The role of logistics, transportation & warehouse in business

1. VALUE ADDED ROLES OF LOGISTICS,
TRANSPORTATION
&
FUNCTIONS OF WAREHOUSE

2. 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

3. 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.

4. Source: Center for Supply Chain Research, Penn State University (2008).
PRODUCTION
FORM UTILITY
MARKETING
POSSESSION
UTILITY
LOGISTICS
PLACE
UTILTY
TIME UTILITY
FUNDAMENTAL UTILITY CREATION IN THE ECONOMY

5. 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

6. 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.

7. LOGISTICS ACTIVITIES
1. Transportation
2. Warehousing and storage
3. Industrial packaging
4. Materials handling
5. Inventory control
6. Order fulfillment
7. Demand forecasting
8. Production planning/scheduling
09. Customer service
10. Facility location
11. Return goods handling
12. Parts and service support
13. Salvage and scrap disposal

8. A SIMPLE LOGISTICS CHANNEL

9. A COMPLEX LOGISTICS CHANNEL

10. TRANSPORTATION COSTS, PRICING & RELATED ISSUES
1. 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)

11. TRANSPORTATION

12. 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”

13. PRICING STARGTEGIES
1. 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

14. 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

16.  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

17. 4. Delivered Pricing
 Buyers are given a price that includes delivery
of the product.
 Seller selects the transportation mode and the
Carrier
5. Zone Pricing
 Categorizes geographic areas into zones
 Each zone has a particular delivery cost
associated to it

18. TRANSPORTATION SERVICE CHARACTERTISTICS
1. Dependability – Consistency of service
2. Time in transit
3. Market coverage – ability to provide door to door
service
4. Flexibility – with respect to the variety of products
that can be handled & meeting special needs of
shippers
5. Loss & damage performance
6. Ability to become part of a shipper’s overall
marketing program – provide more than the basic
transportation services

19. 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

20. 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

21. 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.

22. 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

23. 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.

24.  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

25.  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

26.  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

27.  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.

28.  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

29.  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

30. 30
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 Benefits
2. Service Benefits
Functions and Benefits of Warehousing

31. FUNCTIONS AND BENEFITS OF WAREHOUSING

32. 07/05/10 32
Functions and Benefits of Warehousing
Economic
Benefits
Hold/
Consolidation
Break
Bulk/
Cross
Dock
Processing/
Postponement
Stockpiling

33. 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

34. 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
Consolidation
Warehouse
Plant A
(Vendor-1)
Buyer X
Buyer Y
Plant B
(Vendor-2)
Plant C
(Vendor-3)

35. • 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

36. • 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 Bulk
Warehouse
Customer A
Customer B
Customer C
Plant-1

37. • 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 Bulk
Warehouse
Customer A
Customer B
Customer C
Plant-1

38. 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.

39. • 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

40. 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

41. • 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

42. Functions and Benefits of Warehousing
Service
Benefits
Spot Stock
Production
Support
Assortment/
Mixing
Market
Presence

43. • 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

44. • 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

45. 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
Mixing
Warehouse
Plant A
(Ingredient-1)
Buyer 1
Buyer 2
Buyer 3
Plant B
(Ingredient-2)
Plant C
(Ingredient-3)

46. • 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

47. • 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