You are on page 1of 57

Chapter 2:

Dimensions of Logistics

Dimensions of Logistics:

Introduction

Logistics has come a long way since the 1960s. 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 firms logistics system but also recognizing that no logistics system operates in a vacuum.
Chapter 2 Management of Business Logistics, 7th Ed. 2

What is Logistics?

Popular logistics terms: Logistics Management Business Logistics Management Integrated Logistics Management Materials Management Physical Distribution Management Marketing Logistics Industrial Logistics Distribution
Management of Business Logistics, 7th Ed. 3

Chapter 2

Definition of Logistics:

Council of Logistics Management (CLM, 1985)

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

Chapter 2

Management of Business Logistics, 7th Ed.

(i) Logistics Activities


Transportation Storage Packaging Materials handling Order fulfillment Forecasting

Production planning Purchasing Customer service Site location Other activities

Chapter 2

Management of Business Logistics, 7th Ed.

Transportation: movement of goods. Storage: affected by transportation. Packaging Materials Handling: goods from storage to order picking and to docks. Inventory control: Assuring adequate level Order fulfillment: filling and shipping orders. Forecasting Production Planning, Procurement. Customer Chapter 2 Management of Business Logistics, 7 Ed. 6

th

2 major dimensions of Logistics


1.

2.

The macro environment of Logistics: Economy Perspective The micro environment of Logistics: Firm dimension. The logistics components and its internal relationship

Chapter 2

Management of Business Logistics, 7th Ed.

1. Logistics in the Economy:

A Macro Perspective

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-1970s 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.
Management of Business Logistics, 7th Ed. 8

Chapter 2

Figure 2-2: Logistics Costs as a

Percentage of GDP
1999 1998 1996 1995 1990 1985 1980 0
Chapter 2

9.9 10.1 10.3 10.4 11.4 12.3 15.7 5 10 15 20


9

Management of Business Logistics, 7th Ed.

1. Logistics in the Economy:

A Macro Perspective

The two largest cost categories in logistics systems are transportation and inventory. The most frequent trade-off in logistics is between transportation and inventory cost.

Chapter 2

Management of Business Logistics, 7th Ed.

10

1. Logistics in the Economy:

A Macro Perspective

Contributing to this decline Improvement in transportation cost Better inventory management Turnover has had a very positive impact upon the return on investment for companies

Chapter 2

Management of Business Logistics, 7th Ed.

11

The role of Logistics in Macro economic


(i) Value added role (ii) Economic impact

Chapter 2

Management of Business Logistics, 7th Ed.

12

Figure 2-5 Fundamental Utility

Creation in the Economy

Chapter 2

Management of Business Logistics, 7th Ed.

13

2. Logistics in the Firm:

The Micro Dimension

a. Logistics Interfaces with Operations/Manufacturing b. Logistics Interfaces with Marketing c. Logistics Interfaces with Other Areas

Chapter 2

Management of Business Logistics, 7th Ed.

14

a. Logistics Interfaces with Operations Manufacturing


Examples: 1. Length of production runs Balance economies of long production runs against increased costs of high inventories. 2. Seasonal demand Acceptance of seasonal inventory to balance lead production
Chapter 2 Management of Business Logistics, 7th Ed. 15

a. Logistics Interfaces with Operations Manufacturing


3. Supply-side interfaces Stocking adequate supplies to ensure uninterrupted production now a logistics function. 4. Protective packaging Principal purpose is to protect the product from damage.

Chapter 2

Management of Business Logistics, 7th Ed.

16

b. Logistics Interfaces with Marketing


The Marketing Mix Four Ps (i) Price (ii) Product (iii) Promotion (iv) Place

Chapter 2

Management of Business Logistics, 7th Ed.

17

Logistics in the Firm: (i) Price

Carrier pricing Generally, since the larger the shipment, the cheaper the transportation rate, shipment sizes should be tailored to the carriers vehicle capacity where possible. Volume relationships Volumes sold will affect inventory requirements.

Chapter 2

Management of Business Logistics, 7th Ed.

18

Logistics in the Firm: (ii) Product

Consumer packaging 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. A minor correction in any of the above could conceivably cost (or save) millions of dollars in logistical costs. Logistics costs are not necessarily paramount, but they need to be considered in the decision making process.
Management of Business Logistics, 7th Ed. 19

Chapter 2

Logistics in the Firm: (iii) Promotion

Push versus pull 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. Pull strategies tend to be more erratic. Push strategies tend to more predictable. Channel competition The more popular a product, the easier it is to persuade channel members to promote your product.
Management of Business Logistics, 7th Ed. 20

Chapter 2

Logistics in the Firm: (iv) Place

Wholesalers 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 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.
Management of Business Logistics, 7th Ed. 21

Chapter 2

c. Logistics Interfaces with Other Areas

Manufacturing and marketing are probably the two most important internal, functional interfaces with logistics. Other important interfaces now include finance and accounting. Logistics can have a major impact on return on assets.

Chapter 2

Management of Business Logistics, 7th Ed.

22

The Relationship between Required Inventory and Order Cycle Length from a Customer Perspective

Chapter 2

Management of Business Logistics, 7th Ed.

23

Figure 2-13 The General Relationship of


the Cost of Lost Sales to Inventory Cost

Chapter 2

Management of Business Logistics, 7th Ed.

24

Figure 2-14

The General Relationship of the Cost of Lost Sales to Transportation Cost

Chapter 2

Management of Business Logistics, 7th Ed.

