LOGISTICS AND INFORMATION TECHNOLOGY KEY TERMS Applcation-specitc software Big data Cloud computing Data Data mining Data warehouse Electronic data interchange (ED!) . 1 . 1 . 1 . 1 Electronic procurement (e-procurement) LEARNING OBJECTIVES 1 To appreciate the importance of effective and ofciont utilization of information for logistics management rise resource planning (ERP) systems 1 Global positioning systoms (GPS) 1 Information 1 Logistics information systom LIS) 1 Logistics optimization models 1 On-demand software (sofware- as-a-service) 1 To learn sbout general types of information systems and their logistical applications 1 Radio-requeney identification (RAD) 1H Roverse auction 1 Simulation 1 Transportation managomont systoms mms} 1H Warehouse management systems (ws) 1 Wireless communication 1 To look atthe Intemets influence on leistics 1 To learn sbout select information technology challenges ‘The logistics discipline has been through many changes since the first edition of this book was published in the mid-1970s. The first edition, for example, primarily focused on physical distri- bution management, and the corresponding definition emphasized the movement and storage of ‘goods. The current edition of this book, by contrast, is focused on logistics and its role in supply chain management, Moreover, the corresponding definition of logistics (see Chapter 1) mentions the flows and storage of goods, services, and related information. ‘The elective and efficient utilization of information can be quite beneficial to logistics and supply chain management, and four of the more prominent benefits include the following: + Greater knowledge and visibility across the supply chain, which makes it possible to replace inventory with information + Greater awareness of customer demand via point-of sale data, which can help improve planning and reduce variability in the supply chain 2324 Part + Overview of Loistics + Better coordination of manufacturing, marketing, and distribution through enterprise resource planning (ERP) systems + Streamlined order processing and reduced lead times enabled by coordinated logistics information systems? Successful implementation and exploitation of the right information technologies is eriti- cal to maintaining competitiveness.” Additionally, the effective and efficient use of information allows organizations to simultaneously reduce their costs and improve customer satisfaction in the sense that organizations stock the inventory that will be demanded by customers. For exam- ple, several US.-based grocery chains have carefully studied Hispanic consumers and learned that they place greater emphasis on fresh produce than do other ethnic groups. As such, grocery stores located in heavily Hispanic areas often stock more fresh produce than do grocery stores located in other areas, Before proceeding further, its important to distinguish between data and information: “data are simply facts—recorded measures of certain phenomena—whereas information 4s a body of facts in a format suitable for decision making.”* Advances in technological hardware and software now allow logisticians access to abundant amounts of data in rela- tively short periods of time. In attempting to manage this data, managers must first determine which data are relevant for their purposes. Next the data need to be organized and analyzed; once analyzed, managers should make the appropriate decision or decisions. In today's com- petitive business environment, these actions must be completed in as short a time period as possible, (One contemporary issue for logisticians to consider is the emergence of what industry has termed big data—the collection of large amounts of near-real-time data collected through a variety of sources, such as sensors, smart phones, RF tags and business-to-business data exchanges. Logisticians will need to develop strategies for how they can manage the flood of data that will be available to help them manage assets, increase visibility and enhance com- munications across the supply chain, The opportunity will be to use this data to sense changes in demand and then use logistics activities to effectively and efficiently respond to these changes. ‘The next section of this chapter will provide an overview of general types of information management systems that are applicable across each business function. In addition, examples of how these general types of information systems might be specifically applied in logistics management are provided. This will be followed by an explanation of the Internet’ influ- cence on logistics, and the chapter will conclude with a look at select information technology challenges. GENERAL TYPES OF INFORMATION MANAGEMENT SYSTEMS Professor Steven Alter has identified six different types of information systems that are applicable to every business function.* These six categories, summarized in Figure 2.1, form the basis of, this section. 'suephen M. Runes Brian J. Gibson, Kate. Vitusk, and Cia G. Gustin, "sTechncogy Supply Chai Management Review Mare Apel 200, 58-63 ®genjamin T Haven and Terty Anthony Byrd, “Toward Creating Competitive Advantage with Logie Information Technology” International fournal of Physica Distribution & Lapetce Management $2, 0.1 (2012): 835, Wiliam & Zikmund and Michael CAmicn, Marketing, hed (Cincinnati, OF South Western, 2001), p. 125, ‘Robert # Bye, "Dating Profitable Grow wi Bg Data and Bete Forecasts” Supply Chan Europe 21, o. 1 (2012) The framework inthis section is adapted from S. Alte Information System Hall 2002), ing the Information Gap 4th ed. (Upper Sade River, NP PreteCChapter2 + Logistics and Information Technology ‘System type Logistics examples Office automation system: provides effective ways to process personal and ‘organizational business data, to perform calculations, and to create documents Spreadsheet applications to calculate opti- mal order quantities, facility locaton, trans- port cost minimization, among others. ‘Communication system: helps people ‘work together by interacting and sharing information in many diferent forms Virtual meetings via computer technology Voice-based order picking ‘Transaction processing system (TPS): collects and stores information about transactions; controls some aspects of transactions Electronic data interchange ‘Automatic identification technologies such as bar codes Point-of-sale systems Management information system (MIS) ‘and executive information system (EIS): Converts TPS data into information for monitoring performance and managing an ‘organization; provides executives information ina readily accessible format Logistics information system Decision support system (DSS): helps people make decisions by providing information, models, or analysis tools Simulation Application-speciic software such as ‘warehouse management systems Data mining Enterprise system: creates and maintains ‘consistent data processing methods and Logistics modules of enterprise resource planning systems ‘an integrated database across multiple business functions FIGURE 2.1 General Types of Information Management Systems Source Taken from Steven Alter, Information Systems, 4th ed, (Upper Saddle River, NI: Prentice Hal, 2002), p. 191 Office Automation Systems Office automation systems provide effective ways to process personal and organizational business data, to perform calculations, and to create documents. Included in office automation systems are general software packages—word processing, spreadsheet, presentation, and database man ‘agement applications that most of you probably learned in an introductory computer class ‘The most relevant general software package for logisticians is the spreadsheet. Whereas, early spreadsheet programs for personal computers were litle more than speedy calculators, today’s spreadsheets have a multitude of capabilities that allow managers to solve a variety of complex business problems relatively quickly and inexpensively. Indeed, logistics spreadsheet applications into the early 1990s tended to reflect the rather limited capabilities ofthe existing software packages. For example, representative topics included economic order quantity (BOQ) calculations, warehouse sizing, transportation modal and cat: tier decisions, production planning, and center of gravity location decisions, among others.” As we moved through the 1990s, increased spreadsheet capabilities allowed organizations to ana lyze issues that had traditionally been solved by specially designed computer programs. In this ‘vein, the classic issue of transportation cost minimization transporting products from multiple Sate formation Systems 191 ohn ETyworth and Wiliam. Grenoble, "Spreadsheet Modeling in Logistics: Advancing Todays Educational Journal of Business Loistis 12, 0.1 (1991). 