I. Modern Logistics
Case 1: Modern Logistics at Delphi Corporation
Delphi Corporation, headquartered in Alaska, USA, produces deep-sea fish oils and a wide range of health products. While it consistently excelled in product design and development, Delphi faced declining profits due to its complex, expensive and inefficient logistics system II. Delphi realized that having too many carriers and too many systems was causing a total loss of management control. In order to regain control, Delphi had to reorganize its logistics operations. The implementation of Delphi's new logistics structure began with the transfer of all of its logistics operations to a FedEx affiliate, Commercial Logistics. Business Logistics was tasked with reorganizing, improving and managing every aspect of the flow of goods and information through Delphi's supply chain.
Before the reorganization, the company had six large warehouses, eight top carriers and 12 separate management systems. The result was long lead times, huge inventories, and too many out-of-stocks between customer orders and customer deliveries. If a customer seeks a fast-selling item from a warehouse in Germany, he is told that the item is off the market and that new supplies will not arrive for months. In the meantime, the item is sitting in a backlog in a warehouse in Wales. On average, 16 percent of all lines are off-sale at retail.
Delphi recognized that it needed to reanalyze the location of its existing facilities. Its recommendation was to close all but one of its warehouses in the U.S., which would shift from serving only local customers to serving global customers. The single location, located on-site at a manufacturing plant close to the U.S., would become a worldwide "processing center" that would serve as a logistics clearinghouse for Delphi's products. Although this single-center concept has the potential for higher transportation costs, Delphi believes that this cost will be compensated by increased efficiency. In the past, unexpected demand problems have led to higher inventories to compensate for uncertainty and maintain customer service.
The company knows that a single service location will have more predictable flows than a number of smaller service locations, and that random demand will now be shared universally across market segments, making a higher level in one area lower the level of demand in another.
Transportation costs are compensated by the to of inventory turnover. In fact, Delphi has found that the single-center system actually reduces transportation costs by reducing the total number of cross shipments. With immediate shipments from U.S. warehouses to retail stores, although the lead time from order to delivery is roughly the same, the product is shipped in a single shipment rather than being loaded and handled at many different locations.
Delphi has gained insights that go beyond just reducing costs. The company is targeting opportunities to increase service and flexibility, and it plans to re-supply stores anywhere in the world within 24-48 hours. Advanced systems and communications will be used to monitor and control inventory worldwide. FedEx's globalized network of carriers will ensure that shipments reach their destinations in a timely manner. Delphi is also planning to launch a mail-order business featuring 48-hour delivery to the doorstep of the end customer anywhere in the world. Its current $10 million mail-order business has become increasingly powerful, but until now the company has had to limit its growth because it has struggled to keep up with expanding orders. The new network of superior locations will make such growth possible and profitable.
II. Inventory Management
Case 2
DRP :A Sample Application
MMH has three distribution centers located in the U.S., and a central supply facility at their manufacturing plant in Quebec, Canada. Here's how their Distribution Resource Planning (DRP) system worked over an eight-week period.
The Boston distribution center has a safety reserve level set at 55 units of small appliances. When the reserve drops below that level, the distribution center issues an order to replenish more than 500 units of small appliances. The lead time for shipment from the central supply facility to the Boston Distribution Center is 2 weeks.
The DRP via the Boston Distribution Center shows that there is an 8-week demand forecast number called the total demand number. Starting with an existing inventory surplus of 352 small appliances, the distribution center forecasts that in week 5 there will be only 42 small appliances (122 small appliances in the existing inventory minus 80 small appliances in the total demand number).
This would be below the safety stock level, so the DRP initiated a planned order of 500 widgets in three weeks (week five minus two weeks lead time). As already predicted, once the reserve arrived, the distribution center returned to safe operating levels.
Small appliances are a high-volume item in Chicago, so the Chicago distribution center has a higher total demand than the Boston distribution center. It orders more small appliances at one time.
The Chicago Distribution Center's DRP shows that 800 small appliances are already in transit (the count has been accepted regularly) and should arrive within a week. They arrived on schedule and the order for the next 800 small appliances was scheduled for week 6, having already dealt with the impending fall below safety reserve during week 8.
With experience, the San Diego Distribution Center expressed its safety reserve as a safe time (2 weeks).
After examining the DRP display, the San Diego Distribution Center understands that without replenishment, there will be 30 small appliances remaining in week 5 (60 minus 30), 5 small appliances remaining in week 6 (30 minus 25), and the available stock balance will be -10 (5 minus 15) in week 7. So, the San Diego Distribution Center initiates the number of planned orders, 150 small appliances, in Week 3 - Week 7 minus security time and minus lead time (total of 4 weeks).
