1 Introduction to Logistics and Supply Chain

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1
Introduction 1
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.
1
1
Logistics Management
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 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
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
14
Marketing / Logistics
Management Concept
Customer
satisfaction
• Suppliers
• Intermediate
customers
• Final customers
Integrated
effort
• Product
• Price
• Promotion
• Place (distribution)
Company
profit
• Maximize long-term
profitability
• Lowest total costs
given an acceptable
level of customer
service
Marketing-Logistics
Concepts
and place utility –customer service
level –customer satisfaction
 Time
 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
12
Components of
Logistics Management
Management actions
Inputs into
logistics
Natural
resources
(land, facilities,
and equipment)
Planning
Implementation
Control
Competitive
advantage
Logistics management
Human
resources
Outputs of
logistics
Suppliers
Raw In-process Finished
materials inventory goods
Customers
Time
and place
utility
Financial
resources
Efficient
movement
to customer
Information
resources
Proprietary
asset
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
The Outputs of the Logistics
System
The outputs of the logistics system are
competitive advantage,
time and
place utility,
efficient movement to the customer, and
providing 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
Factors Impacting the
Development of Logistics
 Military
logistics developments
 Transportation deregulation
 Competitive pressures
 Information technology
 Channel power
 Profit leverage
1.Military Logistics
Throughout the history ; wars have
been won and lost through logistics
strengths and capabilities or the lack
of them.
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
Key Logistics Activities
1
6







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
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 ( EDIelectronic 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 economies
distribution of farm products
transportation

Era 2: Segmented functions (1940-1960)
Major influence-military with World War II
independent functions-institutional approach, inbound
outbound transportation, wholesaling, retailing,
physical distribution

Era 3: Integrated functions ( early 1960s- early 1970s)
Major influence- industrial economies
Linking them together
Total cost approach
Systems approach
Integration of logistics
 Era 4: Customer focus (early 1970s-mid 1980)
Major influence: management science
Customer service
Inventory carrying
Productivity
Link-node
OR influence

Era 5: Logistics as a differentiator ( mid 1980s-present)
Major influence-IT, management strategy
globalization
reverse logistics
environment
integrated supply chain management

Era 6: Behavioral and boundary spanning (future)
Major influence: marketing, social sciences
behavioral aspects of interfirm relations
theory development
customer 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.
1
7
MAJOR LOGISTICS COST
CATEGORIES
 Customer
service levels
 Transportation costs
 Warehousing costs
 Order processing/information
systems costs
 Lot quantity costs
 Inventory carrying costs
1
14 key logistics activites
5
Place/
customer service
levels
Customer service,
Parts and service support,
Return goods handling
Transportation
costs
Inventory
carrying costs
Traffic and transportation
Inventory management
Packaging
Reverse logistics
Lot quantity
costs
Warehousing
costs
Material handling
Warehouse and storage
procurement
Order processing and
information costs
Plant and warehouse
selection
Order processing
LIS(logistics
communications)
Demand
forecasting/planning
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 timesincreased inventory and inventory carrying costs

Cost Trade-offs Required
in Marketing and Logistics
1
5
Price
Promotion
LOGISTICS
Place/
customer service
levels
Inventory
carrying costs
Transportation
costs
Lot quantity
costs
Warehousing
costs
MARKETING
Product
Order processing
and information
costs
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.
8
1
Future Challenges in
Logistics
 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
9
Future Challenges in
Logistics
1
(Continued)
Logistics as a boundary-spanning activity
 Global logistics
 Increasing skill requirements
 Logistics information systems
 Outsourcing, partnering, and strategic
alliances
 Green marketing

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

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