Logistics/Supply Chain

Product Management

PPT03
“Logistics/Supply Chain managers are ‘owners’ of the
product-flow process from raw material sources to final
consumers, not activity administrators.”

Curso: Inglés para Logística

Código: 5494
3er cuatrimestre 2017. 1-1
Product in the Planning Triangle

Inventory Strategy
• Forecasting Transport Strategy
• Inventory decisions • Transport fundamentals
• Purchasing and supply • Transport decisions
Customer
scheduling decisions
service goals
• Storage fundamentals

ORGANIZING

CONTROLLING
• The

PLANNING
• Storage decisions The product
product
• Logistics service
• Ord. proc. & info. sys.

Location Strategy
• Location decisions
• The network planning process

3-2
 Nature of the Product

• Product classification

• Product characteristics

• Product packaging

• Product pricing

3-3
 Nature of the Product
Product Classification
• Convenience goods
• They are often the products of habit or impulse, as they are
easily obtained by consumers and are inexpensive enough for
most consumers to purchase. The shops which keep the
convenience goods are called convenience stores. Often
convenience goods are non durable.

• Shopping goods
• Shopping is the activity of examination and selection of the
goods or services from retailers with the intent to purchase at
that time. The selection & purchasing is a result of a comparison
of products based upon their suitability, quality, price, style and
so on.
• Examples are furniture’s, dresses, electronic items & appliances
etc. Most of the shopping goods are durable.
3-4
 Nature of the Product
Product Classification
• Specialty goods
• Specialty goods incur special purchasing efforts and the items
posses some special features. The buyers are willing to spend a
lot of time & money to buy them in contrast with the shopping
goods. The rare arts collections, antiques, prestige brands, style
goods, automobiles etc. are the examples. The particular hotel,
restaurant, hair salon, spa & resorts are examples of services.

• Industrial goods
• Machinery, manufacturing plants, materials, and other goods or
component parts for use or consumption by other industries or
firms.
• They are classified as (1) Production goods, that enter the
production of a final product, such as the raw materials and
component parts, or (2) Support goods, that assist in the
production process, such as equipment and machinery, 3-5
instruments, tools, etc.
Product Life-Cycle Curve

3-6
 Nature of the Product
 The Product life cycle and Pareto's law
- An empirical relationship for the 80-20 curve is

( 1+A)X
Y=
A+X
where
Y = cumulative fraction of sales
X = cumulative fraction of items
A = constant to be determined
The constant is found by
X(1-Y)
A=
Y-X

3-7
 Nature of the Product (Cont’d)
Example Suppose that in an inventory of 10 items, 15% of the items
account for 80% of the sales volume. The total sales of all 10 items is
$90,000 per year. How much inventory can be expected if turnover
for A items = 8, B items = 5, and C items = 2?
First, findA.
.15(1- .80)
A= = 0.0462
.80 - .15

Then, using A = 0.0462 and the first item (1/10), we project the sales
volume to be:

(1 + .0462).10 Turnover
Y= = 0.7156, or 71.6% of the sales
.0462 + .10
Total sales
The inventory for this item is expected to be 0.716(90,000)/8 = $8,055.
Continue for the remaining items and generate the following table.
3-8
 Example (Cont’d)

Projected
Item Cumulative cumulative Projected
(X) item sales cumulative Projected Turnover Average
no. fraction fraction sales (Y) item sales ratio inventory
1 .10 .716 $64,440 $64,440 8:1 $8,055
A
2 .20 .850 76,500 12,060 8:1 1,508
3 .30 .907 81,630 6,630 5:1 1,326
4 .40 .938 84,420 2,790 5:1 558 B
5 .50 .958 86,220 1,800 5:1 360
6 .60 .971 87,390 1,170 2:1 585
7 .70 .981 88,290 900 2:1 450
8 .80 .989 89,010 720 2:1 360 C
9 .90 .995 89,550 540 2:1 270
10 1.00 1.000 90,000 450 2:1 225
5
$90,000 $13,697

3-8
ABC Classification for 14 Products
Product Monthly Cumulative Cumulative An ABC
Product Rank by Sales Percent of Percent of Classifi-
a b c
Number Sales (000s) Total Sales Total Items cation
D-204 1 $5,056 36.2% 7.1%
D-212 2 3,424 60.7 14.3 A

D-185-0 3 1,052 68.3 21.4

D-191 4 893 74.6 28.6 B
D-192 5 843 80.7 35.7
D-193 6 727 85.7 42.9
D-179-0 7 451 89.1 50.0

D-195 8 412 91.9 57.1

D-196 9 214 93.6 64.3
D-186-0 10 205 95.1 71.4 C
D-198-0 11 188 96.4 78.6
D-199 12 172 97.6 85.7
D-200 13 170 98.7 92.9
D-205 14 159 100.0 100.0
$13,966
3-5
 Cumulative 80-20 Curve
100
90
80
Total sales (%)

