Chapter 2:

Dimensions of Logistics
Chapter 2 Management of Business Logistics, 7
th
Ed. 2
Learning Objectives - After reading this
chapter, you should be able to do the following:
Understand the role and importance of
logistics in private and public organizations.
Discuss the impact of logistics on the
economy and how effective logistics
management contributes to the vitality of the
economy.
Understand the value-added roles of logistics
on both the macro and micro level.
Explain logistics systems from several
perspectives.


Chapter 2 Management of Business Logistics, 7
th
Ed. 3
Learning Objectives
Understand the relationship between logistics
and the other important functional areas in a
company, including manufacturing,
marketing, and finance.
Discuss the important management activities
in the logistics function.
Chapter 2 Management of Business Logistics, 7
th
Ed. 4
Learning Objectives
Analyze logistics systems from several
different perspectives to meet different
objectives.
Determine the total costs and understand the
cost trade-offs in a logistics system from a
static and dynamic perspective.

Chapter 2 Management of Business Logistics, 7
th
Ed. 5
Logistics Profile:
Jordano Foods
Jordano Foods is a major vendor for SAB
Distribution, and must decide if it wants a
supply chain relationship with SAB.
Jordanos CEO put together a study team to
evaluate the impact of adding a logistics
systems approach.
As you read this chapter, look for ways for
Jordano to improve its logistics processes and
supply chain relationship with SAB.
Chapter 2 Management of Business Logistics, 7
th
Ed. 6
Dimensions of Logistics:
Introduction
Logistics has come a long way since the 1960s.
The big challenge is to manage the whole
logistics system in such a way that order
fulfillment meets or exceeds customer
expectations.
Focus of this chapter is upon the individual
firms logistics system but also recognizing that
no logistics system operates in a vacuum.
Chapter 2 Management of Business Logistics, 7
th
Ed. 7
Figure 2-2: Logistics Costs as a
Percentage of GDP
15.7
12.3
11.4
10.4
10.3
10.1
9.9
0 5 10 15 20
1980
1985
1990
1995
1996
1998
1999

Chapter 2 Management of Business Logistics, 7
th
Ed. 8
Logistics in the Economy:
A Macro Perspective
As indicated in Figure 2-2, logistics costs as a
percentage of GDP have declined from 16
percent in 1980, to under 10 percent in 1999.
Early to mid-1970s saw the figure closer to
20 percent.
This reflects a serious improvement in the
efficiency of logistics systems.
Figure 2-3 shows a further breakdown of
logistics costs for 1999.

Chapter 2 Management of Business Logistics, 7
th
Ed. 9
Figure 2-3:
Total Logistics Costs --- 1999


