Supply Chain Management

CHAPTER 2
LOGISTICS MANAGEMENT
 Outline
Introduction
Modes of Transportation
Design options for Transportation Networks
Routing and Scheduling
Inbound and outbound logistics
Reverse Logistics
3PLIntegrated Logistics Concepts
Integrated Logistics Model
Activities – Measuring logistics cost and
performance – Warehouse Management - Case
Analysis

2
INTRODUCTION

3
PETER DRUCKERS stated that:

Logistics is one of the last frontiers of

opportunity for organizations wishing to
improve their corporate efficiency.
1
1

Logistics Management
Logistics management is the process of
planning,
implementing and
controlling
 the efficient, cost-effective forward and reverse flow of raw
materials, in-process inventory, finished goods, services,
and related information from point of origin to point of
consumption
for the purpose of conforming to customer requirements.
Council of Logistics Management
 Logistics activities
•Customer service •Plant and warehouse site
•Demand forecasting selection
•Distribution •Procurement
communications •Packaging
•Inventory control •Reverse logistics
•Material handling •Traffic and transportation
•Order processing •Warehousing and storage
•Parts and service support
 Logistics Is Relevant to All Types
of Organizations
• The definition of logistics includes the flow of
materials and services in both the
manufacturing and service sector.
• The service sector includes entities such as the
government, hospitals, banks, retailers and
wholesalers.
 Definition of Logistics
Management
• Logistics has been called by many names including the
following:

– Materials management
– Physical distribution
– Business logistics
– Channel management
– Distribution
– Industrial logistics
– Logistical management
System Approach/Integration
• Logistics is, in itself, a system; it is a network of
related activities with the purpose of managing
the orderly flow of goods, information and service
with the logistics channel.
• The systems approach simply states that all
functions or activities need to be understood in
terms of how they affect, and are affected by,
other elements and activities with which they
interact.
 System must be viewed as a whole

Logistics and Supply Chain Management

Approach
 Systems Approach
• The sum of a series of activities is greater than
its individual parts.
• Trade-off analysis-system should be viewed as
a whole.
High inventory- High customer service
High storage costs
High obsolescence risks
 The Five Rights of Logistics
• Right Items, needed for consumption or
production,
• Right Place
• Right Time
• Right Condition
• Right Cost,
 Logistics Adds Value by Creating Utility
• FORM UTILITY is the process of creating the good and
service, or putting it in the proper form for the
customer to use. (from raw materials to finished
goods)
• POSSESSION UTILITY is the value added to a product
or service because the customer is able to take actual
possession. (by credit a arrangements, loans...)
• TIME UTILITY is the value added by having an item
when it is needed.
• PLACE UTILITY means having the item or service
available where it is needed.
 Logistics Supports Marketing
• According to Kotler and Armstrong;
– marketing management - determining the needs
and wants of target markets and delivering the
desired satisfactions more effectively and
efficiently than competitors
– Impact of marketing concept ----customer
orientation
14 Marketing / Logistics
Management Concept
Customer
satisfaction

• Suppliers
• Intermediate
customers
• Final customers

Integrated Company
effort profit
• Product • Maximize long-term
profitability
• Price
• Lowest total costs
• Promotion given an acceptable
• Place (distribution) level of customer
service
Marketing-Logistics Concepts

• Time and place utility –customer service

level –customer satisfaction

• Customer service is an output of the

logistics system
 Competitive Advantage
• The source of competitive advantage is found ;
– In the ability of the organization to differentiate
itself, in the eyes of the customer, from its
competitors,
– By operating at a lower cost and hence at greater
profit.
 • It is only in the recent past that
business organizations have come to
recognize the vital impact that
logistics management can have in the
achievement of competitive
advantage.
12 Components of
Logistics Management
Management actions
Inputs into
logistics Planning Implementation Control
Outputs of
Natural logistics
resources
(land, facilities, Competitive
and equipment) advantage
Logistics management Time
Human and place
resources Suppliers Raw In-process Finished Customers
materials inventory goods utility
Efficient
Financial movement
resources to customer

Information Proprietary
resources Logistics activities asset
• Customer service • Plant and warehouse site
• Demand forecasting selection
• Distribution • Procurement
communications • Packaging
• Inventory control • Reverse logistics
• Material handling • Traffic and transportation
• Order processing • Warehousing and storage
• Parts and service support
 The Outputs of the Logistics
System
The outputs of the logistics system are
competitive advantage,
time and
place utility,
efficient movement to the customer, and
providing a logistics service mix such that logistics
becomes a proprietary asset of the organization.
MODES OF TRANSPORTATION

23
 Major Transportation Modes
u Highway (truck)

u Water

u Rail

u Air

u Package Carriers
u Pipeline
24
Types of Transport Modes

25
Characteristics of Transport Modes

26
 Truckload (TL)
Average revenue per ton mile (1996) = 9.13
cents
Average haul = 274 miles
Average Capacity = 42,000 - 50,000 lb.
Low fixed and variable costs
Major Issues
– Utilization
– Consistent service
– Backhauls

27
 Less Than Truckload (LTL)
Average revenue per ton-mile (1996) = 25.08
cents
Average haul = 646 miles
Higher fixed costs (terminals) and low variable
costs
Major issues:
– Location of consolidation facilities
– Utilization
– Vehicle routing
– Customer service

28
 Highway Mode
Strengths Weaknesses
• Flexibility to pick up and • Not the fastest
deliver where and when • Not the cheapest
needed
• Often the best balance
between cost/flexibility and
delivery reliability/speed
• Can deliver straight to the
customer (increasing)

29
 Rail
Average revenue / ton-mile (1996) = 2.5 cents
Average haul = 720 miles
Average load = 80 tons
Key issues:
– Scheduling to minimize delays / improve service
– Off-track delays (at pickup and delivery end)
– Yard operations
– Variability of delivery times

30
 Air
• Key issues:
– Location/number of hubs
– Location of fleet bases/crew bases
– Schedule optimization
– Fleet assignment
– Crew scheduling
– Yield management

31
 Air Mode
Strengths Weaknesses
• Quickest delivery over • Often the most
longer distances expensive, particularly
• Can be very flexible on a per pound basis
when linked to highway
mode
• Works best for low
weight-to-value items
Grew 90.5% in value of goods shipped from 1993 to 2002

32
 Package Carriers
Companies like FedEx, UPS, USPS, that carry small
packages ranging from letters to shipments of
about 150 pounds
Expensive
Rapid and reliable delivery
Small and time-sensitive shipments
Preferred mode for e-businesses (e.g., Amazon,
Dell, McMaster-Carr)
Consolidation of shipments (especially important
for package carriers that use air as a primary
method of transport)

33
 Water
• Limited to certain geographic areas
• Ocean, inland waterway system, coastal
waters
• Very large loads at very low cost
• Slowest
• Dominant in global trade (autos, grain,
apparel, etc.)

