INTT 356 Spring 2021 Ch02 Handouts

INTT 356 International Transportation and Logistics
Skip “Logistics in the Economy: A Macro Perspective” – pg. 45-48
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There is an important need for efficient and effective logistics support in a supply chain. In order to
build and sustain competitive advantage and profitability, customer orders need to be fulfilled by
meeting, even exceeding customer expectations. At the same time, transportation, inventory, and
other logistics related costs must be controlled.
GOOD LOGISTICS IS BUSINESS POWER
The challenge is to manage the entire logistics system in such a way that order fulfillment meets
and exceeds customer expectations. At the same time, the competitive marketplace demands
efficiency. Cost and service tradeoffs have to be considered when evaluating customer service
levels and the associated total cost of logistics, but both goals of efficiency and effectiveness are
important.
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The concepts of SCM and logistics are related to each other. A supply chain is a network of the
logistics systems and related activities of all the individual organizations that are part of a particular
supply chain. The coordination and integration of the logistics systems in a supply chain is a
challenge.
The term logistics has become much more widely recognized in the last 20 years. Increased
customer sensitivity to not only product quality but also to the associated service quality has
contributed to the recognition of logistics.
Despite the fact that a number of terms are used to describe logistics, Logistics Management is
the most widely accepted term. It applies to the private business sector, public and nonprofit
sectors, and service organizations.
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We will be using the definition offered by the Council of Supply Chain Management.
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The business sector’s approach to logistics developed into inbound logistics (materials
management to support manufacturing) and outbound logistics (physical distribution to support
marketing) during the 1970s and 1980s. Then, in 1990s, the business sector began to view
logistics in the context of a supply or demand chain that linked all the organizations from the
supplier’s supplier to the customer’s customer. Supply chain management requires a collaborative,
coordinated flow of materials and goods through the logistics systems of all the organizations in the
network.
In the 21st century, logistics should be viewed as a part of management and has four subdivisions.
All four subdivisions have common characteristics and requirements such as forecasting,
scheduling, and transportation, but they also have some differences in their primary purpose. All
four, however, can be viewed in a supply chain context; that is , upstream and downstream other
organizations play a role in their overall success and long run viability.
Here, we will focus on business logistics. A general definition of logistics that encompasses all four
subdivisions is as follows:
Logistics is the process of anticipating customer 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
customer requests in a timely manner.
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A Product or service is of little value if it is not available to customers at the time and place that
they wish to consume it. When a firm transports a product toward the customer or makes it
available in terms of inventory in a timely manner, for the customer value has been created that
was not there previously.
Form Utility: Form utility results when raw materials or components are combined in some
predetermined manner to make a finished product.
Place Utility: Logistics provides place utility by moving goods from production surplus points to
points where demand exists. Logistics creates place utility primarily through transportation.
Time Utility: Not only must goods and services be available where customers need them but also
at that point when customers demand them. This is called time utility, or the economic value added
to a good or service by having it at demand point at a specific time. Logistics creates time utility
through proper inventory maintenance, the strategic location of goods and services, and
transportation.
Quantity Utility: The utilities of when and where must be accompanied by how much. Delivering
the proper quantities of an item to where it is demanded is creating quantity utility. Logistics creates
quantity utility through production forecasting, production scheduling, and inventory control. So,
logistics must deliver products at the right time, to the right place, and in the right quantities to add
utility and economic value to a product.
Possession Utility: Possession utility is primarily created through the basic marketing activities
related to the promotion of products and services. The role of logistics in the economy depends on
the existence of possession utility, for time, place and quantity utilities to make sense only if
demand for the product or service exists. Marketing also depends on logistics, since possession
utility cannot be acted upon unless time, place and quantity utilities are provided.
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Transportation: Transportation is a very important activity in the logistics system and is often the largest variable
logistics cost. A major focus in logistics is the physical movement or flow of goods and on the network that moves the
product. The network is composed of transportation organizations that provide service for the shipping firm. The logistics
manager is responsible for selecting the mode or modes and carriers used in moving raw materials, components, and
finished goods or for developing private transportation as an alternative.
Warehousing and storage: A second area, which has a tradeoff relationship with transportation, is storage. Storage
involves two separate, but closely related, activities: inventory management and warehousing. Decisions about how
many warehouses, how much inventory, where to locate the warehouses, what size the warehouses should be, and the
like are related to storage activities.