Chapter 2 Management of Business Logistics, 7
th
Ed. 10
Figure 2-4:
Inventory Sales Ratio
Chapter 2 Management of Business Logistics, 7
th
Ed. 11
Logistics in the Economy:
A Macro Perspective
As indicated in Figure 2-4, the Federal
Reserve measure of inventory to sales ratios
from 1991 to 1999 clearly indicate that
companies are getting better at managing
inventory.
Companies have been supporting larger
amounts of sales with decreasing amounts of
inventory.
Chapter 2 Management of Business Logistics, 7
th
Ed. 12
Logistics in the Economy:
A Macro Perspective
The two largest cost categories in logistics
systems are transportation and inventory.
While we will look at this in Chapter 9, motor
carriers share of total freight expenditures is
$450 billion versus $99 billion for all other
carriers.
The most frequent trade-off within logistics
is between transportation and inventory cost.
Chapter 2 Management of Business Logistics, 7
th
Ed. 13
What is Logistics?
Increased recognition through news media,
corporate-owned trailer promotions, and
television
Increased sensitivity to service quality
provided by logistics
Logistics definitions provided in Table 2-1 on
the following slide.
Chapter 2 Management of Business Logistics, 7
th
Ed. 14
Table 2-1:
Logistics Definitions
Chapter 2 Management of Business Logistics, 7
th
Ed. 15
What is Logistics?
Popular logistics terms:
Logistics Management
Business Logistics Management
Integrated Logistics Management
Materials Management
Physical Distribution Management
Marketing Logistics
Industrial Logistics
Distribution
Chapter 2 Management of Business Logistics, 7
th
Ed. 16
What is Logistics?:
21
st
Century View of Logistics
Business Logistics supply chain process that
plans, implements, and controls the efficient,
effective flow of goods, services, and related
information from the point of origin to the point
of use or consumption in order to meet
customer requirements.
Military Logistics 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.
Chapter 2 Management of Business Logistics, 7
th
Ed. 17
What is Logistics?:
21
st
Century View of Logistics
Event Logistics network of activities, facilities,
and personnel required to organize, schedule,
and deploy the resources for an event to take
place and to efficiently withdraw after the
event.
Service Logistics acquisition, scheduling, and
management of the facilities/assets, personnel,
and materials to support and sustain a service
operation or business.
Chapter 2 Management of Business Logistics, 7
th
Ed. 18
What is Logistics?:
Value-Added Role of Logistics
Most commonly referred to in terms of
economic utilities:
Form utility (what)
Place utility (where)
Time utility (when)
Possession utility (why)
Also referred to as the seven Rs --- Right
product, Right quantity, Right condition, Right
place, Right time, Right customer, and Right
cost.
Chapter 2 Management of Business Logistics, 7
th
Ed. 19
Figure 2-5 Fundamental Utility
Creation in the Economy
Chapter 2 Management of Business Logistics, 7
th
Ed. 20
Logistics in the Firm:
The Micro Dimension
Logistics Interfaces with
Operations/Manufacturing
Logistics Interfaces with Marketing
Logistics Interfaces with Other Areas
Chapter 2 Management of Business Logistics, 7
th
Ed. 21
Logistics in the Firm: Logistics Interfaces
with Operations Manufacturing
Length of production runs
Balance economies of long production runs
against increased costs of high inventories.
Seasonal demand
Acceptance of seasonal
inventory to balance
lead production times.
Chapter 2 Management of Business Logistics, 7
th
Ed. 22
Logistics in the Firm: Logistics Interfaces
with Operations/Manufacturing
Supply-side interfaces
Stocking adequate supplies to ensure
uninterrupted production now a logistics
function.
Protective packaging
Principal purpose is to protect the product
from damage.
Foreign & third party alternatives
Some logistics functions are being
outsourced.
Chapter 2 Management of Business Logistics, 7
th
Ed. 23
Logistics in the Firm: Logistics Interfaces
with Marketing
Logistics Interfaces with Marketing:
The Marketing Mix Four Ps
Price
Product
Promotion
Place
Chapter 2 Management of Business Logistics, 7
th
Ed. 24
Logistics in the Firm:
Price
Carrier pricing
Generally, since the larger the shipment, the
cheaper the transportation rate, shipment sizes
should be tailored to the carriers vehicle capacity
where possible.
Matching schedules
Quantity discounts should be tied to carrier
quantity discounts.
Volume relationships
Volumes sold will affect inventory requirements.
Chapter 2 Management of Business Logistics, 7
th
Ed. 25
Logistics in the Firm:
Product