1-25 oo 2526 Part + Overview of Loistics sources to multiple destinations, at a minimum transportation cost—could be analyzed using spreadsheet software.® ‘Today spreadsheets have developed to the point that they are able to solve for basic logistics optimization models. Logistics optimization models utilize spreadsheet software and add-ins to help logisticians make complex judgments and decisions about key logistics issues at strategic, tactical, operational and collaborative levels? For example, at a strategic level global consumer products company P&G uses spreadsheets with the add-in package "Whats Best” to help them ‘make decisions regarding plant location and size decisions." Logistics optimization models differ from traditional operations research in that they are typically focused on the practical implemen: tation instead of pure optimization." Thus, the use of spreadsheets provides a method for logisti cians to conduct a variety of “what-if” analyses in support of thei logistics decision making, ‘Communication Systems Communication systems help various stakeholders—employces, supplier, customers—work together by interacting and sharing information in many different forms.” From a logistical perspective, the importance of well-defined and well-executed communication systems was highlighted by the events of September 11, 2001, especialy for companies that use or provide airfreight services. Because ofthe total shutdown ofthe US. aviation system for several days fol lowing the terrorist atacks, many air shipments were diverted onto trucks, thus delaying many deliveries. As such, airfreight providers such as FedEx worked feverishly to inform customers ‘when their shipments would be arriving."* Many advances in telecommunication technology—such as fax machines, personal computers, electronic mail, cellular phones, tablets and smart phones, among others—have occurred since the first edition of this book was published in the 1970s. As recently as the 1990s, some of these technologies were considered workplace “luxuries” Today, by contrast, many of these technologies are essential for enabling the contemporary logistician to perform in the workplace Flectronie data interchange, or EDI (to be discussed in the next section), was viewed by many experts as the measuring stick for logistics information technology in the 1990s. By contrast, wireless communication emerged as the measuring stick during the first decade of the twenty-first century. For our purposes, wireless communication refers to communi- cation without cables and cords and includes infrared, microwave, and radio transmissions, among others. “Although wireless communication has many logistical applications, wel ake a look a one of the more popular types, namely, global positioning systems. Global positioning systems, or GPS, refer to a network of satellites that transmis signals that pinpoint the exact location of an object. You might be familiar with global positioning systems in the form of personal navigation dlevices that provide maps or voce instructions as you drive your automobile Global posoning systems have become quite valuable othe transportation component of logistics because of high fuel costs and the relentless pressure to improve efficiency and produc- tivity. Indeed, transportation companies that have implemented global positioning systems have reported an increase in worker productivity, reduced operating costs, and improved customer aran | Parker and David |. Calne, "Minsmiing Transport Spreadsheet User” Transport Logic, no, 2 (1997); 129-137 "Michael R. Barolaeh, Lary LeBlanc Yesnur Kayikel, and Thomas A. Crossman, “Optimizt Logistics Optens and implementations oural of Busines Logis 3,0, 22012) 118-127 9G. Antes "Modeling Magic TT-Baed Operations Rererch Bude Bete Soply Chains a Procter & Gamble” bp! wnecompterword com/efartceS9484/ModelingMagc Nartoacl eal, "Optimization Modeling for Logistics” Alter, njomation Stems, Chapter 5 kristen. Keae,“FedBxs 5-11 Response” afc World, September 8, 200212 "Roger Merten, “Working Withouta Wit Loss Today, February 2005, 29-38 Coste An Eficent and Elective Approach forthe Modeling forCChapter2 + Logistics and Information Technology relations. More specifically, one study found that GPS implementation allows transportation companies to recapture nearly one hour per day of their drivers’ time, which translates into labor savings of approximately $5,500 per employee. The same study also reported that GPS implemen: tation allows companies to reduce vehicle travel by about 230 miles per week, for an annual fuel savings of approximately $52,000." Tablets, such as Apples iPad, are also becoming important contributors to logistics decision ‘making. The use of these types of consumer-grade mobile devices in an industrial setting, such as a warehouse or port, may requite the device to become “ruggedized” in order to withstand the conditions that exist in these locations.'® For example, Markley Enterprises, a manufacturer of marketing support products, uses iPads along with third-party apps to enhance the produc tivity of their warehouse workers, improve pick accuracy, and eliminate paperwork."” Similarly, Cleveland-based Arhaus Furniture placed iPads in their delivery trucks, which has led to savings in paperwork costs, increased truck utilization, and improved customer service. Continuing advances in hardware and software have resulted in dramatic cost reductions for wireless communication, and one implication is that the technology is no longer limited to those companies with the deepest financial resources. Mozeover, hardware and software cost reductions have shortened the relevant investment payback period and GPS implementations can pay for themselves within one year.” Transaction Processing Systems (TPS) A transaction processing system, or TPS, collects and stores information about transactions and may also control some aspects of transactions. The primary objective of a TPS is the efficent processing of transactions, and to this end, organizations can choose to do batch or real-time processing.”" With batch processing, data are collected and stored for processing at a later time, with the later time perhaps being based on schedule (e.g., process every six hours) or volume (e.g, process once 25 transactions have accumulated) considerations. Real-time processing, not surprisingly, means that transactions are processed as they are received. Although batch process- ing might be somewhat out of step with the contemporary emphasis on speed and time reduc- tion, it can be quite effective when real-time processing is not necessary. Moreover, in comparison with real-time systems, batch processing tends to be less costly and easier for employees to learn. A prominent example ofa logistics-related TPS is electronic data interchange (EDI), the computer-to-computer transmission of business data in a structured format, Because EDI pro- vides for the seamless transmission of data across companies (assuming technological compat- ‘bility, it can facilitate the integration of, and coordination between, supply chain participants. Thus, firms with strong EDI links to both suppliers and customers might have a substantial advantage over supply chain arrangements without such implementations. Common uses of EDI include invoicing, submission of purchase orders, pricing, advanced shipment notices, electronic funds transfer, and bill payment. EDI has a number of benefits, including reductions in document preparation and process- ing time, inventory carrying costs, personnel costs, information float, shipping errors, returned goods, lead times, order cycle times, and ordering costs. In addition, EDI may lead to increases sn cash flow, billing accuracy, productivity, and customer satisfaction. Potential drawbacks to EDI include a lack of awareness of its benefits, high setup costs, lack of standard formats, and incom- patibility of computer hardware and software. "pride McCrea, “The Golden Age of Witles” Logistics Management, Octobe 2008, ‘yaary Shackle, “Supply Chan Technology Prospects forthe Warehouse” World Tad: WT 10025,no, 3 (2012) 24-28 Andrew K Reese, "Pad inthe Warchoure” Supply & Derand Chain Executive 1, no 3 (2010 1-17 ‘pleath £ Combs “Athaus to Equp Trcks with Pads” Furniture Today 4, no, 4 (2010) 3, No author, "Remote Aust Management Worth the Cost” GPSWorl, ansary 200,27. les, information Systems, Chapter 5. 