Introduction to Logistics Management PDF

Department of Logistics and Supply chain Management Chapter one An overview of Logistics management Learning outcomes After completing this chapter, students will be able to:  Define the term logistics  Recognize the historical development of business logistics  Differentiate logistics and supply chain management  Explain the basic functions/activities of logistics management  Elaborate the operating objectives of logistics management.  Enumerate the role of logistics to country economy and for organization‘s competitiveness Introduction Logistics is not new idea. From the building of the pyramids to the relief of hunger in different parts of the world, the principles support the effective flow of materials and information to meet the requirements of customers. Throughout the history of mankind wars have been won and lost through logistics strengths and capabilities – or the lack of them. The same is applied to today‘s business competition. All organizations move materials. Manufacturers build factories that collect raw materials from suppliers and deliver finished goods to customers; retail shops have regular deliveries from wholesalers; a television news service collects reports from around the world and delivers them to viewers. Therefore, Logistics is the function that is responsible for the movement of raw material, work in- process or finished products. It is responsible for the transport and storage of material on their journey between suppliers and customers. 1.1 Definition and evolution of logistics 1.1.1 Definition of logistics Realistically, no ‗true‘ name or ‗true‘ definition that should be pedantically applied, because products differ, companies differs and systems differ. Logistics is a diverse and dynamic function that has to be flexible and has to change according to the various constraints and demands imposed upon it and with respect to the environment in which it works. There many terms are used, often interchangeably, in literature and in the business world. One quite widely Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management view shows that uses some of these terms help to describe one of the key relationships. This is as follows; Logistics =supply + material management+ distribution As well as, Logistics is concerned with physical and information flows and storage from raw material through to the final distribution of the finished product. Thus, supply and materials management represents the storage and flows into and through the production process, while distribution represents the storage and flows from the final production point through to the customer or end user. Major emphasis is now placed on the importance of information as well as physical flows and storage, and an additional and very relevant factor is that of reverse logistics – the flow of used products and returnable packaging back through the system. Some basic definition of logistics What is logistics? Logistics is... the management of all activities which facilitate movement and the co-ordination of supply and demand in the creation of time and place utility‖ (Hesket and glaskowsky and ivie, 1973) ―Logistics is... the placing of resources at the right time, in the right place, at the right cost, at the right quality‖ (Chartered Institute of Logistics and Transport, UK, 2005) In civil organizations, logistics‘ issues are encountered in firms producing and distributing physical goods. Let us see the definition of logistics from different perspective; Perspectives Definition Dictionary The branch of military science having to do with procuring, maintaining and transporting material, personnel and facilities. Chartered Institute of Logistics is... the positioning of resource at the right time, in Logistics and Transport the right place, at the right cost, at the right quality. (UK) International society of The art and s science of management, engineering and logistics technical activities concerned with requirements, design, supplying and maintaining resources to support objectives, plans and operations. Military Logistics – The design and integration of all aspects of support for the operational capacity of the military forces, and their equipment to ensure readiness, reliability, and efficiency. Council of Logistics Part of the supply chain process that plans, implements and Management (CLM) control the efficient, effective flow and storage of goods, services and related information from the point of origin to Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management  most acceptable the point of consumption for the purpose of conforming to definition customer requirements. What is logistics management? Logistics management is... the planning, implementation and control of the efficient, effective forward and reverse flow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customer requirements. (CSCMP, 2006) Logistics has been called by many In order to clearly understand logistics let’s add names based on the type of the one more general definition: Logistics is an organization, including the optimization process of the location, movement following: and storage of resources from the point of origin, through various economic activities, to - Business logistics the final consumer. This definition provides - Channel management - Physical distribution logistics with a comprehensive dimension and - Materials management allows organizations to take full advantage of the - Supply management philosophy. To better understand the exact - Military logistics meaning and scope of logistics we need to explain - Humanitarian logistics this definition by looking at some of its key - Third party logistics (3PL) words;  Process: This means that logistics is not an isolated action, it is rather a series of continuous and interrelated activities in which principles of logistics thinking, planning, organization, management and operation apply. Therefore, logistics is a process concerned with various activities within an organization from the overall thinking to each individual operational task. Logistics is also a process that covers every element that associates with the product from the origin of resources to the final stage of consumption.  Resources: The resources here mean materials, capital, people, but they also include information, technologies know how etc.  Location: it is about where and when to get resources and products and where to send them.  Movement and storage: this is a concern about how to get the resource and products from the origin to the final destination.  Optimization: means to organize all relevant activities for the purpose of minimizing the total cost of providing the consumer with the value (product and/or service) required. This implies the elimination or minimization of all unproductive activities and activities that do not provide or provide less value added. 1.1.2 Evolution of logistics The origin of the term logistics comes from the French word ―logistique,‖ which is derived from ―loger‖ meaning quarters/ accommodation (as in quartering troops). Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management Logistics activity is literally of thousands of years old, dating back to the earliest forms of organized trade. As an area of study however, it first began to an attention in the early 1900s in the distribution of farm products, as a way to support the organization‘s business strategy, and as a way of providing time and place utility. The practice of logistics in the military sector has been in existence for as long as there have been organized armed forces and the term describes a very old practice: the supply, movement, and maintenance of an armed force both in peacetime and in battle conditions. Logistics is not only about the supply of materiel to an army in times of war, it also includes the ability of the national infrastructure and manufacturing base to equip, support and supply the armed forces, the national transportation system to move the forces to be deployed, and its ability to resupply that force once they are deployed. After the war these concepts travelled to business where resource crunch is usual. In business there is no enemy, but there are competitors who pose threat to the organizations survival. The practice of logistics in the business sector, starting in the latter half of the twentieth century, has been increasingly recognized as a critical discipline. The first professional association of logisticians was formed in 1963, when a group of practitioners and academicians formed the National Council of Physical Distribution Management, which in 1985 became the Council of Logistics Management, and then in 2004 the Council of Supply Chain Management Professionals. Today, there are numerous professional associations throughout the world with essentially the same objectives: to conduct research, provide education, and disseminate knowledge for the advancement of the logistics discipline worldwide. Logistics has evolved in scope and influence in the private sector since the mid to late 1940s. In the 1950s and ‗60s, the military was the only organization using the term logistics. There was no true concept of logistics in private industry at that time. Instead, departmental silos including material handling, warehousing, machining, accounting, marketing, and so on, were the norm. According to Edward frazelle, the five phases of logistics development—workplace logistics, facility logistics, corporate logistics, supply chain logistics, and global logistics. 1. Workplace Logistics Workplace logistics (see Figure 1.1) is the flow of material at a single workstation. The objective of workplace logistics is to streamline the movements of an individual working at a machine or along an assembly line. The principles and theory of workplace logistics were developed by the founders of industrial engineering working in WWII and post-WWII factory operations. A popular name today for workplace logistics is ergonomics. Figure 1.1 work place logistics Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management 2. Facility Logistics Facility logistics is the flow of material between workstations within the four walls of a facility (that is, interwork-station and intra-facility). The facility could be a factory, terminal, warehouse, or distribution center. Facility logistics has been more commonly referred to as material handling. The roots of facility logistics and material handling are in the mass production and assembly lines that distinguished the 1950s and 1960s. In those times and even into the late 1970s, many organizations maintained material-handling departments. Today, the term material handling has fallen out of favor because of its association with no value added activities. 