70
60
50
40
30
A items B items C items
20
10
0
0 20 40 60 80 100
Total items (%)
3-6
 Nature of the Product (Cont’d)
 Product characteristics
- Weight -bulk ratio
- Value -weight ratio
- Substitutability
- Risk

 Product packaging

 Product pricing
- F.o.b. origin
- F.o.b. destination
- Zone pricing
- Single and uniform pricing
- Quantity discounts
- Deals 3-12
PRODUCT CHARACTERISTICS

Weight-bulk ratio

Value-weight ratio

Substitutability

Risk Characteristics
PRODUCT CHARACTERISTICS
Weight-bulk ratio
• A measure directly related to transportation and storage
costs
• Products with high weight-bulk(volume) ratio show good
utilization of transportation equipment. (eg.. rolled steel)
& their units costs tend to be low
• Products with low density (eg. potato chips) tends to
have high transportation & handling costs relative to
their selling price

Value- weight ratio

• Dollar value of products is an important factors in
developing a logistics strategy
• Storage costs are particularly sensitive to value
• Low value -weight products (eg.,coal) have low storage
cost (low inventory carrying cost)but high transportation
cost
• High value-weight ratio products (eg. Electronic
equipment) show opposite pattern
 Effect of Weight-Bulk Ratio on
Logistics Costs
percent of sales price
Logistics costs as a

Total costs (transport + storage)

Transportation costs

Storage costs
0
0
Weight-bulk ratio

3-15
Value to weight ratio
• The value to weight ratio of a product is a measure of the
monetary value a product has per kilogram or pound.
• This is an important measure used in supply chain design
and strategy. It is one of the most important factors that
determine how a product will be shipped to its market and
consumers, inventory holding costs is the other major
factor.
• It can also influence how and where products will be built
and warehoused. An example of different value to weight
ratios is between diamonds and coal.
• Both are forms of carbon, but have very different value to
weight ratios. A kilogram of coal is only worth a few cents, but
one full kilogram of Diamonds can be worth tens of millions of
dollars depending on the diamond grade.
• In order to determine which form of transportation should be
used to, we need to compare the value to weight ratio. 3-16
Value to weight ratio
For example if an item has an inventory holding cost of 25% per year
and the difference between transporting one kilogram of goods by
road and air is $20 and the time saving is 10 days, then the value to
weight ratio(x) to justify transporting goods by air instead of road in
this scenario should be :

Holding costs= 0.25*(x)*10 / 365

Freight differential=20(1)

Holding costs=Freight differential

Value to weight ratio(x) = 365*20 / 0.25*10

Value to weight ratio(x) = $2920 p/kilo

Therefore the value to weight ratio must be above $2920 per

kilogram in this scenario for air transport to be justifiable.

3-17
 Effect of Value-Weight Ratio on
Logistics costs as a percent
Logistics Costs
of sales price

Total costs (transport + storage)

Transportation
Storage costs costs

0
0 Value-weight ratio

3-18
PRODUCT CHARACTERISTICS
Substitutability
• High substitutable products - no difference between a
firm’s product and those of competitors (eg. food and
drug) and prone to lost sales
• Logisticians need to plan products distribution (through
transportation & storage choices) according to the
degree of substitutability

Risk Characteristics
• Risk characteristics : – perishability (fruits), flammability
(chemical), value (jewelry), tendency to explode , &
ease of being stolen (pens/watches)
• Transportation and storage costs of products showing
high risk in one of the above characteristics is normally
higher.
 Reasons for Product Packaging
• Facilitate storage and handling
• Promote better utilization of transport equipment
• Provide product protection
• Promote the sale of the product
• Change the product density
• Facilitate product use
• Provide reuse value for the customer
3-20
 OBJECTICE OF PACKAGING
 Physical protection – The objects enclosed in the package may require
protection from, among other things, mechanical shock, vibration,
electrostatic discharge, compression, temperature, etc.
 Barrier protection – A barrier from oxygen, water vapor, dust, etc., is often
required. Permeation is a critical factor in design. Some packages contain
desiccants or Oxygen absorbers to help extend shelf life. Modified
atmospheres or controlled atmospheres are also maintained in some food
packages. Keeping the contents clean, fresh, sterile and safe for the
intended shelf life is a primary function.
 Containment or agglomeration – Small objects are typically grouped
together in one package for reasons of efficiency. For example, a single box
of 1000 pencils requires less physical handling than 1000 single pencils.
Liquids, powders and granular materials need containment.
 Information transmission – Packages and labels communicate how to
use, transport, recycle, or dispose of the package or product. With
pharmaceuticals, food, medical and chemical products, some types of
information are required by governments. Some packages and labels also
are used for track and trace purposes.
 Marketing – The packaging and labels can be used by marketers to
encourage potential buyers to purchase the product. Package graphic
design and physical design have been important and constantly evolving
phenomenon for several decades. Marketing communications and graphic
design are applied to the surface of the package and (in many cases) the
point of sale display.
OBJECTICE OF PACKAGING
 Security – Packaging can play an important role in reducing the security
risks of shipment. Packages can be made with improved tamper
resistance to deter tampering and also can have tamper-evident features
to help indicate tampering. Packages can be engineered to help reduce
the risks of package pilferage: Some package constructions are more
resistant to pilferage and some have pilfer indicating seals. Packages may
include authentication seals and use security printing to help indicate that
the package and contents are not counterfeit. Packages also can include
anti-theft devices, such as dye-packs, RFID tags, or electronic article
surveillance tags that can be activated or detected by devices at exit
points and require specialized tools to deactivate. Using packaging in this
way is a means of loss prevention.

