Chapter 7

Logistics

The arrival of Harry Potter and the Deathly Hollows was full of heightened anticipation for fans of the Harry Potter series of books. The 12 million copies of books were scheduled to hit the shelves of thousands of retail stores all over the United States in synchronized fashion on July 21^st, and be available through online bookstores. This was a record first printing in publishing. Strict security had to be implemented at all stages in order to minimize the risk of someone leaking the book's ending. Marketing was pushing a big publicity launch and the mystery of the ending added to the excitement. For the executives at Scholastic, however, this was a major headache. Achieving synchronized deliveries of millions of books at thousands of different locations, and meeting deadlines all depended on logistics.

Accomplishing the goal required everyone in the supply chain to work in tight coordination. This included executives from Scholastic's manufacturing and logistics divisions, printers, distributors, and trucking companies, all working to make sure the deliveries, tight schedules and turnarounds were met. The author, J.K. Rowling, delivered the manuscript just in time to the publisher who then sent it to printers R.R. Donnelley & Sons and Quebecor World, which worked around the clock to guarantee books would be ready by the release date. In order to reduce time, Scholastic bypassed its own warehouses, using hired trucks to ship from six printing sites directly to large retailers like Barnes & Noble and Amazon.com, as well as numerous distributors of independent booksellers. To expedite loading and unloading, trucking companies such as Yellow Transportation and J.B. Hunt Transport Services used same-size trailers and pallets. To ensure security, every trailer shipping the Potter books had a GPS transponder that would alert Scholastic if the driver of the trailer veered off designated routes.

The timing was especially tricky for e-tailers, which had to ship in advance for the books to hit customer doorsteps on July 21. Barnes&Noble.com even developed special algorithms that enabled its shipping team to figure out when to release books to the U.S. Postal Service or UPS to ensure a simultaneous arrival around the country on that day. Who could have imagined that printing and delivering books could be such a logistical nightmare?

Adapted from: “Harry Potter and the Logistical Nightmare.” Business Week, August 6, 2007: 9.

WHAT IS LOGISTICS?

THE LOGISTICS FUNCTION

Logistics is the business function responsible for transporting and delivering products to the right place at the right time throughout the supply chain. In essence, it is about movement and storage of product inventories throughout the chain. Logistics has a critical responsibility for the functioning of both the organization and the supply chain, as without it materials would not arrive when and where they are needed. In order to achieve its goals, logistics must plan and coordinate all material flows from source of supply to all users in the chain. As we can see by the logistics requirements to deliver Harry Potter books, this task is more complicated than it appears.

Unlike marketing that focuses on the “downstream” part of the supply chain, and sourcing that focuses on the “upstream” part, logistics connects the organization to both its customers and suppliers. Logistics works with sourcing to link the organization to its external suppliers and to ensure that materials are delivered inbound to the organization when needed. This is critical for the operations function, which is responsible for transforming sourced materials into finished products. Logistics also works with marketing to connect the organization to the final customer by ensuring distribution and delivery of outbound products to external customers. This is shown in Figure 7.1.

The function of logistics is complex and requires a great deal of coordination. As we will see in this chapter, there are many important decisions that have to work together in order to enable proper logistics functioning. This includes organizing and managing the entire distribution network, including location of warehouses, distribution centers and plants, and coordinating the modes of transportation between them. It also includes design and management of operations throughout the network for efficient storage and quick movement of goods. Recall that in the Harry Potter example pallets of the same size were used to expedite movement, and even seemingly small decisions were found to be significant, such as the size of trailers used.

FIGURE 7.1 The logistics function

Logistics must also have access to information in real time in order to be able to track product movement and plan exact timing and location of deliveries. It must ensure security of goods from theft or tampering while the products are moved. For example, in the case of Harry Potter, all trailers that carried the books had GPS transponders to enable the company to monitor product location at all times. Adding to the challenge is that all of this must be accomplished while meeting exact customer delivery dates and at the lowest cost possible. It is a challenge of high magnitude.

Logistics is a function that requires large investments in infrastructure, such as transportation vehicles, material handling equipment, and information technology. For this reason many companies outsource this function to outside firms. Companies such as United Parcel Services (UPS), Federal Express (Fed Ex), and DHL have made it their business to provide logistics services to their clients. These companies have invested in the needed infrastructure, such as their own fleet of airplanes and trucks, and the latest technology to track packages from point of origin to destination using bar code technology and scanners. In addition to moving products, these companies can be contracted to perform a range of logistics functions, including designing an entire distribution network for their clients. They can also provide services such as management of inventory, warehouse management, and even customer interface.

EVOLUTION OF LOGISTICS

Today's business logistics is actually rooted in military logistics. Logistics has always been a critical part of national defense. Consider all the issues involved in moving military troops and convoys, planning optimal locations of depots, and delivery of supply items such as food, fuel, and spare parts. Logistics in the military is the function responsible for these activities. In addition, logistics in the military is also responsible for all issues related to equipment maintenance, reliability, and parts sourcing.