34
 Water Mode
Strengths Weaknesses
• Highly cost effective for • Limited locations
bulky items • Relatively poor delivery
• Works best for high reliability/speed
weight-to-value items • Often limited operating
• Most effective when hours at docks
linked into multimodal
system

35
 Pipeline
• High fixed cost
• Primarily for crude petroleum, refined
petroleum products, natural gas
• Best for large and predictable demand
• Would be used for getting crude oil to a
port or refinery, but not for getting refined
gasoline to a gasoline station (why?)

36
 Rail Mode
Strengths Weaknesses
• Highly cost effective for • Limited locations, but
bulky items better than for water.
• Can be most effective • Better delivery
when linked into reliability/speed than
multimodal system water

Increasing part of multimodal solutions, dual tracks on

major routes

37
 Factors Affecting Transportation
Decisions
Carrier (party that moves or transports the
product)
– Vehicle-related cost
– Fixed operating cost
– Trip-related cost
Shipper (party that requires the movement of the
product between two points in the supply chain)
– Transportation cost
– Inventory cost
– Facility cost

38
Considerations for Selecting a Mode
of Transport

Transit Time Predictability

Cost Non-economic
Factors 39
Transportation Modes
Rail
Nation’s largest carrier, cost-effective
for shipping bulk products, piggyback
Truck
Flexible in routing & time schedules, efficient
for short-hauls of high value goods
Water
Low cost for shipping bulky, low-value
goods, slowest form

Pipeline
Ship petroleum, natural gas, and chemicals
from sources to markets

Air
High cost, ideal when speed is needed or to
ship high-value, low-bulk items
40
 Technological Breakthroughs

• Standardized containers for ease of transfer

• “Roadrailers,” etc.
• Multimodal solutions
– Ship  Truck  Train  Truck  ?

41
Multi-Modal Solutions
(An example)

North Carolina’s Global TransPark

42
 Global TransPark

• 15,700 acres at full development with

two parallel runways of 11,500 feet and
13,000 feet
• Integrated air, rail, road, and nearby sea
transportation capabilities
• Free trade zone status

43
 Justification for Such a Facility
 Shift from domestic to global economies
 Emergence of just-in-time, flexible and agile manufacturing
practices requiring sophisticated logistics solutions
 The rapid growth of distribution via air freighters (roughly four times
the growth rate of passenger service by the airlines)
 The need to use air cargo, shipment by sea, and delivery by trucks
and trains in an overall distribution system
 The need for a commercial distribution hub in the Eastern United
States that can reach more than 60 percent of the nation’s
population overnight and also provide a gateway to global markets.

44
 Intermodal
 Use of more than one mode of transportation to move a
shipment to its destination
 Most common example: rail/truck
 Also water/rail/truck or water/truck
 Grown considerably with increased use of containers
 Increased global trade has also increased use of
intermodal transportation
 More convenient for shippers (one entity provides the
complete service)
 Key issue involves the exchange of information to
facilitate transfer between different transport modes

45
Consolidation of Transport Modes
• Given the transportation modes presented, a
combination of them may be used in order to
achieve lower costs & better customer service
quality

46
 Consolidation of Transport Modes
 Basic characteristic of the combined transportation (intermodal) is the
combination of different transport modes by using / interchanging equipment
(i.e. a track container may be directly loaded to a rail-car or cargo aircraft).
 There are 10 types of combined transportation:
 Rail – Road (piggyback)
 Rail - Sea
 Rail - Air
 Rail - Pipeline
 Road - Air
 Road – Sea (fishyback)
 Road – Pipeline
 Sea – Pipeline
 Sea – Rail
 Air – Pipeline

47
Consolidation of Transport Modes

48
 An Indicative Comparison of
Transport Modes
• Selecting which modes to combine and how is
a decision that is based on the following
parameters:

49
 Transport Goods & Unit Loads
• Selecting the appropriate storage units for the transported goods has
major impact in the transportation cost, susceptibility to damages, loading
/ unloading efficiency.
• Some of the storage units used are: Bottles, Boxes, Metal dispensers,
Pallets, Roll-pallets, Sacks, Barrels, etc.
• Many combinations between different storage units can be made in order
to achieve better space utilization and better handling of the transported
goods (i.e. boxes on a pallet)
• Selection of storage units depends on:
– Shape, size and weight of transported goods
– Ability to stack units on top of each other
– Other handling criteria (transport means loading ability, ability to carry
certain storage types, Warehouse gates dimensions)
– Special attention has to be given to Pallets and Containers

50
 Unit Loads - Pallets
• “A pallet is a flat transport structure that supports goods in a stable fashion
while being lifted by a forklift, pallet jack, front loader or other jacking
device. A pallet is the structural foundation of a unit load which allows
handling and storage efficiencies. Goods or shipping containers are often
placed on a pallet secured with strapping, stretch wrap or shrink wrap and
shipped. While most pallets are wooden, pallets also are made of plastic,
metal, and paper.
• Pallet users want pallets to easily pass through buildings, stack and fit in
racks, forklifts, pallet jacks, automated warehouses, and pack tightly inside
intermodal containers and vans.”

51
 Unit Loads - Standardization of Pallets
• There is not a standardized version of sizes, dimensions and
characteristics for pallets world wide. Several organization
companies have created different standards (such as ISO,
North American, Europe Pallets, etc.).

52
 Unit Loads - Containers
• “An intermodal container or freight container (commonly shipping
container) is a reusable transport and storage unit for moving products and
raw materials between locations or countries.
• There are approximately seventeen million intermodal containers in the
world and a large proportion of the world's long distance freight generated
by international trade is transported inside shipping containers.”

