Chapter 12
Logistics:
Positioning Goods in the
Supply Chain
McGraw-Hill/Irwin
©The McGraw-Hill Companies, Inc. 2008
Introduction to Logistics
“the process of planning, implementing, and
controlling the efficient, effective flow and
storage of goods, services, and related
information from point of origin to point of
consumption for the purpose of conforming to
customer requirements.”
12-2
Logistics
• Purchased goods must be transported
from the point where they originate to the
place needed, with inventories held at a
minimum amount, to ensure production
and customer service.
The management of inventory in motion and
storage is called logistics.
Council of Logistics
Management
• Part of the supply chain that plans,
implements, and controls the efficient,
effective flow and storage of goods,
services, and related information from the
point of origin to the point of consumption
in order to meet the customers’
requirements.
Logistics
• Logistics - (business definition)
Logistics is defined as a business
planning framework for the
management of material, service,
information and capital flows. It
includes the increasingly complex
information, communication and
control systems required in today's
business environment. -- (Logistix
Partners Oy, Helsinki, FI, 1996)
Logistics Costs
• Logistics costs can be divided into:
- Inventory carrying cost
- Administrative cost
- Transportation cost (major portion of the
total cost)
Logistics Network Configuration
• Costs are incurred and time is required to
move goods from raw materials to
consumers.
• An important task for supply chain
management is to determine distances
and how travel will take place.
12-7
Supply Chain and Logistics
• Supply chain should be emphasizing
reducing costs and cycle time and cycle
time.
• It requires efficient transportation and
other logistics services.
• Information flow is a critical first step
Logistics Requirements
• Logistics requires skill and knowledge in
the field.
• Knowledge of the rules and regulations
Logistic Activities
•
•
•
•
•
•
Transportation
Warehousing
Material Handling
Packaging
Inventory Management
Logistics Information Systems
Effects of Logistics
• Logistics Accounts for 5 to 35 percent of
total sales costs
• In North America the logistics is 10.7 per
cent of GDP
• Logistics affects delivery, lead time, and
location of an item
Outsourcing Logistics Services
• Third party providers are known as 3PLs
• 3PLs can be narrow in focus or quite
broad
12-12
Logistic Strategy
• To ensure that the logistics choices are
consistent with its overall business
strategy and supports the performance
dimension that targets customers value.
• Performance Dimensions:
- Quality
- Time
- Flexibility
- Cost
Logistics Network Configuration
• Costs are incurred and time is required to
move goods from raw materials to
consumers.
• An important task for supply chain
management is to determine distances
and how travel will take place.
12-14
3PL Selection
• Steps to selecting a
3PL
12-15
Owning vs. Outsourcing
• Do you have enough volume to justify a
private logistics system?
• Would owning private logistics system limit
the firm’s ability to respond to change?
• Is logistics a core competency of the firm?
Reverse Logistics
•
•
•
•
The flow of goods back to their producer
Increasing in importance
Often outsourced
May function as asset recovery
(products to be resold)
12-17
Transportation
• Transportation is an important supply
chain driver because products are rarely
produced and consumed in the same
location.
• Transportation is a significant component
of the costs incurred by most supply chain.
Transportation represents 10 percent of
the GDP and employs more than 20
million people, accounts for 16 percent of
the US employment.
Transportation
• Any supply chain’s success is closely
linked to the appropriate use of
transportation.
• Shipper is the party that requires the
movement of the product between two
points in the supply chain.
• Carries is the party that moves or
transports the product.
Transportation
• Owner or operators of the transportation
facilities
• Agencies that set transportation policies
• Transportation network as a collection of
nodes and links.
Transportation
• The effectiveness of any mode of transport
is affected by equipment investments and
operating decision by the carrier as well as
the available infrastructure and
transportation policies.
Transportation
• Longer supply chain creates complex
transportation system
• Long distances creates complex transportation
system
• Many modes of transportation choices add
complexity
• Modes are: road, rail, air, ships, pipeline, and
intermodal.
•
new
Carrier Objectives
• Objective is to ensure good utilization of its
assets while providing customer with an
acceptable level of service.
• The decision is affected: equipment cost,
fixed operating cost, variable operating
cost, and price it can charge.
Transportation Modes
• U.S. Commercial Freight Activity by Transportation Mode
Truck is the largest mode.
Air is fastest growing
12-24
Road Transport
– Trucking consist of two major segments:
FTL (Full truckload) is the cheapest.
LTL (Less than truckload) costs more.
– Truck is most commonly used cargo mode
– Most goods transportation ends with a truck
delivery
– Most flexible mode of transportation
64 percent of U.S. commercial freight by value
and 58 percent by weight is moved by truck.
12-25
Road Transportation
•
•
•
•
Trucking is most expensive than rail
Door-to-door shipment
Shorter delivery time
No transfer required between pickup and
delivery
Full Truck Load (FTL)
•
•
•
•
Low Fixed cost
Fewer Trucks
Economies of Scale
Good for transportation between factories
and warehouses (manufacturer and
suppliers)
Less Than Truck Load (LTL)
• Small load
• Cheaper
• Consolidate package
Air
• If speed is required, use air
• Cost is very high and should be used in
emergency
• Long distance may require air
transportation
• Cost can be justified by reducing lead
time, reliable delivery, and quick cash
recovery (sell product quickly)
• new
RAIL
• Carried 4 percent shipment b value, and
12 percent by weight and more tan 25
percent of total ton-miles.
• Higher fixed cost in cars and locomotives
• Price is structured and heavy load make it
economical
• Ideal for very heavy, low-value shipments
(coal).
Rail Transport
• Less flexible than truck. But less costly over long
distances.
• Takes longer than truck
• Trend is toward specialty wagons (railcar).
• Can provide specialty wagon such as:
- Hopper wagon for bulk powder products
- Flat wagon for steel and equipment
- tanker wagon for liquid
- car wagon for automobile
for different products. Road trailer can be easily
changed to truck trailer.
• Double stacking (containers are stacked on railcars) is
becoming more common.
12-31
MARINE TRANSPORTATION
•
•
•
•
Limited to certain areas
Inland waterway (rivers)
Coastal water
Large load and low cost
Marine Transport
• Breakbulk ships (goods packed in boxes,
crates, or cartons) carry loose freight. This
makes loading and unloading easy.
• Containerships carry containers.
– Faster loading and unloading
– Easy transfer to rail or truck
12-33
Pipeline
• Least flexible, only used for specialized
product e.g. gas, water or oil.
• Often used to transport between isolated
areas
• High initial investment, but low operating
costs
12-34
Intermodal Transport
• At least two different modes are used, e.g.
Marine/rail, rail/road, marine/road,
marine/rail/road, etc.
• Integrated transport carriers use whatever
is best
– Customer doesn’t have to deal with modes
and is given total cost up front
• Utilizes containerized shipping.
12-35
Integrated Transportation
• Integrate transportation decisions with
inventory and warehousing, order
management, forecasting, and production
planning.
• Combination of modes that best suite the
product from origin to destination,
• Only costs are negotiated and the choice
of modes is made by providers.
Implications of Strategy
Performance
Dimension
Transportation
Mode
Warehousing
System
Delivery reliability
Deliver on time consistently
Highway
Air
None (direct ship)
Assortment
Spot Stock
Delivery Speed
Minimal time from order to delivery
Air
Highway
None (direct ship)
Assortment
Spot stock
Mix Flexibility
Support a wide range of different
products/delivery needs
Highway
Air
Rail
Assortment
Spot Stock
Implications of Strategy
Performance
Dimension
Transportation
Mode
Warehousing
System
Design reliability
Support design changes/unique
customer needs
Highway
Air
Postponement
Volume Flexibility
Provide products/delivery services
in whatever volume the customer
needs
Highway
Air
None (direct ship)
Assortment
Spot stock
Cost
Minimize the cost of transportation
Rail
Water
Pipeline
Rail
Consolidation
Cross-docking
Hub and Spoke
Buyer/Seller Responsibility
• Who pays for product’s transportation
• Who bears the risk and when risk passes
• In international transaction the transportation
terms as well as the sale price are negotiated.
• International Commercial terms (Incoterms)
defined the terms for transportation.
- international carriage not paid by the seller
- international carriage paid by the seller
- arrival at stated destination
Origin
• EXW – Ex Works : Means that the seller
delivers when they place the goods at the
disposal of the buyer at the seller’s
premises or some named place, not
cleared for export and not loaded on a
vehicle.
Incoterms: International Carriage Not Paid
By the Seller
FCA stands for Free Carrier. The seller delivers the
goods, cleared for export, to the carrier the buyer
specifies, at a named location, not loaded. The seller’s
responsibility is fulfilled when he delivers the goods to
the carrier.
• FAS means Free Alongside Ship. The seller delivers
when the goods are placed alongside the vessel at the
named port of shipment. This is specifically used for
ocean shipments that aren’t containerized.
