Logistics and Supply Chain
Management
Part I
An Introduction
ESI 4554
ISE Senior Design
1
Logistics
Definition
“Logistics…
plans, implements, and controls
the efficient, effective forward and reverse
flow and storage of goods, services, and
related information between the point of
origin and the point of consumption in order
to meet customers' requirements”
Council on Logistics Management
2
Logistics
Definition
 The flow of material, information and money
between consumers and suppliers.

In 1990-96:

Freight Transportation
$352, $455 Billion

Inventory Expense
$221, $311 Billion

Administrative Expense
$27, $31 Billion

Logistics related activity
11%, 10.5% of GNP.
3
Logistics Costs
Cost Category
Total Cost ($
Billion
% of Sales
% of Logistics
Costs
Transportation
$590
5.9%
58.4%
Warehousing
$78
.8%
7.9%
Inventory
$299
3.0%
29.7%
Admin.
$39
0.4%
4.0%
Total
$1,006
10.1%
100.0%
Logistics costs are estimated about 10% of sales
Source: Delaney, R. - Cass Logistics Annual State of Logistics report, 2001
4
Logistics in the Manufacturing Firm

Profit
4%

Logistics Cost
21%

Marketing Cost
27%

Manufacturing Cost
48%
Profit
Logistics
Cost
Marketing
Cost
Manufacturing
Cost
5
Logistics vs. Supply Chain Management
What is the difference?

A Supply chain is the network of:




facilities (warehouses, factories, terminals, ports,
stores, homes)
vehicles (trucks, trains, planes, ships)
logistics information systems
connecting suppliers’ suppliers with its customers’
customers.
Logistics is:



“what happens in the supply chain”
“putting the right material in the right place at the right
time“
it provides much of the Supply Chain’s value-added.
6
7
Flows in a supply chain
Information
Product
Funds
8
History of Logistics

Private industry starts evolving since the
1940’s.

Military were the only ones to using the term
(1950’s, 60’s)

No true concept of the term in the private
industry.

Companies had departments, such as
material housing, warehousing, machining,
etc.
9
History of Logistics
Scope & Influence
Global
Logistics
Supply Chain
Logistics
Corporate
Logistics
Facility
Logistics
Workplace
Logistics
1950's
1960's
1970's
1980's
1990's
10
Adapted from:Frazelle, Edward “Supply Chain Strategy” McGraw Hill 2002.
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12
Phases of Logistics Development
1. Workplace Logistics
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Phases of Logistics Development
1. Workplace Logistics
Definition:

the flow of material at a single workstation.
Objective:

to streamline the movements of an individual
working at a machine or assembly line.
Origins:

Principles developed by fathers of Industrial
Engineering during and after WWII.

Also known as: Ergonomics.
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Phases of Logistics Development
2. Facility Logistics
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Phases of Logistics Development
2. Facility Logistics
Definition:

the flow of material between work stations
within the four walls of a facility
(interworkstation, intra facility).

Facility can be a factory, terminal, warehouse,
distribution center (DC).
Origins:

developed in mass production assembly lines
in 1950’s, 60’s and 70’s.
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Phases of Logistics Development
3. Corporate Logistics
(Soda Manufacturer)
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Phases of Logistics Development
3. Corporate Logistics
Definition:

the flow of material and information between
the facilities and processes of a corporation.
(inter workstation, inter-facility, intracorporate).
Objective:

Develop and maintain a profitable customer
service policy while maintaining and reducing
total logistics cost.
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Phases of Logistics Development
3. Corporate
Logistics
Manufacturers
Wholesalers
Retailers
Logistics
takes place
between
and
Its factories
Warehouses
Distribution Centers
Its distribution
centers (DCs)
Retail Stores
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Phases of Logistics Development
4. Supply Chain Logistics
Supplier
Manufacturer
Wholesaler
Retailer
Customer
Supply chain is optimized when material,
information and money flow simultaneously,
in real time, and paperless.
20
Adapted from:Frazelle, Edward “Supply Chain Strategy” McGraw Hill 2002.
Supply Chain Stages
SC: Supplier to Consumer
MC: Manufacturer to Consumer
WC: Wholesaler to Consumer
Supplier
Manufacturer
Wholesaler
Retailer
Customer
Supplier
Manufacturer
Wholesaler
Retailer
Customer
Supplier
Manufacturer
Wholesaler
Retailer
Customer
SW: Supplier to Wholesaler
SR: Supplier to Retailer
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MR: Manufacturer to Retailer
Phases of Logistics Development
4. Supply Chain Logistics
Definition:
 the
flow of material, information and
money between corporations
(interworkstation, interfacility,
intercorporate, and intrachain).
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Phases of Logistics Development
5. Global Logistics
Definition:
 The
flow of material, information, and
money between countries.
 Connects
suppliers’ suppliers with its
customers’ customers internationally.
 Much
more complicated than domestic
logistics given the many languages, laws,
currencies, time zones, cultures, etc.
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Phases of Logistics Development
5. Global Logistics
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What Activities take place in Logistics?
Activities
1. Customer Response
2. Inventory Planning &
Management (IP&M)
3. Supply
4. Transportation
5. Warehousing /
DC Operations
Each of these requires:
- Measures and Goals
- Process Design
- Information System Requirements
- Organizational Development
25
Logistics Activity Framework
*
26
Logistics Activity Framework
*
27
Logistics Activities
1. Customer Response
Involves:
•
•
•
•
•
Developing / Maintaining a Customer Service
Policy*
Order Entry
Order Processing
Invoicing / Collections
Monitoring Customer Satisfaction
(* the contract between the logistics organization and the customer,
defining service targets, such as fill rates, response times, min. order
quantities, terms and conditions for returns, etc.).
28
Logistics Activity Framework
*
29
Logistics Activities
2. Inventory Planning &
Management
Goal:

determining / maintaining the lowest inventory
levels possible that will meet Customer Service
Policy requirements.
Involves:

Forecasting

Order Quantity Engineering

Replenishment planning

Inventory deployment
30
Logistics Activity Framework
*
31
Logistics Activities
3. Supply
Goal:
•
Minimize total acquisition cost
(TAC) while meeting availability, response time
and quality requirements
Involves:
•
Developing / Maintaining a Supplier Service Policy
Sourcing (of supplies)
Supplier integration
Purchase Order processing
•
Buying and Payment
•
•
•
32
Logistics Activity Framework
*
33
Logistics Activities
4. Transportation
Links sources of supply with customers.
Goal:

Link all pick-up and deliver-to points within the response
time requirements and transportation limitations at the
lowest possible cost.
Involves:

Network design & optimization

Shipment Management

Fleet and Container Management

Carrier Management

Freight Management
34
Logistics Activity Framework
*
35
Logistics Activities
5. Warehousing (DC Operations)
Goal:

To minimize the cost of labor, space and equipment in
the warehouse while meeting cycle time and shipping
accuracy and storage capacity requirements.
Involves:

Receiving

Putaway

Storage

Order Picking

Shipping
36
Logistics involves Optimization
Optimization is a key ingredient in
Logistics Master Planning
In general, we optimize:
-
Customer Service Policy (CSP)
purchase order quantities
product sources (which one is best)
location of DCs
product placement in the warehouse
37
Logistics involves Optimization
Example
If we want to optimize CSP, we would address the
Total Logistics Costs
( = inventory cost + response time cost + lost sales cost)
MIN Total Logistics Costs
Subject to


Inventory Availability > Customer Service Inventory
Target
Response time < Customer Service Response time
Target
38
Logistics Activity Profiling and Data Mining
What is Data Mining?




