Chapter 7: Demand Management, Order Management, and Customer

Service
Demand management can be defined as “the creation across the supply chain and its markets of
a coordinated flow of demand.” A key component in demand management is demand (sales)
forecasting, which refers to an effort to project future demand. Without question, demand
forecasting is helpful in make-to-stock situations (when finished goods are produced prior to
receiving a customer order). However, demand forecasting can also be helpful in make-to-order
situations (when finished goods are produced after receiving a customer order).
The three basic types of forecasting models are (1) judgmental, (2) time series, and (3) cause
and effect. Judgmental forecasting involves using judgment or intuition and is preferred in
situations where there is limited or no historical data, such as with a new product introduction.
An underlying assumption of time series forecasting is that future demand is solely dependent
on past demand.
Cause-and-effect forecasting (also referred to as associative forecasting) assumes that one or
more factors are related to demand and that the relationship between cause and effect can be used
to estimate future demand.
Order management refers to management of the various activities associated with the order
cycle; the order cycle (which can also be referred to as the replenishment cycle or lead time) refers
to the time from when a customer places an order to when the goods are received.
Order processing refers to the time from when the seller receives an order until an appropriate
location (such as a warehouse) is authorized to fill the order.
Order picking and assembly is the next stage of the order management process, and it includes
all activities from when an appropriate location (such as a warehouse) is authorized to fill the order
until goods are loaded aboard an outbound carrier.
The final phase of the order cycle is order delivery, which refers to the time from when a
transportation carrier picks up the shipment until it is received by the customer.
Customer service will be defined as “the ability of logistics management to satisfy users in terms
of time, dependability, communication, and convenience. It has 4 dimensions of customer service:
time, dependability, communication, convenience,
Chapter 8: Inventory Management
Inventory refers to stocks of goods and materials that are maintained for many purposes, the most
common being to satisfy normal demand patterns.
Cycle, or base, stock refers to inventory that is needed to satisfy normal demand during the course
of an order cycle.
Safety, or buffer, stock refers to inventory that is held in addition to cycle stock to guard against
uncertainty in demand or lead time.
Pipeline, or in-transit, stock is inventory that is on route between various fixed facilities in a
logistics system such as a plant, warehouse, or store.
Speculative stock refers to inventory that is held for several reasons, including seasonal demand,
projected price increases, and potential shortages of product.
A prominent concern involves the costs associated with holding inventory, which are referred to
as inventory carrying (holding) costs.
Inventory shrinkage is another component of inventory carrying cost and refers to the fact that
more items are recorded entering than leaving warehousing or retailing facilities.

Ordering costs refer to those costs associated with ordering inventory, such as order costs and setup
costs.
Stockout costs, or estimating the costs or penalties for a stockout, involve an understanding of a
customer’s reaction to a company being out of stock when a customer wants to buy an item.
The typical inventory order size problem, referred to as the economic order quantity (EOQ), deals
with calculating the proper order size with respect to two costs: the costs of carrying the inventory
and the costs of ordering the inventory. The EOQ determines the point at which the sum of carrying
costs and ordering costs are minimized, or the point at which carrying costs equal ordering costs.
More specifically, “The economic order quantity (EOQ) is the quantity of product that will
minimize your total costs of inventory per piece.
ABC analysis of inventory, which can be applied in several different ways, recognizes that
inventories are not of equal value to a firm and that, as a result, all inventory should not be managed
in the same way.
Thus, in terms of item importance, ABC might be operationalized as follows: A items could be the
ones with the highest criticality, B items could be those with moderate criticality, and C items
could have low criticality. Similar approaches could be applied to other measures of ABC status
such as sales volume in dollars and item profitability.
Some companies have added a fourth category, D, to ABC analysis. D stands for either “dogs” or
dead inventory (dead stock), which refers to product for which there are no sales during a 12-
month period.
Inventory turnover refers to the number of times that inventory is sold in a one-year period and
can be calculated by dividing the cost of goods sold by the average inventory, where average
inventory is the sum of beginning and ending inventory divided by 2. For example, suppose the
cost of goods sold is $675,000, beginning inventory is $200,000, and ending inventory is $250,000.
The inventory turnover for these data is:
COST OF GOODS SOLD ($675,000) ÷ AVERAGE INVENTORY [($200,000 + $250,000) ÷ 2],
or $675,000 ÷ $225,000, which equals 3.
Lean manufacturing (also referred to as lean) focuses on the elimination of waste and the increase
in speed and flow. The lean manufacturing approach identifies seven major sources of waste, one
of which is inventory. Just-in-time (JIT) is one of the best-known lean inventory practices. We will
take a closer look at JIT in the paragraphs that follow. From an inventory perspective, the Just-in-
time (JIT) approach seeks to minimize inventory by reducing (if not eliminating) safety stock, as
well as by having the required number of materials arrive at the production location at the exact
time that they are needed.
Under vendor-managed inventory (VMI), by contrast, the size and timing of replenishment orders
are the responsibility of the manufacturer.

