Chapter 3 Role of Logistics in Supply Chains PDF

Chapter 3 ROLE OF L O G I S TI C S I N S U P P LY C H AIN S Learning Objectives After reading this chapter, you should be able to do the following: 51 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 52 Chapter 3 Supply Chain Profile Girl Scouts Know Logistics “Would you like to buy some Girl Scout cookies?” That’s not exactly a logistics question, but perhaps it should be. We tend to think of logistics being important for manufacturers and retailers but not necessarily for nonprofit organizations. The Red Cross and food banks need strong logistics capabilities to deliver food, medicine, supplies, and services in times of need. While Girl Scout Cookies aren’t exactly an emergency item (unless you are craving Thin Mints), this service organization’s annual fundraiser must deliver the right products at the right time to the right customers. The Girl Scouts of the USA deploy a classic logistics model each year during cookie season which begins as early as October and runs as late as May. The Scouts, their parents, volunteers, and key companies must integrate orders, information, material handling, production, packaging, inventory, transportation, warehousing, customer service, security, and even last mile delivery! It is nothing short of a large seasonal business that depends upon efficient logistics to support the delivery of 200 million boxes of cookies across the country each year. Two commercial bakeries are licensed to produce Girl Scout cookies. One is ABC Bakeries which produces nearly 77 million boxes of cookies in eight varieties. Production timing is critical to ensure product freshness and availability. The bakeries typically stock warehouses a few weeks ahead of delivery to guard against weather delays or other supply chain disruptions. After these initial deliveries or “cookie drops” at regional 3PL warehouses, workers break the bulk packages and prepare individual troop orders for delivery. Depending on the size of the order and where it is being delivered, cases may be loose loaded or stacked on pallets. The orders are then delivered to distribution points such as churches, schools, homes, and community centers. The troops are responsible for picking up their orders at the distribution points, and transferring them to individual scouts for final delivery. The process is repeated across the country for weeks and weeks. Surprisingly, most of these warehouses and troops do not rely on sophisticated software or technology tools for cookie distribution management. Instead, they rely on the color-coded cases to identify each type of cookie, standardized case quantities, and simple spreadsheets to orchestrate the product flows. However, the Girl Scouts do have a mobile app and accept orders through its website. Cookies sold on the Digital Cookie site are shipped through the mail. But 95% of Girl Scout cookies are still sold and delivered the old-fashioned way: by individual scouts who take orders and participate in the fulfillment process. The drive and related logistics activities play a critical role in the financial viability of all Girl Scout troops. Girl Scout Cookies generates approximately $800 million in annual revenue for the organization. That’s more annual revenue than Vera Bradley Inc, The Boston Beer Company, Buffalo Wild Wings, and many other well-known companies. Pretty spectacular for a part-time business run largely by kids! Sources: Jennifer Smith, “The Logistics of Girl Scout Cookies: Suitcases, Pallets, Mom’s Garage,” The Wall Street Journal (April 18, 2019). Retrieved July 29, 2019 from https://www.wsj.com/articles/the-logistics-ofgirl-scout-cookies-suitcases-pallets-moms-garage-11555603637; Jerry Peck, “Cookie Logistics,” JOC.com (April 24, 2014). Retrieved July 29, 2019 from https://www.joc.com/international-logistics/cookie-logistics_ 20140424.html; and, “Case Study: Girl Scout Cookie Time,” Titan Global Logistics. Retrieved July 29, 2019 from https://www.atlaslogistics.com/titan-global/project-management/case-studies/girl-scouts 3-1 Introduction Logistics professionals and other knowledgeable managers realize that in spite of all the hype about the Internet, omni-channels, etc., successful organizations need to manage order fulfillment effectively and efficiently for competitive advantage and profitability. Sophisticated front-end order systems cannot stand alone in today’s competitive global marketplace. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Role of Logistics In Supply Chains 53 Logistics execution is critical for customer satisfaction. In fact, the speed of ordering via the Internet and other technologies intensifies the need for an efficient and effective logistics system that can deploy appropriate levels of inventory, expedite customer orders, and handle returns. The often-quoted adage “good logistics is business power” is appropriate because logistics helps to build customer loyalty and strengthen the company’s “brand” in the marketplace. If an organization cannot get its products to customers in a timely manner, then it will not stay in business very long. This is not to say that quality products and effective marketing are not important, but they must be combined with effective and efficient logistics systems for long-run success and financial viability. Good logistics can even be very important as highlighted by the Supply Chain Profile chapter opener. The challenge for profit and nonprofit organizations is to manage the entire logistics system in such a way that order fulfillment meets and perhaps exceeds customer expectations. At the same time, the competitive marketplace demands efficiency in controlling transportation, inventory, and other logistics-related costs. As will be discussed, cost and service tradeoffs must be considered when evaluating customer service levels and the associated total cost of logistics, but both goals—efficiency and effectiveness—are important to organizations in today’s competitive environment. At this point, it is important to explain the relationship between logistics management and supply chain management. In Chapter 1, supply chain management was defined using a pipeline analogy, with the start of the pipeline representing the initial supplier and the end of the pipeline representing the ultimate customer (see Figure 3.1). In other words, it is an extended set of enterprises from the supplier’s supplier to the customer’s customer but the flow of materials and related services enabled by good logistics has to be managed carefully for efficiency (cost) and effectiveness (service). Also in Chapter 1, material flow was designated as one of the four major flows in a supply chain. Logistics plays a major or dominant role in the efficiency and effectiveness of this major supply chain flow. The bulges in the pipeline depicted in Figure 3.1 represent inventory being held or stored. The goal of an effective and efficient logistics or material flow should be to minimize the level of inventory at these points as will be discussed subsequently! Logistics can also play an important role in cash flow. Customers typically wait to receive a complete order before taking action to pay for an order. Timely and complete orders can enhance cash flow. Another related perspective on supply chain management is to view the supply chain as a connecting network of logistics systems and related activities of all the individual organizations that are a part of the end-to-end supply chain. The collective logistics Figure 3.1 Supplier Contemporary Supply Chain Profile Manufacturer Wholesaler Retailer Customer Source: Center for Supply Chain Research®, Penn State University. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 54 Chapter 3 systems play a major role in the success of the overall supply chain. The coordination or integration of the logistics systems in a supply chain can provide a competitive edge in the marketplace. The focus in this chapter is on the dimensions and roles of logistics systems, but one must recognize that no logistics system operates in a vacuum. For example, the outbound part of a manufacturer’s logistics system interfaces with the inbound side of its customer’s logistics system. Supply chain management encompasses logistics as well as other activities discussed in Chapter 1. Having introduced the concept of logistics and its relationship to the supply chain, the next section will discuss definitions of logistics and the value-adding roles of logistics. 3-2 What Is Logistics? The term logistics has become more accepted and recognized by the general public in the last 30 years because television, radio, and print advertising have emphasized the importance of logistics to individuals and organizations. Transportation firms, such as UPS, DHL, and FedEx, frequently refer to their organizations as logistics companies and stress the importance of their service to overall logistics success. Humanitarian relief efforts and military conflicts over the last 30 years have also contributed to increased recognition of logistics because news commentators frequently mention the logistics challenges associated with distributing vital supplies under challenging conditions to foreign locations that are thousands of miles away. Another factor contributing to the recognition of logistics has been increased customer sensitivity not only to product quality but also to the speed and quality of customer service thanks to Amazon and JD.com. Logistics management, as defined in this text, encompasses logistics systems not only in the private business sector but also in the public/government and nonprofit sectors. In addition, service organizations such as banks, hospitals, restaurants, and hotels have logistics challenges and issues, and logistics management is a necessary and increasingly important responsibility for service organizations. Consequently, there are different definitions of logistics because of the different perspectives (see Table 3.1). For the purposes of this text, the definition offered by the Council of Supply Chain Management Professionals (formerly the Council of Logistics Management) is the most appropriate. However, it is important to recognize that logistics owes its origins to the military, which has long recognized the importance of logistics activities for national defense, and that the other definitions are also appropriate for their respective objectives and perspectives. The military definition of logistics encompasses supply items (food, fuel, spare parts) as well as personnel. The term logistics became a part of the military lexicon in the eighteenth century in Europe. The logistics officer was responsible for encamping and quartering the troops as well as for stocking supply depots.1 The logistics concept initially appeared in the business-related