1

Introduction to Logistics and

Supply Chain

PETER DRUCKERS stated

that:
Logistics is one of the last frontiers of
opportunity for organizations wishing to
improve their corporate efficiency.

Logistics Management
Logistics management is the process of
planning,
implementing and
controlling
the efficient, cost-effective forward and reverse flow of raw
materials, in-process inventory, finished goods, services,
and related information from point of origin to point of
consumption

for the purpose of conforming to customer requirements.

Council of Logistics Management

Logistics activities
Customer

service
Demand forecasting
Distribution
communications
Inventory control
Material handling
Order processing
Parts and service support

Plant

and warehouse site

selection
Procurement
Packaging
Reverse logistics
Traffic and
transportation
Warehousing and storage

Logistics Is Relevant to All

Types of Organizations
The

definition of logistics includes the

flow of materials and services in both the
manufacturing and service sector.
The service sector includes entities such
as the government, hospitals, banks,
retailers and wholesalers.

Definition of Logistics
Management

Logistics has been called by many names including

the following:

Materials management
Physical distribution
Business logistics
Channel management
Distribution
Industrial logistics
Logistical management

System Approach/Integration
Logistics is, in itself, a system; it is a network of
related activities with the purpose of managing
the orderly flow of goods, information and
service with the logistics channel.
The systems approach simply states that all
functions or activities need to be understood in
terms of how they affect, and are affected by,
other elements and activities with which they
interact.

System must be viewed as a whole

Logistics and Supply Chain

Management Approach

Systems Approach
The

sum of a series of activities is greater

than its individual parts.
Trade-off analysis-system should be
viewed as a whole.
High inventory- High customer service
High storage costs
High obsolescence risks

The Five Rights of Logistics

Right

Items, needed for consumption or

production,
Right Place
Right Time
Right Condition
Right Cost,

Logistics Adds Value by Creating

Utility
FORM UTILITY is the process of creating the
good and service, or putting it in the proper form
for the customer to use. (from raw materials to
finished goods)
POSSESSION UTILITY is the value added to a
product or service because the customer is able to
take actual possession. (by credit a arrangements,
loans...)
TIME UTILITY is the value added by having an
item when it is needed.
PLACE UTILITY means having the item or
service available where it is needed.

Logistics Supports Marketing

According

to Kotler and Armstrong;

marketing management - determining the needs

and wants of target markets and delivering the
desired satisfactions more effectively and
efficiently than competitors
Impact of marketing concept ----customer
orientation

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Marketing / Logistics
Management Concept
Customer
satisfaction
Suppliers
Intermediate
customers
Final customers

Integrated
effort

Company
profit

Product
Price
Promotion
Place (distribution)

Maximize long-term
profitability
Lowest total costs
given an acceptable
level of customer
service

Marketing-Logistics
Concepts
Time

and place utility customer service

level customer satisfaction

Customer

service is an output of the

logistics system

Competitive Advantage
The

source of competitive advantage is

found ;
In the ability of the organization to differentiate
itself, in the eyes of the customer, from its
competitors,
By operating at a lower cost and hence at
greater profit.

Christopher s.5

 It

is only in the recent past that

business organizations have come to
recognize the vital impact that
logistics management can have in
the achievement of competitive
advantage.

Martin
Christopher

12

Components of
Logistics Management
Management actions
Inputs into
logistics
Natural
resources
(land, facilities,
and equipment)
Human
resources

Planning

Implementation

Control
Outputs of
logistics
Competitive
advantage

Logistics management
Suppliers

Raw In-process Finished

materials inventory goods

Customers

Time
and place
utility

Financial
resources

Efficient
movement
to customer

Information
resources

Proprietary
asset

Logistics activities
Customer service
Demand forecasting
Distribution
communications
Inventory control
Material handling
Order processing
Parts and service support

Plant and warehouse site

selection
Procurement
Packaging
Reverse logistics
Traffic and transportation
Warehousing and storage

The Outputs of the Logistics

System
The outputs of the logistics system are
competitive advantage,
time and
place utility,
efficient movement to the customer, and
providing a logistics service mix such that
logistics becomes a proprietary asset of the
organization.

SCM (CSCMP Definition)

Supply Chain Management encompasses the planning

and management of all activities involved in sourcing
and procurement, conversion, and all logistics activities.

Importantly, it also includes coordination and

collaboration with channel partners, which can be
suppliers, intermediaries, third-party service providers,
and customers.

In essence, Supply Chain Management integrates

supply and demand management within and across
companies.

Competition

Today the real competition is

not company against
company but rather supply
chain against supply chain.

Christopher s. 16,38

Factors Impacting the

Development of Logistics
Military

logistics developments
Transportation deregulation
Competitive pressures
Information technology
Channel power
Profit leverage

1.Military Logistics

Throughout the history ;

wars have been won and
lost through logistics
strengths and
capabilities or the lack of
them.

1.Military Logistics
Following

the World War II, logistics

began to receive increased recognition
and emphasis.
In the Persian Gulf War in 1990-1991,
the ability to efficiently and effectively
distribute and store supplies and
personnel were key factors in the success
of the US Armed Force.

