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Outline
1.1 Definition & Scope of Logistics

1.2 Systems Approach to Integrating and Managing Logistics

1.3 Role of Logistics in the Economy & to Organization

1.4 Components of Logistics Management

1.5 Factors Underlying Development of Interest in Logistics

1.6 Key Logistics Activities

1.7. Total Cost Concept

1.8 Future Challenges in Logistics

2
 Introduction
 Logistics facilitates in getting products and services as and
when they are needed and desired to the customer.
 It also helps in economic transactions, serving as a major
enabler of growth of trade and commerce in an economy.
 The role of logistics is to ensure availability of all the required
materials in the supply chain.
 The concept of logistics has its base upon the systems
approach. For this to be successful there has to be co-
ordination in the activities of the department.
 In today’s process driven organization, where the focus has
shifted from functions to process, logistics has become an
essential part of the process.
PETER DRUCKERS stated
that:

Logistics is one of the last frontiers of

opportunity for organizations wishing to
improve their corporate efficiency.

4
 Logistics: ? What is it
1. Military Logistics
- Logistics, initially a military term, refers to the technique of
moving and quartering armies. The scope of logistics in a
military sense is reflected in the definition of adopted by
NATO:
“The science of planning and carrying out movement and
maintenance of forces”. In its most comprehensive sense, the
aspects of military operations which deals with:
a) Design and development, acquisition, storage, transport, distribution,
maintenance, evacuation and disposition of materials.
b) Transport of personnel
c) Acquisition of construction, maintenance, operation and disposition of
facilities
d) Acquisition or furnishing of services and
e) Medical and health support etc.
 2. Non-military application of Logistics
 This applications of logistics, although generally less complicated, still
cover the same ground as indicated by the following definitions.

# Logistics is the total management of the key operational functions in

the SC procurements, production and distribution.

# Logistics is the process of managing both the movement and storage

of goods from the source to the point of ultimate consumption and
the associated information flow.

# Logistics is the part SC process that plans, implements and controls

the efficient, effective flow and storage of goods, services, and related
information from the point of origin to the point of consumption in
order to meet the customers' requirements.
Logistics Definitions
 SCOPE OF LOGISTICS MANAGEMENT

Procurement/ Transport/ production Transport/Storage Transport/ Use

Acquisition storage storage

Raw material
Sub-assemblies Regional
Production Finished goods Warehouse
Manufacture parts Factory
Proprietary parts process warehouse Depot or
etc
store
intermediary

Work-in
Inventory progress Inventory
(Materials management) (Physical distribution mngt.)
Logistics
Input phase Output phase
NB:- MM- is concerned with the flow of materials to
and from production or manufacturing
i.e. concerned with input phase of moving bought
out items, such as raw materials and components
from suppliers to production
PDM- is often considered to be concerned with the
flow of goods from the receipt of an order until the
goods are delivered to the customers.
i.e. relates to the output phase of moving finished
goods from production dep’t to finished goods
store and then to the ultimate consumer.
1
1

Logistics Management
Council of Logistics Management definition:

Logistics management is the process of

 planning,
 implementing and
 controlling
 the efficient, cost-effective forward and reverse flow of raw
materials, in-process inventory, finished goods, services,
and related information from point of origin to point of
consumption
for the purpose of conforming to customer requirements.

10
Cont’d…
 Logistics has been called by many names including
the following:

– Materials management
– Physical distribution
– Business logistics
– Channel management
– Distribution
– Industrial logistics
– Logistical management

11
 The Logistics 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.
 System Approach/Integration
 Logistics is, in itself, a system; it is a network of
related activities with the purpose of managing the
orderly flow of goods, information and service with
the logistics channel.

 The systems approach simply states that all

functions or activities need to be understood in terms
of how they affect, and are affected by, other
elements and activities with which they interact.

