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Logistics

That part of supply chain management that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information, from the point of origin to the point of consumption in order to meet customer requirements
Made up of Warehousing, Transportation, and Reverse Logistics

Why is logistics necessary?

To move goods and materials from suppliers to buyers (inbound logistics)
To move goods and materials between sites (internal and external)
To move finished goods to the customer (outbound logistics)

Inbound Logistics

Move goods and materials from suppliers to buyers

Materials Handling

Move goods and material between sites (internal and external)

Outbound Logistics

Move finished goods to the customer

Product Value

Products have little value to the customer until they are moved to the customer's point on consumption
1. Delivered at the right time2. Delivered to the desired location
Customer examples: After the manufacturer (wholesalers, retailers, and consumers)
Customers can be internal or external

Warehouse

Facility used to store purchases, work-in-process (WIP), and finished goods inventory

Warehousing

Function that allows a company to receive, store, breakdown, repackage, and distribute items to a manufacturing location, or finished products to a customer

What decisions drive Warehouse Management?

Number of warehouse facilities in the network
Site selection
Layout of the warehouse(s)
Methods of receiving, storing, retrieving, and distributing products and materials (examples: manual, semi-automated, fully automated)

What are the primary functions of a warehouse?

1. Receiving2. Storage3. Picking4. Packing5. Shipping

Receiving

Physical receipt of material, identification, inspection for conformance with the purchase order (quantity and damage), put-away, and preparation of receiving reports
Bringing in a product and putting it in a location

Storage

The safe and secure retention of parts or products for future use or shipment

Picking

Withdrawing components from stock to make assemblies or finished goods, or to ship to a customer

Packing

Placing one or more items of an order into an appropriate container for safe shipping, and then marking and labeling the container with customer shipping destination data, and other information that may be required

Shipping

Outgoing shipment of parts, components, and products. Includes packaging, marking, weighing, and loading for shipment (does NOT include transportation)

What are the secondary functions of a warehouse?

1. Quality Inspection - incoming and outgoing
2. Repackaging - for specific customer orders
3. Assembly Operation - warehouse operation that puts products together with other items/components before shipping them out to the final customer

What are some examples of assembly operations?

Literature
Spare Parts
Advertising Materials

What are the types of warehouse ownership?

Public Warehouses
Contract Warehouses
Private Warehouses

Public Warehouse

A business that provides storage and related warehouse functions to companies on a short or long-term basis (e.g. a Hotel for inventory)
Own their own equipment and hire their own staff to manage the facility
Fees are typically a combination of a monthly storage fee plus a pallet-in fee and a pallet-out fee

What are Public Warehouse fees based on?

Size and weight of the pallets
If they can be stacked
How fragile the product is
Value of goods (risk of theft)
Hazards associated with the goods
May also have some document fees and account management fees

Advantages of Public Warehouses

No capital investment or property taxes
Flexibility: Can be short or long term contract, for seasonal products, add storage capacity even on short notice
Reduced costs and reduced riskAccess to special features and services:
Temperature-controlled storage;
customer service, inventory, etc.;
office space for customer's sales, accounting, etc.

Disadvantages of Warehousing

Potential for incompatible computer systems
Specialized services may not be what is required/needed
Space may not be available where/when needed (everyone may need the space at the same time)

Contract Warehouse

A variation of public warehousing that handles the shipping, receiving, and storage of goods on a contract basis for a fee (e.g., renting an apartment for inventory)
The contract can be for an *entire building*, or for a *defined portion* within the building
Usually requires a client to commit to services for *years rather than months*
The fee structure may be fixed cost, cost-plus, or a combination of both
The company providing the space handles the employees, equipment, and maintenance

Advantages of a Contract Warehouse

Services: client can obtain specialized services tailor-made to suit their needs
Cost: can be bundled in the contract and negotiated at a lower cost
Control: contract warehousing offers a degree of control at a reasonable price

