Chapter One

An overview of logistics and channel management

The evolution of logistics management

Early Origins (BC):

 The concept of logistics originated in military operations, ensuring armies had proper
supplies (food, clothing, ammunition).
 Alexander the Great emphasized troop mobility and used locally sourced supplies to
avoid relying on distant deliveries.
 Effective logistics played a crucial role in military victories throughout history.

World War II as a Turning Point:

 WWII highlighted the critical role of logistics in Allied success, propelling its
importance beyond military applications.

Pre-1950s:

 Logistics practices were fragmented and not well-defined at the enterprise level.

Late 1950s and Onwards - The Rise of Modern Logistics:

Factors driving change:

 Development of computers and quantitative techniques for analysis

 Economic volatility prompting a focus on cost reduction, with logistics offering
significant opportunities.

Evolution of Integrated Logistics Management (ILM):

 The passage outlines four periods with evolving attitudes and practices:
 1956-1965: Conceptualization - The concept of integrated logistics began to take shape.
 1966-1970: Testing Relevance - Putting the concepts into practice and assessing their
effectiveness.
 1971-1979: Shifting Priorities - The focus on logistics management may have changed
during this period. (The passage doesn't elaborate on the specific shift.)
 1980-1985: Significant Political and Technological Change - Likely advancements in
areas like communication and automation influenced logistics practices.
 Beyond 1986 - The Move Towards Fully Integrated Logistics:
The benefits of a fully integrated approach, bringing together:

 Physical/Market Distribution
 Manufacturing Support
 Purchasing/Procurement

Reasons for Integration:

 Interdependence between logistical areas allows for synergy and overall improvement.
 Similar control requirements across logistical operations.
 Balancing manufacturing cost efficiency with marketing needs.
 The complexity of logistics demands innovative, integrated approaches.

Logistics as a Flow Management Process:

 Logistics manages the entire product flow, from raw materials to final consumption and
disposal.
 The objective is to deliver the right inventory (finished, WIP, materials) at the right
time, location, and condition, at the lowest cost.
 Logistics ensures a smooth flow of materials into production and finished products out
to consumers.

Definition of Logistics

Logistics Management Defined:

 It's the management of resources (engineering, technical activities) to fulfill plans

and operational needs.

It encompasses:

 Requirement identification and design

 Supplying and maintaining resources

Importance in Today's Market:

 Fierce competition compels businesses to focus on efficient supply chains for a

competitive edge.
 Advancements in communication and transportation technologies further accelerate
supply chain growth.
 The Supply Chain Network:

 It connects all entities involved in product flow, from suppliers to retailers.

It includes:

 Suppliers  Retail outlets

 Manufacturing centers  Raw materials
 Warehouses  Work-in-progress inventory
 Distribution centers  Finished products

Logistics Management's Scope:

 Considers all facilities impacting  Integrates activities across

cost-efficiency. various levels:
 Ensures products meet customer  Strategic
requirements.  Tactical
 Operational

Challenges and Importance:

 Logistics plays a crucial role in integrating suppliers, manufacturers, warehouses, and stores.
 It links suppliers with customers and unites various functional departments within a
company.
 The ever-increasing competition makes efficient resource allocation crucial for strategic
advantage.
 Logistics helps leverage a company's strengths in the marketplace.

Definitions of Logistics Management:

 Council of Logistics Management (CLM): Planning, implementing, and controlling the flow
and storage of goods, services, and information to meet customer needs.
 Hesket, Glaskowsky, and Ivie (1973): Managing activities that facilitate movement and
coordinate supply and demand to create time and place utility (having a product available
when and where a customer needs it).
 Wikipedia (2006): Managing and controlling the flow of goods, energy, information, and
other resources.
 CSCMP (2006): Planning, implementing, and controlling the efficient flow and storage of
goods, services, and information in both forward and reverse directions to meet customer
requirements.
 Chartered Institute of Logistics and Transport (UK) (2005): Positioning resources at the right
time, place, cost, quality.

The role and importance of logistics

The Role of Logistics:

Ensuring Right Product, Right Time, Right Place: The core function of logistics is getting
the correct quantity of the desired product to the designated location at the precise
moment. This is critical within the market channel, the path a product takes from
manufacturer to consumer.

