Chapter One
Introduction to THE CONCEPTS SUPPLY CHAIN MANAGEMENT AND
LOGISTICS
Learning outcomes
• Define and explain the concepts ‘supply chain management’ and
‘logistics’
• Explain interrelationship between two concepts
• Differentiate between different supply chain concepts
• Outline different components, stages or entities of a supply chain
• Explain the general steps in a logistic process
• Outline the role of logistics in generating value and utility and
creating wealth.
• Explain the different supply chain performance drivers
• Discuss the concept ‘network design’ as applicable to supply chain
3
Introduction
• The concepts Supply Chain Management (SCM) and
Logistics are part of our normal daily lives.
• Examples:
• We want to get from our homes to the university or local
supermarket as quickly and cheaply as possible.
• We want cold drinks to be available at vending machines, fuel
to be available at filling stations and products at shops.
4
1.1 Introduction
• Logistics is the physical movement of products and
services in the shortest time period and at the lowest
possible cost from the point of origin (POO) to the point
of consumption (POC).
• Requires a team of supply chain partners being involved
and working together as an integrated and coordinated
unit.
5
1.2 Profit and competitive advantage
• The main reason why entrepreneurs establish, operate and
manage business organisations is to earn and maximise
profit.
• Profit is calculated as the difference between the revenue
generated and the operating costs or expenditure it incurs to
generate the revenue.
• The formula :
• 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑃𝑟𝑖𝑐𝑒 𝑋 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑜𝑙𝑑 − 𝐶𝑜𝑠𝑡
6
Profit and competitive advantage
• Competitive advantage: a product or service that is
preferred to others.
• Product and service differentiation:
• providing customers with better service and better value for
their money.
• result: consumers prefer one product or service to another
Profit and competitive advantage
• Logistics service provider: a business specialising in
providing logistics services (warehousing, packaging,
transportation and information technology) at a set fee.
• Present competitive and global market:
• Customer service and value are key differentiators.
• Customers demand new and improved quality products with
the latest technologies at shorter time intervals.
Profit and competitive advantage
• Respective and interrelated roles played by Logistics and
SCM will enable businesses to secure and maintain:
• a competitive advantage,
• a differentiated product or service,
• maximum revenue,
• lower operating costs and
• higher profits obtained
Profit and competitive advantage
Logistics and
SCM are the
vehicles to
attain the
twin goals of:
efficiency (cost reduction)
organisation succeeding in
supplying materials and
products to its customers at
the lowest possible cost and
price.
effectiveness (satisfying
customers)
customers being satisfied
with the goods and services
they receive.
1.3 Concepts of logistics and supply chain
management (SCM) defined
Success of a team depends to a great
extent on the manner in which the
players combine and coordinate as a
team.
In sport:
Every pass of the ball between players
needs to be executed optimally for the
team to succeed.
In business
environment (e.g.
manufacturing):
Manufacturer together with different
suppliers (providing inputs such as parts
and materials used in the production
process), act as a team (supply chain
partners)
Concepts of logistics and supply chain management
(SCM) defined
Wheat
Carrier
Wheat
Figure 1.1: A supply chain in which
bread is supplied to a supermarket
Carrier
Shops
Carrier
Bakery
Concepts of logistics and supply chain management
(SCM) defined
• Figure 1.2: A manufacturer receiving inputs and
distributing the finished product
Tire
manufacturer
Wire
Rubber
supplier supplier
Carrier doing
the transport
Motor vehicle
manufacturer
All suppliers for a product are
supply chain partners who have to
work together in a coordinated
and well integrated manner.
Concepts of logistics and supply chain management
(SCM) defined
• Five Rights of Logistics:
• Delivering products in the right quantity and quality, and
at the right time, place and price to allow timeous
production at the lowest possible cost.
• All five of these rights need to occur simultaneously to
ensure a successful supply chain.
Concepts of logistics and supply chain management
(SCM) defined
• Figure 1.3: Inbound and outbound flow processes via distribution
channels
INBOUND
Customer
order
FOCAL BUSINESS
Purchase
inputs/
supplies
Manufacturing
process
OUTBOUND
Selling and
distribution
Direct to
customer
Via
distribution
centre (DC)
or warehouse
Customer
Concepts of logistics and supply chain management
(SCM) defined
• Inbound flows: physical movement and management of
materials received and to be used in production.
• Outbound flows: physical distribution and management of
the final products to whoever demands these products.
• A customer order initiates the entire supply process and
ends it off when the customer receives the order.
• Downstream: refers to the movement of supplies from one
manufacturer or supplier to the next in the direction
of/towards the eventual or final customer.
