Chapter Two
Role Of Logistics In Supply Chain Management
2.1 The Definition, Evolution, And Role Of
Logistics In Business
• Logistics is the flow of material, information,
and money between consumers and suppliers
• The five phases of logistics development—
workplace logistics, facility logistics, corporate
logistics, supply chain logistics, and global
logistics.
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Workplace Logistics
• Workplace logistics is the flow of material at a
single workstation..
• The objective of workplace logistics is to
streamline the movements of an individual
working at a machine or along an assembly
line.
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• Facility Logistics
• Facility logistics is the flow of material
between workstations within the four walls of
a facility (that is, inter-workstation and intrafacility). The facility could be a factory,
terminal, warehouse, or distribution center.
Facility logistics has been more commonly
referred to as material handling
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• Corporate Logistics
• As management structures advanced and
information systems accordingly, the ability to
assimilate and synthesize departments
(material handling, warehousing, and so on)
into functions (physical distribution and
business logistics) in the 1970s permitted the
first application of true logistics within a
corporation
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Supply Chain Logistics
• Supply chain logistics is the flow of material,
information, and money between corporations (interworkstation, inter-facility, inter-corporate, and intrachain).
• There is a lot of confusion surrounding the terms
logistics and supply chain management.
• The supply chain is the network of facilities
(warehouses, factories, terminals, ports, stores, and
homes), vehicles (trucks, trains, planes, and ocean
vessels), and logistics information systems (LIS)
connected by an enterprise’s supplier’s suppliers and
its customer’s customers
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Global Logistics
• Global logistics is the flow of material,
information, and money between countries.
Global logistics connects our suppliers’
suppliers with our customers’ customers
internationally
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Next-Generation Logistics
• There are many theories as to the next phase
of logistics development. Many logisticians
believe that collaborative logistics, logistics
models built with continuous and real-time
optimization and communication between all
supply chain partners will be the next phase of
evolution.
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LOGISTICS ACTIVITIES
• logistics is comprised of five interdependent
activities: customer response, inventory
planning and management, supply,
transportation, and warehousing.
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Customer Response
• Customer response links logistics externally to
the customer base and internally to sales and
marketing. Customer response is optimized
when the customer service policy (CSP)
yielding the lowest cost of lost sales, inventory
carrying, and distribution is identified and
executed
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• Inventory Planning and Management
• The objective of inventory planning and
management (IP&M) is to determine and
maintain the lowest inventory levels possible
that will meet the customer service policy
requirements stipulated in the customer
service policy.
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• Supply
• Supply is the process of building inventory
(through manufacturing and/or procurement) to
the targets established in inventory planning. The
objective of supply management is to minimize
the total acquisition cost (TAC) while meeting the
availability, response time, and quality
requirements stipulated in the customer service
policy and the inventory master plan
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• Transportation
• Transportation physically links the sources of
supply chosen in sourcing with the customers
we have decided to serve chosen as a part of
the customer service policy
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• Warehousing
• Warehousing is the last of the five logistics
activities because good planning in the other
four activities may eliminate the need for
warehousing or may suggest the warehousing
activity be outsourced
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LOGISTICS OPTIMIZATION
• Minimize:
• Total logistics costs = Inventory carrying costs
+ Response time costs+ Lost sales cost
• Constraints:
• 1. Inventory availability >Customer service
inventory target
• 2. Response time < Customer service response
time target
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• LOGISTICS MASTER PLANNING
• Logistics master planning (LMP) - is a planning
process that develops short- and long-term
metrics, process definitions, information
system requirements, and organizational
requirements for logistics as a whole and for
customer response, inventory management,
supply, transportation, and warehousing
individually.
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• FINANCIAL MEASURES OF LOGISTICS
PERFORMANCE
• Logistics is playing an increasingly important
role in value creation, revenue enhancement,
capital consumption, and expense control.
• Some key corporate financial measures and
their corresponding logistics financial
measures are described below
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• Logistics Expenses (LE)
• Logistics expenses are dominated by labor
expenses but also include
telecommunications, inbound and outbound
freight, fuel, fees to third parties, and leased
or rented space.
• Logistics Profit (LP = R - LE)
• Logistics profit is computed simply as revenue
minus logistics expenses.
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• Logistics Asset Value (LAV)
• The logistics asset value is the sum total of the
value of assets deployed in logistics including
inventory, logistics facilities, transportation
fleets, material handling systems, logistics
information systems, and so on
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• Return on Logistics Assets (ROLA = P/LAV)
• The return on logistics assets is computed simply
as the ratio of corporate profit (P) to LAV.
• Logistics Capital Charges (LCC = LAV *ACR)
• Logistics capital charges are computed as the
product of the investment in logistics assets and
the asset carrying rate (ACR). The ACR is used to
annualize the holding cost of fixed assets
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• Total Logistics Cost (TLC = LE + LCC)
• Total logistics costs (TLC) is defined to include expense
and capital costs in the five logistics processes:
customer response, inventory planning and
management, supply, transportation, and warehousing.
• The total logistics costs are made up of the following:
total response cost (TRC), total inventory costs (TIC),
total supply costs (TSC), total transportation costs
(TTC), and total warehousing costs (TWC).
• TLC = TRC + TIC + TSC + TTC + TWC
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PRODUCTIVITY MEASURES OF
LOGISTICS PERFORMANCE
• A danger in focusing too much attention on
logistics costs is that certain cost elements
cannot be controlled by logistics managers
and engineers.
• Performance indicators will include measures
of logistics resource utilization and
productivity.
