Business Logistics Mangment

F'OURTH EDITION
Bwineat Logiatica
Management
Planning, Org anrzrtrg,
and Controlling the Supply Chain
Ronald H. Ballou
Weatherhead School of Management
Case Western Reserve University
-#
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For logisticians everlnvhere :
"I laaue hea,Q of you . . . tlaat ltght

an? u,z1er,ttailing an? excellent wisdom
are foun? in you , . , I have heafi that
you grve interpretations an? solve
problems . . . you thal/ lte clothe? witla
purp/e an? have a chain of gold
about ltoLLr neck"
,,.3:;T*11,..,.,
Brief Contenta
PART I: INTRODUCTION AND PLANNING 1
Chapter 1 Business Logistics-A Vital Subject 3
Chapter 2 Logistics Strategy and Planning 29
PART II: CUSTOMER SERYICE GOALS 51
Chapter 3 The Logistics Product 53

Chapter 4 Logistics Customer Service 80
Chapter 5 Order Processing and Information Systems 110
PART III: TRANSPORT STRATEGY 133
Chapter 5 Tiansport Fundamentals 135

Chapter 7 Tiansport Decisions 185
PART Iv: INVENTORY STRATEGY 243
Chapter 8 The Storage and Handling System 245

Chapter 9 Forecasting Logistics Requirements 273
Chapter 10 Inventory Policy Decisions 308
Chapter 11 Purchasing and Supply Scheduling Decisions 394
Chapter 12 Storage and Handling Decisions 437
PART V TOCATION STRATEGY 481
Chapter 13 Facility Location Decisions 483

Chapter 14 The Network Planning Process 542
Yi Brief Contents
PART VI: ORGAI\IZATION Al\D CONTROL 605
Chapter 15 Logistics Organization 601

Chapter 16 Logistics Audit and Control 635
Contentt
Preface riii
PART I: II\TRODUCTION AND PLANNING 1
CHAPTER 1 Business Logistics-A Vital Subject 3
Introduction 3
Business Logistics Defined 5
The Suppiy Chain 6

The Activity Mix 7
Importance of Logistics 11
Business Logistics in the Firm 20
Objectives of BusinessLogistics 22
Approach to the Study of Logistics 23
Concluding Comments 24
Questions and Problems 25

Exercise: Examples of Good Logistics Strategy, or LackThereof 21
CHAPTER 2 Logistics Strategy and Planning 29
Corporate Strategy 29
Logistics Strategy 3I
Logistics Planning 33

PART II: CUSTOMER SERVICE GOALS 51
CHAPTER 3 Product 53
The Logistics
Nature of the Logistics Product 53
:',ari rl1..
vu'
, :..
,.viii Contents
The 80-20 Curve 58
Product Characteristics 62
Product Packaging 66
Product Pricing 67
Arrangements
Incentive Pricing 14
Concluding Comments l6
Questions and Problems 1l
CFIAPTER 4 ,Lggistics,Custbmer Service I 80
Customer Service Defined 8]

Order Cycle Time 86
Importance of Logistics Customer Service 89

Defining a Sales-Service Relationship 92
Modeling the Sales-Service Relationship 94
Cost versus Service 96
Determining Optimum Service Levels 91

Service as a Loss Function 100
Service as a Constraint 101
Service Contingencies i03

ConchLding Comments 106
Qttestions and Problems 106
CHAPTER 5 Order Processing and Information Systems 110
Defining Order Processing 111

Order-Processing Examples i15
Other Factors Affecting Order-Processing Time 121
System 722
The Logistics Information
Information System Examples 126
Comments
Concluding 130
Questions 131
PART III: TRANSPORT STRATEGY T33
CHAPTER 6 Tiansport Fundamentals 135
Importance of an Effective Tiansportation System 135

Service Choices and Their Characteristics I31
Single-Service Choices 1,41
Intermodal Services 146
Agencies and Small Shipment Services 148
Contents , ix
Company-Controlled Tiansportation 149
InternationalTiansportation 150
Tiansport Cost Characteristics 153
Rate Profiles 157
Line-Haul Rates 161
Special Service Charges 172
Private Carrier Costing 716

Documentation 178
InternationalTiansportDocumentation 180
Questions antl Problerns 181
CHAPTER 7 Tiansport Decisions 1B-5
Tiansport ServiceSelection 185

Vehicle Routing I9I
Vehicle Routing and Scheduling 199
Scheduling 2I2
Ship Routing and
Freight Consolidation 21.4
ConcLuding Comments 216
Questions 216
Problems 271
Case Study: Fowler Distributing Compnny 229
Case Sndy: Nletrcthealth Medicul Center 232
Case Stucly: Orion Foods,lnc. 239
PART IV INVENTORY STRATEGY 243
CHAPTER 8 The Storage and Handling System 245
System 245
Need for a Storage
Reasons for Storage 246
Storase System Functions 248
Storage Alternatives 254
Materials-Handling Considerations 267
Storage-System Costs and Rates 261
CHAPTER 9 Forecasting Logistics Requirements 273
Nature of the Problem 214

x Conrcnts
Forecastine Methods 211

Useful Techniques for Logisticians 281,
Special Prediction Problems for Logisticians 294
Fiexibility and Quick Response-An Alternative to Forecasting 298
Concluding Contntents 299

Case Study:World Oil 305
CHAPTER 10 Inventorl'Policy Decisions 308
Appraisal ofInventories 309

lypes of Inventories 311
ClassifyinglnventoryManagementProblems 312
InventoryObjectives 315
Push Inventory Control 379
Basic Pull Inventory Control 322
Advanced Pull Inventory Control 328
PipelineInventories 349
Aggregate Control of Inventories 350
Conchrding Comments 36L
Questions 362
Problents 362
Case Study: Complete Hardware StLppLy,Inc. 37I
Case Study: American LightingProdarcts 313
Case Studlt:American Red Cross: Blood Services 381
CHAPTER 11 Purchasing and Supply Scheduling Decisions 394
SupplyScheduling 396
Purchasing 41,5
Conchtding Comments 429
Questions 430
Problems 430
Case Study: [ndustrial Distributors,Inc. 435
CHAPTER 12 Storage and Handling Decisions 437
Site Selection 438

Planning for Design and Operation 439
N{aterials-Handiing System Design 456
Order-Picking Operations 473
Contents xl
Questiorts and Problenn 415
Technical Supplement 419
PART v: LOCATION STRATEGY 481
CHAPTER 13 Facility Location Decisions 483
Single-Facility'Location 481
Multifaciiity Location 494

Dynamic Warehouse Location 511
Retail/ServiceLocation,5l6
Conclutlirtg Comments 523
Questions 524
Problenn 525
Case Stttdl': Superior Medical Erluipment Company 532

Cnse Study. Ohlo Auto ancl Driver's License Bureaus 534
Case Srudv:Sotfthern Brewer,v 531
Technical Supplemenl 540
CHAPTER 14 The Network Planning Process 542
The Problem of Netrvork Configuration 542

Data for NetworkPlanning 545
The Tools for Analysis 564
Conducting the Analysis 570
A Case Study 585
Concluding Comrnents 588

Cose Smd1,: (Jsemore Soap Compnny:AWarehotLse Location Case Smdy 592
PART VI: ORGAI\IZATION AI\D CONTROL 605
CHAPTER 15 Logistics Organization 607

Organizing the Logistics Effort 601
Organizational Choices 612

Organizational Orientation 617
Organizational Positioning 619
Interfunctional lVlanagement 622
Interorganizational Iv{anagement 623
Aliiances and Third-Partv Providers 621
Xll L'ontents
Concluding Contments 632
CHAPTER 16 Logistics Audit and Control 635
A Framework for the Control Process 635

Control System Details 64I
Control in Practice 643
Controllnformation,Measurement,andlnterpretation 645
Corrective Action 656
Control Links to Artificial Intellisence 658
Conclutling Comments 660
Questions and Problems 66L
APPENDIX A Areas under the Standardized Normal Distribution 662
APPENDIX B Unit NormalLoss Integrals 664
SELECTED BIBLIOGRAPHY 66]

INDEX 673
Preface
Itlct book that vvill not improve by repeated rendings deserves to be read at sll.
CeRryi-p
-THorvres
his book is about the vital subject of business logistics-an area of management
that has been observed to absorb more than 30 percent of the sales dollar for
some firms, that is an essential element in meeting customer service goals, and
that can be essential to a firm's competitive strategy. It has been described by many
names, including physical distribution, materials management, transportatton manage-
ment, and supply chain management, The activities to be managed may include all or
part of the foliolving: transportation. inventory maintenance, order processing, pur-
chasing, warehousing, materials handling, packaging, customer service standards, and
product scheduling,
The focus of this book is on the planning, organizing, and controlling of these ac-
tivities-key eiements to successful management in any organizatton. Special emphasis
is given to strategic planning and decision making as perhaps the most important parts
of the management process. The mission of this managerial effort is to set the level of
the logistics activities so as to make products and services available to customers at the
time, the place, and in the condition and form desired, in the most profitable or cost-
effective way.
Because logistics activities have always been vitpl to companies and organizations.
the field of business logistics represents a synthesis of many concepts, principles, and
methods from the more traditional areas of marketing, production, accounting, pur-
chasing, and transportation, as well as from the disciplines of applied mathematics, or-
ganizational behavior, and economics. This book attempts to unify these into a logical
body of thought that can iead to the effective management of the supply chain.
As with any field of management, there are frequently changing terms to capture
the methods and concepts of business logistics. An attempt has been made to resist fol-
lowing the popular press and fads, and to present the ideas, principles, and techniques
i:.
,:'
'". a;
drl
xiv Preface
that are fundamental to good business logistics practice, now and in the foreseeable fu-
ture,In this spirit, the fourth edition is organized around two themes. First, the basic ac-
tivities of management. namel1,, planning, organizing, and controlling, provide the
overarching theme for the book. Second, a triangle of interrelated transportation. in-
ventory, and location strategies are at the heart ol good logistics planning and decision
making. This triangle is emphasized through the text.
Several trends have been noted that affect the scope and practice of business lo-
gistics. These have been integrated into the body of the text as application illustrations
of the fundamental icleas being presented. First, emphasis is piaced on logistics in a
worldwide setting to reflect the growing internationalization and globalization of busi-
ness in general. Second. the shifting towarci more service oriented economies by indus-
triaiized nations is emphasized by showing how logistics concepts and principles are
equaliy applicable to service-producing firms as they are to product-producing ones.
Third, attention is given to the integrated management of supply chain activities, as
weil as managing these activities among the other functional areas of business. Fourth,
many practical examples are given to show the applicability of the material. Fifth, com-
puter softrvare is provided as an assistance to solving logistics problems to reflect the
growing use of computer technology in management.
Over the years, so many people and companies have contributed to the ideas em-
bodied in this fourth edition that a list of acknowledgments would be far too long to
piint. However, to all those students and professors around the world who were willing
to comment on the previous editions (namely Sohail S. Chaudhry, Villanova Univer-
sity; Jane Feitler. Naval Postgraduate School;John T. Gardner, SUNY Brockport; and
James A. Kling. Niagara University), to those businessmen who were willing to try the
ideas embodied in them, and to all others who made comments of praise as well as crit-
icism-my heartfelt thanks. A special note of gratitude goes to mv wife. Carolyn, for
editorial assistance and encouragement throughout this revision. Considering all of
this help, any shortcominqs and errors that remain must be mine.
R. H. Ballou
Cleveland, Ohio
PART
|::...it.!\y \rt
Introductiorr' irrd Planning