 Convenience – Packages can have features that add convenience in

distribution, handling, stacking, display, sale, opening, reclosing, use,
dispensing, reuse, recycling, and ease of disposal

 Portion control – Single serving or single dosage packaging has a

precise amount of contents to control usage. Bulk commodities (such as
salt) can be divided into packages that are a more suitable size for
individual households. It is also aids the control of inventory: selling sealed
one-liter-bottles of milk, rather than having people bring their own bottles
to fill themselves.
PRODUCT PRICING METHODS

Geographic Pricing
Method

Incentives Pricing
Arrangements
 Product Pricing
• Geographic pricing methods
- F.o.b. pricing
- Zone pricing
- Single, or uniform, pricing
- Freight equalization
- Basing point pricing
• Incentive pricing
- Quantity discounts

3-24
F.O.B (FREE ON BOARD) PRICING
 a policy denotes the location at which
the price is effective
 the designated location in the policy is
the location at which the customer
takes the title to the goods
 Example:
– McDonald/Burger King price its foods
at thepoint of retail sale
– IKEA: fob store/ fob destination
1. Terms of Sale: F.O.B. Origin, Freight Collect
Title Buyer-Pays Freight Charges
Freight Charges Buyer-Bears Freight Charges
Passes to Buyer
Paid by Buyer Buyer-Owns Goods in Transit
Buyer-Files Claims (If Any)
SELLE BUYER
R
2. Terms of Sale: F.O.B. Origin, Freight Prepaid
Title
Passes to Buyer
Seller-Pays Freight Charges
Seller-Bears Freight Charges
A Variety of
Buyer-Owns Goods in Transit

SELLER
Freight Charges
BUYER
Buyer-Files Claims (If Any)
Pricing
Paid by Seller

3. Terms of Sale: F.O.B. Origin, Freight Prepaid and Charged Back

Arrangements
Seller-Pays Freight Charges
Title
Passes to Buyer Buyer-Bears Freight Charges
Buyer-Owns Goods in Transit
Buyer-Files Claims (If Any)
SELLER BUYER
Freight Charges then Collected from Buyer
Paid by Seller... by Adding Amount to Invoice

4. Terms of Sale: F.O.B. Destination, Freight Collect

Buyer-Pays Freight Charges
Title
Passes to Buyer Buyer-Bears Freight Charges
Seller-Owns Goods in Transit
Seller-Files Claims (If Any)
SELLER BUYER

Freight Charges
Paid by Buyer

5. Terms of Sale: F.O.B. Origin, Freight Prepaid (Delivered)

Freight Charges Seller-Pays Freight Charges
Title
Paid by Seller Passes to Buyer Seller-Bears Freight Charges
Seller-Owns Goods in Transit
Seller-Files Claims (If Any)
SELLER BUYER

6. Terms of Sale: F.O.B. Destination, Freight Collect and Allowed

Title Buyer-Pays Freight Charges
Passes to Buyer Buyer-Bears Freight Charges
Seller-Owns Goods in Transit
SELLER BUYER Seller-Files Claims (If Any)
Freight Charges
Paid by Buyer...
then Charged to Seller by 3-26
Deducting Amount from Invoice
ZONE PRICING
 a single price within a geographic area,
eg. postage

SINGLE/UNIFORM PRICING
 a single price for all customers
regardless of location, eg., newspapers
QUANTITY DISCOUNT

 lower per-unit cost for a greater amount

of goods handled in one transaction, eg.
soft drink, rice
 logistics costs, especially transportation
costs, have well-known volume-cost
breaks
 Per-Case Logistics Costs as a Justification
for Price Discounts

Total per-case costs

(transport + inventory +
order processing and
Logistical costs ($/case)

Less than handling costs)

truckload

Per-case inventory
carrying costs
Truckload

Rail carload
Transport costs
Per-case order processing and handling costs
0 100 200 300 400
Quantity purchased (cases)
3-29
THE END

1-30