literature in the 1960s under the label of physical distribution, which had a focus on the outbound side of the logistics system (plant to market). During the 1960s, military logistics began to focus on the engineering dimensions of logistics—reliability, maintainability, configuration, management, life cycle management, and so on—with increased emphasis on modeling and quantitative analysis.2 In contrast, the business or commercial applications were usually more focused on consumer nondurable goods related to the marketing and physical distribution of finished Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Role of Logistics In Supply Chains Table 3.1 55 Logistics Definitions PERSPECTIVE DEFINITION Inventory Management of materials in motion and at rest Customer Getting the right product, to the right customer, in the right quantity, in the right condition, at the right place, at the right time, and at the right cost (called the “seven Rs of logistics”) Dictionary The branch of military science having to do with procuring, maintaining, and transporting material, personnel, and facilities International Society of Logistics The art and science of management, engineering, and technical activities concerned with requirements, design, and supplying and maintaining resources to support objectives, plans, and operations Utility/Value Providing time and place utility/value of materials and products in support of organization objectives Council of Supply Chain Management Professionals That part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from point of origin to point of consumption in order to meet customer requirements Component support Supply management for the plant (inbound logistics) and distribution management for the firm’s customers (outbound logistics) Source: Adapted from Stephen H. Russell, “A General Theory of Logistics Practices,” Air Force Journal of Logistics 24, no. 4 (2000): 15. products. Engineering-related logistics, as practiced by the military, attracted attention among businesses that produced industrial products that had to be maintained with repair parts over the life cycle of the product. For example, heavy machinery manufacturers, such as Komatsu, have developed world-renowned logistics systems for delivering spare parts to repair and maintain their vehicles. The business sector approach to logistics developed into inbound logistics (materials management to support manufacturing) and outbound logistics (plant distribution to support marketing) during the 1970s and 1980s. Then, in the 1990s, the business sector began to view logistics in the context of a supply or demand chain that linked all of the organizations from the supplier’s supplier to the customer’s customer. As indicated in Chapter1, supply chain management requires a more collaborative and coordinated flow of materials and goods through the logistics systems of all the organizations included in the network. Logistics can be viewed as part of organizational management with four major subdivisions:3 Business logistics — That part of the supply chain that plans, implements, and controls the efficient, effective, flow and storage of goods, services, and related information from point of origin to point of consumption in order to meet customer requirements. Military logistics — The design and integration of all aspects of support for the operational capability of the military forces (deployed or on-base) and their equipment to ensure readiness, reliability, and efficiency. 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 facilities, assets, personnel, and materials to support and sustain a service operation or business. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 56 Chapter 3 All four subdivisions have some common characteristics and requirements such as forecasting, scheduling, and transportation, but they also have some differences in their primary purpose. All four, however, can be viewed in a supply chain context; that is, upstream and downstream other organizations play a role in their overall success and longrun viability. Having offered definitions of logistics, it is now appropriate to discuss how logistics adds value to an organization’s products. 3-3 Value-Added Roles of Logistics There are five interrelated principal types of economic utility that add value to a product or service: form (transformation), time, place, quantity, and possession. Generally, production/manufacturing activities are credited with providing form utility; logistics activities with time, place, and quantity utilities; and marketing activities with possession utility. Each will be discussed below. 3-3a Form Utility Form or Transformation Utility refers to the value added to materials or goods through a manufacturing or assembly process. For example, such utility results when raw materials or components are combined in some predetermined manner to produce a finished product. The classic example is combining raw materials to manufacture aluminum or steel. Another example occurs when Dell combines components along with software to assemble a computer to a customer’s specifications. The process of combining the different materials and/or components represents a change in the product form that adds value to the finished product which is usually more than the sum of the cost of the components. 3-3b Place Utility and Time Utility Logistics provides place utility by moving goods from production points to markets WHERE there is a demand for the finished product. For example, Kimberly Clark can produce thousands of diapers in a day at their plant in Conway, Arkansas, where there would be limited demand in the immediate locale. Logistics extends the boundaries of the market area by transporting the diapers at an effective cost to locations where there is a demand or need for the diapers, thus adding economic value through place utility. The market boundary extension, added by place utility can also increase market competition with lower prices and increased sales. Global trade is usually predicated on such results. If transportation costs decrease, market boundaries can expand further and lower market prices even more with increased competition. Not only is it important that goods and services be available where customers need them, but it is also important that they arrive at the time WHEN customers need them. Time utility is the economic value added to goods or a service by having it available at a demand point at the time when it is needed. Logistics creates time utility through proper inventory management, the strategic location of goods and services, and transportation. For example, having heavily advertised products and seasonal merchandise available in retail stores at the time promised in the advertisement or being able to supply products when there is an emergency such as a flood are good examples of time utility. Time utility is much more important today because of the emphasis on reducing lead time and minimizing inventory levels through logistics-related strategies to improve cash flow. Time utility has also increased in importance with the shipment of higher priced products and more perishable Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Role of Logistics In Supply Chains 57 products which have usually have higher inventory carrying costs. The recent surge in home deliveries, particularly for prepared food products also increases the importance of time utility. There is no question that the importance of time utility will continue to increase because of the demographic factors discussed in the previous chapter. As noted in Chapter 2, Generation Y (born after 1980) represents about 40 percent of the total U.S. population and the “55-plus” age group control 40 percent of the consumption growth in several key sectors of the economy. Both groups share a common characteristic, namely, that convenience and timeliness of service may be as important or even more important than price. This characteristic is compounded by another demographic, increased urbanization of the population. The Gen Y and 55-plus groups are more likely to live in urban areas. Amazon’s growth and success is closely related to the changing demographics in the United States and elsewhere. The products they sell are “only a click away” and that level of their service has become a standard that other retailers feel compelled to emulate. Amazon’s logistics has become a “Big Bang” disrupter for a growing number of consumer products organizations. Who would have predicted in 2000 that Amazon could possibly supplant Walmart as the largest retailer in terms of sales? To many it would have seemed like “comparing apples to oranges” since Walmart had such a dominant position at that time and Amazon was an on-line seller with a limited line of products and no physical store presence. By 2019, Amazon has become a corporate giant with about $258 billion in sales. It is predicted that it will become the largest clothing retailer in the next five years. Its annual Prime Day has become legendary with about 100 million products sold in 36 hours. Time utility is obviously important but so is place utility because the products must be delivered to the customer’s location! The convenience of delivery to your door changes not only the dynamics of retailing, but also the local transportation requirements, especially when coupled with the increasing number of returns. The demographic changes discussed above, namely, the urban population shift and the convenience needs of the Gen Y and Plus-55 generations, have become important causal factors in this equation. The “last mile” has become a frequent topic of discussion among logistics and supply chain professionals. The Amazon model has heightened the issue because of the stress it places upon the delivery service providers and the needed transportation infrastructure. A result has been the development of alternate delivery options such as “crowd sourcing” e.g. the Uber Model and drones. On the Line Age of the Drone: Good News or Bad News??? Logistics and supply chain publications, newspapers, other media are replete with stories about the information systems and related technology that may be changing the “face” of supply chains in terms of inventory replenishment, warehousing, transportation, order processing and fulfillment, etc. There is no question that we are living in an era of change that is challenging shippers, carriers, customers and others to transform, and become more efficient or get “left in the dust.” References are made to driverless vehicles and smart highways, intelligent warehouses, robotics, cloud computing, 3-D printing, and other disruptive technologies. However, nothing seems to have captured the general public’s attention as the DRONE. Before answering the question posed above, let’s