Consumer packaging
Generally, since the size, shape, weight and other
physical characteristics of the product impact on
its storage, transportation and handling, the
logistics managers should be included in any
decisions regarding these product traits.
A minor correction in any of the above could
conceivably cost (or save) millions of dollars in
logistical costs.
Logistics costs are not necessarily paramount, but
they need to be considered in the decision making
process.
Chapter 2 Management of Business Logistics, 7
th
Ed. 26
Logistics in the Firm:
Promotion
Push versus pull
The most important factor is that the logistics
division is aware of any changes in demand
patterns so that it can plan for any consequences.
Pull strategies tend to be more erratic.
Push strategies tend to more predictable.
Channel competition
The more popular a product, the easier it is to
persuade channel members to promote your
product.
Chapter 2 Management of Business Logistics, 7
th
Ed. 27
Logistics in the Firm:
Place
Wholesalers
Generally, since wholesalers are combining
purchases for multiple retailers, the shipment sizes
tend to be larger and the number of transactions
that have to be processed are fewer, with the
result that logistics costs are smaller.
Retailers
With the exception of very large retailers who act
more like wholesalers, smaller sales are the norm.
These generally cost more for transportation and
order processing.
Chapter 2 Management of Business Logistics, 7
th
Ed. 28
Logistics Interfaces with
Other Areas
Manufacturing and marketing are probably the two
most important internal, functional interfaces with
logistics.
Other important interfaces now include finance and
accounting.
Logistics can have a major impact on return on
assets and return on investment.
Logistics costs reported by cost systems measure
supply chain trade-offs and performance.
Chapter 2 Management of Business Logistics, 7
th
Ed. 29
Logistics Activities
Transportation
Storage
Packaging
Materials handling
Order fulfillment
Forecasting

Production planning
Purchasing
Customer service
Site location
Other activities
Chapter 2 Management of Business Logistics, 7
th
Ed. 30
On the Line:
Toyota Distribution
Moves more than 8 million parts and accessories every
month.
Computer modeling re-designed the 30 year old
distribution network.
Software looked first at Lexus Division and then at the
entire network.
Resulted in two DCs, one in California, another in
Kentucky, feeding nine smaller DCs located around the
country.
The new network both improved customer service and
lowered costs.


Chapter 2 Management of Business Logistics, 7
th
Ed. 31
Approaches to Analyzing Logistics
Systems: Materials Management v.
Physical Distribution
Frequently the movement and storage of raw
materials is far different from the movement
and storage of finished goods.
Four different classifications of logistics systems
Balanced system - e.g., consumer products
Heavy inbound - e.g., aircraft, construction
Heavy outbound - e.g., chemicals
Reverse systems - e.g., returnable products
Chapter 2 Management of Business Logistics, 7
th
Ed. 32
Approaches to Analyzing Logistics
Systems
Cost Centers
Treating logistics activities as cost centers makes it
easier to study cost trade-offs between the centers.
(see Tables 2-2 and 2-3)
Nodes versus Links
Nodes are spatial points (warehouses, plants, etc.);
Links are the transportation network (rail, motor,
air, pipe and water). (see Figure 2-6)
Logistics Channel
The network of intermediaries involved in the
logistics system. (see Figures 2-7, 2-8, and 2-9)
Chapter 2 Management of Business Logistics, 7
th
Ed. 33
Table 2-2 Analysis of Total Logistics Cost with
a Change to Higher Cost Mode of Transport
Cost Centers Rail Motor
Transportation $ 3.00 $ 4.20
Inventory 5.00 3.75
Packaging 4.50 3.20
Warehousing 1.50 .75
Cost of Lost Sales 2.00 1.00
Total Cost $ 15.00 $ 13.00
Chapter 2 Management of Business Logistics, 7
th
Ed. 34
Table 2-3 Analysis of Total Logistics
Cost with a Change to More Warehouses
Cost Centers
System 1 System 2
Three Warehouses Five Warehouses
Transportation $ 850,000 $ 500,000
Inventory 1,500,000 2,000,000
Warehousing 600,000 1,000,000
Cost of Lost Sales 350,000 100,000
Total Cost $ 3,300,000 $ 3,600,000
Chapter 2 Management of Business Logistics, 7
th
Ed. 35
Figure 2-6 Nodes and Links in a
Logistics System
Chapter 2 Management of Business Logistics, 7
th
Ed. 36
Figure 2-7
A Simple Logistics Channel
Chapter 2 Management of Business Logistics, 7
th
Ed. 37
Figure 2-8
A Multi-Echelon Logistics Channel
Chapter 2 Management of Business Logistics, 7
th
Ed. 38
Figure 2-9
A Complex Logistics Channel
Chapter 2 Management of Business Logistics, 7
th
Ed. 39
Logistics and Systems Analysis
Cost Perspective
Keep in mind that the most efficient
systems are not always comprised of each
system component operating at its lowest
possible cost.
The critical concern is to have the entire
system operating at its lowest total cost.
Chapter 2 Management of Business Logistics, 7
th
Ed. 40
Logistics and Systems Analysis
Level of Optimality
There are often constraints working which
result in sub-optimal outcomes.
Additionally, logistics systems must work in
harmony with marketing, finance,
production, etc.--- this may also result in
sub-optimal logistics performance.
See Figure 2-10 on next slide.
Chapter 2 Management of Business Logistics, 7
th
Ed. 41
Figure 2-10 Levels of Optimality
in Economic Environments
Chapter 2 Management of Business Logistics, 7
th
Ed. 42
Techniques of Logistics System
Analysis: Short-Run/Static Analysis

