Case 9.1 all indian logistics services answers

"Low Nail Company"

Contemporary Logistics

TWELFTH EDITION C

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Twelfth Edition

Contemporary LogistiCs

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Twelfth Edition

Contemporary LogistiCs

Paul R. Murphy, Jr.

A. Michael Knemeyer

New York, NY

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BRIEF CONTENTS Preface xv

PART 1 Overview of Logistics 1 Chapter 1 An Overview of Logistics 2 Chapter 2 Logistics and Information Technology 22 Chapter 3 Strategic and Financial Logistics 41 Chapter 4 Organizational and Managerial Issues in Logistics 54

PART 2 Supply Chain Management 77 Chapter 5 The Supply Chain Management Concept 78 Chapter 6 Procurement 96

PART 3 Elements of Logistics Systems 111 Chapter 7 Demand Management, Order Management,

and Customer Service 112 Chapter 8 Inventory Management 130 Chapter 9 Facility Location 149 Chapter 10 Warehousing Management 168 Chapter 11 Packaging and Materials Handling 185 Chapter 12 Transportation 204 Chapter 13 Transportation Management 224 Chapter 14 International Logistics 243 Glossary 272 Name Index 281 Subject Index 285

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vii

CONTENTS

Preface xv

Part I Overview of Logistics 1

Chapter 1 AN OVERVIEW OF LOGISTICS 2 Economic Impacts of Logistics 2

Logistics: What It Is 3

The Increased Importance of Logistics 5

A Reduction in Economic Regulation 5

Changes in Consumer Behavior 6

Technological Advances 7

Advances in Retailing 8

Globalization of Trade 8

The Systems and Total Cost Approaches to Logistics 8

Logistical Relationships within the Firm 10

Finance 10

Production 11

Marketing 11

Marketing Channels 13

Activities in the Logistical Channel 15

Customer Service 16

Demand Forecasting 16

Facility Location Decisions 16

International Logistics 16

Inventory Management 16

Materials Handling 16

Order Management 16

Packaging 16

Procurement 17

Reverse Logistics 17

Transportation Management 17

Warehousing Management 17

Logistics And Supply Chain Careers 17 Summary  19  •  Key Terms  18  •  Questions for Discussion and  Review  19  •  Suggested Readings  19

▶ CASE 1.1 KiddieLand and the Super Gym 20

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viii Contents

Chapter 2 LOGISTICS AND INFORMATION TECHNOLOGY 22 General Types of Information Management Systems 23

Office Automation Systems 24

Communication Systems 25

Transaction Processing Systems (TPS) 26

Management Information Systems (MIS) and Executive ­Information Systems­(EIS) 28

Decision Support Systems (DSS) 29

Enterprise Systems 31

The Internet’s Influence on Logistics 32

Online Retailing 32

Cloud Computing 34

Electronic Procurement 34

Internet of Things 35

Information Technology Challenges 36 Summary  37  •  Key Terms  37  •  Questions for Discussion and   Review  37  •  Suggested Readings  37

▶ CASE 2.1 To Invest or not to Invest? that is the question 38

Chapter 3 STRATEGIC AND FINANCIAL LOGISTICS 41 Connecting Strategy to Financial Performance 42

Basic Financial Terminology 44

Income Statement 44

Balance Sheet 45

Statement of Cash Flows 46

Reporting Requirements 46

Strategic Profit Model 47

Logistics Connections to Net Profit Margin 49

Logistics Connections to Asset Turnover 49

Balanced Scorecard 49

Logistics Activity Measures 50

Transportation Measures 50

Warehousing Measures 51

Inventory Measures 51

Design and Implementation of Measures 51 Summary  52  •  Key Terms  52  •  Questions for Discussion and  Review  52  •  Suggested Readings  53

▶ CASE 3.1 Brant Freezer Company 53

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Contents ix

Chapter 4 ORGANIZATIONAL AND MANAGERIAL ISSUES IN ­LOGISTICS­ 56 Organizing Logistics within the Firm 56

Organizational Structure for Logistics 57

Organizational Design for Logistics 58

Managerial issues in Logistics 59

Productivity 60

Quality 62

Risk 64

Sustainability 69

Complexity 71 Summary  72  •  Key Terms  72  •  Questions for Discussion and   Review  72  •  Suggested Readings  73

▶ CASE 4.1 Red Spot Markets Company 73

Part II Supply Chain Management 77

­ Chapter­5­THE­SUPPLY­CHAIN­MANAGEMENT­CONCEPT­ 78 Evolution of Supply Chain Management 78

Supply Chain Management Process Frameworks 80

Enablers of SCM Implementation 81

Understanding the Implications of Increased Customer Power 82

Establishing Appropriate Relationship Structures 83

Leveraging Technology for Enhanced Visibility and Communication 85

Use of Supply Chain Facilitators 86

Barriers to SCM Implementation 88

Regulatory and Political Considerations 88

Lack of Top Management Commitment 88

Reluctance to Share, or Use, Relevant Information 88

Incompatible Information Systems 89

Incompatible Corporate Cultures 89

Globalization Challenges 90

Supply Chain Integration 90 Summary  91  •  Key Terms  91  •  Questions for Discussion and   Review  92  •  Suggested Readings  92

▶ CASE 5.1 Johnson Toy Company 93

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­ Chapter­6­PROCUREMENT­ 96 Procurement Objectives 97

Supplier Selection and Evaluation 98

Procurement Portfolio Approach 100

Supplier Development (Reverse Marketing) 101

Global Procurement (Sourcing) 101

Sustainable Procurement 103

Social Responsibility 103

Investment Recovery 104

Supply Chain Finance 105 Summary  105  •  Key Terms  105  •  Questions for Discussion and   Review  106  •  Suggested Readings  106

▶ CASE 6.1 Tempo Ltd. 107

Part III Elements of Logistics Systems 111

Chapter 7 DEMAND MANAGEMENT, ORDER MANAGEMENT, AND CUSTOMER­SERVICE­ 112 Demand Management  112

Demand Forecasting Models 113

Demand Forecasting Issues 114

Order Management 114

Order Transmittal 115

Order Processing 115

Order Picking and Assembly 116

Order Delivery 118

Customer Service 119

Time 120

Dependability 120

Communication 120

Convenience 121

Managing Customer Service 121

Establishing Customer Service Objectives 121

Measuring Customer Service 123

Customer Profitability Analysis 124

Service Failure and Recovery 124 Summary  125  •  Key Terms  125  •  Questions for Discussion and  Review  126  •  Suggested Readings  126

▶ CASE 7.1 Handy Andy, Inc 127

x Contents

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­ Chapter­8­ INVENTORY­MANAGEMENT­ 130 Inventory Classifications 131

Inventory Costs 131

Inventory Carrying Costs 132

Ordering Costs 133

Trade-Off Between Carrying and Ordering Costs 133

Stockout Costs 134

Trade-Off Between Carrying and Stockout Costs 135

When to Order How Much to Order 136

Economic Order Quantity 137

Conditions of Uncertainty 139

Inventory Flows 139

Inventory Management: Special Concerns 140

ABC Analysis of Inventory 140

Dead Inventory 141

Inventory Turnover 142

Complementary and Substitute Products 142

Contemporary issues with Managing Inventory 143

Lean Manufacturing 143

Service Parts Logistics 145

Vendor-Managed Inventory 146 Summary  146  •  Key Terms  146  •  Questions for Discussion  and  Review  147  •  Suggested Readings  147

