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Part I : Introduction and Planning

Chapter 1 : Business logistics – A vital subject

Introduction

• Today, consumption and production take place only within a very limited geographic region. (some countries of Asia and Africa).

• Few foods are imported from other areas.

• Reason:lack of a well-developed and inexpensive logistics system.

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BOX 1.1. EXAMPLEU. S. and South Korea buy videotape

recorder and computer software.Because of the differences in local labor cost,

tariffs, transportation, and product quality, the effective price to the consumers differs.

Consumer in Videotape recorder W-P software Total

South Korea $250 $500 $750 United States 400 300 700

The economics $1,450

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BOX 1.1. EXAMPLE

South Korea has low labor costs for making videotape recorders.

U. S. has low cost and high quality in producing software.

The benefits of trading products when transportation is inexpensive.

Consumer in Videotape recorder W-P software Total

South Korea $250 $350(imports from U.S.) $600 United States 300 (imports from South Korea). 300 600

The economics $1,200

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• This exchange process follows the principle of comparative advantage.

• Logistics activities provide the bridge between production and market locations that are separated by time and distance.

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Business logistics defined1

• Webster’s dictionaryThe branch of military science having to do with procuring, maintaining, and transporting materiel, personnel, and facilities.

• Council of Logistics Management

Logistics is the process of planning, implementing,and controlling the efficient, cost-effective flow and storage of raw materials, in-process inventory, finished goods and related information from pointof origin to point of consumption for the purpose ofconforming to customer requirements.

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Business logistics defined2

• 中華民國物流協會的定義– 物流是種物品流通活動的行為，在流通過程中，透過管理程序有效結合運輸、倉儲、包裝、流通加工、資訊等相關物流機能性活動，以創造價值、滿足顧客及社會需求。

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The Supply Chain

Physical distribution

Physical supply

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The Supply ChainPhysical supply channel : between a firms immediate material resource and its processing points.

Physical distribution channel : between the firm’s processing points and its customer.

Business logistics management is also popularly referred to as supply chain management.

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About the names of logistics Physical distribution Distribution Distribution engineering Business logistics Marketing logistics Distribution logistics

Material management Material logistics

management Logistics Quick-response systems Supply chain

management Industrial logistics

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Reverse logistics Ex: Products become obsolete, damaged, or

nonfunctioning and are returned to their source points for repair or disposition .

RetailerCustomer

Buy toaster

Defective toaster(D)

Refunds

Centralreturncenter

(D)

Scan toaster UPCReturn-to-vendor

Chargeback(D)

Scans the toasterinto its databaseand repair

ToasterManufacturer

Manufacturer Central return center Retailer Customer

Forward logistics channel

Reverse logistics channel

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The Activity Mix

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The components of a Logistics system

Customer service Demand forecastingDistribution

communicationsInventory controlMaterial handlingOrder processingPart and service

support

Plant and warehouse site selection

PurchasingPackagingReturn goods handlingSalvage and scrap

disposalTraffic and

transportationWarehousing and

storage

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Key activities

Customer service standards If set very high service level then logistics costs can exceed high

levels. Transportation Inventory managementTransportation and inventories : 1/2 ~ 2/3 of total logistics cost. Information flows and order processing

contribute most to the total cost of logistics

Transportation adds place value to products and services, whereas inventories add time value.

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Support activities

WarehousingMaterial handlingPurchasingProtective packagingCooperate with production / operations to Information maintenance

They also affect the overall logistics effort and specifically the efficiency of transportation and inventory management.

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Importance of logistics

Logistics adds time and place utility Form utility: making materials available

in a completed stateTime utility : at the right timePlace utility : in the right placePossession utility : allowing the customer

to take ownership of the item

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Importance of logistics Cost are significant Supply and distribution lines are lengthening Logistics is important strategy Logistic adds significant customer valueCustomers increasingly want quick customized responseLogistics in non-manufacturing areas Service industryMilitaryEnvironment

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Cost are significant

• See table 1-3

Category Percent of Sales $/cwt.Transportation 2.88% $19.13Warehousing 2.09 21.94Customer service / order processing 0.55 6.58Administration 0.40 3.32Inventory carrying cost @ 18% 2.32 32.27

Total distribution cost 8.01% $80.27

distribution costs at about 8% of sales Not include physical supply costs

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Supply and distribution lines are lengthening

The trend is toward an integrated world economy.

Ex: Ford’s Escort automobile, produce locally and sell internationally.

Globalization and internationalization of industries everywhere will depend heavily on logistics performance and costs.

See figure 1-4, lead to higher profit by reducing materials, labor, and overhead costs at the expense of logistics costs and tariffs.