3. Corporate logistics Corporate logistics is the flow of material and information between the facilities and processes of a corporation (interwork-station, inter-facility, and intra-corporate). For a manufacturer, logistics activities occur between its factories and warehouses; for a wholesaler, between its distribution centers; and for a retailer, between its distribution centers and retail stores. Corporate logistics is sometimes associated with the phrase physical distribution that was popular in the 1970s. 4. Supply Chain Logistics Supply chain logistics is the flow of material, information, and money between corporations (interwork-station, inter-facility, inter-corporate, and intra-chain). There is a lot of confusion surrounding the terms logistics and supply chain management. To distinguish the two by explaining that the supply chain is the network of facilities (warehouses, factories, terminals, ports, stores, and homes), vehicles (trucks, trains, planes, and ocean vessels), and logistics information systems (LIS) connected by an enterprise‘s supplier‘s suppliers and its customer‘s customers. Logistics is what happens in the supply chain. Logistics activities (customer response, inventory management, supply, transportation, and warehousing) connect and activate the Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management objects in the supply chain. To borrow a sports analogy, logistics is the game played in the supply chain arena. It is unfortunate that the phrase supply chain management has been so readily and commonly adopted as a reference to excellence in logistics. Supplier SM Manufacture MW Wholesaler WR Retailer RC Customer Figure 1.2, supply chain logistics 5. Global Logistics Global logistics is the flow of material, information, and money between countries. Global logistics connects our suppliers‘ suppliers with our customers‘ customers internationally. Global logistics flows have increased dramatically during the last several years due to globalization in the world economy, expanding use of trading blocs, and global access to Web sites for buying and selling merchandise. Global logistics is much more complex than domestic logistics, due to the multiplicity of handoffs, players, languages, documents, currencies, time zones, and cultures that are inherent to international business. Global Scope & influence logistics Evolution of logistics SC logistics 1950’s 1960’s 1970’s 1980’s 1990’s Reasons for the development of logistics There are so many factors that contribute for the growing interest in logistics: 1. Deregulation: the deregulation of the transportation industry in USA in late 1970s and 1980s gave organizations many more options and increased competition within and between transportation modes. As a result, carriers become more creative, flexible, customer oriented and competitive in order to succeed. Shippers are now faced with many more transportation options. This push senior management attention to think about their logistics efficiency for productivity improvement. 2. Channel power: the shifting of channel power from manufacturers to retailers and distributors has also had a profound impact on logistics. When competition rise in major Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management consumer goods industries, there is a shakeout of many suppliers and manufacturers, so that a few leading competitors remain. 3. Competitive pressures: with rising interest rates and increasing energy cost during the 1970s, logistics received more attention as a major cost driver. In addition, logistics cost become a more critical issue for many organizations because of globalization of industry. This has affected logistics in two primary ways. First, the growth of world class competitors from other nations has caused organizations to look for new ways to differentiate their organizations and product offerings. Logistics is a logical place to look because domestic organizations should be able to provide much more reliable, responsive service to nearby market than oversee competitors. Second, as organizations increased by sales offshore, the supply chain between the organization and those it does business with becomes longer, more costly, and more complex. Excellent logistics management is needed to fully leverage global opportunities. Another factor strongly contributing to the increased emphasis and importance of logistics is continued and growing emphasis on cost control. 4. Information technology: the revolution of information technology gave organizations the ability to better monitor transaction incentive activities such as the ordering, movement, and storage of goods and materials. Combined with the availability of computerized quantitative models, this information increased the ability to manage flows and to optimize inventory levels and movements. Systems such as materials requirement planning (MRP, MRP II), distribution resource planning (DRP, DRP II), and just-in-time (JIT) allow organizations to link many materials management activities, from order processing inventory management, ordering from the supplier, forecasting and production scheduling. 5. Profit leverage effect: the profit leverage effect of logistics illustrates that $1 saved in logistics costs has greater impact on the organization‘s profitability than a $ 1 increase in sales. In most organizations, sales revenue increases are more difficult to achieve than logistics cost reduction. This is true in mature markets, where price cuts are often met by competition, and revenue in the whole industry thus declines. There are many costs associated with sales, such as the cost of goods sold and logistics related costs. Thus, a $1 increase in sales does not result in a $1 increase in profit. 2.1 Boundaries and relationships between logistics and supply chain management Logistics management activities typically include inbound and outbound transportation management, fleet management, warehousing, materials handling, order fulfilment, logistics network design, inventory management, supply–demand planning, and management of third- party logistics services providers. On the on other hand Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies. Supply chain management is an integrating function with primary responsibility for linking major business functions and business processes within and across companies into a cohesive Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management and high-performing business model. It includes all of the logistics management activities, as well as manufacturing operations, and it drives coordination of processes and activities with and across marketing, sales, product design, finance, and information technology. Manufacturing Customers Suppliers company Inbound logistics materials management outbound logistics Logistics Logistics Vs. supply chain management particulars Logistics management Supply chain management Logistics is the process of strategically managing Management of upstream and procurement and storage of material , part and finished downstream relationships with suppliers Definition inventory [and related information flow] through and customers to deliver superior organization and its marketing channels in such a way customer value at less cost to the supply that current and future profits are maximized through chain as a whole. cost effective fulfilment of order How it By internal integration of logistics functions By external integration of roles of created in handled by various management functions within various players in the supply chain. business? organization Main Logistics cost reduction by integrating resources Supply chain profitability by value objective across the pipeline creation. Inbound logistics, in process inventory [movement All players in the supply chain from raw Scope from one plant to another], outbound logistics from material source to finished product the plant to customers. consumer, vendors, their vendors, supplier organization[shipper], Warehouses, service providers, customers, their customers Focus L/M tries to take the product to the consumer at SCM focuses on value creation in the minimum logistical cost. supply chain. 1.3 Objectives of business Logistics  Rapid response: This is flexibility objective of an organization. Some companies measure this as response time to customer‘s order. On an average how much time do we need to fulfill one particular type of customer‘s order in a year? This is a measure of Rapid Response Logistics should ensure that the supplier is able to respond to the change in the demand very fast. Entire production should change from traditional push system to pull system to facilitate rapid response. Instead of stocking the goods and supplying on demand, orders are executed on shipment-to-shipment basis. Information Technology plays an important role here as an enabler. IT helps management in producing and delivering goods when the consumer needs them. This results into reduction of inventory and exposes all operational deficiencies. Now the management resolves these deficiencies and slashes down costs. Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management  Minimum variance: This is delivery objective of an organization; this can be measured as ‗On Time Delivery‘ or. If 100 deliveries are made in a month/quarter/year how many reached as per the commitment made to the customer? Any event that disrupts a system is variance. Logistics operations are disrupted by events like delays due to obstacles in information flow, traffic snarls, acts of god, wrong dispatches, damage in transit. Traditional approach is to keep safety stocks and transport the goods by high cost mode. The cost of this approach is huge. Logistics is The major Goal of logistics expected to minimize these events, thereby management is: minimize and improve on one-time delivery.  Quality: If the quality of product fails logistics  To satisfy customer will have to ship the product out of customer‘s expectations for delivery of premises and repeat the logistics operation products (or services) while again. This adds to costs and customer minimizing the total cost dissatisfaction. Hence logistics should contribute to TQM initiative of management. In fact, commitment to TQM has made the management‘s world over wake up to the significance of logistics function. Logistics can play a significant role in total quality improvement by improving the quality of logistics performance continuously and continually. Simply the objective of business logistics are;  Achieve maximum customer service level  Ensure high product quality  Achieve minimum (possible) cost  Be flexible in the constant market changes 1.4 Key activities of logistics Outlined below are the key activities required to facilitate the flow of a product from point of origin to point of consumption. All of these activities, listed below, may be considered part of the overall logistics process. 1. Customer service: Customer service has been defined as "a customer-oriented philosophy which integrates and manages all elements of the customer interlace within a predetermined optimum cost-service mix. Customer service is the output of the logistics system. It involves getting the right product to the right customer at the right place, in the right condition and at the right time, at the lowest total cost possible, Good customer service supports customer satisfaction, which is the output of the entire marketing process. 