Chapter 2 Role of Logistics and Informations in Supply Chains

MANAGING SUPPLY CHAINS
A LOGISTICS APPROACH
9e
COYLE | LANGLEY | NOVACK | GIBSON
Chapter 2
ROLE OF LOGISTICS AND
INFORMATION IN SUPPLY
CHAINS
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Learning Objectives
After reading this chapter, you should be able to do the following:
• Understand the role and importance of logistics in

private and public organizations.
• Discuss the impact of logistics on the economy and

how effective logistics management contributes to the
vitality of the economy.
• Understand the value-added roles of logistics on both a

macro and micro level.
• Explain logistics systems from several perspectives.
Learning Objectives, continued
• Understand the relationship between logistics and

other important functional areas in an organization,
including manufacturing, marketing, and finance.
• Discuss the importance of management activities in
the logistics function.
• Analyze logistics systems from several different
perspectives to meet different objectives.
• Determine the total costs and understand the cost
tradeoffs in a logistics system
Figure 2-1
Contemporary Supply Chain Profile
Source: Center for Supply Chain Research, Penn State University (2008).
What is Logistics?
▫ Logistics management
▫ Business logistics management
▫ Integrated logistics management
▫ Materials management
▫ Physical distribution management
▫ Marketing logistics
▫ Industrial logistics
▫ Distribution
Table 2-1
Logistics Definitions
• Inventory:
▫ Management of materials in motion and at rest
• Customer:
▫ Getting the right product, to the right customer, in the right
quantity, in the right condition, at the right place, at the right time,
and at the right cost (called the dictionary “seven Rs of logistics”)
• International Society of Logistics:

▫ The branch of military science having to do with procuring,
maintaining, utility/ value and transporting material, personnel,
and facilities
• Council of Supply Chain Management
▫ The art and science of management, engineering, and technical
activities concerned with requirements, design, and supplying and
maintaining resources to support objectives, plans, and operations
• Component support:
▫ Providing time and place utility/value of materials and products in
support of Functional management organization objectives
• Common culture:
▫ That part of the supply chain process that plans, implements, and
controls the efficient, effective flow and storage of goods, services, and
related information from point of origin to point of consumption in order
to meet customer requirements
▫ Supply management for the plant (inbound logistics) and distribution
▫ Management for the firm’s customers materials requirements, purchasing,

transportation, inventory management, warehousing, materials handling,
industrial packaging, facility location analysis, distribution, return goods
handling, information management, customer service, and all other
activities concerned with supporting the internal customer
(manufacturing) with materials and the external customer (retail stores)
with product
Four Subdivisions of Logistics
• Business logistics:
▫ That part of the supply chain process that plans, implements, and
controls the efficient, effective flow and storage of goods, service, and
related information from point of use or consumption in order to meet
customer requirements.
• 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 to
efficiently withdraw after the event.
• Service logistics:
▫ The acquisition, scheduling, and management of the facilities/assets,
personnel, and materials to support and sustain a service operation or
business.
Value-Added Roles of Logistics
• The five principal types of economic utility which add value to a product or
service are:
▫ Form – value added through manufacturing or assembly process
 Ex: Dell – combine software and hardware to produce a Computer
▫ Time – Goods and Services are available for the customers when the
demand them.
 Logistic provide proper inventory maintenance, the strategic location
of goods and services and transportation.
▫ Place – by moving goods from production surplus points to points where
demand exist.
▫ Quantity – delivering the right Q to where it is demanded
 Its through the forecasting, production scheduling and inventory
control
▫ Possession – through marketing xtvts related to the promotion of
products and services. Different promotion different value.
Figure 2-2
Fundamental Utility Creation in the Economy
Source: Center for Supply Chain Research, Penn State University (2008).
Logistics Activities
1. Transportation - the physical movement that moves the products.
2. Warehousing and storage – involved Inventory management and warehousing.
3. Industrial packaging – protects the product during transportation and storage.
4. Materials handling – important in warehouse design and warehouse operation.
5. Inventory control – assuring adequate inventory levels and certifying inventory
accuracy.
6. Order fulfillment – filling and shipping customers orders.
7. Demand forecasting – important to control inventory, manufacturing and customers
satisfaction.
8. Production planning/scheduling – help to calculate the no of units to manufacture to
ensure adequate market coverage.
9. Procurement – procurement process should consider the logistics issues.
10. Customer service – 1. process of interacting with the customers to influence them, 2.
products/service offers to the customers.
11. Facility location – plant and warehouse site location (geography issues)
12. Return goods handling
13. Parts and service support
14. Salvage and scrap disposal
Figure 2-3
Logistics Costs as Percentage of GDP
Logistics in the
Economy: A
12.3
13
12
11 macro Perspective
10
9
8
7
6
5
4
3
2
1
0
Year
Source: 17th Annual State of Logistics Report, 2006
Figure 2-5
Macro Inventory as a Percentage of GDP
Source: 18th Annual State of Logistics Report, 2007

