Chapter 2 Dimensions of Logistics Learning Objectives After

Chapter 2: Dimensions of Logistics

Learning Objectives - After reading this chapter, you should be able to do the following: n n Understand the role and importance of logistics in private and public organizations. Discuss the impact of logistics on the economy and how effective logistics management contributes to the vitality of the economy. Understand the value-added roles of logistics on both the macro and micro level. Explain logistics systems from several perspectives. Chapter 2 Management of Business Logistics, 7 th Ed. 2

Learning Objectives n n Understand the relationship between logistics and the other important functional areas in a company, including manufacturing, marketing, and finance. Discuss the important management activities in the logistics function. Chapter 2 Management of Business Logistics, 7 th Ed. 3

Learning Objectives n n Analyze logistics systems from several different perspectives to meet different objectives. Determine the total costs and understand the cost trade-offs in a logistics system from a static and dynamic perspective. Chapter 2 Management of Business Logistics, 7 th Ed. 4

Logistics Profile: Jordano Foods n n n Jordano Foods is a major vendor for SAB Distribution, and must decide if it wants a supply chain relationship with SAB. Jordano’s CEO put together a study team to evaluate the impact of adding a logistics systems approach. As you read this chapter, look for ways for Jordano to improve its logistics processes and supply chain relationship with SAB. Chapter 2 Management of Business Logistics, 7 th Ed. 5

Dimensions of Logistics: Introduction n Logistics has come a long way since the 1960 s. 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. Chapter 2 Management of Business Logistics, 7 th Ed. 6

Figure 2 -1 Contemporary Supply Chain Pipeline Chapter 2 Management of Business Logistics, 7 th Ed. 7

Figure 2 -2: Logistics Costs as a Percentage of GDP Chapter 2 Management of Business Logistics, 7 th Ed. 8

Logistics in the Economy: A Macro Perspective n n 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-1970 s 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. Chapter 2 Management of Business Logistics, 7 th Ed. 9

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

Figure 2 -4: Inventory Sales Ratio Chapter 2 Management of Business Logistics, 7 th Ed. 11

Logistics in the Economy: A Macro Perspective n n 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. Chapter 2 Management of Business Logistics, 7 th Ed. 12

Logistics in the Economy: A Macro Perspective n n n 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. Chapter 2 Management of Business Logistics, 7 th Ed. 13

What is Logistics? n n n Increased recognition through news media, corporate-owned trailer promotions, and television Increased sensitivity to service quality provided by logistics Logistics definitions provided in Table 2 -1 on the following slide. Chapter 2 Management of Business Logistics, 7 th Ed. 14

Table 2 -1: Logistics Definitions Chapter 2 Management of Business Logistics, 7 th Ed. 15

What is Logistics? n Popular logistics terms: n Logistics Management n Business Logistics Management n Integrated Logistics Management n Materials Management n Physical Distribution Management n Marketing Logistics n Industrial Logistics n Distribution Chapter 2 Management of Business Logistics, 7 th Ed. 16

What is Logistics? : 21 st Century View of Logistics n n 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. 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. Chapter 2 Management of Business Logistics, 7 th Ed. 17

What is Logistics? : 21 st Century View of Logistics n n 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. Service Logistics – acquisition, scheduling, and management of the facilities/assets, personnel, and materials to support and sustain a service operation or business. Chapter 2 Management of Business Logistics, 7 th Ed. 18

What is Logistics? : Value-Added Role of Logistics n n Most commonly referred to in terms of economic utilities: n Form utility (what) n Place utility (where) n Time utility (when) n Possession utility (why) Also referred to as the seven Rs --- Right product, Right quantity, Right condition, Right place, Right time, Right customer, and Right cost. Chapter 2 Management of Business Logistics, 7 th Ed. 19

Figure 2 -5 Fundamental Utility Creation in the Economy Chapter 2 Management of Business Logistics, 7 th Ed. 20

Logistics in the Firm: The Micro Dimension n Logistics Interfaces with Operations/Manufacturing Logistics Interfaces with Marketing Logistics Interfaces with Other Areas Chapter 2 Management of Business Logistics, 7 th Ed. 21