▶ CASE 8.1 Low Nail Company 148

­ Chapter­9­FACILITY­LOCATION­ 149 The Strategic Importance of Facility Location 150

Determining The Number of Facilities  151

General Factors Influencing Facility Location 152

Natural Resources 152

Population Characteristics—Market for Goods 154

Population Characteristics—Labor 154

Taxes and Incentives 156

Transportation Considerations 156

Proximity to Industry Clusters 158

Trade Patterns 158

Quality-of-Life Considerations 159

Locating in other Countries 159

Contents xi

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Specialized Location Characteristics 160

Free Trade Zones 160

Finding the Lowest-Cost Location using grid systems 161

Grid Systems 161

Facility Relocation and Facility Closing 163 Summary  164  •  Key Terms   164  •  Questions for Discussion  and  Review  164  •  Suggested Readings  164

▶ CASE 9.1 All-Indian Logistics Services 166

­ Chapter­10­WAREHOUSING­MANAGEMENT­ 168 The Role of Warehousing in a Logistics System 168

Public, Private, Contract, and Multiclient Warehousing 170

Public Warehousing 170

Private Warehousing 172

Contract Warehousing 173

Multiclient Warehousing 173

Design Considerations in Warehousing  173

General Considerations 173

Trade-offs 174

Fixed versus Variable Slot Locations for Merchandise 174

Build Out (Horizontal) versus Build Up (Vertical) 175

Order-Picking versus Stock-Replenishing Functions 175

Two-Dock versus Single-Dock Layout 175

Conventional, Narrow, or Very Narrow Aisles 175

Degree of Warehouse Automation 176

Other Space Needs 176

Warehousing Operations 177

Warehousing Productivity Analysis 177

Safety Considerations 177

Hazardous Materials 180

Warehousing Security 180

Cleanliness and Sanitation Issues 181 Summary  182  •  Key Terms  182  •  Questions for Discussion  and  Review  182  •  Suggested Readings  183

▶ CASE 10.1 Minnetonka Warehouse 183

­ Chapter­11­PACKAGING­AND­MATERIALS­HANDLING­ 185 Product Characteristics 185

Packaging Fundamentals 186

Functional Tradeoffs 187

Package Testing and Monitoring 188

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Labeling 188

Issues in Packaging 190

Environmental Protection 190

Metric System 192

Identifying Packaging Inefficiencies 192

Packaging’s Influence on Transportation Considerations 193

Unit Loads in Materials Handling 195

The Unit Load Platform 196

Beyond the Unit Load 197

Materials Handling 197

Materials Handling Principles 200

Materials Handling Equipment 200 Summary  201  •  Key Terms  201  •  Questions for Discussion  and  Review  202  •  Suggested Readings  202

▶ CASE 11.1 Let There be Light Lamp Shade Company 203

­ Chapter­12­TRANSPORTATION­ 204 Comaparing and Contrasting Transportation Infrastructure 205

Transportation Modes 206

Airfreight 206

Motor Carriers 207

Pipelines 209

Railroads 210

Water 210

Intermodal Transportation 211

Transportation Specialists 213

Transportation Regulation 215

Environmental Regulation 215

Safety Regulation 216

Economic Regulation 216

Legal Classification of Carriers 217 Summary  219  •  Key Terms  219  •  Questions for Discussion  and  Review  219  •  Suggested Readings  220

▶ CASE 12.1 HDT Truck Company 220

Chapter 13 TRANSPORTATION MANAGEMENT 224 Rate (Pricing) Considerations 225

Rate Determination 225

Rate and Service Negotiations 228

Modal and Carrier Selection 234

Documentation  235

Contents xiii

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Bill of Lading 235

Freight Bill 237

Freight Claims 237

Making and Receiving Shipments 238

Consolidating Small Shipments 238

Demurrage and Detention 240

Routing 240

Tracking and Expediting 241

Transportation Service Quality  241 Summary  242  •  Key Terms  242  •  Questions for Discussion  and  Review  243  •  Suggested Readings  243

▶ CASE 13.1 Chippy Potato Chip Company 242

­ Chapter­14­ INTERNATIONAL­LOGISTICS­ 245 Macroenvironmental Influences on International Logistics 246

Political Factors 246

Economic Factors 248

Cultural Factors 249

International Documentation  251

Terms of Sale 251

Group 1: Terms that apply to any mode of transport 252

ExW (Exworks) 252

FCA (Free Carrier) 252

CPT (Carriage Paid To) 252

CIP (Carriage and Insurance Paid To) 252

DAT (Delivered at Terminal) 252

DAP (Delivered at Place) 253

DDP (Delivered duty Paid) 253

Group 2: Terms that Apply to Sea and Inland Waterway ­Transport Only­ 253

FAS (Free Alongside Ship) 253

FOB (Free on Board) 253

CFR (Cost and Freight) 253

CIF (Cost, Insurance, and Freight) 253

Methods of Payment 253

International Trade Specialists 255

International Freight Forwarders 255

Nonvessel-Operating Common Carriers 256

Export Management Companies 256

Export Packers 257

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xv

Transportation and Inventory Considerations in International Logistics 257

Ocean Shipping 258

Shipping Conferences and Alliances 259

International Airfreight 260

Surface Transport Considerations 260

International Trade Inventories 261

Logistics Performance Index 262 Summary  263  •  Key Terms  263  •  Questions for Discussion  and  Review  264  •  Suggested Readings  264

▶ CASE 14.1 Nurnberg Augsburg Maschinenwerke (N.A.M) 265

Glossary 272 Name Index 281 Subject Index 285

Contents xv

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xvii

This edition of Contemporary Logistics reflects a business landscape that is characterized by-geopolitical tensions in various parts of the world, steadily increasing trade among countries and across continents, supply chain vulnerabilities caused by severe natural disasters, and an unabated pace of technological advancement. Although these and other events present both-challenges and opportunities for logis- tics managers, the logistics discipline still remains fun, exciting, and dynamic—characteristics that are reflected in our revision.

WHAT’S NEW IN THIS EDITION?

This edition reflects input from reviewers, adopters, and other interested parties in terms of structure, presentation, and content. Specific modifications include the following:

• This edition welcomes a new coauthor, A. Michael Knemeyer, currently Associate Professor of Logistics at the Fisher College of Business, The Ohio State University. Mike’s impressive blend of practical, academic, and consulting experience in logistics and supply chain management provides this edition with fresh insights and perspectives.

• This edition contains one new end-of-chapter case, Case 9-1 (“All-Indian Logistics Services”), and modifications of several other cases. For example, some case content, as well as several discussion questions, have been changed in Cases 7-1 (“Handy Andy, Inc.”), 11-1 (“Let There Be Light Lamp Shade Company”), and 14-1 (“Nürnberg Augsburg Maschinenwerke (N.A.M.)”).

