Business Logistics/Supply

Chain—A Vital Subject

The supply chain is simply another way of

saying “the whole process of business.”

Chapter 1
CR (2004) Prentice Hall, Inc.
1-1
 The Immediate Supply Chain for an Individual Firm

Transportation Transportation
Warehousing Customers

Information
flows
Factory

Transportation

Vendors/plants/ports
Warehousing Transportation

CR (2004) Prentice Hall, Inc. 1-2

What is a Supply Chain?
■ All stages involved, directly or indirectly, in fulfilling a
customer request
■ Includes manufacturers, suppliers, transporters,
warehouses, retailers, and customers
■ Within each company, the supply chain includes all
functions involved in fulfilling a customer request
(product development, marketing, operations,
distribution, finance, customer service)

1-3
What is a Supply Chain?
■ Customer is an integral part of the supply chain
■ Includes movement of products from suppliers to
manufacturers to distributors, but also includes
movement of information, funds, and products in both
directions
■ Probably more accurate to use the term “supply
network” or “supply web”
■ Typical supply chain stages: customers, retailers,
distributors, manufacturers, suppliers
■ All stages may not be present in all supply chains
(e.g., no retailer or distributor for Dell)
1-4
 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
CR (2004) Prentice Hall, Inc.
1-5
 Reality of SC Scope

CR (2004) Prentice Hall, Inc.

1-6
 The Multi-Dimensions of SC

SUPPLY
CHAIN
MANAGEMENT

Activity and process

administration
CR (2004) Prentice Hall, Inc.
1-7
Evolution of Supply Chain Management
Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+

Demand forecasting

Purchasing

Requirements planning
Purchasing/
Production planning Materials
Management
Manufacturing inventory

Warehousing
Logistics
Material handling

Packaging

Finished goods inventory Supply Chain

Physical Supply Chain
Management
Distribution Management
Distribution planning

Order processing

Transportation

Customer service

Strategic planning

Information services

Marketing/sales

Finance
1-8
CR (2004) Prentice Hall, Inc.
 Supply Chain Schematic

CR (2004) Prentice Hall, Inc. 1-5

 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.

CR (2004) Prentice Hall, Inc.

1-10
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!
CR (2004) Prentice Hall, Inc.
1-11
 Critical Customer Service
Loop
Customer order processing (and
transmittal)

Transportation
Customers

Inventory
or supply source

CR (2004) Prentice Hall, Inc.

1-12
 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 1-13
 Physical Distribution Costs
Category Percent of sales $/cwt.
Transportation 3.34% $26.52
Warehousing 2.02 18.06
Order entry 0.43 4.58
Administration 0.41 2.79
Inventory carrying 1.72 22.25
Total 7.65% $67.71
Logistics cost
Add one-third for inbound supply costs are about 10% of
sales w/o
Source: Herb Davis & Company purchasing costs

CR (2004) Prentice Hall, Inc.

1-14
 Customer Service Performance
10 96
Order Cycle Time,
9 94 Days
92
8 Product
90 Availability--%
Days

7 orders

%
88 Product
6 Availability--% line
86 items
5 84
4 82
19 2
19 4
19 6
98
00
02
9
9
9
19

20
20

Source: Herb Davis & Company

Year
CR (2004) Prentice Hall, Inc.
1-15
Effect on Logistics Foreign Outsourcing
Domestic sourcing Foreign sourcing
Profit Profit Increase
G &A G &A
Marketing Marketing

Logistics Increase
Logistics

Overhead Tariffs
Overhead
Materials
Materials

Labor Reduction
Labor
1-16
CR (2004) Prentice Hall, Inc.
Flows in a Supply Chain

Information

Product
Customer
Funds

1-17
Process View of a Supply Chain
■ Cycle view: processes in a supply chain are
divided into a series of cycles, each
performed at the interfaces between two
successive supply chain stages
■ Push/pull view: processes in a supply chain
are divided into two categories depending on
whether they are executed in response to a
customer order (pull) or in anticipation of a
customer order (push)

