PREFACE

There ha ve beco drarnatic changes in the world sincc lhe first edition of lhe book \Vas
published. Security has come lo lhe forefronl as a logistics concero wherc. prior lo
September 11, 2001. it \Vas a peripheral inlerest al bcst. The growing use of radio fre-
quency idenlHication technologies has made it possible to knOlV in real time where
a srupment is in lhe supply chaio. Similarl y. lhe quantum advances in informaton
technology have increased lhe managec's ability lO manage both lhe firm' s logistics
systems and lhe supply chain in general I-Iowever. sorne things have nol challged. The
ability of lhe Orm to consistently delivcr its products. whcn and whece its customers
demand them. al a reasonable priee has become JUSL as important as lhe qualilY of thc
products themsclves. Sccond. lhe globalization of trade conlinues, wilh the result tbat
companies face rising levcls of competition. both within lbeir borne markets and
around Lhe world. China and India are IinaUy emerging as powerhouses in lhe world
arena, both as producers and consumers of goods. Finally. logisties is assuming a greal
corporate role as companies sLri ve to serve and satisfy cuslomers in increasi ngly
diverse markets wherever they muy be.
Global Logislics Ma1lagement is intended to accamplish three objectives: (1) to edu-
cate students and managers on tbe natore of individual logistics activities in general
and bow lhese lasks functian in a global sclting: (2) lO show how thesc activities can
be \Voven togelher both internally t form an integrated logistics system and external1y
wilh business partners lO form a single unified supply chaio: i:lnd (3) lO provide pres-
eot and future business Icaders wilh the knowledge and skill s nccessary to tuen tbcir
corporale logistics activities io to a source of susta inable competitive adva ntage in the
global business arena.
To accomplish these objectives. Global Logistics Managemellt is orgaoized ioto tbree
parts. Part [ provides an ovcrview of logislics and bow it fits into tbe organization as
a wbole. Part U deals with managing spccific logistics activities such as cuslomer
service. inventory management. transportation. warehousing. materials bandl ing
and paekaging. information systcms. and inbound logisties. Final1y. Part U I brings that
functiona l discussion tagetber into a cobesive exarn.inaLion ofho\\! lo manage tbe total
logistics process. Topies covered in tbis scction incJude the global business environment.
strategy formulalion. quality. performance improvcment. and organizational issues
impacting logistics.
To keep studcnts with littlc or no knowledge of logisLics focused on tbe tapie. the book is
written in a straightforward and uncomplicated way. Por those who. aft. cr reading this
tcxl. become believers in lhe power of 10gisLics. tbere are several books avaiJable lhal
wiJI provide a more in-depth ook at tbe matbematieaJ and analytical tools availablc
to assist lhe more expericnccd logistician in dealing wiLh spccific problems. As orten as
possible. tbe concepts presenled are iJlustrated witb practical examplcs drawn from the
real world oC logislics. To tbat eod. examples from the passenger transport industry are
[1
l'
!
xi, PREfACE
included where they reinforce a part.i cular point beca use, after aH. firms in thaL indus-
try are very much nvolved in logistics as \Vel!. They simply move pcople rather than
boxes. Furthermore. in an elTort to reLao a global view. no ane counlry or regian has
becn singled out ror special auentioD. Bul regardless of what is being moved or wbere
it is gaing, today is an exciting time to be in logisUcs. Hopcfull y. readers of Global Logiscs
Monagement willlcarn enough to appreciate all that integralcd logislics management
can arrer as a source of competitive advantagc.
A series of PowerPoinl slides lo accompany thi s lexl roc tcaching purposes is avaiJ
able al www.blackwellpublishing.com/ gourdin.
ACKNOWLEDGMENTS
The editor and publisher gratefull y acknowlcdge the permission granted Lo reproduce
tbe copyright material in this book.
Figure 1.4 Porter. Michael E .. "The value chain." p. 41 from TlJe Competitive Advantage
ofNations. ew York: The Free Press. 1990.
Figure 1.5 Kotlcr, Pbilip, "Oeterminants of customer added value:' p. 38 from Marke{-
ing Manugement. 8th edn. Englewood CllfTs, NJ: Prcntice-Hall , 1994. 12th Ediban.
(;> 2006. p. 141. Adapted by permission of Pearson Edueation. [neo Upper Saddle
River. NJ.
Logislies ProfiJe l .l Hiekey. Kathleen. "MeDonald' s Tal) Drder:' pp. 8-10 from
Traffic World January S. 2004. (;> Copyright 2005 Commonwealth Business Medi a.
AH rights reserved. Published with copyright permission from Cornmonwealtb
Business Media. http:// www.j oc.com/ oopyrights.
Figure 2.2 Jain Subash, e. o "A1tcmative chanoel structures," p. 564 from 111lernatiollld
Marketing Management. Belmont . CA: Wadsworlh. Inc .. 1993.
Logislics Profile 2.1 Seideman. Tooy. "Oespite Globalization Traumas. Flower
lndustry B1ooms'" from World Trade June l . 2004.
Figure 3.5 Ploos van Amstel. M. J .. ';Pipeline ead-times from Taiwan lo central ware-
house in lhe Netherlands" in "Managing the Pipeline EfTeclively." p. 9 from oumal
oI Bllsil/ess LogisLics 11(1 J. 1990. Reprinted by permission of the CounciJ of Supply
Management Professionals (formerly CLM).
Figure 3.6 Ploos van Amstel. M. J .. adapted from "Jmproved cad-times from Taiwan to
central warehouse in the Nelherlanrls" in "Managing the Pipeline EfTectively." p. 9
from oumal oJ Busess Logistics 1] (1). 1990. Reprinted by permi ssion of the Council
of Supply Managemenl Professionals (formerly CLM).
Logistics ProfiJe 3. 1 Hansen Harps. Leslie. "Office Depot Targets Europe for
Growth." from Illbowlll Logislics August. 2002 . Repri nled with permission from
11lbound Logistics magazine. August 2002. www.inboundlogislics.comlsubscribe.
Copyright "bound LogisLics 2002.
Logistics ProfiJe 3.2 HolIman. WiJliam, "DeJl GeL' Domestie: ' p. 16 frOIn Traffic World
November 29. 2004. Copyright 2005 Commonwealth Business Media. AH rights
reserved. Published with copyright pennission from Commonwealth Business
Media. hup:// ww\V. joc.com/copyrights.
Figure 4.5 Lambert. Oouglas M .. Stock. James R .. "A statistica l presenLation of safety-
stock." p. 418 from SLral egic Logistics Management. Homewood. IL: Richard D.lrwin.
1993. Reprinted by permission orDouglas M. Lamberl. PhO.
Logistics Profile 4.1 Cottrill. Ken. "Saving by Poslponing. " p. 15 fram Traffic
World February 23. 2004. Copyright 2005 Cornmonwealtb Business Media. AH
T
'1
xvi ACKNOWLEOGMENTS
rights reserved. Published with copyright permission [rom Commonwealth Business
Media. http:/ / www. joc.com/copyrights.
Logistics ProfiJe 4.2 Hickey. Kath leen. "A Logistics Nigbtmare," p. 15 fram Traffic
World September 13. 2003. Copyright 2005 Commonwealth Business Media. AH
rights reserved. Published wi th copyright permission [rom Commonwealtb Business
Media. http: // www.joc.com/copyrights.
Logistics PrafiJe 4.3 "Carrefour Technology Revs Up Dislribution System," p. 14
from MMR 26/07/ 2005, 21(11), 2004,
Logistics Prafile 5.1 Agence "Estonia: End of the Line roc Europe's
Passenger Rail Network," August 22.2004.
Logistics Profil e 5.3 Leach. Peter T. "End of the Line?" p. 22 from ol/mal 01
Commerce May 17, 2004. Copyright 2005 Commonwcalth Business Media. Al!
ri ghts reserved. Published with 'copyright permission from Cornmonwealth Business
Media. http: //www.joc.com/copyri ghts.
Figure 6.1 Canna, Elizabeth, "Tmportant transportation factors foc Volvo" in "Taking
JlT to new Iimits," p. 54 from American Sllipper Pcbruary, 1995. 1995 Howard
Publications Inc., (www.AmericanShipper.com). Publisbed with tbe permission of
the publ isher.
Logistics ProfiJe 6. 1 Baasch, Henrik, "W' hicb intermodal technique for BUfope?"
p. 34(2) from Americall Shipper Fcbruary, 1999. 1999 Howard Publi cations Inc ..
(www.AmericanShipper. com). Publi shed with lhe permission of tbe publisber.
LogistLcs Profile 6.2 Mcrle, Rcnac, HRapid rail network grows at sna il's pace:
Tra ns-European network of high-speed trains faces many obstacles, technology
being one of them: Too many standards." from Tll e America's lntel1igence Wire
ja nuary 2, 2004,
Figure 7. 2 Byrne, Patrick M., "Basic warehousing functions." p. 3] 8 from lmproving
QuaJity C/Tld Proliucti vity in tlle togistics Process. Oak Brook. IL: Council of Logistics
Management. ] 99 1. Rcpr inted by permission of the Council of Supply Management
Professionals (formerly CLM).
Logistics Profile 7.1 Smith. Jeremy N .. "The New Warehouse." from Worlll Tradl'
October 1. 2004,
Logistics Profil e 7.2 Chung. H<.mnl. "EU expansion lo bring more Eastern
European warehouses." p. 22( 1) from Logistics Matlagemcll t (Hi ghlands Ranch, CO.
Septcmbcr) Reed Business lnformation, 2004.
Figure 8,1 Coyle, john j " Bardi, Edward j" and Langley, C, john Ir. "Principies ofware-
house layout design," p. 257 from Tlle Managemcnt 01 BusiTless Logistics 6th edn.
Sl. Paul. MN: West Publishing Company, 1996. From Mmwgcment 01 Business
l,ogistics 6th edition by Coyle/ BardilLangley, 1996. Reprinted with permission
of Soulh-Western. a division of Thomson Learning: www.tbomsonrights. com. Fax
800 730-22 15,
Logistics ProfiJ e 8.1 "Logistics: Automated Warehousing and Rapid Distri bution
is lhe Solulion," p. S22(3) from Quick ProzeTl Foads IT1 terrwtioflll/ October. 2004.
Rcprinted by permission of the a uthor Jobn M. Saulnier and Quick Prozen Foods
Intematiol1aJ magazine. October 2004.
Logistics ProfiJ e 8.2 Zuckcrman. Amy. "RFID Leaves the Warehouse foc ' Real World'
Supply Chain Laboratories," [rom World Tr",le April 1, 2001.
ACKNOWlEDGMENTS xvii
Figure 9.2 Emmelhainz. Margarel A.. "How EOC works." p. 5 from BDI: A Total
Matlagement Cuide. 2nd edn. Ncw York: Van Noslrand Reinhold. 1993.
Logi.slics ProfiJe 9. 1 "UPS Suite of New Technologics Promises Better Customer
Service. Operating Efficiency: Latest Network Software Unveiled al UPS Technology
Summit. " from Business Wire Septembcr 23. 2003.
Logistics ProfiJ e 9.2 "Keeping an Eye on RFID Challcnges," p. 21 frcm lnbound
Logislics February. 2005. Reprinted with permission (rom ll'lbound Logistics maga-
zine February 2005. www.inboundJogistics.comJsubscribe. Copyright lnbourld
Logislics 2005.
LogisLi cs Prefile ] 0.1 Hofl'man . Wi lliam, '; Driving Production Changes," p. 16 (rom
TmIfic \'\forld March 14. 2005. Copyri ght 2005 Cornmomvealtb Business Media.
AlI righlS reserved. Publisbed wiLh copyright permission from Commonwealth
Business Media. http: //www.joc.com/ copyrights.
Logislics Profile 10.2 Smock, Doug. "General MoLors Launches New Purchasing
Approach." from Purchasing February 22. 2001. ReprinLed by permission of
Purchasing magazine. AII rights reserved.
Logistics Profile 11.1 Harman. Da nna, "More Roadblocks ror Truckers. ' p. 78 from
USA Today February 22, 2005,
Logistics Profile 11.2 ';Guanxi Rules." p. 84 from lnboulld Logistics. OCLober.