The process of automatically searching large volumes
of data for patterns using tools such as classification,
association rule mining, clustering, etc..
A class of database applications that look for hidden
patterns in a group of data that can be used to predict
future behavior.
True data mining software doesn't just change the
presentation.
Actually discovers previously unknown relationships
among the data.
39
Logistics Activity Profiling and Data Mining
What is Profiling?
Definition
The systematic analysis of item and order activity
used to:
· quickly identify root cause of material/information
flow problems.
· Identify opportunities for improvement.
· Provide basis for decision making.
· First step in logistics master planning.
40
Logistics Activity Profiling and Data Mining
What is a Profile?

A snapshot or picture of an aspect of a
logistics activity.

Many different profiles will be needed to
fully characterize and re-engineer the
logistics enterprise.
 Provides
 First
basis for decision making.
step in logistics master planning.
41
Logistics Activity Profiling and Data Mining
What is a Logistics Activity Profile?
Definition
The compilation of profiles for flow of material, information and money
for each of the major logistics activities.
Logistics Activity
Profiles
Flow of
Material
Flow of Information
Flow of Money
1. Customer Response
√
√
√
2. Inventory Planning &
Management (IP&M)
√
√
√
3. Supply
√
√
√
4. Transportation
√
√
√
5. Warehousing
√
√
√
42
Logistics Activity Profiling and Data Mining
Result:
Five basic sets of activity profiles
1. Customer Activity Profile (CAP)
2. Inventory Activity Profile (IAP)
3. Supply Activity Profile (SAP)
4. Transportation Activity Profile (TAP)
5. Warehouse Activity Profile (WAP)
43
Logistics Activity Profiles
Result:
Typically a profile will exist for the activity, the
item, and the activity-item pair (and many other
relevant ones).
Examples:






Customer Sales Activity Profile
Item Sales Activity Profile
Customer - Item Sales Activity Profile
Supplier Activity Profile
Item Purchasing Activity Profile
Supplier - Item Purchasing Activity Profile
44
Logistics Activity Profiling and Data Mining
What are Segments?
Segments represent and classify something according to
some criteria into A, B, C (usually) or more groups.
Example: Customers and Items sold
Customer Segments (typical)
 A Category: the top 5% of customers
 B Category: the next 15% of customers
 C Category: the bottom 80% of customers
Item Segments (typical)
 A Category: represents 80% of sales
 B Category: represents 15% of sales
 C Category: represents 5% of sales
45
Example: Customer – Item Sales Activity Profile
70
60
50
% of Sa le s 40
Volum e 30
20
C
10
B
0
A
A
B
Ite m
Ca te gorie s
C
Custome r Ca te gorie s
A – 80% of Sales
B – 15% of Sales
C – 5% of Sales
A – Top 5%
AA
AB
AC
B – Mid 15%
BA
BB
BC
C – Bottom 80%
CA
CB
CC
Item Category
Customer Category
46
Logistics Activity Profiling and Data Mining
What are Segments?

Segments are a type of classification system.

The more you know about your customers, the more likely
you will offer the right product’ at the right time and the
right place, and the right price.

Pareto Principle: 80% of your sales & profits come from
20% of your customers.

Create A, B, C, D segments

A: Customers deliver largest portion of revenue

B: Close second, followed by C and D.

Recognize each group’s characteristics.
47
Logistics Activity Profiling and Data Mining
Fine tune each Segment (A, B, C, D Customers)

How many products/services do they buy?

Purchase frequency?

Type of business?

Profitability of each transaction?

Payment promptness?

Cost of the service?

