Managing Logistics Systems
Planning and Analysis for a Successful Supply Chain
John M. Longshore and
Angela L. Cheatham
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1 An Overview of the Logistics System 1
The Scope of Logistics 1
The Economic Impact of Logistics 5
The Increased Importance of Logistics 6
Advances in Retailing 7
Technological Advances 7
Changes in Consumer Behavior 8
A Reduction in Economic Regulation 9
The Systems and Total Cost Approaches to Logistics 9
Relationships Within the Organization 11
Finance 11
Production 11
Marketing 12
Product Decisions 12
Pricing Decisions 12
Place Decisions 13
Promotional Decisions 13
The Need for Systems Logistics 14
Visibility 14
Summary 17
Chapter 1 Concept Questions 17
2 Logistics System Information Technology 19
Information and Logistics Systems Topologies 19
The Different Types of Information Management Systems 20
Office Support Systems 20
Transactional Processing Systems 22
Management Information Systems 23
Communications Systems 25
Decision Support Systems (DSS) 26
Enterprise Information Management Systems 27
Information Management System Challenges 29
Summary 31
Chapter 2 Concept Questions 31
Discussion Questions 33
3 The Measures of Supply Chain and Logistics System Suppor t 35
Measuring Supply Chain and Logistics System Performance 35
Evolution of Metrics 35
Supply Chain and Logistics System Data Analytics 35
Supply Chain and Logistics System Measures of Effectiveness (MOEs) 36
Measurements and Metrics 43
Procurement and Material Flow Measures and Metrics 43
Transportation, Packaging, and Handling Measures and Metrics 43
Warehouse and Distribution Center Measures and Metrics 43
Summary 46
Chapter 3 Concept Questions 49
Discussion Questions 51
4 Demand Management, Order Management, and Customer Service 53
Demand Planning and Management 53
Some Forecasting Realities 54
Demand Forecasting Techniques and Models 55
Demand Forecasting Challenges 56
Order Management 57
Customer Service 63
Customer Profitability Analysis 64
Service Failure and Service Recovery 65
Summary 67
Chapter 4 Concept Questions 67
Discussion Questions 69
5 Supply Chain and Logistics Systems Efficiency and Effectiveness: Organizational and Managerial Design Impact 71
Supply Chain and Logistics Systems Structures 71
Organization Design for the Supply Chain and Logistics System 74
Managerial Issues in Supply Chain and Logistics System
Organizations 79
Managing and Measuring Productivity 79
Non-financial Measures 80
Managing and Measuring Quality 81
Managing and Measuring Risk and Security 83
Managing and Measuring Sustainability 85
Summary 86
Chapter 5 Concept Questions 86
Discussion Questions 90
6
Inventory Planning and Control 92
Inventory Planning and Control 92
Inventory Types and Classifications 92
Inventory Types 93
Inventory Classifications 94
Inventory Costs 94
Minimizing Total Inventory Cost 95
Economic Order Quantity (EOQ) Model 96
EOQ Basic Calculation 97
When to Order 98
Managing Inventory 101
Inventory Accuracy and Control 103
Vendor-Managed Inventory 106
Summary 107
Chapter 6 Concept Questions 107
Discussion Questions 109
7 Packaging, Containerization, and Materials Handling 111
The Functions of Packaging 111
Primary Functions 111
Secondary Functions 113
Packaging Design 113
Packaging Marks and Labels 115
Unitization and Palletization 117
Packaging Testing and Monitoring 120
Packaging and the Environment 121
Sustainable Packaging 121
Materials Handling 123
Special Handling Considerations 130
Summary 132
Chapter 7 Concept Questions 132
Discussion Questions 134
8 Warehouse Management and Operations 136
Introduction 136
Brief History of Warehousing 136
The Importance of Warehousing in a Supply Chain and Logistics System 138 Types of Warehouses 139
Warehouse Classification by Role in the Supply Chain and Logistics System 140
Warehouses by Customer Classification 141
The Economic Impact of Warehousing 142
Warehouse Design and Layout 145
Warehouse Operations 148
Warehouse or DC Key Metrics 150
Summary 152
Chapter 8 Concept Questions 152
Discussion Questions 153
9 Transportation Systems Management 155
Transportation Systems 155
Transportation Systems in the United States 156
Transportation Modes and Cost Structure 157
Transportation Cost Structure 162
Transportation Economics 163
Transportation Pricing 165
Domestic Transportation Documents 166
International Transportation Documents 167
Transportation Performance Metrics 168
Summary 168
Chapter 9 Concept Questions 170
Discussion Questions 174
10 Supply Chain and Logistics System Network Design:
Distribution Network Design in the Supply Chain and Logistics System 176
Supply Chain and Logistics System Network Design Decisions 178
Types of Distribution Networks 181
Models for Designing Network Configuration 186
Modeling Techniques Used in Facility Selection Decision Process 188
Summary 193
Chapter 10 Concept Questions 194
Discussion Questions 195
11 Aggregate Planning and Master Scheduling 197
Decision-Making 197 Process Decisions 197
The Planning and Scheduling Process Overview 200
Sales and Operating Plan Process 201
Integrated Business Planning (IBP) 203
Options Used to Influence Demand and Supply 203
Meeting Uneven Demand in Aggregate Planning 205
Master Production Schedule (MPS) 206
Order Fulfillment Manufacturing Production Strategies 206
Materials Requirements Planning (MRP) 207
MPS and MRP Execution 208
Summary 212
Chapter 11 Concept Questions 212
Discussion Questions 215
12 Reverse Logistics and Sustainability 217
Introduction 217
Activities and Cost Associated With Reverse Logistics 218
Product Return – The Reverse Logistics Process 220
Transforming Reverse Logistics Into a Profit Center 223
Drivers in Reverse Logistics – System Network Design Considerations 224
Reverse Logistics Management 225
Challenges in Reverse Logistics 228
Reverse Logistics and Sustainability 229
Reverse Logistics Role in the Circular Economy 230
Summary 232
Chapter 12 Concept Questions 232
Discussion Questions 234
13 Supply Chain and Logistics Management in the System Life Cycle 236
Introduction 236
Supply Chain and Logistics Program Planning 236
Development of the Work Breakdown Structure (WBS) 248
Scheduling Supply Chain and Logistics System Activities 250
Organizing for Supply Chain and Logistics System Management 255
Integrated Product and Process Development (IPPD) 260
Staffing the Organization 263
Controlling 263
Summary 265
Chapter 13 Concept Questions 265
Discussion Questions 269
14 The Lean, Agile, and Hybrid Supply Chain and Log istics Systems 271
Lean, Agile, and Hybrid Defined 271
Brief History of Lean 271
Lean Tools 277
Summary 287
Chapter 14 Concept Questions 287
Discussion Questions 290
1 An Overview of the Logistics System
The Scope of Logistics
The principles and concepts of logistics stem from specific facets of activity within both the commercial and federal sectors. There are different perspectives of logistics, with variations of key elements. Logistics is the coordination of complex operations, including procurement, transportation, maintenance, and operations affecting the effective and efficient movement of goods throughout the supply chain (Haq, 2006).
Logistic activities include (1) the identification and management of suppliers and procurement and order processing and physical supply of materials and/or services from sources of supply to the manufacturer or producer; (2) the materials handling and inventory management of materials and/or services during and throughout the manufacturing process; and (3) the subsequent transportation and distribution of products from the manufacturer to the ultimate consumer. Figure 1.1 illustrates logistics activities in a forward flow from supplier to consumer. A reverse flow is illustrated as well. This is the flow of items from the consumer back to the point of disposal. These activities are required when materials and products are retired, recycled and/or disposed of and phased out of inventory. This is called reverse logistics, a topic that will be covered in depth in Chapter 12 (Svensson, 2002).
Logistics in the commercial sector has traditionally been oriented toward the management of the physical flow of materials and products among members of the channels of distribution of the organization. Activities such as transportation and warehousing have been available to ensure that the movement of the product is continuous and reliable. Purchasing departments have been responsible for the procurement and acquisition of materials, and marketing and sales groups have been responsible for providing planning information to set demand forecast. In essence, the spectrum of logistics in Figure 1.2 contains a number of different organizational elements working together toward a given objective yet operating independently.
With advances in information technology topologies such as Advanced Planning and Scheduling (APS) and Scaled Agile Framework (SAFe) systems, logistics has taken over new roles within the supply chain architectural framework. The advancement in Bar Coding methodologies for instant Point of Sale (PoS) order processing and rapid improvements in both passive and active Radio Frequency identification (RFID) tags and global positioning systems have enabled rapid and efficient transfer of information on product and material flows.
All of these information system technological advances coupled with data aggregation and transformation structures such as Blockchain clearly signal that the logistics has taken
Figure 1.1 Logistics Flows During the Production Process.
on a more comprehensive, integrated approach and has a leading role in activities such as information technology, marketing and sales, and finance as they relate to the physical flow of materials and products (Winston, 1998).
At the same time, globalization trends represent the competitive landscape with more complexity and the need for partnerships and coalitions to influence the expansion of logistical services. All these various developments have evolved and are directly associated with the supply chain (SC) and Supply Chain Management (SCM).
SCM integrates supply and demand management within and across companies and, as stated by the Council of Supply Chain Management Professionals (CSCMP), ‘includes all logistics management activities, as well as manufacturing operations, and it drives coordination of processes and activities with and across marketing, sales, product design, finance and information technology (Zinn, 1997).
Supply chain includes all those activities associated with inbound logistics, the flow of materials and services from the supplier to the producer and/or manufacturer, the material flows within the factory, and the outbound logistics, flow of materials, products, and services from the factory to the customer. Conversely, SCM is the management of that supply chain, or groups of supply chains, efficiently and effectively with the overall objective being to accomplish those activities shown in Figure 1.1, with a total Business perspective in mind (Winston, 1998).
