1. Business Logistics/Supply Chain—A Vital Subject
The supply chain is simply another way of saying “the whole process of business.”
Dragan Cisic

2. The Immediate Supply Chain for an Individual Firm
Warehousing
Transportation
Vendors/plants/ports
Factory
Customers
Information
flows
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3. Logistics Defined
Supply Chain Management Defined

4. Evolution of Supply Chain Management

5. The Logistics/SC Mission

6. Historical perspective of distribution:
A Revised Strategy is Generating Great Top Management Interest
Historical perspective of distribution:
“The last frontier of cost economies”
The contemporary view:
Distribution is a new frontier for demand generation—a competitive weapon.
Peter Drucker, 1962
Both views are now important!

7. Critical Customer Service Loop

8. Logistics cost are about 10% of sales w/o purchasing costs
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%
Logistics cost are about 10% of sales w/o purchasing costs
Add one-third for inbound supply costs
Source: Herb Davis & Company

9. 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
Notes: Traditionally logistics and supply chain management has been measured in terms transportation and inventory costs and the administration required to manage both. Traditionally firms would have an inventory manager and a transportation manager. This view is very narrow and causes significant problems in the proper functioning of the supply chain.
Source: Cass Logistics

10. Traditional View: Logistics in the Manufacturing Firm
Profit
Logistics
Cost
Profit 4%
Logistics Cost 21%
Marketing Cost 27%
Manufacturing Cost 48%
Marketing
Cost
Notes: Key message here is that logistics costs are a significant fraction of the total value of a product. The problem here is that this a purely cost based view of the supply chain and drives a firm to simply reducing logistics costs. This is an incomplete picture.
Manufacturing
Cost

11. 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

12. 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

13. 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 percent of the price of products (Brousseau 1994).

14. Indirect Costs as % of Total
% of total cost 60
Labor 50 40
Material 30 20
In 1900 the major cost associated with a product was labor
Indirect or overhead costs were only about 10% of the total
In 1990, indirect costs have increased by a factor of five
We need to focus on cutting indirect costs
Remember, competitors ultimately have the same material and labor costs
The battleground is with indirect costs
Indirect 10
1900
1900
1990
1990
Source: Institute for Competitive Design

15. Significance of Logistics

16. Effect on Logistics Foreign Outsourcing
Domestic sourcing
Foreign sourcing
Profit
G & A
Marketing
Logistics
Overhead
Materials
Labor
Profit
Increase
G & A
Marketing
Logistics
Increase
Tariffs
Overhead
Materials
Reduction
Labor

17. Scope of the Supply Chain for Most Firms
Physical distribution
Physical supply
(Materials management)
Business logistics
Sources of
supply
Plants/
operations
Customers •
Transportation
Inventory maintenance
Order processing
Acquisition
Protective packaging
Warehousing
Materials handling
Information maintenance
Product scheduling
Focus firm’s internal supply chain
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18. 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

19. The Supply Chain is Multi-Enterprise
Scope in reality
Focus
Company
Suppliers
Customers
Customers/
Supplier’s
End users
suppliers
Acquire
Convert
Distribute
Product and information flow

20. Reality of SC Scope

21. The Multi-Dimensions of SC
SUPPLY
CHAIN
MANAGEMENT
Interfunctional coordination
Interorganizational coordination
Activity and process
administration

22. The Logistics Strategy Triangle
Customer
service goals
The product
Logistics service
Information sys.

24. Relationship of Logistics to Marketing and Production
Sample
activities:
PRODUCTION/
MARKETING
Transport
Interface
OPERATIONS
Sample
Interface
Inventory
activities:
Sample activities:
activities:
activities:
Order
Customer
Quality control
Promotion
Product
processing
service
Detailed production
Market
scheduling
Materials
standards
scheduling
research
Plant
handling
Pricing
Equipment
maint .
Product
location
Packaging
Capacity planning
mix
Purchasing
Retail
Work measurement
Sales force
location
&
standards
management
Production-
logistics
Marketing-
interface
logistics
interface
Internal Supply Chain
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25. A Framework for Structuring Drivers
Efficiency
Responsiveness
Facilities
Transportation
Inventory
Information
Supply chain structure
Drivers

26. Facilities Role in the supply chain Role in the competitive strategy
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)

27. 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

28. 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

29. 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

30. 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

31. 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

32. The Sourcing Process

33. 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.

34. 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.

35. 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.

36. 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.

37. 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.

38. 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.