LOGISTICS

Defined
Planning implementing and controlling the physical flow of material and
finished goods from point of origin to point of use to meet customer`s
need at a profit
By

Philip Kotler
It is essentially a planning process and an information activity
So A integrative process that optimizes the flow of material and
supplies through the organization and its operations to the customer
The word logistic has originated from Greek word
Logistikos and the Latin word Logisticus which
means science of computing & calculating

In ancient times it was used more in connection with

moving armies, the supplies of food & armaments to
the war front.

During World War II logistics gained importance in

army operations covering the movement of supplies ,
men & equipment across the border

Today It has acquired the wider meaning and is used

in the business for the movement of material from
suppliers to the manufacturer and finally the finished
Scope of Logistic
It is of critical importance to the organization how it
delivers products & services to the customer , whether
the product is tangible or intangible.
Effective & efficient Physical movement of the tangible
product will speak of intangible services associated
with the product and the organization which is
delivering it.
In Case of intangible product , the delivery of tangibles
at the right place & right time will speak about its
quality.
On the macro level infrastructure such as Various
modes of transport , transportation equip., storage
facilities, connectivity & information processing are
contributing to a large extent in the physical
movement of goods produced in manufacturing ,
Scope of logistics

This speed & reliability in distribution of products &

services contribute to a great extent in the growth
of a country`s domestic & international trade .
Logistic cost as a percentage of GDP across the
world is shown in the following table
Country Logistic cost as a percentage of GDP
Korea 16
China 15
Japan 14
India 13
France 12
UK 11
USA 10
Scope of logistics

India spent nearly $ 50 billion to move material

from one use to another.
So the Public distribution system in the country
needs logistical support for delivering goods at
right place on time and the lowest cost.
At Micro Level logistic plays a critical role in the
value delivery system of business organization to
provide superior customer service i.e. to achieve a
desired level of delivered services and quality at
the lowest possible cost.
In a nutshell any productivity improvement that
could be achieved in any part of logistic system, at
the micro or macro level would help in cost
reduction and proper deployment of scare national
Fact

In a manufacturing org. the business process

starts with the flow of material from the
suppliers, progress to the plant, then to the
customer through the distribution channel the
department may excel in their respective
function but org. as a whole their performance
may be dismal.
Reason
Lack of Co ordination in their activities
They have different goal to cherish
There is no single agency that coordinates
their functions and homogenizes them.
How to overcome ?
 INTRODUCTION OF LOGISTICS MANAGEMENT

Logistics is the art and science of managing and controlling the

flow of goods, energy, information, other resources.

Logistics is the process of getting products and services where

they are required and when they desired

Logistics is the process of strategically managing the

procurement, movement and storage of materials, parts and
finished inventory (and the related information flows) through the
organization and its marketing channels in such a way that
current and future profitability are maximized through the cost-
effective fulfillment of orders"
Logistics - Science of managing (controlling) the movement and storage of goods
(or people) from acquisition to consumption.

Goods: Raw Materials Final products, and everything in between.

Logistics for services & people similar to goods logistics.
Ex. Police, fire, ambulance, passenger airlines, taxi cabs, etc.

Movement = Transportation (between locations).

Storage = Inventory, Warehousing (at locations).

Difference between acquisition and consumption is a matter of space and

time.

Focus: Best way to overcome space and time that separates acquisition
and consumption.
 Logistics embodies the effort to
deliver:

the right product

in the right quantity

in the right condition

to the right place

at the right time

for the right customer

at the right cost

DEFINITION

The process of planning, implementing, and controlling the

efficient, cost-effective flow and storage of goods, services,
and related information, from point of origin to point of
consumption, for the purpose of conforming to customer
requirements.
LOGISTICS AS A PART OF SUPPLY CHAIN

Logistics Management is the part of Supply chain

management that plans, implements and controls 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's requirements.

It involves the integration of information , transportation,

inventory, warehousing, material handling and packaging,
and occasionally security.
Logistics vs. Supply Chain Management
What is the difference?

A Supply chain is the network of:

facilities (warehouses, factories, terminals, ports,
stores, homes)
vehicles (trucks, trains, planes, ships)
logistics information systems
connecting suppliers suppliers with its customers
customers.

