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Business Logistics/Supply Chain—A Vital Subject

The supply chain is simply another way of saying “the whole process of business.”

Dragan Cisic

Warehousing

Warehousing

Transportation

Transportation

Vendors/plants/portsTransportation

Factory

Transportation Customers

Informationflows

The Immediate Supply Chain for an Individual Firm

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Logistics DefinedLogistics 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.

Council of Logistics Management

Supply Chain Management DefinedSCM 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.

Handfield and Nichols

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Demand forecasting

Purchasing

Requirements planning

Production planning

Manufacturing inventory

Warehousing

Material handling

Packaging

Finished goods inventory

Distribution planning

Order processing

Transportation

Customer service

Strategic planning

Information services

Marketing/sales

Finance

Supply Chain Management

Supply Chain Management

Logistics

Purchasing/Materials

Management

PhysicalDistribution

Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+

Demand forecasting

Purchasing

Requirements planning

Production planning

Manufacturing inventory

Warehousing

Material handling

Packaging

Finished goods inventory

Distribution planning

Order processing

Transportation

Customer service

Strategic planning

Information services

Marketing/sales

Finance

Supply Chain Management

Supply Chain Management

Logistics

Purchasing/Materials

Management

PhysicalDistribution

Activity fragmentation to 1960 Activity Integration 1960 to 2000 2000+

Evolution of Supply Chain Management

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The Logistics/SC 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.

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.

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A Revised Strategy is Generating Great Top Management Interest

Historical perspective of distribution: “The last frontier of cost economies”

The contemporary view: Distribution is a new frontier for demand generation—a competitive weapon.

Peter Drucker, 1962

Both views are now important!

Both views are now important!

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C ustom ers

T ransporta tion

Inven to ryor supp ly source

C ustom er o rder p rocessing (and transm itta l)

C ustom ers

T ransporta tion

Inven to ryor supp ly source

C ustom er o rder p rocessing (and transm itta l)

Critical Customer Service Loop

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Category Percent of sales

Transportation 3.34%

Warehousing 2.02

Order entry 0.43

Administration 0.41

Inventory carrying 1.72

Total 7.65%

Physical Distribution Costs

Add one-third for inbound supply costs

Source: Herb Davis & Company

Logistics cost are about 10% of

sales w/o purchasing costs

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Traditional View: Logistics in the Economy (1990, 1996)

Freight Transportation $352, $455 Billion

Inventory Expense $221, $311 Billion

Administrative Expense$27, $31 Billion Logistics Related Activity 11%, 10.5% of

GNPSource: Cass Logistics

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Traditional View: Logistics in the Manufacturing Firm

Profit 4%

Logistics Cost 21%

Marketing Cost 27%

Manufacturing Cost 48%

Profit

Logistics Cost

Marketing Cost

Manufacturing Cost

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Supply Chain Management: The Magnitude in the

Traditional View

Estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics and supply chain strategies A typical box of cereal spends 104 days from factory

to sale A typical car spends 15 days from factory to

dealership

Laura Ashley turns its inventory 10 times a year, five times faster than 3 years ago

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Supply Chain Management: The True Magnitude

Compaq estimates it lost $.5 billion to $1 billion in sales in 1995 because laptops were not available when and where needed

When the 1 gig processor was introduced by AMD, the price of the 800 mb processor dropped by 30%

P&G estimates it saved retail customers $65 million by collaboration resulting in a better match of supply and demand

The United Nations has estimated the costs of data flows associated with international trade to be between 4-7 percent of the value of the goods (UNCID 1990), which is roughly consistent with estimates of administrative costs as 10-15 percent of the price of products (Brousseau 1994).

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Freight transportation costs

Indirect Costs as % of Total

% of total cost

Source: Institute for Competitive Design

1900 19900

10

20

30

40

50

60

1900 1990

Indirect

Material

Labor

15

Costs are high About 10.5% of GDP domestically About 12% of GDP internationally A range of 4 to 30% of sales for individual firms, avg. about 10% A high as 70-80% of sales if purchasing and production are

included

Customers are more demanding of the supply chain Desire for quick response Desire for mass customization

An integral part of company strategy Generate revenue Improve profit

Logistical lines are lengthening Local vs. long distance supply

Logistics is a key to trade and an increased standard of living Law of comparative economic advantage applies

Logistics adds value Time and place utilities

Significance of Logistics

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Effect on Logistics Foreign Outsourcing

ProfitG & A

Marketing

Logistics

Overhead

Materials

Labor

Profit

G & A

Marketing

Logistics

Overhead

Materials

Labor

Tariffs

Increase

Reduction

Increase

Domestic sourcing Foreign sourcing

Scope of the Supply Chain for Most Firms

Physical distributionPhysical supply(Materials management)

Business logistics

Sources ofsupply

Plants/operations Customers

• Transportation• Inventory maintenance• Order processing• Acquisition• Protective packaging• Warehousing• Materials handling• Information maintenance

• Transportation• Inventory maintenance• Order processing• Product scheduling• Protective packaging• Warehousing• Materials handling• Information maintenance

Focus firm’s internal supply chain 1-14

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Primary- Setting customer service goals- Transportation- Inventory management- Location

Secondary, or supporting- Warehousing- Materials handling- Acquisition (purchasing)- Protective packaging- Product scheduling- Order processing

Key Activities/Processes

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FocusCompany

Suppliers

Supplier’ssuppliers

Customers

Customers/End users

Acquire Convert Distribute

The Supply Chain is Multi-Enterprise

Product and information flow

Scope in reality

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Reality of SC Scope

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SUPPLYCHAIN

MANAGEMENT

Inte

rfunc

tiona

l coo

rdin

atio

n

Interorganizational coordination

Activity and processadministration

The Multi-Dimensions of SC

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Customer service goals The product Logistics service Information sys.

