1. CHAPTER 2: Logistics

2. Overview of logistics Logistics of business is big and important
The logistical value proposition
The work of logistics
Logistical operations
Logistics integration objectives
Logistical operating arrangements
Flexible structure
Supply chain synchronization

3. What is logistics?
Logistics is the design and administration of systems to control movement and geographical positioning of raw materials, work-in-process, and finished inventories at the lowest total cost.

4. Logistics has risen to a key position in the global economy
Postwar U.S. ( )
Global leader in distribution and logistics, as a direct result of World War II
Rise of EEC and Asia ( )
Both regions became major exporters and distributors
e-Commerce (1998-Present)
Global logistics capability almost everywhere

5. Table 2.1- U.S. logistics cost, 1980-2010 in five year intervals ($B)
Nominal GDP ($T)
Inventory Cost
Transportation Cost
Administrative Cost
Total Logistics Cost
Logistics % of GDP
1980
2.80
220
214 17
451
16.1
1985
4.22
227
274 20
521
12.3
1990
5.80
283
351 25
659
11.4
1995
7.40
302
441 30
773
10.4
2000
9.82
374
594 39
1007
10.3
2005
12.43
395
739 46
1180
9.5
2010
14.60
396
769 47
1212
8.3
Source: Adapted from Rosalyn Wilson, 22nd Annual “State of Logistics Report” Council of Supply Chain Management Professionals and Penske: Oak Brook, IL, 2011.

6. The cost of logistics

7. Logistics will continue its renaissance in the future
Information technologies will automate many of the traditionally manual logistical functions:
Automated port and rail operations
RFID tagging of materials
Advanced technologies for warehousing and inventory operations
Removal of trade barriers will continue to expand global trade and logistics

8. Goal of logistics management
To satisfy customer expectations for delivery of products (or services) while minimizing the total cost
Managers must support the requirements for procurement, manufacturing and customer accommodation supply chain operations

9. Logistics costs trends from Table 2.1
Transportation Costs relative to the Total Cost of Logistics have gone up
Because of fuel prices and movement of manufacturing to Asia
Inventory Costs relative to the Total Cost of Logistics have gone down
Adoption of JIT and Lean practices have reduced these
Administrative Costs relative to the Total Cost of Logistics have stayed the same

10. Logistical value proposition
Logistical value proposition consists of a commitment to key customer expectations and requirements at a minimum cost
The two elements of this value proposition are Service and Cost Minimization
Firms must make appropriate tradeoffs between service and cost for each of their key customers

11. Service benefits are created by logistical performance in 3 areas
Availability involves having inventory to consistently meet customer material or product requirements
Operational performance deals with the time required to deliver a customer’s order
Key metrics for this area involve delivery speed and consistency
Service reliability involves the quality attributes of logistics
Key to quality is accurate measurement of availability and operational performance over time

12. Basic logistical service may not fit all customers
Basic logistics service describes the level of service a firm provides all established customers
However, some customers require unique or special value-added services
Managers must realize that customers are different and that services provided must be matched to accommodate unique requirements and purchase potential

13. Cost minimization using the total cost logistics model
Traditional Cost Logistics Model
Total Cost Logistics Model
Focused on achieving the lowest possible cost for each individual function of logistics
For example, Transport the material the cheapest way possible
Expected lowest cost based on decisions that were cheapest for individual functions
Ignored the impact of cost decisions across logistics functions
Focused on achieving the lowest total cost across each function of logistics
A cost decision in one function should consider impact to costs of all other logistics functions
For example, Transporting material the cheapest way is slower than other choices. This requires an increase in storage cost to hold the material longer
Would it still be a lower cost to use the cheapest mode of transport?

14. Different perspectives on cost minimization
Traditional Cost Logistics Model
Total Cost Logistics Model
Minimize order processing cost + Minimize inventory cost + Minimize transportation cost + Minimize warehousing, materials handling and packaging cost + Minimize facility cost __________________________ Lowest logistics cost
Minimize (order processing + inventory + transportation + warehousing, materials handling and packaging + facility) cost _________________________ Lowest total logistics cost

15. Example of evaluating alternatives to find lowest total cost
Compare two alternative shipping carriers to move a shipment of electronic chips
Value of shipment = $25,000.00
Faster shipping is generally more expensive than slower shipping
Carrier 1 costs $250 to ship
Carrier 2 costs $20 more but delivers 1 day faster
Product in transit is a form of inventory
Holding costs for shipment is 40% of value per year
No other cost differences across remaining logistics functions 15

16. Example of evaluating alternatives to find lowest total cost
Traditional Cost Method
Minimize transportation cost
Compare 1st carrier at $250 vs. 2nd carrier at $270
Decision is to use 1st Carrier to save $20
Total Cost Method
Minimize total of transportation and inventory cost
Compare 1st carrier at $250 + $27.40 = $ vs. 2nd carrier at $270
Decision is to use 2nd Carrier since it is a lower total cost
Daily cost of holding product
= x /365
Annual holding cost
Product value
= (.40 x $25,000)/ 365 = $27.40

17. Logistics includes these major functions of work
Order Processing
Inventory
Transportation
Warehousing, Materials Handling, and Packaging
Integrated through a network of facilities
E.g. warehouses and distribution centers

18. Integrated logistics framework
Goal is to achieve customer satisfaction at the lowest Total Cost
Decisions in one functional area will impact cost of all others
We integrate the logistical functions into a coherent framework starting with the customer (Order processing) and ending with the customer (Transportation and Delivery)

