Lecture 1: An Overview of Logistics

OPS 228 Logistics Management

 Outline
• Logistics management
– The goal of logistics management
– The logistical value proposition
– Integrated logistics framework
• Logistics and supply chain
– Integration creates value
What is Logistics?
• Logistics is the design and administration of
systems to control movement and
geographical positioning of raw materials,
work-in-process, and finished inventories at
the lowest total cost.
A life without logistics?
Logistics includes these major functions of
work
• Order Processing
• Inventory
• Transportation
• Warehousing,
Materials Handling,
and Packaging
• Integrated through a
network of facilities
– E.g. warehouses and
distribution centers
 Goal of logistics management
• To satisfy customer
expectations for delivery of
products (or services) while
controlling the total cost
• Managers must support the
requirements for procurement,
manufacturing and customer
accommodation supply chain
operations
 Logistical value proposition
• Logistical value proposition consists of a
commitment to key customer expectations
and requirements at a minimum cost
• The two elements of this value proposition are
Service and Cost Minimization
– Firms must make appropriate tradeoffs between
service and cost for each of their key customers
Tradeoff and the productivity frontier

Service/responsiveness

Ideal process
Repositioning

World class
Improvement

Low cost
 Key take-away #1

• Two elements of logistical value proposition are

Service Benefits and Cost Minimization, between
which companies need to make appropriate
tradeoffs.
Service benefits from logistical performance

• Availability involves having inventory to consistently meet

customer material or product requirements
• Operational performance deals with the time required to
deliver a customer’s order
– Key metrics involve delivery speed and consistency
– Other metrics like flexibility and recovery time from malfunction are
also important
• Service reliability involves the quality attributes of logistics
– Key to quality is accurate measurement of availability and operational
performance over time
Different perspectives on cost minimization
Traditional Cost Logistics Model Total Cost Logistics Model

Minimize order processing cost Minimize (Order processing

+ +
Minimize inventory cost Inventory
+
+
Minimize transportation cost
+ Transportation
Minimize warehousing, materials +
handling and packaging cost Warehousing, materials
+ handling and packaging
Minimize facility cost +
__________________________ facility) Cost
Lowest logistics cost __________________
Lowest total logistics cost
 Cost minimization
using the total cost logistics model
Traditional Cost Logistics Model Total Cost Logistics Model
• Focused on achieving the lowest • Focused on achieving the lowest total
possible cost for each individual cost across ALL functions of logistics
function of logistics
– For example, transport the
Cost-to-cost
• A cost decision tradeoff
in one function should
consider impact on costs of all other
material the cheapest way
logistics functions
possible
– For example, transporting material
• Expected lowest cost based on the cheapest way is slower than other
decisions that were cheapest for choices. This requires an increase in
individual functions storage cost to hold the material
• Ignored the impact of cost longer
decisions across logistics – Would it still be a lower cost to use
functions the cheapest mode of transport?
 Example of evaluating alternatives to find
lowest total cost
• Compare two alternative shipping carriers to
move a shipment of electronic chips
– Value of shipment = $25,000.00
– Faster shipping is generally more expensive than
slower shipping
• Carrier 1 costs $250 to ship
• Carrier 2 costs $20 more but delivers 1 day faster
– Product in transit is a form of inventory
• Holding costs for shipment is 40% of value per year
– No other cost differences across remaining logistics
functions
 Example of evaluating alternatives to find
lowest total cost
Traditional Cost Method
• Minimize transportation cost
– Compare 1st carrier at $250 vs. 2nd carrier at $270
• Decision is to use 1st Carrier to save $20

Total Cost Method

• Minimize total of transportation and inventory cost
Annual
Daily cost of holding = holding cost x Product value /365
product

= (.40 x $25,000)/ 365 = $27.40

– Compare 1st carrier at $250 + $27.40 = $277.40 vs. 2nd carrier at $270
• Decision is to use 2nd Carrier since it is a lower total cost
 Key take-away #2

• The goal of logistics management is to satisfy

customer expectations for delivery of products (or
services) while controlling the total cost.
• Note the differences between the lowest total cost
of all functions and the total of the lowest cost of
each function.
 Integrated logistics framework
• Goal is to achieve customer satisfaction at the lowest
Total Cost
• Decisions in one functional area will impact cost of
all others (interdependent)
• We integrate the logistical functions into a coherent
framework starting with the customer (Order
processing) and ending with the customer
(Transportation and Delivery)
The five functions of logistical work are
interrelated

