CHAPTER 4 - Matching Supply and Demand

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CHAPTER 4

MATCHING SUPPLY AND


DEMAND

OPM560 SUPPLY CHAIN LOGISTICS


MANAGEMENT
TABLE OF CONTENT
4.1 The lead-time gap
4.2 Improving the visibility of demand
4.3 Demand management and planning
4.4 Collaborative planning, forecasting and
replenishment
4.5 Logistics operations
4.5.1 Transportation
4.5.2 Warehousing
4.5.3 Packaging and materials handling
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4.1 The lead-time gap
➢ Most organisations face a fundamental
problem: the time it takes to procure, make
and deliver the finished product to a
customer is longer than the time the
customer is prepared to wait for it.
➢ The customer’s order cycle refers to the
length of time that the customer is prepared
to wait, from when the order is placed
through to when the goods are received.

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Figure 4.1: The lead-time gap

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4.1 The lead-time gap (cont.)
➢ In the conventional organisation the only way to
bridge the gap between the logistics lead time and
the customer’s order cycle is by carrying inventory.
Example: logistics lead time
• the time taken to complete the process from goods inwards
to delivered product

Example: customer’s order cycle


• the period they are pre- pared to wait for delivery

➢ This normally implies a forecast to build inventory


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4.1 The lead-time gap (cont.)
➢ Unfortunately, forecasting end up as an
inventory problem – whether too much or
too little!
➢ Problem lies not in investing ever greater
sums of money and energy in improving
forecasting techniques, but rather in reducing
the lead-time gap.

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Figure 4.2: Closing the lead-time gap

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4.1 The lead-time gap (cont.)
➢ Reducing the gap can be achieved by
shortening the logistics lead time (end-to-
end pipeline time) whilst simultaneously
trying to move the customer’s order cycle
closer by gaining earlier warning of
requirements through improved visibility of
demand.

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4.2 Improving the visibility of
demand
➢ The challenge is to find a way to receive
earlier warning of the customers’
requirements.
Firstly, the demand penetration point is too far down the
pipeline.

Secondly, real demand is hidden from view and all we tend


to see are orders.

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4.2 Improving the … (cont.)
➢ Demand penetration point is that it occurs at that point in
the logistics chain where real demand meets the plan.
➢ Demand penetration point is often referred to as the
decoupling point and is ideally the point in the supply chain
where strategic inventory is held.
➢ A key concern of logistics management should be to seek to
identify ways in which the demand penetration point can be
pushed as far as possible upstream.
➢ This might be achieved by the use of information so that
manufacturing and purchasing get to hear of what is
happening in the marketplace faster than they currently do.
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Figure 4.3: Demand penetration points and strategic inventory

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4.2 Improving the … (cont.)
➢ In so many cases the supplying company receives no
indication of the customer’s actual usage until an order
arrives.
Example

• The customer may be using 10 items a day but because


he/she orders only intermittently the supplier sometimes
receives an order for 100, some- times for 150 and
sometimes for 200.

➢ If the supplier could receive ‘feed-forward’ on what was


being consumed he would anticipate the customer’s
requirement and better schedule his own logistics activities.
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Figure 4.4: The information iceberg

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4.2 Improving the … (cont.)
➢ The area below the surface of the iceberg
represents the on-going consumption,
demand or usage of the product which is
hidden from the view of the supplier.
➢ It is only when an order is issued that any
visibility of demand becomes transparent.

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4.3 Demand management and
planning
➢ Demand management is the term that has come
to be used to describe the various tools and
procedures that enable a more effective
balancing of supply and demand to be achieved
through a deeper understanding of the causes of
demand volatility.
➢ Many companies today have put in place a
formalised approach to demand management
and planning that is often referred to as sales
and operations planning (S&OP).
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Figure 4.5: The sales and operations planning process

Generate aggregate demand forecast

Modify forecast with demand


intelligence

Create a consensus forecast

Create ‘rough cut’ capacity plan

Execute at individual item (SKU)


level against demand

Measure performance

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4.3 Demand management … (cont.)
 Generate aggregate demand forecast
• Wherever possible these plans should be made on
the basis of high-level aggregate volume forecasts at
the product family level.
• As we get closer to the point of demand fulfilment
then we can start to think about product mix
requirements.
• Because it is generally easier to forecast at the
aggregate level, statistical forecasting tools should
enable a reasonable level of accuracy to be achieved.
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4.3 Demand management … (cont.)
 Modify the forecast with demand intelligence
• This stage of the S&OP process should involve key customers or accounts.
• The benefit of a joint supplier/ customer process to create a forecast is
that a wider array of intelligence can be taken into account.