Inventory Strategy Forecasting Storage fundamentals Inventory decisions Purchasing and supply

scheduling decisions Storage decisions

Transport Strategy Transport fundamentals Transport decisions

Location Strategy Location decisions The network planning process

The Logistics Strategy Triangle

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PRODUCTION/OPERATIONSSample activities: Quality control Detailed production scheduling Equipment maint. Capacity planning Work measurement & standards

LOGISTICSSampleactivities:Transport Inventory Order processing

Materials

handling

Interfaceactivities: Product scheduling Plant location Purchasing

MARKETINGSampleactivities: Promotion Market research Product mix Sales force management

Interfaceactivities: Customer service standards Pricing Packaging Retail location

Production-logisticsinterface

Marketing-logisticsinterface

Relationship of Logistics to Marketing and Production

Internal Supply Chain 1-21

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A Framework for Structuring Drivers

Efficiency Responsiveness

Facilities Transportation Inventory Information

Supply chain structure

Drivers

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Facilities

Role in the supply chain the “where” of the supply chain manufacturing or storage (warehouses)

Role in the competitive strategy economies of scale (efficiency priority) larger number of smaller facilities

(responsiveness priority)

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Inventory: Role in the Supply Chain

Inventory exists because of a mismatch between supply and demand

Source of cost and influence on responsiveness Impact on

material flow time: time elapsed between when material enters the supply chain to when it exits the supply chain

throughput rate at which sales to end consumers occur I = RT (Little’s Law) I = inventory; R = throughput; T = flow time Example Inventory and throughput are “synonymous” in a supply

chain

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Inventory: Role in Competitive Strategy

If responsiveness is a strategic competitive priority, a firm can locate larger amounts of inventory closer to customers

If cost is more important, inventory can be reduced to make the firm more efficient

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Transportation: Role inthe Supply Chain

Moves the product between stages in the supply chain

Impact on responsiveness and efficiency Faster transportation allows greater

responsiveness but lower efficiency Also affects inventory and facilities

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Information: Role inthe Supply Chain

The connection between the various stages in the supply chain – allows coordination between stages

Crucial to daily operation of each stage in a supply chain – e.g., production scheduling, inventory levels

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Purchasing Costs

Manufactures spend 55% of each dollar on purchased goods and services

Approximately 60-80% of operating expense Direct manufacturing costs have declined to

between five and 15% of total operating costs As little as 2% for some high-tech industries

Service industries spend less on purchased materials than manufacturing

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The Sourcing Process

Need Communication: Recognition Description

Supplier Selection: Identification Evaluation Approval Monitoring

Transaction Management: Price Determination Purchase Order Follow-Up and

Expediting Receipt and Inspection Supplier Payment

Relationship Management:Performance Monitoring

andImprovement

Logistics – General perception

General perception in logistics that assets such as stock or vehicles need to exist physically, and need to be identifiable as discrete entities.

By treating logistics systems in strict physical terms we impose constraints on them which can restrict their flexibility and can limit the utilisation of resources.

Virtual logistics Assets are treated in terms of their availability,

not their identity or their physical form. This provides much greater flexibility in how

systems are designed, how resources are sourced, and how assets are utilised.

Virtual logistics allows logistics resources to be treated as commodities, in a similar way to how currencies are treated by banks.

This means that resources can be lent, borrowed, or traded; and flexibly consolidated, apportioned, and allocated.

This creates many powerful new possibilities in the design of logistics systems, and means that major improvements in efficiency become possible.

Financial system example

Once money in circulation was in the form of precious metals such as silver or gold.

By holding their own assets, they might have achieved greater security, but they incurred a high notional or actual cost due to the fact that they needed to store and guard their assets, and they risked losing them due to accidents, damage, or theft.

Then paper money was introduced and banks were, in effect, able to create money from nowhere, by lending more money than they had as reserves.

Today, we rarely hold anything but modest sums of money physically, and the effectiveness of the banking system cannot be denied.

Virtual logistics systems

Virtual logistics resources may be traded in much the same way as shares and foreign currencies are traded by banks or individuals.

Through the use of computer applications and the Internet, it becomes feasible to do this at a very low level in logistics operations.

Such resources could be purchased, utilised remotely, and lent or sold when surplus to requirements.

Design of virtual logistics systems

Treatment of assets in terms of function and availability, rather than as physical objects with particular identity and form, so they can be treated like commodities.

Dissociation of ownership and control of assets from their physical location, so they can be utilised remotely.

Dissociation of information movements from physical movements, so that change of ownership or change of application does not necessitate physical movement.

Design of virtual logistics systems

Dissociation of physical resources from specific operations or processes.

Shared, public, access to logistics resource information through Internet applications.

Computer based trading of logistics resources between suppliers and users.

Integration of warehousing, transport, and production for the purposes of maintaining product availability and controlling stock.