VALUE ADDED ROLES OF LOGISTICS,TRANSPORTATION

& FUNCTIONS OF WAREHOUSE

VALUE-ADDED ROLES OF LOGISTICS The five principal types of economic utility which add value

to a product or service are: Form Utility----WHAT

It refers to value added to goods through a manufacturing, production or assembly process. Ex: raw materials combined to make a complete product.

Time Utility----WHEN It is the economic value added to a good or service by

having it at a demand point at a specific point. Ex: logistics creates time utility by having heavily advertised products and sale merchandise available in retail stores at precisely the time promised in the advertisement copy

VALUE-ADDED ROLES OF LOGISTICS Place Utility----WHERE

It provides place utility by moving goods from production surplus points to points where demand exists. Logistics creates place utility primarily through transportation. Ex: moving farm produce by rail or truck from farm areas to market where consumer need this produce creates place utility.

Possession Utility----WHY It is primarily created through the basic marketing

activities related to the promotion of products and services.

Source: Center for Supply Chain Research, Penn State University (2008).

PRODUCTION FORM

UTILITY

MARKETINGPOSSESSION

UTILITY

LOGISTICSPLACE UTILTYTIME

UTILITY

FUNDAMENTAL UTILITY CREATION IN THE ECONOMY

TIME & PLACE UTILITY

Time utility Time in transit – How fast the product

moves from one point to another Consistency of services – How consistently

products move from one point to another Is added by the warehousing & storage of

products

Point of Origin Point of Consumption

LOGISTICS IN THE FIRM: THE MICRO DIMENSION Logistics interface with Manufacturing/Operations

Seasonal demand: manager should look to minimize the effects of seasonal demand for products.

Supply side interfaces: logistics manager is responsible for inbound movement and storage of raw materials fed to the production line and ensure the availability of raw materials.

Proactive packaging: another activity at the interface of logistics and operations is packaging.

Foreign and third-party alternatives: many firms today are making arrangement for 3Pmanufacturers or co packers to produce finished products.

LOGISTICS ACTIVITIES1. Transportation2. Warehousing and storage3. Industrial packaging4. Materials handling5. Inventory control6. Order fulfillment7. Demand forecasting

8. Production planning/scheduling09. Customer service10. Facility location11. Return goods handling12. Parts and service support13. Salvage and scrap disposal

A SIMPLE LOGISTICS CHANNEL

A COMPLEX LOGISTICS CHANNEL

TRANSPORTATION COSTS, PRICING & RELATED ISSUES1. Product-Related Factors

Density: Product’s weight to volume ratio(low-density products like clothes, toys etc tend to cost more to transport per pound/kilo)

Stowability: or “cube utilization” is the degree to which a product can fill the available space in a transport vehicle. It depends on size, shape & fragility

Ease or difficulty in handling: related to stowability(products that are uniform in size or those that can be easily manipulated usually cost less to transport)

Liability: important concern where products have high value-to-weight-ratio, are easily damaged or are subject to high rate of theft(in cases where the carrier assumes greater liability, a higher price will be charged to transport the product)

TRANSPORTATION

2. Market-Related Factors Degree of intermode or intramode competition The location of markets (i.e. the distance goods must

be transported) The nature & extent of government’s regulation The balance or imbalance of freight traffic in the

market The seasonality of products movement Whether the product is being transported

domestically or internationally

These factors in combination determine the “pricing strategy”

PRICING STARGTEGIES1. Cost of service pricing:

Drawbacks: carrier must be able to “recognize the relevant cost

components” and “ measure those costs” Requires each fixed cost to be allocated to each freight

movement

Hence, transport costs will always vary under this method

Fixed

Cost

Variable cost

Profit

Margin

Rate

2. Value of Service Pricing: Based on the “market demand” for transportation service

and “the competitive situation” Rates are set that will maximize the difference between

revenues received and the variable cost incurred

Terms of sale are important because:

1. The buyer knows the final delivered price prior to the purchase

2. Buyer does not have to manage the transportation activity

3. Buyer typically will not control the transportation decision

4. Delivered Pricing Buyers are given a price that includes delivery

of the product. Seller selects the transportation mode and the

Carrier5. Zone Pricing Categorizes geographic areas into zones Each zone has a particular delivery cost

associated to it

TRANSPORTATION SERVICE CHARACTERTISTICS

1. Dependability – Consistency of service2. Time in transit3. Market coverage – ability to provide door to door

service4. Flexibility – with respect to the variety of products

that can be handled & meeting special needs of shippers

5. Loss & damage performance6. Ability to become part of a shipper’s overall

marketing program – provide more than the basic transportation services

TRANSPORTATION CARRIER CHARACTERISTICS

Basic transportation modes: Motor, rail, air, water and pipeline

Modal combinations: Rail-motor, motor-water, motor-air and rail-

water Others:

