Chapter 1

The evolution of logistics and supply chain management.

6 key developments triggered the evolution:

1. Reduced transport intensity of freight

Before:
-Bulky raw materials – high volume – Low value

Now:
- More in-process and finished products => added value to products
- Increased value to volume ratio => lower transport cost sensitivity
- Higher value freight better able to absorb transport costs

2. Falling product prices

- Increase of competition + falling marketplace prices

 Reduction in costs
- Reduction of storage costs, transport costs,… is a key area for companies!

3. Deregulation of transport
(=government less involved in transp. & less rules)

5 principal modes of transport:

1) road 4) pipeline
2) water 5) air
3) rail 6) The internet? E.g. software

- By removing unnecessary barriers to competition, markets become more competitive

and prices should come down
- Deregulation has had a positive impact leading to cheaper services
- Sometimes private monopolies have replaced public ones (E.g.: Fedex

- But some countryside regions are sometimes cut off because of deregulation

4. Productivity improvements

• Containerization effects:
- Efficient space utilization
- Switching of transport mode easily possible because of standard handling units

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 • Technology
- Online tracking and tracing
- Radio frequency identification (RFID)
- Barcoding
- Internet of Things (IOT)
- Blockchain
- Artificial Intelligence (AI)

5. Emphasis on inventory reduction

• Often significant funds are tied up in unnecessary inventory (accounting: the

working capital!)
• Importance of inventory management because of market pressures
• Competition
• Customer requirements
• An essential competitive weapon
• Introduction of JIT deliveries (cfr. car manufacturers)
• Ability to easily respond to changing demand conditions

6. Changes in company structure

• Structure of companies has changed a lot

• More specialization, less vertically integrated
• Trend towards outsourcing
• Functional or silo-based thinking: hinder the overall performance of a company
• KSF: key success factor: e.g. time(order to delivery time), costs
> CONCLUSION:
• All 6 trends have led to supply chain revolution

What is logistics?

Logistics involves getting:

- the right product, - in the right place at the right time,

- in the right way, - for the right customer at the right
- in the right quantity and right cost
quality,
Depending on who speaks about logistics: 4, 7, 8 R’s

Definition: The process of planning, implementing and controlling procedures for the
efficient and effective transportation and storage of goods including services, and related
information from the point of origin to the point of consumption for the purpose of
conforming to customer requirements.

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What is Logistics Management?

• Logistics management is primarily concerned with optimizing flows within the

organization
• The mission of logistics management is to serve the customer in the most cost-
effective way
• More than “trucks and sheds” / “wheels and walls” alone

WHAT IS SCM (supply chain management)?

What is a supply chain?

A supply chain is a system of organizations, people, activities, information and resources

involved in moving a product or service from supplier to customer. Supply chain activities
transform natural resources, raw materials and components into a finished product that is
delivered to the end customer.

A supply chain is a network of connected and interdependent organizations mutually and

co-operatively working together to control, manage and improve the flow of materials,
resources (money + people + equipment) and information from suppliers to end users.

Supply chain management

SCM is the management of a network of relationships within a firm and between

interdependent organizations and business units consisting of material suppliers,
purchasing, production facilities, logistics, marketing, and related systems that facilitate the
forward and reverse flow of materials, services, finances and information from the original
producer to final customer with the benefits of adding value, maximizing profitability
through efficiencies and achieving customer satifaction.

(=management of physical products, information flows & money, and how we can structure
that in an efficient way)

The integrated supply chain: End – to – End

Downstream

Materials flow

suppliers procurement operations distribution

Requirements information flow

Upstream

Supply Chain Views

1. Supply view = PUSH

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 =producing without exactly knowing how much customer is going to source.

2. Demand view = PULL

=producing based off what the

customer wants

DISTINGUISHING LOGISTICS AND SCM

SUPPLY CHAIN IS A WIDER CONCEPT THAN LOGISTICS

(Don’t have to know the different names of the views, just that they exist and be able to
discuss them)

Application to manufacturing and services

• Logistics and SCM can be used to generate both:
- cost savings - service enhancements/
improvements

(sometimes will have to make a decision that leads more to one of both)

Chapter 2: Globalization and International Trade

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GROWTH IN INTERNATIONAL TRADE
• In recent decades, there has been considerable growth in world trade
• Facilitated by:
- Reduction in trade barriers between countries and regions
- (Regional) trade agreements (EU, NAFTA,…)
- Emergence of institutions such as WTO, IMF, World Bank, OECD
- Product tourism (taking advantage of lower taxes, material sold at “transfer
price”)
- Technology advancements, e.g. containerization (see later)
• Hence more freight is moving all around the world
§ Logistics systems => an increasingly important role in the global
economy

The demand for international transport is derived from increase in international trade

• Last few hundred years: greater openness and

liberalized trade
• However:
- Protectionism has always immersed (ex:
the US and China)
• Advanced nations are realizing that economic
growth and stability depend on a strategic mix of
trade policies, meaning both free trade &
protectionism

5
Merchandise exports and imports by region
• Exports
• Exports - Asia is
- Asia is growing the fastest
- All regions are increasing but the pace is
different
- Imports
- Asia is growing the fastest (increased
disposable income!)
- South America is decreasing imports

World’s leading traders of goods and commercial

services, 2019

• US is still leading
• China is not far behind
• Germany is far ahead other European countries
• First South-American country is Brazil
• First African country is South-Africa

Important conclusions:
- Global trade heavily concentrated in a few countries
- Leading exporters = leading importers
- Leaders are often Western industrialized countries
- Growing importance of China and the Far East in general
§ Japan, South Korea, Hong Kong
§ Vietnam & The Philippines growing rapidly! Chinese companies
circumventing Trade War.
- South America: Only Mexico and Brazil in top 30
- Africa not in top 30
- US import value very large in comparison with other countries – trade deficit!
(import exceeds exports)
World trade

• World trade flows

- https://www.marinetraffic.com/en/ais/home/centerx:3.3/centery:19.1/
zoom:2
- https://www.shipmap.org/

CONTAINERS: the humble hero

• It is said that the advent of containers (as of 1956) has been more of a driver of
globalization than all trade agreements in the past 50 years taken together
• Contributions of containers:
- Quicker
- Safer

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 - More cost-effective
• Shipping containers carry +-16% of volume of seaborne trade, but they carry over
50% of the world’s seaborne trade in terms of value

The world's leading container ship operators as of September 2, 2020, based on TEU
capacity

• TEU: twenty foot equivalent unit

- Dimension of standard container (more on this later)

Measuring logistics performance

• The global logistics performance index (LPI) ranks 160 countries’ logistics
performance against six key dimensions:

1. Customs 4. Logistics competence

2. Infrastructure 5. Tracking & tracing
3. International shipments 6. Timeliness

UNCTAD Liner Shipping Connectivity Index (LSCI)

(captures how well countries are connected to global shipping networks)

• Generated from five components:

1. Maximum vessel size in a country’s ports
2. The number of companies providing services to a country’s ports
3. The number of services offered by the liner companies
4. The number of ships deployed on services to a country’s ports
5. TEU capacity on the deployed ships

Globalization
• The transformation of national economies into an interdependent, integrated global
economic system.

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 • Globalization allow firms to view the market as an integrated marketplace that
includes buyers, producers, suppliers and governments in different countries.
• The country of origin is not valid anymore, the company is the quality assurance
platform.

Different stages in terms of trading relationships in the path towards globalization

1. Countries begin to trade with each other, importing and exporting

2. Establishment of presence in overseas markets
1. Multinational Companies (MNCs): operations in countries other than home
country
2. Transnational Companies (TNCs): trade across many borders, with operations
in many countries = truly global identity

How do organizations think and behave as they internationalize?

• Ethnocentricity
- Company only thinks in terms of home country environment, although
operations might take place elsewhere
• Polycentricity
- The company adopts the host country perspective
• Geocentricity
- The company acts independent of geography and adopts a global perspective
- BUT: taking into account the local enviroment (glocalization, see Mc Donald’s
example on p 27)

Globalization - site selection factors

FDI = foreign direct investment. Financial flows from a company in one country to invest in
another country

• Labour costs • Environmental regulations

• Employment regulations • Taxation rates
• Available skills • Government supports
• Land costs and availability of • Currency stability
suitable sites • Benefits of being part of a cluster
• Transport and logistics costs of similar companies
• Transport linkages • Preferred locations of competitors
• Communications infrastructure • Access to markets
and costs • Community issues and quality of
• Political stability life

DIRECTIONAL IMBALANCES
• Challenge for carriers is to match as much inbound freight capacity with outbound
freight capacity as possible
• Empty containers may need to be repositioned to where they are required
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Chapter 3: Supply Chain Relationships

Globalization of supply chains

• New sourcing patterns because of growth in international trade and global
competition (chapter 2).
• Critical role of relationships in contemporary global supply chains.
• Effective relationships between suppliers and customers have become
differentiators of high-performing supply chains.

• Has resulted in the following trends:

- global competition
- competitors, partners and customers from around the world
- global sourcing
- global presence
- global value chains resulting in increasing complexity and competition
- global access to knowledge and new technologies
- high levels of customer awareness and expectation
- rapid pace of technological change
- fast rate of product commoditization
- SCM expertise and innovation as preconditions for business success

Asia, India and China have become global centres for a large number of sectors (see
example on p36 on volvo trucks):
- Manufacturing
- Software development
- Retailing and financial services
• Ongoing trend of OUTSOURCING or OFFSHORING but includes difficulties as well
(see part on failures)
• Reasons?
- Wage is not the only criterion
- !!! Total cost of outsourcing !!!

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Outsourcing
• The transfer of the management and delivery of a process previously performed by
the company itself to a “third party”
1. Selecting partners to work with
2. Manage the chosen partner
• Requiring:
1. Order winners and qualifiers identified
2. Service Level Agreements (SLAs) made up before agreement being signed
3. Supplier development: avoid to squeeze suppliers by pressure on costs alone
§ Good supplier relationship management = sharing risks and benefits
(information)
• Make or buy decision: what to do yourself and what to outsource?
• Creating:
1. Virtual organizations (ex AirBnB, Vente Exclusive,…) = most found in e-
business sector
• Hard to manage whole network of suppliers!
1. Organization of suppliers into tiers (layers): next slide

• Think of a pyramid
- Top tier is the ultimate, final producer that
carries the brand
§ called original equipment manufacturer
(OEM)
- Next layers are called
§ First-tier suppliers
§ Second-tier suppliers
• Contract manufacturers = term used to
describe suppliers manufacturing or
assembling the products in agreement with the OEM

REASONS FOR MANUFACTURING OUTSOURCING

• Reduce direct and indirect costs

• Reduce capital costs
• Reduce taxes
• Reduce logistics costs
• Overcome tariff barriers
• Provide better customer service
• Spread foreign exchange risks
• Share risk
• Build alternative supply sources
• Pre-empt potential competitors
• Learn from local suppliers, foreign customers or competitors
• Gain access to world class capabilities or attract talent globally

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Offshoring
• The transfer of specific processes to lower cost locations in other countries
- Not the same as outsourcing
- Outsourcing involves handing process ownership over to a third party
- In offshoring, the company may still own and control the process itself in the
lower cost location
• Can the cost savings offset unforeseen costs?
- Extra monitoring costs
- Extra transaction costs
• Nearshoring, backshoring or reshoring, rightshoring

Failures in Outsourcing

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Evaluating and selecting outsources
Order Qualifiers, criteria for being qualified as a supplier

Conformance to
Reliability of Quality
agreed Delivery lead time Financial capability
delivery certifications
specifications

Record of
Senior Responsiveness to
Performance track Price or cost corporate social
management demand
record reduction responsibility
attitude uncertainty
(CSR)

The environmental separation index (ESI)

• Used to assess the level of difference

between the working environments of the
outsourcer and the outsourcee companies
• Higher value = larger differences in:
- Work practices
- Culture
- Perceptions
• The ESI can decrease over time by
experience

• Order winners
- One or more of the qualifiying criteria may
give a cost-benefit advantage to become
order-winning criteria
• Price not the only criterion
- Look at all related costs = total cost of
ownership (TCO)

Outsourcer and Outsourcee Relationship Development

Relationship between outsourcer and outsourcee evolves over time

• Four stages:
1. Master – Servant Stage: outsourcer sets the expectations, the outsourcee delivers,
driver is low cost
2. Consultative Stage: outsourcer consults with the outsourcee. Quality, reliability and
responsiveness on top of cost
3. Peer-to-Peer relationship Stage: ideal stage, intensive collaboration, long-term creating
win-win

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4. Competitive Stage: outsourcee takes the lead and competes with the outsourcing
company in global markets

Supply Chain Integration

Integration vs collaboration

• Integration embodies various communication channels and linkages within a supply

network
• Integration should not be confused with collaboration
• Integration is the alignment and interlinking of business processes
• Collaboration is a relationship between supply chain partners developed over a
period of time
• Integration is possible without collaboration (ex. order processing via electronic data
interchange, EDI)
• Integration is an enabler of collaboration

INTERNAL INTEGRATION

• To integrate communications and information systems so as to optimise their

effectiveness and efficiency
• Can be achieved by structuring the organization and the design and/or
implementation of information systems for improved communication and
information sharing
– Non-value adding activity is minimized
– Costs are reduced
– Lead times are reduced
– Service quality is improved
– Functional silos are reduced
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EXTERNAL INTEGRATION

• EDI is a key enabler of supply chain integration.

- The automated transfer of order data between supply chain partners
streamlines information sharing and processing.
• Effective and efficient organizational design is a prerequisite, (Ex. Leading
automotive manufacturers..
• Keiretsu supply chain structure:
- Original equipment manufacturers (OEM) work closely with their first tier
suppliers to integrate manufacturing, logistics and information processes; in
turn the first tier suppliers work closely with the second tier suppliers, and so
on:
§ This enables just-in-time line-side delivery at their assembly plants
§ A seamless lean supply chain is created
§ The supply chain is viewed as one extended operation

Supply chain collaboration principles

• Integration is product and process oriented.
• Collaboration is focused on relationships.
• Collaboration is dependant on the provision of mutual benefit.
• In supply chains, mutual benefit between suppliers is difficult to achieve. (Ex
supermarkets, automotive = high competition)
• The dynamics of trust and collaboration (prisoner’s dilemma).
- Hence trust becomes an issue!

Prisoner’s dilemma (Nash equilibrium game theory – Nobel price)

§ You and a partner are suspected of committing a crime and are arrested. The police
interview each of you separately. The police detective offers you a deal: your sentence
will be reduced if you confess! Here are your options:
§ If you confess but your partner doesn’t: your partner gets the full 10-year sentence
for committing the crime, whilst you get a 2-year sentence for collaborating.
§ If you don’t confess but you partner does: the tables are turned! You get the full 10-
year sentence, whilst your partner gets the 2-year sentence.
§ If both of you confess: you each get a reduced sentence of 5 years.
§ If neither of you confess: you are both free people.
> The dilemma you face is ‘do you trust your partner to
make the same decision as you?’

• The best strategy is based on trust and results in win-

win.
• If neither partner trusts each other, it is most likely
that both will confess and spend time in prison.

14
Chapter 4: Supply Chain Strategies

Strategy
• Planning and configuring the organization for the future in accordance with certain
stakeholders expectations
• A long term plan for success
• This part: not focused on corporate strategy but more on link between strategy and
both logistics & SCM
• Top-down approach
- Corporate level
- Business unit level (companies divided into different sub-units)
- Functional level = departmental level, e.g. marketing, IT, SCM,…
• Bottom-up approach
- More weight possible for certain department as input for corporate strategy
• Break the silo-structure!
• Strategy implementation is the hardest part

15
The evolution of manufacturing

Lean production
• Lean production and logistics is focused on eliminating waste using a set of proven
standardized tools and methodologies that target organizational efficiencies while
integrating a performance improvement system utilized by everyone.
• The origins of lean production and logistics can be traced back to the car company
Toyota and its Toyota Production System (TPS).

