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Logistics Management LSM 730 Lecture 10 Dr. Khurrum S. Mughal 1-1 The Logistics/Supply Chain Product “Logistics/Supply Chain managers are ‘owners’ of the product-flow process from raw material sources to final consumers, not activity administrators.” 3-2 CONTROLLING Transport Strategy • Transport fundamentals • Transport decisions ORGANIZING Inventory Strategy • Forecasting • Inventory decisions • Purchasing and supply Customer scheduling decisions service goals • Storage fundamentals The product product • The • Storage decisions • Logistics service • Ord. proc. & info. sys. PLANNING Product in the Planning Triangle Location Strategy • Location decisions • The network planning process 3-3 Nature of the Product • Product classification – Consumer Products • Convenience goods • Shopping goods • Specialty goods – Industrial goods 1-4 Nature of the Product • Product classification – Consumer Products • Convenience Products – – – – Purchased Frequently with little comparative shopping Distributed through multiple outlets High distribution costs justified by increased sales Example: vending machines for coca-cola 1-5 Nature of the Product • Product classification – Consumer Products • Shopping Products – – – – – Consumers seek and compare Comparing quality, price and performance Few outlets to be maintained Distribution costs are lower Examples: Furniture, Medical Services, Automobiles etc 1-6 Nature of the Product • Product classification – Consumer Products • Specialty Products – Buyers expend substantial effort – Buyers wait significant amount of time to get the particular product – Distribution is centralized – Lowest physical distribution costs – Examples: Consultancy Service, Musical Instruments for professional musicians 1-7 Nature of the Product • Product classification – Industrial Products • Raw Material that is part of finishes goods • Machinery and equipment that is used for production process • Goods not directly involved like business services, and office Supplies 1-8 Sales volume Product Life-Cycle Curve Introduction Growth Maturity Decline Time 3-9 Product Life-Cycle Curve • Introductory Stage – Sales are not high – Cautious inventory and distribution strategies • Growth Stage – Huge growth after product acceptance – Not history of sales to manage inventory and distribution 1-10 Product Life-Cycle Curve • Maturity Stage – Stable sales – Huge distribution, many stocking points – Sound forecasts • Decline Stage – Stocking points reduced to centralized distribution 1-11 Nature of the Product  The Product life cycle and Pareto's law - An empirical relationship for the 80-20 curve is Y= ( 1+A)X A+X where Y = cumulative fraction of sales X = cumulative fraction of items A = constant to be determined The constant is found by A= X(1-Y) Y-X 80% of Firm’s sales are generated by 20% of the product line items - Difference in inventory and distribution 3-12 ABC Classification for 14 Products Product Number D-204 D-212 Product Rank by a Sales 1 2 Monthly Sales (000s) $5,056 3,424 Cumulative Cumulative An ABC Percent of Percent of Classifib c Total Sales Total Items cation 36.2% 7.1% 60.7 14.3 A D-185-0 D-191 D-192 D-193 D-179-0 3 4 5 6 7 1,052 893 843 727 451 68.3 74.6 80.7 85.7 89.1 21.4 28.6 35.7 42.9 50.0 D-195 D-196 D-186-0 D-198-0 D-199 D-200 D-205 8 9 10 11 12 13 14 412 214 205 188 172 170 159 $13,966 91.9 93.6 95.1 96.4 97.6 98.7 100.0 57.1 64.3 71.4 78.6 85.7 92.9 100.0 B C 3-5 Cumulative 80-20 Curve 100 90 Total sales (%) 80 70 60 50 40 30 A items 20 B items C items 10 0 0 20 40 60 Total items (%) 80 100 3-6 Nature of the Product (Cont’d) Example Suppose that in an inventory of 10 items, 15% of the items account for 80% of the sales volume. The total sales of all 10 items is $90,000 per year. How much inventory can be expected if turnover for A items = 8, B items = 5, and C items = 2? First, find A. A= .15(1- .80) = 0.0462 .80 - .15 Then, using A = 0.0462 and the first item (1/10), we project the sales volume to be: Y= (1 + .0462).10 = 0.7156, or 71.6% of the sales .0462 + .10 Projected Cumulative Sales 0.716(90,000) = $64,440 Turnover Total sales The inventory for this item is expected to be 0.716(90,000)/8 = $8,055. Continue for the remaining items and generate the following table. 3-15 Example (Cont’d) Projected Item Cumulative cumulative (X) item sales no. fraction fraction 1 .10 .716 2 .20 .850 3 .30 .907 4 .40 .938 5 .50 .958 6 .60 .971 7 .70 .981 8 .80 .989 9 .90 .995 10 1.00 1.000 5 Projected cumulative sales (Y) $64,440 76,500 81,630 84,420 86,220 87,390 88,290 89,010 89,550 90,000 Projected Turnover Average item sales ratio inventory $64,440 8:1 $8,055 A 12,060 8:1 1,508 6,630 5:1 1,326 2,790 5:1 558 B 1,800 5:1 360 1,170 2:1 585 900 2:1 450 720 2:1 360 C 540 2:1 270 2:1 450 225 $90,000 $13,697 3-8