Indirect, special carriers or non-operating third parties like freight forwarders, shipper cooperatives, parcel post, DHL, FedEx and other specialty carriers

MOTOR CARRIERS Service Characteristics of Motor Carriers

Flexible: offer point-to-point service between almost any origin-destination combination

Versatile: Can transport products of varying size and weights over any distance

Fast, reliable service with low levels of damage or loss

Many motor carriers operate on scheduled timetable hence, offering short and reliable transit times

Extensive market coverage

RAIL CARRIERS Service Characteristics of Rail Carriers

Available in almost every major metropolitan centre hence not as extensive as road network

Lacks the versatility and flexibility because of limited track facilities

Provides terminal to terminal facility Costs less than air and motor carriage Disadvantage of less frequent departures and high

damage/loss ratio Limited equipment availability. Railcars maybe unavailable

because they are being loaded, unloaded, moved within railroad sorting yard or undergoing repair.

AIR CARRIERS Service Characteristics of Air Carriers

BEST for time-sensitive shipments Considered premium emergency service because of high

costs Air carriers generally transport high value goods Cannot be cost-justified for low value products Provides rapid transit time but terminal and delivery delays

plus congestion may appreciably reduce this advantage Customer service consideration may favorably influence the

decision but only if service issues are more important than associated costs

TRANSPORT DOCUMENTS USED IN INTERNATIONAL TRADE

Transport documents have in common three elements: They are contracts for the carriage of the

goods. They serve as receipt of the goods at the

state destination. They have a similar structure in terms of

number of boxes, content and language used.

Bill of Lading B/L issued by the agent of a carrier to a shipper,

signed by the captain, agent, or owner of a vessel, furnishing written evidence regarding receipt of the goods (cargo)

a receipt for merchandise and a contract to deliver

This is a negotiable instrument B/L may be endorsed and transferred to a

third party while the goods are in transit

Air Way Bill (AWB) a non-negotiable transport document covering

transport of cargo from airport to airport it is not a title of property of the merchandise not a negotiable document. It indicates only

acceptance of goods for carriage prepared by the IATA Transport Agent or the

airline itself is addressed to the exporter, the airline and

the importer

MULTIMODAL BILL OF LADING FBL international transport documents covering

two or more modes of transport, such as shipping by road and by sea

also used as a carriage contract and receipt that the goods have been received

When issued "to the order", this document becomes title of ownership of the goods and can therefore be negotiated.

As a rule it is NOT negotiable

CARGO INSURANCE CERTIFICATE Indicates the type and amount of

insurance coverage in force on a particular shipment.

Includes the name of the insurance company and conditions of coverage.

INTERNATIONAL COMMERCIAL INVOICE an administrative document which contains all the

information about the international sale prepared by the exporter and addressed to the

importer and the import customs clearance Packing List

A detailed commercial invoice without the prices A copy is usually attached to the shipment and another

is sent directly to the consignee prepared by the exporter and addressed to the

importer, the carrier and the import customs clearance

Delivery Note Accompanies the shipment of goods that

list the description and quantity of goods delivered

Signed by the buyer or consignee is returned to the seller or consignor as a proof of delivery

It justifies the removal of the products from its store and proof credit delivery to the importer

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Benefits realized from strategic warehousing are classified on the basis of economics and service. From a conceptual perspective, no warehouse should be included in a logistical system unless it is fully justified on a cost-benefit basis.

1. Economic Benefits2. Service Benefits

Functions and Benefits of Warehousing

FUNCTIONS AND BENEFITS OF WAREHOUSING

07/05/10 32

Functions and Benefits of Warehousing

Economic

Benefits

Hold/Consolid

ation

Break Bulk/Cross Dock

Processing/

Postponement

Stockpiling

33

• Holding is the most important function of a warehouse for the finished products ready for delivery.

• Depending on the demand or order booking pattern and the delivery schedules promised to the customer by the marketing department, the goods are dispatched from the warehouse.

• A proper record of the material, which gets in and out, has to be maintained to know the inventory levels at any point of time.

