CHAPTER 2:
Logistics
McGraw-Hill/Irwin
Copyright © 2013 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
2-2
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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Table 2.1- U.S. logistics cost,
1980-2010 in five year intervals ($B)
Year
Nominal Inventory Transportation
GDP ($T)
Cost
Cost
Administrative
Cost
Total
Logistics
Cost
Logistics
% of GDP
1980
2.80
220
214
17
451
16.1
1985
4.22
227
274
20
521
12.3
1990
5.80
283
351
25
659
11.4
1995
7.40
302
441
30
773
10.4
2000
9.82
374
594
39
1007
10.3
2005
12.43
395
739
46
1180
9.5
2010
14.60
396
769
47
1212
8.3
Source: Adapted from Rosalyn Wilson, 22nd Annual “State of Logistics Report” Council of
Supply Chain Management Professionals and Penske: Oak Brook, IL, 2011.
2-5
20
1200
1000
800
10
600
400
200
20
05
20
00
19
95
19
90
0
19
85
0
19
80
$ Billions GDP
1400
% Gross Domestic Product
The cost of logistics
Year
$ Inventory Carrying Cost
$ Transport
$ Total
% GDP
2-6
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
2-8
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
2-9
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
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?
2-13
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
2-14
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
2-15
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)
2-18
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
2-20
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
2-23
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
2-24
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 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
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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
2-29
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
2-34
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
2-38
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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