review some background on DRONES. The Drone is technically classified as a remote-controlled device and they were developed during World War II for use by the military. Later, remote-controlled model airplanes and boats were developed for outdoor entertainment. These remote-controlled devices became more sophisticated and expensive over Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 58 Chapter 3 time. In the last 20 years more commercial uses were envisioned for these pilotless aircraft in agriculture, forestry and in safety and security, including traffic control. The military drone was viewed as less costly to develop and replace in case of loss and also would reduce human casualties. In recent years, Amazon announced that they were going to experiment with the use of drones for delivery of selected items in the San Francisco area. The initial announcement attracted a lot of attention from both doubters and proponents. The proponents were not surprised since Amazon has frequently pushed the “edge of the envelope” in logistics and supply chain management. As pointed out in a later chapter, transportation provides economic and social benefits, including accessibility and connectivity. The so-called “last mile” in congested city areas for delivery has been an on-going challenge. The selective use of drones in such situations could improve effectiveness if it can be accomplished on an efficient basis. The flexibility of the drone and its minimal requirements for infrastructure make such service attractive and of interest. The interest in using drones to provide delivery service in urban areas is growing with the increase in demand for such service among Gen-Y and the Plus-55 segments of the population. For all those Amazon announcements about drones changing the last-mile delivery game, it is already happening in the east African nation of Rwanda. Zipline, a U.S. company, has partnered with the Rwandan government to launch the world’s first commercial drone delivery service, ferrying vital medical supplies to its far-flung hospitals by air. Since December 2016, the company has dispatched more than 10,000 flights to deliver blood products to hospitals—red blood cells, platelets, and plasma that would have otherwise needed to travel by a treacherous road network that is only 25 percent paved, losing precious hours in the race to save lives. Other success stories are happening as well. DHL uses drones for the delivery of medication on a routine basis for delivery to remote, inaccessible locations and recently entered a strategic partnership to launch a fully automated and intelligent smart drone delivery solution to tackle the last-mile delivery challenges in the urban areas of China. Others are using drones for inventory management in warehouses, raw material extraction in mining, yard management in ports, and traffic safety on the highways. These “Good News” applications offer many potential benefits. What then is the “Bad News? Amazon and Google have been stymied in their efforts to provide such service by various regulatory authorities in the United States. Concerns about privacy, public safety and interference with aviation systems are widely publicized by various media. And, the use of drones to view various activities like forest fires, accidents sites, civil disorder and riot sites can interfere with police and safety responders. Therein lies the problem and potential for the Bad News for Drones. While the devices themselves can perform a useful service for individuals and groups as well as public agencies, they become a true safety threat when used improperly. It’s similar to people texting on mobile phones while driving, a dangerous action that puts others at risk and threatens to harm others. However, with appropriate controls and public cooperation, we can have the Good News without these problems and a new logistics tool. 3-3c Quantity Utility Today’s global competition requires that products not only be delivered on time to the correct destination but also be delivered in the correct quantities to minimize inventory cost and prevent stockouts. The utilities of when and where must be accompanied by HOW MUCH. Delivering the proper quantities of an item to where it is demanded provides quantity utility. For example, assume that General Motors (GM) will be assembling 1,000 automobiles on a given day and is using a just-in-time (JIT) inventory strategy. This will require that 5,000 tires be delivered to support the automobile production schedule. Assume that tire supplier only delivers 3,500 tires on time at the correct location. Even though the when and where utilities are created, the how much utility is not. Thus, GM will not be able Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Role of Logistics In Supply Chains to assemble the 1,000 cars as planned. Logistics must deliver products at the right time, to the right pace, and in the right quantities to add utility and economic value to a product. All three are obviously interrelated. 3-3d Possession Utility Possession utility is primarily created through the basic marketing activities related to the promotion and sale of products and services. Promotion can be defined as the effort, through direct and indirect contact with the customer, to increase the desire to possess a product or benefit from a service. The role of logistics in the economy is related to and supports possession utility. Marketing also depends on logistics, since possession utility cannot be accomplished unless time, place, and quantity utilities are provided. 3-4 Logistics Activities The logistics definition discussed previously indicates activities for which the logistics manager could be responsible: Transportation Warehousing and storage Industrial packaging Materials handling Inventory control Order fulfillment Inventory forecasting Production planning and scheduling Procurement Customer service Facility location Return goods handling Parts and service support Salvage and scrap disposal The list is comprehensive, and some organizations with well-developed logistics functions may not place responsibility for all of these activities within the logistics area. However, decisions regarding these activities impact total logistics costs and require input from logistics managers to evaluate the costs and benefits when changes are made in one or more of the afore mentioned activities. For example, if a procurement manager decides to order larger quantities of certain raw materials or parts for manufacturing to take advantage of price discounts, procurement costs decrease but inventory and warehousing will usually increase. In other words, there is a tradeoff in costs. If the logistics-related costs increase more than the procurement savings, there will be a net loss. Even if there is not a net loss, the reduced total savings should be articulated. The separation of these activities can lead to an increase in overall cost when it is not articulated. 3-4a Transportation Transportation is a very important activity in a logistics system and is usually the largest variable logistics cost. A major focus in logistics and supply chains is on the physical movement or flow of goods in the network that moves the materials and finished products. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 59 60 Chapter 3 The network is usually composed of transportation organizations and related service organizations, e.g., 3PL’s, like those discussed in the On the Line profile. They are evaluated, selected and used by customers to move raw materials, components, and finished goods. Otherwise, a private fleet is needed. It is important to note that transportation is a very important component of supply chains since it provides the physical link among the various organizations in a supply chain. 3-4b Storage A second logistics area, which has a tradeoff relationship with transportation, is storage. Storage involves two separate, but closely related, activities, namely inventory management and warehousing. A direct relationship exists between transportation and the level of inventory and number of warehouses required. For example, if organizations use a relatively slow mode of transportation, they will usually hold higher inventory levels and thus need more warehousing space for inventory. Global transportation in a container ship would be an excellent example of such a situation. An organization could consider using a faster, more expensive mode of transportation such as air service to reduce warehouse space and inventory. The tradeoff costs would have to be evaluated. In other words, would the reduced inventory and warehousing cost offset the higher transportation costs? Typically, the higher the value of the item the more important the inventory and warehousing costs become. For example, logistics costs may be lower using airline service for delivering Mercedes autos from Germany to the United states, but the same would likely not be true for Volkswagens. Several important decisions are related to storage activities (inventory and warehousing), including how many warehouses are needed, how much inventory should be held, where to locate the warehouses, warehouse size, etc. Since transportation affects storage-related decisions, an analytical framework is needed to examine the tradeoffs related to the various alternatives and will be discussed in subsequent chapters. 3-4c Packaging A third area of interest to logistics is industrial (exterior) packaging. Industrial packaging protects the product during movement and storage and includes materials such as corrugated cardboard boxes, stretch wrap, banding, bags, etc. For example, rail or ocean transportation typically require more packaging expenditures because of the greater risk of damage in transit. In analyzing tradeoffs for proposed changes in transportation modes, logistics mangers usually also evaluate how the changes will influence packaging costs. In many instances, changing to a premium transportation mode, such as air, will reduce packaging costs because there is less risk of damage. Packaging has received much more scrutiny in recent years with the increased interest in sustainability since packaging material often end up in landfills. Companies have significantly reduced their packaging waste and environmental concerns by using new alternate materials while improving the protection of the enclosed product(s). More information about packaging will be provided in Chapter 10. 