Introduction to Logistics Management

Module 1 INTRODUCTION TO LOGISTICS MANAGEMENT

Learning Objective    

To To To To

understand the fundamentals of logistics management identify the elements in logistics management briefly explore how the supply chain inter-related understand the issue involve in supply chain

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Introduction to logistics In today‘s competitive industry and the need to be quick-to-market, most companies are focusing on customer delivery and solutions through logistics, while maintaining themselves as leader in business. The term ‗logistics‘ originated from the ancient Greek word, logos, which means ratio, word, calculation, reason, speech, and oration. Logistics is considered to have originated in the millitary‘s need to supply themselves with arms, ammunition and rations as they moved from their base to a forward position. In ancient Greek, Roman and Byzantine empires, there were military officers with the title „Logistikas‟ who were responsible for financial and supply distribution matters. The Oxford English dictionary defines logistics as ‗The branch of military science having to do with maintaining and transporting material, procuring, facilities and personnel. In a modern society, logistics function has a major impact on a society‘s social standards. None to excellent logistics services have come to every body‘s expectation. To understand some of the importance to consumers of logistics activity, consider: 

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The need in shopping for food, clothing and other items that logistical system can conveniently bring all of those items together in one place, such as a single store or shopping mall. The excitement of going to a store to purchase an advertised item, has the store‘s shipment is arrived on time.

Those are only a few of the benefits which illustrate how logistics touches many facets of our daily lives.

Message Focus

The logistics of supplying products to highly populated cities such as Hong Kong is difficult and complex. High efficient and effective logistics system provide consumer with goods and services that improve their standard of living.

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Definition of logistics It is important to establish the meaning of the term before explore further the topic. Logistics has been called by many names, including the following:         

Business logistics Channel management Distribution Industrial logistics Logistical management Materials management Physical distribution Supply chain management Supply management

According to the Council of Logistics Management (CLM), one of the leading professional organization for logistics personal, describe logistics is ―that part of the supply chain process that plans, implements, and control the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customers‘ requirements.‖1 Logistics is not confined to manufacturing operations alone. It is relevant to all enterprises, including government, institutions such as hospitals and schools, and service organizations such as retailers, bank, and financial service organizations.2

Definition

That part of the supply chain process that plans, implements, and control the efficient, effective flow, and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customers’ requirement

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Definition provided in, What’s It All About?(Oak Brook, IL: Council of Logistics Management, 1993). Lambert, Stock, and Ellram, Fundamentals of Logistics Management, Boston, MA: Irwin/McGraw-Hill, 1998 Chapter 1 2

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As stated in Fundamentals of Logistics Management book in Chapter 1, some of many activities encompassed under the logistics umbrella are given in Figure 1, which illustrates that logistics is dependent upon natural, human, financial, and information resources for inputs. Suppliers provide raw materials which logistics manage in the form of raw materials, in process inventory, and finished goods. Management actions provide the framework for logistics activities through the process of planning, implementation, and control. The output of logistics system are competitive advantage, time and place utility, efficient movement to customer, and providing a logistics service mix such that logistics become a proprietary asset of the organization.3

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Ibid, Chapter 1

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Management actions Planning

Implementation

Control Output of logistics

Inputs into logistics

Natural resources (land, facilities, and equipment) Human resources

Marketing orientation (competitive advantage)

Logistics management Suppliers

Raw materials

In process inventory

Finished goods

Customers

Time and place utility

Financial resources

Efficient movement to customer

Information resources

Proprietary assets

Logistics services Customer service

Plant and warehouse site selection

Demand forecasting

Procurement

Distribution communications

Packaging

Inventory control

Return goods handling

Material handling

Salvage and scrap disposal

Order processing

Traffic and transportation

Parts and service support

Warehouse and storage

Figure 1-1: Components of logistics management Source:Lambert, Stock, and Ellram, Fundamentals of Logistics Management, Boston, MA: Irwin/McGraw-Hill, 1998 Chapter 1

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Logistics Supply Chain Supply Chain Management (SCM) is an emerging concept that provides the great deal of benefits to companies. Although many companies claim that they are putting SCM in place, most of the time what they have implemented is not more than one or two business process, such as procurement, customer service management or manufacturing flow management. In fact, both academics and industry professionals are still confronting in understanding the concept of supply chain management.