2004. Reprinted with permission from In bormd Logistics magazine Octohcr 2004.
Figure 12. ] Rao. Kant. Stenger. Alan J .. a nd Wu. Hawjan. "Corporate strategy ror-
muladon" in "1'raining Puture Logistics Managers: Logistics Strategies within the
Corporate Planning Framework," p, 255 from oumal ofBusiness Loistics 15(2). 1994.
Reprinted by permission ofthe Council OfSllpply Management Professionals (formerl y
CLM).
Figure 12.3 Copacill a. WilIiam C .. a nd Lambert. Douglas M .. "Integrated c.bannel
managemenL strategies." p. 748 fram Douglas M. Lambert and James R. Stock, Slrategic
Logislics Ma/'lagcment. 3rd edn. Homewood. Ir...: Ri chard D. [r\Vin. 1993. Reprinted
by pcrmission or Oouglas M. Lambert PhD.
Table 12.1 Lieb. Roben C. and Bentz. Brooks A .. "The most rrcquently used third-party
logistics services." [rom Tll e Use 01 Third Pllrty Logistics Services by Large Americ(U!
MIII/ufacturers. TiJe 2004 Survey. http://web. cba,neu ,edu/ - rlieb/ 20 04UserSurvey.doc.
Reprinted by perrnission of Dr Robert Lieb.
Table 12.2 Lieb. Robert C. and Bentz. Brooks A .. "rmpact or the use or 3PL services
on various corporate issues. 2004." rrom Tlle Use oJ Tllird Pllrty LogisUcs Services
by Large American Mmuifaclurers. Tll e 2004 Survey. http://wcb.cba.neu.edu/ - rlieb/
2004UserSurvey.doc. Reprinted by permission ofOr. Robert Lieb.
Logislics Prome 12.1 "Suppliers: Gear Up!" p. 34 from Aviation Week and Space
TeclllloJoBY November 15. 2004.
Logistics Prafile 12.2 Barnard Bruce. "Raad LO Perdition: Congestion. Rapid
Container Growth Strain Europe's (ntermodaI Nctwork." p. 42(2) from ]ournal 01
Commerce Novemher 10, 2003. Copyright 2005 Commonwealth Business Media.
AH ri ghts reserved. Pllblished with copyright permission from Commonwealth
Business Media. bttp: //www.joc.comlcopyrights.
Figure 13. 1 Zei Lhaml V. A .. Berry. L. L. and Parasuraman, A., "Service quality model'"
in "Coml11unication and control processes in the delivery ar service quaUty." p. 36
!
,1
"
"
,
"
j'
"
l '
xviii ACKNOWlEDGMENTS
[rom oumaJ 01 Marketing 52 (Apeil) 1988. Reprinted with pcnnjssion from the
aumal DI Market ing. publishcd by the American Marketing Association.
Figure 13.3 Langlcy, C. Joho Jr. "Logistics quality process" in "Quality in logislics:
A competitive advantagc," rrom Proceedings: R. HlUUy Waters 1...ogi sUcs afld 'J'rarlS-
porLaUon Symposium. University Park. PA: Pennsylvania Slale Unlversity. The
Center for Logistics Research. 1990.
Table 13.1 Coyle. John J .. 8ardi. Edward J .. "nd Langley. C. Jobn Jr. "lmplernentation
slages in a quality process," p. 537 Crom rhe Managemellt DI Business Logislics 6th
edn. Sl. Paul. MN: West Publishing Company. 1996. From MmUlgement oJ Business
Logistics 6th edition by Coyle/ BardilLangley. 1996. Rcprinted with permission of
Soulh-Western. a division of Thomson Leaming: www.thomsonrights.com. Fax
800730-2215.
Logistics Profile 13.1 McHugb. Mark. "Back to Basics.' [rom American Shipper 1anu-
ary. 44(1). 2002. 0 2002. Howard Publications. loe. (www.AmericanShipper.com).
Published with the pennission of the publisher.
Figure 14.1 Byrne. Patrick M. and Markham. William J .. "POCA cyc1e of improvement."
p. 110 [rom lmproving Quality and Productivily in Logislics. Oak Brook. LL: Council of
Logistics Managcment. 1991. Reprinted by permission of the Council of Supply
Management Professional (formerly CLM).
Figure 14.2 Byrne. Patrick M. and Markham. William J .. "General strueture of a cause
and efTeet diagram, " pp. 117 (rom lmproving QualiLy and Productivity in Logislics. Oak
Brook. [1..: Couneil ofLogistics Management. 1991. Reprinted by permission ofilie
Council of Supply Managemeol Professional (formerly CLM).
Figure 14.3 Byrne Patrick M. and Markham. William) .. "Flow ehart cxample." p. 121
from lmproving Quality alld Productivity in l..ogistics. Oak Brook. IL: Council of
Logistics Managcment. J 991. Reprinted by perrnlssion of the Council of Supply
Management Professional (formerly CLM).
Figure 14.4 PohIen, Terranee L. and LaLonde, Bernard 1. "Two-stage activity-based east
allocation process" in "lmplcmenting activity-based cosling (ABe) in logisties,"
p. 7 from oumaJ o/ Business LogisLics 15(2). 1994. Reprinted by permission of the
Council of Supply Managemenl Professional (formerly CLM).
Figure 14.5 Byrne. Patrick M. and Markham. William J . "DifTerent types of quaHty
mea sures." pp. 152 from Improvirlg Quality and Productivily ir! Logistics. Oak Brook.
11: Council of Logisties Management. 1991. Reprinted by permission of the Couneil
of Supply Managemenl Professional (formerly CLM).
Table 14.1 Liberatore. Matthew J. and MUl er. Tan, "An example of channcl profitabil-
ity as measured by traditional aecounti ng versus ABC methods" in "A framework
for integrating activity-based costing and the balanced scoreeard into the logistics
stralegy development and monitoring process." p. 133 from joumaJ o/ Business
Logistics 19(2). 1998. Reprinted by permission of ,he Council of Supply Manage-
ment Professional (formerly CiM).
Logistics Prome 14.1 Cooke. James. "Bcsl-in-dass go bcyond four \Valls of lbe ware-
house. ,. (rom Logistics Matlllgemetlt November ], 2004.
Logisties Prolil e 15. 1 Richardson. Helen L. ';Shape up your supply chaio: with rig-
orous attention to ndustry trends and markcl changes. efTecli ve supply chain plan-
ning can sharpen your competitive edge." p. 26(4) [rom Logistics Today January. 2005.
ACKNOWLEDGMENTS xix
Reprinted by perlUlSSlon of Logisiics Today, a Penta n Media Lnc. publication,
www.logisticstoday.cQrn.
Logis!ics Profi le 15.2 Kerr. John. 10 Key Challenges for lhe Chinese Logislics
[ndustry," p. S64(4} from LogisUcs Management. February. 2005.
Every cfTort has becn made to trace copyright haldees and l O ohLain their permission
roc the use of copyright material. The publisher apologizes roc any errors oc omissions
in thc aboye list and would be grateful ir notilied of any corrections that should be incor-
porated in ruture reprints oc editions of this book.
Chapter 1
INTRODUCTION TO LOGISTICS
logistics, The Histori cal Perspective
logistics, Tlle Modern Perspect ive
logistics as a Source 01 Competitive Advantage
Why Is Management Interest in logistics Growing
1
logistics in the Global Organization
Conceptual Model and Statement 01 Purpose
Chapter Summary
Study Questions
Logistics: The Historical Perspective
Logistics is a lerm that many people bave heard of but few can define. It is a \\lord that
is mostonco associated with the rnHi tary. whcre it has come lo stand ror all afilie activ-
ties associated with the wartime deployment and ongoing support of a nalian's armed
Corces. In fact. lhe importance of logistics lo the ultimate success of a rnilitary campaign
has been weLl recognized and documented. As early as 500 Be. SUD Tzu Wu in Tlle Arl
01 War referred lo logstical functions and tbcir relaLionships witb stTarcgy and tacties.
Alexander the Great was perhaps tbe Hrst military Icader to develop aD actual logistics
syslcm lo support his troops rather lhan rc1ying on the more common practice of liv-
ing off lhe land as the army progressed. Tbe Romans carried a great deal oftheir equip-
rnent and supplies wilh thcm. relying on a baggage traio incorporatng huodreds of
pack animals as wcll as lhe soldiers themselves for transporto They also util ized a sys-
tero of fortified supply depots stationed tbroughout their empirc a.t approximalely 30
kHomeLer intcrvals (1 day's march for the arrny) wruch contained food and fodder.
.,
11
, I
I
2 INTROOUCTION ro LOGISTICS
Napoleon Bonaparte was also a logistician at heart: his preplanning and respect ror
support faclors were instrumental iD allowing him lo movc and maneu\lcr more
quickly lhan his enemies. I
However. uJtimately Napoloon and.later. Hitler. learncd a hard lesson about logistics:
{ lhe onger the supply lineo lhe greater Lhe cbance it will be disrupted. 60th men attempted
invasions ofRussia that fai led aL leasl partially beca use harsh wintcr weather disrupted
resupply efTorts. Cerlainly thece are many more modern examples of )ogistics issues
ultimately delermining lhe success oc failure of military cndeavors. But iL should be
clear aL t bis point that logistics is firmly rooled in lhe historical doctrine of war.
logistics: The Modern Perspective
Al its heart, logistics deals with satisfyi ng the customer. This implies that managemenL
must first understand what those requirements are before a logistics strategy can be
developed aod iOlplemented to meet theOl . As ""UI be discussed in more detail latero
customer servicc is the most important output of an organizalion' s logistics system.
This focus on cuSLOmer satisfacti on \Vil! be emphasized throughout the text. just as it
should be in lbe firmo
In a more practical sense. logistics refees to tbe systematic management of tbe vari-
ous activities required lo move benefits [rom their point of production to the customer.
Often tbese benefits are in the farOl of a tangible product that musl be manufactured
and moved lo tbe user. Sometimes these benefits are intangible and ar e kno\Vn as ser-
vices: they too must be produced and made available to tbe final consumer. But lo-
gistics encompasses much more than jusl the transport of goods. The concept ofbenefits
is a multifaceted one that goes beyond lhe product or service itself lo inelude issues
{ regarding timin g. quantity. supporLing services. loeaLian. and cost o So a basic defini-
tion of logistics is lbe continuous process of meeting customer needs by ensuring the
availability of the righL benefits for Lhe right cusLomer. in the quantity and conditian
dcsired by that cuslomer. aL the time and place the customer wants them. all for a price the
~ u y e r is willing to pay. 2 Tbese coocepts apply equally well to for-protit industries and
non-profi t orgaoizations. as t be earlier discussion on military rcquirements iIlustrated.
However. logistics can mean dilferent things to dilTerent organizations. Sorne Arms
are more con cerned witb producing lbe benefits: lhal is. their managemenl focus is 00
the flow of raw rnaterials iota tbe productioo process ratber than 00 delivering tbe final
goods te the user. The sourci ng and managing of raw materials and component parts
is often referred lo as materials rnanagemeot and is iIIustrated in fi gure 1-J . For flrms
with very heavy flows in to tbe production process, materials managemeot a nd logi stics
may be synonyrnous. For example. Airbus Jndustrie assemblcs an A-380 airliner in France
for Singapore Airlines (SIA). Once tbe aircraft is finished. SrA sends a crew lo Toulouse
. aod mes the plane away. The logistics effort is not complete al Lhis point. however. RaLher.
for firms Iike Airbus. posl-produclion empbasis is on after-sales service and support as
opposed to product delivery.
Alternatively. some companies experience greater management chal/cnges once the
product is finished. In olber \Vords. hey are much more concerned witb lhe flow or
Raw
matcrials
Raw
materials

