Dimensions of Logistics

1
Lecture 2

• Dimensions of Logistics

2
Learning Objectives

• 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 the macro and micro level.
• Explain logistics systems from several
  perspectives.

3
Learning Objectives

• Understand the relationship between logistics and
  the other important functional areas in a
  company, including manufacturing, marketing, and
  finance.
• Discuss the important management activities in
  the logistics function.

4
Learning Objectives

• Analyze logistics systems from several different
  perspectives to meet different objectives.
• Determine the total costs and understand the cost
  trade-offs in a logistics system from a static
  and dynamic perspective.

5
Figure 2-1Contemporary Supply Chain Pipeline
6
Dimensions of Logistics Introduction

• Logistics has come a long way since the 1960s.
• Good Logistics is business power.
• Supply chain management is a network of logistic
  systems and related activities of all of
  individual companies/organizations that are a
  part of a particular supply chain.
• The individual logistics systems obviously play a
  role in the success of the overall supply chain

7
Dimensions of Logistics Introduction

• The big challenge is to manage the whole
  logistics system in such a way that order
  fulfillment meets or exceeds customer
  expectations.
• Focus of this lecture is upon the individual
  firms logistics system but also recognizing that
  no logistics system operates in a vacuum.

8
Logistics in the Economy A Macro Perspective

• As indicated in Figure 2-2, logistics costs as a
  percentage of GDP have declined from 16 percent
  in 1980, to under 10 percent in 1999.
• Early to mid-1970s saw the figure closer to 20
  percent.
• This reflects a serious improvement in the
  efficiency of logistics systems.
• Figure 2-3 shows a further breakdown of logistics
  costs for 1999.

9
Figure 2-2 Logistics Costs as a Percentage of GDP
10
Figure 2-3 Total Logistics Costs --- 1999
11
Figure 2-4 Inventory Sales Ratio
12
Logistics in the Economy A Macro Perspective

• As indicated in Figure 2-4, the Federal Reserve
  measure of inventory to sales ratios from 1991 to
  1999 clearly indicate that companies are getting
  better at managing inventory.
• Companies have been supporting larger amounts of
  sales with decreasing amounts of inventory.

13
Logistics in the Economy A Macro Perspective

• The two largest cost categories in logistics
  systems are transportation and inventory.
• While we will look at this in Figure 2-3, motor
  carriers share of total freight expenditures is
  450 billion versus 99 billion for all other
  carriers.
• The most frequent trade-off in logistics is
  between transportation and inventory cost.

14
What is Logistics?

• Increased recognition through news media,
  corporate-owned trailer promotions, and
  television (7000-mile supply pipeline)
• Increased sensitivity to product quality and
  service quality provided by logistics
• Logistics definitions provided in Table 2-1 on
  the following slide.

15
Table 2-1Logistics Definitions
16
Table 2-1 Logistics Definitions
17
Table 2-1 Logistics Definitions
18
What is Logistics?

• Popular logistics terms
• Logistics Management
• Business Logistics Management
• Integrated Logistics Management
• Materials Management
• Physical Distribution Management
• Marketing Logistics
• Industrial Logistics
• Distribution

19
What is Logistics?21st Century View of Logistics

• Business Logistics supply chain process that
  plans, implements, and controls the efficient,
  effective flow of goods, services, and related
  information from the point of origin to the point
  of use or consumption in order to meet customer
  requirements.
• Military Logistics design and integration of
  all aspects of support for the operational
  capacity of the military forces, and their
  equipment to ensure readiness, reliability, and
  efficiency.

20
What is Logistics?21st Century View of Logistics

• Event Logistics 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 acquisition, scheduling, and
  management of the facilities/assets, personnel,
  and materials to support and sustain a service
  operation or business.

21
A General Definition of Logistics

• See page 40

22
What is Logistics?Value-Added Role of Logistics

• Most commonly referred to in terms of economic
  utilities
• Form utility (what)
• Place utility (where)
• Time utility (when)
• Possession utility (why)
• Also referred to as the seven Rs --- Right
  product, Right quantity, Right condition, Right
  place, Right time, Right customer, and Right cost.