2. Demand forecasting/planning: There are many types of demand forecasts. Marketing forecasts customer demand based on promotions, pricing, competition, and so on. Manufacturing forecasts production requirements based on marketing's sales demand forecasts and current inventory levels. Logistics usually becomes involved in forecasting in terms of how much should Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management be ordered from its suppliers (through purchasing), and how much of finished product should be transported or held in each market that the organization serves. In some organizations, logistics may even plan production. Thus, logistics needs to be linked to both marketing and manufacturing forecasting and planning. 3. Inventory management: Inventory management involves trading off the level of inventory held to achieve high customer service levels with the cost of holding inventory, including capital tied up in inventory, variable storage costs, and obsolescence. These costs can range from 14 to over 50 percent of the value of inventory on an annual basis! With high costs for items such as high-tech merchandise, automobiles, and seasonal items that rapidly become/obsolete, many organizations are giving inventory management much more attention. 4. Warehousing management Warehousing refers to the storing and assorting products in order to create time utility. The basic purpose of the warehousing activity is to arrange placement of goods, provide storage facility to store them, consolidate them with other similar products, divide them into smaller quantities and build up assortment of products. Generally, larger the number of warehouses a firm has the lesser would be the time taken in serving customers at different locations, but greater would be the cost of warehousing. Thus, the firm has to strike a balance between the cost of warehousing and the level of customer service. 5. Logistics communications: Communications are becoming increasingly automated, complex, and rapid. Logistics interfaces with a wide array of functions and organizations in its communication processes. Communication must occur between: 1. The organization and its suppliers and customers. 2. The major functions within the organization, such as logistics, engineering, accounting, marketing, and production. 3. The various logistics activities listed previously. 4. The various aspects of each logistics activity, such as coordinating warehousing of material, work in process, and finished goods. 5. Various members of the supply chain, such as intermediaries and secondary customers or suppliers who may not be directly linked to the firm. Communication is key to the efficient functioning of any system, whether it is the distribution system of an organization or the wider supply chain. 6. Material handling: Materials handling is a broad area that encompasses virtually all aspects of all movements of raw materials, work in process, or finished goods within a plant or warehouse. Because an organization incurs costs without adding value each time an item moves or is handled, a primary objective of materials management is to eliminate handling wherever possible. That includes minimizing travel distance, bottlenecks, inventory levels, and loss due to waste, miss handling, pilferage, and damage. Thus, by carefully analyzing material flows, materials management can save the organization significant amounts of money. Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management 7. Order processing: Order processing entails the systems that an organization has for getting orders from customers, checking on the status of orders and communicating to customers about them, and actually filling the order and making it available to the customer. Part of the order processing includes checking inventory status, customer credit, invoicing, and accounts receivable. Thus, order processing is a broad, highly automated area. Because the order processing cycle is a key area of customer interface with the organization, it can have a big impact on a customer's perception of service and. therefore, satisfaction. 8. Packaging: Packaging is valuable both as a form of advertising in marketing, and for protection and storage from a logistical perspective. Packaging can convey important information to inform the consumer. Aesthetically pleasing packaging also can attract the consumer's attention. Logistically, packaging provides protection during storage and transport. This is especially important for long distances over multiple transportation modes such as international shipping. Packaging can ease movement and storage by being properly designed for the warehouse configuration and materials handling equipment. 9. Parts and service support: In addition to supporting production through the movement of materials, work in process and finished goods, logistics also is responsible for providing after- sale service support. This may include delivery of repair parts to dealers, stocking adequate spares, picking up defective or malfunctioning products from customers, and responding quickly to demands for repairs. 10. Traffic and transportation: A key logistics activity is to actually provide for the movement of materials and goods from point of origin to point of consumption, and perhaps to its ultimate point of disposal as well. Transportation involves selection of the mode (e.g., air, rail, water, truck, or pipeline), the routing of the shipment, assuring of compliance with regulations in the region of the country where shipment is occurring, and selection of the carrier. It is frequently the largest single cost among logistics activities. 11. Facility of location & Network design: Facility of location & network design refers to the design of the geographical structure of logistics facilities from where logistics operations are carried out. The number, size, location of logistics facilities like manufacturing plants, warehouse, cross dock operation, wholesaler & retail outlets affects to the aspects of other logistical function. This activity is necessary location & network structure. 12. Procurement: with the increase outsourcing of goods and services, the procurement function plays a more important role in the organization. Procurement is the purchase of materials and service from outside organization to support the firm‘s operation from production to sales, and Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management logistics. Procurement also referred to as purchasing, supply management, and by a number of other names, includes activities such as supplier selection, negotiation of price, terms and quantities and supplier quality assessment. Procurement continues to grow in importance and contribution to the organization. 13. Return goods handling: returns may take place because of a problem with the performance of the item or simply because the customer changed his/her mind. Return goods handling is complex because it involves moving of small quantities of goods back from the customer rather than to the customer as the firm is accustomed. Many logistics systems have a difficult time handling of this type of movement. Costs tend to be high. The cost of moving a product backward through the channel from consumer to the producer may be as much as nine times as moving the same product forward from the producer to the customer. Thus, this significant cost and service area is beginning to receive more attention. 14. Reverse logistics: Logistics is also involved in removal and disposal of waste materials left over firm the production, distribution, or packing processes. There could be temporary storage followed by transportation to the disposal, reuse, reprocessing, or recycling location. As the concern of for recycling and reusable packaging grows, this issue will increase in importance. This of particular concern in Europe, which has very strict regulations regarding removal of packaging materials and even obsolete product due in part to limited landfill space. Costs associated with logistical activities 1. Customer Service Levels  The key cost trade-off associated with varying levels of customer service is the cost of lost sales.  Moneys that are spent to support customer service include the costs associated with order fulfillment, parts and service support.  The cost of lost sales includes not only the lost contribution of the current sale, but also potential future sales from the customer and from other customer due to word–of-mouth negative publicity from former customers. 2. Transportation Costs  The activity of transporting goods drives transportation costs.  Costs can be categorized by customer, product line, type of channel such as inbound versus outbound and so on. 3. Warehousing Costs  Warehousing costs are created by warehousing and storage activities and by the plant and warehouse site selection process. 4. Order Processing/ Information Systems Costs  Order processing costs include such as order transmittal, order entry, processing the order and related internal and external costs such as notifying carriers and customers of shipping information and product availability. Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management  Shipper and carriers have invested a great deal in improving their information system such as electronic data interchange (EDI), satellite data transmission and bar coding and scanning shipments and sales. 5. Lot Quantity Costs  LQC are purchasing or production related costs that vary with changes in order size or frequency and include: i. Setup costs 1. Time required to set up a line or locate a supplier 2. Scrap due to setting up the production line 3. Operating inefficiency as the line begins to run or as a new supplier is brought on board ii. Capacity lost due to downtime during changeover of line or changeover to a new supplier iii. Materials handling, scheduling and expediting iv. Price differentials due to buying in different quantities v. Order costs associated with order placement and handling 6. Inventory Carrying Costs  The logistics activities that make up inventory carrying costs include inventory control, packaging and salvage and scrap disposal. The 4 major categories of inventory cost are: 1 Capital Cost/ Opportunity cost - which is the return that the company could make on the money that has tied up in inventory. 2 Inventory service cost – which include insurance and taxes on inventory 3 Storage space cost – This includes those warehousing space related costs which change with the level of inventory. 4 Inventory risk cost – including obsolescence, pilferage, relocation within the Inventory system and damage. 1.5 The role of Logistics in SCM Logistics is an essential component of supply chain management. It involves the planning, carrying out and management of goods, services and information from the point of origin to the point of consumption. Logistics aligns the complex pattern of traffic and transportation, shipping and receiving, import and export operations, warehousing, inventory management, purchasing, production planning and customer service. Companies see logistics as a critical blueprint of the supply chain. It is used to manage, coordinate and monitor resources needed to move products in a smooth, timely, cost effective and reliable manner. Simply the role of logistics is Moving materials into the organization from suppliers is called inbound or inward logistics; moving materials out to customers is outbound or outward logistics; moving materials within the organization is materials management. Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management Chapter two: Lean logistics Introduction All around the globe, 24 hours of every day, 7 days a week, during 52 weeks a year, logistics is concerned with getting products and services where they are needed at the precise time desired. It is difficult to visualize accomplishing any marketing, manufacturing, or international commerce without logistics. Logistics involves the management of order processing, inventory, transportation, and the combination of warehousing, materials handling, and packaging, all integrated throughout a network of facilities. The goal of logistics is to support procurement, manufacturing, and market distribution operational requirements. Within a firm the challenge is to coordinate functional competency into an integrated operation focused on servicing customers. What is Lean logistics? Lean logistics refers to the superior ability to design and administer systems to control the movement and geographical positioning of raw materials, work-in-process, and finished inventories at the lowest total cost. To achieve lowest total cost means that financial and human assets committed to logistics must be held to an absolute minimum. It is also necessary to hold direct operational expenditures as low as possible. The combination of resources, skills, and systems required to achieve lean logistics are challenging to integrate, but once achieved, such integrated competency is difficult for competitors to replicate. 2.1 The Logistics of Business Is Big and Important It is through the logistical process that materials flow into the manufacturing capacity of an industrial nation and products are distributed to consumers. Logistics adds value to the supply chain process when inventory is strategically positioned to achieve sales. Creating logistics value is costly. Although difficult to measure, most experts agree that the annual expenditure to perform logistics in the United States was approximately 10.1 percent of the $9.96 billion Gross National Product (GNP) or $1.006 billion (2001 report). Expenditure for transportation in 2000 was $590 billion, which represented 58.6 percent of total logistics cost. The excitement of lean logistics is not cost containment or reduction. The excitement generates from understanding how select firms use logistical competency to achieve competitive advantage. Firms that have developed world-class logistical competency enjoy competitive advantage as a result of providing important customers superior service. Leading logistical performers typically Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management implement information technology capable of monitoring global logistical activity on a real time basis. Such technology identifies potential operational breakdowns and facilitates corrective action prior to delivery service failure. In situations where timely corrective action is not possible, customers can be provided advance notification of developing problems, thereby eliminating the surprise of an unavoidable service failure. In many situations, working in collaboration with customers and suppliers, corrective action can be taken to prevent operational shutdowns or costly customer service failures. 2.2 The Logistical Value Proposition Logistics should be managed as an integrated effort to achieve customer satisfaction at the lowest total cost. The elements of the logistical value proposition are; service benefit, and cost minimization. a) Service Benefits Almost any level of logistical service can be achieved if a firm is willing to commit the required resources. In today's operating environment, the limiting factor is economics, not technology. For instance, to facilitate order processing, dedicated communications can be maintained on a real time or Internet-enabled basis between a customer and a supplier's logistical operation. The key strategic issue is how to outperform competitors in a cost-effective manner. If a specific material is not available when required for manufacturing, it may force a plant shutdown resulting in significant cost, potential lost sales, and even the loss of a major customer's business. In most situations, the cost benefit impact of logistical failure is directly related to the importance of service to the customer. The more significant the service failure impact upon a customer's performance, the greater is the priority placed on error-free logistical performance. Creation and basic logistical performance is measured in terms of availability, operational performance, and service reliability. Availability: it involves having inventory to consistently meet customer material or product requirements. The traditional paradigm has been the higher inventory availability, the greater is the required inventory amount and cost. Information technology is providing new ways to achieve high inventory availability for customers without correspondingly high capital investment. Information that facilitates availability is critical to achieving lean logistics performance. Operational performance: it deals with the time required to deliver a customer's order. Operational performance involves delivery speed and consistency. Naturally, most customers want fast delivery. To achieve smooth operations, firms typically focus on service consistency first and then seek to improve delivery speed. Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management A firm's operational performance can be viewed in terms of its flexibility to accommodate unusual and unexpected customer requests. Another aspect of operational performance is frequency of malfunction and, when it occurs, it required recovery time. Malfunction is concerned with the probability of logistical performance involving failures, such as damaged products, incorrect assortment, or inaccurate documentation. When such malfunctions occur, a firm's logistical competency can be measured in terms of recovery time. Service reliability: it involves the quality attributes of logistics. The key to quality is accurate measurement of availability and operational performance. Only through comprehensive performance measurement is it possible to determine if overall logistical operations are achieving desired service goals. Identifying and implementing inventory availability and operational performance measurements to achieve service reliability. Logistics quality does not come easy; it's the product of careful planning supported by employee training, operational dedication, comprehensive measurement, and continuous improvement b) Cost Minimization The focus of lean logistics can be traced to relatively recent developments of total costing theory and practice. Total cost was positioned to include all expenditures necessary to perform logistical requirements. Managers had traditionally focused on minimizing functional cost, such as transportation, with the expectation that such effort would achieve the lowest combined costs. The main aim of logistics is to minimize/reduce the total cost. 2.3 Logistics Value Generation The key to achieving logistical leadership is to master the art of matching operating competency and commitment to key customer expectations and requirements. This customer commitment, in an exacting cost framework, is the logistics value generation. It is a unique commitment of a firm to an individual or selected groups of its customers. 2.4 Facility network In business operation, the number, size, and geographical relationship of facilities used to perform logistical operations directly impacts customer service capabilities and cost. Network design is a primary responsibility of logistical management since a firm's facility structure is used to ship products and materials to customers. Typical logistics facilities are manufacturing plants, warehouses, cross-dock operations, and retail stores. Network design is concerned with determining the number and location of all types of facilities required to perform logistics work. It is also necessary to determine what inventory and how much to stock at each facility as well as the assignment of customers. The facility network creates a structure from which logistical operations are performed. Thus, the network integrates information and transportation Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management capabilities. Specific work tasks related to processing customer orders, warehousing inventory, and materials handling are all performed within the facility network. The design of a facility network requires careful analysis of geographical variation. The importance of continuously modifying the facility network to accommodate change in demand and supply infrastructures cannot be overemphasized. Product assortments, customers, suppliers, and manufacturing requirements are constantly changing in a dynamic competitive environment. The selection of a superior locational network can provide a significant step toward achieving competitive advantage. 2.5 Logistical Operations Information from and about customer‘s flows through the enterprise in the form of sales activity, forecasts, and orders. Vital information is refined into specific manufacturing, merchandising, and purchasing plans. As products and materials are procured, a value-added inventory flow is initiated which ultimately results in ownership transfer of finished products to customers. To be fully effective in today's competitive environment, firms must extend their enterprise integration to incorporate customers and suppliers. The internal operational scope of integrated logistics is illustrated as follow; Inventory flow Enterprise Market Manufacturing Procurement Suppliers Customers distribution support Information flow Figure 2.1 logistical integration. Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management a) Inventory flow The operational management of logistics is concerned with movement and storage of materials and finished products. Logistical operations start with the initial shipment of a material or component part from a supplier and are finalized when a manufactured or processed product is delivered to a customer. From the initial purchase of a material or component, the logistics process adds value by moving inventory when and where needed. To support manufacturing, work-in-process inventory must be properly positioned. The cost of each component and its movement becomes part of the value added process. For better understanding, it is useful to divide logistical operations into three areas: (1) market distribution, (2) manufacturing support, and (3) procurement. I. Market Distribution The movement of finished product to customers is market distribution. In market distribution, the end customer represents the final destination. The availability of product is a vital part of each channel participant's marketing effort. Unless a proper assortment of products is efficiently delivered when and where needed, a great deal of the overall marketing effort will be jeopardized. All market distribution systems have one common feature: They link manufacturers, wholesalers, and retailers into supply chains to provide product availability. Market Distribution Activities related to providing customer service requires performing order receipt and processing, deploying inventories, storage and handling, and outbound transportation within a supply chain. Includes the responsibility to coordinate with marketing planning in such areas as pricing, promotional support, customer service levels, delivery standards, handling return merchandise, and life cycle support. The primary market distribution objective is to assist in revenue generation by providing strategically desired customer service levels at the lowest total cost. II. Manufacturing Support The area of manufacturing support concentrates on managing work-in-process inventory as it flows between stages of manufacturing. The primary logistical responsibility in manufacturing is to participate in formulating a master production schedule and to arrange for its implementation by timely availability of materials, component parts, and work-in-process inventory. Thus, the overall concern of manufacturing support is not how production occurs but rather what, when, and where products will be manufactured. Manufacturing support is significantly different from market distribution. Market distribution attempts to service the desires of customers and therefore must accommodate the uncertainty of consumer and industrial demand. Manufacturing support involves movement requirements that are under the control of the manufacturing enterprise. Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management Manufacturing Support  It is activities related to planning. Scheduling, and supporting manufacturing operations. Requires master schedule planning and performing work-in-process storage, handling, transportation, and sortation, sequencing and time phasing of components.  It includes the responsibility for storage of inventory at manufacturing sites and maximum flexibility in the coordination of geographic and assembly postponement between manufacturing and market distribution operations III. Procurement Procurement is concerned with purchasing and arranging inbound movement of materials, parts, and/or finished inventory from suppliers to manufacturing or assembly plants, warehouses, or retail stores. Depending on the situation, the acquisition process is commonly identified by different names. In manufacturing, the process of acquisition is typically called purchasing. In government circles, acquisition has traditionally been referred to as procurement. In retailing and wholesaling, buying is the most widely used term. In many circles, the process is referred to as inbound logistics. The term material is used to identify inventory moving inbound to an enterprise, regardless of its degree of readiness for resale. The term product is used to identify inventory that is available for consumer purchase. In other words, materials are involved in the process of adding value through manufacturing whereas products are ready for consumption. The fundamental distinction is that products result from the value added to material during manufacture, sortation, or assembly. In general Procurement is: Activities related to obtaining products and materials from outside suppliers. Requires performing resource planning, supply sourcing, negotiation, order placement, inbound transportation, receiving and inspection, storage and handling, and quality assurance. It includes the responsibility to coordinate with suppliers in such areas as scheduling, supply continuity, hedging, and speculation, as well as research leading to new sources or programs. The primary procurement objective is to support manufacturing or resale organizations by providing timely purchasing at the lowest total cost. b) Information flow Information flow identifies specific location within a logistical system that have requirements. Information also integrates the three operating areas. Within individual logistics areas, different movement requirements exist with respect to size of order, availability of inventory, and urgency of movement. The primary objective of information flow management is to reconcile these differentials to improve overall supply chain performance. Logistical information has two major components: planning/coordination and operations. a) Planning/ coordination The overall purpose of planning/coordination is to identify required operational information and to facilitate supply chain integration via (1) strategic objectives, (2) capacity constraints, (3) Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management logistical requirements, (4) inventory deployment, (5) manufacturing requirements, (6) procurement requirements, and (7) forecasting. b) Operations A second purpose of accurate and timely information is to facilitate logistical operations. To satisfy supply chain requirements, logistics must receive, process, and ship inventory. Operational information is required in six related areas: (1) order processing, (2) order assignment, (3) distribution operations, (4) inventory management, (5) transportation and shipping, and (6) procurement. 2.6 Logistical Operating Arrangements The potential for logistical services to favorably impact customers is directly related to operating system design. The many different facets of logistical performance requirements make operational design a complex task as an operating structure must offer a balance of performance, cost, and flexibility. The Three widely utilized structures are echelon, direct, and flexible. 1) Echelon structure Classification of a logistical system as having an echeloned structure means that the flow of products typically proceeds through a common arrangement of firms and facilities as it moves from origin to final destination. The use of echelons usually implies that total cost analysis justifies stocking some level of inventory or performing specific activities at consecutive levels of the supply chain. Echelon systems utilize warehouses to create inventory assortments and achieve consolidation economies associated with large-volume transportation shipments. Inventories positioned in warehouses are available for rapid deployment to customer requirements. Typical echelon systems utilize either break-bulk or consolidation warehouses. A break-bulk facility typically receives large-volume shipments from a variety of suppliers. Products manufactured at different plants are stored in a central warehouse facility to allow the firm to ship full-line assortments to customers. Major consumer product manufacturers are prime examples of enterprises using echeloned systems for full-line consolidation. Industrial Wholesaler/ Custo Supplier distribution/ Manufacturer distributer Retailer mers consolidation center warehouse Figure 2.2 Echelon structured logistics 2) Direct system In contrast to inventory echeloning are logistical systems designed to ship products direct to customer's destination from one or a limited number of centrally located inventories. Direct Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management distribution typically uses premium transport combined with information technology to rapidly process customer orders and achieve delivery performance. For Examples of direct shipments are plant-to-customer truckload shipments, direct store delivery, and various forms of direct to consumer fulfillment required to support catalog and e-commerce shopping. Industrial Wholesaler/ distribution/ Custom Supplier Manufacturer distribution Retailer consolidation ers center warehouse Support for direct delivery Figure 2.3 Echeloned and direct-structured logistics 3) Combined /Flexible system The ideal logistical arrangement is a situation wherein the inherent benefits of echeloned and direct structures are combined into a flexible logistics system. Inventory strategies often position fast-moving products or materials in forward warehouses, while other, more risky or costly items, are stocked at a central location for direct distribution to customers. The basic service commitment and the order size economics determine the most desirable and economical structure to service a specific customer. The slowest or least demanded parts may only be stocked at one location that services customers throughout the entire world. Fast-moving parts that have more predictable demand are stocked in forward warehouses close to dealers to facilitate fast delivery, low cost delivery. Combined Flexible logistics capabilities can be designed to operate on an emergency or routine basis. a) Emergency Flexible Structure Emergency flexible operations are preplanned strategies to resolve logistical failures. A typical emergency occurs when an assigned shipping facility is out of stock or for some other reason cannot complete a customer's order. To prohibit back-order or product cancellation, a contingency operating policy may assign the total order, or at least those items not available, for Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management shipment from an alternative warehouse. It is typically based on the importance of the specific customer or the critical nature of the product being ordered. b) Routine Flexible Structure The flexible logistics rules and decision scenarios specify alternative ways to meet service requirements, such as assignment of different shipping facilities. A strategy that exploits routine flexible operations may be justified in at least four different situations. This namely: First, the customer-specified delivery location might be near a point of equal logistics cost or time for delivery from two different logistics facilities. Customers located at such points of indifference offer the supplying firm an opportunity to fully utilize available logistical capacity. A second situation justifying routine flexible distribution is when the size of a customer's order creates an opportunity to improve logistical efficiency if serviced through an alternative channel arrangement. A third type of routine flexible operations may result from a selective inventory stocking strategy. The cost and risk associated with stocking inventory require careful analysis to determine which items to place in each warehouse. The fourth type of routine flexible operations results from agreements between firms to move selected shipments outside the established echeloned or direct logistics arrangements. Two special arrangements gaining popularity are flow through cross docks and service supplier arrangements. A cross-dock operation involves multiple suppliers arriving at a designated time at the handling facility and is typically deployed in situations where storage and materials handling can be avoided. Inventory receipts are sorted across the dock and consolidated into outbound trailers for direct destination delivery. Another form of routine flexible operations is to use integrated service providers to assemble products for delivery. This is similar to consolidation for transportation. 