transport oerings, such as land bridge services. Rather than all water service between two ports, land bridge services involve the use o surace transportation—usually transpor tation—usually rail transportation—between the origin and destination port. Consider, for example, a shipment of pineapples from Hawaii Hawaii to Europe. Rather than the shipment going by water from Hawaii through the Panama Canal and then on to Europe, under land bridge service, the pineapples would move by containership rom Hawaii to a U.S. West Coast water port. por t. From this th is port, po rt, the containers o pineapple would be placed on railcars and shipped across the United States to an East Coast port, where the containers would be loaded onto a vessel for continuation of the shipment to Europe. Although the land bridge adds to total transportation costs, the primary advantage to land bridge service is the reduction in total transit time rom the origin to destination port.
TRANSPORTATION SPECIAlISTS In addition to the ve basic modes and intermodal transportation, a number o dierent transportation specialists can provide value-added services to prospective customers. We will discuss several transportation specialists in the paragraphs that ollow ollow.. Freight forwarders are not modes, but rom the shipper’s shipper’s viewpoint, they are analogous to other carriers. There are two types o domestic reight orwarders—suracee and air—and they can best be thought o as consolidators o reight. orwarders—surac Surace carriers give volume discounts to customers shipping large quantities o reight at one time. For example, the LTL LTL rate from city A to city B might be $5 per 100 pounds for shipments less than 20,000 pounds, whereas the TL TL rate might be $2 per 100 pounds when shipments of 20,000 pounds or more are tendered. Truckload rates are lower than LTL rates for three reasons: (1) the shipper loads the goods, and the consignee unloads the trailer; (2) the load goes g oes directly rom shipper to consignee without passing through terminals; ter minals; and (3) paperwork, billing, and other administrative costs are little more or a 25,000-pound shipment than they would be or a 250-pound shipment. The freight forwarder exists by offering a service to shippers that use LTL rates because they do not generate enough volume to use TL rates. Without the freight forwarder, the shipper has to use the $5 LTL rate. The freight forwarder, however, offers the same transportation service for a rate between the LTL and TL rate—say, $4 per 100 pounds. This is possible because the freight orwarder consolidates enough small shipments to reach a volume o at least 20,000 pounds and thus qualifies for the $2 per 100 pound TL rate. The freight forwarder typically offers pickup and delivery service but does not perorm the line-haul service, which is done by motor carriers or railroads (in terms o intermodal service). The air orwarding industry works works with the air carriers and air orwarders orwarders to consolidate shipments and tender them in containers that are ready or aircrat loading. This results in signiicant ground-handling savings or the airlines. Thereore, airlines encourage orwarder traic because it results in an agreeable division o labor: The orwarders provide the retailing unction unction and deal with each individual shipper and consignee, and the airline concentrates on wholesaling, moving the or warders’ loaded containers among major cities. cities.
Learning Objective
12.4
Some orwarders specialize in certain cargoes. A common example is in the garment g arment industry, in which many small garment irms send large numbers o a ew garments each to retail shops in most large cities. The garment orwarders use special containers in which the garments are on hangers and thus ready or display on arrival. Some orwarders specialize in animals, and their services
232 Part III • Elements of Logistics Logistics Systems
include arranging or transportation, customs clearance, documentation, quarantine acilities, lab services, and custom-made animal containers, among others. Shippers’ associations perorm basically the same unction as surace and air reight or warders, except that they do not operate as proit-making organizations. Shippers’ associations are membership cooperatives where membership can be based on dierent considerations, such as shipping a particular commodity or commodities, belonging to a particular industry industr y, or being located in a particular area. Although shippers’ associations associations tend to be thought o as providing a large number o transportation-related services or their members (ull-service associations), some shippers’ associations are primarily ocused on achieving the lowest rates or their members (“rate negotiator” associations). One example o a shippers’ association is NASA (North American Shippers Association), which specializes specializes in the transportation o beverages across the globe.11 NASA, like many other shippers’ associations, ocuses on transportation cost savings or its members. Brokers are another type o transportation specialist; they are companies that look to match a shipper’s reight with a carrier to transport it. Brokers look to secure the best transportation rate and service package available or shippers, while attempting to ensure that carriers operate as close as possible to maximum capacity. capacity. Brokers can handle both LTL and TL shipments; those handling LTL shipments consolidate them and then turn them over to motor carriers, reight orwarders, or shippers’ associations. With respect to TL shipments, brokers will retain a particular carrier car rier and receive a portion o the transportation charges as compensation. compensation. In some cases, third-party logistics (3PL) companies are involved in arranging transportation services. They try to ind clients with complementary transportation needs so that equipment utilization can be increased, which should reduce transportation costs to the respective clients. As an example, one prominent 3PL was able to persuade Chrysler and Ford to share space on trucks that were delivering repair re pair parts par ts to both Chrysler Chr ysler and Ford dealerships in a particular geographic g eographic area. The 3PL was was able to show show both Chrysler and and Ford that that dedicated equipment equipment (that is, is, equipment car car-rying only Chrysler Chr ysler or only Ford parts) led to additional equipment, additional shipments, and excess capacity or each party—thus increasing increasing the costs o distributing the repair parts. Much o the discussion up to this point has assumed that we are dealing with shipments that weigh at least several several hundred pounds. pounds. We’ll We’ll conclude our discussion o transportation specialists by looking at parcel carriers, companies that specialize in transporting parcels, which are oten reerred to as packages that weigh up to 150 pounds. Parcel shippers have a variety o potential options available to them, one o which is Retail Ground, a service o the U.S. U.S. Postal Postal Service. Retail Ground has size (130 inches in combined length and girth) and weight (70 pounds) limitations, with transporta12
tion charges based on weight, distance, and shape. In most cases, a parcel must be transported to the post oice by the shipper, but it will be delivered to the receiver’s receiver’s actual mailing address. Another option or parcel shippers is United Parcel Service (UPS), which inancially dwars any other transportation company in the United States (2015 revenues revenues o approximately $49 billion rom package operations). UPS was able to attract customers in its early years because it oered certain services, such as automatic daily pickups, multiple delivery delivery attempts, and the return o undeliverable packages, that were not available rom competitors such as the U.S. Postal Service—and UPS was able to oer this service at rates that were competitive with the U.S. U.S. Postal Service. Unlike the U.S. U.S. Postal Service, UPS rates include both pickup and delivery delivery,, and today UPS oers a range o parcel services via several modes o transport, to include truck, rail, and air. Whereas UPS started as a package delivery company that emphasized line-haul movement by truck and in the 1980s expanded into air transportation, Federal Express (now FedEx Express) started as a package delivery company that emphasized service by air transportation and later expanded into line-haul movement by truck. Both UPS and FedEx now offer package shippers serser vice options that include same-day service service involving air air transportation, next-day next-day service involving involving air
11
www.nasaships.com www .nasaships.com
12
http://www.usps.com/ship/mail-shopping-services.htm
Chapter 12 • Trans Transportation portation 233
or truck, and second-day service involving air or truck, among others. The size and weight limitations for packages shipped by UPS and FedEx are similar, with both carriers limiting package sizes to a maximum o 108 inches in length and 165 inches in girth. And while the maximum package weight for UPS and FedEx is 150 pounds, both carriers mandate special guidelines and procedures when shipping packages that weigh more than 70 pounds (UPS) or 75 pounds (FedEx). Package services are also available from Greyhound Lines (called Greyhound Package Express), which is the primary intercity bus company in the United States. As is the case with UPS and FedEx, several service options are available for package delivery delivery,, such as direct drive (which uses dedicated vehicles) and standard service (where the packages travel in special compartments on the bus). Packages that are sent via Greyhound Package Express are limited to a maximum weight of 100 pounds.13
TRANSPORTATION REGUlATION The ve modes o transportation have been infuenced, and continue to be infuenced, by various types o regulation by ederal, state, and local governments g overnments.. You may not be aware, or example, that until 2007 commercial airline pilots in the United States aced mandatory retirement upon reaching 60 years of age (65 is now the mandatory retirement age for commercial pilots). Likewise, Likewise, you might not be aware that there are very specic guidelines guidelines or the placement o lighting on truck trailers. The existence o these and other regulations have implications not only or transportation companies, companies, but also or users o transportation companies because regulations can aect the eectiveness eectiveness and eciency o a user’s user’s logistics system. Indeed, regulation costs money—regulations need to be codied, and government agencies (regulatory bodies) exist to enorce the regulations. Our discussion in this section will ocus ocus on ederal regulation o transportation in the United States. We We will look at environmental, saety, saety, and economic regulation. However, beore proceeding with this discussion, readers should recognize that the level and degree o transportation regulation varies rom country to country. For For example, many o the world’s world’s more industrialized economies have instituted airly stringent regulations with respect to vehicle emissions (air pollution) rom transportation equipment. In lesser economically developed countries, emissions regulations are much less stringent—i they exist at all. We are not here to judge the appropriateness or inappropriateness o transportation regulation in individual countries; rather, logisticians logisticians need to understand the relevant transportation regulations o the countries in which they conduct business as well as the cost and service implications o these regulations.
Environmenta Environmen ta Reguation U.S. .S. federal regulatory agency that was established The Environmental Protection Agency (EPA), a U to protect human health and the environment, infuences transportation in a number o dierent ways.. A major ways major transportation-related concern of the EPA involves various types of pollution such as noise and air pollution. With respect to noise, the EP EPA A is responsible for enforcing noise emissions rom transportation equipment such as rail locomotives and truck tractors. In terms o air pollution, the EPA has mandated that rail locomotives and truck tr uck tractors must meet stringent emissions stanstandards. With respect to locomotives, for example, EPA Tier 4 emission standards, which went into eect in 2015, required new locomotive engines to lower nitrous oxides emissions by approximately 75% compared to locomotive engines that went into service in 2005.14 The EPA is also quite quite concerned with resource conservation, and this is particularly germane ger mane in that transportation accounts or approximately two-thirds o the petroleum consumption in the United States. As such, improved uel eiciency and reduced consumption o petroleum have
Learning Objective
12.5
13
http://www.shipgreyhound.com/e/Pages/Faq.aspx#Ship_Q14
14
Jessica Hardcastle, “GE’s Tier 4 Locomotive Cuts Emissions More Than 70% without Aftertreatment,” Aftertreatment,” Environmental Environmental Leader, Leader, September 30, 2013, n.p.
234 Part III • Elements of Logistics Logistics Systems
become important issues or many transportation companies. For example, United Airlines has improved its aircrat uel eiciency by over over 33% since 1994 and in 2016 began beg an a three-year trial o 15 sustainable aviation biofuel at Los Angeles International Airport.
