OPERATİONS & LOGİSTİCS MANAGEMENT İN AİR TRANSPORTATİON
PROFESSOR DAVİD GİLLEN (UNİVERSİTY OF BRİTİSH COLUMBİA ) &
PROFESSOR BENNY MANTİN (UNİVERSİTY OF WATERLOO)
Istanbul Technical University
Air Transportation Management
M.Sc. Program
Air Transportation Systems and Infrastructure
Strategic Planning
Module 11-12 : 14 June 2014
LOGİSTİCS
Learning Objectives
– Key components of logistics
• Order Processing, Inventory, Transportation, Sourcing,
Warehousing, Materials Handling, and Packaging, integrated
through a network of facilities (warehouses and distribution
centers)
– Logistics is integral to a firm’s strategy
– Keys to managing logistics costs
• Inventory management
• Transportation management
– Supply Chain Flexibility and Synchronization
2
WHAT İS LOGİSTİCS?
• Logistics is the design and administration of systems
to control movement and spatial positioning of factor
inputs (raw materials, labor, capital, energy) workin-process, and finished inventories at the lowest
total cost.
•
Our focus will be on inventory management and transportation
management
THE FİVE FUNCTİONS OF LOGİSTİCAL WORK ARE
İNTERRELATED
WHAT DO WE KNOW ABOUT TURKEY
•
•
•
•
•
•
•
•
•
•
81 provinces
Bordering countries: Armenia, Azerbaijan, Bulgaria, Georgia, Greece, Iran, Iraq,
Syria
Population (January 2013) 74.6 million (18th largest in the world)
Urbanization: about 72 %
Age structure: 0–14 years (26.0%); 15–64 years: (67.9%); 65 and above (6.1%)
Nominal GDP (2012) US$790.5b
GDP per capita (US$ current prices) (2012) - US$10,595.2
GDP Composition: Agriculture (9.1%); Industry (27.9%); Services (63.0%)
Public debt: 40.4 % of GDP
Labor force (2012): 26.5 million
5
GEOGRAPHİC
STRENGTH
6
INTERNATİONAL FREİGHT-MODAL SPLİT
7
GROWTH İN LOGİSTİCS ACTİVİTİES
8
CARE İN COMPARİNG LOGİSTİCS COSTS
9
10
U.S. LOGİSTİCS COST,
1980-2010 İN FİVE YEAR İNTERVALS ($B)
Year
Nominal
GDP ($T)
Inventory
Cost
Transportation
Cost
Administrative
Cost
Total
Logistics
Cost
Logistics
% of GDP
1980
2.80
220
214
17
451
16.1
1985
4.22
227
274
20
521
12.3
1990
5.80
283
351
25
659
11.4
1995
7.40
302
441
30
773
10.4
2000
9.82
374
594
39
1007
10.3
2005
12.43
395
739
46
1180
9.5
2010
14.60
396
769
47
1212
8.3
THE COST OF LOGİSTİCS
LOGİSTİCS COSTS CANADA-U.S. COMPARİSON
13
LOGİSTİCS WİLL CONTİNUE İTS RENAİSSANCE İN THE FUTURE
• Information technologies will automate many of the
traditionally manual logistical functions:
– Automated port and rail operations
– RFID tagging of materials
– Advanced technologies for warehousing and inventory
operations
• Removal of trade barriers will continue to expand global trade
and logistics
• Outsourcing versus near-shoring
– Implications for airlines?
LOGİSTİCAL VALUE PROPOSİTİON-MANUFACTURİNG &
SERVİCE INDUSTRİES
• Logistical value proposition consists of a commitment to
key customer expectations and requirements at a minimum
cost
• The two elements of this value proposition are Service and
Cost Minimization
– Firms must make appropriate tradeoffs between service and cost
for each of their key customers
SERVİCE BENEFİTS ARE CREATED BY LOGİSTİCAL
PERFORMANCE İN 3 AREAS
• Availability involves having inventory to consistently meet
customer material or product requirements
• Operational performance deals with the time required to
deliver a customer’s order
– Key metrics for this area involve delivery speed and consistency
• Service reliability involves the quality attributes of logistics
– Key to quality is accurate measurement of availability and operational
performance over time
COST MİNİMİZATİON USİNG THE
TOTAL COST LOGİSTİCS MODEL
Traditional Cost Logistics Model
Total Cost Logistics Model
• Focused on achieving the lowest
possible cost for each individual
function of logistics
• Focused on achieving the lowest
total cost across each function of
logistics
• A cost decision in one function
should consider impact to costs of
all other logistics functions
– For example, Transport the
material the cheapest way
possible
• Expected lowest cost based on
decisions that were cheapest for
individual functions
• Ignored the impact of cost
decisions across logistics
functions
– For example, Transporting
material the cheapest way is
slower than other choices. This
requires an increase in storage
cost to hold the material longer
– Would it still be a lower cost to
use the cheapest mode of
transport?
