Course: MBA

Semester: III

Logistics and Supply

Chain Management
Unit : I Logistics Vs Supply Chain
Management
Council of logistics management
• “Logistics is the process of planning, implementing and
controlling the efficient, cost-effective flow and storage of
raw materials, in-process inventory, finished goods and
related information from the point of origin to point of
consumption for the purpose of conforming to customer
requirements.”

Handfield and Nichols

• Supply Chain Management(SCM) is the integration of all
activities associated with the flow and transformation of
goods from raw materials through to end user, as well as
information flows, through improved supply chain
relationships, to achieve a sustainable competitive
advantage.
 Supply Chain Overview

Transportation Transportation Customers

Warehousing

Information
flows
Factory

Transportation

Vendors/plants/ports
Warehousing Transportation

1-2
Common 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
 The logistics/SCM mission
• Getting the right goods or services to the right place, at the
right time, and in the desired condition at the lowest cost and
highest return on investment.

• Product / service utility

– Possession utility - the value or usefulness that comes from A
customer being able to take possession of A product
– Form utility - in A form that can be used by the customer and is of
value to the customer
– Place utility - available where they are needed by customers
– Time utility - available when they are needed by customers
• Logistics obviously help time and place utility
Evolution of Supply Chain Management
Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+

Demand forecasting

Purchasing

Requirements planning
Purchasing/
Production planning Materials
Management
Manufacturing inventory

Warehousing
Logistics
Material handling

Packaging

Finished goods inventory Supply Chain

Physical Supply Chain
Management
Distribution Management
Distribution planning

Order processing

Transportation

Customer service

Strategic planning

Information services

Marketing/sales

Finance
.
Supply Chain Schematic

1-5
 Critical Customer Service Loop

C ustom er o rd e r proce ssing (an d

tra n sm ittal)

T ran spo rta tion

C ustom ers

In ve nto ry
or sup ply so u rce
 Traditional Scope of The Supply
Chain
Business logistics

Physical supply Physical distribution

(Materials management)

Sources of Plants/
Customers
supply operations
• Transportation • Transportation
• Inventory maintenance • Inventory maintenance
• Order processing • Order processing
• Acquisition • Product scheduling
• Protective packaging • Protective packaging
• Warehousing • Warehousing
• Materials handling • Materials handling
• Information maintenance • Information maintenance

Internal supply chain 1-14

 Key Activities/Processes
• Primary
– Setting customer service goals
– Transportation
– Inventory management
– Location
• Secondary, or supporting
– Warehousing
– Materials handling
– Acquisition (purchasing)
– Protective packaging
– Product scheduling
– Order processing
 Logistics Strategy and Planning
• The objectives of logistics strategy
– Minimize cost
– Minimize investment
– Maximize customer service
• Levels of logistical planning
– Strategic
– Tactical
– Operational
 The Logistics Strategy Triangle
(4 Problem Areas)
Inventory Strategy
 Forecasting
 Storage fundamentals Transport Strategy
 Inventory decisions  Transport fundamentals
 Purchasing and supply  Transport decisions
scheduling decisions
 Storage decisions Customer
service goals
 The product
 Logistics service
 Information sys.

Location Strategy
 Location decisions
 The network planning process

.
 Strategic, Tactical, and Operational Decision
Making
Decision area Strategic Tactical Operational

Transportation Mode selection Seasonal equip- Dispatching

ment leasing

Inventories Location, Control policies Safety stock levels Order filling

Order Order entry, transmittal, Processing

processing and processing system orders, Filling
design back orders

Purchasing Development of supplier- Contracting, Expediting

buyer relations Forward buying

Warehousing Handling equipment Space utilization Order picking

selection, Layout design and restocking

Facility Number, size, and

location location of warehouses
 Relationship of Logistics to
Marketing and Production

LOGISTICS
Sample
activities: MARKETING
PRODUCTION/ Transport Interface Sample
OPERATIONS  Inventory
Interface activities: activities:
Sample activities:  Order  Customer
 Quality control activities:  Promotion
 Product processing service  Market
 Detailed production
scheduling  Materials standards research
scheduling  Plant  Pricing
 Equipment maint. handling  Product
location  Packaging
 Capacity planning mix
 Purchasing  Retail  Sales force
 Work measurement
location management
& standards