Importance of Business Logistics:

Planning and Execution: It involves efficient planning and execution for storage, movement,
and delivery of various items:
 Raw materials
 Inventory (work-in-progress and finished goods)
 Services

Service Industry: Logistics is also crucial for service organizations, ensuring materials and
information is available for service delivery (e.g., having the right tools and information for a
technician to repair your appliance).

Benefits of Effective Logistics:

 Competitive Advantage: By fulfilling customer needs faster and more accurately than
competitors, businesses gain an edge. The internet has empowered many companies
to achieve this through faster communication and improved tracking systems.
 Stronger Customer Relationships: Prompt and efficient product delivery builds trust
and loyalty, leading to repeat business and positive word-of-mouth promotion.
 Finished Product Creation: Logistics ensures sufficient raw materials are available to
produce finished goods without stockouts or delays.
 Improved Organization: Streamlined processes are achieved by tracking inventory,
transportation, storage, and manufacturing across all departments. This keeps
everyone informed and aligned with company goals.
Economic Significance of Logistics:
 Employment: Studies suggest a significant portion of the workforce is involved
in logistics-related jobs (around 30% in the UK).
 Contribution to GDP: Logistics represents a substantial portion of a country's
Gross Domestic Product: 8-11% for major European and North American
economies.12-21% for developing countries (e.g., 17% in India, 21% in China).
Logistical System

Logistics as a System:

 Connects a business with its suppliers and customers.

Information flows in two main directions:

 Customer forecasts and orders: This data is used for planning.

Refined information: Transforms forecasts into specific goals for manufacturing and
purchasing.

The Logistical Process:

Involves two interrelated efforts:

 Value-added inventory flow: Management of raw materials, work-in-process

(WIP), and finished goods as they move through the system.
 Requirements information flow: Identifying specific inventory needs at
different locations within the system.

Value-added Inventory Flow:

 Goal: Create value for the company, its customers, and suppliers.
 Focus: Operational aspects of managing and storing materials and finished goods.
 Process:
 Starts with acquiring materials from suppliers.
 Involves moving and storing materials and WIP inventory throughout the
manufacturing process.
 Ends with delivering finished products to customers.

Value Addition: Inventory is strategically placed at the right time and location to meet
customer needs.

Examples:

 Storing raw materials near a production facility for easy access.

 Having finished goods in warehouses close to customers for faster delivery.
Logistical Operations:

Divided into three main categories:

 Market Distribution: Focuses on the physical movement of finished products to

consumers (warehousing, distribution centers, delivery).
 Manufacturing Support: Concerned with managing WIP inventory as it flows through
different production stages.
 Purchasing: Responsible for acquiring and transporting materials, parts, and finished
goods from suppliers to manufacturing plants, warehouses, or retail stores.

Requirements Information Flow:

 Identifies the specific inventory needed at various locations within the logistical system.
 Objective: Develop a plan to integrate logistical operations and ensure smooth
functioning.
 Importance: Helps businesses anticipate demand and ensure they have the right
inventory in the right places to meet customer needs.

Logistical System Components (the work of logistics)

Five key components are coordinated to create an integrated logistical process:

 Facility Structure
 Forecasting and Order Management
 Transportation
 Inventory
 Warehousing and Packaging

These components work together to achieve the goals of physical distribution,

manufacturing support, and purchasing.

1. Facility Structure:
 Importance: Location and network design of facilities significantly impact customer
service and costs.
 Network Elements: Manufacturing plants, warehouses, and retail stores.
 Selection Criteria: Continuously evaluate network to adapt to changing demand,
supply, and competition. A well-designed network offers a competitive advantage.
 2. Forecasting and Order Management:
 Information as Core: Customer requirements are crucial for logistics.
 Technology's Role: Current information systems can handle complex customer needs
and provide real-time order information.
 Focus Areas: Forecasting customer needs and communicating them effectively.
 Order Processing: Managing all aspects of customer requirements, from order receipt
to delivery and payment.
3. Transportation:
 Function: Moves and positions inventory geographically, providing "place utility" (having a
product available in the right location).
 Transportation Options:
 Private fleet ownership or lease
 Contracts with transportation specialists
 Using common carriers
 Key Performance Indicators (KPIs):
 Cost: Minimizing total system cost, not just the transportation cost itself.
 Speed: Balancing speed with cost. Faster transportation typically comes at a higher
price.
 Consistency: Reliable and dependable service to avoid disruptions and the need for
excess safety stock.