CHAPTE,R
Bwinedd
AVitat Subject
Experience teuches that men are so mttch governed by whnt they nre
accustomed to see and proctice, that the simple.st and ntost obvious
intproven'Lents irt the most ordinary occttpatiorts are nclopted
vvith hesita{ion, reluctnnce, and by slov, graduations.
HevrLroN. 1791
-ALexexorR
INTRODUCTIO}T
As far back as humankind can recall, the goods that people wanted were not produced
where they rvanted to consume them or were not accessible when they' desired to con-
sume them. Food and other commoc'lities were lvidely dispersed and lvere available in
abundance oniy at certain times of the year, Early people had the choice of consuming
goods at their immediate location or of moving the goods to a preferred site and stor-
ing them for later use. Hor,vever. because no lvell-developed transportation and storage
systems existed, the movement of goods was limited to what an individual could per-
sonally move, and storage of perishable commodities was possible for only a short
time. This limited movement-storage system forced people to live close to the sources
of production and to consume a rather naffow range of goods.
Even today, in some areas of the world, consumption and production take place
onlv within a very limited geographic region. Striking examples can still be observed in
some countries of Asia and Africa, rvhere much of the population lives in small, self-
sufficient hamlets, and most goods needed by the residents are produced in their imme-
diate vicinity. Few goods are imported from other areas. Production efficiency and the
economic standard of living are generally low for this type of economy. A major reason
for this is the lack of a well-developed and inexpensive logistics system that would en-
courage an exchange of goods with other producing areas of the country, (See Box 1.1.)
As logistics systems improved, consumption and production began to separate
geographically, Regions would specialize in those commodities that could be produced
most efficiently. Excess production could be shipped economically to other producing
(or consuming) areas, and needed goods not produced locally were imported. This ex-
change process follorvs the principle of comparative advantage.
This same principle, u'hen applied to world markets, helps to explain the high level
of international trade that takes place today. Efficient logistics systems allow rvorld
businesses to take advantage of the fact that lands and the people rvho occupy them
3
I
{ ,: I
I
.-'. PART Introduction and Plannin,q l
BOX 1.1 EXAMPLE

Suppose that consumers in the United States and in South Korea buy videotape
recorders and computer softlvare.In the coming year, about the same number of
consumers will purchase a word-processing program and a television set. Be-
cause of the differences in local labor costs, tariffs, transportation, and product
quality. the effective price to the consumers differs, as shown in Table 1-1. A con-
sumer in South Korea and one in the United States (the economy of both coun-
tries) together must pay a total of $1,450.00 to fill their needs.
TABLE 1-l Consumer Prices to Boy Only l,or{l"v Produced Products

Consunrcr in Videotape Recorder Word-Processing Software Total
South Korea $250.00 $500.00 $ 7s0.00

United States 400.00 300.00 700.00
The economies $ 1,450.00
Now if each economy trades with the other those goods with which it has a
cost advantage, both consumers and their economies will be better off. South Ko-
rea has low labor costs for making videotape recorders, whereas the United
States has an advantage in producing low-cost, high-quality software. With the
availability of inexpensive and reliable transportation, there is an economic ad-
vantage to specializing in the product that can be produced most cheaply and
buying the remaining product from the other country. With reasonable trans-
portation costs, South Korea can place videotape recorders in the United States
at a price below the locally produced and transported product. Conversely, the
United States has the design and production cost advantage for software and can
incur a reasonable transportation char:ge to place software in South Korea at
prices below what is available locally. The revised economic picture can be seen
in Table 1,-2.The two consumers in the countries save $250 ($1,450 - 1,200). Ex-
pensive transportation would preclude the countries from trading with each
other and realizing their comparative economic advantages by making the
landed price of imported products higher than those available locally.
TABLE,\-2 The Benefits of Trading Products #hen'Transportation Is,Inlxpensi.rei ,'

Consumer in Videotape Recorder Word-Processing Software Totql
South Korea $250.00 $350.00^ $ 600.00

United States 300.00b 300.00 600.00
The economies $1,200.00
a
Imports from the United States
blmports from South Korea
CHAPTER I Business Loeistics-AVital Subiect 5
are not equally productive. Logistics is the very essence of trade. It contributes to a
higher economic standard of living for us all.
To the individual firm operating in a high-level economy, good management of 1o-
gistics activities is vital. Markets are often national or international in scope, whereas
production may be concentrated at relatively few points. Logistics activities provide
the bridge betrveen production and market locations that are separated by time and
distance. Effective manaqement of these activities is the maior concern of this book.
BUSINESS LOGISTICS DEFINED

Business logistics is a relatively new field of integrated management study in compari-
son with the traditional fields of finance, marketing, and production. As previously
noted, logistics activities have been carried out by individuals for many years. Busi-
nesses also have continually engaged in move-store (transportation-inventory) activi-
ties. The newness of the field results {rom the concept of coordinated management of
the related activities, rather than the historical practice of managing them separately,
and the concept that logistics adds values to products or services that are essential to
customer satisfaction and sales. Although coordinated logistics management has not
generally been practiced until recently, the idea of coordinated management can be
traced back at least to 1844. In the writings of Jules Dupuit, a French engineer, the idea
of trading one cost for another (transportation costs for inventory costs) was evident in
the selection between road and water transport.
The fact is that carriage by road being quicker, more reliable and less subject to
ioss or damage, it possesses advantage to which businessmen often attach a con-
siderable value. However, it may well be that the saving of 0 fr.87 induces the
merchant to use the canal:he can buy warehouses and increase his floating capital
in order to have a sufficient supply of goods on hand to protect himself against
slowness and irregularity of the canal, and if all told the saving of 0 fr.87 in trans-
polt gives him an advantage of a few centimes, he will decide in favor of the new
route.l
The first textbook to suggest the benefits of coordinated logistics management ap-
peared as recently as 1961,2 in part expiaining why a generally accepted definition of
business logistics is still emerging. Therefore, it is worthwhile to explore several defini-
tions for the scope and content of the subject.
,,/ A dictionary definition of the term logistics is,'
The branch of military science having to do with procuring, maintaining, and
transporting materiel, personnel, and facilities.3
1
Jules Dupuit, "On the N{easurement of the Utility of Public Works," reprinted in International Economic
Papers, no. 2, translated from the French by R. H. Barback (London:Macmillan and Co., Ltd., 1952): 100.
2
Edward W Smykay, Donald J. Bowersox. and Frank H. Mossman, Physicat Distribuion Management: Lo-
gistics Proble nts of tlte Flnn (Nerv York: Macmillan, 1961).
3
Webster's lrlew Encyclopedic Dictionary (New York: Black Dog & Leventhal Publishers, 1993),590.
,, PART I Introduction and Planning
This definition puts logistics into a military context. To the extent that business objec-
tives and activities differ from those of the military, this definition does not capture the
essence of business logistics management. A better representation of the field may be
reflected in the definition promulgated by the Council of Logistics Management
(CLM), a professional organization of logistics managers, educators, and practitioners
formed in 1962 for the purposes of continuing education and fostering the interchange
oftdeas. [ts definition is
'' 'Logistics
is the process of planning, implementing, and controlling the efficient,u
" cost-effective flow and storage of raw materials, in-process inventory, finished,
goods and related information from point of origin to point of consumption for .
the purpose of conforming to customer requirements.a
This is an excellent definition with two excqptions. First, it gives the impression that we
are only concerned with the movement of physical goods. Actually, many firms that
produce services instead of physical products have substantial logistics problems and
can benefit from good logistics management as well. Both are considered in this text.
Second, the CLM definition implies that the logistician is concerned with the flow
of goods to and from his or her firm. This responsibility appears to extend to the prod-
uct flows through the production process as well. The logistician is not likely to deal
with detailed production processes such as work-in-process inventory control, machine
scheduling, or operations quality control and excludes these from further considera-
tion. Also excluded is the maintenance activity included in the military concept of
logistics,
The mission of the logistician is to provide goods and services to customers ac-
cording to their needs and requirements in the most efficient manner possible. To put it
another way:
The mission of logistics is to get the right goods or services to the right place, at the
right time, and in the desired contlition, while making the greatest contribution to
the firm.
THE SUPPLY CHAII{

Logistics is a collection of functional activitieS that are repeated many times through-
out the channel through which raw materials are converted into finishbd products and
value is added in the eyes of consumers. Because raw material sources, plants, and sell-
ing points are not typically iocated at the same places and the channel represents a se-
quence of manufacturing steps, logistics activities recur many times before a product
arrives in the marketplace. Er,en then, logistics activities are repeated once again as
used products are recycled back up the logistics channel.
A single firm is not generaliy able to control its entire product flow channel from
rarv material source to points of final consumption, although this is an emerging
opportunity. For practical purposes, the business logistics for the individual firm has a
narrower scope. Usually, the marimal managerial control that can be expected is over
a
Council of Logistics Managernent
CHAPTER 7 Bttsiness Logistics-A Vital StLbiect 7
BOX 1.2 EXAMPLE