Production-
logistics Marketing-
interface logistics
interface

Internal Supply Chain

 Relationship of Logistics to
Marketing
Product
Marketing

Promotion
Price

Place-Customer
service levels

Transport
Logistics

Inventory
carrying costs costs

Lot quantity Warehousing

costs Order processing costs
and information
costs
 Relationship of Logistics to Production

• Coordinates through scheduling and strategy

– Make-to-order
– Make-to-stock
• An integral part of 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
 Logistics/SCM in Diverse areas
• Manufacturing - most common
• Service - emerging opportunities
• Environment - causing restrictions
• Non-profits / government - little explored
• Military - long history

Note the global evolvement into a

service-oriented economy!
Supply Chain is Multi-Enterprise
Conventional
Focus Scope
Company

Suppliers Customers

Supplier’s Customers/
suppliers End users

Acquire Convert Distribute

Product and information flow

Reality of SCM scope
The Multi-dimensions of SCM

on

Int
ati

er-
n

org
rdi
oo

an
c

iza
al)

tio
on

n
niz al

SUPPLY
a ti

al
-or ion

CHAIN

co
tra nct

o
ga

MANAGEMENT

rdi
(In er-fu

na
tio
Int

n
Activity and process
administration
 Increasing Significance of
• Costs are high
Logistics
– 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
– Globalization of trade
• 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
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)
 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
Unit –II Customer Service
and Logistics
The Importance of Customer
Service
 The Components of Customer
Service
• Pre-transaction elements: customer service factors
that arise prior to the actual transaction taking place
• Transaction elements: the elements directly related
to the physical transaction and are those that are
most commonly concerned with distribution and
logistics.
• Post-transaction elements: these involve those
elements that occur after the delivery has taken
place
 Pre-transaction Elements

• written customer service policy;

• accessibility of order personnel;
• single order contact point;
• organizational structure;
• method of ordering;
• order size constraints;
• system flexibility;
• transaction elements.
 Transaction elements
.
• order cycle time
• order preparation;
• inventory availability;
• delivery alternatives;
• delivery time;
• delivery reliability;
• delivery of complete order;
• condition of goods;
• order status information.
 Post-transaction elements
• availability of spares;
• call-out time;
• invoicing procedures;
• invoicing accuracy;
• product tracing/warranty;
• returns policy;
• customer complaints and procedures;
• claims procedures.
 Multifunctional Dimensions
of Customer Service

1. Time – usually order fulfillment cycle time;

2. Dependability – guaranteed fixed delivery
times of accurate, undamaged orders;
3. Communications – ease of order taking, and
queries response;
4. Flexibility – the ability to recognize and
respond to a customer's changing needs.
 Conceptual Models of Service
Quality
• Service quality is a measure of the extent to
which the customer is experiencing the level
of service that he or she is expecting.
• service quality is that it is the match between
what the customer expects and what the
customer experiences.
• Service quality = Perceived Performance x 100
Desired Expectations
 Developing a Customer Service
Policy
Six-step plan to identify key customer service components:
• Identify the main elements of service and identify
suitable market segments.
• Determine the relative significance of each service
element.
• Establish company competitiveness at current service
levels offered.
• Identify distinct service requirements for different
market segments.
• Develop specific customer service packages.
• Determine monitoring and control procedures.
 Unit –III: Measuring Logistics
Cost And Performance

• Value and logistics costs

 Content

Where does value come from

How can logistics costs be presented

Activity-based costing

Supply chain operations reference model

 Where does value come from
• Key issues

How can shareholder value

1 be defined?

What is economic value

2 added, and how does it
help in this definition?
 Where does value come from ?
• Business objectives

Business objective

Sharehol
Profit Market share
der value
Social value
 Where does value come from
• Concepts about shareholder value
– Comparable investment
– ROI (Return on investment)
– Sales
– Costs
– Working capital
– Cash and debtors
– Creditors
– Fixed assets
 ROI ＝ Sales revenue － Costs
Inventory ＋ Cash and Debtors － Creditors ＋ Fixed asset
Sales
revenue
－ Profit
Costs
Return on
Inventory ÷ capital
employed

Worki ＋
Cash and
ng debtors
capital －
Capital
employed
Creditors

＋
Fixed
assets
 Where does value come from
ROI

Profitability = Profit / Sales

×

Asset utilization = Sales / Employed investment

ROI is underpinned by two main drivers:

Increased profitability
Increased asset utilization
 Where does value come from

Average inventory turnover

Key time-
Average settlement period for debtors
related ratios

Average settlement period for creditors

 How can logistics costs be represented

• Problems with traditional cost accounting as

related to logistics (Christopher, 1998)
– The true costs of servicing different customer
types, channels and market segments are poorly
understood.
– Costs are captured at too high at a level of
aggregation.
– Costing is functionally oriented at the expense of
output.
– The emphasis on full cost allocation to products
ignores customer costs
 How can logistics costs be represented
Direct / Indirect costs

Direct labor
Direct costs
Direct materials
Whether the
cost can be Managing
directly director’s
allocated to a
given product
Indirect salary
costs
Administration
(overhea
expenditure
ds)
Rent rates
 How can logistics costs be represented
Direct / Indirect costs

• DPP (Direct product profitability) method

Gross sales for product group
Less product-specific discounts and rebates
Net sales by product
Less direct costs of product •Sourcing costs
Gross product contribution •Operations support
Less product-based marketing expenses •Fixed-assets financing
Product-specific direct sales support costs
•Warehousing and
distribution
Less product-specific direct transportation costs
•Inventory financing
Less product-attributable overheads
•Order, invoice and
Direct product profitability collection processing
 How can logistics costs be represented
Engineered / Discretionary costs

Example
Engineere
d costs prevention

Input-output
relationship
Quality cost appraisal

Internal and
Discretion external
ary costs failure
 Activity-based costing
Today’s businesses are working in an
increasingly complex environment.
Use of Advanced Technology
Product Life Cycle
Product Complexity
Channels of Distribution
Quality Requirements
Product Diversity
 Activity-based costing

Criticisms of Traditional Cost Allocation

• Assumes all cost is volume-related

• Departmental focus, not process focus
• Focus on costs incurred, not cause of costs
 Activity-based costing

Conventional Costing
• Total Cost = Material + Labour+ Overheads
• Overheads are allocated to the products on volume
based measures e.g. labour hours, machine hours,
units produced

Will this not distort the costing in the new

environment?

ABC provides an Alternative.

 Activity-based costing

Allocation of indirect costs based

on causal activities

Results in better allocation ABC Purpose

Does not provide “true” cost

 Activity-based costing

• Traditional allocation method

Costs Products

• Activity-based allocation method

Costs Activities Products

First stage Second stage

 Activity-based costing

When is ABC Most Useful?

• High Overheads
• Product Diversity or Multiple Products
• Customer Diversity
• Service Diversity
Supply chain operation reference model
 Unit –IV: Logistics and Supply
Chain Relationships.
• What is benchmarking? Ongoing process of measuring
products, services, practices & processes against the best
that can be identified in order to:
• Learn about & improve best practice.
• Achieve realistic targets.
• Integrate improvements into your strategy.
• Use best practice as inspiration for innovation.
• Be externally focused.
• Be purposeful about improvement.
• Measure improvement.
 Benchmarking
• A control process.
– Involving employees in the process of evaluation
and change.
– Philosophy one of self control rather than
imposed control, where the person most closely
associated with the task is involved in the cross
measurement and assessment of practice.
– Places personnel in a position where their
unquestioned beliefs (paradigm) may be
challenged , creating opportunities for
innovation and learning.
 Benchmarking in the Supply
Chain
• What to Benchmark?
– Supply Chain Council suggests:
• SCOR (Supply Chain operations reference) Christopher, M. 1998 pp 106):
• Plan, Source, Make & Deliver. SCOR is designed to
provide a common framework to facilitate cross
organisational benchmarking.
• Who to Benchmark with?
– Competitors
– Significant opportunities for firms in non
competing industries
 Benchmarking in Logistics
Processes
•One method to measure and compare the
output. A form of reactive control.
•Alternative to concentrate on the processes
which requires a number of steps:
1 Understand the process. Use those most
closely involved and develop flowcharts
2 Identify critical points
Mapping Supply Chain Processes
• Producing a flow chart the first step and highlighting
“value adding” time and “non-value adding time”
(Christopher, M. 1998 pp 110).
– Value Adding Time:
• Time that results in increased value for the
customer
– Non Value Adding Time:
• Elimination of this time or activity would not
reduce the perceived value of the ultimate
consumer.
 Cost and Value added:

Value
Added Transport
Customer
Finished
Time place Regional order
product
& form Stock
perception Production

Raw
material

Time!

