Role of logistics in Supply chain

An introduction

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 Learning Objectives
• The role and importance of logistics
• The impact of logistics on the economy
• The value-added role of logistics
• Logistics systems from several perspective
• The relationship between logistics and other
functional areas
• The importance of management activities in the
logistic function.
• The total cost tradeoffs in a logistics system

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 Definition of Logistics
• Logistics is defined as the detailed coordination of a
complex operation involving many people, facilities,
or supplies.
• Logistics is the process of anticipating customers’
needs and wants; acquiring the capital, materials,
people, technologies and information necessary to
meet those needs and wants; optimizing the goods-
or service-producing network to fulfill customer
requests; and utilizing the network to fulfill the
customers’ requests in a timely manner.

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 Terms Used to Describe Logistics
• Logistics Management (widely used in private,
public/government and non-profit organizations).
• Business Logistics Management- A view of Business
logistics in a company is shown below:

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 Business Logistics
RM supply RM storage M Plants F goods Markets
points Movement/ Movement/ Movement/ Movement/
• Transportation Transportation Transportation Transportation
Raw Warehouse 1
Storage 1 Plant 1 A
Material 1

Raw
Material 2 Plant 2 Warehouse 2 B
Storage 2

Raw C
Storage 3 Plant 3 Warehouse 3
Material 3

• Physical Supply
• Material Management Physical Distribution
• Inbound Logistics Outbound Logistics
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 Various Logistics
• Industrial Logistics - Inbound Logistics (materials to
support manufacturing) and outbound logistics
(physical distribution to support marketing).
• Military Logistics – The design and integration of all
aspects of support for the operational capability of the
military forces (deployed or in garrison) and their
equipment to ensure readiness, reliability and
efficiency.
• Event Logistics –The network of activities, facilities, and
personnel required to organize, schedule and deploy
the resources for an event to take place and efficient
withdrawal of the concerned resources.
• Service Logistics – The acquisition, scheduling, and
management of the facilities/assets, personnel and
materials to support and sustain a service operation
and business. 6
Value added Roles of Logistics

Production Marketing
Form Utility Possession Utility 1st Qtr

2nd Qtr

Logistics 3rd Qtr

Place Utility
Time Utility
Quantity utility

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 Value added Roles of Logistics
• Form Utility – It refers to the value added to the
goods through a manufacturing or assembly
process.
• Place Utility – Logistics provide place utility by
moving goods from production surplus points to
points where demand exists. Logistics extends
the physical boundaries of the market area, thus
adding economic value to the goods.
• Time Utility – It refers to the economic value
added to a good or service by having it at a
demand point at a specific time.
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 Value added Roles of Logistics
• Quantity Utility – It refers to the economic
value added to a good by delivering at a proper
quantity.
• Possession Utility - It refers to the value added
to a good/service due to the possession of that
good/service.

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 Logistics Activities
• Transportation – Transportation cost is often the largest
variable logistics cost.
• Warehousing and storage – A tradeoff relationship
exists
between storage & warehousing cost and
transportation cost.
• Packaging – It plays an important role in protecting
goods during transportation and storage
• Materials Handling – It is important in placing goods in a
warehouse and transporting them from
and into warehouse.
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 Logistics Activities
• Inventory Control – Inventory control has 2 dimensions:
assurance of adequate inventory and
certification of inventory accuracy.
• Order Fulfillment – Generally, it consists of activities
involved with filling and shipping customers
orders in expected lead time.
• Demand forecasting – Accurate forecasting of
materials and inventory requirements are essential
for inventory control, manufacturing efficiency and
customers satisfaction.
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 Logistics Activities
• Production Planning/Scheduling – It is closely
related to forecasting in terms of efficient
inventory control.
• Procurement – Procurement decisions need to
be made in consideration with total
logistics costs.
• Customers Service – Interacting directly with
customers and offering customers expected
service.

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 Logistics Activities
• Facility Location – Facility location affects
transportation cost, service, customer
service and inventory requirements.
• Returns goods Handling (Reverse Logistics), Parts
and service Support (Eg. Warranty) and Salvage
and Scrap Disposal –
• These areas require the development of a
reverse logistics system that will allow used,
broken, or obsolete products to be returned to
the supplier for disposition.
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 Integrated Logistics Management
• Fragmentation Evolving Integration Total Integration
• 1960 1980 1990

• Demand Forecasting
• Purchasing
• Requirements Planning
• Production Planning
• Manufacturing Inventory Inbound Logistics
• Warehousing
• Materials handling Logistics
• Industrial Packaging Supply
Chain
• Finished goods Inventory Outbound Logistics
• Distribution Planning
• Order Processing
• Transportation
• Customer Service 14
 Importance of Logistics
• Quality products and effective marketing must be
combined with effective and efficient logistics systems
for long-run success and financial viability.

