CHAPTER 2

LOGISTICS

Logistics management, and supply chain

management

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

LOGISTICS
DEFINED
PLANNING IMPLEMENTING AND CONTROLLING THE PHYSICAL
FLOW OF MATERIAL AND FINISHED GOODS FROM POINT OF
ORIGIN TO POINT OF USE TO MEET CUSTOMER`S NEED AT A
PROFIT
BY PHILIP KOTLER
IT IS ESSENTIALLY A PLANNING PROCESS AND AN INFORMATION
ACTIVITY
SO A INTEGRATIVE PROCESS THAT OPTIMIZES THE FLOW OF
MATERIAL AND SUPPLIES THROUGH THE ORGANIZATION AND ITS
OPERATIONS TO THE CUSTOMER

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.

THE WORD LOGISTIC HAS ORIGINATED FROM GREEK

WORD LOGISTIKOS AND THE LATIN WORD LOGISTICUS
WHICH MEANS SCIENCE OF COMPUTING & CALCULATING
IN ANCIENT TIMES IT WAS USED MORE IN CONNECTION
WITH MOVING ARMIES, THE SUPPLIES OF FOOD &
ARMAMENTS TO THE WAR FRONT.
DURING WORLD WAR II LOGISTICS GAINED IMPORTANCE
IN ARMY OPERATIONS COVERING THE MOVEMENT OF
SUPPLIES , MEN & EQUIPMENT ACROSS THE BORDER
TODAY
IT HAS ACQUIRED THE WIDER MEANING AND IS USED IN
THE BUSINESS FOR THE MOVEMENT OF MATERIAL FROM
SUPPLIERS TO THE MANUFACTURER AND FINALLY THE
FINISHED GOODS TO THE CONSUMERS

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

The scope of integrated

logistical operations

Figure 2.2 Logistical Integration

SCOPE OF LOGISTIC
IT IS OF CRITICAL IMPORTANCE TO THE ORGANIZATION
HOW IT DELIVERS PRODUCTS & SERVICES TO THE
CUSTOMER , WHETHER THE PRODUCT IS TANGIBLE OR
INTANGIBLE.
EFFECTIVE & EFFICIENT PHYSICAL MOVEMENT OF THE
TANGIBLE PRODUCT WILL SPEAK OF INTANGIBLE
SERVICES ASSOCIATED WITH THE PRODUCT AND THE
ORGANIZATION WHICH IS DELIVERING IT.
IN CASE OF INTANGIBLE PRODUCT , THE DELIVERY OF
TANGIBLES AT THE RIGHT PLACE & RIGHT TIME WILL
SPEAK ABOUT ITS QUALITY.
ON THE MACRO LEVEL INFRASTRUCTURE SUCH AS
VARIOUS MODES OF TRANSPORT , TRANSPORTATION
EQUIP., STORAGE FACILITIES, CONNECTIVITY &
INFORMATION PROCESSING ARE CONTRIBUTING TO A
LARG3E EXTENT IN THE PHYSICAL MOVEMENT OF
GOODS PRODUCED IN MANUFACTURING , MINING &
AGRICULTURE SECTORS.

SCOPE OF LOGISTICS
INDIA SPENT NEARLY $ 50 BILLION TO MOVE MATERIAL FROM
ONE USE TO ANOTHER.

SO THE PUBLIC DISTRIBUTION SYSTEM IN THE

COUNTRY NEEDS LOGISTICAL SUPPORT FOR
DELIVERING GOODS AT RIGHT PLACE ON TIME
AND THE LOWEST COST.
AT MICRO LEVEL LOGISTIC PLAYS A CRITICAL
ROLE IN THE VALUE DELIVERY SYSTEM OF
BUSINESS ORGANIZATION TO PROVIDE SUPERIOR
CUSTOMER SERVICE I.E. TO ACHIEVE A DESIRED
LEVEL OF DELIVERED SERVICES AND QUALITY AT
THE LOWEST POSSIBLE COST.
IN A NUTSHELL ANY PRODUCTIVITY
IMPROVEMENT THAT COULD BE ACHIEVED IN ANY
PART OF LOGISTIC SYSTEM,AT THE MICRO OR
MACRO LEVEL WOULD HELP IN COST REDUCTION
AND PROPER DEPLOYMENT OF SCARE NATIONAL
RESOURCES TO THE PRODUCTIVE PURPOSES.