13
 Cont’d...
 The sum of a series of activities is greater
than its individual parts.
 Trade-off analysis-system should be viewed
as a whole.
High inventory- High customer service
High storage costs
High obsolescence risks

14
 Role of Logistics in the Economy and to
Organization
• Logistics is a significant component of Gross Domestic Product
(GDP)

 Consumes land, labor and capital

• Logistics creates Competitive Advantage for an organization

 Customer service is an output of the logistics system
 Organization with a superior logistics system achieves superior
customer service and product differentiation

15
 Logistics creates Time and Place utility for an organization’s
products
 Time utility is created by making products available to the
customer at the right time for purchase or consumption.
 Place utility is created by making products available to the
customer at the right place for purchase or consumption.
 Time and Place utility complements each other, must happen
together.
 Prevents lost sales/customers, closes the order cycle.

16
 Logistics allows efficient movement of Goods & Services to the
Customer
 Efficient and effective logistics processes have a substantial
impact on an organization’s business costs
 “Almost 50 cents of each dollar the American public spends for
goods goes for activities that occur after the goods are made,
that is, after they have come in finished form … Economically
… distribution is the process in which physical properties of
matter are converted into economic value; it brings the customer
to the product.” (Drucker, 1962)
 “… There is room for substantial improvement, particularly in
the performance of the physical distribution functions of
marketing which constitutes a major part of the total marketing
costs.” (Parker, 1962)

17
• An efficient and economical logistics system is a tangible asset for an
organization
 A competitive differentiation not easily duplicated by competitors

18
The Seven Rights of Logistics
 Right Product, needed for consumption
or production,
 Right Quantity
 Right Place
 Right Time
 Right Condition
 Right Cost,
 Right Customer

19
Logistics Adds Value by Creating Utility
 FORM UTILITY is the process of creating the
good and service, or putting it in the proper form
for the customer to use. (from raw materials to
finished goods)
 POSSESSION UTILITY is the value added to a
product or service because the customer is able to
take actual possession. (by credit a arrangements,
loans...)
 TIME UTILITY is the value added by having an
item when it is needed.
 PLACE UTILITY means having the item or
service available where it is needed.

20
Logistics Supports Marketing
 According to Kotler and Armstrong;
– marketing management - determining the needs
and wants of target markets and delivering the
desired satisfactions more effectively and
efficiently than competitors
– Impact of marketing concept ----customer
orientation

21
 Cont’d...
•Logistics in an organization are considered as
a continuation of marketing.

• Logistics play a critical role in each of the

three critical elements of the marketing
concept (customer satisfaction, integrated
effort/systems approach and corporate
profit) in several ways.

.
14 Marketing / Logistics
Management Concept
Customer
satisfaction
• Suppliers
• Intermediate
customers
• Final customers

Integrated Company
effort profit
• Product • Maximize long-term
profitability
• Price
• Lowest total costs
• Promotion given an acceptable
• Place (distribution) level of customer
service
 Marketing-Logistics
Concepts
 Time and place utility –customer service
level –customer satisfaction

 Customer service is an output of the

logistics system

24
 Competitive Advantage

 Thesource of competitive advantage is

found ;
– In the ability of the organization to differentiate
itself, in the eyes of the customer, from its
competitors,
– By operating at a lower cost and hence at
greater profit.

26
 It is only in the recent past that
business organizations have come to
recognize the vital impact that
logistics management can have in
the achievement of competitive
advantage.

27
12 Components of
Logistics Management
Management actions
Inputs into Planning Implementation Control
logistics Outputs of
Natural logistics
resources
(land, facilities, Competitive
and equipment) advantage
Logistics management Time
Human and place
resources Suppliers Raw In-process Finished Customers
materials inventory goods utility
Efficient
Financial movement
resources to customer

Information Proprietary
resources Logistics activities asset
• Customer service • Plant and warehouse site
• Demand forecasting selection
• Distribution • Procurement
communications • Packaging
• Inventory control • Reverse logistics
• Material handling • Traffic and transportation
• Order processing • Warehousing and storage
• Parts and service support
The Outputs of the Logistics
System
The outputs of the logistics system are
competitive advantage,
time and
place utility,
efficient movement to the customer, and
providing a logistics service mix such that
logistics becomes a proprietary asset of the
organization.
29
 SCM (CSCMP Definition)

 Supply Chain Management encompasses the planning

and management of all activities involved in sourcing
and procurement, conversion, and all logistics 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.
30
 Competition

Today the real competition is

not company against
company but rather supply
chain against supply chain.