Figure 2-4
Total Logistics Costs- 2006
Logistics in the Firm: The Micro Dimension
▫ Another dimension of logistics is the micro
perspective which examines the relationships
between logistics and other functional areas in an
organization
 Marketing
 manufacturing/operations
 Finance
 Accounting
 Others
Logistics interferes with other areas
The impact that logistics can have upon return on assets
(ROA) or return on investment (ROI) is very significant
• ROA is defined as follows:

▫ ROA = Revenue - Expenses/Assets Or
▫ ROA = Gross Profit/Assets
Logistics in the Firm:
Factors Affecting the cost and importance of Logistics
• Deal with specific factors relating to the cost and
importance of logistics in:
1. Competitive relationships
2. Product Relationships
3. Spatial Relationships
Compete based on price – control it with inventory and
logistics.
1.Order cycle is the time elapses from when a customer
places an order until the order is received.
 Xtvt includes: order transmission, order receipt, order
processing, order preparation (picking and packing)
order shipment
 If an org. can improve customer service by shortening its
order cycle time, its customers should be able to operate
with less inventory. (water transportation vs air
transportation)
Figure 2-6
The Relationship between Required Inventory and
Order Customer Length
Example
• A customer is using 10 units of a product per day and
that the supplier’s order cycle time is 8 days.
• The customer’s average inventory during order cycle
time is 40 units (80/2)
• If the supplier can reduce the order cycle time to 4 days,
the customer’s average inventory is reduced to 20 units
( 40/2).
• Therefore, if an org. can improve customer service by
shortening its order cycle time, customer can operate
with less inventory. (cost reduction leads to price
reduction)
2. Substitutability
•A product is similar to other products where
customers might be willing to substitute a
competitive product if a stockout occurs.
•Customer service is more important for highly
substitutable products than for products that
customers might be willing to wait for or back
order
•Its good for avoid lost sales cost.
4. Inventory affect - an inverse relationship between COLS and INV
•Its up to the point at which the marginal savings from reducing lost
sales cost equal the marginal cost of carrying additional inventory.
4. Transportation effect – depends on mode of transportation ex:

water to rail, rail to motor, motor to air.
•The higher transportation cost could also from shipping more
frequently in smaller quantities at higher transportation prices.
•Org. can reduce the COLS by spending more on transportation
service to improve customer service.
Figure 2-7
General Relationship of the Cost of Lost Sales to
Inventory Cost
Flow
TC = Total cost
INV = Inventory cost
COLS = Cost of lost sales
Figure 2-8
General Relationship of the Cost of Lost Sales to
Transportation Cost
Improved transportation service

Flow -----------------------------------------------------
TC = Total cost
Tr = Transportation cost COLS = Cost
of lost sales
2. Product relationships
Product related factors effect the cost and importance
of logistics.
1.Dollar value – direct bearing on logistic cost
(warehouse, inventory, transportation, packaging)
2.Density – refers to the weight/space ratio of the
product.
1. Lightweight item compared to the space it occupies
– eg; household furniture (low density)
2. Density effect the transportation and warehousing
cost.
3. High density item-
Low density vs high density
• A motor carrier needs $5000 in revenue from
the freight that fills a 53 foot trailer.
• Low density product might be able to fit 20000
pounds into this trailer to fill completely.
• Motor carrier need to charge $25 per 100 pound
for this product
• High density product might be fill the trailer at
40k pounds. $12.50 per 100 pound.
3.Susceptibility to damage – the greater the risk of
damage to a product, the higher the transportation
and warehousing cost.
1. Higher degree of risk and liability associated with
more fragile goods, the higher are priced by both
transportation n warehouse provider.
4.Special handling requirement -

•Need special designed equipment, refrigerator,
heating or stapping.
Figure 2-9
General Relationship of Product Value to Various
Logistic Costs
Figure 2-10
The General Relationship of Product Weight Density to
Logistics Costs
Weight density of product

Flow ----------------------------------------------------------
Tr = Transportation cost
Inv = Inventory cost (including
storage) Whse = Warehousing
cost
Figure 2-11
The General Relationship of Product Susceptibility to Loss
and Damage to Logistics Cost
Susceptibility to loss and damage

