JNB225 Logistics

Module 4

Demand side logistics

JNB225 - Logistics - Lecture 4

MLM survey
You have recently received an e-mail from the Head of the Department of Maritime and Logistics Management, Dr. Stephen Cahoon, inviting you to participate in a small survey on your views about the programs offered by MLM.
The survey contains only 12 questions and responses are sought by 8 August.

Your response to this survey would be greatly appreciated.

JNB225 - Logistics - Lecture 4

Module 4 Topics
Environmental scanning
Forecasting CPFR The bullwhip effect Order cycle Communicating with customers Demand side logistics management
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Whats going on?

An important aspect of addressing the elements of demand side logistics is knowledge of what is happening in the broader business environment. Environmental scanning provides such information. It is a starting point for the strategic management process and is a key factor in maintaining competitive advantage.

Reading 4.1 provides information about environmental scanning. Reading 4.2 provides example of how environmental scanning created new opportunities for companies by combining their traditional product offerings with trends displayed by global consumers.
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Environmental scanning

JNB225 - Logistics - Lecture 4

Environmental scanning
Sources of information for environmental scanning:
External: Personal business contacts; journals; books; newspapers; conferences; radio and television news and documentaries; customers; commercial data bases. Internal: Personal contacts; internal documents (reports, research papers, memoranda); development proposals; internal databases

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Demand planning the traditional function approach

Source: Bowersox, Closs & Cooper 2010, p. 136. JNB225 - Logistics - Lecture 4 7

Demand planning an integrated approach

Source: Bowersox, Closs & Cooper 2010, p. 137.

JNB225 - Logistics - Lecture 4

Forecasting
Forecasting provides a picture of the future and is the driving force behind forward planning activities. It provides guidance on:

Demand, sales or requirements Cost of inputs and prices for outputs Replenishment and delivery times Demand for transport, from where to where and when
The time horizon for forecasts may be:

Long term more than 3 years Mid term one to three years Short term less than a year
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Forecasting
There are a very large number of forecasting techniques available which fit broadly into three categories. They are:
Qualitative methods: Use of judgement, intuition, surveys or comparative techniques to provide quantitative estimates about the future. Historical projection methods: Future estimates based on historical trends, seasonal variations and time cycles Causal methods: Forecast is derived from relationship to related variables. Come in various forms e.g. Statistical regression models or Descriptive input/output, life cycle or simulation models.
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Components of Demand Forecasting

Time frame

short, medium, long term

Demand behavior Trend gradual, long-term up or down movement Cycle up and down movement repeating over long time frame Seasonal periodic oscillation in demand which repeats Random movements follow no pattern

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Forms of Forecast Movement

Demand Demand Random movement Time Seasonal pattern Time Demand Trend Cycle

Demand

Trend with seasonal pattern Time

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Time
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Collaborative Planning, Forecasting and Replenishment (CPFR)

CPFR seeks to alter the trade off between inventory and customer service through improved collaboration between buyer and supplier.
CPFR brings plans and projections from both the supplier and the buyer into synchronisation It requires cooperation and exchange of data between the business partners It is a closed loop continuous process that uses feedback of performance assessment as input for strategic planning

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The CPFR Business model

Source: Coyle, Langley, Gibson, Novack & Bardi 2009, p. 253 JNB225 - Logistics - Lecture 4

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The Bullwhip Effect

The bullwhip effect is amplification of demand changes arising from poor coordination within a supply network. The resulting huge swings in demand from high to low result in higher cost manufacturing, periodic excessive inventories in the chain and instability in the supply process.
The four main causes of the bullwhip effect are: Demand signalling Order batching Price fluctuations Rationing and shortage gaming

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The Bullwhip Effect

Demand signalling: Orders placed for replenishment stock plus safety stock are regarded as signals of future demand and demand forecasts are updated accordingly at various stages of the supply chain. Order quantity is then much greater than demand followed by a period of low or no order. Order batching: Companies generally do not place frequent orders because it is administratively expensive to do so and foregoes the per unit economies of transporting larger quantities. Periodic order placing by customer around month end contributes to demand fluctuation.

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The Bullwhip Effect

Price fluctuations: Sales and discounting promotions prompt customers to buy in quantities that do not reflect their on going needs resulting in peaks and troughs of demand.
Rationing and shortage gaming: When an item is in short supply and manufacturers ration the supply available to suppliers, customers respond by placing multiple orders with various suppliers causing apparent demand amplification.

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Demand side logistics

There are of two types of supply chain: Push type (goods pushed onto the customer) Eg Woolworths Pull type (goods requested by the customer) Eg Dell

In both An important element of competitiveness is ORDER CYCLE time

JNB225 - Logistics - Lecture 4

Order Cycle
Order cycle time (Lead time) Total time from customer initiation of order to receipt of the goods. Order cycle time consists of: Order preparation and transmittal Order receipt and entry Order processing Warehouse picking and packing (or manufacture) Transportation Unloading and delivery to customer Order processing is a significant part of order cycle time and may be up to 70% of order cycle time in some industries. Reading 4.3 provides information on the components of order processing.
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Order cycle time

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Order processing
Order processing is not a settled term and varies in scope in different texts and articles.
Some texts describe it as the time from the sellers receipt of an order until authorisation is given to the fill the order. Others, such as Ballou (2004) (Reading 4.3) suggest it commences at the start of preparation of an order and ends when the order is packed ready for shipping .