• FOB stands for Free on Board. FOB means that the
seller delivers when the goods pass the ship’s rail at the
named port of shipment. The buyer is responsible for
costs and risks as soon as the goods pass the ship’s rail.
12-41
Incoterms: International Carriage Paid
By the Seller
• CFR designates Cost and Freight. The seller is responsible for the
cost and fright required to bring the goods to the named destination,
but the buyers is responsible for the risks when the goods pass the
ship’s rail in the port of shipment.
• CIF means Cost, Insurance, and Freight. This is the same a CFR,
except that the seller is responsible for insurance against loss or
damage.
• CPT stands for Carriage Paid To. The seller is responsible for the
cost of freight to the named destination. The risks associated with
loss, damage, or cost increases becomes the buyer’s when the goods
have been delivered to the custody of the first carrier.
• CIP stands for Carriage and Insurance Paid To. This is the same as
CPT, except the seller is responsible for transport insurance against
loss or damage.
12-42
Incoterms: Arrival at Stated Destination
• DAF stands for Delivered at Frontier. DAF means that the seller’s
responsibility stops when the goods have arrived at the frontier, but
before the customs border of the country specified in the contract.
• DES stands for Delivered Ex Ship. DES means that the seller’s
responsibility ends upon placement of the goods at the disposal of
the buyer on board the ship at the named port of destination.
• DEQ stands for Delivered Ex Quay. DEQ means that the sellers
obligation is fulfilled when the goods are made available on the quay
(wharf) to the buyer at the named port of discharge.
• DDU stands for Delivered Duty Unpaid. DDU means that the
seller’s responsibility goes up to the point when the goods have
been made available to the buyer at the named place in the country
of importation. The buyer has to pay all duties, taxes, and customs
charges required for importation.
• DDP stands for Delivered Duty Paid. DDP is like DDU in that the
seller’s obligation ends when the goods have been made available
to the buyer at the named place in the country of importation.
However, the seller is responsible for all duties, taxes, and customs
charges.
12-43
Warehouses
• As product moves form supplier to
customer, there may be a need for a
storage.
• Storage could be provided by supplier,
retailer, or 3PL.
• Warehouse may be used to reduce cost,
reduce response time, increase variety of
product, and handle emergency.
Warehousing
• Distribution Strategies:
12-45
Direct Shipment
• Shipping directly from
manufacturer to retailer
• Eliminates warehouse
costs
• Probably won’t take
advantage of FTL
transportation savings.
• High inventory level
needed
12-46
Consolidation Warehousing
• Storage in warehouse,
then shipped.
• More likely to use FTLs
• Risk pooling benefits of
reduced inventory in
system
• Used in combination with
postponement (delays the
commitment of products
to final configuration.
Packaged to meet needs
of different customers.)
12-47
Cross-Docking
• Continuous shipment from
suppliers to warehouses where
goods are redirected and
delivered to customers.
• Most sophisticated system.
Require close communication
between supplier and retailer.
• Require reliable forecast
• High cost, but very efficient
• Used by high-volume retailers
like Wal-Mart and Dollar
General
• FTL bulk shipments to crossdock center, then FTL mixed
loads to retailers
12-48
Warehouse Location Decisions
• Center-of-gravity method: used for locating a
distribution center among warehouses or retail
stores.
• Finds the “most central location” for the DC by
calculating the X and Y coordinates that
minimize transportation costs.
• Considers distance between the DC and
warehouses or stores as well as the number of
shipments necessary between them
12-49
Location Decision-Making Techniques:Center-ofGravity Method
ΣdixVi
Cx =
Σ Vi
ΣdiyVi
Cy =
Σ Vi
where
Cx = X coordinate of the center of gravity
Cy = Y coordinate of the center of gravity
dix = X coordinate of the ith location
diy = Y coordinate of the ith location
Vi = Volume of goods moved to or from the ith
location
12-50
Information Technology
• Radio Frequency
Identification
(RFID)
– Each tag has a
unique
identifier that
uses the
electronic
product code
(EPC) format.
Exhibit 12.12 EPC Format
12-51
Information Technology
• Radio Frequency
Identification (RFID)
– RFID tags emit a signal
that can be read at a
distance.
– The signal contains a
unique identifier that can
be read by a reader
– Information about the item
can be stored on a host
computer
– RFID can be used to aid in
inventory counts, security,
product tracking, etc.
12-52
Information Technology
• Potential RFID
Applications:
12-53
Information Technology
• Global Positioning systems
– Determine precise locations using satellites.