Safety Reguation The Department of Transportation (DOT) is the U.S. ederal government body with primary responsibility or transportation saety regulation. Although the DOT’s saety responsibilities encompass all ve modes o transportation, transpor tation, saety regulation o inland water carriers is primarily the responsibility o the U.S. U.S. Coast Guard, which is now part o the U.S. U.S. Department o Homeland Security.. The key ederal government Security g overnment saety agency or each mode, along with an example o its roles or responsibilities, will be discussed in the ollowing paragraphs. The Federal Aviation Administration (FAA) has primary responsibility or air transportation saety and strives to improve the saety and eiciency o aviation. One o the FAA’s FAA’s primary roles involves airspace and air traic management and to this end the FAA operates airport towers and air traic control centers.16 The Federal Motor Carrier Car rier Saety Administration (FMCSA), a relatively new government agency, started operations in January 2000. It is ocused on reducing crashes, injuries, and atalities involving large trucks and buses. As such, the FMCSA ocuses on strong enorcement o saety regulations; targeting high-risk carriers and commercial motor vehicle drivers; and improving saety inormation systems and commercial motor vehicle technologies.17 Oice o Pipeline Saety (OPS), which is part par t o theor Pipeline Materials Saety The Administration, is responsible or saety considerations naturaland gas Hazardous and liquid pipelines. The OPS has responsibility responsibility or establishing and and enorcing regulations with with respect to pipeline design, construction, and operation.18 Among its myriad responsibilities, the Federal Railroad Administration (FRA) also has primary responsibility or saety in the U.S. railroad industry. The FRA employs approximately 400 saety inspectors who investigate ive distinct disciplines, namely, hazardous materials; motive power and equipment; operating practices, including drug and alcohol issue; track structures; and signal and train control issues. 19 Finally, the U.S. Coast Guard (USCG) has three broad roles associated with marine (water) transportation, namely namely,, saety, security, security, and stewardship stewardship.. Prominent USCG saety roles include promoting sae boating practices, accident investigation, and licensing mariners.20
Economic Reguation Economic regulation in transportation refers to control over business practices and activities such as entry and exit, pricing, service, accounting and nancial issues, and mergers and acquisitions. Federal Federal economic regulation o transportation in the United States, which began in the 1870s, was was justied because o transportation’ transportation’ss economic and social importance as well as a belie that transportation companies would not act in the public’s best interest without government regulation.21 Economic regulation resulted in the creation o two key economic regulatory bodies, bodies, the Interstate Commerce Commission (ICC), with authority over rail, motor, inland water, and oil pipelines, and the Civil Aeronautics Board (CAB), with authority over air transportation. Although a comprehensive discussion o the economic regulation regulation o transportation is beyond the scope of this book, one of the authors worked for an LTL LTL company while the LTL LTL industry was
15
www.united.com/web/en-US/content/company/globalcitizenship/environment.aspx www.united.com/web/en-US/content/company/globalcitizenship/environment.aspx http://www.aa.gov/about/saety_eciency/
16 17
http://www.mcsa.dot.gov/mission/about-us
18
http://www.phmsa.dot.gov/pipeline/about
19
http://www.ra.dot.gov/us/content/3
20
http://www.gocoastguard.com/about-the-coast-guard/discover-our-roles-missions/marine-saety
21
Donald V. Harper, Transportation in America, 2nd America, 2nd ed. (Englewood Clis, NJ: Prentice Hall, 1982), Chapter 19.
Chapter 12 • Trans Transportation portation 235
economically regulated, and his experiences oer insight into the challenges presented by economic regulation. For example, under economic regulation, price competition among LTL carriers was limited and carriers could set their prices through collective ratemaking (i.e., sharing cost and price information with one another) without fear of legal prosecution. This meant that all LTL carriers charged the exact same prices or transporting shipments between any two points and when companies can’t compete on price, they must compete on service. ser vice. As such, one reason that the author’s employer chose the name “AAA “AAA Trucking Corporation” was because it would be the irst listing in a telephone book. Beginning in the late 1970s, various sectors o the transportation industry experienced a reduction in economic regulation (also reerred to as deregulation), and in 1985 the CAB went out o existence. The Interstate Commerce Commission was legislated out o existence in 1995, and its remaining economic regulatory unctions were transerred to a new agency, the Surface Transportation Board (STB), which is ailiated with the Department o Transportation. Although the STB has primary responsibility or resolving railroad rate and service disputes and reviewing potential rail mergers, it continues to have some jurisdiction over motor carriers, domestic water transportation, and the rates and services of pipelines that are not regulated by the Federal Federal Energy 22 Regulatory Commission. From a logistics perspective, perspective, the economic deregulation o transportation is important because it has allowed transportation companies much greater reedom with respect to pricing and service options—two attributes that are at the heart o the tailored logistics concept that was presented in Chapter 1. 1. In addition, the economic deregulation that occurred in the United States spurred economic deregulation (sometimes called “liberalization”) in many other countries. This movement has been particularly noticeable with respect to air transportation.
lEGAl ClASSIFICATION OF CARRIERS Although there has been a dramatic reduction in U.S. U.S. economic regulation since the late 1970s, the legal classication o carriers continues to be relevant. More specically, specically, transportation carriers are classied as either or hire or private, and or-hire carriers can be urther subdivided into common, contract, and exempt carriers. carriers. The legal classication o carriers car riers is important because o the varying levels o economic regulation that are applicable to the dierent carriers (or example, common carriers have more extensive economic regulation than contract carriers). However, all carriers, regardless o their legal classication, must comply with the relevant environmental and saety regulations. regulations. The key key actor actor that separates a common carrier rom other orms o transportat transportation ion is that the common carrier has agreed to serve the general public. To ensure that the general public is adequately serviced, common carriers assumed our speciic obligations: to serve, to deliver, to charge reasonable rates, and to avoid discrimination in pricing and service. The service obligation means that common carriers are supposed to ser ve all customers who request service, so long as the commodity and origin/ origi n/ destination are within a carrier’s scope o service. For example, a motor carrier that specializes in dry van, general general freight service would would not be expected expected to transport transport a shipment of liquid chemicals chemicals.. Even though a company might not want want to carry certain types o reight, its undesirability is not a legitimate reason to avoid the obligation oblig ation to serve. ser ve. To To this end, in recent years the major U.S. U.S. reight railroads railro ads have tried to convince the Surace Transportation Board to waive their common carrier obligations associated with the transportation o hazardous chemicals such as chlorine.23 The obligat obligation ion to deliver requires that a carrier provide timely pickup and delivery as well as ensuring that the delivered shipment is in the same condition as the picked-up shipment (i.e., the avoidance o lost or damaged reight). Theand obligation to idea charge reasonable rates rates guards has long been viewed as oering oering protection or both carriers carriers users; the o reasonable against
Learning Objective
12.6
22
http://www.stb.dot.gov/stb/about/overview.html
23
John D. D. Boyd, “A “A Toxic Toxic Rate Battle,” The Journal Journal o Commerc Commerce e , June 22, 2009, 62.
236 Part III • Elements of Logistics Logistics Systems
rates so low that carriers are unable or unwilling to carry reight, and it guards against rates so high that users are unwilling or unable to tender reight to carriers. car riers. The obligation to avoid discrimination in pricing and service suggests that similarly situated customers (e.g., customers that ship the same product, customers that ship to the same origin and destination point) should receive identical treatment. One o the key provisions o the ICC Termination Act o 1995 was the elimination o the reasonable rate obligation (hence, also, the obligation to avoid discrimination in pricing and service) or many types o motor carriers. A contract carrier oers a specialized service to customers on a contractual basis. The contract speciies the compensation to be received, received, the services to be provided, and the type o equipment to be used, among other details. Unlike the common carrier, the contract carrier is under no obligation to render services to the general g eneral public and only has to serve customers with whom it has contracts. Moreover, the contract carrier is under no obligation to treat its customers on an equal basis. Because each contract can be tailored to the speciications o individual customers, contract carriage is viewed as oering many o the advantages o private transportation (such (such as control over service) while avoiding many o the disadvantages o private transportation (e.g., (e.g., the hiring o drivers, owning equipment). Exempt carriers are or-hire carriers that have been exempted rom economic regulation through provisions in various pieces o legislation; the appropriate rates and ser vices must be negotiated directly between the carrier and user. For example, the Transportation Transportation Act o 1940, which broug brought ht domest domestic ic water car carriers riers under econom economic ic regula regulation, tion, exempted liquid -bulk commodities rom economic regulation, as well as dry-bulk commodities, so long as no more than three dry-bulk commodities were moved in a particular tow. 24 In a similar ashion, the Motor Carrier Act o 1935, which brought motor carriers under economic regulation, regulation, exempted unprocessed agricultural commodities commodities rom economic regulation; regulation; the Motor Carrier Act o 1980, which lessened economic regulation or motor carriers, exempted agricultural seeds and plants rom regulation.25 Private carriers, which are exempt rom any economic regulation, are companies whose primary business is other than transportation. They provide their own transportation service by operating trucks, railcars, barges, ships, or airplanes. Private Private transportation is most prevalent in the trucking industry,, accounting or over 50 percent o the U.S. industry U.S. highway mileage or trucks.26 Prominent private truckers in the United States include Coca-Cola Company, Sysco Corporation, US Foods, and Walmart, W almart, among others. One advantage to private transportation is that the equipment can serve as a rolling billboard that allows an organization to promote itsel. Operational control is another advantage to private transportation, in part because shipments can move at a time convenient or the company, as opposed to a time that might be convenient or a or-hire carrier. Private transportation can also provide important competitive advantages to an organization. For example, private truck leets allow organizations to better serve key customers relative to the perormance o or-hire carriers.27 Although private transportation transpor tation can be a cost-eectiv cost-eectivee orm or m o transportation, a key disad vantage is that it can can be quite costly, costly, in part because o the capital expenditures that are necessary to own or lease the relevant vehicles as well as regular expenditures to maintain the vehicles vehicles.. Moreover, managerial costs are oten ignored or underestimated; many private leets require at least one ulltime employee to manage the various responsibilities such as vehicle selection, vehicle maintenance, maintenance, staing, labor relations, regulatory compliance, and so on.
24
Harper, Transportation in America.
25
Ibid.
26
http://www.nptc.org/index.php?option=com_content&view=article&id=39&Itemid=457
27
David Cullen, “Private Fleets: Measuring Up,” Fleet Up,” Fleet Owner Owner , October 2010, 30–32, 36.
Chapter 12 • Trans Transportation portation
237
Summary Transportation, the actual, physical movement o goods and people between two points, is pivotal to the success o any logistics or supply chain operation. The chapter began by comparing transportation inrastructures in several dierent
a particular ocus on containerization. The roles that can be played by transportation specialists such as reight orwarders and brokers were also examined. The chapter discussed environmental regulation, saety
countries and ound distinct inrastructural dierences across the countries. The chapter then discusse discussed d the ive modes o transportation portati on in terms o each mode’s capability, capacity, capacity, cost, lexibility, reliability, and speed. This mode-by-mode discussion was ollowed by a look at intermodal transportation, with
regulation, and economic regulation as they apply to transportation. We learned that a number o U.S. ederal agencies are responsible or transportation and also that the levels and types o regulation may not be consistent across modes. modes. The chapter concluded with a look at the our legal classiications o carriers—common, contract, exempt, and private.
Key Terms Accessorial service
Intermodal transportation
Shippers’ associations
Barge Brokers Common carrier Consignees Contract carrier Department o Transportation (DOT) Exempt carriers Freight orwarders
Land bridge services Less-than-truckload (LTL) Line-haul Lock Parcel carriers Piggyback transportation Private carriers Rail gauge
Slurry systems Surace Transportation Board Twenty-foot Tw enty-foot equivalent unit (TEU) Terminals Ton T on miles Transportation Truckload (TL) Unit load devices (ULDs)
Questions for Discussion and Review 12.1
12.2
12.3
12.4
12.5
12.6
12.7 12.8 12.9
Why is transportation important important to a rm’s supply chain operations? Which attributes are considered while selecting transportatransportation modes? Discuss the speed o o airreight transportation transportation in terms o the line-haul and accessorial service. Why is the reliability o airreight transportation somewhat problematic? How do truckload operations dier rom less-thantruckload operations? Explain why the rates for truckload are relatively lower than or less-than-truckload. What are are the dierent dierent types o o pipelines used used in the industry? What are pipeline slurry systems? How do they unction?
