Logistics planning 06

overview

Introduction
The need for a positive approach to planning was discussed in Chapter 2, together
with the concept of a logistics planning hierarchy. In this chapter a generalized
approach to corporate strategic planning is outlined, and this is linked to a specific
logistics design strategy. The main elements of this design strategy are described.
Finally, some of the fundamental influences on logistics network planning and design
are detailed, in particular, product characteristics, the product life cycle, packaging
and unit loads.

Pressures for change

Many organizations adopt a piecemeal and incomplete approach to their strategic
planning. This is particularly true in the context of logistics, where individual
functions within logistics or the supply chain have often been sub-optimized to the
detriment of the logistics chain as a whole. One of the reasons for this incomplete
approach is the pressure for change exerted on companies from a wide variety of
sources. Figure 6.1 provides an illustration of some of these pressures. They include:

● significant changes in communications systems and information technology,

including such developments as the use of Big Data analytics, real-time information
and artificial intelligence, as well as the internet, satellite and mobile phone
technology
● the need for improved financial performance at a time when companies and
economies are under severe pressure
● regulatory changes, such as the development and revision of economic unions, of
which the Single European Market (SEM) is one example among many
● increasing customer service requirements, especially where the levels of service
that logistics can provide are often seen as a major competitive edge between
different companies and their products
96 Planning for logistics

Figure 6.1 Pressures influencing logistics systems

Evolving
competitive Product
Environmental
pressures proliferation and
constraints
shorter product life
Increasing
cycles
customer service
requirements

Competing demands
Regulatory for inventory reduction
changes against shorter lead
times

LOGISTICS SYSTEMS

Continued need for Changes in players and

improved financial roles in distribution
performance channels

Pressures to develop
Ever-changing supply chain vision
information and and cooperation
communication Need to redesign and
technology improve efficiency of
logistics system

● recognition of the importance of various environmental and green issues such as

the need to reduce greenhouse gas emissions
● increased competition from global as well as national companies to new breed
technology disruptors
● a shortening of product life cycles, particularly for high-technology and fashion
products, together with an explosion of product choice
● competing demands for inventory reduction and depot rationalization against
shorter lead times and supply chain disruption
● the development of new players with new roles in channels of distribution – this
includes the continued growth of third-party service providers and their move to
offer global and pan-European operations and to develop supply partnerships
● the need to adopt a wider supply chain perspective when planning, redesigning
and operating logistics systems

The danger for any organization is to overreact to this need for change. Thus, a
measured response is required that enables distribution and logistics systems and
structures to be developed as a whole in the context of company strategic plans. In
this way, the likelihood of the sub-optimization of logistics activities can be avoided.
The quantitative modelling of logistics requirements as a second stage of strategic
 Logistics planning overview 97

business planning is an important aspect of this. This chapter thus focuses on the
development and use of a framework and approach that take into account broad
organizational and business issues as well as more detailed logistics issues.

Corporate strategic planning overview

A generalized approach to corporate strategic planning is depicted in Figure 6.2.
This is in many ways a classic strategic planning approach, but one important point
is that it does clearly identify the logistics function as a key part of strategic planning.
This is not always the case in some corporate planning processes.

Figure 6.2 Corporate strategic planning overview

external environment internal factors

economic strengths
regulatory weaknesses
technological opportunities
competitive threats

corporate objectives
& strategy

competitive
strategy

functional strategic plans

marketing production

finance logistics

The initial phase of a strategic study is very much a data collection exercise to
enable key external influences on the company and its operations to be assessed and
to allow for the major internal factors that help measure and describe a company to
be identified.
This review of the external environment within which a company operates is
likely to include such factors as the economic climate, current regulations and
potential regulatory changes, and any relevant technological developments. Also
of importance for most companies would be some sort of evaluation of major
competitors – particularly, in this context, any information regarding service and
98 Planning for logistics

logistics strategies. One recognized approach to reviewing and evaluating the impact
of the external environment is to undertake political, economic, socio-cultural, tech-
nological, environmental and legal (PESTEL) analysis. A very broad view of external
factors is taken and an assessment is made of the effects of these and how they might
influence the strategy of the company. Typical factors to be assessed using PESTEL
analysis are shown in Table 6.1.

