This document outlines chapter objectives for a logistics course. It will cover key logistics decision areas like transportation, warehousing, inventory management and logistics strategy. Students will learn to calculate metrics like perfect order percentage and landed costs. They will also learn models to analyze location selection, transportation optimization, and solving assignment problems. The chapter aims to describe how logistics has evolved from a tactical to strategic function to support business objectives.

1. Logistics

2. Chapter Objectives
Be able to:
 Describe why logistics is important and discuss the major decision areas that
make up logistics.
 List the strengths and weaknesses of the various modes of transportation and
discuss the role of multimodal solutions.
 Identify the major types of warehousing solutions and their benefits.
 Discuss the purpose of a logistics strategy and give examples of how
logistics can support the overall business strategy.
 Calculate the percentage of perfect orders.
 Calculate landed costs.
 Explain what reverse logistics systems are, and some of the unique
challenges they create for firms.
 Use the weighted center of gravity method to identify a potential location for a
business.
 Develop and then solve, using Microsoft Excel’s Solver function, an
assignment problem.

3. Logistics
Planning, implementing, and controlling the
efficient, effective flow and storage of goods
and materials between the point of origin and
the point of consumption

4. Why the Increasing Interest?
• Deregulation
• Globalization
• Technological breakthroughs
• Environmental concerns
• Performance impact

5. Deregulation
• Transportation providers
– Elimination of artificial barriers
– Unrestricted markets
– Multimodal solutions
– Price, schedule, and terms flexibility
• Buyers have greater freedom
– Negotiate prices, terms, and conditions
– Ownership issues
BUT…

6. Deregulation (continued)
… with greater freedom comes new
responsibilities
Key point
Logistics has evolved from being a
“tactical” area to a “strategic” one

7. Globalization
(Worldwide Statistics)
Year Expenditures % GDP
1997 $5,095 Billion 13.4%
2002 $6,732 Billion 13.8%
Change +32% +3%
What is driving this activity?

8. Environmental Concerns
Even while certain aspects of logistics have
been deregulated, other areas are being
controlled more stringently
Fuel efficiency
Pollution
Recovery, recycling, and reuse of packaging,
containers, and products

9. Management Areas
 Transportation
 Warehousing (and more generally, location)
 Material handling
 Packaging
 Inventory management
 Logistics information systems
(And some would put logistics service providers
here as well!)

10. Logistics Decision Areas
Transportation…
– Modes
– Formats
– Pricing
Warehousing
– Consolidation
– Cross-Docking and Break-Bulk
– Hub-and-Spoke
– Inventory

11. Major Transportation Modes
• Highway (truck)
• Water
• Rail
• Air
• Pipeline

12. Modal Shares of Shipments
(within US, 1999/2002)
Mode Value (%) Tons (%) Ton Miles (%)
Highway (trucking, 80.3/86.0 58.5/67.4 28.4/28.7
parcel, postal, courier)
Water 2.5/1.1 11.1/11.1 20.4/13.6
Rail 4.8/3.7 11.2/16.1 26.7/36.8
Air 2.7/3.2 0 0.2/0.4
Pipeline 4.2/1.8 13.7/5.9 17.6/20.5
Multimodal/Unknown 5.6/5.6 5.5/5.5 6.8/6.8

13. Highway Mode
Strengths Weaknesses
• Flexibility to pick up and • Not the fastest
deliver where and when • Not the cheapest
needed
• Often the best balance
between cost/flexibility and
delivery reliability/speed
• Can deliver straight to the
customer (increasing)
• Can be available 24/7

14. Water Mode
Strengths Weaknesses
• Highly cost effective • Limited locations
for bulky items • Relatively poor
• Works best for high delivery
weight-to-value items reliability/speed
• Most effective when • Often limited
linked into multimodal operating hours at
system docks

15. Air Mode
Strengths Weaknesses
• Quickest delivery over • Often the most
longer distances expensive,
• Can be very flexible particularly on a per
when linked to pound basis
highway mode
• Works best for low
weight-to-value items
Grew 90.5% in value of goods shipped from 1993 to 2002

16. Rail Mode
Strengths Weaknesses
• Highly cost effective • Limited locations, but
for bulky items better than for water.
• Can be most effective • Better delivery
when linked into reliability/speed than
multimodal system water
Increasing part of multimodal solutions, dual tracks on major routes

17. Question
How can businesses design
solutions that exploit the strengths
of each mode?

18. Technological
Breakthroughs
• Standardized containers for ease of transfer
• “Roadrailers,” etc.
• Multimodal solutions
– Ship  Truck  Train  Truck  ?