12.12
12.13
12.14
12.15
12.16
12.17
12.18
How do containers help acilitate intermodal transportation? What are reight orwarders? orwarders? How do they unction? What services do they perorm? Discuss the role o brokers in transportation with with examples rom your country. Discuss the various options that are available to parcel shippers in your country. List several environmental regulations existing in your country and describe their impact on transportation. Pick three modes o transportation, name the government agency in your country responsible or saety regulations or each o the modes that you have picked, and provide a saety-related role or responsibility or each mode.
12.9 12.10
12.11
Discuss the drawbacks to rail transportation. How do weather conditions infuence the reliability reliability o inland water carriers? What are are the positive positive and and negative negative attributes attributes o inland water transportation?
12.18
12.19 12.20
Dene what is meant by economic regulation. Why is transportation economic deregulation important? How does a common carrier dier rom a contract carrier? Discuss advantages and disadvantages to private transportation.
238 Part III • Elements of Logistics Logistics Systems
Suggested Readings Caris, An, Sabina Limbourg, Cathy Macharis, Tom van Lier, and Mario Cools. “Integration o Inland Waterway Waterway Transport Transport in the Intermodal Supply Chain: A Taxonomy o Researc Research h Challenges.” Journal o Transport Geography Geography 41 41 (2014): 126–136. Corsi, Thomas M., Curtis M. Grimm, David Cantor, and Donald Wright. “Should Smaller Commercial Trucks Be Subject to Saety Regulations?” Transportation Journal 53, 53, no. 2 (2014): 117–142. Cullinane, Kevin, Michael Furth, Michael K.Y. Fung, Stephen X.H. Gong, and Japhet S. Law. Law. “Development of Air Transport Industry in the Asia-Pacic Region.” Region.” Pacifc Economic Review 16, no. 1 (2011): 42–46. Dillon, Brooke M. “Where is the ‘T’ in Environmental, Health, and Safety (EHS)? An Argument for Formalized Hazardous MateriMaterials Transportat Transportation ion Management Systems.” Environmental Quality Management 23, 23, no. 1 (2013): 1–9. Egbunike, Obiajulu N. and Andrew T. Polter. “Are Freight Pipelines a Pipe Dream? A Critical Review of the UK and European Perspective.” Journal o Transport Geography Geography 19, 19, no. 4 (2011): 499–508.
Grusevska, Kateryna, Theo Notteboom, and Andrii Shkliar. “Institutional Rail Reorm: The Case o Ukranian Railways. Railways.”” Transport Trans port Policy 46 (2016): 7–19. Hull, Bradley. Bradley. “The Chicago-East Coast Corridor: Changing InterIntermodal Patterns.” Transportation Journal 51, 51, no. 2 (2012): 220–237. Rodrigue, Jean-Paul, Jean Debrie, Antoine Fremont, and Elisabeth Gouvernal. “Functions and Actors of Inland Ports: European and North American Dynamics.” Dynamics.” Journal o Transport Geography Geography 18, no. 4 (2010): 519–529. Saunders, Lance W., John E. Bell, and Rapinder Sawhney. “The Use o Common Carriers to Control Control Internal Capacity: A Survey Survey o the Industry.” Transportation Journal 54, 54, no. 1 (2014): 122–135. Sersland, Daniel and Rajan Natarajan. “Driver Turnover Research: Exploring the Missing Angle with a Global Perspective.” Perspective.” Journal o Service Manage Management ment 26, 26, no. 4 (2015): 648–661. Swan, Peter F. F. “Market-Based Regulation o Freight Transportation: A Primer.” Primer.” Transportation Journal 50, 50, no. 1 (2011): 91–108. Zabihi, Sasha. “Drones and the Lack of Fede Federal ral Control.” Journal o Transportation Law, Logistics & Policy 82, 82, nos. 1 and 2 (2015): 49–58.
CASE
CASE 12.1 HDT TRUCK COMPANY COMPANY HDT Truck Company has been located in Crown Point, were involved, involved, it was was possible to assemble assemble three trucks per Indiana, since 1910. Its only products—large trucks—are day day.. Quality declined whenever the pace quickened. built to individual customer specications. The rm once HDT ocials had decided they could not grow g row and produced automobiles but dropped out out o the auto busi- became satised with their niche in the very-heavy-truck ness in 1924. The rm nearly went out o business in the market. With only two exceptions, since 1970, HDT had late 1930s, but by 1940 its ortunes were buoyed by receipt always had at least a our-month backlog o orders. In the o several military contracts or tank tank retrievers—large wheeled vehicles that can pull a disabled tank onto a low trailer and haul it to a location where it can be repaired. Since World War II, HDT had manuactured only large o-road vehicles, including airport snowplows, airport crash trucks, tr ucks, oil-eld drilling equipment, and the like. HDT purchased all components rom small manuacturers that were still clustered in the Milwaukee Milwaukee–Detroit–T –Detroit–Tooledo–Cleveland area. Essentially, all HDT did was assemassemble components into specialized vehicles containing the combinations o rame, transmission, axles, cab, cab, and other equipment necessary to do the job. The assembly line was relatively slow. slow. Ater wheels were attached to the rame and
1960s, its best market had been airports, but since 1980 its best market had been or oil-eld equipment, rst or the North Slope in Alaska and then for the Middle East. The U.S. military was also a regular customer. In late 2002, HDT received an order or 50 heavy trucks to be used in the oil elds o Saudi Arabia. The terms o sale were delivery delivery on or beore July 1, 2003, at the Port o Doha, Saudi Arabia. Specically, Specically, HDT would receive $172,000 per truck in U.S. unds FAS (ree alongside ship) at the discharging vessel in Doha, which meant that HDT was responsible or all transportation costs up until the time and point the trucks were discharged rom the ship’s tackle at Doha. Once each truck was unloaded,
axles, the night shit labor orce would push the chassis along to its next station on the line so it would be in place
HDT would be paid or it. Chris Reynolds, production manager at HDT, es-
or the next day’s shit. By using one shit, two trucks could be assembled each day. day. I large orders or identical trucks
timated that production could start approximately April 1, 2003, and the order would take 18 working days to
Chapter 12 • Trans Transportation portation 239
ccomplete. omplete. Because weekends were involved, all 50 trucks would be completed by April 20 to 25. Reynolds thought that May 1, 2003, was a more realistic completion date because he had always ound it dicult to restrict the assembly line to constructing trucks or only one account. The
Middle Eastern producers. Three separate orders, totaling 115 trucks, were involved. Robertson and Guillou let Crown Point or an industry convention in San Diego. Robertson phoned rom San Diego that he and Guillou had decided to vacation in
reason thistrucks was that Vic built Guillou, HDT’ s sales manager, or a that whileHDT beore returning to Crown Point. Robliked toor have being or HDT’s as many accounts as Mexico ertson knew could unction in his absence and possible on the assembly line at any one time. Prospective knew that with Pon overseeing operations, the company’s buyers requently visited the plant and were always more assets would be sae. Several days later, a Mexican postcard impressed when they could see a diverse diverse collection o postmarked in Tijuana arrived, saying that both were enmodels being built or a wide range o uses. joying Mexico and would stay longer than initially planned. Norman Pon, HDT’ HDT’ss treasurer, wanted to give priorPon was relieved to learn that Guillou and Robertity to building trucks that were being sold on an FOB plant son would be gone or a longer time and immediately bebasis because that would improve his cash fow position. At gan wondering what types o bills they were accumulating accumulating the time the $172,000 price had been set on the truck sale in Mexico and or which ones they would want company to Saudi Arabia, Pon had argued (unsuccessully) that the reimbursement. Both had several credit cards belonging price was too low. low. Guillou, on the other hand, argued that to the company. Based on experience, Pon also expected the sale was necessary because the Middle East represent - Robertson to phone on his cell phone or a cash advance ed a growth market by anyone’s denition, and he wanted or transer about once a week. (Robertson did not want HDT trucks there. HDT’s president, Gordon Robertson, charge records generated or some o his expenses.) had sided with Guillou. Robertson thought that Pon was As usual, Pon started wondering how paying or a good treasurer but too much o a worrier when it came the Robertson and Guillou vacation venture would aect to making important decisions. Pon, in turn, thought that HDT’s cash fow. Pon looked at his cash fow projections, Robertson had yet to shed the image he had acquired in the which were always made up or six weeks in advance, in 1980s when his late ather was president o HDT HDT.. Pon had this case through the rst o April, when some o the bills lost count o the number o times the elder Robertson had or components o the oil-eld trucks would come due. In needed cash to buy his son’s son’s way out o some embarrassing act, i Reynolds’s Reynolds’s schedule were adhered to, all the comsituation. Guillou was young Robertson’s raternity room- ponents would be on hand by April 10 and, and, i HDT were mate in college, and Pon thought the two o them shared a to receive the customary discounts, discounts, all o the components similar love o lie in the ast lane. would have to be paid or in the period between April 8 At the time the order was signed in 2002, Guillou and April 20 (HDT received a 1 percent discount or goods argued that the FAS destination port represented the best paid or within 10 days o actual or requested receipt, terms o sale because ocean charter charter rates were declining whichever came later). For a moment, Pon thought that as a result o an oversupply o tonnage. Guillou predicted predicted the worst might happen: The component bills would be that by mid-2003 charter rates would be so low that the due at the same time as Robertson’s and Guillou’s request cheapest method o transport would be to load all 50 or a hety cash advance. He called the Crown Point Bank trucks on one vessel. Pon countered that HDT should try and Trust Company, Company, where HDT had a line o credit, and to make a prot only rom the manuacture manuacture o trucks be- learned that the current cur rent rate was 8 percent per annum. He cause nobody in the rm knew much about ocean ship- then asked Bob Vanderpool, who was HDT’s trac manping. Robertson, who was a gambler at heart, disagreed. disag reed. ager, when the oil-eld trucks would arrive in Saudi Arabia. In March 2003, Reynolds had the 50-truck order “I don’t know,” was Vanderpool’s reply. “I assumed scheduled to be on the line rom April 2 to 29, which repre- that Guillou had arranged or transportation at the time sented 2.5 trucks per working day. Other work was sched- you decided to charge $172,000 per truck, but I’ll check uled or the assembly line at the same time, so the produc- urther.” He did and phoned back to tell Pon that Guiltion schedule was considered rm. Component parts or lou’s secretary could nd nothing in the les to indicate the oil-eld trucks andbacklogged or the other trucksseven weremonths, already arriving. Orders were or over
that Guillou had“Would checkedyou outmind charter rates. “That gures,” gures,” muttered Pon. doing some checking?”
