Business Logistics/Supply
Chain—A Vital Subject
The supply chain is simply another way of
saying “the whole process of business.”
Dragan Cisic
1
The Immediate Supply Chain for an Individual Firm
Transportation
Warehousing
Transportation
Customers
Information
flows
Factory
Transportation
Vendors/plants/ports
Warehousing
Transportation
1-2
Logistics Defined
Logistics is the process of planning, implementing and
controlling the efficient, cost-effective flow and storage
of raw materials, in-process inventory, finished goods
and related information from the point of origin to point
of consumption for the purpose of conforming to
customer requirements.
Council of Logistics Management
Supply Chain Management Defined
SCM is the integration of all activities associated with the
flow and transformation of goods from raw materials
through to end user, as well as information flows, through
improved supply chain relationships, to achieve a
sustainable competitive advantage.
Handfield and Nichols
3
Evolution of Supply Chain Management
Activity fragmentation to 1960
2000+
Activity Integration 1960 to 2000
Demand forecasting
Purchasing
Requirements planning
Purchasing/
Materials
Management
Production planning
Manufacturing inventory
Warehousing
Logistics
Material handling
Packaging
Finished goods inventory
Physical
Distribution
Distribution planning
Order processing
Transportation
Customer service
Strategic planning
Information services
Marketing/sales
Finance
4
Supply Chain
Supply Chain
Management
Management
The Logistics/SC Mission
Getting the right goods or services
to the right place, at the right time,
and in the desired condition at the
lowest cost and highest return on
investment.
5
A Revised Strategy is Generating
Great Top Management Interest
Historical perspective of distribution:
“The last frontier of cost economies”
Peter Drucker, 1962
The contemporary view:
Distribution is a new frontier for demand
generation—a competitive weapon.
Both views are
now important!
6
Critical Customer Service
Loop
Customer order processing (and
transmittal)
Transportation
Customers
Inventory
or supply source
7
Physical Distribution Costs
Category
Percent of sales
Transportation
3.34%
Warehousing
2.02
Order entry
0.43
Administration
0.41
Inventory carrying
1.72
Total
7.65%
Add one-third for inbound supply costs
Source: Herb Davis & Company
8
Logistics cost
are about 10% of
sales w/o
purchasing costs
Traditional View: Logistics in the
Economy (1990, 1996)




Freight Transportation
$352, $455 Billion
Inventory Expense
$221, $311 Billion
Administrative Expense $27, $31 Billion
Logistics Related Activity 11%, 10.5% of GNP
Source: Cass Logistics
1-9
Traditional View: Logistics in the
Manufacturing Firm
Profit
 Profit
Logistics
Cost
4%
Marketing
Cost
 Logistics Cost
21%
 Marketing Cost
27%
 Manufacturing Cost
48%
Manufacturing
Cost
1-10
Supply Chain Management: The
Magnitude in the Traditional View
 Estimated that the grocery industry could save $30
billion (10% of operating cost) by using effective
logistics and supply chain strategies
 A typical box of cereal spends 104 days from factory to
sale
 A typical car spends 15 days from factory to dealership
 Laura Ashley turns its inventory 10 times a year, five
times faster than 3 years ago
1-11
Supply Chain Management:
The True Magnitude
 Compaq estimates it lost $.5 billion to $1 billion in sales
in 1995 because laptops were not available when and
where needed
 When the 1 gig processor was introduced by AMD,
the price of the 800 mb processor dropped by 30%
 P&G estimates it saved retail customers $65 million by
collaboration resulting in a better match of supply
and demand
1-12
Freight transportation costs
 The United Nations has estimated the costs of data
flows associated with international trade to be
between 4-7 percent of the value of the goods
(UNCID 1990), which is roughly consistent with
estimates of administrative costs as 10-15 percent of
the price of products (Brousseau 1994).
13
Indirect Costs as % of Total
% of total cost
60
Labor
50
40
Material
30
20
Indirect
10
0
1900
Source: Institute for Competitive Design
1990
Significance of Logistics
 Costs are high




About 10.5% of GDP domestically
About 12% of GDP internationally
A range of 4 to 30% of sales for individual firms, avg. about 10%
A high as 70-80% of sales if purchasing and production are
included
 Customers are more demanding of the supply chain
 Desire for quick response
 Desire for mass customization
 An integral part of company strategy
 Generate revenue
 Improve profit
 Logistical lines are lengthening
 Local vs. long distance supply
 Logistics is a key to trade and an increased standard of living
 Law of comparative economic advantage applies
 Logistics adds value
 Time and place utilities
15
Effect on Logistics Foreign Outsourcing
Domestic sourcing
Foreign sourcing
Profit
G&A
Profit
G&A
Marketing
Increase
Marketing
Logistics
Logistics
Overhead
Increase
Tariffs
Overhead
Materials
Materials
Reduction
Labor
Labor
16
Scope of the Supply Chain for Most Firms
Business logistics
Physical supply
(Materials management)
Sources of
supply
Physical distribution
Plants/
operations
• Transportation
• Inventory maintenance
• Order processing
• Acquisition
• Protective packaging
• Warehousing
• Materials handling
• Information maintenance
Customers
• Transportation
• Inventory maintenance
• Order processing
• Product scheduling
• Protective packaging
• Warehousing
• Materials handling
• Information maintenance
Focus firm’s internal supply chain
1-14
Key Activities/Processes

Primary
- Setting customer service goals
- Transportation
- Inventory management
- Location

