Fundamentals of Logistics Management

Chapter 1: Definition of Logistics Management

Definition of Logistics:

• Logistics is the management of the flow of goods, information and other resources, including energy and people, between the point of origin and the point of consumption in order to meet the requirements of consumers. Logistics involve the integration of information, transportation, inventory, warehousing, material- handling and packaging.

Modern Logistics Function

• the process of a logistics provider participating in the management and administration of a manufacturer’s business

• the logistics provider designs the logistics plan and offers comprehensive services related to the supply chain.

• modern logistics operator aims to offer services that meet customer needs, optimize overall performance of logistics functions and maximize profits and minimize costs across all logistics activities.

• modern logistics is about service and integrated management of the whole supply chain.

Supplier

Supplier

Supplier

Carrier

Carrier

Carrier

Manufacturing site

Distribution center

Distribution center

Carrier

Carrier

Carrier

Customer

Customer

Customer

Customer

Customer

Customer

Network of relationships that logistics has to manage in a channel of distribution

Chapter 2: The Role of Logistics in the Economy

Logistics plays a key role in the economy in two significant ways:

1) Logistics is one of the major expenditures for business, thereby affecting and being affected by other economics activities. The expenses of the logistics is very high and thus, by improving the efficiency of logistics operations, logistics makes an important contribution to the economy as a whole.

2) Logistics support the movement and flow of many economic transactions; it is important activity in facilitating the sale of virtually all goods and services.Example: if good do not arrive on time, in the proper place or in the proper condition, no sale can be made. Thus, all economic activity throughout the supply chain will suffer.

The Role of Logistics in the Economy

Logistics adds value by creating utility(From an economic standpoint, Utility the value or usefulness that an item or

service has in fulfilling a want or need)

1) Form Utility • the process of creating the good or service or putting it in the proper form for

the customer to use• Example; Transforms parts and raw materials into a car, form utility is created

2) Possession Utility • the value added to a product or service because the customer is able to take

actual possession. • This is made possible by credit arrangements, loans and so on.

3) Time Utility • the value added by having an item when it is needed

4) Place Utility • having the item or service available where it is needed

The 5 Rights of Logisticsi) Right itemii) Right placeiii) Right timeiv) Right conditionv) Right cost

Chapter 3: The Role of Logistics in the Organization

Logistics support marketing:

1) The marketing concept is a “customer-driven” perspective which holds that a business exists to meet customer needs.

2) For a firm to be successful, any marketing effort must integrate the ideas of having the right product, at the right price and available in the right place. Logistics plays a critical role particularly in support of getting the product to the right place.

3) To achieve customer satisfaction, the firm need to examine the trade-offs among alternatives, thereby reducing the overall cost of activities within a system

Product

Price Promotion

Place/ customer service levels

Cost trade-offs required in marketing and logistics

Inventory carrying cost

Transportation costs

Lot quantity costs Warehousing costs

Order processing and information costs

Marke

ting

logis

tics

Marketing objective: Allocate resources to the marketing mix to maximize the long run profitability of the firmLogistics objective: Minimize total costs given the customer service objective where total costs = ICC + LQC + TC + WC + OPIC

The Role of Logistics in the Organization

Major element of the marketing mix interact and are affected by logistics operation:

1) Product • in an effort to reduce cost, management may decide to reduce product quality,

eliminate product feature, reduce customer service and etc.• In the long term, may reduce the attraction of the product for consumers -->

creating a loss

2) Price • Supplier may attempt to increase sales by reducing the price of its product,

changing the terms or service offering.

3) Promotion • increasing the advertising expenditure or the size of direct sale can have a

positive impact on sales. A point exist where the extra money being spent does not yield sufficiently high increases in sales or profit to justify the added expenses.

4) Place • Place is the key element of the marketing mix with which logistics interfaces

directly. Place expenditures support the levels of customer service provided by the organization. (i.e: on-time delivery, consistent transit times)

5) Customer service • is an output of the logistic system. When the organization performs well on all

elements of the marketing mix, customer satisfaction occurs.

Total Cost Concept

• is the key to effectively managing logistics processes

• to reduce the total cost of logistics activities

• reducing costs in one area, such as transportation, may drive up inventory carrying costs as more inventory is required to cover longer transit times or to balance against greater uncertainly in transit times.

Chapter 4: Key Logistics Activities

1. Customer service • getting the right product to the right customer at the right place, in the right

condition and the right time.

2. Demand forecasting/planning • Marketing forecasts customer demand based promotions, pricing, competition

and so on.• Logistics usually becomes involved in forecasting in terms of how much

should be ordered from its supplier and how much of finished product should be transported or held in each market that the organization serves

3. Inventory management • involves trading off the level of inventory held to achieve high customer

service levels with the cost of holding inventory, including capital tied up in inventory, variable storage costs and obsolescence.