the highest gure since 1989. This was due, almost in to- Vanderpool said he would mind mind doing some checking. Pon tal, to Guillou’s additional sales o oil-eld equipment to then suggested to him that there were several other newer ( continued continued )
240 Part III • Elements of Logistics Logistics Systems
orders also destined for the Middle Eastern countries so could charter it or $2,400 per day or 30 days, which would Vanderpool should start thinking about widening his area be enough time or it to load, transit the Seaway, reach o expertise. Vanderpool Vanderpool reluctantly agreed, and Pon heard Doha, and discharge the trucks by May 29 or 30.” nothing until Vanderpool passed him in the hall a ew days “Tell me about the alternative,” said Pon. later and said the assignment was much more time-con“Baltimore has airly requent sailings to the area suming than he had imagined. One week later, Vanderpool we want to reach,” said Va Vanderpool. nderpool. “W “Wee could load two said he had done as much as he could and would turn the trucks per day on railcars here and send them to Baltimore. gures over to Pon. Vanderpool also said that he did not T Two wo ships a week are scheduled rom Baltimore to Doha. have the authority to charter a ship and suggested that Pon It would take the trucks an average o 4 days to reach determine who could do so in Robertson’s absence. Later Baltimore, where they would would wait an average o 3 days to that day, Vanderpool came to Pon’s oce with a thick le. be loaded aboard ship. The gure should be 3.5 days, but “It looks like you’ve been doing a lot o guring,” the railroad will hustle i it knows we’re we’re trying to connect said Pon. with an outgoing sailing. Sailing time to Doha averages 15 “No, not me,” said Vanderpool, “but two outsid- days—a little more, a little less, depending on the amount ers. One is Bob Guider, an international reight orwarder o cargo to be handled at ports in between.” between.” in Chicago whom we use or our export parts shipments. “That averages 22 days per truck,” stated Pon, who And he put me in touch with Eddie Quan, a New York had been putting the gures in his calculator. What are the ship broker who is on top o the charter market. We We have charges?” two alternatives.” Vanderpool Va nderpool answered, “It costs $120 to load and “What are they?” asked Pon. block two trucks on a fatcar, which is, o course, $60 apiece “Well,” answered Vanderpool, “the St. Lawrence as long as they move in pairs. Sticking to pairs, the rail rate Seaway will open in mid-April, so we could use it. The or two on a fatcar totals $1,792 to Baltimore. Handling problem is that the Seaway route is circuitous, especially at Baltimore is $200 per truck, tr uck, and ocean reight rate rom to reach the Middle East. Also, there aren’t many schedsched - Baltimore to Doha is $1,440 per truck. We also have to buy uled Seaway sailings to that area, and because the Seaway insurance, which is about $150 per truck.” will just be opening again, cargo carg o space is hard to come by. “That totals $2,790,” said Pon, ater consulting his cal Thereore, i we’re not going to charter a ship, ship, the best bet culator. “What are the costs i we charter the Nola Pino? Pino? You You is to use Baltimore.” said it could be $72,000 or the vessel. What else is involved?” “What about chartering a ship?” asked Pon. “Why “There are two ways ways o getting the trucks to port,” not use Baltimore or that?” said Vanderpool. “The loading and blocking would be only “In theory, we could,” answered Vanderpool. “But $40 per truck because we’d be doing all 50 at one time. The Quan says the size o ship we want is rather small and rail rate per truck would average out to $180 each, and it not likely to be sailing into Baltimore. We could arrange would take 1 day or them to reach Chicago and another to share a ship with another party, but many bulk cargoes day to be loaded. We’d We’d be tying up a whar or 1 day, and are pretty dusty and might not be compatible with our ve- the wharage charge runs $2 per oot, and the Nola Pino is hicles. Quan says there is one oreign vessel entering the 535 eet long. We’d We’d be responsible or loading and stowing Great Lakes in April that is still looking for an outbound the cargo, and this would cost $4,000 or all 50 trucks. The charter. Seaway vessels, vessels, you know, know, are smaller because o Seaway tolls are $1.80 cents per ton or, in our case, $54 per the lock size restrictions. I we want to charter that vessel, truck. At Doha, the unloading costs will be $4,200 or the we’ll have have to move move quickly, quickly, because i somebody else char- entire vessel. Marine insurance will be $210 per truck.” ters her, she’s gone.” “Are there any other alternatives?” asked Pon. “What kind o vessel is it?” asked asked Pon. “The only other one that comes close is to drive the “The vessel’s name is the Nola Pino, the same name trucks rom here to Chicago,” answered Vanderpool. “We as a French movie actress o the 1960s. You You may recall that would need temporary licenses and a convoy permit and some Greek shipping magnate named the vessel ater her, pay to have the uel tank on each truck tr uck drained beore it is but his wie made him give up bothit’s Nola Pino thetoactress and Nola P ino Pino the ship. At present, scheduled be in
loaded. The is that the convoy wouldand cross state lines, and weproblem would need temporary licenses permits
Chicago the last week in April with a load o cocoa beans and ready or outbound loading May 1. Quan thinks we
in Illinois as well. We’d also need 50 drivers and have to pay or their time and or their trips back home.”
Chapter 12 • Trans Transportation portation 241
e n c e e r y w w a a L a t . S e S
Toledo Chicago
Crown Point
tiimore Bal t
Exhibit 12.A Map of the Northeastern United States
“Do me one avor,” said Pon. “Please call Frank Wood, our outside counsel, and ask him what steps we have to go through to charter a ship. Tell him I’m especially concerned about the liability. Give him Quan’s phone number. I want to make sure there are no more costs involved. I Robertson’s Rober tson’s ooling around is on schedule, he’ll he’ ll be wanting me to wire him some cash. I’d really appreciate it i you would summarize what you’v you’vee told me in two columns columns,, with the charter charter costs costs on the let and the overland Baltimore cost column on the right. Then when Robertson calls, I can ask him to decide.” “One question,” asked Vanderpool. “Shoot,” responded Pon. gures be on the let?” “Why should the charter “Because on a map (see Exhibit 12.A ), Chicago is to the let o Baltimore and that’s that’s the only way I’ll keep them straight when I’m talking on the phone.”
QUESTIONS 1. Assume you are Vanderpool. Vanderpool. Drat the comparison Pon Pon just requested.
2. Which o the two routing routing alternatives alternatives would you recommend? Why? 3. Assume that the buyer in Saudi Arabia Arabia has made other other large purchases in the United States and is considering consolidating all its purchases and loading them onto one large ship, which the buyer buyer will charter. charter. The buyer contacts contacts HDT and, and, although acknowledging its commitment to buy FAS Doha, asks how much HDT would subtract rom the $172,000 per truck price i the selling terms were changed to FOB HDT’s HDT’s Crown Point plant. How much much o a cost reduction do you think HDT should oer the buyer? Under what terms and conditions? question 3 with regard to changing the terms o 4. Answer question
sale to delivery at port in Baltimore. The buyer would unload the trucks rom the railcars. 5. Is there an interest rate that would make HDT change rom one routing to another? I so, what is it? 6. Assume that the cost to HDT o borrowing money is 12 percent per year. Because the buyer will pay or trucks as they are delivered, would it be advantageous or HDT to pay overtime to speed up production, ship the trucks as they are nished via the Port o Baltimore, and collect its payment earlier? Why or why not?
13
TransporTaTion ManageMenT
Learning Objectives 13.1 13.2 13.3 13.4 13.5
To discuss how rates are determined To To T o learn about modal and carrier selection To T o distinguish among various various transportation documents To T o illustrate select activities activities associated with making and receiving receiving shipments To T o learn about transportation service quality
The transportation manager’s job is much different today than when the first edition of this text was published in the 1970s, in part because of globalization, changes in i n regulation, reg ulation, and a nd advances ad vances in technology. With respect to globalization, consider that in the 1970s, the People’s People’s Republic of China (China) was in the midst of the Cultural Revolution, a movement movement that severely restricted the country’s economic development as well as trade with other countries. Today, Today, by contrast, China has the second-largest economy in the world (based on gross domestic product) and is a key source of manufactured products for many countries. The transportation requirements associated with a shipment of, say, toys, from Shanghai, China, to Des Moines, Iowa, are noticeably different than those for a shipment of toys from Cleveland, Ohio, Ohio, to Des Moines. As for changes in regulation, Chapter 12 pointed 12 pointed out that a reduction of economic regulation in the United States began in the late 1970s, 1970s, and with it came greater options in terms of both pricing and service. These pricing and service ser vice options meant that transportation managers have morphed from a reactive to a proactive focus; rather than simply accepting the available pricing and service packages that were established by economic regulation (reactive), today’s transportation manager can play an active role (proactive) in blending the appropriate pricing and service packages for an organization. Advances in technology, technology, and their impact on logistics management, management, have have been a recurring theme throughout the text. Rate determination (to be more fully discussed in the next section) provides one example of how advances in technology have impacted transportation management. manage ment. As recently as the 1980s, all rates were published in tariffs (a phonebook-like manual that contained rate information), and it was not uncommon for a transportation manager to refer to multiple tariffs to determine the applicable rate—a process that led to numerous incorrect rate determinations. Today Today, by contrast, many carriers provide rating information online and a transportation manager may need to enter little more than origin and destination zip codes and the relevant shipment weight to receive an estimated rate. For our purposes, transportation management will refer to the buying and controlling controlling of 1 transportation services by either a shipper or consignee. Today more than ever before, organizations are concerned about transportation management becausefor transportation represents a major expense item. In general ter ms, terms, freight transportation accounts approximately 6 percent of U.S. gross
item. In general terms, ter ms, freight transportation accounts for approximately 6 percent of U.S. gross
1
John J.J. Coyle, Edward J.J. Bardi, and Robert A. Novack, Transportation , 6th ed. (Mason, OH: Thomson South-Western, 2006).
242 24 2
Chapter 13 • Transp Transportation ortation Management 243
domestic product. Moreover, as we have emphasized throughout, transportation is the most costly logistics activity or many organizations, and as pointed out in Chapter 12, 12, transportation is pivotal to the successul operation o any supply chain. Similar to Chapter 12, 12, the discussion in this chapter will be approached rom the perspectiv perspectivee o the transportation manager in the United States. Keep in mind that a particular country’s transportation system, the degree o government involvement involvement in transportation, and a country’s technological development will inluence the nature o transportation management in that country. country. For example, in some countries there may be only one government-run transportation company in a particular par ticular mode; thus, the transportation manager would not need to be concerned with carrier selection considerations or that particular mode. Although the majority o this chapter will ocus ocus on several o the transportation manager’s manager’s key responsibilities, it should be pointed out that transportation managers are also involved with many other operations o the irm. They can assist marketing by quoting reight reight rates or salespeople, suggesting quantity discounts that can be based on transportation savings, and selecting carriers and routes or reliable delivery o products. Transportation Transportation managers can help manuacturing by advising on packaging and materials handling and making certain that an adequate supply o transportation is available when it is needed. Transportation managers can aid the outbound shipping process by providing simpliied shipping or routing guides, drawing up transportation documents, documents, and encouraging shipment consolidations. Finally, Finally, they can help purchasing by advising about methods to control the costs and quality o inbound deliveries and by tracing and expediting lost or delayed shipments o important inputs. inputs. The remainder o this chapter will ocus on some o a transportation tr ansportation manager’s primary responsibilities. We We irst analyze rate (pricing) considerations, with a particular par ticular emphasis on rate determination. Next, we discuss modal and carrier selection, ollowed by a discussion o documentation considerations. We also look at making and receiving shipments. The chapter concludes with an examination o transportation service quality. quality.