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Productivity Measures…
• Logistics Workforce Productivity Indicators
• The logistics workforce includes the operators,
supervisors, planners, analysts, and managers
employed in customer response, inventory
planning and management, supply,
transportation, and warehousing.
• The principal mission of the logistics
workforce is order fulfillment.
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• logistics workforce productivity (LWFP) is
computed as the ratio of the total orders
shipped (TOS) to the number of full-time
equivalents working in logistics (LWF):
• LWFP =TOS / LWF
LWFP = TOS/FTEs
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• Customer Response (CR) Productivity
Indicators
• The primary productivity indicator for CR is
the number of customer orders processed per
person-hour.
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• Inventory Management Productivity
• The most popular indicators for inventory
management productivity are inventory
turnover and the productivity of the inventory
planners
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• IT may be computed as the ratio of total sales
revenue at cost (TSR) to the average inventory
value (AIV) or the total unit sales (TUS) to the
average inventory level (AIL):
• IT = TSR / AIV
• IT = TUS / AIL
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• Supply Productivity
• Supply productivity measures are focused on the
buying and procurement organization. Three
common measures of supply productivity are:
• • The number of purchase orders per personhour
• The number of SKUs managed per full-timeequivalent
• • The dollar value managed per full-timeequivalent in procurement
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• Transportation Productivity
• The principal output of transportation is
delivered dollars, orders, weight, and/or cubic
volume. The principal resources consumed in
transportation are operating (vehicle and/or
driver) hours, container capacity, and fuel.
(These resources are of principal concern if
the corporation operates a private fleet.)
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• Warehouse Operations Productivity
• The principal missions of a logistics facility
(warehouses, distribution centers, logistics
centers, and/or terminals) are throughput and
storage. The principal resource consumed in
achieving the throughput mission is the labor
and systems deployed in material handling
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QUALITY MEASURES OF LOGISTICS
PERFORMANCE
• The most effective indicator of logistics
accuracy or quality is the perfect order
percentage (POP), which ties together the
indices for logistics quality in each of the
logistics activities.
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Perfect Order Percentage (POP)
• The perfect order is logistically perfect, meaning it is:
• Perfectly entered (the entry is exactly what the customer
wants) by the means (telephone or direct entry) the customer
desired in a single entry
• Perfectly fillable with the exact quantity of each item available
for delivery within the customer-specified delivery window
• Perfectly picked with the correct quantities of the correct items
• Perfectly packaged with the customer-designated packaging
and labeling
• Perfectly shipped without damage
• Perfectly delivered in the customer-designated time window
and to the customer-designated location
• Perfectly communicated with order status reports available 24
hours a day
• Perfectly billed with on-time payment
• Perfectly documented with customer-specified documentation
means, including paper, fax,
EDI,(PhD)
and/or Internet
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• Customer Response (CR) Quality Measures
• Order entry accuracy (OEA) =Orders entered
exactly as specified by the customer
• Total orders entered
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Inventory Management Quality
Measures
• Fill Rate Inventory availability performance is
typically expressed as the demand fill rate
• The order fill rate (OFR) is the ratio of the
number of orders completely satisfied (OS)
without substitution or backorder to the
number of orders requested (OR):
• OFR =OS / OR
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• Supply Quality Indicators Just like the perfect
order percentage, the supply quality indicator
is the best indicator for our logistics quality, its
counterpart, the perfect purchase order
percentage (PPOP) is the best indicator of
overall supply quality. The PPOP is computed
just like the POP
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• Transportation Quality Indicators The most
important transportation quality indicators for
our own or for our carrier’s fleet are the on-time
arrival percentage (OTAP), damage percentage
(DP), claims-free shipment percentage (CFSP),
and miles between accidents (MBA).
• On-time arrival percentage =Orders arriving
within agreed time window
• Total orders
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• Damage percentage =Orders arriving without intransit damage
• Total orders
• Claims-free shipment percentage =Shipments
without claims
Total shipments
• Miles between accidents =Total miles driven
Number of accidents
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Warehouse Operations Quality
Indicators
• Inventory accuracy =Number of warehouse locations
without discrepancies
• Total number of warehouse locations
• Picking accuracy =Number of lines picked without errors
• Total number of lines picked
• Shipping accuracy =Number of lines shipped without errors
• Total number of lines shipped
• Warehouse damage percentage =$ Value of warehouse
damages per year
• $ Value shipped per year
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Logistics Relationship and Third- party
Logistics (3PL)
• The use of third- party logistics (3PL) and supply
chain management providers is a growing trend,
as firms seek to gain quick competitive advantage
from the development of effective supply chain
strategies.
• 3PL Services assume some or all of a firm’s
sourcing, materials management, and product
distribution responsibilities: charging fee for their
services while saving costs (estimated 10 to 20
percent of total logistics costs); and improving
service, quality, and profits for their clients.
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THE Role of warehouse in the Supply
chain Management
• The warehouse is a point in the logistics
system where a firm stores or holds raw
materials; semi finished goods, or finished
goods for varying periods of time (Langley et
al., 2006:285)
• Warehouse as value adding roles is described
as follows: Consolidation, Product mixing,
Service, Contingency protection, Smooth
Operation.
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Basic Warehousing Decisions
• Location Selection
• When making location decisions, managers
need to consider a range of factors that relate
to a given location including the cost of
facilities, the cost of labor, skills available in
the workforce, infrastructure conditions, taxes
and tariffs, and proximity to suppliers and
customers.
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• In arranging warehousing space, a company
has two basic alternatives: private (or leased)
ownership of facilities or use of public
warehouses.
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