1-18
Cycle View of Supply Chains
Customer
Customer Order Cycle

Retailer
Replenishment Cycle

Distributor

Manufacturing Cycle

Manufacturer
Procurement Cycle
Supplier
1-19
 Push/Pull View of Supply Chains
Procurement, Customer Order
Manufacturing and Cycle
Replenishment cycles

PUSH PROCESSES PULL PROCESSES

Customer
Order Arrives
1-20
Scope of the Supply Chain for Most Firms
Business logistics

Physical supply Physical distribution

(Materials management)

Sources of Plants/
Customers
supply operations
• Transportation • Transportation
• Inventory maintenance • Inventory maintenance
• Order processing • Order processing
• Acquisition • Product scheduling
• Protective packaging • Protective packaging
• Warehousing • Warehousing
• Materials handling • Materials handling
• Information maintenance • Information maintenance

Focus firm’s internal supply chain 1-14

CR (2004) Prentice Hall, Inc.
 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
CR (2004) Prentice Hall, Inc.
1-22
The Supply Chain is Multi-Enterprise
Scope in
reality

Focus
Company
This image cannot
Suppliers
currently be displayed.
Customers

Supplier’s Customers/
suppliers End users

Acquire Convert Distribute

Product and information flow

CR (2004) Prentice Hall, Inc.

1-23
 Relationship of Logistics to Marketing
Product

Promotion
Price

Place-Customer
service levels

Transport
Logistics

Inventory
carrying costs costs

Lot quantity Warehousing

costs Order processing costs
and information
costs
CR (2004) Prentice Hall, Inc. 1-22
 Relationship of Logistics to
Marketing and Production
LOGISTICS
Sample
activities: MARKETING
PRODUCTION/ •Transport Interface Sample
OPERATIONS • Inventory
Interface activities: activities:
Sample activities: • Order
• Quality control activities: • Customer • Promotion
• Detailed production
• Product processing service • Market
scheduling • Materials standards research
scheduling • Plant • Pricing
• Equipment maint . handling • Product
• Capacity planning location • Packaging
mix
• Purchasing • Retail • Sales force
• Work measurement
location management
& standards

Production-
logistics Marketing-
interface logistics
interface

Internal Supply Chain

CR (2004) Prentice Hall, Inc. 1-21
Relationship of Logistics to Production
•Coordinates through scheduling and strategy—
make-to-order or make-to-stock
•An integral part of the the supply chain
−Affects total response time for customers
−Shares activities such as inventory planning
•Costs are in tradeoff
−Production lot quantities affect inventory
levels and transportation efficiency
−Production response affects transportation
costs and customer service
−Production and warehouse location are
interrelated
CR (2004) Prentice Hall, Inc.
1-26
 Logistics/SC in Diverse Areas
•Manufacturing—most common
•Environment—causing restrictions
•Service—emerging opportunities
•Non-profits—little explored
•Military—long history

CR (2004) Prentice Hall, Inc.

1-27
Contemporary Logistics Terms
•Value stream/logistics process
•Quick response and flexible
manufacturing
•Mass customization
•Supply chain management/
collaborative logistics
•Reverse logistics
•Service logistics
•Continuous replenishment
•Lean logistics
•Integrated logistics 1-28
 Study Framework
Inventory Strategy
• Forecasting Transport Strategy
• Inventory decisions • Transport fundamentals

CONTROLLING
• Purchasing and supply

ORGANIZING
• Transport decisions
scheduling decisions Customer

PLANNING
• Storage fundamentals service goals
• Storage decisions • The product
• Logistics service
• Ord. proc. & info. sys.

Location Strategy
• Location decisions
• The network planning process

The focus is
here
CR (2004) Prentice Hall, Inc.
1-29
 The Logistics Strategy Triangle
Inventory Strategy
• Forecasting
• Storage fundamentals Transport Strategy
• Inventory decisions • Transport fundamentals
• Purchasing and supply • Transport decisions
scheduling decisions Customer
• Storage decisions
service goals
• The product
• Logistics service
• Information sys.

Location Strategy
• Location decisions
• The network planning process

CR (2004) Prentice Hall, Inc.

1-30
•Costs are lower than K-Mart or
Target Stores
•CEO is a former logistician
•Wal-Mart is the largest retailer in
the world!
CR (2004) Prentice Hall, Inc.
1-31
1-32