Dimensions of Logistics

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Chapter 2

• Dimensions of Logistics

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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.

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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.

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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.

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Logistics Profile Jordano Foods

• Jordano Foods is a major vendor for SAB
  Distribution, and must decide if it wants a
  supply chain relationship with SAB in a win-win
  case.
• Jordanos CEO put together a facilitating team to
  evaluate the impact of adding a logistics systems
  approach.
• As you read this chapter, look for ways for
  Jordano to improve its logistics processes and
  supply chain relationship with SAB.

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Dimensions of Logistics Introduction

• Logistics is under the glory shadow of SCM
• Fancy front-end cant stand alone.
• Good logistics is business power.
• The big challenge is, order fulfillment meets or
  exceeds customer expectations, and trade-off with
  costs.
• Individual firms logistics system (intrafirm),
  and coordination and integration of logistics
  systems in supply chains.

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Figure 2-1Contemporary Supply Chain Pipeline
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Figure 2-2Logistics Costs as a Percentage of GDP
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Logistics in the Economy A Macro Perspective

• As indicated in Figure 2-2, logistics costs as a
  percentage of GDP have declined from 16 in 1980,
  to under 10 in 1999.
• This reflects a significant improvement in the
  efficiency of logistics systems.
• Figure 2-3 shows a further breakdown of logistics
  costs for 1999.

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Figure 2-3 Total Logistics Costs - 1999
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Figure 2-4 Inventory Sales Ratio
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What is Logistics?

• Increased recognition through news media,
  television ad., corporate-owned trailer
  promotions, and the credit in the wars.
• Increased sensitivity to service quality provided
  by logistics.
• Still lots of confusion about the definition and
  what it really means, at the present of lots of
  other terms.

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Popular logistics terms

• Logistics Management
• Business Logistics Management
• Integrated Logistics Management
• Materials Management
• Physical Distribution Management
• Marketing Logistics
• Industrial Logistics
• Distribution

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What is Logistics?21st Century View of Logistics

• Business Logistics Part of 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.

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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.

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What is Logistics?A general definition

• Logistics is the process of anticipating customer
  needs and wants acquiring the capital,
  materials, people, technologies, and information
  necessary to meet those needs and wants
  optimizing the goods- or service-producing
  network to fulfill customer requests and
  utilizing the network to fulfill customer
  requests in a timely way.

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What is Logistics?Value-Added Role of Logistics

• 4 principal types of economy utility add value to
  a product or service
• Form utility (what)
• Place utility (where)
• Time utility (when)
• Possession utility (why)
• Also referred to as the 7 Rs
• Right product, Right quantity, Right condition,
  Right place, Right time, Right customer, and
  Right cost.

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Logistics in the Firm The Micro Dimension

• Logistics Interfaces with Operations/Manufacturing
  .
• Logistics Interfaces with Marketing.
• Logistics Interfaces with Finance / Accounting.

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Logistics in the Firm 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.

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Logistics in the Firm Logistics Interfaces with
Operations/Manufacturing

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

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Logistics in the Firm The Micro Dimension

• Logistics Interfaces with Marketing
  The Marketing Mix four Ps
• Price
• Product (Packaging)
• Promotion
• Place

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Logistics in the Firm Price

• Carrier pricing
• Volume discount 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 (selling) should be tied to
  carrier quantity discounts.
• Volume relationships
• Volumes sold will affect inventory requirements.

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Logistics in the Firm Product

• Size, shape, weight, packaging and other physical
  attributes 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 save (or lost) millions of dollars in
  logistical costs.
• Consumer packaging

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Logistics in the Firm Promotion

• Push versus pull (two promotion strategies!)
• Pull strategies tend to be more erratic.
• Push strategies tend to more predictable.
• 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.
• Channel competition
• The more popular a product, the easier it is to
  persuade channel members to promote your product.

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Logistics in the Firm 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.

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Logistics Interfaces with Other Areas

• Manufacturing and marketing are probably the two
  most important internal, functional interfaces
  with logistics.
• Other important interfaces include finance and
  accounting.
• Logistics can have a major impact on ROA and ROI.
• Accounting provides appropriate cost information
  for alternative logistics systems alternatives.
• Accounting measure supply chain trade-offs and
  performance.

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Logistics Activities

• Production planning
• Purchasing
• Customer service
• Site location
• Return goods handling
• Part service support
• Salvage scrap disposal

• Transportation
• Warehousing storage
• Packaging
• Materials handling
• Inventory control
• Order fulfillment
• Demand Forecasting

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On the Line Toyota Distribution

• Currently
• 2 main DCs in California and Kentucky, 9 smaller
  DCs around the country and one for Lexus in
  Jacksonville
• serving than 8 million parts and accessories
  every month
• Trends
• the Japanese automaker source more and more of
  its parts from U.S. instead of overseas.
• Customers grow.
• Strategies and technologies
• Computer modeling re-designed its 30 year old
  distribution network.
• Simulation software looked first at Lexus
  Division and then at the entire network.
• Results
• A new CD strictly handling Lexus parts
• The start-up cost will be quickly paid by itself
• The new network both improved customer service
  and lowered the overall costs.