Economic Benefits: Hold

Warehouse(Finished Goods) CustomerManufacturing

Plant

If the supplies are originating from various sources in small quantities, it may be economical to collect these small shipments at one center and combine them into a large shipment for sending it to the customer.

The consolidation will ensure cost saving on freight.

Economic Benefits: Consolidation

ConsolidationWarehouse

Plant A(Vendor-1)

Buyer X

Buyer Y

Plant B(Vendor-2)

Plant C(Vendor-3)

• For import or export of goods for large buyers whose requirement does not warrant for enough volumes for shipment from each source, there is potential cost saving on the freight with consolidated shipment.

• In such cases planning a warehouse for shipment consolidation may be a better proposition.

• The cost saving will offset the cost of setting up a place for consolidation.

Economic Benefits: Consolidation

• In contrast to the consolidation, here the material arriving in bulk is divided into smaller shipments for delivering it to the end customer.

Economic Benefits: Break Bulk

Break BulkWarehouse

Customer A

Customer B

Customer C

Plant-1

• Normally the distribution warehouses of manufacturing firms have break bulk as the common activity.

• The firm saves substantially on freight by dispatching the shipment in bulk to its regional distribution centers, where it is divided into small packets and dispatched to the end user as per the demand.

Economic Benefits: Break Bulk

Break BulkWarehouse

Customer A

Customer B

Customer C

Plant-1

A cross-dock facility is similar to break-bulk except that it involves multiple suppliers. The uses of a warehouse is for very short time ( 24 -48 hrs).

• The material arriving in bulk in fully loaded trucks is broken into smaller consignments for further dispatch to the customers.

• The stay of material in the warehouse in not more than 48 hours.

Economic Benefits: Cross Dock

Retail chains make extensive use cross-dock operations to replenish fast-moving store inventories.

• Warehouses can also be used to postpone, or delay, production by performing processing and light manufacturing activities.

• A warehouse with packaging or labeling capability allows postponement of final production until actual demand is known.

• Once a specific customer order is received, the warehouse can complete final processing by adding the label and finalizing the packaging.

Economic Benefits: Processing/ Postponement

The risk is minimized because final packaging is not completed until an order for a specific label and package has been received.

The combination of lower risk and inventory level often reduces total system cost even if the cost of packaging at the warehouse is more expensive than it would be at the manufacturer’s facility.

Economic Benefits: Processing/ Postponement

• The direct economic benefit of this warehousing is secondary to the fact that seasonal storage is essential to select businesses.

• For example, lawn furniture and toys are produced year-round and primarily sold during a very short marketing effort.

• In contrast, agricultural products are harvested at specific times with subsequent consumption occurring throughout the year.

• Both situations require warehouse stockpiling to support marketing efforts.

Economic Benefits: Stockpiling

Functions and Benefits of Warehousing

Service Benefit

s

Spot Stock

Production

Support

Assortment/

Mixing

Market Presenc

e

• Under this concept, a selected amount of firm’s product line is placed or ‘spot stocked’ in a warehouse to fill customer orders during a critical marketing period.

• Suppliers of agricultural products to farmers often use spot stocking to position their products closer to a service-sensitive market during the growing season.

• Following the sales season, the remaining inventory is withdrawn to a central warehouse.

Service Benefits: Spot Stock

• Assortment warehouse which may be utilized by a manufacturer, wholesaler, or retailer- stock product combinations in anticipation of customer orders.

• The assortments may represent multiple products from different manufacturers or special assortments as specified by customers.

• In first case, for example, an athletic wholesaler would stock products from a number of clothing suppliers so that customers can be offered assortment.

• In the second case, the wholesaler would create a specific team uniform including shirts, pants and shoes.

Service Benefits: Assortment

A Warehouse sometimes is used as a product mixing point for a company having a number of plants manufacturing different ingredients, which are mixed at a convenient place to make final products.

Service Benefits: Mixing Warehouse

MixingWarehouse

Plant A(Ingredient-1)

Buyer 1

Buyer 2

Buyer 3

Plant B(Ingredient-2)

Plant C(Ingredient-3)

• Production support warehousing provides a steady supply of components and materials to assembly plants.

• Safety stocks on items purchased from outside vendors may be justified because of long lead times or significant variations in usage.

Service Benefits: Production Support

• The market presence factor is based on the perception or belief that local warehouses can be more responsive to customer needs and offer quicker delivery than more distant warehouses.

• As a result, it is also thought that a local warehouse will enhance market share and potentially increase profitability.

Service Benefits: Market Presence