Logistics is:
what happens in the supply chain
putting the right material in the right place at the
right time
it provides much of the Supply Chains value-added.
13
OBJECTIVES OF LOGISTICS MANAGEMENT

Cost reduction (variable costs)

Capital reduction (investment, fixed costs)
Inventory reduction
Reliable and consistent performance
Minimum product damages
Quick responses
Delivering customer services-
Customers must be given more importance than the goods and
services that have to be delivered.
Product and services are of significance to the customers only
when they are available to them exactly when customers need
them.
 DECISIONS IN LOGISTICS MANAGEMENT

Product design
Plant location
Choice of markets/ sources
Distribution/ dealer network design
Location of warehouses
Plant layout
Allocation decisions
Production planning
Inventory management-stoking levels
Transportation mode choice, shipment size and routing decisions and transport
contracting
Packaging
Material handling
Warehouse operations
 History of Logistics
Private industry starts evolving since the 1940s.
Military were the only ones to using the term (1950s, 60s)
No true concept of the term in the private industry.
Companies had departments, such as material housing,
warehousing, machining, etc.
 History of Logistics
17

Adapted from:Frazelle, Edward Supply Chain Strategy McGraw Hill 2002.

18
19
 Phases of Logistics Development

1. Workplace Logistics
 Phases of Logistics Development
1. Workplace Logistics

Definition:
the flow of material at a single workstation.

Objective:
to streamline the movements of an individual working at a
machine or assembly line.

Origins:
Principles developed by fathers of Industrial Engineering during
and after WWII.

Also known as: Ergonomics.

 Phases of Logistics Development

2. Facility Logistics
 Phases of Logistics Development
2. Facility Logistics
Definition:
the flow of material between work stations within the four walls
of a facility (interwork station, intra facility).
Facility can be a factory, terminal, warehouse, distribution
center (DC).

Origins:
developed in mass production assembly lines in 1950s, 60s and
70s.
 Phases of Logistics Development
3. Corporate Logistics
(Soda Manufacturer)
 Phases of Logistics Development
3. Corporate Logistics
Definition:
the flow of material and information between the facilities and
processes of a corporation. (inter workstation, inter-facility,
intra-corporate).

Objective:
Develop and maintain a profitable customer service policy while
maintaining and reducing total logistics cost.
 Phases of Logistics Development

Logistics
3. Corporate
Logistics takes place and
between

Manufacturers Its factories Warehouses

Wholesalers Distribution Centers

Its distribution
Retailers Retail Stores
centers (DCs)
 Phases of Logistics Development
4. Supply Chain Logistics

Supplier Manufacturer Wholesaler Retailer Customer

Supply chain is optimized when material, information and money

flow simultaneously, in real time, and paperless.
 Supply Chain Stages
SC: Supplier to Consumer
MC: Manufacturer to Consumer
WC: Wholesaler to Consumer

SW: Supplier to Wholesaler

SR: Supplier to Retailer
MR: Manufacturer to Retailer
 Phases of Logistics Development
4. Supply Chain Logistics
Definition:
the flow of material, information
and money between corporations
(interwork station, interfacility,
intercorporate, and intrachain).

 Phases of Logistics Development

5. Global Logistics
Definition:
The flow of material, information, and
money between countries.
Connects suppliers suppliers with its
customers customers internationally.
Much more complicated than domestic
logistics given the many languages, laws,
currencies, time zones, cultures, etc.
 Phases of Logistics Development

5. Global Logistics

 What Activities take place in

Activities Logistics?
1. Customer Response
2. Inventory Planning &
Management (IP&M)
3. Supply
4. Transportation
5. Warehousing /
DC Operations

Each of these requires:

- Measures and Goals
- Process Design
- Information System Requirements
- Organizational Development
Logistics Activity Framework

*
Logistics Activity Framework

*
Logistics Activities
1. Customer Response

Involves:
Developing / Maintaining a Customer Service Policy*
Order Entry
Order Processing
Invoicing / Collections
Monitoring Customer Satisfaction

(* the contract between the logistics organization and the

customer, defining service targets, such as fill rates,
response times, min. order quantities, terms and conditions
for returns, etc.).
Logistics Activity Framework

*
Logistics Activities
2. Inventory Planning &
Management
Goal:

determining / maintaining the lowest

inventory levels possible that will meet
Customer Service Policy requirements.
Involves:
Forecasting
Order Quantity Engineering
Replenishment planning
Inventory deployment
Logistics Activity Framework

*
Logistics Activities
3. Supply

Goal:

Minimize total acquisition cost

(TAC) while meeting availability, response
time and quality requirements
Involves:
Developing / Maintaining a Supplier Service
Policy
Sourcing (of supplies)
Supplier integration
Purchase Order processing
Buying and Payment
Logistics Activity Framework

*
 Logistics Activities
4. Transportation

Links sources of supply with customers.