In the business arena logistics was introduced under the name of “physical distribution” in the 1960s, and was primarily focused on shipping goods on the outbound side of the organization. The initial interest was on getting the product from the manufacturer to the final customer using the best arrangement of warehouses and distribution centers, and optimal modes of transportation. As a result, logistics developed a strong tie with the marketing function and focused on the “downstream” part of the supply chain (Figure 7.2).

In the 1970s and 1980s the use of logistics concepts was extended to the “upstream” part of the supply chain. There was an increased focus on strengthening manufacturing and a greater awareness of the need to deliver materials to manufacturing facilities in an accurate and timely fashion. This was termed materials management which now looked at logistics for serving the inbound side of the organization in addition to the outbound.

FIGURE 7.2 Evolution of the logistics function

The 1990s witnessed the growth of supply chain management (SCM) and the holistic understanding of the importance of managing the entire supply chain. As a result, logistics in the business sector was extended to include movement of goods through the entire supply chain, both upstream and downstream, serving the inbound and outbound side of the organization.

Today there are three different types of logistics. The first is business logistics, which is focused on the movement and storage of goods throughout the entire supply chain. The second is military logistics, which is focused on supporting military needs. Finally, there is event logistics, which involves organizing and deploying resources in preparation for an event. Examples of this would be logistics involved in setting up the Olympic Games or deploying resources to provide disaster relief anywhere across the globe when needed.

IMPACT ON THE ORGANIZATION

Logistics has a significant impact on the organization by the mere fact that its role is to support all organizational functions by ensuring timely availability of products. On the inbound side of the organization logistics works with sourcing to ensure that materials needed for operations are delivered when required. On the outbound side logistics works with marketing to ensure that products are delivered to various customers when needed. Let's look at this process a bit more closely.

1. Impact on Operations. Logistics interfaces closely with operations through the planning of the amounts of inventory that must be received at various points throughout the supply chain, and the timing of those receipts. Logistics must understand exact delivery schedule requirements. It must also decide on the best balance between bringing extra inventory and arranging for storage, or risking not having enough inventory. This is directly related to operations scheduling and production run time, which is the amount of time required for a batch of goods to be produced before a “set up” or changeover is incurred. Historically companies used long production runs in order to incur economies of scale and stored the excess goods in inventory. The production process was then stopped to “set up” or change equipment for production of another product. This practice required logistics to deliver large amounts of inventory less frequently.

   As more manufacturers have switched to just-in-time (JIT) or lean manufacturing, production run times have become significantly shorter. JIT or Lean, which we discuss in detail in Chapter 10, is known as a “pull” system where demand “pulls” the product through the supply chain. This is different from traditional systems that “push” the product through the supply chain in anticipation of demand. JIT systems are characterized by short production runs in order to respond to demand. They require frequent deliveries of smaller quantities of inventories and carrying little excess inventory as safety stock. As a result, precise timing of deliveries of inbound materials is essential.

   It is up to logistics to work with operations to arrange for the precise timing of deliveries of the exact materials that are needed based on production schedules. If too much inventory is delivered too soon inventory costs become high and storage becomes an issue. If too little inventory is delivered, manufacturing processes will not be able to operate without the needed materials. Therefore, it is critical that logistics understands production schedules and strikes a balance between inventory holding cost and shortages.

   This is especially difficult if we consider that demand patterns and production schedules are not necessarily fixed. Consider holiday demand or seasonal demand, such as sales of ice cream in the summer or shovels in the winter. In these cases most companies produce larger quantities of products in advance of production. It is up to logistics to ensure that these products are stored at the optimal location for quick delivery and that they work with operations to ensure that just the right amount of inventory is available.

   The logistics function has an impact on all operations, whether they are manufacturing or service. Consider a large restaurant that specializes in seafood. It is up to logistics to ensure that the right quantities of fresh seafood are delivered at the right time. Seafood is highly perishable so transportation time should be minimal. Also, logistics must ensure that the right packaging, handling, and temperature controls are correct at all times. It must also ensure that the seafood is delivered at just the right time in the right quantities. If seafood deliveries are late the chefs may not have enough time to prepare the planned menu. If the delivered quantities are low the restaurant may not have enough to serve its customers. In both cases customer service suffers. Similarly, if the seafood arrives too early it must be stored, losing its freshness and risking loss due to its perishable nature. This can result in high inventory costs for the restaurant.