The total number of demands at the central supply facility is facilitated by the distribution centers. The Boston and San Diego distribution centers generated demand totaling 650 small appliances in week 3, while the Chicago distribution center generated demand for 800 small appliances in week 6. The central supply facility finds that the available inventory balance will be negative in week 6. Therefore, it initiates a master program with an order quantity of 2,200 small appliances in week 3 to cover the shortfall.
Three: Transportation Management
Case 3
Partnership in Glass Transportation
Today's shippers are looking for a transportation provider with more consideration for cost and service.LOF, a manufacturer of architectural and automotive glass, is challenged with handling and transporting large quantities of a tricky product.LOF's commitment to its customers has created a need for this a carrier that had both competitive pricing and superior logistics services. These service needs required LOF to seek out innovative carriers and strong channel partners.
In the past, LOF has used as many as 534 carriers for inbound and outbound transportation. Glass shipping often requires the use of specialized equipment to minimize glass damage. But the use of specialized equipment would mean that LOF Corp. could not offer the product for backhaul, so carriers either solicited the backhaul product at competitively low prices or LOF Corp. paid for the empty backhaul.
Thankfully, LOF solved this problem through an alliance with two carriers. All of the inbound and outbound LTL shipments used were arranged to be covered by Rodeway Logistics Services. While this company was responsible for all day-to-day operations, tracking, and payments associated with the shipments, it was not required to deliver all of the shipments. This arrangement allowed LOF to provide a toll-free number to its vendors and to collaborate on all inbound shipments. This "courtesy route" system selects the lowest-cost transportation mode and carrier for both inbound and outbound shipments. The system has reduced $500,000 out of a $3 million transportation budget and eliminated 70,000 pieces of paperwork. In addition, Case Logistics provides third-party payment services and is responsible for processing all billing information electronically.
While cost is a factor for the LOF consortium, there is still a strong sense of quality in full truckload shipments of architectural glass.Schneider National's specialized trucking operation required an 18-month trial run before it was approved as one of LOF's carriers.Schneider National's president, Don. Schneider National's president, Don Snyder, claimed that this was one of the most rigorous reviews he had ever experienced.Schneider National was partnered with Wabash Nation, a trailer manufacturer, and they patented a specialized trailer specifically designed to transport LOF's glass. The trailer was an A-frame design that altered the standard flatbed truck configuration and eliminated the problems associated with specialized equipment, but was not suitable for backhauling other goods. The exclusive arrangement between LOF, Schneider National and Wabash Nation ensures that all equipment can be utilized by all three partners, with no risk of disruption to the total development or financial risk to any one company. As a result of this unique transportation partnership, each of the three companies enjoys a competitive advantage in their respective industries.
In addition to technology, LOF has set very high service expectations and requirements for other commitments, and rather than utilizing price to stimulate business, LOF is committed to reducing total costs. While LOF recognizes the need for its partners to be adequately rewarded for their business, it believes that excess profits would rather undermine the partnership.LOF maintains extensive communication with its partners at all organizational levels, which has helped to further the understanding of the value and status of the partnership.LOF believes that there will be significant value created for its customers in the handling of such partnerships .
IV. Purchasing and Supply
Case 4
An Industrial Wholesale Company
Walter. Negley is the director of purchasing for a wholesale industrial goods company. He needs to set purchase quantities for high-value products, which the company buys, usually puts in inventory, and sells to industrial customers on fairly short lead times.
The spare engines used in conveyors are one such product.
Spare engines are sold primarily to customers in North America and sales are steady throughout the year.
The engines are manufactured in western Germany, imported from Baltimore and trucked to the company's own warehouse in Chicago.
While the German manufacturer's price includes shipping from Baltimore, Germany, the company is responsible for the cost of transporting the goods from Baltimore to Chicago. To help with the decision, Walter also gathered the following information:
Information content
Quantity/cost
Source of information
Average annual sales
1,500 units
Sales department
Replenishment lead time
One month
Purchasing department
Paperwork cost per Clerical cost per order
$20
Accounting Dept.
Inventory holding cost
30% per year
Finance Dept.
Gross per machine
250 lbs.
Transportation Dept.