Secondary, or supporting
- Warehousing
- Materials handling
- Acquisition (purchasing)
- Protective packaging
- Product scheduling
- Order processing
18
The Supply Chain is Multi-Enterprise
Scope in
reality
Focus
Company
Suppliers
Customers
Customers/
End users
Supplier’s
suppliers
Acquire
Convert
Product and information flow
19
Distribute
Reality of SC Scope
20
The Multi-Dimensions of SC
SUPPLY
CHAIN
MANAGEMENT
Activity and process
administration
21
The Logistics Strategy Triangle
Inventory Strategy
 Forecasting
Transport Strategy
 Storage fundamentals
 Transport fundamentals
 Inventory decisions
 Transport decisions
 Purchasing and supply
scheduling decisions
Customer
Storage
decisions

service goals
 The product
 Logistics service
 Information sys.
Location Strategy
 Location decisions
 The network planning process
22
23
Relationship of Logistics to
Marketing and Production
PRODUCTION/
OPERATIONS
Sample activities:
 Quality control
 Detailed production
scheduling
 Equipment maint.
 Capacity planning
 Work measurement
& standards
Interface
activities:
 Product
scheduling
 Plant
location
 Purchasing
LOGISTICS
Sample
activities:
Transport
 Inventory
 Order
processing
 Materials
handling
Interface
activities:
 Customer
service
standards
 Pricing
 Packaging
 Retail
location
Productionlogistics
interface
MARKETING
Sample
activities:
 Promotion
 Market
research
 Product
mix
 Sales force
management
Marketinglogistics
interface
Internal Supply Chain
1-21
A Framework for
Structuring Drivers
Efficiency
Responsiveness
Supply chain structure
Facilities
Transportation
Inventory
Information
Drivers
3-25
Facilities
 Role in the supply chain
 the “where” of the supply chain
 manufacturing or storage (warehouses)
 Role in the competitive strategy
 economies of scale (efficiency priority)
 larger number of smaller facilities (responsiveness
priority)
3-26
Inventory: Role in the Supply
Chain
 Inventory exists because of a mismatch between supply and
demand
 Source of cost and influence on responsiveness
 Impact on
 material flow time: time elapsed between when material enters
the supply chain to when it exits the supply chain
 throughput





rate at which sales to end consumers occur
I = RT (Little’s Law)
I = inventory; R = throughput; T = flow time
Example
Inventory and throughput are “synonymous” in a supply chain
3-27
Inventory: Role in Competitive
Strategy
 If responsiveness is a strategic competitive priority, a
firm can locate larger amounts of inventory closer to
customers
 If cost is more important, inventory can be reduced to
make the firm more efficient
3-28
Transportation: Role in
the Supply Chain
 Moves the product between stages in the supply
chain
 Impact on responsiveness and efficiency
 Faster transportation allows greater responsiveness
but lower efficiency
 Also affects inventory and facilities
3-29
Information: Role in
the Supply Chain
 The connection between the various stages in the
supply chain – allows coordination between stages
 Crucial to daily operation of each stage in a supply
chain – e.g., production scheduling, inventory levels
3-30
Purchasing Costs
 Manufactures spend 55% of each dollar on purchased
goods and services
 Approximately 60-80% of operating expense
 Direct manufacturing costs have declined to between
five and 15% of total operating costs
 As little as 2% for some high-tech industries
 Service industries spend less on purchased materials
than manufacturing
31
The Sourcing Process
Supplier Selection:
 Identification
 Evaluation
 Approval
 Monitoring
Transaction Management:
 Price Determination
 Purchase Order
 Follow-Up and
Expediting
 Receipt and Inspection
 Supplier Payment
Need Communication:
 Recognition
 Description
Relationship Management:
Performance Monitoring
and
Improvement
32
Logistics – General perception
 General perception in logistics that assets such as
stock or vehicles need to exist physically, and need
to be identifiable as discrete entities.
 By treating logistics systems in strict physical terms
we impose constraints on them which can restrict
their flexibility and can limit the utilisation of
resources.
Virtual logistics
 Assets are treated in terms of their availability, not
their identity or their physical form.
 This provides much greater flexibility in how systems
are designed, how resources are sourced, and how
assets are utilised.
 Virtual logistics allows logistics resources to be
treated as commodities, in a similar way to how
currencies are treated by banks.
 This means that resources can be lent, borrowed, or
traded; and flexibly consolidated, apportioned, and
allocated.
 This creates many powerful new possibilities in the
design of logistics systems, and means that major
improvements in efficiency become possible.
Financial system example
 Once money in circulation was in the form of precious
metals such as silver or gold.
 By holding their own assets, they might have achieved
greater security, but they incurred a high notional or
actual cost due to the fact that they needed to store
and guard their assets, and they risked losing them due
to accidents, damage, or theft.
 Then paper money was introduced and banks were, in
effect, able to create money from nowhere, by lending
more money than they had as reserves.
 Today, we rarely hold anything but modest sums of
money physically, and the effectiveness of the banking
system cannot be denied.
Virtual logistics systems
 Virtual logistics resources may be traded in much the
same way as shares and foreign currencies are
traded by banks or individuals.
 Through the use of computer applications and the
Internet, it becomes feasible to do this at a very low
level in logistics operations.
 Such resources could be purchased, utilised
remotely, and lent or sold when surplus to
requirements.
Design of virtual logistics
systems
 Treatment of assets in terms of function and
availability, rather than as physical objects with
particular identity and form, so they can be treated
like commodities.
 Dissociation of ownership and control of assets from
their physical location, so they can be utilised
remotely.
 Dissociation of information movements from
physical movements, so that change of ownership or
change of application does not necessitate physical
movement.
Design of virtual logistics
systems
 Dissociation of physical resources from specific
operations or processes.
 Shared, public, access to logistics resource
information through Internet applications.
 Computer based trading of logistics resources
between suppliers and users.
 Integration of warehousing, transport, and
production for the purposes of maintaining product
availability and controlling stock.