Parts
suppli er
Parts
supplier
Part5
suppli er
Materials managemcnt/ logistics
Figure 1-1 logislics defined as materials management
Raw
materials
Parts
supplicr
Production
process
Figure 1-2 logistics defined as physical distribution
IN1ROOUCTlON 10 LOGIS11CS 3
Customer
Producloll
1----+1
proccss
Customcr
Customer
Customer
Intermediary
lntennediary

Physical distribution/logistics
fini shed goods from Lhe end of tbe producLion line lo the cuslOlllcr. DepicLed in fig-
ure 1-2. logistics in this situalion is sometimes referred to as physical distribution and
is a perspecli\lc in many consumer goods manufacturing firms.
Finally. sorne firms view logistics as embracing both matcrials managemcnt and phys-
ical distribulion. These organizaliolls look at logislics as a way lo manage tbe entire 1.,;
process of customer satisfaction. from sourcing the necessary pars and material
through production of Lhe bcnefil to its deLivcry to tbe finaJ user. Indced. iL is this approach
tbat enables management to cxploil the fulJ potcntial of lhe logislics process. As
sbown in figure 1-3. this broader view of logistics integrates materials management
1,
I
4 INTROOUCTlON 10 lOGISnCS
Raw
materials
Raw
materials

ParlS
supplier
Parts
supplier
Parts
supplier
Materials managemenL
I
ProduClion
process