 Create a consensus forecast


• Essentially the principle is that marketing and sales people will meet at
regular intervals with operations and supply chain people.
• Figure 4.6 highlights the integrative nature of S&OP processes.
• Whereas in conventional businesses there is little integration between
the demand creation side of the business (i.e. sales and marketing) with
the demand fulfilment activity (i.e. logistics and operations), with the
S&OP philosophy there is a seamless alignment between the two.

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Figure 4.6: The focus of demand management and planning

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4.3 Demand management … (cont.)
 Create a ‘rough cut’ capacity plan
• Essentially the logic behind the rough cut capacity plan is to
look at the aggregate product family forecast for the planning
period and to translate that into the capacity and resources
needed, e.g. how much machine time, how much time in an
assembly process, how much transport capacity and so on.

 Execute at SKU levels against demand


• Ideally nothing is finally assembled, configured or packaged
until we know what the customer’s order specifies.
• To achieve this ideal state clearly requires a high level of agility.

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4.3 Demand management … (cont.)
 Measure performance
• Demand management/planning process is working should
be how high the percentage of perfect order achievement
is compared to the number of days of inventory and the
amount of capacity needed to achieve that level.
• The aim should be to progressively reduce this gap by a
concerted focus on time compression and improved
visibility.
• Exemplars of world class demand management and
planning is Dell Inc., the computer company.

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4.3 Demand management … (cont.)
Example: Demand management and planning at Dell
• The computer company Dell has long been seen as one of the most agile businesses in the
industry. The success of Dell is in large part due to its highly responsive supply chain,
which is capable of building and delivering customised products in a matter of days with
minimal inventory.
• Dell’s ability to operate a build-to-order strategy is based partly on the modular design of
many of their products but more particularly on a very high level of synchronisation with
their suppliers. There is a high level of visibility across the Dell supply chain with suppliers
receiving information on Dell’s order book every two hours. Ahead of this information,
suppliers are provided with capacity forecasts from Dell to enable them to produce at a
rate that is planned to match actual demand.
• Each of Dell’s factories is served from a ‘vendor hub’, operated by third-party logistics
service providers, the purpose of which is to keep a buffer of inventory from which Dell
can draw as required. Suppliers are required to keep a defined level of inventory at these
hubs and Dell only takes ownership of the inventory when it reaches their factories.
• Dell adopts a very proactive approach to demand management by using the price
mechanism to regulate demand for specific products or features. If a product is in short
supply the price will rise and/or the price of an alternative substitute product will fall. This
facility to actively manage demand enables a very close matching of supply and demand.

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4.4 Collaborative planning,
forecasting and replenishment
➢ Many of these initiatives have originated in the
retail sector but the ideas have universal
application.
➢ Sharing information and by working together to
create joint plans and forecasts, both the supply
side and the demand side of the supply chain
can benefit.
➢ The idea is a development of vendor managed
inventory (VMI).
➢ VMI is a process through which the supplier
rather than the customer manages the flow of
product into the customer’s operations.
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4.4 Collaborative planning, … (cont.)
➢ The supplier is in effect managing the customer’s
inventory on the customer’s behalf.
➢ In a VMI environment there are no customer
orders; instead the supplier makes decisions on
shipping quantities based upon the information
it receives direct from the point-of-use or the
point-of-sale, or more usually from off-take data
at the customer’s distribution centre.
➢ Under conventional replenishment systems both
sides need to carry safety stock.
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4.4 Collaborative planning, … (cont.)
➢ CPFR is the creation of an agreed framework
for how information will be shared between
partners and how decisions on replenishment
will be taken.
➢ Figure 4.7 presents a nine-step model for the
implementation of CPFR programmes
developed by the US-based organisation VICS
(Voluntary Inter-Industry Commerce
Standards).