• System not focused on efficiency of individual

machines, rather on total flows through a system
• Pull rather than push!
• Origin of JIT (just-in-time) inventory replenishment
• Key focus: eliminating waste in processes, only do
what adds VALUE
Key areas of waste = TIMWOOD (7+1) (acronym to
remember them all)

1. Transportation
2. Inventory
3. Motion
4. Waiting
5. Overproduction
6. Over processing
7. Defects
8. Skills underutilized?

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Agile supply chains and mass customization

• Current trends:
- Expanding product variety
- Short product life cycles
- Increased outsourcing
- Globalization of businesses
- Continuous advances in information technology
- Hyper competition
- Increasing demands from customers

- => This leads to a high volatility in demand for products

• The agile supply chain is a demand-pull chain designed to cope with volatile demand
- Structured, to allow maximum flexibility
- Enabled by mass customization
- Often incorporating postponed production
- Different product configurations contain a majority of shared components
and features to accommodate volume and variety.
• Enabled by postponement
- the reconfiguration of product and process design to allow postponement of
final product customization as far downstream as possible
- The final value added activity in the supply chain is delayed until the
customer order is received.
- Not only applied to manufacturing
- e.g. packaging postponement is merely delaying final packaging of products
until customer orders are received

The principle of postponement

Customer Order Decoupling Point (CODP) = where

we go from push to pull

• The CODP indicates how far upstream (in a supply chain) a customer order
penetrates the production or distribution process of the supplier of a product or
service.
- Where are the inventories held?
- Where the customer order is placed and known to parties in the production
process
• Downstream = inventory is held close to the customer side
• Upstream = inventory is held closer to the supplier side
• 5 CODP’s

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Remember this from the introduction? General supply chain views

(see slide 17-22)

Importance of CODP?

• Great influence on organizing logistics

• Determines degree of business risk
- Before CODP:
§ Production based on demand forecasts - manufacturer carries all the
inventory risk for the products made before the CODP
§ Risk of overstock and unsaleable products
- After CODP:

18
 § Production based on customer orders: manufacturer has no inventory
risk for products completed after CODP
§ Risk of delay in supply, longer delivery leadtime

Combined logistics strategies

EX:

AGILE AGILE LEAN. LEAGILE

Critical factors to consider in supply chain planning

How do managers develop their supply chain strategy and facilitate best fit with overall
firm strategy?

• Focus on processes and flows

• Focus on high level objectives
• The importance of people
• Its supply chains that compete
- Increasingly it is supply chains that compete more so than individual firms and products

Final note: What is a bullwhip effect?

19
Only concept (bullwhip effect)

• Inventory levels fluctuate along the supply chain

• Distortion of orders along the supply chain, where small fluctuations in end customer
demand result in amplification of demand upstream due to several causes
• Serious problem for supply chains:
- Demand amplification creates excess inventory, which in turn consumes
warehouse capacity, has serious cost implications and may never be used!!
• Take away uncertainty in the supply chain!

Chaper 5: Transport in Supply chains

Characteristics of the different transport modes

Selecting different transport modes

• A function of:
- The volume & value of the freight
- The distance travelled
- The availability of different services
- Freight rates to be charged, etc.
• Logistics service providers (LSPs) usually apply volumetric charging
- Based on consignment dimensions

Relationship between rate and distance

Relationship between rate and weight

• No simple linear relationships

• Regardless how short the distance or how low the weight the service
provider will need to recover certain fixed costs
• For bulky or difficult to handle shipments, LSPs (logistic service
providers) will apply volumetric charging based on the dimensions of
the consignment
‒ To compensate for lost capacity
‒ Instead of charging per weight or distance

How to choose the right transport mode?

• Compare fixed cost vs variable cost (also see table 5.1 on p105)
• Operating characteristics
‒ Speed: average time needed to cross distance
‒ Availability/Frequency: at what frequency can the means of transport be
deployed?
‒ Dependability/Variability: the possibility of the transport beginning and/or
ending on an agreed time
‒ Capability/practicability: to what extent can a modality be used for the most
diverse types of goods in the most extreme size/weight
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 ‒ Accessibility: Can the mode of transport reach ALL places
‒ Risk: cargo damage or loss
‒ Environmental impact: How environmentally friendly is the mode of
transport (in comparison with other modes)?

Rail

• Possible for big volumes

• Longer distances
• Heavy loads
• Fixed departure and arrival schedule => fixed time slots and book
long in advance
• Possible for hazardous substances
• Environmentally friendly
• No traffic jams
• Can be expensive due to limited competition of the ownership of
infrastructure
• Not flexible in terms of pickup and destination location
• Steel and chemicals

Road

• Fast
• Door-to-door
• Flexible
• Reliable
• Not very expensive (both fixed & variable costs)
• But:
- Toll (kilometer charging system)
- Congestion: traffic jams
- Limited capability (max 44 tons)
- Legal requirements on driving and resting time

Air
• Fast
• Long distances
• Reliable
• Valuable & perishable products
• But:
- Expensive
- Limited capacity (big cargo plane: +- two trucks)
- Polluting
- Noise

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Water (sea + inland waterways)
• Big volumes (bulk)
• No congestion
• Lower cost
• Low emissions per mile travelled (although not very clean)
• But:
• Slow
• Not flexible
• Fixed schedules
• Fixed locations

Pipeline

• Suited for +-15 product (petroleum, petroleum gas, ethylene, oxygen, hydrogen,
nitrogen, …)
• One-way and single product transported at a time
• High speed of transport (100-150km/h)
• Less negative side-effects
• Noise
• Pollution
• High capacity
• Low energy usage
• No empty retours
• Safe
• But:
• Limited space available, where to locate?
• Heavy investments (1km = 400.000 euros)

Intermodal

• Different modes being combined

• BASF Antwerp
• Rail
• Inland waterways
• Road
• Pipeline
• Movies on canvas
• Intermodal transport
• Straightsol project

• Split of modes varies by region and type of freight

• International movements: maritime transport is leading
• Inland movements: road transport
- Most impactful method (see chapter 14)
• Macro volumes of freight are usually measured in
freight tonne kilometres (FTKs), that is volume of

22
 freight measured in tonnes multiplied by the distance the freight travels measured in
kilometres.

Transport operations, distribution centres and the role of factory gate

pricing
Distribution centres

• Regional distribution centres (RDCs) and national

distribution centres (NDCs)
• Consolidation centres (CCs) – consolidate deliveries
from multiple suppliers into full loads to be
delivered on to DCs (= groupage)
• Distribution centre
- Large number of products being delivered
from different number of suppliers,
preferably in full truck load (FTL), see later

Factory gate pricing (FGP)

- Use of an ex-works (see later in incoterms) price for a product plus the
organization and optimization of transport by the purchaser to the point of
delivery
- Retailers take control of the delivery of goods into their distribution centres
(via their CCs)
- This gives a single point of control for the inbound logistics network
- Reductions in costs and transport miles
• FGP very popular for retailers
- Increased supply chain visibility
- Higher delivery service levels
- Suppliers only need to focus on core competencies (manufacturing)

European Logistics Hubs

• What is a hub?
- Also referred to as hub and spoke
- a place where passengers and cargo are exchanged between vehicles and
transport modes (see intermodality)
• Why do we have hubs in the EU?
- Enlargement of the European Union
- Continual infrastructure development
- Growth of the consumer mass market
- Need of redefining distribution patterns
- Need of new freight traffic routes

• How do we choose a hub?

