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Chapter 2
ROLE OF LOGISTICS
IN SUPPLY CHAINS
Learning Objectives
After reading this chapter, you should be able to do the following:
1. Understand the role and importance of
logistics in private and public
organizations.
2. Discuss the impact of logistics on the
economy and how effective logistics
management contributes to the vitality of
the economy.
3. Understand the value-added roles of
logistics on both a macro and micro level.
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Learning Objectives, continued
4. Explain the relationships between
logistics and other functional areas such
as manufacturing, marketing, and
finance.
5. Discuss the importance of management
activities in the logistics function.
6. Analyze logistics systems from several
different perspectives to meet different
objectives.
7. Determine the total costs and understand
the cost tradeoffs in a logistics system.
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
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Figure 2.1
Contemporary Supply Chain Profile
Source: Center for Supply Chain Research, Penn State University.
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part.
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What is Logistics (four views of it as an
organization’s division)
● Business logistics:
• That part of the supply chain process that plans,
implements, and controls the efficient, effective flow
and storage of goods, service, and related information
from point of use or consumption in order to meet
customer requirements.
● Military logistics:
• The design and integration of all aspects of support
for the operational capability of the military forces
(deployed or in garrison) and their equipment to
ensure readiness, reliability, and efficiency.
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
What is Logistics, continued
● Event logistics:
• The 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:
• The acquisition, scheduling, and management of the
facilities/assets, personnel, and materials to support
and sustain a service operation or business.
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part.
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Table 2.1
Logistics Definitions
Perspective
Definition
Source: Adapted from Stephen H. Russell, “A General Theory of Logistics Practices”,
Air Force Journal of Logistics 24, no 4 (2000): 15
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Logistics – Generic Definition
● A SCM component that plans, implements,
and executes flow and storage of goods,
service and information from the point of
origin to the point of consumption.
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part.
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Figure 2.2
Utility Creation in the Economy
Source: Center for Supply Chain Research, Penn State University
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Economic utilities and means that add value to a
product or service in the SCM
● Production
• Form Utility (by assembling parts into finished goods)
● Logistics
• Place Utility (by moving goods to where demand is)
• Time Utility (by moving goods when demand exists)
• Quantity Utility (by offering the right quantity)
● Marketing
• Possession Utility (by promotion and sale to increase
the desire to posses the goods)
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Logistics Activities
1. Transportation
2. Warehousing and storage
3. Industrial packaging (during the
transportation and storage phase)
4. Materials handling
5. Inventory control
6. Order fulfillment
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Logistics Activities, continued
7. Demand forecasting
8. Production planning/scheduling
9. Procurement (viewed as part of the
logistics process)
10.Customer service (order taking and
filling)
11.Facility location (selecting a plant or
DC location to supply)
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Logistics cost as a % of GDP
1. 1970’s – 20%
2. 1980’s – 12%
3. 1990’s – 8.6%
4. 2000’s – 9.4%
5. 2010
- 8.3%
Note: the decline started in early1980, due
to transportation deregulation.
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Figure 2.3
Logistics Cost as a Percentage of GDP
Source: Council of Supply Chain Management Professionals
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Macro inventory as a % of GDP
● The amount of inventory do organizations
carry to support GDP.
● It is a measure of operations efficiency.
● GDP went up by 212% from 1985 to 2006,
while the inventory value went up by
119%, indicating companies were
improving in managing their inventory
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part.