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Figure 4.7: VICS-ECR nine-step CPFR model Retailer

Source: ECR
Europe/Accenture,
European CPFR Insights,
2002

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Figure 4.8: Benefits of CPFR

Optimise • Higher utilisation of


production production capacity
Reduce capital • Greater supply chain
invested visibility allows inventory
Reduce storage and storage capacity
capacity reduction

Inventory
• 20-25% reduction
inventory carrying cost
• Improved forecast accuracy
Wastage • 50% reduction in
Benefits Decrease Costs unplanned overtime
• Up to 500% ROI on
Overtime promotions
• Reduced excess and
obsolete inventory
Transportation • Reduction in lead time
cost

Better
Increase availability • Reduced out-of-stocks
revenue • Improved consumer
Improved satisfaction ratings
consumer
satisfaction
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4.5 Logistics operations
➢ There are three types of logistics operation:
✓ Transportation
✓ Warehousing
✓ Packaging and materials handling

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4.5.1 Transportation
The Role of Transportation in Logistics
1) Transportation is the physical link connecting
the firm to its suppliers and customers.
2) In a nodes and links scenario, transportation
is the link between fixed facilities (nodes).
3) Transportation also adds value to the product
by providing time and place utility for the
firm’s goods.
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4.5.1 Transportation
The Role of Transportation in Logistics
4) As firms engage in global competition,
transportation costs are becoming even more
significant.
5) In 1999, U.S. firms spent an estimated $554
billion to move freight, or 9.9% of the GNP1;
this is up from 397 billion, or 6.3% of the GDP
in 1993.

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4.5.1 Transportation (cont.)
The Role of Transportation in Logistics
6) In 1999, as a percentage of sales, transportation
was 3.24%, warehousing 1.84%, customer
service 0.48%, administration 0.38%, and
carrying cost 1.52%.
7) Outbound transportation was clearly the largest
component of total physical distribution costs.
8) Cost trade-offs abound in transportation and are
typified by trading lower inventory costs for
higher transportation costs.
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4.5.1 Transportation (cont.)
The Transport Selection Decision
➢ The Transportation – Supply Chain Relationship
 Firms need to recognize that the lowest cost
carrier does not necessarily guarantee that this
carrier will result in the lowest landed cost.
 Therefore, firms need to keep the big picture in
mind when attempting to select a carrier.

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4.5.1 Transportation (cont.)
The Transport Selection Decision
➢ The Carrier Selection Decision:
 Various modes of transportation should be
considered.
 Choose a carrier or carriers within the selected
mode, if there is a choice.
 Carefully examine the service capabilities of the
carrier as services can vary widely between
carriers.
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Figure 4.9: The Carrier Selection Decision

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4.5.1 Transportation (cont.)
The Transport Selection Decision
➢ Carrier Selection Determinants:
 Various modes of transportation should be
considered.
 Cost
 Transit time and reliability
• Can be a competitive advantage
• Lowers customers’ inventory costs
 Capability
 Accessibility
 Security
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Table 4.1: The Carrier Selection Determinants and User
Implications

Selection Determinants Upper Implication

Transport cost Landed costs


Inventory, stockout cost,
Transit time
marketing
Inventory, stockout cost,
Reliability
marketing
Accessibility Transit time, freight costs

Capability Meet physical/marketing needs

Security/Safety Inventory, stockout costs

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4.5.1 Transportation (cont.)
The Transport Selection Decision
➢ The Pragmatics of Carrier Selection:
 Transit time reliability
 Negotiated rates
 Consolidating shipments among a few carriers
 Financial stability
 Sales rep
 Special equipment