In the federal sector, logistics evolved through the concept of integrated logistics support (ILS) which was formally developed in the mid-1960s. As defined in the 4100.35G, Integrated Logistics Support Planning Guide for DoD (Department of Defense) Systems and Equipment, ILS is
a composite of all support considerations necessary to assure the effective and economical support of a system at all levels of maintenance for its programmed life cycle. It is an integral part of the other aspects of system acquisition and operations.
(Werbel, 2002)
Figure 1.2 Generic Logistics Organizational Structure.
As initially envisioned, ILS included a life cycle approach to the planning, development, acquisition, and operation of systems and equipment to maximize readiness and optimize costs. The principal elements of ILS, as shown in Figure 1.3, included the system design and support, interface, reliability and maintainability, maintenance planning, support, and test equipment, supply support, transportation and handling, technical data, facilities, personnel and training, logistics support resource funds, logistics support management information, and contractor support services (Castaldo, 2009).
The emphasis here is on logistics as it pertained to total life cycle system support versus the supply and distribution of components and consumables. It includes not only the maintenance and sustaining support of those systems during their period of utilization, but also the design of those systems for reliability, maintainability, and supportability.
During the ensuing decades of the 1970s, 1980s, and 1990s, the principles and concepts of logistics were further expanded and, as defined by the Defense Systems Management College (DSMC), Integrated Logistics Support Guide was expanded to constitute a
disciplined, unified and iterative approach to the management and technical activities necessary to (1) integrate support considerations into system and equipment design; (2) develop support requirements that are related consistently to readiness objectives, to design, and to each other; (3) acquire the required support; (4) provide the required support during the operational phase at minimum cost (Castaldo, 2009).
Inherent within this definition is the current requirement of design for supportability This pertains to the degree to which a system can be effectively supported in terms of built-in design characteristics and overall maintenance support infrastructure.
To further stress the requirement for dealing with logistics in the system design process, the concept of performance based logistics (PBL) has been introduced by the Department of Defense. The objective is to emphasize the importance of and need for the maintenance
Figure 1.3 Integrated Logistics Support Elements.
5 and support infrastructure by establishing specific metrics and to include these as quantitative design-to-performance requirements in the appropriate specifications (Whitmore, 2015).
In covering the scope of logistics, one needs to consider the entire spectrum of activity, both the commercial and federal (defense) approaches. There is a need to address all logistics activities on an integrated life-cycle basis and from a total system perspective. The interrelationships are many, and, if organizations are to remain competitive in today’s environment, integration of both commercial and federal aspects of logistics is important.
The Economic Impact of Logistics
The logistics discipline has evolved, and one element that has remained constant is the economic impact of logistics. Table 1.1 represents business logistics cost in relation to gross domestic product (GDP) for a select group of countries. As should be noted, although absolute and relative logistics costs in relation to GNP vary from country to country, logistics is definitely an important component in any country’s economy.
The macroeconomic impact of logistics is significant; equally significant are the microeconomic impacts of logistics on the individual consumer. These economic impacts can be illustrated through the concept of economic utility which measures the value or usefulness of a product or service in fulfilling a consumer’s needs and wants. The four general types of economic utility are possession, form, time, and place.
The value or usefulness to a customer is based on the ability to take possession of a product or service or what is called the Possession Utility.
Form Utility refers to product completion in a form that can be used by the customer and is of value to that customer. Normally, form utility is associated with the production of a product or service. Breaking down production lots into useable allocation sizes for individual consumer consumption is form utility.
Having products available where they are needed by the consumer is Place Utility. Products and/or services are moved from a point of less value (warehouse) to that of higher value (consumer).
Time Utility refers to having the product and/or service available when needed by the customer. Different products have different sensitivities to time; perishable products would be more time sensitive than, for example, a product than 3-week shelf life.
Table 1.1 The Cost of Logistics in Relation to a Country’s Gross Domestic Product Source; Researchgate; 2019. Nominal GDP (2020) (Lee, 2002).
Country
Source: The World Bank, World Development Indicators.
GDP (2020)
Simultaneously achieving possession, form, place, and time utilities contributes greatly to achieving, but not guaranteeing customer satisfaction.
The Increased Importance of Logistics
Formal study of business logistics and predecessor concepts such as traffic management and physical distribution have existed since the second half of the twentieth century. However, limited appreciation was shown for the importance of the logistics discipline for several decades from the mid-1950s through 1980s. Over the proceeding decades (1990–2020), increasing recognition has been given to business logistics in part because of tremendous and rapid changes in the discipline (Table 1.2) (Whitmore, 2015).
