MARIUS M.

SOLOMON

CRT,University
Universityof
ofMontreal
Montreal
CRT,
March,2000
2000
March,

Logistics Evolution

Local

Regional

National
Global

Progression
Progression of
of Competitive
Competitive Advantage
Advantage
Increased
Increased
Variety
Variety
80s

Qualit
Qualit
80s yy

Fast
FastResponse
Response
Time
Time

Focused
Focused
Production
Production
70s

90s

Scale
Scale
Facilities
Facilities

Low
LowWage
Wage
Rates
Rates
50s

Cost
CostBased
Based
Management
Management

60s

Time
TimeBased
Based
Management
Management

Source: Adapted from Stalk and Hout, Competing Against Time, 1991

E-Business
E-Business
Technology
Technology
Enabled
Enabled
Management
Management

2000

Competitive
Advantage

Strategic
Vision
Planning

Global Competitors

Global Markets

World-Class
Manufacturing

Quality
People

Speed

Technology

Management Resources

Supp
li

ers

Aftersale Service

and Support

Distribution
Production Process
Planning and Control
Product and Process De
sign

Integration
TQC

JIT
CIM/CIL

Source: Adapted from Gunn, Manufacturing for Competitve Advantage, Ballinger, 1987

Customers

Recent Evolution
Fragmentation

Evolving Integration

Total Integration

1960s

1980s

2000s

Demand Forecasting
Purchasing
Requirements Planning
Production Planning
Manufacturing Inventory

Materials
Management

Warehousing
Materials Handling
Industrial Packaging
Inventory
Distribution Planning

Physical
Distribution

Order Processing
Transportation
Customer Service
Source: Adapted from Coyle, Bardi, and Langley, The Management of Business Logistics, West 1992

Supply
Chain

Logistics
Integration
Warehousing

Distribution
Planning
Order
Processing

Transportation

Inventory
Materials
Handling

Information
Technology

Industrial
Packaging
Demand
Forecasting

Production
Requirements
Planning
Planning

Customer
Service

Purchasing
Manufacturing
Inventory

The physical, financial, and information networks that

move the materials, funds, and related information
through the full logistics process ... from acquisition of
raw materials to delivery of finished products to the
end user.

The Supply Chain

Plan
Implement
Control

Raw Materials

Production

Material Flow and Storage

Storage

Information Flow and Storage

Customer

Nodes and Links

in a Logistics System
Node

Link
Retailer

Warehouse

Node

Node

Link

Node

Link
Plant

Link

Link
Warehouse

Node

Retailer

Typical Supply Chain Network

Suppliers

Plants
Distribution
Centers

Customers

Hierarchy of Logistics Management Decisions

STRATEGIC

Location Choice
Transport Mode Selection
Vendor Choice

TACTICAL

Throughput levels
Employment levels
Distribution routes

Uncertainty

Time
frame
Scope

OPERATIONAL

Vehicle scheduling Order

tracking
Inventory
replenishment

Logistics Environments
External -Macro

Value-added Role
Time Utility
Place Utility
Economic Impacts
Economic
Importance

Intrafirm-Micro

Competitive Advantage
Value Chain
Logistics Interfaces
with Value Activities

Interfirm Distribution Channels

Channel
Structure
Relationships

Source: Adapted from Coyle, Bardi, and Langley, The Management of Business Logistics, West , 1992.

Fundamental Utility Creation in the

Economy
Production
Form Utility

Logistics
Place Utility

Marketing
Possession Utility

Time Utility
Source: Adapted from Coyle, Bardi, and Langley, The Management of Business Logistics, West, 1992.

The Generic Value Chain

Cost leadership
Differentiation
Focus

Firm Infrastructure
Ma

Human Resource Management

n
rgi

Support
Activities

Technology Development
Procurement

Outbound
Logistics

Marketing
and Sales

Primary Activities
Source: Michael E. Porter, Competitive Advantage, Free Press, 1985.

