Logistics Management Finals Reviewer
Services
Module 4: Customer Accommodation
Who is the customer?
• From perspective of the total supply chain
o End user of product in consumer market
o Customer company in business market
• From perspective of specific firm within a
supply chain
o Intermediate customer organizations
exist between the firm and end users
• From perspective of a logistics manager
o Any delivery location – for example,
consumer homes, retail, or wholesale
businesses, receiving docks of
manufacturing plants, warehouses, etc.
Basic Principles of the Marketing Concept
• Customer needs and requirements are more basic
than products and services.
• Different customers have different needs and
requirements.
• Products and services become meaningful only
when available and positioned from the
customer’s perspective.
• Profit is more important than sales volume
Transactional vs. Relationship Marketing
• Transactional Marketing
o Is a traditional strategy with a focus on
creating successful individual
transactions between the company and its
customers.
• Relational Marketing
o Is a new strategy with a focus on the
development of long-term relations with
key supply chain participants in an effort
to develop and retain long-term
preference and loyalty.
Relationship Marketing to a Segment of One
• Micromarketing or one-to-one marketing
recognizes that each individual customer may
indeed have unique requirements
o Example: Walmart and Target are both
mass merchandisers, but their
requirements to interact logistically with
suppliers differs significantly
• One-to-one relationships can
o Significantly reduce transaction costs
o Better accommodate customer
requirements
o Move individual customer transactions
into a matter of routine
Three to Overcome to Enable Exchange of Goods and
• Discrepancy in space refers to the fact that the
location of production activities and location of
consumption are seldom the same.
• Discrepancy in time refers to the difference in
timing between production and consumption.
• Discrepancy in quantity and assortment refers
to the mismatch between customer demand and
manufacturing supply.
o Customers seek small quantities and
wide assortment.
o Firms specialize in large quantities of a
limited assortment.
Four Generic Supply Chain Service Outputs
Eliminate Discrepancies
• Spatial convenience is the amount of shopping
time and effort that will be required on the part of
the customer.
• Lot size is the number of units to be purchased in
each transaction.
• Waiting time is the amount of time the customer
must wait between ordering and receiving
products.
• Product variety and assortment differs by
supply chain.
o Supermarkets may have over 35,000
items on the shelves.
o Warehouse stores generally stock 8,000
to 10,000 items with only one brand and
size of an item.
o Convenience stores may stock only a few
hundred items.
Omnichannel Marketing
• Describes an approach by which a firm markets
to customers through a variety of channels
o Example: online, brick-and-mortar
facilities, telephone, etc.
• Different channels offer different mixes of the
generic supply chain service outputs.\
Three Levels of Customer Accommodation
• Supply chains provide a mix of services, both
generic and custom, in order to accommodate a
range of customer requirements.
• Each service mix can be configured to achieve
one of the following levels of customer
accommodation.
o Customer service
o Customer satisfaction
o Customer success
Customer Service Provides Customers Service Reliability – A Firm’s Ability to Perform All
Order-related Activities
• With the right amount
• Of the right product Service reliability involves:
• At the right time
• Combination of logistics attributes beyond
• At the right place
simply availability and operational performance.
• In the right condition o Damage-free measures how many
• At the right price shipments arrive without damaged
• With the right information products.
Fundamental Elements of Customer Service o Error-free invoices measures what
percentage of invoices contain no errors.
• Availability o Shipment matches order measures how
o Fill rates many shipments contain the exact
o Stockout frequency amount of product ordered
o Orders shipped complete o Shipped to correct location measures
• Operational performance how many shipments are made to the
o Speed customer’s selected location.
o Consistency • Capability and willingness to provide customers
o Flexibility with accurate information regarding operations
o Malfunction recovery and order status.
• Service reliability
The Perfect Order – The Ultimate in Logistics Service
o Damage free
Levels
o Error-free invoices
o Shipment matches order • The Perfect Order is an order that is:
o Shipped to correct location o Delivered complete
o Etc. o Delivered on time
Availability – The Capacity to Have Inventory when o Delivered at the right location
o Delivered in perfect condition
Desired by a Customer
o Delivered with complete and accurate
• Fill rate measures the magnitude or impact of documentation
stockouts over time. • This requires the total order cycle performance to
• Stockout occurs when a firm has no product be executed with zero defects.
available to fulfill customer demand.
Example of Zero-defect Performance Measurement
• Orders shipped complete requires shipping
everything that a customer orders to count as a • Consider an order cycle that achieves the
complete shipment. following performance levels for shipments:
o 97% delivered complete
Operational Performance – Deals with Time Required
o 97% delivered on time
to Deliver a Customer’s Order
o 97% delivered in perfect condition
• Speed of the performance cycle is the elapsed o 97% delivered with correct
time from when a customer established a need to documentation
order until the product is delivered. • Probability that any order will be delivered with
• Consistency of the order cycle is measured by the no defects is only 88.5%.
number of times that actual cycles meet the time o P(zero defects) =0.97 * 0.97 * 0.97 * 0.97
planned for completion. = 0.885
• Flexibility is a firm’s ability to accommodate • Therefore, the probability that any order has a
special situations and unusual or unexpected problem is 11.5%.
customer requests.
• Malfunction recovery is a firm’s ability to quickly
implement contingency plans when a failure
occurs in the supply chain.
The Basic Service Platform – A Commitment to Customer Expectations for Logistics Performance
Perform Each Basic Element at a Given Level
• Reliability
• Service Platform for Customer A • Responsiveness
o Availability level → Medium • Access
o Operational performance → High • Communication
o Service reliability → Above average • Credibility
• Service Platform for Customer B • Security
o Availability level → Low • Courtesy
o Operational performance → Medium • Competency
o Service reliability → Average • Tangibles
• Knowing the customer
Satisfaction and Quality Model

How Much Basic Service Should the Supply Chain

Provide?
• Many firms establish their basic service platforms
using two factors.
o Competitor or industry acceptable
practice Gaps Managers Must Fill to Satisfy Customers
▪ Minimum and average service
performance levels have • Gap 1: Knowledge
emerged in most industries o Reflects management’s lack of
o Firm’s overall marketing strategy knowledge or understanding of
▪ High service levels are needed to customers
compete on the basis of logistics • Gap 2: Standards
competency. o Exists when internal performance
▪ Low service levels are more standards do not adequately reflect
common when competing on the customer expectations
basis of price. • Gap 3: Performance
• Zero-defect approach is not taken across the o The difference between standard and
board for all customers. actual performance
• Establish internal performance standards for each • Gap 4: Communications
service component to reflect industry practice, o Overcommitment or promising higher
cost, and resource requirements. levels of performance that can actually be
provided
What is Customer Satisfaction? • Gap 5: Perception
• Expectancy disconfirmation states that if a o Customers sometimes perceive
customer’s expectations of a supplier’s performance to be higher or lower than
performance are met or exceeded, the customer actually achieved.
will be satisfied. • Gap 6: Satisfaction/Quality
o If Perceived Performance > o When one or more gap exists, customer
Expectations, then Satisfaction. perception is that performance does not
o If Perceived Performance < meet expectations.
Expectations, then Dissatisfaction.
• “Customers will be satisfied if a supplier meets or
exceeds the customer’s expectations.”
Increasing Customer Expectations
• Performance that meets customer expectations
one year may result in extreme dissatisfaction
next year.
• Competition in an industry will often raise the
minimum standards that customers expect.
o For example, Federal Express introduced
real-time tracking of shipment status.
o In response, UPS and other parcel
delivery firms added this service to their
platform. Achieving Customer Success Requires Knowledge of
Individual Customer Requirements
Not all customers have the same requirements
• Know your customers’ processes.
• Determine how your capabilities can enhance
your customers’ performance.
• Extend the supply chain boundaries to include
next destination customer requirements.
• Introduce new performance metrics.
• Develop value-added services for select
customers.
Why Customer Satisfaction is NOT Sufficient
Customer Success Requires Comprehensive Supply
• Satisfied customers may not be happy with the
Chain Perspective
supplier’s performance.
o Customer satisfaction focuses on
expectations, not a customer’s real
requirements.
• Considerable research suggests that “satisfied”
customers still are likely to defect.
• What satisfies one customer may not satisfy
other, much less all, customers.
o There is a tendency by companies to
treat all customers as being equal and
identical.
Low Expectations Always Result in Satisfied Value-added Services are a First Step in Achieving
Customers Customer Success
• Value-added services refer to unique or specific
activities that firms can jointly develop to
enhance their efficiency, effectiveness, and
relevancy.
• Transportation carriers, warehouse firms, and
other specialists may become intimately involved
to make value-adding activities a reality.
• For example, a retail customer may desire a
unique palletization alternative to support its
cross-dock activities for its individual stores.
o Each store requires different quantities of
specific products to maintain in-stock
performance with minimum inventory.
Developing a Customer Accommodation Strategy Module 5: Integrated Operations Planning
• Basic principle of supply chain logistics is that Supply Chain Planning Objectives
customers should be segmented based on their
service needs. • Developing a consistent forecast within the firm
• Supply chains must adapt to serve those • Balancing supply and demand within the firm
segments. • Exchanging demand and inventory availability
• Companies need: information with supply chain partners
o A framework for choosing the • Developing consistent inventory availability
appropriate customer-specific strategies plans throughout the supply chain
o Programs for customer relationship Supply Chain Planning Applications
management
• Demand planning – forecasting of unit sales by
Framework for Choosing Customer Accommodation geography and product
Strategy Using Profit Categories
• Production planning – development of a
manufacturing plan considering resource
availability
o Make-to-order (MTO)
o Assemble-to-order (ATO)
o Make-to-stock (MTS)
• Logistics planning – coordinating overall
movement demand, vehicle availability, and
transportation expense
Typical Customer Relationship Management • Inventory deployment – coordinating product
Extension System demand with the ability to produce and ship
product to the consumer
Planning Process Conflicts
Balancing Objectives

