Chapter 1: Introduction

• Business logistics Defined

• Scope of Logistics &Key Activities
• The Distribution System/Network
• Importance of Logistics
• Relations of Logistics to Marketing &production
• Logistics in Diverse Areas
• Key Trends in Logitics
Definitions

• Logistics - Logistics is that part of the supply chain process that

plans, implements, and controls the efficient, effective forward
and reverse flow and storage of goods, services, and related
information between the point of origin and the point of
consumption in order to meet customers' requirements. (CLM)

• Supply Chain Management - the systemic, strategic coordination

of the traditional business functions and the tactics across these
business functions within a particular company and across
businesses within the supply chain for the purposes of improving
the long-term performance of the individual companies and the
supply chain as a whole. (CLM)

• Logistics - Science of managing (controlling) the movement and

storage of goods (or people) from acquisition to consumption.
Inexpensive Transportation and Inventory

• Inexpensive transportation:
– Allows specialization in space.
– De-couples supply and demand regions.
– Increases availability and competition.

• Inexpensive inventory/warehousing:
– Allows specialization in time.
– De-couples supply and demand in time.
– Increases availability and competition.
Evolution of Supply Chain Management
Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+

Demand forecasting

Purchasing

Requirements planning
Purchasing/
Production planning Materials
Management
Manufacturing inventory

Warehousing
Logistics
Material handling

Packaging

Finished goods inventory Supply Chain

Physical Supply Chain
Management
Distribution Management
Distribution planning

Order processing

Transportation

Customer service

Strategic planning

Information services

Marketing/sales

Finance
CR (2004) Prentice Hall, Inc.
Scope of the Supply Chain for Most Firms
Business logistics

Physical supply Physical distribution

(Materials management)

Sources of Plants/
Customers
supply operations
• Transportation • Transportation
• Inventory maintenance • Inventory maintenance
• Order processing • Order processing
• Acquisition • Product scheduling
• Protective packaging • Protective packaging
• Warehousing • Warehousing
• Materials handling • Materials handling
• Information maintenance • Information maintenance

Focus firm’s internal supply chain

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 Key Activities/Processes
· Primary
- Setting customer service goals
- Transportation
- Inventory management
- Location

· Secondary, or supporting
- Warehousing
- Materials handling
- Acquisition (purchasing)
- Protective packaging
- Product scheduling
- Order processing
CR (2004) Prentice Hall, Inc.
 Total Distribution System
9 Suppliers, 3 Sub-assembly plants, 2 Plants, 5 Warehouses, 52 Retail outlets
SEA
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 Relationship of Logistics to
Marketing and Production
LOGISTICS
Sample
activities: MARKETING
PRODUCTION/ · Transport Interface Sample
OPERATIONS · Inventory
Interface activities: activities:
Sample activities: · Order · Customer
· Quality control activities: · Promotion
· Product processing service · Market
· Detailed production
scheduling · Materials standards research
scheduling · Plant · Pricing
· Equipment maint. handling · Product
location · Packaging
· Capacity planning mix
· Purchasing · Retail · Sales force
· Work measurement
location management
& standards

Production-
logistics Marketing-
interface logistics
interface

Internal Supply Chain

CR (2004) Prentice Hall, Inc. 1-21
 Logistics/SC in Diverse Areas
·Manufacturing—most common
·Environment—causing restrictions
·Service—emerging opportunities
·Non-profits—little explored
·Military—long history

CR (2004) Prentice Hall, Inc.

Key Trends In Logistics

• Supply chain integration.

• Information technology.
• Global markets and competition.
• Quality emphasis.
• Service industries.
• Product variety.
• Quick response.
• Disruptions, shortages, inflation, recession.
• Regulation.
• Security.
 Chapter 2: Strategy & Planning

• Logistics Strategies.

• Logistics Decisions.

• 6 Fundamental Concepts:
– Total Cost & Tradeoffs.
– Consolidation & Economies of Scale.
– Differentiation.
– Mixed Strategy.
– Postponement.
– Standardization.

2-11
 Strategies

Corporate Strategy:
– Market share, Market position.
– Growth, Profit, etc.

Logistics Strategy:
– Maximize profit, Minimize cost.
– Maximize return on investment.
– Service/Quality.

2-12
 Decision Areas

Where?, How many?

Location What size?
Allocation?

Inventory Transportation
Strategy/Control system? Which mode?
How much? Which carrier?
Where? Which route?
Shipment size and frequency?

2-13
 Strategic, Tactical, and Operational Decision Making
Decision area Strategic Tactical Operational

Transportation Mode selection Seasonal equip- Dispatching

ment leasing

Inventories Location, Control policies Safety stock levels Order filling

Order Order entry, transmittal, Processing

processing and processing system orders, Filling
design back orders

Purchasing Development of supplier- Contracting, Expediting

buyer relations Forward buying

Warehousing Handling equipment Space utilization Order picking

selection, Layout design and restocking

Facility Number, size, and

location location of warehouses
CR (2004) Prentice Hall, Inc. 2-7
 6 Fundamental Concepts

• Total Cost & Tradeoffs.

