CHAPTER 2
Logistics and
Information Technology
Learning Objectives
• To appreciate the importance of effective and efficient utilization of information for logistics management
• To learn about general types of information systems and their logistical applications
• To look at the Internet’s influence on logistics• To learn about select information technology
challenges
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Logistics and Information Technology
• Key Terms– Application-specific
software– Data– Data mining– Data warehouse– Electronic data
interchange (EDI)
• Key Terms– Electronic
procurement (e-procurement)
– Enterprise resource planning (ERP) system
– Global positioning systems (GPS)
– Information
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Logistics and Information Technology
• Key Terms– Logistics information
system (LIS)– On-demand software– Radio-frequency
identification (RFID)– Reverse auction
• Key Terms– Simulation– Transportation
Management System (TMS)
– Warehouse Management System (WMS)
– Wireless communication
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Benefits of Effective and Efficient Use of Information
• Replacement of inventory with information
• Reduced variability in the supply chain
• Better coordination of manufacturing, marketing, and distribution
• Streamlined order processing and reduced lead-times
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General Types of Information Management Systems
• Office automation system
• Communication system
• Transaction processing system (TPS)
• Management information system (MIS) and Executive information system (EIS)
• Decision support system (DSS)
• Enterprise system
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General Types of Information Management Systems
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System type Logistics examples
Office automation system: provideseffective ways to process personal and organizational business data, to perform calculations, and to create documents
• Spreadsheet applications to calculate optimal order quantities, facility location, transport cost minimization, among others
Communication system: helps people work together by interacting and sharing information in many different 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
General Types of Information Management Systems
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System type Logistics examples
Management information system (MIS) and executive information system (EIS): converts TPS data into information for monitoring performance and managing anorganization; provides executivesinformation in a readily accessible format
• Logistics information system
Decision support system (DSS): helps people make decisions by providinginformation, models, or analysis tools
• Simulation• Application-specific software
such as warehouse mgmt sys• Data mining
Enterprise system: creates and maintains consistent data processing methods and an integrated database across multiple business functions
• Logistics modules of enterprise resource planning systems
General Types of Information Management Systems
• Office automation system– Process personal and organizational business
data– Perform calculations– Create documents
Examples of use– Spreadsheet applications
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General Types of Information Management Systems
• Communication system– Help stakeholders work together by interacting
and sharing information– Examples of use
• Virtual meetings• Voice-based order picking
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General Types of Information Management Systems
• Transaction Processing System (TPS)– Collects and stores information about transactions– Efficient processing of transactions
• Real-time processing• Batch processing
Examples of use– Electronic data interchange (EDI)– Automatic identification technologies– Point-of-sale (POS) systems
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General Types of Information Management Systems
• Transaction Processing System (TPS) (continued)– Automatic identification technologies Types:
• Optical character recognition• Machine vision• Voice-data entry• Radio-frequency identification (RFID)• Magnetic strips• Bar code scanners
– Point-of-sale systems (POS) enhance decision making
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General Types of Information Management Systems
• Management Information System (MIS) and Executive Information System (EIS)– Convert TPS data into information for
monitoring performance and managing an organization
Examples of use– Logistics information system: “the people, equipment,
and procedures to gather, sort, analyze, evaluate, and distribute needed, timely, and accurate information to logistics decision makers”
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Structure and Function of a Logistics Information System
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General Types of Information Management Systems
• Decision Support Systems (DSS)– helps managers make decisions by
providing information, models, or analysis tools
Examples of use– Simulation– Application specific software– Data mining
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General Types of Information Management Systems
• Enterprise resource planning (ERP)– All company functional areas use a common
database to:• Standardize manufacturing processes• Integrate financial data• Standardize human resource data
– Shortcomings• Costs of installation• Time-consuming installation process
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The Internet’s Influence on Logistics
• Approximately 25% of the world’s population uses the internet – up from 5% at the beginning of the 21st century
• 3 Specific Influences on Logistics Include:
– Online Retailing
– On-Demand Software
– Electronic Procurement
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The Internet’s Influence on Logistics
Logistical Functions & Activities•Transportation•Warehousing•Materials handling•Order management
Equipment & Materials• Bar coding• WMSs
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Similarities between online retailing and in-store retailing
The Internet’s Influence on Logistics
Online Retailing• Many logistical functions
and activities occur• More, smaller orders• Order management and
information management systems must handle large volumes of orders
• Smaller orders dictate open-case picking
In-store Retailing• Many logistical functions
and activities occur• Fewer, larger orders• Order management
system is set up to handle orders from resellers, not consumers
• Full-case picking• Warehouse set up to
handle large volume orders
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Differences between online retailing and in-store retailing
The Internet’s Influence on Logistics
Online Retailing• Products slotted to
facilitate picking smaller orders
• Totes and push carts used
• Packaging is small cartons, envelopes, bags suited to holding small quantities
In-Store Retailing• Warehouse set up to
handle large volume orders
• Variety of materials handling equipment used
• Packaging generally cartons that hold large volume orders
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Differences between online retailing and in-store retailing
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The Internet’s Influence on Logistics
Online Retailing• Transportation
companies used with extensive delivery networks; experience in parcel shipments
• Outbound shipments usually picked up by vans
• Return rates much higher and from ultimate consumers
In-store Retailing• Transportation methods
and companies vary by request of buyer
• Outbound shipments may be picked up by tractor trailers or railcars
• Return rates lower and from resellers
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Differences between online retailing and in-store retailing
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• Numerous logistics-related applications – Collaborative forecasting– Inventory optimization– TMSs
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The Internet’s Influence on Logistics
On-Demand Software
The Internet’s Influence on Logistics
Advantages
• Pay-per-use• Faster installation• Less-costly
installation• Smaller IT staff• Regular upgrades • Regular updates
Disadvantages
• Upgrades and updates can be too numerous and too frequent
• Limited amount of customization
• Security issues
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On-Demand Software
• Types of benefits realized from e-procurement include:– Transactional– Compliance– Management information– Price
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The Internet’s Influence on Logistics
Electronic Procurement
• Drawbacks of using e-procurement– Security risk– Impersonal
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The Internet’s Influence on Logistics
Electronic Procurement
• IT is a tool that can help manage organizational problems, but it is not a be-all/end-all solution for organizational problems
• Theft of proprietary information – Decreasing size and increasing portability of
technology devices
• Employee resistance to IT implementations
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Information Technology Challenges
Case 2-1 JIT in Kalamazoo
• Located Kalamazoo, Michigan
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Company Facts:
• Mini motor homes• Largest component: truck or van chassis• Virtually the entire product was assembled from
purchased components
Product Facts:
Market Facts:• Expanded from local Midwest market a national one
Case 2-1 JIT in Kalamazoo
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• Public warehouse• Inventory between $500,000 and $1,000,000• More than 1.5% / month interest for borrowed funds• Costs of safety stock were going up
– 4 weeks of use for items supplied by vendors more than 500 miles– 1 week of use for items supplied by vendors nearby
• Inventory carrying costs: 20% / year (including acquisition and transportation)– Average inventory = lot size / 2
Inventory/Warehousing information:
Case 2-1 JIT in Kalamazoo
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1. What is the total annual cost of maintaining the components inventory under the present system?
