CHAPTER 9DOMESTIC U.S. & INTERNATIONAL LOGISTICS

Principles of Supply Chain Management:

A Balanced Approach, 2e

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Chapter Nine Outline

• Introduction• The Fundamentals of Transportation• Warehousing and Distribution• The Impacts of Logistics on Supply Chain

Management • Logistics Management Issues• International Logistics• Reverse Logistics

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IntroductionLogistics is necessary to:

– Move goods from suppliers to buyers– Move WIP within the firm – Move finished goods to the customer– Move returned goods back up S.C.

Products have little value to the customer until they are moved to the customer’s point of consumption

– Time utility- products are delivered at the right time.

– Place utility- products are delivered to the desired location.

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The Fundamentals of Transportation

The Objectives of Logistics• Maximize value to the firm through price and

delivery negotiations; provide profit contributions via cost reductions and better service.

• Make sure service is provided effectively• Satisfy the customers’ needs

– ie, deliver at right time, right place, right quantity, in a way that minimizes cost.

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The Fundamentals of Transportation (Cont.)

Legal Forms of Transportation Transportation service companies are classified legally as either common, contract, exempt, or private carriers.

– Common carriers- offer transportation services to all shippers at published rates between designated locations without discrimination.

– Contract carriers- not bound to serve the general public. Contract carriers serve specific customers under contractual agreements.

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The Fundamentals of Transportation (Cont.)

Legal Forms of Transportation (Cont.)-

– Exempt carriers- exempt from regulation of services & rates & if they transport certain exempt products like produce, livestock, coal, or newspapers.

– Private carrier- not subject to economic regulation & typically transports goods for the company owning the carrier.

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The Fundamentals of Transportation (Cont.)

The Modes of Transportation

Motor Carriers (trucks)- most flexible mode of transportation & carries > 80% of U.S. freight. Competes w/rail & air for short-to-medium hauls.

– Less-than-truckload (LTL) & truck-load (TL) carriers. LTL carriers move small shipments & fees are higher.

– General freight carriers carry the majority of goods shipped & include common carriers.

– Specialized carriers transport liquid petroleum, household goods, building materials, & other specialized items.

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The Fundamentals of Transportation (Cont.)

The Modes of Transportation (Cont.)Rail Carriers- compete when the distance is long & the shipments are heavy or bulky.

– Slow & inflexible, but have begun purchasing motor carriers & can thus offer point-to-point pickup & delivery service known as trailer-on-flatcar (TOFC) service.

– Rail companies use each other’s rail cars. Keeping track of rail cars & getting them where needed can be problematic.

– Railroad infrastructure & aging equipment are also problems for the U.S. railroads.

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The Fundamentals of Transportation (Cont.)

The Modes of Transportation (Cont.)Air Carriers- Expensive relative to other modes but fast. Air carriers transport about 5 % of U.S. freight.

– Airlines cannot carry extremely heavy or bulky cargo.

– For light, high value goods over long distances quickly. Most small cities do not have airports.

– Half of the goods transported by air are carried by freight–only airlines, like FedEx.

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The Fundamentals of Transportation (Cont.)

The Modes of Transportation (Cont.)Water Carriers- Inexpensive, slow & inflexible. Includes inland waterway, coastal & intercoastal, & deep-sea.

– Inland waterway transportation is used for heavy, bulky, low-value materials (e.g., coal, grain).

– Competes w/rail & pipeline. – Water carriers are paired w/trucks for door-to-

door delivery.– Supertankers are +1,500 ft long & 200 ft wide.

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The Fundamentals of Transportation (Cont.)

The Modes of Transportation (Cont.)Pipeline Carriers- Limited in variety they can carry.

– Little maintenance once pipeline is running. – Materials hauled in a liquid or gaseous state.

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The Fundamentals of Transportation (Cont.)

Intermodal TransportationCombinations of the various transportation modes, is becoming a popular method.

– Trailer-on-flatcar (TOFC), container-on-flatcar (COFC), piggy-back service. The same containers can be placed on board containerships & airliners.

– RO-ROs or roll-on-roll-off containerships truck trailers & containers to be directly driven on & off the ship, without the use of cranes.

