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Logistics Management

Dr.T.A.S.VijayaraghavanXLRI, Jamshedpur

Logistics

The branch of military science and operations dealing with the procurement, supply and maintenance of equipment, with the movement, evacuation, and hospitalization of personnel, with the provision of facilities and services and with related matters.

The planning, implementation and coordination of the details of a business and or other operation.

[French logistiques, equivalent to loger (to lodge), to quarter – of troops]

Webster’s Unabridged Dictionary

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One definition that some individuals refer to as the layperson’s description of logistics is the Seven R’s, which means ensuring the availability of the

♦ Right product, in the ♦ Right quantity and the ♦ Right condition, at the ♦ Right place, at the ♦ Right time, for the ♦ Right customer, at the ♦ Right cost.

Seven R’s

♦ Logistics is the planning, organising and controlling of all move-store activities that facilitate product flow from the point of raw material acquisition to the point of final consumption ♦Logistics is the physical movement of goods from supply points to final sale to customers and the associated transfer and holding of such goods at various intermediate storage points, accomplished in such manner as to contribute to the explicit goals of the organization

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Council of Supply Chain Management Professionals

Logistics Management is that part of Supply Chain Management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers' requirements.

www.cscmp.org

Council of Logistics Management is now renamed as Council of Supply Chain Management Professionals (CSCP) from January 2005

Another group interested in logistics- the International Society of Logistics(SOLE)-offers the following definition

The area of support management used throughout the life of the product or system to efficiently utilize resources assuring the adequate consideration of logistics elements during all phases of the life cycle so that timely influence on the system assures an effective approach to resource expenditures.

SOLE definition

www.sole.org

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Key Logistics Activities

Customer serviceDemand forecasting/ planningInventory managementLogistics communicationsMaterial handlingOrder processingPackaging

Parts and service supportPlant and warehouse site selectionProcurementReturn goods handlingReverse logisticsTraffic and transportationWarehousing and storage

Activities and Logistics Decisions

Transportationrate and contract negotiationmode and service selectionrouting and scheduling

Inventoriesfinished goods policiessupply schedulingshort term forecasting

Warehousingprivate vs. publicspace determinationwarehouse configurationStock layout and dock designstock placementCross-docking

Facility Locationdetermining location, number

and size of facilitiesallocating demand to facilities

Customer Servicedetermining customer wantsdetermining customer response to service changes

Materials Handlingequipment selection equipment replacementorder picking procedures

Packaging designOrder Processing

order procedure determinationProduction Scheduling

aggregate production quantitiessequencing and timing of

production runs

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Business Logistics within the firm

1. Traditional production / marketing structure fails to recognize the importance of activities between production and consumption

2. Logistics may suffer from poor coordinationa. marketing is concerned with

revenue generationb. production is responsible for

producing at lowest unit costc. purchasing is responsible for

acquisition at lowest unit cost

♦ Materials Management versus Physical Distribution

♦ Cost Centres

♦ Nodes versus Links

♦ Logistics Channel

Approaches to Analyzing Logistics Systems

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Physical Supply ( materials management) and Physical Distribution ( marketing logistics)

Raw MaterialSupply Points

Raw MaterialStorage

Manufacturing Finished goodStorage

Markets

Storage

Storage

Storage

A

B

C

Physical Supply Physical Distribution

Warehouse

Warehouse

Warehouse

Plant

Plant

Plant

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, constructionHeavy outbound - e.g., chemicalsReverse systems - e.g., returnable products

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♦ The division into physical supply and physical distribution is a very useful managerial or control perspective of the logistics activities.

♦ Cost differences that may exist between Physical Supply and Physical Distribution in terms of logistics requirements may have implications for the design of the logistics system.

