LOGISTICS

DIFINITION

Logistics deals with the management of storage and the flow of goods, services and information from point of origin to point of consumption with a view to satisfy customer needs. As a system , it is a network of related activities with the purpose of managing the orderly storage and flow of material / personnel / information within the logistic channel ( Fig 1 2 ) .

Figure 1 2 : Distribution channel Logistics manages flow through the channel Supplier carrier Distribution center carrier Customer

Customer

carrier Supplier

Manufacturing site

carrier

Customer

Customer carrier Distribution center Supplier Customer

carrier

Customer

FACTORS CONTRIBUTING TO IMPORTANCE OF LOGISTICS Increasing energy cost. Global Market: It created increased opportunity to logistics. However, it made logistics system complex due to presence of a large number of mode/ carriers, plethora of systems and procedures, rules and regulations and socio-cultural and legal issues. Continued and growing importance on cost control. In this context, logistic is viewed as major cost driver. Advances in information Technology. This increased the ability to manage flows and optimize inventory level and movements. ROLE OF LOGISTICS IN ECONOMY Logistic is important component of GDP. (Contributed 10.5% to US GDP in 1996) In US, industry spends $797 billion (451 Transport, 311 storage, 35- others) Logistic adds value by creating utility from economic stand point. Utility represents the values or usefulness that an item or service has in fulfilling a want or need.

FOUR TYPES OF UTILITY. Form utility: the process of creating the good or service or putting it in proper form for the customer to use. Possession utility: Values added to a product or service because the customer is able to take actual possession. Example Credit arrangement, loan etc. Time utility : Value added by having an item when it is needed. Place utility: Which means having the item or service available where it is needed. COST ASSOCIATED WITH LOGISTICS Place /customer service levels Customer Service Parts and service supports Return goods handling

Inventory carrying costs Inventory management

Packaging Reverse Logistics

Transportation costs
Traffic and transportation

Lot quantity costs

Material handling Procurement

Warehousing costs
Warehousing and storage Plant and warehousing site selection

Order processing and information costs

Order processing Logistics communication Demand forecasting / planning

BASIC RULE TO CONTROL TRANSPORTATION PURCHASE ORDER SPECIFICATION ABOUT MODE Vague specification leaves too much control over shipment in suppliers hand. Example: Ship best way and Ship as soon as possible. FOB /FOR TERMS Making a purchase involves a transfer of title to the merchandise from the seller to the buyer. Ensure that the seller has a clear title to the goods in the first place. The time and place of the actual transfer of title, responsibility of payment of transport charge is reflected by FOB term used. Larger company generally prefer to buy FOB, the sellers plant, because their traffic department is better equipped to do an effective job of carrier selection and routing.

 FREIGHT RATES AND CLASSIFICATION Each product is given specific classification number. Freight rate is related with their number. Rate Class No. Basic rate 100 Higher rate > 100 Less rate < 100 Commodity description in shipping orders and bill of lading should confirm to those in the applicable tariff, including packaging specs. Table 18.4 provides a few simple examples of incomplete description and its consequence. Table 18.4 shipping costs rise when descriptions are incomplete :
Specific product If shipped with this incomplete description Cotton shirts Is rated Should be rated

Cotton work shirts

Class 100

Class 77.5

Crude sulfate of soda

Cotter pins, iron or steel

Chemical
Hardware

Class 100
Class 70

Class 50
Class 50

1. Terms of Sale FOB Shipping Point, FREIGHT COLLECT

Title passes to Buyer at

Shipping Point

Destination

Buyer pays freight Charges Buyer bears freight charges Buyer owns goods in transit Buyer files claims (if any)

2. Terms of Sale FOB Shipping Point, FREIGHT ALLOWED

Title passes to buyer at Seller pays freight Charges Seller bears freight charges Buyer owns goods in transit Buyer files claims (if any)

Shipping Points

Destination

3. Terms of Sale FOB Shipping Point, FREIGHT PREPAID AND CHARGED BACK
Title passes to buyer at

Seller pays freight charges

Buyer bears freight charges Buyer owns goods in transit Buyer files claims (if any)