2728 Part + Overview of Loistics Despite these drawbacks and a perception that EDI is an “old” technology?" EDI contin: ues to be an important logistics technology tool in the twenty-first century. Moreover, while the Internet was viewed by some as a possible replacement or substitute for EDI, time has shown that the Internet can serve as a complement to, rather than a replacement or substitute for, EDI For example, Walmart was one of the first companies to adopt Internet-based EDI (I-EDD) in place of Value Added Network (VAN)-based EDI. Importantly, EDI’ significantly lower setup costs than VAN-based EDI make EDI more affordable for smaller companies, thus expanding EDIs scope.” “Automatic identification technologies, another type of logistcs-related TPS, include optical character recognition (which can read letters, words, and numbers), machine vision (which can scan, inspect, and interpret what it views), voice-data entry (which can record and interpret a human voice), radio-frequency identification (which can be used where there is no line of sight between scanner and label), and magnetic strips. Automatic identification systems are an essential component in point-of-sale (POS) sys tems and the idea behind POS systems is to provide data to guide and enhance managerial decision-making. Operationally, POS systems involve scanning Universal Product Code (UPC) labels either by passing the product over an optical scanner or recording it with a handheld scan ner. The UPC is read and recorded into a database that supplies information such as the products price, applicable taxes, whether food stamps can be used, and so on. The specific price of each product and its description aze also flashed on a monitor screen positioned near the counter. ‘When all the products have been recorded, the customer receives verification that lists the prod: ucts purchased, the price of each article, and the total bill Bar code scanners currently remain the most popular automatic identification system in, use. They work to integrate suppliers and customers along the supply chain because all parties read the same labels; in addition, the transfer of goods between parties can be recorded by simple electronic means. ‘Traditionally, laser scanners have been used to read bar codes. The scanners record inventory data and may be directly attached to a computer that uses the data to adjust inventory records and track product movement. Radio-frequency identification (RFID) technology is another automatic identification technology that has received considerable attention in the first part of the twenty-first cen cury. Conceptually, REID involves the use of radio frequency to identify objects that have been implanted with an RFID tag. Operationally, REID consists of three components, a scanning antenna, an REID tag (chip) that conveys the relevant data, and a transceiver that interprets the data. As an REID tag passes within the scanning antennas range, the tag’ data are picked up by. the scanning antenna and interpreted by the transceiver. Compared to bar codes, RFID (1) does not requite clear line of sight between an object and REID hardware, (2) can store much larger {quantities of data, and (3) can offer both read and write capabilities. ‘A major catalyst for RFID usage in logistics was a Walmart mandate that by January 1, 2005, its top 100 suppliers deploy REID tags on shipments into one particular Walmart distri bution center in Texas. While this goal has not been realized, Walmart's mandate jumpstarted 1 technology that had existed since the 1940s but that had not been widely used by organiza tions, As a result, there has been significant improvement in the technology and costs are coming down, The apparel and health care industries are approaching a critical mass of users. Many large retail companies are using REID to track individual items of clothing and roughly 10 percent of hospitals in the United States have some form of REID system installed.” A number of benefits have been reported by adopters of RFID technology. For example, dramatic reductions (between 20 percent and 50 percent) in inventory stockouts have been 2iygalcolm Wheatley “A Question of Standards” Automotive Lage, SeptemberlOctober 2008, 664 Saheny Hang, Brian Jans, and Mark N.Frol. "A Comprehensive Examination of lterbel-ED! Adoption Information Systems Managemen 25, 90.3 (2008) 273-286. ‘No author, "Wal 7012 See Widepeead Adoption of REID” REID Journal, January ary (2012) 6-8,CChapter2 + Logistics and Information Technology 29 reported by Walmart and some its suppliers." In addition, RFID reduced the time needed to count inventory by 80 percent and improved the accuracy of inventory counts at one cloth ing retailer" Despite the potential benefits associated with REID, various challenges must be addressed before the technology becomes more widely used in logistics. A major drawback to mote widespread REID adoption involves the costs of installing the related hardware and soft: ‘ware, which can range from $100,000 for smaller companies to $20 million for larger companies. Another drawback to REID involves privacy concerns, such as the inappropriate use of the technology, For example, a major retailer embedded RFID chips into a particular line of cosmetic products, and consumers who selected this product from the store shelf were beamed, via web- ‘am, to the manufacturer's headquarters!" Yet another drawback is that data accuracy can be lower in items with high moisture content, such as fruits and vegetables. Management Information Systems (MIS) and Executive Information Systems (EIS) ‘These systems convert TPS data into information for monitoring performance and managing an organization, with the objective of providing managers and executives with the information they really need.” To this end, a logistics information system (LIS) can be defined as “the people, equipment, and procedures to gather, sort, analyze, evaluate, and distribute needed, timely, and accurate information to logistics decision makers” ‘As shown in Figure 2.2, an LIS begins with a logistics manager requesting information and ends with the manager receiving regular and customized reports. For logistics managers to receive needed information, its important that they be fairly specific when submitting requests. For example, a logistics manager who wants information about a specific warehouse or distribu- tion center needs to request information on, say, “the Chicago warehouse,’ rather than informa- tion on “corporate warehouses.” Timely information would appear to be incumbent on the effectiveness and efficiency of a company’s particular LIS and timely information can encompass several dimensions. However, timely can refer to the up-to-date status of information, which can be influenced by a company's collection and analysis procedures, Information collection should emphasize both internal and as plentiful external sources; unfortunately, internal sources of logistics information are not alway FIGURE 2.2 Structure and Function of a Logistics Information System Source: Adapted from Michac! Etzel, Bruce Walker, and Wiliam Stanton, Marketing, 18th ed, (New York: McGraw-Hill win, 2007), p17. ohn . Webster.“ Wall-Maets RFID Revelation a Tough Sell” Network World, September 1,200, 3 lan M. Field "Tag, Youte Bt” Frida Shipper, Octobe 13,2008, 10-11, om Andel, "Big Brother a Ase Fve” Paperboard Packing, Fbraary 2006, Alter, nfrmation Sater, Chapter 5. Adapted from a detiniton of Princples of Martin, Ld wide by Philip Kotler and Gary Armatrong in 1, 2008), Chape30 Part + Overview of Loistics as desired. Indeed, research into the business value attributable to logistics discovered that “logistics ‘measurement is happening much less frequently than one might imagine”™® External sources focus on information from outside the company and include information about customers, competitors, and suppliers, along with information about economic, technological, political, legal, and sociocul tural environments, ‘Timely also can refer to how quickly managers receive the information requested; this is affected by each company’s retrieval and dissemination procedures. A manager’ ability to quickly receive information can be influenced by technology hardware and software, and faster and ‘more powerful technology has helped to reduce retrieval and dissemination times. Alternatively, retrieval and dissemination can be slowed by hardware and software glitches, including incom patible hardware or software, power outages, system crashes, and computer viruses ‘Accurate information may also reflect the effectiveness and efficiency of a company's logis tics information system. As such, an LIS must be concerned with the nature and quality of the relevant