23
 - Serie of key parameters that typically play a determining role in site
selection for manufacturing and distribution activities
§ Infrastructure and accessibility
§ Market access (blue banana hubs)
§ Operational base costs = basic operational costs including labour,
rental and land costs
§ Labour market capacity = size of working population and volume of
unemployment
§ Logistics competence
§ Business environment

• Some patterns in the choice of hubs

- The Blue Banana Hubs
- Some of these hubs offer a good balance between market access
maximization and competitive operational costs (Liège (BE) and Lille(FR))
- Northern Italy offers good growth potential for distribution
- From distribution perspective, Western Europe’s dominance will be
increasingly challenged by some CEE hubs, such as Prague or Bratislava, as
the centre of Europe gradually shifts to the east.
- Eastern Europe is the best location for low cost manufacturing
- Hubs in Turkey and Russia (strategic) are increasingly integrated in the
global supply chain

• Trade-off between cost and market access

Load devices used in international transportation

Intermodal transport unit (ITU)

• May be moved upon different transport modes but the freight remains within the
unit at all times
• Less handling of freight within the container (freight touchpoints)
• Reduces chances of damage or loss of freight
• Various types of ITUs:
- Standard sized containers (typically 20 and 40 feet in length)
§ Calculated in TEU (twenty-foot equivalent units). 40FT = 2 TEU
- ‘Igloo’ containers used in air freight

Intermodal transport unit (ITU)

• The term FCL is used in transport to refer to full container loads

• The term LCL is used to refer to less than full container loads
• When carriers have a consignment that will not fill an entire loading unit they will
usually try and build a consolidated shipment to make up a FCL

Transloading = loading from one type of transport to another

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Efficiency of transport services

• Refer to part 1: characteristics of the different transport modes

• Issues impacting the efficiency & effectiveness of transport services
- Congestion problems
- Carbon emissions
- Regulatory directives on max working time
- Road user charges
- Skill shortages
• Cause wastes, see Lean
- Empty running vehicles
- Excessive waiting times
- Poor turnaround time
- Low vehicle fill rates
- Poor asset utilization
- Unnecessary administration
- Excessive inventory holding

International transport networks

• Trans-Siberian Railway
• Northern Sea Route
• Silk Road
• …

Chapter7: Logistics service providers

Developments leading to logistics outsourcing

25
 Trends

• Globally, logistical costs are growing

• Logistical costs become a more important part of the added value of products
• Logistical management is increasingly becoming a differentiating element in
international competition
• Fuelled by several factors:
- Change in customer demands
- Assortment expansion
- Faster development of new products
- Smaller orders
- More frequently placed delivery orders
- Shorter leadtimes
- Rise of e-commerce

Results

• Manufacturers have to react faster to meet the changing demand (agile)

- Flexibility in order to gain market advantage
• New concepts of collaboration between manufacturers and suppliers emergence (JIT)
• More streamlining and controlling of the entire logistical chain needed
• Manufactures must ask themselves whether their in-house logistical functions are
capable of performing their tasks at a competitive price-quality ratio
- Companies have to consider or reconsider the question whether to carry out their own
logistical management or to contract it out (make or buy/outsource)
§ Focus rather on manufacturing and marketing rather than on running a distribution
system?
§ Focus on core activities alone?
- Logistics becomes a candidate for outsourcing ( own-account transportation)

Classifying logistic companies

Different services identified (also see table 7.1 + p133/134 in textbook)

• Generic label: logistic service providers (LSPs)

• Categories (often overlaps):
§ Freight carriers
> Basic carriage of freight – by hauliers, trucking companies, train companies, airlines
shipping companies
§ Freight forwarders/freight agents/brokers
> Make transportation and other arrangements
> Brokerage (customs + documents management)
§ Couriers
> Urgent delivery of products
§ Integrators
> Offer a seamless (i.e. integrated) end-to-end service from consignor to consignee
> DHL, FedEx, UPS, ….

26
 > Sole responsibility from origin to destination
§ Agencies
> Companies combine buying power to gain reduced freight transport rates
• Those LSPs providing multiple logistics services, often in an integrated fashion, are called
third-party logistics service providers (3PLs), see next slide

• When a service provider takes care of a shipper’s

entire logistical function, including the data flows
involved, it is called a ‘Third Party Logistics Service
Provider’ (3PL).
• 3PL are companies who provide a range of logistics
activities for their clients. They might operate
distribution centres, manage the delivery of the
product and/or undertake value adding services.
• A ‘Fourth Party Logistics Service Provider’ (4PL) is
an independent specialist that manages and integrates the complete end-to-end supply
chain.
• A 4PL takes the lead on advising or making supply chain decisions on behalf of the
customer

Selecting logistics service providers and services

When outsourcing is under consideration, the activities that qualify for outsourcing must be
identified first

The logistical activities can be divided into activities related to:

•
§ Physical goods flows
§ Information flows
- Loading
o Activities relating to physical goods flows - Reconditioning and packing
• Physical handling-in - Palletising and depalletizing
- Receiving and unloading of goods - Packing and repacking
- Degrouping - Labelling and relabelling
• Storage control - Preparing an order for shipment
• Internal transport • External transport (national and
• Physical handling-out international)
- Order picking • Delivery
- Grouping • Completion return shipments

o Activities relating to information flows • Administrative handling-out

• Order entry - Check on orders and number of order lines
• Administrative handling-in - Preparing for shipments (docs)
- Goods clearance • Creditworthiness check
- Quantity check • Completion customs papers
- Quality check • Inventory control

27
• Wall to wall cycle count • Providing mgmt. information
• Invoicing (outgoing) • Reporting/dashboard (efficiencies, KPI’s)
• Customer service (e.g. complaint resolution)

• Every of the in previously mentioned logistical activities can be outsourced

• The outsourcing towards logistical service centres can be divided into stages

• Single transport involves transport from a to b – the only activity of the service
provider (sp) is renting out a truck and a driver
• Regular transport is single transport on a regular basis
• In a transport centre the sp takes care of the routing and optimal staffing
• At a transhipment centre (cross-docking) goods are unloaded, degrouped and
regrouped. The sp is responsible for optimal usage of truck capacity and routing.
Goods do not stay longer than necessary for regrouping
• At a buffering storage centre goods stay long enough to balance the goods flows
• A 3rd party able to deliver this service is called a transport centre
• When transport centres are linked a network structure is created (serving different
customers)
• In a warehouse storage centre goods are stored for a longer period, shipper is still
responsible for the information flow related to receipt and dispatch
• At a stock centre the sp is responsible for the information flow of receipt and
dispatch, the stock levels and consequently for the service level
• As a result the sp has responsibility for the entire goods flow and has the status of
a distribution centre, transport plays a secondary role
• The most advanced service form is an information centre (the logistics service
centre), the sp takes care of optimal goods flows and information flows securing full
visibility (order-entry, track&trace, invoicing, reporting, …)

Advantages 2. Economies of scale

• LSP advantages
1. Greater efficiency

28
 3. Utilizing full capacity
(counterbalancing peaks and
drops)
4. Transport optimization (return
trips)
5. Specific know-how
6. Improved technology
7. Higher flexibility
• Manufacturer advantages
1. No investment in buildings and
materials
2. Capital invested in core activity
3. Flexibility in storage
4. Fixed costs are made variable
5. Easier budgeting and allocation of
costs
6. Focus on core business
Disadvantages
1. Less frequent & less direct
contact with the customer
2. Delay in customer feedback
3. Less direct control and ability to
react quickly
4. Share confidential information
5. IT integration (development and
costs)
6. Interdependence (long term)
7. Risk of failure or mismatch

Factors to be considered when selecting LSPs

• Which services to be provided

• Costs & costing approach (e.g. inflation)
• Terms of carriage, applicable incoterms (later), insurance
• Speed/transit time
• Performance metrics and service levels, reliability (captured in SLAs)
• Information systems + technology & document requirements
• Core vs value-adding services required
• Staffing issues
• Reverse logistics issues
• Implementation/termination/ability to alter conditions
• Details on the logistics service provider’s history, client references

Chapter 8: Procurement

1. Purchasing vs procurement
Logistics Management Proces

Difference between purchasing and procurement

29
The terms purchasing and procurement are often used synonymously although they differ in
scope:
- Purchasing generally refers to the actual buying of materials and those
activities associated with the buying process.
- Procurement is broader in scope and includes purchasing, transport,
warehousing and all activities related to receiving inbound materials.