2. Impact on Marketing. On the outbound side logistics provides key support for marketing and order fulfillment. Logistics must work with marketing to understand customer requirements, as well as storage and delivery needs. A key element in sales is ensuring that the product is available when needed. Consider sales of orange and black M&Ms during the Halloween season. Marketing arranges for the color designs that are in keeping with the event to promote sales. However, if enough colored M&Ms are not on the retail shelves at the right time, sales will not occur. It is up to logistics to ensure the right timing of the shipment of M&Ms. If the shipment arrives too late or if quantities delivered as small, sales and marketing will suffer. On the other hand, if too much inventory arrives, the company will incur losses through markdowns of the colored M&Ms after Halloween passes.
3. Impact on Packaging. Another logistics decision is packaging of goods as they are being transported. This has a significant impact on the ability to move and handle the material. This decision also protects the items from damage and affects both operations and marketing. Consider the seafood restaurant example mentioned earlier. If logistics does not make proper decisions on packaging, including insulation and temperature monitoring, the product will lose its freshness. In the example of M&Ms, if proper packaging is not used, the candy can get crushed, broken, or damaged. In both cases, it is up to logistics to arrange for proper packaging that ensures product integrity.
4. Impact on Finance. Logistics has an especially important impact on the financial picture of the organization as it is responsible for large capital expenditures, such as transportation, warehousing, and inventory. Its performance can be seen directly on financial measures such as return on assets (ROA) and return on investment (ROI).

Consider that ROA is computed as follows:

Notice in the equation that we can increase ROA in three ways. One is by increasing revenue, another by reducing expenses, and another by reducing assets. All three are directly impacted by logistics. First, inventory is considered an asset on the balance sheet and an expense on the income statement. This means that by reducing inventory both expenses and assets are reduced and ROA is affected positively. In addition, investments in transportation and warehousing are also considered assets. By reducing these assets ROA is significantly affected. This is also another reason why some companies choose to outsource logistics. It is an asset heavy function and by using a third party these assets can be eliminated. Finally, notice that ROA increases with an increase in revenue. Revenue can be increased through customer service and, as we already explained, logistics can play a key role in ensuring deliveries of the right quantities of goods to the right customers.

FIGURE 7.3 Impact of logistics on SCM.

IMPACT ON THE SUPPLY CHAIN

We discussed in Chapter 1 that logistics, in contrast to supply chain management (SCM), consists of the tasks involved in moving and positioning inventory throughout the supply chain. Logistics is a function that supports SCM by being responsible for one of the flows in SCM, namely moving of goods or inventory. Logistics manages the movement of goods both downstream and upstream, and is responsible for making all the decisions that enable this to happen efficiently and effectively. This includes order processing and tracking, inventory management, transportation, warehousing, material handling, and packaging. SCM could not function without logistics as there would be inventory stock-outs at some locations and too much inventory at others.

It can be said that logistics provides SCM with three utilities: place, quantity, and time, shown in Figure 7.3. Logistics provides place utility by ensuring that goods arrive at the right place in the supply chain. It is the function that extends the geographic region by effectively utilizing transportation. It is because of logistics that SCM has a broad place utility and can reach a wide geographic region. Similarly, logistics provides quantity utility by ensuring that the correct quantities are delivered at the right location. Once again, the trade-off here is between delivering too many goods and incurring inventory holding cost or not delivering enough and having shortages. Finally, logistics provides time utility by delivering the goods at precisely the right time needed. Recall that this is especially critical for JIT inventory systems and promotional items.

REVERSE LOGISTICS

Reverse logistics is the process of moving products upstream from the customer back toward manufacturers and suppliers. This is the reverse direction from the way materials typically flow in a supply chain. This occurs for a variety of reasons, such as returns of damaged products or items the customer did not want. As with products that flow downstream, to move products upstream logistics has to organize transporting, storage, receiving, inspecting, sorting, and all other activities, to ensure efficient flow. Sometimes the items are returned directly to the manufacturer from the customer, as shown in Figure 7.4. Other times a 3PL provider may be used to handle returned items and arrange for repairs bypassing the manufacturer as shown in Figure 7.5.

FIGURE 7.4 Reverse logistics with returns to the manufacturer.

FIGURE 7.5 Reverse logistics with returns to a 3PL provider for repairs.

Reverse logistics is especially challenging to design as this flow does not directly add value. Consider that there are many different types of items that are being returned to many different locations. For example, the returned item may be a damaged product being returned for repairs, an overstock item that can be sold elsewhere, or an item that has been recalled or has failed and needs to be disposed of in an environmentally safe manner. If we think about the different types of items returned, we can see that there are many different paths returned items can take and it is up to logistics to arrange for this in a cost effective manner.

There are other issues that add complexity to reverse logistics. One is handling the financials and the cash flows once items are returned. Another is arranging for warehouse and storage space in the reverse order that does not confuse or take away from flow of the usual downstream process. Another consideration is abiding by “green laws” in countries that have them that may require returning packaging materials for proper disposal.