31
 Factors Underlying Development of Logistics
Management

 Increased emphasis on customer service

 recognizing logistics’ role in an organization’s
customer service program

 Total cost analysis

 Cost and service trade-offs
 Logistics costs relative to product value and
importance of service considerations, e.g. fast and
reliable delivery to customers

32
Cont’d…
 Profit squeeze
 Cost pressures from rising interest rates and increasing
energy costs during the 1970s
 Logistics efficiency provides cost savings and contributes
to company profitability

 Competitive pressures from globalization

 Growth of world-class competitors forced organizations to
look for new ways to differentiate their product offerings
 Emergence of longer, more complex and more costly global
supply and distribution channels focused management
action increasingly on developing more effective logistics

33
.
Cont’d…
 Shifts in channel power from manufacturers to retailers
 Consumers see leading brands as substitutes for each
other, i.e. parity products
 Reduction in brand loyalty decreases manufacturers’
power
 Retailers’ power increases as they decide what
products to sell based on efficiency of supply from
manufacturers
 Making product available as and when retailers and
customers demand them becomes of paramount
importance to logistics
34
Cont’d…
 Advances in computer and information technology
 Provided companies with the ability to monitor
transaction-intensive activities
 Computerized quantitative modeling tools
increased organizations’ ability to manage flows
and optimize inventory levels and movements
 Computerized planning systems such as MRP,
DRP and JIT allowed organizations to link many
materials management activities under a logistics
management umbrella

35
1
6 Key Logistics Activities

 Customer service  Parts & service support

 Demand forecasting  Plant & warehouse site
 Inventory management selection
 Logistics
communications  Procurement
 Material handling  Reverse logistics
 Order processing  Traffic & transportation
 Packaging  Warehousing & storage

36
 CUSTOMER SERVICE
 Good customer service supports customer satisfaction.

 Customer service is the output of the logistics system.

 It involves getting the right product, to the right customer

at the right place, in the right condition, at the right time
and at the lowest total cost possible.

 The key trade off of customer service: cost of lost sales

 Dissatisfied customer tells to average of nine others

37
DEMAND FORECASTING
 There are many types of demand forecasting
such as;
– marketing forecasts customer demand based on
promotions, pricing, competition and etc. or
– manufacturing forecasts production requirements based
on marketing sales demand forecasts and current
inventory levels.
 Logistics usually becomes involved in forecasting
in terms of how much should be ordered from its
suppliers and how much of finished product
should be transported or held in each market
that the organization serves.
38
 INVENTORY
MANAGEMENT
 Inventory management involves ; trading
off the level of inventory held to achieve
high customer service levels with the cost
of holding inventory, including capital
tied up in inventory, variable storage
costs and obsolescence.

39
 LOGISTICS
COMMUNICATIONS
 Communicationsare becoming increasingly
automated, complex and rapid.

 Computerized advance communication

systems

 Wal-Mart ( supplier link-real time demand

data-on time replenishment)
40
 MATERIALS HANDLING
 Materials handling is a broad area that
encompasses virtually all aspects of all
movements of raw materials, work in
process, or finished goods within a plant
or warehouse.

A primary objective of materials

management is to eliminate handling
wherever possible-min. travel distance,
bottlenecks, inventory levels and loss.
41
 ORDER PROCESSING
Order processing entails the systems
 getting orders from customers,
 checking on the status of orders
 communicating to customers about them,
 filling the order
 making it available to the customer.
Advanced order-processing methods ( EDI-
electronic data interchange, EFT-electronic
funds transfer, barcoding costs

42
.
 PACKAGING

 For protection and storage from a

logistical perspective.
 Important for protection during storage
and transportaion
 Important to be designed for the
warehouse configuration and materials
handling equipment

43
 PARTS AND SERVICE
SUPPORT
 Logistics is responsible for providing
after-sale service support.
 This may include:
– delivery of repair parts to dealers,
– stocking adequate spares,
– responding quickly to demand for repairs...