2.7 Logistical Synchronization Multi firm operational integration across a supply chain is referred to as logistical synchronization. Logistical synchronization seeks to coordinate the flow of materials, products, and information between supply chain partners to reduce duplication and unwanted redundancy to an absolute minimum. It also seeks to reengineer internal operations of individual firms to create leveraged overall supply chain capability. Leveraged operations require a joint plan concerning the logistics work that each participating firm will perform and be held accountable for. The benefits of synchronization serve to support the generalization that speed of performing a specific service or product movement is secondary to synchronizing the timing of supply with demand requirements. Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management 2.8 Performance Cycle Structure The performance cycle represents the elements of work necessary to complete the logistics related to market distribution, manufacturing, or support procurement. It consists of specific work ranging from identification of requirements to product delivery. Because it integrates various aspects of work, the performance cycle is the primary unit of analysis for logistical synchronization. At a basic level, information and transportation must link all firms functioning in a supply chain. The operational locations that are linked by information and transportation are referred to as nodes. In addition to supply chain nodes and links, performance cycles involve inventory assets. Inventory is measured in terms of the asset investment level allocated to support operations at a node or while a product or material is in transit. Inventory committed to supply chain nodes consists of base stock and safety stock. Base stock is inventory held at a node and is typically one-half of the average shipment size received. Safety stock exists to protect against variance in demand or operational lead time. It is at and between supply chain nodes that work related to logistics is performed. Inventory is stocked and flows through nodes, necessitating a variety of different types of materials handling and, when necessary, storage. While a degree of handling and in transit storage takes place within transportation, such activity is minor in comparison to that typically performed within a supply chain node, such as a warehouse. Performance cycles become dynamic as they accommodate input/output requirements. The input to a performance cycle is demand, typically in the form of a work order that specifies requirements for a product or material. A high-volume supply chain will typically require a different and wider variety of performance cycles than a chain having fewer throughputs. When operating requirements are highly predictable or relatively low-volume throughput, the performance cycle structure required to provide supply chain logistical support can be simplified. The performance cycle structures required to support a large retail enterprise like Target or Wal- Mart supply chains are far more complex than the operating structure requirements of a catalog fulfillment company. Supply chain output is the level of performance expected from the combined logistical operations that support a particular arrangement. To the extent that operational requirements are satisfied, the combined logistical performance cycle structure of the supply chain is effective in accomplishing its mission. The effectiveness and efficiency of logistical performance cycles are key concerns in supply chain management. Depending on the operational mission of a particular performance cycle in a supply chain structure, the associated work may be under the complete control of a single enterprise or may involve multiple firms. For example, manufacturing support cycles are often under the operational control of a single enterprise. In contrast, performance cycles related to market distribution and procurement typically involve multiple firms. Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management It is important to realize that transaction frequency and intensity will vary between performance cycles. Some performance cycles are established to facilitate a one-time purchase or sale. In such a case, the associated supply chain is designed, implemented, and abolished once the transaction is complete. Other performance cycles represent long-standing structural arrangements. A complicating fact is that any operation or facility in one logistical arrangement may simultaneously be participating in a number of other performance cycles. For example, the warehouse facility of a hardware wholesaler might regularly receive merchandise from multiple manufacturers and service competing retailers. Likewise, a motor carrier may participate in numerous different supply chains, spanning a wide variety of industries. When one considers a supply chain of national or multinational scope that is involved in marketing a broad product line to numerous customers, engaging in basic manufacturing and assembly, and procuring materials and components on a global basis, the notion of individual performance cycles linking all participating firms' operations is difficult to comprehend. Regardless of the number and different missions of performance cycles a supply chain deploys to satisfy its logistical requirements, each must be individually designed and operationally managed. The fundamental importance of performance cycle design and operation cannot be overemphasized: The logistics performance cycle is the basic unit of supply chain design and operational control. Three points are important to understanding the architecture of integrated supply chain logistical systems. These are namely: First, as noted earlier, the performance cycles are the fundamental unit for integrated logistics across the supply chain. Second, the performance cycle structure of a supply chain, in terms of link and nodal arrangement, is basically the same whether one is concerned with market distribution, manufacturing support, or procurement. However, considerable differences exist in the degree of control that an individual firm can exercise over a specific type of performance cycle. Third, regardless of how vast and complex the overall supply chain structure, essential interfaces and control processes must be identified and evaluated in terms of individual performance cycle arrangements and associated managerial accountability. To better understand the importance of synchronization in supply chain integration, the similarities and differences in market distribution, manufacturing support, and procurement performance cycles are discussed and illustrated a) Market Distribution Performance Cycles Market distribution operations are concerned with processing and delivering customer orders. Market distribution is integral to sales performance because it provides timely and economical product availability. The overall process of gaining and maintaining customers can be broadly divided into transaction-creating and physical-fulfillment activities. The transaction-creating activities are advertising and selling. The physical fulfillment activities include (1) order Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management transmission, (2) order processing, (3) order selection, (4) order transportation, and (5) customer delivery. b) Manufacturing Support Performance Cycles Manufacturing is the node in a supply chain that creates form value. To a significant degree, manufacturing efficiency depends on logistical support to establish and maintain an orderly and economic flow of materials and work-in-process inventory as required by production schedules. c) Procurement Performance Cycles Several activities or tasks are required to facilitate an orderly flow of materials, parts, or finished inventory along a supply chain: (1) sourcing, (2) order placement and expediting, (3) transportation, and (4) receiving. Once materials, parts, or resale products are received, the subsequent storage, handling, and transportation requirements to facilitate either manufacturing or market distribution are appropriately provided by other performance cycles. Because of the focus on external supplies. This facet of procurement is referred to as inbound logistics. 2.9 Performance Cycle Uncertainty A major objective of logistics in all operating areas is to reduce performance cycle uncertainty. The dilemma is that the structure of the performance cycle itself, operating conditions, and the quality of logistical operations all combine randomly to introduce operational variance. In terms of specific tasks, the variance results from the nature of the work involved. Order transmission is highly reliable when electronic transfer (EDI) or Web based communications are used and more erratic when using telephone or routine mail. Regardless of the level of technology deployed, operational variance will occur as a result of daily changes in workload and resolution of unexpected events. Time and variance related to order processing are a function of workload, degree of automation, and policies related to credit approval. Order selection, speed, and associated delay are directly related to capacity, materials handling sophistication, and human resource availability. When a product is out of stock, the time to complete order selection includes manufacturing scheduling. The required transportation time is a function of distance, shipment size, type of transport, and operating conditions. Final delivery to customers can vary depending on authorized receiving times, delivery appointments, workforce availability, and specialized unloading and equipment requirements. Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management Chapter three: Logistics performance dimension Introduction Effective measurement systems must be constructed to accomplish the three objectives of monitoring, controlling, and directing logistical operations. Monitoring is accomplished by the establishment of appropriate metrics to track system performance for reporting to management. For example, typically metrics are developed and data gathered to report basic service performance related to fill rates and on-time deliveries and for logistics costs such as transportation and warehousing. Controlling is accomplished by having appropriate standards of performance relative to the established metrics to indicate when the logistics system requires modification or attention. For example, if fill rates fall below standards, logistics managers must identify the causes and make adjustments to bring the process back into compliance. The third objective, directing, is related to employee motivation and reward for performance. For example, some companies encourage warehouse personnel to achieve high levels of productivity. They must be paid for 8 hours of work, based on standard measures of picking or loading. If the tasks are completed in less than 8 hours, they may be allowed personal time off or leisure time. An overriding objective of superior logistical performance is to improve shareholder value. A comprehensive measurement system must therefore address the critical points of impact on shareholder value. On the operational excellence dimension, key metrics focus on improved accommodation of customers through increased customer success and on lowest total cost of service. Asset utilization reflects effectiveness in managing the firm's fixed assets and working capital. Fixed capital assets include manufacturing and distribution facilities, transportation and materials handling equipment, and information technology hardware. Working capital represents cash, the inventory investment, and differential in investments related to accounts receivable versus accounts payable. In particular, by more efficiently managing the assets related to logistics operations; the firm may be able to liberate assets from the existing base. This freed capital is known as cash spin, which can be used for reinvestment in other aspects of the organization. Overall asset utilization is particularly important to shareholders and to how the firm is viewed by financial markets. 