DİFFERENT PERSPECTİVES ON COST MİNİMİZATİON
Traditional Cost Logistics Model
Total Cost Logistics Model
Minimize order processing cost
+
Minimize inventory cost
+
Minimize transportation cost
+
Minimize warehousing, materials
handling and packaging cost
+
Minimize facility cost
__________________________
Lowest logistics cost
Minimize (order processing +
inventory + transportation +
warehousing, materials handling
and packaging + facility) cost
_________________________
Lowest total logistics cost
FRAMEWORK: TOTAL LOGİSTİCS COST FUNCTİON
19
COMPONENTS OF TLC
TLC (Q, r: T, ST) = RDi + (UCTDi/365) + (SDi/Q) + (QCI/2) + rIC + K(Di/Q) N(Z)S1
where:
TLC = total logistics cost
R = Transportation Rate per Unit between Origin and Destination
D = Annual Demand for some good ‘i’
U = Carrying Cost of In-transit Inventory
C = Value per Unit
T = Transit Time of Transportation Alternative
S = Fixed Ordering Cost per Order
Q = Order Quantity
I = Carrying Cost of Warehoused Inventory
r = Safety Stock
K = Stockout Cost per Unit
N(Z) = Unit Loss Integral
S1 = Standard Deviation of Demand During Transit Time
ST = Standard Deviation of Demand During Lead Time
20
HOW THESE COSTS ARE DİSTRİBUTED
21
Cost, in dollars
Cost Conflicts: Speed versus Service Reliability
Total cost
Cost of
transportation
service
Inventory cost
(includes
storage and
intransit
Rail
Truck
Air
Transportation service
(greater speed and dependability)
22
OTHER COST CONFLİCTS/TRADEOFFS
Revenue
Transportation,
order processing,
and inventory
costs
Revenue
Total costs
Cost
Cost
Total costs
Inventory
costs
Lost sales cost
Transportation costs
0
0
Improved customer service
100%
(a) Setting the customer service level
0
0
Increasing number of stocking points
(b) Determining the number of warehouses in a logistics
system
Cost
Total costs
Cost
Total costs
Inventory
carrying
costs
Inventory
carryng cost
Lost sales cost
0
0
Production costs
0
Average inventory level
(c) Setting safety stock levels
Product run length and product sequencing
altenatives
(d) Setting the sequence of production runs for
multiple products
23
TRANSPORTATİON
• Transportation is the operational area that geographically
moves and positions inventory
• There are three basic ways to satisfy transportation requirements
– Operate a private fleet of equipment
– Contract with dedicated transport specialists
– Engage carriers that provide different transportation services as
needed on a per shipment basis
MEASURİNG COSTS
Cost Structure
• Costs vary with factor prices,
productivity & output
• Scale economies
• Scope economies
• Utilization economies
• Density economies
• Agglomeration economies
• Value of time/reliability
Accounting Costs
• Variable costs
– Material
– Manufacturing/production
– shipping
• Fixed costs
– Contracts
– Capital
– Manufacturing/production
• Ownership
–
–
–
–
Purchase
Acquisition
Usage
salvage
25
• Opportunity cost-forgone sales
PRİCİNG
•
•
•
•
•
•
•
Concept to ‘Willingness to Pay’
Unit cost or average cost pricing
Cost plus pricing
Incremental cost pricing
Differential Pricing (special case of Ramsey pricing)
Non-linear pricing and two-part tariffs
Bundling and unbundling
26
THE SCOPE OF İNTEGRATED LOGİSTİCAL OPERATİONS
LOGİSTİCAL İNTEGRATİON REQUİRES ACHİEVİNG SİX
OBJECTİVES SİMULTANEOUSLY
 Responsiveness
 Variance reduction
 Inventory reduction
 Shipment consolidation
 Quality
 Life cycle support
EXAMPLE SİTUATİONS FOR FLEXİBLE LOGİSTİCS
STRUCTURE
