11Introduction to Logistics and Supply Chain

PETER DRUCKERS stated that:

Logistics is one of the last frontiers of opportunity for organizations wishing to

improve their corporate efficiency.

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Logistics management is the process of planning,implementing and controlling

the efficient, cost-effective forward and reverse flow of raw materials, in-process inventory, finished goods, services, and related information from point of origin to point of consumption

for the purpose of conforming to customer requirements.Council of Logistics Management

Logistics Management

Logistics activities

Customer serviceDemand forecastingDistribution communications

Inventory controlMaterial handlingOrder processingParts and service support

Plant and warehouse site selection

ProcurementPackagingReverse logistics Traffic and transportationWarehousing and storage

Logistics Is Relevant to All Types of Organizations

The definition of logistics includes the flow of materials and services in both the manufacturing and service sector.

The service sector includes entities such as the government, hospitals, banks, retailers and wholesalers.

Definition of Logistics Management

Logistics has been called by many names including the following:

– Materials management– Physical distribution– Business logistics– Channel management– Distribution– Industrial logistics– Logistical management

System Approach/Integration Logistics is, in itself, a system; it is a network of

related activities with the purpose of managing the orderly flow of goods, information and service with the logistics channel.

The systems approach simply states that all functions or activities need to be understood in terms of how they affect, and are affected by, other elements and activities with which they interact.

System must be viewed as a whole

Logistics and Supply Chain Management Approach

Systems Approach

The sum of a series of activities is greater than its individual parts.

Trade-off analysis-system should be viewed as a whole.

High inventory- High customer service High storage costs High obsolescence risks

The Five Rights of Logistics

Right Items, needed for consumption or production,

Right Place Right Time Right Condition Right Cost,

Logistics Adds Value by Creating Utility

FORM UTILITY is the process of creating the good and service, or putting it in the proper form for the customer to use. (from raw materials to finished goods)

POSSESSION UTILITY is the value added to a product or service because the customer is able to take actual possession. (by credit a arrangements, loans...)

TIME UTILITY is the value added by having an item when it is needed.

PLACE UTILITY means having the item or service available where it is needed.

Logistics Supports Marketing

According to Kotler and Armstrong;– marketing management - determining the needs

and wants of target markets and delivering the desired satisfactions more effectively and efficiently than competitors

– Impact of marketing concept ----customer orientation

1 4 Marketing / LogisticsManagement Concept

Customersatisfaction

•Suppliers• Intermediate

customers•Final customers

Integratedeffort

•Product•Price•Promotion•Place (distribution)

Companyprofit

•Maximize long-term profitability

•Lowest total costs given an acceptable level of customer service

Marketing-Logistics Concepts

Time and place utility –customer service level –customer satisfaction

Customer service is an output of the logistics system

Competitive Advantage

The source of competitive advantage is found ;– In the ability of the organization to differentiate

itself, in the eyes of the customer, from its competitors,

– By operating at a lower cost and hence at greater profit.

Christopher s.5

It is only in the recent past that business organizations have come to

recognize the vital impact that logistics management can have in

the achievement of competitive advantage.

Martin Christopher

1 2 Components ofLogistics Management

Implementation ControlPlanning

Management actions

Competitiveadvantage

Efficientmovement

to customer

Timeand place

utility

Proprietaryasset

Outputs oflogisticsNatural

resources(land, facilities, and equipment)

Financialresources

Humanresources

Informationresources

Inputs into logistics

Logistics activities• Customer service• Demand forecasting• Distribution

communications• Inventory control• Material handling• Order processing• Parts and service support

• Plant and warehouse site selection

• Procurement• Packaging• Reverse logistics• Traffic and transportation• Warehousing and storage

Rawmaterials

In-processinventory

FinishedgoodsSuppliers Customers

Logistics management

The Outputs of the Logistics System

The outputs of the logistics system arecompetitive advantage, time and place utility, efficient movement to the customer, andproviding a logistics service mix such that

logistics becomes a proprietary asset of the organization.

SCM (CSCMP Definition)

Supply Chain Management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics activities.

Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers.

In essence, Supply Chain Management integrates supply and demand management within and across companies.

Competition

Today the real competition is not company against

company but rather supply chain against supply chain.

Christopher s. 16,38

1 3

Military logistics developments Transportation deregulation Competitive pressures Information technology Channel power Profit leverage

Factors Impacting the Development of Logistics

Throughout the history ; wars have been won and lost through logistics

strengths and capabilities or the lack of them.

1.Military Logistics

1.Military Logistics

Following the World War II, logistics began to receive increased recognition and emphasis.

In the Persian Gulf War in 1990-1991, the ability to efficiently and effectively distribute and store supplies and personnel were key factors in the success of the US Armed Force.