Global business is being driven by significant opportunities to increase operating efficiency. Such operational efficiencies are attainable in at least three areas: the global marketplace, labor advantages, and tax laws. First, the global marketplace offers significant opportunities to strategically source raw material and components. Second, significant labor advantages can be gained by locating manufacturing and distribution facilities in developing nations. Third, favorable tax laws can make the performance of value-adding operations in specific countries highly attractive.
The decision to engage in global operations to achieve market growth and enjoy operational efficiency follows a natural path of business expansion. Typically, in the first stage, firms first enter the global marketplace by conducting import and export expansion. Such import and export transactions constitute a significant portion of global international business. The second stage of globalization involves a firm’s establishment of local presence in foreign nations and trading areas. Such presence can range from franchise and licensing of local businesses to the establishment of manufacturing and distribution facilities. The important distinction between import/export involvement and the establishment of local presence is the degree of investment and managerial involvement. The third stage of globalization is the full-fledged conduct of business operations within and across international boundaries. This is the most advanced phase of international engagement and is typically referred to as globalization (Werbel, 2002).
The logistics of globalization involves four significant differences in comparison to national or even regional operations. First, the distance of typical order-to-delivery operations is significantly longer internationally in contrast to domestic business. Second, to accommodate the laws and regulations of all governing bodies, the required documentation of business transactions is significantly more complex. Third, international logistic activities must be designed to deal with significant diversity in work practices and local operating environment. Fourth, accommodation of cultural variations in how consumers demand products and services is essential for successful logistical operations (Brennan, 2000).
Table 1.2 Top Ten Important Logistics Trends a Company Looked Out for in 2020 (Whitmore, 2015)?
Artificial intelligence
Digital twins
Real-time supply chain visibility
Blockchain
Data standardization and advanced analytics
The growing importance of industry newcomers
At the end, twenty-first century commerce is conducted within the constant threat of environmental, social, and manmade issues. Businesses experience both environmental and social threats due to natural and manmade issues. These constraints decrease production, increase security measures, and impact how businesses interact internationally. However, it is the threat of terrorism that requires constant increased vigilance. The intensity and severity of terrorist disruption involve both the shipment itself and the exposure to using the logistical infrastructure as a means to deliver explosive and chemical devices. It is important to understand that successfully engaging in global logistics requires mastering the associated logistical challenges.
Advances in Retailing
In the second decade of the twenty-first century, retailing is noticeably different than in the past, and the differences exemplify the importance of effective and efficient logistics. So-called big-box retailers such Walmart, Carrefour, and Dick’s Sporting Goods explicitly have recognized superior logistics as a super component of their corporate strategy. The same is true for the now dominant, online retailing giants such as Amazon. Two decades ago, one-day delivery of a purchase made online was thought to be not possible; now, it is the new normal. Both big-box retailers as well as online giants have also been trendsetters with respect to environmental and social issues in logistics (World Bank, World Development Indicators, 2020).
Also influencing the rapid change in the retailing landscape is the change in channel structure and management. Omni-channel Retailing, a strategy that focuses on providing customers with a seamless shopping experience, regardless of sales channel, is becoming the norm. In this, retailers enable their customers to transact within and across any contract channel (online, in-store, mobile app, etc.) to enhance information availability and customer experience. Multi-echelon distribution supply chain, a replenishment methodology designed to improve channel synchronization within the supply chain and optimize lot sizing, vastly decreases total costs across the distribution network thus providing more value to the customer at a lower cost (Asiedu, 1998).
Technological Advances
Each academic year, Beloit College in Wisconsin releases its annual ‘Mindset’ list that details the world view of incoming first-year college students. The class of 2032, which assumes a 2020 birthdate, is noteworthy because ‘thumb prints have always provided login security, and harder to lose, than passwords.’
There have been tremendous technological advances in the last 25 years from dial-up to WI-FI, retail stores to online shopping, and the use of GPS (Global Positioning System) technology. Each advancement has profoundly influenced business management and, by extension, business logistics.
Technological advances such as the Internet of Things (IoT) are coming of age. As costs fall, research shows that the number of businesses using IoT devices grew from being 13% in 2014 to 25% in 2019. The IDC (International Data Corporation) forecasts a 13.6% annual year-over-year growth through to 2020. IoT allows organizations to monitor inventory, automate stock reordering and keep track of deliveries, all in real time. Sensors can predict wear and tear on equipment, allowing timely ordering of spare parts and increased supply chain transparency. The Boeing company,
with its management of its fleet of 787 aircraft, is a pioneer in this technological area (Bengtsson, 2005).
With greater access to Big Data, more organizations are turning to Artificial Intelligence (AI) and machine learning to simplify tasks and automate procedures. Gartner reports that in the 4 years leading up to 2020, there was a 270% increase in the number of organizations using AI. Predictive analytics and machine learning algorithms are being used to improve planning and decision support systems, identify purchasing patterns, automate tedious warehousing processes, and manage inventory to ease logistics operations.
