Chapter 1 - Basics of

Logistics Management
(3G Elearning)
 Learning Objectives

After studying this chapter, you will be able to:

• Understand inbound and outbound logistics

• Explain the general principles of logistics management
• Describe logistics as part of SCM
• Explain the classifications of transportation
• Define the process of warehousing management
Introduction
Logistics Management – refers to managing the flow
of material goods between people and places.

It deals with the area of:

• Retail
• Manufacturing, and
• General Warehousing

Example:
• Military Troops
• Post Office
• Retail Stores
 Logistics: Concept

Two Phases in Logistics Management

• Material Management – refers to the timely movement of
materials, parts, and supplies.

• Physical Distribution - refers to the movement of the firm’s

finished products to the customers.

Goal?

“To coordinate all efforts of the company to maintain a cost

effective flow of goods.”
 Logistics: Concept
The word logistics is derived from French word “logger’, which means art of war
pertaining to movement and supply of armies.

Formula:
Logistics = Inbound Logistics + Material Management + Physical Distribution

Where,
Inbound Logistics covers the movement of materials received from suppliers.

Materials Management describes the movements of material and components

within a firm.

Physical Distribution refers to movement of goods outward from the end of the
assembly line to the customer
 Logistics as a Process

Is a process of strategically managing the procurement,

movement and storage of materials, parts and finished inventory
through the organization and its marketing channels in a such a
way that current and future profitability are maximized through
the cost-effective fulfillment of orders.

• It is concerned with getting the products and services where

they are needed and when they are desired.
• It involves the integration of information, transportation,
inventory, warehousing, material handling, and packaging
• Has an operating responsibility of geographical repositioning of
raw materials, work in process, and finished inventories where
required at the lowest cost possible.
 Logistics as a Process

• Council of Logistics Management defined Logistics as:

– A process of planning, implementing and controlling the
efficient, effective flow of and storage of goods, services
and related information from the point of consumption for
the purpose of conforming to customer requirements.
 The Objectives of Logistics

• Operating Objectives
– Rapid response
• Concerned with a firm’s ability to satisfy customer service requirements
in a timely manner.
– Minimum Variance
• Variance is any unexpected event that disrupts system performance.
– Minimum Inventory
• The objective is to reduce inventory deployment to the lowest level
consistent with customer service goals to achieve the lowest overall
total logistics cost.
– Movement Consolidation
• The larger the overall shipment and the longer the distance it is
transported , the lower the transportation cost per unit.
 The Objectives of Logistics

– Quality Improvement
• Seek continuous improvement. TQM has become a major
commitment throughout all facets of industry and become
the major forces contributing to the logistical renaissance.

– Life-Cycle Support
• Few items are sold without some guarantee that a
product will perform as advertised over a specified
period.
 Elements of Logistic System

• Transportation
• Warehousing
• Inventory Management
• Packing and utilization and
• Information and Communication
 Logistics Activities

• Customer Response
– Links logistics externally to the customer base and
internally to sales and marketing. Optimized when the
customer service policy (CSP) yielding the lowest cost of
lost sales, inventory carrying, and distribution is identifies
and executed.
Activities:
• Developing and maintaining a customer service policy
• Monitoring customer satisfaction
• Order Entry
• Order Processing
• Invoicing and Collection
 Logistics Activities

• Inventory Planning and Management

– Determine and maintain the lowest inventory levels
possible that will meet the customer service policy
requirements stipulated in the customer service
policy.
Includes:
• Forecasting
• Order quantity engineering
• Service level optimization
• Replenishment planning
• Inventory deployment
 Logistics Activities

• Supply
– To minimize the total acquisition cost (TAC) while
meeting the availability, response time, and quality
requirements stipulated in the customers service
policy and the inventory master plan.
Includes:
• Developing and maintaining a supplier service policy (SSP)
• Sourcing
• Supplier integration
• Purchase order processing
• Buying and payment
 Logistics Activities

• Transportation
– Is to link all pick-up and deliver-to points within the
response time requirements of the customer’s service
policy and the limitations of the transportations
infrastructure at the lowest possible cost.
Includes:
• Network design and optimization
• Shipment Management
• Fleet and container management
• Carrier management
• Freight management
 Logistics Activities

• Warehousing
– To minimize the cost of labor, space, and equipment, in the
warehouse while meeting the cycle time and shipping
accuracy requirements of the customers service policy and
the storage capacity requirement of the inventory play.
Includes:
• Receiving
• Put away
• Storage
• Order picking
• shipping
 The Role of Logistics in the Economy

• Logistics is the major expenditures for business.

• It accounts around 15-20% of GDP.

• Logistics support the movement and flow of many

economic transactions;
• it is an important activity in facilitating the sale of virtually
all goods and services.