25

Figure 2-17 The General Relationship of


Product Susceptibility to Loss and Damage to Logistics Costs

Chapter 2

Management of Business Logistics, 7th Ed.

26

Techniques of Logistics System Analysis: Short-Run/Static Analysis


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.
Management of Business Logistics, 7th Ed. 27

Chapter 2

Table 2-4 Static Analysis of C & B

Chemical Company (50,000 pounds of output)

Chapter 2

Management of Business Logistics, 7th Ed.

28

3. The logistics components and its internal relationship


(i) Logistics Activities
(ii) Logistics Systems

(iii) Logistics and Systems Analysis


(iv) Techniques of Logistics System Analysis

Chapter 2

Management of Business Logistics, 7th Ed.

29

(i) Logistics Activities


Transportation Storage Packaging Materials handling Order fulfillment Forecasting

Production planning Purchasing Customer service Site location Other activities

Chapter 2

Management of Business Logistics, 7th Ed.

30

On the Line:

Toyota Distribution

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, 7th Ed. 31

(ii) Logistics Systems : Materials Management v. Physical

Distribution

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, construction Heavy outbound - e.g., chemicals Reverse systems - e.g., returnable products
Management of Business Logistics, 7th Ed. 32

Chapter 2

Approaches to Analyzing Logistics Systems

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

Chapter 2

Table 2-2 Analysis of Total Logistics Cost with

a Change to Higher Cost Mode of Transport


Cost Centers Rail Motor

Transportation
Inventory

$ 3.00
5.00

$ 4.20
3.75

Packaging
Warehousing

4.50
1.50

3.20
.75

Cost of Lost Sales


Total Cost
Chapter 2

2.00
$ 15.00
Management of Business Logistics, 7th Ed.

1.00
$ 13.00
34

Table 2-3 Analysis of Total Logistics


Cost Centers System 1 Three Warehouses Transportation $ 850,000

Cost with a Change to More Warehouses


System 2 Five Warehouses $ 500,000

Inventory
Warehousing

1,500,000
600,000

2,000,000
1,000,000

Cost of Lost Sales


Total Cost
Chapter 2

350,000
$ 3,300,000

100,000
$ 3,600,000
35

Management of Business Logistics, 7th Ed.

Figure 2-6 Nodes and Links in a

Logistics System

Chapter 2

Management of Business Logistics, 7th Ed.

36

Figure 2-7

A Simple Logistics Channel

Chapter 2

Management of Business Logistics, 7th Ed.

37

Figure 2-8

A Multi-Echelon Logistics Channel

Chapter 2

Management of Business Logistics, 7th Ed.

38

Figure 2-9

A Complex Logistics Channel

Chapter 2

Management of Business Logistics, 7th Ed.

39

(iii) Logistics and Systems Analysis

Cost Perspective Keep in mind that the most efficient systems are not always comprised of each system component operating at its lowest possible cost. The critical concern is to have the entire system operating at its lowest total cost.

Chapter 2

Management of Business Logistics, 7th Ed.

40

(iii) Logistics and Systems Analysis

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

Chapter 2

Figure 2-10 Levels of Optimality

in Economic Environments

Chapter 2

Management of Business Logistics, 7th Ed.

42

Techniques of Logistics System Analysis: Short-Run/Static Analysis


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.
Management of Business Logistics, 7th Ed. 43

Chapter 2

Table 2-4 Static Analysis of C & B

Chemical Company (50,000 pounds of output)

Chapter 2

Management of Business Logistics, 7th Ed.

44

Techniques of Logistics System Analysis: Long-Run/Dynamic Analysis


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.
Management of Business Logistics, 7th Ed. 45

Chapter 2

Figure 2-11

Dynamic Analysis

Chapter 2

Management of Business Logistics, 7th Ed.

46

Dynamic Analysis
System 1 System 2
Total Cost = Fixed Costs + Variable Cost/unit x number of units y = $4200 + 0.0315x Total Cost = Fixed Costs + Variable Cost/unit x number of units y = $4800 + 0.0230x

Trade-off Point

System 1 Total Costs = System 2 Total Costs $4200 + 0.0315x = $4800 + 0.0230x 0.0085x = $600 x = 70,588 pounds
Chapter 2 Management of Business Logistics, 7th Ed. 47

Logistics in the Firm: Factors Affecting

the Cost and Importance of Logistics

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

Figure 2-12 The Relationship between


Required Inventory and Order Cycle Length from a Customer Perspective

Chapter 2

Management of Business Logistics, 7th Ed.

49

Figure 2-13 The General Relationship of


the Cost of Lost Sales to Inventory Cost

Chapter 2

Management of Business Logistics, 7th Ed.

50

Figure 2-14

The General Relationship of the Cost of Lost Sales to Transportation Cost

Chapter 2

Management of Business Logistics, 7th Ed.

51

Figure 2-15

The General Relationship of Product Dollar Value to Various Logistics Costs

Chapter 2

Management of Business Logistics, 7th Ed.

52

Figure 2-16 The General Relationship of


Product Weight Density to Logistics Costs

Chapter 2

Management of Business Logistics, 7th Ed.

53

Figure 2-17 The General Relationship of


Product Susceptibility to Loss and Damage to Logistics Costs

Chapter 2

Management of Business Logistics, 7th Ed.

54

Figure 2-18

Logistics and Spatial Relations

Chapter 2

Management of Business Logistics, 7th 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