• The challenge is to manage the entire logistics system

in such a way that order fulfillment meets and,
perhaps, exceeds customer expectations.

• Also, the challenge is to maintain competitive

marketplace demands efficiency-controlling
transportation, inventory and other logistics related
costs.
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 Importance of Logistics
• The concepts of supply chain management and
logistics are interrelated.

• Another perspective of supply chain management

views it as a network of the logistics systems and
related activities of all the individual organizations
that are a part of particular supply chain.

• The individual logistics systems obviously play a

role in the success of the overall supply chain.
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A Macro-economic Perspective of Logistics

• If more goods and services are produced,

logistics cost increases. The efficiency of
logistics system is determined as a percentage
of gross domestic product (GDP). Logistics
costs from 1985 to 2006 as per percentage of
GDP are shown by Bar charts in the following
figure.

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 A Macro-economic Perspective of Logistics
Macro Inventory as a percentage of GDP

14
12.3
12 11.4
10.4 10.3
9.9
10 9.5 9.5
8.7 8.8
PERCENT

8.6

0
1985 1990 1995 2000 2001 2002 2003 2004 2005 2006
Year

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 A Macro-economic Perspective of Logistics
• The reduction in logistics cost as a percentage of GDP
resulted from a significant improvement in the overall
logistics systems of the organizations.

• This reduction in relative cost allows organizations to be

more competitive since it directly impacts the cost of
producing goods.

• Three major cost categories included in this system are

warehousing and inventory costs, transportation costs
and other logistics costs as shown in the following figure.

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 A Macro-economic Perspective of Logistics
(Total Logistics Cost in US 2006)

Carrying Costs 1.857 Trillion –All business inventory

Category Cost in $ Billion Category Cost in $ Billion

Interest 93 Railroads 54
Taxes, Obsol., 252 Water 37
Depre., Insurance
Oil Pipelines 10
Warehousing 101
Air 38
Subtotal 446
Forwarders 27
Transportation
Subtotal 166
Cost
Shipper related 8
Motor Carriers
costs
Truck Intercity 432
Logistics 50
Truck Local 203 Administration
Subtotal 635 Total Logistics 1305
Other carriers Cost
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 Logistics in Firms: The Micro Dimension
• Manufacturing/Operations
• The micro dimension of logistics examines the relationships
between logistics and other functional areas in an organization-
marketing, manufacturing/operations, finance, accounting and
others.

• The logistics manager should ensure that available quantities of

raw materials and components are adequate to meet
production schedules yet are conservative in terms of inventory
carrying costs.

• The manufacturing decision requires managers to carefully

weight the advantages and disadvantages of long versus short
production runs and their impacts on inventory.

• Industrial packaging is to protect the product from damage

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 Logistics in Firms: The Micro Dimension
• Marketing
• Logistics is sometimes referred to as the other half of the
marketing, because the outbound side of the logistics system of
an organization is responsible for the physical movement and
storage of products for customers and thus plays an important
role in selling a product.

• The marketing activities are concerned with 4 P’s – price,

product, promotion and place. Each of them is discussed below.

• Price – Pricing of a product is important in its transportation

based on the highest capacity of a transport, discount schedule
for larger purchase quantities, volume of a product in terms of
inventory requirement, replenishment times and other aspects
of customer service.
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 Logistics in Firms: The Micro Dimension
• Product –Information of the physical dimension of a new
product or refurbished old products plays an important role in
providing proper service to customer in terms of packaging and
transportation.

• Promotion – An organization making a promotional effort to

stimulate sales should inform its logistics manager so that
appropriate quantities of products are available in right time
and right place.

• An analysis on the relationship between increasing sales and

promotional strategies and their effects on logistics area should
be carried out.

• Push or pull strategies are employed by the marketing

mangers.
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 Logistics in Firms: The Micro Dimension
• Pull is a technique to create demand of a product to customers
by adapting promotional activities, and to get customers into
the retail store asking for a product they have seen advertised.