Shipping Point

Destination

4. Terms of Sale FOB Destination, FREIGHT COLLECT

Title passes to buyer at

Buyer pays freight charges

Buyer bears freight charges Seller owns goods in transit Seller files claims (if any)

Shipping Point

Destination

5. Terms of Sale FOB Destination, FREIGHT PREPAID

Title passes to buyer at

Seller pays freight charges

Seller bears freight charges Seller owns goods in transit Seller files claims (if any)

Shipping Point

Destination

6. Terms of Sale FOB DESTINATION, FREIGHT COLLECT AND ALLOWED

Title passes to buyer at Shipping Point Destination Seller bears freight charges Seller owns goods in transit Seller files claims (if any) Buyer pays freight charges

TRANSPORTATION MODES - Five transportation modes are: motor, rail, air, water and pipelines. Besides these we have: Inter model combinations: rail-motor, motor-water, motor-air, and rail-water. They provide lower cost services as compared to single Transport mode. Third parties: They are companies that provide linkages between shippers and carriers. There are several types including transportation brokers, freight forwarders etc.

MOTOR it is flexible and versatile . - Provide point to point service - can handle varying size and weight It competes with air carriers on point to point service for any size shipment up to 500 miles . It competes with rail road for Truck load ( TL) shipment for a distance 500 miles and above . For a shipment > 100,000 pounds , rail dominates . Challenges ahead for this system 1. Congestion 2. Pollution 3. Fuel cost RAIL It is mode of larger shipment It lacs the versatility and flexibility of motor carrier . It provides terminal to terminal service rather than point to point services unless company has a rail siding . There is set of rules to be observed in such sidings . Rates of full car load (CL) are generally lower than those of other modes . Some disadvantage of rail may be overcome through the use of piggy

backing i.e placing trailer on flat car ( TOFC) or container on flat car ( COFC) or use of road railers .Road railers can run on highway as well as rail .[ see Fig.7.3 ,Example of konkan railway . AIR Air carriers transport 1% of traffic ( ton miles ) in U S. It generally handles high value product. Despite higher rates , it can be competitive with rail and motor on total cost . The airlines are increasing their share with innovative ideas . Some of these are - Airline counter to counter parcel service . - Fast movement of small package ( < 25 pounds ) ( package to be picked /delivered at airport ) - Air freight forwarders . Figure 7 .3 Selected forms of inter modal transportation 1. Trailer on flatcar ( TOFC )

2. Trailer and tractor on flatcar

3. Road railer

4. Container on flat car ( COFC )

WATER It can be broken down into following categories - inland waterway , river and canals - lakes - coastal ocean - international deep sea It primarily competes with rail and pipeline It is perhaps the most inexpensive method of shipping high bulk , low value commodities like - iron ore , grains , coal , limestone , petroleum .

 The development of very large crude carriers (VLCCS) has enabled marine shipping to assume a vital role in the transport of petroleum . PIPELINE It can handle only a limited number of products including natural gas, crude oil, petroleum ,water ,chemicals and slurry products . It delivers the product on time . Minimal climatic effect on product being handle It is not labour intensive . Table 7.1and 7.2 shows the freight being handle in US/Europe by various modes . Table 7.3 presents comparison of US domestic transportation modes . Table 18.3 presents general modal comparison .

