Fundamentals of Business Administration:

4 – Internal Logistics
Contents

4 Internal logistics

4.1 Introduction

4.2 Procurement marketing

4.3 Procurement and storage planning

Contents

4 Internal logistics

4.1 Introduction

4.2 Procurement marketing

4.3 Procurement and storage planning

Learning objectives

• You can describe the term "internal logistics" and name

the three key processes/groups that it comprises

• You can differentiate the different types of procurement

goods and give illustrative examples for each type

• You can explain the key goals that internal logistics

pursues and discuss that they sometimes conflict with
each other
Internal logistics: Conceptual foundations
DEFINITION
• Internal logistics refers to
the functional area of a
company that comprises
the
-procurement,
-warehousing, and
-transport (distribution)
of all goods that the
company needs to
perform their services
and production processes
Thommen/Achleitner (2017), p. 140
PROCUREMENT GOODS
• Raw materials
Enter directly into the product as base materials, e.g., steel in car
production
• Excipients
Also enter the product, but have only complementary character,
e.g., screws in furniture manufacturing
• Operating materials
Not part of the finished product, but consumed in the production
process, e.g., energy
• Intermediate goods
Parts and assemblies that go into the end product - differ from the
excipients by a higher degree of ripeness
• Trade goods
Supplement to the production program. Do not enter the
production process, but are resold/traded unprocessed
Decision-making areas in internal logistics fall into
three groups
PROCUREMENT
• Procurement program
-Procurement goods type
-Procurement goods
quality
-Order quantity
-Time of order
• Procurement marketing
-Procurement market
research
-Procurement policy
instruments
 Procurement products
 Procurement methods
 Procurement terms
 Procurement
communication
Thommen/Achleitner (2017), p. 143
WAREHOUSING TRANSPORT
• Warehouse equipment • Modes of transport
-Warehouse type • Transport volume
-Warehouse configuration
and features • Distribution of the
-Warehouse capacity transport quantity
-Warehouse location • Transport routes
• Stock/storage program
-Stored goods
-Inventory levels
-Safety stocks
-Storage locations
• Storage process
-Goods acceptance
-Quality inspection
-Outsourcing &
administration
Internal logistics pursues numerous, sometimes
conflicting, goals

PERFORMANCE FINANCIAL MANAGEMENT AND

GOALS GOALS ORG. GOALS

• Cost minimization • Liquidity • Security (delivery-

with regard to • Profitability readiness level)
-Procurement • Flexibility
-Warehousing (adaptability)
-Transport
• Long-lasting
-Shortages and out-
supplier relationship
of-stock situations
• Ecological aspects

OPERATIONAL ACTIVITIES

Thommen/Achleitner (2017), pp. 142-143

Contents

4 Internal logistics

4.1 Introduction
4.2 Procurement marketing

4.3 Procurement and storage planning

Learning objectives

• You can explain the term "procurement marketing" and

its key tasks

• You can name and describe the different instruments of

procurement policy

• You can describe different areas of procurement market

research and name the key criteria that are important in
a supplier analysis
Procurement marketing includes procurement market
research and procurement instruments
PROCUREMENT POLICY
TASKS INSTRUMENTS

• Systematic observation and • Procurement product policy

analysis of procurement • Procurement method policy
markets in order to provide
decision documents • Procurement terms policy
(procurement market • Procurement communications
research) policy
• Design of market
relationships to support the
optimal achievement of the
company's goals (procurement
policy instruments)

Thommen/Achleitner (2017), pp. 146-150

Procurement market research comprises five areas

DESCRIPTION AREAS

• Procurement market research is • Suppliers

the collection, • Supply and demand structure
systematization, and
evaluation of relevant • Price development/history
information about the • Product development
procurement market that is
relevant for internal logistics • Storage and transport
techniques
• It forms the basis for the
planning, decision-making,
task assignment, and control
of the use of procurement
policy instruments

Thommen/Achleitner (2017), pp. 146-147

Example: Characteristics in the supplier analysis

CRITERIA DESCRIPTION
Reliability ● Consistent quality ● Adherence to service
● Timely delivery promises

Production ● Production capacity ● Flexibility with custom-

possibilities ● Quality level made products or
fluctuating order quantities
Conditions/terms ● Price ● Delivery times
● Delivery, payment terms ● Warranty service

Product ● Quality ● Customer service

● Assortment ● Product development
Geographical ● Transport conditions ● Exchange rate stability
location ● Political security in the
country of purchase

General situation and ● Market position/share ● Financial conditions

characteristics of the ● Supply to competitors ● Quality of management
supplier ● Affiliation to a business (especially innovation)
combination (e.g., group)
Thommen/Achleitner (2017), pp. 146-147
Information to be determined for other areas of
procurement market research