• Each chapter in this edition has been revised and incorporates new examples and references. For example, Chapter 1’s discussion of the globalization of trade reports the average growth rate of world trade between 1991 and 2011 (as opposed to between 1997 and 2007 in the tenth edition). As another example, Chapter 14’s discussion of Incoterms reflects the revisions associated with Incoterms 2010, which were effective at the beginning of 2011.

• New content has been added throughout this edition. For example, Chapter 1 now includes a discussion of the rapidly emerging topic of humanitarian logistics. In addition, the “Logistics Activity Measures” section in Chapter 3 contains an expanded discussion of warehousing and inven- tory management performance measurements. Chapter 6 has added a subsection, “Procurement Portfolio Approach,” that highlights Kraljic’s Portfolio Matrix.

• Tables and figures containing country and industry data have been either revised or updated. Examples include Table 1-1, “The Cost of the Business Logistics System in Relation to a Country’s Gross Domestic Product”; Figure 10-3, “2012 Liberty Mutual Workplace Safety Index Findings”; and Table 12-1, “Infrastructure Statistics in Several Countries.”

• The list of Key Terms at the beginning of each chapter has been modified in the eleventh edition, and each key term is defined in the Glossary. New Key Terms in this edition include humanitarian logistics, big data, Logistics Uncertainty Pyramid Model, near-sourcing, and total cost of owner- ship, among others.

• The end-of-chapter Suggested Readings in the eleventh edition have been revised and over 60 percent of them have been published since 2009.

PREFACE

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xviii Preface

INSTRUCTOR SUPPLEMENTS

Supplements are available for adopting instructors to download at www.pearsonhighered.com Registration is simple and gives the instructor immediate access to new titles and new editions. Pearson’s dedicated technical support team is ready to help instructors with the media supplements that accompany this text. The instructor should visit support.pearson.com/getsupport for answers to frequently asked questions and for toll-free user support phone numbers. Supplements include the following:

• Instructor’s Manual • PowerPoint Slides

The current edition of Contemporary Logistics has been prepared by Paul Murphy and Mike Knemeyer, and they welcome your comments and suggestions at drmurphy@jcu.edu (Paul) and knemeyer.4@osu.edu (Mike). Paul and Mike gratefully acknowledge the important contributions that the late Donald F. Wood, James C. Johnson, and Daniel L. Wardlow made to earlier editions.

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1

P art 1 of Contemporary Logistics introduces the many dimensions of the complex and dynamic subject of logistics. Chapter 1 presents an overview of logistics and introduces you to what logistics is and why it is important. The chapter covers the economic impact of logistics and discusses how

logistics interacts with other functions, such as marketing, in an organization. Chapter 2 provides an overview of the general types of information management systems that are

applicable across each business function, and it provides examples of how these general types of information systems are specifically applied in logistics management. Chapter 2 also explores the Internet's influence on logistics and looks at some of the challenges associated with information technology.

Chapter 3 discusses the strategic financial outcomes influenced by logistics decisions. It uses the strategic profit model to highlight how logistics activities influence the key corporate financial measures of net income, capital employed, and return on capital employed.

Chapter 4 examines organizational and managerial issues in logistics. The chapter begins by looking at organizational structure and organizational design for logistics. Chapter 4 also discusses select managerial issues in logistics such as productivity, theft and pilferage, and the impact of terrorism on logistics systems.

OVERVIEW OF LOGISTICS PART I

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1

ECONOMIC IMPACTS OF LOGISTICS

Although the logistics discipline today is vastly different from what it was like when the first edition of this book was published in the 1970s, one thing that remains constant is the economic impact of logistics. Before defining what logistics is, we believe it is important to discuss the economic aspects of logistics; you might be surprised at its significant economic impact. From a macroeconomic per- spective, Table 1.1 presents logistics costs in relation to gross domestic product (GDP) for a select group of countries. Although absolute and relative logistics costs in relation to GDP vary from country to country, logistics is most definitely an important component in any country’s economy.

More specifically, logistics can play an important role in a nation’s economic growth and devel- opment. For example, relatively high logistics costs (as a percentage of GDP) in the People’s Republic of China (China) continue to restrict the country’s economic development; in particular, the high costs of highway transportation have severely constrained the growth of China’s e-commerce mar- ket.1 In a similar fashion, the growth of e-commerce sales in India is challenged by logistical ineffi- ciencies to include poor roads and inferior transportation equipment.2

Apart from the previous examples of macrolevel economic impacts, the economic impacts of logistics can affect individual consumers such as you. These impacts can be illustrated through the concept of economic utility, which is the value or usefulness of a product in fulfilling customer needs or wants. The four general types of economic utility are possession, form, time, and place; logistics clearly contributes to time and place utilities.

Possession utility refers to the value or usefulness that comes from a customer being able to take possession of a product. Possession utility can be influenced by the payment terms associ- ated with a product. Credit and debit cards, for example, facilitate possession utility by allowing the customer to purchase products without having to produce cash or a cash equivalent. Likewise,

1 Hua Wang, “High Logistics Cost, Toll Road and Institutional Factors Countermeasure in China,” Journal of Modern Accounting and Auditing, 7, no. 11 (2011): 1301–1306. 2 Sean McLain and Newley Purnell, “Indian Startups Vie to Win E-Commerce Battle,” The Wall Street Journal, October 25, 2015.

An Overview Of LOgistics

Learning Objectives

1.1 To discuss the economic impacts of logistics 1.2 To define what logistics is 1.3 To analyze the increased importance of logistics 1.4 To discuss the systems and total cost approaches to logistics 1.5 To expose you to logistical relationships within the firm 1.6 To introduce you to marketing channels 1.7 To provide a brief overview of activities in the logistics channel 1.8 To familiarize you with logistics careers

Learning Objective 1.1

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Chapter 1 • An Overview of Logistics 3

automotive leases allow customers to take possession of a more desirable model than would be pos- sible with conventional automotive loans.

Form utility refers to a product’s being in a form that (1) can be used by the customer and (2) is of value to the customer. Although form utility has generally been associated with production and manufacturing, logistics can also contribute to form utility. For example, to achieve production economies (i.e., lower cost per unit), a soft-drink company may produce thousands of cases of a certain type of soft drink (e.g., diet cola). You’re not likely to purchase diet cola by the thousands of cases (unless you’re having a really big social event!) but rather in smaller lot sizes, such as a six- or twelve-pack. Through allocation, logistics can break the thousands of cases of diet cola into the smaller quantities that are desired by customers.

Place utility refers to having products available where they are needed by customers; prod- ucts are moved from points of lesser value to points of greater value. Continuing with the diet cola example, place utility is increased by moving the soda from a point of lesser value (e.g., stored in a warehouse) to a point of greater value (e.g., on a supermarket shelf).

Closely related to place utility is time utility, which refers to having products available when they are needed by customers. It is important to recognize that different products have different sensitivities to time; three-day late delivery of perishable items likely has more serious consequences than three-day late delivery of nonperishable items.