The reverse logistics channel comes into play when a customer buys a toaster
from a retailer. The customer takes the toaster home and finds it is defective' The
customer returns it to the retailer rvho gladly refunds the purchase price. The re-
tailer now has a defective toaster in in-store inventory. The retailer sends it to a
central return center. Upon receipt, the toaster's UPC (universal product code)
is scanned for identification in the return center's database. The database deter-
mines that the toaster has a return-to-vendor disposition. The database credits
the store inventory for the toaster and creates a chargeback to the manufacturer
for the cost of the toaster. The toaster is shipped back to the manufacturer. The
retailer has made a cost recoverv for this defective asset. The toaster is received
at the manufacturer's return center. The manufacturer scans the toaster into its
database and determines that it has a refurbish disposition.:The toaster is re-
paired and sent for resale on the secondary market. The manufacturer has now
sained value for this defective asset.s
the immediate physical supply and physical distribution channels, as shown in Figure
1-1. The physical supply channel refers to the time and space gap between a firm's im-
mediate material sources and its processing points. Similarly, the physical distribution
channel refers to the time and space gap between the firm's processing points and its
customers. Due to the similarities in the activities between the two channels. physical
supply (more commonly referred to as materials management) and physical distribu-
tion comprise those activities that are integrated into business logistics. Business logis-
tics management is also popularly referred to as supply chain management.
Although it is easy to think of logistics as managing the flow of products from the
points of acquisition to the customers, for many firms there rs a reverse logistics chan-
nel that must be managed as well. The life of a product, from a logistics viewpoint, does
not end with delivery to the customer. Products become obsolete, damaged, or non-
functioning and are returned to their source points for repair or disposition. The re-
uerse logistics channel may utilize all or a portion of the forward logislics channel, or it
may require a separate design. The supply chain terminates with the final disposition of-
a pioduit, and the reverse channel must be considered to be within the scope of logis-
tics planning and control. (See Box 1'2.)
THE ACTIVITY MIX

The activities to be managed that make up business logistics (supply chain manage-
ment) vary from firm to firm, depending on a firm's particular organizational structure,
management's honest differences of opinion about what constitutes logistics, and the
5
Jerry A. Davrs, Jerome G. Lawrence, Peter Rector, and Herbert S. Shear, "Reverse Logistics Pipeline"',4it-
nual Conference Proceedings (San Diego, Calif.: Council of Logistics Management,\995):427.
I PART I Introduction and Plannins
[=h
Transportation
_-* @*m+ffi
Wa reho using Transportation Customers
+
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Tf?
llllll
lil -r-------r-
lil ilil tt trrrrrl
trrrral I
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Factory
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Transportation
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@ Warehousing Transportation Vendorsi pla nts/ports
nfCUnn t-l The Immediate S"ppf" Chain for :in Indi;iafnt,nit*
importance of individual activities to its operations. Follow along the supply chain as
shown in Figure 1-1. and note the important activities that take place. Again, according
to the Council of Logistics Management,
The components of a typical logistics system are: customer service, demand fore-
casting. distribution communications, inventory control, material handling, order
processing, parts and service support, plant and warehouse site selection (location
analysis), purchasing. packagrng, return goods handling, salvage and scrap dis-
posal. traffic and transportation, and warehousing and storage.6
Figure 7-2 organrzes these components, or activities, as to'where they are most likely to
take place in the: supply channel. The list is further divided into key and support activ-
ities, along with some of the decisions associated with each activity.
KEYACTIVITIES
1. Customcr service standards
Cooperate with marketing to
a. Determine customer needs and wants for logistics customer service
b. Determine custorner response to service
c. Set customer service leveis
6 Careers in Logistics (Oak Brook, Ill.: Cor-rncrl of Logistics Management):3.

CHAPTER I Business Lo,qistics-AVital Subiect 9
Business logistics
Physicaisupply Physical distribution

(Materials management) ':
.. ,,-' :. '. -t ! .rj
l-E;t,/l [;h customers

I l
. Transportation . Transportation
. Inventory maintenance . Inventory maintenance
. 0rder processing . 0rder processing
. Acquisition ..,Product scheduling
. Protective packaging . Protective packaging
. Warehousing . Warehousing
. Materials handling . Materials handling
. lnformation maintenance . lnformation maintenance
FIGURE l-2 Possible Activities in a Firmfs Immediate Supply Chain
2. Tiansportatiori
a. Mode and transport service selection
b. Freight consolidation
c. Carrier routing
d. Vehicle scheduling
e. Equipment selection
f. Claims processing
g. Rate auditing
3. Inventory management'
a. Raw materials and finished goods stocking policies
b. Short-term sales forecastinq
c. Product mix at stocking points
d. Number, size, and location of stocking points
e. Just-in-time, push, and pull strategies
4. Information flows and order processing,_
a. Sales order-inventory interface procedures
b. Order information transmittal methods
c. Ordering rules
SUPPORT ACTIVITIES
1-. Warehousing -:
a. Space determination
b. Stock layout and dock design
c. Warehouse configuration
d. Stock placement
2. Materials handlins e
a. Equipment selection
b. Equipment replacement policies
c. Order-picking procedures
d. Stock storage and retrieval
PART I Introduction and Planning
3. Purchasing r,
a. Supply source selection

b. Purchase timing
c. Purchase quantities
4. Protective packaging
Design for
a. Handling
b. Storage
c. Protection from loss and damage
Cooperate with productionioperations to
a. Specify aggregate quantities
b. Sequence and time production output
6. Information maintenance
a. Information collection, storage, and manipulation
b. Data analysis
c. Control orocedures
Key and support activities are separated because certain activities will generally
take place in every logistics channel, whereas others will take place, depending on the
circumstances, within a particular firm. The key activities are on the "critical" loop, as
shown in Figure 1-3. They either contribute most to the total cost of logistics or are es-
sential to the effective coordination and completion of the logistics task.
Customer service standards set the level of output and degree of readiness to
which the logistics system must respond. Logistics costs increase in proportion to the
level of customer service provided. such that setting the standards for service also af-
fects the logistics costs to support that level of service. Setting very high service re-
quirements can force logistics costs to exceedingly high leveis.
Tiansportation and inventories are the primary cost-absorbing logistics activities.
Experience has shown that each will represent one-half to two-thirds of total logistics
costs. It is transportation that adds place value to products and services, whereas inven-
tories add time value.
Tiansportation is essential because no modern firm can operate without providing
for the movement of its raw materials and/or finished products. This essential nature is
underscored by the financial strains placed on many firms by so-called national disas-
ters, such as a national railroad strike or independent truckers'refusal'to move goods
Customer order processing

(and transmittal)
FIGURE 1.3
lnventory
maintenance The Critical Customer
or supoly Service Loop
CHAPTER I Business Losistics-AVital Subiect 1l
because of rate disputes. In these circumstances, markets cannot be served, and prod-
ucts back up in the logistics pipeline to deteriorate or become obsolete,
Inventories are essential to logistics management because it is usually not possible
or practical to provide instant production or sure delivery times to customers. They
serve as buffers between supply and demand so that needed product availability may
be maintained for customers rvhile providing flexibility for production and logistics to
seek more efficient methods for manufacturing and distributing the products.
Order processing is the final key activity. Its costs usually are minor compared to
transportation or inventory maintenance costs. Nevertheless, order processing is an im-
portant element in the total time that it takes for a customer to receive goods or ser-
vices.It also is the activity that triggers product movement and service delivery.
Support activities, although they may be as critical as the key activities in an)/ par-
ticular circumstance, are considered here as contributing to the logistics mission.In ad-
dition, one or more of the support activities may not be a part of the iogistics activity
mix for everv firm. For example, products such as finished automobiles or commodities
such as coal, iron, or gravel that do not need the weather and security protection of
lvarehousing will not require the lvarehousing activitl,, even though inventories are
maintained. However, warehousing and materials handling are typically conducted
wherever products are temporarily halted in their movement to the marketplace.
Protective packaging is a support activity of transportation and inventory, as well
as of warehousing and materials handling because it contributes to the efficiency with
which these other activities are carried out. Purchasing and product scheduling often
may be considered more a concern of production than of logistics. However, they also
affect the overall logistics effort and specifically the efficiency of transportation and in-
ventory management. Finally, information maintenance supports all other logistics ac-
tivities in that it provides the needed information for planning and control.
IMPORTANCE OF LOGISTICS
Logistics is about creating vahte-value for customers and suppliers of the firm, and
value for the firm's stiikeholders. Value in logistics is expressed in terms of. time and
place. Products ancl services have no value unless they are in the possession of the cus-
tomers when (time) and where (place) they wish to consume them. For example, con-
cessions at a sports event have no value to consumers if they are not available at the
time and place that the event is occurring, or if inadequate inventories are maintained
to meet the demand of the sports fans. Good logistics management views each activity
in the supply chain as contributing to the process of adding value. If little value can be
added. it is questionable whether the activity should exist. Horvever, value is added
when customers are lvilling to pay more for a product or service than the cost to place
it in their hands. To many firms thror"rghout the world, logistics has become an increas-
ingly important value-adding process for a number of reasons,
Costs Are Significant

Over the years, a number of studies have been conducted to determine the costs of lo-
gistics for the economy and for the individual firm. There have been widely varying es-
timates as to the cost levels. According to the International Monetary Fund, logistics
L2 PART I IntrodLtction and Plannins
TABLEl-5 Recent Average Phydical Distribution Costs in P-ercent of Sales and $lcwt.
Category Percent ol Sales $lcwt.
Tiansportation 2.88% $19.13

Warehousing 2.09 21.94
Customer service/order processing 0.s5 6.-s8
Administration 0.40 3.32
Inventory carrying cost @ 18% 2.32 32.2',7
Total distribution costu 8.01% $80,27
oThe authors claim the totals do not match the sum of the individual statistics
due to a different
number of data entries in each category.
Source: Herbert W Davis and William H. Drumm, "Logistics Costs and Customer Service Levels
1996," AnnuaL Conference Proceedings (Orlando, Fla.: Council of Logistics Management, 1996):
227.
costs average about 12 percent of the world's gross domestic product. Robert Delaney,
who has tracked logistics costs for more than tlvo decades, estimates that iogistics sup-
ply chain costs are 10.5 percent of the gross domestic product. or $1,126 trillion.T For
the firm, logistics costs have ranged from 4 to over 30 percent of sales.B The results of a
recent cost survey are shown in Table 1-3. Although the survey results give physical dis-
tribution costs at about 8 percent of sales, this survey appears not to include physical
supply costs. Probably another one-third can be added to this total to represent aver-
age logistics costs for the firm at about 10.5 percent of sales. However we estimate lo-
gistics costs, they are substantial for most firms, ranking second only to the cost of
goods sold (purchase costs). Value is added by minimizing these costs and passing the
benefit on to the consumers and to the firm's shareholders.
Supply and Distribution Lines Are Lengthening