53
 Unit Loads - Benefits of Containers
u Products / Commodities are stacked into the container, which provide
maximum security and are not affected by weather conditions
u Containers are manufactured in order to be able to be transported and
loaded directly between different transport modes
u The standardized characteristics allow the effective stack and loading of
them to rail cars, vessels, etc.
u Different kind of containers are used, based on the transported
commodities and their characteristics:
– Dry / generic cargo
– Liquids
– Frozen / Perishable
– Bulk Products

54
 Design Options for a
Transportation Network
• What are the transportation options? Which
one to select? On what basis?
• Direct shipping network
• Direct shipping with milk runs
• All shipments via central DC
• Shipping via DC using milk runs
• Tailored network

55
Trade-offs in Transportation Design
• Transportation and inventory cost trade-off
– Choice of transportation mode
– Inventory aggregation
• Transportation cost and responsiveness
trade-off

56
 Choice of Transportation Mode
• A manager must account for inventory costs
when selecting a mode of transportation
• A mode with higher transportation costs can
be justified if it results in significantly lower
inventories

57
 Inventory Aggregation: Inventory vs.
Transportation Cost
• As a result of physical aggregation
– Inventory costs decrease
– Inbound transportation cost decreases
– Outbound transportation cost increases
• Inventory aggregation decreases supply chain costs if
the product has a high value to weight ratio, high
demand uncertainty, or customer orders are large
• Inventory aggregation may increase supply chain costs
if the product has a low value to weight ratio, low
demand uncertainty, or customer orders are small

58
 Trade-offs Between Transportation Cost and
Customer Responsiveness
• Temporal aggregation is the process of
combining orders across time
• Temporal aggregation reduces transportation
cost because it results in larger shipments and
reduces variation in shipment sizes
• However, temporal aggregation reduces
customer responsiveness

59
 Tailored Transportation
• The use of different transportation networks
and modes based on customer and product
characteristics
• Factors affecting tailoring:
– Customer distance and density
– Customer size
– Product demand and value

60
 Role of IT in Transportation
• The complexity of transportation decisions
demands to use of IT systems
• IT software can assist in:
– Identification of optimal routes by minimizing costs
subject to delivery constraints
– Optimal fleet utilization
– GPS applications

61
 Risk Management in Transportation

• Three main risks to be considered in

transportation are:
– Risk that the shipment is delayed
– Risk of disruptions
– Risk of hazardous material
• Risk mitigation strategies:
– Decrease the probability of disruptions
– Alternative routings
– In case of hazardous materials the use of modified
containers, low-risk transportation models,
modification of physical and chemical properties can
prove to be effective

62
 Making Transportation
Decisions in Practice
• Align transportation strategy with competitive
strategy
• Consider both in-house and outsourced
transportation
• Design a transportation network that can handle
e-commerce
• Use technology to improve transportation
performance
• Design flexibility into the transportation network

63
ROUTING AND SCHEDULING

64
 Definition of Routing & Scheduling
• Private firms that undertake the distribution of their goods to
customer locations, and public transportation authorities
responsible for the provision of transportation services to
users both rely upon a fleet of vehicles and associated crews.

• The effective management of these vehicles and crews gives

rise to a variety of problems generally subsumed under the
heading of “routing and scheduling problems”.

65
 Routing and Scheduling
Goals:
• find best path a vehicle should follow through
networks of roads, rail lines, shipping lanes, and
air routes
• determine best pattern for stops, multi-vehicle
use, driver layovers, time of day restrictions
Benefits:
• greater vehicle utilization
• improved and more responsive customer service
• reduced transportation expenses
• reduced capital investment in equipment
66
Main Entities in a Routing &
Scheduling System

67
Main Entities in a Routing &
Scheduling System

68
 Costs related with Routing &
Scheduling
• Various cost factors have to be taken under consideration in order to
generate the cost associated with routing and scheduling. Costs are
generally separated in fixed and variable costs.

• Fixed costs are calculated on an annual basis.

• Variable costs are calculated based on Kilometers.
• Other costs may include the utilization of third-party (hired) fleets.

69
 Transport Service Selection
• Depends on variety of service characteristics
• Not all service characteristics are of equal importance
• Most common bases used for modal choice:
– Cost of service
– Average transit time (speed)
– Transit-time variability (dependability)
• Other bases used
– Capability
– Availability & adequacy of equipment
– Availability of service
– Frequency of service
– Security
– Claims handling
– Shipment tracing
– Problem-solving assistance
 Basic Cost Trade-Offs
• When alternative modes are available, the
one chosen should be the one that offers the
lowest total cost consistent with customer
service goals.
• Often, cost trade-offs must be used.
• Speed & dependability affect both the
seller’s & buyer’s inventory level, as well as
the inventory that is in transit.
• Slower, less reliable modes require more
inventory in the distribution channel
 Example
• A Birmingham luggage company maintains a finished-goods
inventory at its plant
• Currently, rail is used to ship between Birmingham and the
firm’s West Coast warehouse
• Average transit time is T = 21 days
• 100,000 units are kept at each stocking point with the
luggage having an average value of C = $30 per unit
• Inventory carrying costs are I = 30 percent per year
• There are D = 700,000 units sold per year out of the West
Coast warehouse
• Average inventory levels can be reduced by 1 percent for
each day of transit time that is eliminated.
 Example
Transport Services Available to the Firm

Door-to-Door No. of
Transport
Rate ($/unit) Transit Time Shipments per
Service
(days) year

Rail 0.10 21 10

Piggyback 0.15 14 20

Truck 0.20 5 20

Air 1.40 2 40
 Example
• Different modes affect the time inventory is in transit
• Annual demand (D) will be in transit by the fraction of the
year represented by T/365 days, where T is the average transit
time
• Annual cost of carrying this in-transit inventory is ICDT/365
• Average inventory at both ends of the channel can be
approximated as Q/2, where Q is the shipment size
• Holding cost per unit is I x C
– Note that C must reflect where the inventory is in the
channel
– Value of C at the plant is the price ($30 per unit)
– Value of C at the WC warehouse is C + transportation rate
• Total annual transportation cost is R x D
 Example
Method of
Cost Type Rail
Computation