2. Procurement as a strategic activity

• Procurement is about specifying requirements, identifying sources, evaluating
options and acquiring resources that fit for purpose, cost effective and sustainable
• Procurement as a strategic and tactical activity has become increasingly important:
- Global sourcing
- Complexity
- Governance: how, why and with whom
- Consistent with legislation, regulations, values and objectives
- From spend management (traditional view) to profit potential, to corporate
social responsibility (CSR), governance and environmental commitment
• Contemporary procurement reflects a wide range of criteria that includes cost, or
more particularly value, rather than price

3. The difference between public

and private sector procurement
• Public sector procurement: focus on
objectivity and transparency
• Private sector procurement: focused
on own specific objectives, less
transparent

4. Procurement and markets

• Defining sourcing strategies is the first step for an organisation (SME (small or
medium-sized company) or multinational) in considering how it will secure supply
either on a local, national, regional or global basis and how to interact with the
market place and suppliers.
• As a minimum, a sourcing strategy for a clearly defined requirement should include:
§ Level (amount) of spend being considered
§ Risk
§ One-off (project) or recurring procurement
§ Market maturity
§ Number of sources and potential suppliers
§ Contract duration

30
 § Potential for performance improvement and cost reduction

5. Managing value and risk

KRALJIK MATRIX

• The role of procurement is to manage value and risk on

behalf of the organisation
- Matrix used in terms of identifying portfolios or
categories of spend and quantifying them by risk
and value
• Powerful tool to understand and quantify
- Relative value (financial impact)
- Procurement risk (delivery risk)
• ! Used to develop an appropriate sourcing strategy to
manage risk and value
• Kraljik identified 4 types of purchasing products (portfolio’s of spend) using. Every
type requires another procurement strategy!

Pareto principle

• Also in Kraljik matrix = not all suppliers are equal and

have to be treated equally
• ABC analysis (80/20 rule or pareto principle)
- 80% of spend is with 20% of the suppliers (A)
- 15% of spend is with 50% of the suppliers (B) and
the rest of 5% is with 30% of the suppliers (C)
• This highlights the importance and significance of some
suppliers versus others and the relevance of efficient
supplier management
• Supply disruptions: bottom p 149 and p 150: not to
study

31
6. The role of the ‘buyer’
• The role of the buyer has
developed from managing or
dealing with one-off transactions
to procuring assets, resources and
services fundamental for the
success of a business.
• The role of the procurement
manager is to create an
appropriate level of competition
to manage the level of risk and
value that the business faces
when sourcing or procuring goods,
services or works.
• In some businesses a CPO (chief
purchasing officer) is appointed

7. The procurement process

• Procurement must be considered as a process or lifecycle.

• This process is repeated within a business as different contracts mature, expire or
are renewed on a continual basis
• Four stages to be considered in developing a sourcing strategy:
- Specify
- Identify
- Select
- Manage

32
Procurement organisation

• Depends on the level of spend and procurement skills across the business
• Traditionally: procurement organisation to be a sub-set of the finance and
administration activities
• More recent, reflecting the strategic nature of procurement: the organisation or
team as standalone activity with specific objectives, targets and goals
• Procurement teams:
- Centralised or decentralised by location
- Organised by business unit or by spend category
- Organised in terms of strategic or tactical roles, depending on the weight of
the decision
• Tendency for centralisation, creating a center of gravity with more standardised
activities and areas of common spend
• Central procurement organisation able to realize more aggregated and consolidated
large central contracts

• A category manager manages a portfolio of contracts or a category of spend with

similar characteristics that can be grouped and considered in strategic terms in
relationship to supplying across different business units
• A category manager sources centrally across the business, taking into account local
and overall requirements
• Central versus local
> central: contract designed by category manager to cover high
level demand for multiple sites
> local: local execution of the central contract (call-off) for 1 site

33
The role of technology

Enterprise resource planning (ERP) supports complex organisations with multiple activities
in different locations
• Packages (web or cloud based) enabling sharing of information with suppliers (for
example: tender management software)
> submit tenders online
> guarantee secure delivery of data, info and input
> utilize predetermined process parameters
> streamline the process and eliminate administration
• E-auctions: preselected suppliers bid for a contract
• Tools and technology provide rich data, enabeling companies to review and analyse
demand patterns and service levels

Price, cost and value

• Traditionally procurement has focused on price

• However, service associated with the procurement and delivery of the product is
equally important
• Price is not the same as cost: procuring a low priced product could generate higher
maintenance or repair costs
• Total Cost of Ownership (TCO) ~ Value for money (VfM): 4 cost components
1. purchase price (sometimes included in acquisition
costs)
2. acquisition costs
3. usage costs or operating costs
4. end-of-life costs or disposal costs

Low-cost country sourcing

• Technology and improved infrastructure have increased the options available to

many organisations to source and procure goods from low-cost countries (see
previous chapters)
• Due to internationalisation and globalisation of businesses products and services can
easily be sourced at a fraction of Western equivalent prices
• Justifiable with respect to sustainability, environmental costs, social costs?
• Consumers are now much more aware of sources of origin so this can be an
important factor or a public relations disaster if not managed properly.
- Fex Mattel:
§ Policy of manufacturing 2/3 of its toy range in China
§ Paint to be found lead-based
§ 21 million toys recalled or returned (2007)

34
8. Procurement performance

• Procurement performance and metrics reflect a wider range of different key

perforrmance indicators (KPIs), and although price is a vital component, many now
consider the wider aspects of performance and measure them on a regular basis
PPV (purchase price variance):
variance between purchasing price and budgeted/pre-calculated standard cost price (only
looked at price)
Vs
Wider aspects also taken into account

9. Ethical sourcing & sustainability

• Complex logistics networks make it possible to source from anywhere in the world
in short lead-times and in a cost-effective manner
• Consumers are increasingly aware and critical of where and how their products
are being sourced/manufactured
• Businesses have to consider their procurement practises, particularly when it
comes to sourcing in low-cost countries
- Sourcing decisions increasingly reflect a wider range of social and
environmental issues, not just price and cost.
- Businesses are challenged to justify the real cost of a product (e.g. fashion
retailers)

• Ethical issues must be considered and may include:

§ Health and safety
§ Diversity and equality
§ Fair wage policies
§ Working conditions
§ Human rights issues
§ Sustainability
§ Green products => circular economy
§ Environmental performance
§ Carbon emissions
§ Transport
§ Role of the business as an employer, customer and corporate citizen

• Poor procurement decisions can have significant

implications in terms of damage to the company’s
reputation
• Companies are forced to apply a Corporate Social
Responsibility policy (CSR)
• This adds an additional level of complexity but is of
primary importance for the reputation of companies

35
• Especially in public procurement the principle of triple bottom line is applied: sourcing
decision must take into account their social, economic and environmental impact.
- People
- Planet
- Profit

10. Procurement and supply chain management

• Trends
- Value over cost
- Service over delivery
- Increasing complexity of product &
service delivery
• Supply chain thinking more and more
important! Look upstream and
downstream
- Relationships have evolved (cfr.
Table 8.7)
• A key differentiator and perhaps a still not
fully understood part of a business’s or
organisation’s strategy is relationship
management
- Link to Kraljik matrix

Chapter 9: Inventory Management

1. The importance of inventory management

• Inventory is another name for materials and is any material that a firm holds in order
to satisfy customer demand (and these customers may be internal and / or external
to the firm)
• Inventory costs money! It ties up working capital and affects cash flow. The money
could have been invested elsewhere
• Inventory takes up space
• Firms need to hire people to take care of inventory
• The goal in inventory management is to minimise inventory holding while
maintaining a desired customer service level.
- Cost vs service trade-off!