Table 18.3 General model comparisons

Characterist Water ic

Rail

Truck

Air

Pipeline

Speed
Rates

Very slow
Very low rates

Moderate
Low rates

Fast
Moderate to high rates

Fastest
Highest rates

Slowest
Lowest rates

Typical weight
Typical products

50,000 and up
Large volume Raw materials

30,000 and up

20,000 to 30,000
Moderate volume manufactured goods raw materials

Varies

n/a continuous flow

Large volume Raw materials Manufactured goods

Low Oil/natural volume gas low weight slurry high value perishable products

Table 7.1 Estimated Distribution of intercity Freight Ton -miles in the United State Percentage of Total
1993 Mode ( billion of ton miles) Rail 1183 Motor 871 Air 12 Inland waterway 46 Oil pipeline 572 Total 3105
1993 38% 28 <1 15 18 100% 1980 38.5% 22 <1 16 24 100% 1960 44% 22 <1 17 17 100% 1940 61% 10 <1 19 10 100%

Table 7-2 European Freight Movements (in Billion Ton-Kilometers) 1889

Road a European Community Belgium Denmark FR of Germany France Greece Irish Republic 31.0c 9.2c 124.2 116.7 12.5c 4.0c 8.0c 1.7 60.0c 52.3c 0.6c 0.6c 5.3 0 54.0 7.0c 0 2.0c 0.6 1.0 1.6 c 8.8 31.0c Rail b Inland Waterway b Sea-going Inland Pipeline

Italy Luxembourg

165.0c 0.2c

20.0c 0.7

0.1 0.4

36.0c 0

9.0c -

Netherlands
Portugal Spain United Kingdom Other Europe Austria Czechoslovakia

22.1c
12.05c 143 134.3

3.1
1.7 11.9 17.0

36.0
0.3

28.0c 56.2

4.6
4.8c 9.1

8.0c 23.8

11.2c 72.0

1.8cd 4.8d

0 0

5.3 9.0c

German DR f
Hungary Sweden

16.9
13.4 22.6c Road a

59.0
19.8 19.2 Rail b 8.2 29.9 23.0c 1500.0c 4000.0c

2.3
2.1d 0 Inland Waterway b 0.1 8.8

0 8.0c Sea-going 0 -

4.3
3.4 Inland Pipeline 1.1 3.4

Switzerland Yugoslavia Rest of the World Japan United States Soviet Republics

7.5c 25.0ce 260.0c 1200.0c 510.0c

0 550.0c 239.6

2405 900.0c -

9205 1422

Table 7-3 Comparison of U.S. Domestic Transportation Modes.

Road Economic Characteristics Cost Market Coverage Degree of competition (number of competitors) Predominant traffic Moderate Point to Point Many All types Low Terminal to terminal Few Low-moderate value, moderate high density 617 50 to 12000 High Terminal to terminal Moderate High value, low moderate density 885 5 to 125 Low Terminal to terminal Few Low value, high density 376 to 1367 1000 to 60000 Low Terminal to terminal Few Low value, high density 276 to 343 30000 to 2500000 Rail Air Water Pipeline

Average length of Haul (in miles) Equipment capacity (tons) Service Characteristics Speed (time in transit) Availability Consistency (delivery time variability Loss and damage Flexibility (adjustment to shippers needs

515 10 to 25

Moderate to fast High High Low High

Moderate Moderate Moderate Moderate Moderate

Fast Moderate High Low Moderate to high

Slow Low Low to Moderate Low to moderate Low to moderate

Slow Low High Low Low

THIRD PARTIES Transportation Brokers Transportation brokers are companies that provides services to shippers and carriers by arranging and coordinating the transportation of products. They collect transport charge from shipper. A part of it they retain as fee and remaining, they pay to carriers. Small and medium-sized shippers are the major user of such brokers, as they have resource constraints.

Freight forwarders Freight forwarders purchase transport services from various carriers, besides they own equipment. They consolidate small shipments from a number of shippers into large shipments moving into a certain region at a lower rate. Often, they provide faster service. They are classified as domestic or international. In case of international shipments, they also provides documentation services, which is vital for firms with limited international marketing experience.