The trend is toward an integrated world economy. Firms are seeking, or have devel-
oped, global strategies where either their products are designed for a rvorld market
and they are produced wherever the low-cost raw materials, components, and labor
can be found (Ford's Escort automobile) or they simply produce locally and sell inter-
nationally. In either case, supply and distribution lines are stretched as compared with
the producer who wishes to manufacture and sell locally. Not only has the trend oc-
curred naturally by firms seeking to cut costs or expand markets, but it is also being en-
couraged by political arrangements that promote trade. Examples are the formation of
the European Economic Community (EC92);the signing of the North America Free
Tiade Agreement (NAFTA) among Canada, the United States, and Mexico; and the
creation of a new economic trade agreement among several countries of South Amer-
ica (MERCOSUR).
Globalization and internation ahzatron of industries everywhere lvill depend heav-
ily on lo-eistics performance and costs, as companies take more of a rvorld view of their
7
Bruce Vail, "The Problem with Contract Logistics," A merican Shipper (July 1991): 56.
8
For a history of these cost estimates, see Bernarcl J. Lalonde and Paul H.Zinszer, Customer Seryice: Metm-
ing and ivleasurement (Chicago: National Council of Physical Distnbution Nlanagement .1916); Richard E.
Snvder, "Phvsical Distribution Costs:A T\r'o-Year Analysis," Distribution,Age (January 1963): 50-51; and
\\'endall lvl. Stervart, "Ph.vsical Distribution: Key to Improved lblume and Profits," Journal of lvlarkering
{Januar\/ lyb-\):b/.
CHAPTE,R I Btsiness Losistics-AVitnl Subiect 13
operations. As this happens, logistics takes on increased importance within the firm
since costs. especially transportation, become a larger part of the total cost structure.
For example, if a firm seeks foreign suppliers for the materials entering its product or
foreign locations to build its products. the motivation is to increase profit. Material and
labor costs mav be reduced, but logistics costs are likely to increase due to increased
transportation and inventor,v costs. The trade-off, as shown in Figure 1-4, may lead to
higher profit by reducing materials. labor, and overhead costs at the expense of logis-
tics costs and tariffs. Outsourcing adds value, but it requires more careful management
of logistics costs and product-flow times in the supply channel. (See Box 1.3.)
Logistics Is Important to Strategr

Firms spend a great deal of time finding ways to differentiate their product offerings
from those of their competitors. When management recognizes that iogistics impacts
on a significant portion of a firm's costs and that the result of decisions made about the
supply chain vields different levels of customer service, it is in a position to use this ef-
fectively to penetrate new markets. to increase market share, and to increase profits.
Consider holv Benetton, a clothing manufacturer, used logistics strategically to com-
pete better in an international market for highly seasonal products. (See Box 1.4.)
Logistics Adds Significant Customer Value

A product or service is of little value if it is not available to customers at the time and
place that they wish to consume it. When a firm incurs the cost of moving the product
toward the customer or making an inventory available in a timely manner, value has
been created for the customer that was not there previously'. It is value as surely as that
created through the production of a quality product or through a low price.
Domestic sources Foreign sources
Marketing
Marketing
Log istics
Log istics
Ta riffs
Overhead
Materials
Materials
FIGURE 1.4
, :., ' .,, :'
Economic Benefit of Sourcing from Low-
Cost Offshore Locations Rather than
from Higher-Cost Local Suppliers
Source: "International Logistics: Battleground of the '90s" (Chicago:A. T. Kearney, 1988).
t4 PART I Introdttction and Plannins
BOX 1.5 EXAMPLE

Toyota has 35 manufacturing plants in 25 countries outside of Japan at which it
produces nearly 900,000 vehicles annually.Toyota now builds vehicles not only in
the United States, Japan, and Europe, but in South America, South Africa, and
Asian nations such as Thailand,Indonesia, China, Nlalaysia, and the Philippines.
While exports were down by 9 percent in 1993, overseas production was up by 16
percent. In the case of Georgetown, Kentucky, where Camrys are built, Toyota
uses the just-in-time concept to supply parts from across the Pacific. They're
loaded into containers on ships in Japan, hauled across the Pacific, and trans-
ferred to stacktrains on the United States West Coast for relay to Georgetown,
where they feed an assembly line that turns out 1,000 Camrl's a day. Deliveries
are scheduled to the minute in order to keep inventories low Due to the long
suppiy lines and the associated uncertainties, supply channels must be managed
more carefully than if all production were local.e
It
is generally recognrzed that business creates four types of value in products or
services. These are (1) form, (2) time, (3) place, and (4) possession. Logistics creates two
out of these four values. Form value is created by manufacturing as inputs are converted
to outputs, that is, raw materials are transformed into finished goods. Logistics controls
the time and place values in products, mainly through transportation, information
flols, and inventories. Possesslon value is often considered the responsibility of mar-
keting, engineering, and finance, where the value is created by helping customers ac-
quire the product through such mechanisms as advertising (information), technical
support, and terms of sale (pricing and credit availability). (See Box 1.5.)
Customers Increasingly Srant Quick Customized Response

Fast-food retailers, automatic teller machines, overnight package delivery, and elec-
tronic mail on the Internet have led us as consumers to expect that products and ser-
vices can be made available in increasingly shorter times. In addition, improved infor-
mation systems and flexible manufacturing processes have led the marketplace toward
mass customization. Rather than consumers having to accept the "one iize fits all" phi-
losophy in their purchases, suppliers are increasingly offering products that meet indi-
vidual customer needs. (See Box 1.6.)
Companies too have been applying the concept of quick response to their internal
operations in order to meet the service requirements of their own marketing efforts.
The quick response philosophy has been used to create a marketing advantage, as in
the case of Benetton. Similarly, Saks Fifth Avenue applied it, even though big profits
are made through big margins and not on cost reductions that might be achieved from
good logistics management. Suppiy chain costs may even rise. though the intent is to
more than cover these costs through increased profits. (See Box 1.7.)
o
Joseph Bonney. "Toyota's Global Convel or Bclts." Ain eri can Shipper (Scptember 1991): 50 - i8.
CHAPTER 7 Business Losistics-AVital StLbiect 15
BOX 1.4 EXAMPLE

Benetton. the Italian sportswear company, has knitting in its heart. Located in
Ponzano, Italy, Benetton makes and distributes 50 million pieces of clothing
worldrvide each year, mostly sweaters, slacks, and dresses.
Bennetton found that the fastest way to run a distribution system is to create
an electronic loop linking sales agent, factory, and warehouse as illustrated in
Figure 1-5. If, say, a salesrvoman in one of Benetton's Los Angeies shops finds
that she is starting to run out of a best-selling red sweater in early October. she
calls one of Benetton's 80 sales agents, who enters the order in his or her per-
sonal computer, which sends it to a mainframe in Italy. Because the red sweater
was originallv created on a computer-aided design svstem, the mainframe has all
its measurements on hand in digital code, r,vhich can be transmitted to a knitting
machine. The machine makes the sweaters. which factory workers put in a box
with a bar code label containing the address of the Los Angeies store, and the
box goes into the warehouse. That's right-one lvarehouse serves Benetton's
5,000 stores in 60 countries around the world. It cost $30 million, but this distri-
bution center. run by onlv eight people, moves 230,000 pieces of clothing a day,
Once the red slveaters are sitting snugly in one of 300,00t1 slots in the ware-
house, a computer sends a robot flying. By reading the bar codes, the robot finds
the right box and any other boxes being shipped to the Los Angeles store. picks
them up, and loads them onto a truck. Including manufacturing time, Benetton
can get the order to Los Angeles in four r,veeks. If the company already has red
sweaters in stock. it takes one week. That's quite a performance in the notori-
ously slolv garment indr-rstry, where hardly anyone else wili even bother with re-
orders. And if Benetton suddenly realizes that it did not make any, say, black
cardigans and purple blouses this year and they are hot, it can manufacture and
ship a "flash collection" of black cardigans and purple blouses in huge quantities
in a few weeks.lil
FIGURE l- 5 Benetton's Delivery Channel
1'r
"How N{anasers Can Succeed through SPEED," FortLrne (February 13, 1989):54-59. O 1989 The Time
Inc. lvlaeazine Company. All rights reserved.
,.:1 .
16 PART I Introduction and Plannine
BOX 1.5 EXA}IPLE

When discount houses selling computer software from catalogs and magazine
advertisements wished to compete with local retailers, they had a price advan-
tage due to the economies of scale that they could achieve. Operations were cen-
tralized at one location when lower-cost warehouse-quality space rather than
higher-cost retail-quality space could be used. Their staff was predominately
telephone-order takers and warehouse personnel filling and shipping orders. In-
ventories also were minimized relative to sales through centralization but also
offered substantial variety and high levels of product avaiiability. On the other
hand. retailers had the advantage of immediate availability for most products
that would offset a.ny price advantage to the anxious customer. To counter this
possible delivery advantage of retailers in their local markets, the discount
houses made sure that customer orders could be placed by telephone toll-free
and that these orders were filled the same day and then shipped overnight by pri-
ority air delivery to place the product in the hands of the customer by the next
morning at his or her home or workplace. Many customers find this nearly as
fast, and in many cases a lot more convenient, as buying from a local retailer!
Value has been created for the busy customer through logistics.
BOX I.6 OBSERVATIONS

Gateway 2000, a desktop computer company, will configure a PC to exact hard-
ware requirements of the customer, and even install requested software.
L. L. Bean sells clothes through a catalog.In addition to offering a wide as-
sortment of clothing sizes in general, some of the clothes may be purchased with
alterations to exact customer's size. Also, L. L. Bean will assure fast delivery by
shipping the order by Federal Express at no additional charge.
Loqistics in Nonmanufacturing Areas