Service

Ma
r
g
in

Inbound
Operations
Logistics

Conflicting Objectives
Objectives
Sales and
Marketing

High revenues through:

High levels of product
availability

Cost-effective production
through:
Production
High, capacity utilization
Long production runs
Few set-ups

Finance
and
accountin
g

Reduce investments and

costs through:
Fewer facilities
Lower inventory levels

Implications

L
o
g
i
s
t
i
c
s

Source: Magee, Copacino, Rosenfield, Modern Logistics Management, Wiley, 1985.

Higher
Lower
More
Fewer

Customer
Service

Disrupting
factors in
production

Higher

Inventories
Lower

Product

Price

Promotion

Logistics

Place / Customer
Service Levels

Inventory
carrying costs

Lot quantity cost

Transportation
costs

Order processing
and information
costs

Warehousing costs
(throughput cost
not storage)

Total Cost =Transportation costs + Inventory carrying costs +...

Source: Lambert and Stock, Strategic Logistics Management, Irwin, 1993.

Marketing

Cost Trade-offs in
Logistics

Distribution Channels
Manufacturers and
Industrial Users

Retailers

Inventory Repositioning
Farm and
Raw
Materials

Consumers
and
Government
Wholesalers

Distribution Channel -- Loose Links,

Independent Businesses

Inventory management
by each channel
participant
Manufacturer

Company Truck

Manufacturer

Distributor
Common Carrier

Retailer
Local Delivery

Source: Adapted from Bowersox and Closs, Logistical Management McGraw-Hill, 1996.

The Supply Chain

Apparel Pipeline

Raw
Materials

Textile
Production

Apparel

Retail

Customers
Pipeline inventory
management

Information sharing
Joint planning

Organization
Organizationof
ofProductionProductionDistribution
DistributionSystem
System

Inventory

Factory
Factory
Warehouse

2
0.5

Weeks

Inventory
2

Distributors

0.5
3
Retailers
Orders From
Customers
Forrester, J.W. (1958) Industrial Dynamics:
A Major Breakthrough for Decision Makers. Harvard Business Review.

Inventory
1

Delivery of Goods
To Customers

The
The Apparel
Apparel Pipeline
Pipeline

Raw
Material

Textile
Production

Apparel

Retail

Customer

Average Time:
66 Weeks

Information
Information
sharing
sharing
Joint
Jointplanning
planning
Source: Blackburn, Time Based Competition, 1991

Pipeline
Pipelineinventory
inventory
management
management

FORECASTERROR
ERROR(%)
(%)
FORECAST

Effect
Effect of
of Lead
Lead Time
Time on
on Retailers
Retailers
Stocking
Stocking Decision
Decision
+40
+20
0

+/-40%

+/-20%

+/-10%

-20
-40
-26
Weeks

Source: Blackburn, Time Based Competition, 1991

-16
Weeks

Start of
Season

TIME
TIME

Two-Way
Two-Way Flows
Flows in
in Apparel
Apparel Chain
Chain
Product
Textiles

Apparel

Orders and
Capacity
Commitments

Source: Blackburn, Time Based Competition, 1991

Inventory and
Order Information

Retail

Point of
Sale

Sales
Information

Keys to Fast-Cycle Logistics

Cultural
Cultural
Change
ChangeFrom
From
Top
TopDown
Down

Information
Information
Technology
Technology

Partnerships
Partnerships

Shorter
Shorter
Manufacturing
Manufacturing
Cycles
Cycles

Information
Information
Sharing
Sharing

Fast
FastCycle
Cycle
Logistics
Logistics
Source: Blackburn, Time Based Competition, 1991

OR Contributions
Economics
Game theory
Information Management

Inventory Models
Inventory Control and Vehicle Routing
Distribution Requirements Planning
Enterprise Resource Planning
Multiobjective Decision Support Systems