data; for instance, although the Internet can provide access to tremendous amounts of external information at a very low cos, the validity of some Internet information is suspect. Keep in mind the GIGO—garbage in/garbage out—principle: Information that is erroneous, misrepre: sented, or unclear wil likely result in poor decisions by logisticians. Decision Support Systems (DSS) Decision support systems help managers make decisions by providing information, models, or analysis tools,” and they can be widely applied and used by logisticians. Specific uses of DSS in logistics include, but are not limited to, vehicle routing issues, inventory control decisions, devel- coping automatic order picking systems, and optimization models for buyer-seller negotiations, Several of the more prominent logistics-related DSS techniques are discussed in the following paragraphs. ‘Simulation is a technique that models a real-world system, typically using mathematical equations to represent the relationships among the systems components, Simulation reliability is achieved by making the model as akin to the real world as possible. Although simulation can be a powerful analytic tool, poorly constructed simulation involving bad data or inaccurate assump- tions about the relationships among variables can deliver suboptimal or unworkable solutions to logistics problems, ‘The primary advantage of simulation is that it enables the firm to test the feasibility of proposed changes at relatively litle expense. In addition, it prevents firms from experiencing the public embarrassment of making a major change in thear logistics system that might resull in a deterioration of customer service levels or an increase in total operating expense. A second type of DSS is what can be broadly labeled as application-specific software, which has been developed to help managers deal with specific logistics processes or activities. ‘Traditionally, application-specific software often involved customers purchasing a particular software package and then having the software installed (ie. so-called “purchase and install”) on their computer(s). The purchase and install option was (is) quite expensive in the sense that the software costs can approach $500,000 while implementation costs can run into the several mil- lions of dollars. ‘An increasingly popular option for application-specific software is on-demand software (also referred to as software-as-a-service or cloud computing), or “software that users access ‘on a per-use basis instead of software they own or license for instalation.” A major advantage james S. Keebler Kal 3. Manet, David A. Dursche and D. Michael Ledyard. Keeping Seow: Measwring the Busines ale of Logis the Supply Cha (Oak Brook I1-Couacl of Loisues Management, 1999), Chapter ler, formation Sytem, Chapter 5 David Hannon, “On-Demand Bring Spend Coneo tothe Mastes” Purchasing, Mazch 2, 2006, 40-42,CChapter2 + Logistics and Information Technology of on-demand vis-a-vis purchase and install software is on-demand’ pay-per-use model allows customers to avoid high capital investment cost (well ook more closely at on-demand software Jater inthe chapter) ‘Transportation management systems (TMS) and warehouse management systems (WMS) are two prominent examples of logistics-relatedapplication-specific software. Indeed, an annual software survey conducted by Logistics Management magazine has consistently found that TMS and WMS software are the most likely applications to be purchased or upgraded. Due to their importance as logistical decision support systems, well take a brief look at transportation management systems and warehouse management systems, ‘A transportation management system isa software package that automates the process of building orders, tending loads, tracking shipments, audits, and payments * Table 2.1 presents a representative list of 15 tasks that might be performed by a TMS package. Organizations that have implemented TMS software have reported decreases in empty vehicle miles, reduced fuel consumption, and reduced transportation expenditures. The demand for TMSs continues to grow driven by several factors. These factors include the following: older TMS systems needing upgrades, the growth of intermodal transportation, the improvement of TMS capabilities beyond just execution, the emergence of the previously described “big dat and a desire for more holistic solutions." In audition the use of a TMS is now seen as one way for an organization to improve the environmental sustainability oftheir logistics activities. By using the information provided, companies can get their freight to where and when its needed in a more environmentally efficient manner: Warehouse management systems ae software packages that provide oversight ofthe stor age and flow of materials within a companys operations.”* Activities that can be controlled by a WMS include inventory management, product receiving, determination of storage locations, order selection processes, and order shipping. Potential benefits to warehouse management sys tem include dramatic reductions in data entry errors as well as dramatic reductions in the travel distances for order picking. Other benefits to WMS include reduced operating expenses, fewer stockouts increased inventory accuracy, and improved service to customers. Research has shown that firms that have adopted and implemented a WMS have signifi cantly more efficient logistics processes than nonadopters. Adopters were found to spend less on I ‘Trensportation Management Systems Task Capabilities Task Capability Task Capability ‘set wracking Carer selection Claims management Driver management Freight payment Load planning Load tendering Order or shipment vistbility Package delivery verfication Package pickup tracking Pickup scheduling Rating Reaktime route reporting Route optimization Shipment consolidation Sources "Tansporlaion Management Sytem Sluion Selecon Loistis Today, Sepembe 204, 76-30 idget MeCrea,“Seratny Rules the Day’ Logistics Management Apri 208, 38-80, Samy Zuckerman, “Teansporiaton Management Systems Give Shippers Power to Make Smarter Trucking Choe Word Trade, nnsaty 2008, 34-38 Spridget McCrea, "5 Thends Diving TMS Grow Logistics Management 51, no. (2012) 42-44 simon Kaye, “Greens the Calor of Todays TMS Material Handing 6 Logistic 67,0, 22012) 33-34 Dave Piaseckl,"Warchouse Managemen Systems? ww wise 332 Part + Overview of Loistics their overall logistics processes, even though the costs of the WMS affected the costs of operat: ing their warehouse, ‘The results are largely driven by the increased visibility that is provided by the WMS. Because of the many different TMS and WMS options that are available to a logistics manager, its important that an organization utilizes a software package that best suits its needs, as opposed to one from a “name” provider or one that offers many unneeded options. Moreover, the installation of a TMS or WMS can cause organizational upheaval in the sense that the organization will change its established approach to managing transportation and ‘warehousing, and current employees will need varying degrees of training to become proficient ‘with the new system, Data mining, which can be defined as “the application of mathematical tools to large bod: Jes of data in order to extract correlations and rules’ isa DSS technique that has grown in popu larity in recent years, Data mining utilizes sophisticated quantitative techniques to find “hidden” patterns in large volumes of data; these patterns allow managers to improve thelr decision-mak: ing abilities as well as enhance their organization's competitive advantage. Although data mining has been characterized as a “fishing expedition’ of sorts—in the sense of applying sophisticated {quantitative techniques merely to find relationships, whether meaningful or not—data mining, in reality, should follow a well-defined methodology.” Efficient data mining is dependent on data warehouses, that is, a central repository for all, the relevant data collected by an organization. Walmart, which is acknowledged to have one of world’s foremost data warchouses, and its vendors make extensive use of data mining to improve logistical effectiveness and efficiency. For example, data mining has allowed Walmart to discover i when hurricanes are projected to hit the state of Florida, demand dramatically increases for two products, beer and Kellogg’: Pop Tarts (a toasted pastry product)! So, when a hurricane is projected to hit Florida, Walmart makes sure that additional stocks of beer and Pop ‘Tarts are available in its stores there, Enterprise Systems Enterprise systems, the final general ype