Logistics in the Firm: Logistics Interfaces with Operations Manufacturing n n Length of production runs n Balance economies of long production runs against increased costs of high inventories. Seasonal demand n Acceptance of seasonal inventory to balance lead production times. Chapter 2 Management of Business Logistics, 7 th Ed. 22

Logistics in the Firm: Logistics Interfaces with Operations/Manufacturing n n n Supply-side interfaces n Stocking adequate supplies to ensure uninterrupted production now a logistics function. Protective packaging n Principal purpose is to protect the product from damage. Foreign & third party alternatives n Some logistics functions are being outsourced. Chapter 2 Management of Business Logistics, 7 th Ed. 23

Logistics in the Firm: The Micro Dimension n Logistics Interfaces with Marketing: The Marketing Mix – Four Ps n Price n Product n Promotion n Place Chapter 2 Management of Business Logistics, 7 th Ed. 24

Logistics in the Firm: Price n n n Carrier pricing n 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 n Quantity discounts should be tied to carrier quantity discounts. Volume relationships n Volumes sold will affect inventory requirements. Chapter 2 Management of Business Logistics, 7 th Ed. 25

Logistics in the Firm: Product n Consumer packaging n 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. n A minor correction in any of the above could conceivably cost (or save) millions of dollars in logistical costs. n Logistics costs are not necessarily paramount, but they need to be considered in the decision making process. Chapter 2 Management of Business Logistics, 7 th Ed. 26

Logistics in the Firm: Promotion n n Push versus pull n 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. n Pull strategies tend to be more erratic. n Push strategies tend to more predictable. Channel competition n The more popular a product, the easier it is to persuade channel members to promote your product. Chapter 2 Management of Business Logistics, 7 th Ed. 27

Logistics in the Firm: Place n n Wholesalers n 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 n 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. Chapter 2 Management of Business Logistics, 7 th Ed. 28

Logistics Interfaces with Other Areas n n Manufacturing and marketing are probably the two most important internal, functional interfaces with logistics. Other important interfaces now include finance and accounting. n Logistics can have a major impact on return on assets and return on investment. n Logistics costs reported by cost systems measure supply chain trade-offs and performance. Chapter 2 Management of Business Logistics, 7 th Ed. 29

Logistics Activities n n n Transportation Storage Packaging Materials handling Order fulfillment Forecasting Chapter 2 n n n Production planning Purchasing Customer service Site location Other activities Management of Business Logistics, 7 th Ed. 30

On the Line: Toyota Distribution n n 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. Chapter 2 Management of Business Logistics, 7 th Ed. 31

Approaches to Analyzing Logistics Systems: Materials Management v. Physical Distribution n n 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 n Balanced system - e. g. , consumer products n Heavy inbound - e. g. , aircraft, construction n Heavy outbound - e. g. , chemicals n Reverse systems - e. g. , returnable products Chapter 2 Management of Business Logistics, 7 th Ed. 32

Approaches to Analyzing Logistics Systems n n n Cost Centers n 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 n Nodes are spatial points (warehouses, plants, etc. ); n Links are the transportation network (rail, motor, air, pipe and water). (see Figure 2 -6) Logistics Channel n The network of intermediaries involved in the logistics system. (see Figures 2 -7, 2 -8, and 2 -9) Chapter 2 Management of Business Logistics, 7 th Ed. 33

Table 2 -2 Analysis of Total Logistics Cost with a Change to Higher Cost Mode of Transport Cost Centers Transportation Rail Motor $ 3. 00 $ 4. 20 Inventory 5. 00 3. 75 Packaging 4. 50 3. 20 Warehousing 1. 50 . 75 Cost of Lost Sales 2. 00 1. 00 $ 15. 00 $ 13. 00 Total Cost Chapter 2 Management of Business Logistics, 7 th Ed. 34

Table 2 -3 Analysis of Total Logistics Cost with a Change to More Warehouses Cost Centers Transportation Inventory System 1 System 2 Three Warehouses Five Warehouses $ 850, 000 $ 500, 000 1, 500, 000 2, 000 Warehousing 600, 000 1, 000 Cost of Lost Sales 350, 000 100, 000 $ 3, 300, 000 $ 3, 600, 000 Total Cost Chapter 2 Management of Business Logistics, 7 th Ed. 35

