Logistics
McGraw-Hill/Irwin Copyright © 2010 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
2-2
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.
2-3
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
2-4
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
2-5
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
2-6
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
2-7
Cost minimization using the total cost logistics model
Traditional Cost Logistics Model Total Cost Logistics Model
• Focused on achieving the lowest • Focused on achieving the lowest total
possible cost for each individual cost across each function of logistics
function of logistics • A cost decision in one function should
– For example, Transport the material consider impact to costs of all other
the cheapest way possible logistics functions
• Expected lowest cost based on – For example, Transporting material
decisions that were cheapest for the cheapest way is slower than
individual functions other choices. This requires an
• increase in storage cost to hold the
Ignored the impact of cost decisions
material longer
across logistics functions
– Would it still be a lower cost to use
the cheapest mode of transport?
2-8
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
2-9
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
– Daily holding cost = (annual holding cost x product value)/365
2-10
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. 2 nd carrier at $270
• Decision is to use 2nd Carrier since it is a lower total cost
2-11
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
2-12
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)
2-13
The five functions of logistical work are
interrelated
Figure 2.1 Integrated Logistics 2-14
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
2-15
2-16
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
2-17
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
2-18
Inventory
2-19
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
2-20
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
2-21
Transportation
• Cost
• Speed
• Consistency
2-22
Transportation
• 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
2-23
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
2-24
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
2-25
Logistical Operations
• Inventory Flow
• Information Flow
2-26
The scope of integrated logistical operations
Figure 2.2 Logistical Integration 2-27
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
2-28
The 3 areas of the value-added logistic process
• Customer accommodation is the movement of finished
product to customers
• Manufacturing support 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
2-29
Information flow
• Information flow identifies specific
locations within a logistical system
that have requirements
– Information also integrates the three
operating areas
• Information facilitates coordination of
planning and control of day-to-day
operations
• Logistical information has two major
components
– Planning / coordination information
– Operational information needed to
complete work
2-30
Logistical integration requires achieving six objectives
simultaneously
Responsiveness
Variance reduction
Inventory reduction
Shipment consolidation
Quality
Life cycle support
2-31
Responsiveness
• Firm’s ability to satisfy customer requirements in a
timely manner
2-32
Variance Reduction
• Variance results from failure to perform any
expected facet of logistical operations as
anticipated.
2-33
Inventory Reduction
• An integrated logistic system must control asset
commitment and turn velocity
2-34
Shipment Consolidation
• Shipment consolidation end goal is reduction of
transportation costs.
2-35
Quality
• A fundamental operational objective is continuous
quality improvement
2-36
Life Cycle Support
• The logistics support for the life of the product.
2-37
Logistical operating arrangements
• All logistical arrangements share two common characteristics
– They are designed to manage inventory
– The range of logistics alternatives is limited by available technology
• Three widely utilized structures are
– Echelon (traditional) is a linear flow from origin to destination through buffers or
warehouses/distribution centers
– Direct is designed to ship products directly to customer’s destination from one
or a limited number of centrally located inventories
– Combined is a combination of Echelon and Direct, depending on the product,
market, or customer
2-38
Figure 2.3 Echelon Structured Logistics
2-39
Logistical operating arrangements
• All logistical arrangements share two common characteristics
– They are designed to manage inventory
– The range of logistics alternatives is limited by available technology
• Three widely utilized structures are
– Echelon (traditional) is a linear flow from origin to destination through buffers or
warehouses/distribution centers
– Direct is designed to ship products directly to customer’s destination from one
or a limited number of centrally located inventories
– Combined is a combination of Echelon and Direct, depending on the product,
market, or customer
2-40
Figure 2.4 Combined Echelon and Direct
Delivery
2-41
Flexible structures are programs to service customers
using alternatives
• Flexible operations are preplanned contingency strategies to prevent
logistical failures
– For example, a warehouse is out of an item so a contingency policy assigns
the total order to another warehouse
• The structure appears the same as a combined arrangement, but
with the ability to change the logistical structure to suit the service
need
– Different approaches for different situations
– Very common with “factory-less” companies like Nike and Best Buy
2-42
Example situations for flexible logistics structure
• The customer-specified delivery facility might be near a
point of equal logistics cost or equal delivery time from two
different logistics facilities
• The size of a customer’s order creates improved logistical
efficiency if serviced through an alternative channel
arrangement
• Decision to use a selective inventory stocking strategy
• Agreements between firms to move selected shipments
outside the established echeloned or direct arrangements
2-43
Example situations for flexible logistics structure
• The customer-specified delivery facility might be
near a point of equal logistics cost or equal delivery
time from two different logistics facilities
2-44
Example situations for flexible logistics structure
• The size of a customer’s order creates improved logistical
efficiency if serviced through an alternative channel
arrangement
2-45
Example situations for flexible logistics structure
• Decision to use a selective inventory stocking strategy
2-46
Example situations for flexible logistics structure
• Agreements between firms to move selected shipments
outside the established echeloned or direct arrangements
2-47
Supply chain synchronization
• Supply chain synchronization is
the operational integration of
multiple firms across a supply
chain
– Seeks to coordinate the flow of
materials, products and
information between supply chain
partners to reduce duplication of
effort
– Seeks to reengineer internal
operations of individual firms to
leverage overall supply chain
capability
2-48
The logistics performance cycle is the basic unit of
supply chain design and operational control
• The performance cycle represents elements of work
necessary to complete the logistics related to customer
accommodation, manufacturing or procurement
• A performance cycle consists of the following elements
– Nodes
– Links
– Inventory
• Base stock
• Safety stock
– Input and output requirements
2-49
Performance Cycle
Base Stock
Safety Stock
2-50