RATE (PRICING) CONSIDERATIONS Rate Deterination As we have seen throughout this text, logistics has discipline-specic terminolog terminologyy. To this end, one key responsibility o transportation managers involves rate considerations, with rate being the logistics term that signies the priceRate charged reightistransportation (“are” reers to the pricestransporcharged or passenger transportation). deteror determination mination essential to calculating the appropriate tation cost, according to the ollowing ormula: Weight Weig ht * rate = transportation charge.
Moreover,, transportation rates are based on three primary actors—product, weight, and disMoreover tance—which will be discussed next: • Relationships between dierent products in in terms o their handling characteristics, characteristics, or example, the dierence dierence between carrying 2,000 pounds o ballpoint pens and 2,000 2,000 pounds o live chickens • Relations Relationships hips between shipments o dierent weights, or example, shipments shipments o 10 pounds each versus shipments shipments o 1,000 pounds each versus versus shipments o 10,000 pounds each • Relationships between dierent distances the the products are carried, or example, rom Boston, Massachusetts,, to Albany Massachusetts Albany,, New York, versus rom Atlanta, Georgia, to Spokane, Washington
Learnng Objectve
13.1
Rate determination has to deine all three relations in numeric orm and then has to devise methods o tying those numbers into a rate or a speciic shipment. The three relationships just mentioned are o continual importance to the transportation manager manager because i they are altered, the total transportation charges will be altered.
244 Part III • Elements of Logistics Logistics Systems
One approach to rate making is to determine one speciic rate or every possible combination o product, weight, and distance—in other words, words, a commodity rate. Although a commodity rate is very good or dealing with demand-sp demand-speciic eciic situation situations, s, the t he number o commodity rates quickly becomes overwhelming (and potentially counterproductive) when you consider how many dierent products, weights, weights, and distances exist. For example, because there are over 30,000 “important” shipping and receiving points in the United States, in the commodity rate system there would need to be separate rates or all possible combinations o shipping and receiving points—a number number that is in 2 the trillions o trillions! When you consider that the transportation transportation rate structure dates to the time o economic regulation in the late 1800s—a time when “oice automation” might have meant a manual typewriter —it becomes clear that the transportation community needed a way to simpliy rate determination. This was accomplished through the class rate system, which simpliied each each o the three primary rate actors—product, weight, and distance. One widely used system or simpliying the number o products is the National Motor Freight Classiication (NMFC), which has 18 separate ratings, or classes classes,, 3 rom 50 to 500; the higher the rating, the greater g reater the relative charge or transporting the commodity. commodity. Classiication numbers are very important because they are code words that describe cargo in a manner that carriers and shippers understand, and classiication descriptions also speciy the packaging that must be used and that carriers require. Figure 13.1 13.1 shows a page o the National Motor Freight Classiication; note the detail. NOI stands stands or “not otherwise indexed by number” (i.e., one cannot ind a deinition that its more closely). Packages are reerred to by number; they are described in great detail in the classiication document. Four actors are used to determine a product’ product’ss reight classiication, namely, density, stowability, ease o hand handling, ling, and liability to damage and thet. Density, which reers to how heavy a product is in relation to its size, is viewed as the primary actor or setting a product’s product’s classiication, in part because o the opportunity costs associated with it. That is, a product with low density (i.e., low weight per cubic oot), such as oam rubber, r ubber, can easily ill a vehicle’s usable capacity (cubing out) beore reaching the maximum weight (weighing out). As a result, low-density products are assigned a higher classiication; or example, products with densities o less than one pound per cubic oot are assigned to Class 400, while densities o one pound but less than two pounds per cubic oot are assigned to Class 300.4 Stowability reers to how easy the commodity is to pack into a load, and possible considerations involve the commodity’s ability to be loaded with hazardous materials and ability to load reight on top o the commodity. commodity. Ease or diiculty o handling reers reers to challenges to handling that might be presented by a commodity’s size, weight, and so on. Finally, the liability or loss and damage considers, among others, a commodity’s propensity to damage other reight, its perishability, and its value. Just as the reight classiicatio classiication n is used to simpliy the number o commoditie commodities, s, shipment shi pment weight is simpliied through through weight groups (e.g., (e.g., less than 500 pounds; 500–999 pounds; 1,000–1,999 pounds, etc.). The rate or shipments weighing less than 500 pounds will be higher than that or shipments between 500–999 pounds, and so on. Distances are simpliied in a similar ashion and, historically, distances were classiied according to a rate basis number; the higher the rate basis number, the greater the distance between origin and destination. Increasingly, rate basis numbers are being replaced by the zip codes o a particular shipment’s shipment’s origin and destination. An example o transportation charges using the class rate system is presented in Table in Table 13.1. 13.1. Shipment 1 in Table in Table 13.1 13.1 will will serve as our reerence point or looking at transportation charges based on commodity classiication, weight, and distance. As shown in Table in Table 13.1, 13.1, the commodity classiication is the only dierence between Shipment 1 (class 100) and Shipment 2 (class 200). Because a higher class rating takes a higher rate, Shipment 2’s transportation charges ($1,245.87) are noticeably higher than Shipment 1’s transportation charges ($666.52).
2
Ibid.
3
http://www.nmta.org/Pages/Nmc.aspx
4
www.reightquote.com/howtoship/nmc-reight-density.aspx www .reightquote.com/howtoship/nmc-reight-density.aspx
Chapter 13 • Transp Transportation ortation Management 245
Fgure 13.1 Page from Natonal Motor Freght Classfcaton Motor Freight Classification © ATA 2013.
Source: Reprinted
from the National
With respect to the class rate system and weight, Shipment Shipment 1 weighs 500 pounds versus versus 1,500 pounds or Shipment 3. Table 3. Table 13.1 indicates 13.1 indicates that Shipment 3 is more expensive ($1,533.26) than Shipment 1 ($666.52), but not three times more expensive (as might be expected by a linear relationship between weight dierences dierences and reight charges). Finally, Finally, Shipments 1 and 4 dier in terms o the destination zip code and Shipment 4 is traveling much urther (approximately 2,100 miles) than
246 Part III • Elements of Logistics Logistics Systems TAblE 13.1 13.1 Example of the Class Rate System Shpment
Commodty Classfcaton
Weght (pounds)
Dstance (Usng ZiP Codes)
Transportaton Chargesa
1 2
Class 100 Class 200
500 500
44023 to 32169 44023 to 32169
$666.52 $1,245.87
3 4
Class 100 Class 100
1,500 500
44023 to 32169 44023 to 90210
$1,533.26 $829.96
a
Transportation charges are representative as o early 2016. Data derived from a sample rate calculator for Old Dominion Freight Lines http://www.odfl.com/LTLrate/LTLRateResult.
Shipment 1 (approximately 1,000 miles). Not surprisingly, Table surprisingly, Table 13.1 indicates 13.1 indicates that Shipment 4 is more expensive ($829.96) than Shipment 1 ($666.52). The transp transportat ortation ion charg charges es in Table 13.1 13.1 point out some important considerations with respect to class rates. First, a commodity’ commodity’ss classiication (e.g., Class 100 versus Class 200) can noticeably impact transportation expenses and one can see why shippers should should be cognizant o a particular commodity’s commodity’s classiication. Second, heavier shipments o a particular commodity generate higher transportation expenses than do lighter shipments. Having said this, shippers can reduce their transportation expenses by utilizing ewer, heavier shipments (e.g., (e.g., transportation expense or Shipment 3 at 1,500 pounds is $1,533.26) rather than multiple, lighter shipments (e.g., transportation expense or three 500-pound shipments is $1,999.56 [$666.52 times 3]). Third, while longer distance shipments (Shipment 4) are more expensive than shorter distance shipments (Shipment 1), the dierence in cost—Shipment 4 is approximately 1.25 more expensive than Shipment 1—is not proportional to the increase in distance—Shipment 4 travels more than twice the distance o Shipment 1. As such, transportation managers should try to avoid purchasing purchasing transportation in short shor t distance movements. A commo commodity dity’s ’s rei reight ght class classiic iicatio ation n is devel developed oped and main maintain tained ed by the Commo Commodit dityy Classiication Standards Board, which consists o at least three, but no more than seven, ull-time employees o the National Motor Freight Traic Traic Association. There is oten a natural tension between shippers and carriers with respect to a product’s classiication; shippers tend to preer a lower classiication number (which translates into a lower rate), whereas carriers tend to preer a higher classiication number. Transportation Transportation managers can appeal a commodity’ commodity’ss classiication, and Figure 13.2 shows a proposal or a reclassiication o magnesium rakes. rakes. Reerring to Figure 13.2, 13.2, the proposal begins with the present classiication provisions, ollowed by the proposed classiication provisions. Figure 13.2 indicates 13.2 indicates that the proposal seeks to lower the classiication classiication o magnesium rakes according to the length o the handling unit. The majority o the content presented in Figure 13.2 13.2 provides the proponent’s rationale or the proposed classiication. Note that the “Transportation Characteristics” section in Figure 13.2 ocuses 13.2 ocuses on the our-product attributes—density, stowability, handling, and liability—that were discussed earlier in this chapter.
Rate and Service Negotiations As pointed out earlier in this chapter, the contemporary transportation manager is much less constrained by rate and service regulations and thus has the opportunity to assume a proactive role in rate and service negotiations. Today’ Today’ss transportation manager can crat rate and service ser vice packages that
best meet an organization s logistical needs, and these rate and service ser vice packages can conceivably vary rom product to product, location to location, or customer to customer. customer. This rate and and service lexibility allows allows transportation managers to take take advantage advantage o trade-os between price and service, and these price and service trade-os are limited only by the transportation manager’s creativity and ingenuity. Consider the ollowing two examples rom the railroad
Chapter 13 • Transp Transportation ortation Management 247
Fgure 13.2 Motor Carrer Classfcaton Docket Proposal for Changng the Classfcaton of Soft Contact Lenses Source: Permission to reproduce this material has been granted by the National Motor Freight Traffic Association, Inc., 2011.