As we can see, reverse logistics is complex and is especially challenging as it does not directly add value. Further, the role of reverse logistics has become especially important in recent years. The reason is that companies are under increasing pressure to improve customer service and have made it ever easier for customers to return goods. This is especially prevalent in retail and Internet sales, where ease of returns is a major selling feature. The ability to easily return goods is becoming an “order qualifier” in much of retail and it is up to logistics to continue to design ways for a cost-efficient process. For example, the success of the on-line retailer Zappos is in large part attributed to making returns convenient for customers.

LOGISTICS TASKS

As we already discussed, there are many tasks that logistics must do in order to perform the needed coordination for accurate and timely product deliveries. Here we describe the requirements of some of these tasks.

TRANSPORTATION

Transportation is probably the most important task logistics performs as it moves products throughout the supply chain. It is also an especially costly task given the high cost of transportation and distribution network design. Consider that some modes of transportation are less expensive than others, such as rail, but others are faster, such as air. The decision of which mode of transportation to use is directly tied to the consideration of the distance a product has to be moved. This is dependent on the span and complexity of the company's supply chain network. There are also other factors to consider, such as product characteristics. Perishable products, such as bananas, may need climate-controlled transportation. Highly innovative products, such as Apple's iPad, may need rapid delivery to areas with high demand. Products of very high value, such as diamonds, may need high security.

STORAGE

Directly related to transportation is the storage of goods. This involves deciding where goods will be stored, such as the number of warehouses and distribution centers, and the amounts of inventory that will be held at each center. We can see that the greater the number of storage areas and the wider their distribution the lower transportation costs. The key is finding an optimal balance that minimizes costs but maximizes responsiveness to customers. This decision is directly related to warehouse management, inventory management, and material handling. It is also related to how the products will be handled in the storage area, from order picking, to order tracking, to degree of automation.

MATERIAL HANDLING

Material handling is concerned with the physical handling of the product. This includes loading and unloading of goods from vehicles, placement and order picking of goods in the warehouse, and movement throughout facility, such as warehouse staging and dock areas. Efficient material handling saves cost, cuts down on time, and minimizes product damages in the process of movement. On the other hand, poor material handling can result in damaged products and excess processing costs.

Other issues of concern are the degree of automation used versus manual labor. There is a wide range of material handling equipment, from conveyors, forklift trucks, overhead cranes, and automated storage and retrieval systems (ASRS). Unlike years ago where material handling was performed using manual labor, today many warehouses are completely automated and use very sophisticated ASRS.

PACKAGING

Packaging of products is an important issue that directly relates to material handling. In addition to protecting the product during transportation and storage, packaging must be compatible with material handling equipment and material handling requirements of the warehouse. Packaging is also directly related to modes of transportation being used. Some modes of transportation require additional packaging, such as rail or water to prevent water damage. Other modes, such as air, typically require less packaging. Although one mode of transportation may cost less than another, cost of packaging needs to be factored into the decision as well. For example, water transport is much cheaper than air, but requires packaging that may prevent water damage.

INVENTORY CONTROL

All the logistics tasks we discussed so far are directly tied to inventory control. This involves maintaining needed amounts of inventory, arranging for timely replenishments, and maintaining accurate counts of all inventories.

Logistics is the function responsible for managing the quantities of inventory in warehouses and storage areas. This includes using inventory control systems to maintain an adequate level of inventory and replenishing the stock once shipments are made. Managing inventory is directly tied to transportation as arrangements must be made for timely inbound shipments of materials once stock is depleted. Logistics must also ensure accuracy of the inventory amounts. Inventory is typically monitored using electronic tracking systems. However, a process called “cycle counting” is used periodically where inventory is physically counted and any discrepancies with the electronic system reconciled. This is all done to ensure high levels of inventory control.

ORDER FULFILLMENT

Logistics is often responsible for order fulfillment, which is completing, shipping, and delivering a customer order. Order fulfillment typically occurs from a warehouse or distribution center location where orders are directly placed from retailers or manufacturers. Logistics must ensure that the specified lead time, the time from when the order is placed until it is received, is not exceeded. This means picking and packing the order, arranging for proper transportation, and shipping it out. This is an important role for logistics as it involves directly dealing with the customer.

FACILITY LOCATION

Logistics is also involved in determining best location of warehouses, distribution centers, and other storage areas in relation to manufacturing facilities, customers, and suppliers. Decisions on location have a direct impact on the movement of products, distances traveled, cost of transportation, the ability to quickly respond to markets, and ultimately customer satisfaction. Optimal locations of distribution centers, for example, can have a dramatic impact on how quickly deliveries can be received at retail locations. Location decisions also have a huge impact on transportation costs and inventory levels. It is up to logistics to determine the best locations of these facilities, considering modes of transportation to move goods between them and to the final customer.