Inventory locations throughout the supply chain

Inventory turnover

36
 • A concept used to measure a firm’s performance in inventory management
Ø Compares annual sales with the amount of average inventory held throughout the
year
Ø The higher the turnover, the better a firm is doing in keeping its inventory costs
down
Ø Most firms achieve turnover of about 10

• Inventory used as a buffer between processes along the supply chain

• Inventory holding costs are traded-off with other economical advantages

2. The economic order quantity (EOQ) model

Inventory build-up and depletion

• Costs associated with inventory can be

classified in two broad categories
1. Costs associated with procuring/purchasing
the inventory (see chapter 8)
2. Costs associated with actually holding the
inventory
• Questions:
1. What should the order quantity (Q) be?
2. What should the safety stock (SS) be?
3. What should the reorder point be (ROP) be?

Small vs large

37
Order-processing cost vs holding cost per unit

• The higher the amount of orders per year => the higher your order-processing costs BUT the
lower your holding cost per unit (as you will order less quantity each time)

• The lower the amount of orders per year => the lower your order-processing costs BUT the
higher your holding cost per unit (as you will order more quantity each time)

What should the order quantity (Q) be? To minimise the total annual cost, there is best order
quantity, the Economic Order Quantity (EOQ)

What should the order quantity (Q) be? To minimise the total annual cost, there is best order
quantity, the Economic Order Quantity (EOQ)

Notation:
– D: Annual use of a particular item, in number of items per year
– S: Order-processing cost, in $/order
– p: Price per item, in $/unit
– H: Holding cost per unit per year, in $/unit/year
– Q: Number of items ordered in one purchase order, in units
– T: Time periods between purchase orders in fraction of a year
– SS: Safety Stock, in units
– L: Lead time, in fraction of a year
– I: Current inventory on hand, units

38
– TAC: Total annual cost

3. Inventory control systems

Level of safety stock

• Safety stock = buffer stock due to

uncertainties or variations
• Variation of demand from customers
• Variation of leadtime = delivery time
from suppliers
• Variation of production time
• Variation of quality
• …
• Safety stock is not free! Contributes to the inventory holding costs
• Often expressed as weeks of demand (see problem 9.3)

Reorder point

• Reorder point inventory control system: inventory levels are continuously

monitored, and orders are issued when the inventory is depleted to a
predetermined level, called the reorder point (ROP)
• ROP = the unit quantity that triggers the purchase of a particular stock item
ROP = (D x L) + SS

ROP = (D x L) + SS

39
SS expressed as weeks of demand
L expressed as fraction of year

Periodic inventory control system

• In the periodic inventory control system, orders are reviewed periodically (not
continuously as in the reorder point system), after the passage of a fixed time period (T).

• T = EOQ / D
• M = D(L+T) + SS (M = target maximum level of inventory)
• Q = M – I (order quantity is here not fixed as at the EOQ but depending on I (inventory on
hand at time of review))

• At each review time, the current inventory level (I) is determined, and enough inventory
is ordered to bring the inventory level to a target maximum level (M).

• Reorder point system allows closer control of inventory than the periodic system
- Reorder point = continuous monitoring of inventory
- Periodic system = checks at periodic time intervals
- Reorder point system preferred for high-value inventory items in particular
• Periodic system: for other items (very convenient method)

4. Supply chain inventory management

Inventory centralisation

40
• Less safety stock is required if inventory is centralised in the central location, than
decentralising the inventory in the multiple locations
• Form of pooling of inventory (see later)

Delayed product differentiation

• Making multiple products requires (safety) stock for each product

• By using ‘intermediate’ products (= semi-finished), manufacturers try to differentiate as
late as possible in the delivery process
• The intermediate product is stored with a certain safety stock needed as demand occurs
• By postponing final assembly of the intermediate product, manufacturers can centralise
and reduce inventory, create greater flexibility and bring simplicity to the manufacturing
• See postponement, agile and mass customization in chapter 4

Delayed product differentiation

Part commonality
Reduce the number of different parts wherever
possible

B~Y
Reengineerd part D

Transit inventory

• When inventory moves across a supply chain, it is in transit.

• Lead time directly affects costs
• Higher transit times result in higher transit inventory costs
• Transit inventory costs exist in each part of the supply chain where inventory is in
transit, such as from the supplier to the manufacturer and from manufacturer to the
distributor
• Companies use transport as a ‘mobile or rolling warehouse’ (grey box, p179)
• By using alternative transport modes, the flow of inventory through the supply chain
can be speeded up or slowed down
• In-transit inventory is an important category of inventory
• Transport mode = balancing in transit holding costs & cost of the transport mode

41
5. Matching inventory policy with inventory type
ABC analysis

• Too many SKUs (stock keeping units) in firms to focus on everything

• ABC analysis separates out the most important items so that more attention can be
focused on those important items
• Only a few items account for the most of the inventory expenses
• ABC analysis is a focusing tool!
- A-class (20%)
- B-class (30%)
- C-class (50%)
- Different inventory control mechanisms for the different classifications. For
example:
- A items with reorder point. Continuous follow up
- B items with periodic system (short interval)
- C items with periodic system (long interval)

ABC analysis

• Relevance of ABC-analysis of profit range in terms of turnover and profit

contribution
- Make elimination decision
C-products contribute little to turnover, these products are eligible for removal of the
product range
- Be careful! Do not remove products solely based on the ABC-analysis:
> Products at beginning of lifecycle
> Interdependence of products
> Turnover gives not enough information (with respect to profit
contribution)
Inventory flow types
• Inventory can be categorised into three flow types
- base (core)
- wave (seasonal)
- surge (fad = Fashionable, Temporarly demanded)

42
 • Management approach tailored to the product and market characteristics

6. Inventory reduction principles

Inventory reduction needs to be consistent with the strategic goals of customer service

• Pool inventory: Wherever demand for inventory can be combined, the safety stock
can be lowered, still providing the same service level
• Reduce variation: Wherever variation can be reduced, safety stock can be reduced
too
• Reduce lead time: When the lead time is long, we need to forecast more into the
future, thus the accuracy of the forecast suffers, increasing the variability of demand
and consequently requiring higher safety stock

• Just-in-time inventory system (JIT: part of Lean, chapter 4):

• Making it work with the minimum possible level of inventory holding
• JIT is as much a philosophy as it is a technique

• Core concepts of JIT:

- Inventory hides problems!
§ By purposely removing inventory holdings, the problems the
inventory was covering are surfaced, and the problems are then
proactively fixed (see next slide)
- Small lot production
§ Ordering in small quantities keeps the average inventory level small
> Hence reduce order processing costs so that the ideal of small quantity ordering can
be accomplished. Bring down the EOQ!
§ Simplifying the ordering process and the reconfiguring of manufacturing tools and
machines
> Actively improve the setup process so that the time and effort
in setups are reduced drastically (business game: operations,
SMED action)
BUT stock-outs also cost money! Therefore you need to balance thoroughly!

43
 • Costs of stock-out situations
- Costs of stock-outs are those costs incurred by an organization when it has no
inventory in stock. These costs include:
• Production stop (lost production, labor waste, waiting time, restarting
costs, change over costs, …)
• Loss of business from customers who go elsewhere to make
purchases
• Loss of the margin on sales that were not completed
• Overnight shipping costs to acquire goods that are not in stock
- Stock-out situation = a customer wants a product and it’s out of stock, it’s not
available
• Wait
• Backorder
• Cancel

Chapter 10: Warehousing and materials handling & Chapter 11:

Technology in the supply chain
1. Warehousing in global supply chains

• Global supply chains require multiple echelons (levels), spread across

various international locations
• The supply chains are part of networks
• Inventory (chapter 9) is stored in the various (international) locations, in
various states of manufacture or assembly.
- Various states:
§ Raw material
§ WIP
§ Semi-finished
§ Finished
• The role of warehousing and materials handling is to maintain the flow of goods
through the production/manufacturing process, all the way to the end customer.