While many organizations still rely on legacy or primitive supply chain solution software, the future lies in the cloud. Available in many forms, including Software as a Service (SaaS), Infrastructure as a Service (IaaS), and Platform as a Service (PaaS), supply chain cloud computing offers flexibility, scalability, and a global reach while doing away with the need to maintain extensive, expensive on-premises computing infrastructure. According to McKinsey, cloud-specific spending in 2022 will grow six times faster than other IT expenditures. Able to work with and complement on premise supply chain software, cloud-based supply chain applications offer a better experience, greater flexibility, and easy access to new features and releases (Arnold, 2015).
Changes in Consumer Behavior
Although changes in consumer behavior are commonly the purview of psychology and marketing disciplines, such changes have important logistical and supply chain implications as well. Changing family roles, the customized customer, and rising customer expectations are all current examples of changing consumer behavior that is helping transform logistics and supply chains (Hu, 2017).
In terms of changing family roles, 45 years ago, less than 45% of adult women were in the workforce. Today, women hold the majority of jobs for the first time in almost a decade according to the Bureau of Labor Statistics. One consequence of the changing demographic is an increasing emphasis on the convenience associated with a family’s grocery shopping experiences. This convenience is manifested in various ways to include extended store hours, home delivery of purchased items, and ready-to-eat/ready-to-cook foods, and each of these has logistics-related implications. With extended store hours – some stores are open 24 hours – retailers must address issues such as optimal delivery times for replenishment trucks and when to replenish merchandise (Fornell, 2020).
Although home delivery could be convenient to the purchaser, the time-sensitive nature of grocery products means that delivery should be made when the purchaser is at home. Scheduling home deliveries to coincide with the purchaser’s availability is paramount to avoid dissatisfied customers. At the end, the growth in ready-to-eat/ready-to-cook foods means some food processors have added high-volume cooking systems to their production facilities. From a logistics perspective, food processors continue to experiment with packaging alternatives that will extend the shelf life of the ready-to-cook foods.
The Customized Customer signifies that the customer desires a product offering that is highly tailored to the customer’s exact preferences. One approach for addressing the customized customer is through mass customization, which refers to the ability of a company to deliver highly customized products and services that are designed to meet the needs and wants of individual segments or customers. The customized customer will not accept a ‘one size fits all’ approach, and that means that logistics systems must be flexible rather and not rigid. As an example, logistics service providers such as
FedEx and UPS offer a variety of delivery options to prospective customers. FedEx and UPS customers can choose same-day delivery, next-day delivery by noon, nextday delivery by the close of business, second-day delivery by noon, among others. As a rule, the earlier the delivery time, the more expensive the transportation cost (Müßigmann, 2020).
As for Rising Customer Expectations, customer expectations tend to increase through time, which means that a satisfactory level of performance in the past might be considered mediocre today. An excellent example of rising customer expectations is provided by the operations of Toyota Motor North America company. To retain customers and to reduce losing customers to other automotive repair facilities, Toyota now offers same-day delivery (rather than one-day delivery) of automotive parts to certain Toyota dealerships located in major metropolitan areas. This same-day delivery has been facilitated by a redesign of Toyota’s automotive parts’ distribution network (Zinn, 1997).
A Reduction in Economic Regulation
Widespread reductions in economic regulation (commonly referred to as deregulation), enacted during the 1970s and 1980s, relaxed government control of carriers’ rates and fares, entry and exit, mergers, acquisitions, and much more. These controls were particularly onerous in the US transportation industry in the sense that price competition was essentially nonexistent, and customers were forced to accept whatever service the carriers chose to provide. This meant that logistics managers had relatively little control over one of the most important cost components in a logistics system.
Reduction in economic regulation in the airfreight, railroad, and trucking industries in the United States allowed individual carriers flexibility in pricing and service. This flexibility was important to logistics for several reasons. First, it provided companies with the ability to implement the logistics service levels, and prices could be adjusted accordingly. Second, the increased pricing flexibility allowed large buyers of transportation services to reduce their transportation costs by leveraging large amounts of freight with a limited number of carriers (Adams, 2001).
Although the preceding part of this chapter has focused on the adjustment of economic regulation within the United States, deregulation has had a similar effect in other countries. Lessened economic regulation of transportation among European countries has resulted in lower prices for truck shipments in these countries. Privatization of commercial airports has been found to improve their operational efficiency relative to governmentowned and/or operated airports as well.
The Systems and Total Cost Approaches to Logistics
Logistics is a classic example of the systems approach to business problems. From a companywide perspective, the systems approach indicates that a company’s objectives can be realized by recognizing the mutual interdependence of the major functional areas of the firm, such as marketing, production, finance, and logistics. One implementation of the systems approach is that the goals and objectives of the major functional areas should be compatible with the company’s goals and objectives. One logistics system does not fit all companies; goals and objectives vary from one firm to another. The logistics system that emphasizes customer satisfaction is likely to be different from the logistics system that emphasizes cost minimization (Haq, 2006).
