Chapter 1:

Logistics Engineering & Systems: --Introduction

Learning Objectives

Understand the role and importance of logistics in private and public organizations. Discuss the impact of logistics on the economy and how effective logistics management contributes to the vitality of the economy. Understand the value-added roles of logistics on both the macro and micro level. Explain logistics systems from several perspectives.
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Chapter 2

Learning Objectives

Understand the relationship between logistics and the other important functional areas in a company, including manufacturing, marketing, and finance. Discuss the important management activities in the logistics function.

Chapter 2

Learning Objectives

Analyze logistics systems from several different perspectives to meet different objectives. Determine the total costs and understand the cost trade-offs in a logistics system from a static and dynamic perspective.

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Logistics Profile:

Jordano Foods

Jordano Foods is a major vendor for SAB Distribution, and must decide if it wants a supply chain relationship with SAB in a win-win case. Jordanos CEO put together a facilitating team to evaluate the impact of adding a logistics systems approach. As you read this chapter, look for ways for Jordano to improve its logistics processes and supply chain relationship with SAB.
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Dimensions of Logistics:

Introduction

Logistics is under the glory shadow of SCM Fancy front-end cant stand alone. Good logistics is business power. The big challenge is, order fulfillment meets or exceeds customer expectations, and trade-off with costs. Individual firms logistics system (intrafirm), and coordination and integration of logistics systems in supply chains.
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Figure 2-1

Contemporary Supply Chain Pipeline

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Figure 2-2:
1999 1998 1996 1995 1990 1985 1980 0
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Logistics Costs as a Percentage of GDP

9.9 10.1 10.3 10.4 11.4 12.3 15.7 5 10 15 20
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Logistics in the Economy:

A Macro Perspective

As indicated in Figure 2-2, logistics costs as a percentage of GDP have declined from 16% in 1980, to under 10% in 1999. This reflects a significant improvement in the efficiency of logistics systems. Figure 2-3 shows a further breakdown of logistics costs for 1999.

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Figure 2-3:

Total Logistics Costs - 1999

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Figure 2-4:

Inventory Sales Ratio

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What is Logistics?

Increased recognition through news media, television ad., corporate-owned trailer promotions, and the credit in the wars. Increased sensitivity to service quality provided by logistics. Still lots of confusion about the definition and what it really means, at the present of lots of other terms.

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Popular logistics terms

Logistics Management Integrated Logistics Support Materials Management Physical Distribution Management Marketing Logistics Industrial Logistics Emergency Logistics Humanitarian Logistics Military Logistics
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What is Logistics?

21st Century View of Logistics

Business Logistics Part of supply chain process

that plans, implements, and controls the efficient, effective flow of goods, services, and related information from the point of origin to the point of use or consumption in order to meet customer requirements.

Military Logistics Design and integration of all

aspects of support for the operational capacity of the military forces, and their equipment to ensure readiness, reliability, and efficiency.
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What is Logistics?

21st Century View of Logistics

Event Logistics Network of activities, facilities,

and personnel required to organize, schedule, and deploy the resources for an event to take place and to efficiently withdraw after the event.

Service Logistics Acquisition, scheduling, and

management of the facilities/assets, personnel, and materials to support and sustain a service operation or business.

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What is Logistics?

A general definition:
Logistics is the process of anticipating customer needs and wants; acquiring the capital, materials, people, technologies, and information necessary to meet those needs and wants; optimizing the goods- or serviceproducing network to fulfill customer requests; and utilizing the network to fulfill customer requests in a timely way.

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What is Logistics?

Value-Added Role of Logistics

4 principal types of economy utility add value to a product or service:

Form utility (what) Place utility (where) Time utility (when) Possession utility (why)

Also referred to as the 7 Rs:

Right product, Right quantity, Right condition, Right place, Right time, Right customer, and Right cost.
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Logistics in the Firm:

The Micro Dimension

Logistics Interfaces with Operations/Manufacturing. Logistics Interfaces with Marketing. Logistics Interfaces with Finance / Accounting.

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Logistics in the Firm: Logistics Interfaces

with Operations/Manufacturing

Length of production runs Balance economies of long production runs against increased costs of high inventories. Seasonal demand Acceptance of seasonal inventory to balance lead production times.