TRANSPORTATION

Transportation is one of the most important logistics tasks as it enables logistics to provide place utility. For this reason we want to look at this task more closely. Transportation deals with moving products and arranging for optimal modes of transportation. As we discussed earlier, transportation decisions are related to the span and complexity of the company's supply chain network. In developing optimal schedules, transportation must deal with both economies of scale (the larger the amount shipped at one time the lower the per unit cost) and economies of distance (the longer the distance moved at one time the lower the per unit cost). Let's look at these in a bit more detail.

Economies of scale is a term used to describe the fact that the larger the size of a shipment the smaller the per unit cost of freight moved. It is because of this that shipping a partly filled vehicle, such as a partly filled truck, is very costly. This is called a less-than-truck-load (LTL) shipment and companies try to avoid it whenever possible. The reason for this is that there are certain fixed costs that have to be incurred regardless of how much is shipped. This includes equipment, labor, fuel, scheduling, and administrative costs. The larger the load over which these costs can be spread the lower the per unit cost, and is true of all modes of transportation.

Economies of distance is a term used to describe the fact that the longer the distance shipped at one time the smaller the per unit cost of freight moved. Consider that sending one shipment 500 miles is cheaper than sending two shipments 250 miles each. Similarly, in your everyday life, consider that taking a taxi 10 miles is cheaper than taking two taxis 5 miles each. The reason is that the longer distance allows fixed cost to be spread over the larger number of miles.

The challenge for logistics managers is to find an optimal balance between the economies of scale and distance, while maintaining customer service levels. The decision becomes one of selecting the right mode of transportation or combination of modes, considering all the costs and benefits.

Adapted from: “Veggie Tales.” Fortune, June 8, 2009: 25–30.

Let's now look at common modes of transportation and their characteristics.

TRUCK

Trucks are the most flexible mode of transportation given today's expansive highway system and they pose few restrictions on weight or content. Also, trucks can go on a variety of roads typically maintained by the government, resulting in a relatively small fixed investment in vehicles. Given their easy access they are utilized to some extent in almost all logistics movements. One challenge for this mode of transportation is stringent driver safety regulations which can make labor requirements high. This has created a capacity constraint for some transportation companies who simply cannot find enough qualified drivers.

WATER

Water transportation has an advantage in its ability to transport very large and heavy shipments. It is the mode of choice for moving large bulk items, such as oil or coal. It is also a very affordable mode of transport. The disadvantage, however, is that it is an extremely slow mode of shipment and is obviously restricted to water access.

AIR

In contrast to water transportation, air is the fastest mode of transportation. However, it is also most expensive given high fixed and variable costs. Not only are aircraft and fuel expensive, but air transport requires airport location. Given the high cost, it is most appropriate for lighter, smaller, and higher priority items.

RAIL

Rail is the mode of transportation designed for moving heavy loads very long distances. The advantages are the same as with water: ability to handle large and heavy items at a low cost. The disadvantage is long transit time. Also, rail is restricted to a particular infrastructure, such as railroad tracks. For this reason rail typically has to be combined with another mode of transportation for final delivery to customers.

PIPELINE

Pipeline transportation is limited to liquids and gases, such as petroleum and natural gas. It is a highly specialized mode and requires a specific infrastructure, such as a pipeline.

FIGURE 7.6 Cost structure by mode of transportation.

MULTIMODE

Multimode is the combined use of multiple modes of transportation for product delivery. Given the constraints of each mode of transportation, as shown in Figure 7.6, it is almost impossible to exclusively rely on one mode. Often, a combination of a few modes provides optimal cost and customer service. However, the coordination effort can be a challenge for companies. This is one of the reasons many use a third-party-logistics (3PL) provider to handle shipments. Most 3PL providers, such as UPS, use multimode solutions to provide services to customers.

Adapted from: “New rail service opens up a ‘Northeast Passage.’” CSCMP's Supply Chain Quarterly, Quarter 4, 2009: 68–69.

WAREHOUSING

ROLE OF WAREHOUSES IN THE SUPPLY CHAIN

Traditionally the role of warehouses has been to provide storage space for goods, as well as inbound and outbound transport. Goods that arrived at the warehouse via truck or rail were unloaded and then placed in storage bins in the warehouse. When customer orders arrived goods were picked from their storage location, known as “order picking,” then staged for transport, loaded on to trucks or rail, and shipped.

In addition to providing storage, contemporary warehouses are increasingly places for mixing inventory assortments to meet customer needs. They are driven by enhancing and expediting movement rather than lengthy storage. In fact, lengthy storage is discouraged as it does not add value and just contributes to cost and obsolescence. Warehouses provide a centralized location that stores and organizes inventories of products before they get distributed to customers. For that reason they are often called distribution centers.