Chapter 9: Facility Location

Facility location, which refers to choosing the locations for distribution centers, warehouses, and
production facilities to facilitate logistical effectiveness and efficiency.
Alternatively, some organizations have adopted nearsourcing, in which companies reconfigure
their logistics networks to bring some production facilities closer to key consumer markets. For
example, Mexico is the most popular location for nearsourcing among companies that do business
in North America.
Transportation considerations in the form of transportation availability and costs are a key aspect
of facility location decisions because transportation often represents such a large portion of total
logistics costs.
Transportation availability refers to the number of transportation modes (intermodal competition)
as well as the number of carriers within each mode (intramodal competition) that could serve a
proposed facility.
In a free trade zone nondomestic merchandise may be stored, exhibited, processed, or used in
manufacturing operations without being subjected to duties and quotas until the goods or their
products enter the customs territory of the zone country.
Two specialized situations conclude this discussion of location choice, one involving facility
relocation (associated with business growth) and the other involving facility closing (associated
with business contraction). More specifically, facility relocation occurs when a firm decides that
it can no longer continue operations in its present facility and must move operations to another
facility to better serve suppliers or customers. Facility closing, by contrast, occurs when a company
decides to discontinue operations at a current site because the operations may no longer be needed
or can be absorbed by other facilities.

Chapter 10: Warehousing Management

Warehousing, which refers to “that part of a firm’s logistics system that stores products (raw
materials, parts, goods-in-process, finished goods) at and between points of origin and point of
consumption,”2 and transportation are substitutes for each other, with warehousing having been
referred to as “transportation at zero miles per hour.
Moreover, warehousing facilitates the regrouping function in a supply chain. This function, which
involves rearranging the quantities and assortment of products as they move through the supply
chain, can take four forms—accumulating (also referred to as bulk-making), allocating (also
referred to as bulk-breaking), assorting, and sorting out. Accumulating and allocating refer to
adjustments associated with the quantity of product, whereas assorting and sorting out refer to
adjustments associated with product assortment.
Thus, accumulating involves bringing together similar stocks from different sources, as might be
done by a department store that buys large quantities of men’s suits from several different
producers.
Allocating, by contrast, involves breaking larger quantities into smaller quantities. Continuing with
our suit example, whereas the department store might buy 5000 suits in size 42 short, an individual
store might only carry 15 or 20 suits in this size.
Assorting refers to building up a variety of different products for resale to particular customers.
Our department store example might want to supply individual stores with a number of different
suit sizes (e.g., size 36, size 38, size 40, etc.) and styles (e.g., two-button suits, three-button suits,
etc.).
Sorting out refers to “separating products into grades and qualities desired by different target
markets.”
Warehouses emphasize the storage of products, and their primary purpose is to maximize the usage
of available storage space.
Distribution centers emphasize the rapid movement of products through a facility, and thus they
attempt to maximize throughout (the amount of product entering and leaving a facility in a given
time period).
Fulfillment centers represent a special type of distribution center that is focused on e-commerce
orders.
The increased emphasis on time reduction in supply chains has led to the growth of crossdocking,
which can be defined as “the process of receiving product and shipping it out the same day or
overnight without putting it into storage.
Public warehousing serves (is supposed to serve) all legitimate users and has certain
responsibilities to those users.
Private warehousing is owned by the firm storing goods in the facility. Private warehousing
generates high fixed costs and thus should only be considered by companies dealing with large
volumes of inventory.
Contract warehousing has been defined in a number of different ways, in this text it refers to “a
long term, mutually beneficial arrangement which provides unique and specially tailored
warehousing and logistics services exclusively to one client, where the vendor and client share the
risks associated with the operation.
Multiclient warehousing, which mixes attributes of contract and public warehousing, has become
popular in recent years.

