Logistics

Distribution Modes

Cargo (or freight) is goods or produce transported, generally for commercial gain, by ship, aircraft, intermodal train, van, or truck.

Learning Objectives

Compare aircraft cargo, train cargo and road cargo

Key Takeaways

Key Points

  • Air cargo, commonly known as air freight, is collected by firms from shippers and delivered to customers. Aircraft were first used for carrying mail as cargo in 1911.
  • Trains are capable of transporting large numbers of containers that come from shipping ports. Trains also are used for the transportation of steel, wood, and coal.
  • Feight transport by rail is more economical and energy efficient than by road, especially when carried in bulk or over long distances. The main disadvantage of rail freight is its lack of flexibility. For this reason, rail has lost much of the freight business to road transport.

Key Terms

  • Cargo: (or freight) is goods or produce transported, generally for commercial gain, by ship, aircraft, intermodal train, van, or truck. In modern times, containers are used in most intermodal freight transport.

Cargo (or freight) is goods or produce transported, generally for commercial gain, by ship, aircraft, intermodal train, van, or truck. In modern times, containers are used in most intermodal freight transport.

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Cargo: Cargo net being used to unload sacks from a ship at Haikou New Port, Haikou City, Hainan, China.

Air cargo, commonly known as air freight, is collected by firms from shippers and delivered to customers. Aircraft were first used for carrying mail as cargo in 1911. Eventually, manufacturers started designing aircraft for other types of freight as well. There are many commercial aircraft suitable for carrying cargo such as the Boeing 747 and the bigger An-124, which was purposely built for easy conversion into a cargo aircraft. Such large aircraft employ quick-loading containers known as “unit load devices (ULDs)”, much like containerized cargo ships. The ULDs are located in front section of the aircraft. Most nations own and utilize large numbers of cargo aircraft, such as the C-17 Globemaster III, for their logistical needs.

Trains are capable of transporting large numbers of containers that come from shipping ports. Trains are also used for the transportation of steel, wood, and coal. They are used because they can carry a large amount and, generally, have a direct route to the destination. Under the right circumstances, freight transport by rail is more economical and energy efficient than by road, especially when carried in bulk or over long distances. The main disadvantage of rail freight is its lack of flexibility. For this reason, rail has lost much of the freight business to road transport. Rail freight is often subject to trans-shipment costs, since it must be transferred from one mode of transportation to another. Practices, such as containerization, aim at minimizing these costs. Many governments are currently trying to encourage shippers to use trains more often because of the environmental benefits. Many firms, such as Parcelforce, FedEx, R+L Carriers, and U-Haul, transport all types of cargo by road. Delivering everything from letters to houses to cargo containers, these firms offer fast, sometimes same-day, delivery. A good example of road cargo is food, as supermarkets require deliveries every day to keep their shelves stocked with goods. Retailers of all kinds rely upon delivery trucks, be they full-size, semi trucks or smaller delivery vans.

Inventory Management

Inventory represents finished and unfinished goods that have not yet been sold by a company.

Learning Objectives

Explain why and how companies keep inventory

Key Takeaways

Key Points

  • Inventories are maintained because time lags in moving goods to customers could otherwise put sales at risk.
  • Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods.
  • There are four stages of inventory: raw material, work in progress, finished goods, and goods for resale.

Key Terms

  • raw materials: Materials and components scheduled for use in making a product.
  • Finished goods: Goods ready for sale to customers.
  • Work in process: Materials and components that have began their transformation to finished goods.

Reasons for Keeping Inventory

In many cases (such as retail), a business must have its product on hand in order to complete a sale. For these companies, the reason for keeping one of each item on hand (in inventory) is that it enables them to make sales and capture revenue. However, many businesses keep more than one of every item on hand and also keep raw materials and unfinished goods on stock in factories. Why do they do this?

There are three basic reasons for keeping an inventory:

  • Time: The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amounts of inventory to use in this lead time. However, in practice, inventory is to be maintained for consumption during variations in lead time. Lead time itself can be addressed by ordering that many days in advance.
  • Uncertainty: Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods.
  • Economies of scale: Ideal condition of “one unit at a time, at a place where a user needs it, when he needs it” principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory. All these stock reasons can apply to any owner or product.

