Supply Chain

Management,
11e
Chapter 3: Role of Logistics in Supply
Chains

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 Discussion Outline
• Value-added roles of logistics
• Key logistics activities
• Macro perspective on logistics
• Micro dimension of logistics
• Logistics and systems analysis

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 What Is Logistics?
Logistics can be viewed as part of organizational management with four
major subdivisions.

1. Business Logistics. Part of supply chain that plans, implements, and controls
the flow and storage of goods, services, and related information.
2. Military Logistics. Design and integration of all aspects of support for the
operational capability of the military forces and their equipment.
3. Event Logistics. Network of activities, facilities & personnel required to
organize, schedule & deploy the resources for an event to take place and
withdraw after the event.
4. Service Logistics. Acquisition, scheduling & management of facilities, assets,
personnel & materials to support a service operation & business.
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 Value-added Roles of Logistics
Five Principal Types of Economic Utility
Economic Utility
 Time
 Form
 Possession
 Quantity
 Place

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 Value-added Roles of Logistics

Generally, production/manufacturing activities are credited with providing form

utility; logistics activities with time, place, and quantity utilities; and marketing
activities with possession utility.

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 Key Logistics Activities

1. Transportation 8. Production planning & scheduling

2. Storage 9. Procurement
3. Industrial packaging 10. Customer service
4. Materials handling 11. Plant & warehouse site location
5. Inventory control 12. Others*
6. Order fulfillment * Others include parts and service
support, return goods handling, and
7. Demand forecasting salvage and scrap disposal.

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Macro Perspective on
Logistics

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Macro Perspective on Logistics
U.S. Business Logistics Costs

Source Figure 3.2: Reproduced with permission from Council of Supply Chain
Management Professionals.
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 Macro Perspective on Logistics
U.S. Logistics Costs as Percent of GDP

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 Macro Perspective of Logistics
U.S. Business Logistics Costs – 2018 (1 of 2)
US business logistics costs ($ billion) 2018 YoY 18/17 5-yr. CAGR
Transportation costs
Full truckload 296.1 7.6% 3.6%
Less-than-truckload 71.8 8.3% 3.5%
Private or dedicated 300.9 13.1% 7.1%
Motor carriers 668.8 10.1% 5.1%

Source: CSCMP’s 30th Annual State of Logistics Report, 2019

Parcel 104.9 8.7% 8.0%
Carload 61.4 7.2% −0.6%
Intermodal 27.0 28.7% 8.1%
Rail 88.4 12.9% 1.6%
Air freight (includes domestic, import, export, cargo, and express) 76.5 9.2% 3.8%
Water and ports (includes domestic, import, and export) 45.7 12.8% 1.5%
Pipeline 53.0 12.7% 12.7%
Subtotal 1,037.4 10.4% 5.1%

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 Macro Perspective of Logistics
U.S. Business Logistics Costs – 2018 (2 of 2)
US business logistics costs ($ billion) 2018 YoY 18/17 5-yr. CAGR
Inventory carrying costs
Storage 153.1 3.2% 3.0%

Source: CSCMP’s 30th Annual State of Logistics Report, 2019

Financial cost (WACC × total business inventory) 192.5 26.0% 3.0%
Other (obsolescence, shrinkage, insurance, handling, others) 148.1 14.8% 3.0%
Subtotal 493.7 14.8% 3.0%
Other costs
Carriers’ support activities 52.3 10.3% 4.5%
Shippers’ administrative costs 52.1 2.8% 5.3%
Subtotal 104.4 6.4% 4.9%
Total US business logistics costs 1,635.46 11.4% 4.4%

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 Micro Dimensions of
Logistics
Logistics Interface with other functional areas
Factors affecting cost & importance of logistics