Referrals provided?
48
Logistics Activity Profiling and Data Mining
Once Segments are fine tuned & sub classified, plan
to promote customers from one category to the next highest:
Ex. from C to B, from B to A
An “A” customer is the hardest to replace.
Need replacements in case customers go “elsewhere”.
If you loose an “A” customer, promote a good “B” customer
to replace it.
49
Logistic Activity Profiles

What does each profile tell us?
1. Customer Activity Profile (CAP):
illustrates sales activity by customer and by item.



captured in terms of dollars, # of orders, # of order
lines, units, weight, cube, truckloads, pallets and
cases.
different items and customers create different
level / type of logistics
logistics strategy must reflect unique logistics
requirements of each customer – item
combination.
50
Logistic Activity Profiles
1. Example of a Customer Activity Profile (CAP)
70
60
50
% of Sales 40
Volume 30
20
10
0
C
A
Customer
Categories
B
B
C
A
Item
Categories
How to understand example:

Very few customers or items can be found in AA segment, yet it has high volumes,
high revenues and intense competition

Many customers and items are found in the CC segment, yet it has low volumes, 51
low
revenues and little or no competition
Logistic Activity Profiles
Definition - SKU

The abbreviation for Stock Keeping Unit.

An SKU is an individual item or part, a unit of
inventory that is carried as a separate identifiable
unit, and is typically represented by a UPC.

i.e. A box of 100 ball point pens, although
containing the same unit, is a different SKU from a
single ball point pen.
52
Logistic Activity Profiles
Another Example of a Customer Activity Profile (CAP)
300
200
Units
Purchased
100
C SKUs
0
B SKUs
A
B
Customer Categories
A SKUs
C
53
Logistic Activity Profiles
What does each profile tell us?
2. Inventory Activity Profile (IAP):

helps determine opportunities to reduce inventory
and improve customer service.

shows locations in the supply chain where excess
has accumulated.

reports inventory turns, days-on-hand, other.
54
Logistic Activity Profiles
Examples of Inventory Activity Profile (IAP):
ABC Inventory Valuation Analysis
S= Store
T= Transit
W = Warehouse
55
Logistic Activity Profiles
What does each profile tell us?
3. Supply Activity Profile (SAP):

reveals opportunities for purchasing improvements

reports purchasing in $, units, cases, pallets,
truckloads, weight, volume, orders, SKU, supplier,
other.

helps categorize suppliers, make / buy analysis, etc
56
Logistic Activity Profiles
Example of Supply Activity Profile (SAP)
Supplier – Item Classification
57
Logistic Activity Profiles
Example of Supply Activity Profile (SAP):
Inbound Logistics Strategy and Stratification
Dry Grocery
Supply
Plan
A B C D
SuppliersA VMI VMI
B VMI VMI
C
D
Cross Dock
A
Perishables
B C D
DC
A
Clothing
B C D
Eliminate
Health/Beauty
A B C D
VMI VMI
VMI VMI
VMI Vendor Man. Inv.
A
Housewares
Promos.
B
C D
Cns
Cns
Cns
Cns
Cns Consignment
58
Logistic Activity Profiles
What does each profile tell us?
4. Transportation Activity Profile (TAP):
For each transportation lane, reports:

units, cases, pallets, truckloads, weight, volume,
dollars moved, carrier availability, statistics, ontime percentage, damage and claims rates.

Helps measure carrier performance, routing,
scheduling, consolidation opportunities.
59
Logistic Activity Profiles
Example of Transportation Activity Profile (TAP):
Multi commodity transportation activity profile
in the chemical industry.
60
Logistic Activity Profiles
What does each profile tell us?
5. Warehouse Activity Profile (WAP)
Helps reveal patterns in item activity and customer orders to
help improve:

storage system design

warehouse layout

order activity profile
Captures: requests, units, cases pallets, dollars, weight
shipped per unit time.
61
Logistic Activity Profiles
What does each profile tell us?
5. Warehouse Activity Profile (WAP)

Helps choose and design a storage system for each
item.

Helps design order picking and shipping systems.
Typically includes distributions such as:

Order mix by Family

Lines per order
62
Logistic Activity Profiles
Example of Warehouse Activity Profile (WAP):
Lines per Order Distribution
63
Logistic Activity Profiles
Example of Warehouse Activity Profile (WAP):
Item Popularity Distribution
64
Video
Supply Chain Management
65