Role of logistics: Chapter 2

McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
 Overview of logistics

Logistics of business is big and important

The logistical value proposition
The work of logistics
Logistical operations
Logistics integration objectives
Logistical operating arrangements
Flexible structure
Supply chain synchronization

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 What is logistics?
Logistics is the design and administration of
systems to control movement and geographical
positioning of raw materials, work-in-process, and
finished inventories at the lowest total cost.

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 Logistics has risen to a key position in the
global economy
Postwar U.S. (1945-1995)
Global leader in distribution and logistics, as a direct result of
World War II
Rise of EEC and Asia (1980-2000)
Both regions became major exporters and distributors
e-Commerce (1998-Present)
Global logistics capability almost everywhere

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Logistics definitions

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 Logistics will continue its renaissance in
the future
Information technologies will automate many of the
traditionally manual logistical functions:
Automated port and rail operations
RFID tagging of materials
Advanced technologies for warehousing and inventory operations
Removal of trade barriers will continue to expand global
trade and logistics

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 Goal of logistics management
To satisfy customer
expectations for delivery of
products (or services) while
minimizing the total cost
Managers must support the
requirements for procurement,
manufacturing and customer
accommodation supply chain
operations

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Value added roles of logistics

Five principal types of utility/usefulness add value

to a product or service:

Form Utility
Place Utility
Time Utility
Quantity Utility
Possession Utility

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 Intermediaries help create Utility

Form Utility
Refers to the value added to goods through a manufacturing or
assembly process e.g. when raw materials or components are
combined in such a way as to make a finished product.

Place Utility
Moving goods from production points to points where demand
actually exists. Logistics creates place utility primarily through
transportation.

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Intermediaries help create Utility

Time Utility
Not only must goods and services be available where customers need
them but also at a point when customers demand them time utility is
defined as the economic value added to a good or service by having it
at a demand point at a specific time.

Quantity Utility
Todays business environment demands that products not only be
delivered on time to the correct destination but also in the correct
quantities.

Quantity Utility is created through a combination of production

forecasting, scheduling, and inventory control

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Intermediaries help create Utility

Possession Utility
Created through the basic marketing activities related to the promotion
of products or services. Promotion can be defined as the effort, through
direct and indirect contact with the customer, to increase the desire to
possess a good or to benefit from a service.

Possession Utility cannot be achieved unless time, place and quantity

utilities are provided.

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Source: Center for Supply Chain Research, Penn State University (2008).

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 Logistics costs trends
Transportation Costs relative to the Total Cost of Logistics
have gone up
Because of fuel prices and movement of manufacturing to Asia
Inventory Costs relative to the Total Cost of Logistics have
gone down
Adoption of JIT and Lean practices have reduced these
Administrative Costs relative to the Total Cost of Logistics
have stayed the same

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 Logistical value proposition
Logistical value proposition consists of a
commitment to key customer expectations and
requirements at a minimum cost
The two elements of this value proposition are
Service and Cost Minimization
Firms must make appropriate tradeoffs between service
and cost for each of their key customers

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 Service benefits are created by logistical
performance in 3 areas
Availability involves having inventory to consistently meet
customer material or product requirements
Operational performance deals with the time required to
deliver a customers order
Key metrics for this area involve delivery speed and consistency
Service reliability involves the quality attributes of logistics
Key to quality is accurate measurement of availability and
operational performance over time

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 Cost minimization using the total cost
logistics model
Traditional Cost Logistics Model
Focused on achieving the lowest
possible cost for each individual
function of logistics
For example, Transport the material
the cheapest way possible
Expected lowest cost based on
decisions that were cheapest for
individual functions
Ignored the impact of cost decisions
across logistics functions
Total Cost Logistics Model
Focused on achieving the lowest total
cost across each function of logistics
A cost decision in one function should
consider impact to costs of all other
logistics functions
For example, Transporting material
the cheapest way is slower than
other choices. This requires an
increase in storage cost to hold the
material longer
Would it still be a lower cost to use
the cheapest mode of transport?
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 Different perspectives on cost
minimization
Traditional Cost Logistics Model Total Cost Logistics Model
Minimize order processing cost Minimize (order processing + inventory +
+ transportation + warehousing,
Minimize inventory cost materials handling and packaging +
+ facility) cost
Minimize transportation cost _________________________
+ Lowest total logistics cost
Minimize warehousing, materials
handling and packaging cost
+
Minimize facility cost
__________________________
Lowest logistics cost