Warehouses or distribution centers play a critical role in the supply chain enabling efficient movement of goods on both the inbound and outbound side of the organization. For example, in JIT and lean manufacturing warehouses can be located close to the manufacturing facility enabling frequent deliveries of materials on a just-in-time basis. At the same time, warehouses can be utilized to create product assortments for customer shipments For example, a strategically located centralized warehouse can take advantage of consolidated shipments. The products can then be sorted and arranged for a particular customer and then shipped. In addition to these benefits many warehouses are increasingly performing tasks traditionally done at a manufacturing or retail sites. This may include repairs of items, putting garments on hangers and sequencing them to be rolled straight on to the retail floor, and adding labels and price tags.

CROSS-DOCKING

Warehouses perform a number of functions that essentially reconfigure flows from origin to destination in the supply chain in order to improve speed and accuracy of delivery. Two basic functions performed are breaking up of larger shipments on the inbound side, which results in lower transportation cost, and consolidation of orders for customers on the outbound side. The first is called a “break-bulk” operation where a large shipment is received and then needs to be broken into smaller quantities for deliveries at multiple locations. The function of the warehouse in this case is to split the single order into multiple orders and arrange for deliveries.

Sorting of goods is yet another function performed by warehouses, enabling consolidation and mixing of orders to take place. One type of sorting which has gained popularity is called cross-docking. Cross-docking is an approach used to reconfigure bundles of product where, rather than making larger shipments, larger shipments are broken down into small shipments for local delivery in an area. This is shown in Figure 7.7. Cross-docking is often done in a highly coordinated manner so that the products are never stored in inventory. The term implies that the products literally “cross the dock” to be loaded on to the truck for final destination and are never stored.

FIGURE 7.7 Cross-docking.

Cross-docking requires precision in timing and coordination, and uses state-of-the-art information technology to track inventories. Inventory must be received at precisely the right time from each manufacturer, unloaded at the warehouse, and sorted by customer and destination. Computerized systems track the exact quantities of goods requested by each customer at each location and this is factored into the sorting process. Products are then moved across the dock and loaded onto trucks that are dedicated for a particular destination. This method is very effective for replenishing fast moving inventory items at the store level. For this reason cross-docking is especially used in the retail industry, where shipments are sorted at distribution centers or centralized warehouses and then directly shipped to individual stores.

FACILITY LOCATION

Location of warehouses and distribution centers are important decisions logistics has to make. An optimal location will ease distribution of goods in a timely manner, whereas a poor location will make distribution more difficult. There are a number of factors that must be considered.

The first factor to consider is proximity to customers or manufacturing facilities. It is important that the location be selected to be able to serve the largest geographic market size on the same or next day basis. Directly related to this is the availability of infrastructure and access to transportation. This includes convenient access to highway or rail, presence of a major airport, and proximity to inland or ocean port facilities. Ease of access and use of transportation coupled with customer proximity are key factors that must work together.

For labor-intensive operations, as is the case with most warehouses and distribution centers, the cost and availability of labor is another important factor. This includes considering levels of unemployment in the area, labor skills levels, productivity, work ethic, and degree of unionization. These are all important factors that must be considered carefully. Other considerations are business and personal taxes, as they have a significant impact on the cost of doing business. Also important is the overall business climate and whether it is welcoming to new business.

There are a number of techniques that can be used to help determine where to locate warehouses and distribution centers. Some of these use quantitative models that compute distances between locations and try to find the optimal balance between costs and geographic coverage. Other methods are qualitative in nature and help the decision maker evaluate the benefits of each location. One of the more popular techniques is called Factor Rating and involves evaluating multiple alternatives based on a number of selected factors. It is a helpful procedure as it can give structure to a seemingly chaotic process when many location factors need to be considered simultaneously. Next we look at how Factor Rating can be used to make a location decision.

Steps in Factor Rating:

• Step 1: Identify key decision factors (e.g., proximity to customers, transportation, infrastructure, taxes)
• Step 2: Assign weights to each factor based on its importance; factor weights must add to 100.
• Step 3: Establish a scale for evaluating each location relative to each factor. The most common is scale is a five-point scale, with 1 being poor and 5 excellent.
• Step 4: Evaluate each location based on the factors selected, using the scale set up in Step 3.
• Step 5: Compute a score for each location by multiplying the weight of the factor by the score for that factor and summing the results of each alternative.
• Step 6: Select location with the highest score.

Example Urban Apparel is deciding on where to locate its distribution center to serve its northeast retail stores. It has identified six factors it considers most important and has decided to use Factor Rating to evaluate the two location alternatives based on a five-point scale, with 1 being poor and 5 excellent. The weights assigned to each factor for each location are shown below in Figure 7.8, as well as the factor score for each site. We can see that location 2 has a higher total score than location 1 and, therefore, appears to be a better location based on the set factors.

FIGURE 7.8 Factor rating for urban apparel's two DC location alternatives.

