Business Logistics/Supply Chain—A Vital Subject

1. Business Logistics/Supply Chain—A Vital Subject The supply chain is simply another way of saying “the whole process of business.” Dragan Cisic

2. Transportation Transportation Customers Warehousing Information flows Factory Transportation Vendors/plants/ports Transportation Warehousing The Immediate Supply Chain for an Individual Firm 1-2

3. Logistics Defined Supply Chain Management Defined

4. Evolution of Supply Chain Management

5. The Logistics/SC Mission

6. A Revised Strategy is Generating Great Top Management Interest Historical perspective of distribution: “The last frontier of cost economies” The contemporary view: Distribution is a new frontier for demand generation—a competitive weapon. Peter Drucker, 1962 Both views are now important!

7. Critical Customer Service Loop

8. Physical Distribution Costs Logistics cost are about 10% of sales w/o purchasing costs Add one-third for inbound supply costs Source: Herb Davis & Company

9. Traditional View: Logistics in the Economy (1990, 1996) • Freight Transportation $352, $455 Billion • Inventory Expense $221, $311 Billion • Administrative Expense $27, $31 Billion • Logistics Related Activity 11%, 10.5% of GNP Source: Cass Logistics

10. Traditional View: Logistics in the Manufacturing Firm Profit Logistics Cost • Profit 4% • Logistics Cost 21% • Marketing Cost 27% • Manufacturing Cost 48% Marketing Cost Manufacturing Cost

11. Supply Chain Management: The Magnitude in the Traditional View • Estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics and supply chain strategies • A typical box of cereal spends 104 days from factory to sale • A typical car spends 15 days from factory to dealership • Laura Ashley turns its inventory 10 times a year, five times faster than 3 years ago

12. Supply Chain Management: The True Magnitude • Compaq estimates it lost $.5 billion to $1 billion in sales in 1995 because laptops were not available when and where needed • When the 1 gig processor was introduced by AMD, the price of the 800 mb processor dropped by 30% • P&G estimates it saved retail customers $65 million by collaboration resulting in a better match of supply and demand

13. Freight transportation costs The United Nations has estimated the costs of data flows associated with international trade to be between 4-7 percent of the value of the goods (UNCID 1990), which is roughly consistent with estimates of administrative costs as 10-15 percent of the price of products (Brousseau 1994).

14. Indirect Costs as % of Total % of total cost 60 Labor 50 40 Material 30 20 Indirect 10 0 1900 1900 1990 1990 Source: Institute for Competitive Design

15. Significance of Logistics

16. Profit G & A Marketing Logistics Overhead Materials Labor Effect on Logistics Foreign Outsourcing Domestic sourcing Foreign sourcing Increase Profit G & A Marketing Increase Logistics Tariffs Overhead Materials Reduction Labor

17. Business logistics Physical supply Physical distribution (Materials management) Sources of Plants/ Customers supply operations • Transportation • Transportation • Inventory maintenance • Inventory maintenance • Order processing • Order processing • Acquisition • Product scheduling • Protective packaging • Protective packaging • Warehousing • Warehousing • Materials handling • Materials handling • Information maintenance • Information maintenance Scope of the Supply Chain for Most Firms Focus firm’s internal supply chain 1-14

18. Key Activities/Processes Primary · - Setting customer service goals - Transportation - Inventory management - Location Secondary, or supporting · - Warehousing - Materials handling - Acquisition (purchasing) - Protective packaging - Product scheduling Order processing -

19. The Supply Chain is Multi-Enterprise Scope in reality Focus Company Suppliers Customers Customers/ Supplier’s End users suppliers Acquire Convert Distribute Product and information flow

20. Reality of SC Scope

21. Interfunctional coordination Interorganizational coordination SUPPLY CHAIN MANAGEMENT Activity and process administration The Multi-Dimensions of SC

22. Customer service goals • The product • Logistics service • Information sys. The Logistics Strategy Triangle

24. Relationship of Logistics to Marketing and Production LOGISTICS Sample activities: MARKETING PRODUCTION/ · Transport Interface Sample OPERATIONS · Inventory Interface activities: activities: Sample activities: · · Order activities: Customer · Promotion · Quality control · processing Product service · Market · Detailed production scheduling standards · Materials research scheduling · · Plant Pricing handling · Product · Equipment maint . · location Packaging mix · Capacity planning · · Purchasing Retail · Sales force · Work measurement location management & standards Production- Marketing- logistics logistics interface interface Internal Supply Chain 1-21