4. Inventory:

 Balancing Act: Inventory levels are linked to facility network and desired customer
service.
 Goal: Achieve desired service with minimal inventory investment.
 Impact of Inventory: Excessive inventory can compensate for logistical inefficiencies
but increases overall costs.
 Competitive Advantage: Fast and reliable delivery can reduce customer inventory
needs.
 Inventory Management: Understanding the relationship between order processing,
inventory, transportation, and facility decisions is critical.

5. Warehousing and Packaging:

 Interdependence: These functions are integrated with other logistical areas and cannot
operate independently.
 Warehousing: Needed for storing inventory at various stages of the logistical process.
 Materials Handling: Efficient loading and unloading of transportation vehicles.
  Packaging: Grouping products for efficient handling and shipping.
 Overall Impact: When effectively integrated, these functions facilitate smooth product
flow throughout the system.

Total Cost Concept

 The logistical system is viewed as a function that incurs expenses, and minimizing these
expenses is a primary goal.

Trade-off Analysis:

 This is a central concept in designing an efficient logistics system.

 It recognizes that different logistical activities have cost patterns that can conflict with
each other.

Balancing for Optimization:

 The goal is to find the right balance between these activities for overall system
optimization.

Example: Transportation Cost vs. Inventory Cost:

 Choosing a faster transportation service might have a higher direct cost.

However, it could also lead to lower indirect costs by reducing the need for large safety stock
(which incurs storage and handling expenses).

Other Trade-offs:

 Setting customer service level: Balancing the cost of faster deliveries with customer
satisfaction.
 Setting safety stock levels: Finding the right balance between stock-out risks and
inventory carrying costs.
 Determining the number of warehouses: Optimizing warehouse placement for efficient
distribution versus the cost of maintaining multiple facilities.

Finding the Optimal Cost Point:

 The best economic choice is achieved when the sum of all the costs associated with this
trade-offs is minimized.

Chapter Two
 Transportation Management

Transportation Economics and Pricing

Why Transportation Economics and Pricing Matter:

 These concepts are crucial for understanding the factors that influence
transportation costs.
 Knowing these factors helps businesses develop effective logistics strategies that
optimize costs and service levels.
 It's also essential for successful negotiation with transportation providers.

Four Key Topics in Transportation Economics and Pricing:

 Factors Driving Transportation Costs: Understanding what drives costs allows

businesses to identify areas for potential savings or negotiation.
 Cost Structures and Classifications: Different transportation modes (e.g.,
trucking, rail) have different cost structures. Analyzing these structures helps
with cost estimation and comparison.
 Carrier Pricing Strategy: Knowing how transportation companies (carriers) set
their prices helps in negotiation and selecting the most cost-effective service
option.
 Transportation Rates and Ratings: Transportation rates are the actual prices
charged for shipping goods. Ratings (classification systems) determine what rate
applies based on factors like weight, distance, and commodity type.

Economic Drivers

The seven key factors that influence transportation costs, helping businesses make
informed decisions about their logistics strategies:

1. Distance:
 The greater the distance a shipment travels, the higher the cost due to increased
expenses like fuel, labor, and vehicle maintenance.

2. Volume (Scale Economies):

 Transportation costs generally decrease per unit weight as the volume of a shipment
increases.
 This is because fixed pickup, delivery, and administrative costs are spread over a larger
volume.
 However, this benefit is limited by vehicle capacity.
 Management implication: Consolidate small loads whenever possible to maximize these
economies of scale.

3. Density:

 Transportation costs are often quoted per unit weight (e.g., per hundredweight).
 While weight is important, vehicles are limited more by space (cubic capacity) than
weight.
 Higher-density products (more weight per unit volume) allow fixed costs to be spread
over more weight, resulting in lower transport costs per unit weight.
 Management implication: Look for ways to increase product density (e.g., compressing
products to utilize trailer space more efficiently).