THIRD-PARTY LOGISTICS (3PL) PROVIDERS

Third-party logistics providers, or 3PLs, are companies that provide logistics and transportation services to other firms. They have had an increasingly important and prominent role in the supply chain as numerous companies have outsourced their logistics function. Traditional logistics management activities, such as transportation, warehousing, order processing, and related information technology support, are deemed as noncore activities for many firms. In addition, as we discussed earlier, logistics activities have significant asset requirements making logistics a primary candidate for outsourcing. Finally, outsourcing logistics can offer the potential for large cost savings given its impact on ROA.

In the 1980s services offered by 3PL providers were relatively limited in scope. At that time 3PL providers provided traditional logistics services, such as transportation and warehouse management. However, as outsourcing logistics services grew in the 1990s, the role of the 3PL provider within the supply chain began changing accordingly. The role changed from initially offering transportation services, to offering a broad array of bundled services that also include warehousing, inventory management, packaging, cross-docking and technology management. More recently, however, the 3PL provider has taken on a more comprehensive strategic role as supply chain activities become more critical to the business.

Today, 3PL providers are engaged in strategic coordination of their customers' supply chain activities. Consider that United Postal Service Inc (UPS) evolved from a provider of simple delivery services to offering complete distribution management and network design. UPS claims that for their customers they will “act as eyes and ears around the world” (www.ups.com).

As entities that connect members of the supply chain, 3PL providers serve a critical role responsible for achieving effective logistics integration by which inter-and intra-firm activities are integrated to enhance customer satisfaction and provide a competitive advantage. As a result, 3PL providers have gained a prominent role in the coordination of the supply chain.

CHAPTER HIGHLIGHTS

1. Logistics is the business function responsible for transporting and delivering products to the right place at the right time throughout the supply chain.
2. There are three different types of logistics: business logistics, which is focused on the movement and storage of goods throughout the entire supply chain; military logistics, which is focused on supporting military needs, and event logistics, which involves organizing and deploying resources in preparation for an event.
3. Logistics impacts the organization on both the inbound and outbound side. On the inbound side it ensures that materials needed for operations are delivered when required. On the outbound side it ensures delivery of products to various customers when needed.
4. Logistics is a function that supports supply chain management by being responsible for the flow of products. It provides SCM with three utilities: place, quantity, and time.
5. Logistics tasks include: transportation, storage, material handling, packaging, inventory control, order fulfilment, and facility layout.
6. Reverse logistics is the process of moving products upstream from the customer back toward manufacturers and suppliers.
7. Transportation is the primary function of logistics that enables logistics to provide place utility. There are five primary modes of transportation: truck, water, air, rail, and pipeline.
8. Cross-docking is a warehouse sorting approach used to reconfigure bundles of product, where rather than making larger shipments, larger shipments are broken down into small shipments for local delivery in an area.
9. Factor Rating is one tool that can be used to make location decisions.

KEY TERMS

• Logistics
• Physical Distribution
• Reverse Logistics
• Transportation
• Storage
• Material Handling
• Packaging
• Inventory Control
• Order Fulfillment
• Facility Location
• Break-bulk
• Cross-docking
• Factor rating

DISCUSSION QUESTIONS

1. Find an example of a product you have recently purchased. Identify the logistics tasks that would have to take place in order for the product to be available for you to have the ability to purchase it.
2. Explain logistics tasks involved in one service supply chain, say involving a hospital or restaurant. How different are these tasks versus those involved in a manufacturing supply chain?
3. Consider an event you are familiar with, such as a baseball game, a rock concert, or delivering aid to an underdeveloped country in need. Map out the logistics tasks needed and their sequence in organizing this particular event.
4. Consider an item you have recently returned. Identify the steps the company would have to go through to return the product back up the supply chain from where you have returned it. What costs do you think would be involved in this process? Is there a way the company can design this reverse logistics process in order to add value and make a profit?

PROBLEMS

1. Quick Transport Logistics (QTL) is considering where to locate its warehouse to serve its northeast region. The search has been narrowed to two competing locations and QTL has decided to use Factor Rating to make their decision. They have listed the factors they consider important and assigned a factor score to each location based on a five-point scale. The information is shown below. Using the procedure for Factor Rating to decide which location is better.

   

2. DJ Bank is deciding on where to locate its new branch. It has identified three factors it considers most important and has decided to use Factor Rating to evaluate the two candidate locations based on a five-point scale, with 1 being poor and 5 excellent. The factors are: population, average area salary, and cost of land, with weights 30%, 20%, and 50% respectively. Location A has the following scores for the factors: 4, 3 and 3 while B has: 3, 5 and 3. Please evaluate the two candidates based on Factor Rating.
3. An electronic company is deciding on which of the two new products should be put in production. It has identified three factors it considers most important and has decided to use Factor Rating to evaluate the two products based on a five-point scale, with 1 being poor and 5 excellent. The weights assigned to each factor are shown below in the table, as well as the factor score. Please evaluate the two products.