Logislics
figure 1 3 Comprehensive definition DI logistics

Physical distribulion
I
and physical distribution tasks into a single supply cbain that links the cuslomer with
a ll aspects ofthe firmo Viewing internal operations this way kccps seemingly disparate
(Jnc! historically separated activities focused on the common obj ective: lo produce and
I deliver so me bencHt or benelits lo the customer in l way that olTers greater va luc than
can be obtaincd [rom a compctitor. In olher words, this comprehensive view of
logistics. sometimes referrcd lo as supply chain management. can cad to lower casts
andl or betler service that enhance tbe value received by the buyer.
Logistics is a concept valuable to any finn. regardless of size. Somctimes cquated cnly
with large organizaLions. logistics cffers signilicant competitive advantages to smaU firms
as wel!. A British Company. A e Grcup. is ene of a growing numbcr of companies
ofTering its cuslcmers an "in-boot" delivery senrice. This innovative form of customer
support is geared lo companies such as appliance or copier repair businesses. with net-
works of roving engineers or service people who needs parts on a daUy basis, Parts storcd
at ANC's central distributioo center are sorted overnight and dclivcred directly to the
enginecr 's car "boot" (trunk) before 07:00 AM without waking the engineer Lo gel a
signature.
1
Components of a logistics system
A logistics system can be made up of many different functional activities. sorne of which
are described briefly below.
IN1ROOUCTlON 10 l OGISTlCS 5
Customer service is a rnultidimensionaJ and very important parl of any organiza-
tian 's logistics cITarl. In a braad sense. it is the output afthe cntire logistics effort: that
s. customer scrvice and sorne resulling level of salisfaction are what tbe logistics
system ultimately provides tbe buyer. However. many organizations do have a more
narrow funcrional view of customer service as something they actually perform.
For example. a [irrn may have a customer servicc deparlment or customer service
employees that handle complaints. special orders. damagc c1aims, returns. billLng
problems. etc. For all intents and purposes. these cmployees are the organization
as rar as many buyees are concerned. so lheir role in tbe overall logistics syslem
becomes crucial. Di sappointrncnt al thi s level can Icad Lo dissatisfaction with the
organizalion as a whole. wruch eITeclively neutralizes the entire logisties eITort.
lnventory managementdeals \Vith baJaneing the cost of maintainlng additional prod-
ucts on hand againsl the risk of nol having lhose items when the customer wants th.em
(Le. tbe cost of lost sales). This task has become more complex as fi.rms bave gradu-
ally lowered invenlOry levels. The challenge in this situation is lo manage the rest of
the logistics system to accommodate the lack of inventory so lhat customer service does
not sulTer. However, aH ofthe interest in reducing inventories notwithstanding, the
faet remains tbat they are stiU necessary for serving customers in many markets.
Managers rnust. therefore. decide whether they nred additional products in a
given market and, if so. how many of which items. fl is also worth mentioning that
for inventories ofraw matcrials and component parts. the customer is the firm' s own
production line: for tinisbed goods the custorner is the final user of the product. 80th
"custorners" have diITerent needs which musl be assessed. in formulating an appro-
priate invenLory policy that balances the cost of maintaining stockg on the one hand
with tbe costs tbat could result from nor having requisite items (Le. production Line
stoppages. lost sales) on lhe oLber. For thece is no doubt tbal bolding inventory costs
money, so firms don 't want to have any more lban is absolutely necessary to keep
lhemselves and their cuslomers satisfied ,
Tra.osportation rcfers lO the physical movemcnt of goods from a point of origin
to a point of consumption and can involve raw materials being broughl into the
producLion process and/or finished goods being sbipped out to lhe customer.
Transportation has assumed a greater role in many logislics syslcms for t\Vo rcasoos.
First. the Iiberalization of transporlation laws in mal1y countries has provided
opportunilies for knowledgeablc managers to obtain beller service at lower priees
than lhey could in thc past. Second. as inventory levels have dropped in response
to the populari ty of just-in-time UI'f) strategies. transportation is frequently used
to offset tbe potentially damaging impact 00. eustomer service levels that would
otherwise result [rom tbose inventory reductions.
Storage and materiaJs handling addrcsses the physica l rcquirements of holding
inventory. Storage encompasses the tasks necessary to manage whatever space is
nceded: materials handling is eoncerned \Vith lhe movement of goods withi.n that
space. Thus, tbe former would consider issues related to warebouse number. size.
layout. and design: the latter would focus on the syslems needed to move gooos into.
through. and out of each facility. Obviously. an organization's inventory policies
ha ve a direct impael on its storage and handling needs. Thus, one resul l of lhe move
to smaller inventories is tbe rcquiremenl for less storage space.
6 INTROOUCTION 10 LOGISTICS
Packaging racuses on protecting the product wbile it is being shipped and stored.
Too much packaging ncreases costs while inadequate protection can result in mec-
chanrlisc damage ando ultimately, customer dissatisfaction. Furthermore. since every
bit of packaging is ultimately discarded. logistics managers must also considcr the
socictaJ costs associated with waste disposal. Increasingly, finns are working to develap
materals that previde requi site levels of protection yet are recyclable oc quickly
biodegradable.
lnformation processing is what links all areas of the logistics system together.
'l' he growth of reasonably priced computers and software has put sophisticated man-
agement information systems within the reach of even the smal!est organization.
lndeed. finns are now linking their internal logistics information systems wilh
those oftheir vendors and customers as a means of adding more value to the entire
channeL Such an opeo exchange of information can result in faster order placement.
quicker benefit deli very. and greater accountability throughout the logistics process.
Demand forecasting addresses the need for accurate informatian on future cus-
tomer needs so that the logistics system can ensure the right products and/ar scrvices
are avai lable to meet those requirements. Logistics requirements necessitate going
beyond market sales forecasting lo obtain speciJic data on the timing. mix. and quan-
tity ofbenefits desired by buyers. Without this information. the logistics system runs
the risk of compromising customer satisfaction rather than enhancing it.
Production planning can be included under logistics beca use manufacturing
necds components and raw materia ls to make finished goods that are. in turno
demanded by a customer. Thus. production planning is arguably at the center of
the cntire logistics process. yet it is oflen viewed as a stand-alone entity with its own
objectives and agenda. The risk here is thal production rather than customer needs
becomes the primary focus. a situation that can lead to cuslomer dissatisfaclion.
Purchasing deals with the buying of goods and services that keep the organization
fllilctioning. Since these inputs can have a direct impact on both the cost and quality
ofthe [mal product/scrvice olTcrcd lo the consumer. this activity is vital to the over-
al! success of l ile logistics effort. In addition. the move away from local sourcing in
favor of global buying has complicated this entice process dramatically in recent years.
Facility location addresses the strategic placement of warehouses. plants. and
transportation resources to achicve customer scrvicc objectives and minimize cost.
Altbough not neccssarily made often, these decisions can have very long-term and
potential!y costly implications for the organization.
Other activities for a specmc organization could include Lasks such as afLer-sales
parts and service support. maintenance functions. return goods handling. and
recycl ing operati ons.
Clearly. any oue organizalion is unlikely lo requirc the accomplishmeot orall these
specifi c tasks. For example, a service firm such as an airline might combi ne elements
Crom the information processing. maintenance. demand forecasting. customer service.
and purchasing functions discussed aboye into a logistics system designed to reach its
customers. 00 the other hand. in addition to customer service. purchasing. and demand
forecasting. a manufacturer of consumer goods may draw from transportation. invcn-
tory rnanagement. slorage. materials handling. and packaging for ts logistics support.
INTROOUCTlON 10 lOGIS11CS J
The point is thal evcry organizatlon. be it manufacturer or service provider. ror-pro6t
oc non-profit. has customers that tbey wanL to rcach. By intcgrating the appropriale
functions into a customer-focused logistics syslem. the enterprise can develop a sus-
tainablc advantage that is very diffi culL for a competitor lo imitate.
Sorne of lhcse activities have traditionally had a wcll-defincd sta nd-alone role within
a company (purchasing. production. informatlon processing). while olhers have gener-
a11y beco more c10sely associmed with logislics (transportation. warehousing. packagillg).
What ties all of these funclions together is their ability lo impaci customer satisfaction.
This is nol lo say lhal production, roc example. sbould be subordinate lo logistics. Rather.
top management should utilizc logistics as a way to integrate tbese corporate activities
and keep them focused on the customer rather tban 0 0 internal processes.
The role 01 logis!ics in the organiza!ion
Michael Porter's concept orthe value chain provides an excelleot way to better under-
stand how 10gisLics 6ts into aD organi7.alion. Depicted in figure 1-4. Porter' s mode\
ilIustrates the activilies that a mm must perform to provide beoefits to its customers.
Primary activities (running verticall y in the model) inelude those nvolved in the on-
going production. marketi ng. delivery and serviciog of the product or service; support
activities span those primary tasks and deal witb tbe purchased iopuls. technology.
human resources, and overall infrastructure nceded lo support thc primary activities.
4
lt is important lo note that two of tbe five primary aclivities focus 0 0 logistics: reed-
ing raw materi als. componcnt parts, and related services ioto tbe production l,ine
(inbound logistics) . and managing the now of fini shed goods rrom the end of tbe pro-
duction Hoe to the cuslomer (outbound logisti cs).
An organizati on's stra tegy guides the way tbe indi vidual activities are performed
and dictates lhe structure of lhe overall value chain. s In the long runo tirrns succeed
Support
actlvilies
Inbound
togisUcs
Figure 1-4 The value chain
,
,
,
,
,
,
,
,
,
Finn infrastructure (Finance. Planning. etc.)
, ,
Human. rcsource
, ,

, ,
,
Procuremenl
,
, ,
Operalions Outbound M<lrkcling
(manufacluring) !ogisl.ics and sales
Primary aclivities
\
,

