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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







© 2008 Prentice Hall

3
-
2

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

© 2008 Prentice Hall

3
-
3

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

© 2008 Prentice Hall

3
-
4

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



© 2008 Prentice Hall

3
-
5

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

3
-
6

General Types of Information
Management Systems

3
-
7

System type

Logistics examples

Office automation system: provides

effective ways to process personal and
organizational business data, to perform
calculations, and to create documents


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Transaction processing system (TPS):
collects and stores information about
transactions; controls some aspects of
transactions


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General Types of Information
Management Systems

3
-
8

System type

Logistics examples

Management information system (MIS) and
executive information system (EIS): converts
TPS data into information for monitoring
performance and managing an

organization; provides executives

information in a readily accessible format


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Decision support system (DSS): helps people
make decisions by providing

information, models, or analysis tools


Simulation


Application
-
specific software
such as warehouse
mgmt

sys


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integrated database across multiple business
functions


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General Types of Information
Management Systems


Office automation system


Process personal and organizational business
data


Perform calculations


Create
documents


Examples of use


Spreadsheet applications


© 2008 Prentice Hall

3
-
9

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

© 2008 Prentice Hall

3
-
10

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


© 2008 Prentice Hall

3
-
11

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

© 2008 Prentice Hall

3
-
12

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”

© 2008 Prentice Hall

3
-
13

Structure
and Function of a
Logistics Information System

© 2008 Prentice Hall

3
-
14

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


© 2008 Prentice Hall

3
-
15

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

© 2008 Prentice Hall

3
-
16

The Internet’s Influence on
Logistics


Approximately 25% of the world’s population
uses the internet


up from 5% at the
beginning of the 21
st

century



3 Specific Influences on Logistics Include:


Online Retailing


On
-
Demand Software


Electronic Procurement


2
-
17

© Pearson Education, Inc. publishing
as Prentice Hall


The Internet’s Influence on
Logistics

Logistical Functions &
Activities


Transportation


Warehousing


Materials handling


Order management

Equipment & Materials


Bar coding


WMSs

© Pearson Education, Inc. publishing as Prentice
Hall


2
-
18

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

2
-
19

© Pearson Education, Inc. publishing as Prentice
Hall


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

2
-
20

Differences between online retailing and in
-
store retailing

© Pearson Education, Inc. publishing as Prentice
Hall


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


2
-
21

Differences between online retailing and in
-
store retailing

© Pearson Education, Inc. publishing as Prentice
Hall



Numerous logistics
-
related applications


Collaborative forecasting


Inventory optimization


TMSs

© Pearson Education, Inc. publishing
as Prentice Hall


2
-
22

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

© Pearson Education, Inc.
publishing as Prentice Hall


2
-
23

On
-
Demand Software


Types of benefits realized from e
-
procurement include:


Transactional


Compliance


Management information


Price

© Pearson Education, Inc. publishing
as Prentice Hall


2
-
24

The Internet’s Influence on
Logistics

Electronic Procurement


Drawbacks of using e
-
procurement


Security risk


Impersonal

© Pearson Education, Inc. publishing
as Prentice Hall


2
-
25

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



© Pearson Education, Inc. publishing
as Prentice Hall


2
-
26

Information Technology
Challenges

Case 2
-
1 JIT in Kalamazoo


Located Kalamazoo, Michigan

1
-
27

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

1
-
28


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

1
-
29

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

1
-
30

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:

1
-
31

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

None

Awning bracket

48

540

1,200

$4

$1

Insect screen

159

570

1,240

$7

$1

1
-
32

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

0

Awning bracket

48

540

60

$5

$1

Insect screen

159

570

50

$7

$2

1
-
33

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

1
-
34

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