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