Goal:

Link all pick-up and deliver-to points within the

response time requirements and transportation
limitations at the lowest possible cost.
Involves:
Network design & optimization
Shipment Management
Fleet and Container Management
Carrier Management
Freight Management
Logistics Activity Framework

*
 Logistics Activities
5. Warehousing (DC Operations)

Goal:

To minimize the cost of labor, space and

equipment in the warehouse while meeting
cycle time and shipping accuracy and storage
capacity requirements.
Involves:

Receiving
Put away
Storage
Order Picking
Shipping
 Logistics involves Optimization
Optimization is a key ingredient in
Logistics Master Planning
In general, we optimize:

- Customer Service Policy (CSP)

- purchase order quantities
- product sources (which one is best)
- location of DCs
- product placement in the warehouse
 Logistics involves Optimization
Example
If we want to optimize CSP, we would address the
Total Logistics Costs
( = inventory cost + response time cost + lost sales
cost)

MIN Total Logistics Costs

Subject to

Inventory Availability > Customer Service

Inventory Target
Response time < Customer Service Response time
Target
 Logistics Activity Profiling and
Data Mining

What is Data Mining?

The process of automatically searching large volumes of data for patterns
using tools such as classification, association rule mining, clustering, etc..
A class of database applications that look for hidden patterns in a group of
data that can be used to predict future behavior.
True data mining software doesn't just change the presentation.
Actually discovers previously unknown relationships among the data.
 Logistics Activity Profiling and Data
Mining
What is Profiling?
Definition
The systematic analysis of item and order activity used to:

quickly identify root cause of material/information flow problems.

Identify opportunities for improvement.

Provide basis for decision making.

First step in logistics master planning.

 Logistics Activity Profiling and Data
Mining
What is a Profile?
A snapshot or picture of an aspect of a
logistics activity.
Many different profiles will be needed to fully
characterize and re-engineer the logistics
enterprise.
Provides basis for decision making.
First step in logistics master planning.
Logistics cost

The performance of a supply chain can be illustrated with the

help of
total logistics cost.

To define the logistics cost, one must define the desired outputs
From the logistics system and then seek to identify the costs
associated
with providing those outputs.

The manager must understand how the behavior of one cost

differs from
the behavior of another cost and for running a logistics system
requires
the manager to understand and use a variety of cost
information.

The cost of logistics varies from industry to industry.

 Some of logistics cost are:
Insurance

Handling and warehouses operations

Packaging

Transportation

Customers shopping
 LOGISTICS FUNCTIONS

Logistics is not a single term actually it is a blend of number of

activities or functions:-

Order processing

Inventory management

Warehousing transportation

Material handling

Logistical packaging

Information
Models in logistics management

1.Forecasting models- these models allow prediction of

demand based on past data or other parameters that are
independently available. They enable better planning, given
the lead time necessary for response.

2.Mathematical programming models- under this model,

there are three models
Location model
Allocation model
Distribution network design models
(a) Location model-
These models help in planning the optimal location of plants or
warehouses, considering the inbound and outbound
transportation
costs and infrastructure cost at the locations.

Such models can be solved as an integer program or

sometimes as
a linear program.

(b)Allocation models-

These models help in optimally allocating commodities from

sources to destinations in a multi-source multi-destination
environment

(c) Distribution network design models-

These models are usually comprehensive in nature, deciding

between a two, three or even four stage distribution
network, location of warehouses and break bulk points,
Logistic A system approach

Logistic recognizes that all the activities of

material movement across the business
process are interdependent and needs close
coordination and these are to be maintained
as a system and not the functional Silos.
System is shown as logistic Mix including
following functional Areas
Order Processing
Information Flow
Warehousing
Inventory control
Packaging
Transportation
What is Bullwhip effect?
 What is Bullwhip effect?

The Bullwhip effect is an observed phenomenon in forecast

driven distribution channels. It refers to larger and larger
swing in inventory in response to changes in customer
demand, as one looks at firms further back in the supply chain
of the product. The concept first appeared in Jay Forrester's
Industrial Dynamics (1961) and thus it is also known as the
Forrester effect. Since the oscillating demand magnification
upstream of a supply chain is reminiscent of a cracking whip,
it became known as the bullwhip effect.
The Bullwhip effect.
 Supply Chain in
Equilibrium
Customer demand forecast = 10 units

Information

Products & Products & Products &

Suppliers Services Producers Services Distributors Services Retailers
10 Units 10 Units 10 Units

10 Units 10 Units 10 Units

Cash

Retailers are selling product at a constant rate and price. Firms along the supply
chain are able to set their inventory to meet demand.