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Table 4.2: Importance Ranking of Carrier Selection
Determinants
Determinant Rank
Transit time reliability or consistency 1
Door-to-door transportation rates or costs 2
Total door-to-door transit time 3
Willingness of carrier to negotiate rate changes 4
Financial stability of the carrier 5
Equipment availability 6
Frequency of service 7
Pickup and delivery service 8
Freight loss and damage 9
Shipment expediting 10
Quality of operating personnel 11
Shipment tracing 12
Willingness of carrier to negotiate service changes 13
Scheduling flexibility 14
Line-haul services 15
Claims processing 16
Quality of carrier salesmanship 17
Special equipment 18
Source: Edward J. Bardi, Prabir Bagchi, and T. S. Raghurathan, “Motor Carrier Selection in a Deregulated 38
Environment,” Transportation Journal 29, no. 1 (Fall 1989): 4-11.
4.5.2 Warehousing
➢ In the past, warehouse management could focus
solely on controlling the movement and storage
of materials within an warehouse operation and
processing the associated transactions of
picking, packing, shipping and receiving.
➢ However, today’s systems must integrate
warehouse operations, so that visibility extends
beyond the four walls of the warehouse and to
the rest of the value chain.
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4.5.2 Warehousing (cont.)
Uses of Warehouses:
➢ Support manufacturing.
➢ Mix products from multiple production
facilities to a single customer.
➢ Break bulk.
➢ Consolidate small shipments into large
shipments.

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Figure 4.10: Logistics Concepts

S C
u u
p Inbound Logistics Outbound Logistics
s
p t
l o
i m
e e
r r

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Figure 4.11: Manufacturing Support (inbound logistics)

Carload or truckload shipments

Supplier A

Supplier B
Warehouse
Supplier C

Supplier D

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Figure 4.12: Mixing Warehouse (outbound logistics)

1 2 3 4
Customer W
Plant A, Product 1
1 2 3 4

Plant B, Product 2
Customer X
1 2 3 4
Plant C, Product 3

Customer Y
Plant D, Product 4
1 2 3 4

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Figure 4.13: Mixing Warehouse (outbound logistics)

Customer W
Plant A, Product 1 1
1 2 3 4

Plant B, Product 2 22
Customer X
Mixing Warehouse 1 2 3 4
Plant C, Product 3 3

Customer Y
Plant D, Product 4 44
1 2 3 4

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Figure 4.14: Consolidation Warehouse (outbound logistics)

Customer
Plant A

Plant B
Customer
Consolidation Warehouse
Plant C

Customer
Plant D

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Figure 4.15: Breaking Bulk

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Figure 4.16: Breakbulk Warehouse (outbound logistics)

Customer 1

Customer 2
Plant Breakbulk Warehouse

Customer 3

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4.5.2 Warehousing (cont.)
Types of Warehousing: XYZ Company Warehouse
➢ Direct store delivery.
➢ Private warehousing.

Advantages Disadvantages
• Control • Fixed costs, especially if built
• Flexibility in design and for peak seasons
operation • Investment. Return may be
• Long-term cost better if money is placed
• Better use of human resources elsewhere
• Tax benefits: depreciation
• Intangibles: image of stability

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4.5.2 Warehousing (cont.)
Types of Warehousing: ABCCompany
XYZ Public Warehouse
Warehouse
➢ Direct store delivery.
➢ Private warehousing.
➢ Public warehousing.
Advantages Disadvantages
• Conservation of capital • Incompatible communications
• Able to increase capacity when needed systems
• Reduced risk of obsolescence • Lack of specialized services
• Economies of scale due to warehouse • May be unavailable when needed
company’s investment
• Flexibility
• Tax advantages: some states have no
inventory taxes for products in public
warehouses
• Specific knowledge of costs

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4.5.2 Warehousing (cont.)
ABCCompany
Types of Public Warehousing: XYZ Public Warehouse
Warehouse
➢ General merchandise
➢ Refrigerated or cold storage
➢ Bonded warehouses
➢ Household goods, furniture
➢ Special commodity
➢ Bulk storage
➢ Cross-docking facilities (3PL concept)
➢ Contract warehousing (can be used in 3PL)

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4.5.2 Warehousing (cont.)
Warehouse Characteristics
➢ Increase the number of warehouses and the
average size of warehouses decreases.
➢ Factors influencing the number of
warehouses:
✓ Cost of lost sales
✓ Inventory costs
✓ Warehousing costs
✓ Transportation costs
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4.5.2 Warehousing (cont.)
Warehouse Locations
➢ Market-based – nearest the final customer.
➢ Production positioned – collection points or
mixing facilities.
➢ Intermediate positioning between producer
and final customer.

