1

SCM and Logistics

Dickson K.W. ChiuPhD, SMIEEE, SMACM

Text: Ballou - Business Logistics Management, 5/E (Chapter

1)

Dickson Chiu 2006 SCM-2

Learning Objectives To familiarize with basic concepts of

logistics and supply chain management To understand recent evolvement of

logistics To understand the reasons for its recent

growth in importance To understand the importance of IT in

logistics

3

Overview of Logistics and Supply Chain Management

Dickson Chiu 2006 SCM-4CR (2004) Prentice Hall, Inc. 1-2

Supply Chain Overview

Warehousing

Warehousing

Transportation

Transportation

Vendors/plants/portsTransportation

Factory

Transportation Customers

Informationflows

Dickson Chiu 2006 SCM-5CR (2004) Prentice Hall, Inc.

Logistics vs Supply Chain Management

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 the point of origin to point of consumption for the purpose of conforming to customer requirements.”

Handfield and Nichols SCM is the integration of all activities associated

with the flow and transformation of goods from raw materials through to end user, as well as information flows, through improved supply chain relationships, to achieve a sustainable competitive advantage.

Dickson Chiu 2006 SCM-6

Common Contemporary Logistics Terms

Value stream/logistics process Quick response and flexible manufacturing Mass customization Supply chain management/ collaborative logistics Reverse logistics Service logistics Continuous replenishment Lean logistics Integrated logistics

=> IT people have to deal with any related automation anyway

Dickson Chiu 2006 SCM-7

The Logistics/SCM Mission Getting the right goods or services to the right place, at

the right time, and in the desired condition at the lowest cost and highest return on investment.

Product / Service Utility Possession Utility - the value or usefulness that comes from a

customer being able to take possession of a product Form Utility - in a form that can be used by the customer and is

of value to the customer Place Utility - available where they are needed by customers Time Utility - available when they are needed by customers

Logistics obviously help time and place utility

Dickson Chiu 2006 SCM-8

Demand forecasting

Purchasing

Requirements planning

Production planning

Manufacturing inventory

Warehousing

Material handling

Packaging

Finished goods inventory

Distribution planning

Order processing

Transportation

Customer service

Strategic planning

Information services

Marketing/sales

Finance

Supply Chain Management

Supply Chain Management

Logistics

Purchasing/Materials

Management

PhysicalDistribution

Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+

Demand forecasting

Purchasing

Requirements planning

Production planning

Manufacturing inventory

Warehousing

Material handling

Packaging

Finished goods inventory

Distribution planning

Order processing

Transportation

Customer service

Strategic planning

Information services

Marketing/sales

Finance

Supply Chain Management

Supply Chain Management

Logistics

Purchasing/Materials

Management

PhysicalDistribution

Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+

CR (2004) Prentice Hall, Inc.

Evolution of Supply Chain Management

Dickson Chiu 2006 SCM-9CR (2004) Prentice Hall, Inc. 1-5

Supply Chain Schematic

Dickson Chiu 2006 SCM-10

A Revised Strategy is Generating Great Top Management Interest Historical perspective of distribution

(Peter Drucker, 1962): “The last frontier of cost economies”

The contemporary view: Distribution is a new frontier for demand

generation—a competitive weapon.

Both views are important!

Dickson Chiu 2006 SCM-11

Critical Customer Service Loop

C ustom ersT ransporta tion

Inventoryo r supp ly source

C ustom er o rder p rocess ing (and transm itta l)

C ustom ersT ransporta tion

Inventoryo r supp ly source

C ustom er o rder p rocess ing (and transm itta l)

Dickson Chiu 2006 SCM-12

Category Percent of sales $/cwt.

Transportation 3.34% $26.52Warehousing 2.02 18.06Order entry 0.43 4.58Administration 0.41 2.79Inventory carrying 1.72 22.25 Total 7.65% $67.71

Add one-third for inbound supply costs

Source: Herb Davis & Company

Logistics cost are about 10% of

sales w/o purchasing costs

CR (2004) Prentice Hall, Inc.

Physical Distribution Costs

Dickson Chiu 2006 SCM-13

Customer Service Performance

4

5

6

7

8

9

10

Year

Day

s

8284868890929496

%

Order Cycle Time,Days

ProductAvailability--%ordersProductAvailability--%line items

Source: Herb Davis & Company

Dickson Chiu 2006 SCM-14

Physical distributionPhysical supply(Materials management)

Business logistics

Sources ofsupply

Plants/operations Customers

• Transportation• Inventory maintenance• Order processing• Acquisition• Protective packaging• Warehousing• Materials handling• Information maintenance

• Transportation• Inventory maintenance• Order processing• Product scheduling• Protective packaging• Warehousing• Materials handling• Information maintenance

Internal supply chainCR (2004) Prentice Hall, Inc. 1-14

Traditional Scope of the Supply Chain

Dickson Chiu 2006 SCM-15

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

Dickson Chiu 2006 SCM-16

Logistics Strategy and Planning The objectives of logistics strategy

Minimize cost Minimize investment Maximize customer service

Levels of logistical planning Strategic Tactical Operational

Dickson Chiu 2006 SCM-17

Customer service goals The product Logistics service Information sys.

Inventory Strategy Forecasting Storage fundamentals Inventory decisions Purchasing and supply

scheduling decisions Storage decisions

Transport Strategy Transport fundamentals Transport decisions

Location Strategy Location decisions The network planning process

CR (2004) Prentice Hall, Inc.

