Logistics

McGraw-

Copyright 2010 by The McGraw-Hill Companies, Inc. All rig

Overview of logistics

Logistics of business is big and important

The logistical value proposition
The work of logistics
Logistical operations
Logistics integration objectives
Logistical operating arrangements
Flexible structure
Supply chain synchronization

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What is Logistics?
Logistics is the design and administration of
systems to control movement and geographical
positioning of raw materials, work-in-process, and
finished inventories at the lowest total cost.

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Logistics has risen to a key position in the global

economy
Postwar U.S. (1945-1995)
Global leader in distribution and logistics, as a direct result of
World War II

Rise of EEC and Asia (1980-2000)

Both regions became major exporters and distributors

e-Commerce (1998-Present)
Global logistics capability almost everywhere

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Logistics will continue its renaissance in the

future
Information technologies will automate many of the
traditionally manual logistical functions:
Automated port and rail operations
RFID tagging of materials
Advanced technologies for warehousing and inventory operations

Removal of trade barriers will continue to expand global

trade and logistics

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Goal of logistics management

To satisfy customer
expectations for delivery of
products (or services) while
minimizing the total cost
Managers must support the
requirements for procurement,
manufacturing and customer
accommodation supply chain
operations

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Transportation has become the major

logistics cost component in the USA

$ Billion

1980

2007

1980

2007

Logistics Cost of $451 billion is 16.1% of GDP

Transportation ($214B) is 47.5% of Logistics Cost

Logistics Cost of $1398B is 10.1% of GDP

Transportation ($857B) is 61.3% of Logistics Cost

Source: 19th Annual State of Logistics Report Council of Supply Chain Management Professionals, 2008

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Logistics costs trends from Table 2.1

Transportation Costs relative to the Total Cost of Logistics
have gone up
Because of fuel prices and movement of manufacturing to Asia

Inventory Costs relative to the Total Cost of Logistics have

gone down
Adoption of JIT and Lean practices have reduced these

Administrative Costs relative to the Total Cost of Logistics

have stayed the same

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Logistical value proposition

Logistical value proposition consists of a
commitment to key customer expectations and
requirements at a minimum cost
The two elements of this value proposition are
Service and Cost Minimization
Firms must make appropriate tradeoffs between service
and cost for each of their key customers

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Service benefits are created by logistical

performance in 3 areas
Availability involves having inventory to consistently meet
customer material or product requirements
Operational performance deals with the time required to
deliver a customers order
Key metrics for this area involve delivery speed and consistency

Service reliability involves the quality attributes of logistics

Key to quality is accurate measurement of availability and
operational performance over time

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Basic logistical service may not fit all customers

Basic logistics service describes the level of service a
firm provides all established customers
However, some customers require unique or special value-added
services

Managers must realize that customers are different and that

services provided must be matched to accommodate
unique requirements and purchase potential

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Cost minimization using the total cost logistics

model
Traditional Cost Logistics Model

Total Cost Logistics Model

Focused on achieving the lowest

possible cost for each individual
function of logistics
For example, Transport the material
the cheapest way possible

Expected lowest cost based on

decisions that were cheapest for
individual functions
Ignored the impact of cost decisions
across logistics functions

Focused on achieving the lowest total

cost across each function of logistics
A cost decision in one function should
consider impact to costs of all other
logistics functions
For example, Transporting material
the cheapest way is slower than
other choices. This requires an
increase in storage cost to hold the
material longer
Would it still be a lower cost to use
the cheapest mode of transport?

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Different perspectives on cost minimization

Traditional Cost Logistics Model

Total Cost Logistics Model

Minimize order processing cost

+
Minimize inventory cost
+
Minimize transportation cost
+
Minimize warehousing, materials
handling and packaging cost
+
Minimize facility cost
__________________________
Lowest logistics cost

Minimize (order processing + inventory +

transportation + warehousing,
materials handling and packaging +
facility) cost
_________________________
Lowest total logistics cost

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Example of evaluating alternatives to find lowest

total cost
Compare two alternative shipping carriers to move
a shipment of electronic chips
Value of shipment = $25,000.00
Faster shipping is generally more expensive than
slower shipping
Carrier 1 costs $250 to ship
Carrier 2 costs $20 more but delivers 1 day faster

Product in transit is a form of inventory

Holding costs for shipment is 40% of value per year

No other cost differences across remaining logistics

functions

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Example of evaluating alternatives to find lowest

total cost
Traditional Cost Method
Minimize transportation cost
Compare 1st carrier at $250 vs. 2nd carrier at $270

Decision is to use 1st Carrier to save $20

Total Cost Method

Minimize total of transportation and inventory cost

Daily cost of holding product =

Annual holding
x Product value /365
cost

= (.40 x $25,000)/ 365 = $27.40

Compare 1st carrier at $250 + $27.40 = $277.40 vs. 2nd carrier at $270

Decision is to use 2nd Carrier since it is a lower total cost

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Logistics includes these major functions of work

Order Processing
Inventory
Transportation
Warehousing,
Materials Handling,
and Packaging
Integrated through a
network of facilities
E.g. warehouses and
distribution centers
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Integrated logistics framework

