Fundamentals of Supply Chain Management

BCSC 611

PhD in Project Management & Entrepreneurship (Australia)

Master of Applied Project Management (Australia)
Certified Project Management Professional (PMP)®
Dr. Torky Althaqafi Certified Enterprise Risk Management Specialist (CERMS)

Email: tmalthaqafi@uj.edu.sa Certified Strategic Planning & KPIs Practitioner

Certified International Supply Chain Professional
(SPKP)
(CISCP)
College of Business Certified International Supply Chain Consultant (CISCC)
University of Jeddah Accredited SME Consultants (ASMEC)
Chapter 3:
Logistics
 Learning Objectives
• Logistical value proposition
• Work of logistics
• Logistical operations
• Logistical integration objectives
• Logistical operating directives
• Flexible structure
• Supply chain synchronization
 Logistics of Business is Big and Important!
• No other business operations involve the complexity or span the geography
• Around the globe, 24 hours of every day, 7 days a week, 52 weeks a year…
• Concerned with getting the right products to the right place at the right time.
• One of the most exciting and challenges areas of Supply Chain Management
• Rapid change of pace taking place in best practice can be characterized as a
renaissance!
Logistics Management
• Definition
Process and activities that create value focused on the design and
administration of a system to control the timing and geographical
positioning of raw materials, work-in-process, and finished inventories
at the lowest total cost
• Discussion will focus on the Logistics of Integrated Supply Chain
Management
Logistics Value Proposition
Logistics Value Proposition
• Logistics should be managed as a integrated effort to achieve
customer satisfaction at the lowest total cost.
• Logistics performed in this manner creates VALUE!
• Elements of the logistical value proposition include Service and Cost
Minimization.
Logistics Value Proposition
• Service benefits
• Cost benefits
• Value generation
Logistics Service Benefits
• Alignment of capabilities with firm goals and financial constraints:
The more significant the service failure impact upon a customer’s
business, the greater priority placed on error-free logistical
performance.
• Elements
– Availability – having inventory meet customer requirements
– Operational Performance – time required to deliver an order
– Service Reliability – quality of performance, how consistent?
Logistics Cost Benefits
• Cost Minimization –
 Total Landed Cost
Total landed cost is the sum of expenses associated with shipping a product from the
supplier to the buyer.
 Total Cost Logistics Model
A total cost logistics model is a framework that considers all the costs associated with
the movement and storage of goods and products, and aims to minimize the total
cost while meeting customer service objectives
 Activity-based costing capabilities
Activity-based costing (ABC) is a method of assigning overhead and indirect costs to
related products and services based on the activities that consume those costs
Logistics Cost Benefits
• Total Landed Cost
For example, if you are importing a product from Italy to sell in the U.S., you
may have the following costs:
• Product cost: $20 per unit
• Shipping cost: $2 per unit
• Duties: 2% of the product cost ($0.40 per unit)
• Insurance: 5% of the product cost plus shipping cost ($1.10 per unit)
• Processing fee: $2 per unit

• Total landed cost = $20 (product) + $2 (shipping) + $0.40 (duties) + $1.10

(insurance) + $2 (processing) = $25.50 per unit
Logistics Cost Benefits
 Total Cost Logistics Model
Here is an example of a total cost logistics model for a clothing company that imports
clothes from a manufacturer in China and sells them in the KSA.
 Product cost: $20 per unit
 Shipping cost: $2 per unit
 Duties: 2% of the product cost ($0.40 per unit)
 Insurance: 5% of the product cost plus shipping cost ($1.10 per unit)
 Processing fee: $2 per unit
 Inventory cost: $2 per unit Total landed cost = $20 (product) + $2 (shipping) +
 Warehousing cost: $1.5 per unit $0.40 (duties) + $1.10 (insurance) + $2 (processing) =
 Packaging cost: $1 per unit $25.50 per unit
 Administrative cost: $3 per unit

Total logistics cost = Total landed cost + Inventory cost + Warehousing cost + Packaging cost +
Administrative cost = $25.50 + $2 + $1.5 + $1 + $3 = $33.00 per unit
Logistics Cost Benefits
 Activity-based costing capabilities
• Here is an example of activity-based costing for a toy company that produces two types of toys: cars and
dolls. The company has the following costs for the year:

• Direct materials: $100,000 for cars and $50,000 for dolls

• Direct labor: $200,000 for cars and $100,000 for dolls

• Overhead: $300,000, which consists of:

• Machine maintenance: $50,000, driven by machine hours
• Quality inspection: $100,000, driven by number of inspections
• Packaging: $50,000, driven by number of packages
• Electricity: $100,000, driven by machine hours
Logistics Cost Benefits
 Activity-based costing capabilities
• The company produces 10,000 cars and 5,000 dolls in the year. The activity information for the year is as follows:

• Machine hours: 20,000 for cars and 10,000 for dolls

• Number of inspections: 1,000 for cars and 500 for dolls

• Number of packages: 10,000 for cars and 5,000 for dolls

To calculate the activity-based costing for each product, the company needs to follow these steps:

1. Identify the cost pools and cost drivers for each overhead activity.

• Machine maintenance: cost pool = $50,000, cost driver = machine hours

• Quality inspection: cost pool = $100,000, cost driver = number of inspections

• Packaging: cost pool = $50,000, cost driver = number of packages

• Electricity: cost pool = $100,000, cost driver = machine hours

Logistics Cost Benefits
 Activity-based costing capabilities
2. Calculate the cost driver rate for each cost pool by dividing the total cost by the total cost driver units.

• Machine maintenance: cost driver rate = $50,000 / 30,000 machine hours = $1.67 per machine hour

• Quality inspection: cost driver rate = $100,000 / 1,500 inspections = $66.67 per inspection

• Packaging: cost driver rate = $50,000 / 15,000 packages = $3.33 per package

• Electricity: cost driver rate = $100,000 / 30,000 machine hours = $3.33 per machine hour
Logistics Cost Benefits
 Activity-based costing capabilities
3. Assign the overhead costs to each product by multiplying the cost driver rate by the number of cost driver units for
each product.

• Machine maintenance:
• Cars: $1.67 x 20,000 machine hours = $33,400
• Dolls: $1.67 x 10,000 machine hours = $16,700

• Quality inspection:
• Cars: $66.67 x 1,000 inspections = $66,670
• Dolls: $66.67 x 500 inspections = $33,335

• Packaging:
• Cars: $3.33 x 10,000 packages = $33,300
• Dolls: $3.33 x 5,000 packages = $16,650

• Electricity:
• Cars: $3.33 x 20,000 machine hours = $66,600
• Dolls: $3.33 x 10,000 machine hours = $33,300
Logistics Cost Benefits
 Activity-based costing capabilities
4. Add the direct materials and direct labor costs to the overhead costs to get the total product cost.

• Cars: $100,000 (direct materials) + $200,000 (direct labor) + $33,400 (machine maintenance) + $66,670 (quality
inspection) + $33,300 (packaging) + $66,600 (electricity) = $499,970

• Dolls: $50,000 (direct materials) + $100,000 (direct labor) + $16,700 (machine maintenance) + $33,335 (quality
inspection) + $16,650 (packaging) + $33,300 (electricity) = $249,985

5. Divide the total product cost by the number of units produced to get the unit cost.
• Cars: $499,970 / 10,000 units = $49.997 per unit
• Dolls: $249,985 / 5,000 units = $49.997 per unit

Using activity-based costing, the company can see that both products have the same unit cost of
$49.997, even though they have different direct costs. This is because the overhead costs are
allocated more accurately based on the activities that consume them. The company can use this
information to set its selling prices, evaluate its product mix, and identify areas for cost
reduction.
Logistics Value Generation
• Key to achieving logistical leadership is to master the art of matching operating
competency and commitment to key customer expectations.
• A well-designed logistics effort must provide high customer impact while controlling
operational variance and minimizing inventory commitment
• Most of all, it must be relevant to the customer.
Remember the EERS model!
The Work of Logistics
The Work of Logistics
Logistics exists to move and position
inventory to achieve desired time, place,
and possession benefits at the lowest
total cost.

Inventory has limited value until it is

positioned at the right time and at the right
location to value-added creation.

The five areas of logistical work:

(1) order processing;
(2) inventory;
(3) transportation;
(4) warehousing, materials handling, and packaging;

(5) facility network.

The Work of Logistics
• Order processing
– Emphasis on accurate information
– Work balancing
– Forecasting and communication