,
,
,
,

,
,
,
\
,
,
Afl cr-s<l les
service

;;-

"
Sourct: Porter, Michacl E .. TI!!! CoIl1/Jelilh'l' Adl'twragl' of Naliolls (Ncw York: The Free Press. 1990). p. 41 .
'.
I
1:
I
I I
"
l.
!
8 INTROOUCTION TO LOGISTI CS
relative to their rivals if they possess a sustainable competitive adv3ntagc. Tbis advan-
lage can come from an ability to provirle comparable goods/services al lower costs oc
by difTerentiation (ofTering superior benefits lo the buyee foc the same cost). 6 Whether
as a resull of low costs oc dilferentiation. the intcnl is Lo arrer more vaJue lo customers
than lbey can receive elsewhere. In oLhcr words. competitive advantage grows out
of the way firms organize and perform lhe discrete activities lbal comprise their
respective value chains.
Organizations create value roc tbeir customers by performing those activilies Doted
earlier. The ultimate value a firm creates is measured by tbe amount buyers are willing
to pay roc its product oc service. A firm is pro(itable ir trus val ue exceeds lhe total cost
or perrorming aU the required acLivities. To gain competitive advantage over its rivals.
a firm must either provide comparable buyee value by performing activities more effici-
eotly tban its competition (Iower cOSl) . or accomplisbing tbose tasks in a unique way
that crea tes greater cusLDmer value and commands a premium price (differentiation).
8
(ll is generally risky to attempl Lo do both si nce dUferentiation implies rugher costs.) Tbc
key is to find sources of advantage tbaL cannal be easily duplicated by tbe competition.'
Por example. tbe Industrial Division of Toshiba [ntemational Corporation (TIC)
builds moLDrs. drives. uninterruptible power supplies. and otber industrial equipmenl.
It srups Lbese products rrom its majn finished goods \\' arehouse in Houston. Texas. and
rrom a distribution center in Erlanger. Kentucky. lo dlstributors. original equipment
rnanufacturers (OEMs). and end users throughout lhe United States and overseas. Many
or its customers require just-in-time deliveries. I.f a late shipment idles tbe engineers
scbeduled to install the incoming equipment. tbe customer may assess a penalty. In
late 1998. lhe company was utilizing 23 differenl motor carriers lO rneet its transportation
nccds and lacked a standardized agreernent for dealing with tbem. Tbe company real-
ized that it had to reduce its domestic freight costs and improve its on-time delivery
rateo '1'0 hclp minimize breakage. it wanted more dir ecto point-to-pojnt sbipments and
fewer stops. TIC began using performance scorccards Lo evaluate lhe carriers. and even-
luaUy reduced the number used from 23 to six. It Qlso startcd utilizing a web-based
lrading network to tcnder loads to carriers. As a resulto l he company now pays less to
move its [reight. its carriers providc higher le veis of servicc. and customers are much
more likely to received their goods undamaged and on time. 10
logistics as a Source 01 Competitive Advantage
Managers are increasingly becoming aware Lhat a well-run Iogistics system can pro-
vide Lhe organization with a sustainable compclitive advantagc. However. this appre-
ciation for logislics is a relatively recent phenomenoD. TraditioDaI sources ofadvantage
centered around factors sucb as access to Iow labor costs. natural resources. large
captivc markets. or sorne unique technological expcrtise. Unfanunately. while still crit-
ically important to corporate success. tbese elements are declining in importance as
sustainable advantagcs. ew techn.ologies are shrinking clircctlabor costs as a percentage
of total costs: many nations with historically 10\V labor costs are finding tbat emerging
countries can undercul mem: the rate of advancement in sorne industries seems to make
IN1ROOUC110N 10 LOGISlICS 9
technologica1 developments obsolete almost as soon as new products reach the mar-
ketplace. Finally. the availability oC natural rescurces and incxpensivc components has
become increasingly global. largely eliminating access lo thern as 3n advantage.
Il
Throughout the 1970s and earty 19805. sorne companies tried lo achieve compel-
tive advantage by improving productivity and reducing costs. As the 19805 unColded.
compctitive advantage meanl delivering flawless praducL quality. while in the 19905.
providing superior cuslomer scrvice became lhe ohjective of leading-edge firms.
12
The
Dew millennium saw tbe focus on service conti nue. but tbe emphasis is now c:-
00 value by helping them lo do their t3sb better. However. this discussion high-
lights two points regarding competitive advantage. First. even the most successful
advances lose Lheir individual determinance over lime SO that yesterday's competitive
advantage bccomes today's minimum acceptable standard. Second. tbe window of oppor-
tunity for any given stratcgic innovalion may be relatively narrow. so organizations
must constantly be for to meellheir customers' nceds bcttcr lban
tbe competition can. Thougb the topie will be discussed in sorne detaillater. it is worth
mentioning here that ti competi tive advantage built on a wcll-planned and suc-
cessfully executed logislics strategy can be sustainable beca use it is very dillicult ror a
to cOPY:- - l 1
What might be sources of competitivc advantage in the next decadc? Unfortunately.
there is no easy answer to tbis question. Acbicving meaningful competitive advantage
requircs ao organization to have a tborough understanding of its customers and the
additional value lhat they seek. In addi tion. lhe firm rnust have the internal skills (or
competencies) necessary to exploit lbat knowledge in ways lbal no rival can duplicate.
Por example. there is a growing demand for time-based logistics management in 1
developed markets where customers are relatively sopltisticated and resultant conipetive J L
1
pressures are high. Specding up lhe process means slreamlining thc f10w of goods from
the supplier to the customer by reducing or eliminating activities that add time but no
value.
1J
Customer demands for faster dclivery. continuous shipment tracking. and elec- .)1.
tronic transfer of information retlect this desire lO minimi7.e wasted time. Kauppatalo
Hansel Oy. a Pinnish distributor ormaintenance. repair. and operations (MRO) goods.
is addressing trus demand in an innovative way. f...ocated in Helsioki. the capital ol'FinJand.
Hansel olTers 2.5 miUion product variants lo its customers. 6.000 of whicb it storcs in
its own warebouse in Helsinki Tbe rest are stored by 500 suppliers included in tbeir
supply network. A customer's order will Lypically involve products coming fram sev-
eral locations. Rather than sending multiple shipments tbat can arrive al dilTerent limes.
each item is shipped to a central distribution center where it is consolidated into one
shipmenl tbat is thcl1 delivercd lo the cuslomer. This system adds value lo the customer
by minimizing Lbe number of sbipments that must be tracked and lowering the chance
for service disruption. 14
AILcrnalively. customers in less-developcd or cmerging markets may nol see rapid
replenishment as a particular advantage given lbal it also implies higher costs. Indeed.
a significant competitive advantage in lhis situation migbt be realized simply by
having the ability to gel t he product to t bat cuslomer on a regular basis al same
reasonable cost. The chal lenge ror any organizaton is lo focus its skills on satisfying
those customer needs that oITer the greatest opportunities for obtaining a sustainable
compelitive advantage.
r
.-0
10 lNTROOUCTlON lO lOGISTICS
Why Is Management Interest in logistics Growing?
Porter's theory of competiti vc advanlagc and the va lue cbain is nol new. yet. in gen-
eral. logistics has remained a rather underapprcciatcd part of many lirms. Howevcr.
I dramatic changes in the internationaJ business cnvironment in recent years have led
lo an increased role roc logistics in firros operating globally. Several of lbese events and
their impact on logistics wiJI be discussed belDw.
lrends in globallrade
Firms are searching roc ways lo capitali1.e on the growing demand roc goods in markels
such as Central and Eastern Europe. China. and tbe Cornmonwealt.h of Independent States
(CrS).l ndeed. witb more man 1.2 biJlien consumers and increasing disposable ocome.
China's retail sales during the first halr of 2003 alone totaled 2.1556 lrillion YU3n
(US$260.3 billion). up 8 pereent over Ibe previous ycar.
15
Similarly. a 2003 A. T. Keamey
study identified Russia and Eastern European countries as offering the besl opportunities
for rood and general merchandise retailers with intcrnalional expansion plans,l6 Al the
samc time, new and cheaper sources foc raw materia ls. manufacturing capabi li ty, and
other inputs are encouraging fjrms to explore purchasing arrangements in countries
they have never considercd befare. Exploi ting tbese opporlunities will inevilably
requirc logistics systems that are difTerenl from lhose serving more developed markels.
Trade blocs are emerging as a way lo give srnalJer cQuntries econornic power against
their larger. more developed counterparts around the \Vorld. These arrangements
have lhe added benefit of simplifying business transactions among lhe member sta tes.
Al l more fundamentallevel. tbese cconomic unioos are reshaping t be en tire pcrcep-
lion of domestic versus intcrnational markets. For examplc. a British firm may real-
istically considcr its "dorncstic" markcl to nelude aU !lations in lhe European Union
(EU). while a Canadian firm may vicw olher members of the Norlh American Free Trade
Agreement (NAFTA) in lhe same way. Of eourse. signHicant country-to-country dif-
ferences continue to existo BUl a well-run logistics system can provide lhe organization
\Vith a mecbanism for dealing \Vitb lhose disparities so lhal euslomers' needs can be
satislied regardless of lhe markct's geographic loeali on.
Customers are demanding greater vaJue
Cuslomers prefcr lo buy from tbe firm lhal they perceive lo orrer lhe highesl cuslomer
deli\'ered As depicted in figure 1-:;. euslomer delivered value is !he differeoce between
total customer va/uf and total cuslOmer costo where lOlal customer value is tbe bundle of
benefits customers expect from a givcn product or service and total customer cost rep-
resents all direct and indirect costs associatcd wilh oblai ning those benefits.
17
As mentioncd aboye. to incrCilSC the customer delivered value. the (irm must either
dispense more benefits (increase total customer val ue) ror t he same cost: give the same
total customer value al a lower cost: or provide sorne combinabon o[lhe two. The diffieulty
for global companics is tbat customers in diITerent markets define val ue in dramaticaUy
IN1ROOUCTlON 10 LOGISTlCS 11
Product
value
+
Serviccs
value
=
Total
+
CUSl o me r
1-
Personnel
value
value
+
Image
value
Customer
=
- deli vcred
Monetary
value
price
+
Time
cost
Total
=
+ customer
-
Energy cost
cosl
+
Psychic
cost
Figure 1-5 Delerminants of customer delivered value
SourCI!: Koller. Philip. Markeli ng Mmwyeml'nf. 11th oon (Englewood Cliffs, NI: PrenUce ]-Iall. 2003), p. 38.
difTerent ways. Management. rhen. must have a clear idea ofwhaL is important to t heir
various cuslomer groups so t bat the appropriate benefits can be deli vered lo each a ne.
Unfortunately. people rarely lower their desired level of deJiveroo valuc. For example.
firms dolng business in Europe used lo routinely serve all of those cuslomers from a
dislribulion ccnlee situalcd in l he southeastern parl of England or the Benelux area
(Belgum. l he Nelherl ands. a nd Luxembourg). Today. howevcr. to provide the fastser-
vice that customers are demanding. smaller. regional distributi on ccnters (RDCs) are
being opened in a varety of locations throughout Europe. For example. an RDC in Lyon.
E'ranee. mi ght serviee eustomers in southern Franee. Italy and Spain.
18
Transportation privatization and liberalizat ion
Because of tbe key role play<..>d, by transportalion in a nation 's economy. governmenls
have historically taken a great nterest in how it is accornplished. For sorne naLions.
this involvcment has taken the form of outri ght national ownership of transport
resources such as airli nes. steamship Ines. and railways: olher coul1Lries have chosco
'1"
,
,1
,
12 INJROOUCTlON 10 lOGISTlCS
lo rely on the private seclor lo provide these scrvices. However. regardless of location.
transportation services bave almost always taken place within a complex framework