It think of logistics in terms of moving and storing a physical prod-
is perhaps easiest to
uct in a manufacturing setting. This is too narrow a view and can lead to many missed
business opportunities. The logistics princrples and concepts learned over the years can
be applied to such areas as service industries, the military, and even the management of
the environment.
Service Industry
The service sector of industrialized countries is large and growing.In the United States,
more than 70 percent of all jobs are in what the U.S. government classifies as the ser-
vice sector. The size of this sector alone forces us to ask if logistics concepts are not as
applicable here as they are to the manufacturing sector. If they are, there is a tremen-
dous untapped opportunity vet to be iulfilled.
CHAPTER 7 Business Losistics-AVital Subiect 17
BOX 1.7 APPLICATION

It is predicted that one-half of the retailers in the countrv will go ont of business
in the next six years. To Saks Fifth Avenue, this fear alone may have been ade-
quate motivation for management to integrate merchandising and logistics. The
benefits are obvious when merchandising relies on manufacturers that might cut
cioth in Bangladesh and finish garments in Italy before shipping them to a ritzy
selling floor in the United States. The difference between profit and loss on hot-
selling items may be as little as 7 to 10 days, so good logistics performance re-
quires that such items be on the selling floor precisely when needecl most. How
does Saks do it?
The company's 69 stores are served by just two distribution centers. One is in
Yonkers, New York, close by Saks's flagship store on Nerv York City's Fifth Av-
enue. The second is in Ontario, California. i,vell situated to serve the trendy
southern California market. Rapid movement through the supply channel is key
to profitabihty. Items go through these centers on a 24-hour turnaround. About
80 percent of Saks's imported items come into these centers by air freight-those
from Europe are handled by Yonkers, and those from the Far East, by Ontario.
Items are exchanged between the centers bir air freight, with a dedicated flight
between New York and Los Angeles every business day. Distribution centers
then serve their local stores with a cornbination of air freisht and truckins.ll
Many companies are classified as service firms that. in fact, produce a product,
Examples include McDonald's Corporation (fast food);Dow Jones & Co.,Inc. (news-
paper publishing); and Sears, Roebuck and Co. (merchandise retailing). These compa-
nies carry out all the typical logistics activities as does any manufacturing firm. How-
ever, for service companies such as Bank One (retail banking), Nlarriott Corporation
(lodging), and Consolidated Edison (electric power), logistics activities, especially
physical distribution ones, are not as obvious.
Even though many service-oriented companies may be distributing an intangible,
nonphysical product, thev do engage in many physical distribution activities and deci-
sions. A hospital may want to extend emergency medical care throughout the commu-
nity and must make decisions as to the locations of the centers. United Parcel Service
and Federal Express mvst locttte terminals and roi,te prckup and delivery trucks. The
East Ohio Gas Company inventories natural gas in underground wells during the off
season in the region where demand will occur. Bank One must locnte and have cash ln-
ventorv on hand for their teller machines. The Federal Reserve Bank must select the
methods ol transportation to move canceled checks among member banks. The United
Methodist Church must decide the number,locntion, and size of the churches needed
to meet shifts in size and location of congregations, as well as to plan the inventory of
the ministerial staff. Promise Keepers' logistics is a good example of the logistics deci-
sions encountered in a service operation. (See Box 1.8.)
1r Bruce \/aii. "Logistics. Fifth Avenue Style." r\nrcrican Shipper (August 1994): 49 - 51
18 PART I Introduction and Planning
BOX 1.8 EXAXTPLES
Promise Keepers must rely on good logistics management to assure that their
crusades can be conducted on time. Promise Keepers is a Christian men's min-
istry that conducts 23 malor events around the United States-with attendance
ranging from 50 to 80,000. The operation is large enough to involve a major mo-
tor carrier that handles the event logistics. Using the concept of time definite de-
livery,the carrier coordinates the receipt of supplies such as bibles from Chicago
or hats from Kansas City, in addition to trailerloads of stage equipment. The ma-
terials must be assembled and delivered to an event site and delivered precisely
on time. Since events are held at stadiums, speedways, and the like, there are
other events (ball games, races, etc.) also scheduled on the same weekend. There
may be as many as 30 truckloads that must be coordinated to arrive precisely on
time and leave just as precisely to avoid congestion with the logistics of the other
events. Computer technology is used to track trailer movements and assure that
the extremely close coordination can be achieved.12
During the time span of one week, there were three major stories that drew
the largest TV audience in history: British Princess Diana was killed in an auto-
mobile crash in Paris,India's lvlother Teresa died of heart failure in Calcutta, and
there was a major bombing incident in Jerusalem. Suddenly, the media had major
logistical problems with covering three major news stories in three corners of the
u,orlci. For exampie, CNN diverted a reporter from Paris to the Nliddle East,
lvhile other networks sent their Hong Kong correspondents to Calcutta. Then,
there were the logistical problems of allocating air time to the three stories.13
The techniques, concepts, and methods discussed throughout this text should be as
applicable to the service sector as they are to the manufacturing sector. The key, ac-
cording to Theodore Levitt, may be in transforming an intangible service into a tangi-
ble product.la Problems rvill remain of carefully identifying the costs associated with
the distribution of an intangible product. Perhaps because of this, few service firms or
organizations have a physical distribution manager on their staff, although they fre-
quently do have a materials manager to handle supply matters. Hower4er, managing lo-
gistics in service industries does represent a new direction for the future development
of logistics practice.
Military
Before businesses showed much interest in administering logistics activities in a coor-
dinated manner, the military was well organized to carry out logistics activities. More
than a decade before the beginning of the developmentai period of logistics, the mili-
tary carried out what was called the most complex, best-planned logistics operation in
history-the invasion of Europe dunng World War II.
i2 Roger \{orton. "Direct Response Shipping," Transportation & Distributlon (April 1996):32-36.
1i Kvle Pope. "For the lvledia, Diana's Funerai Prompts Debate," Wall Street Joarnal (September 8, 1997);81.
1a
Theodore Levitr, The Mctrkering Intaginti.tion (New York:The Free Press, 1983), 108 -i10.
CHAPTER t Business Logistics-AViral Sttbiect L9
Although the problems of the military, with its extremely high "customer service"
requirements. were not identified with those of business, the similarities were great
enough to provide a valuable experience base during the developmental years of logis-
tics. For example, the military alone maintained inventories valued at about one-third
of those held bv all U.S. manufacturers. In addition to the management experience that
such large-scaie operations provide, the military sponsored, and continues to sponsor^
research in the logistrcs area through such organizations as the RAND Corporation
and the Office of Naval Research. With this background, the field of business logistics
began to grolv. El'en the term logistics seems to have had its origins in the military.
The most recent example of military logistics on a large scale r.vas the conflict be-
tween primarilv the Unitecl States zrnd Iraq over Iraq's invasion of the small country o{
Kurvait. This invasion has been described as the largest military logistics operation in
history.is The logistics support in that war is yet another illustration of what worid-class
companies have alwavs knolvn: good logistics can be a source of competitive advan-
tage. Lieutenant General Wiiliam Pagonis. who was in charge of logistics support for
Desert Storm. obsen'ed:
When the Middle East started heating up, it seemed like a good time to pull out
some history books on desert warfare in this region . . . But there was nothing on
logistics. Logistics is not a best seller. In a couple of his diaries, Rommel talked
about logistics. He thought the Germans lost the battle not because they didn't
have sreat soldiers or equipment-in fact. the German tanks outfought ours
almost throughout \trbrld War II-but because the British had better logistics.i6
Gooci logistics performance was obvious. The first rvave of 200,000 troops and their
equipment was deploy'ed in a month and a half, whereas it took nine months in the
Vietnam conflict. In addition, the application of many good logistics concepts u,as evi-
dent. Take customer service, for erample:
We believed that if we took care of our troops, the objectives rvould be accom-
plished no matter lvhatever else happened. The soldiers are our customers. It is no
different than a determined, single focus on customers that many successful busi-
nesses have. Norv, you take care of your soldiers not only by providing them cold
sodas, and burgers, and good food: you make sure they have the ammunition on
the front line, so that when they go fight the war they know they have what they
need.17
Jhis meant that rvhen 120-mm guns rather than 105-mm guns were desired on tanks,
they were changed. When broln veiricles were preferred over the traditional camou-
flage green, they',vere repainted at a rate of 7,000 per month.
Environment
Population growth and resulting economic development have heightened our aware-
ness of environmental issues. Whether it is packaging materials that are being recycled,
hazardous materials that are being transported, or products that are being refurbished
G*, week (Nt arch4, 199i ): 12, 43.

16
Graham Sharman. ''Good Loeistics is Combat Power," The McKinsey Quarterly.no. 3 (1991): 3 -21.
rT
Ibid.
20 PART I Introchtction and Plannine
BOX 1.9 EXA.ilIPLE

In Germany, the government requires retail grocers to collect cereai boxes at the
point of sale. Typically, consumers pay for the product, then open the box and
empty the contents into containers they brought from home, and put the empty
boxes into collection bins. The seller has the responsibility for recovery of the
spent materials and their repackaging and reuse or their disposal.18
for resale, logisticians are involved in a major way. After all, America alone produces
more than 160 million tons of waste each year, enough for a convoy of 10-ton garbage
trucks reaching halfway to the moon.le In many cases, planning for logistics in an envi-
ronmental setting is not different from that in manufacturing or service sectors. How-
ever, in a few cases additional complications arise, such as a result of governmental reg-
ulations, that make the logistics for a product more costly by extending the distribution
channel. (See Box 1.9.)
BUSINESS LOGISTICS IN THE FIRTI

