Chapter 3

Logistics

©2020 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
 Logistics
No other are of business operations involves the complexity
or spans the geography of logistics. Around the globe 24
hours of every day, 7 days a week, 52 weeks a year, logistics
is concerned with getting the right products to the right
place at the right time.

Although logistics has been performed since the beginning

of civilization, implementing 21st century best practices is
one of the most exciting and challenging areas of Supply
Chain Management. Because logistics is both old and new,
the rapid change of pace taking place in best practice can
be characterized as a renaissance!

©2020 McGraw-Hill Education

 Logistics Management
Logistics Management is the process and activities that
create value focused on the design and administration
of a system to control the timing and geographical
positioning of raw materials, work-in-process, and
finished inventories at the lowest total cost.

This discussion will focus on the Logistics of Integrated

Supply Chain management.

©2020 McGraw-Hill Education

 The Logistics of Business Is Big and
Important 1

Logistics adds value to the supply chain process when

inventory is strategically positioned to achieve sales.

Creating logistics value is costly.

Experts agree that the annual expenditure to perform

U.S. Business Logistics operations in 2016 was
approximately 7.5% or $1.39 trillion USD!!!

©2020 McGraw-Hill Education

 The Logistics of Business Is Big and
Important 2

Metric 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Nominal GDP ($ billion) 14,478 14,719 14,419 14,964 15,518 16,155 16,692 17,393 18,037 18,566

Total business inventory 2,047 2, 195 1,933 2,032 2,271 2,344 2,413 2,514 2,470 2,493
($ billion)
Inventory carrying rate (%) 21 18 19 18 18 17 18 16 17 16

Transportation costs 749 774 623 682 749 786 810 879 901 895
($ billion)
Inventory carrying costs 421 397 372 375 400 409 428 407 423 410
(ICC) ($ billion)
Other costs ($ billion) 73 74 68 70 74 79 83 87 90 88

Total USBLC ($ billion) 1,243 1,245 1,063 1, 127 1,224 1,274 1,321 1,373 1,414 1,393

Total USBLC (as % of GDP) 8.6 8.5 7.4 7.5 7.9 7.9 7.9 7.9 7.8 7.5

Total business inventory 14.1 14.9 13.4 13.6 14.6 14.5 14.5 14.5 13.7 13.4
(as % of GDP)
Transportation 5.2 5.3 4.3 4.6 4.8 4.9 4.9 5.1 5.0 4.8
(as % of GDP)

TABLE 3.1 U.S. Business Logistics Costs 2007 to 2016 in One-Year Intervals
Source: A.T. Kearney analysis.
©2020 McGraw-Hill Education
 The Logistics of Business Is Big and
Important 3

Logistics is not just about cost containment.

Firms with world class logistics operations often enjoy a

competitive advantage as a result of providing their
most important customers superior service.

By performing above industry average with respect to

inventory availability, speed, consistency of delivery,
and operational efficiency, logistically sophisticated
firms are ideal supply chain partners.

©2020 McGraw-Hill Education

 Logistics Value Proposition 1

Logistics should be managed as an integrated effort to

achieve customer satisfaction at the lowest total cost.

Logistics performed in this manner creates VALUE.

Elements of the logistical value proposition include

Service and Cost Minimization.

©2020 McGraw-Hill Education

 Logistics Value Proposition 2

Service Benefits – Alignment of capabilities with firms

goals and financial constraints: The more significant the
service failure impact upon a customers business, the
greater priority placed on error-free logistical
performance.

Elements:
• Availability – having inventory meet customer requirements.
• Operational Performance – time required to deliver an order.
• Service Reliability – the quality of performance, how
consistent?
©2020 McGraw-Hill Education
 Logistics Value Proposition 3

Cost Minimization – Concept of Total Landed Cost, the

tradeoff between individual cost elements to achieve
lowest total system cost

Total Cost Logistics Model, first conceptualized by

Lewis, Culliton, and Steel

Elimination of silo approach to cost management,

establishment of cost-to-cost tradeoffs and activity-
based costing capabilities

©2020 McGraw-Hill Education

 Logistics Value Generation
Key to achieving logistical leadership is to master the
art of matching operating competency and
commitment to key customer expectations.