44
PLANT AND WAREHOUSE
SITE SELECTION
 Determining the location of the
company’s plants and warehouses is a
strategic decision
 affects the costs of transporting raw
materials inbound and finished goods
outbound, but also customer service
levels and speed of response.

45
.
 PROCUREMENT

Procurement is the purchase of materials

and service from outside organizations to
support the firm’s operations from
production to marketing, sales, and
logistics.

Supplier selection, negotiation of price,

supplier quality assessment…

46
.
 REVERSE LOGISTICS
 Reverse flow of goods, services and related information
because of recycling, reusing and disposal activities.

 Returns may take place because of a problem with the

performance of the item or simply because of the
customer changed his or her mind.

 Return goods handling is complex and costly.

 The cost of moving a product backward nearly as much

as nine times as high as moving the same product
forward.

47
 TRAFFIC AND
TRANSPORTATION
 This is the key logistics activity actually provide for the
movement of materials and goods from point of origin
to point of consumption and (disposal as well)

 Selection of mode, routing the shipment, assuring of

compliance with regulations in the region of the
country where shipment is occuring, selection of the
carrier…

 Largest logistics cost

48
WAREHOUSING AND
STORAGE

Warehousing supports time and place

utility by allowing an item to be
produced and helps for later
consumption.
Warehouse layout, design,ownership,
automation…

49
Logistics activity is literally thousands of
years old, dating back to the earliest
forms of organized trade.

As an area of study however, it first began

to gain attention in the early 1900s
-in the distribution of farm products,
-as a way to support the organization’s
business strategy,
-and as a way of providing time and place
utility.
50
Development of Logistics 6 Eras
 Era 1: Farm to market ( early 1900s)
( 1916-1940)
Major influence- agricultural economies
distribution of farm products
transportation

 Era 2: Segmented functions (1940-1960)

Major influence-military with World War II
independent functions-institutional approach, inbound
outbound transportation, wholesaling, retailing, physical
distribution

51
 Cont’d…
 Era 3: Integrated functions ( early 1960s- early 1970s)
Major influence- industrial economies
Linking them together
Total cost approach
Systems approach
Integration of logistics
 Era 4: Customer focus (early 1970s-mid 1980)
Major influence: management science
Customer service
Inventory carrying
Productivity
Link-node
OR influence
52
 Cont’d…
 Era 5: Logistics as a differentiator ( mid 1980s-present)
Major influence-IT, management strategy
globalization
reverse logistics
environment
integrated supply chain management

 Era 6: Behavioral and boundary spanning (future)

Major influence: marketing, social sciences
behavioral aspects of interfirm relations
theory development
customer perceptions of logistics systems
53
 TOTAL COST CONCEPT

 “The total cost concept” is the key to

effectively managing logistics processes.

 The goal of the organization should be to

reduce the total cost of logistics activities,
rather than focusing on each activity in
isolation.

54
1
7
MAJOR LOGISTICS COST
CATEGORIES

 Customer service levels

 Transportation costs
 Warehousing costs
 Order processing/information
systems costs
 Lot quantity costs
 Inventory carrying costs
55
1
5
14 key logistics activites

Place/
customer service
levels
Customer service,
Parts and service support,
Return goods handling

Inventory Transportation
carrying costs costs
Inventory management Traffic and transportation
Packaging
Reverse logistics

Lot quantity Warehousing

costs costs
Material handling Warehouse and storage
procurement Plant and warehouse
Order processing and selection
information costs
Order processing
LIS(logistics
communications)
Demand
forecasting/planning

56
 Cont’d…

 Inventory carrying costs: capital costs, inventory

service cost (insurance and taxes on inventory),
storage space costs, inventory risk costs.
 Lot quantity costs: procurement and production
related costs varying with changes in order size
or frequency.
Order costs, setup costs, capacity lost, material
handling cost, price differentials due to buying
in different quantities
57
TRADE-OFF APPROACH
IN LOGISTICS
 Central goal of trade off in logistics is to maximize long
term profitability and the effective use of assets.