2.Deregulation Deregulation of the transportation industry in

the late 1970s and early 1980s gave organizations many more options and increased the competition within and between transportation modes.

Carriers become more creative, flexible, customer-oriented, and comparative in order to succeed.

They can focus on negotiation of rates, terms, and services, with their overall attention directed toward getting the best transportation buy.

3. Competitive Pressures Globalization and competition With rising interest rates and increasing energy

costs during the 1970s, logistics received more attention as a cost driver-emphasis on cost control

WHY? Local firms versus overseas competitors Increased offshore buying and selling

activities, more complex and more costly global supply chains

4.Information Technology Information technology gave organizations the

ability to better monitor transactions intensive activities such as ordering, movement of goods...

Computerized quantitative models for controlling and optimization

MRP,MRP II,DRP,DRP II,JIT link material management from order processing to inventory management, forecasting and production.

5.Channel Power

Shifting channel power from manufacturers to retailers, wholesalers, and distributors has also had a profound impact on logistics.

Lower brand loyalty decreases a manufacturer’s power-increases retailer’s power

6. Profit Leverage

$1 saved in logistics costs has a much greater impact on the organization’s profitability than a $1 increase in sales.

There are costs associated with sales ( cost of goods sold…) ] $ 1 increase in sales does not result in $ 1 dolar increase in profit

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Customer service Demand forecasting Inventory management Logistics

communications Material handling Order processing Packaging

Parts & service support Plant & warehouse site

selection Procurement Reverse logistics Traffic & transportation Warehousing & storage

Key Logistics Activities

CUSTOMER SERVICE

Good customer service supports customer satisfaction.

Customer service is the output of the logistics system.

It involves getting the right product, to the right customer at the right place, in the right condition, at the

right time and at the lowest total cost possible.

The key trade off of customer service: cost of lost sales

Dissatisfied customer tells to average of nine others

DEMAND FORECASTING There are many types of demand forecasting

such as; – marketing forecasts customer demand based on

promotions, pricing, competition and etc. or– manufacturing forecasts production requirements

based on marketing sales demand forecasts and current inventory levels.

Logistics usually becomes involved in forecasting in terms of how much should be ordered from its suppliers and how much of finished product should be transported or held in each market that the organization serves.

INVENTORY MANAGEMENT

Inventory management involves ; trading off the level of inventory held to achieve high customer service levels with the cost of holding inventory, including capital tied up in inventory, variable storage costs and obsolescence.

LOGISTICS COMMUNICATIONS

Communications are becoming increasingly automated, complex and rapid.

Computerized advance communication systems

Wal-Mart ( supplier link-real time demand data-on time replenishment)

MATERIALS HANDLING Materials handling is a broad area that

encompasses virtually all aspects of all movements of raw materials, work in process, or finished goods within a plant or warehouse.

A primary objective of materials management is to eliminate handling wherever possible-min. travel distance, bottlenecks, inventory levels and loss.

ORDER PROCESSING Order processing entails the systems getting orders from customers, checking on the status of orders communicating to customers about them, filling the order making it available to the customer. Advanced order-processing methods ( EDI-

electronic data interchange, EFT-electronic funds transfer, barcoding costs

PACKAGING

For protection and storage from a logistical perspective.

Important for protection during storage and transportaion

Important to be designed for the warehouse configuration and materials handling equipment

PARTS AND SERVICE SUPPORT

Logistics is responsible for providing after-sale service support.

This may include:– delivery of repair parts to dealers,– stocking adequate spares,– responding quickly to demand for repairs...

PLANT AND WAREHOUSE SITE SELECTION

Determining the location of the company’s plants and warehouses is a strategic decision

affects the costs of transporting raw materials inbound and finished goods outbound, but also customer service levels and speed of response.

PROCUREMENT

Procurement is the purchase of materials and service from outside organizations to

support the firm’s operations from production to marketing, sales, and

logistics.

Supplier selection, negotiation of price, supplier quality assessment…

REVERSE LOGISTICS Reverse flow of goods, services and related information

because of recycling, reusing and disposal activities.

Returns may take place because of a problem with the performance of the item or simply because of the customer changed his or her mind.

Return goods handling is complex and costly.

The cost of moving a product backward nearly as much as nine times as high as moving the same product forward.

TRAFFIC AND TRANSPORTATION

This is the key logistics activity actually provide for the movement of materials and goods from point of origin to point of consumption and (disposal as well)

Selection of mode, routing the shipment, assuring of compliance with regulations in the region of the country where shipment is occuring, selection of the carrier…

Largest logistics cost

WAREHOUSING AND STORAGE

Warehousing supports time and place utility by allowing an item to be produced

and helps for later consumption. Warehouse layout, design,ownership,

automation…

Logistics activity is literally thousands of years old, dating back to the earliest

forms of organized trade.