248 Part III • Elements of Logistics Logistics Systems
Fgure 13.2
(Continued)
Chapter 13 • Transp Transportation ortation Management 249
Fgure 13.2
(Continued)
250 Part III • Elements of Logistics Logistics Systems
Fgure 13.2
(Continued)
Chapter 13 • Transp Transportation ortation Management 251
TAblE 13.2 13.2 Representati Representative ve Rate and Service Items in the Carrier—Shi Carrier—Shipper pper Negotiatio Negotiation n Process Adjustment to Rates Audit rights Car arrrier eq equipment an and dr drive verrs Detention time How loss and damage claims are handled Proof of delivery Ter ermi mina nati tion on of ag agrree eeme ment nt
Arbitration Basis for charges Car arrrier in insuran ancce Duration of agreement Lead times
Articles and Commodities Covered Billing procedures Car arrrier no notification req equ uirements Estimated transportation volume Pallet loading
Renegotiation and Schedule of rates and charges reopening of contract Tra rans nspo port rtat atio ion n ser servi vice ce le leve vell Waive aiverr of of ter terms ms
industry. In one case, the shipping organization agreed to pay the railroad a premium or each railcar that was delivered on a precise, previously agreed-upon schedule. In the second case, an organization agreed to ship six million pounds o intermodal reight each year between Houston and Chicago. The shipper agreed ag reed to pay the railroad an additional $75 per trailer when at least 90 percent o the trailers completed the rail movement within 96 hours. Although these two examples illustrate situations where monetary premiums were paid or meeting predetermined service standards, the rate and service negotiations can also include monetary penalties or or ailure to achieve predetermined ser vice standards. It is not possible to present a comprehensive list o all possible rate and service items that might by negotiated by shippers and carriers. However, Table However, Table 13.2 contains 13.2 contains a representative representative list o items that might be used in the negotiation neg otiation process. DOmESTIC TERmS Of SAlE One consideration in rate and service negotiations involves the
terms o sale, or when the reight charges are paid or a particular domestic shipment (we will discuss international terms o sale in Chapter 14 ). FOB (ree on board) is ollowed by either “origin” or “destination” and this location speciies the point at which the title and control o a shipment passes rom buyer to seller. With FOB origin, the buyer assumes title and control o a shipment at the point o pickup pickup,, while with FOB destination the seller retains title and control o a shipment until it is delivered. In addition to establishing the point at which title or a shipment passes rom buyer to seller, the FOB location term also establishes which party is responsible or arranging transportation or a shipment as well as which party is responsible or iling reight claims (a topic that will be discussed later in this chapter). FOB origin and FOB destination are typically qualiied by modiying terms, the most common o which are reight collect , reight prepaid , and reight prepaid and charged char ged back. This results 5 in six possible domestic terms o sale, which are described next. • FOB origin, freight collect: The The buyer pays reight charges, owns the goods in transit, and iles loss and damage (L&D) claims, claims, if needed. • FOB origin, freight prepaid: The The seller pays the reight charges; the buyer owns the goods g oods in transit and files L&D claims, claims, if needed. • FOB origin, freight prepaid and charged back: The The seller pays the reight charges in advance but bills the buyer for them; the buyer owns the goods in transit and files L&D claims, if needed.
FOB destination, freight collect: The The buyer pays the reight charges; the seller owns the goods in transit and files L&D claims, claims, if needed.
5
Derived rom http://www.provisionlogistics.com/domestic-terms-sale
252 Part III • Elements of Logistics Logistics Systems
• FOB destination, freight prepaid: The The seller pays the reight charges, owns the goods in transit, and files L&D claims, claims, if needed. • FOB destination, freight prepaid and charged back: The The seller pays the reight charges in advance but bills the buyer for them; the seller owns the goods in transit and files L&D claims, i neede needed. d. The transpor transportation tation responsibi responsibilities lities associated with FOB origin and FOB destinati destination on have important implications or transportation management. For example, example, an advantage o FOB destination rom the seller’s perspective perspective is that the seller controls transportation and can assure a more uniorm transportation outcome or each buyer. Alternatively, Alternatively, a disadvantage o FOB destination rom a seller’s seller’s perspective is that the seller’s organization must have a thorough knowledge o transportation management (e.g., rate and service negotiations, modal and carrier selection, and so on) and this knowledge is not learned in a short period o time. TRANSPORTATION COST ANAlySIS Anothe Anotherr conside consideration ration in rate and serv service ice nego negotiatio tiation n
involves transportation cost analysis, which can be especially valuable in the shipment consolidation decision. Because transportation costs tend to be lower per unit o weight or larger shipments, there is a natural motivation to consolidate smaller shipments into larger ones. Having said this, shipment consolidation decisions aect other logistical activities such as warehousing and inventory management. Transportation Transp ortation cost analysis analysis continues continues to be acilitated by advances advances in inormation technology. technology. Some trucking companies, or example, can examine inbound or outbound deliveries or a representative period o time using data gathered rom a customer’s customer’s paid reight bills. This can allow both the carrier and the customer to determine whether individual shipments or shipment patterns can be improved. Moreover, Moreover, it is also possible to conduct sensitivity analysis to determine the transportation costs or varying levels o transportation service. ser vice. Although sensitivity analysis can provide insights about potential transportation cost savings i shiting rom one service level to another, the sensitivity analysis does not estimate other relevant costs (e.g., unhappy customers because because o slower transportation service).
Learnng Objectve
13.2
mODAl AND CARRIER SElECTION Transportation Transportation managers have long been responsible or both modal and carrier selection. Conceptually, modal and carrier selection is a two-step process in which the transportation manager rst determines the appropriate mode, or modes, to use and then selects a particular carrier, or carriers, within the chosen mode(s). mode(s). At a minimum, an an understanding o the modal characteristics presented in Chapter 12 would 12 would be helpul in the modal selection process. Unortunately, the carrier selection procedure is more challenging than that or modal selection, in part because there can be tens, hundreds, or even thousands o carriers rom which to choose in a particular mode. It might not be realistic to expect a transportation transpor tation manager to be aware o every possible carrier in a particular mode or to know about each carrier’s service and operating characteristics. Carrier selection selection is also less straightorward straightorward due to a lack o agreement on the number number o relevant actors that might be used in carrier selection. For example, the number number o carrier selection actors evaluated in academic research studies has ranged rom less than 10 to over 150. As was the case with rate and service negotiation, it is not possible to provide a comprehensive list o all
possible actorstotal that transit might be used in the carrier selection decision. Representative carrier selection actors include time, transit time reliability, competitive rates, and loss and damage perormance, among others. Modal and carrier selection has become even murkier in recent years with the rise in what we will call the amodal shipper. An amodal shipper reers to a transportation manager manag er who purchases a prespeciied level o transportation service (e.g., (e.g., two-day delivery delivery or a particular price) and is
Chapter 13 • Transp Transportation ortation Management 253
indierent to the mode(s) and/or carrier(s) used to provide the actual transportation service. Indeed, research indicates that shippers are exhibiting more interest in transportation metrics such as transit time and transit time dependability than in transportation transpor tation modes. One reason or the growth o amodalism is that non-asset-based third-party logistics companies have the ability to develop multimodal solutions to a client’s transportation problems.6 Amodalism is also aided by companies such as UPS and FedEx that own companies that provide dierent types o transportation services (e.g., air, expedited, LTL, parcel).
DOCUmENTATION The denition o logistics presented in Chapter 1 1 reers to the manage management ment o inorma inormation tion and the documents associated with transportation shipments, or documentation, are one important source o logistics inormation. Transportation documentation serves both a practical unction (e.g., (e.g., what, where, and how much is being transported) as well as potentially providing legal leg al recourse i something goes awry with a particular shipment. Our discussion here will ocus on the documents associated with domestic shipments; the documentation or international shipments is presented in Chapter 14. 14. The transport transportation ation depart department ment is responsible or completing all the documents needed to transport the irm’s products. Today Today,, many carriers provide sotware or secure websites that enable the shipper to generate g enerate all the commonly used documents. Some shippers also have their own orderprocessing sotware that is capable o generating g enerating transportation documents. documents.
bi o lading The most important single transportation document is the bill of lading, which is the basic operating document in the industry. The bill o lading unctions as a delivery receipt when products are tendered to carriers. On receipt o the reight, the carrier signs the bill o lading and gives the original to the shipper. The signed signed original o the bill o lading is the shipper’s shipper’s legal proo that the carrier received the reight. reight. The bill o lading is a binding contract, speciying the duties and obligations o both carrier and shipper. The bill o lading contract or surace carriers is basically standardized by law and greatly simplies the transportation manager’s job because it species exactly exactly the duties o the shipper and carrier. There are two types o bills o lading: the straight bill o lading and the order bill o lading. On a strai straight ght place, bill o and bill lading, ladin g, which whitelegal paper, the name o the consignee in the appropriate the carrieris isprinted under on a strict obligation to deliver the reightistostated the named consignee and to no one else. Ownership o the goods is neither stated nor implied. On the order bill o la ladi ding, ng, which is printed on yellow paper, the name o the consignee is not speciied. For example, assume that a lumber company in Washington Washington State has loaded a boxcar o plywood that it has not yet sold. It would use an order bill and tender the shipment to the Burlington Northern Railroad, which would would start the car moving toward Chicago. Chicago. Once a buyer buyer or the plywood plywood is ound, the shipshipper would send the original copy o the order bill by mail to a bank near the buyer and would also tell the buyer which bank had possession o the order bill. The buyer would go to the bank and pay or the plywood, and the bank would give the original copy to the buyer. The buyer would take it to the railroad, and the railroad would deliver the carload o plywood. Order bills can also be used when aced with slow-paying customers because the order bill guarantees that the customer must pay or the products prior to receipt. An additional classiication or bills o lading is the speciic orm: long, short, or preprinted.
Learnng Objectve
13.3
The long- long-orm orm bill bill o ladin lading, g, which may be either an order or straight bill, contains the standard inormation on the ace o the bill (see Figure 13.3 ), and on the reverse side it contains contains the entire contract between carrier and shipper. The reverse side is printed in extremely small print. Because o the 6
“Transport Buying Shits rom Mode to Metrics,” Transportation and Distribution, January Distribution, January 2006, 34–35.
254 Part III • Elements of Logistics Logistics Systems
Fgure 13.3
A Long-Form Bll of Ladng
diiculty o reading the long-orm contract and the printing costs o including the contract on all all bills, in 1949 the railroads and motor carriers carriers adopted the short-orm bill o lading. The short orm has the ollowing statement on its ace: “Every service to be perormed hereunder shall be subject to
all the Another terms and conditions the Uniform Domestic Straight Billorder, of Lading. kind o bill oof lading—which may be long, short, or straight—is preprinted. In theory, the bill o lading is prepared and issued by the carrier. In act, however, however, most shippers buy their bills o lading and then have them preprinted with a list o the th e products they regularly ship. Shippers go to the expense o buying and printing their own bills because, in practice, they requently prepare them prior to calling the carrier. The preprinted bill can be prepared more rapidly
Chapter 13 • Transp Transportation ortation Management 255
and with less chance o error; or example, the shipper can insert the correct cor rect classiication rather than letting the carrier determine it. A ew shippers are adopting their own bills o lading, which carriers may be reluctant to accept because the carriers may be subject to new liabilities speciied in the documents. Carriers are advised to supply drivers with stickers to place on the bills o lading indicating that their signature means only that they have picked up the reight.
freight bi Another basic document that the transportation manager must be amiliar with is the freight bill, which is an invoice invoice submitted submitted by the carrier requesting requesting to be paid. Oten, the transportation manager must approve each each reight bill beore it is paid, and carriers car riers must be paid within a specic number o working days. In an attempt to meet these time limits, limits, many transportation managers now participate in automated reight bill-paying services. Once the transportation manager initiates the program with the payment service, the carriers submit their reight bills directly to the service. The payment service treats the reight bills as checks drawn on the shipper’s reight account and then pays the carriers. CT Logistics, Cass Information Services, and Data2Logistics are examples of well-known U.S.-based U.S.-based reight payment companies. One continuing issue with reight bills involves companies being charged too much (overcharges) or transportation services. ser vices. To To detect current errors er rors that result in overcharges and to correct these errors in the uture, shippers conduct internal audits (work (work is perormed by employees employees o the company) o their reight bills. Some shippers shippers also conduct external audits (work (work is perormed by an independent third party) o their reight bills. bills.
freight Cais Another key documentation issue inv involves olves freight claims, which reers to a document that noties a carrier o wrong or deective deliveries, deliveries, delays, or other delivery shortcomings. Filing claims against carriers is a routine matter, and many carriers post ling inormation and sample claim orms on their websites. The ollowing are representative representative o reight claims inormation that might be ound on a carrier website: “Who can le an LTL freight claim? What is the time limit for ling a claim? How do I le an LTL freight claim? What documents do I need to le an LTL freight claim? What should I expect to happen after the freight claim has been led?7 You should be aware that there are time limitations—nine months rom the date o the bill o lading—within which a reight claim claim must be led. One o the most diicult and challenging challenging aspects o claim work work is the determination o the exact dollar amount o the damage. The law states that the common common carrier is responsible or the ull actual loss sustained by the shipper or consignee. The amount o the “ull actual loss” is oten determined according to the ollowing common rule o thumb: The basic thought underlying the ederal statutes that deine the liability and prescribe the measure o damages in cases o this kind is that the owner shall be made whole by receiving the proper money equivalent or what has actually [been] lost; or, in other words to restore [the owner] to the position he or she would have occupied, had the carrier perormed its contract.8 A key actor in determining the value o the ull actual loss is the word earned. Assume that a retailer owned the products shipped via a common carrier and that they were damaged beyond repair. The question arises, “Should the retailer recover the wholesale price or the retail price?” If the products destroyed were going into a general inventory replacement stock, the retailer would
recover the wholesale plus reight costs is costs (iordered they had been paid) the retail has not been earned. Assume, price instead, that a product especially orbecause a customer. Whenprice the product
7
http://works.pittohio.com/mypittohio/ltl/reight-claims.asp
8
Atlantic Coast Line Ry. Ry. Co. v.v. Roe , 118 So. 155.
