27 transcript physical distribution system - david jankowski

7/29/2019 27 Transcript Physical Distribution System - David Jankowski

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TranscriptPhysical Distribution System

David JankowskiIntroduction to Physical Distribution SystemsSlide 01: Overview

Hello, my name is David Jankowski and I am the owner of DT Jankowski and Associates, acompany committed to life-long professional education through supply chain managementinstruction and consulting. I have over 30 years of experience with a variety of businessorganizations, both as a practitioner and a consultant. I am Certified in Production and InventoryManagement at the Fellow level CFPIM by APICS, The Educational Society for ResourceManagement., and I am an instructor for a number of local APICS chapters.

This course is entitled Physical Distribution System, and it will explain how an organization plansand executes a coordinated system of product distribution that supports its primary goal of first-class customer service and satisfaction.

Slide 02: Three Phases of Material Flow

In a typical flow of a companys supply chain structure, the movement of material occurs in threephases. First, from supplier to producer; second, through the steps of a producers manufacturingprocess; and third, from the producer to the final customer. This course will concentrate on thethird flow of material, which makes up our topic of physical distribution.

Slide 03: Physical Distribution

Physical distribution is an activity whose primary goal is to get the product in the hands of thecustomer the best way possible. In some markets such as consumer goods, this simply targets

the final product being made available for the appropriate customer pick-up. Examples of thisinclude supermarket grocery stores or bulk warehouse stores where, in each case, the product isdelivered to be appropriately stocked and displayed for convenient customer selection andpurchase.

This system of delivery could occur straight from the producing plant or through a detailedmultilevel network of supply that could either be completely self-owned, or that contains levels ofdistribution partners who contribute their expertise in the delivery of products to the ultimatecustomer.

Slide 04: Physical Distribution

For an industrial application, we can look at a company where our customer will send their ownvehicle to pick up some barrels of machine lubricant. In either case, the approach taken must addvalue for the customer. This could be achieved strategically by a company depending upon amarkets demands and the organizations core competency, which provides the order-winners forcustomer satisfaction.

The distribution capabilities can be defined to support situations where the producer mustconcentrate on delivery speed, customer location, material availability to support customerservice targets, and on any special services that the customer may request. All of thesecircumstances influence how a companys physical distribution system will take shape.


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Slide 05: Physical Distribution System

The components that make up the approach to distribution for an organization include thetransportation methods employed, the makeup and planning for distribution inventory, thecreation of a distribution system that is made up of a number of warehouses also known asdistribution centers, decisions on the type of materials handling and packaging to be used, and

finally, an efficient approach to customer order processing and communication between all keydepartments within an organization.

Key TerminologySlide 06: Terminology

Before we begin our presentation in detail, lets define some key terminology that helps todescribe physical distribution. In discussing the terms that relate to distribution, you may havecome across more than one phrase that describes the same technique. In this course, we striveto be consistent in all explanations of supply chain terminology. From time to time, you mayencounter some synonyms that are used based upon an authors preference to that word. Forthat reason, we ask you to use the APICS Dictionary for which there are links in this course to

help familiarize yourself with the primary vocabulary.

A companys distribution system is typically made up of a series of activities that are defined bythe necessary movement and storage of finished goods. To expand upon the APICS definition ofa distribution system, the system must be an integrated network of facilities and interactions thatprovide the best combination of customer service and minimal cost to ship the companys goods.

The partnerships that usually occur within a typical distribution system are there to contributevalue to the entire process. This movement of goods can result in changes in inventory ownershipdepending upon the nature of the industry. Independent distributors and retailers can exist thatwill either partner in inventory ownership or will take complete possession of product inventoryprior to providing delivery to the ultimate consumer of the item.

The system can be made up of what is called the distribution network structure, which consists ofa series of distribution channels that service to map out a detailed flow of product to one or morepartnering organizations that help to put the product in the customers hands. Networks like theseexist in a number of industries. The number of levels and participants can vary, depending uponhow widespread the market demand is.

Slide 07: Distribution Network

To illustrate the concept of a distribution network and distribution channels, lets look at a diagramof a supply chain for a hardware manufacturer that contains a significant distribution system. Toget the product that the hardware producer makes to the ultimate consumer, three distributionchannels exist in this example.


The first distribution channel consists of a number of retailers who maintain their own supplysystem, which then moves goods to local retail stores who sell to the general public, thecustomers. These retailers can purchase the finished goods inventory from the hardwareproducer, and then, in the transaction, become their customer. The hardware producers canprovide a product such as door knobs and packaging that is specific to that retailer. Dependingupon how large a market area they serve, the national retail chain can operate a number of


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regional warehouses called distribution centers (or DCs) that in turn will supply a number of localstores. The local store owner can also arrange to partner or totally own inventory that it sells.


In the second channel that exists in our example, the producer can sell to a hardware wholesaler

who may add value to the original product by repacking, or bundling the hardware in various sizepackages, so as to provide pricing economies which are then passed along to either the industrialsuppliers or local retailers who then sell to their particular markets. The hardware wholesaler canbuy door knobs in bulk from the producer and pass along the same bulk package or repackaccording to the customer that it serves, who in turn sells it to their end customers accordingly.


In the third channel, there are customers to the hardware producers who are called originalequipment manufacturers (or OEMs), who use the purchased hardware in the manufacture ofanother product. Lets say they purchased door knobs to use in the production of a family ofwooden doors; these doors in turn are sold to wholesalers who then can sell to retailers for their

particular markets. So we can see how an organizations distribution network can include a largenumber of companies who make up a supply chain alliance that serves a particular consumermarket.

Agenda Overview and Transportation ChoicesSlide 11: Course Agenda

The choices that a company must make in constructing a distribution system are covered in thefour sections of this course.

Slide 12: Course Agenda

We will discuss first how a transportation approach depends upon products being shipped andthe markets being served. Choices on the modes of transportation that should be used can belimited by availability of open routes of shipping called ways. The company must then choosehow to provide the necessary modes of shipment. The choice encompasses whether to own thevehicles or to partner with a company that has invested in that type of transportation; and finally,to determine how the cost of those transportation choices can be leveraged to provide the bestshipment performance to the customer.


In the second session, we will cover the choices that surround the building of the facilities thatmake up the distribution system. The types of warehousing, and the roles they must play to serve

specific markets, provide many cost trade-offs that must be considered in determining the bestway to satisfy the customer. An organizations knowledge of the types and volumes of productsthat must be shipped will help to determine the best choices of material handling and packaging.


In the third section, we will see how an organizations business approach affects its choices infilling the distribution inventory pipeline. The purpose of the inventory to be carried helps todetermine the characteristics necessary to ship economically. Company objectives here cover the


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same goals that govern manufacturing; maximum customer service with optimum systemperformance at minimum production support costs. The makeup of an organization can affect thedistribution environment by determining inventory requirements and replenishment strategy atcorporate or at individual district levels.


And finally, we will see how a companys distribution strategy must communicate to and interactwith the other key organizational areas that encompass manufacturing, marketing, and finance.Important decisions that affect even basic customer support must be coordinated through anintegrated system of operations and materials management.

Slide 16: Transportation: Modes

Lets begin by discussing the transportation choices that are available to a company. We willcover different modes of travel that products can take, providers of the transportation needed,and cost issues that must be considered in making transportation decisions. What are theproducts that a company provides? They can be anything from vegetable seeds to tractors, from

soup to electricity.

Where must those products be shipped? To the next town? Cross-country? To another country?Throughout a global marketplace? The answers to these questions, along with the marketdemand, the availability of routes or ways in which to travel, and in some cases governmentalregulations, help to determine the appropriate selection of the mode of transportation to take.

And after all this thought process, we still must address the best cost option to accomplish theexecution of that choice of mode. And how do we make these choices? Lets begin by looking atthe characteristics of each choice of mode and how best they apply to various industriestransportation requirements.

Modes of TransportationSlide 17: Transportation: Modes - Rail

The first choice of mode is by rail. The routes that trains or vehicles commonly called railcarsmust travel are called railways. The capital cost of these railways is high. They are provided bycompanies that provide and maintain the routes available for transport, and sometimes, aresubject to governmental regulations. For these reasons, this choice of mode is best suited forlarge volumes of heavy bulk goods to be carried over long distances.

Although the speed of this choice of delivery is slower than other choices such as by road, theoverall operating costs are low. If this mode of shipment is essential to a business, they maychoose to construct rail connections on their plant site that merge with an existing railway. Thisoption allows local control of loading or unloading depending upon the transportation advantage

desired.

Shipping routes have to be planned carefully because of the limitations on flexibility. Specifically,shipments by rail are dependent upon the schedules by which trains are planned and deliveriesmay be restricted by the timing of such schedules to move products to a specific destination at aspecific time. Also, rail deliveries can only go so far on the routes or ways that they travel. Onceunloaded at freight stations, products may depend upon transport to other modes oftransportation to get to their final destination.


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There are many versions of railcars available that provide flexible and special handlingcapabilities. These vehicles are designed by railroad providers in response to the specific productcharacteristics and logistic needs of their customers. Over the years, providers have had to bevery innovative in the types of transport offered, and on providing customer specific solutions. Acustomers decision to ship by train versus other modes of transport can depend upon how aprovider can competitively design and furnish these services.

Slide 18: Alternative Rail Cars

A few examples on the choice of railcar that is available are boxcars, which provide a protectedand economical choice based upon optimum use of a cars capacity to handle boxes or drums;tank cars that allow for the transport of liquid or gaseous products and can also be temperaturecontrolled; flat cars that handle various large and bulky loads like logs or bars of steel; in theresponse to a customers special handling needs, special versions of the flat car, which isadapted to carry things such as automobiles or large transformers.

Slide 19: Transportation: Mode - Road

Another choice of transportation mode is by road. The vehicles used for this choice of transportare usually trucks. Trucks can handle a large variety of goods in different volumes andcontainers. They travel on their own ways commonly called roads or highways. These roads areusually built by local government agencies that charge taxes and/or tolls for their use and forupkeep.

Delivery with these vehicles is very flexible, as delivery speed is moderately fast, and can be asclose to the customer as door-to-door. Shipping schedules can be very specific as to the timingand destination. Of course, we need to be aware that the more specific service that is requestedon this delivery, the more it could cost.

A trucks capacity is chosen to match up with the type and volume of a product that must beshipped. It is more economic to fill the truck to capacity, which can be determined by cubic

volume or weight. Product packaging is designed to make the best use of a trucks cargo space.

Shipments made by road can be partnered with other modes of transportation to gain overalleconomies and delivery capabilities. We will discuss this concept further in our presentation ofintermodal transportation.

Slide 20: Road Alternatives: Loading Profiles

Shipping by road via trucks provides many alternatives to product loading. Some choices includesingle high automatic loaders such as tank trucks. Liquids are pumped directly from thewarehouses holding tanks through pipelines into a tank truck, which will shut off the flowautomatically once the tank trucks capacity has been reached. Another approach is to load thetruck with stacked product containers on pallets, which are designed to make the best use of avehicles cubic capacity. Products shipped this way include truckloads of the same products, suchas boxes of bagged potato chips, or candy.

A truck can be loaded with products in a loose pack, where various types of products orpackaging are loaded from a distribution center to be delivered to a local store that has requestedthat combination of goods. Examples include fruits and vegetables being delivered from a centraldistribution point to fill the various needs of local grocery stores, or a mixed delivery of televisionsets, refrigerators, and stoves sent from an appliance distributor to a retail store.


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Modes of Transportation ContinuedSlide 21: Transportation: Modes - Air

A third mode of transportation is by air. The routes that airplanes fly are regulated by agovernmental system that controls air traffic. This choice of transport is fast, but is usually veryexpensive. Therefore, the appropriate choices of goods for this mode are high-value products,usually of low weight. This type of cargo, if shipped by this mode, can be time-sensitive, possiblydue to an emergency, and from that perspective, it can be a relatively inexpensive way to getproducts to the customer quickly.

Unusual cargo can be handled with proper planning, such as in transporting animals. The storagelocation on a plane is important because the container size can adapt to the shape of a planescargo hold, or if it is a passenger flight, the product travels in holds located below the seatingarea. Aircraft schedules must be considered to plan deliveries correctly to ensure that the productarrives at the necessary location for timely customer delivery.

Some situations for the type of products shipped by this means of transport include a companythat needs to ship automobile engines from Germany to an assembly plant located in North

America; a business that may ship medical supplies such as artificial limbs or blood to a hospitalto meet patient needs; and a companys emergency shipment of high-value products that canbest absorb the expense of flying them.

Slide 22: Transportation: Modes - Water

Another transportation mode that can be chosen is to have products shipped by water. Routes inwhich ships travel commonly called waterways are usually there by nature, although moreand more routes are man-made, such as the St. Lawrence Seaway or the Panama Canal.Shipping by water is a good option to use for transporting products over long distances at verylow cost per unit due to the large capacities that are available. Beware though that this mode oftransportation is the slowest of all choices, and should be planned accordingly. The slowness ofthe delivery would mean that more inventories are in the overall transportation supply line and

any flexibility is lost.

A product is often packaged into large seagoing containers, which are able to be stacked to beable to take the best advantage of the cubed volume of a ships cargo hold or stackable areaabove the decks.

Seagoing vessels are only one type of shipping option available. There are other sizes of water-going shipping. The largest, for example, are used to move large amounts of low-valuable cargo,such as salt or oil on local water routes.

Slide 23: Types of Water Freight

Coastal shipping terminals are built to which container-carrying ships can come and be loaded bycrane to maximize ocean-bound freight capacity at good rates. These ships can make numerousstops at different coastal terminals until they are fully loaded for their overseas trip. A similarsequence of stops may also apply then when making deliveries at receiving ports of call.

Local waterways include rivers, canals, and bays. Vessels are designated that can specificallytravel over those routes effectively. A choice of barge or steamship can be made based upon thebest maneuverability required to get that product to the desired point of delivery. Products such


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as fresh fish, cattle feed, or sugarcane can be shipped this way right up to the processing plantsthat normally locate themselves adjacent to local waterways.

Slide 24: Transportation: Modes - Pipeline

A mode of product transport that is not widely used but has important implications in specific

industries is called a pipeline. Construction of the type of pipeline delivery is made to best matchthe type of product to be moved. Products such as oil, natural gas, and drinking water aredelivered to local customers from bulk storage facilities by pipeline grids that are specifically builtfor this purpose.

Very high volumes can be moved continuously over large distances. The cost of initialconstruction is high due to local government regulations that control obtaining rights of way inactual pipeline construction. But once in place, ongoing operating costs are very low. In perviousto weather conditions, pipelines can be located on either above or below ground.

Slide 25: Transportation: Modes - Intermodel

A combination of modes of transportation called intermodal is very prevalent today. Any two ormore modes can be used to get product from the producing location to the ultimate customer.The choices made are selected to make the best use of a combination of benefits that the modescan supply. Shipping truckload containers from the producer to a coastal terminal, where it is thentransferred to a ship, is an example of combining ways of freight transfer. Once the ship reachesport and is unloaded, the cargo can then go by road on a truck to a rail yard where the product isthen shipped by rail to a customers distribution center. There are many uses of intermodalshipping that can exist that are not just economically motivated, but are the only choices possibledue to local geography.

Modes of Transportation SummarySlide 26: Transportation Modes - Summary

So we have seen that there are quite a few choices that can be made to move products from aproducer to the final customer. Just what choice a company makes depends on the customerservice and operations strategies that target a specific markets requirements and logistics.

In summary, lets look at a chart which will show the characteristics of each mode oftransportation. The characteristics address the initial fixed cost investment that is involved withthe decision of transportation mode, the operating cost that will be incurred as a result ofchoosing that particular mode, which is addressed here as cost per ton mile, the differences inthe aspects of speed and flexibility regarding the choice of routes traveled and schedulesavailable, and finally, the possibilities of product types that can be handled by that particularmode of transport. We will show how choices can be made by comparing these characteristicsagainst the goals that exist for a companys distribution system.

Slide 27: Transportation Modes - Summary

For rail, the initial fixed cost is high, but the cost per ton mile is low. Speed of delivery is slow,route flexibility is very low, and other complementary means of transport may have to beconsidered to arrive at a final destination. Schedule flexibility is low and must be taken intoaccount for delivery promises. The good news is that there is a wide variety of goods that can beaccommodated by rail shipment.


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For road transport, initial fixed costs are moderate and may have some flexibility depending uponwhether equipment is owned, leased, or handled by a third party logistics provider. The cost perton mile is moderate. Speed of shipment is moderate with high flexibility of both routes andschedules. Wide assortment of products can be handled.


Shipping by air incurs high fixed costs and costs per ton mile. Speed is very fast and the urgencyfor this delivery speed may in fact prove to be a large factor to weigh into the real cost of theproduct and serving a customer. Route flexibility is moderate to high depending upon the use ofprivate or public air transportation. Because of the schedule limitations that may exist dependingupon choice of air service provider, schedule flexibility is moderate. The variety of products thatmay be shipped by air is also moderate.


Transporting product by water has moderate to high fixed costs. Due to the bulk nature of cargoshipped, the cost per ton mile is moderate to very low. The choice of an ocean shipment versusthe use of local waterways for cargo greatly influences these operating cost levels. Carefulplanning and review of delivery options is important due to the slow speed and low flexibility ofroutes and schedules. There are a wide variety of goods that can be shipped by water.


Finally, a company that chooses to transport products by pipeline will incur initial high capitalcosts but will have very low costs of operation or costs per ton mile. Moving a product within thepipeline is moderate. There is little or no flexibility in the routing or scheduling of the pipeline flow.The types of products that can be shipped this way are very limited.


In looking at all the characteristics involved with the varied choices and the movement ofproducts, we may see that many choices can be made within the logistics operations of anorganization. There are many priority factors, both internal and external, which may affect whichselection a company will ultimately choose. How well these choices are made will help todetermine both customer service and satisfaction.

Transportation Providers & CostsSlide 33: Transportation: Providers

There are many types of companies that offer transportation choices. These companies arecalled providers. The vehicles used can be solely owned by a producer, or there can bepartnerships which assist in getting products from a producer to a customer. These providers arecommonly known as third party logistics or 3PL providers. The possible choices of providers canbe defined as a common carrier, which is available on call to the general business public, acontract carrier, which works by negotiated arrangements, and a private carrier, where themanufacturing company may own or lease their vehicles for private use. 3PL businesses existthat can control shipping arrangements and movement even though they may not actually ownthe shipping equipment itself.


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Slide 34: Transportation: Cost Elements

Choices of shipment are cost oriented, and a system of billing depends largely upon the type ofservice contracted for. Some different types of cost elements to be aware of include;: first, linehaul cost, which is charged depending upon the distance traveled regardless of weight. In thissituation, a company should look to make maximum use of the cargo space available. Some

examples of this include shipping such things as unassembled tables or products that can benested into tight packages such as baskets or lampshades.

Line haul costs are based on covering the transportation expenses of the drivers wages, fuel,and vehicle maintenance. An example of this cost calculation would occur when a providercharges a line haul rate based upon mileage, such as $5 a mile. A company should look tomaximize the tonnage shipped in this way. If two tons are transported 300 miles at a rate of $5 amile, the cost is $1,500 and the cost per ton shipped is $750. If the producer, through productnesting, increased the tonnage to three tons, the cost per ton would lower to $500.

Another transportation charge that can be incurred is called pickup and delivery costs. Thisoccurs when a carrier would charge based upon the total weight shipped and the total number ofpickups necessary to obtain that weight. This situation can happen if a company contracts with a

carrier to make stops at all warehouses within a certain geographical area before shipping to afinal destination.

A third type of transportation charge that can be issued is called terminal handling costs. Thisoccurs when a company needs to be aware of the cost of shipping less than a full truckload orLTL. Unless contracted to ship direct non-stop to a destination, the carrier will, after pickup, returnto a local terminal to consolidate other loads that are destined to travel to that same geographicalarea.

Mixed loads of television sets and drums of solvent have been known to travel on the samevehicle. Then, once arrived at another terminal, the load is broken down and reloaded onto othervehicles for the final local delivery. Each time a shipment is handled, loaded, and unloaded, thecost tally is increased. So a company should go for full truckload whenever possible to save ontransportation costs.

Transportation billing and collection is now a thriving 3PL business. Unless a company is set upto do their own billing, audit and payment operations, they usually contract with an outside serviceprovider. The charges to accomplish these tasks add on to an organizations transportation costtotals.

Slide 35: Transportation Providers & Cost Summary

Mr. Jankowski has presented the modes of transportation and the types of charges that areassociated with each. There is a natural hierarchy to the transportation decision which considersgroups of products and groups of customers. Lets look at examples where the transportation

choices are limited by the product or the environment or chosen by the customer.

Situation Transportation Choices

A company produces large ocean going shipsfor commercial and military uses

In this situation, there are only two reasonable

methods for distributing a vessel from the shipyard to the customer. The customer can pick it

up at the shipyard and sail it to its base or the


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producer can maintain a crew to sail the ship

to the designated base.

A distributor sells clothing and accessories

to the end consumer through catalogues and

an internet store.

In this situation there are several choices, but theywould all be based on using a package deliveryservice or the country postal service. The

company could offer standard delivery at onecharge and more rapid delivery at a higher charge.

A company purchases fresh cut flowersfrom local growers and ships them to

distributors around the world.

Refrigerated trucks could be used for delivery todistributors within an hour or two of the fields, butair transportation would be used for mostdistributors.

The hierarchy of choices is typically:

1. What are the shipping and receiving locations and who is paying for the transportation?2. What are the characteristics, including regulatory limitations or requirements, of the

product?3. What mode of transportation will be used?4. What are the delivery, security, and handling requirements?5. Will the company transport the goods or employ a contract carrier?6. If a contract carrier is used, what is the freight classification and rating? When will the

goods be available and when must they be delivered.

The answers to those seven questions should point to a specific transportation arrangement.

Warehouse StrategiesSlide 36: Warehousing: Types

Lets move on to discuss the strategy of establishing warehousing for our manufactured products,and then determining the best network of distribution that can result. Knowledge of the marketand the product characteristics will help in deciding on things like how many warehouses areneeded, where they should be located, and on what roles they will need to play in servicingcustomers., the nature of the products required in customer orders, which dictate how those itemsmust be identified, packaged, and handled throughout the distribution network. Lets look at someof the details that make up a companys distribution system.

There are two types of warehousing approaches. Both are based upon the immediacy andfrequency of product movement. Storage can be for a long term or for a very short stay. A generalwarehouse is set up to store and protect goods for long periods of time until needed. There wouldbe minimal materials handling as packages would be mostly bulked by the use of pallets andshrink-wrap for example, and then hopefully only moved once for put-away and once again forany shipment requirements.

Packages in this warehouse environment will seldom have to be moved and broken down intosmaller packages prior to shipment. An example of this type of warehouse is for a companywhose products are seasonal. Their items are usually made months in advance of the sellingseason based upon market forecasts. They are then shipped to be stored in a general warehouseuntil that season arrives. Retail stores that handle seasonal merchandise may choose to pack upthe product once the particular season is over and return it back to the general warehouse untilthe next seasonal requirement occurs.


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The opposite of a general warehouse is a very active distribution warehouse or distribution center(or DC). The purpose of this type of warehouse is to move, mix, or consolidate various types ofproducts with the purpose of filling customer orders such as individual retail stores, supermarkets,wholesale stores, or other manufacturers. Service activities such as special packaging or speciallabeling may be required prior to shipment. The DC becomes the focal point for achievingcustomer service goals, and as such, may be organized for optimal movement and added valuefor the customer.

Slide 37: Warehousing: Roles

We have already talked in some general terms of the roles that warehouses may have to play infilling customer orders. Now lets look at some of those roles in more detail. The customer servicegoals of an organization become the main drivers of particular warehouse roles, as they areactivities that are necessary to be successful.


One such role is transportation consolidation. This task entails the bringing together of many

small shipments and staging them to eventually be shipped together to obtain the cost benefits offull loads. A central warehouse located at the manufacturing plant looks to do this when pushinggoods through a specific geographic network of distribution centers. We will discuss thecharacteristics of a push system in our upcoming section on distribution inventory characteristics.Examples of this type of activity occur within a dyestuff manufacturer, whose product can beshipped to numerous garment producers within a specific area, or with a carpet manufacturerwho stocks a central warehouse, which then will look to fill orders for different types of carpets fora regional wholesaler.


Another role is product mixing. This commonly occurs in a distribution center where manydifferent products, all from different manufacturing locations, are stored. This DC always

replenishes orders from the field, such as those received in a supermarket chains DC on a time-sensitive basis. The every Thursday truck, for example, that goes to a grocery store will containvarious types of products made up of many different sizes and packaging. The main purpose ofthis approach is to minimize order processing costs.


And last, a warehouse can provide specific customer requested services. For example, genericproducts can be stored at a warehouse location, and pending customer order instructions, canhave the product completed to order specifications by the application of customer-specificpackaging and or labels prior to shipment. A dye warehouse that stores colors in various tankscan draw from those tanks and mix primary colors together to deliver customer-ordered dyes for

specific applications, such as for garments or carpet.

Cost Elements that Affect the Distribution SystemSlide 41: Warehousing: Costs Distribution Cost Elements

For an organization, the controlling of distribution costs presents a constant challenge. There arefive major cost elements that affect the distribution system. The first cost element is the cost oftransportation itself. We have discussed so far the choices that a company must make to planshipments by taking advantage of full truckload quantities and strategic carrier alliances


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whenever possible. The structure of a distribution network must take this cost into account indetermining the number and location of warehouses in the system. This activity makes up themajor portion of total distribution costs.

The second cost element concerns the cost of carrying inventory. Although inventory planning isbased upon the concept of an average inventory calculation, a warehouse must be flexible

enough to handle periodic maximums as well as averages. The cost of carrying this product mixis made up of the cost of money tied up in inventory at any given time and the cost of storing theinventory, which is made up of such things as insurance, financing, labor costs, etc.

The third cost factor is the cost of the warehouse itself. Fixed costs like space and equipmentplus ongoing operating costs make up this number. The more warehouses in the distributionsystem, the more these costs increase.

The fourth cost factor concerns materials handling. How much and how often does a productneed to be moved,? The number of distribution centers in the network and the capability of fullload shipments affect the number of times the product must be handled. This definitely canincrease the cost in this category.

Finally, the cost of packaging is included. The types of packages, along with any specialconditions and/or labeling, make up this cost, which definitely grows along with the size of theinventory.

Slide 42: Warehousing: Costs Effect of Distribution Centers

All of these cost factors, except those of transportation, will tend to increase as more warehousesare added to the network; and even total transportation costs, which at first will significantlydecrease when adding warehouses, will tend to level out at some point. This is due to thediminishing capability to ship full loads as more warehouses are brought on board with thepurpose of getting closer to the customer.

All of these costs must be measured up against the companys stance on customer servicemeasurements. For example, adding a warehouse close to a cluster of customers reduces thedelivery time to those customers, lowers the transportation cost from the warehouse to thecustomer, but also results in increasing costs of facilities, materials handling, labor, and inventoryinvestment. The trade-offs must be weighed in the analysis of the companys customer servicestrategy.

Materials HandlingSlide 43: Warehousing: Materials Handling

Lets now turn our attention to the decisions of materials handling. The basic makeup of awarehouse depends upon the products that it must carry, plus the service needs of the customer.

The goal is to make the most efficient use of overall space to store items safely and effectively. Ina warehouse environment, we are mainly looking at short-distance movement of products. Weneed to be aware of something called cube utilization, which means knowing how wide, how high,and how deep a product and its packaging dimensions are. Do we store it on shelves, in tanks, oron pallets? Do we store only unopened, full cartons, or do loose items and open packages exist?

The same way that we strive to maximize utilization of shipping containers, we also look tomaximize the capacity or cube utilization of warehouse space. Utilization must also be balancedwith the need for accessibility. The highest utilization could be achieved by stacking pallets, for


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example, floor-to-ceiling and wall-to-wall, but movement of stock may be necessary to get aparticular pallet, which is against the back wall.

The strategic location of inventory to address the needs for working stock, fast-moving products,or reserve stock may be necessary to help achieve this balance. There are numerous devicesavailable that are capable of quick and efficient materials handling. Some of these are very

capital intensive and others are simply labor intensive. Lets look at some examples of each type.

Slide 44: Materials Handling Devices

Here, we see some of the more commonly-used types of materials handling devices. Devicessuch as manual dollies allow warehouse personnel to move more goods than one single personcan, but are subject to a weight or size range limitation. By using tools, such as mechanized folklifts or conveyors, more products can be moved quickly and with more flexibility. Special-purposemechanisms, such as hoists, provide greater space utilization along with greater range ofmovement. We strive to move the right product with the right material handling device. The onlylimitation a company may have with the choice of device is usually related to the capital fundingthat is available. That is why a lot of equipment is leased rather than purchased outright.

Slide 45: Warehousing: Packing and Marking

The final warehousing issue to address covers packing and marking. Manufacturers productsneed to be packaged in such a way so as to not damage the item, yet provide some measure ofsafety to the materials handler. Usage of such packing aids as shrink-wrap and specialtydesigned tapes help to provide assurance of the safe shipment of goods. Since cube utilization isalways a major concern in storage and shipment, the packaging options available must addressunitization, or as the APICS Dictionary states, the consolidation of several units into larger unitsfor fewer handlings.

For example, there normally are a dozen eggs in a carton of eggs. The carton of eggs can beshipped to a warehouse in corrugated boxes that contain 24 of the cartons, and in turn, the

corrugated boxes can be shipped on-truck by shrink-wrapping pallets in certain combinations. Wecan also offer special pricing options to customers, pending the size of container that they chooseto buy. The saving is based on not having to break down packages.