Industrial packaging: Industrial packaging protects the product during transportation and storage and includes
materials such as cardboard boxes (corrugated), stretch wrap, banding, bags, sacks, and so on. The type of
transportation mode selected effects packaging requirements.
Materials handling: Materials handling is important in warehouse design and efficient warehouse operations. Logistics
managers are concerned with the movement of goods into a warehouse (from transportation vehicle), the placement of
goods in a warehouse, and the movement of goods from storage to order-picking areas and eventually to dock areas for
transportation out of the warehouse.
Inventory control: Inventories can be found in both warehouses and manufacturing facilities. Inventory control has two
dimensions: assuring adequate inventory levels and certifying inventory accuracy.
Order fulfillment: Order fulfillment generally consists of activities involved with filling and shipping customer orders. It is
significant for logistics because an important physical distribution factor is the time that elapses from when a customer
places an order until the customer receives a satisfactory fulfillment of the order. This is referred to as lead time.
Demand forecasting: Accurate forecasting of inventory requirements and materials and components is essential in
inventory control, manufacturing efficiency, and customer satisfaction.
Production planning/scheduling: Production planning and scheduling is closely related to forecasting in terms of
effective inventory control. Once a forecast is developed and the current inventory on hand and usage rate is
determined, production managers can calculate the number of units to manufacture to ensure adequate market
coverage.
Procurement: The basic rationale for including procurement in logistics is that transportation costs relate directly to the
geographic location (distance) of raw materials ansd component parts purchased for an organizations manufacturing
needs.
Customer service: Two dimensions of customer service are important to logistics: 1- the process of interacting directly
with the customer to influence or take the order and 2- the levels of service an organization offers to its customers. From
an order-taking perspective, logistics is concerned with having adequate inventory levels in the proper locations to meet
the customer's order requirements. Also, logistics is concerned with being able to promise the customer, at the time the
order is placed, when the order will be delivered. This requires coordination among inventory control, manufacturing,
warehousing, and transportation to guarantee that any promises made when the order is taken as to delivery time and
product availability will be kept.
The second dimension of customer service relates to the levels of service the organization promises its customers.
These service levels might include order fill rates (percentage of orders satisfied from inventory on hand) and on-time
delivery rates. Decisions about inventories, transportation, and warehousing relate to customer service levels.
Facility location: Plant and warehouse site location changes could alter time and place relationships between facilities
and markets or between supply points and facilities. Such changes will affect transportation costs and service, customer
service, and inventory requirements.
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Logistics, by its nature, focuses on processes that cut across traditional functional boundaries, particularly with the
current emphasis on the supply chain.
Manufacturing/Operations
One of the interfaces between logistics and manufacturing relates to the length of the production run. Long
production runs with infrequent line setups or changeovers result in higher inventory levels of some finished
products ands limited supplies of others.
If there exists seasonal demand for products, advance production is inevitable, which will inevitably increase
inventory storage costs.
Another interface occurs on the supply side since the logistics manager is responsible for the inbound movement
and storage of raw materials and components that will support production.
Industrial packaging is a logistics responsibility that happens to be another interface activity.
Marketing
Logistics is often referred to as the other half of marketing and plays an important role through the physical
movement and storage of goods in selling a product. Logistics pricing decisions concern carrier pricing, matching
discount schedules to transportation rates, and volume relationships affecting the ability to move and store
products.
The outbound side of an organization’s logistics system is responsible for the physical movement and storage of
products for customers and thus plays an important role in selling a product. The ability to provide the product at
the right time to the right place in the right quantities might be the critical element in making a sale. Interfaces with
marketing are discussed in terms of price, product, promotion, and place - the four Ps of marketing:
Price: From a logistics perspective, adjusting quantity prices to conform to shipment sizes appropriate for
transportation organizations might be quite important. If there are any price specials, the logistics manager must be
notified so that he or she can adjust inventory levels to meet projected demand.
Product: The size, shape, weight, packaging, and other physical dimensions of the product affect the ability of the
logistics system to move and store them.
Promotion: Firms often spend millions of dollars on national advertising campaigns and other promotional practices
to improve sales. An organization making a promotional effort to stimulate sales should inform its logistics manager
so that sufficient quantities of inventory will be available for distribution to the customer. Marketing can either
“push” the product through the distribution channel to the customer or “pull” it through.
Place: The place decision refers to the distribution channels decision and thus involves both transactional and
physical distribution channel decisions.
Finance
Logistics can have an impact on return on assets (ROA) and return on investment (ROI).
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Logistics can positively impact ROA in several ways.

