Chapter 2:

Chapter 2:

Dimensions of Logistics

Chapter 2 Management of Business Logistics, 7th Ed. 2

Dimensions of Logistics: Introduction

Logistics has come a long way since the 1960s. The big challenge is to manage the whole

logistics system in such a way that order fulfillment meets or exceeds customer expectations.

Focus of this chapter is upon the individual firm’s logistics system but also recognizing that no logistics system operates in a vacuum.


What is Logistics?

Popular logistics terms: Logistics Management Business Logistics Management Integrated Logistics Management Materials Management Physical Distribution Management Marketing Logistics Industrial Logistics Distribution


Definition of Logistics: Council of Logistics Management (CLM,

1985)

Logistics is the process of planning, implementing and controlling the efficient, effective flow and storage of raw materials, in-process inventory, finished goods and related information from point of origin to point of consumption for the purpose of conforming to customer requirements.


What is Logistics?:21st Century View of Logistics (4 subdivisions)

1. Business Logistics – supply chain process that plans, implements, and controls the efficient, effective flow of goods, services, and related information from the point of origin to the point of use or consumption in order to meet customer requirements.

2. Military Logistics – design and integration of all aspects of support for the operational capacity of the military forces, and their equipment to ensure readiness, reliability, and efficiency.


What is Logistics?:21st Century View of Logistics

3. Event Logistics – network of activities, facilities, and personnel required to organize, schedule, and deploy the resources for an event to take place and to efficiently withdraw after the event.

4. Service Logistics – acquisition, scheduling, and management of the facilities/assets, personnel, and materials to support and sustain a service operation or business.


3 major dimensions of Logistics

1. The macro environment of Logistics: Economy Perspective

2. The micro environment of Logistics: Firm dimension

3. The logistics components and its internal relationship


1. Logistics in the Economy: A Macro Perspective

As indicated in Figure 2-2, logistics costs as a percentage of GDP have declined from 16 percent in 1980, to under 10 percent in 1999.

Early to mid-1970s saw the figure closer to 20 percent.

This reflects a serious improvement in the efficiency of logistics systems.

Figure 2-3 shows a further breakdown of logistics costs for 1999.


Figure 2-2: Logistics Costs as a Percentage of GDP

15.7

12.3

11.4

10.4

10.3

10.1

9.9

0 5 10 15 20

1980

1985

1990

1995

1996

1998

1999


Figure 2-3: Total Logistics Costs --- 1999



The two largest cost categories in logistics systems are transportation and inventory.

While we will look at this in Chapter 9, motor carriers’ share of total freight expenditures is $450 billion versus $99 billion for all other carriers.

The most frequent trade-off in logistics is between transportation and inventory cost.



As indicated in Figure 2-4, the Federal Reserve measure of inventory to sales ratios from 1991 to 1999 clearly indicate that companies are getting better at managing inventory.

Companies have been supporting larger amounts of sales with decreasing amounts of inventory.


Figure 2-4: Inventory Sales Ratio



Contributing to this decline Improvement in transportation cost Better inventory management Turnover has had a very positive

impact upon the return on investment for companies


The role of Logistics in Macro economic

(i) Value added role(ii) Economic impact


(i) Add values to product/services: Four4 principal of economic utility

1. Form utility- (what) - production2. Place utility- (where) - logistic3. Time utility- (when) - logistic4. Possession utility- (why) - marketing

Also referred to as the seven Rs --- Right product, Right quantity, Right condition, Right place, Right time, Right customer, and Right cost.


Figure 2-5 Fundamental Utility Creation in the Economy


(ii) Economic Impact: Four areas

Economic development and specialization

Variety of goods Effects on prices Land values


2. Logistics in the Firm: The Micro Dimension

a. Logistics Interfaces with Operations/Manufacturing

b. Logistics Interfaces with Marketingc. Logistics Interfaces with Other Areas


a. Logistics Interfaces with Operations Manufacturing

Examples:1. Length of production runs

Balance economies of long production runs against increased costs of high inventories.