Table 6.1 PESTEL analysis: external influences

Political Technological
Taxation policy Government spending on research
Foreign trade policy Government/industry focus on technology
Trade restrictions and tariffs New discoveries/development
Government stability Speed of technology transfer
Political stability Rates of obsolescence

Economic Environmental
Business cycles Environmental protection laws
Interest rates Weather, climate, and climate change
Money supply Carbon footprint targets
Inflation Business ethics
Unemployment Sustainability
Disposable income
Energy availability and cost

Socio-cultural Legal
Population demographics Employment law
Income distribution Consumer rights and laws
Social mobility Health and safety law
Lifestyle changes Monopolies legislation
Attitude to work and leisure Discrimination law and equal
Consumerism opportunities
Levels of education Advertising standards
Product labelling and product safety

An analysis of relevant internal factors should also be undertaken. A typical approach

is strengths, weaknesses, opportunities and threats (SWOT) analysis. This allows a
company to review its position within the marketplace with respect to its products,
the demand for its products, the service it offers its customers and the position of its
competitors. This type of analysis can and should also be undertaken with respect to
identifying a company’s key logistical variables.
Approaches such as these enable a company to identify what its overall corporate
strategy should be. One of the key points that must be addressed is to define what
business the company is in. Many companies can be classified as ‘retailers’ or ‘manu-
facturers’, but often a further definition is important because it will have an influence
 Logistics planning overview 99

on how the overall business is organized and structured. Beer provides a useful
example. Typically, the brewing of beer has been seen as the key feature of the
industry, and the brewing industry has a strong tradition that endorses this. Thus, the
brewing of beer is seen as the key activity. However, there are many different aspects
that need to be considered when determining how best to get the beer to the cus-
tomer and many different types of customer. Different elements of a supply chain can
be more or less influential dependent on the nature of the product output and the
customer type. These requirements can necessitate the development of a variety of
very different business and logistics environments. For example:

● Brewing the beer: this is the traditional role concerned with production and
packaging. Beer production is often seen as a magician’s art. Varieties of beer are
produced, and they can be packaged in a number of different ways – barrels, kegs,
cans, bottles, etc.
● Environments in which to drink beer: traditionally these have been pubs, clubs
and bars. For the brewing industry a key question is whether or not to own these
outlets (and thus have an assured sales outlet) or whether to concentrate solely on
the production of the beer. A linked logistics issue is how best to get the beer to
the outlets.
● Environments in which to eat food and drink beer: these are often known as
leisure or lifestyle experiences. Typical are restaurants or ‘theme’ restaurants
where the family might go to eat, drink and play. A major issue for these
establishments is the supply and preparation of food as well as drink. For a
brewer, this significantly changes the basic business objectives – there are other
aspects to consider apart from brewing. Again, there are some obvious and
extremely important implications for logistics.
● Drinking beer at home: another important aspect is the home consumption of
beer and the fact that beer for home consumption is primarily bought from
supermarkets, specialist shops, wholesalers or corner shops. The brewer is unlikely
to have the option to own these outlets (although, of course, beer can also be
bought from pubs and bars for home consumption), but there are very different
business, marketing, packaging and logistics implications in competing in this
environment.

These represent an overview of some of the alternative business choices a brewer

might have. Before attempting to design a competitive strategy and identify possible
functional strategies, a company must be clear about which business it is in and what
it wants to achieve within this business – a strategy based on set objectives.
In addition to a company’s corporate or business strategy, the other element that
is crucial is the competitive strategy that the company plans to adopt. Competitive
strategy has a major influence on the development of logistics strategy and in the
100 Planning for logistics