Unloading cost at the warehouse
$0.25/quart
Accounting Department
Warehouse storage capacity
300 units
Warehouse manager
Expedited cost per order
$5
Transportation Department
Storage rate at public **** warehouses
$10/per unit per year
Public **** warehouse
Note: The company warehouse can only store 300 engines. If a replenishment order is placed for more than 300 units, the portion over 300 units will be stored in the Public **** Warehouse.Order quantity per order
Unit price in dollars
First 100 units
700
Second 100 units
680
More than 200 units
670
The manufacturer has just released a new price list to the Port of Baltimore. In negotiating inland freight rates with trucking companies, Walter discovered that trucking companies could either ship full truckloads at a rate of $12 per quart or LTL at a rate of $18 per quart.
Question:
If a manufacturer uses a special pricing strategy, at what level should the order quantity for a replenishment order be set.
Should Walter adjust the size of the replenishment order if the manufacturer's pricing strategy is that the price at each quantity cutoff point applies to all goods ordered.
V. Site Selection
Case 5
Super Medical Devices, Inc.
Super Medical Devices, Inc. produces electronic devices that are parts used in MRIs, CAT scanners, PET scanners, and other medical diagnostic equipment. Super Medical Devices has manufacturing facilities in Phoenix, Arizona and Monterrey, Mexico. Customers requiring these parts are located in certain parts of the United States and Canada. Currently, a warehouse in Kansas City, Kansas week receives all parts produced at the plant and later distributes them to customers.
With sales declining due to increased competition and changes in customer sales levels, the company's management began to consider the location of a warehouse. The lease on the existing warehouse is about to expire and management would like to consider whether to renew the lease on the existing warehouse or to look for another location. The warehouse has promised a favorable lease renewal rate of $2.75 per square foot per year for 200,000 square feet of warehouse space. It's estimated that the rent for a warehouse of the same size in any other location would be $3.25 per square foot.
Both the new lease and the renewal are for five years. Transferring inventory, relocation costs for key personnel and other site selection costs would result in a one-time expense of $300,000 dollars. Operating costs for the warehouses at each location are essentially the same.
In a recent year, SuperMed had sales of $70 million. Transportation costs from the plants to the Kansas warehouse were $216,253,535, and from the warehouse to customers was $481,9569. The cost of leasing the warehouse is $1 million per year. The data collected for the study of warehouse location are shown in Tables 1 and 2.
Table 1
Volume, Rate, Distance, and Coordinate Value Data for Transportation of Full Truckloads (Class 100 Goods) from the Plants to the Kansas Warehouse for the Most Recent Year
Location of the Plants
Annual Demand (Quintals)
Transportation Rate (Dollars/Quintal)
Distance (miles)
Coordinate X
Coordinate Y
Phoenix
61500
16.73
1.163
3.90
Monterey
120600
9.40
1.188
6.90
1.00
Total
182100
Table 2 Volume, Rate, Distance, and Coordinate Data for Recent Years Transported in 5000 lb. Trucks (Class 100 Cargo) from Kansas City Warehouse to Customer
Customer Location
Annual Demand (Quarts)
Transportation rate ($/quart)
Distance (miles)
Coordinate value (X)
Coordinate value (Y)
Seattle
17,000
33.69
1858
0.90
9.10
Los Angeles
32,000
30.43
1496
1.95
4.20.
Denver
12,500
25.75
598
5.60
6.10
Dallas<
9500
18.32
560
7.80
3.60
Chicago
29500
25.24
504
10.20
6.90
Atlanta
21000
19.66
855
11.30
3.95
New York
41300
26.52
1340
14.00
6.55
p>Toronto
8600
26.17
1115
12.70
7.80
Montreal
10700
27.98
1495
14.30
8.25
Total
182,100
The average rate for outbound shipments originating at warehouses is $0.0235 per quart/mile.
Based on this year's information, is Kansas City the best place to locate? If not, what are the coordinates of the better siting site? What cost savings can be realized from the new coordinate site?
Management expects the Seattle, Los Angeles and Denver markets to rise 5 percent over the next five years, while the other markets will decrease 10 percent. Transportation costs remain the same. Production will increase 5 percent in Phoenix and decrease 10 percent in Monterey. Would you change your warehouse location decision? If so, how would it be changed?
If, by year five, the outbound transportation rate for the warehouse increases by 25 percent and the inbound transportation rate for the warehouse increases by 15 percent. Would you change your warehouse location decision?
If you use the center of gravity method to analyze the data to select a site for the warehouse, what are the benefits and limitations of doing so?
VI. Logistics Demand Forecasting