2. Seasonal demand Acceptance of seasonal

inventory to balance lead production times.


a. Logistics Interfaces with Operations Manufacturing

3. Supply-side interfaces Stocking adequate supplies to ensure

uninterrupted production now a logistics function.

4. Protective packaging Principal purpose is to protect the

product from damage.5. Foreign & third party alternatives

Some logistics functions are being outsourced.


b. Logistics Interfaces with Marketing

The Marketing Mix – Four Ps(i) Price(ii) Product(iii) Promotion(iv) Place


Logistics in the Firm: (i) Price Carrier pricing

Generally, since the larger the shipment, the cheaper the transportation rate, shipment sizes should be tailored to the carrier’s vehicle capacity where possible.

Matching schedules Quantity discounts should be tied to carrier

quantity discounts. Volume relationships

Volumes sold will affect inventory requirements.


Logistics in the Firm: (ii) Product

Consumer packaging Generally, since the size, shape, weight and

other physical characteristics of the product impact on its storage, transportation and handling, the logistics managers should be included in any decisions regarding these product traits.

A minor correction in any of the above could conceivably cost (or save) millions of dollars in logistical costs.

Logistics costs are not necessarily paramount, but they need to be considered in the decision making process.


Logistics in the Firm: (iii) Promotion

Push versus pull The most important factor is that the logistics

division is aware of any changes in demand patterns so that it can plan for any consequences.

Pull strategies tend to be more erratic. Push strategies tend to more predictable.

Channel competition The more popular a product, the easier it is to

persuade channel members to promote your product.


Logistics in the Firm: (iv) Place Wholesalers

Generally, since wholesalers are combining purchases for multiple retailers, the shipment sizes tend to be larger and the number of transactions that have to be processed are fewer, with the result that logistics costs are smaller.

Retailers With the exception of very large retailers

who act more like wholesalers, smaller sales are the norm. These generally cost more for transportation and order processing.


c. Logistics Interfaces with Other Areas

Manufacturing and marketing are probably the two most important internal, functional interfaces with logistics.

Other important interfaces now include finance and accounting. Logistics can have a major impact on return

on assets and return on investment. Logistics costs reported by cost systems

measure supply chain trade-offs and performance.


3. The logistics components and its internal relationship

(i) Logistics Activities(ii) Logistics Systems

(iii) Logistics and Systems Analysis(iv) Techniques of Logistics System Analysis


(i) Logistics Activities

Transportation Storage Packaging Materials handling Order fulfillment Forecasting

Production planning

Purchasing Customer service Site location Other activities


On the Line: Toyota Distribution

Moves more than 8 million parts and accessories every month.

Computer modeling re-designed the 30 year old distribution network.

Software looked first at Lexus Division and then at the entire network.

Resulted in two DCs, one in California, another in Kentucky, feeding nine smaller DCs located around the country.

The new network both improved customer service and lowered costs.


(ii) Logistics Systems: Materials Management v. Physical Distribution

Frequently the movement and storage of raw materials is far different from the movement and storage of finished goods.

Four different classifications of logistics systems Balanced system - e.g., consumer products Heavy inbound - e.g., aircraft, construction Heavy outbound - e.g., chemicals Reverse systems - e.g., returnable products


Approaches to Analyzing Logistics Systems Cost Centers

Treating logistics activities as cost centers makes it easier to study cost trade-offs between the centers. (see Tables 2-2 and 2-3)

Nodes versus Links Nodes are spatial points (warehouses, plants,

etc.); Links are the transportation network (rail,

motor, air, pipe and water). (see Figure 2-6) Logistics Channel

The network of intermediaries involved in the logistics system. (see Figures 2-7, 2-8, and 2-9)


Table 2-2 Analysis of Total Logistics Cost with a Change to Higher Cost Mode of Transport