Figure 1-2: A Simple logistics channel

Four categories of different school of thoughts commonly available are functional chain awareness school, linkage logistics school, information school and integration school of thoughts. 1. Functional chain awareness school of thought accepted that there is a chain of activities and product flow between the functional silos within and interorganization but did not go any further. In fact manufacturing department produce the products and accordingly sends it to distribution. Then, sales

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people, who sell it to other companies‘ purchasing department, receive the product. 2. Linkage logistics school of thought pointed out the importance of establishing linkages between those functional silos for efficient logistics and distribution functions. 3. The information school of thought draws the attention to the allocation of information between supply chain members for efficient and effective management of supply chain. 4. The integration process school of thought pointed out that business process should be integrated across the supply chain. Linkage logistics school of thought‘s goal is efficiency viewing the functional silos and related product flow as constant; whereas, the integration process school of thought‘s goal is effectiveness. Moving on the dimension from chain awareness school through integration school, SCM better distinguished from Logistics in the sense that definitions include more process integration between members rather than solely material flow. In 1998, The Global Supply Chain Forum, which is an organization that gathered number of non-competitive companies together for the purpose of improving each other‘s supply chain operations, accepted the above definition. This definition has further distinguished SCM from Logistics. The definition states ―integration of business processes from end user through the original suppliers‖ rather than stating it as a product flow from end user through the original supplier. Logistics is a functional silo that deals with the effective and efficient product flow within and inter organization just like Manufacturing is a functional silo that deals with production; whereas, SCM facilitates that product flow integrating the key business processes.

Supply chain concept A supply chain is a group of partners who collectively convert a basic commodity (upstream)into a finished product (downstream) that is valued by end-customers, and who manage returns at each stage.

Definition

Planning and controlling all of the processes that link partners in a supply chain together in order to serve needs of the end-customer.

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Figure 1-3: The Supply chain of a manufacturing company

Supply chains encompass the companies and the business activitiesneeded to design, make, deliver, and use a product or service.Businesses depend on their supply chains to provide them withwhat they need to survive and thrive. Every business fits into one ormore supply chains and has a role to play in each of them. The pace of change and the uncertainty about how markets willevolve has made it increasingly important for companies to be aware ofthe supply chains they participate in and to understand the roles thatthey play. Those companies that learn how to build and participate instrong supply chains will have a substantial competitive advantage intheir markets. The practice of supply chain management is guided by some basicunderlying concepts that have not changed much over the centuries.Several hundred years ago, Napoleon made the remark, ―An armymarches on its stomach.‖ Napoleon was a master strategist and a skillfulgeneral and this remark shows that he clearly understood the importanceof what we would now call an efficient supply chain. Unless thesoldiers are fed, the army cannot move.

Along these same lines, there is another saying that goes, ―Amateurstalk strategy and professionals talk logistics.‖ People can discuss all sortsof grand strategies and 8

dashing maneuvers but none of that will be possiblewithout first figuring out how to meet the day-to-day demands ofproviding an army with fuel, spare parts, food, shelter, and ammunition.It is the seemingly mundane activities of the quartermaster and the supplysergeants that often determine an army‘s success. This has many analogiesin business. The term ―supply chain management‖ arose in the late 1980s andcame into widespread use in the 1990s. Prior to that time, businesses usedterms such as ―logistics‖ and ―operations management‖ instead. Somedefinitions of a supply chain are offered below: • ―A supply chain is the alignment of firms that bring productsor services to market.‖—from Lambert, Stock, and Ellramin their book Fundamentals of Logistics Management (Lambert,Douglas M., James R. Stock, and Lisa M. Ellram, 1998, Fundamentals of Logistics Management, Boston, MA:Irwin/McGraw-Hill, Chapter 14) • ―A supply chain consists of all stages involved, directly orindirectly, in fulfilling a customer request. The supply chainnot only includes the manufacturer and suppliers, but alsotransporters, warehouses, retailers, and customers themselves.‖—From Chopra and Meindl in their book SupplyChain Management: Strategy, Planning, and Operations (Chopra,Sunil, and Peter Meindl, 2001, Supply Chain Management: Strategy, Planning, and Operations, Upper Saddle River, NJ:Prentice-Hall, Inc. Chapter 1). ―A supply chain is a network of facilities and distributionoptions that performs the functions of procurement ofmaterials, transformation of these materials into intermediateand finished products, and the distribution of these finished products to customers.‖—from Ganeshan and Harrisonat Penn State University in their article An Introductionto Supply Chain Management published at http://silmaril.smeal.psu.edu/supply_chain_intro.html(Ganeshan, Ram, and Terry P. Harrison, 1995,―AnIntroduction to Supply Chain Management,‖ Department of Management Sciences and Information Systems, 303 BeamBusiness Building, Penn State University, University Park, PA). If this is what a supply chain is then we can define supply chain managementas the things we do to influence the behavior of the supply chainand get the results we want. Some definitions of supply chain managementare: • ―The systemic, strategic coordination of the traditional businessfunctions and the tactics across these business functionswithin a particular company and across businesses within thesupply chain, for the purposes of improving the long-term performance of the individual companies and the supply chainas a whole.‖—from Mentzer, DeWitt, Deebler, Min, Nix,Smith, and Zacharia in their article Defining Supply ChainManagement in the Journal of Business Logistics (Mentzer, John T.,William DeWitt, James S. Keebler, Soonhong Min, NancyW. Nix, Carlo D. Smith, and Zach G. Zacharia, 2001,―Defining Supply Chain Management,‖ Journal of BusinessLogistics,Vol. 22, No. 2, p. 18).