SCOPE OF LOGISTICS
THIS SPEED & RELIABILITY IN DISTRIBUTION OF PRODUCTS
& SERVICES CONTRIBUTE TO A GREAT EXTENT IN THE
GROWTH OF A COUNTRY`S DOMESTIC & INTERNATIONAL
TRADE . LOGISTIC COST AS A PERCENTAGE OF GDP ACROSS
THE WORLD IS SHOWN IN THE FOLLOWING TABLE
COUNTRY

KOREA
CHINA
JAPAN
INDIA
FRANCE
UK
USA

LOGISTIC COST AS A PERCENTAGE OF GDP

16
15
14
13
12
11
10

Logistics Operations
Inventory Flow

Enterprise

Customers

Customer
Service

Manufacturing Procurement
Support
(Purchasing)

Information Flow

Suppliers

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)

Logistics has risen to a key

position in the global
economy

Postwar U.S. (1945-1995)

Rise of EEC and Asia (1980-2000)

Global leader in distribution and logistics, as a direct result of

World War II
Both regions became major exporters and distributors

e-Commerce (1998-Present)

Global logistics capability almost everywhere

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

LOGISTIC A SYSTEM APPROACH

LOGISTIC RECOGNIZES THAT ALL THE ACTIVITIES OF
MATERIAL MOVEMENT ACROSS THE BUSINESS PROCESS ARE
INTERDEPENDENT AND NEEDS CLOSE COORDINATION AND
THESE ARE TO BE MAINTAINED AS A SYSTEM AND NOT THE
FUNCTIONAL SILOS.
SYSTEM IS SHOWN AS LOGISTIC
MIX INCLUDING FOLLOWING FUNCTIONAL AREAS

LOGISTIC
HR

A/Cs

Fin.

Uti.

Mark. PPC

QC

IT

M.M

Others

Organizational Functions
In process Log.

Suppliers

Procurement
In Bound Log.

Processing

Distribution

Customer

Out Bound Logistic

Logistic System Component

Transportation

Material Handling & Storage

Logistical Packaging

Warehousing
Information
Inventory Mang.

LOGISTIC FUNCTION
Order Processing

The five functions of logistical

work are interrelated

Figure 2.1 Integrated Logistics

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

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

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

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

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

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

Logistics Value
Proposition

Service

Cost Minimization

Supply Chain Logistics Management

Logistics Value
Proposition

Service

Cost Minimization

Supply Chain Logistics Management

Logistics Value
Proposition

Service

Logistics Service Quality Process Dimensions

Logistics Service Quality Outcome Dimensions

Cost Minimization

Supply Chain Logistics Management

Logistics Value
Proposition

Service

Logistics Service Quality Process Dimensions

Procedures

Contact

Information

Discrepancy

Logistics Service Quality Outcome Dimensions

Cost Minimization

Supply Chain Logistics Management

Logistics Value
Proposition

Service

Logistics Service Quality Process Dimensions

Logistics Service Quality Outcome Dimensions

Timeliness

Availability

Condition

Accuracy

Cost Minimization

Supply Chain Logistics Management

Logistics Value
Proposition

Service Benefits

Cost Minimization

Integrated Cost Tradeoffs

Supply Chain Logistics Management

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

Echelon structured logistics

Combined echelon and direct

delivery

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

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

Flexible echeloned and direct

delivery

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

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

Logistical performance cycles

Input and output requirements

are not illustrated

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

Total time to complete the

customer delivery cycle is based
on each task within the cycle

Figure 2.8 Performance Cycle Uncertainty

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

Performance cycle
synchronization seeks to
achieve planned time
Delayed or faster performance at any point
performance
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

Table 2.1- U.S. logistics

cost,
Yea Nomin Invent Transport Administr
Total
r 1980-2010
al GDP
ory ation
Cost
ative
Cost Logisti
in
five
year
($T)
Cost
cs Cost
198
2.80
220($B) 214
17
451
intervals
0

Logisti
cs % of
GDP
16.1

198
5

4.22

227

274

20

521

12.3

199
0

5.80

283

351

25

659

11.4

199
5

7.40

302

441

30

773

10.4

200
9.82
374
594
39
1007
10.3
0
Source:
Adapted from
Wilson, 22nd Annual
State
200
12.43
395 Rosalyn 739
46
1180of
9.5
5 Logistics Report Council of Supply Chain Management Professionals
and Penske: Oak Brook, IL, 2011.
201
14.60
396
769
47
1212
8.3

The cost of logistics

Logistics costs trends from

Table

Transportation Costs relative to the Total Cost of

Logistics have gone up

Inventory Costs relative to the Total Cost of

Logistics have gone down

Because of fuel prices and movement of

manufacturing to Asia

Adoption of JIT and Lean practices have reduced

these

Administrative Costs relative to the Total Cost of

Logistics have stayed the same

Service benefits are

created by logistical
Availability involves having inventory to consistently
meet customer materialin
or product
requirements
performance
3 areas

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

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 valueadded services

Managers must realize that customers are different and

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

Cost minimization using

the total cost logistics
Traditional Cost Logistics
Total Cost Logistics Model
Model
model
Focused on achieving the
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

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?

Different perspectives on
cost minimization

Traditional 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

Total Cost Logistics Model

Minimize (order processing +
inventory + transportation
+ warehousing, materials
handling and packaging +
facility) cost
_________________________
Lowest total logistics cost

The 3 areas of the valueadded logistic process

Customer relationship management is the

movement of finished product to customers

Manufacturing production concentrates on

managing work-in-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

Logistical integration
requires achieving six
objectives
simultaneously
Responsiveness

Variance reduction

Inventory reduction

Shipment consolidation

Quality

Life cycle support