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The Fundamentals of Transportation (Cont.)

Transportation Pricing– Cost-of-service pricing- varies based on fixed &

variable costs. – Value-of-Service Pricing- services priced at

market bearing competitive levels. – Terms of Sale- includes transportation FOB (free

on board) destination.– Pricing Negotiation- Since deregulation,

negotiating prices has become more common.– Rate Categories- Classified as line haul rates,

class rates, exception rates, commodity rates, & miscellaneous rates.

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The Fundamentals of Transportation (Cont.)Transportation Security

– Particularly important since Sept. 11, 2001– Aviation & Transportation Security Act

(2001)- Transportation Security Administration (TSA) to oversee transportation security at all US airports

– Department of Homeland Security (DHS) (2003) created to provide overall U.S. security leadership.

– Not all measures have improved security as envisioned

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The Fundamentals of Transportation (Cont.)

Transportation Regulation – Granger laws (1870s)- regulate the RRs.– Interstate Commerce Act of 1887- Created the

Interstate Commerce Commission (ICC). – Transportation Act of 1920- Changes to IC Act.– Motor Carrier Act of 1935- brought motor carriers

under ICC control.– Transportation Act of 1940- established ICC

control over domestic water transportation. – Federal Aviation Act of 1958 created air traffic &

safety regulations & national airport system. – Department of Transportation Act 1966-

Coordination of all transportation-related matters.

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The Fundamentals of Transportation (Cont.)

Transportation Regulation - Pro- Regulation tends to assure

adequate transportation service throughout the country while protecting consumers from monopoly pricing, safety, & liability.

– Con- Deregulation encourages competition & allows prices to adjust as demand & negotiations dictate.

– Today, U.S. transportation industry remains essentially deregulated

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The Fundamentals of Transportation (Cont.)

Transportation Deregulation – Railroad Revitalization & Regulatory Reform Act

(1976)- RRs could change rates w/o ICC approval.

– Air freight deregulated in 1977.– Motor carriers deregulated in 1980 to promote

competitive, safe & efficient motor transportation.– Shipping Act of 1984 allowed ocean carriers to

pool shipments, assign ports, publish rates, & enter into contracts with shippers.

– ICC Termination Act of 1995 & the Ocean Shipping Reform Act of 1998- ICC was eliminated, requirement for ocean carriers to file rates also came to an end.

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Warehousing & Distribution

Warehousing – allows firms to store purchases, WIP, & finished

goods and perform break bulk and assessment services

– provides faster & more frequent deliveries & better customer service

Crossdocking– to receive, breakdown, repackage, & distribute

components to a manufacturing location or finished products to customer’s warehouse. These activities are frequently seen in a distribution center

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Warehousing & Distribution (Cont.)

Importance & Types of Warehouses– Support purchasing, production, & distribution. – Consolidation warehouses collect LTL shipments

for transport in TL or CL quantities.

Private Warehouses– owned by the firm storing goods. – Pro- Reduces the cost, offers greater control,

provides better workforce utilization, & can generate income & tax advantages through leasing of excess capacity &/or asset depreciation.

– Con- Owning a private warehouse represents a financial risk & loss of flexibility.

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Warehousing & Distribution (Cont.)

Public Warehouses– Owned by for-profit orgs & contracted out Activities:– Breakbulk– Repackaging– Assembly – Incoming & outgoing quality inspections.– Material handling, equipment maintenance, &

documentation services– Storage

– Pro - Provides flexibility & investment cost savings – Con - Lack of control.

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Warehousing & Distribution (Cont.)

Warehouse Location Issue– As the # of warehouses increases, the system

becomes more decentralized. Responsiveness & delivery service increase.

– However, warehousing operating & inventory costs also increase. Trade-off between costs & customer service must be considered.

Risk Pooling– Describes the relationship between the # of

warehouses, inventory, & customer service.– Risk pooling is estimated by square-root rule

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square-root rule (p. 324):

Where:

S1 = Total system stock for the N1 warehouses

S2 = Total system stock for the N2 warehouses

N1 = # of warehouses in the existing system, &

N2 = # of warehouses in the proposed system

Thus, as # warehouses decreases, total stock needed also decreases.