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Figure 2.5
Macro Inventory as a Percentage of GDP
Source: Council of Supply Chain Management Professionals
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Figure 2.4
Total Logistics Costs – 2011 ($billion)
Interest
4
Taxes, obsolescence, depreciation,
insurance
Warehousing
280
Subtotal
336
Transportation Costs
M otor Carriers
Truck—Intercity
403
Truck—Local
189
Subtotal
592
112
Other Carriers
Railroads
60
Water (international 32, dom estic 8)
33
Oil pipelines
10
Air (international 15, dom estic 23)
33
Forwarders
32
Subtotal
Shipper–related costs
Logistics adm inistration
Total logistics cost
168
9
47
1211
Source: 22nd Annual State of Logistics Report, http://www.cscmp.org (2011) reproduced with permission
from Council of Supply Chain Management Professionals
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Logistics in the Firm: The Micro
Dimension
● Logistics interfaces with manufacturing or
operations
•
•
•
•
Demand fluctuation
Setup (changeover)
Inbound and outbound
Loading and packaging
● Logistics Interfaces with marketing
•
•
•
•
Price (quantity discounts)
Product (physical attributes)
Promotion (to promote sales)
Place (to select different channels)
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Logistics in the Firm: Factors Affecting
the Cost and Importance of Logistics
● Competitive relationships
•
•
•
•
Order cycle
Sustainability
Inventory effect
Transportation effect
● Product relationships
• Dollar value
• Density
• Special handling & susceptibility to damage
● Spatial relationships
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Figure 2.6
Required Inventory and Order Cycle
Source: Center for Supply Chain Research, Penn State University
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Figure 2.7
Lost Sales Cost to Inventory Cost
Source: Center for Supply Chain Research, Penn State University
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Figure 2.8
Lost Sales Cost to Transportation Cost
Source: Center for Supply Chain Research, Penn State University
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Figure 2.9
Product Dollar Value to Logistics Costs
Source: Center for Supply Chain Research, Penn State University
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Figure 2.10
Product Weight Density to Logistics Costs
Source: Center for Supply Chain Research, Penn State University
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Figure 2.11
Susceptibility to Loss & Damage to Costs
Source: Center for Supply Chain Research, Penn State University
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Figure 2.12
Logistics and Spatial Relations (Plant selection)
Source: Center for Supply Chain Research, Penn State University
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Table 2.3
Logistics Mode Cost Comparison (transportation mode selection)
COST CENTER
Transportation
RAIL MOTOR
3
4.3
Inventory
Packaging
5
3.5
3.75
3.2
Warehousing
1.5
0.75
Cost of Lost Sales
2
1
Total Cost (per unit)
15
13
Source: Center for Supply Chain Research, Penn State University
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Approaches to Analyzing Logistics
Systems
● Materials management versus physical
distribution
● Cost centers
● Nodes versus links
• Nodes are fixed spatial points where goods stop for
storage or processing.
• Links represent the transportation network and
connect the nodes in the logistics system.
● Logistics Channels
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Figure 2.13
Dynamic (Cost) Analysis
Source: Center for Supply Chain Research, Penn State University
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Figure 2.14
Nodes and Links in a Logistics System
Source: Center for Supply Chain Research, Penn State University
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Figure 2.15
Simple Logistics Channel
Source: Center for Supply Chain Research, Penn State University
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Figure 2.16
Multi-Echelon Logistics Channel
Source: Center for Supply Chain Research, Penn State University
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Figure 2.17
Complex Logistics Channel
Source: Center for Supply Chain Research, Penn State University
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Summary
1. Logistics has developed as an important area or
function of business since World War II. It has gone
through several phases of development in achieving its
present status.
2. Logistics is a critical part of supply chain management.
The coordination and, perhaps, integration of the
logistics systems of all the organizations in a supply
chain are necessary requirements for successful
management of the supply chain.
3. Logistics has a number of different definitions because
of the broad-based interest in its activities and the
recognition of its importance. The definition developed
by the Council of Supply Chain Management
Professionals is the primary definition used in this text. 34
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Summary, continued
4.
5.
6.
7.
8.
Logistics is an area of management that has four sub-disciplines:
business, military, service, and event.
On a macro basis, logistics-related costs have been decreasing on
a relative basis, which has helped the U.S. economy regain its
competitive position on a global basis.
Logistics adds place, time, and quantity utilities to products and
enhances the form and possession utilities added by manufacturing
and marketing.
Logistics has an important relationship to manufacturing,
marketing, finance, and other areas of the organization.
Logistics managers are responsible for a number of important
activities, including transportation, inventory, warehousing,
materials handling, industrial packaging, customer service,
forecasting, and others.
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
35
Summary, continued
9. Logistics systems can be viewed or approached in
several different ways for analysis purposes, including
materials management versus physical distribution, cost
centers, nodes versus links, and channels. All four
approaches are viable for different purposes.
10. Logistics systems are frequently analyzed from a
systems approach, which emphasizes total cost and
tradeoffs when changes are proposed. Either a short- or
a long run perspective can be used.
11. The cost of logistics systems can be affected by a
number of major factors, including competition in the
market, the spatial relationship of nodes, and product
characteristics.
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
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