4. Logistics communications Communication must occur between:

• The organization and its suppliers and customer• The major functions within the organization, such as logistics,

engineering, accounting, marketing and production.• The various aspect of each logistics activities, such as coordinating

warehousing of material, work in process and finished goods.

5. Material handling • encompasses all aspects of all movement of raw material, work in process or

finished goods within a plant or warehouse.

6.Order processing• the system that an organization has for getting orders from customers,

checking on the status of orders and communicating to customers about them and actually filling the order and making it available to the customer.

• is a key area of customer interface with the organization, it can have a big impact on a customer’s perception of service and satisfaction

• organizations today are turning to advanced order-processing method such as electronic data interchange (EDI) and electronic fund transfer (EFT) to speed the process and improve accuracy and efficiency.

7. PackagingPackaging is valuable both as form of:

• advertising/ marketing Convey important information to inform the customer Pleasing packaging can attract the consumer’s attention

• for protection and storage from a logistical perspective. Provides protection during storage and transport.

8. Parts and service supportProviding after-sale service support

• this may include delivery of repair parts to dealers, stocking adequate spares, picking up defective or malfunctioning products from customers and responding quickly to demand for repairs

9. Plant and warehouse site selection• Determining the location of the company’s plants and warehouses is a

strategic decision that affects not only the costs of transporting raw materials inbound and finished goods outbound, but also customer service levels and speed of respond.

10. Procurement• Is the purchase of materials and services from outside organizations to

support the firm’s operation from production to marketing, sales and logistics.

• also referred to as purchasing, supply management and by a number of other names, includes activities such as supplier selection, negotiation of price, terms and quantities and supplier quality assessment.

11.Return goods handling• Returns make take place because of a problem with the performance of the

item or simply because the customer changed his or her mind.

• return goods handling is complex because it involves moving small quantities of goods back from the customer to the manufacturer

12.Reverse Logistics• Removal and disposal of waste materials left over from the production,

distribution or packaging processes.

13.Traffic and transportation• Key logistics activity is to actually provide for the movement of

materials and goods from point of origin of consumption and perhaps to its ultimate point of disposal as well.

• Transportation involves selection of the mode (e.g., air, rail, water, truck), the routing of the shipment, assuring of compliance with regulations in the region of the country where shipment is occurring and selection of the carrier.

14.Warehousing and storage• Warehousing supports time and place utility by allowing an item to be

produced and held for later consumption.

Chapter 5: The Relationship of Logistics Activities to Logistics Costs

1. Customer Service Levels• The key cost trade-off associated with varying levels of customer service

is the cost of lost sales.• Monies that are spent to support customer service include the costs

associated with order fulfillment, parts and service support.• The cost of lost sales includes not only the lost contribution of the

current sale, but also potential future sales from the customer and from other customer due to word–of-mouth negative publicity from former customers.

2. Transportation Costs• The activity of transporting goods drives transportation costs.• Costs can be categorized by customer, product line, type of channel such

as inbound versus outbound and so on.

3. Warehousing Costs• Warehousing costs are created by warehousing and storage activities,

and by the plant and warehouse site selection process.

4. Order Processing/ Information Systems Costs• Order processing costs include such as order transmittal, order entry,

processing the order and related internal and external costs such as notifying carriers and customers of shipping information and product availability.

• Shipper and carriers have invested a great deal in improving their information system such as electronic data interchange (EDI), satellite data transmission and bar coding and scanning shipments and sales.

The Relationship of Logistics Activities to Logistics Costs

5. Lot Quantity Costs• LQC are purchasing or production related costs that vary with changes in

order size or frequency and include: Setup costs

a) Time required to set up a line or locate a supplier b) Scrap due to setting up the production linec) Operating inefficiency as the line begins to run or as a new

supplier is brought on board Capacity lost due to downtime during changeover of line or

changeover to a new supplier Materials handling, scheduling and expediting Price differentials due to buying in different quantities Order costs associated with order placement and handling

6. Inventory Carrying Costs

• The logistics activities that make up inventory carrying costs include inventory control, packaging and salvage and scrap disposal.

• The 4 major categories of inventory cost are: Capital cost/ Opportunity cost - which is the return that the

company could make on the money that has tied up in inventory. Inventory service cost – which include insurance and taxes on

inventory Storage space cost – which includes those warehousing space-

related costs which change with the level of inventory. Inventory risk cost – including obsolescence, pilferage, relocation

within the inventory system and damage.

Chapter 6: Future Challenges and Areas for Logistics Performance Improvement

Logistics need to meet the challenge and improve its performance to support those goals:

1. Strategic Planning and Participation• Activities such as logistics budgeting and control, inventory planning and

positioning, and customer service have become important parts of the organization’s strategic planning process.