19. The five functions of logistical work are interrelated
Figure 2.1 Integrated Logistics

20. Order processing
Order processing is the transmission of customer requirements to the supply chain
Accurate information is needed to achieve superior logistical performance
Responsive supply chains require accurate and timely information about customer purchase behavior
Fast information flow enables improved work balancing

21. Inventory
Inventory requirements of a firm are directly linked to the facility network and the desired level of customer service
Inventory strategy seeks to achieve the desired customer service with the minimum inventory commitment
Inventory strategy is based on a combination of
Core customer segmentation
Product profitability
Transportation integration
Time-based performance
Competitive performance

22. Transportation
Transportation is the operational area that geographically moves and positions inventory
There are three basic ways to satisfy transportation requirements
Operate a private fleet of equipment
Contract with dedicated transport specialists
Engage carriers that provide different transportation services as needed on a per shipment basis

23. Warehousing, materials handling and packaging
These work activities are integral parts of other logistical functions
Inventory typically needs to be warehoused at selected times during the logistics process
Transportation vehicles require materials handling for efficient loading and unloading
Individual products are most efficiently handled when packaged together into shipping cartons
Effective integration of these functions facilitates the speed and overall ease of product flow throughout the logistical system

24. Facilities network
The number, size and geographical relationship of facilities used to perform logistical operations directly impacts customer service capability and cost
Types of facilities in the logistics network include
Manufacturing plants, warehouses, cross-dock operations and retail stores

25. The scope of integrated logistical operations
Figure 2.2 Logistical Integration

26. Inventory flow
Managers must be concerned with the movement and storage of inventory in 3 major forms
Materials
Work-in-process
Finished products
Logistical operations should add value by moving inventory when and where needed
Materials and components gain value at each step of their transformation into finished inventory

27. The 3 areas of the value-added logistic process
Customer relationship management is the movement of finished product to customers
Manufacturing production concentrates on managing work-in-process inventory as it flows between stages of manufacturing
Procurement is concerned with purchasing and arranging inbound movement of materials, parts, and/or finished inventory from suppliers into manufacturing or assembly plants, warehouses or retail stores

28. Information flow
Information flow identifies specific locations within a logistical system that have requirements
Information also integrates the three operating areas
Information facilitates coordination of planning and control of day-to-day operations
Logistical information has two major components
Planning / coordination information
Operational information needed to complete work

29. Logistical integration requires achieving six objectives simultaneously
Responsiveness
Variance reduction
Inventory reduction
Shipment consolidation
Quality
Life cycle support

30. Logistical operating arrangements
All logistical arrangements share two common characteristics
They are designed to manage inventory
The range of logistics alternatives is limited by available technology
Three widely utilized structures are
Echelon (traditional) is a linear flow from origin to destination through buffers or warehouses/distribution centers
Direct is designed to ship products directly to customer’s destination from one or a limited number of centrally located inventories
Combined is a combination of Echelon and Direct, depending on the product, market, or customer

31. Figure 2.3 - Echelon structured logistics

32. Figure 2.4 - Combined echelon and direct delivery

33. Flexible structures are programs to service customers using alternatives
Flexible operations are preplanned contingency strategies to prevent logistical failures
For example, a warehouse is out of an item so a contingency policy assigns the total order to another warehouse
The structure appears the same as a combined arrangement, but with the ability to change the logistical structure to suit the service need
Different approaches for different situations
Very common with “factory-less” companies like Nike and Best Buy

34. Example situations for flexible logistics structure
The customer-specified delivery facility might be near a point of equal logistics cost or equal delivery time from two different logistics facilities
The size of a customer’s order creates improved logistical efficiency if serviced through an alternative channel arrangement
Decision to use a selective inventory stocking strategy
Agreements between firms to move selected shipments outside the established echeloned or direct arrangements

35. Figure 2.5 - Flexible echeloned and direct delivery

36. Supply chain synchronization
Supply chain synchronization is the operational integration of multiple firms across a supply chain
Seeks to coordinate the flow of materials, products and information between supply chain partners to reduce duplication of effort
Seeks to reengineer internal operations of individual firms to leverage overall supply chain capability

37. The logistics performance cycle is the basic unit of supply chain design and operational control
The performance cycle represents elements of work necessary to complete the logistics related to customer accommodation, manufacturing or procurement
A performance cycle consists of the following elements
Nodes
Links
Inventory
Base stock
Safety stock
Input and output requirements

38. Figure 2.6 - Logistical performance cycles
Input and output requirements are not illustrated

39. Performance cycle uncertainty
Major objective of logistics in all areas is to reduce performance cycle uncertainty
Operational variance is randomly introduced during the cycle through
The structure of the performance cycle itself
Operating conditions
The quality of logistical operations

40. Figure 2.8 Performance Cycle Uncertainty
Total time to complete the customer delivery cycle is based on each task within the cycle
Figure 2.8 Performance Cycle Uncertainty

41. Ways to improve performance cycle times
EDI (Electronic Data Interchange) or Internet order management and tracking
RFID or Bar code material tracking
Automated inventory management
Automated order selection and picking
Communication with customers to determine their needs
Communication with suppliers to determine their capabilities

42. Performance cycle synchronization seeks to achieve planned time performance
Delayed or faster performance at any point along the supply chain results in potential disruption of operations
Once consistent operations are achieved, managers can focus on reducing the time to complete the performance cycle to a minimum