Conversely, if we double the number of warehouses, what happens to the total inventory?

Warehousing & Distribution (Cont.)

1

2

N

NS2 = (S1)

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Warehousing & Distribution (Cont.)

Warehouse Location Strategies

– Market-positioned strategy- warehouses close to customers to maximize distribution svcs & improve transp. economies of scale.

– Product positioned strategy- close to supply source for firm to collect goods & consolidate.

– Intermediately positioned strategy- midway between supply source & customers when distribution requirements are high & product comes from various locations.

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Warehousing & Distribution (Cont.)

Just-in-Time WarehousingEmphasis on warehousing to support JIT operations:

– Commitment to customers & service quality– Reduced lot sizes & shipping quantities– Emphasis on cross-docking– Increased automation– Increased assembly operations

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Impacts of Logistics on Supply Chain Management

Third Party Logistics (3PL) – Provide reliable & timely delivery required

by user– Used to a significant degree in

international logistics– Favored by small businesses– Some firms outsource all of their logistics

needs to a lead logistics provider or fourth party logistics provider (4PL)

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Logistics Management Issues

Environmental Sustainability in Logistics– Green logistics is a response to the need

for reducing carbon emissions and can also save money for the firm

3PL Supply Base Reduction – by reducing the 3PL supply base a firm

can achieve lower prices and better service as it becomes a larger customer

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Logistics Management Issues (Cont.)

Mode & 3PL Selection– firms identify the optimum transportation

services to minimize costs & improve customer service

Firms often use transportation intermediaries, such as:– Freight forwarders– Transportation brokers – Shipper Associations– Intermodal marketing companies (IMCs)

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Logistics Management Issues (Cont.)

Logistics Management Software Applications

Transportation management systems- used to select the best mix of transportation services & pricing.

Warehouse management- track & control the flow of goods from receiving dock to outbound shipment. New technologies, such as RFID tags, facilitate tracking.

Returns management systems (RMS) provide global visibility, standardization, & documentation of product returns, while minimizing reverse logistics costs.

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Logistics Management Issues (Cont.)

Use of e-Commerce Technologies in Logistics

• Electronic Invoice Presentment & Payment (EIPP)- sending & receiving invoices online.

• Supply Chain Visibility- time-related benefits that lead to SC success. Visibility allows better communication across org boundaries

• Third Party Electronic Transaction Platforms- Internet based transaction systems providing freight-matching services, auctions, & on-line marketplaces

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International Logistics

International Logistics Intermediaries– Customs Brokers- move through customs

& handle documentation.– International Freight Forwarders- move

goods to foreign destination– Trading Companies- Put buyers & sellers

together & handle export/import arrangements.

– Non-Vessel-Operating Common Carriers- operate like freight forwarders but use scheduled ocean liners.

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International Logistics (Cont.)

Foreign Trade Zones- – Secure sites in U.S. under supervision of U.S.

Customs. – FTZs offer storage, exporting, manufacturing,

assembly, repacking, testing, & repairing services.

North American Free Trade Agreement (NAFTA)

– Created in 1994 & removes most barriers to trade & investment among U.S., Canada & Mexico.

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Reverse Logistics

– Backwards flow of goods from customers in SC when goods are returned by a customer in the supply chain

– Retail returns range 6% to 40% of sales– Often is an unwanted SC activity– Poor reverse logistics can hurt firm– Green reverse logistics programs-

designed to return unneeded products for recycling. These programs reduce environmental impact on landfills & deal with dangerous contaminants.

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Here are some links to interesting logistics sites: • The Aalsmeer flower auction—world’s largest:

http://web1.msue.msu.edu/mastergardener/trips/2002/netherlands/aalsmeer.htm

• World’s largest ship: http://en.wikipedia.org/wiki/Knock_Nevis

• World’s fastest train: http://www.popularmechanics.com/technology/transportation/4219935.html

• World’s longest trucks: http://www.etrucker.com/apps/news/article.asp?id=27086

• World’s biggest air transport plane: http://travel.howstuffworks.com/air-freight4.htm