A well designed logistics effort must provide high

customer impact while controlling operational variance
and minimizing inventory commitment.

Most of all, it must be relevant to the customer.

Remember the EERS model!

©2020 McGraw-Hill Education

 The Work of Logistics 1

FIGURE 3.1
Integrated Logistics

Access the text alternative for these images

©2020 McGraw-Hill Education
 The Work of Logistics 2

Order Processing
• Emphasis on Accuracy
• Work Balancing
• Forecasting and Communication

Inventory
• Core Customer Segmentation
• Product Profitability
• Transportation Integration
• Time Based Performance
• Competitor Performance

©2020 McGraw-Hill Education

 The Work of Logistics 3

Transportation
• Cost of Transportation
• Speed of Transportation
• Transportation Consistency
Warehousing, Materials Handling, and Packaging
• Integrated nature, integral part of other areas
• Forward Facing Logistics
• Reverse Logistics
Facility Network Design
• Number of Facilities
• Location
• Ownership Arrangement
©2020 McGraw-Hill Education
 Logistical Operations 1

The internal operational scope of integrated logistics

operations is illustrated by the shaded area of Figure 3.2

Information from and about customers

• Sales activity
• Forecasts
• Orders
• Refined into Specific manufacturing, merchandising and
purchasing plans

©2020 McGraw-Hill Education

 Logistical Operations 2

FIGURE 3.2 Logistical Integration

Access the text alternative for these images

©2020 McGraw-Hill Education
 Logistical Operations 3

Inventory Flow – the operational management of logistics is

concerned with movement and storage of inventory in the form
of materials, work-in-process, and finished products.
Customer Accommodation
Activities related to supporting customer accommodation. Requires performing order receipt and processing, deploying
inventories, storage and handling, and outbound transportation within a supply chain. Includes the responsibility to coordinate
with marketing planning in such areas as pricing, promotional support, customer service levels, credit delivery standards,
reverse logistics, and life cycle support. The primary market distribution objective is to assist in revenue generation by
providing strategically desired customer service delivery levels at the lowest total cost.
Manufacturing Production
Activities related to planning, scheduling, and supporting manufacturing operations. Requires master schedule planning and
performing work-in-process storage, handling, transportation, and sortation, kilting, sequencing, and time phasing of
components. Includes the responsibility for storage of inventory at manufacturing sites and maximum flexibility in the
coordination of geographic and assembly postponement between manufacturing and customer relationship management.
Procurement
Activities related to obtaining products and materials from outside suppliers. Requires performing resource planning, supply
sourcing, negotiation, order placement, inbound transportation, receiving and inspection, storage and handling, and quality
assurance. Includes the responsibility to coordinate with suppliers in such areas as scheduling, supply continuity, hedging, and
speculation, as well as research leading to new sources or programs. The primary procurement objective is to support
manufacturing or resale organizations by timely purchasing at the lowest total cost.

TABLE 3.2 Specific Logistics Operating Concerns of Customer Accommodation, Manufacturing and Procurement
©2020 McGraw-Hill Education
 Logistical Operations 4

Information Flow – specific locations within a logistics

system produce, send, and receive information thus
enabling the integration of this information across all
operating areas

Primary objective – reconcile and streamline

information connectivity to improve overall supply
chain performance

Important Observation: Occurs in parallel to physical

product flow

©2020 McGraw-Hill Education

 Logistical Integration Objectives 1

To achieve Logistical integration within a supply chain

context, six operational objectives must be
simultaneously achieved:
• Responsiveness
• Variance Reduction
• Inventory Reduction
• Shipment Consolidation
• Quality
• Life Cycle Support

The relative importance of each is directly related to a

firms logistical strategy
©2020 McGraw-Hill Education
 Logistical Integration Objectives 2

Responsiveness
• A firm’s ability to satisfy customer requirements in a timely
manner is referred to as responsiveness.
• Importance of Information Technology.
• Reduction of Inventory in anticipation of customer requirements.
• Shift from forecasting future requirements towards
accommodating customers on a rapid order-to-shipment basis.