4. Stowability:

 This refers to how well a product's packaging dimensions fit into a transport vehicle.
 Odd-shaped or oversized items can waste space and increase costs.
 Even items with similar densities might have different stowability (e.g., rectangular
boxes vs. long rods).
 Management implication: Design packaging that utilizes space efficiently for easier
stowing and potentially lower costs.

5. Handling:

 Special equipment or procedures for loading and unloading certain products can
increase transportation costs.
 How products are grouped together on pallets or in boxes can also impact handling
costs.
 Management implication: Work with carriers to find efficient handling methods and
potentially reduce costs.

6. Liability:

 Products prone to damage or potential claims can lead to higher transportation costs.
 Carriers may charge more for such products to cover insurance or potential losses.
 Management implication: Improve packaging or reduce product susceptibility to
damage to potentially lower costs.

7. Market Factors (Lane Volume and Balance):

 Transportation lanes: These refer to routes between origin and destination points.
 Carriers often need to find return loads (backhauls) to avoid returning empty vehicles,
which increases costs.
 Ideally, balanced lanes (equal volume in both directions) are most cost-effective.
 However, demand imbalances are common, leading to potentially lower rates for the
direction with higher volume (e.g., Eastbound shipments in the US due to
manufacturing concentration).
 Seasonality can also affect rates (e.g., higher rates for transporting fruits during off-
seasons).
 Management implication: Logistics design should consider backhauls whenever
possible and take into account seasonal and directional rate variations.

Cost Structure

Understanding cost structure helps shippers negotiate effectively with carriers.

Main Cost Categories:

 Variable Costs:
 Change directly with the level of activity (e.g., distance traveled, weight of shipment).
 Examples: Labor, fuel, maintenance.
 Minimum amount a carrier must charge to cover day-to-day operational expenses.
 Fixed Costs:
 Do not change in the short term, even if no operations are happening.
 Examples: Vehicles, terminals, infrastructure, equipment.
 Must be covered by contribution margins from variable costs in the long term.
 Joint Costs:
 Incurred when providing a specific service (e.g., cost of an empty return trip).
 Carriers must consider these costs when setting rates.
 May be covered by the original shipper or a backhaul shipper found by the carrier.
 Common Costs:
 Incurred for the benefit of all or a group of shippers (e.g., terminal expenses,
management).
 Examples: Overhead costs allocated based on activity (shipments, deliveries).
 Allocation based solely on activity might not be entirely accurate (e.g., a shipper might
not use all services they're charged for).

Understanding Cost Structure Benefits Shippers:

 By understanding these categories, shippers can better assess carrier quotes and
negotiate rates that reflect the true cost of their specific shipment.
 For example, if a shipper consistently uses full truckloads, they can negotiate a rate that
reflects the lower variable cost per unit compared to smaller shipments.
Carrier Pricing Strategies
 Carriers employ different strategies to set rates for shippers, often using a combination
of two main approaches.
1. Cost-of-Service Pricing:
 This strategy sets rates based on the carrier's cost to provide the service (e.g.,
labor, fuel, maintenance) with a profit margin added.
 It's a common approach for low-value goods or highly competitive markets.
 Example: Carrier cost = 2000 Br, Profit margin = 10%, Rate = 2200 Br.
2. Value-of-Service Pricing:
 This strategy sets rates based on the perceived value of the service to the shipper,
not just the carrier's cost.
 It's used for high-value goods or when competition is limited.
 Shippers are typically willing to pay more for faster or more reliable
transportation of valuable goods.
 Example: Electronics vs. Coal - Shippers might pay more to transport electronics
due to their higher perceived value.
Combination Pricing:

 Most carriers use a combination approach, setting rates somewhere between the
cost-of-service minimum and the value-of-service maximum.

Understanding these strategies is crucial for logistics managers to:

 Negotiate effectively with carriers.

 Gain insights into the range of potential prices.
Recent Trends in Carrier Pricing:
 Net-Rate Pricing: This simplifies pricing structures by creating one all-inclusive
rate for a shipper based on their specific needs.
 It eliminates the need for complex discount sheets and tariffs, reducing carrier
administrative costs.
Benefits for shippers include:
 Increased billing accuracy.
 Clearer understanding of cost-saving opportunities.