of information management system to be discussed, cre- ate and maintain consistent data processing methods and an integrated database across multiple business functions.” The most prominent example of enterprise systems is probably enterprise resource planning (ERP) systems, which “lels a company automate and integrate the majority. of its business processes, share common data and practices across the enterprise, and produce and access information in a real-time environment!!! In theory, ERP systems (such as those offered by Oracle and SAP) allow all prospective users access to a single database when making decisions. The attractiveness of ERP systems comes from their potential for lower costs (such as inventory reductions), as well as increased productivity and increased customer satisfaction, Although contemporary ERP systems encompass a firmwide perspective, their origins can be traced back to logistics and manufacturing in the form of inventory control and materials requirement planning programs. Unlike these earlier programs, today's ERP systems (conceplu- ally, atleast) provide an opportunity for all functional areas within a firm to access and analyze a common database—which might not have been previously possible because (1) certain data were proprietary to a particular functional area and (2) of insufficient or slow computing capabilities. chy Pada, ‘WMS Can Produce Big Logtics Benefit” Suply Chain Management Review 16, no. 3 (2012: 5-58, Stn foreph and Daniel Saka, “AL” Jpn ney November 2001, 20-28, Macha § Gaver, “Try New Data Mining Techniques” Marketing News, September 16,2002, 21-83, “lex aformation Stems Chapter 5 Joe D. Wiser 6. Keong Leong. and Keab-Choon Tan, Principles of Supply Chain Management A Balanced Approach, ad ed. (Mason, OH: South-Western Cengage Leating 2008), p. 507 ‘Sxuldeep Komar and Tos v ences and Evolution” Commurications of the ACM 43, no. 4 (2000): 35-26CChapter2 + Logistics and Information Technology ‘One of the most frequently mentioned shortcomings of ERP systems involves the costs of installation. Its common knowledge that ERP software is relatively expensive; however, the softwae is only one part of ERP implementation costs For example, the vast amounts of data necessary for ERP systems may necessitate new or upgraded computer hardwate. Other hidden or frequently overlooked costs of ERP implementation include employee training, data conver sion (converting existing data into a usable and consistent forma), integrating and testing a new system, maintenance costs, and consultant fes. Indeed, consultant fees can quickly ratchet up ERD implementation costs; there ate suggestions that consultant fees may be three times more costly than the softwace itself"? When all elevant costs are factored in, ERP installation costs can casly reach into the tens of millions of dollars, and installation costs in the hundreds of millions of dollars are not out ofthe question. {A second shortcoming is that implementation of ERP systems can be avery time-consuming process. Indeed, many ofthe hidden costs of ERP implementation mentioned in the previous para graph are the result of hidden time associated with ERP implementation. For instance, employee training, data conversion, and integrating and testing the new system all equite time beyond the installation ofthe ERP software itself. general rule of thumb is that actual time to implement BRP systems may range from two to four times longer than the time period specified by the ERP vendor. A thied shortcoming of ERP systems is that they initially lacked strong applicaton-specific logistical capabilities such as TMS or WMS, Many companies addressed this challenge by add ing so-called “best of breed” (ie, the best product ofits type) logistical applications to their ERP programs, but the process associated with adding the respective software could be costly and time consuming. In recent yeas, however, ERP vendors have begun to provide high-quality applica ‘ion-specific logistical capabilities, particularly with respect to WMS. Given the preceding discussion on time and implementation costs, itis not surprising that some ERP installations do not go as smoothly as desired, and these ERP glitches occasionally have a logistical component to them. For example, ERP implementation problems a a leading manu: facturer of home medical products caused the company to lower its revenue estimates for several time periods. From a logistical perspective, the ERP-related problems meant that the company missed shipment deadlines, could not respond to customer inquities, and had limited informa: tion about order status. The order-related problems, in turn, resulted in a higher-than-normal level of returns associated with incortect orders, and the missed shipment deadlines caused the company to spend more money for expedited transportation. THE INTERNET'S INFLUENCE ON LOGISTICS Although the Internet may appear to be a ubiquitous technology today, the reality is that only about 35 percent of the world’ population currently uses the Internet, up from approximately 5 percent of the world’s population at the beginning of the twenty-first century. Just as the Internet’ usage continues to expand during the twenty-first century, so does its influence on the logistics discipline. While is not possible to present a comprehensive discussion of the Internets influence on logistics, this section will discuss three specific influences—online retailing, cloud computing, electronic procurement—of the Internet on the logistics discipline Online Retailing Ik should be noted that there are logistical similarities between online retailing and in-store retail- ing. For example, many logistical functions and activities—such as transportation, warehousing, ‘ab Violin, “Wila New Paning Sytem Bs You” Basin, June 205,88 idget MeCien, "ERP: Gung Momentusn’ Lopistics Management, November 2008, 4-46. far. Song, "Fly ERP App Revs n Shor for Medical Fim Computerworld ansary2, 2006, 8 “ynatennetworketat com 3334 Part + Overview of Loistics materials handling, and order management—occur in both. Likewise, both may use the same type of equipment and materials, such as bar coding and warehouse management systems. Alternatively, powerful differences exist between online and in-store retailing with respect to the execution of logistics activities. For example, the orders associated with online shopping tend to be more plentiful and in much smaller quantities than those associated with in-store retailing. As such, online retailing requires an order management system capable of handling high volumes of orders, and is also essential that the information management system be capa: ble of correctly transmitting each order so that it can be filled in a timely fashion. In addition, because of smaller order quantities, online shopping is characterized by open. case, rather than full-case, picking; open-case picking is facilitated by materials handling equip. ‘ment, such as totes and push carts. Moreover, open-case picking necessitates that products be slotted (placed) in locations that facilitate picking effectiveness and efficiency. Not surprisingly, online retailing’s smaller order quantities have important packaging implications as well, in the sense that companies need containers—small cartons, envelopes, bags—that are well suited to holding small quantities of product.” Some companies that engage in both online and in-store retailing choose to outsource online’ pick-and-pack activities because they are so different than for in-store retailing * ‘Iwo other Key logistical considerations for online retailing involve transportation and returned orders. The smaller order quantities associated with online retailing tend to favor trans: port companies with extensive delivery networks and expertise in parcel shipments. This, in turn, suggests that outbound shipments tend to be picked up at a loading dock by small-capacity vehicles, such as delivery vans. Moreover, many online retailers are challenged by “ast-mile”con- siderations (those related to delivering product to the customer) such as congestion, frequent stops, and return trips if the customer is not available to accept the delivery. Another emerging consideration is the use of same-day delivery of online orders. Companies such as Amazon, eBay, and Walmart are all looking at ways to offer their online customers the ability to receive their products the same day. While still in the pilot stage, the logistical implications of this strategy Although returned orders are an issue in all types of retailing, the return rates associated with online shopping tend to be much higher than with other types of retailing: one estimate suggests 10 percent return rates for traditional forms of retailing, compared to approximately 30 percent for online purchases." Because many of these returns ae from individual customers, not businesses or organizations, online retailers should attempt to make the return process as painless as possible. As such, when online customers receive their orders, they might also receive informa: tion on how to return the order, a return label, as well asa return container such as an envelope or bag. A relatively smooth and painless returns process not only improves return effectiveness and efficiency, but can also be an effective way of building and maintaining customer loyalty.