Logistics Management Final Review Overview of Logistics Logistics Management that part of supply chain management that plans implements and controls the efficient effective forward and reverse flow and storage of goods services and related information between the point of origin and the point of consumption in order to meet customers requirements Reasons for Increased Interest o Increasing competitive pressures place customer service is the hardest component for competitors to replicate of the marketing mix components logistics competency is one way that a company can outcompete others in its industry by providing outstanding customer service superior service creates a lock in whereby it is harder for the buyer to find a substitute for the supplier o Shift in channel power the development of category killers such as Walmart Best Buy and Home Depot has resulted in a shift of channel power from manufacturers to retailers o Globalization supply chains become increasingly longer due to sourcing materials throughout the world inventory levels have been consistently reduced o Development of IT systems and the increasing importance of information information and visibility within and across organizations improves cost performance and operational efficiency o Increased product proliferation companies have greatly increased the number of product offerings within categories to try and secure niche customers SKU proliferation greatly increases the challenges of inventory management o Increased number of delivery points retail outlets are beginning to expand their product offerings making the logistics process even more complicated for manufacturers and distributors Time and place utility Cost categories o Time when and place where are provided by logistics o Transportation is largest percentage of logistics costs followed by inventory carrying cost and warehousing Total Cost Concept view the sum of logistics operations as a system and seek to minimize the total cost of the system rather than the individual functions o All cost and service elements are interlinked o Simple Rules about Trade Offs Increasing the number of warehouses increases inventory cost but decreases transportation costs and often decreases the cost of lost sales Using faster modes of transportation decrease the cost of lost sales Lot quantity costs and inventory carrying costs are inversely related Investments in information technology should decrease the cost of lost sales Demand Management Order Management and Customer Service Customer Service the output of the logistics function and is the place component of the marketing mix customer service is crucial for a company to keep customers and can be utilized as an important competitive weapon to secure customers o Existing customers are often considered cheaper to sell to it is 5x more expensive to acquire new customers than have repeated purchases o Existing customers are more loyal o Existing customers often buy more o Existing customers are a good source for referrals o Lifetime value of customer average transaction value X yearly frequency of purchase X customer life expectancy Pre transactional and post elements of logistics service o Pre Transactional Elements establish a written customer service policy communicate and give the policy statement to customers formally establish the policy o Transactional Elements stockout level order information elements of the order cycle expedited shipments and transshipments system accuracy order convenience substitution Order Cycle total time that elapses from the time a customer places an order till it is received o Post Transactional Elements installation warranty alterations and repairs product tracing customer claims complaints and returns temporary product replacement ABC Analysis some customers and products are more profitable than others a company should maintain higher levels of customer service for the most profitable customer product combinations profitability should be measured on a contribution basis and consider trends and potential growth o Make unprofitable accounts profitable or look for alternatives o Provide tailored service to best customers o Segment the customer base across important criteria and establish different customer service standards for each category Top 30 A Next 50 B Bottom 20 C Impediments to an effective customer service strategy o Failing to segment markets in terms of service offered o Misuse of customer service by salespeople o Failing to measure the cost effectiveness of service levels o Inadequate customer service research Perfect Order no fault performance from the time of order receipt through customer delivery defined differently by different customers customer segments o Requirements Quality throughout process Clear communications within firm and with customer Willingness to stand behind the promise On time in full error free Inventory Management Reasons to Hold Inventory o Maintaining customer service requirements o Leverage economies of scale for production o Take advantage of purchase discounts o Take advantage of transportation discounts o Act as a buffer for demand variability and lead time variability o Hedge against risk EOQ o EOQ 2PD CV P the ordering cost D annual demand or usage C annual inventory carrying cost as a V average product cost of one unit of inventory o Demand we don t expect sales to equal forecast o Performance Cycle we don t expect logistical execution at a constant Sources of uncertainty rate When Should We Order o Fixed Order Point Fixed Quantity Model determine an inventory level at which to reorder the EOQ depending on demand the interval between order varies but not the quantity ordered Requires constant monitoring of inventory As this model is triggered by quantity safety stock is needed to protect during order lead times only as further orders can be placed at any time o Fixed Interval Model determine a fixed order cycle depending on demand the quantity ordered varies but not the interval between orders Requires reliable demand forecasts for the next interval but only periodic inventory reviews Safety stock needs to protect order lead time plus the entire next order interval Reasons for forecasting o Increasing customer satisfaction o Scheduling production more efficiently o Lowering safety stock requirements o Reducing product obsolescence costs o Improving pricing and promotion management o Negotiating superior terms with suppliers o Making more