A second implication is that decisions made by one functional area should consider the potential implications for other functional areas. For example, one consequence of pursuing the marketing concept, which focuses on satisfying customer needs and wants, is often a marked increase in the number of stock-keeping-units (SKUs) or line items of inventory offered for sale. An increase in the number of SKUs provides customers with more choices, which today’s customers want.
Alternatively, from a logistics perspective, the proliferation of SKUs creates challenges such as more items to identify, store, track, which increase the chances of mistakes. Example of misidentification involves a consumer products company that mistakenly assigned the same product code to a 3-pack, 6-pack, and 12 pack of a product it sold. Imagine the reaction of the customer who ordered a 3-pack of the product, only to receive a 6-pack and was charged for the 12-pack.
Just as the major functional areas of a firm should recognize their interdependence, so too should the various activities that comprise the logistics function (the intra-functional logistics). The logistics manager should balance each logistics activity to ensure each area is operating effectively and efficiently.
These infra-functional logistic functions illustrated in Figure 1.4 indicate that systems logistics serves as the foundation for business logistics which is made up of materials management (movement and storage of materials into the firm) and physical distribution (storage of finished product and movement to the customer). Infra-functional logistics attempts to coordinate materials management and physical distribution in a cost-efficient manner that supports an organization’s customer service objectives (Haq, 2006).
Coordination of material management and physical distribution can be made possible in many ways. One way is by designating one vehicle to deliver materials and component parts and to pick up finished goods. This may sound like common sense, but considerate amounts of communication/coordination are required and can be elusive.
1.4 Points of Control over Inbound and Outbound Logistics Movement.
Figure
Logistics managers use the total cost approach to coordinate materials management and physical distribution in a cost-efficient manner. This approach is built on the premise that all relevant activities in moving and storing products should be considered (total cost), and not individually. Use of the total cost approach requires an understanding of cost tradeoffs; in other words, changes to one logistics activity cause some costs to increase and others to decrease. It is important to understand that logistical cost trade-offs recognize that the costs of certain logistic activities move in opposite directions. As an example, a decrease in transportation costs is often associated with an increase in warehousing costs.
The key to the total cost approach is that all relevant logistical cost items are considered simultaneously during the decision-making process. Expedited transportation for example, such as air freight, will increase a company’s transportation costs. However, expedited transportation leads to a faster order cycle, which allows the receiving company to hold lower levels of inventory, thus reducing both its inventory and warehousing costs. The total cost approach evaluates if the decreased inventory and warehousing costs are greater than the increased costs of expedited transportation.
When used in the logistics decision-making process, the total cost concept approach forms what is commonly called the total logistics concept. This concept is unique, not because of the activities performed, but because of the integration of all activities into a unified whole that seeks to minimize distribution costs in a manner that supports an organization’s customer service objectives (Coelho, 2012).
Relationships Within the Organization
The system and total cost approaches to logistics require an understanding of logistics and its relationship with other functional areas within the organization. We could state that logistics touches every facet of the organization in some way because of both intra and inter business relationships. However, here, we focus on the logistical relationships with three key functional organizational areas: finance, production, and marketing (Hu, 2017).
Finance
The finance staff is often charged with the responsibility of allocating the organization’s funds to approved projects in various operating departments. The finance department is instrumental in approving capital budgeting decisions that affect logistic activities. These include the acquisition of materials, handling equipment, packaging, and inventory. A basic challenge for the two areas is that finance often measures inventory in terms of its cost and value while logistics tends to measure inventory in terms of units. These two different ways of measuring inventory can often create friction between the two groups.
It is also not unusual to have identical items added to inventory at different times which means that each unit can have a different cost even though inventory levels are not affected. The concept of depreciation, which reduces the monetary value of inventory by a certain amount per period of time, even though the actual quantity of inventory may be unchanged, often can cause the two functional areas to have ‘discussions.’
Production
One of the most common interfaces between production and logistics involves the length of production runs. The production department favors long production runs of individual
products because this allows the relevant fixed costs to be spread over more units, resulting in a lower production cost per unit. However, long production runs require large amounts of inventory, and it is the responsibility of logistics to store and track that inventory.
Another consideration with long production runs is that, occasionally, excess inventory of products occurs due to limited or demand forecast inaccuracies. This adds to the inventory carrying cost and contributes to an increased handling cost.
Increasing utilization of the postponement concept or the delay of value-added activities such as final assembly, production, and packaging until the latest possible time also influences the interface between production and logistics. Some value-added activities including case packing and labeling that were traditionally performed at the production site are now performed in warehousing facilities. As a result, warehouse facilities are adding new types of equipment and being reconfigured differently.
Marketing
Marketing places a heavy emphasis on customer satisfaction, and logistics strategies facilitate this by reducing the cost of the products, which can translate into lower prices for customer and higher margins for the organization as well as can bring a broader variety of choices closer to where the customer wishes to buy and use the product. Logistics strategies offer a unique way for the organization to differentiate itself among competitors, and logistics offers an important route for organization to create marketing superiority. Interaction between logistics and marketing focuses on the marketing mix – the four Ps of marketing – product, price, place, and promotion.
