ENGR 3210 Fundamentals of Logistics Engineering

Class 41Class 41

2

Thoughts on Wednesday’s Discussion ““Never thought about trying to determine Never thought about trying to determine

how many forklifts were needed by how many forklifts were needed by thinking about speeds, distances and thinking about speeds, distances and numbers of pallets to move”numbers of pallets to move”

For engineers seeking to design something, For engineers seeking to design something, mathematical modeling should be the mathematical modeling should be the firstfirst thing you think aboutthing you think about

3

Virtually all the courses you take use mathematical models to explain how things work

The arc of a projectileThe arc of a projectile The thickness needed to resist a forceThe thickness needed to resist a force The weight of an objectThe weight of an object The temperature of a roomThe temperature of a room

4

The entire design problem of the Sonic Speakers Case should be looked at mathematically The space requirementsThe space requirements The space allocationThe space allocation The doors needed for inbound and The doors needed for inbound and

outbound trafficoutbound traffic The equipment requiredThe equipment required

5

Alternative designs should be then modeled economically All the physical requirements reduced to costs or All the physical requirements reduced to costs or

revenuesrevenues Costs and revenues have a time component to Costs and revenues have a time component to

them (streams of costs or revenues)them (streams of costs or revenues) These streams must be aggregated or normalized These streams must be aggregated or normalized

using the time value of money (interest)using the time value of money (interest) Then we can compare the designs.Then we can compare the designs. Typically the cheapest one is preferredTypically the cheapest one is preferred

6

Trying to model the real world mathematically as a means to understand it and predict what it will look like is one thing that differentiates Engineers from other people

7

“Understanding Inventory – Stay Curious!” An annual publication available on the An annual publication available on the

Internet which is a succinct snapshot of the Internet which is a succinct snapshot of the prior year’s logistics activitiesprior year’s logistics activities

A “State of Logistics Report” A “State of Logistics Report”

8

The report is a byproduct of the business research of two companies Cass Transportation Systems, Inc.Cass Transportation Systems, Inc.

They help companies pay their freight bill more They help companies pay their freight bill more efficientlyefficiently

ProLogisProLogis They provide distribution warehousing for large They provide distribution warehousing for large

companiescompanies Both need to know what the latest trends are in Both need to know what the latest trends are in

LogisticsLogistics

9

The reports are an annual source for logistics costs and trends in the US How much are companies in the US How much are companies in the US

spending on logistics?spending on logistics? What are they spending on certain What are they spending on certain

components of logistics costs?components of logistics costs? How do those costs compare to overall How do those costs compare to overall

economic activity?economic activity? What other trends can we identify in What other trends can we identify in

logistics practices in the US?logistics practices in the US?

10

How much did we spend on Logistics in the US $970 billion$970 billion

In real dollars we spent less than last yearIn real dollars we spent less than last year $33 billion less$33 billion less

Why less?Why less? The overall economy in the US is poorThe overall economy in the US is poor People are buying less so there is less People are buying less so there is less

need to ship and store goodsneed to ship and store goods

11

Where did we spend the $970 billion? (Figure 10) Inventory Carrying Costs $328Inventory Carrying Costs $328 Truck Transportation $494Truck Transportation $494 Other Transportation $106Other Transportation $106 Shipper and Admin Costs $ 42Shipper and Admin Costs $ 42

Transportation about 60%Transportation about 60% Inventory about 40%Inventory about 40%

12

How do these costs compare with overall economic activity? Track the costs as a percent of Gross Track the costs as a percent of Gross

Domestic Product – the measure of the US Domestic Product – the measure of the US output of goods and servicesoutput of goods and services

Logistics Costs declined to 9.5% of GDPLogistics Costs declined to 9.5% of GDP Therefore have become more efficientTherefore have become more efficient Figure 12 shows long term trendsFigure 12 shows long term trends What components of logistics costs are What components of logistics costs are

improving?improving?

13

Logistics costs component analysis - Transportation Transportation costs are about the same % of GDP Transportation costs are about the same % of GDP

since 1991since 1991 Transport is not becoming more efficientTransport is not becoming more efficient In fact the authors argue that it may become more In fact the authors argue that it may become more

expensive next year as clean air requirements for expensive next year as clean air requirements for diesel engines go into effectdiesel engines go into effect

Trucking makes up 50% of US total logistics costsTrucking makes up 50% of US total logistics costs

14

The improvement has come about by reductions in Inventory Inventory costs have declined by 60% during the Inventory costs have declined by 60% during the

21 years of the study21 years of the study ““faster and more reliable transportation allowed faster and more reliable transportation allowed

US businesses to invest in less inventory and US businesses to invest in less inventory and consolidate it into fewer locations”consolidate it into fewer locations”

Further we now have better forecasting, systems Further we now have better forecasting, systems and communications to manage inventoryand communications to manage inventory

15

But lets look at the inventory improvement more closely Three classes of inventoryThree classes of inventory

Raw materials inventoryRaw materials inventory Work in process inventoryWork in process inventory Finished goods inventoryFinished goods inventory

How are cost savings in inventory How are cost savings in inventory distributed among these three distributed among these three classifications?classifications?

