Introduction to LogisticsIntroduction to Logistics

Exactly What is “Logistics?”• Business Logistics

– The planning, implementation, & control of the efficient & effective flow and storage of goods, services, & related information from point of origin to point of use or consumption in order to meet customer requirements

• Military Logistics– The design & integration of all aspects of support for the

operational capability of the military forces (deployed or in garrison) and their equipment to ensure readiness, reliability, & efficiency

Exactly What is “Logistics?”• Event Logistics

– The network of activities, facilities, and personnel required to organize, schedule, and deploy the resources for an event to take place and to efficiently withdraw after the event

• Service Logistics– The acquisition, scheduling, and management of

the facilities/assets, personnel, and materials to support and sustain a service operation or business

Logistics Costs as a Percentage of GDP

0

2

4

6

8

10

12

14

16

1980 1990 1996 1999

% of GDP

The Value-Added Role of Logistics• Place Utility

– Addition of economic value to goods by moving the goods from production surplus points to points where demand exists

– Essentially extends the physical boundaries of the market area

• Time Utility– Addition of economic value

to goods by having them at a demand point at a specific time

Production

Form Utility

Logistics

Place Utility

Time Utility

Marketing

Possession Utility

A Simple Logistics Channel

Raw materials supply point

Raw materials supply point

Production facility

MarketCustomers

MarketCustomers

MarketCustomers

Product Flow

A Multi-Echelon Logistics Channel

Raw materials supply point

Raw materials supply point

Production facility

Retailer

Product Flow

Retailer

Retailer

Retailer

Retailer

Retailer

Warehouse

Warehouse

Raw materials supply point

Logistics is a Game of Trade-offsChanging to a Higher Cost Mode of Transportation

Cost Centers Rail Motor

Transportation $ 3.00 $ 4.20

Inventory 5.00 3.75

Packaging 4.50 3.20

Warehousing 1.50 0.75

Subtotal 13.00 12.00

Cost of lost sales 2.00 1.00

Total Cost/Unit $ 15.00 $ 13.00

Logistics is a Game of Trade-offs

Cost of Changing to More Warehouses

Cost CentersSystem 1

3 Warehouses

System 2

5 Warehouses

Transportation $ 850,000 $ 500,000

Inventory 1,500,000 2,000,000

Warehousing 600,000 1,000,000

Subtotal $ 2,950,000 $ 3,500,000

Cost of lost sales 350,000 100,000

Total Cost $ 3,300,000 $ 3,600,000

Expected cost of lost sales based on probabilities of not having stock/inventory available when customers want it

Factors Influencing Logistics Cost• Competitive Relationships

– Order cycle time• Time it takes for a customer to receive an order once it has been placed

• The shorter the cycle, the less inventory is required

– Substitutability• The more substitutable a product is, the more willing customers are to use a

competitor’s product in the event of stockouts

– Cost of lost sales• In order to reduce the cost of lost sales, more inventory typically must be

carried

– Transportation costs• More expensive modes of transportation help reduce

– inventory costs

– cost of lost sales

– order cycle time

Factors Influencing Logistics Cost

• Product Relationships– Higher Dollar Value of the Goods

• Transportation rates: costs the carrier more to reimburse in the event of damage, hence transportation rates are generally higher

• Warehousing costs: more money tied up in inventory & storage risk increases

• Packaging costs: more protective packaging must be used

– Product Density• An item that is lightweight compared to the space it occupies

has low density (I.e., household furniture)

• Higher density products generally have lower warehousing & transportation costs

Factors Influencing Logistics Cost

• Product Relationships– Susceptibility to Damage

• The higher the risk of damage, the higher the transportation costs and warehousing costs

– Special Handling Requirements• As the specialized handling requirements increase,

transportation costs & warehousing costs increase

Factors Influencing Logistics Cost

• Spatial Relationships– Location of fixed points in the logistics system with

respect to market and supply points– Impacts landed cost and extent of market