Customer Relationship Management Has Grown

Rapidly in Recent Years
Sales & Operations Planning (S&OP)
• Customer relationship management (CRM) is a
process for improving the overall performance of • An internal-to-firm demand collaboration process
a business by better understanding and where individuals from operations-focused and
anticipating the wants and needs of customers. customer-facing processes collaborate to develop
o In practice, companies and vendors use a coordinated plan for responding to customer
the term CRM to mean different things. requirements within the resource constraints of
• One CRM example – Procter & Gamble has the enterprise.
employees who live and work in the city of its • S&OP may also be used collaboratively across
largest customer, Walmart. enterprises.
• Logistics has primary responsibility for many of
the processes that drive value and customer
success.
S&OP Process
Collaboratively establishes a coordinated plan for
responding to customer requirements within the resource
constraints of the enterprise.
• Consider marketing and sales plans (including
innovation and pricing plans)
• Consider materials availability
• Prioritize plans and choices
• Evaluate and prioritize risks
• Set risk tolerances
• Manage, monitor, and control demand and supply
plan performance and variances
External Evaluation – Part of S&OP
• Measurements and functional goals on the
operations focused and customer-facing “side,”
including:
o Profitable customers
o Product mix priorities
• External trends and their impact on strategic plans
o Trends in customer demand
o Changes in technology
o Changes in competitive environment
o Changes in resource availability
S&OP Process
• Develop functional input (marketing, sales,
finance, and operations)
• Collaborate to develop common demand forecast
• Collaborate to determine resource availability
(supplies, raw materials, and capacities)
• Identify alternatives and assess trade-offs
• Review financial implications
• Review with executives to agree on common plan
• Execute plan
• Review results of plan
Making S&OP Work
• Executing the process every month
• Process ownership and clarity of roles and
responsibilities
• Organizational commitment to achieving high
forecast accuracy
• Focus on the next 3 to 12 months
• One plan that integrates the actions of the entire
organization
• Senior management decision making
• Measuring end-to-end supply chain performance
• S&OP forecast versus operating plan or budget
Benefits from S&OP
• Increases forecast accuracy
• Improves customer service and perfect order
percent
• Reduces cash-to-case cycle time
• Enhances gross profit margin
• Improves capacity utilization
Barriers to Effective S&OP
• Disconnect between S&OP and corporate
strategy
o e.g., transaction versus business focus
• Lack of senior management support/decision
• Unrealistic “single-number”
• Lack of commitment to regular meetings
• Short-term planning horizon/focus
• Biased “leader”
• Failure to consider product life cycle issues and
external business trends
• Failure to prioritize
• Lack of proper and consistent measures
APS System Overview
• Advanced Planning and Scheduling
o Focuses on component or item
o Considers network of plants, distribution
centers, and customers
o Requires links for lead times
• Sample APS planning situation
• APS system modules
APS System Components
• Demand management
• Resource management
• Resource optimization
• Resource allocation
o Available-to-promise (ATP)
o Capable-to-promise (CTP)
Internal Integrative Management – The Challenge of Stationary vs. Dynamic Demand
Functional Boundaries
• Stationary demand
The Great Divide o Reasonably stable and doesn’t fluctuate
o May be deterministic (constant) or
probabilistic (limited variability)
• Dynamic demand
o Highly variable and driven by
unpredictable events such as weather or
Why is balance so hard to achieve? political events.
o Typically, highly probabilistic
Supply and demand “sides” have different objectives!
Single vs. Multi-echelon Demand
Operations-Focused Customer-Facing
Efficiency Effectiveness • Single-echelon demand
Cost-to-Provide Cost-to-Serve o Placed on a single stage distribution
Predictable demand Tailored service and system, such as customer to distribution
patterns is product offerings – center to plant.
assumed/desired flexibility o Typically, easier to forecast since there is
Cost Maximize service options only one level of forecast required.
reduction/containment • Multi-echelon demand
Operational plans/order Sales forecasts/sales o Placed against a multi-stage distribution
forecasts targets system, such as customer to local
distribution center to regional
distribution center to plant
Demand Types o Multi-stage systems are more difficult to
forecast since it is necessary to forecast
• Independent vs. dependent demand both the local and the regional
• Stationary vs. dynamic demand distribution center
• Single vs. multi-echelon demand
• Single-item vs. system demand Single-item vs. System Demand