♦ Although different management approaches may result for viewing these two, however, close coordination between them is necessary

Cost Centres

Logistics system is analysed on the basis of activity centres or cost centres since the possibility for reducing total logistics costs and/or improving service will occur by trading off one of these activity centres against another

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Total Cost ConceptTrade-off Concept

Systems Concept

Analysis of Total Logistics Cost with a Change to Higher Cost Mode of Transport

3.204.50Packaging

13.0015.00Total Cost

1.002.00Cost of Lost Sales

.751.50Warehousing

3.755.00Inventory

4.203.00Transportation

Cost Centers MotorRail

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Analysis of Total Logistics Cost with a Change to More Warehouses

3,600,0003,300,000Total Cost

100,000350,000Cost of Lost Sales

1,000,000600,000Warehousing

2,000,0001,500,000Inventory

500,000850,000Transportation

Five WarehousesThree WarehousesCost Centers

System 2System 1

Trade-offs

Cost to Cost

Cost to Service

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Transportation vs Inventory

Cost

Transportation Service

inventorytransportation

service

Rail Truck Air 0

Customer Service vs Cost

Cost

lost salecost

transportation, order,

inventorycosts

Improved Customer Service0 % 100 %

0

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No. of Warehouses

Cost inventory

transportation

Increasing no. of stocking points 0

Trade-off Examples

Faster transportation vs. reduction in pipeline (transit) inventoriesMake vs buy decisions regarding finished products and/or componentsCentralized vs decentralized warehousingAdding or reducing private fleet equipment vsoutsourcing transportationIncreasing frequency of shipments vs carrying larger inventoriesPublic vs private warehousing

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Trade-off Examples (cont’d)

Higher service levels vs lower inventory levelsLocations/types/no. of manufacturing facilities and/or warehousesHolding orders for consolidation (transportation) vs immediate shipping to reduce inventoriesInventory carrying costs vs order-set-up costsTrucking or quantity discount savings with larger lots vs cost of extra inventory

NODES AND LINKS

♦ The nodes are the established spatial points where the movement of goods is stopped for storage or processing

♦ The links represent the transportation network connecting the nodes

♦ This has paved way for Operations Research/ Management Science techniques and models to play a significant role in logistics

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Nodes and Links in a Logistics System

LOGISTICS CHANNEL

This represent the network of intermediaries engaged in various functions such as transfer, storage, handling and communication that contribute to the efficient flow of goods

INDUSTRIAL CAPITAL GOODSProduct dominated

CONSUMER DURABLES

PERISHABLE GOODS Market dominated

Manufacturer

Consumer

Manufacturer

Central Warehouse

Regional Warehouse

Retailer

Consumer

Manufacturer

Commodity Market

Wholesale Market

Retailer

Consumer

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A Simple Logistics Channel

A Multi-Echelon Logistics Channel

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A Complex Logistics Channel

Direct SellingSupplier

Customer

Supplier

Intermediary

Customer

Selling through one Intermediary

Reducing the cost of market contact by intermediaries

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Factors Affecting the Cost and Importance of Logistics

Competitive RelationshipsInventory/order cycle lengthInventory/lost sales effect Transportation/lost sales effect

Product RelationshipsProduct dollar value/logistics costs Weight density/logistics costs Susceptibility to loss & damage/logistics costs

Spatial Relationships

Value-Added Role of Logistics

Most commonly referred to in terms of economic utilities:

Form utility (what)Place utility (where)Time utility (when)Possession utility (why)

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Fundamental Utility Creation in the Economy

1997 Global Logistics Expenditures

Region Country

Gross Domestic Product (GDP) (US$ in Billions)

Logistics Cost (US$ in Billions)

Logistics Cost to GDP

North America Canada 658 80 12.1Mexico 695 106 15.3United States 8083 849 10.5Total 240 1035 11

Europe Belgium/ Lux. 240 27 11.4Denmark 123 16 12.9France 1320 158 12Germany 1740 228 13.1Greece 137 17 12.6Ireland 60 8 14Italy 1240 149 12Netherlands 344 41 11.9Portugal 150 19 12.9Spain 642 94 14.7United Kingdom 1242 125 10.1Total 7238 884 12.2

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1997 Global Logistics Expenditures (cont.)