• Push is an approach of collaboration with a distribution channel

(Distribution channels are composed of all the organizations
that handle products after they are manufactured but before
sale to the customer) to stimulate customer sales.

• Although there is a controversy both for and against these two

approaches, most organizations combine these two approaches
in their promotional efforts.

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 Logistics in Firms: The Micro Dimension
• Place- This is a decision to place a product to wholesalers or to
retailers. This decision refers to the decisions of the distribution
channels and thus involves the decisions of both the
transactional and physical distribution.

• Customer Service – Customer service place an important role in

earning increased revenue through customer satisfaction, and it
has become a key element of the marketing mix.

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 Logistics interfaces with other areas
• ROA (Return On Assets) or ROI (Return On Investment
• ROA = Revenue – Expenses/Assets = Gross
Profits/Assets
• Impact on ROA by
• 1) Inventory, both as an asset and as an expense
• 2) Transportation and warehousing costs
• 3) Customer Service
• So justification of increased investment in logistics-
related assets is required.
• Accounting of logistics-related costs is also required

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 Specific Factors relating to the cost and
importance of Logistics
• Order Cycle – A well-accepted principle of logistics management is
that the order cycle length directly affects inventory levels as shown in
the following figure:
• Inventory Inventory versus order cycle

•
•
• Order cycle (order length)
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 The general relationship of the cost of lost
sales to inventory
• Logistics Cost
• Total Cost

• Lost sales Cost

• Inventory Cost

• Flow of Goods
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The general relationship of product dollar
value to various logistics costs
• Logistics Cost Inventory Cost (including storage)

• Transportation Cost

• Packaging Cost

•
• Dollar value of products following increasing flow of Products
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 The general relationship of the cost of lost
sales to Transportation Cost
Logistics Cost

Total Cost

Lost sales Cost Transportation Cost

Flow by improved transportation service

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 The general relationship of product
weight density to logistics Cost
Logistics Cost

Transportation Cost

Inventory Cost

Warehousing Cost

Weight density of product following increasing flow

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 The general relationship of product susceptibility to
loss and damage to logistics Costs
• Logistics Cost
• Packaging Cost

•
• Transportation Cost

•
• Warehousing Cost

• Susceptibility to loss and damage following increasing flow of a

product 32
 Spatial Relationship
• The spatial relationship is the location of a fixed point in the
logistics system with respect to demand and supply points.

• These relationships are very important to transportation costs,

since these costs tend to increase with distance.

• Example: A firm located at point B has a $1.50 production cost

advantage over firm A, since firm B produces at $7.00 per unit as
opposed to $8.5 per unit for firm A. However, firm B pays $1.35
for inbound raw materials ($0.60 + $0.75) and $3.50 for outbound
movement to the market (M), for a total of $4.85 in per unit
transportation charges. Firm A pays $0.90 ($0.50 + $0.40) for
inbound raw materials and $1.15 for outbound movement, for a
total of $2.05 in per unit transportation charges.
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 Spatial Relationship
• $2.80 transportation cost advantage of Firm A offsets the $1.50
production cost disadvantage. Firm B might want to investigate
alternative strategies for its logistics system in order to compete
more effectively at M. Firm B might base its $3.50 per unit
transportation cost for shipping to M on less-than-truckload
prices (low volume movements). Firm B might consider using a
warehouse at M and shipping in full truckload quantities at lower
transportation cost. The scenario is shown in the figure below:
• $0.40 $0.75
• A $1.15 M $3.50 B
• PC =$8.50 PC = $7.00
• $0.50 $0.60

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 Techniques of Logistics system Analysis
• There are two types of Analysis:
• i) Short-run/Static Analysis: In this analysis costs are
developed for the various logistics cost centres at a specific
point of time or a specific level of production. Multiple short-
run costs are analyzed and the system with the lowest overall
cost is selected, as long as it is consistent with constraints
imposed on the logistics area by an organization. Sometimes it
is referred as static analysis.
• ii) Long-run/Dynamic Analysis:
• Dynamic analysis examines a logistics system over a long
time period or a range of output. Consider an example as
follows:

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 Techniques of Logistics system Analysis
• An organization is currently using an all-rail route from its
plants and the associated plant warehouse to its customers. At
the plant warehouse, the chemicals are bagged and palletized
and shipped by rail to the customer. A proposed second system
would use a market oriented warehouse. The chemicals would
be shipped from the plant to the market warehouse and then
packaged and sent to the customer. Instead of shipping all
goods by rail, the organization would shipped them by barge to
the market warehouse, taking advantage of low, bulk
transportation prices. Then after bagging the chemicals would
move by rail from the warehouse to the customer.