AREAS DESCRIPTION

Supply and ● Number and size of eligible suppliers

demand structure ● Number and size of competitors with the same potential
suppliers
Price development/ ● Determination of the current price level
history ● Forecasts about future prices (price elasticity, price fixing,
price leadership, etc.)
Product ● New manufacturing processes as well as storage and
development transport techniques
● New products (materials) that are substitution possibilities
 must be recognized early to avoid competitive disadvan-
tages compared to the competition. Then, manufacturing
facilities need to be adapted as well as old stocks dissolved

Storage and ● Existing storage capacities

transport techniques ● Possible options and costs of different storage methods
● Technical and economic aspects of adequate transport
techniques and substitution options

Thommen/Achleitner (2017), pp. 146-147

Four procurement policy instruments exist

• Product design
Procurement
• Product assortment/program
product policy
• Product development

• Procurement channel
Procurement
• Supplier structure
method policy
• Procurement organs

• Price
Procurement • Delivery times
terms policy
• Terms of payment

• Procurement advertising
Procurement
communications • Supplier support
policy • Public relations
Thommen/Achleitner (2017), pp. 148-151
Contents

4 Internal logistics

4.1 Introduction

4.2 Procurement marketing

4.3 Procurement and storage planning

4.3.1 Procurement and storage strategies

4.3.2 ABC analysis

4.3.3 Exercise: ABC analysis
4.3.4 SCM and IT
Contents

4 Internal logistics

4.1 Introduction

4.2 Procurement marketing

4.3 Procurement and storage planning

4.3.1 Procurement and storage strategies

4.3.2 ABC analysis

4.3.3 Exercise: ABC analysis
4.3.4 SCM and IT
Learning objectives

• You can contrast the three procurement types case-by-

case procurement, production-synchronous procurement,
and stock procurement and explain the main decision
factors when deciding for or against a suitable type

• For each of the procurement types, you can name its key
characteristics, discuss advantages and disadvantages,
and give examples for their typical application areas
and requirements
Initial considerations for procurement and warehouse
planning
GOALS PROCUREMENT TYPES DECISION FACTORS
• Optimal, i.e., economic • Principle of case-by- • Quantity of material to
procurement of case procurement be procured
materials • Principle of • Value of goods ordered
• Analysis of possible production- (price level, price
types of procurement, synchronous fluctuations)
because procurement procurement • Temporal
has great potential for • Principle of stock accumulation/ time
profit procurement of material
requirements
• Characteristics of the
material (suitability for
storage, availability)
• Evaluation of suppliers
(readiness for delivery,
reliability)

Thommen/Achleitner (2017), pp. 149-151

1) Principle of case-by-case procurement
Procurement types (1/3): Principle of case-by-case
procurement

•Procurement process is triggered when

demand arises

Description •Only meaningfully applicable if material

can be procured at any time or if material
requirements cannot be planned for a
longer period of time

Application •Order production

areas •Special parts

Thommen/Achleitner (2017), p. 149

2) Principle of production-synchronous procurement
Procurement types (2/3): Principle of production-
synchronous procurement

• Procurement process is synchronized with production

planning, also "just-in-time procurement"
• Feasible, if
Description -certainty of the procurement data is high and
-production program can be determined in terms of type,
quantity and period (deterministic demand structures
available).

• Reduces the need to store large quantities of material/

intermediate products
• Long-term relationships with suppliers usually result in
higher quality and/or lower prices
Characteristics
• Often joint development of parts/processes with
suppliers
• Supplier responsible for high quality products and
delivery
Thommen/Achleitner (2017), pp. 149-150
Procurement types (2/3): Production in "smartville" as
example for production-synchronous procurement

Link to video: https://youtu.be/l9KhjFMXQlo, retrieved 12.08.2018

3) Principle of stock procurement
Procurement types (3/3): Principle of stock
procurement

• Construction of incoming storage for different

materials
• Is typically applied,
Description
-if procurement planning is no longer directly/exactly
compatible with production planning
-if there are random (stochastic) demand profiles (for
example, for raw materials)

• Safety or reserve storage

Underlying • Speculative storage

stock keeping • Anticipatory or seasonal storage
motives • Warehousing as a productive function
• Legal regulations

Thommen/Achleitner (2017), pp. 150-151

Procurement types (3/3): Detailed description of stock
keeping motives for stock procurement
• Safety or reserve storage
-If uncertainties exist on the
procurement market
-Goal: to create a balance between
procurement and production; to
ensure continuous production
processes
• Speculative storage
-If price fluctuations exist on the
procurement market
-Goal: to keep costs or final price of the
product as constant as possible
• Anticipatory or seasonal storage
-If materials are not available at all
times (can only be delivered or
delivered at certain times = seasonal
storage)
-Goal: to increase procurement security
Thommen/Achleitner (2017), p. 151
• Warehousing as a productive
function
-If the storage itself is part of the
production process (for example in
the production of wine or cheese)
-Goal: quality improvement, maturing
of the products
• Legal regulations
-If laws require storage, so-called
compulsory warehouses must be set
up (e.g., oil, food, antibiotics)
-Governmental institutions typically
close contracts with companies
regarding the establishment of these
compulsory warehouses
-Objective: to bridge shortage
situations
Contents