• The customer-specified delivery facility might be near a
point of equal logistics cost or equal delivery time from
two different logistics facilities
• The size of a customer’s order creates improved logistical
efficiency if serviced through an alternative channel
arrangement
• Decision to use a selective inventory stocking strategy
• Agreements between firms to move selected shipments
outside the established echeloned or direct arrangements
SUPPLY CHAİN SYNCHRONİZATİON
• Supply chain
synchronization is the
operational integration of
multiple firms across a
supply chain
– Seeks to coordinate the flow
of materials, products and
information between supply
chain partners to reduce
duplication of effort
– Seeks to reengineer internal
operations of individual firms
to leverage overall supply
chain capability
THE LOGİSTİCS PERFORMANCE CYCLE İS THE BASİC UNİT
OF SUPPLY CHAİN DESİGN AND OPERATİONAL CONTROL
• The performance cycle represents elements of work
necessary to complete the logistics related to customer
accommodation, manufacturing or procurement
• A performance cycle consists of the following elements
– Nodes
– Links
– Inventory
• Base stock
• Safety stock
– Input and output requirements
PERFORMANCE CYCLE UNCERTAİNTY
• Major objective of logistics in all areas is to reduce
performance cycle uncertainty
• Operational variance is randomly introduced during the cycle
through
– The structure of the performance cycle itself
– Operating conditions
– The quality of logistical operations
TOTAL TİME TO COMPLETE THE CUSTOMER DELİVERY CYCLE İS
BASED ON EACH TASK WİTHİN THE CYCLE
Figure 2.8 Performance Cycle Uncertainty
INVENTORY MANAGEMENT
THE ECONOMİC ORDER QUANTİTY MODEL
34
Knowing what you've got,
Knowing what you need,
Knowing what you can live without –
That’s inventory control.
Frank Wheeler, Revolutionary
35
INVENTORY
• Definition: The stock of any item or resource used in an
organization
Raw Materials &
Component Parts
Replacement parts,
tools & supplies
Work-In-Process
Goods in transit to
warehouses or
customers
Finished Products
36
IMPORTANCE OF INVENTORY:2005 FİSCAL YEAR
Wall Mart
(Billion $)
Boeing
(Billion $)
General
Motors
(Billion $)
Dell
(Billion $)
Cash & ShortTerm
Investments
6.4
5.9
50.4
9.0
Account
Receivable
2.6
5.2
180.7
5.4
Inventories
32.2 73.5%
7.7
35%
30.1
9.6%
0.57
Other Current
Assets
2.5
Total Current
Assets
43.8
Other Assets
94.3
38.1
163.1
5.4
Total Assets
138.2
60
476.1
34.1
2.8
100%
22
51.7
100%
312.9
3.3%
2.6
100%
17.7
100%
37
IMPORTANCE OF INVENTORY MANAGEMENT
• ... by 1990 Wal-Mart was already winning an important
technological war that other discounters did not seem to
know was on. “Wal-Mart has the most advanced inventory
technology in the business and they have invested billions
in it”. (New York Times, Nov. 95)
• Kmart increased its inventories to $8.3 billions in the third
quarter of 2001 with an expectation of more shoppers.
“But higher sales never materialized, leading to a
disastrous holiday selling season.” Kmart filed for
bankruptcy on Jan. 22. (Business Week, Mar. 02)
38
IMPORTANCE OF INVENTORY MANAGEMENT
MORE RECENT NEWS
• SanDisk suspends production as inventories pile up for
makers of computers, cell phones, and TVs … (Business Week, Dec. 08)
• Natural-gas futures soared 15% Thursday after U.S. inventory
data slightly eased concerns about the possibility of a storage
glut (Wall Street Journal, Sept. 11, 09)
• Fruit growers were blessed with excellent weather this year.