Managing Inventory

Inventory management is primarily about specifying the location and amount of stocked goods. Optimizing inventory management requires balancing many factors, including:

  • Replenishment lead time
  • Carrying costs of inventory
  • Asset management
  • Inventory forecasting
  • Inventory valuation
  • Inventory visibility
  • Future inventory price forecasting
  • Physical inventory
  • Available physical space for inventory
  • Quality management
  • Replenishment
  • Returns and defective goods
  • Demand forecasting

Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business needs to react to the wider environment. Optimal inventory levels are those that maximize profit from sales, while minimizing cost from storage, shipping, and working capital deployment.

While accountants often discuss inventory in terms of goods for sale, other organizations (such as manufacturers, service-providers and not-for-profits) also have inventories (fixtures, furniture, supplies, etc.) that they do not intend to sell. Manufacturers’, distributors’, and wholesalers’ inventory tends to cluster in warehouses. Retailers’ inventory may exist in a warehouse or in a shop or store accessible to customers. Inventories not intended for sale to customers or to clients may be held in any premises an organization uses. Stock ties up cash and, if uncontrolled, it will be impossible to know the actual level of stocks, and therefore impossible to control them.

Stages of Inventory

While the reasons for holding stock were covered earlier, most manufacturing organizations usually divide their “goods for sale” inventory into:

  • Raw materials: materials and components scheduled for use in making a product
  • Work in process (WIP): materials and components that have began their transformation to finished goods
  • Finished goods: goods ready for sale to customers
  • Goods for resale: returned goods that are salable
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Inventory: Inventory in a warehouse

Warehousing

A warehouse is a commercial building for storage of goods.

Learning Objectives

Explain the logistics of warehousing

Key Takeaways

Key Points

  • Warehouses are used by manufacturers, importers, exporters, wholesalers, transport businesses, customs, etc.
  • Some warehouses are completely automated, and require only operators to work and handle all the task.
  • Warehouse management monitors the progress of products through the warehouse. It involves the physical warehouse infrastructure, tracking systems, and communication between product stations.

Key Terms

  • Warehouse management: The progress of products through the warehouse. It involves the physical warehouse infrastructure, tracking systems, and communication between product stations.
  • Auto ID Data Capture (AIDC): Warehouse management systems often utilize AIDC technology, such as barcode scanners, mobile computers, wireless LANs and potentially radio-frequency identification (RFID) to efficiently monitor the flow of products.

A warehouse is a commercial building for storage of goods. Warehouses are used by manufacturers, importers, exporters, wholesalers, transport businesses, customs, etc. They are usually large plain buildings in industrial areas of cities and towns and villages. They usually have loading docks to load and unload goods from trucks. Sometimes warehouses are designed for the loading and unloading of goods directly from railways, airports, or seaports. They often have cranes and forklifts for moving goods, which are usually placed on ISO standard pallets and loaded into pallet racks. Stored goods can include any raw materials, packing materials, spare parts, components, or finished goods associated with agriculture, manufacturing, or commerce.

Some warehouses are completely automated, and require only operators to work and handle all the tasks. Pallets and products move on a system of automated conveyors, cranes, and automated storage and retrieval systems coordinated by programmable logic controllers and computers running logistics automation software. These systems are often installed in refrigerated warehouses where temperatures are kept very cold to keep product from spoiling, especially in electronics warehouses where they require specific temperatures to avoid damaging the parts, and also where land is expensive, as automated storage systems can use vertical space efficiently. These high-bay storage areas are often more than ten meters (33 feet) high, with some over 20 meters (65 feet) high. Automated storage systems can be built up to 40m high.

Warehouse management monitors the progress of products through the warehouse. It involves the physical warehouse infrastructure, tracking systems, and communication between product stations. Warehousing is critical in saving costs and timely order fulfillment, and today it is a vital part of supply chain management demand management. Even production management is to a great extent dependent on warehouse management. Efficient warehouse management gives a cutting edge to a retail chain distribution company. It should start at the container design stage of a product and not at the delivery of material in the warehouse.

Warehouse management systems often utilize Auto ID Data Capture (AIDC) technology, such as barcode scanners, mobile computers, wireless LANs and potentially radio-frequency identification (RFID) to efficiently monitor the flow of products. Once data has been collected, there is either a batch synchronization with, or a real-time wireless transmission to a central database. The database can then provide useful reports about the status of goods in the warehouse. A set of computerized procedures handle the receipt of stock and returns into a warehouse facility, model and manage the logical representation of the physical storage facilities (e.g., racking), manage the stock within the facility, and enable a seamless link to order processing and logistics management in order to pick, pack and ship product out of the facility.