23
Figure 2-5 Fundamental Utility Creation in the
Economy
24
Logistics in the Firm The Micro Dimension

• Logistics Interfaces with Operations/Manufacturing
  
• Logistics Interfaces with Marketing
• Logistics Interfaces with Other Areas

25
Logistics in the Firm The Micro Dimension
Logistics Interfaces with Operations /
Manufacturing

• Length of production runs
• Balance economies of long production runs against
  increased costs of high inventories.
• Seasonal demand
• Acceptance of seasonal inventory
  to balance lead
  production times.

26
Logistics in the Firm The Micro Dimension
Logistics Interfaces with Operations /
Manufacturing

• Supply-side interfaces
• Stocking adequate supplies to ensure
  uninterrupted production now a logistics
  function.
• Protective packaging
• Principal purpose is to protect the product from
  damage.
• Foreign third party alternatives
• Some logistics functions are being outsourced.

27
Logistics in the Firm The Micro Dimension
Logistics Interfaces with Marketing

• Logistics Interfaces with Marketing
  The Marketing Mix Four Ps
• Price
• Product
• Promotion
• Place

28
Logistics in the Firm The Micro Dimension
Logistics Interfaces with Marketing Price

• Carrier pricing
• Generally, since the larger the shipment, the
  cheaper the transportation rate, shipment sizes
  should be tailored to the carriers vehicle
  capacity where possible.
• Matching schedules
• Quantity discounts should be tied to carrier
  quantity discounts.
• Volume relationships
• Volumes sold will affect inventory requirements.

29
Logistics in the Firm The Micro Dimension
Logistics Interfaces with Marketing Product

• Consumer packaging
• Generally, since the size, shape, weight and
  other physical characteristics of the product
  impact on its storage, transportation and
  handling, the logistics managers should be
  included in any decisions regarding these product
  traits.
• A minor correction in any of the above could
  conceivably cost (or save) millions of dollars in
  logistical costs.
• Logistics costs are not necessarily paramount,
  but they need to be considered in the decision
  making process.

30
Logistics in the Firm The Micro Dimension
Logistics Interfaces with Marketing Promotion

• Push versus pull
• The most important factor is that the logistics
  division is aware of any changes in demand
  patterns so that it can plan for any
  consequences.
• Pull strategies tend to be more erratic.
• Push strategies tend to more predictable.
• Channel competition
• The more popular a product, the easier it is to
  persuade channel members to promote your product.

31
Logistics in the Firm The Micro Dimension
Logistics Interfaces with Marketing Place

• Wholesalers
• Generally, since wholesalers are combining
  purchases for multiple retailers, the shipment
  sizes tend to be larger and the number of
  transactions that have to be processed are fewer,
  with the result that logistics costs are smaller.
  
• Retailers
• With the exception of very large retailers who
  act more like wholesalers, smaller sales are the
  norm. These generally cost more for
  transportation and order processing.

32
Logistics Interfaces with Other Areas

• Manufacturing and marketing are probably the two
  most important internal, functional interfaces
  with logistics.
• Other important interfaces now include finance
  and accounting.
• Logistics can have a major impact on return on
  assets and return on investment.
• Logistics costs reported by cost systems measure
  supply chain trade-offs and performance.

33
Logistics Activities

• Transportation
• Storage
• Packaging
• Materials handling
• Order fulfillment
• Forecasting

• Production planning
• Purchasing
• Customer service
• Site location
• Other activities

34
Logistics Activities

• Traffic Transportation involves the physical
  movement or flow of raw materials or finished
  goods and involves the t ransportation agencies
  that provide service to the firm.
• Warehousing Storage involves two closely
  related activities inventory management and
  warehousing.
• A direct relationship exists between
  transportation and the level of inventory and
  number of warehouses required.
• It is important to examine the trade-offs related
  to the various alternatives in order to optimize
  the overall logistics system.

