Logistics

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
 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 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 800

Logistics
600
Transportation
400

200

0
1980 2007

1980 2007
• Logistics Cost of $451 billion is 16.1% of GDP • Logistics Cost of $1398B is 10.1% of GDP
• Transportation ($214B) is 47.5% of Logistics Cost • Transportation ($857B) is 61.3% of Logistics Cost

Source: “19th” Annual “State of Logistics Report” © Council of Supply Chain Management Professionals, 2008 1-6
 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 customer’s 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
• 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
Total Cost Logistics Model
• 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 (order processing +
+ inventory + transportation +
Minimize inventory cost warehousing, materials handling
+ and packaging + facility) cost
Minimize transportation cost _________________________
+ Lowest total logistics cost
Minimize warehousing, materials
handling and packaging cost
+
Minimize facility cost
__________________________
Lowest 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
Annual holding
Daily cost of holding product = cost x Product value /365

= (.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 1-17

 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
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

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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 customer’s 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 customer’s 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 1-38

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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