256 Part III • Elements of Logistics Logistics Systems
arrives, it is damaged, and the retailer’s customer customer states that he or she will wait no longer and cancels the order. In this situation, the retailer is entitled to the retail price because the proit would have been earned i the carrier had properly perormed its service. Another diicult area or shippers and carriers alike involves concealed loss or damage, which reers r eers to a situation where loss or damage is not apparent until ater a shipment has been unpacked and inspected. Carriers may be reluctant to pay concealed loss and damage claims or two reasons. First, the shipment through the was transportation with damage, then there is a i strong possibilitycame that the product improperlyprocess protected onno theexterior inside. I this is the case, the carrier is exempted rom liability because improper packaging packaging is the ault o the shipper. Second, the possibility exists that the consignee’s employees damaged or stole the products in question. The potential delicateness o concealed loss or damage claims is the balancing act between a carrier (1) not wanting to pay claims caused by shipper or consignee errors and (2) upsetting a shipper or consignee by seemingly implicating them in the loss or damage. damag e. Transportation Transp ortation experts suggest sug gest that receivers/consignees ollow ive tips or managing concealed loss and damage: (1) inspect the reight as soon as possible; (2) break down the shipment as soon as possible; (3) note issues that look out o the ordinary in the proo o delivery (e.g., (e.g., broken pallets, punctured packaging); (4) document, document, document; (5) have the shipper take photos when the reight is being shipped out and the receiver take take photos when the reight is received. received.9 Since transportation deregulation, the volume o claims activity has dropped because, because, during the negotiation process, the shipper may agree to hold the carrier less liable or claims in return or lower transportation charges. In addition, the transportation deregulation acts have reduced carrier liability.. The Staggers liability Stagg ers Act o 1980, which lessened lessened railroad economic regulation, and the Motor Carrier Act o 1980, which pertained to trucks, permitted railroads and motor carriers, respectively, respectively, to establish released value rates (wherein the shipper agrees that a commodity is worth no more than so many dollars per hundred pounds in case a claim is iled, in return or a lower rate). Learnng Objectve
13.4
mAKING AND RECEIVING SHIPmENTS Another key area o decision making in transportation management involves making and receiving shipments, which which reers to tactical planning and control o shipments along with supervision o reight loading and unloading.10 A number o activities are associated with making and receiving receiving shipments. We We will discuss some o them in the paragraphs parag raphs that ollow. ollow.
Consoidating Sa Shipents Small shipments, oten dened as those that weigh more than 150 pounds and less than 500 pounds, represent one o the most challenging situations situations aced by the transportation manager. As mentioned in Chapter 12, 12, the nature o transportation costs is that it costs costs less on a per-pound basis to ship a larger quantity because certain costs (xed, administrative, or terminal) are the same per shipment. When the the shipment shipment is larger, larger, such costs can be allocated allocated over a larger weight. The transportation transportation manager aces the decision o whether and when to consolidate large numbers numbers o small shipments into small numbers o large shipments. shipments. Some shipment consolidation activities activities are shown in Figure 13.4. 13.4. Smaller shipments are problematic or several reasons. From a carrier perspective, there may be reluctance to accept small shipments because they they tend to require a high degree o manual labor, thus increasing labor costs. In addition, there is a belie by some carriers that they lose money on small shipments because the revenues rom them do not suiciently relect cost considerations. From a transportation manager’s perspective, perspective, a large number o small shipments means that there
needs to be an inormation system capable o keeping track o each shipments shipment s status; as a general 9
cerasis.com/2015/04/28/concealed-damage-claims/
10
John E. Tyw Tyworth, orth, Joseph L. Cavinato, and C. John Langley, Trafc Management: Planning, Operations, and Control (Prospect Heights, IL: Waveland Press, 1991).
. e s u f t o o o r h e s t i e r t a n c l w e u p d p g m u n p o r s i i p h m s s e s a o r p d l g f y a i n y b o s l l t , k a c r c e e u r m r i T d t o s u c
s r e m o t s u C
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e l b i s s o P r e v e n e h W s t n e m p i h S s e t a d i l o s n o C r e g a n a M n o i t a t r o p s n a r T e h T 4 . 3
u p u O s
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257
258 Part III • Elements of Logistics Logistics Systems
rule, it is easier to keep track o, say, say, one shipment o 10 units than to keep track o 10 shipments o one unit apiece. However, However, it could take some time to accumulate 10 units, and the increased time could result in poorer service to the inal customer. Moreover, although a 10-unit shipment might yield transportation cost savings, there would be inventory carrying cost considerations in the sense that it is more costly to hold 10 units o product than to hold 1 unit o product. Potential solutions or consolidating small shipments involve consolidation across time or 11
place. Continuing with the 10-unit example romacross the previous paragraph, and supposing thatvolume 2 units are available or shipment each day, consolidation time could be accomplished through guidelines (e.g., minimum shipment o 8 units, which would would mean a shipment on the ourth day) or time guidelines (e.g., ship every third day, in which case the shipment volume would be 6 units). In consolidation across place, the transportation manager looks to build volume with shipments going to a similar destination or similar destinations, and this oten involves looking outside one’s irm. Transportation Tr ansportation specialists specialists such as reight orwarders, shippers’ shippers’ associations, associations, and transportati transportation on brokers (all o which were discussed discussed in Chapter 12 ) ) can can be helpul in achieving consolidation across place.
Deurrage and Detention Demurrage is a penalty payment made by the shipper or consignee to a railroad or keeping a railcar beyond the time when it should be released back to the carrier. Demurrage is also collected by inland water carriers i their barges are kept by the shipper or consignee or a longer period than allowed.
Pipelines are involved involved with demurrage i oil stored in tanks at destination is not removed within specied time limits. Detention is basically the same concept as demurrage, demurrag e, except that it usually reers to the trucking industry. Users o containers owned by the airlines are subject to similar charges. With both demurrage and detention, carriers are concerned that their equipment is idle and unproductive—a less-than-optimal less-than-optimal situation or a revenue-generating asset. From the shipper or consignee perspective, idle transportation vehicles such as a rail car or truck trailer can act as temporary (and potentially inexpensive) warehousing. Both demurrage and detention operate on a “ree-time “ree-time”” principle; that is, shippers or consignees are permitted a speciied amount o time to load or unload reight beore monetary penalties are levied. For example, as o mid-2016, CSX Transportation’s penalties or demurrage violations violat ions were $105 per day per car, with several exceptions. More speciically, CSX also assesses demurrage charges charg es o $175 per day per hazardous materials cars, $200 per day per car or rerigerated units, and $1,500 per day per car or rail security-sensitive materials such as PIH (poisonous by inhalation) materials and radioactive materials.12 Many carriers currently oer averaging agreements, where an accounting system system o debits and credits is established, or demurrage and detention. A credit is received every time the shipper or consignee releases a piece o equipment early, early, and a debit is recorded each time a piece o equipment is surrendered to a carrier late. These averaging agreements are typically one month in duration, and at the end o a month, credits and debits are totaled, and the particular demurrage account is settled. I the total demurrage days exceed the total credit days, days, then demurrage charges are equal to: (total demurrage days minus total credit days) times the applicable demurrage demurrag e rate. Alternatively, Alternatively, i the total credit days exceed the total demurrage days, then no demurrage charges are paid. As a general rule, credits are not allowed to be carried car ried over rom one month to another.
Routing Routing can be dened as the “process o determining how a shipment will be moved between between ori13 gin and destination.” One example o routing is a routing guide, which is a document that can
provide a variety o shipment-related inormation such as shipment preparation, reight invoicing, a 11
Ibid.
12
Inormation derived rom CSX Transportation’s Publication CSXT 8100, Terms and Conditions o Service and Prices Pri ces or Accessorial Services, eective July 1, 2016. 13
http://www.cscmp.org/sites/deault/les/useruploads/resources/downloads/glossary.pd
Chapter 13 • Transp Transportation ortation Management 259
list o preerred carriers, and a list o which carrier or carriers to use or shipments moving moving between two points. As an example, Nordstrom’s (a high-end retail department store) routing guide contains inormation that lists which distribution center is to supply a particular par ticular retail location. To this end, the Nordstrom’s in Spokane, Washington is supplied rom the Nordstrom’s distribution center in Portland, Oregon. In addition, Nordstrom’ Nordstrom’ss routing guide also indicates which carriers car riers are to be used to transport shipments to Nordstrom’s distribution centers. intended to standardize various aspects associated withbe transporting shipmentsRouting and can guides simpliyare modal/carrier selection (e.g., modes and/or carriers may explicitly identiied), reduce transportation costs (e.g., via volume discounts), and improve supply chain perormance (e.g., reduced cycle times). However, the reality is that routing guides aren’t always ollowed, which can lead to higher transportation costs and potentially dissatisied customers. customers. Suggestions Suggestions or maximizing the eectiveness eectiveness o routing guides include making them readily available to the relevant personnel as well as monitoring and enorcing compliance with them.14
Tracking and Expediting Tracking reers to determining a shipment’s location during the course o its move, and the ability to track shipments directly aects expediting, which involves the need to rapidly move a shipment to its nal destination. Today, many transportation carriers have inormation systems that provide real-time inormation about shipment status, and this inormation is widely available to customers through the Internet and smart phones, thus making it ast and easy to trace shipments shipments.. Air transportation and motor carriers are the two most prominent modes involved in expediting, and both modes played key roles in alleviating supply chain problems, such as congestion cong estion and delays, that arose with U.S. West West Coast water port labor issues in late 2014 and early 2015. 15
TRANSPORTATION SERVICE QUAlITy W Wee will conclude this chapter with a look at transportation service quality quality.. Chapter 7 pointed 7 pointed out that macroenvironmental changes, such as globalization and advances in technology, have caused organizations to demand higher levels o service quality, and this is particularly true or transportation services. For example, when one o the authors worked in the trucking industry in the late 1970s and early 1980s, shipment tracking was a laborious manual process that might take multiple days beore inormation was provided to a transportation manager about a particular shipment. Today, by contrast, the combination o real-time inormation systems and global positioning systems allows or virtually instantaneous tracking tracking o a shipment, and this tracking inormation is increasingly provided to the transportation manager on mobile devices such as a laptop, tablet, and/or smart phone. Recall rom Chapter 12 that 12 that economic deregulation allowed or both price and service competition among carriers, and this resulted in the need or organizations to measure their carriers’ perormance. To To this end, a number o organizations utilize transportation perormance scorecards that contain a list o relevant attributes (perhaps the same attributes used to select carriers) and an evaluation o each carrier on every attribute. Table Ta ble 13.3 13.3 illustrates how a carrier perormance peror mance scorecard might work; in this example, the transportation manager has selected ive perormance attributes that will be used to evaluate individual carriers. The transportation manager assigns each attribute an importance rating, rating , such as 30% or “improved cost perormance.” The transportation manager also evaluates each attribute with respect to a particular carrier’s perormance on that attribute; 4 is the evaluation or “improved cost perormance.” “Net weighted score” is calculated by multiply multiplying ing each attribute’s attribute’s importance rating by its evaluation; or example, the 1.2 or “improved cost perormance” comes rom its 30% importance multiplied by its
Learnng Objectve
13.5
evaluation o 4. The net weighted scores or all ive attributes are summed (4.1375 in Ta in Table ble 13.3 ) and divided by the maximum possible gross score (5.00) to yield the “perormance score” (82.75%). 14
Nico Michas, “Using Routing Guides G uides to Reduce Costs,” Trafc World , June 30, 2008, 6.