Disadvantages

Duration: The client company is expected to enter into contract for a specific period of time; generally three years

Private Warehouse

A storage facility that is owned by the company that owns the goods being stored in the facility (e.g. buying a house for inventory)
Generally established by companies that have a *large volume or highly valuable goods*, or the need for some type of *specialized storage or handling*
Can be operated as a separate division within a company
Can be co-located on-site with manufacturing, or off-site

Advantages of Private Warehouses

1. Control: offers greater flexibility in designing the warehouse and gives users significant control over operations
2. Visibility: inventory, material flow, handling, supervision, and associated costs
3. Cost: Operating cost can be 15%-25% lower if the company achieves at least 75% utilization

Disadvantages of Private Warehouses

1. High Start-up Cost: capital to build or buy a warehouse. Long, risky, investment. Cost of hiring and training employees. Purchase of material handling equipment
2. Fixed Location: Not easy to move to another location if the market changes
3. Fixed Size and Costs: When volume is low, the company still assumes the fixed costs

What are the types of warehouses?

1. Consolidation2. Break-Bulk3. Cross-Docking

Consolidation Warehouse

Warehouse operations that receives products from different plants or suppliers, stores them, and then combines them with similar shipments from other plants or suppliers for further distribution
Located *closer to the supply base* so that smaller LTL (Less-Than -Truckload) shipments travel shorter distance and can be consolidated into larger FTL (Full Truckload) shipments traveling *longer distance to the customer*
Lower cost per unit by consolidating shipments

Break-Bulk Warehouse

Warehouse operation that divides full truckloads of items from a single source or manufacturer into smaller, more appropriate quantities for use or further distribution
Start off with a FTL and end with a higher cost per unit
Located closer to the *customer base* so that the smaller LTL shipments travel the shorter distance, while the larger FTL shipments from the single source travel the longer distance before arriving at the break-bulk warehouse

Cross-Docking Warehouse

The logistics practice of unloading materials from an incoming truck or railcar and loading these materials directly onto outbound trucks or railcars, *with little or no storage between* to reduce inventory investment and storage space requirements
Suppliers can be internal or external

What are the main reasons that cross docking is implemented?

1. Provide a *central site* for products to be sorted and combined for delivery to multiple destinations in the most productive and fasted method possible
2. *Consolidate* Combine smaller product loads into one method of transport to save on transportation costs
3. Break-Bulk: Break down large product loads into smaller loads for transportation for an easier delivery process to the customer

What are the advantages of Cross-Docking?

1. Transportation Cost Savings: 8 FTL Shipments are less expensive per unit than 16 LTL shipments
2. Operational Efficiency: Warehouse operations are more efficient as the material does not have to be stored at the warehouse, moving directly from receiving to shipping
3. Inventory Efficiency: As there is no storage at the warehouses, total inventory in the supply chain can be reduced

Warehouse Network

The number of, and the relationship between, the warehouses that a company has in their organizational structure

What are the fundamental questions to be answered in establishing a warehouse network

1. How many warehouses are needed
2. Where should they be located

What are the trade-offs that will determine how many warehouses the company needs and where they should be located?

1. The *level of customer service* the company wants to provideThe greater the desired custom service level - the more warehouses the company may need to geographically disperse inventory
2. The *amount of inventory* the company is willing to invest inThe more warehouses the company needs - the greater amount of inventory the company will need to invest

Positives of Single Warehouses

Less complicated
Operating costs and inventory will be lower
No duplication of equipment, warehouse staff, and managers
Network will be centralized and the company will have its best people, equipment, and inventory systems concentrated in one place
Warehouse can more actively focus on the needs of its customers

Negatives of a Single Warehouse

May take longer to deliver product to some customers who are remote from the central location

Positives of Multiple Warehouses

Potentially faster delivery to customers from a decentralized network that is geographically dispersed throughout the market, assuming adequate inventory in each warehouse

Negatives of Multiple Warehouses

More complicated
Operating costs and inventory will be higher as each warehouse costs money to staff and operate. Duplication of equipment, warehouse staff, and managers
Network will be decentralized and the company will have to spread its best people, equipment, and inventory systems across a larger network

Hub-and-Spoke Hybrid Approach (Warehouse Network)

One example is called *hub-and-spoke* where there is a centralized warehouse *i.e., the "hub") which holds most of the inventory linked to a series of smaller geographically dispersed warehouses (i.e., the "spokes") which hold only a small amount of inventory to support their local area in the immediate frame

What are positives of the hub and spoke hybrid approach?

