Chapter 2:

logistics in the economy

Prepared by Prof. Madya Dr. Datin Norhayati Binti Shariff

Learning Objectives -
be able to:
Understand the role and importance of logistics in private and public
organizations.
Discuss the impact of logistics on the economy perspectives
1. Macro economy
2. Micro economy
analyze how effective logistics management contributes to the vitality of
the economy.
Understand the relationship/ interfaces between logistics and the other
important functional areas in a company, including manufacturing,
marketing, and finance.
Analyze logistics systems from several different perspectives to meet
different objectives in the economy, public and private organization.

2
 Dimensions of Logistics:
Introduction
Logistics has come a long way since the 1960s.
The big challenge is to manage the whole logistics system in such
a way that order fulfillment meets or exceeds customer
expectations.
Focus of this chapter is upon the economy and individual firm’s
logistics system.

3
Logistics Costs as a Percentage of
GDP relate to Malaysia Economy

To show :
1.logistics costs as a percentage of GDP have declined

2.This reflects a serious improvement in the efficiency of

logistics systems.

3.Shows a further breakdown of logistics costs.

PLEASE UPDATE THE

STATISTICS RELATED
MALAYSIA GDP Source From:
James and Lambert,
Strategic Logistic Management
Logistics in the Economy:
A Macro Perspective
As indicated in Figure 2-2, logistics costs as a percentage of
GDP have declined from 16 percent in 1980, to under 10
percent in 1999.
Early to mid-1970s saw the figure closer to 20 percent.
This reflects a serious improvement in the efficiency of
logistics systems.
Figure 2-3 shows a further breakdown of logistics costs for
1999.

5
Figure 2-3:
Total Logistics Costs --- 1999

6
Logistics in the Economy:
A Macro Perspective
As indicated in Figure 2-4, the Federal Reserve measure of
inventory to sales ratios from 1991 to 1999 clearly indicate
that companies are getting better at managing inventory.
Companies have been supporting larger amounts of sales
with decreasing amounts of inventory.

7
Logistics in the Economy:
A Macro Perspective
The two largest cost categories in logistics systems are
transportation and inventory.
While we will look at this in Chapter 9, motor carriers’ share
of total freight expenditures is $450 billion versus $99 billion
for all other carriers.
The most frequent trade-off in logistics is between
transportation and inventory cost.

8
Benefits of Logistics in Macro
Economy

This part Prepared by N. M. Aslaam Bin M. Abdul Ghani, Ph.D

9
The increase in time and especially in recent decades of the importance
given to logistics in the economy is determined by a number of factors
such as:

the cost of transport,

technical limitations in production,
inventory management,
diversification of assets,
the volume of information,
the role of computers and
the transition to quality management.
Prepared by N. M. Aslaam Bin M. Abdul Ghani,
Ph.D.
The main economic objectives of logistics are:

the reduction of inventory

inventory is considered one of the key factors, which
can affect the profit of an enterprise to a great extent.

the economy of freight,

freight is a major source of cost in logistics. This can be
reduced by following measures like selecting the proper
mode of transport, consolidation of freight, route
planning, long distance shipments etc.

Prepared by N. M. Aslaam Bin M. Abdul Ghani,

Ph.D.
The main economic objectives of logistics are:

obtaining an maintaining reliability and consistency in

delivery performance
materials required by the customer must be delivered on
time, not ahead of the schedule or behind the schedule.

insuring minimum damage to products and

sometimes products may be damaged due to improper
packing, frequent handling of consignment, and other
reasons. This damage adds to the logistics cost. The use of
proper logistical packaging, mechanized material handling
equipment, etc will reduce this damage.

Prepared by N. M. Aslaam Bin M. Abdul Ghani,

Ph.D.
The main economic objectives of logistics are:

a quicker and faster response to

customers’ demands.
a firm must have the capability to extend
service to the customer in the shortest time
frame.

Prepared by N. M. Aslaam Bin M. Abdul Ghani,

Ph.D.
 Logistics in the Firm:
The Micro Dimension

Prepared by Prof. Madya Dr. Datin Norhayati Binti Shariff

Logistics in the Firm:
The Micro Dimension
Logistics Interfaces with
Operations/Manufacturing
Logistics Interfaces with Marketing
Logistics Interfaces with Other Areas

15
Logistics in the Firm: Logistics
Interfaces with Operations
Manufacturing

Length of production runs

Balance economies of long production runs against
increased costs of high inventories.
Seasonal demand
Acceptance of seasonal inventory to balance
lead production times.

16
Logistics in the Firm: Logistics
Interfaces with
Operations/Manufacturing

Supply-side interfaces
Stocking adequate supplies to ensure uninterrupted
production now a logistics function.
Protective packaging
Principal purpose is to protect the product from damage.
Foreign & third party alternatives
Some logistics functions are being outsourced.

17
Logistics in the Firm:
The Micro Dimension

Logistics Interfaces with Marketing:

The Marketing Mix – Four Ps
Price
Product
Promotion
Place

18
Logistics in the Firm:
Price

Carrier pricing
Generally, since the larger the shipment, the cheaper the
transportation rate, shipment sizes should be tailored to
the carrier’s vehicle capacity where possible.
Matching schedules
Quantity discounts should be tied to carrier quantity
discounts.
Volume relationships
Volumes sold will affect inventory requirements.

19
Logistics in the Firm:
Product

Consumer packaging
Generally, since the size, shape, weight and other physical
characteristics of the product impact on its storage,
transportation and handling, the logistics managers should
be included in any decisions regarding these product traits.
A minor correction in any of the above could conceivably
cost (or save) millions of dollars in logistical costs.
Logistics costs are not necessarily paramount, but they need
to be considered in the decision making process.

20
Logistics in the Firm:
Promotion

Push versus pull

The most important factor is that the logistics division is
aware of any changes in demand patterns so that it can
plan for any consequences.
Pull strategies tend to be more erratic.
Push strategies tend to more predictable.
Channel competition
The more popular a product, the easier it is to persuade
channel members to promote your product.

21
Logistics in the Firm:
Place

Wholesalers
Generally, since wholesalers are combining purchases
for multiple retailers, the shipment sizes tend to be larger
and the number of transactions that have to be
processed are fewer, with the result that logistics costs
are smaller.
Retailers
With the exception of very large retailers who act more
like wholesalers, smaller sales are the norm. These
generally cost more for transportation and order
processing.

22
Logistics Interfaces with
Other Areas

Manufacturing and marketing are probably the two most

important internal, functional interfaces with logistics.
Other important interfaces now include finance and
accounting.
Logistics can have a major impact on return on assets
and return on investment.
Logistics costs reported by cost systems measure supply
chain trade-offs and performance.

23
Key Logistics Activities
Transportation Production planning
Storage Purchasing
Packaging Customer service
Materials handling Site location
Order fulfillment Other activities
Forecasting

24
 On the Line:
Toyota Distribution

Moves more than 8 million parts and accessories every month.

Computer modeling re-designed the 30 year old distribution network.
Software looked first at Lexus Division and then at the entire
network.
Resulted in two DCs, one in California, another in Kentucky, feeding
nine smaller DCs located around the country.
The new network both improved customer service and lowered
costs.

25
Approaches to Analyzing Logistics Systems:
Materials Management v. Physical
Distribution

Frequently the movement and storage of raw materials is far

different from the movement and storage of finished goods.
Four different classifications of logistics systems
Balanced system - e.g., consumer products
Heavy inbound - e.g., aircraft, construction
Heavy outbound - e.g., chemicals
Reverse systems - e.g., returnable products

26
Approaches to Analyzing
Logistics Systems
Cost Centers
Treating logistics activities as cost centers makes it easier to
study cost trade-offs between the centers. (see Tables 2-2
and 2-3)
Nodes versus Links
Nodes are spatial points (warehouses, plants, etc.);
Links are the transportation network (rail, motor, air, pipe and
water). (see Figure 2-6)
Logistics Channel
The network of intermediaries involved in the logistics system.
(see Figures 2-7, 2-8, and 2-9)

27
Table 2-2 Analysis of Total Logistics Cost
with a Change to Higher Cost Mode of
Transport

Cost Centers Rail Motor

Transportation $ 3.00 $ 4.20
Inventory 5.00 3.75
Packaging 4.50 3.20
Warehousing 1.50 .75
Cost of Lost
2.00 1.00
Sales
Total Cost $ 15.00 $ 13.00
28
Table 2-3 Analysis of Total Logistics
Cost with a Change to More
Warehouses

System 1 System 2
Cost Centers Three Five
Warehouses Warehouses
Transportation $ 850,000 $ 500,000
Inventory 1,500,000 2,000,000
Warehousing 600,000 1,000,000
Cost of Lost
350,000 100,000
Sales
29

Total Cost $ 3,300,000 $ 3,600,000

Figure 2-6 Nodes and Links in
a Logistics System

30
Figure 2-7
A Simple Logistics Channel

31
Figure 2-8
A Multi-Echelon Logistics
Channel

32
Figure 2-9
A Complex Logistics Channel

33
End of Chapter 2 Slides