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Approaches to Analyzing Logistics Systems

• Materials Management vs. Physical Distribution
• Cost Centers
• Nodes vs. Links
• Logistics Channels

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Materials Management (inbound) vs. Physical
Distribution (outbound)

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

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Approaches to Analyzing Logistics Systems

• Cost Centers
• Total cost analysis
• 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 Channels
• The network of intermediaries involved in the
  logistics system. (see Figures 2-7, 2-8, and 2-9)

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Table 2-2 Analysis of Unit Logistics Cost with
a Change to Higher Cost Mode of Transport
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Table 2-3 Analysis of Total Logistics Cost with
a Change to More Warehouses
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Approaches to Analyzing Logistics Systems

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

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Figure 2-6Nodes and Links in a Logistics System
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Approaches to Analyzing Logistics Systems

• Cost Centers
• Total cost analysis
• 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 Channels
• The network of intermediaries involved in the
  logistics system. (see Figures 2-7, 2-8, and 2-9)

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Figure 2-7 A Simple Logistics Channel
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Figure 2-8A Multi-Echelon Logistics Channel
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Figure 2-9 A Complex Logistics Channel
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Systems Analysis

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

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Logistics and Systems Analysis

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

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Figure 2-10 Levels of Optimality in Economic
Environments
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Techniques of Logistics System Analysis

• Short-Run/Static Analysis (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, or in
  a long run.
• Examine the data presented in Table 2-4.

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Table 2-4 Static Analysis of CB Chemical
Company (50,000 pounds of output)
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Techniques of Logistics System Analysis

• Long-Run/Dynamic Analysis (Figure 2-11)
• Comprised a graph of the fixed and variable costs
  of at least two alternative logistics systems.
• The graph may have no indifference point, and may
  have multiple points of indifference.
• Examine the data presented in Figure 2-11.

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Figure 2-11 Dynamic Analysis
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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

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Crossover Charts Dynamic Analysis

Volume
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Example
Crossover between system A and B 10 V1 150,000
8V1 350,000 2V1 200,000 V1 100,000 units
Crossover between system B and C 8V2 350,000
6V2 950,000 2V2 600,000 V2 300,000 units
Taggert Custom Machine Shop has a contract for
145,000 units of product from its new plant.
James Taggert, the logistics Manager, has
calculated the cost for three logistics
alternatives. Which system should he choose for
this new contract?
Therefore, at a volume of 145,000 units, system B
is the appropriate logistics channel.
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Crossover Charts
Process Cost Chart

A air, 1warehouse
C rail, 3 warehouses
B truck, 2 warehouses
Use C
Use B
Use A
0
100000 300000
Units
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Logistics in the Firm Factors Affecting the Cost
and Importance of Logistics

• Competitive Relationships
• Inventory/order cycle length (Figure 2-12)
• Inventory/lost sales effect (Figure 2-13)
• Transportation/lost sales effect (Figure 2-14)
• Inventory and transportation combined effect on
  COLS
• substitutability
• Product Relationships
• Dollar value/logistics costs (Figure 2-15)
• Density/logistics costs (Figure 2-16)
• Susceptibility to damage/logistics costs (Figure
  2-17)
• Special handling
• Spatial Relationships (Figure 2-18)

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Figure 2-12 The Relationship between Required
Inventory and Order Cycle Length from a Customer
Perspective
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Figure 2-13 The General Relationship of the Cost
of Lost Sales to Inventory Cost
Units of inventory
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Figure 2-14 The General Relationship of the
Cost of Lost Sales to Transportation Cost
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Logistics in the Firm Factors Affecting the Cost
and Importance of Logistics

• Competitive Relationships
• Inventory/order cycle length (Figure 2-12)
• Inventory/lost sales effect (Figure 2-13)
• Transportation/lost sales effect (Figure 2-14)
• Inventory and transportation combined effect on
  COLS
• substitutability
• Product Relationships
• Dollar value/logistics costs (Figure 2-15)
• Density/logistics costs (Figure 2-16)
• Susceptibility to damage/logistics costs (Figure
  2-17)
• Special handling
• Spatial Relationships (Figure 2-18)

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Figure 2-15 The General Relationship of Product
Dollar Value to Various Logistics Costs
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Figure 2-16 The General Relationship of Product
Weight Density to Logistics Costs
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Figure 2-17 The General Relationship of Product
Susceptibility to Loss and Damage to Logistics
Costs
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Logistics in the Firm Factors Affecting the Cost
and Importance of Logistics

• Competitive Relationships
• Inventory/order cycle length (Figure 2-12)
• Inventory/lost sales effect (Figure 2-13)
• Transportation/lost sales effect (Figure 2-14)
• Inventory and transportation combined effect on
  COLS
• substitutability
• Product Relationships
• Dollar value/logistics costs (Figure 2-15)
• Density/logistics costs (Figure 2-16)
• Susceptibility to damage/logistics costs (Figure
  2-17)
• Special handling
• Spatial Relationships (Figure 2-18)

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Figure 2-18 Logistics and Spatial Relations