Page 300 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Unit 13: Logistics Design and Operational Planning

Identifying Best Alternative Notes
The alternatives and sensitivity analyses should identify the best options to consider for
implementation. However, multiple alternatives often yield similar or comparable results.
Performance characteristics and conditions for each alternative must be compared to identify
the two or three best options. Although the concept of best may have different interpretations,
it will generally be the alternative that meets desired service objectives at the minimum total
cost.

Evaluating Costs and Benefits
In the earlier discussion of strategic planning, potential benefits were identified as service
improvement, cost reduction, and cost prevention. It was noted that these benefits are not
mutually exclusive and that a sound strategy might realize all benefits simultaneously. When
evaluating the potential of a particular logistics strategy, an analysis comparing present cost
and service capabilities with projected conditions must be completed for each alternative. The
ideal cost/benefit analysis compares the alternatives for a base period and then projects
comparative operations across some planning horizon. Benefits can thus be projected on the
basis of both one-time savings that result from system redesign as well as recurring operating
economies.

Developing Risk Appraisal

A second type of justification necessary to support strategic planning recommendations is an
appraisal of the risk involved. Risk appraisal considers the probability that the planning
environment will match the assumptions. Additionally, it considers the potential hazards related
to system changeover. Risk related to adoption of a specific alternative can be quantified using
sensitivity analyses.

Example: Assumptions can be varied and the resulting impact on system performance
for each alternative can be determined.
To illustrate, sensitivity analysis can be used to identify the system performance for different
demand and cost assumptions. If the selected alternative is still best even though demand
increases or decreases by 20 percent, management can conclude that that there is little risk
associated with moderate errors in the demand environment. The end result of a risk appraisal
provides a financial evaluation of the downside risk if planning assumptions fail to materialize.

Risk related to system change over can also be quantified. Implementation of a logistics strategic
plan may require several years to execute. The typical procedure is to develop an implementation
schedule to guide system changeover. To evaluate the risk associated with unanticipated delays,
a series of contingency plans can be tested to determine their possible impact.

Typical sources of external risk include uncertainty associated with demand, performance cycle,
cost, and competitive actions. Common sources of internal risk include labour and productivity
considerations, changes in firm strategy, and changes in resource accessibility. These
considerations must be assessed both quantitatively and qualitatively to provide management
with direction and justification.
Developing a Presentation

The final task develops a presentation to management that identifies, rationalizes, and justifies
suggested changes. The presentation and accompanying report must identify specific operating
and strategic changes, provide a qualitative rationale as to why such change is appropriate, and

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