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Outsourcing

See box 1.3

Toyota has 35 manufacturing plants in 25 countries outside of Japan.

Exports were down 9%, overseas production was up 16% in 1993.

Uses the JIT concept to supply parts from across the pacific.

Outsourcing adds value, but it requires more careful management of logistics costs and product-flow times in the supply channel.

Figure 1-4

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Logistics is important strategy Logistics impacts on a significant portion of a fi

rm’s costs. Benetton : Italian sport wear company in Ponz

ano, Italy 50 million pieces/year. Electronic loop

Saleswoman 80 agents Italy manufacture

CAD code and make

Warehouse =>L.A.

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Including manufacturing time, to LA in 4 weeks.

If the company already red sweaters in stock, it takes one week.

Question ? If black cardigans and purple blouses this year are hot.

Flash collection Quick Response.

The warehouse 30 million, 8 peopleDeal with 230,000 ps/day

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Logistic adds significant customer value

Logistics controls the time and place values in products.See box 1.5 exampleDiscount houses selling computer software from catalogs and

magazine advertisement.Economies of sale price advantage Operations were centralized at low-cost warehouse quality space. Their staff was predominately telephone-order taker and warehouse

personnel filling and shipping orders In inventories were minimized relative to sales through centralization Customer orders could be placed by telephone toll-free and that

these orders were filled the same day, next morning delivery to the customer.

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Customers increasingly want quick customized response

Customers increasingly want quick customized response.

Fast food retailer, ATM, fast package delivery, internet…, can be made available in increasingly shorter times.

Improved information system, FMS have led marketplace toward mass customization.

EX: Gateway 2000, a desktop computer company, will configure a PC to exact hardware requirement of the customer and even install requested software.

L.L. Bean offers a wide assortment of clothing sizes.

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Logistics in non-manufacturing areas

• Move and store a physical product (narrow view) logistics can be applied to service industries, the military, and even the management of the environment.

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Service industry

Ex:McDonald, Dow Jones, Sears, Roebuck,…

Hospital emergency medical care: distribution activities and make decision.

FedEX must locate terminals and UPS route pickup and delivery trucks.

Box 1.8 example : Promise Keepers.

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Box 1.8 examples Promise keepers conducts 23 major events arount t

he U.S. Using the concept of time definite delivery, the carri

er coordinates the receipt of supplies. Computer technology is used to track trailer move

ments and assure the extremely close coordination can be achieved.

Ex: there were the logistical problems of allocating air time to the three stories ( British Princess Dinan, India’s Mother Teresa and bombing incident in Jerusalem)

Managing logistics in service industries does represent a new direction for the future development of logistics practice.

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Military

WWII (inventory, transportation…)U.S. v.s. Irag.The logistics support in that war is yet an

other illustration of what world-class companies good logistics can be a source of competitive advantage.

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Environment

Recycle, reuse, refurbished reduce waste. Reverse logistics: Box 1.9 example. In Germany, the government requires retail

grocers to collect cereal boxes at the point of sale.

The seller has the responsibility for recovery of the spent materials and their repackaging and reuse or their disposal.

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Business logistics in the firm The logistics activities affect the efficiency and

effectiveness of both marketing and production (see Box 1.10)

GM hopes improving customer service will boost sales of Cadillacs.

Research shows that 10% ~ 11% of sales are lost because the cars are not available ( put off by lengthy delivery times).

Production and distribution program is being prepared for Florida (the state’s older population), to await delivery to dealers statewide with 24 hours.

MTO Cadillac’s will arrive at dealerships in about three weeks, compared with 8-12 weeks now.

Dealership inventories to decline by about 50%.

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Business logistics in the firm

Marketing is the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create exchange with target groups that satisfy individual and organizational objectives. See figure 1-6, logistics interfaces with marketing and

production. Marketing would be primarily responsible for market

research, promotion, sales force management, and the product mix, which create “possession” value in the product.

Production/operations would be concerned with the creation of the product or service, which creates “form” value in the product.

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To manage interface activities effectively, some mechanism or incentive for cooperation among the functions involved needs to established.

Disadvantage : some of the most difficult administrative problems arise from the inter functional conflicts that occur, when one is attempting to manage interface activities.

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Objectives of business logistics

Highest return on investment over time

(1) the impact of the logistics system design on the revenue contribution

(2) the cost of the design (a) operating costs (b) capital costs

Financial objective Maximize over time the ratio of the annual revenue less the operating costs of the logistics system to the annualized investment in the logistics system

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Approach to the study of logistics

Overview for strategyDecision makingTransportation, location, and inventoryOrganization, control

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The Logistics Planning Triangle

Facility location decisions

Inventory decisions

Transportation decisions

Customer service goals