Chapter 2:

Dimensions of Logistics
 Dimensions of Logistics:
Introduction
 Logistics has come a long way since the
1960s.
 The big challenge is to manage the whole
logistics system in such a way that order
fulfllment meets or exceeds customer
expectations.
 Focus of this chapter is upon the individual
frm’is logistics system but also recogniging
that no logistics system operates in a vacuum.

Chapter 2 Management of Business Logistics, 7th Ed. 2

Figure 2-2: Logistics Costs as a
Percentage of GDP

Chapter 2 Management of Business Logistics, 7th Ed. 3

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 fgure closer
to 20 percent.
 This refects a serious improvement in
the efciency of logistics systems.

Chapter 2 Management of Business Logistics, 7th Ed. 4

Figure 2-4:
Inventory Sales Ratio

Chapter 2 Management of Business Logistics, 7th Ed. 5

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.

Chapter 2 Management of Business Logistics, 7th Ed. 6

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 Chapter 9,
motor carriers’i share of total freight
expenditures is $450 billion versus $99
billion for all other carriers.
 The most frequent trade-of in logistics is
between transportation and inventory
cost.

Chapter 2 Management of Business Logistics, 7th Ed. 7

What is Logistics?:
21st Century View of Logistics
 Business Logistics – supply chain process
that plans, implements, and controls the
efcient, efective fow 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 efciency.
Chapter 2 Management of Business Logistics, 7th Ed. 8
What is Logistics?:
21st Century View of Logistics
 Event Logistics – network of activities,
facilities, and personnel required to
organige, schedule, and deploy the
resources for an event to take place and
to efciently 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.

Chapter 2 Management of Business Logistics, 7th Ed. 9

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.
Chapter 2 Management of Business Logistics, 7th Ed. 10
Figure 2-5 Fundamental
Utility Creation in the
Economy

Chapter 2 Management of Business Logistics, 7th Ed. 11

Logistics in the Firm:
The Micro Dimension
 Logistics Interfaces with
Operations/Manufacturing
 Logistics Interfaces with Marketing
 Logistics Interfaces with Other Areas

Chapter 2 Management of Business Logistics, 7th Ed. 12

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
 Keeping seasonal Inventory

to balance lead production

times.

Chapter 2 Management of Business Logistics, 7th Ed. 13

Logistics in the Firm: 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.

Chapter 2 Management of Business Logistics, 7th Ed. 14

Logistics in the Firm:
The Micro Dimension
 Logistics Interfaces with Marketing:
The Marketing Mix – Four Ps
 Price

 Product

 Promotion

 Place

Chapter 2 Management of Business Logistics, 7th Ed. 15

Logistics in the Firm:
Price
 Carrier pricing
 Generally, since the larger the shipment,

the cheaper the transportation rate,

shipment siges should be tailored to the
carrier’is vehicle capacity where possible.

Chapter 2 Management of Business Logistics, 7th Ed. 16

Logistics in the Firm:
Product
 Consumer packaging

Generally, since the sige, 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.

Chapter 2 Management of Business Logistics, 7th Ed. 17

Logistics in the Firm:
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.

Chapter 2 Management of Business Logistics, 7th Ed. 18

Logistics in the Firm:
Place
 Wholesalers
 Generally, since wholesalers are combining

purchases for multiple retailers, the shipment

siges 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.

Chapter 2 Management of Business Logistics, 7th Ed. 19

Logistics Interfaces with
Other Areas
 Manufacturing and marketing are probably the
two most important internal, functional
interfaces with logistics.
 Other important interfaces now include fnance
and accounting.
 Logistics can have a major impact on return

on assets and return on investment.