• Inventory
– Core customer segmentation
– Product profitability
– Transportation integration
– Time-based performance
– Competitor performance
 The Work of Logistics
• Transportation
– Cost of transportation
– Speed of transportation
– Transportation consistency
• Warehousing, materials handling, and packaging
– Integrated nature, integral part of other areas
– Forward facing logistics
– Reverse logistics
• Facility network design
– Number of facilities
– Location
– Ownership arrangement
Logistical Operations
Logistical Operations
Logistical operations start with the initial shipment of materials or
component parts from a supplier and are finalized when a manufactured Internal operational
or processed product is delivered to a customer. scope of integrated
logistics operations
 Logistical Operations
• Inventory flow
The operational management of logistics is concerned with movement and
storage of inventory in the form of materials, work-in-process, and finished
products. divide operations into three areas:
(1) procurement,
(2) manufacturing, and
(3) customer accommodation.
• Information flow
Specific locations within a logistics system produce, send, and receive
information, thus enabling the integration of this information across all
operating areas.
Facility Network Design
Some of the decisions involved in facility
network design are:
1. How many facilities to open and where to
locate them
2. How to allocate customer demand to the
facilities
3. How to assign products to the facilities
4. How to select transportation modes and
routes
5. How to manage inventory and capacity
levels
6. How to incorporate sustainability and
reverse logistics aspects
Logistical Integration Objectives
• To achieve logistical integration within a supply chain context, six operational
objectives must be simultaneously achieved:
– Responsiveness
– Variance reduction
– Inventory reduction
– Shipment consolidation
– Quality
– Life cycle support
• The relative importance of each is directly related to a firm’s logistical strategy.
 Logistical Integration Objectives
• Responsiveness
– A firm’s ability to satisfy customer requirements in a timely manner
– Importance of information technology
– Reduction of inventory in anticipation of customer requirements
– Shift from forecasting future requirements towards accommodating customers on a rapid
order-to-shipment basis
• Variance Reduction
– All operations areas of a logistical system are susceptible to variance.
– Common solutions to safeguard against variance include additional inventory and/or
expedited transportation.
– Information technology is a catalyst to address variance.
– To the extent variance can be minimized, logistical productivity will improve.
 Logistical Integration Objectives
• Inventory Reduction
– Control of asset commitment and turnover
– Goal to reduce overall assets committed to support a customer and/or integrated
operations
• Shipment Consolidation
– Transportation cost is the most significant logistical expenditure.
– Transportation cost is directly related to product type, size of shipment, and distance
traveled.
– System object is to achieve consolidation, where possible, to reduce the transportation
cost of each individual shipment.
 Logistical Integration Objectives
• Quality
– Focus on continuous quality improvement
– Total Quality Management (TQM)
– Sunk logistics cost of quality defects
– Emphasis on zero-defect order-to-delivery performance
• Life Cycle Support
– Few products are sold without some guarantee the product will perform as advertised.
– Reverse logistics capabilities, both government required (recycling) and disaster
recovery (product recalls) are critical.
– Cost recovery occurs through reverse flow and secondary markets.
– Cradle-to-cradle logistics and opportunities for margin enhancement exist.
 Supply Chain Synchronization
• Multi-firm operational integration across a supply chain

• Seeks to coordinate flow of materials, products, and information between supply chain partners to reduce
duplication and redundancy

• Leveraged operations requiring join planning concerning the logistics work that each participating firm in a supply
chain will perform and be held accountable for

• Core common goal – reduce Inventory Dwell Time:

time inventory sit 𝑠 idle

amount of time inventory is being moved to a desired location
 Logistics Performance Cycle Structure
• Represents the elements of work necessary to complete the logistics
related to customer accommodation, manufacturing, or procurement
• Basic unit of supply chain design and operational control
• Framework for implementation of integrated logistics across the supply
chain
 Logistics Performance Cycle Structure
• Become dynamic as it accommodates input/output requirements
• Input = DEMAND
…typically, an order that specifies requirements for a product or material
• Output = LEVEL OF PERFORMANCE
…expected from the combined logistical operations (EERS Model)

Depending on the operational mission of a particular performance cycle, the associated work
may involve one or many firms and may have significant variance in complexity
(e.g., Catalog Company vs. Walmart)
 Logistics Summary
• Logistics is the process that links supply chain participants into integrated operations.

• The Business of Logistics is Big Business!

• Logistical service is measured in terms of availability, operational performance, and service reliability.

• Each aspect of service is framed in terms of customer expectation and requirement.

• Logistics is all about providing the essential customer service attributes at the lowest possible total cost.

• Such customer accommodation, in an exacting cost framework, I the logistics value proposition.
 Logistics Summary
• The actual work of logistics is functional in nature.
– Order processing
– Inventory
– Transportation
– Warehousing, materials handling, and packaging
– Facility network design

• The functions of logistics combine into three primary operational processes: customer accommodation,
manufacturing support, and procurement

• To achieve integration, the inventory and information flow between these areas must be coordinated.
 Logistics Summary
• In supply chain synchronization, the operational focus becomes the logistics performance cycle.

• The performance cycle is also the primary unit of analysis in logistical design.

• The basic proposition is that, regardless of size and complexity, logistical integration is best understood and
evaluated by the structure and dynamics of the performance cycles.
 Logistics Summary
• Primary goal is to achieve consistent service at the lowest possible total cost.

• The challenge is to design a supply chain capable of performing the required logistical work as rapidly but, even
more importantly, as consistently as possible.

• A strong understanding of the foundation of the logistical discipline is key to understanding how logistics creates
value in a supply chain context.

• Logistics and supply chain are not one and the same concept.
– Supply Chain: strategy that integrates all aspects of satisfying customer requirements.
– Logistics: process of positioning and managing inventory throughout the supply chain.