1. Reducing inventory levels reduces the asset base as well as the corresponding variable
expenses
2. If an organization owns its warehouses and transportation fleet, assets will be
increased. If these assets are reduced or eliminated, ROA will increase. Similarly, if an
organization uses third parties for warehousing and transportation, variable expenses will
be incurred. Reducing these will have a positive impact on ROA.
3. The focus on customer service can increase revenue. As long as the incremental
increase in revenue is larger than the incremental increase in the cost of customer service,
ROA will increase.
On the other hand, logistics managers have to justify in logistics related assets using
acceptable financial parameters related to payback periods.
Chapter 2 - 12
Competitive Relationships: Frequently, competition is narrowly interpreted only in terms of

price competition. While price is certainly important, in many markets, customer service
can be a very important form of competition.
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Order Cycle: A well-accepted principle of logistics management is that order cycle length
directly affects inventory levels. Stated another way, the shorter the order cycle, the less
inventory required to be held by the customer. Order cycle can be defined as the time that
elapses from when a customer places an order until the order is received.
Substitutability: Substitutability very often affects the importance of customer service.
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Inventory Effect: By increasing inventory costs (either by increasing the inventory level or
by increasing reorder points), organizations can usually reduce the cost of lost sales. In
other words, an inverse relationship exists between the cost of lost sales and inventory
cost.
Chapter 2 - 15
Transportation Effect: Organizations can usually trade off increased transportation costs
against decreased lost sales costs.
Chapter 2 - 16
Chapter 2 - 17
Dollar / TL Value
Transportation prices reflect the risk associated with the movement of goods. There is
often more chance for damage with higher value goods; damage to them will cost the
transportation provider more money with the reimbursement to the owner. Also, customers
of high value products can typically afford to pay higher transportation prices, so providers
tend to charge higher prices.
Warehousing and inventory costs increase since higher value means more capital invested
in inventory, resulting in higher total capital cost. Also, the risk factor for storing high-value
products increases the costs of obsolescence and depreciation. The physical facilities
required to store higher-value products are more sophisticated.
Packaging costs also usually increase because protective packaging to minimize damage
is used.
Finally, materials-handling equipment used to meet the needs of higher-value products is
often more sophisticated.
Density
When establishing their prices, transportation providers consider how much weight they
can fit into their items. On high-density items, these providers can afford to charge a lower
price per unit weight because they can fit more weight ,into their vehicle.
Density also affects warehousing costs. The higher the density, the more weight can fit into
an area of warehouse space – hence, the more efficient use of warehousing space.
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Example: The 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 $8.50 per unit for Firm A.
However, Firm B pays $1.35 for inbound raw materials 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 for inbound raw materials and $1.15 for outbound movement, for a total
of $2.05 in per-unit transportation charges.
Firm A’s $2.80 transportation cost advantage 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.
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Short-Run/Static Analysis
One general approach to total cost analysis for logistics is known as short-run analysis. In
a short-run analysis, a specific point in time or level of production is chosen, and costs are
developed for the various logistics cost centers described previously.
Long-Run/Dynamic Analysis
While short-run analysis concentrates on specific time or level of output, dynamic analysis
examines a logistics system over a long time period or range of output.
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Approaches to Analyzing Logistics Systems

