Physical Distribution Chapter 13 Physical Distribution n Physical

Physical Distribution Chapter 13

Physical Distribution n Physical Supply n n n goods moving from supplier to manufacturer “inbound” Physical Distribution n n goods moving from manufacturer to customers “outbound” Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Channels of Distribution Any series of firms or individuals that participates in the flow of goods and services from the raw material supplier and producer to the final user or consumer. ” n Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive APICS 12 th Edition Dictionary © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Physical Distribution n Adds place value n n by delivering goods to customers Adds time value n by delivering goods when customers want them Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Reverse Logistics - Information n n Goods are returned to supplier Information is also needed n n reason / approval for the return credit information Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Total Cost Concept - Example Problem A company normally ships a product by rail. Transport by rail costs $200, and the transit time is 10 days. However, the goods can be moved by air at a cost of $1000 and it will take one day to deliver. The cost of inventory in transit is $100 per day. What are the costs involved in the decision? Rail Air Transportation Cost $ 200 $1000 Inventory Carrying Cost 1000 100 Total $1200 $1100 Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Global Distribution n Differences in: Distance n Language n Currency n Measurement n Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Interfaces n A bridge between: n Marketing n Production Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Interface with Marketing n Marketing is responsible for the transfer of ownership n n selling, advertising, sales promotion, merchandising and pricing Physical distribution is responsible for delivering the goods n contributes to creating demand n prompt delivery, availability of product, accurate order filling Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Interface with Production n Production requires a steady flow of raw materials and components n n Factory location may depend on the transportation cost n n n interruptions are very expensive raw materials finished goods Factory demand is created by distribution centers Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Line Haul Costs n n Fuel, labor, depreciation Approximately the same per mile whether full or empty LHC = Total Line-Haul Cost Distance Travelled Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Line-Haul Costs - Example For example, for a given commodity, the line-haul cost is $3 per mile and the distance shipped is 100 miles. The total line-haul cost is therefore, $300. If the shipper sends 50, 000 pounds (or 500 cwt), the total line haul cost is the same as if 10, 000 pounds were shipped. However the line-haul cost (LHC) per hundredweight (cwt, Centum Weight) will vary. LHC 50, 000 lbs = $300 = $. 60 per cwt 500 LHC 10, 000 lbs = $300 = $3. 00 per cwt 100 Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Line-Haul Costs n Total line-haul cost varies with: n n n cost per mile distance moved Line-haul cost per cwt varies with: n n n cost per mile distance moved weight moved Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Line-haul Cost - Example For a particular commodity, the line-haul cost is $2. 50 per mile. For a trip of 500 miles and a shipment of 600 cwt, what is the cost of shipping per cwt? If the shipment is increased to 1000 cwt, what is the savings per cwt? Cost 600 =($2. 50 x 500) / 600 = $2. 083 / cwt Cost 1000 = ($2. 50 x 500) / 1000 = $1. 25 / cwt Savings = $2. 083 - 1. 25 Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive = $0. 833 / cwt © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Increasing Weight Shipped n n n Truck will have a weight limitation Some products have a low density and the truck is filled before the weight limitation is met Therefore, nest products or ship products unassembled to increase the weight shipped Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Shipping un-assembled ly emb s s e. A d Som equire R Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Shipping Cost - Example A company ships barbecues fully assembled. The average line-haul cost is $12. 50 per mile, and the truck carries 100 assembled barbecues. The company decides to ship the barbecues unassembled and can ship 500 barbecues in a truck. Calculate the line-haul cost per barbecue assembled and unassembled. If the average trip is 300 miles, calculate the savings per barbecue. Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Shipping Cost - Example Line-haul costassembled = $12. 50/100 =$0. 125 / bbq / mile Line-haul cost unassembled = $12. 50/500 =$0. 025/ bbq/mile Savings per mile = $0. 125 - 0. 025 = $0. 10 / bbq / mile Trip savings = 300 miles x $0. 10 / bbq/mile =$30 per barbecue Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive probably worth the cost of assembly at the buyer’s © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Pickup and Delivery Costs n n n Depends on time spent (not distance) Charged for each pickup Therefore, consolidate multiple shipments to avoid many trips Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Terminal Handling n n Cost depends on how many times the shipment must be handled Full truckloads (TL) go directly to the customer Less than truckloads (LTL) must be sent to a terminal, sorted and consolidated Therefore, consolidate shipments into fewer parcels Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Billing and Collecting n n n Costs of paperwork Costs of invoicing Therefore, reduce the number of pickups and pieces shipped (consolidating) Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Total Transportation Costs n n Line-haul + pickup and delivery + terminal handling + billing and collecting To reduce costs: n n increase the weight shipped (line-haul cost) reduce the number of pickups (pickup and delivery cost) decrease the number of parcels (terminal handling costs) consolidate shipments (billing and collecting costs) Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Total Cost Distance Versus Cost of Carriage Fixed Cost: pickup, and delivery terminal handling, billing and collecting Distance Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Rate Charged - Other Factors n n Value - to cover carrier’s liability Density - can affect the total weight shipped Perishability - may require special equipment i. e. refrigeration Packaging - to reduce the risk of damage and breakage Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Role of Warehouses n Transportation consolidation n Product Mixing n Service Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