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There is a difference between the concept of supply chain managementand the traditional concept of logistics. Logistics typically refers toactivities that occur within the boundaries of a single organization andsupply chains refer to networks of companies that work together andcoordinate their actions to deliver a product to market. Also traditionallogistics focuses its attention on activities such as procurement, distribution,maintenance, and inventory management. Supply chain managementacknowledges all of traditional logistics and also includes activities such asmarketing, new product development, finance, and customer service. In the wider view of supply chain thinking, these additional activitiesare now seen as part of the work needed to fulfill customer requests.Supply chain management views the supply chain and the organizationsin it as a single entity. It brings a systems approach to understanding andmanaging the different activities needed to coordinate the flow of productsand services to best serve the ultimate customer. This systems approachprovides the framework in which to best respond to business requirementsthat otherwise would seem to be in conflict with each other. Taken individually, different supply chain requirements often haveconflicting needs. For instance, the requirement of maintaining high levelsof customer service calls for maintaining high levels of inventory, but thenthe requirement to operate efficiently calls for reducing inventory levels. Itis only when these requirements are seen together as parts of a larger picturethat ways can be found to effectively balance their different demands. Effective supply chain management requires simultaneous improvementsin both customer service levels and the internal operating efficienciesof the companies in the supply chain. Customer service at itsmost basic level means consistently high order fill rates, high on-timedelivery rates, and a very low rate of products returned by customersfor whatever reason. Internal efficiency for organizations in a supplychain means that these organizations get an attractive rate of return on their investments in inventory and other assets and that they find waysto lower their operating and sales expenses. There is a basic pattern to the practice of supply chain management.Each supply chain has its own unique set of market demands andoperating challenges and yet the issues remain essentially the same inevery case. Companies in any supply chain must make decisions individuallyand collectively regarding their actions in five areas: 1. Production—what products does the market want? How much ofwhich products should be produced and by when? This activityincludes the creation of master production schedules that takeinto account plant capacities,workload balancing, quality control,and equipment maintenance. 2. Inventory—what inventory should be stocked at each stage in asupply chain? How much inventory should be held as raw materials,semifinished, or finished goods? The primary purpose ofinventory is to act as a buffer against uncertainty in

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the supplychain. However, holding inventory can be expensive, so what arethe optimal inventory levels and reorder points? 3. Location—where should facilities for production and inventorystorage be located? Where are the most cost efficient locationsfor production and for storage of inventory? Should existingfacilities be used or new ones built? Once these decisions aremade they determine the possible paths available for product toflow through for delivery to the final consumer. 4.Transportation—how should inventory be moved from one supplychain location to another? Air freight and truck delivery are generallyfast and reliable but they are expensive. Shipping by sea or railis much less expensive but usually involves longer transit timesand more uncertainty. This uncertainty must be compensated forby stocking higher levels of inventory. When is it better to usewhich mode of transportation? 5. Information—how much data should be collected and how muchinformation should be shared? Timely and accurate informationholds the promise of better coordination and better decision making.With good information, people can make effective decisionsabout what to produce and how much, about where to locate inventory and how best to transport it. The sum of these decisions will define the capabilities and effectivenessof a company‘s supply chain. The things a company can do andthe ways that it can compete in its markets are all very much dependenton the effectiveness of its supply chain. If a company‘s strategy is toserve a mass market and compete on the basis of price, it had better havea supply chain that is optimized for low cost. If a company‘s strategy isto serve a market segment and compete on the basis of customer serviceand convenience, it had better have a supply chain optimized forresponsiveness. Who a company is and what it can do is shaped by itssupply chain and by the markets it serves.