The analysis of logistics systems frequently requires different views or perspectives of
logistics activities. The best perspective to take depends on the type of analysis that is
needed. For example, if an organization wants to analyze the long-run design of its
logistics system, a view of logistics that focuses on the organization’s network of node and
link relationships would probably be most beneficial. On the other hand, if an organization
is evaluating a change in a carrier or mode of transportation, it should probably analyze the
logistics system in terms of cost centers. In this section, four approaches to analyzing
logistics systems are discussed: (1) materials management versus physical distribution, (2)
cost centers, (3) nodes versus links, and (4) logistics channels.
Chapter 2 - 23
Balanced System
Some organizations have a reasonably balanced flow on the inbound and outbound sides
of their logistics systems. In other words, they receive raw materials and components from
suppliers in different locations and ship finished product to customers in various locations.
Many consumer product companies, like Unilever, fit this description.
Heavy Inbound
Some organizations have a very heavy inbound flow and a very simple outbound flow. An
aircraft manufacturer such as Boeing is a good example.
Heavy Outbound
Some organizations have a very heavy outbound flow compared to its inbound flow. A
chemical company like Exxon Mobil offers a good example.
Reverse Systems
Some organizations have reverse flows on the outbound side of their systems. This is the
case for organizations like Nokia that produce durable goods that the consumer might
return for trade-in, for repairs, or for salvage and disposal.
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The management activities that many organizations include in the logistics area are:
transportation, warehousing, inventory, materials handling, and industrial packaging. The
breakdown of logistics into various cost centers represents a second approach to logistics
system analysis.
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A third approach to analyzing logistics systems in an organization is in terms of nodes and

links. The nodes are fixed spatial points where goods stop for storage or processing. Links
represent the transportation network and connect the nodes in the logistics system
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A final approach to logistics system analysis is the study of the logistics channel, or the
network of intermediaries engaged in transfer, storage, handling, communication and other
functions that contribute to the efficient flow of goods. The logistics channel can be viewed
as part of the total distribution channel, which includes both the logistics flow as well as the
transaction flow which would be of specific interest to the marketing manager. The logistics
channel can be simple or complex
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Optimality Level I – Optimizing the Organization

An organization should not optimize transportation at the expense of related logistics areas such
as warehousing and packaging. At the same time, logistics is only one subsystem in an
organization, and, therefore, the organization should not optimize it at another area’s expense such
as marketing, production, or finance. The overall organization is a system that should be optimize.
The organization might have to sub-optimize internal subsystems to achieve the best overall
position in the market. Generally, this means that logistics might work within constraints such as
set delivery times, minimum production runs, and financial limits on warehouse improvements and
construction. The goal is to identify the tradeoffs that exist within the organization and optimize the
organization as a whole at optimality level I.
Optimality Level II – Optimizing the Supply Chain
Many times an organization is faced with constraints imposed by other supply chain members.
These members include suppliers (raw materials, components, and transportation providers) and
customers (other manufacturers, wholesalers, and retailers). When an organization makes
decisions to optimize at level I, it must also consider the impact of these decisions on the operation
of the organizations in level II.
Optimality Level III – Optimizing the Environment
Level III involves various constraints imposed by the society and includes social, political, and
economic influences. At this level of optimality, decisions must be made that optimize the
organization and the supply chain subject to the requirements of society.
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INTT 356 Spring 2021 Ch02 Handouts

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INTT 356 Spring 2021 Ch02 Handouts

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INTT 356 International Transportation and Logistics

Skip “Logistics in the Economy: A Macro Perspective” – pg. 45-48

GOOD LOGISTICS IS BUSINESS POWER

Logistics can positively impact ROA in several ways.

Competitive Relationships: Frequently, competition is narrowly interpreted only in terms of

Approaches to Analyzing Logistics Systems

A third approach to analyzing logistics systems in an organization is in terms of nodes and

Optimality Level I – Optimizing the Organization

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