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Chapter 2:

Chapter 2:. Dimensions of Logistics. 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.

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Chapter 2:

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  1. Chapter 2: Dimensions of Logistics

  2. 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 firm’s logistics system but also recognizing that no logistics system operates in a vacuum. Management of Business Logistics, 7th Ed.

  3. What is Logistics? • Popular logistics terms: • Logistics Management • Business Logistics Management • Integrated Logistics Management • Materials Management • Physical Distribution Management • Marketing Logistics • Industrial Logistics • Distribution Management of Business Logistics, 7th Ed.

  4. Definition of Logistics: • Council of Logistics Management (CLM, 1985) • Logistics is the process of planning, implementing and controlling the efficient, effective flow and storage of raw materials, in-process inventory, finished goods and related information from point of origin to point of consumption for the purpose of conforming to customer requirements. Management of Business Logistics, 7th Ed.

  5. What is Logistics?:21st Century View of Logistics (4 subdivisions) 1. 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. 2. 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. Management of Business Logistics, 7th Ed.

  6. What is Logistics?:21st Century View of Logistics 3. 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. 4. Service Logistics – acquisition, scheduling, and management of the facilities/assets, personnel, and materials to support and sustain a service operation or business. Management of Business Logistics, 7th Ed.

  7. 3 major dimensions of Logistics • The macro environment of Logistics: Economy Perspective • The micro environment of Logistics: Firm dimension • The logistics components and its internal relationship Management of Business Logistics, 7th Ed.

  8. 1. 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. Management of Business Logistics, 7th Ed.

  9. Figure 2-2: Logistics Costs as a Percentage of GDP Management of Business Logistics, 7th Ed.

  10. Figure 2-3: Total Logistics Costs --- 1999 Management of Business Logistics, 7th Ed.

  11. 1. 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. Management of Business Logistics, 7th Ed.

  12. 1. 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. Management of Business Logistics, 7th Ed.

  13. Figure 2-4: Inventory Sales Ratio Management of Business Logistics, 7th Ed.

  14. 1. Logistics in the Economy: A Macro Perspective • Contributing to this decline • Improvement in transportation cost • Better inventory management • Turnover has had a very positive impact upon the return on investment for companies Management of Business Logistics, 7th Ed.

  15. The role of Logistics in Macro economic (i) Value added role (ii) Economic impact Management of Business Logistics, 7th Ed.

  16. (i) Add values to product/services: Four4 principal of economic utility • Form utility- (what) - production • Place utility- (where) - logistic • Time utility- (when) - logistic • Possession utility- (why) - marketing • Also referred to as the seven Rs --- Right product, Right quantity, Right condition, Right place, Right time, Right customer, and Right cost. Management of Business Logistics, 7th Ed.

  17. Figure 2-5 Fundamental Utility Creation in the Economy Management of Business Logistics, 7th Ed.

  18. (ii) Economic Impact: Four areas • Economic development and specialization • Variety of goods • Effects on prices • Land values Management of Business Logistics, 7th Ed.

  19. 2. Logistics in the Firm: The Micro Dimension a. Logistics Interfaces with Operations/Manufacturing b. Logistics Interfaces with Marketing c. Logistics Interfaces with Other Areas Management of Business Logistics, 7th Ed.

  20. a. Logistics Interfaces with Operations Manufacturing Examples: 1. Length of production runs • Balance economies of long production runs against increased costs of high inventories. 2. Seasonal demand • Acceptance of seasonal inventory to balance lead production times. Management of Business Logistics, 7th Ed.

  21. a. Logistics Interfaces with Operations Manufacturing 3. Supply-side interfaces • Stocking adequate supplies to ensure uninterrupted production now a logistics function. 4. Protective packaging • Principal purpose is to protect the product from damage. 5. Foreign & third party alternatives • Some logistics functions are being outsourced. Management of Business Logistics, 7th Ed.

  22. b. Logistics Interfaces with Marketing • The Marketing Mix – Four Ps (i) Price (ii) Product (iii) Promotion (iv) Place Management of Business Logistics, 7th Ed.

  23. Logistics in the Firm: (i) Price • Carrier pricing • Generally, since the larger the shipment, the cheaper the transportation rate, shipment sizes should be tailored to the carrier’s vehicle capacity where possible. • Matching schedules • Quantity discounts should be tied to carrier quantity discounts. • Volume relationships • Volumes sold will affect inventory requirements. Management of Business Logistics, 7th Ed.

  24. Logistics in the Firm: (ii) 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. Management of Business Logistics, 7th Ed.

  25. Logistics in the Firm: (iii) 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. Management of Business Logistics, 7th Ed.

  26. Logistics in the Firm: (iv) 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. Management of Business Logistics, 7th Ed.

  27. c. 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. Management of Business Logistics, 7th Ed.

  28. 3. The logistics components and its internal relationship (i) Logistics Activities (ii) Logistics Systems (iii) Logistics and Systems Analysis (iv) Techniques of Logistics System Analysis Management of Business Logistics, 7th Ed.

  29. Production planning Purchasing Customer service Site location Other activities (i) Logistics Activities • Transportation • Storage • Packaging • Materials handling • Order fulfillment • Forecasting 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. Management of Business Logistics, 7th Ed.

  31. (ii) 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 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) Management of Business Logistics, 7th Ed.

  33. Table 2-2 Analysis of Total Logistics Cost with a Change to Higher Cost Mode of Transport Management of Business Logistics, 7th Ed.

  34. Table 2-3 Analysis of Total Logistics Cost with a Change to More Warehouses Management of Business Logistics, 7th Ed.

  35. Figure 2-6 Nodes and Links in a Logistics System Management of Business Logistics, 7th Ed.

  36. Figure 2-7 A Simple Logistics Channel Management of Business Logistics, 7th Ed.

  37. Figure 2-8A Multi-Echelon Logistics Channel Management of Business Logistics, 7th Ed.

  38. Figure 2-9 A Complex Logistics Channel Management of Business Logistics, 7th Ed.

  39. (iii) 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. Management of Business Logistics, 7th Ed.

  40. (iii) 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. Management of Business Logistics, 7th Ed.

  41. Figure 2-10 Levels of Optimality in Economic Environments 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. Management of Business Logistics, 7th Ed.

  43. Table 2-4 Static Analysis of C & B Chemical Company (50,000 pounds of output) 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 2-11. Management of Business Logistics, 7th Ed.

  45. Figure 2-11Dynamic Analysis Management of Business Logistics, 7th Ed.

  46. 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 x= 70,588 pounds Dynamic Analysis Management of Business Logistics, 7th Ed.

  47. 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. Management of Business Logistics, 7th Ed.

  48. Figure 2-12 The Relationship between Required Inventory and Order Cycle Length from a Customer Perspective Management of Business Logistics, 7th Ed.

  49. Figure 2-13 The General Relationship of the Cost of Lost Sales to Inventory Cost Management of Business Logistics, 7th Ed.

  50. Figure 2-14 The General Relationship of the Cost of Lost Sales to Transportation Cost Management of Business Logistics, 7th Ed.

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