Message Focus

Moving materials and personnel to space stations orbiting the Earth can be a daunting task. Overcoming the enormous distance challenges the logistics capabilities of NASA, but offers significant opportunities for furthering future space exploration. of living.

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Figure 1-4: The distribution channel: Logistics manages to follow through the channel. Case Study: Refresh Your Supply Chain – Have a Coke and a Smile Source: http://www.supplychainnetwork.com/refresh-your-supply-chain-have-acoke-and-a-smile/#more-1161

Coca-Cola is a globally recognized brand, and the company consistently delivers its products. Their scale is huge and the territories they cover vary from congested urban settings to remote rural areas. Clearly, this company knows a thing or two about supply chain management. Not only do they respond to the times and maintain flexibility in their operations, they also work toward recyclable packaging and water sustainability. How do they do it all?

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Always Adapting This company stays on top of technology. In 2003, Coca-Cola enterprises began a five year, $200 million IT plan called Project Pinnacle. As part of this effort, they combined their logistics with the retail expertise of SAP software. The purpose was to streamline the supply chain by providing the latest technology to managers, delivery drivers and merchandisers. When faced with the dilemma of decreasing sales, they knew that profitability depended on maximizing production and distribution. Getting More Flexible Coca-Cola confronted significant challenges during the last ten years as consumers found new interests in flavored waters and juices. Though the company had benefited from equity interests in franchised bottling groups, the need to make more from less prompted Coca-Cola to buy out their main North American distribution groups. With these acquisitions, Coca-Cola was able to better control supply chain operations. The result was improved flexibility of production, as well as better inventory and asset management. After these changes, during the fourth quarter, North American sales rose 3% while the quarterly profit almost quadrupled. They tightened a few belts along the supply chain and the outcome was a success. Setting a Good Example While aiming for profits, Coca-Cola has devoted some energy to sustainable packaging. In order to take their bottle from 30% renewable to completely renewable, the company partnered with Gevo, Virent and Avantium in order to develop a route to the biobasedpara-xylene which would fulfill their goals. A scalable version of para-xylene has eluded chemists, but Coca-Cola is determined to perfect a completely renewable supply chain. This may become a reality as soon as 2015, and they are providing global aid in other unexpected places. Taking Advantage, in a Positive Way In even the most rural parts of Tanzania, you can find a bottle of coke. Unfortunately, access to antiretroviral drugs is far less reliable. About 1.3 million people in Tanzania have HIV/AIDS out of the total population of 45 million. Interestingly, the original push for profit has caused Coca-Cola to become an excellent resource in medical distribution. The company uses vehicles that vary from large trucks, to pushcarts, to donkeys. This indomitable supply chain innovation is now being put to use for the delivery of much-needed medications. ―Watered Down‖ Coca-Cola Water is an essential resource in Coca-Cola‘s supply chain. In the U.S., Coca-Cola uses 2.36 liters of water per liter of soda, and the ratio is 4:1 in India. This simple 13

resource has numerous variables including depletions of water supplies due to population growth, climate change and old water infrastructures. Though the company has taken some criticism in the past for reducing water supplies in some communities, Coca-Cola has researched climate change and committed to four sustainable strategies: reduce, recycle, replenish and risk management. Looking into the future, Coca-Cola‘s prominent interest in water supplies could fund productive research in methods of protecting this essential resource. Global Guidelines Even though the company achieved success with development of IT and partnership with SAP, there were still some gaps in the supply chain as of 2010. To further streamline their approach, Coca-Cola partnered with ITC Infotech, a global leader in supply chain consulting. Coke‘s main desires in terms of supply chain improvement included metrics with no manual intervention, industry standards that are not Coke specific and an even more vigorous system for reporting hierarchies. Ultimately, Coca-Cola is planning on new global initiatives that will monitor supply chain strategies. Obviously, Coca-Cola does not sit back and let the world go by. The company has fascinating and proactive strategies in supply chain management which keep it at the top of the business sector. Next time you pick up a coke bottle, look at it more carefully, from a manufacturing point of view, and you might feel refreshed in a less obvious way.