This technique is illustrated in Table 2-4.
Comprised a matrix-like table which presents
each of the logistics and other relevant costs
for two or more alternative logistics systems.
The major downside to the model is that it
presents a solution which is not necessarily
the correct one at all possible volume levels.
Examine the data presented in Table 2-4.
Chapter 2 Management of Business Logistics, 7
th
Ed. 43
Table 2-4 Static Analysis of C & B
Chemical Company (50,000 pounds of
output)
Chapter 2 Management of Business Logistics, 7
th
Ed. 44
Techniques of Logistics System
Analysis: Long-Run/Dynamic Analysis
This technique is illustrated in Figure 2-11.
Comprised a graph of the fixed and variable
costs of at least two alternative logistics
systems.
The graph may have at least one indifference
point, but may have multiple points of
indifference.
Examine the data presented in Figure 2-11.
Chapter 2 Management of Business Logistics, 7
th
Ed. 45
Figure 2-11
Dynamic Analysis
Chapter 2 Management of Business Logistics, 7
th
Ed. 46
Dynamic Analysis

System 1
Total Cost = Fixed Costs + Variable Cost/unit x number of units
y = $4200 + 0.0315x
System 2
Total Cost = Fixed Costs + Variable Cost/unit x number of units
y = $4800 + 0.0230x
Trade-off Point
System 1 Total Costs = System 2 Total Costs
$4200 + 0.0315x = $4800 + 0.0230x
0.0085x = $600
x = 70,588 pounds
Chapter 2 Management of Business Logistics, 7
th
Ed. 47
Logistics in the Firm: Factors Affecting
the Cost and Importance of Logistics
Competitive Relationships
Inventory/order cycle length see Figure 2-12.
Inventory/lost sales effect see Figure 2-13.
Transportation/lost sales effect - see Figure 2-14.
Product Relationships
Product dollar value/logistics costs see Figure 2-15.
Weight density/logistics costs see Figure 2-16.
Susceptibility to loss & damage/logistics costs see
Figure 2-17.
Spatial Relationships
Examine Figure 2-18.
Chapter 2 Management of Business Logistics, 7
th
Ed. 48
Figure 2-12 The Relationship between
Required Inventory and Order Cycle
Length from a Customer Perspective
Chapter 2 Management of Business Logistics, 7
th
Ed. 49
Figure 2-13 The General Relationship of
the Cost of Lost Sales to Inventory Cost
Chapter 2 Management of Business Logistics, 7
th
Ed. 50
Figure 2-14
The General Relationship of the Cost of
Lost Sales to Transportation Cost
Chapter 2 Management of Business Logistics, 7
th
Ed. 51
Figure 2-15
The General Relationship of Product
Dollar Value to Various Logistics Costs
Chapter 2 Management of Business Logistics, 7
th
Ed. 52
Figure 2-16 The General Relationship of
Product Weight Density to Logistics Costs
Chapter 2 Management of Business Logistics, 7
th
Ed. 53
Figure 2-17 The General Relationship of
Product Susceptibility to Loss and
Damage to Logistics Costs
Chapter 2 Management of Business Logistics, 7
th
Ed. 54
Figure 2-18
Logistics and Spatial Relations