Independent vs. Dependent Demand • Single-item demand

• Independent demand
o Characteristic of items purchased by end-
user (i.e., consumer)
o Typically, not under the control of the
firm
o Under minimal control by the firm
o Examples include consumer goods such
as food, electronics, and automobiles
• Dependent demand
o Characteristic of items used to assemble
other items
o Typically, driven by the production
schedule of the firm
o Under significant control by the firm
since the firm typically makes the
production schedule
o Examples include components for
automobiles and electron
o Most common and focuses on developing
a forecast and inventory control
parameters for individual items
o Inventory control parameters for each
item based on the service objectives and
the demand characteristics
• System Demand
o Focuses on developing forecast and
inventory control parameters based on
the need to keep a system (e.g., vehicle or
plane) operating
o Items that are critical for the operation of
the system provided a higher service
level than an item that is not critical for
operation.
Bill of Materials
Collaborative Planning, Forecasting,
Replenishment
• Coordinates the requirements planning process
between supply chain partners for demand
creation and demand fulfillment activities
• Steps:
1. Create a joint business plan where a
customer and supplier share, discuss,
coordinate, and rationalize their own
individual strategies to create a joint plan.
2. Create a joint calendar for planning
activities.
3. Create a common sales forecast.
4. Develop production, replenishment, and
shipment plans
Basic Relationships for CPFR in a Retail Situation
VICS CPFR Model
Retailer/Manufacturing Tasks
Rationale for Supplier Integration
• Identifying how suppliers can enhance customer
value
• Facilitating joint product innovation and
development
• Enhancing the relationship between firm and
supplier
Rationale for Customer Integration
• Facilitating customer segmentation with key
and
customers
• Allowing firms to customize products and
delivery capabilities with key customers
Forecasting
• Forecast is the specific definition of what is
projected to be sold, when, and where
• Forecasting is a critical capability
o Many logistics and supply chain
activities must be completed in
anticipation of a sale
• Forecasting achieves enhanced service or reduced
inventory
o Improve forecast accuracy
o Forecast at a higher level of aggregation
Forecasting Requirements
• Collaborative planning
o Without collaboration, each partner tries
to plan the level and timing of demand for
its customers, both individually and
collectively.
o Without a collaborative plan, the
supplier-customer combination typically
results in either inventory excess or
shortage. A collaborative forecast, jointly
agreed to by supply chain partners,
provides a common goal that can be the
basis for developing effective operating
plans.
• Requirements planning
o The plan determines inventory
projections and resulting replenishment
or production requirements for the
planning horizon.
• Resource management
o Manage critical supply chain processes
such as production, inventory, and
transportation.
Forecast Components
• Base - represents the long-term average demand
after the remaining components have been
accounted for
• Seasonal - an annually recurring upward and
downward movement in demand
• Trend - the long-range shift in periodic sales
• Cyclical - characterized by periodic shifts in
demand lasting more than a year
• Promotional - characterizes demand swings
initiated by a firm’s marketing activities, such as
advertising, deals, or promotions
• Irregular - includes the random or unpredictable
quantities that do not fit within the other
categories
Major Factors Influencing Forecasts
• Promotions
• Price changes
• Financial requirements
• Product substitution
• New product introductions
• Competitive actions
Forecast Management Process
How Product Characteristics Influence The Need to
Forecast
Forecasting Techniques
1. Moving Average
o Description: Unweighted average of the
previous periods sales
o Application: Useful when there are only
base and irregular demand components
o Limitations: Not useful when there is
significant seasonality or trend
2. Exponential Smoothing
o Description: Exponentially weighted
moving average using smoothing
constants to place greater weights on
more recent demands
o Application: Useful when necessary to
maintain data and generate forecasts for
many items which incorporate individual
trend and seasonality components
o Limitations: Not as useful when there are
other factors influencing demand, such as
promotions, price changes, or
competitive actions not regularly
scheduled
3. Time Series
o Description: Uses time period as the
independent variable to predict future
demand patterns
o Application: Useful when demand
patterns repeat with some cyclic,
seasonal, or trend components
o Limitations: Not particularly responsive
to change as it takes numerous periods
for the model to identify changes in
patterns and for the forecast to respond to
the pattern changes; also requires
judgment regarding selecting variables
that should be included
4. Regression
o Description: Uses other independent
variables, such as price, promotion plans,
or related product volumes to predict
sales.
o Useful when there’s a strong linear or
non-linear relationship between
independent variables and demand
o Not particularly responsive to change, as
it takes numerous periods for the model
to identify changes in patterns and for
forecasts to respond to the pattern
changes; also requires judgment with
selecting which variables to included
5. Multi-Variate
o Description: Uses more complex
statistical techniques to identify complex
demand history relationships, such as
spectral analysis, Fourier analysis,
transfer functions and neural networks
o Application: Useful with complex,
generally nonlinear, relationships
between historical patterns and demand.
Analyses identify and evaluate
alternative sets of parameters to
determine the best fit and use it to predict
future demand. Often more useful for
macro forecasts, such as energy
 consumption, economic growth, or
aggregate transportation.
o Limitation: While there are quantitative
factors for selecting the best model, there
is often substantial judgment involved as
well, so these techniques are often not
suited for detailed item-location time
period forecasts
Chapter 6: Procurement
• Procurement and manufacturing play a crucial
role in the complex network of an organization's
supply chain operations, influencing the overall
system dynamics and efficiency. This chapter
explores the complex interactions between these
vital tasks, illuminating their complex
interrelationships and intricate dance with
logistics operations. Following a perceptive
examination of total quality management, the
chapter delves deeper into the main goals and
significant elements of manufacturing and
procurement strategies, offering a thorough grasp
of their strategic significance within the context
of organizations.
The Quality Imperative
• Every organization prioritizes quality, especially
in a cutthroat market were failing to meet
expectations can have negative consequences.
Quality is hard to define, even though it
ultimately comes down to how customers view a
company, its goods, and services.
• The primary goal of supply chain logistics is the
timely and undamaged delivery of goods,
supported by necessary service elements. This
section delves into important facets of product
quality, exploring the nuances that help guarantee
the smooth and satisfactory flow of goods along
the supply chain.
Quality is Traditionally Looked at in Eight Different
Ways:
1. Performance: Performance refers to how well a
product or service meets or exceeds the specified
requirements and expectations. It is a measure of
functionality and efficiency.
2. Reliability: Reliability focuses on the
consistency of performance over time and in
various conditions. It measures the likelihood of
a product or service functioning without failure.
3. Durability: Durability evaluates the lifespan and
robustness of a product. It assesses how well a
product can withstand wear and tear, usage, and
environmental conditions.
4. Conformance: Conformance refers to how well
a product or service adheres to established
standards and specifications.
5. Features: Customers often associate more
features with higher quality. For instance, a TV
with remote control, picture-in-picture, and on-
screen programming is perceived as better than a
basic model without these features.
6. Aesthetics: The visual appeal and materials used
in a product influence its perceived quality. For
instance, in clothing, cashmere sweaters are seen
as higher quality than polyester ones. In
automobiles, leather seats and wood/metal details
convey higher quality compared to plastic and
cloth interiors.
7. Serviceability: The ease of fixing or repairing a
product is important to some customers. Products
with diagnostic capabilities or easy repair options
are seen as higher quality. Customers prefer items
or brands that can be quickly repaired at minimal
cost.
8. Perceived Quality: Ultimately, a customer's
perception of how well a product meets their
needs determines its quality. It's a combination of
the eight dimensions (including the ones
mentioned above) blended by a company and
perceived differently by each customer.
Total Quality Management
• Is a comprehensive approach to management that
aims to improve the quality of products and
services through continuous refinement of
processes, involvement of all employees, and a
focus on customer satisfaction
Procurement Importance
• Procurement used to be just about buying things
at the lowest price, but now it's much more.
Organizations, whether they make things or sell
them, focus on not just saving money but also
building good relationships with the people they
buy from. This new way of thinking about
procurement helps companies save a lot of money
and do their jobs better.
Procurement Objectives
• Companies are changing how they think about
buying things (procurement). It's now seen as a
crucial part of how well an organization operates.
Instead of just haggling over prices, the focus is
on making sure the company can smoothly carry
out its plans with the help of its suppliers. This
includes making sure they always have what they
need, minimizing excess inventory, improving
quality, accessing new technology and ideas, and
spending the least amount of money overall. In
simple terms, it's about building a good
relationship with suppliers to help the company
run efficiently
Continuous Supply
• Stockouts of raw materials or component parts
can shut down or force a change in production
plans, resulting in unexpected cost. Downtime
due to production stoppage increases operating
costs and may result in an inability to provide
finished goods as promised to customers. Imagine
the chaos that would result if an automobile
assembly line had all parts available but tires.
Minimum Inventory Investment
• Maintain supply continuity with the minimum
inventory investment possible. This requires
balancing the costs of carrying material against
the possibility of a production stoppage. The
ideal, of course, is to have needed materials arrive
just at the moment they are scheduled to be used
in the production process, in other words, just-in-
time (JIT).
Quality Improvement
• Buying the right stuff is super important for any
business to make good products or services. If a
company uses bad-quality things to make stuff,
the final product won't be as good as customers
expect. So, getting high-quality materials through
procurement helps make sure the end product
meets the standards customers want.
Technology and Innovation
• Firms look to suppliers as sources of innovation
and new technology to aid in the design of new
products and the improvement of existing ones.
Lowest Total Cost of Ownership
• Involves strategic supplier selection, negotiation
for favorable terms, and continuous supplier
relationship management. By leveraging
economies of scale, embracing technology for
process efficiency, and implementing effective
risk mitigation strategies, organizations can
minimize procurement costs over the long term.
This comprehensive approach ensures cost-
effectiveness while maintaining the quality and
reliability of the procured goods and services.
•
Procurement Strategy
• Developing an effective procurement strategy
involves a comprehensive plan to acquire goods
or services in the most cost-effective and efficient
manner while ensuring quality, reliability, and
compliance with organizational goals.
Insourcing VS. Outsourcing
• Insourcing refers to keeping certain business
functions or processes within the company rather
than seeking external sources.
• Outsourcing involves hiring external parties or
vendors to perform certain business functions or
tasks instead of handling them in-house.
Alternative Procurement Strategies
• Alternative procurement strategies refer to
different approaches or methods that
organizations can use to acquire goods, services,
or projects. The choice of procurement strategy
depends on various factors, including the nature
of the project, the organization's goals, and the
external environment.
Alternative Procurement Strategies Routine Purchases
1. User Buy: The simplest approach to procurement • Routine purchases are typically items that involve
is to allow users in the organization to determine a low percentage of a firm’s totally spend and
their own purchase needs, evaluate sources of involve very little supply risk
supply, and execute the purchasing process. o Example: Each department identifies its
2. Volume Consolidation: An important step in office supplies needs, including pens,
developing an effective procurement strategy is paper, notepads, and other consumables.
volume consolidation, a procurement strategy
accomplished through a reduction in the number
of suppliers.
3. Supplier Operational Integration: Operational
integration occurs when buyers and sellers begin
to integrate their processes and activities in an
attempt to achieve substantial performance
improvement.
4. Value Management: Achieving operational
integration with suppliers creates the opportunity
for value management. Value management is an
even more intense aspect of supplier integration,
going beyond a focus on buyer-seller operations
to a more comprehensive and sustainable Bottleneck Purchases
• Bottleneck purchases represent a unique
procurement problem
Leverage Purchases
• Like routine purchases, leverage purchases
involve little supply risk. The items are generally
commodities where many alternative sources of
supply exist.
Critical Purchases
• Typically the strategic items and services that
involve a high level of expenditure and are vital
Procurement Strategy Portfolio to the organization’s success.