Transportation RxD (.1)(700,000) = 70,000

[(.3)(30)(700,000)(21)]/365 =
In-transit Inventory ICDT/365
363,465

Plant Inventory ICQ/2 [(.3)(30)(100,000)] = 900,000

Warehouse Inventory IC”Q/2 [(.3)(30.1)(100,000)] = 903,000

Total for Rail $2,235,465

 Example
Method of
Cost Type Piggyback
Computation

Transportation RxD (.15)(700,000) = 105,000

[(.3)(30)(700,000)(14)]/365 =
In-transit Inventory ICDT/365
241,644

[(.3)(30)(50,000)(0.93)c] =
Plant Inventory ICQ/2
418.500

[(.3)(30.15)(50,000)(0.93)c] =
Warehouse Inventory IC”Q/2
420.593

Total for Rail $1,185,737

C = accounts for improved transport service & number of shipments per year
 Example
Method of
Cost Type Truck
Computation

Transportation RxD (.2)(700,000) = 140,000

[(.3)(30)(700,000)(5)]/365 =
In-transit Inventory ICDT/365
86,301

[(.3)(30)(50,000)(0.84)c] =
Plant Inventory ICQ/2
378,000

[(.3)(30.2)(50,000)(0.84)c] =
Warehouse Inventory IC”Q/2
380,520

Total for Rail $984,821

C = accounts for improved transport service & number of shipments per year
 Example
Method of
Cost Type Air
Computation

Transportation RxD (1.4)(700,000) = 980,000

[(.3)(30)(700,000)(2)]/365 =
In-transit Inventory ICDT/365
34,521

[(.3)(30)(25,000)(0.80)c] =
Plant Inventory ICQ/2
378,000

[(.3)(30.4)(25,000)(0.80)c] =
Warehouse Inventory IC”Q/2
190,755

Total for Rail $1,387,526

C = accounts for improved transport service & number of shipments per year
 Example
Modal Choice

Method of
Cost Type Rail Piggyback Truck Air
Computation

Transportation RxD 70,000 105,000 140,000 980,000

In-transit
ICDT/365 363,465 241,644 86,301 34,521
Inventory

Plant Inventory ICQ/2 900,000 418,500 378,000 182,250

Warehouse
IC”Q/2 903,000 420,593 380,520 190,755
Inventory

Totals $2,235465 $1,185,737 $984,821 $1,387,526

 Factors Other Than Transportation
Cost that Affect Modal Choices
• Effective buyer/seller cooperation is encouraged if a reasonable
knowledge of the other party’s costs is available
• If there are competing suppliers, buyer & supplier should act
rationally to gain optimum cost-transport service trade-offs
• Offering higher-quality transportation services than the
competition may allow the seller to charge a higher price for
the product
• Elements in the mix change frequently
– Transport rate fees, product mix changes, inventory cost
changes, & transport service retaliation by competitors
• If buyer makes the transport choice, seller’s inventories are
impacted as well, which may impact price charged for the
product
 Vehicle Routing & Scheduling
• Selecting the best paths for the transport mode to follow to
minimize travel time or distance reduces transportation costs
and improves customer service
• Start with determining shortest possible routes based on
– Transit time
– Distance
– Cost
• Incorporate restrictions
 Restrictions on Vehicle Routing &
Scheduling
• Each stop on the route may have volume to be picked up as
well as delivered
• Multiple vehicles may be used using different capacity limits
to both weight and cube
• Maximum total driving time allowed before a rest period must
be taken is 8 hours
• Stops may permit pickups/deliveries only at certain times of
day (time windows)
• Pickups may be permitted on a route only after deliveries are
made
• Drivers may be allowed to take short rests or lunch breaks at
certain times of the day.
 8 Principles for Good Routing &
Scheduling
• Load trucks with stop volumes that are in the closest
proximity to each other – minimizes interstop travel
between them
• Stops on different days should be arranged to
produce tight clusters – develop overall route, plus
daily routes
• Build routes beginning with the farthest stop from
the depot
• Sequence of stops on a truck route should form a
teardrop pattern – try to keep route paths from
crossing
 8 Principles for Good Routing &
Scheduling
• The most efficient routes are built using the largest
vehicles available – allocate largest vehicles first,
then smaller
• Pickups should be mixed into delivery routes rather
than assigned to the end of routes
• A stop that is greatly removed from the other stops
in a route cluster is a good candidate for an
alternative means of delivery
• Narrow stop time window restrictions should be
avoided – see if you can renegotiate the time
window restrictions
 The Sweep Method of Routing
• Simple method to use
• Fairly accurate with a projected error rate of
about 10%
• Good to use when results must be obtained in
short order or
• Good to use when a good solution is needed
as opposed to an optimum solution
 The Sweep Method of Routing
• Locate all stops including the depot on a map or grid
• Extend a straight line from the depot in any direction
• Rotate the line (clockwise or counterclockwise) until it
intersects a stop
– Will the inserted stop exceed the vehicle’s capacity?
– If not, continue rotating the line until the next stop is
intersected
– Will the cumulative volume exceed the vehicle’s capacity?
– Continue process until vehicle’s capacity would be
exceeded
• Sequence the stops to minimize distance
 Sweep Method Example
• Gofast Trucking uses vans to pickup merchandise from
outlying customers
• Merchandise is returned to a depot where it is consolidated
into large loads for intercity transport
• Firm’s vans can haul 10,000 units
• Completing a route typically takes a full day
• Firm wants to know
– How many routes (trucks) are needed
– Which stops should be on the routes
– And sequence of stops for each truck
 Sweep Method Example
Pickup Stop Data:
quantities shown in units
E
1000 H
4000
A
F 2000
3000 D
Depot
G B 3000

2000 3000
I
1000 C
L
2000 K 2000
J
2000
2000
 Sweep Method Example
“Sweep” method solution

E
1000 H
4000
A
F 2000
3000 D
Depot
G B 3000

2000 3000
I
1000 C
L
2000 K 2000
J
2000
2000
 Sweep Method Example
“Sweep” method solution

E
1000 H
4000
A
F Route 1 2000
3000 10,000 units
D
Depot
G B 3000

2000 3000
I
1000 C
L
2000 K 2000
J
2000
2000
 Sweep Method Example
“Sweep” method solution

E
1000 H Route 3
4000 8,000 units
A
F Route 1 2000
3000 10,000 units
D
Depot
G B 3000

2000 3000
I
Route 2
1000 C
L 9,000 units
2000 K 2000
J
2000
2000
INBOUND & OUTBOUND LOGISTICS

92
 Logistics
• Inbound Logistics
–The delivery of goods and services that are
purchased from suppliers and/or their distributors.
• Outbound Logistics
–The delivery of goods and services that are sold to a
firm’s customers and/or distributors.
A Company’s Supply Chain
The Evolution of Supply Chain Management
The Evolution of Supply Chain Management (cont’d)
Inbound & Outbound LOGISTICS
REVERSE LOGISTICS
 Definitions
 Logistics (Forward)
“Process of planning, implementing and controlling the efficient, cost-effective flow of
raw materials, in-process inventory, finished goods and related information from the
point of origin to the point of consumption for the purpose of conforming to customer
requirements”
- Council of Logistics, 1988 -

 Reverse Logistics
“Process of planning, implementing and controlling the efficient, cost-effective flow of
raw materials, in-process inventory, finished goods and related information from the
point of consumption to the point of origin for the purpose of recapturing value or
proper disposal”
- Rogers and Tibben-Lembke -
99
 Reverse Logistics Activities

 Handling of returned merchandise

– Damage
– Seasonal inventory
– Resell via outlet
– Salvage of outdated products
– Stock–balancing returns

 Recycling and reuse

– Material reuse
– Remanufacturing / refurbishing

 Hazardous materials disposition

100
The Reverse Logistics Process

101
 Size of Reverse Logistics
“Reverse logistics costs in the United States are estimated to be approximately 4% of
total U.S. logistics costs”
- ROGERS, D., Reverse Logistics Challenges, 2002 -
- Roughly $47 billions in 2006

“It is estimated that reverse logistics costs account for almost 1% of the total United
States gross domestic product”
- MOORE, R., Reverse logistics: The least used differentiator, 2006.
- Roughly $132 billions in 2006

“The Center for Logistics Management at the University of Nevada conservatively

estimates that 6% of all goods may be returned, but concedes that the true number
may be closer to 8%”
- MOORE, R., Reverse logistics:
The least used differentiator, 2006.
102
Return Percentages

103
 Publishing Industry

 Highest rate of unsold copies (28% on average)

 Growth of large chain stores: More square
footage requires more books
 To secure a prominent display in superstores,
publishers must supply large quantities of
books
 Superstores sell less than 70% of books they
order
 Shorter shelf life

104
 Computer / Electronic Industry
 Shorter life cycles
 Approximately 325 million PC’s became obsolete in the US
between 1985 and 2005
 Opportunities to reuse and create value out of a nearly
omnipresent asset
 How to recover and reuse materials contained within E-
waste?
 Lead, copper, aluminum gold, plastics and glass
 E-waste includes computers, televisions, cell phones,
audio equipment and batteries

 Remanufacturing of toner cartridges: 12,000

remanufacturers, employing 42,000 workers, sell nearly
$1 billion annually
105
 Automotive Industry
 Three primary areas:
– Components in working order sold as is
– Other components, such as engines,
alternators, starters, and transmissions are
refurbished before they can be sold
– Materials are reclaimed through crushing or
shredding
 Automotive recyclers handle more than
37% of the nation’s ferrous scrap
 Remanufactured auto parts market is
estimated at $34 billion, annually

106
 Retail Industry

 Profit margins are so slim that

good return management is
critical
 Returns reduce the profitability
of retailers marginally more than
manufacturers
 Returns reduce the profitability of
retailers by 4.3%
 The average amount that returns
reduce profitability among
manufacturers is 3.80%

107
Forward vs. Reverse Logistics

108
 STRATEGIC USE OF REVERSE LOGISTICS

• Reverse Logistics as a Strategic Weapon

– Many firms have not yet decided to emphasize reverse logistics as a
strategic variable.

– The handling of reverse logistics challenges is an strategic capability.

Reverse logistics is strategically used to:

 Reduce the risk of buying products that

may not be “hot selling” items.

 Increase the switching costs of changing

suppliers.

Source: Rogers and Tibben-Lembke, Going Backwards: Reverse Logistics Trends and Practices, 1998 109
 STRATEGIC USE OF REVERSE LOGISTICS

• Competitive Reasons

– Liberal return policies over the last few years due

of competitive pressures.

– Taking back unwanted products or products

customers believe do not meet needs.

 Good Corporate Citizenship

o Use reverse logistics capabilities for altruistic reasons, such as
philanthropy.
o These activities enhance the value of the brand and are a
marketing incentive to purchase their products.

Source: Rogers and Tibben-Lembke, Going Backwards: Reverse Logistics Trends and Practices, 1998
110
 STRATEGIC USE OF REVERSE LOGISTICS

• Clean Channel

– Clean out customer inventories, so that they can purchase more new goods.

– Fresher inventories can demand better prices, which in turn, protects margin.

 Recapture Value and Recover Assets

Large portion of bottom-line profits is derived from

asset recovery programs.

Profit derived from materials that were previously

discarded.

 Legal Disposal Issues

o As landfill fees increase, and options for disposal of hazardous material decrease, legally
disposing of non-salvageable materials becomes more difficult.

111
 STRATEGIC USE OF REVERSE LOGISTICS

• Operational Factors in Reverse Logistics Systems

– A holistic view of reverse logistics is essential for a profitable and sustained
business strategy.

Source: Dowlatshahi S. Developing a theory of reverse logistics. Interfaces; May/Jun 2000

112
 REVERSE LOGISTICS CHALLENGES
• Retailer – Manufacturer Conflict
– Inefficiencies that lengthen the time for processing returns:
 Condition of the item
 Value of the item
 Timeliness of response

– They have to develop a working partnership to derive mutual benefit.

 Problem Return Symptoms

o Lack of information about the
process.
o If you aren’t measuring it, you
aren’t managing it.

Source: Rogers and Tibben-Lembke, Going Backwards: Reverse Logistics Trends and Practices, 1998 113
 REVERSE LOGISTICS CHALLENGES

• Cause and Effect

– Poor data collection leads to uncertainty
about return causes.
– Improving the return process decreases costs.
– Being able to see defective products and to
track return issues.

 Reactive Response
o Government regulation or pressure from environmental agencies .
o It has not been possible to justify a large investment in improving reverse
logistics systems and capabilities.