Simultaneously achieving possession, form, place, and time utility goes a long way toward facilitating—but not guaranteeing—customer satisfaction. Consider the experience of a former stu- dent who placed an online order of Valentine’s Day flowers for his out-of-state girlfriend. The seller facilitated possession utility by allowing the student to pay by credit card, and a healthy arrangement of the correct bouquet (form utility) arrived at the girlfriend’s residence on Valentine’s Day (place and time utility). Although the seller provided possession, form, place, and timely utility, the buyer was quite unsatisfied with his purchase. The problem: The greeting card that accompanied the flow- ers had the wrong name for the girlfriend (but the right name for the boyfriend)!

LOGISTICS: WHAT IT IS

Now that you have been introduced to select economic impacts of logistics, it’s important to define what logistics is. This book adopts the definition promulgated by the Council of Supply Chain Management Professionals (CSCMP), one of the world’s most prominent organizations for logistics professionals. According to the CSCMP, “Logistics management is that part of supply chain manage- ment 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 consump- tion in order to meet customers’ requirements.”3

Learning Objective 1.2

3 www.cscmp.org/about-us/supply-chain-management-definitions

TABLE 1.1 The Cost of the Business Logistics System in Relation to a Country’s Gross Domestic Product

Country Logistics as a Percentage of GDP

United States 8.5

Brazil 12.0 South Africa 12.8 India 13.0 People’s Republic of China 18.0 Vietnam 25.0 Indonesia 27.0

Sources: Various country reports.

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4 Part I • Overview of Logistics

Let’s analyze this definition in closer detail. First, logistics is part of supply chain manage- ment. We’ll talk about supply chains and supply chain management in greater detail in Chapter 5, but the key point for now is that logistics is part of a bigger picture in the sense that supply chain management focuses on coordination among business functions (such as marketing, production, and finance) within and across organizations. The fact that logistics is explicitly recognized as part of supply chain management means that logistics can affect how well (or how poorly) an individual firm—and its associated supply chain(s)—can achieve goals and objectives.

The CSCMP definition also indicates that logistics “plans, implements, and controls.” Of par- ticular importance is the word and, which suggests that logistics should be involved in all three activi- ties—planning, implementing, controlling—and not just one or two. Note that the CSCMP defini- tion also refers to “efficient and effective forward and reverse flows and storage.” Broadly speaking, effectiveness can be thought of as, “How well does a company do what it says it’s going to do?” For example, if a company promises that all orders will be shipped within 24 hours of receipt, what percentage of orders are actually shipped within 24 hours of receipt? In contrast, efficiency can be thought of as how well (or poorly) company resources are used to achieve what a company promises it can do. For instance, some companies use premium or expedited transportation services—which cost more money—to cover for shortcomings in other parts of their logistics systems.

With respect to forward and reverse flows and storage, for many years logistics focused only on forward flows and storage, that is, those directed toward the point of consumption. Increasingly, however, the logistics discipline has recognized the importance of reverse flows and storage (reverse logistics), that is, those that originate at the point of consumption. Although the majority of the discus- sion in this book focuses on forward logistics, many companies today recognize the tactical and strategic implications of reverse logistics. Indeed, reverse logistics continues to grow in importance as individual companies, and select supply chains, recognize it as an opportunity for competitive advantage.4 One illustration of this is FedEx Corporation’s (a leading logistics service provider) 2015 acquisition of GENCO, a logistics service provider with long-standing expertise in reverse logistics.

The CSCMP definition also indicates that logistics involves the flow and storage of “goods, services, and related information.” Indeed, in the contemporary business environment, logistics is as much about the flow and storage of information as it is about the flow and storage of goods. The importance of information in contemporary logistics is captured by Fred Smith, CEO and chairman of FedEx, who believes that “information about the package is as important as the package itself.”5 Furthermore, an important contemporary logistics and supply chain axiom involves the ability to substitute information for inventory;6 for example, the cash register at many contemporary retailers also tracks what and when products are being purchased.

Finally, the CSCMP definition indicates that the purpose of logistics is “to meet customer requirements.” This is important for several reasons, with one being that logistics strategies and activities should be based on customer wants and needs, rather than the wants, needs, and capabili- ties of manufacturers or retailers. Contemporary information technology facilitates an understand- ing of customer wants and needs and this technology allows for real-time interactive communication with customers—a key to meeting customer requirements.

A second reason for the importance of meeting customer requirements is the notion that because different customers have different logistical needs and wants, a one-size-fits-all logistics approach (mass logistics)—in which every customer gets the same type and levels of logistics ser- vice—will result in some customers being overserved while others are underserved. Rather, compa- nies should consider tailored logistics approaches, in which groups of customers with similar logistical needs and wants are provided with logistics service appropriate to these needs and wants.7

4C. Clifford Defee, Terry Esper, and Diane Mollenkopf, “Leveraging Closed-Loop Orientation and Leadership for Environ- mental Sustainability,” Supply Chain Management: An International Journal, 14, no. 2 (2010): 87–98. 5Quote by Fred Smith, CEO and chairman of FedEx. 6David Ross, Distribution Planning and Control: Managing in an Era of Supply Chain Management, 3rd ed. (New York: Springer, 2015).

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Chapter 1 • An Overview of Logistics 5

For example, one particular retailer might require all its suppliers to route products through the retailer’s distribution centers while another retailer might require its suppliers to send products directly to the retailer’s stores.

The principles in this textbook are generally applicable not only to for-profit situations, but also to governmental and not-for-profit situations. From a governmental perspective, logistics is quite germane to the armed forces, which shouldn’t be surprising, given that logistics was first associ- ated with the military. Consider the potential consequences of a supply chain disruption. For exam- ple, in 2015 Russia officially closed the Northern Distribution Network—consisting of railway and road links—that provided a key logistics route into Afghanistan for countries that were fighting the Taliban insurgency.8

A community food bank provides one example of the relevance of logistics to not-for-profit situations. As an example, the Food Bank of New York City is responsible for delivering nearly 75 million pounds of food annually to more than 1,000 food assistance programs such as homeless shel- ters and food pantries. From a logistical perspective, the Food Bank of New York City is responsible for collecting, storing, repacking, and distributing food from its 90,000-square-foot warehouse.9

Furthermore, humanitarian logistics represents an emerging application of logistics to not- for-profit situations. Briefly, humanitarian logistics can be defined as the process and systems involved in mobilizing people, resources, skills, and knowledge to help people who have been affected by either a natural or man-made disaster.10 For example, natural disasters such as a catastrophic earthquake require food and medical supplies to be located, collected, transported, and distributed— and sooner, rather than later. Because of the increasing frequency (and severity) of disasters over the past 50 years, humanitarian logistics is likely to be an important topic into the foreseeable future.

THE INCREASED IMPORTANCE OF LOGISTICS

The formal study of business logistics, and predecessor concepts such as traffic management and physical distribution, has existed since the second half of the twentieth century. Quite frankly, from approximately 1950 to 1980, limited appreciation was shown for the importance of the logistics disci- pline. Since 1980, however, increasing recognition has been given to business logistics, in part because of tremendous—and rapid—changes in the discipline. Several key reasons for this are discussed next.