Utility – represents the value of usefulness that an item or service

has in fulfilling a want or need.
 The Role of Logistics in the Economy

• Four Types of Utilities

– Form.
• Is a process of creating the good or service or putting them in
proper form for the customer to use
– Possession
• Is a value added to a product or service because the customer is
able to take actual possession like credit arrangement and loans.
– Time
• Is a value added by having an item when it is needed.
– Place
• Is the item or service available where it is needed.
 The Role of Logistics in an Organization

• Logistics in an organization are considered as a continuation of

marketing.
• It plays a critical role in three elements of marketing concept.
 The Role of Inventory in an Organization

• Reduction of Inventory
• Economy of Freight
• Reliability and consistency in delivery performance
• Minimum damage to products
• Quicker and faster response
 The Role of Logistics in an Organization

• Logistics as a Function in a Company

– If logistics plays a critical role in a company’s success, it
makes sense to position it in the functional organization
beside the basic functions of finance, production or human
resources.
– Centralization of logistics

• Logistics as an Operational Function

• It can be included centrally or de-centrally in the current
organizational structure as an additional operation.
 The Role of Logistics in an Organization

Operational Function of Logistics

Company Management

Human
Finance Production Logistics Marketing
Resources
 The Role of Logistics in an Organization

• Logistics in a Functional Organization

– Broad centralization can be achieved if logistics is
placed directly under the managerial level.
 Logistics and Competitive Performance

• Linking logistics activities directly to organization strategic

plan can work effectively to support their organization for
achieving competitive advantage.
• Porter’s Value chain may be used to identify and understand
the specific source of competitive advantage how they related
to buyer value.
• Value – is an amount a customer is willing to pay for the
products, services provided by an organization.
• Value added – is the difference between what the customer
pays and the cost to the organization in providing that product
or service.
 Logistics and Competitive Performance

Value Chain Five Categories of Primary Activity involved in

competing in an industry.
• Inbound Logistics – activities associated with receiving,
storing, and disseminating input to the product.
 Logistics and Competitive Performance

• Operation
• Activity associated with transforming input into the final product
form.
• Outbound Logistics
• Activity associated with collecting storing and physical
distribution of the products to buyers.
• Marketing & Sales
• are those activities associated with getting buyers to purchase
the product, including channel selection, advertising, pricing,
etc.
• Service
• activities are those that maintain and enhance the product's
value including customer support, repair services, etc.
Logistics and Competitive Performance
 Eight Step Process for improving Logistics activities

1. Define Logistics activity Interrelationships

2. Conduct a Logistics Audit
3. Define Operational Baselines
4. Analyze Systems and Determine Options
5. Define Required Decision Criteria
6. Decide which Intervention to Implement
7. Identify Owners and make Plans
8. Implement and Monitor
 Transportation

• The key element in a logistics chain is transportation

system, which joints the separated activities.
• It occupies one-third of the amount in the logistics
costs.
• Influence the performance of logistics system hugely.
• Required in the whole production procedures, from
manufacturing to delivery to the final consumers and
returns.
• One of the most visible elements of logistics
operations
 Transportation

• Essentially concerns the spatial dimension of the

business firm.
• Has a purpose or function to serve as a connecting link
between the spatially separated units within a firm’s
own organization and between units of the firm and
units of other firms and individuals.
• Good transportation has the effect of holding to a
minimum the time and cost involved in the spatial
relationships of the firm.
 Transportation Utility

• Transportation’s function is to create place utility for

the goods produced or distributed by a firm.
• Place utility exists when goods are in the place where
they can be consumed .
• Goods that are not in the place where they are
needed have less than full value and so
transportation creates value by creating place utility
with the right place, time, form, and possession.
 Transportation in Production
and Marketing

• Transportation in production is looked after by

executives of materials management department or
general administration department or general
department.
• Part of the transportation function can be tagged on
to purchase materials, but the total transportation
planning concept requires higher in-depth skills and
expertise than are contributed by a purchase
executive who is even otherwise preoccupied with
the responsibilities of his complex purchase function.
 Transportation in Production
and Marketing

• Transport of the finished product is often left to the

marketing manager.
• However, a marketing manager is oriented more
towards marketing of the product and development
of market than optimization of transportation cost,
time or effort.
 The Effects of Transportation on
Logistics Activities

• It is planning of functions and sub functions into a system

of goods movement in order to minimize cost and to
maximize service to the customers that constitutes the
concept of business logistics.
• Warehousing services between plants and marketing
outlets involved separate transport.
• Merchandising establishment completed the chain with
delivery to the customers.
• The manufacturers limited themselves to the production of
goods, leaving marketing and distribution to other firms.
 The Role of Transportation
in Service Quality

• By means of well-handed transport system , goods

could be sent to the right place at right time in order
to satisfy customers’ demand.
• It brings efficacy, and also it builds a bridge between
producers and consumers.
• A good transport system performing in logistics
activities brings benefits not only to service quality
but also to company’s competitiveness.