3.1 Financial Measures of Logistics Performance Logistics is playing an increasingly important role in value creation, revenue enhancement, capital consumption, and expense control. As a result, logistics financial performance is playing a bigger role in corporate financial performance. Measuring and improving logistics financial performance is increasingly important in measuring and improving corporate financial performance. In addition, since logistics is often in competition with other business processes for capital projects, the better the overall financial reporting we do in logistics, the better chance we have to justify our logistics projects. The most important principal to remember in developing Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management and implementing logistics financial performance measures is that nearly every generally accepted corporate financial measure has a corresponding logistics financial measure. Logistics Expenses (LE) Logistics expenses are dominated by labor expenses but also include telecommunications, inbound and outbound freight, fuel, fees to third parties, and leased or rented space. Logistics Profit (LP = R -LE) Logistics profit is computed simply as revenue minus logistics expenses. The computation of logistics profit per item, per category, or per location is helpful in determining the business viability of an item, category, or location. 3.2 Productivity Measures of Logistics Performance It is a relationship, usually a ratio or an index between output of goods, work completed, and/or services produced and quantities of inputs or resources utilized to produce the output. If a system has clearly measurable outputs and identifiable, measurable inputs that can be matched to the appropriate outputs, productivity measurement is quite routine, however it can be difficult and frustrating if  Outputs are hard to measure and input utilization is difficult to match up for a given period of time;  Input and output mix or type constantly changes; or  Data are difficult to obtain or unavailable. Generally, logistics executives are very concerned with measuring the productivity of labour. While the labour input can be quantified in many ways, the most typical manner is by labor expense, labor hours, or individual employees. Thus, typical labour productivity measures in transportation include units shipped or delivered per employee, labour dollar, and labour hour. Warehouse labour productivity may be measured by units received, picked, and/or stored per employee, dollar, or hour. Similar measures can be developed for other activities, such as order entry and order processing. It is also common for managers to set goals for productivity improvement and compare actual performance to goal, or at the very least to prior year performance. Logistics managers have direct control over the amount of inventory in the system, the amount of working hours expended, the amount of occupied space, and the number of transportation miles traveled. The productivity of a specified resource(s) is generically measured as the ratio of the output of the resource(s) to the consumption of the resource(s): Productivity r _=Output r / Consumption r 3.3 Quality Measures of Logistics Performance Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management Performance relative to service reliability is generally reflected in an organization's measurement of logistics quality. Accuracy of work performance in such activities as order entry, warehouse picking, and document preparation is typically tracked by computing the ratio of the total number of times the activity is performed correctly to the total number of times it is performed. For example, picking accuracy of 99.5 percent indicates that 99.5 out of every 100 times, the correct item(s) were picked in the warehouse. Overall quality performance can also be measured in a variety of ways. Typical measures include damage frequency, which is computed as the ratio of the number of damaged units to the total number of units. While damage frequency can be measured at several points in the logistics process, such as warehouse damage, loading damage, and transportation damage, it frequently is not detected until customers receive shipments or even some point in time after receipt. Therefore, many organizations also monitor the number of customer returns of damaged or defective goods. It is also common to measure customer claims for credit. Additionally, the occurrence of information inaccuracy should be recorded for future action for example, when physical counts of merchandise inventory differ from the inventory status as reported in the database, the information system must be updated to reflect actual operating status. Logistics quality performance measures are; frequency of damage, birr amount of damage, number of customer returns, and costs of returned goods. 3.4 Customer service measure of logistics performance The elements of basic customer service were identified as availability, operational performance and service reliability. An effective basic service platform requires specific metrics for assessing performance in each dimension. Availability is typically reflected by an organization's fill rate. It is critical to note, however, that fill rate may be measured in a variety of ways: Clearly, the order fill rate (also known as orders shipped complete) is the most stringent or strict measure of a firm's performance relative to product availability. In this metric, an order that is Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management missing only one item on one line is considered to be incomplete. It is also common for companies to track specifically the number of stock outs encountered and number of back orders generated during a time period as indicators of availability. - Operational performance deals with time and is typically measured by average order cycle time, consistency of order cycle time, and/or on-time deliveries. Average order cycle time is typically computed as the average number of days (or other units of time) elapsed between order receipt and delivery to customers. Order cycle consistency is measured over a large number of order cycles and compares actual performance with planned. For example, suppose average order cycle time is 5 days. However, if 20 percent were completed in 2 days and 30 percent in 8 days, there is great inconsistency around the average. In situations where delivery dates or times are specified by customers, the most stringent measure of order cycle capability is on time delivery, the percentage of times the customer's delivery requirements are actually met. 3.5 Customer satisfaction measures of logistics performance This metrics measures the firm‘s ability to provide overall customer satisfaction. Customer satisfaction is measured by perceptions regarding performance cycle time, perfect order fulfilment components, and the ability to respond to order status and Inquiry requests. 3.6 Cycle Time Measures of Logistics Performance The total logistics cycle time (TLCT) includes order entry time (OET), order processing time (OPT), purchase order cycle time (POCT), if the product is not available from stock), warehouse order cycle time (WOCT), and in transit time (ITT). OET is the elapsed time from order placement until completed order entry and capture for processing. For orders received by mail, the order entry time includes ITT, waiting time for order entry, and OET. For orders received by fax, the OET includes fax transmission time, waiting time for order entry, and the keying and/or scanning time for order entry. For orders received by phone, the OET includes the waiting time for the customer, the conversation time, and the keying time for the order entry specialist. For orders received electronically, the OET is reduced to the transmission time for the order. The OPT clock starts when the order is entered in and captured by the order processing system and stops when the order is released to the warehouse (or factory) for picking. The OPT includes the time to verify customer information, verify for credit clearance, batch for schedule for release, and dwell for release to the warehouse for assembly. The POCT is simply the customer order cycle time you receive from your supplier. The POCT clock starts when you place your order with your supplier and stops when the order is received at Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management your designated location. POCT is included in the TLCT when the product is not available from stock. The WOCT clock starts when the order is released to the warehouse management system and stops when the order is picked, packed, and staged for shipping. The WOCT includes the time to schedule, pick, assemble, pack, and stage the order for shipping. The ITT clock starts when the order is ready for shipping and stops when the order is delivered at the customer‘s designated location. ITT includes waiting for loading, travel time, and unloading time at the customer site. Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management Chapter four: Customer Accommodation 4. Customer service The definition of customer services various across organization. Suppliers and their customers can view the concept of service quiet differently. In a broad sense customer service is the measure of how well the logistics system is performing in providing time and place utility for a product or service. Customer service is often confused with the concept of customer satisfaction. In contrast to customer service, customer satisfaction represents the customers overall assessments of the marketing mix; product, price, promotion, and place. 