 Examining trade-offs among alternatives and costs,

thereby reducing the overall total cost of activites.
 Reduced transportation costs and longer transit times-
increased inventory and inventory carrying costs

58
 Making Trade-offs in Logistics is Important
 As seen from the previous sections, logistics affect many procedures
and activities in a business, leading to increasing operational costs and
decreased customer service in case of “bad” logistics management.
 Logistics interfere with many business areas and, thus, it is suggested
to identify and determine several “cost trade-offs” in order to provide a
positive benefit to the logistics system as a whole.
 Four (4) different levels of trade-off are proposed:
 Within distribution components: e.g. the decision to use random storage
locations compared to fixed storage locations in a depot. The first 
better storage utilization, more difficult for picking; the second has
the opposite results
 Between distribution components: e.g. a company might increase the
strength and thus the cost of packaging but find greater savings
through improvements in the warehousing and storage of the product
 Cont’d...
 Between company functions: e.g. a trade-off between
optimizing production run lengths and the associated
warehousing costs of storing the finished product. Long
production runs produce lower unit costs (and thus more
cost-effective production) but mean that more product
must be stored for a longer period (which is less cost-
effective for warehousing).
 Between the company and external organizations: e.g. a
change from a manufacturer’s products being delivered
direct to a retailer’s stores to delivery via the retailer’s
depot network might lead to mutual savings for the two
companies.
1
5
Cost Trade-offs Required
in Marketing and Logistics
Product

MARKETING
Price Promotion

Place/
customer service
levels

Inventory Transportation
carrying costs costs
LOGISTICS

Lot quantity Warehousing

costs costs

Order processing
and information
costs
Source: Adapted from Douglas M. Lambert, The Development of an Inventory Costing Methodology: A Study of the Costs
Associated with Holding Inventory (Chicago, IL: National Council of Physical Distribution Management, 1976), p. 7.
81
Future Challenges in
Logistics

 Strategic planning and participation

 Total quality management (TQM)
 Just-in-time (JIT)
 Quick response (QR)
 Efficient consumer response (ECR)
 Logistics as a competitive weapon
 Accounting for logistics costs
62
9 1 Future Challenges in
Logistics
(Continued)

 Logistics as a boundary-spanning activity

 Global logistics
 Increasing skill requirements
 Logistics information systems
 Outsourcing, partnering, and strategic
alliances
 Green marketing

63
 JIT

 Just in time
 Aim to reduce waste and redundant inventory
by delivering products, components, materials
when they are needed.
 Needs close coordination
 Reduces inventory, increases customer service
level
 JIT in retail and grocery: QR and ECR

64
 Quick response

 Began in apparel and textile industry

 Retail sector strategy
 Speeding inventory flows
 Mostly between manufacturer and retailer
 When fully implemented, QR applies JIT.
 Moving product fastly-cross docking rather
than warehousing, floor ready
merchandise( prehung and preticketed)
 Wide usage of IT ( EDI, POS, Barcodes, CAD,
CAM…)
65
Efficient Consumer Response

 Combining several logistics methods for improving the

competitiveness of the grocery industry by cutting
waste in SC
 Grocery industry’s answer to QR
 Wide implementation of EDI, POS(point of sale),
barcoding: paperless information flow
 Continuous replenishment
 Cooperative relation between manufacturer,
suppliers,distributors and customers
 Cross dock
 Moving away from deal mentality to cooperation

66
 ECR

% 41 of total chain reduction of

inventory
 speeds up cycle time from 104 days to 61
days

67
The end !