It has been the tradition in many firms to organize around marketing and production
functions. T,vpically, marketing meant selling something, and production meant making
something. Although few business people would agree that their organization is so
simple, the fact remains that many businesses emphasize these functions while treating
other activities, such as traffic, purchasing, accounting, and engineering. as support ar-
eas. Such an attitude is justified to a degree, because if a firm's products cannot be pro-
duced and sold, little else matters. However, such a pattern is dangerously simpie for
many firms to follow in that it fails to recognize the importance of the activities that
must take place between points and times of production or purchase and the points
and times of demand. These are the logistics activities, and they affect the efficiency
and effectiveness of both marketing and production. (See Box 1.10.)
Scholars and practitioners of both marketing and production have not neglected
the importance of logistics. In fact, each area considers logistics within,its scope of ac-
tion. For example, the following definition of marketing management includes physical
distribution.
Marketing (management) is the process of planning and executing the concep-
tion, pricing, promotion, and distributron of ideas, goods, and services to create
exchanges with target groups that satisfy individual and organizational
objectives.2o
18
"European Logistics Changes Sharpli'," American Shipper (May 1993): 66.
I
i
Le
E. J.lv{uller, "The Greening of Logistics," Distriburlon (January I99I):32.
:
20
Definition approved by the American lv{arketing Assocration as paraphrased in Philip Kotler. iv[arketing
Managentent: Planning, Analy-sis, Implementation, ancl Control,8th ed. (Upper Saddie River. NJ: Prentice i
Hall. i994).13.
CHAPTER 1 Business Logistics-AVitttl Subiect 21
BOX 1.10 EXAIIPLE

GM hopes improving customer service will boost sales of Cadillacs, which have
been squeezed as buvers shift to more stylish U.S. cars as rvell as imports. Cadil-
lac loses a substantial number of sales when customers are put off by lengthy de-
livery times. Research shows that 10% to 11% of sales are lost because the cars
are not available:.
A test production ancl distribution program is being prepared for Florida, a
ma.jor market for Cadillacs because of the state's older population. Under the
proqram, about 1,500 Cadillacs will be parked at a regional distribution center in
Orlando. Florida, to arvait delivery to dealers statewicle w'ithin 24 hours. In some
areas of Florida, many buyers wait two days for popularly equipped cars. Addi-
tionally, GM's Cadillac factorv in Detroit r,vill speed up production of specially or-
dered Cadillacs as well as reduce shipping time. Made-to-order Cadiilacs will ar-
rive at dealerships in about three lveeks, compared with 8 to 12 weeks now. Under
this program, GM expects dealership inventories to decline by abor-rt 50%.21
Marketing's concern is to place its products or services in convenient distribution

channels so as to facilitate the exchange process. On the other hancl, the concept of
production/operations management often includes logistics activities. For example:
"Operations management has the responsibility for the production and delivery of
physical goods and services."22 Production/operations is likely to be most interested in
those activities that directly affect manufacturing and its primary objective of produc-
ing at the lowest unir cost.
The difference in operating objectives (maximize revenue versus minimize cost)
for these two primary management areas mav lead to a frasmentation of interest in,
and responsibility for,logistics activities, as well as a lack of coordination among logis-
tics activities as a rvhole. This. in turn, may leacl to lower customer service levels and
higher total logistics costs than are necessarv. Business logistics represents a resroup-
ing, either by formal orsanizational structure or conceptually' in the minds of manage-
ment. of the move-store activities that historically may have been partially under the
control of marketing and partially under the control of production/operations.
If logistics activities are looked upon as a separate area of managerial actjon. the
relationship of logistics activities to those of mat'keting and production/operations
would be as sholvn in Figure 1-6. Marketing rvould be primarily responsible for market
research, promotion, salesforce management, and the product mix, which create "pos-
session" value in the product. Productionioperations ',vould be concernecl rvith the
creation of the product or service, which creates form value in the product. Key re-
sponsibilities rvould be quality control. production planning and scheduling, job design,
capacitv plannin-9, maintenance, and work measurement and standards, Logistics
would be concerned with those activities (previously defined) that give a product or
21V!/all Street
Journal (August 16. 1994):.A5.
22
John O. NIcCIain and L. Joseph Thomas, Operations Nlanagement; Production of Goods and Services.2nd
ed. (Upper Saddle l{iver. NJ: Prentice Hall, 1985), 14.
22 PART I Introduction and Planninp
LOGISTICS
Qemnlo
PRODUCTION/ MARKETING
activities: In!_erfaqe
OPERATIONS . Transport Sample activities:
I nterface; activities: . Promotion
Sample activities: . Inventory . Customer
acttvril es:
. Quality control . Market research
. Product . Order service
. Detailed . Product mix
scheduling processi ng standards . Sales force
production . Plant . Materials . Pricing
scheduling . Packaging management
location handling
. Equipment maint. . Purchasing . Retail
. Capacity planning
location
. Work
Production- Marketing-
logistics lnnictins
i nte rface i nterface
FIGURE |-$ I.ogistics Interfaces with Marketing and ProductioS . :
service time and place value. This separation of the activities of the firm into three
groupings rather than two is not ahvays necessary or advisable to achieve the coordi-
nation of lcgistics activities that we seek. Marketing and production/operations, when
broadly conceived and coordinated, can do an effective job of managing logistics activ-
ities without creating an additional organizational entity. However, a separate func-
tional area may be the most effective wa,v of achieving the desired coordination.
Figure 1-6 also shows activities that are at the interface of marketing and logistics
and production/operations and logistics. An interface activity is one that cannot be
managed effectively within one functional area. The interface is created by the arbi-
trary separation of a firm's activities into a limited number of organizational divisions.
Nlanaging the interface activities by one function alone can lead to suboptimal perfor-
mance for the firm by subordinating broader company goals to the goals of the indi-
vidual function-a potential danger resulting from the departmental form of organiza-
tional structure so common in companies today. To manage interface activities
effectively, some mechanism or incentive for cooperation among the functions in-
volved needs to be established.
It is important to note, however, that establishing a third functionai group is not
lvithout its disadvantages. Two functional interfaces now exist where onl1, one between
marketing and production/operations previously existed. Some of the most difficult
administrative problems arise from the interfunctional conflicts that occur when one is
attempting to manage interface activities.
OBJECTIVES OF BUSINESS LOGISTICS

Within the broader objectives of the firm. the business logistician seeks his or her own
functional goals that will move the firm toward its overall objectives. Specifically, he or
she desires to develop a logistics activity mix that wiil result in the highest possible re-
CHAPTER I Business Lo.qistics-AVirsl Subiect 23
turn on investment over time. There are two dimensions to this goal: (1) the impact of
the logistics system design on the revenue contribution and (2) the cost of the design.
Ideally, the logistician should know how much additional revenue would be gener-
ated through incremental improvements in the quality of customer service provided.
Holever, such revenue is not generallv known with great accuracy. Often he or she
must set the customer service level at some value, usually at a level that is acceptable to
ctistomers. the sales function, or other concerned parties. At this point, the logistics ob-
jective may become one of minirnizing costs subject to meeting the desired service
level rather than profit maximization or return on investment.
Unlike revenue? logistics costs usually can be determined as accurately as account-
ing practice will allow and are generally of two types: operating costs and capital costs.
Operating costs are those that recur periodically or those that var,v directly with varia-
tion in activitv leveis. Wages, public rvarehousing expenses. and administrative and cer-
tain other overhead expenses are examples of operating costs. Capital costs are the
one-time expenses that do not chzrnge with normal variations in activity levels. Exam-
ples here are the investment in a private trucking fleet, the construction cost of a com-
pany warehouse, and the purchase of materials-handhng equipment.
If it is assumed that there is knorvledge of the effect of logistics activity levcls
on revenues of the firm, a workable financial objective for logistics can be stated as
follows:
FINANCIA.L OBJECTIVE
Maximize over time the ratio oJ the unnttal revenLle (dtLe to the customer service
level provided) less the operating (:osts of the logistics svstem to the annualized
investment in the logistics system.
If the time value of money is great. maximizing the present r,alue of cash flows or
maximizing the internal rate of return would be an even more appropriate statement
of the objective, Maximizing the cumulative return on investment over time is the sin-
gle most important objectil'e to ensllre the survival of the firm.
APPROACH TO THE, STUDY OF LOGISTICS

Nor,v that a background of definition and srgnificance has been provided, we proceed
to study the management of logistics in a systematic way. There are a number of ac-
ceptable ways to organize this study, and thereforo this book. Two themes are used
here as they follow rvhat management does and the skills needed to perform in a tech-
nically complex world. First, the r,vork of management can be looked upon as perform-
ing the tasks of planning, organizing, and controlling to achieve the objectives of the
firm. Planning refers to deciding on the goals for the firm, organizing refers to collect-
ing and positioning the resources of the firm to accomplish the company goals, and
controlling refers to measuring company performance and taking corrective action
when performance is not in line with goals. Because these are central to what manage-
ment does, they rvill each be covered in this book.
Second, it is recognized that managers, whether at entry level or top level, spend a
great deal of time in the planning activity. To do effective planning, it is useful to have
a vision of the goals of the firm, to have concepts and principles for guidance on holv to
24 PART I IntrochLction and Planning
Customer service levels
Facility location
decisions
Inventory Tra nspo rtatio n

decisions decisions
Customer service levels

FIGURE:1-7 Th" Logistics Planning Tri"ngl"
get there, and to have tools that help to sort among alternative courses of action.
Specifically for logistics management, planning revolves around a primary decision tri-
angle of location, inventory, and transportation, with customer service being the result
of these decisions (see Figure 1-7). Although the logistics pianning triangle is the orga-
nizational theme for this book, additional topics that relate to it must also be discussed.
Therefore, the study will proceed in the following way. First, an overview is given of a
strategy for logistics planning and the information systems and technology that sup-
port the strategy. Second, there is a section on the customer, who drives all logistics de -
cision making. Third, there are sections on transportation, location, and inventor,v that
form the cornerstones of the logistics pianning triangle. Finally, there are sections on
organization and control, to round out the planning, organizing, and control theme.
Such contemporary issues as international logistics, service industry logistics, quality,
and reverse logistics are important but are recognized as extensions of the basic ideas
presented in the text. Their discussion is integrated throughout the text. Numerous ex-
amples are given to illustrate horv the concepts and tools for good logistics manage-
ment applv to the problems actually encountered in practice.
COI\CLUDING COtrIMENTS
From just about ever,v standpoint, whether cost, value to customers, or strategic impor-
tance to a firm's mission, logistics is vital. However, only in recent years have busi-
nesses on a broad scale begun to manage supply chain activities in an integrated way,
that is. to think about products and services flowing seamlessly from the sources of raw
materials to the final consumers. And in recent times, that flow must include movement
back up the supply channel, or reverse logistics. The economic forces-mainly in-
creased worldr,vide deregulation of business, proliferation of fiee-trade agreements,
increased foreign competition, increased globalization of industries, and increased re-
quirements for faster and more certain logistics performance-have all been instru-
mental in elevating logistics to a high level of importance in many' firms. New opportu-
CHAPTER 7 Business Logistics-AVitat Subject ,75
nities for logistics management, brought about by growth in the service sector, envi-
ronmental issues, and information technology, will continue to support the vital nature
of logistics for manv years to come.
The primary emphasis of this text is directed toward dealing effectively with the
managerial problems associated rr,'ith moving and storing goods throughout the supply
chain by business firms. These firms may be producing either goods or services and will
have profit-making obj ectives.
This text is organized around the three primary tasks of nanagement: planning, or-
ganizin-q, and controlling. Usually the most difticult of these is planning, that is, the iden-
tification of, and selection among, alternative courses of action. Therefore, major empha-
sis rvill be given to this phase of management. It is the approach of this text to describe
logistics problems as simply as possible and to appl,v definitive methodology that has
proven to be of practical value in real application. It is a decision-making approach.
Questions and Problems