15
William B. Cassidy, Cassidy, “Expediting Advantage,” The Journal Journal o Comm Commerce erce , May 18, 2015, 58–62.
260 Part III • Elements of Logistics Logistics Systems TAblE 13.3 13.3 Example of a Carrier Performance Scorecard Attrbute
importance (% (%) Evaluaton (1 (1–5)
Weghted Ev Evaluaton
Improved cost performance
30
4
1.2
On-time delivery performance
25
4.5
1.125
Customer complaints
20
4.25
.85
Loss and damage performance
15
4.75
.7125
Social media presence
10
2.5
.25
Sum
4.1375
Performance score
82.75%
The data are hypothetical and or illustrative purposes only.
The perormance scorecard can be used as a diagnostic tool; i an individual carrier’s perormance is rated as lower than, say, 70, then the carrier might be put on probation or a certain time period. Moreover, i perormance does not exhibit satisactory improvement during the probationary period, then the carrier might be ired. There are also more “positive” maniestations maniestations o transportation service quality. quality. A number o organizations now oicially recognize (e.g., a press release, an awards recognition dinner, a plaque) transportation carriers that provide superior service. In addition, several logistics trade publications annually recognize transportation service ser vice excellence. For example, Logistics Management annually annually conducts its “Quest or Quality,” Quality,” in which users o transportation services are asked to rate transportation companies on ive dimensions: on-time perormance, value, customer service, inormation technology, and equipment and operations. Individual carriers receive a “Quest or Quality” award when their overall rating on the ive dimensions exceeds their industry average, and many o these carriers prominently eature this award on their websites.
Summary This chapt chapter er covere covered d tran transpor spor tati tation on manag emen ement, t, which
Documentation is another responsibility responsibility o a transpor-
reers to the buying or selling o transportatio transportation n services by a shipper or consignee. This chapter analyzes several several o a transportation manager’s primary responsibilities. Rate considerations are one prominent responsibility, particularly in terms o rate determination. A transportation manager is also responsible or modal and carrier selection, and an emerging selection trend involves a ocus on transportation metrics as opposed to transportation mode.
tation manager, and the chapter discussed key documents such as the bill o lading, reight bill, and reight claims. Another key area o decision making in transportation management is making and receiving shipments, which includes activities such as shipment consolidation, demurrage, and detention, among others. The chapter concluded by looking at transportation service ser vice quality.
Key Terms Amodal shipper
Detention
Rate
Bill o ladin lading g Class rate system Commodity rate Concealed loss or damage Demurrage Density
Documentation Expediting FOB destination FOB origin Freight bill Freight claims
Routing Routing guide Stowability Tracking Trac king Transportation Transp ortation management
Chapter 13 • Transp Transportation ortation Management 261
Questions for Discussion and Review transportation management and and why is it important? 13.1 What is transportation advances in technology changed the rate determi 13.2 How have advances nation process? 13.3 Discuss how transportation managers could be involved
13.12 Why is documentation documentation a very very important component in transportation? 13.13 Distinguish between the straight bill o lading and the order bill o lading.
with other operations operations o the rm. 13.4 What are the three three primary actors that determine transportransportation rates? 13.5 Distinguish between a commodity rate and a class rate. 13.6 Discuss the our actors used in determining a product’s reight classication. commodity classication and rate system 13.7 Identiy the commodity prevailing in your country in domestic logistics. logistics. 13.8 Discuss how a transportation manager might take advantage o the trade-os between between price and service. 13.9 What are the important rate and service items in the transportation negotiation process between carrier and shipper? 13.10 Why is the carrier carrier selection process less straightorward straightorward than the modal selection process? 13.11 Dene what is meant by an amodal shipper, and discuss the actors that have contributed to its growth.
13.14 What are freight claims? What is the the time limit for ling ling these claims? 13.15 Discuss the basic issues, conicts, conicts, and problems involve involved d in concealed loss and damage claims. 13.16 Explain why smaller shipments are challenging to transportation managers. 13.17 Discuss the basic idea o demurrage and detention and how averaging avera ging agreements can be helpul in this area. 13.18 Explain how a routing guide might be used by a transportation manager. 13.19 Distinguish between tracking and expediting. 13.20 What is a carrier performance performance scorecard? How might it be used by transportation managers?
Suggested Readings Björn Lantz. “Seasonality of Cargo Theft at Ekwall, Daniel and Björn Service Quality: A Survey within the Indian Steel Sector.” Indus Transport Chain Chain Locations.” Locations.” International Journal o Physical Distritrial & Commercial Training 48, 48, no. 4 (2016): 199–207. bution & Logistics Management 43, 43, no. 9 (2013): 728–746. Robinson, Jessica L., Rodney W. Thomas, and Karl B. Manrodt. Eng-Larsson, Fredrik and Christofer Kohn. “Modal Shift for “Food or Thought in the Transportation Carrier-Selection Greener Logistics: The Shipper’s Perspective.” International JourDecision.” Transportation Journal 52, 52, no. 2 (2013): 277–296. Rogerson, Sara, Dan Andersson, and Mats Johansson. “Inuence nal o Physical Distribution & Logistics Management 42, 42, no. 1 (2012): o Context on the Purchasing Process or Freight Transport Transport 36–59. Han, Lixum. “Delivery “Delivery of Goods under a Straight Bill Bill of Lading: Services.” International Journal o Logistics: Research Research & Applications Applications Chinese Judicial Practice and Perspective.” Journal o Business Law 17, no. 3 (2014): 232–248. 7 (2015): 573–586. Wen, Yuh-Homg. Wen, Yuh-Homg. “Impact o Collaborative Tra Transportation nsportation ManHan, Sang-Kyun and Glen Murphy. “Trucking Productivity and agement on Logistics Capability and Competitive Advantage for Costing Model or Transportation o Recov Recovered ered Waste Waste in OrCarriers.” Transportation Journal 51, 51, no. 4 (2012): 452–473. egon.” Forest Products Journal Journal 61, 61, no. 7 (2011): 552–560. Williams, Zachary Zachary,, Michael S S.. Garver, Garver, and G. G. Stephen Taylor. Taylor. “CarHanna, Joe B. “Exploring the Future Futur e of U.S. LTL LTL Motor Carrier Carr ier rier Selection: Understanding the Needs of Less-Than-T Less-Than-Truck ruck load Shippers.” Transportation Journal 52, 52, no. 2 (2013): 151–182. Pricing.” World Trade 24, 24, no. 10 (2011): 20–26. Jena, N. N. and Nitih Seth. “Factors Inuencing Inuencing Logistics Cost and
262 Part III • Elements of Logistics Logistics Systems
CASE CASE 13.1 CHIPPY POTATO CHIP COMPANY Located in Reno, Nevada, since 1947, the Chippy Potato Chippy management believed that because the Chip Company manuactured potato chips and distrib- new chips were less bulky, the LTL LTL classication of 200 uted them within a 100-mile radius o Reno. It used its was too high. Management decided to ask the motor carown trucks for delivery in the Reno, Carson City, and Lake rier classication bureau or a new, lower classication. Tahoe Tah oe areas and common common carrier trucking or or all other other outout- (Motor carrier rates or a movement are the classication going shipments. shipments. All o its motor carrier shipments were multiplied by a distance actor. I the classication were on an LTL basis. The applicable motor carrier carri er freight rating, lowered, the rate would be lowered proportionally or all or classication, for LTL potato chips was 200. This clasclas- shipments.) sication was high, although potato chips are oten given as textbook examples examples o bulky reight that will cause a truck QUESTiONS to cube out. Even ater much o the th e motor carrier indus1. I you worked or Chippy, Chippy, what new classication would try was deregulated, Chippy had difculty nding contract you ask for? Give your reasons. truckers interested in negotiating specic contract rates. 2. Classications are based on both cost and value o service. This was because because potato potato chips—as chips—as a result result o their bulk— bulk— From the carrier’s carrier’s standpoint, how has cost o service were not a desirable desirable cargo rom the truckers’ truckers’ point point o view. view. changed? The potato chips were packed in 8-ounce bags. Twenty-our 8-ounce bags were packed in cartons that Twenty-our were 12 inches by 12 inches inches by 36 inches. inches. The packed carton weighed 14 pounds. The 8-ounce bags o chips wholesaled FOB plant or 40 cents each and retailed or cents. Recently, the Chippy rm acquired rights to produce a new type o chip chip,, made rom powdered potatoes, yielding chips o identical shape that could be packed packed in tubular containers. A 5-ounce paper tube o chips would wholesale (FOB plant) or 40 cents cents and retail or 59 cents. cents. The new chips were were much much less less bulky: Tw Twenty-our enty-our 5-ounce containers could be packed in a carton measuring one cubic oot. The lled carton weighed 10 pounds. (The dier-
3. Given the existing LTL classication classication of 200, how has value of service to the customer changed? changed? 4. The new tubular containers containers are much much sturdier. sturdier. I you worked or Chippy, Chippy, how—i at all—would all—would you argue that this factor inuences classication? the motor carrier classication classication bureau and 5. You work or the notice that the relationship between the weight weight o potato chips and the weight o packaging has changed. How, How, i at all, should this inuence changes in the product’ product’ss classication? 6. One o Chippy’ Chippy’ss own trucks, used or local deliveries, has two axles and an enclosed body measuring (inside) 7 eet by 8 eet by 20 eet and is limited by law to carrying a load o no more than 8,000 pounds. pounds. Because the truck is not
ence thematerials. weight oThe chips andisthat is due tobetween packaging carrier paidooncartons the basis o carton weight.) weight.)
supposed to be overloaded, what combinations, expressed in terms o cartons o both new- and old-style old-style chips can it legally carry? ( Hint: Hint: Use a piece o graph paper.)
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