Dimensions of Logistics

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Chapter 2

• Dimensions of Logistics

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Learning Objectives - After reading this
chapter, you should be able to do the following

• 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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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.

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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.
• Jordanos CEO put together a study 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 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.

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Figure 2-1Contemporary Supply Chain Pipeline
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Figure 2-2 Logistics Costs as a Percentage of GDP
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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 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.

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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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Logistics in the Economy A Macro Perspective

• As indicated in Figure 2-4, the Federal Reserve
  measure of inventory to sales ratios from 1991 to
  1999 clearly indicate that companies are getting
  better at managing inventory.
• Companies have been supporting larger amounts of
  sales with decreasing amounts of inventory.

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Logistics in the Economy A Macro Perspective

• The two largest cost categories in logistics
  systems are transportation and inventory.
• While we will look at this in Chapter 9, motor
  carriers share of total freight expenditures is
  450 billion versus 99 billion for all other
  carriers.
• The most frequent trade-off in logistics is
  between transportation and inventory cost.

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What is Logistics?

• Increased recognition through news media,
  corporate-owned trailer promotions, and
  television
• Increased sensitivity to service quality provided
  by logistics
• Logistics definitions provided in Table 2-1 on
  the following slide.

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Table 2-1 Logistics Definitions
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What is Logistics?

• Popular logistics terms
• Logistics Management
• Business Logistics Management
• Integrated Logistics Management
• Materials Management
• Physical Distribution Management
• Marketing Logistics
• Industrial Logistics
• Distribution

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What is Logistics?21st Century View of Logistics

• Business Logistics 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?Value-Added Role of Logistics

• Most commonly referred to in terms of economic
  utilities
• Form utility (what)
• Place utility (where)
• Time utility (when)
• Possession utility (why)
• Also referred to as the seven Rs --- Right
  product, Right quantity, Right condition, Right
  place, Right time, Right customer, and Right cost.

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Figure 2-5 Fundamental Utility Creation in the
Economy
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Logistics in the Firm The Micro Dimension

• Logistics Interfaces with Operations/Manufacturing
  
• Logistics Interfaces with Marketing
• Logistics Interfaces with Other Areas

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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 now a logistics
  function.
• Protective packaging
• Principal purpose is to protect the product from
  damage.
• Foreign third party alternatives
• Some logistics functions are being outsourced.

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Logistics in the Firm The Micro Dimension

• Logistics Interfaces with Marketing
  The Marketing Mix Four Ps
• Price
• Product
• Promotion
• Place

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Logistics in the Firm 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.
• Matching schedules
• Quantity discounts should be tied to carrier
  quantity discounts.
• Volume relationships
• Volumes sold will affect inventory requirements.

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Logistics in the Firm 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.

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Logistics in the Firm 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.

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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 now include finance
  and accounting.
• Logistics can have a major impact on return on
  assets and return on investment.
• Logistics costs reported by cost systems measure
  supply chain trade-offs and performance.

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Logistics Activities

• Transportation
• Storage
• Packaging
• Materials handling
• Order fulfillment
• Forecasting

• Production planning
• Purchasing
• Customer service
• Site location
• Other activities

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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.

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Approaches to Analyzing 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

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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)

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Table 2-2 Analysis of Total Logistics Cost with
a Change to Higher Cost Mode of Transport
Cost Centers Rail Motor
Transportation 3.00 4.20
Inventory 5.00 3.75
Packaging 4.50 3.20
Warehousing 1.50 .75
Cost of Lost Sales 2.00 1.00
Total Cost 15.00 13.00
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Table 2-3 Analysis of Total Logistics Cost with
a Change to More Warehouses
Cost Centers System 1 System 2
Cost Centers Three Warehouses Five Warehouses
Transportation 850,000 500,000
Inventory 1,500,000 2,000,000
Warehousing 600,000 1,000,000
Cost of Lost Sales 350,000 100,000
Total Cost 3,300,000 3,600,000
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Figure 2-6 Nodes and Links in a Logistics System
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Figure 2-7 A Simple Logistics Channel
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Figure 2-8A Multi-Echelon Logistics Channel
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Figure 2-9 A Complex Logistics Channel
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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.

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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.

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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

• 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.

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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

• 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.

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Figure 2-11Dynamic 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 System 2 Total Costs
• 4200 0.0315x 4800
  0.0230x
• 0.0085x 600
• x 70,588 pounds

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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.

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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
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Figure 2-14 The General Relationship of the
Cost of Lost Sales to Transportation Cost
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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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Figure 2-18 Logistics and Spatial Relations
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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

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End of Chapter 2 Slides

• Dimensions of Logistics