LOGISTICS MANAGEMENT

Chapter 3: Forecasting and Order

Management
 Reference

▪ Prescribed textbook:
Coyle, J. J., Langley, C. J. & Bardi, E. J. 2003, The Management of Business Logistics: A Supply Chain
Perspective, 7th edn, Thomson Learning, Canada.
▪ Reference textbook:

Bloomberg, D.J., Murray, A. and Hanna, J.B. 1998, The Management of Integrated Logistics: A Pacific Rim
Perspective, 2nd edn, Sprint Print, Prentice-Hall.
Bowersox, D.J. Closs, D.J. and Cooper, M.B. 2002, Supply Chain Logistics Management, McGraw-Hill/Irwin,
New York.
Christopher, M. 1998, Logistics & Supply Chain Management, 2nd edn, Pearson Education. Essex.
Cooper, J. 1994, Logistics & Distribution Planning, Kogan Page, London.
Coyle, J.J., Bardi, E.J. and Langley, C.J. 2003, The Management of Business Logistics, West Publishing
Company, New York.
Greasley, A. 2006, Operations Management, John Wiley & Sons Ltd, Chichester, England.
Johnson, J.C. 1999, Contemporary Logistics, Prentice Hall, Upper Saddle River, N.J.
Stock, J.R. and Lambert D.M. 2001, Strategic Logistics Management, 4th Edn, Irwin/McGraw-Hill, Boston.
Rushton, A., Croucher, P. and Baker, P. 2006, The Handbook of Logistics and distribution Management, 3rd
edn, Kogan Page, UK.
Lambert, D. M., Stock, J. R. and Ellram, L. M. 1998, Fundamentals of Logistics Management, McGraw Hill,
USA.
▪ List of additional readings:
Zissis, D., Aktas, E. and Bourlakis, M. 2018, ‘Collaboration in urban distribution of online grocery
orders’, The International Journal of Logistics Management, Vol. 29, No. 4, pp. 1196 – 1214.
 Content

3.1 Customer order processing

3.2 Environmental scanning
– The environments
– Approaches to scanning
3.3 Logistics-needs forecasting
3.4 Lead time under certainty and uncertainty
3.5 Enhancing forewarning of demand
 3.1 Customer order processing

• Demand-side Logistics – Outbound system

• Order Cycle and Order Processing
Demand-side Logistics – Outbound system

Flow of information

Manufacturing/
Supplier Customer
production
Flow of materials/goods
Demand-side Logistics – Outbound system (C)

• Elements of demand side logistics :

– To increase levels of customer service, significant
emphasis is placed on outbound logistics systems
– Understanding customer demand
– Estimating demand
– Meeting the demand with a high level of customer
service
– Efficiency with respect to cost management
– Forecasting demand and logistics support
Demand-side Logistics – Outbound system (C)

• Main concerns :
– How do we know what the customers want?
– How do we satisfy our customers?
– How do we ‘influence sale’ or create demand for our goods?
– How do we manage these at minimum cost?
• Lack of communication between departments results in
little or no coordinated response to demand information
• Too much emphasis is often placed on forecasts of
demand with little attention paid to collaborative efforts
and strategic and operational plans that need to be
developed from the forecasts
Demand-side Logistics – Outbound system (C)

• Demand in logistics are of two types:

– Push type
– Pull type

• In both
– Important elements of competitiveness are ORDER
CYCLE time and ORDER PROCESSING
 Order Cycle and Order Processing

• Order cycle
– Traditionally includes those activities that occur from the time
an order is placed to the time it is received by the customer
• Order processing
– Activities associated with fulfilling a customer order
– May take up to 60-70% of the total order cycle time in many
industries
– The core of logistics activity: receipt of the customer order is
the trigger that sets into motion all logistics functions that
culminate in the delivery of the product to the customer
– Of prime importance to good order processing is a good flow
of communications
 Order Cycle and Order Processing (C)

• Order management system:

– Order-management systems represent the principal
means by which buyers and sellers communicate
information relating to individual product orders

– Effective order management is key to operational

efficiency and customer satisfaction

• Why?
• Implications?
 Order Cycle and Order Processing (C)