4.1 customer-focused marketing The basic principles of customer-focused marketing have their roots in the marketing concept-a business philosophy that suggests that the focal point of a business's strategy must be the customers it intends to serve. It holds that for an organization to achieve its goals, it must be more effective than competitors in identifying specific customer needs and focusing resources and activities on accommodating these customer requirements. The marketing concept builds on four fundamental ideas: customer needs and requirements are more basic than products or services; different customers have different needs and requirements; products and services become meaningful only when available and positioned from the customer's perspective, which is the focus of logistics strategies; and volume is secondary to profit. The belief that customer needs are more basic than products or services places a priority on fully understanding what drives market opportunities. The key is to understand and develop the combination of products and services that will meet those requirements. For example, if customers only require a choice of three different colored appliances, it makes little sense to offer six colors. It also makes little sense to try to market only white appliances if color selection is important from a customer's perspective. The basic idea is to develop sufficient insight into basic needs so that products and services can be matched to these opportunities. Successful marketing begins with in-depth study of customers to identify product and service requirements. The second fundamental aspect of the marketing concept is that there is no single market for any given product or service. All markets are composed of different segments, each of which has somewhat different requirements. Effective market segmentation requires that firms clearly identify segments and select specific targets. For marketing to be successful, products and services must be available to customers. In other words, the third fundamental aspect of marketing is that customers must be readily able to obtain the products they desire. To facilitate purchase action, the selling firm's resources need to be focused on customers and product positioning. Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management Four economic utilities add value to customers: form, possession, time, and place. The product's form is for the most part generated in the manufacturing process. For example, form utility results from the assembly of parts and components for a dishwasher. In the case of a service such as a haircut, form utility is accomplished with the completion of specified activities such as shampooing, cutting, and styling. Marketing creates possession by informing potential customers of product/service availability and enabling ownership exchange. Thus, marketing serves to identify and convey the attributes of the product or service and to develop mechanisms for buyer-seller exchange. Logistics provides time and place utility requirements. Essentially, this means that logistics must ensure that the product is available when and where desired by customers. The achievement of time and place requires significant effort and is expensive. Profitable transactions materialize only when all four utilities are combined in a manner relevant to customers. The fourth aspect of the marketing concept is the focus on profitability as contrasted to sales volume. An important dimension of success is the degree of profitability resulting from relationships with customers, not the volume sold. Therefore, variations in all four basic utilities- form, possession, time, and place-are justified if a customer or segment of customer‘s value and are willing to pay for the modification. 4.1.1 The components of customer service The logistics components of customer service can be classified in different ways. They may be seen as transaction-related elements, where the emphasis is on the specific service provided, such as on-time delivery, or they may be seen as functional attributes that are related to overall aspects of order fulfilment, such as the ease of order taking. Figure 3.2 The seven 'rights' of customer service, showing the main service classifications. Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management Transaction elements are usually divided into three categories. These reflect the nature and timing of the particular service requirements (before, during and after delivery of the product): 1. Pre-transaction elements: these are customer service factors that arise prior to the actual transaction taking place. They include: written customer service policy; accessibility of order personnel; single order contact point; – organizational structure; method of ordering; order size constraints; system flexibility. 2. Transaction elements: these are the elements directly related to the physical transaction and are those that are most commonly concerned with distribution and logistics. Under this heading would be included: order cycle time; order preparation; inventory availability; delivery alternatives; delivery time; – delivery reliability; delivery of complete order; condition of goods; order status information. 3. Post-transaction elements: these involve that elements that occur after the delivery has taken place, such as: availability of spares; call-out time; invoicing procedures; invoicing accuracy; product tracing/warranty; returns policy; customer complaints and procedures; claims procedures. Customer service elements can also be classified by multifunctional dimensions. The intention is to assess the different components of customer service across the whole range of company functions, to try to enable a seamless service provision. Time, for example, constitutes a single requirement that covers the entire span from order placement to the actual delivery of the order – the order cycle time. One of the main consequences of this approach is that it enables some very relevant overall logistics measures to be derived. These will be considered later in this chapter. The four main multifunctional dimensions are: 1. Time – usually order fulfilment cycle time; 2. Dependability – guaranteed fixed delivery times of accurate, undamaged orders; 3. Communications – ease of order taking, and queries response; 4. Flexibility – the ability to recognize and respond to a customer's changing needs. 4.1.2 Customers service level and logistics function By means of a survey of a range of manufacturing companies, Gilmour found that the nine most important aspects of customer service were; -On time delivery -Customer enquiry handling -Order accuracy -Quality -Price -Availability -No product damage -Order status information -Ease of order placement Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management 4.1.3 Developing customer service policy An appropriate customer service policy needs to be developed based on identifiable customer service requirements, and a suitable logistics operation must be established to provide this service. This is a six steps plan to identify key customer service components and then to design and maintain a suitable customer service package. 1. Identify the main elements of service and identify suitable market segments: The first step is to identify those elements of service that are most highly rated by customers. Only then can the company's resources be concentrated on these key factors. The main means of determining these key elements are by market research techniques. These processes might include: the identification of the main decision maker or buyer of the product; the use of personal interviews to determine the importance of customer service and the different elements within customer service; the use of group interviews to determine the same. The importance of this stage is to identify relevant measures of service that are generated by customers themselves and not imposed arbitrarily by 'best guesses' from outside. A major output from this stage of the study is to enable an appropriate survey questionnaire to be designed. 2. Determine the relative significance of each service element: Recognized research techniques can be used within the questionnaire to enable measurement of the relative importance of the different service components identified. Straightforward rating of the key elements is often sufficient. It is also possible at this stage to identify what the minimum requirements are for customer service –that threshold below which it is unlikely that a customer will consider a company as a feasible supplier. 3. Establish company competitiveness at current service levels offered: Having identified the key service components and their relative importance to the customer, the next step is to measure how well the company is performing for each of these key components. The list of key components can be rated by the respondent on perceived performance. This will provide an indication of where the company is both underperforming and over performing and where it has got it about right. 4. Identify distinct service requirements for different market segments: As already indicated, the needs of different customer types can vary quite substantially. This may be true in terms of product quality, method of ordering, level of service or any other of the many different service elements that can be identified. Within a total market, it is possible to identify distinct submarkets or segments. A typical example might be the supply of stationery items. These might be supplied to retailers for sale to the public, to wholesalers for further distribution or direct to public service bodies or private companies for their own consumption. 5. Develop specific customer service packages: This is the implementation phase and it will depend on the results obtained from the stages that have been described. Alternative packages for the different market segments need to be costed accordingly and the most suitable packages determined. Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management 6. Determine monitoring and control procedures: It is vital to ensure that any service policy implemented is also monitored. This requires an effective focus on the measurement of the service provided, involving a systematic and continuous concentration on monitoring and control. In practice, it is rare for this to be adequately carried out: this is because Firstly, because companies do not have a recognized customer service policy Secondly, because companies find it difficult to construct quantifiable standards that are capable of measurement. 4.2 supply chain service output Prepared by Instructor Abebe Y. (MA) Department of Logistics and Supply chain Management Understanding customer-focused marketing in a supply chain context requires consideration of the services actually provided to end customers. Bucklin presented a longstanding theory that specifies four generic service outputs necessary to accommodate customer requirements: (1) spatial convenience, (2) lot size, (3) waiting or delivery time, and (4) product variety and assortment, different customers may have different requirements regarding such service outputs. It follows that different supply chain structures may be required to accommodate these differences. 1. Spatial Convenience Spatial convenience, the first service output, refers to the amount of shopping time and effort that will be required on the part of the customer. Higher levels of spatial convenience are achieved in a supply chain by providing customers with access to its products in a larger number of places, thus reducing shopping effort. The difference in the level of spatial convenience has major implications for the overall supply chain structure and for the logistics cost incurred in the supply chain. It is also clear that some customers are willing to expend greater time and effort than others as they search for a desired product or brand. 2. Lot Size The second service output is lot size, which refers to the number of units to be purchased in each transaction. When customers are required to purchase in large quantities, they must incur costs of produ

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