way the physical structure of the operation may be configured. There are a number
of influencing factors, but some of the key ones include the extent of globalization
– the size and spread of the business, the type of competitive positioning adopted
and the degree to which the supply chain is an integrated one. These factors were
discussed in Chapter 2, and some of the major implications for logistics were
explored.
As indicated in Chapter 2, a company should adopt a competitive strategy by
competing as a service or cost leader, or where relevant (and if feasible!) as both of
these. A service leader is a company that is trying to gain an advantage over its com-
petitors by providing a number of key added-value service elements that differentiate
it from its competitors in terms of what it is offering to its customers. A cost leader
is a company that is trying to utilize its resources by offering the product at the
lowest possible cost, thus gaining a productivity advantage.
Either of these extremes, or a combination of both, will necessitate a very specific
logistics structure. A more service-oriented approach will involve investment in
service-enhancing features such as next-day delivery, time-guaranteed delivery, track-
ing systems, or information support systems (all of which will increase costs). A
more cost-oriented approach will aim to reduce costs through methods such as full
load deliveries, minimum order sizes, 48- or 72-hour delivery (all of which will limit
service possibilities).

Logistics design strategy

On completion of this initial phase of the business planning process it should be
possible to identify corporate strategy and objectives, and to determine a specific
competitive strategy. The next task is to prepare appropriate functional strategic
plans. Figure 6.2 indicates that such plans can be developed for finance, marketing,
production and logistics. For some companies there will be other functions that
require specific plans such as research and development (R&D). The remainder of
this chapter will concentrate on the functional strategy for logistics.
There are several important issues concerning the development of a suitable logis-
tics strategy. The first is the need to link the logistics or distribution plan directly
with the corporate plan. This is best achieved by ensuring that logistics is an integral
part of the corporate plan and that factors related to these functions are used as
inputs in the overall planning process.
The second point concerns the extent or coverage of the logistics strategic plan.
This will clearly vary from one company to another. It may well just be a ‘distribu-
tion’ functional plan, but it is most likely that it will be necessary to incorporate
elements from other functions (marketing, production, etc) to represent the fully
integrated nature of logistics or the supply chain.
 Logistics planning overview 101

The third, and in many ways most important, issue is whether or not a company
has a structured logistics plan at all. Many still don’t, so a first and major step may
be to ensure that such a plan is developed, based of course on the company’s business
and competitive strategic plans. To achieve this, a logistics planning framework, as
outlined in Figure 6.3, can be used.

Figure 6.3 A framework for logistics network design

Corporate strategy

Competitive strategy

Logistics strategy

Logistics
Logistics Logistics Logistics
information
process network organizational
system
design design structure
design

As can be seen from Figure 6.3, there are four key logistics design elements that
need to be considered. Traditionally, logistics planning and design have evolved
around the structure of the logistics network, such as depot numbers and location,
but it is now recognized that, as well as these physical logistics elements, there are
other factors that also need to be considered. These are the design of logistics
processes, logistics information systems and logistics organizational structure.
Logistics process design is concerned with ensuring that business methods are
aligned and organized so that they operate across the traditional company functions
and become supply chain-oriented. Thus, they should be streamlined and should not
be affected or delayed because they cross functional boundaries. A typical logistics
process is order fulfilment, designed to ensure that customers’ order requirements
are satisfied with the minimum of time and the maximum of accuracy. The process
should be designed as a seamless operation from the receipt of the order to the
delivery of the goods and not as a series of different operations that occur each
time a different internal function is involved – sales department, credit control, stock
control, warehouse, transport, systems design. As well as order fulfilment, other
logistics processes that might be considered are information management, new
product introduction, returns or spare part provision. Processes might also need to
be further developed to take account of different customer types, customer service
requirements, product groups, etc. Logistics process design is considered in more
detail in Chapter 7.
102 Planning for logistics