Figure 2.1 Integrated Logistics

 Order processing
• Order processing is the transmission of customer
requirements to the supply chain
• Accurate information is needed to achieve superior
logistical performance
• Responsive supply chains require accurate and timely
information about customer purchase behavior
• Well-maintained customer relationship is important
for fast information flow
 Inventory
• Answers the questions of
– When to order
– How many to order/stock
– Where to stock
• The objective is to achieve desired customer service with
minimum inventory commitment.
• Inventory strategy is based on a combination of
– Core customer segmentation
– Product volume and profitability
– Transportation integration
– Time-based performance
– Competitive performance
 Transportation
• Transportation is the operational area that
geographically moves and positions inventory
• Different ways to satisfy transportation requirements
– Operate a private fleet of equipment
– Contract with dedicated transport specialists
– Engage carriers that provide different transportation services as
needed on a per shipment basis

• Metrics: cost, speed, and consistency

 Warehousing, materials handling and
packaging
• These activities are integral parts of other logistical functions
– Inventory typically needs to be warehoused at selected times during
the logistics process
– Transportation vehicles require materials handling for efficient loading
and unloading
– Individual products are most efficiently handled when packaged
together into shipping cartons
• Effective integration of these functions facilitates the speed
and overall ease of product flow throughout the logistical
system
 Facility network
• The number, size and geographical
relationship of facilities used to
perform logistical operations directly
impacts customer service capability and
cost
• Types of facilities in the logistics
network include
– Manufacturing plants, warehouses, cross-
dock operations and retail stores
• Specific logistics activities are
performed within the facility network
The scope of integrated logistical
operations

Figure 2.2 Logistical Integration

 Logistical support units
• Customer relationship management is dealing with the
varied aspects of serving customers
• Manufacturing production concentrates on managing work-
in-process inventory as it flows between stages of
manufacturing
• Procurement is concerned with purchasing and arranging
inbound movement of materials, parts, and/or finished
inventory from suppliers into manufacturing or assembly
plants, warehouses or retail stores
Topics to Cover
 Supply chain?

Supplier Manufacturer Distributor Retailer Customers

 Supply Chain Management
• Supply chain management is a set of processes
used to effectively and efficiently integrate
suppliers, manufacturers, distribution centers,
distributors and retailers, so that products are
produced and distributed at the right quantities,
to the right locations, and at the right time in
order to minimize system-wide costs while
achieving the consumer’s desired value
proposition.
 Additional Definition
• “Supply Chain Management encompasses the planning
and management of all activities involved in sourcing
and procurement, conversion, and all logistics
management 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.” (Council of
Supply Chain Management Professionals – CSCMP)
The integrated value-creation process must be
managed across firms from end to end

Figure 1.1 The Integrated Supply Chain Frameworks

 The total integration of the overall
business process creates value
Table 1.1 Integrative Management Value Proposition
Integrative management requires simultaneous
achievement of 8 processes

Table 1.3 Eight Supply Chain Processes

Supply Chain Value Proposition

Configure in a customer relevant way while

simultaneously increasing quality,
productivity and operational excellence.

• Service Excellence – Effectiveness

• Cost Minimization and Avoidance – Efficiency
• Value Generation – Relevancy
• Continuous Improvement – Sustainability
 Key take-away #3

• Integrated management (Integration) is important

for businesses to create value; functional silos hurt
business performance.
 Key take-aways
• Two elements of logistical value proposition are Service
Benefits and Cost Minimization, between which
companies need to make appropriate tradeoffs.
• The goal of logistics management is to satisfy customer
expectations for delivery of products (or services)
while controlling the total cost.
• Integrated management (Integration) is important for
businesses to create value; functional silos hurt
business performance.
Learning objectives
– Understand what logistics management is, and why it’s important.
– Be able to define and explain the logistical value proposition.
– Be able to explain the goal of logistics management.
– Understand the total cost perspective, and be able to evaluate
alternatives to find the lowest total cost.
– Understand the integrated logistics framework, and be able to
explain the major functions and the scope.
– Understand the relationship between logistics and supply chain,
and be able to explain why and how integration creates value.