• The processing of a customer’s order goes

through a few well-defined phases

Source: Coyle et al. (2003)

 Order Cycle and Order Processing (C)

• Order management functions:

Source: Coyle et al. (2003)

 Order Cycle and Order Processing (C)

• For the company: the time to fulfil the

customer’s order is from the time the order is
received and entered into their system till the
time it is shipped
• However, for the customer, the time to fulfil the
order is from the time the order is sent till the
time the product or service is received
• Order cycle or lead time and Replenishment
cycle: the cycle of a firm is another cycle of the
other
 Order Cycle and Order Processing (C)

• Major components of the Order Cycle:

Source: Coyle et al. (2003)

 Order Cycle and Order Processing: Order
Placement

• Order placement time can vary significantly

• Improvements in order-placement systems and

processes offer great opportunities to reduce
order cycle length

• What measures would you think beneficial to

improve order placement time?
 Order Cycle and Order Processing: Order
Placement (C)

• Order placement methods seem to be changing

to accommodate new technologies

Source: Coyle et al. (2003)

 Order Cycle and Order Processing: Order
Processing

• This usually involves:

– Checking customer credit
– Transferring information to sales records
– Sending order to the inventory & shipping areas
– Preparing shipping documents
• Many of the above activities can occur
simultaneously thru effective use of IT
• Technology such as bar code order entry can
reduce error and expedite processing time.
– Ex.: Book order
 Order Cycle and Order Processing: Order
Processing (C)

• Factors affecting Order Processing time:

– Processing priorities
– Parallel versus sequential processing
– Order-filling accuracy
– Order batching
– Lot sizing
– Shipment consolidation
 Order Cycle and Order Processing: Order
Preparation

• A set of physical activities to prepare the order

– Acquisition through production, purchasing or
retrieval
– Packing, labelling, etc.
– Shipment scheduling and shipping documentation
completion, etc.
• Order preparation may be simple or complex
depending on type of commodity
• Advance information of composition of
individual shipments, e.g. real-time information
systems, is highly desirable
 Order Cycle and Order Processing: Order
Preparation (C)

• Order processing rules affect order preparation

speed (Ballou 1999):
– First-received, first-processed
– Shortest processing time first
– Specified priority number
– Smaller, less complicated orders first
– Earliest promised delivery date
– Orders having the least time before promised
delivery date
 Order Cycle and Order Processing: Order
Shipment
• Shipment time is from order placed upon transport
vehicle until it is received & unloaded at buyer’s
location
• Order shipment time may be affected by external
element, i.e. choice of carriers, modes, etc.
• Advance shipment notification and real-time shipment
positioning & delivery are highly desirable
– Ex: Internet-based track & trace functions of liner shipping
companies
• Precisely-planned and well-executed transport
capability help to reduce time of fulfilling customer
orders
Order Cycle and Order Processing: Length and
Variability of Order Cycle
• Any reduction in length of any order cycle components
provides more time for planning (for manufacturer) &
shortened order cycle time (for buyer)
• Passing time-saving in order cycle time to customers
makes manufacturer of great value in the marketplace.
Why?
• Variability in order cycle time directly affects level of
safety stock carried by customers
• Ideal improvement is to have shortened order cycle time
& improved reliability
• What can component(s) of order cycle time offer much
improvement, and how?
Order Cycle and Order Processing: Length and
Variability of Order Cycle (C)

Source: Coyle et al. (2003)

Order Cycle and Order Processing in the time of E-
Commerce
COMMUNICATION NETWORK - INFORMATION SUPERHIGHWAY

Orders: Logistics Orders:

Confirmation provider Confirmation
Shipment notice Shipment arrival
Distributor
Shipment status Shipment status

Suppliers Products Customers

Source: Ballou (1999)
Order Cycle and Order Processing in the time of E-
Commerce (C)

• The fundamental requirement is collaboration of

all supply chain partners to eliminate costs
associated with inefficient movement of goods,
redundant practices and processes, and excess
inventory
• Effective collaboration fosters not only
efficiency & effectiveness but also ability to
change when needed
– Ex: September 11th event, US West-coast port
closure, etc.
 3.2 Environmental Scanning

• Why environmental scanning?

