MIM 524Class Six

Agenda- Logistics Defined- Logistics as a strategy- Logistics as a system- Logistics Metrics- Modes and types of carriers- 3PL providers- Negotiations & partnerships- Genchev article questions

Logistics defined

“That which plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and information between the point of origin and the points of consumption.”

Quote from: Council of Supply Chain Management Professionals

Logistics as a strategy- In this course, “logistics” will concentrate

on carrier selection & inventory MGMT, not warehouse management or cost accounting variances- Cycle counting, physical inventories, receiving

functions are important, but not necessarily part of a sourcing strategy.

- Logistics can be a profit center for outbound materials or a loss on reverse logistics or continuity of supply / inventory.

Logistics as a strategy - Data- Council of Supply Chain Management

Professionals (CSCMP) Data 2010- 2009 logistics costs as % of GDP 7.7%,

down from 9.3% in 2008- Inventory carrying costs fell 4.6%- Transportation costs were down 20.2%

- These due to interest rate declines and recession

- What has changed in 2011? Oil prices!

Logistics Strategies Include….Uninterrupted Supply of Inbound Material

Supplier SelectionForecasting of SupplyInformation SharingInbound Transportation

Facility Numbers and LocationsLocal WarehousesDistribution Centers

Inventory Quantities and LocationsTimely Distribution of Necessary Materials

Forecasting of DemandOutbound Transportation

Key Logistics System FeaturesCycle Time / Lead TimeConsistency of CyclesOrder AccuracyConsolidationProblem

Notification/ResolutionCustomer

Satisfaction/FeedbackFlexibility / ResponsivenessCost

Logistics Measurements- Total Costs: Inventory, warehousing,

buffer stock, broker fees, insurance, customs, etc.

- Speed: metric is time when shipment released at supplier to receipt by buyer

- Reliability or fill rate: On-Time-Delivery- Capability: ability to move specific

materials- Accessibility: Carrier capable to door-to-

door service

Transportation Modes

- Motor: Highly flexible, limited to domestic service

- Rail: Low cost, limited to long lead-times & less flexible

- Air: Quick, very high cost- Water: Good for bulk, seasonal and slow

Logistics terms- FOB Destination: supplier owns until buyer takes

ownership (owns freight cost & liability)- FOB Origin: Supplier relinquishes ownership at

shipment (UCC 2-401)- CIF Incoterms (International commercial terms):

Cost ,insurance, & Freight in one shipping price; supplier can arrange, (easy to hide costs)

- FOB Incoterms: transfer of title negotiated- Rotterdam rules: Liability can now be negotiated

Types of carriers

Common: Serves general publicContract: Serves a buyer under negotiated

termsPrivate: owns own equipment, limited to

capacity availableExempt: free of regulation, limited to specific

freight

Top Ten International Logistics Companies- UPS: 1.8M customers & 6M destinations / day;

USA: 89% revenue- FedEX: USA: 76% revenue, air ops 83%- DHL: 49% EU revenue- AP Moeller: shipping mainly, 250 vessels- Nippon Express: 93% from Japan- Ryder: USA: 82% of revenue, leading 3PL- TNT Post: EU 85% of revenue- Expeditors: customs services & distribution- Panalpina: world’s largest “footprint” shipping

group; 52% revenue from EU & Africa- Excel: Primarily UK

Third party Service providers- 3PL – outsource logistics, from inventory

warehousing to inbound / outbound freight.

- Good solution for smaller businesses- UPS supply chain and FedEX participate- Very important if packaging or

postponement is part of your sourcing strategy, especially globally in an MNC.