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A Warehouse: Inside Green Logistics Co., Kotka, Finland. The image shows goods loaded on pallets to the left of the aisle, and stacked pallets with no loads to the right of the aisle.

Materials Handling

Materials handling is the movement, storage, control, and protection of materials during their manufacturing, distribution, consumption, and disposal.

Learning Objectives

Explain the importance of efficient material handling

Key Takeaways

Key Points

  • Material handling systems range from simple pallet rack and shelving projects to complex overhead conveyor systems and automated storage and retrieval systems (AS/RS). Material handling can also consist of sorting and picking, as well as automatic guided vehicles.
  • The Material Handling System (MHS) is a fundamental part of a flexible manufacturing system, since it interconnects the different processes supplying and taking out raw material, workpieces, subproducts, parts, and final products.
  • There are several ways to determine if the material handling equipment is achieving peak efficiency. These include capturing all relevant data related to the warehouse’s operations, such as the Stock Keeping Unit (SKU).

Key Terms

  • Stock Keeping Unit (SKU): A unique identifier for each distinct product and service that can be purchased in business.
  • Material Handling System (MHS): A fundamental part of a flexible manufacturing system, since it interconnects the different processes supplying and taking out raw material, workpieces, subproducts, parts, and final products.

Material Handling is the movement, storage, control and protection of materials, goods, and products throughout the process of manufacturing, distribution, consumption, and disposal. This trade channel is necessary when agents cannot directly sell to industrial users. The focus is on the methods, mechanical equipment, systems, and related controls used to achieve these functions.

The material handling industry manufactures and distributes the equipment and services required to implement material handling systems. Material handling systems range from simple pallet rack and shelving projects, to complex overhead conveyor systems and automated storage and retrieval systems (AS/RS). Material handling also can consist of sorting and picking, as well as automatic guided vehicles. The material handling system (MHS) is a fundamental part of a flexible manufacturing system, since it interconnects the different processes supplying and taking out raw material, workpieces, sub-products, parts, and final products. Due to the automated nature of the whole production process, the MHS must respond in concert with timeliness for all requirements of the processes and systems. The MHS is composed of warehouses, buffers, conveyors, transportation vehicles or systems, part sorters, feeders, and manipulators. Specialized material handling equipment is used to increase output, control costs, and maximize productivity.

There are several ways to determine if the material handling equipment is achieving peak efficiency. These include capturing all relevant data related to the warehouse’s operation (such as the stock keeping unit (SKU)), measuring how many times an item is “touched” from the time it is ordered until it leaves the building, making sure you are using the proper picking technology, and keeping system downtime to a minimum.

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A Forklift: Forklift trucks are common in material handling.

Shipping and Transportation

Shipping is a physical process of transporting commodities and merchandise goods and cargo, by land, air, and sea.

Learning Objectives

Compare land, air, and sea methods of shipment

Key Takeaways

Key Points

  • Cost, insurance, and freight (CIF): Insurance and freight are paid by the exporter to the specified location. For example, at CIF Los Angeles, the exporter pays the ocean shipping/air freight costs to Los Angeles including the insurance of cargo.
  • Shipment of cargo by trucks, directly from the shipper’s place to the destination, is known as a door to door shipment, and more commonly called multimodal transport system. Trucks and trains make deliveries to sea ports and air ports where cargo is moved in bulk.
  • Freight on board, or free on board (FOB): the exporter delivers the goods at the specified location (and on board the vessel). Costs paid by the exporter include loading, securing, etc.

Key Terms

  • insurance: A means of indemnity against a future occurrence of an uncertain event.

Shipping is a physical process of transporting commodities, merchandise goods, and cargo, by land, air, and sea.

Land or “ground” shipping can be by train or by truck. In air and sea shipments, ground transportation is required to take the cargo from its place of origin to the airport or seaport, and then to its destination, since it is not always possible to establish a production facility near ports due to limited coastlines of countries. Ground transportation is typically more affordable than air shipments, but more expensive than shipping by sea, especially in developing countries, where inland infrastructure is not efficient.

Shipment of cargo by trucks, directly from the shipper’s place to the destination, is known as a door to door shipment, and more commonly called multimodal transport system. Trucks and trains make deliveries to sea ports and air ports where cargo is moved in bulk.