1. What is snpply chain management?
2. Compare business logistics as you would expect it to be practiced in the following
counLries or regions:
a. United States
b. Japan
c. European Economic Communitl'
d. Australia
e. South Africa
f. China
g. Brazil
3. Summarize the factors and forces that give logistics importance among other func-
tional areas of the firm.
4, Discuss the similarities and differences between logistics management of a manufac-
turing firm and
a. a service firm (bank, hospital, etc.)
b. a nonprofit organization (symphony orchestra, art museum, etc.)
c. the military
d. a retailing firm (general merchandise, fast food, etc.)
5. Discuss the role that efficient and effective logistics systems plays in encouraging a
high level of foreign trade.
6. Why is it that both marketing and production may claim some or all of logistics activi-
ties as part of their area of responsibility?
7. What are the key activities of the business logistics function? Discuss their existence
and importance to the management of
a. a television set manufacturer (Sony)
b. a touring music group (Cleveland Orchestra)
c. a hospital (Nlzrssachusetts General)
cl. a citv go\:ernment (New York Citv)
e. a fast food chain (McDonald's)
B. Horv do l ou think internatronal logistics differs from logistics for a globalized firm?
t.
PART I Introduction and Plannins
9, Suggest some products that benefit significantly from increased time and place value.
10. Establishing logistics as a separate area for management within a business firm cre-
ates an additional set of interface activities. What are interface activities? Why
would the creation of an additional set of interface activities cause concern in most
companies?
1i. The political and economic barriers are continuing to come dolvn among the 12 coun-
tries of the Europezrn Economic Community. If you are a manager of physical distrib-
ution for a company that sells finished consumer goods (e.g., Procter & Gamble of
Italy) within your own country, what distribution decisions are facing you in the fu-
ture?
12. Suppose that a manufacturer of men's shirts can produce a dress shirt in its Houston,
Texas, plant for $8 per shirt (including the cost of raw materials). Chicago is a majgr
market for 100,000 shirts per -vear. The shirt is priced at $15 at Houston. Transporta-
tion and storage charges from Houston to Chicago amount to $5 per hundredweight
(cwt.). Each packaged shirt weighs 1 lb.
As an alternative. the company can have the shirts produced in Taiwan for $4 per
shirt (including the cost of raw materials). The raw materials, rveighing about 1 lb.
per shirt, would be shipped from Houston to Taiwan at a cost of $2 per cwt. When the
shirts are completed, they are to be shipped directly to Chicago at a transportation
and storage cost of $6 per cwt. An import duty of $0.50 per shirt is assessed.
a. From a logistics-production cost standpoint, should the shirts be produced in
Tailvan?
b. What additional considerations, other than economic ones, might be considered be-
fore making a final decision?
13. Use the following form as part of an in-class exercise. Be prepared to discuss your
choices and to contrast them with others in the class. Attempt to identify the common
elements that make some successful logistically and those elements that are missing
among others that lead to logisticalfailures.
CHAPTER I Business Logistics-AVital Subject 27
Extrmp{i,rCGoo7L-yutw Sf rategg,
o;r Loik""rhere'of
Many firms use logistics strotegy ats a central element in their corporate strategy. You
are asked to identify those firms that have been successful because of their execution
of their logistics strategy and to note rvhy you consider the execution outstanding (Hall
of Famers). Conversely, identify those firms that suffer from poor execution of an im-
portant logistics strategy (Hall of Shamers).
l. Hull of Famers.Iclentify three firms that use a logistics strategy as an important

element of their overall business stratesv.
HaII of Famers Lo gistical Ele me nts WrII E xe c ute d
2. Hall of Shamers. Identify three firms that have failed in the execution of a lo-
gistics strategy important to their overall strategy.
Hall of Shamers Logistical Elements that Failed

.F
i
!
28,
:r' ,'
PART 1 Introduction and Planning
3. From a logistical point of view, what distinguishes the Hall of Famers from the
Hall of Shamers?
Distinguishing Fe ature s
CHAPTER
r:
iL!i'!1
'.:i..:r\.
;:i'ilil
Logitttia Dffategy
::l::f:, a
dnd PtAr?ning
When the Chinese vvrite the worcl "crisis," they do so in tv,o ckorocters-
one meaning danger, the other opportunity.
-ANoxvvrous
ffin ,zllice's Advqfiures in Wonderlnnd,Alice "Would you tell

asks the Cheshire cat,
W *.,please. which way I ought to go from here?" "That depends a good deal on
K where you want to get to," says the cat.l Deciding the strategic direction for a com-
pany in order to meet its financial, growth, market share, and other objectives is an im-
portant first consideration for management. This is a creative, visionary process, usually
conducted by top management, whereby the overall direction of the firm is outlined
and translated into a corporate plan of action.
The corporate plan is then divided into subplans for the functional areas of the busi-
ness, such as marketing. production, and logistics. These subplans require many specific
decisions to be made. Regarding logistics, these decisions include, among others,locating
warehouses, setting inventory policies, designing order entry systems, and selecting the
modes of transportation. Many of these may be aided by the application of varrous con-
cepts for logistics and decision-making techniques available to the logistician.
In this chapter, we want to look at the planning process, first from the corporate-
wide perspective and then from the logistics function point of view. A framework will
be set for planning that r,vill form the basis for later chapters. This chapter, as well as
much of this book, is focused on planning and the decision making that leads to good
logistics plans that contribute to the financial goals of the firm.
CORPORATE STRATEGY
Corporate strategy creation begins with a clear expression of the objectives of the firm.
Whether the companv is to seek profit, survival, social, return on investment, market
share, or growth goals should be weil understood. Next, a process of "visioning" is
likely to take place where unconventionai, unheard of, and even counterintuitive
strategies are considered. This requires addressing the four components of good strat-
egy: customers, suppliers, competitors, and the company itself. Assessing needs,
strengths, weaknesses, orientations, and perspectives of each of these components is a
I Leivis Carrall, Alice's AdventrLres inWonderlund (New York: Knopf, 1983),12
29
30 PART I Introduction and Planninp
BOX 2.1 EXANIPLES

Xerox,lvith its copier patents running out, would no longer have a differentiated
product in the marketplace, so it adopted the strategy to be number one in field
service.
StarKist Foods adopted a supply-side strategy of buving and packing all the
tuna that its own fleet and its contracted fleets of fishermen could catch. This
would helo it be the dominant packer in the tuna business.
beginning.2 Then, brainstorming about what may be possible as a niche strategy is the
output of this visioning process. The following are examples of such visions:
. General Eiectric's vision is to be number one or two in each market that it
serves or it will get out of that market.
o Hewlett-Packard envisions serving the scientific community
. IBIVI constantly reshapes itself so as to remain an effective competitor.3
Next, the broad, general visioning strategies need to be converted into more defin-
itive plans. With a clear understanding of the firm's costs, financial strengths and weak-
nesses? market share position, asset base and deployment, external environment, com-
petitive forces, and employee skills. a selection is made from alternative strategies that
evolve from threats and opportunities facing the firm. These strategies now become
more specific directions as to how the vision will be accomplished. (See Box 2.1.)
FIGURE 2-l Overview of Corporate Strategic Planning to

Functional Strategic Planning
External factors: /^^-^^,^+^

uurpurdLtr
. Economic strategic plan
. Regulatory
. Technological
. Competitive
Marketing
Manufacturing
Log istics
Functional strategic plans
William Copacino and Donald B. Rosenfield,'Analytic Tools for Strategic

Source'.
Planning," International JounnL of Phvsical Distribution and fulaterials Managerttent 1 5,
no.3 (1985):48.
: Roger Kallock. ''Develop a Stratesic Outlook." Transportntion nnd DistribtLtion (Jtnuarv 1989): 16-18.
I Kenneth R. Ernst, "Visioninq: Key to Effective Strategic Planning." Annttal Cor.ference Proceedings,Yol-
ume 1 (Boston: Council oi Logistics N{anagement. 1988): 153 -165.
CHAPTE,R 2 Logistics Srrategt and Planning 31
The corporate strategy drives the functional strategies since they are contained
within the former, as shown in Figure 2-7.The corporate strategv is realized as manu-
facturinq. marketing, finance, and logistics shape their plans to meet it. When StarKist
Foods decided on a supplv-side strategy, marketing and logistics responded rvith their
plan to control the potential excess inventories that wouid result. This plan rvas to place
tuna on sale to reduce inventories when necessary.The plan works because tuna is such
a prized product anong households that consumers often stock up when a sale is on.
Let us nolv turn to the specific rvay logistics strategies are developed.
LOGISTICS STR^*TEGY
Selecting a good logistics strategy requires many of the same creative processes as de-
veloping a good corporate strategy.Innovative approaches to logistics strategy can give
a competitive advantage. (See Box 2.2.)
It has been suggested that a logistics strategy has three objectives: (1) cost reduc-
tion, (2) capital reduction. and (3) service improvement.
Cost reduction is strategv directed torvard minimizing the variable costs associated
with movement and storage. The best strategy is usuallv formulated by evaluating alter-
native courses of action. such as choosing among different warehouse locations or select-
ing arnong alternative transport modes. Service levels are typically held constant while
the minimum cost alternatives are being found. Profit maximization is the prime goal.
Capitnl reducrion is strategy directed toward minimizing the level of investment in
the logistics system. Maximizing the return on investment is the motivation for this
strategy. Shipping direct to customers to avoid warehousing, choosing public ware-
houses over privately orvned rvarehouses, seiecting a just-in-time supply approach
rather than stocking to inventory, or using third-party providers of logistics services are
BOX 2.2 E)L,L\IPLES