19. Multi-Modal Solutions
(An example)
North Carolina’s Global TransPark

20. Global TransPark
• 15,700 acres at full development with two
parallel runways of 11,500 feet and 13,000
feet
• Integrated air, rail, road, and nearby sea
transportation capabilities
• Free trade zone status

21. Justification for Such a Facility
• Shift from domestic to global economies
• Emergence of just-in-time, flexible and agile manufacturing
practices requiring sophisticated logistics solutions
• The rapid growth of distribution via air freighters (roughly four times
the growth rate of passenger service by the airlines)
• The need to use air cargo, shipment by sea, and delivery by trucks
and trains in an overall distribution system
• The need for a commercial distribution hub in the Eastern United
States that can reach more than 60 percent of the nation’s
population overnight and also provide a gateway to global markets.

22. Warehousing
Any operation that stores,
repackages, stages, sorts, or
centralizes goods or materials

23. New View
Warehousing a key piece of logistics strategy
– J. B. Hunt
– Lowe’s
• More than just storage
– “Warehousing”  “Distribution Centers”

24. Warehousing Benefits
Economic benefits:
Accrue directly to company
Must consider total system costs
Service benefits:
Support customer service needs
May or may not reduce costs

25. Consolidation

26. Example 1
Customer Shipment Weight
Venetian Artist 100 boxes, artist 3,000 lbs.
Supply supplies
Kaniko 100 PC printers 3,000 lbs.
Ardent Furniture 10 dining room sets 4,000 lbs.
•Dedicated truck from Los Angeles to Atlanta: $2,000
•Cost to run consolidation warehouse: $9 per hundred-weight
•Local delivery in Atlanta: $200 per customer

27. Cost Benefits of Consolidated
Warehousing
Warehousing costs 10,000 lbs × $9/100 lbs = $900
Cost of one truck to Atlanta $2,000
Delivery to final customer 3 customers × $200 = $600
Total: $3,500
How does this compare to the cost of separate
dedicated shipments?
What about truck utilization (assume 3 trucks
hold 60,000 lbs.)

28. Cross-Docking
What about supply / demand mismatches?

29. Break-Bulk
Like cross-docking, but usually refers to a single
source

30. Example 2
• Manufacturer  Customers
• 500 lb. average order size
• Direct shipments:
$7.28 per hundred-wt.
$7.28 × 5 = $36.40
• > 20,000 lbs: $2.40 per hundred-wt.
• Local delivery: $1.35 per hundred-wt.

31. Insight:
If we can run a warehouse for less than:
5 × ($7.28 – $2.40 – $1.35) = $17.65/500 lbs.
Or
$17.65 / 5 = $3.53 per hundred-weight
we should do it.

32. Hub-and-Spoke Systems

33. Postponement
Coca Cola syrup Customer A
Bulk food products, Postponement
paints, etc.
Assembly, Customer B
Packaging,
 high volumes Labeling, etc.
 containers Customer C
Minimizes risk
Minimizes inventory (how?)

34. Warehousing Service
Benefits:
Spot stock
Assortment

35. Spot Stock
Region
1
Region
2
Region
Time sensitive, seasonal items 3
Often temporary, public storage

36. Assortment
Broad product line and good inventory
control key to success
Supplier E Customer A
Assortment
Warehouse
Supplier F Customer B
Supplier G
Customer C
Supplier H
Customer D

37. Information Systems
• Decision support tools
– Real-time simulation and optimization
– Location selection
– Cost estimations
• Precise coordination of multimodal solutions
• Execution systems
– Global positioning systems
– Bar-coding applications
– RFID on the horizon as replacement (NYK Logistics)

38. Material Handling and
Packaging
What are the typical marketing
criteria?

39. Unitization
• Unit loads
– Transport and handling efficiencies
• Non-rigid containers
– pallets and unit load platforms
– ropes, steel, shrink and stretch wrap
• Rigid containers
– Maximum protection (Viper windshield frame)
– Standard sizes?
– Recycling?