3-4d Materials Handling A fourth area to be considered is materials handling which may also be of interest to other functions in a typical manufacturing organization. Materials handling is important to consider in warehouse design and warehouse operations because logistics Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Role of Logistics In Supply Chains managers are concerned with the movement of goods into a warehouse from a transportation vehicle, the placement of goods in a warehouse, the movement of goods from storage to order-picking areas and eventually to dock areas for transportation out of the warehouse. Materials handling equipment is usually used for such short-distance warehouse movement and includes equipment such as conveyors, forklift trucks, overhead cranes, and automated storage and retrieval systems (ASRS). Materials handling has become one of the most dynamic areas of logistics in the last 10 years because of the fast-paced changes in technology such as robots and automated retrieval systems which will be discussed in Chapter 10. Also, the increased emphasis upon timely delivery of products has led to more automation in storage facilities. Materials handling designs should be coordinated with manufacturing, for example, in order to ensure congruity between the types of equipment used and the storage devices they are moving. 3-4e Inventory Control A fifth area to examine is inventory control which has two dimensions, namely assuring adequate inventory levels for manufacturing and order fulfillment and certifying inventory accuracy. Assuring adequate inventory levels requires monitoring current inventory levels and placing appropriate replenishment orders from manufacturing or vendors to prevent stockouts. Another dimension of inventory control is certifying inventory accuracy. As inventory is depleted to fill customer orders, a facility’s information system should be tracking the status of current inventory levels in order to replenish stock and minimize stockouts. To assure that the actual physical inventory levels match those shown in the information system, cycle counts are often taken of selected items periodically throughout the year. The use of barcodes and RFID tags has helped to make this process more efficient and effective. There has also been more attention and emphasis upon technology to improve visibility of inventory in the supply chain. Effective visibility of inventory can reduce uncertainty which will lower inventory costs and improve customer service. 3-4f Order Fulfillment Order fulfillment consists of the activities involved in filling and shipping customer orders. Order fulfillment is important because it directly impacts the time that elapses from when a customer places an order until the customer receives the order. This may also be referred to as order lead time. The four basic processes or activities of order fulfillment or lead time are order transmittal, order processing, order preparation, and order delivery which will be discussed in more detail in Chapter 8. As indicated previously, the so-called Amazon Effect has raise customer expectations about speed of order fulfillment and delivery with its one- and two-day Prime fulfillment service levels. 3-4g Forecasting Another important activity is demand forecasting. Reliable forecasting is important to meet inventory requirements for manufacturing efficiency and customer needs. Logistics and supply chain personnel should develop inventory forecasts in conjunction with manufacturing schedules and marketing forecasts of demand to assure that proper inventory levels are maintained to meet customer requirements. This topic will receive additional attention in Chapter 7 because of its increased importance to effective and efficient supply chains. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 61 62 Chapter 3 3-4h Production Planning Another area of interest to logistics is production planning and scheduling for effective inventory control. Once a forecast is developed and the current level of inventory on-hand and the usage rate are determined, production managers can calculate the number of units to manufacture to ensure adequate market coverage. However, organizations with multiple product lines that require manufacturing-process timing may require close coordination or actual control of production planning and scheduling by logistics. 3-4i Procurement Procurement is another activity that can be included in logistics. The basic rationale for including procurement in logistics is that transportation and inventory costs are related to the geographic location (distance) of raw materials and other needed items to meet manufacturing needs. The quantities purchased also affect total logistics costs. For example, buying components parts from China in a large quantity for a manufacturing facility located in the United States might require a transportation lead time of and inventory holding space for 10 to 12 weeks. This would have a direct impact on the inventory levels needed at the manufacturing facility to prevent a plant shutdown. Using a premium mode of transportation to reduce this lead time or ordering in a smaller quantity would reduce inventory levels but would probably increase transportation costs. Procurement decisions also need to be made from a systems perspective to achieve lower overall cost levels. 3-4j Customer Service Two dimensions of customer service are important to this discussion: (1) the process of interacting directly with the customer to influence or take the order and (2) the levels of service an organization offers to its customers. From an order-taking perspective, logistics is concerned with being able to inform the customer, at the time the order is placed, if the inventory is available and when the order should be delivered. This requires coordination among inventory control, manufacturing, warehousing, and transportation when the order is taken for delivery time and product availability. As stated previously, demographic changes, have increased the importance of customer service for supply chain managers. The second dimension of customer service relates to the levels of service the organization promises its customers. These service dimensions could include order fill rates and on-time delivery rates. Decisions about inventories, transportation, and warehousing relate to customer service levels. Logistics plays an important role in ensuring that the customer gets the right product at the right time and the right quantity. Logistics decisions impact product availability and lead time, which are critical to customer service. 3-4k Facility Location Another area of interest to logistics is plant and warehouse site location. A site location change could alter time and place relationships between facilities and markets or between supply points and manufacturing facilities. Such changes will affect transportation costs and service, customer service, and inventory requirements. Therefore, the logistics manager must be engaged and must provide input for facility location decisions. As companies have become more global in the scope of their operations, the importance of supply chain input into the location decision has become more critical. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Role of Logistics In Supply Chains 63 3-4l Other Activities Other areas that can be considered a part of logistics include parts and service support, return goods handling, and salvage and scrap disposal. Logistics managers can also provide valuable input for product design as well as to maintenance and supply services, since transportation and storage decisions impact these decisions. These areas may require the development of a reverse logistics system that will allow used, broken, or obsolete products to be returned to the supplier for disposition which is usually managed in the logistics area directly or through a third-party logistics service provider. On the Line “UPS and Wiley Coyote” The 2015 acquisition of Coyote Logistics by UPS conjures up memories of the origins of UPS and the strategic journey to their present position in the logistics and supply chain world. Some logistics and supply chain professionals may not be aware of the relatively humble beginnings of UPS in 1907 as American Messenger Service, a home delivery bicycle courier in Seattle. Prior WWII, many urban families lived in very modest homes and did not own automobiles. They would use public transportation (bus and trolley cars) to get to the central districts in the city where the large multiple-story department stores were located to shop for nonfood items, normally not available in the smaller neighborhood retail stores and/or to see more variety. If they had too many packages or the items were too large for the transit carriers, the items could be delivered by UPS. It was an invaluable service “for the times,” but “times change.” With the end of World War II, there was pent up demand and increased household savings from the War years. Families started to move from small, urban homes to larger suburban residencies with individual lots and most families acquired an automobile for convenience and shopping. This PostWar phenomenon had serious implications for UPS as retail stores started locating in shopping malls with free parking for shoppers which lessened the demand for parcel delivery. UPS had to do an evaluation of their business model and strategy, and ask the classic question: What Business Are We In?” UPS essentially answered the question by stating that they were a transportation company that specialized in moving small packages between and among businesses as well as residencies, that is, business-to-business, business-to-residences, and residences-to-residences. This restatement of their mission opened up many new opportunities but presented some major challenges going forward. Intrastate and interstate transportation carriers were highly regulated by the federal government and state agencies where operating authorities had to be approved. It was especially challenging for approval of interstate service. Also, it put them in direct competition with the U.S. Post Office which offered similar service but not direct pick-up at businesses and homes. Over time they mitigated these “roadblocks” and with the elimination of federal regulation of motor carrier transportation at the federal level, they could move ahead more aggressively. However, deregulation of transportation also provided an opportunity for FedEx to emerge. Initially one could say that UPS provided surface transportation service and FedEx provided air service. However, that distinction has become blurred over time as both companies moved aggressively to grow and expand. Both UPS and FedEx have used acquisition of established companies to expand the scope of their services and global geographic reach. The end result has been the development of two successful organizations who started as delivery companies and have become much more comprehensive logistics service companies who offer a variety of services for businesses and individuals. Both companies have become household names as they have ridden the wave of interest and expansion of logistics and supply chain management into the twenty-first century by providing service on a global basis. UPS generated $72.5 billion in revenue during 2018 with FedEx at $65.5 billion. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 3 Their ability to identify and meet the needs of global organizations has accounted for their growth and expansion, but competition and the need to be more efficient and effective has necessitated a continual effort to improve and stay ahead of their rivals. Coyote Logistics appears to be a great fit for UPS just as GENCO Distribution was for FEDEX. The latter provided entry into the increasing product returns or reverse logistics business for FEDEX. UPS is looking to expand aggressively into the freight brokerage which is an important part of Coyote’s success and profitability because of their development of a proprietary scheduling technology for managing that service. This same technology should be a major benefit to UPS to handle their fleet of trucks, especially during the peak holiday season which has been a serious challenge for UPS during the last several seasons. The key takeaway here is that UPS has been able to change their internal operations and business model to meet the challenges and changes occurring in the external environment and to recognize the criticality of the “final mile” of the supply chain which is essentially a logistics function. Source: The acquisition of Coyote Logistics by UPS is described in Jeff Berman, “UPS’s Acquisition of Coyote Logistics is Made Official,” Logistics Management, July 31, 2015. The content of this On-the-Line is drawn from the content of this article and a number of other relevant sources. 3-5 Logistics in the Economy: A Macro Perspective The overall cost of logistics on a macro basis increases with growth in the economy. In other words, if more goods and services are produced, total logistics costs will increase. To determine the efficiency of the logistics system, the total logistics costs need to be measured in relationship to gross domestic product (GDP), which is a widely accepted barometer used to gauge the rate of growth in the economy. In 2018, logistics-related costs accounted for 8 percent of GDP and totaled $1.64 trillion. This was an increase of 11.4 percent from the previous year as companies retooled supply chains in response to the growth in online sales and tight freight hauling capacity drove up shipping rates.. As indicated in Figure 3.2, total U.S. business logistics costs have been on the rise since the low points in 2009 during the Great Recession. Over the last decade, however, they have Figure 3.2 U.S. Business Logistics Costs 1,800 $1,636 1,600 1,400 1,200 $Billions 64 $1,063 $1,126 $1,222 $1,274 $1,318 $1,401 $1,429 $1,411 $1,468 1,000 800 600 400 200 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: 30th Annual Council of Supply Chain Management Professionals (CSCMP) State of Logistics Report (June 18, 2019). Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Role of Logistics In Supply Chains 65 remained between 7.4 percent and 8 percent of nominal GDP. That is much lower than in the mid-1970s when U.S. business logistics costs were closer to 20 percent of GDP. The greater control over logistics cost as a percent of GDP has resulted from a significant improvement in the overall logistics systems of the organizations operating in the economy. This reduction in relative cost allows organizations to be more competitive since it directly impacts the cost of producing goods. It can be argued that the turnaround that occurred in the U.S. economy following the Great Recession is due in part to the reduction in relative logistics costs. Some additional understanding of logistics costs can be gained by examining the three major cost categories—warehousing and inventory costs, transportation costs, and other logistical costs. These costs are depicted in Figure 3.3 for 2018. A trend in levels of inventories in manufacturing and trade during the 1999–2018 time period are shown in Figure 3.4. Warehousing costs are those associated with the assets used to hold inventory. Inventory costs are all the expenses associated with holding goods in storage. Carrying costs include interest expense (or the opportunity cost associated with the investment in inventory), risk-related costs (obsolescence, depreciation), and service-related costs (insurance, taxes). Transportation costs are the total national expenditures for the movement of freight in the United States. The third category of logistics costs is the administrative and shipper-related costs associated with managing logistics activities and personnel. Figure 3.3 U.S. Business Logistics Costs—2018 $ BILLION Transportation Costs Motor carriers (full truckload, less-than-truckload, private/dedicated) 669 Parcel (carload and intermodal) 105 Rail 88 Air freight (domestic, import, export, cargo, and express) 77 Water (domestic, import, and export) 46 Pipeline 53 Subtotal 1,037 Inventory carrying costs Storage 153 Financial cost 193 Other (obsolescence, shrinkage, insurance, handling, others) 148 Subtotal 494 Carriers’ support activities 52 Shippers’ administrative costs 52 Other costs Subtotal Total logistics cost 104 1,635 Source: 30th Annual Council of Supply Chain Management Professionals (CSCMP) State of Logistics Report. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 3 Figure 3.4 Manufacturing and Trade Inventories 8,00,000 7,00,000 6,00,000 Millions of Dollar 5,00,000 4,00,000 3,00,000 2,00,000 1,00,000 0 19 9 20 9 0 20 0 0 20 1 0 20 2 0 20 3 0 20 4 0 20 5 0 20 6 0 20 7 0 20 8 0 20 9 1 20 0 1 20 1 1 20 2 1 20 3 1 20 4 1 20 5 1 20 6 1 20 7 18 66 Manufacturing Wholesale Trade Retail Trade Source: Manufacturing & Trade Inventories & Sales, U.S. Census Bureau. The declining trend for logistics costs relative to GDP started in the early 1980s and was related to the deregulation of transportation, which permitted much more flexibility for shippers to purchase transportation services and allowed more flexibility for carriers to adjust their freight rates and service in response to competition. Transportation rates are also impacted by the fluctuations in fuel prices which have benefited by the increase in U.S. domestic production in recent years. A second factor contributing to the trend has been the improved management of inventory levels with more attention being placed on inventory investment and the technology available to managers to make more effective inventory decisions. Finally, the focus by many organizations on cash flow resulted in more emphasis on inventory turnover. The two largest cost categories in any organization’s logistics system are transportation and inventory costs. As indicated, transportation is usually the single largest variable cost. Note the magnitude of the motor carrier expenditures relative to other carriers shown in Figure 3.3 ($669 billion versus $368 billion for all other modes combined). This level of expenditure is not based necessarily on the lowest transportation rates but also reflects the value to shippers of the service provided by motor carriers and importance of LANDED COSTS. This point is discussed in Chapter 11 on transportation, but it is worth noting here because logistics management requires examining the total cost of logistics, not just one cost such as transportation. 3-6 Logistics in the Firm: The Micro Dimension The micro dimension of logistics examines the relationships between logistics and other functional areas in an organization which have been indicated previously in this chapter but these relationships deserve additional consideration, especially marketing, manufacturing or operations, finance and accounting, and others. Logistics focuses on processes that cut across traditional functional boundaries, particularly in today’s Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Role of Logistics In Supply Chains environment with emphasis on the supply chain. Consequently, logistics interfaces in many important ways with other functional areas since the logistics-related flows, as well as supply chain flows, tend to be horizontal in an organization, cutting across other functions. 3-6a Logistics Interfaces with Manufacturing or Operations A classic interface between logistics and manufacturing relates to the length of the production run. Manufacturing efficiency is often based upon long production runs or scale with infrequent manufacturing line setups or changeovers. Longer production run can result in higher levels of inventory for some finished products and limited supplies of others. The best or optimal manufacturing decisions require managers to analyze the cost tradeoffs of longer production runs and their impact on inventory cost. Shorter production runs with more efficient set-ups can provide flexibility to meet short-run changes in demand. The trend toward “pull” systems where the product is “pulled” in response to demand as opposed to be “pushed” in advance of demand necessitates such flexibility. This practice lowers inventory levels, which can lower total logistics costs even though production costs may increase. The production manager is also interested in minimizing the inventory impact of seasonal products. For example, the candy industry is affected by several holidays, namely, Valentine’s Day, Easter, Halloween, and Christmas. To minimize manufacturing cost and potential stockouts, production managers produce candy in advance of the holiday or event. This strategy requires accumulating inventory and the associated costs. The manufacturing cost savings should be traded off against the inventory costs and other related benefits or costs. Logistics and manufacturing also interface on the inbound side of production. For example, a shortage or stockout of input materials could result in the shutdown of a manufacturing facility and an increase in production costs. The logistics manager should ensure that available quantities of raw materials and components are adequate to meet production schedules yet are conservative in terms of inventory carrying costs. Because of the need for this type of coordination, many organizations today have shifted the responsibility for production scheduling from manufacturing to logistics or have made it a shared responsibility. Another activity at the interface of logistics and manufacturing is industrial packaging, which many organizations treat as a logistics responsibility. In the context of manufacturing or logistics, the principal purpose that industrial packaging serves is to protect the product from damage. This is distinct from whatever value the consumer packaging might have for marketing or promotional reasons. The interface between logistics and manufacturing is becoming more critical, given the growth in procurement of raw materials and components from offshore sources and sustainability issues. Also, many organizations today are making arrangements with third-party manufacturers, “co-packers,” or contract manufacturers to produce, assemble, or enhance some or all of the organization’s finished products. These arrangements are especially prevalent in the food industry where some manufacturers produce food items to be sold under someone else’s label. Management of global supply chains is intensifying the importance of the need for collaboration between logistics and production. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 67 68 Chapter 3 3-6b Logistics Interfaces with Marketing Logistics has an important relationship with marketing that also necessitates collaboration. The rationale for this strong relationship is that physical distribution, or the outbound side of an organization’s logistics system, plays an important role in the sale of a product. In some instances, order fulfillment may be the key variable in the continuing sales of products; that is, the ability to provide the right product at the right time to the right place in the right quantities and the right cost can be the critical element in making a sale. This section discusses the interfaces between logistics and marketing activities in each principal area of the so-called marketing mix—price, product, promotion, and place. 4 In addition, recent trends in the interface between logistics and marketing will be discussed. Price Organizations selling products often provide a discount schedule for larger purchase quantities. If such discount schedules relate to transportation rate discount schedules in terms of weight, then both the shipper and customer should be able to reduce total transportation cost. In some organizations, entire pricing schedules conform to various quantities that can be shipped by modes of transportation. Under the Robinson–Patman Act and related legislation, transportation cost savings are a valid reason for offering a price discount. In addition, the logistics manager should be interested in the volume requirements of the price schedule because this impacts inventory storage requirements, replenishment times, and other aspects of customer service. An organization should consider its ability to provide sufficient volumes within an attractive price schedule. The logistics manager should be notified of pricing specials so that he or she can adjust inventory levels to meet projected demand. Product Much has been written about the number of new products that come on the market each year. Their size, shape, weight, packaging, and other physical dimensions affect the ability of logistics and supply chain systems to move and store the new products. The logistics manager can offer input when marketing is deciding on the physical dimensions of new products to minimize problems. In addition to new products, organizations frequently change established products to improve or maintain sales. Very often, such changes might take the form of new package design and, perhaps, different package sizes. The physical dimensions of products affect the utilization and costs of warehousing and transportation systems such as equipment needed, damage rates, storage ability, use of materials-handling equipment such as conveyors and pallets, industrial packaging, etc. Frustration can mount for logistics managers when faced with a change in a product’s dimensions that makes use of standard-size pallets uneconomical, uses trailer or container space inefficiently, or creates the risk of product damage. These issues may seem somewhat trivial to sales and marketing executives, but they greatly affect an organization’s overall success and profitability in the long run. Collaboration is needed to give logistics managers opportunities for input in these decisions. Another marketing area that affects logistics is consumer packaging. The marketing manager often regards consumer packaging as a “silent salesperson.” At the retail level, the package can be an influential factor in the sale of a product. The marketing manager will be concerned about package appearance, information provided, and the other related aspects; for a consumer comparing several products on a retailer’s shelf, the consumer Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Role of Logistics In Supply Chains package might make the differences. The consumer package is also important to the logistics manager for several reasons. First, the consumer package has to fit into the industrial package, or the external package. The size, shape, and other dimensions of the consumer package will affect the use of the industrial package. Second, the protection offered by the consumer package also concerns the logistics manager. The physical dimensions and the protection aspects of consumer packages affect the logistics system in the areas of transportation, materials handling, and warehousing. Simply stated, consumer packaging can negatively impact logistics costs (efficiency) and customer service if there is damage. Collaboration is an important ingredient for logistics efficiency and marketing effectiveness. Promotion Companies may spend millions of dollars on national advertising campaigns and other promotional practices to improve sales. An organization making a promotional effort to stimulate sales should collaborate with the logistics manager so that appropriate levels of inventory will be available for distribution to the customer. Problems can still occur, even with collaboration, because of the difficulty of forecasting the demand for a new product, but frequent exchange of information can mitigate problems. Chapter 4 discusses the growth of omni-channel distribution which necessitates even more collaboration between logistics and marketing. Place The place decision refers to the distribution channel selection and involves both transactional and physical distribution channel decisions. Marketers typically become more involved in making decisions about marketing transactions and in deciding, for example, whether to sell products to wholesalers or to deal directly with retailers. From the logistics manager’s perspective, such decisions can affect logistics system costs and requirements. For example, wholesalers purchase in larger quantities with more predictable and consistent demand, thus lowering their service cost. The dominance of super-size retailers like Wal-Mart and Amazon have significantly changed this dynamic, as indicated in Chapter 1. Recent Trends Perhaps, the most significant trend is that marketers recognize the strategic value of place in the marketing mix and the increased revenues and customer satisfaction that might result from excellent logistics service. As a result, many organizations have recognized customer service as the interface activity between marketing and logistics and have aggressively and effectively promoted customer service as a key element of the marketing mix. Organizations in such industries as food, chemicals, pharmaceuticals, and technology have reported considerable success with this strategy to improve efficiency and effectiveness. 3-6c Logistics Interfaces with Other Areas While manufacturing and marketing are probably the two most important internal functional interfaces for logistics in a product-oriented organization, there are other important interfaces. The finance area has become increasingly more important during the last decade. In fact, it will be argued in a later chapter that finance should be the second language of logistics and supply chain management. The impact that logistics and supply chain management can have upon return on assets (ROA) or return on investment (ROI) is very significant. Logistics can positively impact ROA in several ways. First, inventory is both a current asset on the balance sheet and a variable expense on the income statement. Reducing inventory levels reduces the asset base as Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 69 70 Chapter 3 well as the corresponding variable expenses, thus having a positive impact on ROA. Second, transportation and warehousing costs can also influence ROA. If an organization owns its warehouses and transportation fleet, they are fixed assets on the balance sheet. If these assets are reduced or eliminated, ROA should increase. Similarly, if an organization utilizes 3PL’s for warehousing and transportation, variable expenses and asset levels will usually be impacted. Finally, the focus on customer service (Chapter 8) can increase revenue. As long as the incremental increase in revenue is larger than the incremental increase in the cost of customer service, ROA will increase. Logistics managers are also expected to justify increased investment in logistics-related assets like warehouse automation using acceptable financial tools related to payback periods. Consequently, supply chain and logistics managers must be knowledgeable about financial metrics and standards of performance. Accounting is also an important interface for logistics. Accounting systems are critical for providing appropriate cost information for analysis of alternative logistics options. Far too often in the past, logistics-related costs were not measured specifically and were often accumulated into an overhead account, which made it extremely difficult to systematically monitor logistics costs. Greater interest in customer profitability and the related cost accounting systems such as activity-based costing (ABC) has been beneficial to improving the quality of logistics data and analyses. Accounting systems are also critical for measuring supply chain tradeoffs and performance. 3-7 Logistics in the Firm: Factors Affecting the Cost and Importance of Logistics This section deals with specific factors relating to the cost and importance of logistics. Understanding some of the competitive, product, and spatial relationships of logistics can help explain the strategic role of an organization’s logistics activities. 