Factory Warehouse Customer

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4.5.2 Warehousing (cont.)
 Cross-docking:
➢ Movement from an inbound dock directly to an
outbound dock.
➢ Movement directly from an inbound dock to a sorting
process to an outbound dock.
Outbound
Inbound
Outbound
Outbound
Inbound
Outbound
Inbound

Sorting area
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4.5.2 Warehousing (cont.)
 Cross-docking in at least two of these conditions:
➢ Product destination is known upon receipt.
➢ Destination is ready for immediate delivery.
➢ You daily ship to less than 200 locations.
➢ More than 70% of products fit conveyors.
➢ You receive large quantities of individual items.
➢ Products arrive pre-labeled.
➢ Some products are time-sensitive.
➢ Distribution center is near capacity.
➢ At least some inventory is pre-priced.
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4.5.3 Packaging and materials
handling
Packaging Fundamentals
➢ Building-blocks concept
 Smallest unit is consumer package
 Each unit is stocked within the next larger one to protect
the product
➢ Packaging
 refers to materials used for the containment, protection,
handling, delivery, and presentation of goods
 Serves three general functions
• To promote
• To protect
• To identify (label) the relevant product

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4.5.3 Packaging and … (cont.)
Promotional and Protective Functions of Packaging
➢ Protective functions of packaging:
– Enclose materials
– Restrain materials from undesired movement
– Separate contents to prevent undesired contact
– Cushion contents from outside vibrations and shocks
– Support the weight of identical containers stacked above
– Position the contents to provide maximum protection
– Provide for uniform weight distribution
– Provide exterior surface for labeling
– Be tamperproof
– Be safe for consumers or others
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4.5.3 Packaging and … (cont.)
Package Testing and Monitoring
 A package system requires 3 types of information
to design
➢ Severity of the distribution environment
➢ Fragility of the product
➢ Performance characteristics of various cushion
materials

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4.5.3 Packaging and … (cont.)
Package Testing and Monitoring
 Package testing
➢ Vibrations
➢ Dropping
➢ Horizontal impacts
➢ Compression
➢ Overexposure to extreme temperatures or
moisture
➢ Rough handling

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Figure 4.17: Kaiser Aluminum’s Moisture-Alert Label

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4.5.3 Packaging and … (cont.)
Labeling
➢ Retroflective labels
➢ Batch numbers
➢ Weight
➢ Specific contents
➢ Instructions for use
➢ Information to allow passage through customs
➢ Compliance labeling
➢ One- or two-dimensional bar codes
➢ Smart labels or RFID labels
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Figure 4.18: Examples of Shipping Labels

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4.5.3 Packaging and … (cont.)
Labeling
➢ Hazardous Materials
− Governmental regulations address labeling of hazardous
materials
➢ Requirements involve
− Labeling
− Packaging and repackaging
− Placing warnings on shipping documents
− Notifying transportation carriers in advance
➢ Globally Harmonized System of Classification and
Labeling of Chemicals (GHS) is a global system to
classify and label hazardous materials
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4.5.3 Packaging and … (cont.)
Issues in Packaging
➢ Environmental Protection
– Reduce packing materials used
– Use packaging materials that are more
environmentally friendly with recycled content
– Use reusable containers (closed-loop system)
– Retain or support services that collect used
packaging and recycle it (closed-loop system)

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4.5.3 Packaging and … (cont.)
Issues in Packaging
➢ Metric System
– U.S., Liberia, and Myanmar (formerly Burma) are
the only 3 countries in the world that do not use
the metric system of measurement
– Increasing pressure on U.S. exporters to market
their products overseas in metric units