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 Example of evaluating alternatives to find
lowest total cost
Compare two alternative shipping carriers to
move a shipment of electronic chips
Value of shipment = $25,000.00
Faster shipping is generally more expensive than
slower shipping
Carrier 1 costs $250 to ship
Carrier 2 costs $20 more but delivers 1 day faster
Product in transit is a form of inventory
Holding costs for shipment is 40% of value per year
No other cost differences across remaining logistics
functions

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 Example of evaluating alternatives to find
lowest total cost
Traditional Cost Method
Minimize transportation cost
Compare 1st carrier at $250 vs. 2nd carrier at $270
Decision is to use 1st Carrier to save $20

Total Cost Method

Minimize total of transportation and inventory cost
Annual holding
Daily cost of holding product = cost x Product value /365

= (.40 x $25,000)/ 365 = $27.40

Compare 1st carrier at $250 + $27.40 = $277.40 vs. 2nd carrier at $270
Decision is to use 2nd Carrier since it is a lower total cost
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 Logistics includes these major functions
of work
Order Processing
Inventory
Transportation
Warehousing,
Materials Handling,
and Packaging
Integrated through a
network of facilities
E.g. warehouses and
distribution centers

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The five functions of logistical work are
interrelated

Figure 2.1 Integrated Logistics

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 Order processing
Order processing is the transmission of customer
requirements to the supply chain
Accurate information is needed to achieve superior
logistical performance
Responsive supply chains require accurate and
timely information about customer purchase
behavior
Fast information flow enables improved work
balancing

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 Inventory
Inventory requirements of a firm are directly linked to the
facility network and the desired level of customer service
Inventory strategy seeks to achieve the desired customer
service with the minimum inventory commitment
Inventory strategy is based on a combination of
Core customer segmentation
Product profitability
Transportation integration
Time-based performance
Competitive performance

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 Transportation
Transportation is the operational area that
geographically moves and positions inventory
There are three basic ways to satisfy transportation
requirements
Operate a private fleet of equipment
Contract with dedicated transport specialists
Engage carriers that provide different transportation
services as needed on a per shipment basis

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 Warehousing, materials handling and
packaging
These work activities are integral parts of other logistical
functions
Inventory typically needs to be warehoused at selected times
during the logistics process
Transportation vehicles require materials handling for efficient
loading and unloading
Individual products are most efficiently handled when packaged
together into shipping cartons
Effective integration of these functions facilitates the speed
and overall ease of product flow throughout the logistical
system

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 Facilities network
The number, size and
geographical relationship
of facilities used to perform
logistical operations
directly impacts customer
service capability and cost
Types of facilities in the
logistics network include
Manufacturing plants,
warehouses, cross-dock
operations and retail stores
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 The 3 areas of the value-added logistic
process
Customer relationship management is the movement of
finished product to customers
Manufacturing production concentrates on managing
work-in-process inventory as it flows between stages of
manufacturing
Procurement is concerned with purchasing and arranging
inbound movement of materials, parts, and/or finished
inventory from suppliers into manufacturing or assembly
plants, warehouses or retail stores

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The scope of integrated logistical
operations

Figure 2.2 Logistical Integration

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 Tutorial
Why is least total cost performance not always
what a customer prefers? Illustrate a situation
that supports your answer?
What are the five principal value added roles
of logistics?
What are the major functions of logistics work?

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 Why is least total cost performance not always what a customer
prefers? Illustrate a situation that supports your answer?

Cost is only one of the several parameters for evaluating the logistics
options.
Some of the other factors are speed of delivery, consistency,
reliability and flexibility.
The more significant the service failure impact upon a customer
business, the greater the priority placed on error free logistical
performance. For example, online retailer promises its customer a
delivery within 2 days. A substantial part of its success as an online
retailer will depend on its ability to consistently keep its promise.
Hence the logistic partner of Amazon needs to adhere to these
customer requirements rather than concentrating on the reduction of
cost alone.

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