Logistics network design refers to the more traditional elements of logistics

strategy. These include aspects related to the physical flow of the product through
a company’s operation, such as the manufacturing location from which a product
should be sourced, the inventory that should be held, the number and location of
depots, the use of stockless depots and final product delivery. One key to the deter-
mination of an appropriate physical design is the use of trade-offs between logistics
components and between the different company functions. Some typical trade-offs
were described at the beginning of Chapter 2. A detailed approach to physical design
is provided in Chapter 10.
Logistics information system design should include all of those information-related
factors that are vital to support the processes and the physical structure of the oper-
ation. As well as these, however, it is important to recognize that there are also
enterprise-wide information systems (enterprise resource planning or ERP systems),
which may directly influence logistics process and network design. Typical informa-
tion systems that may support logistics process and network design include elec-
tronic point-of-sale (EPOS), electronic data interchange (EDI) between companies,
warehouse management systems and vehicle routeing and scheduling, as well as the
use of Big Data analytics, real-time information and artificial intelligence (outlined
in Chapter 40).
The final design element is that of the logistics organizational structure. It is the
experience of many companies that an inadequate organizational structure can lead
to substantial problems. These include issues such as sub-optimization whereby
functions tend to concentrate on their own operation in isolation from the rest of the
company, or even worse examples where different functions and their managers
compete against one another and develop antagonistic attitudes, often styled as
a ‘blame culture’. These types of attitude work against the company but are also
detrimental to customers and customer service. Organizational issues are further
discussed in Chapter 11.
Each one of these different logistics design factors needs to be planned in associa-
tion with the others. It is inappropriate to concentrate on any one without under-
standing and taking into account the influence of the others. Although Figure 6.3 has
process design as the first logistics design factor, this does not mean that it is neces-
sarily the first one that should be considered when a strategic study is undertaken.
For different companies it may be any one of the other design factors that plays
the most dominant role. For example, a company that has introduced an enterprise-
wide information system may find that this has a primary influence on how logistics
strategy is formulated, because it has a set structure that needs to be accommodated
with the various processes that are to be developed. Equally, a company may feel
that it is necessary to put a workable logistics organizational structure in place before
it attempts to redesign its logistics processes and physical operations – so that those
 Logistics planning overview 103

who are to manage and operate the system will also plan it and thus have a vested
interest and responsibility in its success.
Note that Figure 6.3 emphasizes the need for constant reappraisal within the
planning process (the arrows that refer back to previous steps in the planning
process). Logistics and supply chain operations are dynamic by their very nature
and require regular and ongoing reappraisal as many elements (customer demand,
customer types, products, technology, etc) continue to adapt and change over time.
The different tools and techniques for undertaking logistics design are described
in the next few chapters. Before considering these, the remainder of this chapter
looks at some key logistics factors that also have an influence on how a logistics
operation is designed.

Key logistics design factors

Product characteristics
One of the major factors to be considered when planning for logistics is, perhaps not
surprisingly, the product itself. The product is, in fact, perceived to be an amalgam of
its physical nature, its price, its package and the way in which it is supplied. For the
logistics planner, the physical characteristics of the product and package are seen to
be of great significance. This is because, in distribution and logistics, we are directly
concerned with physical flow – movement and storage. The physical characteristics
of a product, any specific packaging requirements and the type of unit load are all-
important factors in the trade-off with other elements of distribution when seeking
least-cost systems at given service levels. This potential for trade-off should continu-
ally be borne in mind.
There is a variety of product characteristics that have a direct, and often
important, impact on the development and operation of a distribution system. This
impact can affect both the structure of the system and the cost of the system. There
are four main categories: volume-to-weight ratio; value-to-weight ratio; substitut­
ability; and high-risk products.

Volume-to-weight ratio
Volume and weight characteristics are commonly associated, and their influence
on logistics costs can be significant. A low ratio of volume to weight in a product
(such as sheet steel, books, etc) generally means an efficient utilization of the main
components of distribution. Thus, a low-volume/high-weight product will fully
utilize the weight-constrained capacity of a road transport vehicle.
104 Planning for logistics

The converse, a high volume-to-weight ratio, tends to be less efficient for

distribution. Typical products include paper tissues, crisps, disposable nappies, etc.
These products use up a lot of space, and are costly for both transportation and
storage, because many companies measure their logistics costs on a weight basis
(cost per tonne) rather than a volume basis (cost per cubic metre). In Europe, for
example, draw-bar trailer outfits are often used to increase vehicle capacity and so
decrease the transportation costs of moving high-volume products.
Companies need to recognize the extent to which both weight and volume drive
their distribution costs.

