IELM2410 Logistics & Freight

Transportation Operations
Introduction
History of the GAP Inc

 Doris and Don Fisher opened the first Gap store in 1969.
The reason was simple. Don couldn’t find a pair of jeans
that fit.

 One day, Don decided to buy a handful of jeans and

slacks from the salesman. The product arrived from a
distribution center. When he tried on the pants, none fit.
He needed a 34-waist, 31-length. All the pants had 30-
inch lengths.

 So he asked if the salesman would exchange the pants

for the correct sizes. He hesitated, saying it would be a
paperwork nightmare. But the salesman suggested
exchanging the pants at a city department store.
GAP traditional merchandise
GAP new merchandise
GAP Success story

 Fit customer demand for variance in sizes / colors

 Right market target – in line with Baby Boomer American Culture
 Overseas production – sourcing vs locals (lower cost)
 Young and Casual life style - Culture
 8 seasons a years. New items in store every 2 weeks / change display
 Attract new buys
 Yield Management to maximize profit
Gap Supply Chain

Source:
http://
www.leegardens.com.hk/shopping/HP/107/GAP?lang=zh-HK
Gap Supply Chain

Factories deliver
Ocean liners
boxes to ocean
ship to US port
GAP Supply consolidator Distribution
(says West
Chain HQ in HK and put on the center delivery Store put on
Garment coast and East
(controller the container (one to stores shelves for
Factory in China Coast) – enter a
buying and container may (across the customers
distribution
logistics) have goods countries)
center for
from 2 or more
sorting
factories)
Knock off and Excess Handling
Retailers Challenges

 Objective : Sell everything in store and maximize profit

 Challenges :
 Long lead time from suppliers (production cycle, and transportation lead
time) , 6 – 9 months.
 Insight on market trend
 Forecast on future demand (12 – 18 months)
 Optimal Ordering Quantity
 Bullwhip Effect – amplify demand variance

 MAXIMISE Sell and OPTIMIZE order quantity

Modern supply chain - Banana

 The banana supply chain could be broken into the following key
processes:
 Growing
 Packing
 Transporting and Receiving
 Loading at port
 Unloading at port
 Ripening
 Distribution

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Complexity of modern supply chains
- Banana
 GROWER
 production
 harvesting
 despatching
 record keeping of appropriate information about the
field and products sent to the packing station.

Picture source:
http://resources0.news.com.au/images/2011/09/25/1226145/
812968-110926-paul-johnston.jpg

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Complexity of modern supply chains
- Banana
 PACKER
 receives the bananas from the grower or another packer, packs them
into boxes, and may palletize them.
 despatches them to a third party (e.g. service provider) or the loading
port.
 keeps records of the origin of the products packed, labelling their
identification and how and where they were dispatched.

 Picture Sources:
 http://www.globalripening.com/photos.html

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Complexity of modern supply chains
- Banana
 TRANSPORT AND RECEIVING
 The transporter receives the bananas from the
packer.
 This may be loose boxes or pallets (boxes that were
palletized).
 He transports the boxes or pallets from the packer
to the port or other 3rd party service provider.

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Complexity of modern supply chains
- Banana
 RIPENING
 The ripening company is responsible for receiving the pallets, storing them
in ripening chambers, repacking, order picking and despatching.

15
Picture Source: http://
s1.hubimg.com/u/6954574_f260.jpg
Complexity of modern supply chains
- Banana
 DISTRIBUTION
 The retail distribution center receives pallets from the ripening company
 stores or cross-docks them for despatch to the retail points of sale.

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Picture Source: http://www.shpratt.com/about/
Complexity of modern supply chains
- Banana
 LOADING PORT
 The port facility receives transport storage units, which are sent either to
storage, palletizing, labelling, quality control and/or to the ship.
 The port facility is responsible for keeping records about the handling
process.

 UNLOADING PORT
 The port facility is responsible for unloading the ship and allotting the
pallets and/or containers to storage, road and/or rail transport vehicles.

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Retailers Challenges

 Objective : Sell everything in store and maximize profit

 Challenges :
 Long lead time from suppliers (production cycle, and transportation lead
time) , 6 – 9 months.
 Insight on market trend
 Forecast on future demand (12 – 18 months)
 Optimal Ordering Quantity
 Bullwhip Effect – amplify demand variance

 MAXIMISE Sell and OPTIMIZE order quantity

 Reduce COGS (cost of goods sold)
Strategy in Maximize profit – yield
management / Revenue
Management
Sell at the price that customer willing to pay
 Traditional thought is to set the price that maximize total profit
 Ie. Total revenue - cost of goods

 Traditional practice - Achieve profit maximization through Bargaining

 Time Consuming
 IELM approach - Strategic pricing, supply and discount strategy.
Yield Management
Traditional Supply/Demand Equilibrium

Consumer surplus
= the difference between the
maximum price a consumer is willing
to pay and the actual price they do
pay.
Price
Price
Revenue / Price paid by
customer

Shaped Area Demand: willingness to

= # of Quantity sold * selling pay
price

Quantity
 Yield Management
Market Segmentation
Consumer surplus

Segment price

Segment price

Price
Segment price

Demand: willingness to
pay
Revenue

Quantity
GAP strategy on yield management

 New Items introduction every 2 weeks

 Change display
 Selected items on discount vs off seasons sales
 Maximize sales in before end of season

 EVERYTHING OFF THE SHELVES

Yield Management

 Yield management (sometime called revenue

management) involves strategic control of inventory to sell
it to the right customer at the right time for the right
price.