And finally, all packages shipped must be appropriately labeled. Types of labels may containinformation on destination addresses, item identification, special handling instructions, warnings,and content descriptions. The labels may be typed out or printed with bar codes. Labelingrequirements, such as UPC identifiers or RFID tags, may be defined by specific customers. Othernecessary safety labeling denotes products as flammable, hazardous or biohazard, and may bedefined by various regulatory agencies. All of these labeling operations and options must addvalue to the customer in ensuring safe delivery of the product.

Automated Material Handling & Inventory DistributionSlide 46: Warehousing Trends in Automation

As technology expands we are finding better, more economical ways to store our warehouseitems. Computer controlled lifts can both put away and retrieve inventory with minimum humanintervention. The concept of an automated storage and retrieval system can be used inwarehouse situations for industries such as high-tech, where reels of integrated circuitcomponents are kept in an automated tower that is dust free and temperature controlled.

Automatic carousels allow for a maximum product variety and a minimum of inventory to be


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available to the warehouses order picker, providing for delivery speed on shipments. Onecompanys president has been overheard to say that if the carousel is not turning, we are notmaking money today.

Increased automation has also allowed us to move more products without the need for either alarge operating labor force or significant energy costs. A recently developed storage approach

known as lights-out operations extends automation capabilities using computer-controlledwarehouses to save on overall operating costs. A recent development in this area is theautomated garage.

This is a service facility where a customer can safely park their car by the procedure of swipingan ID card through a computer terminal, then driving their car into a large compartment which willthen automatically be moved to an open grid oriented bin location, such as on a rack for storage.It will then remain there safely until retrieved by its owner. This kind of operation definitelyrequires a high integration of computers, data, and control. The capital cost for startup is high,and has to be compared against the benefits being sought by the use of this warehousingapproach.

Slide 47: Distribution Inventory: Characteristics

Our next section of the course takes us through the makeup and planning of distributioninventory. We will discuss the characteristics of different types of inventory warehouses thatsupport various operating environments. We will point out how a companys business objectivesaffect decisions on how a product not only will be produced but also distributed to customers. Wewill then look at the decisions an organization can make to determine both the replenishment andthe shipping of the product throughout its distribution system.

Lets start this section with a look at the characteristics of a typical distribution inventory as itrelates to some specific operating environments. The two production environments that we willconcentrate on are make-to-stock and assemble-to-order. In make-to-stock production, thedistribution inventory is made up of finished goods and maybe some spare parts inventory ifapplicable to the market served. It should be noted here that spare parts inventory can relate toany company approach to satisfying customer demand and could also include engineer-to-orderand make-to-order environments.

A product can be in various stages of transit or storage within the system of warehouses anddistribution centers. This total transportation inventory is a major part of a companys aggregatedinventory investment. Issues of either a seasonal or steady demand will dictate the type ofstorage and activity that is necessary. Customer service goals drive the organization of a logisticsstrategy that looks for maximum efficiency while minimizing costs.

In an assemble-to-order production environment, the distribution inventory will have some semi-finished product and materials that are needed to complete products with special options andfeatures as demanded by customers. In this case, warehouses must be equipped with the correctconfiguration possibilities to meet customer order specifications. This strategy may also allow thewarehouse to be located close to customer markets to provide a quick response. In bothapproaches, strategy concentrates on the efficient management of distribution costs.

Slide 48: Distribution Inventory: Objectives

The ultimate objective of any distribution system is to meet or exceed corporate customer servicegoals in a matter that requires excellent cost control and efficient operations.


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Demand Planning and ReplenishmentSlide 49: Distribution Inventory System Control

The decision-making that is entailed in determining when and how to stock and re-supply adistribution network lies mainly within a companys approach to management style and thedemands of the market the company serves. The decisions on demand and supply issues can bemade either in a centralized approach, where all choices of re-supply are made from the centralsupply point, or in a decentralized strategy, where decisions on demand and replenishment aremade at district-oriented distribution centers which are closer to their customers. There aresignificant implications on the activities within a distribution network that result from eachapproach.

Lets use a chart to list and compare choices made in both centralized and decentralizeddistribution strategies.

Slide 50: Distribution Inventory System Control

The first issue that we see highlighted on our chart is the one that deals with determining product

demand. In a decentralized approach, that demand is captured directly from the distributioncenters who are closest to customer activity within their geographic areas. In some situations,these warehouses can have their own individual order entry and customer service departmentswho can track actual orders, and determine their own supply levels that they feel are needed tosupport the local market.

In a centralized approach, all product demands are tracked then forecasted in aggregate at thecentral supply point, which is usually located at the factory. Customer order entry is usually alsocentralized in order to control the flow of materials through the distribution system.


Replenishment ordering is done at the local distribution centers in a decentralized environment,and a product is requested regardless of what is happening elsewhere in the distribution network.The danger, here, is if a distribution center oversells a normal forecast, or does not forecast well,they can still draw more inventories than projected at the expense of other DC requests. This alsocauses large spikes in demand on the supplying plants schedules. It is like, first-come, first-served in this approach of inventory replenishment. This situation can also result in an expensiveand sometimes painful re-balancing effort to get inventory where it needs to be. There have beenmany products that have experienced trips back and forth among warehouses in this kind ofsituation.


Product allocations would only be done in a centralized environment. This happens because inthe process of aggregate forecasting, overall history is used to project sales at the distributioncenter levels. They are then combined to determine the overall demand on the plant. Once theproduct has been delivered, distribution decisions are made district by district to determine theso-called fair share allocation of inventory. Economies of scale can be used in this approachbecause forecasted products can be used to fill truckload shipments even though inventory maynot be needed right away.



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As we can see on the chart cooperation with other warehouses in the network, in a decentralizedenvironment is low or even non-existent. By the centralizing of distribution decisions, the entiredistribution structure can be taken into account.


The build on inventory in a decentralized environment is mainly due to the setting of eachdistribution centers safety stock levels independently, rather than in a system-wide aggregatedapproach as is done in centralized control. The rule is that forecast error is normally less in anaggregated calculation than it is in an individual DC by DC calculation. The size of the error,along with any existing distribution center service level targets, which tend to be high in adecentralized environment, causes the calculation of safety stock to end up being high.