2. Warehousing in global supply chains

• Costs in supply chain warehousing are mainly:

44
 - fixed asset costs (warehouses + equipment)
- labour (handling)
- administration
- inventory (centrally – locally)

• The objective of supply chain management is to minimise inventory holding (see

chapter 9) and handling costs
• BUT in contemporary supply chains, customisation and responsiveness to market
demands more than ever require multiple inventory holding points.
• PARADOX!
- The more standardisation in finished products and SC processes, the easier to
automise
- BUT in e-commerce customisation is a key element, which makes it more difficult to
automise

• Therefore, material storage and handling systems have two main objectives:
- Minimise cost
- Add value (e.g. service)
• Warehousing and distribution centres are essential to global supply chains, they are
complementary to other supply chain activities
• Need to find the correct balance! Make trade-offs between cost & service

• Customer value added to a product by

- Improving quality
§ E.g. maturing whiskey, wine, cheese or cured meats
- Improving service
§ E.g. delivery information availability or specialist packaging
- Reducing costs
§ E.g. reduced packaging or administration costs
- Reducing the lead time of a product
§ E.g. cross-docking (see later)

VALUE-ADDING ACTIVITIES

• Also, on top:
- ‘Value-adding’ is the additional value a product can obtain in a logistical chain
as a consequence of being subjected to form, place or time-related changes.
- VAL (value added logistics) involves the transmission of manufacturing
activities into distribution environments (postponement performed in the
distribution activities)
- The concept of VAL is strongly related to the principles of the order
penetration point (or order decoupling point
concept) (Hoekstra, Romme; 1992)

• Warehousing operations can achieve value by:

- Creating bulk consignments

45
 - Breaking bulk consignments
- Combining goods (example of VAL)
- Smoothing supply to meet demand
• Important role of warehousing in the postponement concept, see chapter 4 (VAL,
value added logistics: previous slide)
• Trend: Order fulfilment as close to the customer as possible

Warehouses should aim to provide value-adding services as well as minimising

operating costs .

3. Warehouse layout and design

• All activities within a warehouse can be associated with one

of the four functions:
• Warehouse layouts are designed to optimise the flow of
goods through these four functions, aiming at reduced goods
movement and handling
• But keeping the value for the customer in mind!

Automation in warehousing - technologies

Manual
Warehouse
• Forklifts
• Reachtrucks
• Picking-lists
• Handscanning
ERP (see part 3

Automation in warehousing - technologies

Semi-Automated
Warehouse
• Automated cranes
• Forklifts (manned)
• Handsfree picking
• Goods to man picking
• WMS (see part 3)

46
 Automation in warehousing - technologies
Fully-Automated Warehouse

• Automated cranes
• AGV (automated guided vehicles)
• Conveyors
• Robots
• TMS / WMS (transport management system / warehouse management system)

• Cross-docking bypasses the storage area in

warehouses and distribution centres:
- reduces cost
- improves customer service
- non-value-adding functions are eliminated
- typically employed for fast moving freight
with constant demand, less then 24h on site
- = quick response logistics

2. Warehouse management systems

47
 ERP vs WMS
• Enterprise resource planning (ERP) is the integrated management of main business
processes, often in real-time and mediated by software and technology.
• ERP provides an integrated and continuously updated view of core business
processes using common databases maintained by a database management system.
• ERP facilitates information flow between all business functions and manages
connections to outside stakeholders

• ERP = higher level information (order level)

• WMS = more detailed information
(activity/operations level)
- What needs to be done in detail to execute
the order, perform a receipt, …

3. Materials handling and storage

• Continuing trend in automation of Material Handling Equipment -

MHE
• Automated material handling improves and standardises
warehouse performance by minimising human intervention
• Optimisation of floor space
• Storage solutions vary depending on the volume, variety and
throughput of freight in a warehouse or distribution system
- Pallet storage
- Non-pallet storage

Examples of pallet sizes (see grey box p 197) + self-study p198-

199 on pallet storage + non-pallet storage

48
 Order picking
• WMS programmed to offer pick sequences to order pickers
• Picking solutions vary depending on freight volume, variety and throughput:
- Pick-to-order
- Batch picking
- Pick-to-zero or pick-by-line
§ Cross-docking
- Zone picking
- Wave picking

7. Additional technology aspects

RFID (form of IoT), primary applications

• Item tracking and management

• Improved inventory management and availability
• Storage management, increased warehouse efficiency
• Increased productivity and accuracy
• Reduced errors in product data handling
• Increased security of freight

49
A basic logistics-related RFID application

EDI

• Electronic Data Interchange is a technology for the (automatic) electronic

interchange of data between two or more companies.
• EDI is a key enabler of supply chain integration. The automated transfer of order
data between supply chain partners streamlines information sharing and processing
(see chapter on supply chain relationships).

• Forms of data transfer via EDI:

- Sending and populating purchase orders
- Acknowledging purchase orders
- Integrating POs into the invoice and the inventory system
- Sending shipping notices and logistics information
- Sending and populating invoices both from customers and to vendors
- Receiving confirmation of transmissions to other entities and applications

• Eliminating errors
• Increasing speed of business
• Insights in analytics
• Efficiency between partners
The easier it is for your business to manage your suppliers’
relationships, the better lead times you can provide, the better
your customer service is to your customers, the more you can
increase your ROI.

50
 • Self-study page 210 – top 215

CHAPTER 14: Sustainable Logistics and Supply Chain Systems

1. Introduction
• Sustainable logistics is concerned with reducing the environmental and other
disbenefits associated with the movement of freight
• Sustainability seeks to ensure that decisions made today do not have an adverse
impact upon future generations
• Sustainable supply chains seek to reduce these disbenefits by for example
redesigning sourcing and distribution systems so as to eliminate any inefficiencies
and unnecessary freight movements
• Not only about “green” issues! How can a firm itself survive and grow in a
sustainable manner without having adverse impacts on future generations, and
specifically, what is the role of logistics and SCM in this context

2. The ‘green revolution’ and supply chain redesign

The drivers behind the increased emphasis on green issues

51
The drivers behind the increased emphasis on green issues

• The international Kyoto Protocol has called for a 60% reduction in carbon emissions
by 2050
- Hard to believe we will obtain this by the proposed date
- Emissions trading..
- Some terminology:
- Carbon footprint: the environmental disbenefits associated with economic
activities such as the movement of freight
- Food miles: the distance by which the various components of a particular
food item have to travel before final consumption

Supply Chain Redesign

• ‘Greening’ the supply chain:

- Largely about forward/strategic planning
- Over 80% of carbon savings are only achievable at the supply chain design
stage, e.g.:
§ deciding where to locate warehouses and distribution centres
§ deciding which transport modes to use
§ reconfiguring distribution networks so as replace small deliveries
direct to all end customers with centralised deliveries to a hub from
where end customers retrieve their goods

• Example: Port Centric Logistics

• Some ports are actively encouraging companies to locate distribution centres at
ports rather than in their traditional locations which tend to be in geographically
central, inland locations
• Current patterns of (inland) distribution centre location ignore the fact that most of
the freight that passes through these distribution centres first transits through a port
• Therefore, it is logical (and often easier in terms of land cost, lack of congestion, etc.)
to site such distribution centres at ports
• One advantage of port centric logistics is that it cuts down on the number of empty
(return) containers on roads by ‘stripping’ (i.e. emptying) imported containers at the
port. This also allows faster repositioning of containers to another port where they
are required.