 Robert Crandall, former Chairman and CEO of American

Airlines, gave yield management its name and has called it
 "the single most important technical development in
transportation management since we entered deregulation."
Source: http://en.wikipedia.org/wiki/Yield_management
Yield Management Applications

 Industry application:
1. Airlines
2. Hotel
3. Car rental
4. …

http://infographiclist.com/2014/01/05/
Retailers Challenges

 Objective : Sell everything in store and maximize profit

 Challenges :
 Long lead time from suppliers (production cycle, and transportation lead
time) , 6 – 9 months.
 Insight on market trend
 Forecast on future demand (12 – 18 months)
 Optimal Ordering Quantity
 Bullwhip Effect – amplify demand variance

 MAXIMISE Sell and OPTIMIZE order quantity

 Reduce COGS (cost of goods sold)
Bullwhip Effect

 A trend of larger and larger swings in inventory in response to

changes in customer demand, as one looks at firms further back in
the supply chain for a product.

The final customer places an order (whip) and order fluctuations build up
upstream the supply chain.
Cause of Bullwhip Effect

 Because customer demand is rarely perfectly stable, businesses

must forecast demand to properly position inventory and other
resources.
 Forecasts are based on statistics, and they are rarely perfectly
accurate. Because forecast errors are given, companies often
carry an inventory buffer called "safety stock".
 Moving up the supply chain from end-consumer to raw materials
supplier, each supply chain participant has greater observed
variation in demand and thus greater need for safety stock.
 In periods of rising demand, down-stream participants increase orders.
 In periods of falling demand, orders fall or stop, thereby not reducing
inventory.
 The effect is that variations are amplified as one moves upstream in
the supply chain (further from the customer).
Zeit (in German) = time (in English)
Source: http://en.wikipedia.org/wiki/Bullwhip_effect
Strategy in ordering optimization

 Strategy to improve forecast and ordering accuracy

 Minimize Bullwhip amplification – Optimize DCs to Store distribution
network
 Inventory planning
 Avoid mis-match of supply and demand
 Daily/weekly on sales volume & inventory on-hand (REAL TIME)
 Improve demand forecast and planning
 Cut Ordering lead time – split orders
 Standardization vs customization ( colors, sizes, distribution)
 Direct-to-store
Strategy in Logistics Optimization

 Strategy to cut supply lead time

 Flow chart – process map
 Identify critical path – sequential process vs parallel process
 Explore alternative solutions
 Implementation and execution
 TQC
 6- sigma
 PMO


Gap Supply Chain

Factories deliver
Ocean liners
boxes to ocean
ship to US port
GAP Supply consolidator Distribution
(says West
Chain HQ in HK and put on the center delivery Store put on
Garment coast and East
(controller the container (one to stores shelves for
Factory in China Coast) – enter a
buying and container may (across the customers
distribution
logistics) have goods countries)
center for
from 2 or more
sorting
factories)

3 months production time

Final QC, Shipping, Inbound
packing, loading/unloadin 3 – 5 months to sell
sorting,
consolidation gCustoms storage, re-
2 - 3 weeks 4 – 6 weeks distribution
2 - 4 weeks
Strategy in supply Chain optimization
- Assorted pack and SDD shipment

 Clothes are packed in assorted sizes in carton boxes.

 Store address (bar code, RFID tag …etc) label on individual box
 Cross dock at DC with truckers loading boxes deliver to store

 Benefits
 Cut DC operation lead time.
 Reduce initial sorting and storage cost at DC
 Improve store operation efficiency ( no need to sort out difference sizes/color for
display)
 Drawback
 Increase production cost (excess or shortage)
 Impact on store to store stock transfer frequency
Trends in Logistics Industry

Cost Service

Physical Flow Information Flow

Internal External

Domestic Global
Logistics Management
 “ the process of planning, implementing, and controlling the efficient,
effective flow and storage of goods, services, and related information
from point of origin to point of consumption for the purpose of
conforming to customer requirements.”

[Council of Logistics Management]

Key concepts here :

- Implies a scientific approach, empirical study, data
gathering and analysis. Innovation and creativities
to process improvement.
- Implies application of technology to existing
process, either improve in efficiency, or a change in
paradigm.
Logistics Trade Off

 Increase in wastage on excess and knock off.

 Increase packing and distribution cost at the factory side.
 Factory challenges in meeting delivery schedule impacting the total
profit in the supply chain.

 Production vs Inventory vs
Distribution vs Time to Market
Trade off on Supply Chain cost

• DC operations
• Packaging at factory
• Airfreight vs ocean
freight
• Split shipments and
reduce warehouse
cost
Cost vs. Service

Traditional view: deliver to markets using the

cheapest possible way
• Lower cost = higher profit

Major decisions: how to organize orders and

shipments to lower the cost
• Using “operations research” techniques
Cost vs. Service

New view: generate more revenue using good logistics service,

e.g.,:
• Customers avoid stores that stock out often
• Shippers pay more to use couriers that provide online tracking services
• Prices of fashion/high-tech products drop over time, i.e., shorter time-to-market
= more revenue

E.g., 1-month reduction led to US$100 million gain by Samsung

over 3 years
• Time = value

Major decision: how to balance cost vs. service?

Cost vs. Service

Huge cost
Cost

Huge improvement in
service Small improvement in
service
Small cost

Service: % Population Covered

Physical vs. Information Flow

Component Final Customers

Suppliers Distribution
manufacturing assembly

Flow of items Flow of orders

Fl ow of i n forma t i on ?
Physical vs. Information Flow

Information flow is critical

Traditional order propagation

• Each party only knows partial information from immediate
downstream party
• Variability of orders increases upstream (bullwhip effect)
Information sharing among ALL parties
• Collaborative forecasting
• Electronic data interchange (EDI)

Incentives to share information