1. Global Supply Chain Management
Logistics A378
Spring 2004

2. Logistics in the Organization
Chapter #2
Logistics in the Organization

3. The Logistics System
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4. Overview
Marketing strategy requires the implementation of distribution channels
Links the organization and its customers
The organization’s logistics system is designed to support the marketing strategy
Chapters examines the relationship between marketing channels and logistics
Must systematically manage the logistics to support marketing's channel objectives
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5. Marketing/Logistics Partnership
Marketing must develop a strategy
Marketing must determine:
What products/services customers want
When they want it
Where they want it
And what level of customer service is desired
Marketing’s goal is to maintain a customer focus and ensure that the organization meets the customer’s requirements
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6. Marketing/Logistics Partnership
With a marketing strategy in hand, the organization must implement it
Four key elements
Product (or Service)
Price
Promotion (communications)
Place
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7. The Marketing Mix
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8. Alternative Channel Structures
Domestic
International
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Source: Jain, Subhash C., International Marketing Management, Wadsworth, In 1993, p. 564

9. Marketing and Logistics Channels
Once marketing develops a strategy, we must decide how to get the goods to the customers
Requires that we design a distribution channel system (network)
Channels can be very simple
Producer sells directly to the customer
Or very complex
Multi-level global distribution networks
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10. Marketing and Logistics Channels
A little bit of history
When you live in a cabin and pursue a subsistence life style, you don’t need to worry about distribution
If someone else has something I need and can not make for myself, I trade them something I have for it …barter
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11. Marketing and Logistics Channels
With urbanization and specialization, barter is replaced by formalized trade
We became dependent on others for basics at first, e.g. food and fuel
Later we became dependent of others for “luxuries”, e.g. a television
“Middlemen” (i.e., someone between the producer and the consumer) were required to support distribution logistics
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12. Marketing and Logistics Channels
Another way to view a distribution channel is as a pipeline
Money, information and returned Product V e n d o r M a u f c t W h l s D i b R C m
Products and Customer Service
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13. Marketing and Logistics Channels
Channel design is not a new endeavor
Only recently, however, have we begun to address it as part of overall system design
Environmental Issues
Global economy
Deregulation
Corporate reconfiguration
Technological innovation
Total quality management/customer service
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14. Environmental Issues Global economy
Hard to be “just” a domestic company today
Specialization in manufacturing
Foreign markets, suppliers and raw materials
Fragmented distribution systems on a global scale
Cultural preferences
Formal and implied etiquette of each nation’s business culture
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15. Environmental Issues Government regulatory environment
Deregulation has led to an environment in which the rules of channel management are constantly changing
US and other western countries led the way
New phenomenon for many countries
International initiatives also affect channel design, e.g. NAFTA and the European Union
Management must design flexible systems and must emphasize adaptability while maintaining focus on customer service
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16. Environmental Issues
Corporate reconfiguration forces continuous realignment of channels
Mergers, acquisitions and spin-offs
Competitors become family members
Formers suppliers are purchased by competitors
Former internal partners become suppliers and/or competitors
Such issues require we constantly reevaluate our distribution channel system and adapt as necessary
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17. Environmental Issues Technological Innovation
Big changes in the past two decades
Satellite communications
GPS/on-line tracking of vehicles
Automated handling systems
Bar coding, EDI, XLM the internet, RFID tags, etc.
Most significantly, the use of technology as a competitive advantage
FedEx, UPS, DHL, etc.
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18. Environmental Issues
Total quality management continues to be a significant driver in business
Through the 80’s into the 90’s it was an issue we focused on through design and manufacturing improvement
Today it is a critical concern of channel design
The distribution channel provides a major step in delivering customer quality
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19. Marketing and Logistics Channels
Marketing Issues
Must decide what type of distribution best supports the marketing strategy
Must maintain focus on customer service
Extremely complex problem for global companies