2. Total Quality Management (TQM)• TQM is a philosophy that is integrated in designing logistics systems to

achieve desired results, performing logistics activities and monitoring result.• In logistics – short, predictable transit times, certain levels of in-stock

availability and certain fill rates on customer order.• The ISO 9000 – is an internationally recognized certification program whereby

the quality processes of firms are audited to verify whether they have well-documented and effective quality processes in place.

3. Just-in-time (JIT)• JIT is an inventory management philosophy aimed at reducing waste and

redundant inventory by delivering product, components or materials just when an organization needs them.

• Reduce inventory -> reduce costs.

Future Challenges and Areas for Logistics Performance Improvement

4. Quick Response

• QR is a tactics to improve inventory management and efficiency, while speeding inventory flows.

• When fully implemented, QR applies JIT principles throughout the entire supply chain, from raw material suppliers through ultimate customer demand.

• The concept works by:a) Combining electronic data interchange (EDI) with bar coding technology,

so that the customer sales are tracked immediatelyb) This information can be passed on to the manufacturer, who can then

notify its raw material supplierc) Schedule production and deliveries as required to meet replenishment

needs.• This allows inventory reductions while speeding response time, lowering the

number of out-of-stock products and reducing handling and obsolescence.

Future Challenges and Areas for Logistics Performance Improvement

5. Efficient Consumer Response (ECR)

• ECR is an effort to improve the competitiveness of the grocery industry by cutting waste in the supply chain.

• ECR includes the following strategies:a) Widespread implementation of electronic data interchange up and down

the supply chain, both between; Suppliers and manufacturers Manufacturers and distributors Distributors and customers

b) Greater use of point-of-sale data obtained by greater and more accurate use of bar coding

c) Cooperative relationships between manufacturer, distributors, supplier and customers.

d) Continuous replenishment of inventory and flow through distribution (on JIT basis)

e) Improved product management and promotions.

Future Challenges and Areas for Logistics Performance Improvement

6. Logistics as a Competitive Weapon

• Logistics may be the best source of competitive advantage for a firm because it is less easily duplicated than other elements of the marketing mix; product, price and promotion.

• For example, forming close, ongoing relationships with carriers or logistics service providers can help give the firm a distinct competitive advantage in speed to the customer, reliability, availability or other customer service factors.

7. Accounting for Logistics Costs

• More organizations move into activity-based costing (ABC) systems to allocate costs to activities on a more accurate and meaningful basis.

Future Challenges and Areas for Logistics Performance Improvement

8. Logistics as a Boundary-Spanning Activity

• Logistics plays a key role in activities throughout the supply chain, both within and outside the organization

• Outside organization logistics interfaces with customers in the ordering processing, order

fulfillment and delivery cycles. Interfaces with carriers, warehouses, suppliers and other 3rd parties that

play a role in the supply chain.• Within the organization

logistics interfaces with finance in the planning process logistics interfaces with accounting in establishing logistics costs for

various product, customers and distribution channel. Interfaces with marketing – plays an important role in customer

satisfaction by providing high levels of customer service Interfaces with production – manages the flow of materials or work in

process, stocking and shipping the finished product as it is available.

Future Challenges and Areas for Logistics Performance Improvement

9. Global Logistics

• Many leading organizations are heavily involved in international markets through purchasing inputs to production, other importing, exporting, joint ventures, alliances, foreign subsidiaries and divisions, and other means. This creates a need for familiarity with global logistics and global logistics network.

10.Increasing Skill Requirements

• As logistics become increasingly involved in setting corporate strategy and other aspects of the strategic planning process, different skill sets are required in quality issues, global logistics and improving relationships with third party providers.

Future Challenges and Areas for Logistics Performance Improvement

11. Logistics Information Systems

• The ability to monitor customer demand and inventory level, to act in a timely manner to prevent stockouts and to communicate potential problems to customer.

• May link with a variety of information technology such as EDI to communicate with suppliers, receiving information such as shipment, timing, quantities and even invoicing.

• Use bar coding to scan sales as customers make their purchases.

12.Outsourcing, Partnering and Strategic Alliances

• Outsourcing – an organization hires an outside organization to provide a good or service because this third party is an expert in efficiently providing this good or service, while the organization itself may not be.

• Partnering – the concept of partnering or establishing long term working relationships with supplier of goods or services, customers and third party providers.

• Strategic Alliances – the most close integrated partnerships are often referred to as Strategic Alliances. It must be strategic in nature and must directly support one of the organization’s distinctive competencies.

Future Challenges and Areas for Logistics Performance Improvement

13. Technology

• Combining information technology with automated warehousing reduces inherent human variability, creating an opportunity to improve customer service.

14. Green Marketing

• Transportation and disposal of hazardous materials are frequently regulated and controlled.

• Organization are continually looking at reducing, reusing and reapplying packaging materials, by-product of production and obsolete items.