Chap 2- Integrated logistics and

supply chain relations

 Bullet
Pressures Pointlogistics
to improve Slide
• Customers are more knowledgeable and
demand high quality, low cost and better service
• Competition is getting fiercer and organisations
must look at every opportunity to remain
competitive.
• There are changing poers in supply chain. Very
large retail chains like Walmart, Tesco and Mc
Donald demand customised logistics from their
suppliers.
• Other changes in retail include the 24 hour
opening, home deliveries, out-of-the –town
malls and online shopping.
• International trade continues to grow. This is
encouraged by free trade areas such as the
European Union and North American free
trade area.
• Oragnisations are introducing new types of
operation, such as just-in-time, lean
operations, time compression, flexible
manufacturing,mass customization etc.
• Some organisations are turning from product focus
to process focus.
• There have been considerable improvements in
communication. These allow EDI, item coding,
Electronic fund transfer, E-commerce , shared
knowledge system.
• Organisations are increasing cooperation through
alliances, partnerships and other arrangements. This
integration is important for logistics which is usually
the main link between organisations in supply chain.
Suppy chain Mgt
Components of supply chain management
 Introduction
• Supply Chain Management (SCM) maximizes
profit by integrating three key flows across the
boundaries of the companies that form the
supply chain: flow of value
(product/materials), information, and funds.
Successful integration or coordination of these
three flows produces improved efficiency and
effectiveness for business organizations.
• In theory, supply chains can work as cohesive,
singularly competitive units similar to a large,
vertically integrated firm, without significant
financial investments by the members of the
chain. The basic difference between vertically
integrated firms and a supply chain is that
firms in a supply chain are relatively free to
enter and leave supply chain relationships if
these relationships are no longer proving
beneficial.
 Definition
• A supply chain is the management of a
network, which is used to deliver products and
services, from the raw-material to the
customers, through physical distribution, flow
of information, and cash. A supply chain, in
view of the above supply chain management
definition, comprises a network of both
processes and entities.
 Objective
• Maximise the overall value generated – is the difference
between what the final product is worth to the customer and
the effort the supply chains expends in filling the request of
the customer
• Supply chain profitability is the difference between the
revenue generated from the customer and the overall cost
across the supply chain.
• It is the total profit to be shared across all supply chain stages
• Supply chain success is measured in terms of supply chain
profitability and not in terms of the profits at an individual
stage
• Revenue is from customer – positive cash flow
• All other cash flows are simply fund exchanges
that occur within the supply chain given that
different stages have different owners
• All flows of information, product or funds
generates costs within the supply chain
• Supply chain management involves the
management of flows between and among
stages in a supply chain to maximise total supply
chain profitability
Problems with fragmented logistics
• Traditionally the activities within the logistics
have been managed separately, sothat an
organization might have a distinct purchasing
department, transport department,
warehouse, distribution fleet and so on.
Dividing logistics in such way creates
problems.
• Purchasing might look for the more reliable
suppliers, inventory control for the low unit
costs, warehousing for fast stock turnover,
material management for easy handling,
transport for full vehicle loads and so on. These
aims might seem worthy but becomes a problem
when the aim turns into conflict.
• Eg: Warehousing might save money by reducing
the stock of raw material but this leads to more
frequent shortages and raises the cost of
expediting for purchasing and emergency
deliveries for transport.
• A fragmented supply chain also makes it difficult to co-
ordinate the flow of information through different
systems. Suppose a production dept knows that it is
running short of material and needs new delivery, this
information should pass seamlessly to purchasing.If
however it has to pass from one system to another there
is greater chances oerror, uncertainty, delay and
inefficiency-resulting in late delivery, emergency orders,
shortages.
• Fragmenting logistics into different parts has the
disadvantages of:
• Duplicating effort and reducing productivity
• Giving worse communications and information flows
between the parts
• Increasing uncertainty and delays along supply chain
• Making planning more difficult
• Giving logistics a low status within an organization.
• Reducing co-ordination between the parts –leading
to lower efficiency, higher cost and worst customer
service.
• Introducing unnecessary buffers between the parts
such as stocks of work in progress, additional
transport and administrative procedures.
Integrating logistics within an organisation

There should be an increasing integration of

supply chain. Organisations cannot work in
isolation , but must co-operate with other
organisations in the supply chain to achieve
their wider objectives. Logistics should not be
considered as a series of distinct activities, but
as a single integrated function. Then all the parts
work together to get the best overall result of
the organization.
 INTEGRATED LOGISTICS.
• Logistics integrates the activities such as
– Facility location and network design.
– Information Management.
– Transportation Management.
– Inventory Management.
– Warehousing Management.
– Material Handling and
- Packaging
• Logistics integrates the above activities into a single
activity or process of logistics directed towards
servicing the customer effectively and at the lowest
total cost of all the functional activities taken
together.
• INTEGRATED LOGISTICS is defined as “ the process
of anticipating customer needs and wants;
acquiring the capital, materials, people ,
technologies and information necessary to meet
those needs and wants; optimizing the goods-or-
service-producing a network to fulfill customer
requests; and utilizing the network to fulfill
customer request in a timely way.”
• Integrated logistics is a service-oriented
process. It incorporates actions that help
move the product from the raw material
source to the final customer.
 Operations involved in Integrated
logistics model.
• Inbound logistics: It is referred to as procurement or
physical supply. It deals with the relationship between
the firm and its suppliers. It addresses the flow of
materials from the suppliers to the plant or into
service operations.
•  Conversion / operations: It deals with the logistical
relationship between and among the facilities of the
firm. It addresses how goods and materials move
among workstations within operations.
• Outbound logistics: It is referred to as physical
distribution. It is the logistical relationship
between the firm and its customers. It is the
movement of s finished product out of the
plant to the final customer.
• Each of these relationships is sustained by the
execution of 5 primary logistics activities like
transportation, facility structure, inventory
management, material handling and
communication / information. These activities
are interwoven throughout the integrated
logistics system. Each is vital and is found at
every stage.
•
• A well designed , integrated logistics system is a vital
prerequisite for commercial success
• Integrating logistics within an organization has all the
related activities working together as a single function.
• This is responsible for all storage and movement of
materials throughout the organization.
• It tackles problems from the view point of the whole
organization , and looks for the greatest overall
benefit.
• Combining the two functions of material
management and physical distribution into single
function responsible for all material movement
into, through and out of the organization. This
completes the internal integration of an
organization’s logistics.
• Another factor which encourages internal
integration is the analysis of the total logistics cost.
• Total logistics cost=transport cost +ware house
cost+ stock holding cost + packaging cost +
information processing cost+ other logistics
overhead.
 Benefits of integration
• genuine co-operation between all parts of the supply
chain, with shared information and resources
• lower costs – due to balanced operations, lower stocks,

less expediting, economies of scale, elimination of

activities that waste time or do not add value, and so on .
• improved performance – due to more accurate forecasts,
better planning, higher productivity of resources, rational
priorities, and so on
• improved material flow, with co-ordination giving faster
and more reliable movements
• better customer service, with shorter lead times,
faster deliveries and more customisation
• more flexibility, with organisations reacting faster
to changing conditions
• standardised procedures, becoming routine and
well-practiced with less duplication of effort,
information, planning, and so on
• reliable quality and fewer inspections, with
integrated quality management programmes
The benefits of external integration may be clear, but
there are many practical difficulties of achieving them.
Many organisations simply do not trust other
members of the supply chain, and they are reluctant
to share information.
• Eg:Confederated Bottlers used to deliver bottles
from their main plant in Elizabethville to a
brewery in Johnston, 115 miles away. The
brewery filled the bottles and took them to a
distribution centre 20 miles outside
Elizabethville. Both companies used their own
trucks to deliver products, returning empty.
Eventually, they formed a joint transport
company that used the same trucks for both
deliveries. Not surprisingly, the transport costs
almost halved. This example shows one obvious
benefit of integration, but there are many others.
 ACHIEVING INTEGRATION
• Co-operation and conflict :Normally, a supply
chain consists of distinct organisations, each
working for their own benefit. So why should
they co-operate? Why should one company
work to benefit another? The answer is that
external integration brings benefits that can
be shared among all members of the supply
chain.
 Different types of co-operation
• There are several ways that organisations can
co-operate. They can, of course, simply do
business together. If an organisation has a
good experience with a supplier, it will
continue to use them and over some period
will develop a valuable working relationship.
• Sometimes the cooperation is more positive, such
as small companies making joint purchases to get
the same quantity discounts as larger companies;
EDI links to share information; combining loads to
reduce transport costs; agreed package sizes to ease
material handling, lists of preferred suppliers, and so
on.
• The key point with these informal arrangements is
that there is no commitment. This is probably how
you shop, as you have favourite shops but are not
obliged to use them. Japanese companies take this
approach further forming Keiretsu – which are
groups of organisations that work together without
actually forming partnership.
• An informal arrangement has the advantage of
being flexible and non-binding. On the other hand,
it has the disadvantage that either party can end
the co-operation without warning, and at any time
that suits them. This is why many organisations
prefer a more formal arrangement, with a written
contract setting out the obligations of each party.
These are common when organisations see
themselves as working together for some time.
• More formal agreements have the advantage
of showing the details of the commitment, so
that each side knows exactly what it has to do.
On the other hand, they have the
disadvantage of losing flexibility and imposing
rigid conditions.
 Strategic alliances
• When an organisation and a supplier are
working well together, they may both feel that
they are getting the best possible results and
neither could benefit from trading with other
partners. Then they might look for a long-term
relationship that will guarantee that their
mutual benefits continue. This is the basis of a
strategic alliance or partnership.
 The following list gives the main features of
alliances:
• Organisations working closely together at all levels
• senior managers and everyone in the organisations supporting
the alliance
• shared business culture, goals and objectives
• openness and mutual trust
• long-term commitment
• shared information, expertise, planning and systems
• flexibility and willingness to solve shared problems
• continuous improvements in all aspects of operations
• joint development of products and processes
• guaranteed reliable and high quality goods and
• SUPPLIER PARTNERING is ‘an ongoing relationship
between firms, which involves a commitment over
an extended time period, and a mutual sharing of
information and the risks and rewards of the
relationship.
• Partnerships can lead to changes in operations. For
example, the stability of a partnership might
encourage suppliers to specialise in one type of
product. They give such a commitment to the
alliance that they reduce their product range, make
these as efficiently as possible, and concentrate on
giving a small number of customers a very high
quality service.
 Vertical integration
• VERTICAL INTEGRATION describes the amount
of a supply chain that is owned by one
organisation.
• Another option is for two organisations to start
a joint venture, where they both put up funds
to start a third company with shared
ownership. A manufacturer and supplier might
together form a transport company for moving
materials between the two.
 Logistical competency •
• Is a relative assessment of a firm's capability
to provide competitively superior customer
service at the lowest possible total cost.
• This typically means that logistical
performance is dedicated to supporting any or
all marketing and manufacturing requirements
in a manner that exploits delivery capability.
• In short, the strategy is to provide superior
service at a total cost below industry average.
• One of several competencies required to
create customer value is logistics.
• When logistics becomes a cornerstone of
basic business strategy, it must be managed as
a core competency.
 Network Design
• Typical logistics facilities are manufacturing
plants, warehouses, cross-dock operations and
retail stores.
• Determining how many of each type of facility
are needed, their geographic locations, and the
work to be performed 'at each is a significant
part of network design.
• In specific situations, facility operation may be
outsourced to service specialists.
 Information
• Current technology is capable of handling the
most demanding information requirements.
• Information can be obtained on a real-time
basis.
• Managers are learning how to use such
information technology to devise new and
unique logistical solutions.
 Transportation
• Transportation requirements can be accomplished in three
basic ways.
• First of all, a private fleet of equipment may be operated.
• Second, contracts may be arranged with transport specialists.
• Third, an enterprise may engage the services of a wide
variety of carriers that provide different transportation
services on an individual shipment basis.
• These three forms of transport are typically referred to as
private, contract, and common carriage. From the logistical
system viewpoint, three factors are fundamental to
transportation performance: cost, speed, and consistency
• Speed of transportation is the time required to
complete a specific material movement.
• Consistency of transportation refers to
variations in time required to perform a
specific movement over a number of
shipments.
• Speed and consistency combine to create the
quality aspect of transportation. In the design
of a logistical system, a delicate balance must
be maintained between transportation cost
and quality of service
 Inventory
• The inventory requirements of a firm depend on the
network structure and the desired level of customer
service.
• The objective is to achieve the desired customer
service with the minimum inventory commitment,
consistent with lowest total cost.
• Logistical strategies are designed to maintain the
lowest possible financial assets in inventory. The basic
goal of inventory management is to achieve maximum
turnover while satisfying customer commitments.
• Inventory strategies need to be focused on
meeting requirements of such core customers.
• The key to effective segmented logistics rests in
the inventory priorities designed to support core
customers.
• Most enterprises experience a substantial
variance in volume and profitability across
product lines.
• If no restrictions are applied, a firm may find that
less than 20 percent of all products marketed
account for more than 80 percent of total profit.
 Warehousing, material handling, and
packaging
• Warehousing, material handling, and packaging are
an integral part of other logistics areas.
• For example, merchandise typically needs to be
warehoused at selected times during the logistics
process.
• Transportation vehicles require material handling for
efficient loading and unloading. Finally, the individual
products are most efficiently handled when packaged
together into shipping cartons or other types of
containers.
• Within the warehouse, material handling is an
important activity. • Products must be
received, moved, sorted, and assembled to
meet customer order requirements.
• The direct labor and capital invested in
material handling equipment are a major part
of total logistics cost. A variety of mechanized
and automated devices exist to assist in
material handling.
 Barriers to internal logistics

Organizations do not implement internal logistics

integration in a vacuum. It is important to recognize
obstacles, or barriers, that often serve to inhibit
internal process integration. Integration barriers
originate in traditional practices related to organization
structure, measurement systems, Inventory ownership,
information technology, and knowledge transfer
capability. Each potential barrier is discussed below. 
• Organization Structure 

The traditional organization structure for

conducting business prevents any cross- functional
process from being implemented. Most traditional
organizations are structure to divide authority and
responsibility according to functional work. In
essence, both structure and budget closely follow
the work to be performed. The traditional practice
is to assemble all persons related to performing
specific work into a functional department such as
inventory' control, warehousing operations. or
transportation.  
• Each of these organizations becomes concerned
with achieving its own functional excellence. Since
the goal of integration is cooperation among
functional areas, the formal organizational structure
can hinder success. Popular terms to describe
traditional functions are the sandbox or silo
nieiztalitv. In part, this managerial preoccupation
with function is caused by the fact that most man-
agers are rewarded for achieving functional
excellence. The general belief that prevailed was
that functions, excellently executed, would combine
to create overall superior performance.
• Successful integration of a process such as logistics
requires managers to look beyond their
organizational structure and facilitate cross-
functional coordination. This may or may not be
best accomplished by creating a new organization
structure. However, regardless of whether the
organization structure is realigned, significant
modification of how an organization deals with
cross- functional matters is essential for successful
process integration.
• Measurement Systems 

Traditional measurement systems have also made cross-

functional coordination difficult. Most measurement
systems mirror organization structure. To successfully
facilitate integration of logistics functions, a new scorecard
must be developed. Managers must he encouraged to view
their specific functions as pail of a process rather than as
stand-alone activities. Managers may. at times, have to
assume increased costs within their functional area for the
sake of lower costs throughout the process. Unless a
measurement system is created that does not penalize
managers, logistical integration will be more theory than
practice. 
• Inventory Ownership 

It is a fact that inventory can help a specific function

achieve its mission. The traditional approach to inventory
ownership is to maintain adequate supply to gain comfort
and protect against demand and operational uncertainty.
The availability of inventory, for example. can support long
manufacturer runs resulting in maximum economy of
scale. Forward commitment of inventory to local markets
can also serve to facilitate sales. While such practices
create benefits. they have a related cols The critical issue is
the cost - benefit relationship and the risks related to
incorrectly located or obsolete inventory. 
• Information Technology 

Information technology is the key resource to achieve

integration. However, similar to performance
measurement, information system applications tend to
be designed along organization lines. Many databases
are limited to specific functions and are not easily
accessed on a cross-functional basis. The need to shoe
information has resulted in the development of data
warehouses that exist for the sole purpose of sharing
information between systems. Until schemes are
developed to transfer information, the existing
applications can serve as a barrier to process integration
because critical data cannot he readily shared. 
• Knowledge Transfer Capability 

Knowledge is power in most business situations.

An additional barrier to integration is limitation
in the ability to share experience. Failure to
transfer intonation or knowledge containment
tends to foster the functional orientation by
developing a workfare composed of specialists.
The failure to transfer knowledge can also
create a barrier to continued integration when
an experienced employee retires or for some
other reason leaves the firm.
• In many cases, replacement personnel are not
available to . learn'' from the experienced
worker. The more serious situation is a failure of
many firms to develop procedures and systems
for transferring cross functional knowledge.
Process work often involves many employees
and is not limited to any specific functional
area. Transfer of this type of knowledge and
experience is difficult to standardize.
 Physical distribution
• The area of physical distribution concerns movement of a
finished product to customers. In physical distribution, the
customer is the final destination of a marketing channel.
The availability of the product is a vital part of each
channel participant’s marketing effort. Even a
manufacturer’s agent, which typically does not own
inventory, must depend on inventory availability to
perform expected marketing responsibilities. Unless a
proper assortment of products is efficiently delivered
when and where needed, a great deal of the overall
marketing effort can be jeopardized
• . It is through the physical distribution process that
the time and space of customer service become an
integral part of marketing. Thus physical distribution
links a marketing channel with its customers. To
support the wide variety of marketing systems that
exist in a highly commercialized nation, many
different physical distribution systems are utilized.
All physical distribution systems have one common
feature: they link manufacturers, wholesalers, and
retailers into marketing channels that provide
product availability as an integral aspect of the
overall marketing process.
 A distribution centre
• A distribution center is a facility or a group of facilities
that perform consolidation, warehousing, packaging,
decomposition and other functions linked with handling
freight. Their main purpose is to provide value-added
services to freight, which is stored for relatively shorts
periods of time (days or weeks). Goods stored in a
distribution center have usually been sold and are in
transit to their destination. They can also perform light
manufacturing activities such as assembly and
labeling. A distribution center tends to focus on the
demand of customers.
 Distribution centres in the logistic system

• In order to realize economies of scale, a distribution

company may build its own DCs, or several companies
may share one DC. Generally, distribution centres can be
classified into the following six categories:
• distribution centres built by manufacturers (MDC)
• distribution centres built by wholesalers;
• distribution centres built by truckers;
• distribution centres built by retailers (ReDC);
• regional distribution centres – serving retail stores or
outlets within a particular (small) area;
 Basic functions of the distribution centre

• There are eight primary functions of the DC:

receiving; warehousing; order picking; moving
and handling; reprocessing and assembling;
sorting and merging; checking; and vehicle
route scheduling.
Factors Influencing Distribution and Logistics