1. Transportation Consolidation n n Reduces transportation costs Truckload (TL) shipments to warehouse Less than truckload (LTL) shipments to local customers “Break-bulk” n breaking down large shipments from factories into small shipments for local buyers Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Product Mixing Figure 13. 6 Product mixing Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

2. Product Mixing n n n Avoids many small LTL shipments Customers want a mix of products often from different manufacturers or locations The distribution center can assemble many small items into one shipment Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

3. Service n n n Local distribution centers can improve customer service by being close to the customer Faster response time Improved variety of products Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Warehousing and Transportation Costs n n Number of customers Geographic distribution of customers Customer order size Number and location of plants and distribution centers Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive Customer Service $ © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Warehousing and Transportation Costs - Example Problem A plant located in Toronto is serving customers in the Boston area. If they ship direct to customers most shipments will be LTL. However if they locate a distribution center in Boston they can ship TL to the warehouse and LTL from the warehouse to the local customers. Costs are as follows: Plant to customer (LTL) = $100 / cwt Plant to distribution center (TL) = $50 / cwt Distribution center = $10 / cwt Distribution center to customer (LTL) = $20 / cwt Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Warehousing and Transportation Costs - Example Problem Costs if a distribution center is used: TL Toronto to Boston = $50 per Distribution center costs = $10 per LTL Boston area = $20 per Total cost = $80 per cwt cwt Savings per cwt = $100 - $80 = $20 per cwt Annual savings at 10, 000 cwt = $20 x 10, 000 = $200, 000 Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Market Boundaries n n The line between two methods of distribution where the laid down cost is the same. Deciding which customers should be served from which location Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Laid-down cost (LDC) “The sum of the product and the transportation costs. The laid-down cost is useful in comparing the total cost of a product shipped from different suppliers from a customer point of view” n Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive APICS 12 th Edition Dictionary © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Laid-down Costs - Example Problem Syracuse is 300 miles from Toronto. The product cost is $10 per cwt, and the transportation cost is $0. 20 per mile. What is the laid down cost per cwt? LDC = Product cost +(trans’n cost per mile x distance) = $10 + ($0. 20 x 300) = $70 per cwt Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Market Boundary - Example Problem Market Boundary Figure 13. 7 Market boundary Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Market Boundary - Figure 13. 7 In the example, the distance between A and B is 100 miles. If we let the distance from A to Y be X miles, then the distance from B to Y is (100 - X) miles. Assume supply A is the factory and B is a distribution center. Assume the product cost from A is $100 and from B is $110 which includes inventory and TL costs to the distribution center. LTL costs are $. 40 per unit per mile from either location. LDCA = LDCB 100 + 0. 40 X = 110 + 0. 40(100 - X) X = 62. 5 miles Customers within 62. 5 miles from the factory A, ship direct. The rest of the customers, ship from the distribution center B. Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Market Boundary - Example Problem The distance between Toronto and Boston is about 500 miles. Given the cost structure in the previous example, calculate the location of the market boundary between Toronto and Boston. Assume the product cost at Toronto is $10 per cwt. Product cost at Boston Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive = product cost at Toronto + TL transportation + handling costs © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Market Boundary - Example Problem Product cost at Boston = product cost at Toronto + TL transportation + handling = $10 + $50 + $10 = $70 LDCT = LDCB $10 + $0. 20 X = $70 + $0. 20(500 - X) 0. 4 X = 160 X = 400 The market boundary is 400 miles from Toronto or 100 miles from Boston. Ship orders direct within 400 miles from Toronto. Closer to Boston ship from Distribution Center in Boston. Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Effect of Adding More Warehouses n As more distribution centers are added: n TL shipments to DC’s will increase n LTL costs to customers will decrease n Total cost of transportation will decrease Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Effect of Adding More Warehouses n n n Transportation Costs TL shipments will be made over long distances LTL shipments to customers will be shorter Total costs decrease with more warehouses n diminishing effect as more warehouses are added Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Effect of Adding More Warehouses Figure 13. 8 Transportation cost versus number of warehouses Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Multi-Warehouse System + + + = Transportation costs Inventory-carrying cost Warehousing costs Materials handling costs Packaging costs Total system cost n Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive System service capability © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Inventory-Carrying Cost n Inventory n n order quantity - stays the same safety stock n n Total SS increases with the number of warehouses varies with the square root of the change SSnew = SSold New Annual Demand/warehouse Old Annual Demand/warehouse Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Inventory Carrying Costs A company is considering adding a warehouse. For an item with an average demand of 1000 units each warehouse will have a demand of 500 units. n The safety stock in one warehouse was 100 units for a service level of 90%. What is the new safety stock? SS = 100 x 500 = 71 units (in each warehouse) 1000 n Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Total System Cost Figure 13. 11 Total system cost Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

System Service Capability Figure 13. 12 Estimate of market reached versus number of warehouses Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

System Service Capability n 3 distribution centers provide the lowest total system cost Figure 13. 13 Cost versus number of warehouses Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.

Homework Assignment Problems 13. 8, 13. 9, 13. 10, 13. 11 Introduction to Materials Management, 7 th Edition Arnold, Chapman, Clive © 2012, 2008, 2004, 2001, 1998, 1996 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved.