Module 5

Logistics and Supply Chain Management

 Logistics
• “Logistics is the process of planning, implementing and controlling the
efficient, effective flow and storage of goods, services and related
information from point of origin to point of consumption for the
purpose of conforming the customer requirement”.
Logistics has gained importance due
to the following trends
• Raise in transportation cost.
• Production efficiency is reaching a peak
• Fundamental change in inventory philosophy
• Computer technology
• Increased public concern of products Growth of several new, large retail
chains or mass merchandise with large demands & very sophisticated
logistics services, by pass traditional channel & distribution.
• Growing power of retailers
• Globalization
 Supply Chain Overview

Transportation Transportation Customers

Warehousing

Information
flows
Factory

Transportation

Vendors/plants/ports
Warehousing Transportation
Logistics vs Supply Chain Management
Council of Logistics Management
• “Logistics is the process of planning, implementing and
controlling the efficient, cost-effective flow and storage of
raw materials, in-process inventory, finished goods and
related information from the point of origin to point of
consumption for the purpose of conforming to customer
requirements.”
Handfield and Nichols
• SCM is the integration of all activities associated with the
flow and transformation of goods from raw materials
through to end user, as well as information flows, through
improved supply chain relationships, to achieve a
sustainable competitive advantage.
The Logistics/SCM Mission
• Getting the right goods or services to the right place, at the
right time, and in the desired condition at the lowest cost and
highest return on investment.

• Product / Service Utility

• Possession Utility - the value or usefulness that comes from a customer
being able to take possession of a product
• Form Utility - in a form that can be used by the customer and is of
value to the customer
• Place Utility - available where they are needed by customers
• Time Utility - available when they are needed by customers
• Logistics obviously help time and place utility
 Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+

Demand forecasting

Purchasing

Requirements planning
Purchasing/
Production planning Materials
Management
Manufacturing inventory

Warehousing
Logistics
Material handling

Packaging

Finished goods inventory Supply Chain

Physical Supply Chain
Management
Distribution Management
Distribution planning

Order processing

Transportation

Customer service

Strategic planning

Information services

Marketing/sales

Finance
Key Activities/Processes
• Primary
• Setting customer service goals
• Transportation
• Inventory management
• Location
• Secondary, or supporting
• Warehousing
• Materials handling
• Acquisition (purchasing)
• Protective packaging
• Product scheduling
• Order processing
Dickson Chiu 2006 SCM-8
Logistics Strategy and Planning
• The objectives of logistics strategy
• Minimize cost
• Minimize investment
• Maximize customer service
• Levels of logistical planning
• Strategic
• Tactical
• Operational

Dickson Chiu 2006 SCM-9

The Logistics Strategy Triangle
(4 problem areas)
Inventory Strategy
 Forecasting
 Storage fundamentals Transport Strategy
 Inventory decisions  Transport fundamentals
 Purchasing and supply  Transport decisions
scheduling decisions
Customer
 Storage decisions
service goals
· The product
· Logistics service
· Information sys.

Location Strategy
 Location decisions
 The network planning process

CR (2004) Prentice Hall, Inc. Dickson Chiu 2006 SCM-10

Relationship of Logistics to
Marketing Product

Marketing Promotion
Price

Place-Customer
service levels

Transport
Logistics

Inventory
carrying costs costs

Lot quantity Warehousing

costs Order processing costs
and information
costs
CR (2004) Prentice Hall, Inc. Dickson Chiu 2006 SCM-11
EOQ (Economic Order
Quantity)
• Perhaps the most well-know, traditional approach to managing
inventory
• computes an “optimum’ value for the economic order quantity (EOQ)
based on a trade-off of two types of cost:
• Inventory carrying cost
• Ordering cost or setup cost
• Replenishment orders placed when inventory-on-hand reaches a pre-
determined “ROP”
• currently declining in popularity and frequency of use:
• Too much emphasis on carrying inventory
• Not very useful for systems with multiple distribution centers
• Greater emphasis today on approaches which “synchronize” delivery
of shipments with timing of actual need (e.g., JIT)
 Determining the Reorder Point

The Goal is to have a shipment of EOQ units to arrive as the

Balance-On-Hand = 0

Reorder Point (ROP)

= minimum amount of inventory to last during the
replenishment or lead time
= [Lead time length (in days)] X [Demand per day (in units per
day)]
JUST-IN-TIME (JIT)
JIT is originated in Japan as part of the Toyota
Production System in the approach to a Lean
Production System.

JIT is a strategy that strives to improve a business’s

return on investment by reducing in-process inventory
and associated carrying cost.
JUST-IN-TIME
• JIT means making only “what is needed, when it is needed, and in the
amount needed.”

• JIT supplies “what is needed, when it is needed, and in the amount

needed” according to the production plan to eliminate waste,
inconsistencies, and unreasonable requirements, resulting in improved
productivity

• JIT removes inventory to expose production flaws that can be corrected or

removed in order to improve production quality and increase efficiency and
effectiveness .
JUST-IN-TIME EFFECTS
• Increase factory response time.

• Improve customer satisfaction.

• Build of make-to-order models to eliminate the risk of no being sold.

• Standardization of parts assemblers increasing product quality.

• Reduce setup time allowing the company to reduce or eliminate inventory for
“change-over” time.

• The flow of goods from warehouse to shelves improves by reducing lot sizes to
simplify inventory flow and inventory management.
JUST-IN-TIME BENEFITS
• Employees with multiple skills are used more efficiently by
having the flexibility to move employees where they are
needed.

• Production schedule and work hour consistency is

synchronized with demand by avoiding paying overtime or
focus resources to other areas.

• Increase emphasis on supplier relationship.

• Supplies comes in at regular intervals through the production

day by synchronizing the supply with the demand.
JUST-IN-TIME LIMITATIONS
• Preconditions to JIT
• Trust must be present between labor/management as well as
suppliers/consumers
• Recognition of processes
• Familiarity with problem solving
• Quality at the source
• Agreement over value and waste

• Right Settings
• Applicable in growth to maturity phases of Product Life Cycle
• Standard Product
• Standard/Fixed Pay-Rate
• Problems with Piece-Rate Scheme

• JIT operations may leave suppliers and consumers open to supply shocks
and large supply or demand changes.