Operating costs are lower because the spoke warehouses are smaller than in a purely decentralized model
Inventory is also lower as all of the safety stock is held centrally, which generally means that less total safety stock is required because all of the risk and uncertainty is managed centrally
Customer service is generally better than in purely centralized model since some of the inventory is maintained closer to the customer

What are the 3 main warehouse network location strategies?

1. Market Positioned Strategy2. Product Positioned Strategy3. Intermediately Positioned Strategy

Market Positioned Strategy

Warehouses are set up close to customers to maximize distribution services and improve delivery
Companies use this strategy when they *have more customers than suppliers*, and the customers are spread out geographically around the market
If the warehouses are closer to the customers, the company can minimize transportation cost
There will likely be FTL shipments coming in from suppliers from greater distances, and LTL shipments going out to customers from shorter distances

Product Positioned Strategy

Warehouses are set up close to supply sources to collect goods and consolidate before shipping products out to customers
This is the reverse of the market positioned strategy
Companies use this strategy when they have many more suppliers than customers
If the warehouses are closer to the suppliers, the company can minimize transportation cost
There will likely be LTL shipments coming in from the suppliers from shorter distances and consolidated FTL shipments going out to customers from longer distances

Intermediately Positioned Strategy

Warehouses are set up somewhere midway between the supply sources and the customers to try to balance costs, inventory, and customer service
This strategy is used when distribution requirements are high, and product comes from various supply locations
A warehouse optimization study may be needed to determine the optimal number and location of warehouse in this strategy

Warehouse Network Optimization

Companies need to find the balance that will work for their products and markets
There are many consulting companies that offer services to help a company determine their optimal number of warehouses and locations by using a number of different *optimization software programs*
The software analyzes the *inputs* including *customer and manufacturer locations*, and then informs the optimal number of warehouses and locations based on these factors
These programs try to *minimize the amount of transportation on both ends*, inbound from your suppliers and outbound to your customers

LEAN Warehousing

Warehouses and distribution centers are continuing to develop their LEAN capabilities
*Cross Docking*: A LEAN concept because it eliminates the need to store inventory, and reduces some transportation, which are both wastes
*Reduced Lot Sizes and Shipping Quantities*: By reducing lot sizes and shipping quantities, a company can increase velocity in the warehouse, ad get shipments out faster. *Faster throughput is a LEAN concept*
*Increased Automation*: Companies are using automated systems like pick to light, voice picking, conveyor systems, automated guided vehicles (AGV's), and robotics to improve efficiencies and throughput times in the warehouse
*Green Warehousing*: One of the most sustainable goals for a green warehouse is to make it a net zero energy user

Third Party Logistics (3PL)

A company that is an outsourced provider that manages all, or a significant part, of an organization's logistics requirements for a fee
They typically generate a 10% to 20% savings in logistics costs
Favored by small businesses
Used to a significant degree for international logistics

3PL Services

Inbound Transportation
Outbound Transportation
Warehousing
Pick and Pack (picking the correct number of items from shelves and packing them efficiently for shipping)
Freight Forwarding
Customs Brokerage
Customs Clearance
Order Taking
Billing and Invoicing
Inventory Auditing
Freight Bill Auditing and Payment

What are the Advantages of Using a 3PL?