FACTORS AFFECTING FREIGHT TRANSPORTATION CHOICE: 1 Freight Rate 2 Reliability- dependable travel time, meets pickup and delivery dates and on time performance 3 Transit time 4 Over, short and damaged 5 Shipper market considerations: competitiveness, customer needs (handling a variety of products, 24 hour service, door to door service lot size, etc). 6 Carrier consideration: financial health, capability and reputation. 7 Product characteristics (Given in the next slide)

DENSITY Low density products tend to cost more on a per pound basis than high density product. STOWABILITY This is degree to which a product can fill the available space in a transport vehicle. Stowability depends on size, shape and other physical characteristics. Items with good flowability: grain, ore, oil etc. EASE OR DIFFICULT TO HANDLE It depends on stowability, shape and size, fragility etc. Difficult to handle items are more costly to transport. LIABILITY Products having high value-to-weight ratios, perishable goods, security related items, things of arts and historical importance are more prone to damage and are subject to theft or pilferage. Carriers assume greater liability in case of such items and charge higher transport cost.

MODE/CARRIER SELECTION DECISION PROCESS 1. Transportation need should be clearly identified. 2. Search for alternatives modes/carriers. 3. Evaluate the alternative w.r. to criterion/criteria. Usually multiple criteria are chosen to evaluate alternatives, these are: Competitive rates On time pickups Prompt response to customer enquiry. Consistency and duration of transit time. - Weights of each criteria can be determined by paired comparison. - Each alternatives can be rated against each criteria. - With the help of criteria weights and evaluation of each criterion, overall points earned by an criteria can be determines.

Example: Analytical Hierarchy process (AHP) and mixed integer programming (MIP) for selecting carriers Problem: A corporation is involved in processing industries. It has five main markets. It can use five potential truck carriers for all of its five markets for transporting goods. The objective is to select the carriers for each market to maximize corporate objectives. Solutions: Step 1: Determination of the overall performance of truck carriers using AHP a. Identify criteria to analyze the potential carriers and structure them in to a hierarchical form. This is give in fig. 1. b. Select AHP measurement scale as Preference Numerical Rating Extremely preferred 9 Very strongly preferred 7 Strongly preferred 5 Moderately preferred 3 Equally preferred 1 Reciprocal: If activity i has numerical rating with respect to activity j, then j has the reciprocal value when compare to i.

Fig 1: The AHP hierarchy of criteria

Select the best carriers

Market Share

Competitive Leaders

Logistics Process

Company objective
Strategic Compatibility

Customer Services

Pricing and Rates

Criteria
Strategic fit

Reliability

Basic Rates

Long Term Relationship

Flexibility

Flexibility of Rates

Continuous Improvement

Sub criteria
Quality

Facilities/ Equipments

Outstanding

Above Average

Average

Unsatisfactory Below Average

Rating

c.

d.

e.

f.

Carryout pair-wise comparison corporate objectives with regard to overall goal using scale defined above. Priority of three objectives have been obtained as: Competitive Leader 0.493 Logistic process 0.311 Market shares 0.196 Next, under each objective, three main criteria are compared pair-wise. Priority of each factor under each objective is obtained by multiplying the weight of pair-wise comparison by the respective priority of the objective. Some total of priorities of each criteria under all objectives gives the priority of the criteria. Priorities of main criteria comes to Customer Service 0.493 Price and rate 0.161 Strategic Compatibility 0.346 Pair-wise comparison of sub criteria under each main criteria is carried out to establish priority of sub criteria. The priority of sub criteria is presented in table 1. Now, each carrier is rated against 1 to 5 scale under each sub criteria. Each rating is multiplied by respective weight of sub criterion. Sum total of these gives the priority of the supplier. (Table 1).

Main Criteria

Sub Criteria

Carrier 1

Carrier 2

Carrier 3

Carrier 4

Carrier 5

Customer Service

Reliability 0.1797
Flexibility 0.1386 Facility/ equipment 0.059 Quality 0.1157

O
O A AA A AA A A BA 0.521 94.5

A
O O A A BA A AA AA 0.481 87.3

O
AA A BA AA O AA AA U 0.510 92.5

AA
AA A A BA A AA A BA 0.352 63.9

AA
AA AA O A BA O A AA 0.551 100.0

Price / Rates Strategic Compatibility

Basic Rates 0.0644 Flexibility of rates 0.0644 Long-term Relationship 0.0585 Strategic fit 0.1534 Continuous Improvement 0.1340

Total Percentage Max

Outstanding O; Above Average AA; Average A; Below Average B; Unsatisfactory U

e.