Order processing is administrative in nature and can involve many activities which typically include: Checking the order for completeness and accuracy Checking the buyers creditworthiness and past performance Determine stock status - inventory or back order Prepare picking list Determine shipping mode and prepare shipping documents Prepare invoice
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Typical Elements of Order cycle

Sales order

Order Preparation Requesting products or services

Order Transmittal Transferring order information

Order Entry Stock checking Accuracy checking Credit checking Back ordering/ order canceling Transcription Billing

Order Status Reporting Tracing and tracking Communicating with customer on order status
(Ballou 2004, p. 132)

Order Filling Product retrieval, production, or purchase Packing for shipment Scheduling for delivery Shipping document preparation
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JNB225 - Logistics - Lecture 4

Order filling
Order filling is a set of physical activities. It involves:
Acquisition through production, purchasing or retrieval from inventory Packing and labelling Verification of completeness of the order Shipment scheduling and despatch Expeditious order fill time is important in achieving customer service Technology such as bar coding can reduce errors and expedite order fill time

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Order Filling: Time is important

Processing rules affect order filling speed. Various approaches that may be adopted include:
First-received, first-processed Shortest processing time first Specified priority number Smaller, less complicated orders first Earliest promised delivery date Orders having the least time before promised delivery date

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Filling multiple item orders

Often the customer service goals cannot be met for multiple item orders

Metrics:
- Item fill rate - Order fill rate

Have different implications and can create additional processes for order filling due to split shipments
Order fill rate is lower than item fill rate FR = nPi where n = number of items on order Pi = in stock probability of item i.

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Filling multiple item orders

Question Suppose that an order contains five items, each having an in stock probability of 93%. What is the probability that the order will be filled complete?

Answer

FR (.93)(.93)(.93)(.93)(.93) 0.70, or 70%

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Communication with customers

Communication with customers is a very important part of customer service and is required throughout the order cycle. It begins with acknowledgment of receipt of the order and progresses through the various stages of order processing. This process may be faster if a supplier is pre-qualified by a customer. That covers much of the background checking that each party might do on the other. Order status and tracking information are particularly important items of communication during the order fill process.

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E-commerce
E-commerce was covered for supply side logistics in module 3. Similar considerations apply in the demand side except that it is considered from the point of view of a supplier rather a customer.

For many products and services e-commerce provides alternative procurement and distribution channels to the traditional system. It by-passes intermediaries and allows supplier and consumer to deal directly with each other. Example: online travel bookings; buying on Amazon; bidding for items on e-bay.
E-Commerce does not facilitate integrity checking nor the development of strategic relationships between the parties. An on-line order management system must be capable of handling a high volume of small orders. The transport system associated with e-commerce requires extensive delivery networks and expertise in small parcel handling. Fleets of small vans engaged in the this type of activity are common in cities.
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Electronic Commerce: Direct to customer delivery

COMMUNICATION NETWORK - INFORMATION SUPERHIGHWAY

Orders: Confirmation Shipment notice Shipment status

Logistics provider Distributor

Orders: Confirmation Shipment arrival Shipment status

Suppliers
( Ballou 2004, p. 139)

Products

Customers

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Online and off line procurement

Reading 3.1 reports on research which compares of online and offline (traditional) procurement in a business to business context. Results suggest the following trends: As the importance of the items being purchased increases, the probability of using online procurement decreases. The psychological distance factor (impersonal interaction) also supports offline procurement for high importance items.

As the availability of online markets expand the probability of the use of online procurement increases. Complexity of item specifications has no influence on the use of either online or offline procurement.
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Software as a service (SaaS)

Information system technology is expensive to purchase and maintain but this is the traditional method by which firms access that capability. A recent development is a rental service known as Software as a service under which software applications are provided and operated by a third party information technology provider. This scheme offers the advantages of: Reduced capital commitment Reduced need for specialist expertise Facilities economies of scale since costs are shared across multiple users

Like any outsourcing, the risks need to be evaluated

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Demand side logistics management

In module 3 ERP was mentioned in the context of data and information systems. ERP is Enterprise Resource Planning. These systems integrate the internal operations of an enterprise with a common software platform and centralised database. Commercial examples are Oracle, SAP and Mincom Ellipse but there are many more available. ERP offers greater organisational efficiency because of shared information, lower costs, increased productivity and improved customer service. ERP systems are frequently customised to the requirements of a particular enterprise by the application of a selected range of modules.

The main disadvantages are installation, maintenance and personnel training costs.
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A Typical Logistics Information System

LOGISTICS INFORMATION SYSTEM INTERNAL Finance/Accounting Marketing Logistics Manufacturing Purchasing OMS Stock availability Credit checking Invoicing Product allocation to customers Fulfillment location
(Ballou 2004, p. 147)

EXTERNAL Customers Vendors Carriers Supply chain partners

WMS Stock level management Order picking Picker routing Picker assignments and work loading Product availability estimating
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TMS Shipment consolidation Vehicle routing Mode selection Claims Tracking Bill payment Freight bill auditing
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Assignment 1
Assignment 1 is due on 8 August 2011 and you should now be well advanced with your preparation. It is very important that your assignment is presented in the correct manner and that you follow the referencing standard used by AMC which is detailed in the MLM Toolbox. You are urged to review the Preparing for an assignment section of the MLM Toolbox. The tool box can be found on line by going to the AMC home page. Ports and Shipping / MLM / MLM Student Toolbox. You are also urged to review the Writing assignments notes posted on MyLO. Steves Automotive is the model for presentation of assignments and it should be closely followed, including the information on the cover page.

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Preparation for next week

Work through the study guide for this module and read the study resource material as directed.
Prepare answers to questions 2,3 and 7 on page 152 of your text book. Assignment 1 is due for submission on 8 August.

There are no student presentations next week.

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