2.Deregulation
Deregulation of the transportation industry in
the late 1970s and early 1980s gave
organizations many more options and increased
the competition within and between
transportation modes.
Carriers become more creative, flexible,
customer-oriented, and comparative in order to
succeed.
They can focus on negotiation of rates, terms,
and services, with their overall attention
directed toward getting the best transportation
buy.

3. Competitive Pressures
Globalization and competition
With rising interest rates and increasing energy
costs during the 1970s, logistics received more
attention as a cost driver-emphasis on cost
control
WHY?
Local firms versus overseas competitors
Increased offshore buying and selling
activities, more complex and more costly global
supply chains

4.Information Technology
Information technology gave organizations the
ability to better monitor transactions intensive
activities such as ordering, movement of
goods...
Computerized quantitative models for
controlling and optimization
MRP,MRP II,DRP,DRP II,JIT link material
management from order processing to
inventory management, forecasting and
production.

5.Channel Power
Shifting

channel power from

manufacturers to retailers, wholesalers,
and distributors has also had a profound
impact on logistics.
Lower brand loyalty decreases a
manufacturers power-increases
retailers power

6. Profit Leverage
$1

saved in logistics costs has a much

greater impact on the organizations
profitability than a $1 increase in sales.

There

are costs associated with sales

( cost of goods sold) ] $ 1 increase in
sales does not result in $ 1 dolar increase
in profit

Key Logistics Activities

1
6

Customer service
Demand forecasting
Inventory management
Logistics
communications
Material handling
Order processing
Packaging

Parts & service support

Plant & warehouse site
selection
Procurement
Reverse logistics
Traffic & transportation
Warehousing & storage

CUSTOMER SERVICE

Good customer service supports customer satisfaction.

Customer service is the output of the logistics system.

It involves getting the right product, to the right

customer at the right place, in the right condition, at the
right time and at the lowest total cost possible.

The key trade off of customer service: cost of lost sales

Dissatisfied customer tells to average of nine others

DEMAND FORECASTING

There are many types of demand forecasting

such as;
marketing forecasts customer demand based on
promotions, pricing, competition and etc. or
manufacturing forecasts production requirements
based on marketing sales demand forecasts and current
inventory levels.

Logistics usually becomes involved in

forecasting in terms of how much should be
ordered from its suppliers and how much of
finished product should be transported or held
in each market that the organization serves.

INVENTORY
MANAGEMENT
Inventory

management involves ; trading

off the level of inventory held to achieve
high customer service levels with the cost
of holding inventory, including capital
tied up in inventory, variable storage
costs and obsolescence.

LOGISTICS
COMMUNICATIONS
Communications

are becoming increasingly

automated, complex and rapid.

Computerized

systems

Wal-Mart

advance communication

( supplier link-real time demand

data-on time replenishment)

MATERIALS HANDLING
Materials

handling is a broad area that

encompasses virtually all aspects of all
movements of raw materials, work in
process, or finished goods within a plant
or warehouse.

primary objective of materials

management is to eliminate handling
wherever possible-min. travel distance,
bottlenecks, inventory levels and loss.

ORDER PROCESSING
Order processing entails the systems
getting orders from customers,
checking on the status of orders
communicating to customers about them,
filling the order
making it available to the customer.
Advanced order-processing methods ( EDIelectronic data interchange, EFT-electronic
funds transfer, barcoding costs

PACKAGING
For

protection and storage from a

logistical perspective.
Important for protection during storage
and transportaion
Important to be designed for the
warehouse configuration and materials
handling equipment

PARTS AND SERVICE

SUPPORT
Logistics

is responsible for providing

after-sale service support.
This may include:
delivery of repair parts to dealers,
stocking adequate spares,
responding quickly to demand for repairs...

PLANT AND WAREHOUSE

SITE SELECTION
Determining

the location of the

companys plants and warehouses is a
strategic decision
affects the costs of transporting raw
materials inbound and finished goods
outbound, but also customer service
levels and speed of response.

PROCUREMENT
Procurement is the purchase of materials
and service from outside organizations to
support the firms operations from
production to marketing, sales, and
logistics.
Supplier selection, negotiation of price,
supplier quality assessment

REVERSE LOGISTICS

Reverse flow of goods, services and related information

because of recycling, reusing and disposal activities.

Returns may take place because of a problem with the

performance of the item or simply because of the
customer changed his or her mind.

Return goods handling is complex and costly.

The cost of moving a product backward nearly as much

as nine times as high as moving the same product
forward.

TRAFFIC AND
TRANSPORTATION

This is the key logistics activity actually provide for the

movement of materials and goods from point of origin
to point of consumption and (disposal as well)

Selection of mode, routing the shipment, assuring of

compliance with regulations in the region of the
country where shipment is occuring, selection of the
carrier

Largest logistics cost

WAREHOUSING AND
STORAGE
Warehousing supports time and place
utility by allowing an item to be
produced and helps for later
consumption.
Warehouse layout, design,ownership,
automation

Logistics activity is literally thousands of

years old, dating back to the earliest
forms of organized trade.
As an area of study however, it first began to
gain attention in the early 1900s
-in the distribution of farm products,
-as a way to support the organizations
business strategy,
-and as a way of providing time and place
utility.