– Used to monitor vehicle locations
– Estimate arrival times
– Update customers on delays
– Increase security
12-54
Logistics Costs
• Landed Cost computations
– Convert all logistics-related costs to a per unit basis for
comparison
12-55
Supply Chain and Information
Technology
• Widespread implementation of enterprise resource
planning (ERP) systems offers the promise of
homogeneous, transactional databases that will facilitate
integration of supply chain activities.
Examples of ERP – SAP, Oracle, and PeopleSoft.
• To effectively apply IT, a company must use its
transactional and analytical information.
Information Technology
• Transactional Database – keeping record
of all business transactions
• Analytical Process – Ability to evaluate
large numerical databases in helping
manager identify optimal option. Analysis
not only must evaluate each option but
also compare multiple option to suggest a
best option.
Transactional VS. Analytical IT
• Transactional IT deals with acquiring, managing, and
communicating raw data of the company’s supply chain
and compilation and dissemination of reports
summarizing these data.
• Analytical IT deals with evaluating supply chain options
using descriptive and optimization models.
- Description models – forecast and cost models.
- Optimization models – Linear programming, decision
models, project management.
Internet Enabled 4PL
A Case Study
Padraic Allen
Two Trends Facing Supply
Chain Managers Today
• eCommerce – the internet can offer true
integration – the Cornerstone of Supply
Chain Management
• Outsourcing – organisations are
outsourcing non-core competencies
The Supply Chain Challenge
Outdated pricing
Long turn around time
Legacy systems
Customer
service
Issues
Large
support
staff
Manufacturer
Supplier
High costs
Distributor
Merchant
Cumbersome communications
Too much stock
eBusiness & Supply Chain
Management
One area where the payback from e-Business
can be substantial is in the integration of the
supply chain
“The B2B Frenzy is all about the Supply Chain”
AMR Research
Outsourcing
• Listed by Harvard Business Review as
one of the most important management
concepts of the past 75 Years
• Means of increasing performance of
non-core supply chain activities
• Fourth Party Logistics is the evolution of
supply chain outsourcing
The key benefit of 4PL is that of
increasing shareholder value
-Benefits of 4PL–
• 4PL provider maintains primary
accountability and quality within
the arrangement
• 4PL has the overarching
responsibility for supply chain
performance
• 4PL should be able to impact
the entire supply chain –
increasing revenue, lowering
costs, reducing working capital
and fixed capital
4PL Operating Models
The 4PL environment has three primary operating
models:
• The Synergy Plus Model
• The Solution Integrator Model
• The Industry Integrator Model
Note: 4PL is a trademark of Accenture
4PL Operating Models
• The Synergy Plus Model - relies on a working
relationship between the 4PL Organisation and a 3PL
Company. Both the 4PL and the 3PL partner to
market supply chain solutions which capitalise on the
capabilities and market reach of both. The 4PL offers
a broad range of services to the Third Party Logistics
Provider including; technology, supply chain strategy
skills and program management.
4PL Operating Models
• The Solution Integrator Model - focuses on the
strength of the 4PL as an individual organisation
which manages a comprehensive supply chain
solution for a single client. This arrangement
encompasses the resources of the 4PL with a
selection of complementary service providers,
chosen by the 4PL, to establish a “best fit” integrated
solution for the client company.
4PL Operating Models
• The Industry Innovator Model - is the most
complex operating model within the 4PL
environment but also the most rewarding. Within
this model,a 4PL organisation develops and runs a
supply chain solution for multiple industry players
with a focus on synchronization and collaboration.
What is the Industry Innovator
Model?
– The Industry Innovator is an integrated eCommerce based range of
outsourced supply chain functions that act as a highly efficient path
for enabling the transfer of product from suppliers to buyers.
– An individual company in each industry will have slightly different
supply chain needs, but there should be similarities within an
individual industry.
– Although the model looks similar to a marketplace, it could in fact be
a series of one-to-many relationships pushed through one Market site
on the web.
Typical Supply Chains
Inefficient and Clogged with inven
Supply Chain Re-engineering fo
a Single Company
Supply Chain Re-engineering for an
Entire Industry
Internet Enabled 4PL – A
Case Study
iTooling.com
iTooling.com was conceptualised as an
‘Industry Innovator’ 4PL. It was developed
for the industrial tooling sector with an
initial focus on cutting tools.
Brief Profile of the Industry
• Customers – Aerospace, Automotive, Job
Shops, etc.
