Week 1: Introduction

Logistics Systems
 Outline
• Logistics management
– The goal of logistics management
– The logistical value proposition
• Logistics and supply chain
– Supply chain value proposition
– Responsiveness and
Postponement
– Variability
– Supply chain synchronization
• Integrated logistics framework
What is Logistics?
• Logistics is the design and
administration of systems to control
movement and geographical positioning
of raw materials, work-in-process, and
finished inventories at the lowest total
cost.
A life without logistics?
 Logistics includes these major
functions of work
• Order Processing
• Inventory
• Transportation
 Goal of logistics management
• To satisfy customer
expectations for delivery of
products (or services) while
controlling the total cost
• Managers must support the
requirements for
procurement, manufacturing
and customer accommodation
supply chain operations
 Logistical value proposition
• Logistical value proposition consists of a
commitment to key customer expectations and
requirements at a minimum cost

• The two elements of this value proposition are

Service Benefits and Cost Minimization
– Firms must make appropriate tradeoffs between
service and cost for each of their key customers
Tradeoff and the productivity frontier

Service/responsiveness

Ideal process
Repositioning

World class
Improvement

Low cost
Key take-away #1

• Two elements of logistical value proposition

are Service Benefits and Cost Minimization,
between which companies need to make
appropriate tradeoffs.
Service benefits from logistical performance

• Availability involves having inventory to consistently

meet customer material or product requirements
• Operational performance deals with the time
required to deliver a customer’s order
– Key metrics involve delivery speed and consistency
– Other metrics like flexibility and recovery time from
malfunction are also important
• Service reliability involves the quality attributes of
logistics
– Key to quality is accurate measurement of availability
and operational performance over time
– Consistency
 Different perspectives on cost
minimization
Traditional Cost Logistics Model Total Cost Logistics Model
Minimize order processing cost Minimize (Order processing
+ +
Minimize inventory cost
Inventory
+
+
Minimize transportation cost
+ Transportation
Minimize warehousing, materials +
handling and packaging cost Warehousing, materials
+ handling and packaging
Minimize facility cost +
facility) Cost
Lowest logistics cost
Lowest total logistics cost
 Cost minimization
using the total cost logistics model
Traditional Cost Logistics Model Total Cost Logistics Model
• Focused on achieving the • Focused on achieving the lowest
lowest possible cost for total cost across ALL functions
each of
individual function of logistics logistic Cost-to-cost tradeoff
s
– For example, Transport the cost decisions across logistics
material the cheapest way functions
possible
• Expected lowest cost based
on decisions that were
cheapest for individual
functions
• Ignored the impact of
• A cost decision in one
function should consider
impact on costs of all
other logistics functions
– For example,
Transporting material the
cheapest way is slower
than other choices. This
requires an increase in
storage cost to hold the
material longer
– Would it still be a lower
cost to use the cheapest
mode of transport?
 Example of evaluating alternatives to
find lowest total cost
• Compare two alternative shipping carriers
to move a shipment of electronic chips
– Value of shipment = $25,000.00
– Faster shipping is generally more expensive
than slower shipping
• Carrier 1 costs $250 to ship
• Carrier 2 costs $20 more but delivers 1 day faster
– Product in transit is a form of inventory
• Holding costs for shipment is 40% of value per year
– No other cost differences across
remaining logistics functions
 Example of evaluating alternatives to
find lowest total cost
Traditional Cost Method
• Minimize transportation cost
– Compare 1st carrier at $250 vs. 2nd carrier at $270
• Decision is to use 1st Carrier to save $20

Total Cost Method

• Minimize total of transportation and inventory cost
Annual
Daily cost of holding = holding cost x Product value /365
product

= (.40 x $25,000)/ 365 = $27.40

– Compare 1st carrier at $250 + $27.40 = $277.40 vs. 2nd carrier at
$270
• Decision is to use 2nd Carrier since it is a lower total cost
Key take-away #2

• The goal of logistics management is to satisfy

customer expectations for delivery of products
(or services) while controlling the total cost.
• Note the differences between the lowest total
cost of all functions and the total of the lowest
cost of each function.
 Supply chain?