Sustainability of logistics and supply chain systems

• How to lower the environmental footprint of
logistics & SCM:
• Redesigning supply chains (as discussed)
• Using scale to reduce the negative
environmental effects of logistics activities (i.e. by moving freight in larger
single loads, thus cutting down on both unit costs and disbenefits)
• Similarly promoting various efficiency solutions (by transporting and handling
freight more effectively)

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 • Not mutually exclusive: a smart, environmentally sensitive supply chain will
combine all three
• Redesign already discussed
• Others will come up in later sections (4 & 5)

3. The link between economic growth and transport growth

• There is a strong link between economic growth (GDP) and transport
- i.e. as economies grow, more transport is required to move the freight that
economic growth inevitably generates
- A core issue for policy makers is to endeavour to decouple economic growth
and transport growth
- i.e. to find ways of allowing economic growth without comparable growth in
transport
- In history, world trade was growing +- twice as fast as GDP. However, this
seems to slow down.
• The demand for international transport is derived from increase in international
trade, remember from chapter 2?

4. The role of ‘scale’ in logistics and SCM

• If all the containers in the world were lined up, it would create a container wall with
a length of 108,000 kilometres
- i.e. 2.7 times around the earth at the equator
- The volume of freight that can be held in one standard 40- foot container is
quite significant: 200 dishwashers, 350 bicycles or 5,000 pairs of jeans
• The shipping cost per unit is thus quite low: Maersk estimate for freight coming from
Asia to Europe it costs £9.00 per dishwasher, £5.00 per bicycle and just £0.35 per
pair of jeans

Using scale to reduce the negative environmental effects of logistics activities (i.e. by
moving freight in larger single loads, thus cutting down on both unit costs and disbenefits)

• Only certain ports can handle ultra large vessels

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 • There is growing traffic concentration at certain other ports
- Increasingly, many mid-sized ports are playing a feeder role to the very large
ports as hub and spoke networks
- In these networks the larger vessels ply between the major transhipment
hubs
- The prosperity of the smaller ports is increasingly dependent on the route
strategies of the major shipping lines

Is this growth in scale sustainable in the long term?

• Pro and con
- Pro:
§ Developments are inevitable and necessary
- Con:
§ Frequent movement of low-value products around the world is
unnecessary, bad to the environment, and not sustainable in the long
term
• However, shipping cost is only a fraction of end-product value. This long distance
shipping will not disappear unless other costs (labour, raw materials) are being
rebalanced.
- Logistics viewpoint: facilitate this while reducing negative consequences as
much as possible

Efficiency Solutions

• In addition to looking to increased scale, many logistics operators are also seeking
efficiencies with how they move and store freight so as to reduce the environmental
impact of their activities.

Transport and Fuel Use (grey box, p284)

§ Reduce the harmful effects of fuel used (less sulphur)

§ Enhancing the fuel efficiency of engines
§ Converting to other energy sources (electric, LNG, ships using sales and wind power)

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 § Much has already been done but constant innovation by academics & the industry is
needed (supported by governmental regulations)

In transportation, it is not just the road haulage sector that is seeking to reduce its
environmental footprint. With the growth of air travel, spurred on in particular by rapid
growth in the so called low fares category of air travel, many commentators are looking
towards the air transport sector to reduce its impact on the environment.
In logistics, efficiency solutions are not just restricted to transportation. The area of
green warehouse design is also growing in popularity. Many warehouses are vast
structures and their environmental footprints can be reduced by for example more
efficient lighting and heating / refrigeration systems.

CHAPTER 15: Reverse logistics

1. Introduction
• The concept of reusing products & materials and recovering value
- Focus on the reverse flow from end customer to the original supplier, vs
traditional forward flow
- More and more important !
- Reverse logistics practices can be used to gain competitive advantage
§ reputation creation, public image => higher revenue &
§ cost-efficiencies
• Examples (also on next slides):
- Waste collection and processing
- Reusable packaging
- Re-engineering and reworking obsolete products
- Servicing and repairing broken products

2. Definition of reverse logistics

• Reverse logistics can be defined as:
‘The process of planning, implementing, and controlling the efficient, cost effective
flow of raw materials, in-process inventory, finished goods, and related
information from the point of consumption to the point of origin for the purpose of
recapturing or creating value or proper disposal.’

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 A generic reverse logistics system with recovery options

3. Motivations for reverse logistics

• Government Policy and Legislation
- Legislation on the collection, transportation, recovery and disposal of used
products
- Particularly in the EU
§ Take back of white and brown goods
§ Collection of sales packaging material
§ Seek techniques and technologies that avoid waste
§ Promote the recovery processes of unavoidable waste materials
• Economic Considerations
- Landfill usage costs increased
- Disposal costs
- Recoverable manufacturing systems became more profitable

• Environmental Considerations
- Public concern about sustainable
development
- Forcing companies to be
responsible for their waste
- Reverse logistics: adherence to
environmental legislation +
branding and marketing: ‘green’
company
• Shift Towards Buying Sets of Services
- No longer buying physical products,
but sets of services
- Service contracts (i.e. maintenance
contracts) facilitating the take back
of end-of-life products

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 4. Recovery options in reverse logistics
• Reuse
– Reuse refers to a process in which the recovered product is used again for a
purpose similar to the one for which it was originally designed
– Alternative to new parts and products
– Recover products and packaging for direct reuse (often after inspection or
cleaning)
– Bottles, pallets, containers and furniture
• Remanufacturing
– Remanufacturing involves a process of reducing a product into its constituent
parts. It requires more extensive work, often complete disassembly of the
product
– Reuse of these parts in the assembly of new products
– Value-added recovery
– Economically profitable
– Copiers, printers, computers, car engines

• Recycling
– Recycling is the process of collecting and disassembling used products,
components and materials, and separating them into categories of like
materials, such as plastic, glass, etc., and then processing them into recycled
materials
– Least value-added recovery process of reuse, remanufacture, recycle since it
does not retain the functionality of used parts or products
– Increasingly restrictive environmental regulations and a potential economic
benefit have encouraged firms and municipalities to recycle. The success of
recycling depends on two criteria:
– Whether or not there is a market for the recycled materials
– The quality of the recycled materials
– Examples
• Cartons to a paper mill
• Metal scrap to a foundry
• Disposal (with or without energy recovery)

A reverse logistics network may occur in either a closed- or open-loop system

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 Ø In a closed-loop reverse logistics system origins
(sources) and destinations coincide so that flows
cycle in the system.
Ø Companies adopting this system collect their
used products and either refurbish and resell or
remanufacture them or they recycle them.

Ø In an open-loop system, the flows enter at one

point of the logistics system and leave at
another.
Ø Companies using this system might assume
responsibility for collecting and finding markets
for their products, but do not use the recovered
materials for themselves.

5. Characteristics of the remanufacturing environment in reverse logistics

• The operational characteristics of reverse logistics are more complex to manage

than the forward logistics activities
• Aspects to consider when comparing traditional and recoverable manufacturing
environments (read table 15.2, not to study):
– Environmental focus
– Forecasting
– Purchasing
– Inventory control and management
– Production planning and control
– Logistics

Unique characteristics of the remanufacturing environment

• Supply–demand balance
§ Difficult variable: the distribution of returns of end-of-life products
§ Mismatch between demand and returns: excess stocks of unwanted parts and
shortages of those parts that are required
§ Complexity in planning and controlling (purchasing and inventory mgmt)
• = Accumulation and shortage of parts
§ Uncertainty in Timing and Quantity of Returns
> The recovery rate of core material will never be 100% of sales of the product
§ Random Routings and Processing Times
> Variation in quality, need for checking and testing, irregular supply

• Logistical network of a recoverable manufacturing system has three major

components:

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 § disassembly
§ remanufacturing
§ assembly
• Transportation: plant location decisions are not only influenced by location cost for
assembly, but also for disassembly and remanufacturing

6. Performance measures of reverse logistics

A performance measure, or a set of measures, is used to determine the efficiency
or effectiveness of logistics systems.

• Traditional measures are typically concerned with:

– Customer satisfaction
– Service level
– Responsiveness
– Cost
– Quality
– These measures are appropriate for traditional logistics systems, BUT
inadequate in capturing the reverse logistics objectives of environmental
protection
• Firms must develop procedures that focus on continuous improvement of the
metrics shown in Table 15.3 (next slide)

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