• $19Bn Worldwide Market (Roughly 1/3 in
each region US, Europe & Asia)
• Small form factor
• Relatively high value
• Consumable – Frequent repeat buying
• Many suppliers – Very fragmented
Background
• The industrial tools market is one of the most fragmented
and agency locked markets in the world today.
• The route from manufacturer to customer is characterised
by the involvement of many intermediaries, several handoffs and multiple inventory holding points.
• The belief was that there is minimal value added by these
intermediaries and the consequence of their involvement
is additional touches, increased customer cost and an
erosion of manufacturer’s margin.
• It was felt that there was an outstanding opportunity to
totally simplify the supply chain and in doing so reduce the
cost and significantly improve the buying experience for
the customer.
Supply Chain
Typical Supply Chain
Global
Manufacturers
Regional
Distributor
+
Customer
Country
Wholesaler
+
Local
Agent
Supply Chain Future
Global
Manufacturers
Customer
Regional
Distributor
Country
Wholesaler
Local
Agent
Strategy
• Partner with quality brand manufacturers of selected
industrial tools.
 Create a multi brand carrying internet site to allow
customers a full catalog view of the selected products
and pricing.
 Manage the customer relationship and the fulfillment
process and this would become a core competence of
the company.
 Partner with strategically positioned logistics providers
capable of meeting or exceeding customer’s response
expectations.
Strategy (Continued)
 Hub inventory at the logistics sites calculated to
achieve a defined customer fill rate
 Take ownership of the product only when it is being
picked for a customer order and aggressively manage
the cash conversion cycle
 Primarily trade on-line and actively encourage
customers to do so but this will be supplemented by
call center support
 Work on an agreed service fee calculated to cover
iTOOLING.com’s costs and achieve target profit
Hubbing Animation…
Benefits- Win, Win
Manufacturer
Customer
•Real Time Demand Information
•Product Choice & Comparison
•Online without being in direct
competition with existing channels
•Best Price Available
•Forecasting Data Available
•Distribution Coverage
•Product Feedback
•Improved Manufacturers Margin
•Improved Purchasing Experience
•Simple / Transactional Cost Savings
•Improved Customer Service
•Technical Support available 24/7
•One Stop Shop for Industry
Price
End User Price
“Sheffield” Margin
Discount
vs R.R.P.
Local Distributor Margin
National Distributor Margin
Saving
iTOOLING.com Profit
Geographic Agent Margin
iTOOLING.com
Service Charge
Manufacturer Selling Price
Sheffield RecommendedExisting DistributioniTOOLING.com Model
Network Model
Retail Price Model
But….
• Industry was not ready for radical change
• Manufacturers feared increased competition
and even less opportunity for differentiation
• Intermediaries proved to be more valuable
than anticipated and in fact held a lot of
power in the chain
These lessons were not unique to the Tooling industry!
Where to next?
• How Could We ?
– Continue to engage the Intermediaries
– Overcome the Manufacturers fears
– And Still Achieve Supply Chain Efficiencies

Conclusion:
By moving From Revolution to Evolution
Mfg A
Mfg B
Mfg B
Mfg C
Mfg D
Mfg E
A.S.P.
Charge
Supply & Inventory Management
On-line Web Presence
Dist A :Business as
usual with reduced
inventory
Order Fulfilment
Invoicing & Billing
Dist B : On-line
presence &
reduced inventory
Sell Direct
Dist C : Added value sales
agent. On line presence,
sources product & provides
technical support
eMarkets
No Dist : Manufacturer
Website or Large Customer
Exchange, MRO or other
marketplace (Covisint?)
Integrated M3 Cataloging Technology & 4PL Mgmt.
Manufacturer(s)
Industry
Master
Channel
Partner
Catalog
Touch
Points
End-User
Custom
Catalogs
4PL Management
The Information Conduit
iTooling.com Value Proposition
ASP £ Model
Software Partner: Catalogs, ASP, Back Office,
eCommerce Platform
Technical &
Business
Implementation
Manufacturer
Manufacturer
Manufacturer
Fee % Based
Partner
Relationship
Management
Channel Type A
Channel Type B
iTooling.com
Communicate &
Consult
Channel Type C
Manufacturer
Design & Manage
Processes
Channel Type D
Standard Software Interface to 3PL Partners
Variable £ Model
Cost + Mgmt. Fee
3PL Partners: Tracking, Delivery, Inbound
Manage Hubs, Reports,
Conclusions
• The story continues…
• There are still tremendous efficiencies
to be achieved in Supply Chains
• Despite the bad press, eBusiness is
happening now and is a major force in
achieving these savings
• The path will be more an evolution than
a revolution as first expected