Product Decisions
Several potential interfaces are possible between marketing and logistics in terms of product decisions. The marked increase in product offerings allows for customer choice and creates logistical challenges in terms of identification, storage, and tracking. The number of SKUs to hold is another product interface between the two functional areas. Marketers often prefer to carry higher quantities because this reduces the likelihood of stock-outs. Product design, which is often the purview of marketing, also has important logistical implications. Beverage containers are a good example of this. Long-neck glass beverage containers might be more distinctive than aluminum cans; however, from a logistics perspective, long-neck bottles take up more space and are more likely to be damaged than aluminum cans.
The growing emphasis on offering sustainable products, products that meet present needs without compromising the ability of future generations to meet their needs, impacts logistical decisions. Fair trade products are those that guarantee a better deal for producers in the developing world through fair and stable prices as well as teaching farming methods that are environmentally sustainable. From a logistical perspective, an organization’s commitment to selling fair trade products can result in more rapidly changing sourcing requirements for necessary raw materials (Brennan, 2000).
Pricing Decisions
The product’s transportation costs are reflected in its selling price; this is a key pricerelated decision for marketers and has proved to be a particularly viewing issue for some
online merchants. For example, should an organization’s selling price reflect its product’s landed cost, which refers to the price of a product at the source along with the transportation costs to its destination? A selling price that is based on a product’s landed cost, on the one hand, could result in a substantial increase in a product’s selling price. That increased price could decrease buyer demand as well, on the other hand. One way that some organizations address this conundrum is to require a minimum order dollar amount to qualify for ‘free’ delivery.
Logistics managers play a key role in product pricing including the associated cost of providing various levels of customer service and the formulation of the firm’s quality discount pricing policy. These decisions affect price per unit, customer satisfaction, and shipping cost.
Place Decisions
Two types of networks, logistics and marketing channel, are directly affected by place decisions. Logistics decisions concern the most effective way to move and store the product from where it is produced to where it is sold. An effective logistics system can provide positive support by enabling the organization to attract and utilize the most productive channel and supply chain members. Those channel members are frequently able to pick and choose which manufacturer’s products they desire to sell. If a manufacturer is not able to provide a product at the right time, in the right quantities, and in an undamaged condition consistently, the channel members are apt to end their relationship or end active promotion of the product.
A popular marketing strategy involves co-branding, which refers to an alliance that allows customers to purchase products from two or more name-brand retailers at one retail outlet. Co-branding offers the customer convenience by allowing one-stop shopping and the opportunity to purchase brand-name rather than private-label products. From a logistical perspective, delivery of that product to a retail location can be a major decision. Should each co-branding party deliver its respective products to a location, or should the co-branding parties co-load vehicles to minimize the number of deliveries that arrive at a particular location? While the former might result in higher delivery costs because of multiple deliveries, the latter requires a higher degree of coordination between the cobranding parties (Asiedu, 1998).
Promotional Decisions
Promotional decisions require close coordination between marketing and logistics. The availability of highly advertised products, when an organization is running pricing campaigns, is one important situation where a close coordination is required. A few things that are more damaging to a firm’s image are having a stock-out of an item that has been heavily promoted in a sales campaign. In some instances, imbalances of product supply and demand can be viewed as bait and switch tactics – enticing customers with promise of low-priced items only to find that they are unavailable, but a higher priced substitute item is mysteriously available.
Once a decision is made to promote the introduction of a new item, logistics assumes responsibility for having the item in place on the scheduled release date – not earlier, not later.
The Need for Systems Logistics
The complexity and the costs of products and/or systems, in general, have been increasing over recent years. As an example, the B-757 was first flown in 1982. Five years later, the B-737-400 had 1.9 times the onboard Source Lines of Code (SLOC) requiring an estimated 2.7 times the development effort of that required for B-757. Five years later, the B-777 had 21 times more onboard SLOC than the B-757 and estimated 28.5 times the development costs. A combination of the introduction of new technologies in response to a constantly changing set of performance requirements and increased external social and political pressures associated with environmental issues has been a major driver. Moreover, the requirements to reduce the time it takes to develop and deliver a new system to the customer and the requirement to extend the life cycle of systems already in operation constitute a major challenge for today’s logistician.
Because of this increased complexity and costs, many systems in use today fail to adequately meet the needs of today’s customers. In addition, they are not cost-effective in terms of their operation and support. This is happening in real time when resources are dwindling, and international competition is increasing worldwide (Whitmore, 2015).
When one examines the issue of cost-effectiveness, experience shows that a lack of total cost visibility is a major contributing factor. A graphical representation of this is shown in Figure 1.5.