• Customer Service: The customer service is of

great importance to the logistics. A company
should consider minimizing buyer inventory
costs to be just as important as keeping
product price low, since minimizing such costs
will contribute to more profit or in turn enable
the seller to be more competitive.
• Order Cycle: The order cycle length directly
affects inventory requirement is a well-
accepted principle of logistics management;
stated another way; the shorter the cycle, the
fewer inventories is required. Order cycle as
the time it takes for a customer to receive an
order once he or she has decided to place it. It
includes elements such as order transmittal
time, order preparation time, and
transportation time.
• Substitution: Substitutability very often affects
the importance of customer service. In other
words, if a product is similar to other
products, consumers may be willing to
substitute a competitive product if a stock out
occurs. Therefore, customer’s service is more
important for highly substitutable products
than for products that customer may be
willing to wait for or back order. In this case
the logistics manager should spend more on
transportation.
• Transportation :Effect Companies usually
trade off increased transportation costs
against decreased lost sales costs. For
transportation, this additional expenditure
involves buying a better service. For example,
switching from water to rail, or rail to motor,
or motor to air. The higher transportation
costs also could result from shipping more
frequently in smaller quantities at higher
rates.
• Impact of Transportation Costs :Transportation
rates reflect the risk associated with the
movement of goods. There is often more chance
for damage with higher value goods; damage to
such goods will cost the transportation company
more to reimburse. Transportation companies
also tend to change higher rates for higher value
products because their customers can typically
afford to pay a higher rate for such products. A
relationship exists between the product value
and the rate amount in transportation rate
structures.
• Density :Density which refers to the
weight/space ratio. An item that is lightweight
compared to the space it occupies. For
example, household furniture has low density.
Density affects transportation and
warehousing costs and transportation costs
tend to fall. In establishing their rates,.
Transportation companies consider how much
weight they can fit into their vehicles, since
they quote their rates.
• Distance: The distance factor or spatial
relationship may affect logistics costs in ways
other than transportation costs. For example,
a firm located far from one or more of its
markets may need to use a market-oriented
warehouse to make customer deliveries in a
satisfactory time period. Therefore, distance
can add to warehousing and inventory
carrying costs. It may also increase order
processing costs
• Cost :Most organizations want low costs, but some adopt a
positive strategy of minimizing their logistics costs. This leads
to higher profits for the organization and lower prices for
customers.
• Customer Service :Logistics controls stock levels, delivery
times, speed of response, and other measures of customer
service. By concentrating the logistics strategy on customer
service, organizations can get a long-term competitive
advantage.
• Timing :Customers generally want products as soon as
possible, so a common logistics strategy guarantees fast
deliveries. Timing can also mean rapid supply of new products,
or delivering at the time specified by a customer.
• Technology: Logistics uses a wide range of technologies
for communication, tracking loads, sporting parcels,
identifying products, recording stock movements, and so
on. Some organizations have a strategy of developing and
using the latest technologies.
• Location: Customers generally want products to be
delivered as close to them as possible. This might mean
that a book club delivers directly to door, a shop has a
convenient location in a town centre, or a wholesaler has
a regional logistics centre near to major cities. One
logistics strategy is to provide a service in the best
possible location, such as bus station in town centers.
 Distribution is Important Because
• Firstly, it affects sales - if it’s not available it
can’t be sold. Most customers won’t wait.
• Secondly, distribution affects profits and
competitiveness since it can contribute up to
50 percent of the final selling price of some
goods. This affects cost competitiveness as
well as profits since margins are squeezed by
distribution costs.
• Thirdly, delivery is seen as part of the product
influencing customer satisfaction. Distribution and
its associated customer service play a big part in
relationship marketing
• Decisions about physical distribution are key
strategic decisions. They are not short term.
Increasingly it involves strategic alliances and
partnerships which are founded on trust and
mutual benefits. We are seeing the birth of
strategic distribution alliances. You can see
Cavinkare as a marketing and distribution company
how it is providing solutions for its customers. .
• Channels change throughout a product’s life
cycle. Changing lifestyles, aspirations and
expectations along with the IT explosion offer
new opportunities of using distribution to
create a competitive edge.