Value-to-weight ratio
Product value is also important to the planning of a logistics strategy. High-value
products are more able to absorb the associated distribution costs because the
distribution element is a relatively low proportion of the overall product cost. Low-
value products need to have an inexpensive distribution system because the cost is a
large proportion of the overall product cost – and if too high the effect on the total
cost of the product might make it non-viable in terms of its price in the marketplace.
Once again, it is useful to assess the value effect in terms of a weight ratio: this is
called the value-to-weight ratio. Low value-to-weight ratio products (e.g. ore, sand,
etc) incur relatively high transport unit costs compared with high value-to-weight
products (e.g. computers, mobile phones, etc). Inventory holding unit costs of
low value-to-weight ratio products tend to be low in comparison with high-value
products because the capital tied up in inventory is much lower for the low-value
products.

Substitutability
The degree to which a product can be substituted by another will also affect the
choice of distribution system. When customers readily substitute a product with a
different brand or type of goods, then it is important that the distribution system is
designed to avoid stockouts or to react to replenish stocks in a timely fashion. Typical
examples are many food products, where the customer is likely to choose an alter­
native brand if the need is immediate and the first-choice name is not available.
In a distribution system, this can be catered for either through high stock levels,
additional local distribution centres or through a high-performance transport mode.
All of these options are high cost. High stock levels will decrease the likelihood of a
stockout, but will raise average stock levels and, thus, costs. Additional depots would
be costly. The provision of a faster and more dependable transport function will
reduce acquisition time and length of stockout, but this increase in service will be at
a higher transport cost.
 Logistics planning overview 105

High-risk products
The characteristics of some products present a degree of risk associated with their
distribution. Typical examples include: perishability, fragility, hazard/danger, con-
tamination potential and extreme value. The need to minimize this risk (sometimes
a legal obligation) means that a special distribution system design must be used.
As with any form of specialization, there will be a cost incurred. Examples of this
effect are as follows:

● Hazardous goods may require special packaging, a limited unit load size, special
labelling and isolation from other products. Regulations for the movement of
hazardous goods differ between the different modes of transport.
● Fragile products require special packaging to take account of handling and
transport shocks. Specialist distribution service providers exist for some types of
fragile goods.
● Perishable goods in many instances require special conditions and equipment for
their distribution (e.g. refrigerated storage and transport facilities for frozen and
chilled food).
● Time-constrained products – almost all foods are time-constrained, especially
those with ‘best before’ or ‘use by’ dates – have implications for distribution
information and control systems (e.g. first in/first out). Some products have fixed
time or seasonal deadlines: daily newspapers have a very limited lifespan, which
requires early morning delivery and allows for no delivery delays; fashion goods
often have a fixed season; agrochemicals such as fertilizers and insecticides have
fixed time periods for usage; there are the classic seasonal examples of Easter eggs
and Christmas crackers, which are time-constrained. There are significant
implications for the choice of distribution system for many products such as these.
● Very high-value products – cigarettes, mobile phones, computer tablets, etc – are
attractive products that require especially secure means of distribution.

There are many and varied product characteristics that can impose important
requirements and constraints on all manner of logistics operations. They also affect
the interrelationships between the different logistics functions, providing quite
complex alternatives that need to be carefully assessed according to the implications
on service and on cost.

The product life cycle

One marketing concept that concerns the product and is also very relevant to
distribution and logistics is that of the product life cycle (PLC). The principle behind
106 Planning for logistics

the PLC is that of the staged development of a product. This starts with the introduc-
tion of the product into the market and follows (for successful products) with the
steady growth of the product as it becomes established. The life cycle continues with
the accelerated growth of the product as competitors introduce similar products at
competitive prices, which reduces the demand for the company’s product, and ends
as the demand for the product runs into acute decline. The PLC concept is illustrated
in Figure 6.4.