Rates and Rating

What are Class Rates?

 The price per hundredweight (CWT) to move a product between two locations,
listed in carrier pricing sheets or tariffs.
 Determined by a two-step process: classification and rate determination.

Classification:

 Grouping products based on characteristics (density, stowability, handling,

liability, value) that influence transportation costs.
 Products with similar characteristics are assigned the same class (rating), used
for determining the freight rate.
 Packaging can also affect classification (e.g., glass shipped loose vs. boxed).

Rate Determination:

Once a product's classification is obtained, the rate is determined based on:

 Shipment origin and destination.

 Minimum charge per shipment.
 Surcharges (additional fees).

Historical vs. Modern Rate Management:

 Traditionally, rates were in physical notebooks, requiring manual updates.

 Today, rates are computerized and often provided on disks by carriers.

Class Rate Structure:

 Class rates, minimum charges, arbitrary charges, and surcharges form a pricing
system for transportation within a region (e.g., continental US).
 Tariffs specify class rates for each classification group between specific origins
and destinations.

Other Rate Types:

 Commodity Rates: Special rates published for large quantities of a product

moving regularly between two locations, negotiated in contracts.
 Often supersede class rates for specific products.
 More common in rail freight than motor carriage.
 Exception Rates: Special rates published to offer lower prices than the prevailing
class rate for specific situations:
  Competitive pressures.
 High-volume movements.
 May involve a new class assignment or a percentage discount on the
original class rate.

Several new types have emerged since deregulation:

 Aggregate Tender Rate: Discount for providing multiple shipments to a

carrier at once.
 Limited Service Rate: Discount for performing tasks like loading in exchange
for reduced responsibility by the carrier (e.g., shipper load and count).
 Released Value Rate: Lower rate with limited carrier liability in case of loss or
damage (shipper may self-insure for high-value goods).

Key Takeaways:

 Understanding class rates and other pricing structures is crucial for logistics
managers.
 Classification systems and rate structures provide a generalized pricing
mechanism for transportation.
 Different rate types (commodity, exception) offer flexibility based on specific
situations and volume.
 Newer exception rates leverage cooperation between shippers and carriers to
reduce costs.

Special Rates:

These rates offer cost savings on specific types of shipments compared to standard class
rates.

1. Freight-All-Kinds (FAK) Rates:

 Used for mixed shipments containing different products.
 A single rate applies to the entire shipment, simplifying paperwork and potentially
lowering costs.
 Primarily used in physical distribution to streamline mixed-commodity
transportation.

2. Local, Joint, Proportional, and Combination Rates:

These are all strategies to reduce costs based on the number of carriers involved in a
shipment:

 Local Rate: Single carrier handles the entire shipment.

 Joint Rate: Multiple carriers handle the shipment with a single published rate.
 Often cheaper than using separate local rates for each carrier involved.
 Proportional Rate: Uses a published tariff for only part of the desired route,
offering a discount on that portion.
 Useful when no joint rate exists.
 Combination Rate: Combines multiple rates (class, exception, commodity) when
no single through rate exists.
 Requires expertise due to technicalities but can significantly reduce costs.
 Through Rate: Standardized rate for a shipment from origin to destination,
eliminating the need for combination rates for frequent routes.

Special Services:

1. Transit Services:
 Allows stopping a shipment at an intermediate point for processing (e.g., milling
grain) before final delivery.
 A through rate plus a transit privilege charge applies.

Benefits: Potential cost savings and flexibility for processing goods in transit.

Drawbacks:

 Limited to specific routes and destinations.

 Changing the final destination after using transit services can be expensive.
 Reduced availability in recent years, especially with railroads.