Economics
Capacity Choice and Allocation: Strategic Behavior and
Supply Chain Performance, G. Cachon and M. Lariviere,
Management Science/Vol. 45, No. 8, August 1999
Truth telling provides some advantages to the supply chain that should
be weighed against the costs of inducing it

Competitive and Cooperative Inventory Policies in a TwoStage Supply Chain, G. Cachon and P. Zipkin, Management
Science/Vol. 45, No. 7, July 1999
Competition generally lowers supply chain inventory relative to the
optimal solution

Economics
The Role of Returns Policies in Pricing and Inventory
Decisions for Catalogue Goods Authors: H. Emmons and S.
Gilbert, Management Science /Vol. 44, No. 2, February 1998
Relationship of such policies return policies on both retailers and
manufacturers profits

Capacity Allocation Using Past Sales: When to Turn-and-Earn

G. Cachon and M Lariviere, Management Science/Vol. 45,
No. 5, May 1999
Turn-and-earn allocation does not generally coordinate the system, and
in certain cases is a means for the supplier to increase profits at the
expense of retailers

Economics
Centralization of Stocks: Retailers vs. Manufacturer, R.
Anupindi and Y. Bassok, Management Science/Vol. 45, No.
2, February 1999
Shows that centralizing stocks by retailers increases profits for the
manufacturer up to a certain level of market search in the supply
chain

Value of Information in Capacitated Supply Chains, S.

Gavirneni, et al., Management Science/Vol. 45, No. 1,
January 1999
Examine benefits of partial vs complete information sharing in a
supplier-retailer setting

Economics
The Quantity Flexibility Contract and Supplier-Customer
Incentives, A. Tsay, Management Science/Vol. 45, No. 10,
October 1999
Quantity Flexibility (QF) contract and its implications for the
behavior and performance of suppliers and customers

Quantity Flexibility Contracts and Supply Chain Performance,

A. Tsay and W. Lovejoy, Manufacturing & Service
Operations Management Vol 1, No 2, 1999
Analysis extended to multiple time periods

Economics
Coordinating Investment, Production, and Subcontracting, J. Van
Mieghem, Management Science/Vol. 45, No. 7, July 1999
Analysis of the role of transfer prices and of the bargaining
power of buyer and supplier
Decentralized Multi-Echelon Supply Chains: Incentives and
Information : H. Lee and S. Whang, Management
Science/Vol. 45, No. 5, May 1999
Desirable properties of performance measurement schemes
that align the incentives and interests of the multiple managers
in decentralized supply chains

Economics
Echelon Reorder Points, Installation Reorder Points, and the
Value of Centralized Demand Information, F. Chen,
Management Science /Vol. 44, No. 12, Part 2 of 2, December
1998
Examine cost difference between an echelon stock and an installation
stock policy.

Decentralized Supply Chains Subject to Information Delays, F.

Chen, Management Science/Vol. 45, No. 8, August 1999
Information lead times play the same role as the
production/transportation counterparts in the determination of the
optimal replenishment strategies, but they are less costly

Inventory Models
Managing Supply Chain Demand Variability with Scheduled
Ordering Policies, G. Cachon, Management Science/Vol. 45,
No. 6, June 1999
Identify two strategies that reduce the suppliers demand variance and
also reduce total supply chain costs

The Stabilizing Effect of Inventory in Supply Chains, M.