*! Furthermore, its important to note that a “one size fits all” logistics strategy is not likely to facilitate the effectiveness and efficiency of online shopping, Rather, a variety of logistics strate gies might need to be applied, and its important to recognize the potential trade-offs associated with the different strategies. For example, one way of addressing the last-mile issue of customer “unavailability would be to install some type of receptacle (e.g. a drop box) for the product at the customers residence. However, these receptacles might not be feasible for large items (such as a refrigerator), for perishable items (such ascertain types of food), or for extremely valuable items (such as jewelry). The challenges of implementing the appropriate logistics strategy. or strategies, ie "Picking she Best Practices for F-fulllnent” IE Solutions 3, no. (2001): 37-0 ‘Wiliam Hetiman, "One Click hopping” Journal of Commerce, February 20,2006 22-23, him Pay, Wi day Delivery Service” Malichannel Merchant Exclusive Insight, Octobe 10, 2012.2, S8Sgena “Fcking tum Pct." 8 Happy Retna?” Mulichannel Merchant, February 006,37CChapter2 + Logistics and Information Technology for online shopping are exacerbated by the fact that (1) a particular customer may require vastly different levels of service depending on the product ordered and (2) a particular product may require vastly different levels of service depending on the customer ordering it. Cloud Comput ‘The previously mentioned cloud computing (an umbrella term including both on-demand! soft ware and software asa service) has experienced meteoric growth since the beginning ofthe twenty- first century. In fact, the worldwide public cloud services market—where software, services, oF information are shared via the Internet without the users having control over he technology infra- structure—grew almost 20 percent between 2011 and 2012.*? ‘There are myriad logistics-rclated applications for cloud computing, including collaborative forecasting and inventory optimization, with transportation management systems emerging a the most popular on-demand application. * One season for cloud computings popularity is that its pay-per-use formula allows custom ers to avoid high capital investment costs, which speeds up return on investment for the software. In addition, because cloud computing involves operational as opposed to capital expenditures, it becomes a viable option for many companies that could not afford to purchase, instal, and main- tain application-specific software such as transportation management systems and warchous- ing management systems. Moreover, the worldwide economic slowdown that began in 2007 has caused many organizations to slash their information technology expenditures, thus benefitting loud-based applications. Other advantages to cloud computing include faster and less-costly installation, a smaller information technology staf, and regular upgrades and upd: software provider." As such, companies such as Red Prairie, a provider of productivity software, are now offering cloud-based deployment of TMSs and WMSs Although cloud computing appears to be quite attractive, particularly from a financial perspective, it has several potential drawbacks. For example, the regular software upgrades and updates mentioned earlier can sometimes be foo numerous and too frequent, and customers can struggle to keep up with them. Moreover, cloud-based software allows for # limited amount of customization, meaning that customers need to fit what theyre doing to what the software can achieve.” And, because the Internet is the primary transaction medium for cloud-based soft- ware, security issues such as data protection have been identified as & key concern. s from the ELECTRONIC PROCUREMENT Electronic procurement (also known as e-procurement) uses the Internet to make it easier, faster, and less expensive for an orgenization to purchase goods and services. The types of benefits that come from clectronie procurement include transae- tional benefits, compliance benefits, management information benefits, and price benefits Transactional benefits measure the benefits of enhnaced transactional efficiency (eg, a reduced invoice-to-payment time) associated with e-procurement. Compliance benefits focus on the savings that come from adherence to established procurement policies. Management informa- tion benefits encompass those that result from management information, customer satisfaction, and supplier satisfaction levels after implementation of electroni procurement, Price benefits are those that are given as the result of adopting e-procurement. For example, the electronic pro- cessing of invoices can save a great deal of money in terms of postage and stationery, and these savings can be passed on to the buyer. alberto Grando and Matco Goso, "Avoiding the E-Commerce Tap" EBF, 4 48-51 bridget MeCrea, Cloud Breakthrough" Lops Management SL no 11 (2012) 36-40 Sprigget MeCea, “The Sate of On-Demand. CATCHING FIRE, Logie Management, anuary 2009, 43-4 SS}ghn Fonlana, Whals Behind On Demands Software Rie” Network World, December 12,2008, , 14 “David Biederman. Supply Chlas Head the Cloud: Journal of Commerce 13, no. (201): 186-189. Sitannon, “On-Demand Brings Spend Control” David Ean, "Measuring E Procurement Benelits” Government Procrement, August 202, 6-12. 3536 Part + Overview of Loistics Just as there are benefits to electronic procurement, there are important drawbacks as well ‘One concern with electronic commerce in general and e-procurement in particular, involves the security of information that is being transmitted; there isa risk that sensitive or proprietary infor: ‘mation could end up in the wrong hands. Another concern is that electronic procurement can be impersonal in the sense that human interaction is replaced by computer transactions. Moreover, despite substantial hype about the potential benefits of e-procurement, one study discovered that only about 25 percent of the responding companies mandate the use of electronic procurement. ‘The same study also found a dramatic drop in user confidence with respect to having the required skills and knowledge to use e-procurement tools. ‘One activity that has been greatly facilitated by electronic procurement is online reverse auctions. You might be familiar with traditional auctions in which multiple buyers bid on a particular product, with the product being sold to the highest bidder. By contrast, in a reverse auction, a buyer invites bids from multiple sellers, and the seller with the lowest bid is generally awarded the business. As reverse auctions have evolved, so too have their parameters; in some situations a buyer is exempted from accepting the lowest bid, whereas in other situations a buyer does not have to accept any of the bids.” Buyers tend to like reverse auctions because they aim to generate low procurement prices, and the online nature of reverse auctions allows buyers to drill down to a seller’ low price very quickly, Alternatively, sellers are critical of reverse auctions because their primary emphasis is low price. However, reverse auctions can provide sellers with valuable information such as the num: ber of other bidders. This can be important in the sense that a large number of bidders will likely lead to a great deal of price competition.” INFORMATION TECHNOLOGY CHALLENGES Ths fa, this chapter has presented various challenges associated with specific types of informa. tion technology. We conclude this chapter witha discussion of several macro-leve information technology challenges, or those challenges that might be faced regardless of the type(s) of infor- sation technology being utilized ‘One macro-level challenge isthe recognition that information technology isa ol that can help managers to address organizational problems and is not a panacea or a be-allend-all solution for organizational problems. This can be illustrated by the