Chapter 2 Management of Business Logistics, 7th Ed. 20

Approaches to Analyging Logistics
Systems: Materials Management v.
Physical Distribution
 The movement and storage of raw materials is
far diferent from the movement and storage of
fnished goods.
 Four diferent classifcations 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

Chapter 2 Management of Business Logistics, 7th Ed. 21

Approaches to Analyging
Logistics Systems
 Cost Centers

Treating logistics activities as cost centers
makes it easier to study cost trade-ofs
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)

Chapter 2 Management of Business Logistics, 7th Ed. 22

 Table 2-2 Analysis of Total Logistics
Cost with a Change to Higher Cost Mode
of Transport

Cost Centers Rail Motor

Transportation $ 3.00 $ 4.20

Inventory 5.00 3.75
Packaging 4.50 3.20
Warehousing 1.50 .75
Cost of Lost
2.00 1.00
Sales
Total Cost $ 15.00 $ 13.00
Chapter 2 Management of Business Logistics, 7th Ed. 23
 Table 2-3 Analysis of Total
Logistics Cost with a Change to
More Warehouses
System 1 System 2
Cost Centers Three Five
Warehouses Warehouses
Transportation $ 850,000 $ 500,000
Inventory 1,500,000 2,000,000
Warehousing 600,000 1,000,000
Cost of Lost
350,000 100,000
Sales
Total Cost $ 3,300,000 $ 3,600,000

Chapter 2 Management of Business Logistics, 7th Ed. 24

Figure 2-6 Nodes and Links
in a Logistics System

Chapter 2 Management of Business Logistics, 7th Ed. 25

Figure 2-7
A Simple Logistics Channel

Chapter 2 Management of Business Logistics, 7th Ed. 26

Figure 2-8
A Multi-Echelon Logistics
Channel

Chapter 2 Management of Business Logistics, 7th Ed. 27

Figure 2-9
A Complex Logistics Channel

Chapter 2 Management of Business Logistics, 7th Ed. 28

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.

Chapter 2 Management of Business Logistics, 7th Ed. 29

Table 2-4 Static Analysis of C & B
Chemical Company (50,000 pounds
of output)

Chapter 2 Management of Business Logistics, 7th Ed. 30

Techniques of Logistics System
Analysis: Long-Run/Dynamic
Analysis
 This technique is illustrated in Figure 2-11.
 Comprised a graph of the fxed and
variable costs of at least two alternative
logistics systems.
 The graph may have at least one
indiference point, but may have multiple
points of indiference.
 Examine the data presented in Figure 2-
11.

Chapter 2 Management of Business Logistics, 7th Ed. 31

Figure 2-11
Dynamic Analysis

Chapter 2 Management of Business Logistics, 7th Ed. 32

 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-of ooint
System 1 Total Costs = System 2 Total Costs
$4200 + 0.0315x = $4800 + 0.0230x
0.0085x = $600
Chapter 2 Management of Business Logistics, 7 Ed. 33
x = 70,588 pounds
th
 Logistics in the Firm: Factors
Afecting the Cost and
Importance of Logistics
 Competitive Relationships

Inventory/order cycle length – see Figure 2-12.

Inventory/lost sales efect – see Figure 2-13.

Transportation/lost sales efect - 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.

Chapter 2 Management of Business Logistics, 7th Ed. 34

Figure 2-12 The Relationship
between Required Inventory and
Order Cycle Length from a Customer
Perspective

Chapter 2 Management of Business Logistics, 7th Ed. 35

Figure 2-13 The General
Relationship of the Cost of Lost Sales
to Inventory Cost

Chapter 2 Management of Business Logistics, 7th Ed. 36

Figure 2-14
The General Relationship of the Cost
of Lost Sales to Transportation Cost

Chapter 2 Management of Business Logistics, 7th Ed. 37

Figure 2-15
The General Relationship of Product
Dollar Value to Various Logistics
Costs

Chapter 2 Management of Business Logistics, 7th Ed. 38

Figure 2-16 The General
Relationship of Product Weight
Density to Logistics Costs

Chapter 2 Management of Business Logistics, 7th Ed. 39

Figure 2-17 The General
Relationship of Product Susceptibility
to Loss and Damage to Logistics
Costs

Chapter 2 Management of Business Logistics, 7th Ed. 40

Figure 2-18
Logistics and Spatial
Relations

Chapter 2 Management of Business Logistics, 7th Ed. 41

 Chapter 2:
Summary and Review Questions

Students should review their knowledge of the

chapter by checking out the Summary and
Study Questions for Chapter 2.

This is the last slide for

Chapter 2
 End of Chapter 2 Slides

Dimensions of Logistics