Flow ------------------------------------------------------------------
Pkg = Packaging cost
Tr = Transportation cost
Whse = Warehousing cost
Spatial Relationships:
Spatial Relationships are extremely significant to logistics is

spatial relationships, the location of fixed points in the
logistics system with respect to demand and supply points.
Spatial relationships are very important to transportation costs,

since these costs tend to increase with distance.
Figure 2-12
Logistics and Spatial Relations
• The firm B located at point B has a $1.50 production cost advantage
over Firm A.
• Firm B produces at $7 per unit as opposed to $8.50 per unit for firm A.
• Firm B pays $1.35 for inbound raw materials ($0.6+0.75) and $ 3.50
outbound movement to market. Total = $4.85 in per unit
transportation charges.
• Firm A pays $0.9 for inbound raw material and $1.15 for outbound
movement, for a total of $2.05 in per unit transportation charges.
• Firm A’s $2.80 transportation cost advantages offsets the $1.50
production cost disadvantages.
Table 2-3
Analysis of Total Logistics Cost with a Change to a Higher
Cost Mode of Transport
Techniques of Logistics System Analysis
Short-Run/Static Analysis
Long-Run/Dynamic Analysis
• Nodes
▫ The nodes are fixed spatial points where goods stop for
storage or processing.
• Links
The links represent the transportation network and
connect the nodes in the logistics system.
Figure 2-13
Dynamic Analysis
Table 2-4
Analysis of Total Logistics Cost with a Change
to More Warehouses
Figure 2-14
Nodes and Links in a Logistics System
Figure 2-15
A Simple Logistics Channel
Figure 2-16
A Multi-Echelon Logistics Channel
Figure 2-17
A Complex Logistics Channel
Figure 2-18
Levels of Opportunity
Summary
• Logistics has developed as an important area or function of business since
World War II. It has gone through several phases of development in
achieving its present status.
• Logistics is a critical part of supply chain management. The coordination

and, perhaps, integration of the logistics systems of all the organizations in
a supply chain are necessary requirements for successful management of
the supply chain.
• Logistics has a number of different definitions because of the broad-based

interest in its activities and the recognition of its importance. The definition
developed by the Council of Supply Chain Management Professionals is the
primary definition used in this text.
• Logistics is an area of management that has four subdisciplines: business,

military, service, and event.
Summary, continued
• On a macro basis, logistics-related costs have been decreasing on a

relative basis, which has helped the U.S. economy regain its
competitive position on a global basis.
• Logistics adds place, time, and quantity utilities to products and

enhances the form and possession utilities added by manufacturing
and marketing.
• Logistics has an important relationship to manufacturing,

marketing, finance, and other areas of the organization.
• Logistics managers are responsible for a number of important

activities, including transportation, inventory, warehousing,
materials handling, industrial packaging, customer service,
forecasting, and others.
Summary, continued
• Logistics systems can be viewed or approached in several different

ways for analysis purposes, including materials management versus
physical distribution, cost centers, nodes versus links, and channels.
All four approaches are viable for different purposes.
• Logistics systems are frequently analyzed from a systems approach,

which emphasizes total cost and tradeoffs when changes are
proposed. Either a short- or long-run perspective can be used.
• The cost of logistics systems can be affected by a number of major

factors, including competition in the market, the spatial relationship
of nodes, and product characteristics.

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Chapter 2 Role of Logistics and Informations in Supply Chains

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MANAGING SUPPLY CHAINS

• Understand the role and importance of logistics in

• Discuss the impact of logistics on the economy and

• Understand the value-added roles of logistics on both a

• Explain logistics systems from several perspectives.

• Understand the relationship between logistics and

• International Society of Logistics:

▫ Supply management for the plant (inbound logistics) and distribution

▫ Management for the firm’s customers materials requirements, purchasing,

Source: 17th Annual State of Logistics Report, 2006

Source: 18th Annual State of Logistics Report, 2007

• ROA is defined as follows:

4. Transportation effect – depends on mode of transportation ex:

Improved transportation service

4.Special handling requirement -

Weight density of product

Susceptibility to loss and damage

Spatial Relationships are extremely significant to logistics is

Spatial relationships are very important to transportation costs,

Logistics and Spatial Relations

• Logistics is a critical part of supply chain management. The coordination

• Logistics has a number of different definitions because of the broad-based

• Logistics is an area of management that has four subdisciplines: business,

• On a macro basis, logistics-related costs have been decreasing on a

• Logistics adds place, time, and quantity utilities to products and

• Logistics has an important relationship to manufacturing,

• Logistics managers are responsible for a number of important

• Logistics systems can be viewed or approached in several different

• Logistics systems are frequently analyzed from a systems approach,

• The cost of logistics systems can be affected by a number of major

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