But…must define the channel that will meet our constraints while minimizing overall system cost and thus maximizing system (channel) profit
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20. Channel Management Issues
Inevitably, one channel member dominates
Manufacturer may dominate when customer demand is brand name driven
Retailers may be large enough to drive the channel (Wal-Mart)
Sometimes a wholesaler or distributor dominates the channel (Numerous small retailers)
Channel leader must manage for overall efficiency and mutual benefit...or the channel fails to remain competitive
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21. Formal and Informal Relationships
Channel management is highly dependent on relationship management
Can be formalized through contracts
Articulate participating members’ rights and obligations
Required for complex channel systems
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22. Formal and Informal Relationships
Informal relationships are often the first step
More flexibility
Chance to get to know each other and build trust
Can be the first step toward a formalized relationship
Often all that is needed for simple channel systems
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23. Domestic vs. Global Channels
Focus of the channel is the customer
Social, cultural, economic and historical conditions force channels to be country specific
US, Europe, Japan, India, China, Brazil, etc.
In many countries, consumers as we know them in western society, are still evolving
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24. Domestic vs. Global Channels
For global firms, sourcing, production and distribution may involve 10s of alternatives
Challenge is to define the system that best focuses on the customer and is most efficient
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25. Future Trends Supply Chain Management Quick response logistics
An extended enterprise model enabled by technology and required by competition
Quick response logistics
Boeing and spare parts
Strategic alliances and partnerships
One way to expand into new markets both product/service wise and geographically
Third-party logistics providers
Providing a variety of functions more efficiently than we can ourselves.
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26. Managing the Logistics System
Logistics systems support the marketing strategy and provide channel realization
Once the channel is defined the logistics must be designed
Numerous trade-offs are available
Fast vs. slow transport
Bulk vs. small quantities
JIT vs. local/regional warehousing, etc.
Focus must always remain on customer service and overall system profit
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27. The Logistics Mix as a System
Customer
Service
Information
Systems
Materials
Management
Inventory
Warehouse
Transportation
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28. Trade-Off Analysis
Logistics activities must be managed as an integrated system
Individual decisions affect the overall cost
Total cost view must be adopted by management
Impossible to minimize one cost without affecting others
Failure to consider the system as a “whole” results in suboptimal decision making
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29. Trade-Off Analysis Monetary Logistics Costs
Total Cost
Inventory Costs
Monetary Logistics Costs
Transport Costs
Ordering Costs
Computerized Order- Processing
Premium Transport
Little Inventory
Manual Order-Processing
Low-cost Transport
High Inventory
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30. Trade-Off Analysis Monetary Logistics Costs
Total Cost
Inventory
Cost
Monetary Logistics Costs
Transport Costs
Ordering Costs
Computerized Order- Processing
Premium Transport
Little Inventory
Manual Order-Processing
Low-cost Transport
High Inventory
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31. Trade-Off Analysis Monetary Logistics Costs
Total Cost
Monetary Logistics Costs
Inventory
Costs
Transport Costs
Ordering Costs
Computerized Order- Processing
Premium Transport
Little Inventory
Manual Order-Processing
Low-cost Transport
High Inventory
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32. Trade-Off Analysis
Static Analysis of Quantum Chemical (50,000 lbs of production)
Plant Logistics Costs
System A
System B
Packaging
500 $
Storage and handling
150 50
Inventory carrying 25
Administrative 75
Fixed Cost
4,300
2,400
Transportation costs
To market warehouse
To customer
800
100
Warehouse Costs
TOTAL COSTS
5,775
5,950
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33. Trade-Off Analysis
Dynamic  changing over time, i.e. the production level may change over time
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34. Trade-Off Analysis
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35. Trade-Off Analysis Algebraically…and more accurately
Y1 = 4, x
Y2 = 4, x
Where Y1 is the total cost of System A, Y2 is the total cost of System B and x is the level of production in pounds, then:
Y1 = Y2 defines the Break-even point
4, x = 4, x
0.085x = 600
x = 70,588 lbs
That is, below 70,588 system A is preferred and above that point, system B is bests (lowest TC)
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36. Summary
Logistics decisions can not be made until a marketing strategy is developed
Logistics supports the “place” and “price” components of marketing
Management must view logistics as a set of interacting activities
The goal is overall system efficiency which yields lowest system cost and maximizes profit
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