40. Packaging Implications
• Transportation
– Class segmentation
– Damage protection
• Material handling and warehousing
– Storage requirements
– Unitization
– Container recycling
– Ease of handling

41. Questions
What are the strengths and weaknesses of
each?
How does the choice of format tie into the
business strategy?

42. The Evolution of Logistics
Strategy
From functional silos to strategic
positioning

43. Logistics Strategy Choices
Performance Dimension Transportation Mode Warehousing System
Delivery Reliability Highway, Air Direct Ship, Assortment,
Spot Stock
Delivery Speed Air, Highway Direct Ship, Assortment,
Spot Stock
Mix Flexibility Highway, Air, Rail Assortment, Spot Stock
Design Flexibility Highway, Air Postponement
Volume Flexibility Highway, Air Direct Ship, Assortment,
Spot Stock
Cost Rail, Water, Pipeline, Consolidation, Cross-
Highway Docking, Hub-and-Spoke

44. Who “Owns” Logistics?

45. Owning Versus Outsourcing
• Does the firm’s volume justify a private
system?
• Would ownership limit firm’s ability to
respond to marketplace changes?
• Is logistics a core competency?
• Are outsource capabilities are available?
Kellogg logistics strategy example in text

46. Transportation “Outsources”
• Common (public) carriers
– Published rates and schedules
– “Nondiscriminatory” pricing
– Increased flexibility to partner
• Contract carriers
– Service for select customers
– Unlimited number of customers
• Third-Party Logistics Providers (3PLs)
– Service firms specializing in logistics for other
companies

47. Warehouse Ownership
Issues
Public Contract Private
Cost structure EOS EOS ???
Financial flexibility High Moderate Low
Location flexibility High Moderate Low
Managerial control Less Varies Highest
Expertise High High ???

48. Question:
When would it make sense to
combine private and public
ownership?

49. Measuring Performance
• Perfect Order
– Delivered on time
– Shipped complete
– Invoiced correctly
– Undamaged in transit
• Landed Costs
– Packing
– Insurance
– Customs, other fees
– Warehousing
– Transportation
– Documentation (Redwing Automotive Example)

50. Reverse Logistics Systems
• Customer returns
– Warranty failures
– Incorrect or damaged orders
• Repair and remanufacture process
support
• Recycling (increasing importance!)
Generally independent systems because of low volume and
mix complexity

51. Logistics Decision Models
• Weighted Center of Gravity Method
• Optimization
• Assignment Problem

52. Weighted Center of Gravity
A method to determine best location for central warehouse
from n demand points.
– Requires position of each demand point (Xi, Yi)
– Requires weight of each demand point (Wi), based on importance,
demand volume, market strategy, etc.
n
∑ Wi X i
Weighted X coordinate = X = i =1n *
∑ Wi
i =1
n
∑ W i Yi
Weighted Y coordinate = Y = i =1n*
∑ Wi
i =1

53. CupAMoe’s Coffee

54. Optimization
• Requires an objective function to be maximized or minimized.
• Decision variables — values to be manipulated to affect
outcome of objective function
• Constraints — limits set on range of decision variables to be
used or on other aspects of the solution possible
For Example:

55. Assignment Problem
• Specialized optimization model.
• Decision variables are the shipment quantities
• Known values are demand, capacity, and shipping cost
between warehouses
• Constraints:
– Sum of shipments from a warehouse cannot exceed its capacity
– Sum of shipments to meet demand must be greater than or equal to the
demand
– Sum of shipments from each warehouse must be greater than or equal to
zero
(Flynn Boot Company Excel example in text)

56. Case Study in Logistics
Just-In-Time Shipping