• Events & situations in the global, market or company
environments will have an impact on the efficient filling
and dispatching of orders for customers
• Environmental scanning, therefore, is a logistics activity
that, done well, can enhance the order processing
function
• Moreover, such events and situations can seriously
affect all of the activities of a company, and the logistics
manager must be constantly aware of the nature of the
environment in which the business is operating and be
ready to adjust product movement as required
 Environmental Scanning: The Environments

• The global, or macro, environment

• The competitive, or market, environment

• The company, or micro, environment

Environmental Scanning: The Environments (C)

• The global, or macro, environment:

– sets the tone for the wider operations of the industry
– Events may have profound impacts on enterprises:
• According to OECD, immediately following the Limberg attack in
2002 off the coast of Yemen, underwriters tripled insurance premiums
for vessels calling on Yemeni ports. These premiums, reaching as
much as USD 300,000 per vessel (and USD 250 per TEU), led some
lines to cut Yemen from their schedules and/or switch to ports in
neighbouring countries. Terminals in Yemen saw throughout plummet
(from 43,000 TEU in September 2002 to 3,000 TEU in November
2002) and have had to lay off workers. Local sources claim that as
many as 3,000 people have lost their jobs and government estimated
losses stemming from attack are USD 15 million per month.
Environmental Scanning: The Environments (C)

• The global, or macro, environment:

• The OECD estimated that during the 11-day closure at the
29 major US West Coast ports in September/October 2002,
port management projected losses of approximately USD
19.4 billion with costs increasing exponentially as time
went on. This estimate did not cover costs borne by non-
American ports and manufacturers faced with container
back-logs and increased warehousing costs. Analysts also
estimate a month-long disruption at US West Coast ports
would lower Asian export receipts by up to 0.4% of GDP,
in which the negative impact in Hong Kong, Singapore and
Malaysia was estimated to be as high as 1.1% of GDP. The
incident also posed the threat to US$ 2.5 billion of
Australian meat and wine exports to the United States.
Environmental Scanning: The Environments (C)

• The global, or macro, environment:

• The Bali bombing devastated tourism to Indonesia, reducing GDP in
2002 by 1%, which does not include the cost of lost investment and
business activities;
• A recent study in the US found that if business were required to
increase inventories by 10% and pay 20% more in commercial
insurance premiums the total cost would be US$ 37.5 billion per
annum;
• A study of over 200 countries from 1968 to 1979 found a doubling of
the number of terrorist incidents decreased bilateral trade between the
targeted economies by 6%;
• The terrorist threat in Spain between 1975-1991 reduced average
annual FDI in Spain by 13.5%.
• Industry experts have estimated that the total costs of extra security
measures implemented after the 11 September event could amount to 1
to 3 percent of the value of traded goods. A study of trade effects of
September 11 also estimated that world trade declined by US$ 75
billion per year for each 1% increase in costs to trade from programs to
tighten border security.
Environmental Scanning: The Environments (C)

– Events such as terrorism and the spectre of terrorist acts create

uncertainty which increases perceived risk and negatively
affect supply chain
• there are indirect costs to a supply chain without security confidence
• such a supply chain may be less cost-efficient due to higher freight and
insurance rates
• companies without security confidence may have to abandon JIT or
lean inventory processes, apply a higher inventory level policy to
safeguard against unexpected security breaches and supply chain
disruption
• increased inspections would likely add cost to the final product, cause
delays, and thus lengthening the time it takes goods to the market
• Ex: after Sep 11th, Ford shut down five of its U.S. plants, in part
because the company could not get enough engines parts from
suppliers in Canada due to delays at border
Environmental Scanning: The Environments (C)

• The competitive, or market, environment:

– It responds to the global environment as well as to
events occurring within the industry
– Ex: there is the advent of ever larger container ships
in increasing numbers. The supply of such ships has
far exceeded demand and has seriously impacted on
rates. Implications on users & industry?
– There are two trends that emerge from a general
environment of high costs and uncertain global
market conditions —specialisation and out-sourcing
of operations. Implications again?
Environmental Scanning: The Environments (C)