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4.5.3 Packaging and … (cont.)
Identifying Packaging Inefficiencies
➢ Building-blocks concept is useful for analyzing
packaging inefficiencies.
➢ Packaging inefficiencies can have a number of
undesirable logistics consequences including:
– Increased loss
– Increase damage
– Slower materials handling
– Higher storage costs
– Higher transportation costs
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Table 4.3: A Hypothetical Example of Packaging Inefficiency

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4.5.3 Packaging and … (cont.)
Packaging’s Influence on Transportation
Considerations
➢ Carrier’s tariffs and classifications influence the type of
packaging and packing methods that must be used.
➢ Carriers established classifications for two main reasons:
– Packaging specifications determined by product density lead to
the best use of the equipment’s weight and volume capabilities
– Carrier specifications for protective packaging reduce likelihood
of damage to products thus reducing the loss and damage
claims filed against the carrier

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Figure 4.19: Boxmaker’s Guarantee

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4.5.3 Packaging and … (cont.)
Unit Loads in Materials Handling
➢ A unit load (unitization) refers to consolidation
of several units (cartons or cases) into larger
units to improve efficiency in handling and to
reduce shipping costs.
• Source: http://cscmp.org/digital/glossary/glossary.asp

➢ Handling efficiency can be facilitated by


mechanical devices (pallet jack or forklift) as well
as by using a pallet or skid.

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4.5.3 Packaging and … (cont.)
Unit Loads in Materials Handling

Advantages Disadvantages
• Additional protection • Provides large quantity
• Pilferage is discouraged that sometimes is of
• More fragile items can be limited value to resellers
stacked inside the load dealing in smaller
quantities
• Mechanical devices can be
substituted for hand labor • Must use mechanical or
automated device to move

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Figure 4.20: Automated Guided Vehicle

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4.5.3 Packaging and … (cont.)
Unit Loads in Materials Handling
➢ Basic unit is a pallet or skid
– Can be constructed from wood, wood composites,
plastic, paper, and metal
– Each pallet material has advantages and
disadvantages
– Should be less than 50 pounds
➢ Pallet or skid alternatives
– Slip sheet
– Shrink-wrap
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4.5.3 Packaging and … (cont.)
Unit Loads in Materials Handling
➢ Beyond the unit load
– Use of load-planning software
– Bracing
– Inflatable dunnage bags
– Load is subjected various forces including
• Vibration
• Roll
• Pitch
– Weighing out

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4.5.3 Packaging and … (cont.)
Materials Handling
➢ Materials handling refers to the “short-distance
movement that usually takes place tihin the confines
of a building such as a plant or DC and between a
build and a transportation service provider.”
Source: John J. Coyle, C. John Langley, Jr., Brian J. Gibson, Robert A. Novack, and Edward J. Bardi, Supply
Chain Management: A Logistics Perspective, 8th ed. (Mason, OH: South-Western Cengage Learning,
2009), Appendix 11-A.

➢ How the products are handled depends on whether


they are packaged or in bulk
➢ Handling may change the characteristics of the
product
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4.5.3 Packaging and … (cont.)
Materials Handling Principles
➢ 10 Material Handling Principles Include:
1. Planning
2. Standardization
3. Work
4. Ergonomic
5. Unit load
6. Space utilization
7. System
8. Automation
9. Environmental
10. Life cycle cost
Source: “The Ten Principles of Material Handling,” www.mhia.org.
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4.5.3 Packaging and … (cont.)
Materials Handling Equipment
➢ Two categories of handling equipment
– Storage
• Shelves
• Racks
• Bins
– Handling
• Conveyor systems
• Lift trucks
• Carts
• Cranes
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4.5.3 Packaging and … (cont.)
Materials Handling Equipment
➢ The choice of handling equipment can influence
the type of storage equipment.

➢ The choice of storage equipment can influence


the type of handling equipment.

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4.5.3 Packaging and … (cont.)
Materials Handling Equipment
➢ Material handling equipment can also be
categorized as:
– Labor intensive
– Mechanized
– Automated

➢ Sufficient volume is needed to justify high cost of


automated equipment

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4.5.3 Packaging and … (cont.)
Materials Handling Equipment
➢ An organization’s order picking and assembly
system can also influence the type of handling
equipment.
– Picker-to-part systems
– Part-to-picker systems

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