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Logistics in the Firm: Logistics Interfaces

with Operations/Manufacturing

Supply-side interfaces Stocking adequate supplies to ensure uninterrupted production becomes a logistics function. Protective packaging Principal purpose is to protect the product from damage, as a logistics activity. Foreign & third party alternatives Some logistics functions are being outsourced - international procurement.
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Chapter 2

Logistics in the Firm:

The Micro Dimension

Logistics Interfaces with Marketing: The Marketing Mix four Ps Price Product (Packaging) Promotion Place

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Logistics in the Firm:

Price

Carrier pricing

Volume discount: the larger the shipment, the cheaper the transportation rate; shipment sizes should be tailored to the carriers vehicle capacity where possible. Quantity discounts (selling) should be tied to carrier quantity discounts. Volumes sold will affect inventory requirements.
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Matching schedules

Volume relationships

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Logistics in the Firm:

Product

Size, shape, weight, packaging and other physical attributes 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 save (or lost) millions of dollars in logistical costs. Consumer packaging
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Logistics in the Firm:

Promotion

Push versus pull (two promotion strategies!)

Pull strategies tend to be more erratic. Push strategies tend to more predictable. 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. The more popular a product, the easier it is to persuade channel members to promote your product.
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Channel competition

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Logistics in the Firm:

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.

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Logistics Interfaces with Other Areas

Manufacturing and marketing are probably the two most important internal, functional interfaces with logistics. Other important interfaces include finance and accounting. Logistics can have a major impact on ROA and ROI. Accounting provides appropriate cost information for alternative logistics systems alternatives. Accounting measure supply chain trade-offs and performance.
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Logistics Activities

Transportation Warehousing & storage Packaging Materials handling Inventory control Order fulfillment Demand Forecasting
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Production planning Purchasing Customer service Site location Return goods handling Part & service support Salvage & scrap disposal
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On the Line:

Toyota Distribution
Currently: 2 main DCs in Melbourne and Sydney, 9 smaller DCs around the country and one for Lexus in Perth; serving than 8 million parts and accessories every month; Trends: the Japanese automaker source more and more of its parts from Victoria instead of overseas. Customers grow. Strategies and technologies: Computer modeling re-designed its 30 year old distribution network. Simulation software looked first at Lexus Division and then at the entire network. Results: A new CD strictly handling Lexus parts; The start-up cost will be quickly paid by itself; The new network both improved customer service and lowered the overall costs.
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Chapter 2

Approaches to Analyzing Logistics Systems:

Materials Management vs. Physical Distribution Cost Centers Nodes vs. Links Logistics Channels

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Materials Management (inbound) vs. Physical Distribution (outbound)

Frequently the movement and storage of raw materials/supplies is far different from the movement and storage of finished goods. 4 different classifications of logistics systems Heavy inbound - e.g., aircraft, auto Heavy outbound - e.g., chemicals Balanced system - e.g., consumer products Reverse systems - e.g., returnable products
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Approaches to Analyzing Logistics Systems

Cost Centers Total cost analysis 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 Channels The network of intermediaries involved in the logistics system. (see Figures 2-7, 2-8, and 2-9)
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Table 2-2: Analysis of Unit Logistics Cost with

a Change to Higher Cost Mode of Transport

Cost Centers
Transportation Inventory Packaging Warehousing Cost of Lost Sales Total Cost
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Rail
$ 3.00 5.00 4.50 1.50 2.00 $ 16.00

Motor
$ 4.20 3.75 3.20 .75 1.00 $ 12.90
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Table 2-3: Analysis of Total Logistics Cost

with a Change to More Warehouses

Cost Centers Transportation Inventory Warehousing Cost of Lost Sales Total Cost
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System 1 Three Warehouses $ 850,000 1,500,000 600,000 350,000 $ 3,300,000

System 2 Five Warehouses $ 500,000 2,000,000 1,000,000 100,000 $ 3,600,000

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Approaches to Analyzing Logistics Systems

Cost Centers Total cost analysis Cost trade-offs between the centers. (see Tables 2-2 and 2-3) Nodes versus Links Nodes are spatial points (plants, warehouses, etc.); Links are the transportation network (rail, motor, air, pipe and water). (see Figure 2-6) Logistics Channels The network of intermediaries involved in the logistics system. (see Figures 2-7, 2-8, and 2-9)
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Figure 2-6:

Nodes and Links in a Logistics System

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Approaches to Analyzing Logistics Systems

Cost Centers Total cost analysis 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 Channels The network of intermediaries involved in the logistics system. (see Figures 2-7, 2-8, and 2-9)
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Figure 2-7

A Simple Logistics Channel

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Figure 2-8

A Multi-Echelon Logistics Channel

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Figure 2-9

A Complex Logistics Channel

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Systems Analysis

Cost Perspective

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

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Logistics and Systems Analysis

Level of Optimality (Figure 2-10 )

Additionally, logistics systems must work in harmony with production, marketing, finance and accounting, etc. --- this may also result in sub-optimal logistics performance. There are often constraints working which result in sub-optimal outcomes.
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Figure 2-10 Levels of Optimality in

Economic Environments

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Techniques of Logistics System Analysis:

Short-Run/Static Analysis (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, or in a long run. Examine the data presented in Table 2-4.