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 Techniques of Logistics system Analysis
• Example: Static Analysis of C & B Chemical Company
(50,000 pounds of output)
Plant Logistics Costs System 1 ($000) System 2 ($000)

Packaging 500 0
Storage and Handling 150 50
Inventory carrying 50 25
Administrative 75 25
Fixed Cost 4200 2400
Transportation costs
To market warehouse 0 150
To customer 800 100
Warehousing costs
Packaging 0 500
Storage and handling 0 150
Inventory carrying 0 75
Administrative 0 75
Fixed cost 0 2400
Total Cost 5775 5900 37
 Techniques of Logistics system Analysis
• Total Cost Fixed Cost Total variable cost Variable
cost/pound
• System 1 5775 4200 1575 0.0315
• System 2 5950 4800 1150 0.0230

• Model Total cost = Fixed cost + Variable cost/unit x Number of units in a lot
• For system 1 y = 4200 + 0.0315x,
• x is the quantity in a lot and y is the total cost.
• Question: Which system is better?

• Cost Centres
• The management activities that many organizations include in the logistics
system, are namely, transportation, warehousing, inventory, materials
handling and industrial packaging. By examining these activities as cost
centres, trade-offs between them can be analyzed to determine the overall
lowest cost or higher service logistics system. The following table shows an
analysis of total logistics cost with a change to a higher cost mode of
transportation.
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 Techniques of Logistics system Analysis
• Analysis of total logistics cost with a change to a higher cost
mode of transportation

Cost Centres Cost by Rail ($) Cost by Motor ($)

Transportation 3.00 4.30
Inventory 5.00 3.75
Packaging 3.50 3.20
warehousing 1.50 0.75
Cost of lost sales 2.00 1.00
Total cost/ unit 15.00 13.00
Shows that the motor carrier price is higher than the rail, but
resulting reductions in other costs, more than that offset this
higher transportation price

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 Techniques of Logistics system Analysis
• Analysis of total logistics cost with a change to more
warehousing

Cost centrers System 1 System 2

3 warehouses 5 warehouses
Transportation 850,000 500,000
Inventory 1,500,000 2,000,000
Warehousing 600,000 1,000,000
Cost of lost sales* 350,000 100,000
Total cost 3,300,000 3,600,000
* Expected cost based upon probabilities of not having stock/inventory available when customer want it

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 Nodes and Links in a Logistics system
• Nodes and links are used to analyze logistics systems in an
organization. The nodes are fixed spatial points where goods
stops for processing or storage.
• Links represent the transportation network and connect the
nodes in the logistics system. The nodes and links in a
logistics system are shown in the following figure.
• W, Warehouse; P, Plant; M, Market
• M M
• W
• M P M
W
W
P

W P
W
W
• M P M
W
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 Logistics Channels
• A final approach to logistics system analysis is the study of the
logistics channels, or the network of intermediaries engaged
in transfer, storage, handling, communication, and other
functions that contribute to the efficient flow of good. A
simple logistics channel is shown in the following figure:
Market/
Raw materials Customer
supply point
Manufacturing Market/
plant Customer
Raw materials
supply point
Market/
Customer
• Flow
•
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 A multi-Echelon Logistics Channel
Retailer
Raw materials
supply point Warehouse Retailer

Raw materials Manufacturing Retailer

supply point Plant

Retailer
• Raw materials
supply point
Warehouse Retailer

Retailer

Flow

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 A Complex Logistics channel
Retailer Retailer

Wholesaler Retailer
Raw materials Warehouse
supply source Retailer
Retailer
Manufacturing
Plant Retailer Retailer
Raw materials Warehouse
Wholesaler Retailer
supply source
Manufacturing
Retailer Retailer
Plant
Retailer
Raw materials Retailer
Warehouse
supply source Wholesaler
Retailer
Manufacturing
Retailer
Plant Retailer
Raw materials Warehouse Retailer Retailer
supply source Wholesaler Retailer
Retailer
Retailer
• Flow
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