of laws and regulations seemingly ntended to protect the industries tbemselves al the
expense of cfficicnt resource uLiHzation cllld customcr service.
In 1968. lhe United Kingdom was one of the first to reduce governmenl's involve-
ment in the provision of transportalan services. specHicaJly road freight movement.
This rcduction of government's role in the business affairs of transportatan compan-
es has come to be known as dereguJation. The United States followed the Britisb cad.
slaning with lhe all-cargo ai rlinc in 1977. Since lhen. other counlries have gradually
moved to sell their governmcnt-owned ar controUed transport campanies ta priva te inter
ests while simullaneously reduci ng their in volvcment in the busi.ness oftranspartation.
China. far example. began apening up its natia nal railway to pri vate operators in early
1998 ando by lhe end of 2004. started permitting fareign campanies ta aperate wholl y
owned road transportatian companies.
19
Similar interest in improving rail efficiency
in Europe has led the EU to advocate splining railway infrastructure and operational
capacities into two separate enlities so that private operators su eh as tbe Dutch com-
pany Railion can compete wilh stateowned railroads. In faclo the NeLherlands and
Germany have aggressively moved to djsmantJe state monapolies. The Dutcb have aclu
aUy seen freight val umes increase sincc commercial firms began providing service, while
Germany now has appraximately 25 private rai! freight companies of which ten are
cansidered serious campetilors for tbe staterun Deutsche 8ahn Group?O
lnvariably such a reorientatian tawards more competitive transport systems provides
apportunities ror sruppers to obtain better service and lower priees. However. the reality
is tbat managing lhe transport funelion today bas become more eomplex as logistics
managers rnust now deal witb a n everchanging array of cosllservice options.
Transportation security
Sinee late 2001. transportation securit'y has become a major concern for several
reasons. First. companies now realize that the dellnition of a higbrisk cargo bas
cbanged. In lhe pasL. highvalue conswner goods. ror examplc. \Vere typical of
produets most susceptible to tbeft. Today. many types ofinduslrial cargoes may be tar-
gets as \Vell. Second. governments around the world are inereasing tbeir scrutiny
. of freight moving through Lheir parts. which mC3 1lS that new o e u m ~ and
handling procedures must be follawed by aH parties engaged in t he transport process.
Mi stakes can del ay srupments. raise eosts. and generaUy disrupt customer supply
chains. FinaUy. oervous shippers now want to kno\\' al any time where their shipments
are in the transit chain, a demand lhal has led to innovative identillcation techno
(ogies that \Viii be discussed below.
Environmental concerns
Wcl l tado natians and their citizens are becoming more concerned with actions
that adversely atTeet lhe environment and society's quality of Iife. Air. water. and noisc
INTROOUCTION TO LOGISTICS 13
pollution. salid waste disposal. energy conservation, and product-safety issues can all
be viewed as public casts associated with meeting individual customer needs. For ex-
ample. providing buyers with lhe goods they want requires the use of transport vehicles
that pollute the airo create noise, add to trallie congestion, and consume scar ce cnergy
resources. Furthermore. these products must be packaged lo protecl them rrom dam-
age whUe in transit. bul very oflen lhe packing material tbat ofTers the masl reason-
ably peieed protection is the slowest lo decompose once it is discarded. lo response lo
customer conccros about packaging waste. logistics companies in the United Kingdom
distrbuling to supermarkets are now collecting cardboard waste frorn their customcrs
and selling il for pulping. Thc transport costs are minimal and a disposaJ cost to the
retaiJer is avoided.
On the olher hand. developing nalions in which a eompetitive markelplaee is stiL!
emerging tend to have a lower leve! of eoncern for these issues. Tbey are more inter-
ested in raisi ng their standard ofliving and acquiring the goods and services that their
more advanced neighbors already possess. Cuslomers in these markets are not willing
to pay higher priees for cnvironmentaUy fricndly goods. despile the long-lerm benefits
oC doing so. Thus. the chaUenge Cor tbe logistics manager is to satisfy lhe customer while
minimizing the advcrse impaet on tbe environment oC doing so.
Changing view 01 inventory
The perception oC inventory has changed dramatical1y over tbe years. H.i storicaJl y, in ven-
tory was used lo compensate for internaJ problems tbat eould ultimately resull in a dis-
satisfied eustomcr. In Caet. from a purely funetional pointofview, everyone (other tban
tbe accountants) likcd inventory. Manufaeturing managers desired long produetion
runs of similar products 0 0 lines tbat did DOt stop: work-in-process and fini shed goods
inventa ries made that possible. The sales force relied on Large inventories lo back up
promises of rapid goods delivery lo the eustomer. Finally. euslomers liked inventory
because it meanl thal items were always available on lhe sbelf. Unfortunately. what
became obvious to many managers in lhe early 1980s is that holding inVCDlory eosts
money. As lirms became more conceroed with cODtrolling eosts, inventory levels rell
as firms adopted sorne form of a J IT systern. But. over the longer term, many of these
same firms found tbal while lbeir overall costs fell, eustorner serviee deterioraled as
stockouts inereased. EventualJy, sales and profits declined as well . more than ofTsetting
any cosl savings.
Managing inventory beeomes an especially crucial issue when selling globally
beca use holding goods in nondomeslic markets is virtuaUy a necessity ir customer ser-
vice levels are to be maintained. So tbe issue of invent"ory management continues to
be of great importanee. Speeifically, managers must decide how mucb (if aoy) lO hold
and how to administer the rest of tbe logistics system more creaLi vely to eosure that
customer servi ce does not sulfer as a resul t or lower inventory levels. Coles Meyer,
Australia' s largest retailer. plans to save up lo $1 billion by making its 65,000 sup-
pliers shouJder more of ilS supply chain costs in a program designed lo c10se lbe
performance gap with areh-rival Woolwortbs. The firm is ehanging tbe way it buys
about $18 billion orfood, liquor, consumer goods, and c10tbing each year, cutting lhe
'1
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1
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14 INTROOUCTION 10 LOGISTICS
amounl of stock it holds in warehouscs and hack rooms and forcing its suppliers lo move
lO a just-io-time approach lo delivcring goods. Tbe project \ViII ncrease the pressure
on the 65.000 suppliers to the retailer. wha are heing asked lo shoulder more of lhe
back-end operations. inc1uding picking and packing goods on to pallets. which relail-
crs would tradiLionally undertake. Coles Meyer's broad strategy is lo cut its invcntory
levels by moving lo a syslcm where suppliers deLiver stocks just befare tbey are nceded
on lhe shelves. This cuts the amounl of warchouse space lbe relailer needs and
lowcrs the casts of holding nventory. It wants to rcmove slow-selling product lines lO
maximize profitahility by selling more orlcn (ram the same shel f space and reduce lbe
amounL ofwastage in lines such as groccries.
l1
Continuing advances in information technology
LLlformation syslems are the glue that holds the logistics system together. fLldeed, lhe
dramatic improvement in computcr tcchnology over the pasl 30 years has made il pos-
sible lo systematically manage logistics at aH. As compuling power bas grown and prices
have droppcd, sophisticated computer resaurces are now \vilhin reach of even the small-
est organization, [nformation transfer can occur inslantaneously, not only wilhn
Single organizations. but also betwccn them. Tbis capabilily means that data are cap-
turcd and analyzed more quiekly. leading to better dccision making.
In faet. lhe capability to fully automale the logistics system is IlO\-\" available. A cus-
lomer's order can be generated automaticaJJy as on-hand inventory drops to a certain
leve!. The order is transmitted via clCClroni c data interchange (EDr) to lhe supplier's
compuler. whieh then directs lhe required amount ofthe needed produet be pulled aul.o-
maticall y from Lhe warehouse and shippcd to the cuslomer. [nventory leveIs are
updated, billing initiated. and necessary documents gcneratcd al each appropriaLe step
in the process. Theoreti ca ll y. th is enlire process can occur wit hout human interven-
tion and with vi rtuaUy no waiting time.
OLher developmcnts are taking place in lhe use of global posi lioning systems (CPS) and
radio frequency identificaliol1 (RFID) tags. CPS uLilize satellitcs to monitor vehicles
(and lhe shipments they are earrying) in rcal time. a capability that allo\Vs the carrier
not only to te11 eustomers where their cargo is al any givcn time. but also to reroute
vehicles should lhe need arise. RFID utili7.es a small transmitter to sead radio frequcncies
from pallets and cases that allolV lhose ilems to be instant1ncously localed by the cus-
tamer or the carrier. The gianl. United Sl.ales railroad Burlington orthern and Santa
Fe Railway Co. (BNSF) has increased productivity and efficiency by investing in bOlh
tcchnologies to auLOmate lhe no\\' ofinformation and shipping containers to and from
customers. Botb systems have bcen used ror years lo track company equiprnent as il
mavcs around t he caulltry. Today. ho\Vever. cOLltainers are loaded and unloadcd in
inlermodal hubs with a series of overbead cranes equipped witb satellite-linked GPS
cquipment. This capability provides a precise gcographic loca tion of a container at Lhe
moment it' s being loaded or unloadcd and crea tes a precise. 3-D image of where a given
container is locatcd in Lhe yard. Similarty. BNSP's systems can handle RHD-cnablcd
packaging as wel!. Por examplc. if they are trallsporLi ng frcight from a
retailer' s wholesalers. they can associate the individual RFID-packaged goods with the
IrlTROOUCTlON TO lOGISTlCS 15
container to provide a precise descri ption of the freighL's location as it makes its way
across t he country.H
Electronic cornmerce
Electroni c COIllt11CrCe, or C-CQmmcrce. is ra pidty taking hold as el rctClil selling vCl1 ue.
Customers can 11 0W shop and c rder virtuall y any merchandi sc on-line fram the
comforl of tbeir own homes. Security issues regarding lhe transmission of credil card
nformalion are bcing resolved. SO buyers are bccoming more co.nforh'1blc wilh the
Internet as a shoppi ng 1O01. Howevcr. ir lhe fu ll promisc of c-commcrce is LO be real-
red. the goods must reach the buyer just as qu ickl y. Thus. ftrms have had to rcassess
their logistics systems lo ensure t hat their customcrs receivc t he goods 1haL t hey have
ordered in an expcditious rnanner. ln olher words. logislics is an essenLial elemenl of
a succcssful e-commerce ven tu re.
logistics in the Global Organization
As Lhe world's markets become more managers are finding lhat new ways ofdoing
business are necessary to both fu ll y exploit lhe opportuniLies available as well as guard
againsl cmergin g lhreals lo corporate success. The lraditional inlernationaJ oc multi-
natianal approach to business concentratcs largcly 01'1 geographic markcts. develop-
ing a di stinct marketing mix for each one.
2J
This strategy. in turno implies a primar y
focus 00, sorne domcstic markel. with intcrnationaI efTorts a subordinate concern.
Global organizalions. on the oLher hand. look al the whole world as one potential
market - sourcing. manufacturing. researching. raising capital. and selling wherever
the job can be done
One of Genera l Motors' nelVcst America n modcls is lhe Pontiac CTO. which is actu-
ally a slightly modilied Australian car known as the Holden Monero. The GTO is built
in Adelaide and shipped to tbe United Slates where it is marketed as lhe successor to
tbe wildl y popul ar] 960s era "muscle" car of lhe same name.!S l he challenge is how
to manage this network of far-flung overseas activitics as a single. efTeclive unit.
firms are searching for ways lo convert worldwide producti on, marketing. research
and development. and financial prescnce inlo a competilive advantage.
u
, 'J'here are lwo