16

There are some changes in measurement techniques over the years which cause problems with analyzing this question The macroeconomic references used for the The macroeconomic references used for the

past 20 years no longer tell the storypast 20 years no longer tell the story The Department of Commerce adopt new The Department of Commerce adopt new

methods and sources for measuring methods and sources for measuring economic activityeconomic activity

So the author turned to some work at Ohio So the author turned to some work at Ohio State for answers State for answers

17

Ohio State looked at selected companies grouped into 14 industries and 91 sectors Compared ratios of inventory to cost of goods sold Compared ratios of inventory to cost of goods sold

(equivalent to GDP at a macro level)(equivalent to GDP at a macro level) Where did the improvement in inventory management Where did the improvement in inventory management

efficiency come from?efficiency come from? ““nearly all industries have reduced the ratio of raw nearly all industries have reduced the ratio of raw

material inventory to cost of goods sold and work in material inventory to cost of goods sold and work in process inventory to cost of goods sold”process inventory to cost of goods sold”

““in 9 of 14 industries the ratio of inventory investment in 9 of 14 industries the ratio of inventory investment in finished goods to cost of goods sold has in finished goods to cost of goods sold has either either increased or has not changed”increased or has not changed”

What is going on?What is going on?

18

What is going on?

Companies have greater control over their Companies have greater control over their internal processes allowing reductions in internal processes allowing reductions in raw materials and work in process through raw materials and work in process through lean manufacturinglean manufacturing

Finished goods are another matterFinished goods are another matter The Dell Effect and the Wal-Mart effect are The Dell Effect and the Wal-Mart effect are

at workat work

19

They looked at the industries that did improve finished goods inventory Automotive parts, Automotive parts,

computers/electronics,industrial durables, computers/electronics,industrial durables, paper/packaging and pharmaceuticalspaper/packaging and pharmaceuticals

The Dell process of make to order is being The Dell process of make to order is being adopted in these industriesadopted in these industries

The process enables a reduction in finished The process enables a reduction in finished goods inventorygoods inventory

20

They looked at the industries that had increased or flat inventories of finished goods Apparel, textiles, chemicals, electrical/mechanical Apparel, textiles, chemicals, electrical/mechanical

equipment, food products, furniture/home equipment, food products, furniture/home furnishings medical products,consumer packaged furnishings medical products,consumer packaged goods, retail/wholesale trade (Products that goods, retail/wholesale trade (Products that consumers purchase)consumers purchase)

Wal-Mart type stores which have great power over Wal-Mart type stores which have great power over their suppliers can force these producers to keep a their suppliers can force these producers to keep a lot of this finished goods inventory on handlot of this finished goods inventory on hand

Finished goods inventories increasedFinished goods inventories increased

21

There may be some other things going on here too Transportation costs have not gone down for yearsTransportation costs have not gone down for years But we are trying to reduce transport costsBut we are trying to reduce transport costs One way to do this is to “buy down” (Cheaper, One way to do this is to “buy down” (Cheaper,

slower transport service providing larger slower transport service providing larger shipments less frequently)shipments less frequently)

If we do this, what happens to inventory?If we do this, what happens to inventory? Perhaps in our search for lower transport costs is Perhaps in our search for lower transport costs is

driving inventory costs updriving inventory costs up

22

The Wal-Mart effect is “Retailer Power” There is also “Manufacturer Power” There is also “Manufacturer Power” Dell uses it in dealing with suppliersDell uses it in dealing with suppliers Chrysler uses it with DuPont Chrysler uses it with DuPont

DuPont is not paid for paint until it is DuPont is not paid for paint until it is applied to the carapplied to the car

The paint, which sits in Chrysler’s The paint, which sits in Chrysler’s manufacturing warehouse is essentially manufacturing warehouse is essentially owned by Dupontowned by Dupont

23

A final trend observed in the report Companies continue to outsource their Companies continue to outsource their

logistics requirements to third party logistics requirements to third party logistics providerslogistics providers

The responsibility for moving and storing The responsibility for moving and storing raw materials and finished product is raw materials and finished product is entrusted to some other partyentrusted to some other party

24

Even in 2001 this trend continued

Overall logistics expenditures in the US Overall logistics expenditures in the US declined by $33 billion to $970 billiondeclined by $33 billion to $970 billion

Of that $970 billion, about $61 billion was Of that $970 billion, about $61 billion was paid to 3PL’spaid to 3PL’s

An increase of 7.4% in a year when the An increase of 7.4% in a year when the total went downtotal went down

That followed a 24% growth recorded in That followed a 24% growth recorded in 20002000

25

Closure

The design and operation of logistics The design and operation of logistics systems is important and exciting worksystems is important and exciting work

It will challenge you with continual change It will challenge you with continual change and opportunity for continuous and opportunity for continuous improvementimprovement