Variance Reduction
• All operating areas of a logistical system as susceptible to variance.
• Common solutions to safeguard against variance include additional
inventory and/or expedited transportation.
• Information technology is a catalyst to address variance.
• To the extend variance can be minimized, logistical productivity will
improve.
©2020 McGraw-Hill Education
 Logistical Integration Objectives 3

Inventory Reduction
• Control of asset commitment and turnover.
• Goal to reduce overall assets committed to support a
customer and/or integrated operation.

Shipment Consolidation
• Transportation cost is the most significant logistical
expenditure.
• Transportation cost is directly related to product type, size of
shipment, and distance traveled.
• System object to achieve consolidation, where possible, to
reduce the transportation cost of each individual shipment.
©2020 McGraw-Hill Education
 Logistical Integration Objectives 4

Quality
• Focus on continuous quality improvement.
• Total Quality Management (TQM).
• Sunk logistics cost of quality defects.
• Emphasis on zero-defect order-to-delivery performance.

Life Cycle Support

• Few products sold without some guarantee the product will
perform as advertised.
• Reverse Logistics capabilities, both government required
(recycling) and disaster recovery (product recalls) are critical.
• Cost recovery through reverse flow / secondary markets.
• Cradle-to-Cradle logistics and opportunities for margin
enhancement.
©2020 McGraw-Hill Education
 Logistical Operating Arrangements 1

The potential for logistical services to favorably impact

customer experience is directly related to operating
system design
Balance of Performance, Cost, and Flexibility
When considering variety of logistical systems used
throughout the world to service widely diverse
markets, it is astonishing any similarity exists!
However, all logistical arrangements have two common
characteristics
• Designed to manage inventory positioning.
• Range of alternative is limited by information technology.
©2020 McGraw-Hill Education
 Logistical Operating Arrangements 2

Echelon
• Flow of products typically proceeds through an established
arrangement of firms as it moves from origin to final
destination
• Use of Warehouses

FIGURE 3.3 Echelon-Structured Logistics

Access the text alternative for these images

©2020 McGraw-Hill Education
 Logistical Operating Arrangements 3

Direct
• In contrast to inventory echeloning are systems designed to
ship product direct to the customers destination from one or
a limited number of centrally located inventories
• Use of expedited or premium transportation

FIGURE 3.4 Combined Echeloned and Direct Delivery

©2020 McGraw-Hill Education
 Logistical Operating Arrangements 4

Combined
• The ideal logistical arrangement is a situation wherein the
inherent benefits of echeloned and direct logistics structures
are combined.

• Use of different strategy (Echelon vs. Direct) depending on

customer value, inventory value, and goals specific to unique
business channels.

• Example:
• Automobile Replacement Parts.
• Machine Parts to Industrial Firm.

©2020 McGraw-Hill Education

 Logistical Operating Arrangements 5

Flexible Structure
• Preplanned contingency strategies to prevent logistical
failures, typically based on the importance of meeting the
needs of a specific customer.
• Gaining popularity, enabled by Technology, scenario modeled
approach to solving challenges.
• Common in four different situations:
• A customer serviced by design from two similarly adjacent warehouse
facilities to enable order fulfillment from either.
• A customer serviced from different facilities based on size of order.
• Selective inventory stocking strategies at different locations based on
product attributes.
• Introduction of Integrated Service Providers, Cross Dock or Flow
Through Operations, and/or consolidation centers.
• True Value Example.
©2020 McGraw-Hill Education
 Logistical Operating Arrangements 6