situation ofa senior manager whose disorganization caused him to often miss regularly scheduled meetings with various con- stituencies. The senior manager and his boss decided to “solve” the missed meeting problem by providing the manager with a smart phone that contained a calendar detailing the time and place ofhis various meetings. Unfortunately, the senior manager continued to miss regularly scheduled meetings because he occasionally failed to (1) carry the smart phone with him; 2) have the smart phone turned on; and 3) upload the meeting information into the smast phone’ calendar. In this situation, the technological “solution” could not address—and may have actually exacerbated — the manager's disorganization. Security concerns represent another maczo-level information technology challenge, and these security concerns have many dimensions. For example, a 2006 study indicated that infor- ration security is the most important technology issue that companies face today." Moreover, the theft of proprietary information for an “average” company i estimated to cost approximately $300,000 annually Moreover, increasing reliance on the Internet for logistics activities such as Syria Varmais, “Buyers Become More Scie in Online Tos ‘Ppridget MeCrea, Going Once, Going Fie" Industrial Dustin ly 2 ry "paal Demy, "Sfe Driving? te Your Lap Strapped in?” Accounting Tehrology, September 2006, 45-49. Ray Zambvosk, “Thick Before You Send Communication World May-June 2008, 38-10, Purchasing September 15,2008, 48-48CChapter2 + Logistics and Information Technology ordering and shipment tracking makes it essential that websites are as secure as possible from computer viruses or computer hackers that could compromise a customer’ access to those websites. Yet another security concern involves the decreasing size and increasing portability of tech nology devices such as laptop computers, flash drives, and smart phones. These smaller technol ogy devices are more susceptible than larger technology devices to loss or theft, and it’ important to recognize that the loss or theft of small, portable technology devices cause an organization to lose both the device and the data stored on the device. A particularly noteworthy example involved an intern for the state of Ohio who had a laptop computer, containing personal data on approximately I million residents of Ohio, stolen from her cat A third information technology challenge involves human resource issues. Importantly, people-related factors such as employee resistance have been identified as a major cause of infor: mation technology implementation failure.” Technology addiction, another human resource issue, is perhaps best exemplified by the term “CrackBerry” which describes a person who uses a BlackBerry smart phone addictively or obsessively.* Underscoring the potential seriousness of technology addiction is whether an employer can be held liable for an employee’ technology 37 addiction, Summary This chapter discussed key issues of logistics and information technology. Six general types of information management systems were examined, with a particular emphasis on rel- evant logistical applications. Topics discussed include global positioning systems, electronic data interchange, application- specific software, and enterprise resource planning systems. Questions for Discussion and Review 2. In what ways can information be helpful in logistics and supply chain management? 22 List the six general types of information management sys- tems, and give one logistics application for each one that youvenamed, 23. Do you view the spreadsheet as the most relevant general software package for logistcians? Why or why not? 24 How can communication systems facilitate logistics man- agement in the aftermath of situations such as terrorist aMtacks and natural drasters? 2.5. What advances in telecommunications technology do you vicw as heing most beneficial o logistics management? Why? 26 Discuss how global positioning systems have become quite valuable in transportation management, 2.7. Discuss the benefits and drawbacks of EDI. Stacey E. Rinuta and Jenit S sredctionarycom Reeves, "A Maltdieiplinary Meta-Analysso lnnpementtion’ Coming Pachalgy Jornal: Practice ad Research 38, n0, 2 (2007 ‘The chapter also looked at the Internets influence ‘on logistics in terms of three issues, online retailing, cloud computing, and electronic procurement. A discussion of information technology challenges—such as the rec- ‘ognition that information technology is a tool and not a ‘panacea—concluded the chapter. 2.8 Discuss the relationship between automatic identifi technologies and point-of sae systems. 29 Why are some companies hesitant to adopt technology? 2.10 Discuss the importance of timely and ace to a logistics information system. 2.11 What benefits are associated with transportation manage sent and warchoute management systems? 2.12. What is data mining? ow might it be uted in logistics? 243 Discuss advantages and disadvantages of enterprise resource planning systems 2.14 Refer back to the logistical activities listed in Chapter 1; pick two that you're interested in and research how they have been influenced by the Internet, Are you surprised by yout findings? Why or why not? (information3B Parl + Overview of Logistics 2.15 From a logistical perspective, what are some of the dif. ences between online and in-store retailing? 2.16 Why isa “one size fits al!” logistics strategy not likely to facilitate effective or eflicient online shopping? 247 Discuss the advantages and disadvantages of cloud «computing Suggested Readings Paweet Stanley B, Paul Osterhaus, Gregory M. Magnan, and Amydee M, Fawcett, "Mastering the Slippery Slope of Technology” Supply Chain Management Review 12,07 (2008): 16-25 Haven, Benjamin T. and Terry Anthony Byrd. “Toward Creating Competitive Advantage with Logistics Information ‘Technology? International Journal of Physical Distribution & Lagistcs Management 42, no. 1 (2012): 8-35, Hurley, W. J and Mathieu Balez.’A Spreadsheet Implementation of an Ammunition Requirements Model for the Canadian Army! Interfaces 38, no. 4 (2008): 271-280, Kerr, john. "Technology Outlook: Getting by Without the Big Buy” ‘Supply Chain Management Review 13,0. (2008) 14-19 Leonatd, Lori N. K, and Christine Clemons, "Supply Chain, Replenishment: Before-and-After EDI Implementation” Supply Chain Management: An International Journal 11, n0. 3 (2006): 225-232 ‘Min, Hokey. “Application ofa Decision Support System to Strategie ‘Warehousing Decisions” International Journal of Physical Distribution & Logistics Management 39, n0.4 (2008):270-281 ‘Moser, George and Peter Ward. “Which TMS is Right for You?” ‘Supply Chain Management Review 12, na, 3 (2008): 50-56, New, Steve “The Transparent Supply Chain” Harvard Business “Review 88, no, 10 (2010): 76-82. CASE CASE 2.1_Just-in-Time in Kalamazoo Jim Ballenger was president of a medium-size firm that manufactured mini motor homes in Kalamazoo, Michigan. The firm had expanded from a local Midwest ‘market to a national one, including Southern California ‘and New England, As markets had expanded, o too had sources of supply for the company, with major suppliers located in Southern California, the Pacific Northwest, and Michigan. The decision to found the company in ‘Michigan had been made for two reasons: Jims former associates in the auto industry were there, andthe largest single component of the mini—the truck or van chassis ‘on which the rest of the vehicle is built—was purchased from one of the US, light-truck makers, Discuss the benefits and drawbacks to electronic procurement, ‘What is an online reverse auction? Why do buyers like them? ‘What are some of the macro-level information technology challenges that managers face? 218 219 2.20 Parry, Glenn and Andrew Graves, “The Importance of Knowledge for ERP Systems” International Journal of Logistics; Research €- Applications 11, no. 6 (2008) 427—441, Pearcy, Dawn H, and Larry C. Guinipero, “Using «-Procurement Applications to Achieve Integration: What Roe Does Firm Size Play?” Supply Chain Management; Ar International Journal 13, ro. 1 (2008): 26-34 Rai, Arun, Paul A. Pavlos, Ghiyoung Im, and Steve Du, “Interfirm TT Capability Profiles and Communications for Cocreating Relational Value: Evidence from the Logistics Industry” MIS (Quarterly 36,0. 