4 Internal logistics

4.1 Introduction

4.2 Procurement marketing

4.3 Procurement and storage planning

4.3.1 Procurement and storage strategies

4.3.2 ABC analysis

4.3.3 Exercise: ABC analysis

4.3.4 SCM and IT
Learning objectives

• You can explain what an ABC analysis is, can illustrate

what it is used for and why it is necessary

• You are able to conduct an ABC analysis yourself and

interpret its results
Order planning intensity as a function of the goods
value: Determination by means of an ABC analysis
Share of total spend in %

Share of total
number of items
in %

Thommen/Achleitner (2017), pp. 156-158

Differentiation of A, B, and C goods
SHARE OF SHARE OF TOTAL
CLASS TOTAL SPEND NO. OF ITEMS
Typical A 70-80% 10-20%
distribution B 10-20% 20-30%
C 5-10% 60-70%

• A goods: e.g., complex modules or systems like seating

systems, engines, etc.
-Exact disposition regarding amount and date (possibly just-in-time
procurement)
-Elaborate procurement market research, intensive price negotiations
Example • B goods: e.g, simpler plastic parts, windscreen wipers, etc.
implications -Mostly stock procurement with more complex disposition procedures
and determination of concrete safety stocks
• C goods: e.g., adhesives, standard parts such as screws,
washers, etc.
-Mostly stock procurement with simple disposition procedures

Thommen/Achleitner (2017), pp. 156-158

Contents

4 Internal logistics

4.1 Introduction

4.2 Procurement marketing

4.3 Procurement and storage planning

4.3.1 Procurement and storage strategies

4.3.2 ABC analysis

4.3.3 Exercise: ABC analysis

4.3.4 SCM and IT
ABC analysis exercise (1/5): Provided information
Consumption Consumption
Price per unit Total spend Total spend
Art. no. quantity quantity Rank
(in €) (in €) (in %)
(in pieces) (in %)
A58 300 14.00

B42 200 4.00

D17 500 12.00

E61 800 6.00

L27 1,500 2.00

L33 1,000 2.80

M74 5,000 0.20

M78 2,000 0.80

N27 200 23.00

P14 50 80.00

R68 50 200.00

R84 100 34.00

T28 200 40.00

V28 2,000 0.45

X84 2,500 0.60

Total
ABC analysis exercise (2/5): Calculation of relative
consumption quantity (in %) and total spend
Consumption Consumption
Price per unit Total spend Total spend
Art. no. quantity quantity Rank
(in €) (in €) (in %)
(in pieces) (in %)
A58 300 1.8 14.00 4,200 7.4

B42 200 1.2 4.00 800 1.4

D17 500 3.1 12.00 6,000 10.6

E61 800 4.9 6.00 4,800 8.5

L27 1,500 9.2 2.00 3,000 5.3

L33 1,000 6.1 2.80 2,800 4.9

M74 5,000 30.5 0.20 1,000 1.8

M78 2,000 12.2 0.80 1,600 2.8

N27 200 1.2 23.00 4,600 8.1

P14 50 0.3 80.00 4,000 7.1

R68 50 0.3 200.00 10,000 17.7

R84 100 0.6 34.00 3,400 6.0

T28 200 1.2 40.00 8,000 14.1

V28 2,000 12.2 0.45 900 1.6

X84 2,500 15.2 0.60 1,500 2.7

Total 16,400 100.0 56,600 100.0

ABC analysis exercise (3/5): Ranking of articles by
relative share of total spend
Consumption Consumption
Price per unit Total spend Total spend
Art. no. quantity quantity Rank
(in €) (in €) (in %)
(in pieces) (in %)
A58 300 1.8 14.00 4,200 7.4 6