A Reduction in Economic Regulation

During the 1970s and 1980s, widespread reductions in economic regulation (commonly referred to as deregulation) relaxed government control of carriers’ rates and fares, entry and exit, mergers and acquisitions, and more. These controls were particularly onerous in the U.S. transportation industry in the sense that price competition was essentially nonexistent, and customers were pretty much forced to accept whatever service the carriers chose to provide. This meant that logistics managers had relatively little control over one of the most important cost components in a logistics system.

Reductions in economic regulation in the U.S. airfreight, railroad, and trucking industries allowed individual carriers flexibility in pricing and service. This flexibility was important to logistics for several reasons. First, it provided companies with the ability to implement the tailored logistics approach discussed earlier, in the sense that companies could specify different logistics service levels, and prices could be adjusted accordingly. Second, the increased pricing flexibility allowed large buy- ers of transportation services to reduce their transportation costs by leveraging large amounts of freight with a limited number of carriers.

7Joseph B. Fuller, James O’Conor, and Richard Rawlinson, “Tailored Logistics: The Next Advantage,” Harvard Business Review 71, no. 3 (1993): 87–98. 8http://www.silkroadreporters.com/2015/06/19/central-asia-will-miss-the-northern-distribution-network 9www.foodbanknyc.org 10Luk N. Van Wassenhove, “Humanitarian Aid Logistics: Supply Chain Management in High Gear,” Journal of the Operational Research Society, 57 (2006): 475–489.

Learning Objective 1.3

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6 Part I • Overview of Logistics

Although the preceding discussion has focused on lessened economic regulation in the United States, it appears that deregulation has had similar effects in other countries. For example, lessened eco- nomic regulation of transportation among European countries has resulted in lower prices for truck shipments in these countries.11 Likewise, privatization of commercial airports has been found to improve their operational efficiency relative to government-owned and/or government-operated airports.12

Changes in Consumer Behavior

A common business adage suggests that “change is the only constant.” Although changes in con- sumer behavior are commonly the purview of the psychology and marketing disciplines, such chang- es have important logistical implications as well. Several examples of changes in consumer behavior (customized customer, changing family roles, and rising customer expectations) and their possible logistical implications are discussed next.

The customized customer signifies that the customer desires a product offering that is highly tai- lored to the customer’s exact preferences. One approach for addressing the customized customer is through mass customization, which refers to the ability of a company to deliver highly customized products and services that are designed to meet the needs and wants of individual segments or cus- tomers. Going forward, mass customization is likely to be facilitated by advances in 3D printing (additive manufacturing), a process of making three-dimensional solid objects from a digitized file.13

Furthermore, the customized customer will not accept a “one size fits all” approach, and this means that logistics systems must be flexible rather than rigid. As an example, logistics service pro- viders such as FedEx and UPS offer a variety of delivery options to prospective customers; custom- ers can choose same-day delivery, next-day delivery by noon, next-day delivery by the close of busi- ness, or second-day delivery by noon, among others. As a general rule, the earlier the delivery time, the more expensive the transportation cost.

In terms of changing family roles, in the United States approximately 60 percent of families with children report that both parents work. One consequence of these dual-income families has been an increasing emphasis on the convenience associated with a family’s grocery shopping experiences. This convenience is manifested in various ways to include extended store hours, home delivery of purchased items, and ready-to-eat/ready-to-cook foods, and each of these has logistics-related impli- cations. With extended store hours—some stores are now open 24 hours—retailers must address issues such as the optimal delivery times for replenishment trucks and when to replenish merchan- dise. For example, it wouldn’t be a good idea for a 24-hour grocery store to replenish the shelves when its stores are crowded with customers.

Although home delivery could be convenient for the purchaser, the time-sensitive nature of grocery products means that delivery should be made when the purchaser is at home. As such, scheduling home deliveries to coincide with the purchaser’s availability is paramount to avoiding dis- satisfied customers.14 Finally, the growth in ready-to-eat/ready-to-cook foods means that some food processors have added high-volume cooking systems at their production facilities. From a logistics perspective, food processors continue to experiment with packaging alternatives that will extend the shelf life of ready-to-cook foods. For example, innovative vacuum packaging technology now allows for shelf lives of up to 45 days for chilled (and not frozen) forms of microwavable foods.15

11Francine LaFontaine and Laura Malaguzzi Valeri, “The Deregulation of International Trucking in the European Union: Form and Effect,” Journal of Regional Economics, 35, no. 1 (2009): 19–44. 12Tae H. Oum, Jia Yan, and Chunyan Yu, “Ownership Forms Matter for Airport Efficiency: A Stochastic Frontier Investiga- tion of Worldwide Airports,” Journal of Urban Economics, 64, no. 2 (2008): 422–435. 13http://3dprinting.com/what-is-3d-printing 14Jane Hiback, “Alternative Retailing Strategies,” Natural Food Merchandiser, August 2011, 18–19. 15Joe Condon, “Packaging Technology Extends Chilled Shelf-Life out to 45 Days,” www.beefcentral.com/p/news/ article/3180, May 2013.

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Chapter 1 • An Overview of Logistics 7

As for rising customer expectations, it should come as no surprise that customer expectations tend to increase over time, which means that a satisfactory level of performance in the past might not be considered so today. An excellent example of rising customer expectations is provided by Toyota Motor Company’s North American Parts Operations. In an effort to retain customers and to reduce losing customers to other automotive repair facilities, Toyota now offers same-day delivery (rather than one-day delivery) of automotive parts to certain Toyota dealerships located in major metropoli- tan areas. This same-day delivery has been facilitated by a redesign of Toyota’s automotive parts dis- tribution network.16 In a similar vein, online retailer Amazon now provides same-day delivery in a number of U.S. cities, and some of these cities also offer one-hour delivery service.17

Technological Advances

Prior to the start of every academic year, Beloit College in Wisconsin releases its annual Mindset list that details the world view of incoming first-year college students.18 The class of 2019, which as- sumes a 1997 birthdate, is particularly noteworthy because it has never lived in a world without access to Google. Tremendous technological advances during the course of your lifetime—from desktop computers to tablets, from second-generation mobile phones to fourth-generation mobile phones— have profoundly influenced business management and, by extension, business logistics. The follow- ing paragraphs will discuss several examples of the logistical impacts of technological advances.

Technological advances have influenced channel design by allowing companies to offer an alternate distribution channel (or alternate distribution channels) to already existing channels. In some cases, this alternate channel is direct (i.e., no intermediaries between the producer and final customer) in nature because the final customer orders directly from the producer rather than through an intermediary. The removal of intermediaries between producer and consumer—called disintermediation—can clearly affect the design of logistics systems in the sense that there could be changes in both the number and location of fixed facilities such as warehouses and distribution centers. In addition, the logistical considerations of a retailer’s online store (e.g., orders from numer- ous customers; orders for small quantities) are quite different from that retailer’s bricks-and-mortar stores (e.g., orders from a defined customer base; orders in larger quantities).