FIGURE 3.5 Flexible Echeloned and Direct Delivery

Arrows reflect information flows facilitating a specific service profile.
Access the text alternative for these images
©2020 McGraw-Hill Education
 Supply Chain Synchronization
Multi-firm operational integration across a supply chain
is referred to as Supply Chain Synchronization.
Supply Chain Synchronization seeks to coordinate flow
of materials, products, and information between supply
chain partners to reduce duplication and redundancy.
Leveraged operations require joint planning concerning
the logistics work that each participating firm in a
supply chain will perform and be held accountable for.
Core common goal: reduce Inventory Dwell Time
• Dwell Time = ratio of time inventory sits idle in comparison to
the amount of time it is being moved to a desired location.
©2020 McGraw-Hill Education
 Performance Cycle Structure 1

The Performance Cycle represents the elements of

work necessary to complete the logistics related to
customer accommodation, manufacturing, or
procurement.

The Logistics performance cycle is the basic unit of

supply chain design and operational control. In
essence, the performance cycle structure is the
framework for implementation of integrated logistics
across the supply chain.

©2020 McGraw-Hill Education

 Performance Cycle Structure 2

Performance cycles become dynamic as they accommodate

input/output requirements.
The Input to a performance cycle is DEMAND, typically an
order that specifies requirements for a product or material.
The Output to a performance cycle is the LEVEL OF
PERFORMANCE expected from the combined logistical
operations. (EERS Model)
Depending on the operational mission of a particular
performance cycle, the associated work may involve one or
many firms, and may have significant variance in complexity
(Catalog Company vs. Walmart).
©2020 McGraw-Hill Education
 Performance Cycle Structure 3

FIGURE 3.6
Logistical Performance
Cycles

Access the text alternative for these images

©2020 McGraw-Hill Education
 Performance Cycle Structure 4

FIGURE 3.7 Multiecheloned Flexible Logistical Network

Access the text alternative for these images
©2020 McGraw-Hill Education
 Performance Cycle Uncertainty 1

A major objective of logistics in all operating areas is to

reduce performance cycle uncertainty.

The inherent dilemma is that the structure of the

performance cycle itself, operating conditions, and the
quality of the logistical operations all randomly
introduce operational variance.

The goal of Performance Cycle Synchronization is to

achieve planned time performance.

The key and main goal is OPERATIONAL CONSISTENCY.

©2020 McGraw-Hill Education
 Performance Cycle Uncertainty 2

FIGURE 3.8 Performance Cycle Uncertainty

Access the text alternative for these images
©2020 McGraw-Hill Education
 Logistics 1

Logistics is the process that links supply chain participants into

integrated operations.
The Business of Logistics is Big Business!
Logistical service is measured in terms of availability, operational
performance, and service reliability.
Each aspect of service is framed in terms of customer
expectation and requirement.
Logistics is all about providing the essential customer service
attributes at the lowest possible total cost.
Such customer accommodation, in an exacting cost framework,
is the logistics value proposition.
©2020 McGraw-Hill Education
 Logistics 2

The actual work of logistics is functional in nature:

• Order Processing.
• Inventory.
• Transportation.
• Warehousing, Materials Handling, and Packaging.
• Facility Network Design.
The functions of Logistics combine into three primary
operational processes of customer accommodation,
manufacturing support, and procurement.
To achieve integration the inventory and information
flow between these areas must be coordinated.
©2020 McGraw-Hill Education
 Logistics 3

In Supply Chain Synchronization, the operational focus

becomes the logistics performance cycle.

The performance cycle is also the primary unit of

analysis in logistical design.

The basic proposition is that regardless of size and

complexity, logistical integration is best understood and
evaluated by the structure and dynamics of the
performance cycles.

©2020 McGraw-Hill Education

 Logistics 4

The primary goal is to achieve consistent service at the lowest

possible total cost.
The challenge is to design a supply chain capable of performing
the required logistical work as rapidly but, even more
importantly, as consistently as possible.
A strong understanding of the foundation of the logistical
discipline is key to understanding how logistics creates value in a
supply chain context.
Logistics and supply chain are not one and the same concept.
Supply Chain is a strategy that integrates all aspects of satisfying
customer requirements. Logistics is the process of positioning
and managing inventory throughout the supply chain.
©2020 McGraw-Hill Education