Major Supply Chain Issues The supply chain management must address the following problems: 

Distribution network configuration Number, location and network mission of suppliers, production facilities, distribution centers, warehouse, cross-docks and customers

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Distribution strategy Including questions of operating control (centralized, decentralized or shared); delivery scheme (e.g. direct shipment, pool point shipping, crossdocking, direct store delivery (DSD), closed loop shipping); mode of transportation (e.g. motor carrier, truck load, parcel, rail road; intermodal; replenishment strategy (e.g. pull, push or hybrid); and transportation control (e.g. owner-operated, private carrier, common carrier, contract carrier, or third party logistics)

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Information Integration of and other processes through the supply chain to share valuable information, including demand signals, forecasts, inventory and transportation. 14

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Inventory management Quantity and location of inventory including raw materials, work in process and finished goods

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Cash-flow Arranging the payment terms and the methodologies for exchanging funds across entities within the supply chain

Supply chain execution is managing and coordinating the movement of materials, information and funds across the supply chain. Supply Chain Network Supply chain network enables the companies to figure out the members of the supply chain, position in the supply chain, and identify key members in the supply chain. Each company has existing supply chain; in fact each company buys some raw materials from some suppliers and sells some products to end customers or users. However, identifying network structure can be very confusing after certain point due to the fact that focal company may have three suppliers in the first tier and one of those three suppliers may have nine suppliers in tier (focal company‘s tier two suppliers) and each of those nine may have 15 suppliers in tier one (focal company‘s tier three supplier). Network structure can explode after a while and it would be overwhelming to identify all members, and even harder to manage all the links in the system. The first step in determining the network structure is mapping the supply chain on a piece of paper to determine the suppliers and customers in each tier. Secondly, identifying the most important members in terms of volume and sales, companies can determine with which members they should establish process links and in some cases partnership. Therefore, it is critically important to identify the key members of the supply chain and link the business processes and management components with more important ones rather than all of them because it would not worth the effort.

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Module concept mapping

Introduction Logistics is important in today's world

Greek word, Logos - ratio, word, calculation, reason, speech & oration Logistics impact society's social standard

Introduction to logistics Definition of Logistics supply Supply chain logistics chain concept Part of supply . Functional . Planning & chain that plan, chain controlling all implement and awareness the processes control the school that link efficient & . Linkage partners in a effective flow & logistics school supply chain storage of goods, . The together in services & related information order to serve information from school need of the the point of origin . The end-customer to the point of integration . Supply chain consumption in process school issues: order to meet - Distribution customer's network requirement configuration - Distribution strategy - Information - Inventory management - Cash flow

Supply chain network . Members of supply chain . Position of members in supply chain . Identify key member in supply chain

Questions and Problems 1. How do logistics function in modern society has an impact on a society‘s social standard? 2. Based on the examples shown in the text, what are the four categories of different school of thoughts described logistics supply chain? 3. In your own words, explain what is supply chain? Describe about the supply chain in your working place. 4. Each supply chain has its own unique set of operating challenges and market demand and yet the issues remain essentially the same in every case. How do you see company in any supply chain make decisions regarding production, inventory, location, transportation and information? Reading materials 1. What‟s It All About?(Oak Brook, IL: Council of Logistics Management, 1993). 2. Lambert, Stock, and Ellram, Fundamentals of Logistics Management, Boston, 16

MA: Irwin/McGraw-Hill, 1998 Chapter 1 3. Chopra,Sunil, and Peter Meindl, 2001, Supply Chain Management: Strategy, Planning, and Operations, Upper Saddle River, NJ:Prentice-Hall, Inc. Chapter 1 4. Ganeshan, Ram, and Terry P. Harrison, 1995,“An Introduction to Supply Chain Management,” Department ofManagement Sciences and Information Systems, 303 BeamBusiness Building, Penn State University, University Park, PA). http://silmaril.smeal.psu.edu/supply_chain_intro.html 5. Mentzer, JohnT.,William DeWitt, James S. Keebler, Soonhong Min, NancyW. Nix, Carlo D. Smith, and Zach G. Zacharia, 2001,―Defining Supply Chain Management,‖ Journal of BusinessLogistics,Vol. 22, No. 2, p. 18 6. http://www.supplychainnetwork.com/refresh-your-supply-chain-have-a-cokeand-a-smile/#more-1161 7. Michael B. Stroh, What is Logistics? http://www.logisticsnetwork.net/articles/What%20is%20Logistics.pdf

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