Cost Centers Rail Motor

Transportation $ 3.00 $ 4.20

Inventory 5.00 3.75

Packaging 4.50 3.20

Warehousing 1.50 .75

Cost of Lost Sales

2.00 1.00

Total Cost $ 15.00 $ 13.00


Table 2-3 Analysis of Total Logistics Cost with a Change to More Warehouses

Cost CentersSystem 1 System 2

Three Warehouses

Five Warehouses

Transportation $ 850,000 $ 500,000

Inventory 1,500,000 2,000,000

Warehousing 600,000 1,000,000

Cost of Lost Sales

350,000 100,000

Total Cost $ 3,300,000 $ 3,600,000


Figure 2-6 Nodes and Links in a Logistics System


Figure 2-7 A Simple Logistics Channel


Figure 2-8A Multi-Echelon Logistics Channel


Figure 2-9 A Complex Logistics Channel


(iii) Logistics and Systems Analysis

Cost Perspective Keep in mind that the most efficient

systems are not always comprised of each system component operating at its lowest possible cost.

The critical concern is to have the entire system operating at its lowest total cost.


(iii) Logistics and Systems Analysis

Level of Optimality There are often constraints working

which result in sub-optimal outcomes. Additionally, logistics systems must

work in harmony with marketing, finance, production, etc.--- this may also result in sub-optimal logistics performance.

See Figure 2-10 on next slide.


Figure 2-10 Levels of Optimality in Economic Environments


Techniques of Logistics System Analysis: Short-Run/Static Analysis

This technique is illustrated in Table 2-4. Comprised a matrix-like table which

presents each of the logistics and other relevant costs for two or more alternative logistics systems.

The major downside to the model is that it presents a solution which is not necessarily the correct one at all possible volume levels.

Examine the data presented in Table 2-4.


Table 2-4 Static Analysis of C & B Chemical Company (50,000 pounds of output)


Techniques of Logistics System Analysis: Long-Run/Dynamic Analysis

This technique is illustrated in Figure 2-11. Comprised a graph of the fixed and

variable costs of at least two alternative logistics systems.

The graph may have at least one indifference point, but may have multiple points of indifference.

Examine the data presented in Figure 2-11.


Figure 2-11Dynamic Analysis


Dynamic Analysis

System 1Total Cost = Fixed Costs + Variable Cost/unit x number of units y = $4200 + 0.0315xSystem 2Total Cost = Fixed Costs + Variable Cost/unit x number of units y = $4800 + 0.0230xTrade-off PointSystem 1 Total Costs = System 2 Total Costs $4200 + 0.0315x = $4800 + 0.0230x

0.0085x = $600 x = 70,588 pounds


Logistics in the Firm: Factors Affecting the Cost and Importance of Logistics

Competitive Relationships Inventory/order cycle length – see Figure 2-12. Inventory/lost sales effect – see Figure 2-13. Transportation/lost sales effect - see Figure 2-14.

Product Relationships Product dollar value/logistics costs – see Figure

2-15. Weight density/logistics costs – see Figure 2-16. Susceptibility to loss & damage/logistics costs –

see Figure 2-17. Spatial Relationships

Examine Figure 2-18.


Figure 2-12 The Relationship between Required Inventory and Order Cycle Length from a Customer Perspective


Figure 2-13 The General Relationship of the Cost of Lost Sales to Inventory Cost


Figure 2-14 The General Relationship of the Cost of Lost Sales to Transportation Cost


Figure 2-15 The General Relationship of Product Dollar Value to Various Logistics Costs


Figure 2-16 The General Relationship of Product Weight Density to Logistics Costs


Figure 2-17 The General Relationship of Product Susceptibility to Loss and Damage to Logistics Costs


Figure 2-18 Logistics and Spatial Relations

Chapter 2: Summary and Review Questions

Students should review their knowledge of the chapter by checking out the Summary and

Study Questions for Chapter 2.

This is the last slide for Chapter 2

End of Chapter 2 Slides

Dimensions of Logistics

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