ways in which a lirm can achieve that goal. The lirst is in the \Vaya global organ-
ization can spread activities among nations to serve lhe \VorId markct. The second is
via t he abil ity of a global company to coordinate among those dispersed activitics. In
some instances these acLi vilies may be placed close lo lhe buyer in the value ehain.
Outhound logislics. service. and marketing are ll sually lied lo t he buyer's
location. ln conlrast. tasks such as sourcing. inbound logistics. and manufacturing can
be performed anywherc. But geography is generaIly becoming less of a conslraint. A
firm with a global strategy locales sucb activitics to oplimize ilS cost posilion or difTer-
entiation from l worldwide perspective. Por instance. Del! Computers in the United Stales
is the second largest computer company in Lhe \Vorld in lerms 01' number of shipmen ts.
Dell has factories in tbe USA. Ireland. Malaysia. and China: il also commissions an
'"
li
,
1.1
,
1"
"
16 INTROOUCTION 10 LOGISTlCS
original equipment manufacturer (OEM) in Taiwan to produce computers wilh tbe Del!
brand name. The OEM is nol just in charge of assembly: it also dcsigns. tests and pro-
duces ncw machines. carries out inspections and manages stock. Furthermore, over
the Jast few years. the Taiw<.lnese OEM has been rapidly transfcrring part of the pro-
ductian ofmotherboards and peripherals to Chi na: these are then exported from China
as semi-manufactured goods. Finally, a hard-disk drive asscmbly plant in Thailand
exports ils producls lo the United States, Malaysia, 'I'aiwan. and China. In tbis way.
the mechanism of production and distribution has spread across Asia.
27
As can be secn.
competilive advantage from an international presence comes from locating activitics
utilizing a global perspective and coordinating actively among them.
l S
Logistics is a particularly powerful management tool in a global organization
because it is n approach to doing business that works anywhere. Clearly, fuUilIing cus-
tomer needs in North America or Europe requires ditTercnt skills and resources than
satisfying buyers in rural China or A;.'..erbaijan. The objective, however. is t he same: to
meet those needs better than lhe competition. By understanding the basics of logistics
management and haw to puL together a logistics system respansive to customer
rcquircrncnts, managers wiII be better able to deal with the unique chall enges inher-
ent in doing business outside the conflnes of theie own country. Logistics profile 1-1
discusses McDonald's and iIIustrates just how important a resource logistics can be.
LOGISTlCS PROFILE 1-1
McDonald's
When McDonald's a few years ago ofTered to add an extra strip of bacon on its
burgers [oc (US) 35 cents, it misjudged customer appetites. The promoLion
proved so popular the fast-food giant had to rush order a few more rashers, trigger-
ing l bit of a ripple impact across part of the economy. "We closed the spot
market for pork bellies and increased our costs greatly,"' said Robert Bauer.
informaton technology director for McDonald's global supply chain. It also
foreed McDonald's to rethink the way it manages purchasing, inventory, and
rcplen ishmcnt. Now the company wants its franchisees and corporate managers
to use an onHne ordering system that will help it plan exactly what to purchase,
pack, and ship and how many trucks it \-vill need to do t.
'McDonald's already has seen dramatic improvements in its European opera-
tions using this technology. The company has reduced raw waste by 30 percent,
inventory by 30 percent and slore transfers from eight lO four," said Bauer. "Order
times were bal ved, saving 60 minutes per week.' he said. "Annual savings pcr
store are approximately (US)$5,585, which sounds like litLle lo a big corporation
except t hat it adds up to at Icast $]] ,5 million in savings at just the 2.072
McDonald's restaurants in France and Germany.
McDonald's onHne ordering program reflects the shift toward "demand cbain
planning" under way across many industries, Product !ife cycles are getting
INTROOUCTION 10 LOGISTICS 1 J
shorter. comIXtition more iotense. and even global giants need lO be niroble. Waste
has lo be cut out of supply chains. whether it is too many plasUe spoons or too
many shipments using too many Lrucks. trains, planes. and ships. In 2003. only
12 percent of restaurants ordered road supplies electronicall y - 10 percent roc
nonfood supplies. according to the NaLi onal Restaurant Association. Sorne tWQ-
tbirds purchased perishable foods and nonfood supplies primarUy through a
distributor. McDonald's. however, is one of a handful of companies witb tbe power
to gel thousands of franchisees - its business partners and customers - to sigo
up roc 5uch a system. The company serves more people by Tuesday than Wal-
Mart serves cacb week. More thao 31.000 McDonald's restaurants serve 46
million customers each day in 119 countries, In lhe United States, lhousands
of trucks are on the rcad each day delivering rood and supplies to McOona ld' s
francruses, Those LTucks are bauling more than just alI-beef patties and sesame
seed buos, McDonald' s is one of lhe largest loy distribut ors in lhe Unilcd States.
selling toys. cloLhing, footwear, acceSSOries, books, OVOs, and videos - and you
still can get fries with tbat.
In the United Stales, where McDonald's has about 13,000 restaurants. nearly
12.100 are on-line. "H is unlikely it will ever hit ] 00 percent. " said Bauer.
"beca use lhe franchisees don't have lo sign up ir tbey don' t want to, Planning
the r ight affiount to ship lO restaurants each week is critical. however. beca use
McDonald's wants its invenlory to be ;invisible.' It wants deliveries lo its stores
at night so that workers areo't tied up dadgiog haodcarts and large trucks are
0 0 1 parked in froot of the restaurants, McDonald's delivers supplies belwcen
ane to three times per week per store, someti mes more often in urban arcas, Each
lruck makcs t\Vo Lo three stops per route, "
Por 2004. McDonald's plans to complete implementation of ontine ordering in
Germany and France, wbere it is using the system foc all road and supplies,
McDonald's has 1.100 restaurants in Germany and 972 in France, wbere tbe
company says it has generated positive comparable sales and protit inereases eacb
of the past six years, despiLe much publicized protests by Freneb farmcrs and
activists. MeOonald's is one-third oftbe way through the project in Germany and
half-way through the project in France, said Bauer, McOonald's plans lo expand
tbc system to l he Unitcd Kingdom, Hungary. Austria, Spain. the Czceh Republic
and tbe Netherlands,
(So urce: Hi ekey, KathJeen. "McDonald's TaL! Order," TrajJic World. January S,
2004. pp. 8-10.)
Conceptual Model and Statement 01 Purpose
This text is structured around the logistics system model shown in figure 1-6, The logis-
ties system provides the e ~ J l S ror moving goods from tbeir point of origin to their poinL
of consumption. The various activitics discussed carl1er must be performed together to
"' 1' (
i
"