An office machine company took a bold step to save on valuable machine ser-
vicing time. Tiaditionally, technicians were assigned from a service center to the
customer repair site. Highlv trained and highly paid technicians spent a fair
amount of their time traveling. The company redesigned its logistics system so
that inventories of on-loan and replacement machines were placed around the
country. When a machine broke down, a replaceinent machine ivould be sent to
the customer ancl the broken machine sent to the service center for repair. The
new system not only saved on repair costs but improved customer service as
well.
American f{ospital Supply developed an efficient purchasing system for its
customers b-v putting terminals in each of its customers' offices. The system sim-
plified and facilitated the ordering process for its customers and guaranteed a
higher proportion of orders for American Hospital Supply.a
a
William Copacino and Donald B. Rosenfield,'Analytic Tools for Strategic Planning," Intenwtional Journal
of Physicrtl Distrihutiott antl Material.s l[anasernenr 1,5. no.3 (1985): 41-6L
3? PART I Introduction and Planning
examples. These strategies may result in higher variable costs than strategies requiring
a higher level of investment, however. the return on investment mav be increased.
Service improventenl strategies usually recognize that revenues depend on the
level of logistics service provided, Aithough costs increase rapidly with increased levels
of iogistics customer service, the increased revenues may more than offset the higher
costs. To be effective, the service strategy is developed in contrast with that provided by
competition.
A proactive logistics strategy often begins with the business goals and customer
service requirements. These have been referred to as "attack" strategies to meet com-
petition. The remainder of the logistics system design can then be derived from these
"attack" strategies. (See Box 2.3.)
Each link in the logistics system is planned and balanced with every other in an in-
tegrated logistics planning process (see Figure 2-2). Design of the management and
control systems completes the planning cycle.
Crafting effective logistics customer service strategies requires no particular pro-
gram or technique.It is simply the product of a sharp mind. However, once the logistics
service strategy is formulated, the task is then to meet it.This involves selecting among
alternative courses of action. Such selection is amenable to various concepts and tech-
niques for anaiysis. The next section sets the stage for such evaluation. Understanding
the logistical alternatives open to the logistician and hor,v they can be evaluated is a re-
current theme throushout this book.
BOX 2.3 EXAMPLES

Nabisco had comfortably reigned as the king of steak sauces r.vith its A-1 brand
when Kraft came out with a spicier version called Bulls Eye. This competitive
move by Kraft threatened Nabisco's franchise, and Nabisco responded with A-1
Bold. The supply chain was thrown into overdrive and had Bold on the store
shelves in a matter of months. Nabisco succeeded in knocking Bulls Eye off the
market. Without a fast-response supply chain, Bulls Eye, whtch was a very good
product, would have had time to take market share.s
Domino's Przza was not number one in the ptzza market that was serviced
bv competitors such asPrzza Hut and an army of independent retail operations.
It has become America's second-largestpizza chain by promising customers a
$3 discount on any pie that takes longer than 30 minutes to be delivered to their
home.6
Frito-Lay developed a strategic advantage with its direct-to-store delivery
svstem. and Atlas Door recognized that there was no companv in the industrial
door business that could get a door to a customer in less than three months,
Atlas stepped in and developed a strategy based on delivering a door in much
less time, and it noiv enjoys a major share of the market.T
5
J. Robert Hall. "Supply Chain Management from a CEO's Perspective," Proceedings oJ'the Council of Lo-
gistics Management (.San Diego, Caiif.: Councii of Logistics Management,1995): 16.{.
6
"How lvlanagers Can Succeed through SPEED," Fortune (February 13,1989):54-59.
Ernit. ''1'1tionins." l5i 165.
CHAPTER 2 Logistics Strategy and Planning 33
Individual Link of Business goals and

Logistics System strategies
. Facility location
. Operations strategy
. Inventory management Customer service
. Information systems requirements
. Material handling
. Traffic and transportation
. Planning and control methods Integrated logistics
planning
. Organization
Design of integrated
log istics
management
system
Overall performance
measu res
FIGURE 2-2 Flow of Logistics Planning

Source'.William Copacino and Donald B. Rosenfield,'Analytic Tools for
Strategic Planning," International Jotuttal of Physical Distributictn ond
Materinls Management 15, no. 3 (1985):a9.
LOGISTICS PLANNING
Levels of Planning
Logistics planning attempts to answer the questions of what, when, and hoq and it
takes place at three levels: strategic, tactical, and operational. The major difference be-
tween them is the time horizon for the planning. Strategic planning is considered to be
long range, where the time horizon is longer than one year. Tactical planning involves
an intermediate time horizon, usually less than a year. Operational planning is short-
range decision making, with decisions frequently made on an hourly or daily basis. The
concern is how to move the product effectively and efficiently through the strategically
planned logistics channel. Selected examples of typical proble4s with these various
planning time horizons are shown in Table 2-1.
Each planning level requires a different perspective. Because of its long time hori-
zon, strategic planning works with data that are often incomplete and imprecise. Data
may be averaged, and plans are usually considered good enough if they are reasonably
close to optimum. At the other end of the spectrum, operational pianning works with
very accurate data, and the methods for planning should be able to handle a geat deal
of these data and still find reasonable plans. For example, we may strategically plan all
company inventories to not exceed a certain dollar limit or to achieve a certain inven-
tory turnover ratio.8 On the other hand, an operational plan for inventories requires
that each item be manased individttally.
8Inventorv turnover ratio is defined as the ratio of annual sales to the average inventory levei for the same
annuai period. usuallv in dollar units.
34 PART I Introduction and Plannins
mgLE 2-1' Exarnples of Strategrc,.Tacricaln'and,Operational'p,ii!fu llUfin$

Level of Decision
Type of Decision Strategic Operational
Location No. of facilities, size, Inventory positioning Routing, expediting,

and location and dispatching
Tiansportation Mode selection Seasonai service mix Replenishment quantities
and timing
Order processin-9 Selecting and designing Priority rules for Expediting orders
order entry system customer orders
Customer service Setting standards
'Warehousing Layout, site selection Seasonal space choices Order filling
Purchasing Policies Contracting, vendor Order releasing
selection
Much of our attention will be directed toward strategic logistics planning because
it can be discussed using a general approach. Operational and tactical planning often
require an intimate knowledge of the particular problem, and specific approaches must
be customized. Because of this, we begin with what is the major logistics planning prob-
lem-designing the overali logistics system.
llajor Planning Areas

Logistics planning tackles four major problem areas: customer service levels, facility
location, inventory decisions, and transportation decisions, as shown in Figure 2-3.Ex-
cept for setting a desired customer seryice level-customer service is a result of the
strategies formulated in the other three areas-logistics planning may be referred to as
a triangle of iogistics decision making. These problem areas are interrelated and'should
be planned as a unit, although it is not uncommon to plan them separately. Each has an
important impact on system design.
Customer Service Goals

The level of logistics customer service to be provided, more than any other factor,
dramatically affects system design. Low levels of service allow'centralized inventories
at few locations and the use of less expensive forms of transportation. High service lev-
els generally require just the opposite. However, when service levels are pressed to
their upper limits,logistics costs will rise at a rate disproportionate to the service level.
Therefore, the first concern in logistics strategic planning must be the proper setting of
customer service levels.
Facility Location Strategy

The geographic placement of the stocking points and their sourcing points create
an outline for the logistics plan. Fixing the number,location, and size of the facilities
and assigning market demand to them determines the paths through which products
are directed to the marketplace. The proper scope for the facility location problem is to
include all product movements and associated costs as they take place from plant, yen-
dor, or port location through the intermediate stocking points and on to customer lo-
cations. Assigning customer ciemand to be served directly from plants, vendors, or

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F'OURTH EDITION

Copyright O 1999, 1992 by Prentice-Hall.Inc.

This edition may be sold only in those countries to which it is consigned by

Prentice-Hall International (UK) Limited, London

Printed in the United States of America

"I laaue hea,Q of you . . . tlaat ltght

PART I: INTRODUCTION AND PLANNING 1

Chapter 1 Business Logistics-A Vital Subject 3

Chapter 2 Logistics Strategy and Planning 29

PART II: CUSTOMER SERYICE GOALS 51

Chapter 3 The Logistics Product 53

PART III: TRANSPORT STRATEGY 133

Chapter 5 Tiansport Fundamentals 135

PART Iv: INVENTORY STRATEGY 243

Chapter 8 The Storage and Handling System 245

PART V TOCATION STRATEGY 481

Chapter 13 Facility Location Decisions 483

PART VI: ORGAI\IZATION Al\D CONTROL 605

Chapter 15 Logistics Organization 601

CHAPTER 1 Business Logistics-A Vital Subject 3

Business Logistics Defined 5

The Suppiy Chain 6

Questions and Problems 25

CHAPTER 2 Logistics Strategy and Planning 29

Questions and Problems 48

Nature of the Logistics Product 53

The 80-20 Curve 58

CFIAPTER 4 ,Lggistics,Custbmer Service I 80

Customer Service Defined 8]

Importance of Logistics Customer Service 89

Determining Optimum Service Levels 91

Service Contingencies i03

Qttestions and Problems 106

CHAPTER 5 Order Processing and Information Systems 110

Defining Order Processing 111

CHAPTER 6 Tiansport Fundamentals 135

Importance of an Effective Tiansportation System 135

Company-Controlled Tiansportation 149

Private Carrier Costing 716

Questions antl Problerns 181

CHAPTER 7 Tiansport Decisions 1B-5

Tiansport ServiceSelection 185

PART IV INVENTORY STRATEGY 243

CHAPTER 8 The Storage and Handling System 245

Questions and Problems 212

CHAPTER 9 Forecasting Logistics Requirements 273

Nature of the Problem 214

Forecastine Methods 211

Questions and Problems 299

CHAPTER 10 Inventorl'Policy Decisions 308

Appraisal ofInventories 309

CHAPTER 11 Purchasing and Supply Scheduling Decisions 394

CHAPTER 12 Storage and Handling Decisions 437

Site Selection 438

Questiorts and Problenn 415

Technical Supplement 419

PART v: LOCATION STRATEGY 481

CHAPTER 13 Facility Location Decisions 483

Multifaciiity Location 494