Cost Added
Production, Storage & transport costs & the time value of money
dapted from Christopher, M., (1998), “Logistics and Supply Chain Management. Strategies
r Reducing Cost and Improving Service”, Financial Times Pitman Publishing, London. pp 111
 Suppliers and Distributors
• Involve inbound and outbound elements fo
the value system. Their cost will add to the
ultimate cost!
• Establish and Encourage:
– Commitment to continuous improvement.
– Acceptance of innovation and change.
– Use of regular and formal and benchmarking.
– Employee concern for the ultimate consumer.
– Leadership involvement
 Setting Benchmarking Priorities
Strategic Importance
Processes that are
competitively critical

Relative impact on Organisational

business. Readiness
Processes carried out
•High total cost Benchmarking
by “ready to improve
•High revenue priorities
personnel”.
•High human input

Adapted from Walleck et al, (1991)

“Benchmarking World Class Performance”,
The McKinsey Quarterly, Cited in
Make V Buy Economics Christopher, M., (1998),
“Logistics and Supply Chain
Processes with high Management.
impact on value and Strategies for Reducing
Cost and Improving Service”,
hard to outsource Financial Times Pitman
Publishing, London. Pp118.
 Key Performance Indicators
• Highlight issues regardless of measurability
that have high impact on the organisational
success.
– Articulate the strategic objectives to personnel.
– Understand measurable outcomes of success.
– Communicate importance of key processes.
– Highlight and focus attention on key
performance indicators.
• Better faster Cheaper!
 Channel Levels

•Manufacturer
•Wholesaler
•Retailer
•Consumer
Channel Design Decisions

Analyzing
Analyzing Consumer
Consumer Service
Service Needs
Needs

Setting
Setting Channel
Channel Objectives
Objectives &
& Constraints
Constraints

Identifying
Identifying Major
Major Alternatives
Alternatives

Intensive
Intensive Selective
Selective Exclusive
Exclusive
Distribution
Distribution Distribution
Distribution Distribution
Distribution

Evaluating
Evaluating the
the Major
Major Alternatives
Alternatives
Channel Management Decisions

Selecting
Selecting

FEEDBACK
Motivating
Motivating

Evaluating
Evaluating
Integrated Logistics Management
Concept Recognizes that Providing Better Customer
Service and Trimming Distribution Costs Requires
Teamwork,
Teamwork Both Inside the Company and Among All the
Marketing Channel Organizations.

Cross-Functional
Cross-Functional Teamwork
Teamwork inside
inside
the
the Company
Company

Building
Building Channel
Channel Partnerships
Partnerships

Third-Party
Third-Party Logistics
Logistics
 Unit –V:

Sourcing , Transporting
and Pricing Products
 Supply Chain Strategy
• Functional Products
– Diapers, soup, milk, tiers
– Appropriate supply chain strategy for functional products
is push
– Focus: efficiency, cost reduction, and supply chain
planning.
• Innovative products
– Fashion items, cosmetics, or high tech products
– Appropriate supply chain strategy is pull
– Focus: high profit margins, fast clockspeed, and
unpredictable demand, responsiveness, maximizing
service level, order fulfillment
Procurement Strategy for the Two Types
• Functional Products
– Focus should be on minimizing total landed cost
• unit cost
• transportation cost
• inventory holding cost
• handling cost
• duties and taxation
• cost of financing
– Sourcing from low-cost countries, e.g., mainland China and
Taiwan is appropriate
• Innovative Products
– Focus should be on reducing lead times and on supply
flexibility.
– Sourcing close to the market area
– Short lead time may be achieved using air shipments
 Contemporary IT applications in logistics
• Tremendous technological advances in past decades
• Logistics management relies on analysis over massive
information from heterogeneous sources
• Disparate business functions in service-oriented economy
• Internet and mobile technologies has further improved
logistical effectiveness and efficiency
– Enabled logisticians and management to make timely, informed, and
accurate decisions
– But create new dimensions of complexity
• IT people work closely with logistician and management
– Understand complex requirements
– Choose the right technology and design appropriate IT infrastructures,
architectures, and systems
– Explain how contemporary IT can help to others
Transportation Modes
Rail
Rail
Nation’s
Nation’slargest
largestcarrier,
carrier,cost-effective
cost-effective
for
forshipping
shippingbulk
bulkproducts,
products,piggyback
piggyback
Truck
Truck
Flexible
Flexiblein
inrouting
routing&&time
timeschedules,
schedules,efficient
efficient
for
forshort-hauls
short-haulsof
ofhigh
highvalue
valuegoods
goods
Water
Water
Low
Lowcost
costfor
forshipping
shippingbulky,
bulky,low-value
low-value
goods,
goods,slowest
slowestform
form
Pipeline
Pipeline
Ship
Shippetroleum,
petroleum,natural
naturalgas,
gas,and
andchemicals
chemicals
from
fromsources
sourcesto
tomarkets
markets
Air
Air
High
Highcost,
cost,ideal
idealwhen
whenspeed
speedis
isneeded
neededor
orto
to
ship
shiphigh-value,
high-value,low-bulk
low-bulkitems
items
 International transportation
issues
1. Infrastructure
2. Availability of modes
3. Choice of modes among the given
alternatives
 Ocean or Sea transport
 Liner service-regular scheduled passage on established
routes
 Bulk service-contractual services for individual voyages
 Tramp service- irregular routes and scheduled only on
demand
Based on the type of cargo carried
1. Conventional cargo vessels-oversized and unusual cargo
2. Container ships-standardized containers
3. Roll-on roll-off vessels-ocean going ferries
 Shipping documents used in
ocean shipping
• The standard shipping note(SSN)- what is to
happen to the goods on arrival at the foreign
port
• The bill of lading-shipping company’s receipt
for the goods loaded
 Air transport or Air freight-
advantages
• Useful for transportation of perishable
products, high value, high density products
• Less stock holding in loading terminals
• Speedier settlement of invoices
• Eliminates excess need of intermodal
transportation
• Facilitates JIT
• Convenience and ease of administration
The global logistics management
process
1. Environmental analysis
2. Planning
3. Structure
4. Plan implementation and
5. Controlling the logistics program
 Guidelines for developing a global
logistics strategy
• Logistics planning should be integrated into the firm’s strategic
planning process
• Logistics departments must be guided by a clear vision and
must measure output regularly
• Import-export management should try to ensure integrated
management of all elements of the logistics supply chain from
origin to destination
• Opportunities to integrate domestic and international
operations should be pursued to leverage total company
volumes with globally oriented carriers
The global logistics environment
1. Controllable elements
2. Uncontrollable elements
 Uncontrollable elements
i. Political and legal systems of foreign markets
ii. Economic conditions
iii.Degree of competition in each market
iv. Level of distribution technology available or
accessible
v. Geographic structure of the foreign market
vi. Social and cultural norms of various target
markets
 Controllable elements
i. Customer service
ii. International Inventory issues
iii. International Packaging issues
iv. Transportation
v. Warehousing and storage
vi. Other activities like global sourcing of
materials
 Issues related to global logistics
1. International customer service issues
2. International inventory issues
3. International packaging issues
4. International transportation issues
5. International warehousing and storage issues
 International customer service
issues
• Consumes longer time
• Requires different types of transport carriers,
• Multiple transfers and handling
• Crossing of many international borders
• Time in transit vary from shipment to
shipment
 International Inventory Issues
• International business have 50% or more of their
assets in inventory
• Inventory levels differ depending on the length of
the transit
• Includes unique factors such as currency
exchange rates, greater distances and custom
duties
• In case of high inflation, large inventories provide
inflation hedge
 International Packaging Issues
• Handling of products
• Climate
• Potential for pilferage
• Communication and language differences
• Freight rates
• Customs duties
• Customer’s requirements
 Containers - advantages
• Reduced cost due to loss or damage
• Increased use of automated or mechanized
material handling equipments
• Lower warehousing and transportation costs
• Available in variety of sizes
• Serve as temporary storage facilities at ports
and terminals
 Containers- disadvantages
• Delay caused in in-bound and out-bound
cargo
• Large capital expenditures are required to
initiate a container
 Summary
• The logistic process plans, implements, controls
the flow and storage of goods, services, and
related information between the point of origin
and the point of consumption to satisfy
customer requirements
• Logistics becomes more important and complex
because of new requirements of the service-
oriented economy, disparate business functions,
and the impact of various contemporary IT
• Logistics involves the interaction with
multiple departments within A company as
well as now also across business partner
organizations and customers
• Application of contemporary IT, especially
information and process integration for
efficient and effective decision support, is A
critical success factor and therefore the focus
of this course.
• Logistics addresses the time utility & place
utility out of the four economic utilities
Thank you