Development of Logistics
6 Eras
Era 1: Farm to market ( early 1900s)
( 1916-1940)
Major influence- agricultural economies
distribution of farm products
transportation

Era 2: Segmented functions (1940-1960)

Major influence-military with World War II
independent functions-institutional approach, inbound
outbound transportation, wholesaling, retailing,
physical distribution

Era 3: Integrated functions ( early 1960s- early 1970s)

Major influence- industrial economies
Linking them together
Total cost approach
Systems approach
Integration of logistics
Era 4: Customer focus (early 1970s-mid 1980)
Major influence: management science
Customer service
Inventory carrying
Productivity
Link-node
OR influence

Era 5: Logistics as a differentiator ( mid 1980s-present)

Major influence-IT, management strategy
globalization
reverse logistics
environment
integrated supply chain management

Era 6: Behavioral and boundary spanning (future)

Major influence: marketing, social sciences
behavioral aspects of interfirm relations
theory development
customer perceptions of logistics systems

TOTAL COST CONCEPT

The

total cost concept is the key to

effectively managing logistics processes.

The

goal of the organization should be to

reduce the total cost of logistics activities,
rather than focusing on each activity in
isolation.

MAJOR LOGISTICS COST

CATEGORIES
Customer

service levels
Transportation costs
Warehousing costs
Order processing/information
systems costs
Lot quantity costs
Inventory carrying costs

1
5

14 key logistics activites

Place/
customer service
levels
Customer service,
Parts and service support,
Return goods handling

Inventory
carrying costs
Inventory management
Packaging
Reverse logistics

Transportation
costs
Traffic and transportation

Lot quantity
costs
Material handling
procurement

Warehousing
costs
Warehouse and storage
Plant and warehouse
selection

Order processing and

information costs
Order processing
LIS(logistics
communications)
Demand
forecasting/planning

Source: Adapted from Douglas M. Lambert, The Development of an Inventory Costing Methodology: A Study of the Costs
Associated with Holding Inventory (Chicago, IL: National Council of Physical Distribution Management, 1976), p. 7.

Inventory carrying costs: capital costs,

inventory service cost (insurance and taxes on
inventory), storage space costs, inventory risk
costs.
Lot quantity costs: procurement and production
related costs varying with changes in order size
or frequency.
Order costs, setup costs, capacity lost, material
handling cost, price differentials due to buying
in different quantities

TRADE-OFF APPROACH
IN LOGISTICS

Central goal of trade off in logistics is to maximize long

term profitability and the effective use of assets.

Examining trade-offs among alternatives and costs,

thereby reducing the overall total cost of activites.
Reduced transportation costs and longer transit timesincreased inventory and inventory carrying costs

Product

Price

Promotion

LOGISTICS

Place/
customer service
levels
Inventory
carrying costs

Transportation
costs

Lot quantity
costs

Warehousing
costs

MARKETING

Cost Trade-offs Required

in Marketing and Logistics

Order processing
and information
costs
Source: Adapted from Douglas M. Lambert, The Development of an Inventory Costing Methodology: A Study of the Costs
Associated with Holding Inventory (Chicago, IL: National Council of Physical Distribution Management, 1976), p. 7.

81

Future Challenges in
Logistics
Strategic

planning and participation

Total quality management (TQM)
Just-in-time (JIT)
Quick response (QR)
Efficient consumer response (ECR)
Logistics as a competitive weapon
Accounting for logistics costs

Future Challenges in
Logistics

(Continued)

Logistics as a boundary-spanning activity

Global logistics
Increasing skill requirements
Logistics information systems
Outsourcing, partnering, and strategic
alliances
Green marketing

JIT
Just in time
Aim to reduce waste and redundant inventory
by delivering products, components, materials
when they are needed.
Needs close coordination
Reduces inventory, increases customer service
level
JIT in retail and grocery: QR and ECR

Quick response
Began in apparel and textile industry
Retail sector strategy
Speeding inventory flows
Mostly between manufacturer and retailer
When fully implemented, QR applies JIT.
Moving product fastly-cross docking rather
than warehousing, floor ready
merchandise( prehung and preticketed)
Wide usage of IT ( EDI, POS, Barcodes, CAD,
CAM)

Efficient Consumer Response

Combining several logistics methods for improving the

competitiveness of the grocery industry by cutting
waste in SC
Grocery industrys answer to QR
Wide implementation of EDI, POS(point of sale),
barcoding: paperless information flow
Continuous replenishment
Cooperative relation between manufacturer,
suppliers,distributors and customers
Cross dock
Moving away from deal mentality to cooperation

ECR
%

41 of total chain reduction of

inventory
speeds up cycle time from 104 days to 61
days