3-7a Competitive Relationships Frequently, competition is narrowly interpreted only in terms of price competition. While price is certainly important, customer service can also be a very important form of competition. For example, if an organization can reliably provide customers with its products in a relatively short time period, then its customers can reduce their inventory costs. Customers may consider minimizing their inventory costs to be just as important as keeping product prices low, since minimizing such costs will contribute to profit. Also, as discussed previously in this Chapter, the growth of e-commerce convenience and speed of delivery increases customers’ expectations for logistics excellence. Order Cycle Order cycle length directly affects inventory levels. Stated another way, shorter order cycles reduce the inventory required by the customer. Figure 3.5 shows this relationship. Order cycle can be defined as the time that elapses from when a customer places an order to when the customer receives the order. The order cycle includes activities such as order transmission, order receipt, order processing, order preparation (picking and packing), and order shipment. Figure 3.5 shows that longer order cycle times usually necessitate higher customer inventories. For example, assume that a customer is using 10 units of a product per day and that the supplier’s order cycle time is eight days. The customer’s average inventory Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Role of Logistics In Supply Chains 71 The Relationship Between Required Inventory and Order Cycle Length from a Customer Perspective Units of inventory Figure 3.5 Order cycle (days) Source: Center for Supply Chain Research®, Penn State University. during order cycle time is 40 units (80/2). If the supplier can reduce the order cycle time to four days, the customer’s average inventory is reduced to 20 units (40/2). Therefore, such a cost reduction could be as important as a price reduction. Substitutability Substitutability very often affects the importance of customer service. In other words, if a product is similar to other products, consumers may be willing to substitute a competitive product when a stockout occurs. Therefore, customer service is usually more important for highly substitutable products than for products that customers are willing to wait for or back-order. This is one reason why companies advertise their brands. They want consumers to ask for their brands, and, if their brands are temporarily not available, they would like consumers to wait until they are. As far as logistics managers are concerned, an organization wishing to reduce its lost sales cost, which is a measure of customer service and substitutability, can either spend more on inventory and/or spend more on transportation to reduce the order cycle. When substitutability is an important issue, visibility in the supply chain becomes more important. Inventory Effect Figure 3.6 shows that by increasing inventory costs (either by increasing the inventory level or by increasing the reorder point), organizations can usually reduce the cost of lost sales. An inverse relationship exists between the cost of lost sales and inventory cost. However, organizations are usually willing to increase the inventory cost only until total costs start to increase. Stated in economic terms, it is the point at which the marginal savings from reducing lost sales cost equals the marginal cost of carrying additional inventory. Transportation Effect A similar relationship exists with transportation as can be seen in Figure 3.7. Companies can usually tradeoff increased transportation costs against decreased lost sales costs. For transportation, this additional expenditure usually involves buying a better service—for Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 3 Figure 3.6 The General Relationship of the Cost of Lost Sales to Inventory Cost TC Logistics cost INV COLS Flow TC = Total cost INV = Inventory cost COLS = Cost of lost sales Source: Center for Supply Chain Research®, Penn State University. Figure 3.7 The General Relationship of the Cost of Lost Sales to Transportation Cost TC Tr Logistics cost 72 COLS Improved transportation service Flow TC = Total cost Tr = Transportation cost COLS = Cost of lost sales Source: Center for Supply Chain Research®, Penn State University. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Role of Logistics In Supply Chains 73 example, switching from water to rail, or rail to motor, or motor to air. The higher transportation cost could also result from shipping more frequently in smaller quantities at higher transportation prices. As indicated in Figure 3.7, organizations can reduce the cost of lost sales by spending more on transportation service to improve customer service. Once again, most organizations willingly do this only up to the point where the marginal savings in lost sales cost equals the marginal increment associated with the increased transportation cost. Organizations can spend more for inventory and transportation simultaneously to reduce the cost of lost sales. Improved transportation will usually result in lower inventory cost, that is, the situation is more interactive and coordinated than is indicated above. 3-7b Product Relationships A number of product-related factors affect the cost and importance of logistics. Among the more significant of these are dollar value, density, susceptibility to damage, and the need for special handling. Dollar Value The product’s dollar value typically affects warehousing costs, inventory costs, transportation costs, packaging costs, and even materials-handling costs. As Figure 3.8 indicates, as the product’s dollar value increases, the cost in each identified area also increases. The actual slope and level of the cost functions will vary among products. Transportation prices reflect the risk associated with the movement of goods, and higher value products are often more susceptible to damage and loss and/or require more care in Figure 3.8 The General Relationship of Product Dollar Value to Various Logistics Costs Inv Logistics cost Tr Pkg Dollar value of product Flow Inv = Inventory cost (including storage) Tr = Transportation cost Pkg = Packaging cost Source: Center for Supply Chain Research®, Penn State University. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 3 the movement. Transportation providers may also charge higher prices for higher-value products since these customers may be willing to pay higher rates for transportation service. Warehousing and inventory costs also increase as the dollar value of the product increases. Higher value means more working capital invested in inventory, resulting in higher total capital costs. In addition, the risk factor for storing higher-value products increases the costs of obsolescence and depreciation. Also, since the physical facilities required to store higher-value products are more sophisticated, warehousing costs increase with higher dollar value products. Packaging costs also usually increase because the organization will use protective packaging to minimize potential damage to the product. An organization spends more effort in packaging a product to protect it from damage or loss if it has higher value. Finally, materials-handling equipment used to meet the needs of higher-value products is very often more sophisticated. Organizations are usually willing to use more capital-intensive and expensive equipment to speed higher-value goods through the warehouse and to minimize the chance of damage and improve customer service. Density Another factor that affects logistics cost is product density, which refers to the weight/space ratio of the product. An item that is lightweight compared to the space it occupies— for example, pillows—has low density. Density affects transportation and warehousing costs, as shown in Figure 3.9. As density increases for a product, its transportation and warehousing costs tend to decrease. Figure 3.9 The General Relationship of Product Weight Density to Logistics Costs Logistics cost 74 Tr Inv Whse Weight density of product Low High Tr = Transportation cost Inv = Inventory cost (including storage) Whse = Warehousing cost Source: Center for Supply Chain Research®, Penn State University. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Role of Logistics In Supply Chains 75 When establishing their prices, transportation providers consider how much weight they can fit into their vehicles, since they quote their prices in dollars and cents per hundred pounds. Therefore, on high-density items, providers can charge a lower price per hundred pounds because they can fit more weight into their vehicle. For example, assume a motor carrier needs $5,000 in revenue from the freight that fills a 53-foot trailer. A low-density product might be able to fit 20,000 pounds into this trailer to fill it completely. The motor carrier would need to charge $25 per hundred pounds for this product. On the other hand, a high-density product might be able to fill the trailer at 40,000 pounds. The resulting charge per hundred pounds would be $12.50. Susceptibility to Damage The third product factor affecting logistics cost is susceptibility to damage (see Figure 3.10). The greater the risk of damage to a product, the higher the transportation and warehousing cost. Because of a higher degree of risk and liability associated with more fragile goods, higher are prices charged by both transportation and warehousing providers. These providers also charge higher prices because of measures they must take to prevent product damage. Special Handling Requirements A fourth factor is special handling requirements for products. Some products might require specific services, for example, refrigeration, heating, or strapping. These special requirements will usually increase warehousing, transportation, and packaging costs. Figure 3.10 The General Relationship of Product Susceptibility to Loss and Damage to Logistics Costs Pkg Logistics cost Tr Whse Susceptibility to loss and damage Flow Pkg = Packaging cost Tr = Transportation cost Whse = Warehousing cost Source: Center for Supply Chain Research®, Penn State University. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 76 Chapter 3 3-7c Spatial Relationships A final topic that is extremely significant to logistics is spatial relationships, the location of fixed points in the logistics system with respect to demand and supply points. Spatial relationships are very important to transportation costs, since these costs tend to increase with distance. Consider the following example (see Figure 3.11). Example The firm located at point B has a $1.50 production cost advantage over Firm A, since Firm B produces at $7.00 per unit as opposed to $8.50 per unit for Firm A. However, Firm B pays $1.35 for inbound raw materials ($0.60 1 $0.75) and $3.50 for outbound movement to the market, for a total of $4.85 in per-unit transportation charges. Firm A pays $0.90 for inbound raw materials and $1.15 for outbound movement, for a total of $2.05 in per-unit transportation charges. Firm A’s $2.80 transportation cost advantage offsets the $1.50 production cost disadvantage. Firm B could investigate alternative transportation strategies to compete more effectively in the market. The distance factor or spatial relationships may affect logistics costs in ways other than transportation costs. For example, a firm located far from one or more of its markets might need to use a market-oriented warehouse to make customer deliveries in a satisfactory time period. Therefore, distance can add to warehousing and inventory carrying costs. Distance or spatial relationships are of such importance to logistics that logistics responsibilities might include site location. For many organizations, warehouse location decisions are made based on distance to market, distance from suppliers, and access to transportation. Location, or site analysis, is covered in Chapter 4. Figure 3.11 Logistics and Spatial Relations SB1 SA1 $0.40 SA2 $0.50 SB2 A $0.60 Production cost $8.50 $0.75 B $1.15 $3.50 Production cost $7.00 Market Source: Center for Supply Chain Research®, Penn State University. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Role of Logistics In Supply Chains 3-7d Logistics and Systems Analysis An earlier section pointed out that developments in analyses and methodologies have facilitated the development of logistics. One such development was systems analysis, or the systems concept. Essentially, a system is a set of interacting elements, variables, parts, or objects that are functionally related to one another and that form a coherent group. For example, students learn about the solar system and how relationships among the planets, the sun, and the moon result in day and night, changing weather, and so forth. The general tenet of the systems concept is that the focus is not on individual variables but on how they interact as a whole. The objective is to operate the whole system efficiently and effectively, not just the individual parts. From a logistics and supply chain perspective, this is a major challenge, but one that can yield great performance benefits if achieved. SUMMARY Logistics developed as an important area of business after World War II with several phases of development which increased its importance and value to many different organizations including the government and nonprofit sectors. Logistics has become an important component of efficient and effective supply chains. The coordination and integration of the logistics systems of the organizations in a supply chain facilitate the successful management of supply chains. While there are a number of different definitions for logistics, it is important the appreciate and understand the reasons for the different definitions. Logistics is an area of management that has four subdisciplines: business, military, service, and event. They have common characteristics and requirements but differences in their primary purposes. On a macro basis, logistics-related costs have helped the U.S. economy maintain its competitive position on a global basis which has become increasingly important in the twenty-first century. Logistics adds place, time, and quantity utilities to products and enhances the form and possession utilities created by manufacturing and marketing. There is an important interrelationship among all five utilities. Logistics has an important systemic relationship with manufacturing, marketing, finance, and other areas of the organization which aids in making organizations more efficient and effective. Logistics activities, including transportation, inventory, warehousing, materials handling, industrial packaging, customer service, and forecasting, are important components of successful supply chains. Logistics systems can be viewed or analyzed in several different ways, including materials management versus physical distribution, cost centers, nodes versus links, and channels (see Appendix 3B). All four approaches are viable for different purposes. Logistics is frequently analyzed from a systems approach, which emphasizes cost and service tradeoffs when changes are proposed. Either a short or a long-run perspective can be used. (see Appendix 3A.) The cost of logistics systems can be affected by a number of major factors, including competition in the market, the spatial relationship of nodes, and product characteristics. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 77 78 Chapter 3 STUDY QUESTIONS 1. Provide a definition of logistics and a rationale for why it is important in private companies and public organizations. 2. Explain the importance of logistics on a macro level and the contributions of logistics to the economy. 3. How does logistics add value in the economy? How does logistics add value for firms? What, if any, are the differences? 4. Explain the relationship between logistics and supply chain management? 5. Compare and contrast the four major subdivisions of logistics discussed in this chapter. 6. Discuss the relationship between manufacturing and logistics. What are the tradeoffs between the two areas? Has the relationship become more or less important in the twenty-first century? 7. Physical distribution has a special relationship to marketing. What is the nature of the relationship and why is it growing in importance 8. Logistics encompasses a relatively large number of managerial activities. Discuss five of these activities and why they are important to logistics systems. Are some of these activities increasing in importance in the twenty-first century? Why? 9. Why do companies analyze their logistics systems from perspective of nodes and links? What additional or special insights do they gain by this analysis? 10. What product characteristics affect logistics costs? Discuss the impact of these characteristics on logistics costs. Are some characteristics increasing in importance in the twenty-first century? Why? Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Role of Logistics In Supply Chains CASE 3.1 Supply Chain Profile Jordano Foods Tracie Shannon, Vice President for Logistics at Jordano Foods (Jordano), had sent the following e-mail to members of the executive committee of the company two years ago: I just returned from a lengthy meeting with Susan Weber, CEO of SAB Distribution. She is under great pressure from her Board of Directors to continue to grow market share and improve profitability. SAB received a recent tender offer from another larger food distributor to buy the company and several members of their board have recommended that the offer be seriously considered. Susan feels that SAB can continue to improve their “bottom line” with additional changes in service offerings. Ms. Weber met with SAB’s major suppliers and customers to discuss new services that SAB can offer to enhance the competitiveness of the SAB supply chain. She was particularly concerned with the changing demographics of their customer base, particularly the Gen-Y and Plus-55 age groups. Background on Jordano Foods Jordano Foods was founded in 1950 in Lewistown, Pennsylvania, by two brothers, Luigi and Mario Jordano. Their parents operated a restaurant in Burnham, Pennsylvania, featuring Italian cuisine. Marie Jordano was famous for her culinary skills. She developed her own recipes for pasta sauce, meatballs, fresh and dry pasta, and other Italian food items. Luigi and Mario worked in a restaurant prior to establishing Jordano Foods. The brothers felt that they could capitalize on the family recipes by selling pasta, sauces, and other related Italian food products to restaurants in nearby communities in central Pennsylvania. Their initial venture was so successful that they expanded their product line and began selling their products to small and medium-sized wholesalers and distributors throughout Pennsylvania. They built a plant in Lewistown to produce their food products and subsequently built another plant in Elizabethtown, Pennsylvania, and a warehouse in Mechanicsburg, Pennsylvania. Current Situation The 1990s and 2000s were times of significant growth for Jordano. Mario and Luigi were still active in the company as president/CEO and chairman of the board, respectively. Revenue now exceeded $600 million per year, and a third plant had been built in the western part of Pennsylvania near Uniontown. A group of professional managers has been developed in the company to head up the major functional areas. Tracie Shannon was hired in 2010 to manage the logistics area which had not received much attention. Tracie realized that the Jordano brothers had managed and developed the manufacturing and marketing functions during the formative years, and these two areas had been considered as cornerstones of the company’s success. Logistics was a relatively new functional area for Jordano, but had received more attention with Tracie’s vision and leadership. The vision Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 79 80 Chapter 3 of Susan Weber for SAB had tremendous potential for all members of their supply chain, including Jordano Foods. Now, Tracie has to help orchestrate the transformation of Jordano again to enable them to perform as an important part of the supply chain for SAB Foods. She understood that Jordano has to assist SAB in meeting the challenges of the changing demographics and the competitive threat of the larger chain stores. CASE QUESTIONS 1. What are the relevant demographic changes that Jordano and SAB have to address in the twenty-first century? Why are they important for the success of both organizations? Provide some recommendations for Jordano and explain why they are needed for the future. 2. What areas of logistics do you think have the most potential for Jordano and SAB to collaborate for the benefit of SAB’s customers? Why are your recommendations important in today’s competitive market place? Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Role of Logistics In Supply Chains 81 CASE 3.2 Senco Electronics Company (Senco) is a U.S.-based manufacturer of personal computers and other electronic equipment. Current assembly operations are still located in the United States and primarily serve the U.S. market. Transportation in the United States from Senco sites to its customers is primarily performed by motor carriers. Rising costs in its U.S. operations caused Senco to evaluate the construction of a new assembly plant in China. Subsequently, Senco decided to also consider Vietnam. Jim Beierlein, the new executive vice president of supply chain management for Senco, is concerned with how Senco will transport its products from Asia to the United States. “We’ve had the luxury of a well-developed ground transportation infrastructure in the United States to move our products. Now we will be faced with moving enormous quantities of electronic products across several thousand miles of ocean. We really don’t have that much experience with other modes of transportation.” Skip Grenoble, director of logistics for Senco, was called on for his advice. “Obviously, we need to decide on whether to use ocean or air transportation to move our products from the new locations. Air transportation will cost more than ocean but will result in lower inventory costs because of the faster transit times. The opposite is true for o

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