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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
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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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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
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.