Region Country

Gross Domestic Product (GDP) (US$ in Billions)

Logistics Cost (US$ in Billions)

Logistics Cost to GDP (%)

Pacific-Rim PRC 4250 718 16.9India 1534 236 15.4Hong Kong 175 24 13.7Japan 3080 351 11.4Korea 631 78 12.3Singapore 85 12 13.9Taiwan 308 40 13.1Total 10063 1459 14.5

South America Brazil 1040 156 15Venezuela 185 24 12.8Argentina 348 45 13Total 1573 225 14.3

Remaining Other Countries 9690 1492 15.4Total Logistics Expenditures 38000 5095000 13.4

ProductionOperationsSample activities•Quality control•DetailedProductionScheduling•Equipment maint..•Capacity planning•Work

Interfaceactivities:•ProductScheduling•Plantlocation•purchasing

LogisticsSampleactivities•Transport•Inventory•orderprocessing•Materialshandling

Interfaceactivities•Customer•service standards•pricing•packaging•Retaillocation

MMarketing-logisticsinterface

MarketingSample activities•Promotion•Market research•product mix•sales force management

Productionlogisticsinterface

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HOW SHOULD ORDERS BE HANDLED?ORDER PROCESSING

WHERE SHOULD STOCKS TO BE LOCATED?WAREHOUSING

HOW MUCH STOCK SHOULD BE HELD?INVENTORY

HOW SHOULD GOODS BE SHIPPED?TRANSPORTATION

MAJOR DECISION ISSUES

BEGINS WITH A CUSTOMER ORDER

TRY TO SHORTEN THE “ORDER-TO-REMITTANCE CYCLE

ORDER PROCESSING

FINISHED GOODS NEED TO BE STORED UNTIL THEY ARE SOLD

DECIDE ON NUMBER OF STOCKING LOCATIONS

WAREHOUSING

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•It affects the customer satisfaction•Inventory cost increases at an increasing approaches 100%•Involves when to order and how much to order •Order processing costs Vs inventory carrying costs

Variables which affect stock levels•Delays in supplying goods to warehouses•Variations in customer requirements•Fluctuations in handling times•Deterioration of goods held in stock•Varying quantity discounts•Costs of placing orders•Return on capital secured as inventory•Variations in warehousing costs•Differences in order lead times•Acceptable level of risk for stock outs

INVENTORY

OPERATIONAL FACTORS

Covering the operating environment, the product,the company and its customers

IDENTIFYING THE FEATURES OF EACH ALTERNATIVE MODE OF TRANSPORT

CHANNEL SITUATION

Covering the alternative approaches to the total distribution system

FACTORS AFFECT CHOICE OF TRANSPORT MODES

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Customer service levels

Facility location decisions

Inventorydecisions Transportation decisions

Customer service levels

LOGISTICS PLANNING TRIANGLE

.

.

Transport Strategy•Modes of transportCarrier routing/scheduling•Shipment size/consolidation

Inventory strategy•Inventory levels•Deployment of inventories•Control methods

Location Strategy•Number, size, and location of facilities•Assignment of stocking points to sourcing points•Assignment of demand to stocking points orsourcing points

•Private/public warehousing

Customerservice goals

TRIANGLE OF LOGISTICALDECISION MAKING

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Level of DecisionsType of Decision Strategic Tactical Operational

Location No of facilities,size and location

Inventorypositioning

Routing, expeditingand displacing

Transportation Mode selectionSeasonalservice mix

Replenishment quantitiesand timing

Order processing Selecting anddesigning orderentry system

Priority rulesfor customerorders

Expediting orders

Customer service Setting standards

Warehousing Layout, siteselection

Seasonal spacechoices

Order filling

Purchasing Policies Contracting, vendor selection

Order releasing