Much shipping is done aboard actual ships. An individual nation’s fleet, and the people that crew it, are referred to as its merchant navy or merchant marine. Merchant shipping is lifeblood to the world economy, carrying 90% of international trade with 102,194 commercial ships worldwide. The term “shipping” in this context originated from the shipping trade of wind power ships, and has come to refer to the delivery of cargo and parcels of any size above the common mail of letters and postcards.

Common trading terms used in shipping goods internationally include:

  • Freight on board, or free on board (FOB): the exporter delivers the goods at the specified location (and on board the vessel). Costs paid by the exporter include loading, securing, etc. For example, “FOB JNPT” means that the exporter delivers the goods to the Jawahar lal Nehru Port, India, and pays for the cargo to be loaded and secured on the ship.
  • Cost and freight (C&F, CFR, CNF): Insurance is payable by the importer, and the exporter pays all expenses incurred in transporting the cargo from its place of origin to the port/airport and ocean freight/air freight to the port/airport of destination. For example, C&F Los Angeles (the exporter pays the ocean shipping/air freight costs to Los Angeles). Most governments ask their exporters to trade on these terms to promote their exports.
  • Cost, insurance, and freight (CIF): Insurance and freight are paid by the exporter to the specified location. For example, at CIF Los Angeles, the exporter pays the ocean shipping/air freight costs to Los Angeles including the insurance of cargo. This also states that responsibility of the shipper ends at the Los Angeles port.
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Shipping: Harbour cranes unloading cargo from a container ship at the Jawaharlal Nehru Port, Navi Mumbai, India

Supply Chain Management

Supply chain management is the management of the network of interconnected steps involved in the provision of product and service packages.

Learning Objectives

Explain the problems that are solved by supply chain management

Key Takeaways

Key Points

  • Supply chain management spans all movement and storage of raw materials, work-in- process inventory, and finished goods from point of origin to point of consumption.
  • Distribution Network Configuration: number, location, and network missions of suppliers; production facilities; distribution centers; warehouses; cross-docks; and customers.
  • Supply chain management addresses the following issues: distribution network configuration, distribution strategy, logistical activities, information, and cash flow.

Key Terms

  • Work in process: Work in process (acronym: WIP) or in-process inventory includes the set at large of unfinished items for products in a production process.
  • raw materials: A raw material is the basic material from which a good product is manufactured or made, frequently used with an extended meaning.
  • Finished goods: goods that are completed as to manufacturing but not yet sold or distributed to the end-user.

Supply chain management (SCM) is the management of a network of interconnected businesses involved in the provision of product and service packages required by the end customers in a supply chain. Supply chain management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point of origin to point of consumption.

Another definition is provided by the APICS Dictionary, when it defines SCM as the “design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally. ”

Supply chain management must address the following problems:

Distribution network configuration: number, location and network missions of suppliers, production facilities, distribution centers, warehouses, cross-docks and customers.

Distribution strategy: questions of operating control (centralized, decentralized or shared); delivery scheme (e.g., direct shipment, pool point shipping, or cross docking), DSD (direct store delivery), closed loop shipping; mode of transportation (e.g., motor carrier, including truckload, LTL, or parcel); railroad; intermodal transport, including TOFC (trailer on flatcar), and COFC (container on flatcar); ocean freight; airfreight; replenishment strategy (e.g., pull, push or hybrid); and transportation control (e.g., owner-operated, private carrier, common carrier, contract carrier, or 3PL).

Trade-offs in logistical activities: The above activities must be well coordinated in order to achieve the lowest total logistics cost. Trade-offs may increase the total cost if only one of the activities is optimized. For example, full truckload (FTL) rates are more economical on a cost per pallet basis than less than truckload (LTL) shipments. If, however, a full truckload of a product is ordered to reduce transportation costs, there will be an increase in inventory holding costs, which may increase total logistics costs. It is, therefore, imperative to take a systems approach when planning logistical activities. These trade offs are key to developing the most efficient and effective Logistics and SCM strategy.

Information: Integration of processes through the supply chain to share valuable information, including demand signals, forecasts, inventory, transportation, potential collaboration, etc.

Inventory management: Quantity and location of inventory, including raw materials, work-in-process (WIP), and finished goods.

Cash-flow: Arranging the payment terms and methodologies for exchanging funds across entities within the supply chain.

Supply chain execution means managing and coordinating the movement of materials, information, and funds across the supply chain. The flow is bi-directional.

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Supply Chain: A supply and demand network