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Business Logistics/Supply Chain—A Vital Subject

The supply chain is simply another way of saying “the whole process of business.”

Warehousing

Warehousing

Transportation

Transportation

Vendors/plants/portsTransportation

Factory

Transportation Customers

Informationflows

The Immediate Supply Chain for an Individual Firm

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

Council of Logistics Management

Supply Chain Management DefinedSCM is the integration of all activities associated with the flow and transformation of goods from raw materialsthrough to end user, as well as information flows, throughimproved supply chain relationships, to achieve a sustainable competitive advantage.

Handfield and Nichols

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Demand forecasting

Purchasing

Requirements planning

Production planning

Manufacturing inventory

Warehousing

Material handling

Packaging

Finished goods inventory

Distribution planning

Order processing

Transportation

Customer service

Strategic planning

Information services

Marketing/sales

Finance

Supply Chain Management

Supply Chain Management

Logistics

Purchasing/Materials

Management

PhysicalDistribution

Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+

Demand forecasting

Purchasing

Requirements planning

Production planning

Manufacturing inventory

Warehousing

Material handling

Packaging

Finished goods inventory

Distribution planning

Order processing

Transportation

Customer service

Strategic planning

Information services

Marketing/sales

Finance

Supply Chain Management

Supply Chain Management

Logistics

Purchasing/Materials

Management

PhysicalDistribution

Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+

Evolution of Supply Chain Management

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Supply Chain Schematic

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The Logistics/SC Mission

Getting the right goods or servicesto the right place, at the right time, and in the desired condition at thelowest cost and highest return oninvestment.

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A Revised Strategy is Generating Great Top Management Interest

Historical perspective of distribution:“The last frontier of cost economies”

The contemporary view:Distribution is a new frontier for demand

generation—a competitive weapon.

Peter Drucker, 1962

Both views are now important!

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CustomersTransportation

Inventoryor supply source

Customer order processing (and transmittal)

CustomersTransportation

Inventoryor supply source

Customer order processing (and transmittal)

Critical Customer Service Loop

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$67.717.65%Total

22.251.72Inventory carrying

2.790.41Administration4.580.43Order entry

18.062.02Warehousing$26.523.34%Transportation

$/cwt.Percent of salesCategory

Physical Distribution Costs

Add one-third for inbound supply costs

Source: Herb Davis & Company

Logistics cost are about 10% of

sales w/o purchasing costs

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4

5

6

7

8

9

10

1992

1994

1996

1998

2000

2002

Year

Day

s

8284868890929496

%

Order Cycle Time,Days

ProductAvailability--%ordersProductAvailability--% lineitems

Customer Service Performance

Source: Herb Davis & Company

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• Costs are high − About 10.5% of GDP domestically − About 12% of GDP internationally − A range of 4 to 30% of sales for individual firms, avg. about 10% − A high as 70-80% of sales if purchasing and production are

included

• Customers are more demanding of the supply chain − Desire for quick response − Desire for mass customization

• An integral part of company strategy − Generate revenue − Improve profit

• Logistical lines are lengthening − Local vs. long distance supply

• Logistics is a key to trade and an increased standard of living − Law of comparative economic advantage applies

• Logistics adds value − Time and place utilities

Significance of Logistics

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•Costs are lower than K-Mart or Target Stores

•CEO is a former logistician•Wal-Mart is the largest retailer in

the world!

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Effect on Logistics Foreign Outsourcing

ProfitG & A

Marketing

Logistics

Overhead

Materials

Labor

ProfitG & A

Marketing

Logistics

Overhead

Materials

Labor

Tariffs

Increase

Reduction

Increase

Domestic sourcing Foreign sourcing

Scope of the Supply Chain for Most Firms

Physical distributionPhysical supply(Materials management)

Business logistics

Sources ofsupply

Plants/operations Customers

• Transportation• Inventory maintenance• Order processing• Acquisition• Protective packaging• Warehousing• Materials handling• Information maintenance

• Transportation• Inventory maintenance• Order processing• Product scheduling• Protective packaging• Warehousing• Materials handling• Information maintenance

Focus firm’s internal supply chain1-14

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• Primary- Setting customer service goals- Transportation- Inventory management- Location

• Secondary, or supporting- Warehousing- Materials handling- Acquisition (purchasing)- Protective packaging- Product scheduling- Order processing

Key Activities/Processes

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FocusCompany

Suppliers

Supplier’ssuppliers

Customers

Customers/End users

Acquire Convert Distribute

The Supply Chain is Multi-Enterprise

Product and information flow

Scope in reality

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Reality of SC Scope

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SUPPLYCHAIN

MANAGEMENT

Inte

rfunc

tiona

l coo

rdin

atio

n Interorganizational coordination

Activity and processadministration

The Multi-Dimensions of SC

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PLA

NN

ING

OR

GA

NIZ

ING

CO

NTR

OLL

ING

Transport Strategy• Transport fundamentals• Transport decisionsCustomer

service goals• The product• Logistics service• Ord. proc. & info. sys.

Inventory Strategy• Forecasting• Inventory decisions• Purchasing and supply

scheduling decisions• Storage fundamentals• Storage decisions

Location Strategy• Location decisions• The network planning process

PLA

NN

ING

OR

GA

NIZ

ING

CO

NTR

OLL

ING

Transport Strategy• Transport fundamentals• Transport decisionsCustomer

service goals• The product• Logistics service• Ord. proc. & info. sys.

Inventory Strategy• Forecasting• Inventory decisions• Purchasing and supply

scheduling decisions• Storage fundamentals• Storage decisions

Location Strategy• Location decisions• The network planning process

Study Framework

The focus is here

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Customer service goals• The product• Logistics service• Information sys.

Inventory Strategy• Forecasting• Storage fundamentals• Inventory decisions• Purchasing and supply

scheduling decisions• Storage decisions

Transport Strategy• Transport fundamentals• Transport decisions

Location Strategy• Location decisions• The network planning process

The Logistics Strategy Triangle

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PRODUCTION/OPERATIONSSample activities:• Quality control• Detailed production

scheduling• Equipment maint.• Capacity planning• Work measurement

& standards

LOGISTICSSampleactivities:•Transport• Inventory• Order

processing• Materials

handling

Interfaceactivities:• Product

scheduling• Plant

location• Purchasing

MARKETINGSampleactivities:• Promotion• Market

research• Product

mix• Sales force

management

Interfaceactivities:• Customer

servicestandards

• Pricing• Packaging• Retail

location

Production-logisticsinterface

Marketing-logisticsinterface

Relationship of Logistics to Marketing and Production

Internal Supply Chain1-21

Relationship of Logistics to MarketingProduct

Price Promotion

Place-Customer service levels

Inventory carrying costs

Lot quantity costs Order processing

and information costs

Transport costs

Warehousing costs

Mar

ketin

gLo

gist

ics

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Relationship of Logistics to Production•Coordinates through scheduling and strategy—make-to-order or make-to-stock•An integral part of the the supply chain

−Affects total response time for customers−Shares activities such as inventory planning

•Costs are in tradeoff−Production lot quantities affect inventory

levels and transportation efficiency−Production response affects transportation

costs and customer service−Production and warehouse location are

interrelated

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Logistics/SC in Diverse Areas

•Manufacturing—most common

•Environment—causing restrictions

•Service—emerging opportunities

•Non-profits—little explored

•Military—long history

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Contemporary Logistics Terms•Value stream/logistics process•Quick response and flexible manufacturing•Mass customization•Supply chain management/collaborative logistics•Reverse logistics•Service logistics•Continuous replenishment•Lean logistics•Integrated logistics