Cost: Eliminates the need for a company to invest in warehouse space, technology, and staff to execute the logistics process
Logistics Expertise: Knowledgeable of industry best practices and the latest developments in technology
Efficiency: 3PL's can leverage relationships and volume discounts, which result in lower overhead and the fastest possible service

Disadvantages of Using a 3PL

Control: A company will not have direct control over the logistics operation
Dependency: Outsourcing logistics creates a dependency on the 3PL
Pricing: The company is locked into the pricing model specified in the contract

Fourth-Party Logistics (4PL)

An interface between the client company and multiple logistics service providers (Manages all the 3PLs)
A company will select a lead logistics partner (refereed to as a 4PL) that is then charged with managing the activities of all the other 3PL's being used by the company
Ideally, all aspects of the client company's supply chain handled by 3Pl's would be managed by the 4PL organization

Transportation

The function of planning, scheduling, and controlling activities related to the mode, carrier, and movement of inventories into and out of an organization
Get the right product, to the right place, at the right time by ensuring the product is moved as efficiently as possible from point-of-origin to point-of-destination

What are the objectives of transportation?

1. To maximize the value to the company through price negotiations
2. To make sure service is provided effectively
3. To satisfy customers' needs

What are the Transportation Company Classifications?

1. Contract Carriers2. Private Carriers3. Common Carriers4. Exempt Carriers

Contract Carriers

Person or company who transports freight under contract to one or a limited number of shippers

Private Carriers

Person or company that transports its own cargo as a part of a business that produces, uses, sells, or buys the cargo that is being hauled

Common Carriers

Person or company who transports freight for a fee that can be hired by anyone to transport goods

Exempt Carriers

Person or company specializing in services or transporting commodities exempt from regulation by the Interstate Commerce Act

Mode

Refers to the way which goods are transported

Carrier

Refers to the company that transports the goods

What are the main modes of transportation?

Truck, rail, pipeline, air, and water

Truck

*Most flexible mode of transportation*
Carries \> 80% of U.S. Freight (because of interaction with other transportation modes to and from ports & warehouses)
Carriers nearly anything from packaged household goods, to building materials, to liquid petroleum, etc.
Competes with Rail and Air for short-to-medium hauls
Short Haul = 0 - 200 miles from the driver's home terminal
Long Haul = over 200 miles from the driver's home terminal
Price based on shipment
Impacted by the truck driver shortage and Hour-of-Service rules

Short Haul

0 - 200 miles from the driver's home terminal

Long Haul

Over 200 miles from the driver's home terminal

General Freight Carriers

A trucking company which handles a wide variety of commodities in standard trailers. Freight is generally palletized
There can be LTL or FTL carriers
They carry the majority of the goods shipped
Does not require the use of specialized equipment

Specialized Carriers

A trucking company which handles the movement of cargo that requires specialized equipment for transportation because of the shipment's size, weight, and shape
Transport commodities like liquid, petroleum, household goods, building materials, and other specialized items

Less-Than-Truckload (LTL)

The transportation of relatively small freight, i.e., the freight does not require the entire space of a truck
Advantages: Can be cost effective. There are more available options. Ideal for small businesses
Disadvantages: Increased risk of theft/damage. Increased shipping times and delays

Full-Truckload (FL)

The transport of goods that fill up a full truck, or a partial load shipment occupying an entire truck
Advantages: Best way to transport large shipments. Ideal for high risk or delicate freight shipments. Considerably faster than LTL
Disadvantages: Costs more than LTL

Rail

Accounts for approximately 9% of total U.S. freight spend
Competes for transportation when the distance is long and the shipments are heavy or bulky
Shipments involve building materials, construction equipment, coal, gravel, sand, lumber, etc.
Aging infrastructure and equipment are an issue
Paired with trucks for door-to-door delivery
As a result, rail carriers have begun purchasing motor carriers and can now offer point-to-point pickup and delivery service

Pipeline

Accounts for approximately 2% of total U.S freight spend
Most reliable form of transportation
Lowest per unit cost for transportation
Limited variety of commodities
Materials are transported in liquid or gaseous state; petroleum, natural gas, drinking water, gasoline
Little maintenance needed once the pipeline is running

