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Logistics
2-2
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
2-3
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.
2-4
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
2-5
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
2-6
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
2-7
1980 2007
$ Billion
1980

Logistics Cost of $451 billion is 16.1% of GDP

Transportation ($214B) is 47.5% of Logistics Cost
2007

Logistics Cost of $1398B is 10.1% of GDP

Transportation ($857B) is 61.3% of Logistics Cost
Source: “19
th”
Annual “State of Logistics Report” © Council of Supply Chain Management Professionals, 2008
Transportation has become the major
logistics cost component in the USA
2-8
Logistics costs trends from Table 2.1


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
2-9
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
2-10
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 customer’s 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
2-11
Basic logistical service may not fit all customers

Basic logistics service describes the level of service a
firm provides all established customers

However, some customers require unique or special value-added
services

Managers must realize that customers are different and that
services provided must be matched to accommodate
unique requirements and purchase potential
2-12
Cost minimization using the total 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

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?
Traditional Cost Logistics Model Total Cost Logistics Model
2-13
Different perspectives on cost minimization
Minimize order processing cost

+
Minimize inventory cost
+
Minimize transportation cost
+
Minimize warehousing, materials
handling and packaging cost
+
Minimize facility cost
__________________________
Lowest logistics cost
Minimize (order processing + inventory +
transportation + warehousing,
materials handling and packaging +
facility) cost
_________________________
Lowest total logistics cost
Traditional Cost Logistics Model Total Cost Logistics Model
2-14
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
2-15
Example of evaluating alternatives to find lowest
total cost

Minimize transportation cost

Compare 1
st
carrier at $250 vs. 2
nd
carrier at $270

Decision is to use 1
st
Carrier to save $20

Minimize total of transportation and inventory cost

Compare 1
st

carrier at $250 + $27.40 = $277.40 vs. 2
nd
carrier at $270

Decision is to use 2
nd
Carrier since it is a lower total cost
Traditional Cost Method
Total Cost Method
Daily cost of holding product
Daily cost of holding product
=
=
x
x
/365
/365
Annual holding
Annual holding
cost
cost
Product value
Product value
= (.40 x $25,000)/ 365 = $27.40
= (.40 x $25,000)/ 365 = $27.40
2-16
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
2-17
Integrated logistics framework

Goal is to achieve customer satisfaction at the lowest Total
Cost

Decisions in one functional area will impact cost of all
others

We integrate the logistical functions into a coherent
framework starting with the customer (Order processing)
and ending with the customer (Transportation and Delivery)
2-18
The five functions of logistical work are
interrelated
Figure 2.1 Integrated Logistics
2-19

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
2-20
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
2-21
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
2-22
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
2-23
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
2-24
The scope of integrated logistical operations
Figure 2.2 Logistical Integration
2-25
Inventory flow

Managers must be concerned
with the movement and storage
of inventory in 3 major forms


Materials

Work-in-process

Finished products

Logistical operations should
add value by moving inventory
when and where needed

Materials and components gain
value at each step of their
transformation into finished
inventory

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