The Logistics Strategy Triangle (4 problem areas)

Dickson Chiu 2006 SCM-18

Decision area Strategic Tactical Operational

Transportation Mode selection Seasonal equip-ment leasing

Dispatching

Inventories Location, Control policies Safety stock levels Order filling

Orderprocessing

Order entry, transmittal,and processing systemdesign

Processingorders, Fillingback orders

Purchasing Development of supplier-buyer relations

Contracting,Forward buying

Expediting

Warehousing Handling equipmentselection, Layout design

Space utilization Order pickingand restocking

Facilitylocation

Number, size, andlocation of warehouses

CR (2004) Prentice Hall, Inc.

Strategic, Tactical, and Operational Decision Making

Dickson Chiu 2006 SCM-19

PRODUCTION/OPERATIONSSample activities: Quality control Detailed production scheduling Equipment maint. Capacity planning Work measurement & standards

LOGISTICSSampleactivities:Transport Inventory Order processing

Materials

handling

Interfaceactivities: Product scheduling Plant location Purchasing

MARKETINGSampleactivities: Promotion Market research Product mix Sales force management

Interfaceactivities: Customer service standards Pricing Packaging Retail location

Production-logisticsinterface

Marketing-logisticsinterface

Internal Supply ChainCR (2004) Prentice Hall, Inc.

Relationship of Logistics to Marketing and Production

Dickson Chiu 2006 SCM-20

Product

Price Promotion

Place-Customer service levels

Inventory carrying costs

Lot quantity costs Order processing

and information costs

Transport costs

Warehousing costs

Mar

ketin

gLo

gist

ics

CR (2004) Prentice Hall, Inc.

Relationship of Logistics to Marketing

Dickson Chiu 2006 SCM-21

Relationship of Logistics to Production Coordinates through scheduling and strategy

make-to-order make-to-stock

An integral part of the supply chain Affects total response time for customers Shares activities such as inventory planning

Costs are in tradeoff Production lot quantities affect inventory levels and

transportation efficiency Production response affects transportation costs and

customer service Production and warehouse location are interrelated

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Contemporary IT and Logistics

Dickson Chiu 2006 SCM-23

Wal-Mart Wins with Logistics Costs are lower than K-Mart or Target

Stores CEO is a former logistician Wal-Mart is the largest retailer in the

world!

Dickson Chiu 2006 SCM-24

Logistics/SCM in Diverse Areas Manufacturing - most common Service - emerging opportunities Environment - causing restrictions Non-profits / Government - little

explored Military - long history

Note the global evolvement into a service-oriented economy!

Dickson Chiu 2006 SCM-25

FocusCompany

Suppliers

Supplier’ssuppliers

Customers

Customers/End users

Acquire Convert Distribute

Product and information flow

Conventional Scope

CR (2004) Prentice Hall, Inc.

Supply Chain is Multi-Enterprise

Dickson Chiu 2006 SCM-26

ProfitG & A

Marketing

Logistics

Overhead

Materials

Labor

ProfitG & A

Marketing

Logistics

Overhead

Materials

Labor

Tariffs

Increase

Reduction

Increase

Domestic sourcing Foreign sourcing

CR (2004) Prentice Hall, Inc.

Effect on Logistics Foreign Outsourcing

Dickson Chiu 2006 SCM-27CR (2004) Prentice Hall, Inc.

Reality of SCM Scope

Dickson Chiu 2006 SCM-28

SUPPLYCHAIN

MANAGEMENT

Inte

r-fun

ctio

nal

(Intra

-org

aniza

tiona

l) co

ordi

natio

n Inter-organizational coordination

Activity and processadministration

CR (2004) Prentice Hall, Inc.

The Multi-Dimensions of SCM

Dickson Chiu 2006 SCM-29

Increasing Significance of Logistics

Costs are high About 10.5% of GDP domestically About 12% of GDP internationally A range of 4 to 30% of sales for individual firms, avg. about 10% A high as 70-80% of sales if purchasing and production are

included Customers are more demanding of the supply chain

Desire for quick response Desire for mass customization

An integral part of company strategy Generate revenue Improve profit

Logistical lines are lengthening Local vs. long distance supply Globalization of trade

Logistics is a key to trade and an increased standard of living Law of comparative economic advantage applies

Logistics adds value Time and place utilities

Dickson Chiu 2006 SCM-30

Contemporary IT Applications in Logistics – Focus of this Course

Tremendous technological advances in past decades Logistics management relies on analysis over massive

information from heterogeneous sources Disparate business functions in service-oriented

economy Internet and mobile technologies has further improved

logistical effectiveness and efficiency Enabled logisticians and management to make timely, informed,

and accurate decisions but create new dimensions of complexity

IT people work closely with logistician and management Understand complex requirements Choose the right technology and design appropriate IT

infrastructures, architectures, and systems Explain how contemporary IT can help to others

Dickson Chiu 2006 SCM-31

Some Useful Contemporary IT in Logistics

eXtended Markup Language (XML) Service-oriented architecture Process integration and interaction management

Exceptions, alerts, and relationship management in logistics Information integration Facilitating decision support

Mobile technologies Radio Frequency Identification (RFID)

=> The key is to achieve information and process integration for efficient and effective decision support.

32

Summary

Dickson Chiu 2006 SCM-33

Summary The logistic process plans, implements, controls the

flow and storage of goods, services, and related information between the point of origin and the point of consumption to satisfy customer requirements

Logistics addresses the time utility & place utility out of the four economic utilities

Logistics becomes more important and complex because of new requirements of the service-oriented economy, disparate business functions, and the impact of various contemporary IT

Logistics involves the interaction with multiple departments within a company as well as now also across business partner organizations and customers

Application of contemporary IT, especially information and process integration for efficient and effective decision support, is a critical success factor and therefore the focus of this course.