• Consolidation & Economies of Scale.
• Differentiation.
• Mixed Strategy.
• Postponement.
• Standardization.

2-15
 More Cost Conflicts
Revenue

Total costs
Total costs

Revenue
Cost
Cost

Transportation,
order processing,
and inventory Inventory
costs costs
Lost sales cost Transportation costs
0 0 0
0 Improved customer service 100% Increasing number of stocking points

(a) Setting the customer service level (b) Determining the number of warehouses in a logistics
system

Total costs Total costs

Cost
Cost

Inventory Inventory
carrying carryng cost
costs
Lost sales cost Production costs
0 0
0 Average inventory level Product run length and product sequencing
altenatives

(c) Setting safety stock levels (d) Setting the sequence of production runs for
multiple products
CR (2004) Prentice Hall, Inc. 2-10
 2. Consolidation & Economies of Scale

• Larger amounts cost less per unit to move

store, process, order, etc.

– Use larger vehicles and larger loads to reduce

transportation cost.

– Purchase in larger quantities to get lower prices.

• But, must consider tradeoffs:

– Larger orders and larger loads imply greater
inventory costs.

2-17
 3. Differentiation

• Not all products and customers should be treated

the same.

– Identify most important products & customers.

– Treat them better!

2-18
 4. Mixed Strategy

• A mixture of transportation and inventory

options is usually best.

– Use air, rail and truck transportation as

appropriate.

– Use public and private warehousing as

appropriate.

2-19
 5. Postponement

• Delay finishing and shipping the product until

it is ordered.

– Prevents unneeded transportation and

inventory.

– Reduces obsolete inventory.

– Examples: Dell computer, paint sales.

2-20
 6. Standardization

• Standard (interchangeable) parts and less

product variety reduce costs.

– Interchangeable parts and modularity reduce

inventory and transportation.

– Modularity and postponement can provide

product variety.

2-21
Chapter 3: The Product

1. Classification.

2. Life Cycle.

3. 80-20 Curve.

4. Product Characteristics.

5. Packaging.

6. Pricing.
 1. Classification

• Different products should be treated differently.

• Consumer Goods:
– Directed to ultimate consumers.
– Buyer seeks goods.
– Marketing is important.

• Industrial Goods:
– Used to produce other goods and services.
– Raw materials, components, equipment.
– Vendors seek buyers (usually).
 Classification: Consumer Goods

• Convenience goods & services:

– Food, convenience store products, gasoline, etc.
– Dry cleaners, banking, etc.

• Shopping goods & services:

– Clothes, furniture, automobiles, etc.
– Healthcare (personal physician), restaurants, etc.

• Specialty goods & services:

– Luxury autos, gourmet foods, custom products, etc.
– Advanced medical treatments, etc.
 Consumer Goods & Logistics

Convenience Shopping Specialty

goods goods goods

Substitutability HIGH MEDIUM LOW

Availability HIGH MEDIUM LOW

Value LOW MEDIUM HIGH

2. Life Cycle

• Logistics system changes as product “ages”.

Sales

Maturity

Growth
Decline

Introduction

Time
 3. 80-20 Curve (Pareto Principle)

• Most of the revenue (or profit) comes from a

relatively small percentage of items (products).

• Focus on the small number of important items.

– Identify the important items: ABC classification.
– Apply highest service level to most important items.

• Examples:
– 20% of the people do 80% of the work.
– 10% of the people cause 90% of the problems.
– 15% of the items (products) create 90% of the sales.
 4. Product Characteristics

• Density (weight/bulk or weight/volume)

– High: Metals, printed matter, liquids, etc.

– Low: Snack foods, light bulbs, etc.

– Vehicles have weight and volume limits.

– Can increase density by disassembly.

– Mix loads to adjust density.

 4. Product Characteristics - Value

• Value

– High value:
• Transport quickly.
• Few items and short time in inventory.
• Extra security may be needed.

– Low value:
• Can transport slowly.
• Large inventories OK.
 4. Product Characteristics - Substitutability

• Substitutability

– High substitutability:
• Wide availability at many locations.
• High service level; Always in stock; Quick service.

– Low substitutability:
• Few locations; Customers will travel.
• Customers will wait.
 4. Product Characteristics - Risk

• Risk

– Theft, Perishability, Explosion, Fire, etc.

– High risk:
• Few locations, small inventories.
• Increased security for storage.
• Increased security for transportation.

– Low risk:
• Many locations.
• No added security.
5. Packaging

• For easier and safer storage, handling and

transportation.
• For economies of scale in movement and storage.

•For protection of product and workers.

• For promotion (marketing).
• For information.
6. Pricing

• Transportation price depends mainly on distance and

weight transported.

• Zone pricing:
– Constant price over geographic regions.
– Price increases with distance.

