You are on page 1of 57

Chapter 2:

Dimensions of Logistics

Learning Objectives -

After
reading this chapter, you 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 the macro and micro level.
Explain logistics systems from several
perspectives.

Chapter 2

Management of Business Logistics, 7th


Ed.

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.

Chapter 2

Management of Business Logistics, 7th


Ed.

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.

Chapter 2

Management of Business Logistics, 7th


Ed.

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.
Jordanos CEO put together a study 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.
Chapter 2

Management of Business Logistics, 7th


Ed.

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
fulfillment meets or exceeds customer
expectations.
Focus of this chapter is upon the individual
firms logistics system but also recognizing
that no logistics system operates in a vacuum.
Chapter 2

Management of Business Logistics, 7th


Ed.

Figure 2-1
Contemporary Supply Chain
Pipeline

Chapter 2

Management of Business Logistics, 7th


Ed.

Figure 2-2: Logistics Costs as a


Percentage of GDP

Chapter 2

Management of Business Logistics, 7th


Ed.

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.
Chapter 2

Management of Business Logistics, 7th


Ed.

Figure 2-3:
Total Logistics Costs --- 1999

Chapter 2

Management of Business Logistics, 7th


Ed.

10

Figure 2-4:
Inventory Sales Ratio

Chapter 2

Management of Business Logistics, 7th


Ed.

11

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.

12

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 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.
Chapter 2

Management of Business Logistics, 7th


Ed.

13

What is Logistics?

Increased recognition through news


media, corporate-owned trailer
promotions, and television
Increased sensitivity to service quality
provided by logistics
Logistics definitions provided in Table 21 on the following slide.

Chapter 2

Management of Business Logistics, 7th


Ed.

14

Table 2-1:
Logistics Definitions

Chapter 2

Management of Business Logistics, 7th


Ed.

15

What is Logistics?

Popular logistics terms:


Logistics Management
Business Logistics Management
Integrated Logistics Management
Materials Management
Physical Distribution Management
Marketing Logistics
Industrial Logistics
Distribution
Chapter 2

Management of Business Logistics, 7th


Ed.

16

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.
Chapter 2

Management of Business Logistics, 7th


Ed.

17

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.
Chapter 2

Management of Business Logistics, 7th


Ed.

18

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.

19

Figure 2-5 Fundamental


Utility Creation in the
Economy

Chapter 2

Management of Business Logistics, 7th


Ed.

20

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.

21

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.
Chapter 2

Management of Business Logistics, 7th


Ed.

22

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.
Foreign & third party alternatives
Some logistics functions are being
outsourced.
Chapter 2

Management of Business Logistics, 7th


Ed.

23

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.

24

Logistics in the Firm:


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.
Chapter 2

Management of Business Logistics, 7th


Ed.

25

Logistics in the Firm:


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.
Chapter 2

Management of Business Logistics, 7th


Ed.

26

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.

27

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.
Chapter 2

Management of Business Logistics, 7th


Ed.

28

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.
Chapter 2

Management of Business Logistics, 7th


Ed.

29

Logistics Activities

Transportation
Storage
Packaging
Materials handling
Order fulfillment
Forecasting

Chapter 2

Production
planning
Purchasing
Customer service
Site location
Other activities

Management of Business Logistics, 7th


Ed.

30

On the Line:
Toyota Distribution

Moves more than 8 million parts and accessories


every month.
Computer modeling re-designed the 30 year old
distribution network.
Software looked first at Lexus Division and then
at the entire network.
Resulted in two DCs, one in California, another
in Kentucky, feeding nine smaller DCs located
around the country.
The new network both improved customer
service and lowered costs.
Chapter 2

Management of Business Logistics, 7th


Ed.

31

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

Chapter 2

Management of Business Logistics, 7th


Ed.

32

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)
Chapter 2

Management of Business Logistics, 7th


Ed.

33

Table 2-2 Analysis of Total Logistics Cost


with a Change to Higher Cost Mode of
Transport
Cost Centers

Rail

Motor

$ 3.00

$ 4.20

Inventory

5.00

3.75

Packaging

4.50

3.20

Warehousing

1.50

.75

Cost of Lost
Sales

2.00

1.00

Transportation

Total Cost
Chapter 2

$ 15.00

$ 13.00

Management of Business Logistics, 7th


Ed.

34

Table 2-3 Analysis of Total Logistics


Cost with a Change to More
Warehouses
Cost Centers
Transportation
Inventory

System 1

System 2

Three
Warehouses

Five
Warehouses

850,000

500,000

1,500,000

2,000,000

Warehousing

600,000

1,000,000

Cost of Lost
Sales

350,000

100,000

Total Cost
Chapter 2

$ 3,300,000

$ 3,600,000

Management of Business Logistics, 7th


Ed.

35

Figure 2-6 Nodes and Links


in a Logistics System

Chapter 2

Management of Business Logistics, 7th


Ed.

36

Figure 2-7
A Simple Logistics Channel

Chapter 2

Management of Business Logistics, 7th


Ed.

37

Figure 2-8
A Multi-Echelon Logistics
Channel

Chapter 2

Management of Business Logistics, 7th


Ed.

38

Figure 2-9
A Complex Logistics Channel

Chapter 2

Management of Business Logistics, 7th


Ed.

39

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.
Chapter 2

Management of Business Logistics, 7th


Ed.

40

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.
Chapter 2

Management of Business Logistics, 7th


Ed.

41

Figure 2-10 Levels of


Optimality in Economic
Environments

Chapter 2

Management of Business Logistics, 7th


Ed.

42

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.

43

Table 2-4 Static Analysis of C & B


Chemical Company (50,000 pounds
of output)

Chapter 2

Management of Business Logistics, 7th


Ed.

44

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 211.
Chapter 2

Management of Business Logistics, 7th


Ed.

45

Figure 2-11
Dynamic Analysis

Chapter 2

Management of Business Logistics, 7th


Ed.

46

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
Management
of
Business Logistics, 7th
Chapter 2
47
x
70,588 pounds
Ed. =

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.
Chapter 2

Management of Business Logistics, 7th


Ed.

48

Figure 2-12 The Relationship


between Required Inventory and
Order Cycle Length from a Customer
Perspective

Chapter 2

Management of Business Logistics, 7th


Ed.

49

Figure 2-13 The General


Relationship of the Cost of Lost Sales
to Inventory Cost

Chapter 2

Management of Business Logistics, 7th


Ed.

50

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

Chapter 2

Management of Business Logistics, 7th


Ed.

51

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

Chapter 2

Management of Business Logistics, 7th


Ed.

52

Figure 2-16 The General


Relationship of Product Weight
Density to Logistics Costs

Chapter 2

Management of Business Logistics, 7th


Ed.

53

Figure 2-17 The General


Relationship of Product Susceptibility
to Loss and Damage to Logistics
Costs

Chapter 2

Management of Business Logistics, 7th


Ed.

54

Figure 2-18
Logistics and Spatial
Relations

Chapter 2

Management of Business Logistics, 7th


Ed.

55

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