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several of the products that were produced and sold by the customer. A supplier was located that would make the required material but the contract included a clause that all of the material that was produced would be pur- chased. This was the security that the supplier would not be left with mate- rial that could not be used. In other cases I have seen the customer end up paying for the raw materials when special products were involved. There are many ways that arrangements can be made to obtain special products but the best interests of both parties need to be considered.
The typical inventory process before just-in-time looked like a saw blade with ups and downs as the material was used and replenished. The goal under that system was to have the inventory replenished before too many back orders had to be made. The order quantity was calculated to adjust the inventory levels so that the customers got the material when they wanted it. This was a balancing process where the hope was that the custom- ers would accept a small back order while the inventory was being restored and to not create a large amount of dissatisfaction in the customer.
There is much more coverage of this topic in production and opera- tions management texts. These books can be very good resources for inven- tory management as well as basic principles of forecasting.
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depending on the contract. The possession issue is one that needs to be spelled out in the contract for logistics services.
When we think about logistics, we think of trucks initially, but there is also ocean freight as well as railroads. Ocean freight and railroads tend to deal with larger volumes of materials. These need to be considered because for larger volumes they may be cheaper cost-wise, but are the deliveries dependable enough is the question.
With many domestic companies now trying to do business in Asia, the necessity of understanding the implications of ocean freight is increasing.
Space on freighters has to be purchased well ahead of time. The freight con- tainers get filled in Asia and shipped to the United States. The container and contents are examined by customs personnel and then the container gets loaded onto a frame that can be trucked or sent by rail to the next desti- nation. As this process is examined, we see that the time involved can be very lengthy and delays can happen at any number of points in the process.
For example, a long delay could occur in the customs examination process or the transfer process to the truck or rail car. Each of these can delay the arrival of the material at the final destination. One downside of all of this is that inventory has to be maintained to be able to keep operations running through all of these potential delays. There will be bumps in the road in this process and you need to be ready for them when they occur. It can be very difficult to predict when a shipment from Asia will actually arrive at its destination in the United States.
A term that is becoming more and more popular is third-party logistics (3PL). Companies are contracting with logistics suppliers to handle the complete process of getting materials to the right location. With this type of arrangement the logistics supplier can connect with all forms of trans- portation and take advantage of the best costs. A third-party logistics orga- nization deals with all of the various companies and knows what the rates should be and what can be expected for delivery. This gives the customer the best logistics possible as the experience of the logistics organization is being used to the advantage of the supplier and customer. Many organi- zations used to have transportation departments that were responsible for handling all of their logistical issues and arranging for all shipments. With the third-party logistics companies coming on the scene these departments are being eliminated in favor of using 3PL providers.
As companies desire to get more and more lean, logistics will be one area that companies are outsourcing to logistics suppliers. I have seen cases where a customer will negotiate a contract with a trucking company for all deliveries to a particular facility. With this type of agreement the suppli- ers are told to use this trucking company to get materials to the facility. In theory this should reduce the costs for the customer, but the performance
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of the logistics company needs to be monitored to ensure that deliver- ies are being handled properly. It is easy to end up with late shipments because a trucker did not deliver as promised and have the supplier blamed for the late delivery. Remember, one of the big issues in the entire supply chain management process is relationships. Efforts must be taken to ensure that relationships are maintained and are growing to be beneficial to both organizations.
Logistics includes any transportation that is done to a product to move it to the next step in the supply chain. This can include ocean freighter, barge, rail, truck, as well as air freight. A logistical supply chain can get complex just like a standard product supply chain. Let’s look at an example of how things can change quickly. A raw material was being manufactured in a plant that was only about three hours away from the customer. The material could be stored by the supplier and ordered by the customer as space became available in the raw material storage at the customer. This system was very close to being just-in-time. The supplier decided to go out of the business of making the raw material. The only source for the raw material became Japan, and it had to be ordered in freighter quantities.
This quickly created a major logistics problem. Issues like storage volume, lead times, cash requirements, and so on, now came into play. The logis- tics map expanded to include a freighter to the Gulf of Mexico, transfer to an oceangoing barge to New Orleans, transfer to a river barge going up the Mississippi River to a port on the Ohio River, transfer to trucks to deliver to the plant three hours away. With barge demurrage at $175 per hour, trans- fer had to be completed quickly and with as many trucks as possible to reduce the costs. It took several freighters full to get the operation figured out so that the demurrage of both the barges and the trucks could be mini- mized. It was a learning experience that was forced on the organization but they responded and made it work. In another illustration in the auto- mobile industry, suppliers may have to fly parts to assembly plants to keep them from shutting down. Helicopters are rented for this purpose, and I was surprised at how much companies can spend on this type of operation. The suppliers spent enough money that they could have purchased the helicop- ter and paid the pilot but they had a contract instead. Requiring materials to be shipped by air to keep plants running may not be the best solution for the supply chain when the customer is not very good at relationships.
Logistics is becoming a critical part of supply chain management but was almost ignored as a significant part a few years ago. Some of the characteristics that need to be considered when working with a logistics supplier are:
• What modes of transportation does the organization deal with?
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• Will they handle all of the transfers required and documentation necessary?
• Will they see the material through customs and handle any duties?
• Can this organization handle both inbound and outbound freight for you?
• Where is this supplier of logistics located? Where are the hubs set up?
• How much lead time is required by the logistics company?
• Do the employees have the required training to handle the materials that you are shipping?
• How are the various shipping modes insured and who is responsible for any damage?
• How is a damage claim filed? How much paperwork is involved?
• What kind of rates and discounts are available?
These questions will give you a pretty good overview of the logistics com- pany and the capabilities of their organization. The next step may be a visit to the organization or at least to one of the hubs to see what goes on there. This can give you a very good idea of how freight is handled and how orders are moved. The attitudes of the employees will become very obvious as you watch the organization for just a few minutes. Is there care shown for the materials being handled? Are orders prepared ahead of the truck arrival? Is there a schedule of arrivals and departures? Many factors can be revealed with a visit that can be missed when only a discussion in an office is being held.
There are textbooks that have been written on the subject of logistics and these should be used for a reference if more information on logistics is needed.
CONCLUSION
Two important parts of materials management are inventory manage- ment and logistics. Inventory management can impact the working capi- tal that the company has and thus the financial health of the organization.
Logistics is the transportation that is involved throughout the entire supply chain. These two parts must be considered when a process of supply chain management is being initiated.
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KEYWORDS
Inventory Economic order quantity
Order size Just-in-time Warehouse space
Logistics Ocean freight
Rail freight Trucking Air freight Barge freight Third-party logistics
DISCUSSION QUESTIONS
1. How does inventory impact the profits of an organization?
2. On a visit to a supplier, would you want to visit the warehouse as well as the production area? Why?
3. How can an order quantity be determined? What are some methods that can be used?
4. What is 3PL and how can it be used?
5. What are some of the benefits of using a third-party logistics provider?
6. Why are logistics important in supply chain management?
7. Why would a company want to have a just-in-time inventory system?
8. What are some things that can happen to materials that are in inventory? What actions can be taken to prevent some of these things?
9. What actions can an organization take to compensate for potential delays that could be incurred at a customs inspection?
10. Why would a company want to import materials?
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