• The competitive, or market, environment:

– For example, what could be the key factors that can
impact on a supermarket as a result of increased
specialisation in all its suppliers?
• The company, or micro environment:
– The logistics manager must be aware of the
company’s abilities and constraints
– These are crucial for planning and executing the
numerous functions and processes that a company
carries out
Environmental Scanning: Approaches to Scanning

• Three main approaches to scanning:

– Formal research: carried out for a specific purpose
with a specified budget, following a predetermined
plan and methodology, and with outcomes in mind
– Informal research: carried out in an unstructured way
but with a defined purpose
– Casual information collection: has no definition or
structure and the information collected is general
rather than specific
Environmental Scanning: Approaches to Scanning
(C)

• Information about the environment can be collected

through various means, including canvassing employees
who interact with the customers, vendors and
subcontractors or through consultants
• Each of these will provide information of different
kinds, all of which should be used to substantiate or
counterbalance what is already known, as well as
discover developments
• One of the important contributions environmental
scanning makes is towards making forecasts
 3.3 Logistics-needs Forecasting

• The need to know what quantity of any product

or commodity will be required is important
because it affects all the processes involved in
the logistics chain, from sourcing through to
consumption by the customer
• Forecasting demand means defining all the
requirements to make the product reach the
market
Logistics-needs Forecasting: What are forecasted?

• Level of inventory to be maintained

• Allocating money and material resources to
various markets that have to be serviced
• Planning activities that will service the demand
• Replenishment and delivery times
• Etc.

• While all the activities named above must be

carried out, that should be done at optimal cost
Logistics-needs Forecasting: Forecasting Process

1. Identify the 2. Collect 3. Plot data and

purpose of forecast historical data identify patterns

4. Select a forecast model that 5. Develop / compute forecast for 6. Check forecast accuracy
seems appropriate for data period of historical data with one or more measures

8b. Select new forecast model or

adjust parameters of existing model

7.
Is accuracy
of forecast
acceptable?

8a. Forecast over 9. Adjust forecast based 10. Monitor results and
planning horizon on additional qualitative measure forecast accuracy
information and insight

Source: Ballou (1999)

Logistics-needs Forecasting: Some Forecasting
Methods

• Historical projection
– Moving average
– Exponential smoothing
• Causal or associative
– Regression analysis
• Qualitative
– Surveys
– Expert systems or rule-based
• Collaborative
Logistics-needs Forecasting: Time Series Methods

• Statistical methods using historical data

– moving average
– exponential smoothing
– linear trend line
• Assume patterns will repeat
• Naive forecasts
– forecast = data from last period
Logistics-needs Forecasting: Time Series Methods
(C)

Typical Time Series Patterns: Random

250

200
Sales

150
Actual sales
100 Average sales

50

0
0 5 10 15 20 25
Time
Source: Ballou (1999)
Logistics-needs Forecasting: Time Series Methods
(C)
Sales
Typical Time Series Patterns: Lumpy

Time
Source: Ballou (1999)
Logistics-needs Forecasting: Time Series Methods
(C)

• Can a time series be reasonably forecasted?

– Often depends on the time series’ degree of variability
• If the time series is regular - FORECAST
• If the time series indicates LUMPY demand - use other
techniques
• Time series forecasting methods:
– Moving average
– Weighted moving average
– Exponential smoothing and
– Variations of exponential smoothing for correcting trend and
cyclical movements
Logistics-needs Forecasting: Time Series Methods
(C)

• Moving Average method:

– The simplest method
– Assumes that the time series has only a level
component plus the random element
– Average several periods of data
– Dampen, smooth out changes
– Use when demand is stable with no trend or seasonal
pattern
Logistics-needs Forecasting: Time Series Methods
(C)
• Moving Average method: Example 3-Month
Moving Average Forecasting
Total demand 3-month
Demand for during past 3 moving
Month, i month, i months average
. . . .
. . . .
. . . .
20 120 . .
21 130 360/3 120
22 110 380/3 126.67
23 140 360/3 120
24 110 380/3 126.67
25 130
26 ?