Transport Decisions

The selection of mode of transportation or service offering within a mode of

transportation depends on a variety of service characteristics. The six key factors
include:

 Freight rate
 Reliability
 Transit time
 Loss, damage, claim processing, and tracing
 Shipper market consideration and
 Carrier consideration
Chapter Three
Traffic Management
Traffic Science:
 Studies the flow of goods, people, and vehicles across various regions and the globe.
 Analyzes the combined transportation activities of individuals, businesses, and other
economic entities.
Traffic Engineering:
 Focuses on developing, planning, building, and maintaining:
 Traffic routes and networks.
 Public transportation systems.
 Includes traffic control and safety measures.
Traffic Management and Traffic Policy: Aims to:
 Plan and build new traffic networks.
 Ensure safe, efficient flow through existing networks.
 Minimize disruption and environmental impact.
 Meet the transportation needs of a region or country at an optimal cost.
Traffic Economics:
 Analyzes the economic side of public transport and traffic networks.
 Investigates the structure of:
 Traffic networks.
 Routes and nodes.
 Interactions between different transportation modes.
 Studies:
 Costs, pricing models, and competition within the transportation market.
 Traffic flow patterns within and between regions.
 Causes of traffic congestion and potential restrictions.
Goal Conflicts between Transportation and Traffic:
 Interdependence: Efficient transportation relies on good traffic infrastructure.
 Challenges:
 Balancing investments in infrastructure with sufficient traffic volume for cost-effective
operation.
 Addressing the sometimes conflicting goals of individual businesses vs. societal needs.
Traffic Management and Logistics Research:
 Analyzes various options for achieving transportation and traffic goals.
 Develops methods to address current and future challenges in transportation and freight
movement.
 Investigates transportation markets, competition, and pricing for transport and
networks.
 Designs strategies to manage or reduce excessive transportation demand and traffic
volume.
 Proposes legislative solutions for balancing transportation and traffic goals.

Importance of Independent Research:

 
Logistic research should be independent of specific business interests or short-term
political agendas.
 This ensures fair solutions that consider the long-term well-being of society.
While traffic managers administer many different activities, they are fundamentally responsible
for: (1) operations management, (2) Freight consolidation, (3) Rate negotiation, (4) Freight
control, (5) Auditing and claims, and (6) Logistical integration.

1. Operations Management:
 Overseeing day-to-day shipping activities.
 Key elements:
 Equipment Scheduling: Planning for timely loading, unloading, and preventative
maintenance of transportation equipment.
 Load Planning: Optimizing how shipments are loaded onto vehicles for efficiency
and space utilization.
 Routing: Deciding the most efficient geographical path for shipments to travel.
 Carrier Administration: Selecting, integrating, and evaluating the performance of
for-hire and private transportation providers.
2. Freight Consolidation:

 Combining smaller shipments into larger ones to reduce transportation costs.

 Two approaches:
 Reactive Consolidation: Combining existing shipments without influencing their
timing.
Techniques:
 Market Area: Combining shipments to the same geographic area.
 Scheduled Delivery: Limiting shipments to specific days for specific markets.
 Pooled Delivery: Participating in a consolidation plan with other shippers.
 Proactive Consolidation: Planning for consolidation even before shipments are placed.
Driven by:
 Increased number of small shipments due to time-based logistics and e-
commerce.
 Desire to share consolidation benefits among shippers, carriers, and consignees.

 Rate negotiation: Securing the best possible rates from carriers.

 Freight control: Tracking and monitoring the movement of shipments.
 Auditing and claims: Identifying and resolving discrepancies in freight bills and
pursuing compensation for lost or damaged goods.
 Logistical integration: Ensuring smooth coordination between different logistical
activities.
.

3. Rate Negotiation:
  Traffic managers secure the best possible transportation rates while meeting service
requirements.
 They use tariffs (published price lists) from various carriers (rail, air, motor, etc.) to find
the most economical option.
4. Freight Control:
 This involves tracking and expediting shipments.
 Tracing: Locating lost or delayed shipments.
 Initiated by the shipper's traffic department.
 Most large carriers offer online tracing tools.
 Expediting: Informing a carrier to prioritize a specific shipment for faster delivery.
5. Auditing and Claims Administration:
 When transportation services fall short of expectations, shippers can file claims for
compensation.
 Two main claim types:
 Loss and Damage: Recovering financial losses due to damaged or lost goods in transit.
 Overcharge/Undercharge: Resolving discrepancies between billed and expected freight
charges, often through freight bill audits.
6. Logistical Integration:
 Traffic managers ensure that transportation services meet budgeted costs while
exploring cost-reduction strategies.
 Example: Modifying packaging to qualify for a lower freight classification (potentially
saving on transportation costs even with increased packaging expenses).