35
Logistics Activities

• Industrial Packaging involves the necessary
  packaging needed to move the product to the
  market.
• Logistics managers must analyze the tradeoffs
  between the type of transportation selected and
  its Logistics selected and its packaging
  requirements

36
Logistics Activities

• Materials handling is important to efficient
  warehouse operation and concerns the mechanical
  equipment for short-distance movement of goods
  through the warehouse.
• Order fulfillment consists of the activities
  involved with completing customer orders.
• Order fulfillment concerns the total lead time
  from when the order is placed to actual delivery
  in satisfactory condition.
• Demand Forecasting involves the prediction of
  inventory requirement and materials and parts
  essential to effective inventory control.

37
Logistics Activities

• Production planning concerns the determination of
  the number of units necessary to provide market
  coverage.
• The integration of production planning into
  logistics has become increasingly popular in
  large companies to effectively forecast and
  control inventory.
• Purchasing concerns the availability for
  production of needed parts, components and
  materials in the right quantity, at the right
  time, at the right place, and at the right cost.
• Purchasing is included within the logistics area
  if it more effectively coordinates and lowers
  costs for the firm.

38
Logistics Activities

• Customer service levels play an important part in
  logistics by ensuring the customer gets the right
  product, at the right time and place.
• Logistics decisions about product availability
  and inventory lead time are critical to customer
  service.
• Plant and Warehouse Site location is concerned
  with creating the time and place relationships
  between plants and markets, or between supply
  points and plants.
• Site location impacts transportation rates and
  service, customer service, inventory
  requirements, and possible other areas.

39
Logistics Activities

• Parts Service Support is concerned with
  maintaining an adequate channel to anticipated
  repair needs.
• Salvage Scrap Disposal deals with reverse
  logistics systems and channels in order to
  effectively and efficiently dispose of containers
  and other scrap at the end of the distribution
  channel.

40
Approaches to Analyzing Logistics Systems

• Logistics systems can be analyzed on the basis of
  four perspectives
• 1. materials management versus physical
  distribution,
• 2. cost centers,
• 3. nodes versus links,
• 4. logistics channel.

41
Approaches to Analyzing Logistics Systems
Materials Management v. Physical Distribution

• Frequently the movement and storage of raw
  materials is far different from the movement and
  storage of finished goods.
• Four different classifications of logistics
  systems
• Balanced system - e.g., consumer products
• Heavy inbound - e.g., aircraft construction
• Heavy outbound - e.g., chemicals
• Reverse systems - e.g., returnable products

42
Approaches to Analyzing Logistics Systems

• Cost Centers
• Treating logistics activities as cost centers
  makes it easier to study cost trade-offs between
  the centers. (see Tables 2-2 and 2-3)
• Nodes versus Links
• Nodes are spatial points (warehouses, plants,
  etc.)
• Links are the transportation network (rail,
  motor, air, pipe and water). (see Figure 2-6)
• Logistics Channel
• The network of intermediaries involved in the
  logistics system. (see Figures 2-7, 2-8, and 2-9)

43
Table 2-2 Analysis of Total Logistics Cost with
a Change to Higher Cost Mode of Transport
44
Table 2-3 Analysis of Total Logistics Cost with
a Change to More Warehouses
45
Figure 2-6 Nodes and Links in a Logistics System
46
Figure 2-7 A Simple Logistics Channel
47
Figure 2-8A Multi-Echelon Logistics Channel
48
Figure 2-9 A Complex Logistics Channel
49
Logistics and Systems Analysis

• Cost Perspective
• Keep in mind that the most efficient systems are
  not always comprised of each system component
  operating at its lowest possible cost.
• The critical concern is to have the entire system
  operating at its lowest total cost.

50
Logistics and Systems Analysis

• Level of Optimality
• There are often constraints working which result
  in sub-optimal outcomes.
• Additionally, logistics systems must work in
  harmony with marketing, finance, production,
  etc.--- this may also result in sub-optimal
  logistics performance.
• See Figure 2-10 on next slide.