Source: Ballou (1999)

Logistics-needs Forecasting: Time Series Methods
(C)

• Regression Methods:

– Study relationship between two or more variables

– Dependent variable depends on independent
variable
Ex: y = ax + b
 Logistics-needs Forecasting (C)

• It is important to bear in mind that the only accurate

outcome of any forecast is that it is never 100 per cent
accurate!
• This has a direct impact on costs: the less accurate the
forecast, and the longer the lead time to production, the
more expensive the forecast errors
• While forecasts are being made as accurate as possible,
lead time is also being reduced as much as possible
• As lead times becomes shorter, forecasting becomes less
critical because companies can adjust output quickly to
respond to the market conditions
 Logistics-needs Forecasting: Actions when
Forecasting is not appropriate

• Seek information directly from customers

• Collaborate with other channel members
• Apply forecasting methods with caution (may
work where forecast accuracy is not critical)
• Delay supply response until demand becomes
clear
• Develop quick response and flexible supply
systems
Logistics-needs Forecasting: Managing highly
Uncertain Demand

• Delay forecasting as long as possible

• Prioritize supply by product’s degree of uncertainty
(supply to the more certain products first)
• Apply the principle of postponement to the most
uncertain products (delay committing to a final product
form until an order is received)
• Create flexible supply to changing demand (alter
capacity and output rates through subcontracting,
computer technology, multi-purpose processes, etc.)
• Be able to respond quickly to uncertain demand levels
 Logistics-needs Forecasting Categories

• Long-term (≥ 3 years):
– used for long-term planning and strategic issues
– aimed at sections of the market and are linked to capacity and cost
– may also look into other key corporate resources including production
capacity, resource allocation and inventory asset levels
• Mid-range forecast (1 to 3 years):
– usually address budgeting and sales planning
– will also be linked to cost but to specific products rather than market
segments
– The first year in a multiyear forecast is usually by month, with subsequent
years quarterly
• Short-term (≤ 1 year):
– most important to the operational logistics planning function
– predict demand several months into the future and focus more on short
time intervals
3.4 Lead-time under Certainty and Uncertainty

• It is important to reduce lead time so as to reduce

inventory and uncertainty
• When demand is consistent, the lead time and
quantity of product demanded are known.
Inventory needs to be maintained at cycle stock
level
– Ex: if the corner shop sells 20 pots of honey every
fortnight, regularly, then the beekeeper only needs to
have 20 pots available every fortnight
• When there is uncertainty in demand or lead
time, a safety stock needs to be maintained
 Lead-time under Certainty and Uncertainty

• As forecasting is seldom, if ever, accurate, demand can

hardly ever be predicted with absolute certainty
– Ex: transport delays and uncertainties make lead times equally
variable
• To protect against these variables and prevent stock-
outs, management must decide on maintaining safety
stocks at a certain percentage of regular stocks
• In addition, reorder levels will have to be identified and
processes put in place to arrange timely delivery of
stock
 3.5 Enhancing Forewarning of Demand

• It is desirable to get as much forewarning as

possible of customer’s demand to be able to
bring the logistics lead time as close to it as
possible
• There are two ways of doing this:
– Get information on customer needs faster, before
orders are placed
– Understand reorder points of customers, to pre-empt
orders
 Enhancing Forewarning of Demand - EPOS

• Electronic Point of Sale

• The electronic till is linked to the inventory level
and sensitive data monitoring identifies customer
behaviour
• If articles are being purchased faster than
normal, reorder points are adjusted to prevent
stock-out situations
• Getting such information allows the supplier to
be prepared for changes in orders and be able to
source supplies in time
 Enhancing Forewarning of Demand - ERP

• Enterprise Resource Planning

• This system records all transactions, produces
and executes orders and follows payments
• It can schedule all procurement and distribution
activities
• ERP is based on computing and IT for data
collection and information processing
• Organisation-wide computing and data collecting
functions are linked into the system and this data
can be shared with suppliers and customers