But that hasn’t translated into a great year for the province’s
cherry and blueberry growers, as a bumper crop has flooded
the market and pushed down prices. (The Vancouver Sun, Aug. 09)
• The Ford assembly plant in Oakville and 3,000 workers will
remain idle this week because of a parts shortage from a
supplier in India. (Toronto Star, Oct. 27, 09)
39
WHY SHOULD YOU HOLD İNVENTORY?
Predictable Variability
Seasonal Inventories
What are some of the inventories
Safety Stock
Unpredictable Variability
that you have?
Economies of Scale
Cycle Stock
Transportation
Flowhave these
Whytimes
do /you
Pipeline Inventories
times
inventories?
Other: Strategic /
Speculative / etc.
40
WHY SHOULD YOU NOT HOLD İNVENTORY?
• Inventory increases certain costs such as
–
–
–
–
–
Carrying cost
Cost of customer responsiveness
Cost of diluted return on investment
Large-lot quality cost
Cost of production problems, etc.
• The Sea of Inventory
Inventory hides problems …
41
REDUCİNG WASTE
THE SEA OF INVENTORY
42
HOW MUCH İNVENTORY SHOULD YOU HOLD?
• Trade-off #1
Inventory ordering costs
(Economies of scale)
Inventory holding costs
• Trade-off #2
Cost of running out
Cost of having excess
inventory
43
INVENTORY COSTS
Ordering/Setup
Costs
(Fixed Costs)
• Fixed transportation Cost
• Order Processing Cost
Holding Cost
(Carrying Cost)
• Costs for storage, handling, insurance,
working capital tied-up, etc
Shortage Cost
(Opportunity Cost)
• Lost sales, etc
44
INVENTORY CLASSİFİCATİON
A classification to help manage inventories better
Type A Items
• Small group of high volume items
• Accounts for 15% by the number of parts, and 70-80% of
the total sales of all parts
Type B Items
• Accounts for 35% of the number of parts, and 10-15% of
the total value
Type C Items
• Accounts for 50% of the total number of parts, and for 5-10% of the
total value
(The above percentages are approximate)
45
MOTİVATİON: ATM
• How much cash do you take out from ATM?
• Why not more or less?
46
ECONOMİC ORDER QUANTİTY (EOQ)
• The Economic Order Quantity (EOQ) balances
Inventory ordering costs
(Economies of scale)
Inventory holding costs
• Assumptions
– Known annual demand, constant demand rate
– No uncertainty
47
NOTATİON
D
Annual Demand Rate
Q
Lot or batch size
S
Set-up cost per lot/batch, or average cost of
processing/placing an order
C
Unit cost
H
Annual holding and storage cost per unit of
average inventory
i
Percent carrying cost (e.g., “interest” rate)
Usually, H = iC.
48
CYCLE STOCKS: TRADEOFF BETWEEN FİXED COSTS
AND HOLDİNG COSTS
Profile of Inventory Level over Time
Q
Demand
rate
Quantity
on hand
Receive
order
Receive
order
Receive
order
Time
49
Example: “The South Face”
• Some facts about The South Face retail shop
D
Annual Demand Rate
1200 jackets/year
S
Set-up cost per lot/batch, or
average cost of
processing/placing an order
$2,000
C
Unit cost
$200 per jacket
i
Percent carrying cost (e.g.,
interest rate)
25%
Thus, H = iC = (0.25)*($200) = $50 per unit-year
Warehouse
Retailer
Customers
• What order size (Q) would you recommend for
The South Face?
50
THE SOUTH
FACEInventory Profile:
Inventory
D
Annual Demand
Q
Lot or batch size
(Number of jackets per
replenishment order)
S
Order or setup cost
H
Annual Holding cost
# of jackets in
inventory over time.
Q
Q/2
D = Demand rate
Time t
Number of orders per year
D/Q
???
Average inventory
???