Air

Accounts for approximately 5% of total U.S. freight spend
Generally the *fastest* mode of transportation
Most *expensive* mode of transportation
Cannot carry extremely heavy or bulky cargo. Ideally, items with a *high cost to weight ratio*
Shipments involve very light, high-value goods that need to travel long distances quickly including; jewelry, fine wines, pharmaceuticals, racehorses, etc.
Half of the goods transported by air are carried by freight-only airlines, e.g. FedEx. Other half in passenger planes with luggage
Paired with trucks for door-to-door delivery

Water

Accounts for approximately 5% of total U.S. freight spend
Includes inland waterways, coastal and intracoastal, and deep-sea cargo shipments
*Inexpensive*
*Very slow and inflexible*
Primarily used for *heavy*, *bulky*, *low value* materials like coal, grain, sand, and petroleum
However, because transport by water is so cheap almost any item may be shipped by water including: automobiles, produce, containerized cargo, etc.
Competes with rail and pipeline for some cargo shipments
Paired with trucks for door-to-door delivery

Ranking of Modes of Transportation

1. Truck2. Rail3. Pipeline4. Air5. Water

Most accessible mode of transportation

Truck

Most capable mode of transportation (can handle the most kinds of freight)

Rail

Lowest per-unit cost mode of transportation

Pipeline

Most reliable form of transportation

Pipeline

Fastest mode of transportation

Air

Intermodal Transportation

The use of multiple modes of transportation to execute a single transport shipment
Sometimes considered the sixth mode of transportation
Also called "Piggy-back" service

What are the most common forms of intermodal transportation?

Rail and motor carriers (i.e., trucks)
Rail and water carriers
Roll-on/roll-off ships

Rail and Motor Carriers (trucks)

Offer point-to-point pickup and delivery service known as *Trailer-on-Flatcar (TOFC)*

Rail and Water Carriers

Offer point-to-point pickup and delivery service known as *Container-on-Flatcar (COFC)*

Roll-On/Roll-Off Ship

Specifically designed to allow trucks to be driven directly on and off the ship without the use of cranes
Provides flexibility and speed

Trailer-on-Flatcar (TOFC)

Rail and Motor Carriers (trucks)

Container-on-Flatcar (COFC)

Rail and Water Carriers

Interstate Commerce Act of 1887

Created the Interstate Commerce Commission (ICC)

Interstate Commerce Commission (ICC)

Used to oversee the conduct of the railroad industry. With this act, the railroads became the first industry subject to Federal regulation.

ICC Termination Act of 1995

The Interstate Commerce Commission (ICC) was eliminated

Regulation of Transportation Pro's

Tends to assure adequate transportation service throughout the country
Protects consumers from monopoly pricing, safety, and liability

Regulation of Transportation Con's

Discourages competition
Does not allow prices to adjust based on demand or by negotiation

Deregulation

Encourages competition and allows prices to adjust as demand and negotiations dictate
*The U.S. transportation industry remains mostly deregulated*

What are the types of Transportation Pricing?

1. Cost of Service Pricing
2. Value of Service Pricing
3. Combination Pricing
4. Net-Rate Pricing

Cost-of-Service Pricing

The setting of a price for a service based on the costs incurred in providing it (charge based on costs incurred)

Value of Service Pricing

A pricing strategy which sets prices based on the value perceived by the customer, i.e., "priced at what the market will bear"

Combination Pricing

Price is set at a value between cost-of-service minimum and value-of-service maximum. *Most carriers use some form of combination pricing*. Common in highly volatile markets and changing competitive situations

Net-Rate Pricing

Established discounts and accessorial charges are rolled into one all-inclusive price. Pricing is tailored to the individual customer's needs (similar to bundling)

Term of Sale

Delivery and payment terms agreed between a buyer and a seller