114
 BARRIERS TO GOOD REVERSE LOGISTICS

• Numerous barriers to good reverse logistics exist

– Management inattention and the lack of importance of reverse logistics.
– Corporate strategy for handling returns and non-salable items.
– Legal issues do not appear to be a major problem.

Companies can not continue to

overlook the necessity of good
reverse logistics management.

Source: Rogers and Tibben-Lembke, Going Backwards: Reverse Logistics Trends and Practices, 1998 115
 Key Reverse Logistics Management Element

• Avoidance
Goal: design its merchandise and systems in a manner that will minimize
returns since the impossibility of fully prevent customers from sending
purchased products back
Preventive Measures:

To increase Quality – minimize returns by defective products

Return agreements with retailers / distributors

Customer Service – providing toll-free numbers that customers can

call before returning products

116
Key Reverse Logistics Management Element

GATEKEEPING

“The screening of defective and unwarranted returned merchandise at the

entry point into the reverse logistics process”

Rogers, Dale, and Don Tibben-Lembke

The Nintendo example:
- Rebate retailers if they register the game player sold to the consumer at
the point of sale
- Nintendo/retailers can determine if the product is under warranty, and also
if it is being returned inside the allowed time window
- The impact from this new system on their bottom line was substantial:
80% drop in return rates

117
 Key Reverse Logistics Management Element

 Compacting Disposition Cycle Time

Goal: to reduce the amount of time to figure out what to do with
returned products once they arrive

 Important to know beforehand what to do with returned goods

 When material often comes back in to a distribution center, it is not

clear whether the items are: defective, can be reused, or refurbished, or
need to be sent to a landfill

 The challenge of running a distribution system in forward is difficult

– employees have difficulty making decisions when the decision rules
are not clearly stated and exceptions are often made

118
 Key Reverse Logistics Management Element

 Reverse Logistics Information Systems

One of the most serious problems that the companies face in the
execution of a reverse logistics is the dearth of a good information
systems. To work well, a flexible reverse logistics information system is
required.

 The system should create a database at store level so that the retailer can begin tracking
returned product and follow it all the way back through the supply chain

 Information system should also include detailed information programs about important
reverse logistics measurements, such as returns rates, recovery rates, and returns inventory
turnover

 Useful tools such as radio frequency (RF) are helpful. New innovations such as two-
dimensional bar code and radio frequency identification license plates (RFID) may soon be in
use extensively

119
 Key Reverse Logistics Management Element

Centralized Return Centers (CRC)

• Consistency in disposition decisions and • Faster disposition times – it allows the company to
minimizations of errors obtain higher credits and refunds stay idle for
smaller periods of time, thus losing less value
• Space saving advantage for retailers who want to
dedicate as much of the shop floor to salable • Easier to identify trends in returns – an advantage
merchandise as possible to manufacturer who can detect and fix quality
problems sooner than if these returns were handled
• Labor cost reduction – due to specialization, CRC
entirely by customer service personnel
employees can typically handle returns more
efficiently than retail clerks can
• Transportation cost reduction – empty truckloads
used to pick up return merchandise
• A selling tool – the easy disposition of returned
items represent can be an appealing service to
retailers, and may be a deal-maker for obtaining or
retaining customers

120
 Key Reverse Logistics Management Element

 Zero Returns
 A program where the company in question does not accept returns from its customers.
Rather, it gives the retailer an allowable return rate, and proposes guidelines as to the proper
disposition of the items. Such policies are usually accompanied by discounts for the retailer

 It passes the returns responsibility onto the retailer, while reducing costs for the
manufacturer or distributor

 The drawback: the manufacturer losses control over its merchandise

121
 Key Reverse Logistics Management Element

 Remanufacture and Refurbishment

The advantage to using reworked parts is felt through cost saving

 Five categories of remanufacture and refurbishment:

Make the product reusable for its Retrieving reusable parts from old Reusing parts of products for
intended purpose or broken products different purpose

1) Repair 4) Cannibalization 5) Recycling

2) Refurbishing
3) Remanufacturing

122
 Key Reverse Logistics Management Element

 Asset Recovery
“Asset recovery is the classification and disposition of returned goods,
surplus, obsolete, scrap, waste and excess material products, and other
assets, in a way that maximizes returns to the owner, while minimizing
costs and liabilities associated with the dispositions”

Rogers, Dale, and Don Tibben-Lembke

“the objective of asset recovery is to recover as much of the economic

(and ecological) value as reasonably possible, thereby reducing the
ultimate quantities of waste.”

Rogers, Dale, and Don Tibben-Lembke

 This is a good cash generating opportunity for companies who can sell these
goods that would be otherwise end up in landfills

123
 Key Reverse Logistics Management Element

 Negotiation
 Negotiation is a key element for all parties of the reverse logistics process. Because of the
inherent lack of expertise on product returns, negotiations usually are informal and approached
without formal pricing guidelines. Firms often do not maximize the residual value of returned
product

 Financial Management
 Probably the most difficult part of reverse logistic and also one of the most important

 Returns are sometimes charged against sales. People in the sales department may tend to fight
returns and delay them as much as possible. Furthermore, accounts receivables are impacted by
returns

 Outsourcing
 Reverse logistic is usually not a core competence of the firm. In many cases, however, it makes
more sense for the firm to outsource their reverse logistics functions than keep those in-house.
124
 Reverse Logistics and the Environment

• Environmental considerations have a greater

impact on many logistics decisions.
• For example:
– Many products can no longer be placed in landfills
– Firms forced to take back their products at the end
of their useful lifetime.
– Decrease of landfill availability and increase in
Landfill costs.

125
 Green Logistics and Reverse Logistics

– Reverse Logistics refers to all efforts to move goods

from their typical place disposal in order to recapture
value.
– Green Logistics refers to minimizing the ecological
impact of logistics, for example, reducing energy
usage of logistics activities and reducing usage of
materials.

126
 Landfill costs and availability

– There is a shortage of landfill space

– Prices of landfill usage have been rising.
– Considering the rate at which Americans generate
waste, landfill alternatives must be developed.
– New ways are considered to prolong the lives of
existing landfills by reducing the volume of
material that goes into them.
– The reduction in material sent to the landfill can
be achieved through recycling, composting and
incineration.
127
 Disposal Bans and Reverse Logistics

– Products are banned from being placed in a landfill

either because they present a health risk, example
the cathode ray tubes (CRTs) in computer monitors,
or because they take up too much space.
– Products banned from landfills are: motor oil,
household batteries, household appliances, paper
products, tires, and some medical and electrical
equipment.
– Product ban represents a new reverse logistics
opportunity.
128
 Product Take-Back
– A number of societal changes regarding the
environment are having a profound impact on
reverse logistics.
– Firms are forced to take their products back
when they are banned; this benefits the firms in
two ways. They reuse the products and recapture
their value. The firm is exposed as an
environmentally friendly company.