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 Micro Dimensions of Logistics
Logistics Interfaces with Other Functional Areas
Manufacturing Marketing (4 Ps – Marketing Mix)
• Length of the production run • Price (e.g. purchase quantity
• Available quantity of raw material and discounts)
component • Product (e.g. size, shape, weight,
• Industrial packaging packaging)
• Promotion
• Place (distribution channel selection)
Logistics
Finance Accounting
• Inventory • Cost information for analysis of
• Warehouses & transportation fleet alternative logistics options
owned and/or outsourced • Supply chain tradeoffs and
• Customer service performance measurement

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 Micro Dimensions of Logistics (1 of 5)
Factors Affecting Cost & Importance of Logistics
1. Competitive relationships
2. Order cycle length
3. Substitutability
4. Inventory effect
5. Transportation effect
6. Product-related factors
7. Spatial relationships

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 Micro Dimensions of Logistics (2 of 5)
Factors Affecting Cost & Importance of Logistics
Competitive
Order Cycle Length Substitutability
Relationships

• Customer service can • Shorter order cycles • Customer service is

be a very important reduce the inventory important for highly
form of competition. required by the substitutable products
customer. to reduce lost sales
cost.

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 Micro Dimensions of Logistics (3 of 5)
Factors Affecting Cost & Importance of Logistics

Inventory Effect Transportation Effect Spatial Relationships

• Increasing inventory • Cost of lost sales can • The location of fixed

costs can reduce the be reduced by points in the logistics
cost of lost sales. spending more on system with respect to
transportation service demand and supply
to improve customer points are very
service. important to
transportation costs.

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 Micro Dimensions of Logistics (4 of 5)
Factors Affecting Cost & Importance of Logistics
Product-related Factors
• Dollar value. The product’s dollar value typically affects warehousing costs, inventory
costs, transportation costs, packaging costs, and even materials-handling costs.
• Density. Weight/space ratio affects transportation and warehousing costs. As
density increases for a product, its transportation and warehousing costs tend to
decrease.
• Susceptibility to damage. The greater the risk of damage to a product, the higher
the transportation and warehousing cost.
• Special handling requirements. Need for special handling (e.g. refrigeration,
heating, or strapping) will usually increase warehousing, transportation, and
packaging costs.
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 Micro Dimensions of Logistics (5 of 5)
Factors Affecting Cost & Importance of Logistics
Spatial Relationship Example

Source Figure 3.11: Center for Supply Chain Research, Penn State University.
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Logistics and Systems
Analysis

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 Logistics and Systems Analysis
Short-run and Long-run Analysis
Short-run or Static Analysis
• Concentrates on a specific point in time or level of production output.

Long-run or Dynamic Analysis

• Examines a logistics system over a long time period or range of output.

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 Logistics and Systems Analysis
Approaches to Analyzing Logistics Systems
The analysis of logistics systems may require different views or perspectives of logistics activities.

• Materials management vs. physical distribution

− Examine logistics as inbound vs. outbound logistics.
• Cost centers
− Examine logistics activities as cost centers, allowing tradeoffs between them to be analyzed.
• Nodes vs. links
− Examine nodes (fixed spatial points where goods stop for storage or processing) vs. links
(transportation network that connect the nodes in the logistics system).
• Logistics channels
− Examine supply chain of network organizations engaged in transfer, storage, handling, communication,
and other functions that contribute to product flow.

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 Summary
• Logistics adds place, time, and quantity utilities to products and enhances the
form and possession utilities added by manufacturing and marketing.
• Key logistics activities are transportation, inventory, warehousing, materials
handling, industrial packaging, customer service, and forecasting.
• On a macro basis, logistics-related costs have helped the U.S. economy maintain
its competitive position on a global basis.
• On a micro basis, logistics interface with other functional areas which aids in
making organizations more efficient and effective.
• The cost of logistics systems can be affected by market competition, spatial
relationship of nodes, and product characteristics.
• Four approaches to analyzing logistics systems are: materials
management vs. physical distribution, cost centers, nodes vs. links,
and distribution channels.
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