Technological advances can also improve the productivity of the order picking process, which we’ll discuss in greater detail in Chapter 7. Order picking traditionally involved paper pick tickets that listed the particular item(s) and quantity to be picked—and not necessarily the item’s location in a facility. Locating the items to be picked could be quite time-consuming, and paper picking often resulted in picking errors in part because of illegible pick orders. Today, by contrast, order picking can utilize radio frequency (RF) devices, voice-directed picking, as well as robotic picking. Although these technological picking advances are more costly than paper picking, they can lead to substantial improvements in picking efficiency. For example, RF terminals can reduce pick errors by approxi- mately 60 percent compared to paper picking.19

Shipment tracking provides another example of how technological advances have impacted logistics management. When one of the authors worked for a U.S. trucking company in the early 1980s, shipment tracking was a time-consuming, labor-intensive process that sometimes did not yield a location for the shipment in question. If we fast-forward to today, global positioning systems can provide real-time location information about a shipment (sometimes to within 10 feet of its exact location) as well as information about the vehicle’s temperature, humidity, and vibrations. Such infor- mation can be especially important to pharmaceutical and health-care companies.20

16http://toyotadriverseat.com/pr/tds/same-day-parts-deliveries-help-230692.aspx 17http://techcrunch.com/2015/10/22/amazon-brings-its-one-hour-delivery-service-prime-now-to-the-san-francisco-bay-area/ 18http://www.beloit.edu/mindset/2019/ 19Kristi Montgomery, “Tips for Quicker Product Picking,” Multichannel Merchant, December/January 2012, 28–29. 20Ian Putzger, “Apps Mania,” CT&L, April 2012, 32–33.

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Advances in Retailing

Retailing in the second decade of the twenty-first century is noticeably different than at the beginning of the twenty-first century, and the differences exemplify the importance of effective and efficient logistics for retailing success. Consider for example, so-called big-box retailers—stores with large amounts of both floor space and products for sale—such as Walmart, Carrefour, and Dick’s Sporting Goods. Many big-box retailers explicitly recognize superior logistics as an essential component of their corporate strat- egies, and because of this, their logistical practices are often viewed as a barometer for emerging logistics trends. Big-box retailers have also been trendsetters with respect to environmental and social issues in logistics. For example, two of Best Buy’s sustainability goals for 2020 are to recycle one billion pounds of consumer goods and reduce its carbon footprint by 20 percent (relative to 2009 performance).21, 22

Omnichannel retailing is a strategy that focuses on providing customers a seamless shopping experience regardless of sales channel. Retailers enable their customers to transact within and across any contract channel (online, in-store, mobile app, etc.) to enhance information availability and customer experience. Omnichannel retailing takes a number of different forms and if you have ordered something online and picked it up at a bricks-and-mortar store, then you have engaged in omnichannel retailing. What you might not have thought about in this situation is that the inventory used to fill your online order depletes that store’s inventory, and thus inventory visibility and accurate demand forecasting become essential for successful omnichannel retailing.23

Globalization of Trade

Although countries have traded with each other for thousands of years, globalization’s impact is greater today than ever before. Consider that world trade has grown at an average annual rate of ap- proximately five percent since 1990, including the worldwide economic slowdown in 2008 and 2009.24 Looking forward, the annual growth in world trade between 2016 and 2020 is forecast to be between 3 and 4 percent.25 Many factors, such as rising standards of living and multicountry trade alliances, have contributed to the growth of global trade; logistics has played a key role, too. Indeed, the ship- ping container—a uniform sealed reusable metal box in which goods are shipped—is often champi- oned as an important catalyst for the growth in global trade. The shipping container allows many different products to be securely transported long distances via water transportation—important be- cause long-distance water transportation is much less expensive than long-distance air transportation.

We’ll look at international logistics in much greater detail in Chapter 14, but for now one should recognize that the international logistics created by global trade is much more challenging and costly than domestic logistics. With respect to challenges, the geographic distances between buyers and sellers are often greater (which may translate into longer transit times), and monitoring logistics processes is sometimes complicated by differences in business practices, culture, and language. As for costs, the greater geographic distances tend to result in higher transportation costs, and docu- mentation requirements can be quite costly as well.

THE SYSTEMS AND TOTAL COST APPROACHES TO LOGISTICS

Logistics is a classic example of the systems approach to business problems. From a companywide perspective, the systems approach indicates that a company’s objectives can be realized by recogniz- ing the mutual interdependence of the major functional areas of the firm, such as marketing, produc- tion, finance, and logistics. One implication of the systems approach is that the goals and objectives

21http://sustainability.bby.com/management-approach/product-stewardship 22http://searchcio.techtarget.com/definition/omnichannel 23http://multichannelmerchant.com/opsandfulfillment/warehouse/key-omnichannel-success-strong-logistics-strategy- 21022014/ 24https://www.wto.org/english/news_e/pres15_e/pr739_e.htm 25https://www.atkearney.com/documents/10192/5498252/Global+Economic+Outlook+2015-2020--Beyond+the+ New+Mediocre.pdf/5c5c8945-00cc-4a4f-a04f-adef094e90b8

Learning Objective 1.4

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https://www.atkearney.com/documents/10192/5498252/Global+Economic+Outlook+2015-2020--Beyond+the+New+Mediocre.pdf/5c5c8945-00cc-4a4f-a04f-adef094e90b8
http://multichannelmerchant.com/opsandfulfillment/warehouse/key-omnichannel-success-strong-logistics-strategy-21022014/
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of the major functional areas should be compatible with the company’s goals and objectives. This means that one logistics system does not fit all companies because goals and objectives vary from one firm to another. As such, the logistics system of an organization that emphasizes customer satisfaction is likely different from the logistics system of an organization that emphasizes cost minimization.

A second implication is that decisions made by one functional area should consider the poten- tial implications on other functional areas. For example, one consequence of pursuing the marketing concept, which focuses on satisfying customer needs and wants, is often a marked increase in the number of stock-keeping units (SKUs) or line items of inventory (each different type or pack- age size of a good is a different SKU) offered for sale by many companies. An increased number of SKUs provides customers with more choices, which customers often want.

Alternatively, from a logistics perspective, the proliferation of SKUs creates challenges such as more items to identify, more items to store, and more items to track, which increases the chances of mistakes—which customers don’t like. An example of misidentification involves a consumer prod- ucts company that mistakenly assigned the same product code to a three-pack, six-pack, and twelve-pack of a particular product it sold. Imagine the reaction of the customer who ordered a three-pack of the product, only to receive a six-pack or a twelve-pack of it!

Just as the major functional areas of a firm should recognize their interdependence, so too should the various activities that comprise the logistics function (what we’ll call intrafunctional logistics). The logistics manager should balance each logistics activity to ensure that none is stressed to the point where it becomes detrimental to others.

This can be illustrated by referring to Figure 1.1, which indicates that business logistics is made up of materials management (movement into and storage of materials in a firm) and physical

Figure 1.1 Control over the Flow of Inbound and Outbound Movements In this drawing, the circles represent buildings where inventories are stored, and the lines with arrows represent movement performed by carriers, a stop-and-start process. Current thought deals more with flows, possibly in different volumes and at different speeds, but without the inventory standing still. The supply chain extends to both the left and right of this diagram and includes the suppliers’ suppliers and the customers’ customers.