129
 Product Take-Back
– Companies have begun to examine new ways to
regain value from products once they have reached
the end of their useful lives.
– Companies have begun to realize the potential
marketing benefits of a take-back program.

130
 Product Take-Back

– Many companies such as Compaq, Hewlett-Packard,

and Xerox have adopted the Extended Product
Responsibility (EPR) program. EPR focuses on the
total life of the product, looking for ways to prevent
pollution and reduce resource and energy usage
through the product’s life cycle.

131
LOGISTICS PARTIES

132
 Logistics Parties
• Firms have directed considerable
attention to developing supply
chain relationships.
• Many companies have been in 4PL
3PL
the process of extending their 2PL
logistics organizations into those 1PL
of other supply chain
participants and facilitators.
• One way of accomplishing this
extension is through the use of a
supplier of third-party or
contract logistics services.5
133
 Logistics Parties

11/3/2021 134
Logistics Parties

135
 First Party Logistics (1PL)
• A First-party logistics
provider (abbreviated 1PL) is a firm or an
individual that needs to have cargo, freight,
goods, produce or merchandise transported
from a point A to a point B. The term first-
party logistics provider stands both for the
cargo sender and for the cargo receiver.

136
 Second Party Logistics (2PL)
• A Second-party logistics
provider (abbreviated 2PL) is an asset-
based carrier, which actually owns the means
of transportation
– shipping lines, which own, lease, or charter
their ships,
– airlines, which own, lease, or charter their planes,
– truck companies, which own, or lease their trucks,
– rail companies, which own their trains,
– warehouse owners. 137
 Third-Party Logistics (3PL):
Definitions
• 3PLs are external suppliers that perform all or
part of a company’s logistics functions,
including:
– Transportation
– Warehousing
– Distribution
– Financial services
• Terms contract logistics and outsourcing are
sometimes used in place of 3PL.

138
 Third-Party Logistics (3PL):
Types of 3PL Providers
• Transportation-Based
• Warehouse/Distribution-Based
• Forwarder-Based
• Financial-Based
• Information-Based

139
 Third-Party Logistics (3PL):
Types of 3PL Providers
• Transportation-Based
– Services extend beyond transportation to offer a
comprehensive set of logistics offerings.
– Leveraged 3PLs use assets of other firms.
– Nonleveraged 3PLs use assets belonging solely to
the parent firm.
– Ryder, Schneider Logistics, FedEx Logistics, and
UPS Logistics are examples of 3PLs.

140
 Third-Party Logistics (3PL):
Types of 3PL Providers
• Warehouse/Distribution-Based
– Many, but not all, have former warehouse and/or
distribution experience.
– Transition to integrated logistics has been less
complex than for the transportation based
providers.
– DSC Logistics, USCO, Exel, Caterpillar Logistics, and
IBM are examples of warehouse/distribution-
based 3PLs.

141
 Third-Party Logistics (3PL):
Types of 3PL Providers
• Forwarder-Based
– Essentially very independent middlemen
extending forwarder roles.
– Non-asset owners that capably provide a wide
range of logistics services.
– AEI, Kuehne & Nagle, Fritz, Circle, C. H. Robinson,
and the Hub Group are examples of forwarder-
based 3PLs.

142
 Third-Party Logistics (3PL):
Types of 3PL Providers
• Financial-Based
– Provide freight payment and auditing, cost
accounting and control, and tools for monitoring,
booking, tracking, tracing, and managing
inventory.
– Cass Information Systems, CTC, GE Information
Services, and FleetBoston are examples of
financial-based 3PLs.

143
 Third-Party Logistics (3PL):
Types of 3PL Providers
• Information-Based
– Significant growth and development in this
alternative category of Internet-based, business-
to-business, electronic markets for transportation
and logistics services.
– Transplace and Nistevo are examples of
information-based 3PLs.

144
 On the Line: Trade Team
• Excel, the largest provider of brewery distribution
services in Great Britain, and Bass, the industry’s
low-cost producer, formed Trade Team, the UK’s
leading independent logistics provider to the
beverage industry.
• Annual sales of $200 million; 280 million gallons of
beer and other beverages to over 27,000 retail
customers; 40-50% market share.
• Has capability to move other products.

145
 Fourth Party Logistics (4PL)
• A Fourth-party logistics
provider (abbreviated 4PL), lead logistics
provider, or 4th Party Logistics provider, is
a consulting firm specialized
in logistics, transportation, and supply chain
management.
– NON-ASSET BASED!

146
 Fourth-Party Logistics (4PL): The Next
Evolution?
• Thought of as supply chain integrator, a
firm that “assembles and manages the
resources, capabilities, and technology
of its own organization with those of
complementary service providers to
deliver a comprehensive supply chain
solution.
• 4PLs manage and direct the activities of
multiple 3PLs, serving as an integrator.

147
Integrated Logistic Model
Integrated Logistics Management
Integrated Logistics Model
Concept Recognizes that Providing Better Customer
Service and Trimming Distribution Costs Requires
Teamwork, Both Inside the Company and Among All
the Marketing Channel Organizations.

Cross-Functional Teamwork inside

the Company

Building Channel Partnerships

Third-Party Logistics
 Integrated Logistics System Design Model
Potential Network Schematic
Raw Intermediate Finished
Materials Products Products
FW1
CZ1
P1
FW2 CZ2
PW1

S1 P2 FW3 CZ3

PW2
CZ4
FW4
P3
S2
CZ5
PW3 FW5

CZ6
Interplant DC Transfer
Inbound Replenishment Outbound
 Integrated Logistics System Design Model
Actual Network Design
Raw Intermediate Finished
Materials Products Products
FW1
CZ1
P1
FW2 CZ2
PW1

S1 P2 FW3 CZ3

PW2
CZ4
FW4
P3
S2
CZ5
PW3 FW5

CZ6
Interplant DC Transfer
Inbound Replenishment Outbound
Case Study in Logistics
 Warehousing

• Any operation that stores,

repackages, stages, sorts, or
centralizes goods or materials
 New View
Warehousing a key piece of logistics strategy
– J. B. Hunt
– Lowe’s
• More than just storage
– “Warehousing”  “Distribution Centers”

155
 Warehousing Benefits
Economic benefits:
Accrue directly to company
Must consider total system costs
Service benefits:
Support customer service needs
May or may not reduce costs

156
 Consolidation

Small shipments in ...