51
Figure 2-10 Levels of Optimality in Economic
Environments
52
Techniques of Logistics System Analysis
Short-Run/Static Analysis

• This technique is illustrated in Table 2-4.
• Comprised a matrix-like table which presents each
  of the logistics and other relevant costs for two
  or more alternative logistics systems.
• The major downside to the model is that it
  presents a solution which is not necessarily the
  correct one at all possible volume levels.
• Examine the data presented in Table 2-4.

53
Table 2-4 Static Analysis of C B Chemical
Company (50,000 pounds of output)
54
Techniques of Logistics System Analysis
Long-Run/Dynamic Analysis

• This technique is illustrated in Figure 2-11.
• Comprised a graph of the fixed and variable costs
  of at least two alternative logistics systems.
• The graph may have at least one indifference
  point, but may have multiple points of
  indifference.
• Examine the data presented in Figure 2-11.

55
Figure 2-11Dynamic Analysis
56
Dynamic Analysis

• System 1
• Total Cost Fixed Costs Variable Cost/unit x
  number of units
• y 4200
  0.0315x
• System 2
• Total Cost Fixed Costs Variable Cost/unit x
  number of units
• y 4800
  0.0230x
• Trade-off Point
• System 1 Total Costs System 2 Total Costs
• 4200 0.0315x 4800
  0.0230x
• 0.0085x 600
• x 70,588 pounds

57
Logistics in the Firm Factors Affecting the Cost
and Importance of Logistics

• Competitive Relationships
• Inventory/order cycle length see Figure 2-12.
• Inventory/lost sales effect see Figure 2-13.
• Transportation/lost sales effect - see Figure
  2-14.
• Product Relationships
• Product dollar value/logistics costs see Figure
  2-15.
• Weight density/logistics costs see Figure 2-16.
• Susceptibility to loss damage/logistics costs
  see Figure 2-17.
• Spatial Relationships
• Examine Figure 2-18.

58
Figure 2-12 The Relationship between Required
Inventory and Order Cycle Length from a Customer
Perspective
59
Figure 2-13 The General Relationship of the Cost
of Lost Sales to Inventory Cost
60
Figure 2-14 The General Relationship of the
Cost of Lost Sales to Transportation Cost
61
Figure 2-15 The General Relationship of Product
Dollar Value to Various Logistics Costs
62
Figure 2-16 The General Relationship of Product
Weight Density to Logistics Costs
63
Figure 2-17 The General Relationship of Product
Susceptibility to Loss and Damage to Logistics
Costs
64
Figure 2-18 Logistics and Spatial Relations
65
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.

66
Summary

• 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
  Logistics Management is the primary definition
  used in common.
• Logistics is an area of management that has four
  subdisciplinesbusiness, military, service, and
  event.

67
Summary

• 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 and time value to products
  and enhances the form and possession value added
  by manufacturing and marketing.
• Logistics has an important relationship to
  manufacturing, marketing, finance, and other
  areas of companies

68
Summary

• Logistics managers are responsible for a number
  of important activities, including
  transportation, inventory, warehousing, materials
  handling, industrial packaging, customer service,
  forecasting, and others.
• 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.

69
Summary

• Logistics systems are frequently analyzed from a
  systems approach, which emphasizes total cost and
  trade-offs when changes are proposed. Either a
  short-run or a 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.

70

• 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
  Logistics Management is the primary definition
  used in the text.
• Logistics is an area of management that has four
  subdisciplinesbusiness, military, service, and
  event.
• 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 and time value to products
  and enhances the form and possession value added
  by manufacturing and marketing.
• Logistics has an important relationship to
  manufacturing, marketing, finance, and other
  areas of companies.
• Logistics managers are responsible for a number
  of important activities, including
  transportation, inventory, warehousing, materials
  handling, industrial packaging, customer service,
  forecasting, and others.
• 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
  trade-offs when changes are proposed. Either a
  short-run or a 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.

71
After reading this chapter, we 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.

72
After reading this chapter, we should be able to
do the following

• Understand the relationship between logistics and
  other important functional areas in a company,
  including manufacturing, marketing, and finance.
• Discuss the important 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
  trade-offs in a logistics system from a static
  and dynamic perspective.