• Upstream: the movement of products backwards in the
supply chain towards the original source.
Concepts of logistics and supply chain management
(SCM) defined
Figure 1.4: Some of the steps in a logistics flow process or channel of distribution
Customer
Supplier A
Carrier (own)
Supplier B
Carrier (theirs)
Supplier C
Carrier (3PL)
Focal business/
Manufacturer
Distribution
centre or
warehouse
Customer
17
Concepts of logistics and supply chain management
(SCM) defined
• A typical supply chain involves a number of components,
stages or entities, which include:
• Customers (after doing market research about products and
services)
• Component/Raw material suppliers
• Manufacturers
• Wholesalers/Distributors
• Retailers
• Customers (receipt of ordered goods and services).
Concepts of logistics and supply chain management
(SCM) defined
Figure 1.5: Different distribution channels
Manufacturer
Consumer
Manufacturer
Mail order
Consumer
Manufacturer
Own store
Consumer
Manufacturer
Retailer
Consumer
Manufacturer
Wholesaler
Retailer
Manufacturer
Sales agent
or broker
Wholesaler
Manufacturer
Manufacturer’s
branch
Wholesaler
Consumer
Retailer
Consumer
Retailer
Consumer
19
Concepts of logistics and supply chain management
(SCM) defined
• A channel of distribution – route taken by supplies of raw
materials, component parts and finished products or
services from the point of origin through to the point of
consumption.
• A direct channel is one in which goods and services are
sold and sent directly to the customer.
Concepts of logistics and supply chain management
(SCM) defined
• An indirect channel - one in which finished products are first
sent to a warehouse or distribution centre (DC) where it is
kept on a temporary basis until being sent to customers
upon request.
• A warehouse - building in which finished goods or
merchandise are stored until required by customers or
outlets.
• Manufacturers need to decide whether it is more cost
effective (efficient) to have their own private warehouse, or
to rent space in a public warehouse.
• Distribution centre (DC) - facility used for the receipt,
temporary storage and distribution of goods according to
received customer orders.
Concepts of logistics and supply chain management
(SCM) defined
• The longer the channel and the more the number of
intermediaries or middlemen who operate in the
channel, the more expensive the items become because
of more transactions being concluded and salaries paid.
Concepts of logistics and supply chain management
(SCM) defined
• Transportation from supplier to manufacturer to
customer can be:
• Private transport operations – organisation-owned
vehicles – manufacturer makes use of its own, leased or
hired vehicles to provide a secondary (ancillary)
transport function of delivering its completed products
to customers or fetching supplies.
• Third party logistics provider (3PL) - outside, professional
carrier transport supplies transported (outsourcing a
service).
Concepts of logistics and supply chain management
(SCM) defined
• Supply Chain Management:
• “encompasses the planning and management of all
activities involved in the sourcing and procurement,
conversion, and all logistics management activities”
(Council of Supply Chain Management Professionals
(CSCMP)).
• includes coordination and collaboration with channel
partners which can be suppliers, intermediaries, third
party service providers, and customers.
Concepts of logistics and supply chain management
(SCM) defined
• Logistics is seen as a sub-set of Supply Chain
Management.
• Defined:
• That part of Supply Chain Management that plans,
implements and controls the efficient, effective physical
forward and reverse flow and storage of raw materials,
work-in-process inventory, finished goods, services and
related information between the point of origin and the
point of consumption in order to meet customer
requirements” (CSCMP).
Concepts of logistics and supply chain management
(SCM) defined
• SCM practices have become increasingly service-based
and applied in both the private sector and the public
sector.
• Supply chain partners make mistakes which negatively
affect the supply chains and their partners.
• Leads to unhappy customers.
Concepts of logistics and supply chain management
(SCM) defined
• The primary purpose of any supply chain is to satisfy
customer needs
• In the process will generate and maximise profit and
overall value.
Concepts of logistics and supply chain management
(SCM) defined
• Supply chain success should be measured in terms of
total supply chain profitability and not in terms of the
profits at an individual stage.
Concepts of logistics and supply chain management
(SCM) defined
• Supply chains are in competition with one another.
•
• All the suppliers involved in manufacturing the motor vehicle
of company A form a separate supply chain.
• One supplier may be part of a number of supply chains.
• A tyre manufacturer, for example, may supply tyres to
different motor vehicle assemblers that are part of different
and competing supply chains.
1.5 Supply chain drivers
• It is important to ensure that the business strategy of
organisation is aligned with the overall business strategy
of specific supply chain.
• This is achieved through the proper deployment of
supply chain drivers.
Supply chain drivers
• There are six supply chain drivers with the aim of giving a
business efficiency and effectiveness (responsiveness).
• The first three are referred to as logistical drivers and the
other three as cross-functional drivers.
• Structuring these six drivers in the correct combination
leads to optimum responsiveness and efficiency.
Supply chain drivers
Facilities
• actual physical locations or sites in the supply chain network
where products are manufactured, processed, assembled or
stored
Inventory
• all raw materials, work-in-process (unfinished) and finished
goods within a supply chain.
Transportation
• A value creating activity in a supply chain which entails moving
inventory of products from one location (point A) to another
(point B).
Information
Sourcing
Pricing
• consists of data and analysis about product availability,
suppliers, facilities, costs, prices and the availability of
transportation throughout the supply chain
• Strategic decisions on which functions will be performed by the
organisation itself (in-house) and which will be outsourced
• Determined by the economic forces of demand and supply
Supply chain drivers - Facilities
Strategic decisions
• To have both production and storage facility close to the market or only
one of the two
• To expand an existing production facility to increase capacity and serve
distant markets through storage facilities or to relocate to a new
production facility at the distant market.
• To maintain the current number of sites and facilities, or to add more, or
to increase the capacity of some of the existing facilities.
• To stop production at a current facility because it has become less
profitable, and to use the facility for producing a different item in its
product range, or to sell or lease the facility
1.6 Supply chain network design
• Supply chain network is almost like arteries, consisting of
the channels of distribution through which inbound
material supplies and outbound completed products
flow upwards and downwards in a supply chain.
• Needs to be optimally designed to ensure the optimum
balance between efficiency and customer response.
• Relates to decisions regarding infrastructure, overall
capacity, the main network activities of movement,
storage and transformation, as well as the selection of
the members in the supply chain.
Supply chain network design
Strategic decisions based on:
• The core product(s), services and business strategy
• The target market
• Sources of supply
• Facility role
• Facility location
• Capacity allocation
• Market and supply allocation
1.7 Concept of logistics
Steps in the logistics process
• Step 1: A customer order initiates the logistics process.
• Step 2: Drawing up the production schedule against the actual orders received and/or
the sales forecast and checking the in-store availability of the materials.
• Step 3: Purchasing the supplies not in stock.
• Step 4: Actual receipt, inspection and internal management of the purchased supplies
• Step 5: Producing the products or services the customer wants as per the production
schedule.
• Step 6: Getting the products correctly packaged for the local and global marketplace (the
customer).
• Step 7: Moving the finished goods directly to a customer, a wholesaler, retailer \to a
warehouse (either private or public) or a distribution centre.
• Step 8: Managing customer payment
Concept of logistics :
The value-added role of Logistics
• This willingness to pay for a product or service is
determined by the utility that the product or service will
have for the demander/customer.
• Utility refers to the satisfaction derived from the usage
or consumption of a product or service.
• Logisticians differentiate between mainly the following
four types of utility:
• Tine utility
• Form utility
• Place utility
• Possession utility
Concept of logistics
The main characteristics of customer service include:
• The availability of items in the right quantity and quality, and at
the right time, place and price.
• Effective after-sales and back-up service.
• Competent technical representatives who can illustrate and
assist prospective buyers with the specifications of the products
and equipment they are interested in buying.
• Acceptable lead-times.
• Reliability and consistency.
Concept of logistics
Indicators for measuring customer feedback include:
• The percentage of consignments received at the correct place as
was requested.
• The percentage of consignments received on the scheduled time
and date.
• The percentage of consignments received damage-free.
• The percentage of consignments received complete, in other
words, accurately and in full.
• The percentage of orders billed accurately.
Concept of logistics
Wealth is created through Logistics in these
four areas:
Revenue growth
Operating cost reduction
Fixed capital efficiency
Working capital efficiency
Concept of logistics
Key business logistics activities include
the following:
• Demand forecasting, estimating and planning
• Logistics communication and order processing
• Procurement and purchasing
• Packaging
• Transportation
• Reverse logistics (also referred to as returned goods handling)
• Materials Management
1.8 The role of SCM and Logistics as tools to create
competitive advantage
• From the perspective of this objective of competitive
advantage, logistics can put a business ahead of its
competitors by ensuring that goods and services are
always delivered:
• In the right quantity,
• At the right quality,
• At the right time,
• To the right place and
• At the right price
42
1.9 Short overview of International Logistics
• International logistics involves basically the same
logistics activities or functions as local logistics in any
country, which include material handling, packaging,
inventory management, warehousing, storage, crossdocking and transportation.
• International Commercial Terms (Incoterms): These are
a set of uniform rules and commercial terms defining
the costs, risks and obligations of sellers and buyers in
the international trade and movement of goods and
services.
43