L OGISTICS & EOQ M ODEL P ROFESSOR D AVID G ILLEN (U NIVERSITY OF B RITISH C OLUMBIA ) & P ROFESSOR B ENNY M ANTIN (U NIVERSITY OF W ATERLOO ) Istanbul Technical University Logistic Management in Air Transport Air Transportation Management Module 11-12 M.Sc. Program 20 December 2014
L OGISTICS Learning Objectives – Key components of logistics • Order Processing, Inventory, Transportation, Sourcing, Warehousing, Materials Handling, and Packaging, integrated through a network of facilities (warehouses and distribution centers) – Logistics is integral to a firm’s strategy – Keys to managing logistics costs • Inventory management • Transportation management – Supply Chain Flexibility and Synchronization 2
W HAT IS LOGISTICS ? • Logistics is the design and administration of systems to control movement and spatial positioning of factor inputs (raw materials, labor, capital, energy) work- in-process, and finished inventories at the lowest total cost. • Our focus will be on inventory management and transportation management
T HE FIVE FUNCTIONS OF LOGISTICAL WORK ARE INTERRELATED
W HAT DO WE KNOW ABOUT T URKEY • 81 provinces • Bordering countries: Armenia, Azerbaijan, Bulgaria, Georgia, Greece, Iran, Iraq, Syria • Population (January 2013) 74.6 million (18th largest in the world) • Urbanization: about 72 % • Age structure: 0 – 14 years (26.0%); 15 – 64 years: (67.9%) ; 65 and above (6.1%) • Nominal GDP (2012) US$790.5b • GDP per capita (US$ current prices) (2012) - US$10,595.2 • GDP Composition: Agriculture (9.1%); Industry (27.9%); Services (63.0%) • Public debt: 40.4 % of GDP • Labor force (2012): 26.5 million 5
G EOGRAPHIC S TRENGTH 6
I NTERNATIONAL F REIGHT -M ODAL S PLIT 7
G ROWTH IN L OGISTICS A CTIVITIES 8
C ARE IN C OMPARING L OGISTICS C OSTS 9
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U.S. LOGISTICS COST , 1980-2010 IN FIVE YEAR INTERVALS ($B) Year Nominal Inventory Transportation Administrative Total Logistics GDP ($T) Cost Cost Cost Logistics % of GDP Cost 1980 2.80 220 214 17 451 16.1 1985 4.22 227 274 20 521 12.3 1990 5.80 283 351 25 659 11.4 1995 7.40 302 441 30 773 10.4 2000 9.82 374 594 39 1007 10.3 2005 12.43 395 739 46 1180 9.5 2010 14.60 396 769 47 1212 8.3
T HE COST OF LOGISTICS
L OGISTICS C OSTS C ANADA -U.S. C OMPARISON 13
I NVENTORY T URNS 2007 C ANADA 14
L OGISTICS WILL CONTINUE ITS RENAISSANCE IN THE FUTURE • Information technologies will automate many of the traditionally manual logistical functions: – Automated port and rail operations – RFID tagging of materials – Advanced technologies for warehousing and inventory operations • Removal of trade barriers will continue to expand global trade and logistics • Outsourcing versus near-shoring – Implications for airlines?
L OGISTICAL VALUE PROPOSITION -M ANUFACTURING & S ERVICE I NDUSTRIES • Logistical value proposition consists of a commitment to key customer expectations and requirements at a minimum cost • The two elements of this value proposition are Service and Cost Minimization – Firms must make appropriate tradeoffs between service and cost for each of their key customers
S ERVICE BENEFITS ARE CREATED BY LOGISTICAL PERFORMANCE IN 3 AREAS • Availability involves having inventory to consistently meet customer material or product requirements • Operational performance deals with the time required to deliver a customer’s order – Key metrics for this area involve delivery speed and consistency • Service reliability involves the quality attributes of logistics – Key to quality is accurate measurement of availability and operational performance over time
C OST MINIMIZATION USING THE TOTAL COST LOGISTICS MODEL Traditional Cost Logistics Model Total Cost Logistics Model • Focused on achieving the lowest • Focused on achieving the lowest possible cost for each individual total cost across each function of function of logistics logistics – For example, Transport the • A cost decision in one function material the cheapest way should consider impact to costs of possible all other logistics functions • Expected lowest cost based on – For example, Transporting decisions that were cheapest for material the cheapest way is individual functions slower than other choices. This requires an increase in storage • Ignored the impact of cost cost to hold the material longer decisions across logistics – Would it still be a lower cost to functions use the cheapest mode of transport?
