Chapter 2: Strategy & Planning

• Logistics Strategies.

• Logistics Decisions.

• 6 Fundamental Concepts:– Total Cost & Tradeoffs.– Consolidation & Economies of Scale.– Differentiation.– Mixed Strategy.– Postponement.– Standardization.

Strategies

Corporate Strategy:– Market share, Market position.– Growth, Profit, etc.

Logistics Strategy:– Maximize profit, Minimize cost.– Maximize return on investment.– Service/Quality.

• Strategic Decisions:– Design of logistics system (Chapters 4, 13, 14).– Top management involved.– Based on imprecise data and forecasts.

• Tactical & Operational Decisions:– Use of logistics system (Chapters 6-12).– Top management not involved.– Based on detailed data.

Logistics Decisions

Location

Inventory Transportation

Decision Areas

Where?, How many? What size?Allocation?

Strategy/Control system?How much?Where?

Which mode?Which carrier?Which route?Shipment size and frequency?

• Total Cost & Tradeoffs.

• Consolidation & Economies of Scale.

• Differentiation.

• Mixed Strategy.

• Postponement.

• Standardization.

6 Fundamental Concepts

1. Total Cost & Tradeoffs

• Minimize total costs.

• Look for tradeoffs.

Total cost

Cost for one activity

Cost for another activity

$

1. Total Cost & Tradeoffs

• Minimize total costs.

• Look for tradeoffs.

Total cost

Cost for one activity

Cost for another activity

Minimum total cost

$

2. Consolidation & Economies of Scale

• Larger amounts cost less per unit to move store, process, order, etc.

– Use larger vehicles and larger loads to reduce transportation cost.

– Purchase in larger quantities to get lower prices.

• But, must consider tradeoffs:– Larger orders and larger loads imply greater

inventory costs.

3. Differentiation

• Not all products and customers should be treated the same.

– Identify most important products & customers.

– Treat them better!

4. Mixed Strategy

• A mixture of transportation and inventory options is usually best.

– Use air, rail and truck transportation as appropriate.

– Use public and private warehousing as appropriate.

5. Postponement

• Delay finishing and shipping the product until it is ordered.

– Prevents unneeded transportation and inventory.

– Reduces obsolete inventory.

– Examples: Dell computer, paint sales.

6. Standardization

• Standard (interchangeable) parts and less product variety reduce costs.

– Interchangeable parts and modularity reduce inventory and transportation.

– Modularity and postponement can provide product variety.

Eli Whitney

• Born 1765.

• Graduated Yale University 1792.

• Moved to Savannah, GA with Yale alum

managing a plantation (tobacco and rice).

• Invented cotton gin (1793).

• Made cotton profitable.

Eli Whitney & the Cotton Gin

• Established New Haven (CT) plant to make

cotton gins.

• Developed machine tool industry &

standardization.

• Cotton gin made cotton profitable to grow and

encouraged slavery.

• Did not benefit Eli Whitney due to poor marketing plan and production difficulties.

Eli Whitney

• Converted New Haven plant to make guns for

U.S. Army.

– Standardized parts and machine tools allowed mass

production.

• Firm continued making guns for westward

expansion, War of 1812, Civil War, etc.