• A key step in determining procurement strategies, Logistical Interface with Procurement

then, is to understand exactly what the firm is • Procurement may also provide an organization's
currently buying (or planning to buy) and how logistical linkage with customers as many
much is actually being spent on each purchased organizations have turned to outsourcing
item or service. logistical services. Justin-time, logistics
Spend Analysis outsourcing, and performance-based logistics
represent three critical aspects of the interface
• Is a tool that identifies how much is being spent between logistics and procurement within an
on each type of product or service across all organization.
locations in the firm.
o Example: A medium-sized company
wants to assess its spending on office
supplies to identify potential cost-saving
opportunities and streamline
procurement processes.
Just-in-Time
• The implications of JIT are numerous. Obviously,
it is necessary to deal with suppliers who have
high and consistent levels of product quality.
Absolutely reliable logistical performance is
required and eliminates, or at least reduces, the
need for buffer stocks of materials. JIT generally
requires more frequent deliveries of smaller
quantities of purchased inputs, which may require
modification of inbound transportation. Clearly.
to make JIT work, there must be very close
cooperation and communication between the
buying organization and suppliers.
Procurement of Logistics Services
• Refers to the process of acquiring external
assistance or support for managing various
aspects of the transportation, storage, and
distribution of goods or products within a
business's supply chain.
• Direct spend and Indirect spend
Performance-Based Logistics
• Performance-Based Logistics (PBL) changes
how the military works with suppliers. Before,
they'd specify what to make and pay based on the
quantity produced. Now, PBL focuses on desired
outcomes— like durable vehicles or efficient
equipment—letting suppliers figure out how to
achieve these goals. This approach boosts quality
while saving money because it's about results, not
micromanaging production steps. By outlining
needs instead of dictating methods, PBL lets
suppliers find innovative, cost-effective ways to
meet requirements, shifting away from strict
instructions to focusing on desired results.
Manufacturing
• A substantial number of firms in the supply chain
are involved in the manufacturing of products.
They convert raw materials, parts, and
components into finished products to meet the
needs of their customers
Manufacturing Processes
• There are four basic manufacturing process
structures that differ in terms meeting a firm ’ s
production requirements related to the volume of
output required and the variety of products that
can easily be produced by the process structure.
Companies that require high volume production
of a small variety of products are not likely to use
the same basic processes as those that produce
small quantities of many different products. The
basic process also differs with respect to the
manufacturing cost per unit and other critical
issues such as the degree of capital investment,
customer involvement, and the use of generalized
versus specialized equipment.
4 Manufacturing Processes
1. Job Shop Process: A job shop process provides
high flexibility to produce a variety of different
products, but in limited volumes. Each customer
order or “job” can involve different materials and
inputs. Examples of job shop processes include a
commercial printer, airplane manufacturers,
custom furniture manufacturers, and a tool and
die shop
2. Batch Process: Is essentially a higher-volume
job shop, in which the same or similar products
are produced repetitively.
3. Line Flow Process: Can produce high volumes
of relatively standardized products. They are used
when there are many customers who want similar
products, such as appliances, automobiles, and
cell phones. The workflow is organized around a
single product
4. Continuous Process: Are used for high-volume
products where the demand for the product is very
large and can justify the capital investment
necessary
Manufacturing Strategies
• There are four common manufacturing strategies
that are typically employed by organizations. The
strategies differ considerably in their ability to
meet individual customer requirements for exact
product specifications and therefore the logistical
requirements required to support their use
4 Manufacturing Strategies
1. Engineer-To-Order: Is a manufacturing and
business process strategy where a product is
designed, engineered, and manufactured
specifically for a customer ' s unique
requirements. In an Engineer-to-Order
environment, the product is not built until the
customer places an order, and each product may
be highly customized or tailored to meet the
specific needs of the individual customer.
2. Make-To-Order: Is a manufacturing and
production strategy where products are only
manufactured after a customer place an order
3. Assemble-To-Order: In an ATO strategy, base
product components are manufactured in
anticipation of future customer orders; however,
no finished product is created until a customer
place an order
4. Make-To-Plan: MTP strategies are characteristic
of companies exploiting economy of scale gained
from long production runs utilizing line or
continuous flow processes.
Manufacturing Strategy and Performance Cycles
Manufacturing Process Characteristics
Mass Customization
• The desire on the part of many manufacturers is
to get the cost advantages of high volume
continuous and line flow processes while
increasing variety for customers. Accomplishing
this objective is known as mass customization.
Lean Systems
• Lean has been defined in several different ways,
but, in general, it is a philosophy of
manufacturing that emphasizes the minimization
of the amount of all the resources (including time)
used in the operations of a company. Operational
processes are considered to be lean when they are
very efficient and have few wasted resources. The
elimination of “ waste ” is actually the defining
principle of lean. By eliminating wastes of all
sorts in the system, the lean approach lowers
labor, materials, and energy costs of production.
Lean also emphasizes building exactly the
products customers want, exactly when they need
them
The primary objectives of lean systems are to
1. Produce only the products (goods or services) that
customers want.
2. Produce products only as quickly as customers
want to use them
3. Produce products with perfect quality
4. Produce in the minimum possible lead times.
5. Produce products with features that customers
want, and no others.
6. Produce with no waste of labor, materials, or
equipment; designate a purpose for every
movement to leave zero idle inventory.
7. Produce methods that reinforce the occupational
development of workers.
Six-Sigma
• In a six-sigma approach, the goal is to achieve a
process standard deviation that is six times
smaller than the range of outputs allowed by the
product’s design specification. A primary
objective of six sigma programs is to design and
improve products and processes so that
variability is reduced.
Design-For-Logistics
• The logistics interface with other functional areas
can be greatly enhanced by incorporating a
concept known as design-for-logistics (DFL) into
the early phases of product design. Recall that the
objectives of JIT are to minimize inventories and
handling, with materials and components being
ready for assembly or transformation as they are
needed. How a product is designed and the design
of the components and materials themselves can
have a significant impact on this process
Chapter 7: Inventory
Inventory Functionality and Definitions
Inventory for the following people:
1. Manufacturers
o Inventory risk is long-term, spanning
from raw material acquisition through
finished goods.
2. Wholesalers
o Wholesalers purchase large quantities
from manufacturers to sell them at
smaller quantities to retailers.
o Wholesalers face a problem in seasonal
product scenarios since it can increase
the depth and duration of inventory risk.
3. Retailers
o For retailers, inventory management
revolves around the velocity of buying
and selling.
o Due to the high cost of store location and
space, retailers place prime emphasis on
inventory turnover.
Retailers’ Risk Mitigation Strategies
• Inventory risk is long term, spanning from raw
material acquisition through finished goods.
• Additional commitment of pre-positioning
finished goods in warehouses and potential
consignment inventory practices.
Impact of Distribution Channel Levels
• Wholesalers purchase large quantities from
manufacturers to sell them at smaller quantities to
retailers
• Wholesalers face a problem in seasonal product
scenarios since it can increase the depth and
duration of inventory risk.
Inventory Functionality
• Inventory is considered a current asset with an
expectation of providing a return on the invested
capital.
• There is a historical difficulty in accurately
measuring the true cost and benefits of inventory
on corporate profit-and-loss statements.
• There are complex trade-offs in inventory
management among service level, operating
efficiency, and inventory level due to lack of
measurement
• Despite an overall decrease in aggregate
inventory levels across sectors, many enterprises
still carry more inventory than necessary for
actual business requirements.
Four Functions of Inventory
