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LOGISTICS is the function responsible for all aspects of the movement and storage of

materials on their journey from original suppliers through to final customers.

Logistics Support Operations

• products – a complex package that contains a mixture of both goods and
• operations – create and deliver the products
Inputs Operations Outputs
Largely Goods Balance of Goods and Services Largely Services
People Manufacture Goods
Buildings Serve Services
Raw materials Supply Profit
Car HouseEquipmentBook Fast Food
Transport Health
Waste Sea
Makers Builders Publisher
Information Restaurant
Sell Service
Wages Cruise
Investment Train
The Flow of Materials Controlled by Logistics

External Organization External

Suppliers Customers
Operations within an Organization

Inward Outward
Logistics Materials Management Logistics


From Cow to Customer
Material Flow

Dairy Cooperative Cheese Factory National DC Retailer DC Store and End Customer

Information Flow

A SUPPLY CHAIN is a network of partners who collectively convert a basic commodity

(upstream) into a finished product (downstream) that is valued by end customers, and who
manage returns at each stage.
Basic Structure
• upstream – in front of an organization and moving materials inwards from
original suppliers
• downstream – after an organization and moving materials outwards to final

Upstream Activities Downstream Activities

Initial 3rd Tier 2nd Tier 1st Tier 1st Tier 2nd Tier 3rd Tier Final
Supplier Supplier Supplier Supplier Customer Customer Customer Customer

Typical Supply Chain
Definitions and Concepts

LOGISTICS: The task of coordinating material flow and information flow across the supply

A SUPPLY CHAIN is a network of partners who collectively convert a basic commodity

(upstream) into a finished product (downstream) that is valued by end customers, and who
manage returns at each stage.

SUPPLY CHAIN MANAGEMENT: Planning and controlling all of the business processes –
from end-customer to raw material supplier – that link together partners in a supply chain
in order to serve the needs of end customer.
Essential Purpose
• Space gaps
• Time gaps
• Quantity gaps
• Variety gaps
• Information gaps
Customer Service
• Achieving customer satisfaction
• Higher customer service needs more resources that come with higher costs
• Provide the best balance of customer service and costs
• Adding value – costs are less than the perceived benefits that it brings
Logistics Activities
• Procurement/Purchasing – find suppliers, negotiate terms and conditions,
organize delivery, insurance, payment
• Inward Transport – moving materials from suppliers to the organization
• Receiving – checking quality and quantity, unloading, sorting
• Warehousing – storage, keep materials in good condition
• Stock Control – inventory management
• Material Handling – moving materials within the organization
• Order Picking – finding and removing materials from storage
• Packaging
• Outward Transport – from the organization to final customer
• Recycling, Returns and Waste Disposal – reverse logistics
• Location
• Communication
Role of Logistics in Meeting Demand
Moved to Create

Logistics is
Supply responsible for all Demand

Organize Passed to

needed by
Effects on Financial Performance
Return on Assets = Profits earned / Assets Employed
ROA = (Units Sold * Selling Price * Profit Margins) / (Current Assets + Fixed Assets)

Stocks Current Assets

Fixed Assets
Equipment, Plant
Return on
Customer Assets

Product Features Price Profit

Operating Costs Profit Margin

Practical Example
ABC Company has sales $ 10 million a year. Its stocks amount to 25% of sales, with annual holding costs
of 20% of the value held. Operation costs (excluding the cost of stocks) are $ 7.5 million a year and
other assets are valued at $ 20 million. What is the current ROA? How will this change if stock levels
are reduced to 20% of sales?

Current Position With Stock Reduced to 20% of Sales

• Cost of stock = amount of stock * holding cost • Cost of stock = 10 million * 0.2 * 0.2 = $ 0.4
= 10 million * 0.25 * 0.2 = $ 0.5 million a year million a year
• Total costs = operating costs + cost of stock = • Total costs = 7.5 million + o.4 million = $ 7.9
7.5 million + o.5 million = $ 8 million a year million a year
• Profit = sales – total costs = 10 million – 8 • Profit = 10 million – 7.9 million = $ 2.1 million
million = $ 2 million a year a year
• Total assets = other assets + stock = 20 million • Total assets = 20 million + 10 million * 0.2 = $
+ 10 million * 0.25 = $ 22.5 million 22 million
• ROA = profit / total assets = 2 million / 22.5 • ROA = profit / total assets = 2.1 million / 22
million = 0.089 or 8.9% million = 0.095 or 9.5%
Summary of Importance of Logistics
• Essential
• Strategic importance
• Expensive
• Effects on most operations
• Directly affects profits, lead time, reliability
• Form links with upstream suppliers
• Form links with downstream customers
• Determines the best locations and sizes of facilities
• Risky
• Encourage growth of the other organizations
Different Views of Service
Customer Service is a measure (set of measures), which show how well logistics is

• an internal view of suppliers, who largely consider a service in terms of cost and
• an external view of customers, who judge a service by how pleased they are
with the result

Categories of Customer Service Elements

• Pre-transaction Activities – before an actual commercial transaction
• Transaction Activities – commercial transaction
• Post-transaction Activities – after a customer has received a delivery
Lean and Agile

Lean Logistics always aims at a more efficient flow of materials, typically looking
for faster deliveries, lower stock levels, less handling, fewer movements, and lower

Agile Logistics should be flexible enough to give a customized service and respond
quickly to changing demands.
Technology Advancements
• Electronic Data Interchange (EDI)
• Electronic Point of Sales (EPOS)
• E-Purchasing / E-Procurement
 B2B
 B2C
• Item Coding and RFID
• Electronic Fund Transfer (EFT)
Effects of E-Business

• Less paperwork • Range of products

• Shorter supply chains • Transport
• Improved communications • Stock
• Transaction recording • Order tracking
• Convenient timing • Flexible pricing
• Convenient location • Goods return
• Lead time • Operating costs
• Type of facilities
Responding to Changes
• Cooperation and Integration
• Globalization
• Outsourcing
 3PL providers
 4PL providers
• Using Fewer Suppliers
• Concentration of Ownership
• Movement of Power to Retailers
• Increasing Environmental Concerns
• Risk Management
New Types of Operations to Improve Performance
• Postponement – moves almost-finished products into the distribution system
and delays finishing and customization until the last possible moment
• Factory Gate Pricing – a single organization takes the responsibility for
movements from the factory gate to the final customer
• Cross-Docking – goods arrive at the receiving area and are moved to the
loading area without storing them
• Direct Delivery
• Other Stock Reduction Methods – Vendor-Managed Inventory
• Small Deliveries
• Increasing Vehicle Utilization