Similarly, priority of each supplier is obtained of the other market area. The overall performance of truck carriers for all markets are given in table 2. Table 2: overall priorities of truck carriers for all markets Destination

Truck Carrier Market 1 Market 2 Market 3 Market 4 Market 5 Carrier 1 0.52 0.47 0.51 0.43 0.50 Carrier 2 0.48 0.51 0.54 0.48 0.48 Carrier 3 0.51 0.42 0.44 0.47 0.42 Carrier 4 0.35 0.54 0.39 0.51 0.39 Carrier 5 0.55 0.36 0.48 0.39 0.52 Step 2: Selecting the carriers by using MIP based analysis a. Priorities obtained by AHP analysis form the basis for the optimization and selection of the carrier. b. Constraints associated with the problem: i Minimum and maximum limits to the transportation share of any truck carrier operating in each area are 20% and 80%. ii Total no of truck carriers working for the company will be 1 to 3. iii Minimum technical capacity of a carrier to operate in certain market area is considered as 1800 Tons.

iv

Quantity of goods transported from plant to different markets are as under: Materials 1 2 3 4 5 Total Quantity (Tons) 20000 8000 35000 4000 16000 83000 c. The MIP models MIP model has been formulated based on constraint and objective functions discussed above. The objective value and the restrictions of the MIP model I J MAX Z = N pnij * TSDnij
n 1 i 1 j 1

With subject to,

TSD
n 1 i 1

nij

Dj

dD j X nij TSDnij
f nij X nij TSDnij
N n

eD j X nij TSDnij

TSDnij g nij X nij

Yn a
n 1

Y
n 1

b
I i J

Tn Yn
j

Tn KYn

Tn X nij

pnij
TSDnij Dj

Over all performance of truck carrier n from source i to destination j

Transportation volume of truck carrier n from source i to destination j
Market demand of destination j 0/1 variable of truck carrier n 0/1 variable of truck carrier ns transportation from source i to j Number of destinations j to be operated for truck carrier n
Tn

Yn {0,1}n
X nij {0,1}n, i, j

Tn
a
b d

Minimum number of truck carriers to be selected Maximum number of truck carriers to be selected Minimum percentage of the market area sales to be given to one truck carrier.

e
k

Maximum percentage of the market area sales to be given to one truck carrier. Constant, whose value is bigger than the sum of destinations j is Minimum technical capacity for the truck carrier n to operate from source i to destination j Maximum technical capacity for the truck carrier n to operate from source i to destination j Truck carriers, n = 1,., ..N Sources, i = 1,,I Destinations, j = 1,,J

f nij

g nij
n i j

Step 3: Above model is solve using MIP package. Solution is given in table 3. Table 3: The results of the preference based optimization Market Area Truck Market Market Market Market Market Carriers Area 1 Area 2 Area 3 Area 4 Area 5 Total Carrier 1 4000 1800 7000 1800 3200 17800 Carrier 2 6200 28000 2200 36400 Carrier 3 Carrier 4 Carrier 5 16000 12800 28800 Total 20000 8000 35000 4000 16000 83000 Step 4: If objective is change to cost as shown in table 4, we obtained a new set of solution the solution is given in table 5.

Table 4: Transportation cost $ of truck carriers from plant market areas

Destination Truck Carrier 1 2 3 Market Area 1 750 730 710 Market Area 2 430 425 400 Market Area 3 650 665 600 Market Area 4 380 375 360 Market Area 5 540 545 535

4
5

700
705

460
470

620
615

350
365

530
525

Table 5: Result of the transportation cost based minimization Truck Carriers Destination 1 2 3 4 5 Total

1 2
3 4 5 16000 4000 6200 1800 7000 28000 1800 2200 3200 12800 36000 23200 23800

Total

20000

8000

35000

4000

16000

83000