1 (2012): 283-262. Savilzke, Katrina, “Internal and External Logistic Information, Technologies: The Performance Impact in an International Setting” International Journal of Physical Distribution & Logistics Management 37, no. 6 (2007) 454-468. Schoenherr, Tobias. “Differion of Online Reverse Auctions for B2B Procurement: An Explanatory Study” International Journal of Operations é Production Management 28, no. 3 (2008): 259-278 ‘White, Andrew and Mark Johnson. “RFID in the Supply Chain Lessons from European Early Adopters” International Journal of Physical Distribution & Lagistice Management 38, no. 2 (2008): 88-107. Like others in the field, Jim's company actually. manufactured very few of its components, Virtually the entire product was assembled from components pur- chased from outside vendors. There was, however, a well-defined order in which the components could most efficiently be installed in the vehicle. Recently, it had ‘become clear to Jim that transportation and inventory costs were a relatively large portion of his component parts expenses and that they might be ripe for a substan- tial reduction. He had been hearing about just-in-time (ITT) systems. According to some notes he had taken at a professional mecting, the JIT production system was developed by the Toyota Motor Company more than50 years ago, It involves an approach to inventory that, in turn, forces a complementary approach to production, quality control, supplier relations, and distributor rela- tionships. The major tenets of JIT can be summarized as follows: 1, Inventory in itself is wasteful and should be minimized. 2. Minimum replenishment quantity is maintained for both manufactured and purchased parts. 3. Minimum inventory of semifinished goods should be maintained—in this case, partially completed motor homes. 4. Deliveries of inputs should be frequent and small 5. The time needed to set up production lines should be reduced to the absolute minimum. 6. Suppliers should be treated as part ofthe produc- tion team. This means that the vendor makes every effort to provide outstanding service and quality and that there is usually a much longer-lasting relationship with a smaller number of suppliers than is common in the United States. 7. The objective of the production system is zero defects 8, The finished product should be delivered on a very short lead time, ‘To the US. inventory planner, vice president of logistics, and production planner, an operation run on the preceding principles raised a number of disturbing prospects, Jim Ballenger was very aware of the costs that might arise if a JIT production system were to be established. From the materials management stand- point, the idea of deliberately planning many small shipments rather than a few large ones appeared to ensure higher freight bills, especially from more dis- tant suppliers, for which freight rates would make the most difference. ‘With regard to competition among suppliers, im often had the opportunity, in the volatile mini-motor- hhome market, to buy out parts and component supplies from manufacturers that were going out of business. Those components could be obtained at a substantial savings, with the requirement that inventory in the par- ticular parts be temporarily increased or that purchases from existing vendors be temporarily curtailed, Perhaps the greatest question raised by JIT, however, had to do with the probability of much more erratic production as a result of tight supplies of components. Both with sup- pliers’ products and with his own, Jim operated with the CChapter2 + Logistics and Information Technology (generally tacit) assumption that there would be some defective components purchased and that there would likely be something wrong with his product when it first came off the assembly line. For this reason, the Kalamazoo minis were extensively tested (Their advertis- ing said, “We hope you'll never do what we do to your Kalamazoo mini”), as were the components prior to installation, fo the extent that only afew of a particular type of component were on hand, the interruption in the production schedule would be that much greater. It might entail expensive rush orders for replacement components or equally expensive downtime for the entre plant. Jim was also concerned about his relationship with his suppliers, as compared, say, toa large auto manufac- turer. In the mini-motor-home business, generally the ‘manufacturers are small and the component makers are large. In ths situation, it was somewhat more difficult to see the idea of the supplier as a part of the production team, in the sense that the supplier would be expected to make a special effort in either quality control or deliv- ery flexibility on behalf of one of its almost miniscule accounts Despite these concerns, Jim was painfully aware that he was using a public warehouse near his plant that usually contained between $500,000 and $1,000,000 in inventory, on which he paid more than 1.5 percent per ‘month for the borrowed funds used to buy it, as well as expenses relating to the use of the warehouse itself. In addition, his firm was now producing so many differ- ent models (one with a bath, one with a shower only) and using so many different appliances (various types of radio, three varieties of refrigerator, etc.) that the costs of a safety stock for each component were going up every day. ‘As an aid to making his decision on whether to try a JIT orientation at his plant, Jim's execu- tive assistant, Kathy Williams, drew up a table that summarized the anticipated impacts of a JIT system (see Exhibit 2.A). The figures are based on random samples of inventory items. The major component of any mini motor home—the chassis—would always be purchased on a one-at-a-time basis from Ford, Chevrolet, Dodge, or International. With rare excep- tions, it would always be available on demand. It would be delivered through the local dealer. If the dealer did not have one in stock, one could easily be obtained from another area dealership. Exhibit .A is a representative 10 percent sample of Ballenger’s components inventory. It covers weekly 3940 Part + Overview of Logistics Current System Using a ‘Average Distance Average average freight from number of Current freight = tT cost per vendor units used ‘lot size Unit cost per fot Unit. unit tem (Gnrmiles) _eachweek purchased cost unit size cost__(surface) Gas range 1145 10 200 100 $20 vo $105 Sa Talet 506 10 240 80 18 10 100 18 Pump 6 56 125 16 3 7 15 4 Refrigerator arge) 2 6 120 110 2 6 18 2s Refrigerator (mal 2 7 15 95 15 18s 5 Foam cushion 430 675 1,500 8 2 ws 7 3 Dvb player {ype 0) 1,800 9 24 136 1 3 130 26 Dome lights 3 a8 1.720 2 ° 36 4 ° ‘Awning Brackets 48 540 1.200 4 1 © s 1 Insect screens 159 570 1240 7 1 50 7 2 EXHIBIT 2.A Ten Percent Random Sample of Component Inventory No use of each item, the current lot size purchased, and 450 on, Before figuring the total costs under the present and JIT systems, two additional facts must be noted First, Balengers inventory carrying costs are assumed to be 20 percent per year on the average investment in inventory on hand, including its acquisition and transportation costs. Second, under the current system, the number of units of each type of component kept in stock is calcu- lated as follows: For those items purchased from vendors ‘more than 500 miles away, a safety stock representing four weeks of use is maintained. For items from vendors between 100 and 500 miles away, a safety stock repre- senting two weeks of use is maintained. For items from closer sources, safety stock representing one week of use is maintained. In addition to safety stocks, the average inventory of any item isthe current lot size purchased, divided by 2 Ifyou are familiar with Excel or other spreadsheet software, you might try using it her, although itis not necessary he plant operates 52 weeks per year and produces 10 min! motor homes per week, Questions 2 |. Whats the total annual cost of maintaining the components inventory under the presen system? ‘What would be the total annual cost of maintaining the ‘components inventory under the JIT system (assuming no safety stocks)? Should Ballenger take into account any other costs of benefits fom the JT system? Ifso, what ae they? the JIT system is adopted, are there safety stocks of any. item that should be maintsined? If so, which ones and hhow much? Ifthe JIT system is adopted, what changes, if any, should ‘occur in the rlationships between Ballenger firm and his suppliers of components? Discus. ‘Assume that Ballenger has seitched tothe [TT aystem and that he receives a surprise phone call from a competitor ‘who is going out of business. The competitor wants to sell Ballenger 7,000 dome light ofthe type listed in Exhibit 2A. ‘Should Ballenger buy them? Ifo, at what price? Carrying costs are 20 percent. Is there a level of carrying costs at which both Ballengers present system and a TT system have similar cost? Ifo, what isi