Total inventory investment in a decentralized approach tends to be higher than a centralized onedue to the fact that each distribution center is acting independently in netting their customerservice targets, and in turn, inventory levels.

Replenishment Continued: Push Vs. PullSlide 56: Distribution Inventory: Push Vs. Pull Replenishment

So, in our comparison of a centralized versus a decentralized approach in inventoryreplenishment, we see a push versus a pull strategy taking place against demand on the centralsupply warehouse.

Slide 57: Distribution Inventory: Push Vs. Pull Replenishment

A push replenishment approach does just what it implies. It pushes inventory out of thedistribution network based upon forecasts and allocations. Equal weight is given to each DCssupply situation.

Slide 58: Distribution Inventory: Push Vs. Pull Replenishment

When a pull replenishment approach is used, as is done in a decentralized strategy, the DC pullsits inventory through the network independently of other stock points that exist. Bothreplenishment strategies can best be served by looking at our next type of distribution planningapproach, which is being implemented at more and more companies distribution requirementplanning.

Slide 59: Distribution Inventory: Planning

Distribution requirements planning (or DRP) provides a time-phased approach to managinginventory within a companys distribution system. Each warehouse in the network is able to sendtheir demands to the integrated company planning system and have the time-period comparisondone as far out as necessary to plan replenishment. Special situations can be planned andcommunicated in enough time so as not to upset any previously made replenishment plans. Theprojections also give the supplying plant warehouse an early warning as to significant changes inthe network and to re-supply plans.


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This approach to planning uses similar logic as a plant does in using to plan materialrequirements for production demands. Shipments can be based upon calculated replenishmentorder quantities that match up with the modes of transportation that are used. In this planningapproach, a hierarchy of acceptable replenishment warehouses can be defined for anywarehouse in the system. This is especially useful if stock is not readily available from centralsupply. This overall replenishment approach works to provide stability to both the supplying plantand to the distribution network.

An extension of DRP known as distribution resource planning (or DRP II) takes one more step inthe DRP replenishment approach by using the demand and supply information projected to planneeded resources to support future needs of the system. These resources can include additionalwarehouse space, labor, finances, or logistic partnerships.

Slide 60: DRP Approach to Inventory Replenishment

This diagram illustrates how DRP would work. A western distribution center places areplenishment order for product A144 as shown as a planned order release on the chart forweeks one and three. In turn, these demands are communicated to the central supplywarehouse.


The eastern distribution center has demand in week two also for product A144, and also sends italong to central supply for replenishment planning.


The execution of the DRP process takes all of these orders called gross requirements, as seen inthe first line of the central supply worksheet, and is able to compare available inventory and anyprojected production receipts to plan replenishment orders. The visibility of this plan, throughoutthe distribution network, allows all interested parties up-to-date information on the demand andsupply issues of the moment. We can see from this presentation, how DRP combines the bestaspects of both the push and pull replenishment strategies.

Interfaces with Other Functions & Course ConclusionSlide 63: Interfaces with Other Functions

In our final section of this course, we will cover the important responsibility of the distributionnetwork of a company to communicate with the other managing departments of an organization,namely marketing, production, and finance. We will use another chart to look at the differentcomponents that we have seen make up the important characteristics of a companys distributionsystem. We will review each characteristic individually to show the information that needs to becommunicated to these important branches within any organization.

Slide 64: Interfaces with Other Functions

Starting with decisions made in the area of transportation, manufacturing would be interested inthe mode of transportation selected for shipments. They would need to plan the appropriateproduction quantities and product packaging in order to best match up with the mode chosen.This allows for sound economics and logistical shipments to be made to support customer orders.


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Marketing is interested in the reliability of promised delivery dates to the customer. Transportationchoices can directly affect delivery performance if not planned carefully; and marketing would liketo know ahead of time if any issues in transportation capability could affect promises made tocustomers. Our friends over in finance would be interested in all of the cost of freight that can beincurred that could make the promised customer delivery a reality.


For the makeup of the distribution network, the number and types of roles played by warehouses,and/or distribution centers, determine the capability of finished goods storage available in amake-to-stock environment, or within the assemble-to-order approach of any subassemblyinventory storage. Marketing needs to know the availability of products to support their customerservice goals. Having enough inventory in the right place is very important. To finance the sizeand number of warehouses in the network project any needs [??] for capital cost planning andinvestment.


Distribution inventory characteristics show manufacturing how to plan its production to bestprovide for the customer requirements for finished goods inventory. Marketing needs to know thebest way to respond to any special customer request for special options or features. Financeneeds to keep score on the total cost of finished goods inventory investments to support thebusiness.


In material handling decisions, manufacturing has to plan to match its operations accordingly tolink up with the material handling capability in the distribution centers. Issues of weight andvolume are among the important dimension issues to match up with the capabilities of thedistribution network. Marketing has a need for speed, delivery speed that is. The choice ofmanufacturing handling capability is important to the response rate necessary to make things

happen in time to support customer demands. Finance again needs to be kept updated of theimpact in the cost of operations.


With the last system characteristic of packaging, manufacturing is concerned with requirements ofhow to prepare our customer shipments in regards to package size, and on any nesting andpalletizing needs. Marketing wants to be sure to supply adequate protection for the goods to bedelivered undamaged. The product needs to be shipped with the correct identification anddestination information to be sure that the right product gets to the right customer location asordered, and just as important, as promised. Finance needs to know the effect on the capital costof facilities and operations required to support any special packaging to support the business.


So in summary, we can see how decisions made in the set-up and operation of a distributionsystem need to be communicated throughout the company, especially to the key players in theoperations management group. The timely and integrated flows of information and the resultantsupport activities are very important parts of a successful distribution and logistics operation forany company.


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Slide 70: Physical Distribution System: Summary

So remember all weve talked about. The next time you drive to work or go on a vacation orbusiness trip, just by looking around you, you will see many systems of transportation hard atwork. It will give you an appreciation for the vision of your customer and the delivery performanceof the network that delivered your car, your clothing, your home, and that serves your local

community.

Thank you for your attention, and I wish you safe and happy travels.