Goal is to achieve customer satisfaction at the
lowest Total Cost
Decisions in one functional area will impact cost of
all others
We integrate the logistical functions into a coherent
framework starting with the customer (Order
processing) and ending with the customer
(Transportation and Delivery)
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The five functions of logistical work are

interrelated

Figure 2.1 Integrated Logistics

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Order processing
Order processing is the transmission of customer
requirements to the supply chain
Accurate information is needed to achieve superior
logistical performance
Responsive supply chains require accurate and
timely information about customer purchase
behavior
Fast information flow enables improved work
balancing
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Inventory
Inventory requirements of a firm are directly linked to the
facility network and the desired level of customer service
Inventory strategy seeks to achieve the desired customer
service with the minimum inventory commitment
Inventory strategy is based on a combination of

Core customer segmentation

Product profitability
Transportation integration
Time-based performance
Competitive performance

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Transportation
Transportation is the operational area that
geographically moves and positions inventory
There are three basic ways to satisfy transportation
requirements
Operate a private fleet of equipment
Contract with dedicated transport specialists
Engage carriers that provide different transportation
services as needed on a per shipment basis

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Warehousing, materials handling and packaging

These work activities are integral parts of other logistical
functions
Inventory typically needs to be warehoused at selected times
during the logistics process
Transportation vehicles require materials handling for efficient
loading and unloading
Individual products are most efficiently handled when packaged
together into shipping cartons

Effective integration of these functions facilitates the speed

and overall ease of product flow throughout the logistical
system
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Facilities network
The number, size and
geographical relationship of
facilities used to perform
logistical operations directly
impacts customer service
capability and cost
Types of facilities in the
logistics network include
Manufacturing plants,
warehouses, cross-dock
operations and retail stores
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The scope of integrated logistical operations

Figure 2.2 Logistical Integration

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Inventory flow
Managers must be concerned
with the movement and storage
of inventory in 3 major forms
Materials
Work-in-process
Finished products

Logistical operations should

add value by moving inventory
when and where needed
Materials and components gain
value at each step of their
transformation into finished
inventory

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The 3 areas of the value-added logistic process

Customer accommodation is the movement of finished
product to customers
Manufacturing support concentrates on managing workin-process inventory as it flows between stages of
manufacturing
Procurement is concerned with purchasing and arranging
inbound movement of materials, parts, and/or finished
inventory from suppliers into manufacturing or assembly
plants, warehouses or retail stores

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Information flow

Information flow identifies specific

locations within a logistical system
that have requirements
Information also integrates the three
operating areas

Information facilitates coordination of

planning and control of day-to-day
operations
Logistical information has two major
components
Planning / coordination information
Operational information needed to
complete work

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Logistical integration requires achieving six

objectives simultaneously
Responsiveness
Variance reduction
Inventory reduction
Shipment consolidation
Quality
Life cycle support

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Logistical operating arrangements

All logistical arrangements share two common characteristics
They are designed to manage inventory
The range of logistics alternatives is limited by available technology

Three widely utilized structures are

Echelon (traditional) is a linear flow from origin to destination through buffers
or warehouses/distribution centers
Direct is designed to ship products directly to customers destination from one
or a limited number of centrally located inventories
Combined is a combination of Echelon and Direct, depending on the product,
market, or customer

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Figure 2.3 Echelon Structured Logistics

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Figure 2.4 Combined Echelon and Direct

Delivery

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Flexible structures are programs to service

customers using alternatives
Flexible operations are preplanned contingency strategies to prevent
logistical failures
For example, a warehouse is out of an item so a contingency policy assigns
the total order to another warehouse

The structure appears the same as a combined arrangement, but

with the ability to change the logistical structure to suit the service
need
Different approaches for different situations
Very common with factory-less companies like Nike and Best Buy

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Example situations for flexible logistics structure

The customer-specified delivery facility might be near a
point of equal logistics cost or equal delivery time from two
different logistics facilities
The size of a customers order creates improved logistical
efficiency if serviced through an alternative channel
arrangement
Decision to use a selective inventory stocking strategy
Agreements between firms to move selected shipments
outside the established echeloned or direct arrangements

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Figure 2.5 Flexible Echeloned and Direct

Delivery

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Supply chain synchronization

Supply chain
synchronization is the
operational integration of
multiple firms across a supply
chain
Seeks to coordinate the flow of
materials, products and
information between supply chain
partners to reduce duplication of
effort
Seeks to reengineer internal
operations of individual firms to
leverage overall supply chain
capability

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The logistics performance cycle is the basic unit

of supply chain design and operational control
The performance cycle represents elements of work
necessary to complete the logistics related to customer
accommodation, manufacturing or procurement
A performance cycle consists of the following elements
Nodes
Links
Inventory
Base stock
Safety stock

Input and output requirements

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Figure 2.6 Logistical Performance Cycles

Input and output requirements

are not illustrated

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Performance cycle uncertainty

Major objective of logistics in all areas is to reduce
performance cycle uncertainty
Operational variance is randomly introduced during
the cycle through
The structure of the performance cycle itself
Operating conditions
The quality of logistical operations

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Total time to complete the customer delivery

cycle is based on each task within the cycle

Figure 2.8 Performance Cycle Uncertainty

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Ways to improve performance cycle times

EDI (Electronic Data Interchange) or Internet order
management and tracking
RFID or Bar code material tracking
Automated inventory management
Automated order selection and picking
Communication with customers to determine their needs
Communication with suppliers to determine their
capabilities

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Performance cycle synchronization seeks to

achieve planned time performance
Delayed or faster performance at any point along
the supply chain results in potential disruption of
operations
Once consistent operations are achieved,
managers can focus on reducing the time to
complete the performance cycle to a minimum

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