Business Logistics/Supply
Chain—A Vital Subject
The supply chain is simply another way of
saying “the whole process of business.”
Chapter 1
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The Immediate Supply Chain for an Individual Firm
Transportation
Warehousing
Transportation
Customers
Information
flows
Factory
Transportation
Vendors/plants/ports
Warehousing
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Transportation
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Logistics Defined
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.
Council of Logistics Management
Supply Chain Management Defined
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.
Handfield and Nichols
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Evolution of Supply Chain Management
Activity fragmentation to 1960
2000+
Activity Integration 1960 to 2000
Demand forecasting
Purchasing
Requirements planning
Production planning
Manufacturing inventory
Purchasing/
Materials
Management
Warehousing
Logistics
Material handling
Packaging
Finished goods inventory
Distribution planning
Physical
Distribution
Supply Chain
Supply Chain
Management
Management
Order processing
Transportation
Customer service
Strategic planning
Information services
Marketing/sales
Finance
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Supply Chain Schematic
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The Logistics/SC 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.
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A Revised Strategy is Generating
Great Top Management Interest
Historical perspective of distribution:
“The last frontier of cost economies”
Peter Drucker, 1962
The contemporary view:
Distribution is a new frontier for demand
generation—a competitive weapon.
Both views are
now important!
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Critical Customer Service
Loop
Customer order processing (and
transmittal)
Transportation
Customers
Inventory
or supply source
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Physical Distribution Costs
Category
Percent of sales
$/cwt.
Transportation
3.34%
$26.52
Warehousing
2.02
18.06
Order entry
0.43
4.58
Administration
0.41
2.79
Inventory carrying
1.72
22.25
7.65%
$67.71
Total
Add one-third for inbound supply costs
Source: Herb Davis & Company
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Logistics cost
are about 10% of
sales w/o
purchasing costs
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Customer Service Performance
10
96
94
9
90
7
88
6
86
84
4
82
Product
Availability--%
orders
Product
Availability--% line
items
19
92
19
9
19 4
96
19
9
20 8
00
20
02
5
%
92
8
Days
Order Cycle Time,
Days
Year
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Source: Herb Davis & Company
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Significance of Logistics
 Costs are high




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
 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
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•Costs are lower than K-Mart or
Target Stores
•CEO is a former logistician
•Wal-Mart is the largest retailer in
the world!
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Effect on Logistics Foreign Outsourcing
Domestic sourcing
Foreign sourcing
Profit
G&A
Profit
G&A
Marketing
Logistics
Overhead
Increase
Marketing
Logistics
Increase
Tariffs
Overhead
Materials
Materials
Labor
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Reduction
Labor
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Scope of the Supply Chain for Most Firms
Business logistics
Physical supply
(Materials management)
Sources of
supply
Physical distribution
Plants/
operations
• Transportation
• Inventory maintenance
• Order processing
• Acquisition
• Protective packaging
• Warehousing
• Materials handling
• Information maintenance
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Customers
• Transportation
• Inventory maintenance
• Order processing
• Product scheduling
• Protective packaging
• Warehousing
• Materials handling
• Information maintenance
Focus firm’s internal supply chain
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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
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The Supply Chain is Multi-Enterprise
Scope in
reality
Focus
Company
Suppliers
Customers
Customers/
End users
Supplier’s
suppliers
Acquire
Convert
Distribute
Product and information flow
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Reality of SC Scope
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The Multi-Dimensions of SC
SUPPLY
CHAIN
MANAGEMENT
Activity and process
administration
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CONTROLLING
Customer
service goals
• The product
• Logistics service
• Ord. proc. & info. sys.
Transport Strategy
• Transport fundamentals
• Transport decisions
PLANNING
Inventory Strategy
• Forecasting
• Inventory decisions
• Purchasing and supply
scheduling decisions
• Storage fundamentals
• Storage decisions
ORGANIZING
Study Framework
Location Strategy
• Location decisions
• The network planning process
The focus is
here
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The Logistics Strategy Triangle
Inventory Strategy
 Forecasting
Transport Strategy
 Storage fundamentals
 Transport fundamentals
 Inventory decisions
 Transport decisions
 Purchasing and supply
scheduling decisions
Customer
Storage
decisions

service goals
 The product
 Logistics service
 Information sys.
Location Strategy
 Location decisions
 The network planning process
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Relationship of Logistics to
Marketing and Production
PRODUCTION/
OPERATIONS
Sample activities:
 Quality control
 Detailed production
scheduling
 Equipment maint.
 Capacity planning
 Work measurement
& standards
Interface
activities:
 Product
scheduling
 Plant
location
 Purchasing
LOGISTICS
Sample
activities:
Transport
 Inventory
 Order
processing
 Materials
handling
Interface
activities:
 Customer
service
standards
 Pricing
 Packaging
 Retail
location
Productionlogistics
interface
MARKETING
Sample
activities:
 Promotion
 Market
research
 Product
mix
 Sales force
management
Marketinglogistics
interface
Internal Supply Chain
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Relationship of Logistics to Marketing
Product
Promotion
Price
Logistics
Place-Customer
service levels
Transport
costs
Inventory
carrying costs
Lot quantity
costs
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Order processing
and information
costs
Warehousing
costs
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Relationship of Logistics to Production
Coordinates through scheduling and strategy—
make-to-order or make-to-stock
An integral part of the 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
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Logistics/SC in Diverse Areas
Manufacturing—most common
Environment—causing restrictions
Service—emerging opportunities
Non-profits—little explored
Military—long history
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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
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