   

CASE STUDY: STRATEGIC SOLUTIONS INC.

Strategic Solutions (SS) is a small 3PL provider that was started by Scott Crash in 1992. Scott began his career working in the logistics division of a large trucking company. He worked with fleet scheduling, customer support, and route scheduling before he saw the opportunity to start his own business offering similar services. Strategic Solutions provides logistics services to small businesses in Columbus, Ohio, and has recently acquired major accounts with two well-known grocery store chains. Their core competency is specializing in the movement of cold and frozen food products. Refrigerated trailers can be expensive and if not transported using reliable equipment, can prove to be very costly for all parties. Scott started his company by strategically combining LTL (less-than-truckload) shipments for small stores such as gas stations, pharmacies, and small grocery stores. He found his niche in climate controlled trailer movements. Business has been growing since.

THE BUSINESS

Strategic Solutions operates by arranging customer shipments with the best for-hire transportation service they can find. Two of their main transporters are Frigid Movements and Problem Solved Shipments. Strategic Solutions has long-term contracts with most of its customers, but they also accept one-time shipments and business from random customers on a regular basis. Customers can either call or e-mail Strategic Solutions with the details, such as identifying the products that need to be shipped, the destination, and required time of delivery. Once Strategic Solutions has this information they can then arrange for the outbound shipments from the customer's distribution centers to the desired location. The customer base has increased substantially as a result of the company's success in the cold food movement area and they have acquired new contracts with major grocery store chains.

THE PROBLEM

Scott's company has begun to struggle with the business growth due to information technology constraints. Their current method of telephone and e-mail information exchange has become outdated and customers have found it hard to communicate with Strategic Solutions. Customer satisfaction has dropped in the recent past and Scott fears the loss of some of his top business clients. Something must be done so that Strategic Solution's reputation isn't damaged and no customers are lost.

THE NEED FOR EDI OR TMS

Scott understands that logistics depends on accurate real-time information, but isn't sure what type of system would be best suited for his operation, and has decided to take a customer oriented approach. He personally spoke with each of his customers to find out what would be the best system for them and how the two companies could best work together. He also spoke with his transportation providers to see what type of information exchange and transportation scheduling arrangements would best work for them. It seems that the ideal system would be a single point of contact for customer orders where information is updated in real time. It is inconvenient and time consuming for a customer to call and deal with busy phone lines and unanswered phone calls, or wait for an e-mail reply. There could also be clerical errors when transferring the information between different parties.

THE EDI VS. TMS EXPANSION

Scott is not sure which system to implement and what would be the best investment. He assumes that electronic data interchange (EDI) can accomplish real-time information sharing with all of their customers as well as potential carriers. For customers, information can be available online with proper access codes so that scheduling arrangements involving shipments, equipment, and time schedules can be made with a single point of contact. The down side of an EDI system is the expense. Also, system failure could halt the business, potentially resulting in significant financial losses.

Another option is a transportation management system (TMS), which is a software system designed to manage transportation operations. TMS would enable Strategic Solutions to directly link to their transporters' systems to more efficiently identify and find potential routes. They wouldn't have to arrange shipments through telephone or e-mail, but could simply schedule them using the TMS. A down side to TMS is that it would leave out non-contracted carriers. If a certain time or route wasn't available through Frigid Movements or Problem Solved Shipments, Strategic Solutions would have to find other ways to schedule the transportation of their customers' goods.

Scott has estimated the following costs for both systems as well customer preferences:

CASE QUESTIONS

1. Identify the characteristics of an ideal information system for this logistics environment. Gather information on both EDI and TMS and compare their suitability for this environment.
2. Help Scott decide if he should invest in either EDI or TMS, or both. Is there another type of system that you would believe would be better? What kind of benefits, including performance and customer satisfaction, can Scott expect by making these proposed changes to the business process?
3. What are the key considerations for Scott when deciding on the best possible systems to implement?

REFERENCES

Amaral, J., C. A. Billington, and A. A. Tsay. “Outsourcing Production Without Losing Control.” Supply Chain Management Review, 8(8), 2003: 44–52.

Ellram, L. “Purchasing: The Cornerstone of the Total Cost of Ownership Concept.” Journal of Business Logistics, 14(1), 1993: 161–183.

Fisher, M. L. “What is the Right Supply Chain for Your Product?” Harvard Business Review, March-April 1997: 105–16.

Hamel, G., and C. K. Prahalad. “The Core Competence of the Corporation.” Harvard Business Review, 68(3), 1990: 243–244.

Hamel, G., and C. K. Prahalad. Competing for the Future. Boston: Harvard Business School Press, 1996.

Lee, H. L. “Aligning Supply Chain Strategies with Product Uncertainties.” California Management Review, 44(3), Spring 2002: 105–19.