25. Efficiency Responsiveness Supply chain structure Facilities Transportation Inventory Information Drivers A Framework for Structuring Drivers

26. Facilities • Role in the supply chain • the “where” of the supply chain • manufacturing or storage (warehouses) • Role in the competitive strategy • economies of scale (efficiency priority) • larger number of smaller facilities (responsiveness priority)

27. Inventory: Role in the Supply Chain • Inventory exists because of a mismatch between supply and demand • Source of cost and influence on responsiveness • Impact on • material flow time: time elapsed between when material enters the supply chain to when it exits the supply chain • throughput • rate at which sales to end consumers occur • I = RT (Little’s Law) • I = inventory; R = throughput; T = flow time • Example • Inventory and throughput are “synonymous” in a supply chain

28. Inventory: Role in Competitive Strategy • If responsiveness is a strategic competitive priority, a firm can locate larger amounts of inventory closer to customers • If cost is more important, inventory can be reduced to make the firm more efficient

29. Transportation: Role inthe Supply Chain • Moves the product between stages in the supply chain • Impact on responsiveness and efficiency • Faster transportation allows greater responsiveness but lower efficiency • Also affects inventory and facilities

30. Information: Role inthe Supply Chain • The connection between the various stages in the supply chain – allows coordination between stages • Crucial to daily operation of each stage in a supply chain – e.g., production scheduling, inventory levels

31. Purchasing Costs • Manufactures spend 55% of each dollar on purchased goods and services • Approximately 60-80% of operating expense • Direct manufacturing costs have declined to between five and 15% of total operating costs • As little as 2% for some high-tech industries • Service industries spend less on purchased materials than manufacturing

32. The Sourcing Process

33. Logistics – General perception • General perception in logistics that assets such as stock or vehicles need to exist physically, and need to be identifiable as discrete entities. • By treating logistics systems in strict physical terms we impose constraints on them which can restrict their flexibility and can limit the utilisation of resources.

34. Virtual logistics • Assets are treated in terms of their availability, not their identity or their physical form. • This provides much greater flexibility in how systems are designed, how resources are sourced, and how assets are utilised. • Virtual logistics allows logistics resources to be treated as commodities, in a similar way to how currencies are treated by banks. • This means that resources can be lent, borrowed, or traded; and flexibly consolidated, apportioned, and allocated. • This creates many powerful new possibilities in the design of logistics systems, and means that major improvements in efficiency become possible.

35. Financial system example • Oncemoneyincirculationwasintheformofpreciousmetalssuch as silver or gold. • By holding their own assets, theymighthaveachievedgreatersecurity, but theyincurred a highnotional or actualcostdue to thefactthattheyneededtostoreandguardtheirassets, andtheyriskedlosingthemdue to accidents, damage, or theft. • Thenpapermoneywasintroducedandbankswere, ineffect, able to createmoneyfromnowhere, bylending more moneythanthey had as reserves. • Today, werarelyholdanything but modestsumsofmoneyphysically, andtheeffectivenessofthebankingsystemcannotbedenied.

36. Virtual logistics systems • Virtual logistics resources may be traded in much the same way as shares and foreign currencies are traded by banks or individuals. • Through the use of computer applications and the Internet, it becomes feasible to do this at a very low level in logistics operations. • Such resources could be purchased, utilised remotely, and lent or sold when surplus to requirements.

37. Design of virtual logistics systems • Treatmentofassetsintermsoffunctionandavailability, ratherthan as physicalobjectswithparticularidentityandform, sotheycanbetreatedlikecommodities. • Dissociationofownershipandcontrolofassetsfromtheirphysicallocation, sotheycanbeutilisedremotely. • Dissociationofinformationmovementsfromphysicalmovements, sothat change ofownership or change ofapplicationdoesnotnecessitatephysicalmovement.

38. Design of virtual logistics systems • Dissociation of physical resources from specific operations or processes. • Shared, public, access to logistics resource information through Internet applications. • Computer based trading of logistics resources between suppliers and users. • Integration of warehousing, transport, and production for the purposes of maintaining product availability and controlling stock.