LECTURE

1
INTRODUCTION TO
LOGISTICS & INVENTORY
MANAGEMENT
Introduction
Logistics is a word often heard but seldom understood
Definitions of logistics abound and are often framed in the
context of a single business, military, societal or personal issue
Logistics enables growth of business, global commerce and our
civilization

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The Historical Perspective
Like many other areas of management, logistics was originally
associated with the military
◦ Sun Tzu Wu (500 BC) in his The Art of War discussed logistical
functions and their relationships with strategy and tactics
◦ Alexander the Great
◦ The Roman Armies
◦ Napoleon

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The Historical Perspective
Management techniques and philosophies developed by the
military were adopted by the commercial sector
◦ Logistics was the enabler and frequently the determining
factor in success of
◦ Colonization
◦ The industrial revolution
◦ Urbanization
◦ Centralization of commerce and power
◦ Increasing consumerism

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The Modern Perspective
As we study logistics in this course we will find that, at its heart,
logistics addresses issues of customer satisfaction
◦ The systematic management of the various activities required
to move benefits from their point of production to the
customer

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The Modern Perspective
Traditional definition:
Logistics is the process of planning, implementing and
controlling the efficient, effective flow and storage of raw
materials, in-process inventory, finished goods and related
information from point of origin to point of consumption for the
purpose of conforming to customer requirements (Council of
Logistics management 1985)

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The Modern Perspective
Modern Definition:
Logistics is the continuous process of meeting customer needs by
ensuring the availability of the right benefits for the right
customer, in the quantity and condition desired by that
customer at the time and place the customer wants them, all for
a price the customer is willing to pay.

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The Modern Perspective
Logistics means or is applied differently by different organizations
(or different parts of the same organization):
◦ Materials Management – management of raw materials and
parts into the production processes
◦ Physical Distribution – management of finished products
through delivery to the customer
◦ A combination of both the above
*Production Management may be included in either or
addressed separately depending on the organization

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The Modern Perspective
Raw
Materials Distributor
Customer
Parts
Supplier
Raw Customer
Manufacturer
Materials
Parts
Supplier Customer
Raw Distributor
Materials
Materials Materials Distribution
Management Management Management
Logistics

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 Components of Logistics Systems
Customer service Information processing
Inventory management Demand forecasting
Transportation Purchasing
Storage and materials Facility location
handling
Reverse Logistics
Packaging Warranty support
Many of these functions have traditionally been stand-alone roles within
the organization….BUT they are all related because of their ability to
impact customer satisfaction.

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The Modern Perspective
Supply Chain Management
◦ The integration and management of inter and intra business
logistics to deliver customer satisfaction at the lowest system
cost. Optimization of the value chain.

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The Modern Perspective
Raw
Materials Distributor
Customer
Parts
Supplier
Raw Customer
Manufacturer
Materials
Parts
Supplier Customer
Raw Distributor
Materials
Materials Materials Distribution
Management Management Management
Logistics
Supply Chain Management

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Components of the Logistics
System
??

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Logistics in the Organization
Michael Porter’s concept of the value chain

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Logistics in the Organization
Primary activities of the organization are shown running vertically
◦ Ongoing production
◦ Marketing
◦ Delivery
◦ Servicing of the product or services, etc.

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Logistics in the Organization
Horizontal activities are the support services
◦ Purchasing
◦ Human resources
◦ Facilities, etc.

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Logistics in the Organization
Note that two of the five primary activities are logistics activities
◦ Inbound logistics
◦ Outbound logistics
Depending on the size of the organization and the complexity of
the products/services provided, there is frequently a function
with Operations that addresses internal logistics.

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Logistics in the Organization
The ultimate value a firm creates is a function of the amount
buyers are willing to pay for its products/services
Profit occurs when the value exceeds the total cost of
production/delivery activities
Firms gain competitive advantage by delivering at lower total
cost than their competition

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Logistics as a Competitive
Edge
Logistics is important strategically and tactically in order to gain
competitive advantage
Business is increasingly aware that well-managed logistics
systems can provide the organization with a sustainable
competitive advantage

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Logistics as a Competitive
Edge
Appreciation of the importance of logistics is a relatively recent
phenomenon
◦ Lower labor cost
◦ Natural resources
◦ Large captive markets
◦ Technical advantage/expertise