Factory Finished goods inventory

Distribution to warehouses and wholesalers

Retailers Initial processing or creation of subassemblies

Raw materials, parts, and components

C u s t o m e r s

Materials management Physical distribution

Business logistics

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10 Part I • Overview of Logistics

distribution (storage of finished product and movement to the customer). Intrafunctional logistics attempts to coordinate materials management and physical distribution in a cost-efficient manner that supports an organization’s customer service objectives.

Materials management and physical distribution can be coordinated in many ways. One way is by using the same truck to deliver materials and component parts and to pick up finished goods. Although this may appear to be little more than common sense—and the authors believe that common sense is one of the keys to being an effective logistics manager—consider the case of the company that used the same trucking company to deliver materials and parts to one of its production plants as well as to take finished products from the facility. Unfortunately, one truck would arrive early in the morning to deliver the materials and parts, and another truck would arrive in the late afternoon to pick up the finished products. How could this happen? It’s quite simple: The inbound logistics group and the outbound logistics group were unaware that they were using the same trucking company—the two groups never communicated even though they worked in the same building!

Logistics managers use the total cost approach to coordinate materials management and physical distribution in a cost-efficient manner. This approach is built on the premise that all relevant activities in moving and storing products should be considered as a whole (i.e., their total cost), not individually. Use of the total cost approach requires an understanding of cost trade-offs; in other words, changes to one logistics activity cause some costs to increase and others to decrease. Importantly, an understanding of logistical cost trade-offs recognizes that the costs of certain logis- tical activities generally move in opposite directions. As an example, a decrease in transportation costs is often associated with an increase in warehousing costs.

The key to the total cost approach is that all relevant logistical cost items are considered simul- taneously when making a decision. For example, expedited transportation, such as air freight, will increase a company’s transportation costs. At the same time, expedited transportation leads to a faster order cycle, which allows the receiving company to hold lower levels of inventory, thus reduc- ing both its inventory carrying costs and warehousing costs. The total cost approach evaluates if the decreased inventory and warehousing costs are greater than the increased costs of expedited transportation. If so, the company might consider using expedited transportation (assuming that customer satisfaction isn’t negatively impacted), because the total logistics costs (consisting, in this example, of transportation, inventory, and warehousing costs) are less than the total costs of the existing system.

When used in the logistics decision-making process, the total cost concept approach forms what is commonly called the total logistics concept. This concept is unique not because of the activities performed, but because of the integration of all activities into a unified whole that seeks to minimize distribution costs in a manner that supports an organization’s strategic objectives. The total logistics concept can be extended to include a firm’s suppliers and customers, such as in supply chain manage- ment, which will be covered in Chapter 5.

LOGISTICAL RELATIONSHIPS WITHIN THE FIRM

From a companywide perspective, the system and total cost approaches to logistics require an under- standing of logistics and its relationships with other functional areas. Because Chapter 6 is devoted specifically to procurement (purchasing), our discussion here focuses on logistical relationships with finance, production, and marketing.

Finance

The finance staff is often charged with the responsibility of allocating the firm’s funds to projects desired by the various operating departments. As such, the finance department is often instrumental in approving capital budgeting decisions that affect logistics, such as the acquisition of materials handling equipment (e.g., forklifts) and packaging equipment (e.g., a shrink-wrap machine). In such

Learning Objective 1.5

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Chapter 1 • An Overview of Logistics 11

situations, finance personnel may decide between purchasing or leasing the relevant equipment, assuming they have approved the decision to acquire it.

Inventory is another area where finance and logistics can interact. A basic challenge for the two areas is that the finance department often measures inventory in terms of its cost or value in dol- lars, whereas logistics tends to measure inventory in terms of units. The differing ways of measuring inventory can create potential friction between the two groups, as illustrated in the following exam- ple. From a cash flow perspective, the finance department might prefer to sell two boxes of hair dryers worth $1,000 dollars than to sell 15 boxes of hair shampoo worth $900. Alternatively, from a productivity perspective such as the number of boxes handled per worker, the logistics department might prefer selling the 15 boxes of hair shampoo rather than the two boxes of hair dryers.

In addition, in times of inflation, identical items added to inventory at different times means that each unit has a different cost, and even though inventory levels are not affected, it makes a dif- ference whether an organization uses historic cost or current value as an indicator of the inventory’s total value. Furthermore, certain items of inventory (for example, automobiles and produce, among others) lose value over time, and the authors have had consulting experiences with companies that showed a particular SKU to have a market value of $0—while the companies’ warehousing facilities contained several hundred units of physical inventory of the particular SKU.

Production

One of the most common interfaces between production and logistics involves the length of production runs. In many cases, the production people favor long production runs of individual products because this allows the relevant fixed costs to be spread over more units, thus resulting in a lower production cost per unit. Having said this, long production runs generate large amounts of inventory, and it is often the logistician’s responsibility to store and track the inventory. It’s generally much easier to store and track 5 unit of a product that to store and track 500 units of the product.

Another consideration with long production runs is that sometimes excess inventory for par- ticular products occurs because of limited (or no) demand for them. At a minimum, these products add to a company’s inventory carrying costs and also take up space that could be used to store other products. Slow-selling (or non-selling) products may also increase a company’s handling costs, as illustrated by a situation in which forklift drivers would periodically move 150 refrigerators from one warehouse area to another, just to ensure that the company’s managers would not see the refrigera- tors sitting in the same place for an extended period of time! You may find it difficult to believe that these 150 refrigerators were moved throughout the warehouse for nearly five years before managers were alerted to the behavior.

Increasing utilization of the postponement concept (the delay of value-added activities such as assembly, production, and packaging until the latest possible time)26 also influences the interface between production and logistics. More specifically, some value-added activities (e.g., case packing, case labeling) that were traditionally performed at a production plant are now performed in ware- housing facilities. As a result, warehousing facilities are adding new types of equipment and being configured differently to allow specific value-added activities to take place.

Marketing

Contemporary marketing places a heavy emphasis on customer satisfaction, and logistics strate- gies can facilitate customer satisfaction by reducing the cost of products, which can translate into lower prices as well as bringing a broader variety of choices closer to where the customer wishes to

26 Glossary, www.cscmp.org

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buy or use the product. Logistics strategies offer a unique way for a company to differentiate itself among competitors, and logistics now offers an important route for many firms to create marketing superiority. The following discussion about the interactions between logistics and marketing focuses on the marketing mix, sometimes referred to as the four Ps of marketing (place, price, product, and promotion).

PLACE DECISIONS Decisions regarding place involve two types of networks, namely, logistics and the marketing channel (which is discussed in greater detail later in this chapter). Logistics decisions concern the most effective way to move and store the product from where it is produced to where it is sold. An effective logistics system can provide positive support by enabling the firm to attract and utilize what it considers to be the most productive channel and supply chain members. Channel members are frequently in a position to pick and choose which manufacturer’s products they wish to merchandise. If a manufacturer is not consistently able to provide a certain product at the right time, in the right quantities, and in an undamaged condition, the channel members may end their relation- ship with the supplier or cease active promotion of the supplier’s product.