1. Geographical specialization
o Allows geographical positioning across
multiple manufacturing and distributive
units of an enterprise. Inventory
maintained at different locations and
stages of the value-creation process
allows specialization.
2. Decoupling
o Allows economy of scale within a single
facility and permits each process to
operate at maximum efficiency rather
than having the speed of the entire
process constrained by the slowest.
3. Supply/demand balancing
o Accommodates elapsed time between
inventory availability (manufacturing,
growing, or extraction) and consumption.
4. Buffering uncertainty
o Accommodates uncertainty related to
demand in excess of forecast or
unexpected delays in order receipt and
order processing in delivery and is
typically referred to as safety stock.
Inventory Definitions
• Goods and Materials
• List of Assets
• Record of Items
• Stock of Something
Inventory Policy
• Set of guidelines used by the company to manage
their stocks.
• It answers the questions about what, when, and
how much to order to produce.
• Geographical inventory positioning
To know What, When, and How many to
Purchase/Manufacture
1. Demand Forecasting
2. Historical Data
3. ABC Analysis
4. Inventory Control Models
Geographical Inventory Positioning 3 approaches
1. Centralized: Consolidating inventory in one,
large warehouse.
2. Postponement Strategy: Delayed toppings
assembly and delayed baking.
3. Speculative Positioning: Pre-position popular
holiday toys in regional warehouses.
Two Key Indicators of Inventory Performance Alternative Ordering Policies
1. Service Level: Expected probability of meeting • Reorder Point (ROP): 100 units (triggers
customer demand for a specific item without a replenishment orders)
stockout. • Average Inventory: 100 units (related to order
2. Average Inventory: Mean amount of inventory quantity)
held on hand over a specific period • Inventory Turnover: 24 times/year (indicates
3. Average Inventory Days: A metric indicates the efficient inventory management)
average number of days it takes to sell off
inventory. Dependent Vs Independent Demand
4. Reorder Point: New order should be placed, and
Independent Demand
it is typically calculated by adding the average
daily demand to the safety stock. • Consumer Level: Consumers arrive
unpredictably, requiring prepositioned inventory
Average Inventory across Multiple Performance
("just-in-case").
Cycles
• Demand Forecasting: Retailers rely on historical
Average Inventory across Multiple Performance Cycles patterns to forecast needs.
• Example: Consumers purchasing groceries at a
• Average of Cycle Averages supermarket
• Weighted Average of Cycle Averages
Dependent Demand
Sawtooth Diagram
• Supplier Level: Components for assembly follow
a known production schedule.
• "Just-in-Time" Deployment: Possible due to
predictable demand based on production
schedules.
• Example: Tire supplier anticipating daily tire
needs for a car assembly plant.
Inventory Carrying Cost
• Sawtooth diagram is a visual representation of
how the level of inventory for a particular item • The total expense associated with maintaining or
change over time holding inventory
o Carrying Cost = Annual Inventory
• Components of the diagram:
Carrying Cost % x Average Inventory
o X-axis (Time)
Value
o Y-axis (Inventory Level)
o Order Point (Reorder Point) • Components of Carrying Cost
o Lead Time o Capital
o Inventory Cycle o Taxes
o Insurance
Base Policy o Obsolence
o Storage
The "base policy " refers to the initial policy for ordering
inventory, which involves the following key elements:
• Replenishment cycle: A constant 10 days.
• Daily sales rate: 10 units per day.
• Order quantity: 200 units.
• Reorder point: 100 units on hand.
• Average inventory: 100 units (half of the order
quantity).
• Inventory turnover: 24 times per year (total sales
divided by average inventory).
Capital
• It includes the interests added and the cost of
money invested in the inventory.
o Prime Interest Rate: The cost of
borrowing money to replace inventory
o Hurdle Rate: Expected return on
investment in inventory
• Clearly specify the cost of capital in planning
supply chain logistics.
o High Capital Cost:
▪ Constantly use cash and launch
products
▪ High value or short life cycle
o Low Capital Cost:
▪ Established products and longer
product life cycle
Taxes
• Tax expense on inventory held in warehouses.
o 12% Value-Added Tax (VAT) & Property
Tax
o Can be charged based on a specific day
or over a period of time on the average
inventory value.
Insurance
• Expense on estimated risk or loss over time
o High-value products - High insurance
cost
o Facility characteristics to lessen loss risk.
(security cameras, alarm systems)
Obsolence
• Expense from deterioration of product during
storage
o Beyond recommended sell-by date
o No demand
Storage
• Facility expense in product holding. Storage cost
must be allocated on the requirements of specific
products.
• In public or contract warehouses, storage charges
are billed based on average inventory in the
facility
• Calculating Average Storage Cost per Unit
o Step 1: Determine the average daily
physical space occupied by the product in
the warehouse.
o Step 2: Multiply this space by the
standard cost per facility dimension for
the specified time period
o Step 3: Divide the result from Step 2 by
the total number of units of that product
processed through the facility.
o This final figure represents the average
storage cost per unit for that specific
product.
Planning Inventory
• Involves determining when and how much to
order.
• When to order is influenced by demand,
replenishment lead time average, and uncertainty.
• How much to order is determined by the order
quantity.
When to Order
• Defines when to initiate a replenishment
shipment.
• Can be specified in terms of units or days' supply.
Reorder Point in Units Formula
• R=DXT
o R = REORDER POINT IN UNITS
o D = AVERAGE DAILY DEMAND IN
UNITS
o T = AVERAGE PERFORMANCE
CYCLE LENGTH IN DAYS
• R = D X T + SS
o R = REORDER POINT IN UNITS
o D = AVERAGE DAILY DEMAND IN
UNITS
o T = AVERAGE PERFORMANCE
CYCLE LENGTH IN DAYS
o SS = SAFETY STOCK IN UNITS
How Much to Order
• Balances inventory carrying cost with the cost of
ordering
• Greater order quantity leads to larger average
inventory and higher annual carrying cost.
• Larger order quantity results in fewer
replenishment orders per planning period,
reducing total ordering cost.
• Identify precise quantities for the lowest annual
combined total inventory carrying and ordering
cost at a given sales volume.
Economic Order Quantity (EOQ) • EOQ ignores transportation cost
• A freight-rate discount for larger shipments is
• An ideal order quantity that balances both the common across all transportation modes.
carrying and ordering cost
• Impact of Larger Order Quantity
• Assumes constant demand and price for a product o Higher base inventory = higher carrying
throughout the year cost
• Computation is limited to one product, o Lower number of orders per year = lower
disregarding joint reordering benefits such as ordering cost
transportation cost.
Factors Regarding Origin Purchase
1. Weight Breaks
o Points in different shipping methods
where the cost per unit of weight changes
significantly
• o E.g. A lighter product may be cheaper to
ship through an airplane than a ship
o In Free on Board (FOB), the buyer
Formula for EOQ shoulders the costs of transportation.
2. Transportation Cost
o Must be added to the purchase price to
determine the value of goods tied up in
inventory.
o Ignoring transportation costs can lead to
inaccurate cost computations
• Where:
o Co = Cost per order Quantity Discounts
o D = Annual sales volume or demand
• Quantity discounts are available if you buy in
o Ci = Annual inventory carrying cost
large rather than in small quantities.
o U = Cost per unit
Other EOQ Adjustments
EOQ Assumption
• Production Lot Size: Most economical
• All demand is satisfied
quantities from a manufacturing perspective.
• Demand rate is continuous, constant, and known
• Multiple-Item Purchase: Situations when more
• Constant and known replenishment performance
than one product is bought concurrently.
cycle time
• Limited Capital: Situations with budget
• Fixed price
limitations for total inventory investment.
• There is an infinite planning horizon
• Dedicated Trucking: Truck has a fixed cost
• There is no interaction between multiple items of consideration.
inventory
• Unitization: Many products are stored and
• No inventory is in transit moved in standard units such as cases or pallets
• No limit is placed on capital availability
Demand Uncertainty
Relationships in EOQ
• Sales forecasting estimates unit demand during
1. Balanced order placement cost and inventory the inventory replenishment cycle.
carrying cost
• To protect against a stockout when demand
2. Average base inventory = ½ EOQ
exceeds forecast, safety stock is added to base
3. Higher product value = Higher order frequency
inventory
Adjustments in EOQ
1. Volume Transportation Rates
2. Quantity Discounts
3. Other EOQ Adjustments
Volume Transportation Rates
Demand Uncertainty: Inventory Relationship,
Demand Uncertainty, and Constant Performance
Cycle
Demand Uncertainty: Normal Distribution
• Data is symmetrically distributed with no skew,
usually in a form of a symmetrical bell-shaped
curve.
• Mean- (average) value
• Median- (middle) observation
• Mode- (most frequently observed) value
• Standard Deviation- the dispersion of
observations within specified areas under the
normal curve.

Demand Uncertainty: Typical Demand Experience

during Three Replenishment Cycles

Demand Uncertainty: Formula in Calculating

Standard Deviation for Safety Stock

Demand Uncertainty: Frequency of Demand

Demand Uncertainty: Calculation of Standard

Deviation of Daily Demand

Demand Uncertainty: Historical Analysis of Demand

History

Performance Cycle Uncertainty: Calculation of

Standard Deviation of Replenishment Cycle Duration
Performance Cycle Uncertainty: Safety Stock with
Combined Uncertainty

•
• Where:
o SL = The stockout magnitude (the
product availability level or case fill
rate);
o g(k) = A function of the normal loss curve
which provides the area in the right tail of
a normal distribution;
o σc = The combined standard deviation
Safety Stock with Combined Uncertainty: Frequency considering both demand and
Distribution— Demand and Replenishment Uncertainty replenishment cycle uncertainty; and
o Q = The replenishment order quantity.

•
• The required safety stock level is:

• Where:
o SS = Safety stock in units;
Safety Stock with Combined Uncertainty: o k = The k factor that corresponds with g
Convolution Formula (k);
o σc = The combined standard deviation.
Dependent Demand Replenishment
• Inventory requirements for dependent demand
replenishment are a function of known events that
are not generally random. Therefore there is no
uncertainty, dependent demand does not
necessitate forecasting.
Safety Stock with Combined Uncertainty: Average • As a result, there is no specified safety. A time-
Inventory Impact Resulting from Changes in EOQ phased procurement scheme, such as materials
requirements planning (MRP), must involve
stock.
The case for carrying no safety stocks under
conditions of dependent demand rests on two
assumptions:
Estimating Fill Rate • Procurement replenishment to support planning is
predictable and constant.
• The magnitude of a stockout is determined by the
fill rate rather than its probability • Vendors and suppliers maintain adequate
inventories to satisfy 100 percent of purchase
• The case fill rate is the percentage of units that
requirements.
can be filled from available inventory when a
request is made.

•
• The mathematical formulation of the relationship
is:
3 basic approaches of Dependent Demand
Replenishment
• A common practice is to put safety time into the
requirements plan.
• To increase the requisition by a quantity specified
by some estimate of expected plan error.
• The third method is to utilize the previously
discussed statistical techniques for setting safety
stocks directly to the component rather than to the
item of top-level demand
Inventory Management Policies
Inventory Controls
• The managerial process used to carry out an
inventory policy is known as inventory control.
The accountability of control keeps track of
additions and deletions and counts the number of
units available at a given place. Tracking and
accountability can be done manually or with a
computer.
Perpetual Review
• Inventory levels are regularly reviewed as part of
a perpetual inventory control process to identify
when inventory needs to be replenished. All
SKUs must be accurately tracked in order to use
perpetual review.
Perpetual Review: Reorder Point in Units Formula
• ROP = D × T + SS
• Where:
o ROP = Reorder point in units;
o D = Average daily demand in units;
o T = Average performance cycle length in
days; and
o SS = Safety or buffer stock in units
Perpetual Review: Order Quantity in Units Formula
• If I + OQO ≤ ROP, then order OQ
• Where:
o I = Inventory on hand;
o OQO = Inventory on order from
suppliers;
o ROP = Reorder point in units; and
o OQ = Order quantity in units
Perpetual Review: The average inventory level for a
perpetual review system is:
• I avg = OQ/2 + SS
• Where:
o I avg = Average inventory in units;
o OQ = Order quantity units; and
o SS = Safety stock units.
Periodic Review
• Periodic inventory control checks an item's
inventory status on a weekly or monthly basis.
The fundamental ordering point needs to be
modified for periodic review in order to account
for the time between reviews
Periodic Review: Reorder Point Formula
• ROP = D(T + P/2) + SS
• Where:
o ROP = Reorder point;
o D = Average daily demand;
o T = Average performance cycle length;
o P = Review period in days; and
o SS = Safety stock
Periodic Review: The average inventory level for a
perpetual review system is:
• I avg = OQ/2 + (P × D)/2 + SS,
• Where:
o Iavg = Average inventory in units;
o OQ = Order quantity in units;
o P = Review period in days;
o D = Average daily demand in units; and
o SS = Safety stock in units.
Inventory Controls
• High volume and high value items should use
perpetual review to minimize the risk of stock-
outs and inventories. Since they have to be
ordered together, items that need to be renewed
collectively usually undergo periodic reviews.
Reactive Methods
• The reactive or pull inventory system draws the
goods through the distribution channel in
response to a channel member ' s inventory
demands. When available warehouse stock levels
drop below a set minimum or order point,
replenishment shipments are started.
Classical Reactive Inventory Logic Is Rooted In The
Following Assumptions:
1. The system is founded on the basic assumption
that all customers, market areas, and products
contribute equally to profits.
2. A reactive system assumes infinite capacity at the
source.
3. Reactive inventory logic assumes infinite
inventory availability at the supply location.
4. Reactive decision rules assume that performance
cycle time can be predicted and that cycle lengths
are independent.
5. Reactive inventory logic operates best when
customer demand patterns are relatively stable
and consistent.
6. Reactive inventory systems determine each
distribution warehouse’s timing and quantity of
replenishment orders independently of all other
sites, including the supply source.
7. Reactive inventory systems is that performance
cycle length cannot be correlated with demand
Planning Methods
• Inventory planning methods use a shared
database to coordinate inventory requirements
across multiple locations or stages in the supply
chain. Planning activities may occur centrally to
coordinate inventory allocation and delivery to
multiple destinations. Planning may also
coordinate inventory requirements across
multiple channel partners such as manufacturers
and retailers.
Fair Share Allocation
• A simplified inventory management planning
method that provides each distribution facility
with an equitable distribution of available
inventory
• Using fair share allocation, the inventory planner
determines the amount of inventory that can be
allocated to each warehouse from the available
inventory at the plant.
Fair Share Allocation Formula
Requirements Planning
• An approach that integrates across the supply
chain, taking into consideration unique
requirements. Requirements planning is typically
classified as materials requirements planning
(MRP) or distribution requirements planning
(DRP)
Conceptual Design Of Integrated MRP/DRP System
Collaborative Inventory Replenishment
• In Chapters 5 and 6, CPFR was introduced and
discussed as a major collaborative effort between
supply chain trading partners. Several
collaborative initiatives focus only on inventory
replenishment. Replenishment programs are
designed to streamline the flow of goods within
the supply chain
Quick Response
• IA technology-driven cooperative effort between
retailers and suppliers to improve inventory
velocity while closely matching replenishment
supply to consumer buying patterns is quick
response (QR). QR is implemented by sharing
retail sales for specific products between supply
chain participants to facilitate right product
assortment availability when and where it is
required. Instead of operating on a 15- to 30-day
order cycle, QR arrangements can replenish retail
inventories in a few days.
Vendor-Managed Inventory
• Vendor-managed inventory (VMI) is a
modification of quick response that eliminates the
need for replenishment orders. The goal is to
establish a supply chain arrangement so flexible
and efficient that retail inventory is continuously
replenished. The distinguishing factor between
QR and VMI is who takes responsibility for
setting target inventory levels and making
restocking decisions.
Profile Replenishment
• Some manufacturers, wholesalers, and retailers
are experimenting with an even more
sophisticated collaboration known as profile
replenishment (PR). The PR strategy extends QR
and VMI by giving suppliers the right to
anticipate future requirements according to their
overall knowledge of a merchandise category. A
category profile details the combination of sizes,
colors, and associated products that usually sell in
a particular type of retail outlet.
Postponement
• At the heart of time-based competition is the
capability to postpone customization and the
timing of logistical fulfillment. The concept of
postponement has long been discussed in
business literature.8 However, practical examples
involving postponement are directly related to
advancements in information technology.
Postponement strategies and practices serve to
reduce the anticipatory risk of supply chain
performance
Manufacturing Postponement
• The global competitive climate of the 21st
century is facilitating the development of new
manufacturing techniques designed to increase
flexibility and responsiveness while maintaining
unit cost and quality. Traditional practice has
focused on achieving economy of scale by
planning extensive manufacturing runs. In
contrast, flexible manufacturing logic is typically
driven by a desire to increase responsiveness to
customer requirements.
Geographic Postponement
• In many ways geographic, or logistics,
postponement is the exact opposite of
manufacturing postponement. The basic notion of
geographic postponement is to build and stock a
full-line inventory at one or a limited number of
strategic locations. Forward deployment of
inventory is postponed until customer orders are
received. Once the logistical process is initiated,
every effort is made to accelerate the economic
movement of products directly to customers.
Inventory Management Practices
Product/Market Classification
• The objective of product/market classification is
to focus and refine inventory management efforts.
Product/market classification, which is also
called fine-line or ABC classification, groups
products, markets, or customers with similar
characteristics to facilitate inventory
management. The classification process
recognizes that not all products and markets have
the same characteristics or degree of importance.
Sound inventory management requires that
classification be consistent with enterprise
strategy and service objectives.
Segment Strategy Definition
• This strategy includes specification for all aspects
of the inventory management process, including
service objectives, forecasting method,
management technique, and review cycle. The
key to establishing selective management
strategies is the realization that product segments
have different degrees of importance with respect
to achieving the enterprise mission. Important
differences in inventory responsiveness should be
designed into the policies and procedures used for
inventory management.
Policies and Parameters
• The final step in implementing a focused
inventory management strategy is to define
detailed procedures and parameters. The
procedures define data requirements, software
applications, performance objectives, and
decision guidelines. The parameters delineate
values such as review period length, service
objectives, inventory carrying cost percentage,
order quantities, and reorder points.
Chapter 8: Transportation
Importance of Transportation in Logistics:
• Customer Satisfaction: Timely and efficient
deliveries keep customers happy, boosting brand
loyalty and repeat business.
• Cost Optimization: Choosing the right mode
and optimizing routes can significantly reduce
transportation costs, impacting a company's
bottom line.
• Global Reach: Efficient transportation enables
businesses to expand their markets and reach
customers worldwide.
• Supply Chain Efficiency: Smooth product flow
throughout the supply chain relies heavily on
seamless transportation. Delays or disruptions
can ripple through the entire system.
Transport Functionality and Participants
Functionality - Transportation provides two major
logistical services:
• Product Movement - The mode of transportation
chosen will depend on a number of factors, such
as the distance to be traveled, the size and weight
of the goods, and the desired delivery time.
• Product Storage - This storage function is crucial
for ensuring the safe and efficient delivery of
products. Additionally, some transportation
services might offer temporary storage solutions
before or after the actual movement.
Participants - The Crew Keeping the Ship Afloat and
decisions are influenced by six parties:
1. Shipper- It is the party sending the goods or
people.
2. Consignee- It is the party receiving goods or
people
3. Carrier and Agents - The businesses that
provide the actual transportation services, such as
airlines, shipping companies, trucking
companies, etc.
4. Government - Regulates and oversees the
transportation sector to ensure safety, efficiency,
and environmental responsibility
5. Information Technology - It plays a crucial role
in communication, tracking and information
sharing within the transportation system.
6. Public - It generates the demand for
transportation services through their travel and
consumption needs
From Regulation to a Free Market System
• There may be advantages and disadvantages to
the complicated process of transitioning from a
regulated market system to a free market one
Interstate Commerce Commission (ICC)
• Regulates all types of interstate surface
transportation, including pipelines and
automobiles like trains, buses, trucks, water
carriers, shipping firms, and domestic product
carriers that are not under the Federal Energy
Regulatory Commission's authority.
Motor Carrier Act of 1980
• Significantly lessening government control over
the trucking industry, the act also made it easier
for new carriers to enter the market, eliminated
some restrictions placed on regulated carriers,
and encouraged price competition among
carriers.
Staggers Rail Act of 1980
• By limiting government interference and giving
railroads greater control over pricing and
operations, the act sought to encourage the
development of a more efficient and competitive
rail transportation system.
Transportation Modal Structure
The rights-of-way, automobiles, and carriers that work
within the five fundamental transportation modes make
up the freight transportation framework.
• Rail - The majority of ton-miles inside the
continental United States have been handled by
railroads. The common unit of measurement for
freight activities that combines weight and
distance is the ton-mile
• Truck - Trucks travel on publicly funded and
maintained roadways and require comparatively
less fixed investment in terminal facilities than do
railroads
• Water - Water transport ranks between rail and
motor carrier. Although water carriers must
develop and operate their own terminals, the
government develops and maintains the right-of-
way, resulting in lower fixed costs than rail. The
main disadvantages of water transportation are its
limited operating range and slow speed. It is a
popular mode of transport when low freight rates
are desired and speed of transit is secondary.
 • Pipeline - Pipelines operate 24 hours a day, seven
days a week, and are only limited by commodity
changeover and maintenance. There is no empty
container or vehicle to return, unlike other modes.
Pipelines have the highest fixed cost and the
lowest variable cost of any mode of
transportation.
• Air - Airfreight variable costs, on the other hand,
are extremely high due to fuel, user fees,
maintenance, and the labor intensity of both in-
flight and ground operations crews on the ground.
Air transport has a lower fixed cost than rail,
water, and pipeline transportation. In fact, air is
second only to trucks in terms of low fixed costs
Modal Comparative Characteristics and Capabilities
• It shows the fixed variable cost structure of each
mode ranking modals with its operating
characteristics.
Modal Operating Characteristics:
• Speed - Has elapsed movement of time
• Availability - Direct to origin points of
transportation
• Dependability - Expected delivery are scheduled
• Capability - There are transportation
requirements
• Frequency - Quantity delivery are scheduled
Specialized Transportation Services
• Special transport is the moving of goods or
objects which cannot be transported with a
standard transport vehicle
Parcel Service
• Refers to shipping lighter, smaller boxed items. A
parcel service is a goods or item that can be
carried by a person so from the word parcel
means a package that weighs 100 pounds or less.
Intermodal
• Incorporates two or more modes to benefit from
each one's inherent economies and offer an
integrated service at a reduced cost overall.
• Initial attempts at modal coordination trace back
to the early 1920s
• Intermodal offerings began to develop more
successfully during the 1950s with the advent of
integrated rail and motor service commonly
termed piggyback service.
• Descriptive jargon such as piggyback, fishyback,
trainship, and airtruck.
Trailer on a Flatcar (TOFC) and Container on a
Flatcar (COFC)
• Trailer on a flatcar (TOFC) and container on a
flatcar (COFC) are the best known and most
widely used intermodal systems
Oldest Form of Intermodal Transport:
• Fishyback
• Trainship
• Containership
Nonoperating Intermediaries
• Nonoperating Intermediaries
Three Primary Intermediaries:
• Freight Forwarder - Businesses that aim to
make a profit by consolidating multiple small
deliveries from different clients into a single large
package, which is then transported by a single
surface or air carrier.
• Shipper Association - Similar to goods
forwarders in the sense that they consolidate
small shipments into larger movements in order
to save costs.
• Broker - Intermediaries who arrange for shippers'
transportation needs, carriers as well as
consignees. They also plan shipments for owner
operators and exempt carriers.
Transportation Economics and Pricing
• Transportation economics and pricing are driven
by multiple factors that influence rates. The
primary factors are distance, weight, and density
Economy of Distance
• Distance is a major influence on transportation
cost since it directly contributes to variable
expense, such as labor, fuel, and maintenance.
•
Economy of Weight
• A second factor is shipment weight. Similar to
other logistics activities, scale economies exist
for most transportation movements.
• activity are labeled variable costs.
Economy of Density
• A third factor is product density. Density is the
combination of weight and volume. Weight and
volume are important since transportation cost for
any movement is usually quoted in dollars per
unit of weight.
• Pricing Freight
Other Pricing Factors
• Stowability: Stowability refers to how product
dimensions fit into transportation equipment.
Odd package sizes and shapes, as well as
excessive size or length, may not fit well in
transportation equipment, resulting in wasted
cubic capacity.
• Handling: Special handling equipment may be
required to load and unload trucks, railcars, or
ships. In addition to special handling equipment,
the manner in which products are physically
grouped together in boxes or on pallets for
transport and storage impacts handling cost
• Liability: Liability includes product
characteristics that can result in damage. One
example of this is hazardous material such as
aerosol paint. Carriers must either have insurance
to protect against potential damage or accept
financial responsibility.
• Market: Market factors such as lane volume and
balance influence transportation cost. A transport
lane refers to movements between origin and
destination points. Since transportation vehicles
and drivers typically return to their origin, either
they must find a back-haul load or the vehicle is
returned empty, commonly referred to as
deadheading
Costing Freight
• Refers to the process of allocating the various
costs associated with transporting goods to
different parties involved in the supply chain.
Costing Freight: Categories Of Transportation Costs
1. Variable
o Costs that change in a predictable, direct
manner in relation to some level of
o Include direct carrier costs associated
with movement of each load
2. Fixed
o Expenses that do not change in the short
run and must be paid even when a
company is not operating, such as during
a holiday or a strike
3. Joint
o Expenses created by the decision to
provide a particular service
4. Common
o Includes carrier costs that are incurred on
behalf of all or selected shippers
Class Rates
• The transportation charge applicable to ratings of
articles listed in class tariffs of common carriers
and distinguished from commodity rates
o Rate: The price in dollars and cents per
hundredweight to move a specific
product between two locations
o Tarriff: The rate is listed on pricing sheets
or on computer files
Freight Classification
• Is a system used in the transportation industry to
categorize products based on their characteristics
that affect the cost of handling and shipping.
Classification System
• Truck
o Uses the National Motor Freight
Classification
o 18 classes of freight
• Rail
o Published in the Uniform Freight
Classification
o 31 classes of freight
• Local/Regional Carriers
o May have additional classifications
Class Rating Transportation Operations Management
• Each product receives a class rating based on its • Involves a wide variety of planning, execution,
characteristics. and administrative responsibilities.
• Higher ratings generally mean higher
transportation costs. Transportation Management System (TMS)