2. What would be the total annual cost of maintaining the components inventory under the JIT system ( assuming no safety stocks)?
3. Should Ballenger take into account any other costs or benefits from the JIT system? If so, what are they?
4. If the JIT system is adopted, are there safety stocks of any item that should be maintained? If so, which ones and how much?
5. If the JIT system is adopted, what changes, if any, should occur in the relationships between Ballenger’s firm and his suppliers of components? Discuss.
Questions:
Case 2-1 JIT in Kalamazoo
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6. Assume that Ballenger has switched to the JIT system 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 lights of the type listed. Should Ballenger buy them? If so, at what price?
7. Carrying costs are 20 percent. Is there a level of carrying costs at which both Ballenger’s present system and a JIT system have similar costs? If so, what is it?
Questions:
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Case 2-1 JIT in Kalamazoo(Current System)
Item Average distance from
vendor (in miles)
Number of units used each week
Current lot size
purchased
Unit cost Average freight cost
per unit
Gas range 1,145 10 200 $100 $20 Toilet 606 10 240 $80 $18 Pump 26 56 125 $16 $3 Refrigerator (large) 22 6 120 $110 $20 Refrigerator (small) 22 7 15 $95 $15 Foam cushion 490 675 1,500 $8 $2 CB radio (type D) 1,800 9 24 $136 $11 Dome lights 3 824 1,720 $2 NoneAwning bracket 48 540 1,200 $4 $1 Insect screen 159 570 1,240 $7 $1
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Case 2-1 JIT in Kalamazoo(JIT)
Item Average distance from
vendor (in miles)
Number of units used each week
Current lot size
purchased
Unit cost Average freight cost
per unit
Gas range 1,145 10 10 $105 $22 Toilet 606 10 10 $100 $18 Pump 26 56 7 $15 $4 Refrigerator (large) 22 6 6 $113 $25 Refrigerator (small) 22 7 1 $85 $15 Foam cushion 490 675 75 $7 $3 CB radio (type D) 1,800 9 3 $130 $26 Dome lights 3 824 36 $4 0Awning bracket 48 540 60 $5 $1 Insect screen 159 570 50 $7 $2
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Case 2-1 JIT in Kalamazoo(Current System)
Item
Safety Stock (Unit)
Avg. Inv.
(Unit)
Total Inv.
(Unit)
Total Inventory
($)Inventory Cost ($/yr)
Investment ($/yr)
Gas range 40 100 140 $16,800 $3,360.0 $62,400 Toilet 40 120 160 $15,680 $3,136.0 $50,960 Pump 56 62.5 118.5 $2,252 $450.3 $55,328 Refrigerator (large) 6 60 66 $8,580 $1,716.0 $40,560 Refrigerator (small) 7 7.5 14.5 $1,595 $319.0 $40,040 Foam cushion 1350 750 2100 $21,000 $4,200.0 $351,000 CB radio (type D) 36 12 48 $7,056 $1,411.2 $68,796 Dome lights 824 860 1684 $3,368 $673.6 $85,696 Awning bracket 540 600 1140 $5,700 $1,140.0 $140,400 Insect screen 1140 620 1760 $14,080 $2,816.0 $237,120 $96,111 $19,222.1 $1,132,300
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Case 2-1 JIT in Kalamazoo(JIT)
Item
Safety Stock (Unit)
Avg. Inv.
(Unit)
Total Inv.
(Unit)
Total Inventory
($)Inventory Cost ($/yr)
Investment ($/yr)
Gas range 40 5 45 $5,715 $1,143.0 $66,040 Toilet 40 5 45 $5,310 $1,062.0 $61,360 Pump 56 3.5 59.5 $1,131 $226.1 $55,328 Refrigerator (large) 6 3 9 $1,242 $248.4 $43,056 Refrigerator (small) 7 0.5 7.5 $750 $150.0 $36,400 Foam cushion 1350 37.5 1387.5 $13,875 $2,775.0 $351,000 CB radio (type D) 36 1.5 37.5 $5,850 $1,170.0 $73,008 Dome lights 824 18 842 $3,368 $673.6 $171,392 Awning bracket 540 30 570 $3,420 $684.0 $168,480 Insect screen 1140 25 1165 $10,485 $2,097.0 $266,760 $51,146 $10,229.1 $1,292,824
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