As an area of study however, it first began to gain attention in the early 1900s

-in the distribution of farm products, -as a way to support the organization’s

business strategy, -and as a way of providing time and place

utility.

Development of Logistics 6 Eras

Era 1: Farm to market ( early 1900s)( 1916-1940)Major influence- agricultural economiesdistribution of farm productstransportation

Era 2: Segmented functions (1940-1960)Major influence-military with World War IIindependent functions-institutional approach, inbound

outbound transportation, wholesaling, retailing, physical distribution

Era 3: Integrated functions ( early 1960s- early 1970s)Major influence- industrial economiesLinking them togetherTotal cost approachSystems approachIntegration of logistics Era 4: Customer focus (early 1970s-mid 1980)Major influence: management science Customer serviceInventory carryingProductivityLink-nodeOR influence

Era 5: Logistics as a differentiator ( mid 1980s-present)Major influence-IT, management strategyglobalizationreverse logisticsenvironmentintegrated supply chain management

Era 6: Behavioral and boundary spanning (future)Major influence: marketing, social sciencesbehavioral aspects of interfirm relationstheory developmentcustomer perceptions of logistics systems

TOTAL COST CONCEPT

“The total cost concept” is the key to effectively managing logistics processes.

The goal of the organization should be to reduce the total cost of logistics activities, rather than focusing on each activity in isolation.

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Customer service levels Transportation costs Warehousing costs Order processing/information

systems costs Lot quantity costs Inventory carrying costs

MAJOR LOGISTICS COST CATEGORIES

1

5 14 key logistics activites

Place/customer service

levelsCustomer service,

Parts and service support,Return goods handling

Order processing and information costsOrder processing

LIS(logistics communications)

Demand forecasting/planning

Warehousingcosts

Warehouse and storagePlant and warehouse

selection

Transportationcosts

Traffic and transportation

Inventory carrying costs

Inventory managementPackaging

Reverse logistics

Lot quantitycosts

Material handlingprocurement

Source: Adapted from Douglas M. Lambert, The Development of an Inventory Costing Methodology: A Study of the Costs Associated with Holding Inventory (Chicago, IL: National Council of Physical Distribution Management, 1976), p. 7.

Inventory carrying costs: capital costs, inventory service cost (insurance and taxes on inventory), storage space costs, inventory risk costs.

Lot quantity costs: procurement and production related costs varying with changes in order size or frequency.

Order costs, setup costs, capacity lost, material handling cost, price differentials due to buying in different quantities

TRADE-OFF APPROACH IN LOGISTICS

Central goal of trade off in logistics is to maximize long term profitability and the effective use of assets.

Examining trade-offs among alternatives and costs, thereby reducing the overall total cost of activites.

Reduced transportation costs and longer transit times-increased inventory and inventory carrying costs

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Cost Trade-offs Required in Marketing and Logistics

Place/customer service

levels

Product

PromotionPrice

Order processing and information

costs

Warehousingcosts

Transportationcosts

Inventorycarrying costs

Lot quantitycosts

LOG

ISTI

CS

MA

RK

ETIN

G

Source: Adapted from Douglas M. Lambert, The Development of an Inventory Costing Methodology: A Study of the Costs Associated with Holding Inventory (Chicago, IL: National Council of Physical Distribution Management, 1976), p. 7.

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Strategic planning and participation Total quality management (TQM) Just-in-time (JIT) Quick response (QR) Efficient consumer response (ECR) Logistics as a competitive weapon Accounting for logistics costs

Future Challenges inLogistics

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Logistics as a boundary-spanning activity Global logistics Increasing skill requirements Logistics information systems Outsourcing, partnering, and strategic

alliances Green marketing

(Continued)

Future Challenges inLogistics

JIT

Just in time Aim to reduce waste and redundant inventory

by delivering products, components, materials when they are needed.

Needs close coordination Reduces inventory, increases customer service

level JIT in retail and grocery: QR and ECR

Quick response

Began in apparel and textile industry Retail sector strategy Speeding inventory flows Mostly between manufacturer and retailer When fully implemented, QR applies JIT. Moving product fastly-cross docking rather

than warehousing, floor ready merchandise( prehung and preticketed)

Wide usage of IT ( EDI, POS, Barcodes, CAD, CAM…)

Efficient Consumer Response

Combining several logistics methods for improving the competitiveness of the grocery industry by cutting waste in SC

Grocery industry’s answer to QR Wide implementation of EDI, POS(point of sale),

barcoding: paperless information flow Continuous replenishment Cooperative relation between manufacturer,

suppliers,distributors and customers Cross dock Moving away from deal mentality to cooperation

ECR

% 41 of total chain reduction of inventory

speeds up cycle time from 104 days to 61 days