From a marketing perspective, place decisions may also involve new strategies for reaching customers. A popular contemporary marketing strategy involves co-branding, which refers to an alliance that allows customers to purchase products from two or more name-brand retailers at one store location. Examples of co-branding include Starbucks coffee shops located within Marriott hotels, Subway restaurants located within some Walmart stores, and co-located Dunkin’ Donuts and Baskin-Robbins stores. From a marketing perspective, co-branding offers potential customers con- venience by allowing for one-stop shopping as well the opportunity to purchase brand-name, rather than private-label (proprietary), products.27 From a logistical perspective, one decision involves product delivery to the particular retail locations. Should, for example, each co-branding party deliver its respective products to a particular location, or should the co-branding parties co-load vehicles to minimize the number of deliveries that arrive at a particular location? While the former might result in higher delivery costs because of multiple deliveries, the latter requires a higher degree of coordi- nation between the co-branding parties.

PRICE DECISIONS A key price-related decision for marketers involves how a product’s transpor- tation costs should be reflected in its selling price, and this has proved to be a particularly vexing issue for some online merchants. For example, should a company’s selling price reflect its product’s landed cost, which refers to the price of a product at the source plus transportation costs to its destination? On the one hand, a selling price that is based on a product’s landed cost allows the seller to offer “free” delivery of the product to prospective customers, because the transportation costs associated with delivery are captured in the landed cost. On the other hand, a selling price that is based on a product’s landed cost could result in a substantial increase in a product’s selling price, and a higher selling price tends to decrease buyer demand for most products. One way that some online merchants address this conundrum is to require a minimum order amount (e.g., $50) to qualify for “free” delivery.

In addition to transportation considerations, logistics managers may play an important role in product pricing. They are expected to know the costs of providing various levels of customer service and therefore should be consulted to determine the trade-offs between costs and customer service. Because many distribution costs produce per unit savings when larger volumes are handled, the logistics manager can also help formulate the firm’s quantity discount pricing policies.

PRODuCT DECISIONS A number of potential interfaces are possible between marketing and logistics in terms of product decisions. For example, as noted earlier, the marked increase in product offerings—which allows for more customer choice—creates logistical challenges in terms of identi- fication, storage, and tracking.

27 Marilyn Odesser-Torpey, “Co-Branding: Positives and Pitfalls,” Convenience Store Decisions, April 2012, 46–48.

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Chapter 1 • An Overview of Logistics 13

Another product interface between marketing and logistics involves the amount of particular SKUs to hold. Marketers often prefer to carry higher quantities of particular items because this reduces the likelihood of stockouts (being out of an item at the same time there is demand for it). However, from a logistics perspective, higher quantities of inventory (1) necessitate additional stor- age space and (2) increase inventory carrying costs.

Product design, which is often the purview of marketers, can also have important implications for logistical effectiveness and efficiency. For example, long-necked glass beverage containers might be more distinctive than aluminum cans; however, from a logistics perspective, long-necked bottles take up more space and are more likely to be damaged than aluminum cans.

In addition, marketers’ growing emphasis on offering sustainable products—products that meet present needs without compromising the ability of future generations to meet their needs—can also impact logistical decisions. Consider, for example, fair trade products, those that guarantee a better deal for producers in the developing world through fair and stable prices as well as teaching farming methods that are environmentally sustainable.28 From a marketing perspective, customer demand for fair trade products, such as coffee or chocolate, has resulted in some companies establishing distinct fair trade brands.29 From a logistical perspective, an organization’s commitment to selling fair trade products, such as coffee or chocolate, may result in changed sourcing requirements for the necessary raw materials.

PROMOTION DECISIONS Many promotional decisions require close coordination between market- ing and logistics. One important situation concerns the availability of highly advertised products, par- ticularly when a company is running pricing campaigns that lower the price of certain items. Few things are more damaging to a firm’s goodwill than being stocked out of items that are heavily promoted in a sales campaign. In addition, in some instances, imbalances of product supply and demand can be viewed as bait-and-switch tactics—that is, enticing customers with the promises of a low-priced product, only to find that it is unavailable, but that a higher-priced substitute product is readily available.

Moreover, once a decision is made to promote the introduction of a new product, the logistics staff assumes responsibility for having the product in place on the scheduled release date—not earlier, not later. The complexity of so doing is well illustrated by looking at how Apple manages the release of new versions of the iPhone. Because the iPhone is manufactured in China, Apple pre-purchases space on airfreight carriers such as FedEx in order to move the devices to distribution centers in vari- ous parts of the world. In order to minimize opportunities for theft and other glitches, Apple security personnel will accompany the shipments from the factory floor to the different distribution centers.30

MARKETING CHANNELS

Another concept that is useful in studying the marketing relationships between and among firms is to look at marketing channels, which refer to “a set of institutions necessary to transfer the title to goods and to move goods from the point of production to the point of consumption and, as such, which consists of all the institutions and all the marketing activities in the marketing process.”31 The principal traditional institutions in the marketing channel are the manufacturer, the wholesaler, and the retailer. These channel members work together in several different channel arrangements—own- ership channel, negotiation channel, financing channel, promotions channel, and logistics channel—and we’ll look more closely at how manufacturers, wholesalers, and retailers interact in these five channels.

The ownership channel covers movement of the title to the goods, and the goods themselves might not be physically present or even exist. If a good is in great demand, such as a commissioned piece of art or a scarce new consumer product, one might have to buy it before it is produced. Sometimes, a product

28 Derek Townsend, “Fair Trade Future?” Food Service, June 2008, 27. 29 No author, “More Chocolate Manufacturers Moving to Ethical Sourcing,” Candy Industry, April 2010, 10–12. 30 http://www.bloomberg.com/news/2013-09-11/the-iphone-s-secret-flights-from-china-to-your-local-apple-store.html

Learning Objective 1.6

31 American Marketing Association Dictionary, www.marketingpower.com

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14 Part I • Overview of Logistics

will not be made until there are sufficient financial commitments; this is often the case with new models of commercial airplanes. The party owning the good almost always has the right to trade or sell it and bears the risks and costs associated with having it in inventory. Also, while owning the good, one can use it as collateral for a loan, although this may place some restrictions on its use or movement.

The negotiations channel is the one in which buy and sell agreements are reached. This could include transactions face-to-face or by telephone, e-mail, electronic data interchange, or almost any other form of communication. In many situations, no actual negotiations take place; the price for the product is stated, and one either buys at that price or does not. In some trades, auctions are used; in others, highly structured, organized trading takes place, such as markets for some commodities. One part of the negotiations covers how activities in the other channels are to be handled. For example, each buying party will specify the point and time of delivery and the point and time of payment. Even packaging design may be negotiated. (An old Henry Ford story is that suppliers of some parts were directed to ship in wooden crates built of good lumber and to very exacting specifications. It turned out that the empty crates were then partially disassembled and became floorboards in Ford Model Ts.)