18 INTROOUC110N 10 lOGISTl CS
Customer
service
lnformatioll
syslcms
Malcrials
management
Fi gure '6 The logistics system
I Transportalion I
Warehousing I
IllvenlOr)' I
meet customers' needs at lhe lowesl total cost. a systems approach that involves
weighing the impact ofindividual decisions on the logislics errort as a whole. The premise
is lhal failing to adopt 5uch a systematic view of logistics \Viii impcde lhe now of valuc
to customers eithcr through poor service. increased costs. or both. Thus. while sub-
sequent chapters \Viii examine many of t hese activities in detaLl. their overalJ role as
parts of a Iarger whole musl nol be forgotten.
As nOled in Lhe Preface. rhe purpose of l his book is threcJold. Firsl. il \Viii provide lhe
rcader wilh a concisc descriplion of individuallogislics activitics and ho\\' lhey funclion
in a global setling. Second. the reader wi ll be able to understand haw l hose separate
acLi vities ca n be made to funcUon as a cohcsive system that adds great value lo the
firm's ClIstomers. Finall y. lhis basic knowlcdge \ViII enable managers to elTectively lIli-
Lil.e logislics as a compelitive weapon in lhe continual lighl ror marketplacc advantage.
CHAPTER SUMMARY
Logislics is a concepl familiar to st udents or military history. Long associaLcd wilh
the deploymem and rcsupply of armed forces in wartime. logislics is proving lo
be l source of sustilinable competitive advanlage for finns competing in lhe
global iJrena . Those firms view logisti cs as the process of moving benefits from
Lheir point of production lO the custorners whose necds tbey are intended to 5a1-
isfy. Organizations lend lo derine logistics difTerently depending on whelher lhey
are for-profit or non-profir manllfacturers of products or providers of services. But
the overall objectivc rcmains lhe same: LO satisry tbe clI stomer bettcr lhan the
competition. The remaindcr of the book will utilize the logisti cs system modcJ lo
iIIustratc how logistics can be ulilized to do just thalo
Notes
ctls[[1bullon. wna[ 8", '1'i1i"1IIIi
or customer benefits. What does log\slil
value? How does price affect
1II or competitive advantage changed
value chain and why is il relevant to a 6nn
role of iuvcntory in an organization ehall,.."
included as a logistics function?
t for managers or global organizatloM
issucs such as air pollution, fuel
tnfluence logistics?
prolile 1-1 and figure 1-6. Howare

automatcd ordering
of implementing lhe new system
l. RUlcllberg. David C. and Allen, Jane S .. rile l.QgSfics oJWagillB War (GunLer Air Force SLation.
AL. USA: Air Force Logistics Managemcnt Ccnter. 1986). p. 2.
2. Adapled from Shapiro. Roy D. and Heskcll. James L .. Logislics Str/lLl'gy: Cases alld eollcepls
(SL. Paul. MN: \Vest Publishing. 1985). p. 6.
3. "The 800t Leg." Tmffic Wode/. Jul y 19.2004. p. 15.
4. Porler. E .. rile Competifive AtlvtmUlge 01 NaUom; (Ncw York: Thc Free Press. 1990).
p.40.
5. lbid .. p. 4 I .
6. Ibid .. p.37.
7. Ibid .. p. 38.
8. (bid .. p. 40.
9. Ibid .. p. 43.
10. Douglas. Merrill. MToshiba's Public-PrivalC l'artncrship,H '"bol/nd Octobcr 2002.
h U p: //www.inboundlogistics.com/ tlrticlcs/ toolkitltoolkHl002.htm 1
11. Portero MiclHlcl E .. COlllpt'Liti011 in Global Industries (Bastan. MA: Harvard Business School
Prcss. 1986). p. 4.
12. Byme. Patrick M .. "Goi ng Bt:yond Quality Por Compclilive Advantagc." TrtlllSIlOrl(llioll (wd
Distriblllioll. vol. 32. no. 12. Dccembcr 1991. p. 5.
13. Murphy. David J. and Farris, Martin T .. "Time-Bascd Strategy and Carrier Selection.-
}ourtwl o/ Busntss l.ogislics. vol. 15, no. 2. J 993, p. 27.
'[J
"
't!

lj
1,
'I1
'.
20 INTROOUCTlON ro LOGISTICS
14. Ka rkkaincn . Mikko. Ala-Hisku. Timo. <Ind Holmstrom. Jan. "Incrcasing CustoOler Value
and Decrcasing Distribulion Costs wilh Mcrge-In-Transit." lmematiollal oumal 01 Physiccd
Dislribllliol (lIId Logislics Management. vol. 33. no. 2. 2003, pp. 135-7.
15. "Retai l sales strong. bul sector has problcms," China Daily. October 8. 2003. hltp:/1
\Vww. chinadaily.com .cn/en doc12003-1 Q-08/conlent_2 699 53. htm
16. "Russia, Easlern Europc Masl Attraclive Expansion Targcts rOf Food and General
Merchandise Rctailers. According lo A.T. Kcarney Study," http://ww\V.atkcarney.com/
main.taf?p:=1.5.1 .134
17. KoUer. Philip. Markeling Marlllgement . 11th edn (Englcwood ClifTs. NI: Prentice Hall.
2003). p. 60.
18. Harps. Leslie Hanscn. "Europe's Evolving Logistics Landscape." lnboulld Logistics. August
2003. as presenled at inboundlogistics.com. bttp: //www.inboundlogistics.com/ articles/
fea tures/O 80 2 _fcCI tu reO 2 . h troJ
19. Lee. Jane Lanbee. "Torturcd Logistics Take 1'011 on Wall Slreet foumal.june 29.
2004. p. A 12.
20. Stares. Justin. "Pain of geUing Europc back on lhe rails: Many problems plague Europe's
21.
22.
23.
24.
25.
26.
27.
28.
raH freight induslry. bul. the biggest ofthesc appears 1.0 be government ownership." Lloyds
Ustl"temaliorwl. issue 58626. March 29. 2004. p. 10.
Evans. Simon. "Coles TargelS $lBN Squee',c 011 Suppliers." AIISlrali(1II Fimlllcial Review.
Scptember 15. 2003. p. 1.
Campbell. Jeffrcy and Oraper. frilZ. "Best PrClctices-Railroad RcvitaWes Freighllndustry."
Optimiu. July I. 2001. p. 53.
Cateara. Pbilip R. and Graham. Jobn L.. lntemalional Marketing (New York: McGraw-
HillIJrwin. 2005). p. 23.
rbid.
erain. K. C .. "Oull Styling. Price Hobble Sales ofGTO," AUlOmol,ive News. May 24. 2004.
p. l.
Porter, 1986. p. 2.
Nlntervicw with Akiro Suehiro." Asia Pacific Pers/J/'ctives. July 2004. as presenled al
bttp://www.jijigaho.or.jp/ app/0407/eng/inlcrview02.htmI
Porter. 1990. pp. 54-S.
,