Product’s Classification • It proactively identifies and evaluates

transportation strategies and tactics to determine
• Density the best method for shipment of a given product.
• Stowability
Main Functions Of Transportation Management
• Handling
System (TMS)
• Liability
• Shipment size • Order Consolidation
• Packaging • Route Optimization
• Carrier Rate Management
Cubes Rates and Freight Dimensioners
• EDI Links with Carriers
• Significant focus has been placed on accurately • Internet-based Shipment Tracking
determining the correct classification for mixed • Integrated Claims Management
commodity less-than-truckload (LTL) freight. A • Identify Most Economical Mode
dimensioner is a weight-and-volume measuring • Calculate Best Route
device used to measure three dimensional or • Carrier Selection
cube-shaped objects such as packages, parcels, • Yard Management
cartons, or boxes and obtain an accurate density
factor for the package. The carriers can identify Five Capabilities of Transportation Management
when actual density varies from the reported System
density and review with shippers to adjust pricing
1. OPERATIONS
or make changes to packaging configurations.
2. CONSOLIDATION
Other Rates Structure 3. NEGOTIATION
4. CONTROL
• Commodity rates 5. PAYMENT, AUDITING, AND CLAIMS
• Aggregate tender rate ADMINISTRATION
• Limited-service rate
• Released value rate Transportation Management system includes four key
functionalities under operations
Special Rates and Services
1. Equipment scheduling and yard management
• A freight all-kind (FAK) 2. Load planning
• A local rate 3. Shipment routing
• A joint rate 4. Track and trace
• Transit services Equipment Scheduling and Yard Management
• Diversion and
• Reconsignment • It aims to optimize logistics performance while
• Split delivery or multi-stop load avoiding costly bottlenecks.
• Yard Management System assist proper yard
Assessorial Service Charges management
• Accessorial charges in transportation are fees • A collaborative integration between
levied by freight transportation carriers for Transportation Management System (TMS), Yard
services that go beyond standard pick-up and Management System (YMS), and Warehouse
delivery. Accessorial charges or accessorial fees Management System (WMS
are usually applied when there is a need for
additional labor, equipment, time, or fuel.
Two approach that shippers use:
1. Drop-and-Hook
o Enables the carrier to drop a loaded
trailer in the yard and leave immediately
with a different loaded or empty trailer.
2. Live Unloads
o Driver arrives at the yard and wait while
the trailer is loaded or unloaded directly
by warehouse personnel
Load Planning
o Transportation Management System optimizes
mode selection based on the size and attributes of
each shipment.
o Maximizing the use of the truck’s available space
without compromising product integrity and
loading/unloading inefficiency.”
Transportation Management System Must Consider:
1. Physical Handling Characteristics
2. Delivery Sequence
Shipment Routing
• TMS system can help identify the most efficient
route for a shipment to travel based on a variety
of constraints such as delivery appointments,
preferred road type, and projected traffic
conditions.
• Two common strategies of routing:
o Static Routing: Routes have very little
variation from one day to next.
o Dynamic Routing: Each route is
optimized based on the individual
characteristics of those shipments.
Track And Trace (Shipment Visibility and
Information Exchange)
• Advanced Shipment Notifications (ASN):
Electronic notifications sent by shippers to
consignees informing about upcoming deliveries.
• EDI Status Updates: Receive updates from
carriers known as “214 updates”
• GEO-FENCINGTECHNOLOGY: Utilizes
computer on board the truck to provide accurate
real-time updates
Freight Consolidation
• A logistics practice where multiple smaller
shipments are combined into one larger shipment
for transport to reduce overall transportation costs
and increase efficiency.
Response-Based Logistics
• Focuses on agility and responsiveness
• Aim to synchronize replenishment with demand
in real time.
E-Commerce Growth
• Fueled by the rise of online shopping
Two Types of Consolidation
1. Reactive Consolidation: It is combining
multiple smaller shipments into a larger one after
they’ve already been booked
o Three Main Strategies:
i. Market Area Consolidation:
Combining shipments with similar
final destinations, regardless of
delivery timing
ii. Scheduled Area Delivery: Holding
shipments for specific markets and
delivering on selected days each
week.
iii. Pooled Delivery: combining
shipments from multiple shippers for
a single delivery to a specific market
area.
2. Proactive Consolidation: Proactive
consolidation is a transportation strategy that
focuses on optimizing efficiency and cost savings
by consolidating multiple shipments into a single,
larger shipment.
o Preorder Planning: Allows for flexible
order creation to facilitate consolidated
freight movements
o Multivendor Planning: Involves
collaborating with other vendors to create
opportunities for consolidated shipments
Negotiation
• The transportation department’s responsibility
is to find the lowest cost for shipping while
fulfilling service requirements. To negotiate
transportation costs, collaboration between
shippers and carriers is essential to enhance
efficiency and cut expenses
• Building long-term relationships based on
mutual efficiency and gain is critical in
transportation cost negotiations
Control
• The TMS (Transportation Management System)
helps with control, an essential component of
transportation operations management
• This is an important aspect of transportation that
transportation managers must keep an eye on.
Payment, Auditing, and Claims Administration FOB Pricing
• Carrier bill payment and auditing frequently use • The term FOB technically means free on board or
information provided from the TMS database to freight on board
ensure the carrier bill is presented at the rates and • FOB origin is the simplest way to quote price.
terms agreed upon during negotiation. • In FOB destination pricing, product ownership
o 2 Types of Audits title does not arrange for transportation and the
i. Pre-audit charges are added to the sales invoice
ii. Post-audit
o Claim Administration Delivered Pricing
i. Damage
• Single zone delivered pricing
ii. Over and/or short
• Multiple-zone pricing
Documentation • Base-point pricing system

• Detailed documentation is required to perform a Pickup Allowances

transportation service. Except for private transfer
within the confines of a single firm, products are • Pickup allowances are equivalent to purchasing
typically sold when being transported. merchandise on a fob origin basis. Buyers are
given a reduction from the standard delivered
Bill of Lading price if they or a representative pick up shipments
at the seller’s location and perform transportation.
• The bill of lading is the basic document utilized
in purchasing transport services. It serves as a
receipt and documents products and quantities
shipped. For this reason, accurate product
description and count are essential.
Freight of Bill
• The freight bill represents a carrier’s method of
charging for transportation services performed. It
is developed by using information contained in
the bill of lading. The freight bill may be either
prepaid or collect
Shipment Manifest
• The shipment manifest lists individual stops or
consignees when multiple shipments are placed
on a single vehicle. Each shipment requires a bill
of lading. The manifest lists the stop, bill of
lading, weight, and case count for each shipment.
Here's what a shipment manifest typically includes:
1. Basic shipment information
2. Consignor and consignee details
3. Itemized list of goods
4. Customs declarations
Product Pricing and Transportation
• Pricing is an important aspect of marketing
strategy that directly impacts logistical
operations. The terms and conditions of pricing
determine which party has responsibility for
performing logistics activities.