Q/2
Annual Setup Cost
(D/Q) * S
Annual Holding Cost
(Q/2) * H
Annual Total Cost
Annual Setup Cost + Holding Cost
51
THE SOUTH FACE: COST
Per Order/Batch Batches per Year
Q
D/Q
Annual
Setup Cost
Annual
Holding Cost
Annual
Total Cost
48000
1250
49250
EOQ Model: Cost
24.0
100
12.0
24000
2500
26500
150
8.0
16000
3750
19750
200
6.0
12000
5000
17000
250
4.8
9600
6250
15850
260
4.6
9231
6500
15731
270
4.4
8889
6750
15639
280
4.3
8571
7000
15571
15000
290
4.1
8276
7250
15526
300
4.0
8000
7500
15500
310
3.9
7742
7750
15492
320
3.8
7500
8000
15500
330
3.6
7273
8250
15523
340
5000
3.5
7059
8500
15559
350
3.4
6857
8750
15607
400
3.0
6000
10000
16000
0
500
2.4
4800
12500
17300
15000
19000
17500
20929
25000
20000
10000
600
700
110
130
150
170
190
210
230
250
270
290
310
330
350
370
390
410
430
450
470
490
510
530
550
570
590
610
630
650
670
690
710
730
750
770
790
810
830
850
870
890
910
930
950
970
990
50
30000
2.0
1.7
4000
Setup Cost
3429
Holding Cost
Total Cost
52
Annual Cost
COST MİNİMİZATİON GOAL
Q
D
TC  H  S
2
Q
Lowest
Annual
Cost
Total Cost
Q
H
2
Inventory holding
cost
Ordering Costs
QO (optimal order quantity)
D
S
Q
Order Quantity (Q)
53
ECONOMİC ORDER QUANTİTY
Q
D
TotalCost TC (Q)  H  S
2
Q
QOPT
D
Annual Demand Rate
S
Order or Setup Cost
H
Annual Holding Cost
2SD

H
54
ECONOMİC ORDER QUANTİTY:THE SOUTH FACE
QOPT
2SD

H
D
1200 jackets/year
S
$2,000
H
$50 per unit-year
• What is the optimal order quantity?
QOPT 
2SD
2(2000 )(1200 )

 309 .8
H
50
• How many times would you place orders per year, i.e.,
D
1200
frequency of ordering?
QOPT

309 .8
 3.8
• What is the time duration between successive orders (this is
also called the cycle time or reorder interval)?
QOPT 309 .8

 0.258
D
1200
55
EOQ AND SENSİTİVİTY ANALYSİS
• What happens to the cost and optimal
quantity as the parameters change?
As ….
QOPT
2SD

H
“Cost”
EOQ
Frequency
S↑
↑
↑
↓
H↑
↑
↓
↑
D↑
↑
↑
↑
56
MANAGERİAL IMPLİCATİONS OF EOQ
EOQ Model: Cost
• Cost curve is almost “flat” near the optimal point
30000
– Use the EOQ formula, but do not worry about making minor
25000
adjustment to get a number that is “more realistic” for your
organization
• The flatness of the cost curve implies that the EOQ figure is
“robust”
15000
20000
– Estimating holding cost is usually difficult
– The EOQ formula guarantees that the “optimal” order quantity is not
10000
very sensitive to errors in estimation
5000
110
130
150
170
190
210
230
250
270
290
310
330
350
370
390
410
430
450
470
490
510
530
550
570
590
610
630
650
670
690
710
730
750
770
790
810
830
850
870
890
910
930
950
970
990
0
Setup Cost
Holding Cost
Total Cost
57
MANAGERİAL CHALLENGES
HOW TO ESTİMATE COSTS?
Ordering/Setup Costs (Fixed Costs): S
• Estimate costs incurred during the start of each new order
• Do not count “sunk” costs and fixed overhead
Unit Cost: C
• Estimate variable cost incurred in the production of each additional unit
Holding or Carrying Costs (as % of unit cost): i
• Estimate opportunity cost of working capital
• Estimate cost of storage, handling, etc
58
MANAGERİAL CHALLENGES
HOW TO REDUCE THE EOQ İNVENTORY?