• f.o.b. = free on board

– Where price takes effect; Where ownership changes.
– fob factory: Buyer pays for transportation from factory and
owns product at factory.
– fob destination: Seller transports and owns until
destination.

• Negotiation: Key in deregulated environment.

 Customer Service
in Planning Triangle

Inventory Strategy
• Forecasting Transport Strategy
• Inventory decisions • Transport fundamentals
• Purchasing and supply • Transport decisions

CONTROLLING
ORGANIZING
scheduling decisions Customer

PLANNING
• Storage fundamentals service goals
• Storage decisions • The product
Logisticsservice
• Logistics service
• Ord . proc. & info. sys.

Location Strategy
• Location decisions
• The network planning process

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 Customer Service Elements
Customer
service

Pretransaction Transaction Posttransaction

elements elements elements
• Written statement Stockout level • Installation, warranty
of policy • Ability to back alterations, repairs,
• Statement in hands order parts
of customer • Elements of order • Product tracking
• Organizational cycle • Customer claims,
structure • Time complaints
• System flexibility • Transship • Product packaging
• Technical services • System accuracy • Temporary
• Order conveniences replacement of
• Product substitution product during repairs

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4-4
 Most Important Customer
Service Elements

•On-time delivery
•Order fill rate
•Product condition
•Accurate documentation

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 Order Cycle Time
 Order cycle time contains the basic elements of customer service
where logistics customer service is defined as:
the time elapsed between when a customer order, purchase order, or
service request is placed by a customer and when it is received by that
customer.

 Order cycle elements

- Transport time
- Order transmittal time
- Order processing and assembly time
- Production time
- Stock availability

 Order cycle time is expressed as a bimodal frequency distribution

 Constraints on order cycle time
- Order processing priorities
- Order condition standards (e.g., damage and filling accuracy)
- Order constraints (e.g., size minimum and placement schedule)

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 Components of a Customer Order Cycle

WAREHOUSE
Order processing
Customer and assembly
order
transmittal Transmittal of
backorder items
CUSTOMER
Retail outlet Order
delivery

FACTORY
Express Order processing,
order assembly from stock, or
delivery production if no stock

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Chapter 5: Logistics Information Systems

pp. 122-131

• Data.

• Communications.

• Tools.

• E-Commerce & Logistics.

Data Required

• Collect data on:

– Customers (location, orders, etc.).
– Products (transportation and storage characteristics).
– Transportation options.
– Warehouse/Inventory options.
– Service.

• Data sources:
– Company records.
– Customers.
– Published information.
– Competition.
ERP Systems

• ERP (Enterprise Resource Planning) systems or

legacy systems:
– Backbone of information system.
– Maintains current and historical data.
– Provides transaction processing.
– ERP provides integrated corporate-wide system.

• Add-on software for logistics decisions: APS

(Advanced Planning and Scheduling):
– Warehouse & transportation management.
– Network design.
– Vehicle dispatching.
Communications

• EDI - Electronic Data Interchange.

– Intercompany computer-to-computer data exchange.
• Internet.
– XML, World Wide Web, Wireless.
• Radio Frequency (RF) exchange.
– Real-time two-way communication in facilities.
– RFID communicates contents of container, pallet,
etc.
• Bar coding & scanning.
• Satellite communications.
– For transportation carriers & retailers.
Software “Solutions”

• Demand Planning & Forecasting.

– To forecast demand, plan replenishment and
manage inventory.
– Link to Production, Warehousing, Inventory,
Transportation, etc.
– Major effects on inventory costs and fill rate.

• Supply Chain Planning.

– To design network, locate facilities, allocate products
to facilities, determine transportation links, etc.
– Long-range strategic planning.
– Major effects on transportation and inventory (and
production).
Software “Solutions”

• Transportation Management.
– For load planning, routing and scheduling,
dispatching, driver management, international
freight, etc.
– Major effect is to reduce transportation costs.

• Warehouse Management.
– To control movement and storage of materials in a
warehouse.
– Includes inbound shipments, outbound shipments,
storage, yard management, etc.
– Major effects on inventory costs, fill rate.
E-Commerce & Logistics

• E-Commerce impacts location, inventory &

transportation.

• Customers can deal directly with

manufacturers.

• Business-to-Consumer E-Commerce.
– May require home delivery to consumer vs.
consumer pick-up at retailer.
– Emphasis on small shipments delivered to homes.
– High service level complicates deliveries (books vs.
groceries).
Info System for a Large Merchandise Retailer
Sales Counter

Bar code item Coffee pot sold

at store to customer Manual register input or
Bar code scanning

In-store computer
Credit data
Delivery from
Payroll
supplier Transmission Regional center main computer
Accounting
Corporate Payroll
Merchandising
Corporate Accounting
Corporate Credit
Inventory Management

Coffee maker Purchase Order Corporate Annual

Dept. Mgr. Review Report
supplier