Baganha and M. Cohen, Operations Research Vol. 46, Supp.
No. 3, MayJune 1998
Model helps to explain the bullwhip effect and indicates
mechanisms that can promote stabilization

Inventory Models

A Single-Item Inventory Model for a Nonstationary Demand

Process, S. Graves, Manufacturing & Service Operations
Management Vol. 1, No. 1, 1999
Demand process for the upstream stage is more variable than that
for the downstream stage

Probabilistic Analyses and Algorithms for

Three-Level Distribution Systems
Wal-Marts cross-docking strategy
Integrate inventory control and vehicle routing for a
distribution system consisting of a single vendor, a
fixed number of warehouses, and many retailers
Warehouses receive fully loaded trucks from the
vendor but never hold inventory
Warehouses serve only to coordinate the frequency,
time and sizes of deliveries to retailers
Source: L. Chen and D. Simchi-Levi, MANAGEMENT SCIENCE/Vol. 44, No. 11, Part 1 of 2, November 1998

Distribution Requirements Planning

A Dynamic Model For Requirements Planning With

Application To Supply Chain Optimization, S. Graves, et al.,
Operations Research Vol. 46, Supp. No. 3, MayJune 1998
Use a model for a single production stage as a building block for
modeling a network of stages
Apply the DRP model to strategic inventory placement in the film
manufacturing processes at Kodak

Extended-Enterprise Supply-Chain
Management at IBM Personal
Systems Group
and Other Divisions

Source: G. Lin et al., ITERFACES 30: 1 JanuaryFebruary 2000 (pp.

Cooperative Multiobjective
Decision Support
for the Paper Industry
The A-team
architecture

Source: S. Murthyet al., I TERFACES 29: 5 SeptemberOctober 1999 (pp.

Unifi: Begin at Home - ERP

Keys to competing: Automation and process control systems
Message to supply chain: Cooperate as if vertically integrated
Companywide program of linkages among processes and machines
Exchanging production and quality information with suppliers over the
Internet
Daily WIP information to make-to-order customers

Computer to computer exchanges

Allow partners to come in, rather than pushing data out
Spin off as Manufacturing-Systems Consultant

Source: How a Tighter Supply Chain Extends the Enterprise, Fortune, November 8, 1999.

Mercury Marine: Dealer focus

Vertically integrated
Supplier consigns truckload loads to factory and gets
paid as used
MercNet - Private electronic network for parts ordering
moved to the Internet
Share forecasts and collaborate with dealers on promotions
Resistance from sales on electronic ordering

Source: How a Tighter Supply Chain Extends the Enterprise, Fortune, November 8, 1999.

Rocketdyne: Suppliers Beyond the

Firewall
Brought engineering, manufacturing and suppliers
together from the start
Alleviated job-shop problems with Manufacturing
Execution System (MES)
Computer connections to work areas

Linked with MRP and Product Data Management

Included suppliers via the Internet
Dedicated server, control on depth of system access

Source: How a Tighter Supply Chain Extends the Enterprise, Fortune, November 8, 1999.

Adaptec: Value Added Cycle Time

100 day cycle time
Manually entered information
Different computer systems

Treat suppliers as partners

Incompatible systems: SAP vs homemade ERP

Extricity Internet Software

Fast orders, drawings, confirmations
Cycle time dropped to 55

day

WIP shrank from $18 M to $9 M

If customers would share forecasts, Adaptec could deliver
directly rather than from the current 22 FG warehouses
Source: How a Tighter Supply Chain Extends the Enterprise, Fortune, November 8, 1999.

Nimbus: Streamlined Supply Chain by

Merging
Most studios outsource production, distribution,
and packaging of VHS tapes and DVDs
Technicolor - largest converter of movies to VHS
People, systems, and facilities capability to handle
distribution
Nimbus sales rose to $89 M in first six months of 1999
Consolidation of production facilities and other supply
chain moves - $10.2 M savings for the first half of 1999

Conclusions
Integration and coordination
Production and Distribution
Routing and Location
Routing and Inventory

Dynamic Problems
Real Time

Conclusions
Increase in fast-cycle logistics for companies of all size
Doing business faster, and especially smarter

replacing inventory with information

With real-time information companies can manage
inventory in motion, rather than at rest
Supply chains are increasingly moving online
Can dramatically reduce overhead and obsolescence
while speeding time to market
Source: Fedex Corporation, 1999 Annual Report