Chapter 11: Packaging and Materials Handling

Packaging, which refers to materials used for the containment, protection, handling, delivery, and
presentation of goods, can be thought of in terms of the building-blocks concept, in which a very
small unit is placed into a slightly larger unit, which then might be placed into a larger unit, and
so on.
Airlines, express delivery companies, and the U.S. Postal Service also have packaging
requirements, although they are somewhat less detailed than those used by rail and motor carriers.
These companies make extensive use of dimensional weight (also called dim weight), which
considers a shipment’s density (the amount of space occupied in relation to actual weight) to
determine a shipment’s billable weight.
A unit load (unitization) refers to consolidation of several units (cartons or cases) into larger units
to improve efficiency in handling and to reduce shipping costs.16 Handling efficiency can be
facilitated by mechanical devices such as a pallet jack or forklift as well as by using a pallet or
skid (a small platform made of plastic, metal, or wood on which goods are placed for handling by
mechanical means).
Materials handling (also referred to as material handling) will be defined as “short-distance
movement that usually takes place within the confines of a building such as a plant or DC and
between a building and a transportation service provider.
Materials handling equipment can be divided into two categories—storage equipment and
handling equipment. Examples of storage equipment include shelves, racks, and bins, whereas
examples of handling equipment include conveyor systems, lift trucks, carts, and cranes. Although
storage and handling equipment are very different, the choice of one often influences the choice
of the other
In picker-to-part systems, an order picker goes to where a product is located, such as with a forklift,
whereas in part-to-picker systems, the pick location is brought to the picker, such as with carousels.

Chapter 12: Transportation

Transportation, which can be defined as the actual, physical movement of goods and people
between two points, is pivotal to the successful operation of any supply chain because it carries
the goods, literally, as they move along the chain.
Each of the five modes of transportation exists because of certain attributes that provide one or
more advantages over the other modes of transportation. The attractiveness of a particular mode
depends on the following attributes:
• Cost (price that a carrier charges to transport a shipment)
• Speed (elapsed transit time from pickup to delivery)
• Reliability (consistency of delivery)
• Capability (number of different types of products that can be transported)
• Capacity (volume that can be carried at one time)
• Flexibility (ability to deliver the product to the customer.
When one thinks of air transportation, one immediately thinks of speed, particularly on the line-
haul (terminal-to-terminal movement of freight or passengers); modern jet aircraft are capable of
traveling between 500 and 600 miles per hour, a speed that far exceeds any other form of
transportation. Indeed, air is generally the fastest mode of transportation for shipments exceeding
600 miles although some motor carriers now offer overnight service of between 600 and 700 miles.
However, air transportation is a quite expensive form of transportation, and the line-haul cost of
airfreight service is regarded as its primary disadvantage; many companies simply cannot afford
to have their shipments travel by air.
The most important business user of the highway system is the motor carrier (trucking)
industry. One way of classifying motor carriers is according to whether they carry less-than-
truckload (LTL) or truckload (TL) traffic.
Less-than-truckload (LTL) shipments range from about 150 to 10,000 pounds, they are often too
big to be handled manually, yet they do not fill an entire truck.
Truckload (TL) carriers focus on shipments of greater than 10,000 pounds, and although the exact
weight depends on the product, it is close to the amount that would physically fill a truck trailer.
Pipelines are a unique mode of transportation because it is the only one without vehicles, and this
is significant for several reasons.
For our purposes, intermodal transportation refers to transportation when using a container or other
equipment that can be transferred from the vehicle of one mode to the vehicle of another mode
without the contents being reloaded or disturbed.
Freight forwarders are not modes, but from the shipper’s viewpoint, they are analogous to other
carriers. Brokers are another type of transportation specialist; they are companies that look to
match a shipper’s freight with a carrier to transport it.