D IFFERENT PERSPECTIVES ON COST MINIMIZATION Traditional Cost Logistics Model Total Cost Logistics Model Minimize order processing cost Minimize (order processing + + inventory + transportation + warehousing, materials handling Minimize inventory cost and packaging + facility) cost + _________________________ Minimize transportation cost + Lowest total logistics cost Minimize warehousing, materials handling and packaging cost + Minimize facility cost __________________________ Lowest logistics cost
F RAMEWORK : T OTAL L OGISTICS C OST F UNCTION 20
C OMPONENTS OF TLC TLC (Q, r: T, S T ) = RD i + (UCTD i /365) + (SD i /Q) + (QCI/2) + rIC + K(D i /Q) N(Z)S 1 where: TLC = total logistics cost R = Transportation Rate per Unit between Origin and Destination D = Annual Demand for some good ‘ i ’ U = Carrying Cost of In-transit Inventory C = Value per Unit T = Transit Time of Transportation Alternative S = Fixed Ordering Cost per Order Q = Order Quantity I = Carrying Cost of Warehoused Inventory r = Safety Stock K = Stockout Cost per Unit N(Z) = Unit Loss Integral S 1 = Standard Deviation of Demand During Transit Time S T = Standard Deviation of Demand During Lead Time 21
H OW THESE C OSTS ARE D ISTRIBUTED 22
Cost Conflicts: Speed versus Service Reliability Total cost Cost, in dollars Cost of transportation Inventory cost service (includes storage and intransit Rail Truck Air Transportation service (greater speed and dependability) 23
O THER C OST C ONFLICTS /T RADEOFFS Revenue Total costs Total costs Revenue Cost Cost Transportation, order processing, Inventory and inventory costs costs Lost sales cost Transportation costs 0 0 0 0 100% Increasing number of stocking points Improved customer service (a) Setting the customer service level (b) Determining the number of warehouses in a logistics system Total costs Total costs Cost Cost Inventory Inventory carrying carryng cost costs Lost sales cost Production costs 0 0 0 Average inventory level Product run length and product sequencing altenatives (c) Setting safety stock levels (d) Setting the sequence of production runs for multiple products 24
T RANSPORTATION • Transportation is the operational area that geographically moves and positions inventory • There are three basic ways to satisfy transportation requirements – Operate a private fleet of equipment – Contract with dedicated transport specialists – Engage carriers that provide different transportation services as needed on a per shipment basis
M EASURING C OSTS Cost Structure Accounting Costs • Variable costs • Costs vary with factor prices, – Material productivity & output – Manufacturing/production • Scale economies – shipping • Scope economies • Fixed costs – Contracts • Utilization economies – Capital • Density economies – Manufacturing/production • Agglomeration economies • Ownership • Value of time/reliability – Purchase – Acquisition – Usage – salvage 26 • Opportunity cost-forgone sales
T HE SCOPE OF INTEGRATED LOGISTICAL OPERATIONS
L OGISTICAL INTEGRATION REQUIRES ACHIEVING SIX OBJECTIVES SIMULTANEOUSLY Responsiveness Variance reduction Inventory reduction Shipment consolidation Quality Life cycle support
E XAMPLE SITUATIONS FOR FLEXIBLE LOGISTICS STRUCTURE • The customer-specified delivery facility might be near a point of equal logistics cost or equal delivery time from two different logistics facilities • The size of a customer’s order creates improved logistical efficiency if serviced through an alternative channel arrangement • Decision to use a selective inventory stocking strategy • Agreements between firms to move selected shipments outside the established echeloned or direct arrangements
S UPPLY CHAIN SYNCHRONIZATION • Supply chain synchronization is the operational integration of multiple firms across a supply chain – Seeks to coordinate the flow of materials, products and information between supply chain partners to reduce duplication of effort – Seeks to reengineer internal operations of individual firms to leverage overall supply chain capability
T HE LOGISTICS PERFORMANCE CYCLE IS THE BASIC UNIT OF SUPPLY CHAIN DESIGN AND OPERATIONAL CONTROL • The performance cycle represents elements of work necessary to complete the logistics related to customer accommodation, manufacturing or procurement • A performance cycle consists of the following elements – Nodes – Links – Inventory • Base stock • Safety stock – Input and output requirements
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