Warehouse

Large economical shipments out ...

157
 Example 1
Customer Shipment Weight

Venetian Artist 100 boxes, artist 3,000 lbs.

Supply supplies
Kaniko 100 PC printers 3,000 lbs.

Ardent Furniture 10 dining room sets 4,000 lbs.

• Dedicated truck from Los Angeles to Atlanta: $2,000

• Cost to run consolidation warehouse: $9 per hundred-weight
• Local delivery in Atlanta: $200 per customer

158
 Cost Benefits of Consolidated
Warehousing

Warehousing costs 10,000 lbs × $9/100 lbs = $900

Cost of one truck to Atlanta $2,000
Delivery to final customer 3 customers × $200 = $600
Total: $3,500

How does this compare to the cost of separate

dedicated shipments?

What about truck utilization (assume 3 trucks hold

60,000 lbs.)
 Cross-Docking
Large economical shipments in ...

Warehouse

Small shipments out ...

What about supply / demand mismatches?

160
 Break-Bulk
Like cross-docking, but usually refers to a single source

Plant A

Warehouse

Customer Delivery

161
 Example 2
• Manufacturer  Customers

• 500 lb. average order size

• Direct shipments:
$7.28 per hundred-wt.
$7.28 × 5 = $36.40

• > 20,000 lbs: $2.40 per hundred-wt.

• Local delivery: $1.35 per hundred-wt. 162

 Insight:

If we can run a warehouse for less than:

5 × ($7.28 – $2.40 – $1.35) = $17.65/500 lbs.

Or

$17.65 / 5 = $3.53 per hundred-weight

we should do it.
163
 Hub-and-Spoke Systems
A

To Los Angeles
A C

Syracuse
A B

B
Phoenix

B
To El Paso

164
 Postponement

Coca Cola syrup Customer A

Bulk food products, Postponement
paints, etc.
Assembly, Customer B
Packaging,
 high volumes Labeling, etc.
 containers Customer C

Minimizes risk
Minimizes inventory (how?)

165
Warehousing Service Benefits:

Spot stock
Assortment
 Spot Stock

Region
1

Region
Manufacturer Warehouse 2
or Centralized
Source
Region
Time sensitive, seasonal items 3
Often temporary, public storage

167
 Assortment
Broad product line and good inventory control
key to success

Supplier E Customer A

Supplier F
Assortment
Warehouse
Customer B

Supplier G
Customer C
Supplier H
Customer D

168
 Material Handling and Packaging

• What are the typical marketing

criteria?
 Owning Versus Outsourcing
• Does the firm’s volume justify a private
system?
• Would ownership limit firm’s ability to
respond to marketplace changes?
• Is logistics a core competency?
• Are outsource capabilities are available?

Kellogg logistics strategy example in text

170
 Transportation “Outsources”
• Common (public) carriers
– Published rates and schedules
– “Nondiscriminatory” pricing
– Increased flexibility to partner
• Contract carriers
– Service for select customers
– Unlimited number of customers
• Third-Party Logistics Providers (3PLs)
– Service firms specializing in logistics for other companies

171
Case Study in Logistics

Just-In-Time Shipping
 Supplemental Slides on Transportation
Costs and Factors

• Pricing, Distance, Economic Factors

Pricing Transportation Services
•Economic factors
–Pricing versus distance
–Price/pound versus density
–Stowability, handling, and liability
–Market factors
•Ratings
–Goods classification
–Class index

174
 Economic Factors I
Price

… why the “tapering principle”?

Distance
Price/pound

Density
175
 Economic Factors II
Stowability, handling, and liability

versus

176
 Economic Factors III
Market factors
What might this include?

West East
Coast, Coast,
USA USA

177
 Ratings

• Translating economic factors into

actual prices
 Ratings (a simplified view)

• Goods classification
– Perishability, stowability, handling, etc.

• Class index?
– From 35 - 400
– “average product” = 100
– Based on expected transportation costs

179
Determining Transportation Rates
• Rate Determination
– By weight (Less-than-truckload shipment)
– By distance (truckload shipments)
Minimum charges and surcharges

• Exceptions to the rule

– Seasonal commodities
– FAK (freight of all kinds)

180
 Example 1
Shipping 800 lbs of glass slides from Atlanta, GA
to Lansing, MI

… Looking at a rate classification guide

Item Articles Class - LTL Class – TL Minimum TL

Shipment Shipment Weight
86770 Glass, microscopical 70 40 3,600 lbs.
slide or cover, in
boxes

181
Specific Rates for Shipments FROM
Atlanta TO Lansing
Rates express $ charged per hundred-weight
Rates fall as rate class falls and volume increases

Rate Class < 500 lbs 500 to 1,000 1,000 to 30,000

lbs lbs
200 $98.37 $61.97 $17.00
100 $52.62 $43.68 $9.22

70 $40.48 $33.59 $8.10

182
 Result
• $33.59 × 8 = $268.72 shipping cost

• Key points
– Classification tables standardized, BUT
– Rate tables vary by transportation
provider
– Real-time updating of provider tables

183
 Example 2
• 3 Shipments of Class 100 to Lansing:
– 5,000 lbs., 10,000 lbs., 7,000 lbs.

• Different stops in Lansing

• Can consolidate, but extra $100 for two

additional stops

• What to do?
184
 What to Do?
Separate shipments at Consolidated shipments at
costs below: costs below:

50×$18.94 = $947 220×$9.22 = $2,028

100×$14.74 = $1,474 Additional

drop-off
70×$18.94 = $1,326 charges: $100
$3,747 $2,128

185
 Key Points
• Choosing a mode
– Five choices
– Speed? Cost? Flexibility?

• Choosing a format
– Flexibility versus control

• Controllable factors affecting cost

– Density, stowability, packaging, and
containerization 186