Figure 2 -6 Nodes and Links in a Logistics System Chapter 2 Management of Business Logistics, 7 th Ed. 36

Figure 2 -7 A Simple Logistics Channel Chapter 2 Management of Business Logistics, 7 th Ed. 37

Figure 2 -8 A Multi-Echelon Logistics Channel Chapter 2 Management of Business Logistics, 7 th Ed. 38

Figure 2 -9 A Complex Logistics Channel Chapter 2 Management of Business Logistics, 7 th Ed. 39

Logistics and Systems Analysis n Cost Perspective n Keep in mind that the most efficient systems are not always comprised of each system component operating at its lowest possible cost. n The critical concern is to have the entire system operating at its lowest total cost. Chapter 2 Management of Business Logistics, 7 th Ed. 40

Logistics and Systems Analysis n Level of Optimality n There are often constraints working which result in sub-optimal outcomes. n Additionally, logistics systems must work in harmony with marketing, finance, production, etc. --- this may also result in sub-optimal logistics performance. n See Figure 2 -10 on next slide. Chapter 2 Management of Business Logistics, 7 th Ed. 41

Figure 2 -10 Levels of Optimality in Economic Environments Chapter 2 Management of Business Logistics, 7 th Ed. 42

Techniques of Logistics System Analysis: Short-Run/Static Analysis n n 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. Chapter 2 Management of Business Logistics, 7 th Ed. 43

Table 2 -4 Static Analysis of C & B Chemical Company (50, 000 pounds of output) Chapter 2 Management of Business Logistics, 7 th Ed. 44

Techniques of Logistics System Analysis: Long-Run/Dynamic Analysis n n 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. Chapter 2 Management of Business Logistics, 7 th Ed. 45

Figure 2 -11 Dynamic Analysis Chapter 2 Management of Business Logistics, 7 th Ed. 46

Dynamic Analysis System 1 Total Cost = Fixed Costs + Variable Cost/unit x number of units y = $4200 + 0. 0315 x System 2 Total Cost = Fixed Costs + Variable Cost/unit x number of units y = $4800 + 0. 0230 x Trade-off Point System 1 Total Costs = System 2 Total Costs $4200 + 0. 0315 x = $4800 + 0. 0230 x 0. 0085 x = $600 x = 70, 588 pounds Chapter 2 Management of Business Logistics, 7 th Ed. 47

Logistics in the Firm: Factors Affecting the Cost and Importance of Logistics n n n Competitive Relationships n Inventory/order cycle length – see Figure 2 -12. n Inventory/lost sales effect – see Figure 2 -13. n Transportation/lost sales effect - see Figure 2 -14. Product Relationships n Product dollar value/logistics costs – see Figure 2 -15. n Weight density/logistics costs – see Figure 2 -16. n Susceptibility to loss & damage/logistics costs – see Figure 2 -17. Spatial Relationships n Examine Figure 2 -18. Chapter 2 Management of Business Logistics, 7 th Ed. 48

Figure 2 -12 The Relationship between Required Inventory and Order Cycle Length from a Customer Perspective Chapter 2 Management of Business Logistics, 7 th Ed. 49

Figure 2 -13 The General Relationship of the Cost of Lost Sales to Inventory Cost Chapter 2 Management of Business Logistics, 7 th Ed. 50

Figure 2 -14 The General Relationship of the Cost of Lost Sales to Transportation Cost Chapter 2 Management of Business Logistics, 7 th Ed. 51

Figure 2 -15 The General Relationship of Product Dollar Value to Various Logistics Costs Chapter 2 Management of Business Logistics, 7 th Ed. 52

Figure 2 -16 The General Relationship of Product Weight Density to Logistics Costs Chapter 2 Management of Business Logistics, 7 th Ed. 53

Figure 2 -17 The General Relationship of Product Susceptibility to Loss and Damage to Logistics Costs Chapter 2 Management of Business Logistics, 7 th Ed. 54

Figure 2 -18 Logistics and Spatial Relations Chapter 2 Management of Business Logistics, 7 th Ed. 55

Chapter 2: Summary and Review Questions Students should review their knowledge of the chapter by checking out the Summary and Study Questions for Chapter 2. This is the last slide for Chapter 2

End of Chapter 2 Slides Dimensions of Logistics