Figure 6.4 Standard product life cycle curve showing growth, maturity and decline
Product sales

Introductory Growth Maturity Decline

stage stage stage stage

Time

It is important that the performance of a logistics operation is able to reflect and

respond to the developing life cycle of a product. This can be differentiated as
follows:

● Introductory stage: here, there is usually a requirement for an operation that can
provide a high response to demand with a logistics structure that gives stock
availability and quick replenishment, and can react to sudden demand increases.
Initial retail stockholdings are likely to be low, to avoid the overstocking of
products that might not fulfil their expected demand. Thus, there is a need for
speedy information and physical logistics systems, probably from a centralized
stockholding base and using a fast mode of transport.
● Growth stage: here, sales are more predictable. The requirements for distribution
are now for a better-balanced, more cost-effective system. The trade-off between
service and cost can be realized.
● Maturity stage: this is where the introduction of competitive products and
substitutes are likely to increase price and service competition. Thus, an effective
logistics operation becomes vital in order to maintain market share, especially for
key customers.
● Decline stage: here, the product is becoming obsolete. The logistics system needs
to support the existing business but at minimum risk and cost.
 Logistics planning overview 107

There is a clear requirement to take account of the product life cycle when planning
for logistics. A different emphasis needs to be placed on certain aspects of the
logistics system according to the stage of a product’s life. For operations where there
are many products at varying stages of their product life cycle, the effect on the over-
all system may not be apparent. In many instances, however, there will be a need to
plan a logistics operation that is suitably dynamic and flexible to reflect the changing
characteristics of a product (see Chapter 8, ‘Supply chain segmentation’).

Packaging
As a part of considering the product and its logistics requirements, it is important to
be aware of other relevant physical characteristics that can influence any decisions
regarding the choice of logistics operation. In terms of the physical nature of a prod-
uct, it is not generally presented to the logistics function in its primary form, but in
the form of a package or as a unit load. These two elements are thus relevant to any
discussion concerned with the relationship of the product and logistics.
The packaging of a product is broadly determined for product promotion and
product protection, the latter being the function that is particularly pertinent to
logistics. There are also some other factors that need to be considered when design-
ing packaging for logistics purposes. In addition to product protection, packages
should be easy to handle, convenient to store, readily identifiable, secure and of a
shape that makes best use of space – usually cubic rather than cylindrical.
Once again, there are trade-offs that exist between these factors. These trade-offs
will concern the product and the logistics operation itself. It is important to appreci-
ate that, for those involved in logistics, the package is the product that is stored and
moved and so, where possible, should be given the characteristics that help rather
than hinder the logistics process.
Packaging is very much a part of the total logistics function, and the design and
use of packaging has implications for other functions such as production, marketing
and quality control, as well as for overall logistics costs and performance.

Unit loads
The idea of using a unit load for logistics was developed from the realization of the
high costs involved in the storage and movement of products – particularly in the
inefficient manual handling of many small packages. The result of this has been the
unit load concept, where the use of a unit load enables goods and packages to be
grouped together and then handled and moved more effectively using mechanical
equipment. Two familiar examples are the wooden pallet and the large shipping
108 Planning for logistics

container, both of which, in their different ways, have revolutionized physical

distribution and logistics. From the product point of view, it is possible to introduce
unit load systems to alter the characteristics of a product and thus make more effec-
tive logistics possible. One classic example has been the development of the roll-cage
pallet that is in common use in the grocery industry to aid the movement of products
from depots into store stockholding areas and onto the shop floor. Although the
cages are expensive units, the trade-off, in terms of time saving and security, is such
that overall distribution costs decrease significantly.
Much of distribution and logistics is structured around the concept of load uniti-
zation, and the choice of unit load – type and size – is fundamental to the effective-
ness and economics of a logistics operation. Choosing the most appropriate type and
size of unit load minimizes the frequency of material movement, enables standard
storage and handling equipment to be used with optimum equipment utilization,
minimizes vehicle load/unload times, and improves product protection, security and
stocktaking.