Additional Distribution Approaches

There are several important topics regarding distribution systems that have evolved since thisexpert on demand course was originally produced. Some of them are based on approaches thatwere first, or primarily used production operations. Five of those topics are:

Push-Pull supply chain Buffers in the supply chain Reverse logistics Total cost concept Global distribution complexities

Each of those topics will be addressed briefly.

Push-Pull Supply Chain

The presentation addressed both push and pull distribution systems, but as supply chainmanagement has evolved, the concept of a supply chain that manages the distribution of goodspartially in a push mode and partially in a pull mode has evolved. This is referred to as a push-pullsupply chain. The point at which pull systems are replaced by pull systems is referred to as the

push-pull boundary. Typically the supply chain push systems are used for processing stepsclosest to the raw materials and the supply chain pull systems are used for processing stepsclosest to the end customer. A trading partner in either the push or pull zones can choose to useeither push or pull systems for its internal planning and control.

Buffers in the Supply Chain

As stated in an earlier course, inventory and time can be used to buffer operations and elementsof the supply chain that operate at different paces or to keep the constraint on the systemoperating when there is an upstream disruption. Determining where and how much inventory willbe maintained in the supply chain is a very important element of the design of a synchronizedsupply chain. Risk pooling is one approach to manage the supply chain inventory buffers whendemand is highly variable.

Reverse Logistics

Reverse logistics deals with the flow of goods and material from the point of use up the supplychain and ultimately the disposition of those goods and materials. Reverse logistics applies notonly to upstream flow of the product, but also to containers, packaging and other materials usedin the production, storage, and transportation of the raw materials, intermediate products, and thefinished goods. The reverse logic for product includes packaging and support materials as well asthe product itself. Reverse logistics systems support the reduction of waste, the drive towards


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sustainability, and product life cycle management. Industry segments in which products areoverhauled, rebuilt or remanufactured typically have fairly extensive reverse logistics systems, butthey are not the only industries for which reverse logistics processes are important. The followingtable provides examples of other situations for which reverse logistics solutions are important.

Situation Reverse Logistics Solution

An electronics manufacturer ships a largevolume of components and assemblies amongits 25 plants spread around the world.

The company requires that all containers used inthe plants and for shipping goods among theplants be reusable. The containers can typicallybe nested or flattened and the total amount ofpackaging used was reduced. The receiving planttypically returns the containers to the plant oforigin, but may also use the internally or to shipgoods to other plants.

Laser printers and copiers use toner which iscontained in a fairly complex assembly.

The printer and copier manufacturer reduceswaste and saves money by: 1. Designs thepackaging for replacement cartridges so that theempty cartridge can be packed in them andreturned. 2. Contracts with a package deliveryservice for the transport of the empty cartridgesto a facility that cleans and refills the cartridges.3. The cartridges are cleaned and refilled. Thetypical cartridge can be used six times before it isdisposed of.

Smoke detectors contain small amounts ofradioactive material and one region in which theyare sold required that the radioactive material beremoved before the product is disposed of.

The smoke detector manufacturer provides asingle point in the region to which the end usercan return the smoke detectors. It contracts witha third party to disassemble the smoke detectorsand to properly dispose of all materials.

Total Cost Concept

Distribution choices and decisions can be made with a focus on one cost element, such astransportation or warehousing, or it can be made considering all of the cost elements. The totalcost concept is a formalization of the idea that it is more appropriate to favor the option that hasthe lowest total logistics cost whenever multiple options provide equal service level. It isimportant to agree upon a measure of customer service that will be used when comparing theoptions. Consider the following example.

An agriculture cooperative began exporting dried fruit to a neighboring country several yeas agousing a distributor in that country. The distributor receives cases of fruits on pallets, breaks thepallets down into individual cases and delivers the cases of fruit to retailers. The volume of saleshas grown to the point that the cooperative is considering establishing two warehouses in thatcountry because the warehouses can be leased for one-half the amount that the distributor

charges.

The cooperative is only considering one element of the logistics costs of getting the fruitdistributed when comparing the lease of the two warehouses with the distributors fee. Thedecision might be very different when other logistics system costs are included. Those costswould typically include:

personnel to operate the two warehouses including any additional management transportation of the fruit from the warehouse to the customers


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financial system changes that may be required to operate in both countries policy changes required to operate in both countries

Global Distribution Complexities

The distribution system and processes typically become more complicated when goods are

delivered and services are performed globally. These complications frequently add time andsteps to the distribution and settlement processes.

The complexities of doing business increase as a company or a supply chain distributes itsproducts, services, or bundle of products and services further from their point of origin. Anincrease in the distance between the point of origin and point of consumption typically means thatthe time to move the goods between those points and level of inventory in the distribution systemincrease. It may also mean that multiple:

time zones are crossed and communications will be more inconvenient or difficult cultures and languages may be involved in the distribution and use of the products and

services currencies and measures may be used legal systems will have to be considered

In addition, the company or supply chain must comply with export and import regulations and mayhave to pay duties, tariffs, or taxes. Legal compliance may include preparing additionaldocumentation and completing additional paperwork both before exporting and before the goodsare allowed in the destination country or region.

There are also additional risks due to the distance covered and the time between the agreementto ship the goods and payment by the customer. These risks include:

a significant change in the exchange rate between the currencies of the two countries damage to or loss of the goods while in transit

natural or human-caused disaster occurring change in government and policies in the destination county

Steps that are added in the distribution processes when exporting from one country to anotherinclude:

Obtaining permission to export the goods to the specific country Obtaining permission to import the goods into the specific country Obtaining assistance from a third party such as a logistics service provider or a customs

broker Arranging for financing in advance of shipping the goods Arranging for air, sea, or pipeline transport of the goods

Clearing customs at the point of export and the point of import

Improvements in transportation, communications, and information processing technology andglobal standards can alleviate some of the complexities associated with global distribution.Examples of technologies that have reduced these complexities are:

International standards for ocean shipping containers and international commerce termswhich are referred to as incoterms,


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The internet which enables communications between individuals in organizations aroundthe world and makes remote delivery of some services practical

Large bulk, container, and specialized ships that reduce the costs of shipping goodsaround the world

International banking systems improvements in currency exchange and money transfers

27 transcript physical distribution system - david jankowski

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