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Table 2-4 Static Analysis of C&B Chemical

Company (50,000 pounds of output)

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Techniques of Logistics System Analysis:

Long-Run/Dynamic Analysis (Figure 2-11)

Comprised a graph of the fixed and variable costs of at least two alternative logistics systems. The graph may have no indifference point, and may have multiple points of indifference. Examine the data presented in Figure 2-11.

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Figure 2-11 Dynamic Analysis

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

System 2

Total Cost = Fixed Costs + Variable Cost/unit x number of units y = $4800 + 0.0230x

Trade-off Point

System 1 Total Costs $4200 + 0.0315x 0.0085x x

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= System 2 Total Costs = $4800 + 0.0230x = $600 = 70,588 pounds

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Crossover Charts Dynamic Analysis

Variable costs

Variable costs

$
Fixed cost

Variable costs

$
Fixed cost Option C

Fixed cost Option A

Option B

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V1

V2

Volume
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Example
Crossover between system A and B Crossover between system B and C

Taggert+Custom Machine350,000 a contract + 350,000 = units of 8V2 for 145,000 6V2 + 950,000 10 V1 150,000 = 8V1 + Shop has product from its new plant. James Taggert, the logistics 600,000 has 2V2 = Manager, 2V1 = 200,000 calculated the cost for three logistics alternatives. Which system should V2 = 300,000 units V1 = 100,000 units he choose for this new contract?
System A (air, 1W) $150,000 $10 System B (truck, 2Ws) $350,000 $8 System C (rail, 3Ws) $950,000 $6

Fixed Costs Variable Costs

Therefore, at a volume of 145,000 units, system B is the appropriate logistics channel.

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Crossover Charts
Process Cost Chart $

Use A 0
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Use B 100000 Units 300000

Use C

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Logistics in the Firm: Factors Affecting

the Cost and Importance of Logistics

Competitive Relationships Inventory/order cycle length (Figure 2-12) Inventory/lost sales effect (Figure 2-13) Transportation/lost sales effect (Figure 2-14) Inventory and transportation combined effect on COLS substitutability Product Relationships Dollar value/logistics costs (Figure 2-15) Density/logistics costs (Figure 2-16) Susceptibility to damage/logistics costs (Figure 2-17) Special handling Spatial Relationships (Figure 2-18)
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Figure 2-12 The Relationship between

Required Inventory and Order Cycle Length from a Customer Perspective

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Figure 2-13 The General Relationship of the

Cost of Lost Sales to Inventory Cost

Units of inventory

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Figure 2-14

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

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Logistics in the Firm: Factors Affecting

the Cost and Importance of Logistics

Competitive Relationships Inventory/order cycle length (Figure 2-12) Inventory/lost sales effect (Figure 2-13) Transportation/lost sales effect (Figure 2-14) Inventory and transportation combined effect on COLS substitutability Product Relationships Dollar value/logistics costs (Figure 2-15) Density/logistics costs (Figure 2-16) Susceptibility to damage/logistics costs (Figure 2-17) Special handling Spatial Relationships (Figure 2-18)
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Figure 2-15

The General Relationship of Product Dollar Value to Various Logistics Costs

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Figure 2-16 The General Relationship of

Product Weight Density to Logistics Costs

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Figure 2-17 The General Relationship of

Product Susceptibility to Loss and Damage to Logistics Costs

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Logistics in the Firm: Factors Affecting

the Cost and Importance of Logistics

Competitive Relationships Inventory/order cycle length (Figure 2-12) Inventory/lost sales effect (Figure 2-13) Transportation/lost sales effect (Figure 2-14) Inventory and transportation combined effect on COLS substitutability Product Relationships Dollar value/logistics costs (Figure 2-15) Density/logistics costs (Figure 2-16) Susceptibility to damage/logistics costs (Figure 2-17) Special handling Spatial Relationships (Figure 2-18)
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Chapter 2

Figure 2-18

Logistics and Spatial Relations

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