B42 200 1.2 4.00 800 1.4 15

D17 500 3.1 12.00 6,000 10.6 3

E61 800 4.9 6.00 4,800 8.5 4

L27 1,500 9.2 2.00 3,000 5.3 9

L33 1,000 6.1 2.80 2,800 4.9 10

M74 5,000 30.5 0.20 1,000 1.8 13

M78 2,000 12.2 0.80 1,600 2.8 11

N27 200 1.2 23.00 4,600 8.1 5

P14 50 0.3 80.00 4,000 7.1 7

R68 50 0.3 200.00 10,000 17.7 1

R84 100 0.6 34.00 3,400 6.0 8

T28 200 1.2 40.00 8,000 14.1 2

V28 2,000 12.2 0.45 900 1.6 14

X84 2,500 15.2 0.60 1,500 2.7 12

Total 16,400 100.0 56,600 100.0

ABC analysis exercise (4/5): Sorting by rank and
classification of articles in classes
Consumption Cumulated Quantity Cumulated Total spend
Total spend
Rank Art. no. quantity quantity per class total spend per class Class
(in %)
(in %) (in %) (in %) (in %) (in %)
1 R68 0.3 0.3 17.7 17.7

2 T28 1.2 1.5 14.1 31.8

3 D17 3.1 4.6 10.6 42.4

4 E61 4.9 9.5 12.8 8.5 50.9 73.5 A

5 N27 1.2 10.7 8.1 59.0

6 A58 1.8 12.5 7.4 66.4

7 P14 0.3 12.8 7.1 73.5

8 R84 0.6 13.4 6.0 79.5

9 L27 9.2 22.6 15.9 5.3 84.8 16.2 B

10 L33 6.1 28.7 4.9 89.7

11 M78 12.2 40.9 2.8 92.5

12 X84 15.2 56.1 2.7 95.2

13 M74 30.5 86.6 71.3 1.8 97.0 10.3 C

14 V28 12.2 98.8 1.6 98.6

15 B42 1.2 100.0 1.4 100.0

ABC analysis exercise (5/5): Graphical representation

Share of total spend in %

A B C

Share of total
number of items
in %
Contents

4 Internal logistics

4.1 Introduction

4.2 Procurement marketing

4.3 Procurement and storage planning

4.3.1 Procurement and storage strategies

4.3.2 ABC analysis

4.3.3 Exercise: ABC analysis
4.3.4 SCM and IT
Learning objectives

• You can explain the bullwhip effect, where it originates

from, and how supply chain management helps solving it

• You can describe the overall concept of supply chain

management and outline some of its exemplary
principles

• You can illustrate the importance of IT in inter-corporate

information exchange in supply chain management
Reduction of the depth of added value through
outsourcing can lead to the so-called bullwhip effect

Order quantity Order quantity Order quantity Order quantity

Stock Stock Stock Stock

Consumer Retailer Wholesaler Manufacturer

Time Time Time Time

Order quantity Stock Transfer of orders

Backhaus, Herbst, Voeth, Wilken (2010), pp. 143-147; image adapted from Wikipedia.org
Outsourcing and the requirement for inter-corporate
coordination make SCM necessary

Supply Chain Management is not a well-defined management

concept, but rather a group of management approaches and
Description network coordination instruments that seek to optimize flows of
material, goods and information across value creation process
steps

• Willingness to cooperate & IT networking: Advantages

of close networking must overcompensate disadvantages
such as the abandonment of freedom of decision
• Single and Global Sourcing: Collaboration with few or
ideally only individual suppliers at all levels, who had to face
a global "best selection"
Exemplary
• Process overlaps: Boundaries of the companies involved
principles
disappear, e.g., in Vendor Managed Inventory, where the
supplier is responsible for the customer's inventory levels
• Postponement: Material flow is only efficient if as many
common parts as possible can be used. The variant creation
time is shifted as far as possible "backwards" in the supply
chain, early stages rely on material homogeneity
Backhaus, Herbst, Voeth, Wilken (2010), pp. 143-147
Supply chain management tries to coordinate logistics
across company boundaries
IT plays a crucial role in internal logistics and SCM

• Electronic procurement
• Process cost reduction through use of "electronic
documents", i.e., no media breaks
eProcurement
• Standards: BMEcat, OpenTRANS, EDIFACT
• Different models: supplier model, orderer model,
and marketplace model

• Supplier Relationship Management

• Active design of all supplier relationships across
SRM all business units
• E-marketplaces, online tenders, online bidding
systems (auctions)

Wünsche (2010), pp. 157-159

Repetition questions: Internal logistics

1. Please explain in a nutshell what is 7. Please name and describe key

meant by "internal logistics"! characteristics by which suppliers
can be analyzed and selected!
2. Please name and describe the
essential procurement goods! 8. Name three procurement types and
describe them in a nutshell! Which
3. Please explain in a nutshell the
prerequisites must be fulfilled so that
typical decision situations in internal
the respective procurement type can
logistics!
be used?
4. Please explain the goals of internal
9. Please name and explain typical
logistics goals and the resulting
motives for stock procurement!
target relationships!
10.Please explain the ABC analysis!
5. Please explain the tasks and
instruments of procurement 11.Which type of procurement is
marketing! generally chosen for A, B and C
goods? Explain briefly!
6. Please name and explain
investigation areas of procurement
market research!