3PL services

- Custom brokers- Freight brokerage- Warehouse / distribution center- Delivery- Packaging- SCM planning

3PL advantages / disadvantagesAdvantages-Econ of scale-Release capital-Allows core competency focus-VMI-Spares-postponement

Disadvantages-Relinquish control-Loss of integration-Service / flexibility-Information flow to customers-Direct shipment limits

Services Provided By 3PL’s

Transportation Mgt21%

Private Fleets7%

Intermodal4%

Warehousing21%

Value Added20%

International9%

Integrated9%

Other5%

Lead Logistics4%

Contract negotiations

- Freight carriers have a brutal business model- Competitive bidding common- Gas prices fluctuate, Container costs

rising- Port-to-port different than hub & spoke- Thus the 3PL model to expand business

Inventory Management

- We will talk about this key part of sourcing strategies in weeks 7 & 8 regarding SKU growth and e-procurement

- VMI – Vendor managed inventory- JIT – Stresses the relationship pending life

cycles and negotiated terms

Just-in-time management (JIT)Conditions for low inventories:The consumption of the component at hand is fairly stableThe consumption of the component is evenly spread over the course of

timeThe delivery time of the product is fixed and not due to fluctuationThe ordering costs per order are fixedThe inventory carrying costs do not depend on the ordered quantity (not

based on EOQ)

JIT basically challenges each of these assumptions. E.g.

order-related costs are analyzed in terms of costs related to:

Negotiations with the supplier: EOL & freight provisionsAdministrative processing: Kan Ban or RFID trackingFollow-up and expediting of orders: postponement or safety stockIncoming and quality inspections: zero defect capability

Disadvantages of JIT for a supplierIt may result in a pyramid shaped structure with a strong

hierarchy in the different links of the supply chain. The large manufacturers at the top of the pyramid impose their demands ruthlessly on the often smaller first tier suppliers aka: DELL

It takes time (and money) to deliver at zero defects or to produce zero defects. These investments come at the expense of the supplier

Supplier can become very dependent on only one manufacturer. This can become a threat to its continuity.

Consequences for suppliers

Consequences for Buyer

Disadvantages of JIT for a buyerLends itself to single sourcing strategy, it is

hard to split the business and trackCalls for the need for inventory ownership up

stream and must be trackedObsolescence in the chain must be managed

downwardSystems must be developed and investedHigh volumes, little flexibility

Rabinovich & Knemeyer- What are LSPs / VARs, why are they

important?- Why care about internet resellers?- What is their IP?

- Time- Service

- Customer focus versus delivery focus?- DFX in packaging important?

3M – What do we know?

- Heathcare in Canada is rising ~10% annually- Government is targeting new logistics methods,

dealing direct, and reducing disti- 3M Canada has over 10K SKUs- Sales to hospitals are $46.8 annually, 90% thru

VARS (value added resellers) to 350 hospitals- VARS – AP/AR, warehousing, inventory- VARS had IT / EDI integrated with 3M- Uses 3PL for balance

3M - Questions• What value do VARs provide in healthcare supply chains?

How much money can be saved by adopting a direct business model? How would the translate internationally?

• Does it make sense for 3M to eliminate VARs and increase its logistics organization?

• Why are hospitals pressuring 3M to adopt a direct business model?

• What are the long term trends in healthcare and how will VARs be affected?

• Should 3M hire a 3PL to handle distribution?• How does 3M’s distribution network help position the

company against the competition?

What should 3M do?- Currently has $4.5M in inventory- If direct, inventory rises $800K- Storage goes up $14K- Picking costs increase $720K- Transport increases $850K- Service / Order Admin increases $450K- Total - $1.6-$2.0M- Less than 10% sales, more in the 3.5%- But….

What should 3M do?- Start-up costs? – IT, return of inventory?- CRM? Order admin services, expediting,

etc…- Relationships with VARS – Market issues?- Core competence? – become a logistics

provider?- How about reducing the cost, reducign the

number of VARS, or 3PL?

CLSC – Reverse Flow is critical

Genchev Article – Reverse Logistics- In your mind does reverse logistics matter

as a coursing strategy? Why?- How does this play into a closed loop

quality system?- How would inventory management be

affected?- How would you disposition the product in

your company & is this a consideration for start-up organizations?