Key: = Inventory Levels

 Supply chain disrupted
Customer Demand forecast = 20 units

Information Flow
Suppliers
Producers
Products & Products & Distributors Products &
Services Services Services Retailers
80 Units 40 Units 20 Units

160 Units 80 Units 40 Units

Cash Flow

As demand increases, the distributor decides to accommodate the forecasted demand

and increase inventory to buffer against unforeseen problems in demand. Each step
along the supply chain increases their inventory (double in this example) to accommodate
demand fluctuations. The top of the supply chain receives the harshest impact of the whip
effect.

Key: = Inventory Levels

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 Places
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Replenishme Replenishm
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 Material Flow
Order = (+/-)
Order = (+/-)
20%
80%
Change by
Change by
Demand = (+/-)
Demand = (+/-)
10%
40%
Forecast = (+/-)
Forecast = (+/-)
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HUGE
Change Demand
in Change
Raw by
Material (+/-)10%
Supply

Order =
(+/-)40%
Change by
Demand = (+/-)
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Forecast = (+/-)
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Order Flow
Down Stream Order
Amplification
Impact of bullwhip effect

Excess Inventory
Unnecessary costs
Insufficient or excess capacities
Expedited transportation
Poor customer service
Poor forecast accuracy
Impact of Bullwhip effect

Poor quality
Lengthened and inaccurate lead time
Loss of sales
 Causes of Bullwhip effect

Because customer demand is rarely perfectly stable, businesses

must forecast demand to properly position inventory and other
resources. Forecasts are based on statistics, and they are rarely
perfectly accurate. Because forecast errors are given, companies
often carry an inventory buffer called "safety stock
Moving up the supply chain from end-consumer to raw materials
supplier, each supply chain participant has greater observed
variation in demand and thus greater need for safety stock.
Causes of Bullwhip effect

Behavioral causes
Misuse of base-stock policies
Misperceptions of feedback and time delays
Panic ordering reactions after unmet demand
Perceived risk of other players' bounded rationality
Causes of Bullwhip effect

Operational causes
Dependent demand processing
Forecast errors
Adjustment of inventory control parameters with each
demand observation
Lead time variability (forecast error during
replenishment lead time)
Causes of Bullwhip effect

Lot-sizing/order synchronization
Consolidation of demands
Transaction motive
Quantity discount

Trade promotion and forward buying

Causes of Bullwhip effect

Anticipation of shortages
Allocation rule of suppliers
Shortage gaming
Lean and JIT style management of inventories and a
chase production strategy
How to cope up with Bullwhip effect

Improve communication along the supply chain

Improve sources of forecast data
Share Information
establish a demand-driven supply chain which
reacts to actual customer orders
Break order batches
Stabilize prices
Eliminate gaming in shortage situations
 Improve communication along the supply
chain

Retailers notifying firms upstream of sales promotions will help

clarify demand signals from consumers

Improved information will improve demand forecasts upstream

in the supply chain
Improve sources of forecast data

Firms can use data from Point of Sale computer systems to derive
data from forecasting

Firms along the supply chain can use EDI systems to retrieve
data on items that are legitimately being purchased by
customers
 Information sharing

Lack of visibility = rise in costs. Encourage

information sharing among your partners. Be a
catalyst and good example of information
sharing. Work with suppliers on releasing lead
times and improving on time delivery.
 establish a demand-driven supply chain which reacts to
actual customer orders

In manufacturing, this concept is called Kanban. This model has

been successfully implemented in Wal-Mart's distribution
system. Individual Wal-Mart stores transmit point-of-sale (POS)
data from the cash register back to corporate headquarters
several times a day. This demand information is used to queue
shipments from the Wal-Mart distribution center to the store
and from the supplier to the Wal-Mart distribution center. The
result is near-perfect visibility of customer demand and
inventory movement throughout the supply chain. Better
information leads to better inventory positioning and lower
costs throughout the supply chain.
 Break order batches

Use EDI Exchange to reduce the cost of placing

orders. Place orders more frequently. Ship
assortments of products in a shipload to counter
high transportation costs or use a third party
logistics company to handle shipping.
 Stabilize prices

Manufacturers reduce the frequency and level of wholesale

price discounting to keep customers from stockpiling
Work to develop consistent pricing of products to avoid demand
fluctuations from the sale of inexpensive products.
 Eliminate shortage gaming

Rationing and Shortage Gaming

When demand exceeds supply, manufacture ration supplies to
distributors
This results in distributors ordering more than they need, to fulfill the
demand
When the market cools down, orders start getting cancelled; excess
inventory piles up, leading to the bullwhip effect
Real demand is never known in such market conditions.
Most commonly affected is the IT hardware & telecom industry