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 Logistics as a Competitive
Edge
 Into the ’80s companies focused on improved productivity and lower
costs
 In the late ’80s, focus shifted to high quality
 In the ’90s, focus shifted to customer service
 Business strategies
o Lose advantage over time
o Window of opportunity for any given strategic innovation is
relatively narrow

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 Logistics as a Competitive
Edge
In the early 1980s business strategy focused on improved productivity
and lower costs as foreign competition eroded once strong domestic
markets
Later in the 1980s, business strategic focus shifted to include higher
quality in goods and services
In the 1990s, business focus shifted to excellence in customer service

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Logistics as a Competitive
Edge
Growing demand for time-based logistics management
◦ Streamlining the flow of goods from supplier to customer
◦ Reducing or eliminating activities that add time but not value

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Logistics as a Competitive
Edge
Customers demand
◦ Faster delivery
◦ Continuous shipment tracking
◦ Electronic transfer of information
◦ Reduction of wasted time

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Logistics as a Competitive
Edge
The challenge for any organization is to focus its skills on
satisfying those customer needs that offer the greatest
opportunities for obtaining a sustainable competitive advantage.
◦ Speed of delivery may be important to those in developed
regions/countries
◦ Consistency of availability may be more important to those in
underdeveloped regions

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 Interest in Logistics is
Growing
Searching for ways to capitalize on the new markets
◦ Central and Eastern Europe
◦ China, India and the Russian Far East
◦ Central Africa
Taking advantage of these opportunities requires logistics systems that
are often different from those in developed countries

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 Interest in Logistics is
Growing
Emerging Trade Blocks
◦ Give smaller countries economic advantage
◦ Simplifies economic transactions between members
◦ Reshaping the perception of domestic vs. international markets

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Customers Demand Greater
Value
Customers prefer perceived ‘highest customer value’
◦ The difference between total customer cost and total
customer value
Difficult for global companies to determine with customers in
many different markets
Customers seldom lower their desired level of delivered value

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Customers Demand Greater Value
Product
Value

Services
Value Total
Customer
Personnel
Value
Value

Image
Value Customer
Delivered
Monetary
Value
Price

Time
Costs Total
Customer
Energy
Costs
Costs

Psychic
Costs

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Customers Demand Greater Value
Transportation
◦ Complex framework of laws and regulations
◦ Recently deregulated (1977)
◦ Reorientation towards more competitive transport system
◦ Opportunities for shipper to obtain better service and lower
prices
◦ Increased complexity for transport managers

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Customers Demand Greater
Value
Environmental concerns affect society’s quality of life
◦ Logistics impacts are important in affluent countries
◦ Willing to pay more for environmentally friendly goods …
recycling, “green” products/services, etc.
◦ Less important to those in developing countries
◦ More interested in raising their standard of living

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Customers Demand Greater Value
Changing view of inventory
◦ Historically used to compensate for internal problems that
could result in customer dissatisfaction
◦ Long runs for reduced set-up cost
◦ Sales force pressures
◦ Focus on inventory costs
◦ JIT results in lower cost but lower customer service
◦ Inventory management increasingly critical management
activity for global companies

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Customers Demand Greater
Value
Information technology
◦ The glue that holds the logistics system together
◦ Dramatic improvements in the past 20 years enable
systematic management of logistics
◦ Capability to fully automate the logistics system is now
available
◦ EDI
◦ Supply chain visibility
◦ Customer visibility of order fulfillment
◦ RFID, GPS, secure containers, etc.

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Customers Demand Greater
Value
Electronic commerce
◦ E-commerce rapidly taking hold
◦ Security issues
◦ Quick order placement requires quick delivery to insure
customer value
◦ Total logistics management (Supply chain management) is the
best approach to the problem we have today

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Global Organization of
Logistics
Traditional approach to business concentrates on geographic
markets
Global organizations must look at the whole world as one
potential market
◦ Sourcing
◦ Manufacturing
◦ Researching
◦ Raising capital
◦ Sales

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 Global Organization
Logistics
Challenge is managing this global network
 Spread activities among nations to serve the world market “locally”
 Coordinate among those dispersed activities to minimize cost and
maximize value for each customer population served
◦ Outbound logistics, after-sales service and marketing tied to
buyer’s location
◦ Inbound logistics and manufacturing performed anywhere

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The Logistics System
Customer
Transportation
Service

Information Warehouse
LOGISTICS
Systems Management

Inventory Materials
Management Management

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