• Reduce the set-up cost
• Re-evaluate sources of fixed costs, and
find ways to reduce, spread-out, or
eliminate these costs
QOPT
2SD

H
59
APPENDİX MATERİAL
60
CONTENTS
I. INTEGRATED LOGISTICS MANAGEMENT
Ia. The Growth of Logistics and Its Role in the Economy
A. What is Logistics?
B. History of Logistics
C. Role of Logistics in the Economy
D. Why Logistics is gaining in importance
Ib. The Integrated Logistics Management Concept
A. Definition
B. Logistics is concerned with questions about inventories
D. Strategic profit analysis
Ic. Logistics As An Element of Corporate Strategy
A. A Few Logistics Facts
B. Corporate Leverage From Logisitics
C. Product Strategy: Innovation Phase
D. Product Strategy: Cost Leadership Phase
E. Product Line (Customer Service) Strategies
CONTENTS
Id. Distribution Channels
A. Channels: Definition, Types, Functions
B. Integrated Channel Concept
C. Some Logistical Implications
Ie. Customer Service
A. Defining Customer Service
B. Measuring Customer Service
C. Relationship of Customer Service to Marketing
D. Optimizing Customer Service
E. Stockouts
F. Stockout Costs
G. ABC Analysis
If. International Logistics
A. Importance of International Logistics
B. International Strategies
C. Some Additional Considerations
CONTENTS
II. LOGISTICS SYSTEM ELEMENTS
IIa. Inventory Management - Introduction
A. Financial Impact
B. Reasons for Holding Inventory
C. Types of Inventory
D. Example of Financial Impact
IIb. Inventory - Carrying Costs
A. General
B. Capital Costs
C. Other Costs
D. Annual Inventory Costs
E. Valuing Inventory (i.e. Value on Balance Sheet)
F. Why Inventory Costs are Often Misstated
IIc. Inventory - Management Under Certainty (EOQ)
A. Basic Inventory Cycle
B. Ordering Costs
C. Effect of Decrease in Cycle Time
D. Total Costs
E. Optimum Quantity to Order
F. Quantity Discounts
G. Other Cases
CONTENTS
IId. Inventory - Uncertainty
A. Calculating Safety Stocks
B. Example of Safety Stock Calculations
C. The Flip Side: Reducing Cycle Variability for Your Customers
D. Appendix Derivation of Formula for σc
IIe. Inventory - Control
A. Stock Control Methods
B. Inventory System Design
C. Fixed Order Point
D. Fixed Order Interval
E. Transport Choice Case
F.
Items covered in readings, not in lectures
G.
Postscript: Inventory, Production, Marketing, Finance
IIf. International Shipping
A. Importance
B.
Technology
C.
Demand - Shippers (Two main market segments)
D.
Supply - Shipping Carriers/Owners
E.
Freight Rates
CONTENTS
IIg. Transport - Modes and Service Characteristics
A. Mode Characteristics
B. Costs
C. Rate-Service Tradeoff
IIh. Transportation: Consolidation
A. Types of Consolidators
B. Reasons for Consolidation
C. Types of Consolidation
D. Typical LTL Routing
E. Containers
IIi. Transportation: Traffic Management
A. Traffic Management Functions
B. Deregulation
C. Negotiations
D. Private Versus Public Carriage
CONTENTS
IIj. Warehousing
A. Functions of Warehousing
B. Types of Warehouses
C. Optimal Number of Warehouses
D. Optimal Size of Warehouse
E. Stock Location Methods
F. Order Picking Design
G. Public versus Private Warehouse Choice
H. A Note on Warehouse Costs
IIk. Facility Location
A. Two Types of Locational Decisions
B. Transport Cost Models
C. Other Locational Decisions
D. Tactical Location Considerations
CONTENTS
IIl. Packaging
A. The Two Functions of Packaging
B.
Unitization
C.
Packaging Materials
D. Some Packaging Problems/Solutions
E. Where/When Should Packaging Be Added?
IIm. Purchasing
A. Introduction
B. Forward Buying
C. Other Aspects of Purchasing
IIn. Materials Management
A. Introduction
B. Materials Requirement Planning (MRP)
C. Manufacturing Resource Planning (MRP II)
CONTENTS
IIo. Total Quality Management
A. Introduction
B. TQM versus Traditional Approach
C. Employee motivation
D. Examples
IIp. Just-in-Time Systems
A. Just-In-Time-System
B. Manufacturing Resource Productivity (MRP III)
IIq. Production Systems
IIr. Distribution Requirements Planning
A. Distribution Requirements Planning (DRP)
IIs. Order Processing
A. The Order Cycle
B. The Order Processing System
C. Impact on Logistics
D. Implications of Advanced Order Processing Systems
INVENTORY TURNS 2007
CANADA
69