Visibility
For many systems, the costs associated with design and development, construction, initial procurement, and installation of capital equipment and production are relatively well known. These costs are dealt with and decisions made on a regular basis. However, the
Operations Cost (Personnel,Facilities, Utilities andEnergy
Software Cost(Operating andMaintenance Software)
AcquisitionCost (research,Design, Test,Production, Construction)
ProductDistributionCost (Transportation,Traffic,and Material Handling)
MaintenanceCost (CustomerService,Field, Supplier Factory Maintenance) TechnicalDataCost Training Cost (Operator andMaintenance Training
Figure 1.5 The Need For Total Cost.
TestandSupport EquipmentCost
costs associated with utilization and the maintenance support that the system needs throughout its intended life cycle are often overlooked. This is particularly true through the past decade when systems have been modified to include the ‘latest and greatest technology’ without consideration of cost impact downstream (Whitmore, 2015).
A large percentage, up to 75%, of the total life-cycle cost for a given system can be attributed to operating and maintaining activities. A significant portion of those costs stems from decisions made during the early phases of planning and conceptual design of the system. Decisions pertaining to the selection of technologies and of materials, the design of manufacturing processes, equipment packaging schemes and diagnostic routines, the performance of functions manually versus using automation, the design of maintenance and support equipment have a significant impact on the downstream life-cycle costs. Additionally, the ultimate maintenance and infrastructure selected for a system throughout its period utilization significantly affect the overall cost-effectiveness of that system.
Including life-cycle considerations in the decision-making process from the beginning of the product/systems is critical. As illustrated in Figure 1.6, although improvements to reduce cost can be initiated at the any stage of development, the greatest impact on life-cycle cost, and hence maintenance and support costs, can be realized during the early phases of product/system design and development. In other words, logistics and the design of supportability must be inherent within the early product/system design and development process if the results are to be cost-effective (Bhutta, 2002).
Determining supportability early in the decision-making process positively impacts the effects of early life-cycle planning versus supportability issues later. It is imperative that future system design and development efforts emphasize;
1 Improving methods for defining system requirements as related to true customer needs early in the conceptual design phase and addressing performance, effectiveness, and all essential requirements for logistics.
2 Addressing the total system, its prime components, and all its elements of support from a life-cycle perspective.
3 Organizing and integrating the appropriate and necessar y logistics-related activities into mainstream design effort concurrently and in a timely manner; and,
4 Establishing a disciplined approach, with the necessary review, evaluation, and feedback provisions to ensure that logistics and design for supportability are adequately considered in the overall system acquisition process.
System logistics must be considered as an integral part of the business system function, not separately and not after-the-fact. More specifically, to be affected, it must include the following activities:
1 The initial definition of product/system support requirements.
2 Development of criteria as an input to the design including key competitive differential related elements of the product/system, support infrastructure and design, and procurement specifications.
3 Ongoing evaluation of alternative design configurations of the product/system through trade-off studies, design optimization, and formal design review.
4 Determination of resource requirements for support based on a given design configuration to include personnel quantities and skill levels, spares and repair parts, test and support equipment, facilities, transportation, data, and computer resources.
5 Ongoing assessment of the overall support infrastr ucture with the objective of continuous improvement through iterative processes of measurement, evaluation, and recommendations for enhancement to include the data collection methodologies, evaluation, and process improvement capabilities.
Figure 1.7 Consequences of Not Addressing Supportability Early in the Product/System Life Cycle A Comparison Showing the Effects of Early Life-Cycle Planning Versus Supportability Issues Later (Bhutta, 2002).
Summary
This chapter provided an abbreviated introduction to the scope of logistics and defined it in a broad context as it applies to commercial product and complex systems development from a life-cycle perspective. Business logistics was initially presented and discussed in the context of its overall fit within the supply chain structure as well as its relationships with other functional elements within the organization context. System logistics was then addressed by first discussing the current environment and establishing the importance of Engineering logistics. Rational was then given for the inclusion of logistics as part of the larger logistics support infrastructure and the need to consider it as a major Systems Element when conceptualizing the development of a product and/or complex system. Additionally, the need to define this infrastructure early in the product/system life cycle was addressed so that it can positively affect the Design and Development process thus yielding manageable Life Cycle Costs
Chapter 1 Concept Questions
1 In your own words, provide definitions of the following terms: logistics, supply chain, supply chain management, integrated logistics support. Briefly address the distinguishing characteristic(s) of each.
2 Discuss logistics globalization by addressing its advantages/disadvantages, its various stages, and how it differs from national or regional operations.
3 Explain in your own words what impact the following have had on the field of logistics:
• Advances in retailing.
• Technological advances.
• Changes in consumer behavior.
• A reduction in economic regulation.
4 Briefly describe the relationship logistics has within the organization. Specifically address how it interfaces and influences/impacts the functional areas of finance, production, and marketing.
5 In your own words, illustrate your understanding of the need to view logistics from a systems perspective. Your response should, at a minimum, touch on the point’s product complexity, new technologies, total cost visibility, and life-cycle supportability.
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