Supplier Manufacturer Distributor Retailer Customers

 Supply Chain Management
• Supply chain management is a set of
processes used to effectively and
efficiently integrate suppliers,
manufacturers, distribution centers,
distributors and retailers, so that products
are produced and distributed at the right
quantities, to the right locations, and at the
right time in order to minimize system-
wide costs while achieving the consumer’s
desired value proposition.
 Additional Definition
• “Supply Chain Management encompasses the planning
and management of all activities involved in sourcing
and procurement, conversion, and all logistics
management activities. Importantly, it also includes
coordination and collaboration with channel partners,
which can be suppliers, intermediaries, third-party
service providers, and customers. In essence, Supply
Chain Management integrates supply and demand
management within and across companies.” (Council
of Supply Chain Management Professionals – CSCMP)
The integrated value-creation process must be
managed across firms from end to end

Figure 1.1 The Integrated Supply Chain Frameworks

 The total integration of the overall
business process creates value
Table 1.1 Integrative Management Value Proposition
 Integrative management requires
simultaneous achievement of 8 processes

Table 1.3 Eight Supply Chain Processes

Supply Chain Value Proposition

Configure in a customer relevant way while

simultaneously increasing quality,
productivity and operational excellence.

• Service Excellence – Effectiveness

• Cost Minimization and Avoidance – Efficiency
• Value Generation – Relevancy
• Continuous Improvement – Sustainability
EERS Value Performance Model

Effectiveness

Value Creation
Sustainability Efficiency

Relevancy
Key take-away #3

• Integrated management (Integration) is

important for businesses to create value;
functional silos hurt business performance.
Responsiveness as a competitive
advantage
Anticipatory Model

Responsive Model
 Responsiveness as a competitive
advantage (Cont.)
Figure 1.3 Anticipatory Business Model

Figure 1.4 Responsive Business Model

 Postponement Strategy
Differentiation as late as possible – closer to the consumer!

Longer-term forecasts are less accurate

Shorter-term forecasts are more accurate
Aggregated forecasts are more accurate
Disaggregated forecasts are less accurate

Hence:
Aggregated forecast early on – gain accuracy for the aggregated
products BEFORE differentiation
Quickly deliver the product after specific demand information is
collected
Allows the SC to better match the supply to demand
Postponement

Examples:
• Benetton (dyeing after knitting is ~10% more expensive)
• Fish cans for North America (labelled and shipped as
demand becomes known)

Postponement is valuable with a large variety of products with

independent demand, comparable in size.
Postponement can add production and transportation costs.
 Postponement

Manufacturing as long as possible

• Base modular
construction of
product
• No customization until the
exact customer
specifications and
financial commitment is
received
• Objective is to
maintain products in
an uncommitted status
Distributional
• Build or stock a full-
line inventory at one
or a few strategic
locations
• Forward deployment
of inventory is
postponed until
customer orders are
received
• Once orders received,
specific item is
expedited to the local
distributor
 Example of postponement

Keeping all the car panels a base color (white or gray)

until the order is received, then painting to the color
ordered
 Example of postponement

Keeping full inventory in a central warehouse

and releasing customer orders to local
distributors or direct shipping to customer
 Postponement
• Keeping the basic products centralized and
performing the customization at the destination
distributor
• Balances economy of scale with responsiveness
– Can build a sufficient quantity of “ready to customize”
basic units
• Requires a lot of forethought during product
design
 Some capacity terminologies
and ideas
Economies of Scale
 When the average cost per unit of output decreases as a plant gets
larger and the fixed costs get divided across more units.

Dis-economies of Scale
 When the reduction in average unit cost is no longer possible through
further increases in facility size because co-ordination of material flows
and personnel becomes so expensive that new sources of capacity must
be found.
Best Operating Level
 The level for which the process was designed, and thus the volume of
output at which the average unit cost is at a minimum.
Best operating level
Key take-away #4

• Postponement is one strategy (along with

many others) to keep supply chain and
operations responsive.
 Variability
Variation;
Uncertainty;
Randomness…
 Variability

• Variability is anything that causes the system to

depart from regular, predictable behavior

• Sources of Variability:
• Customer orders • Workplace variation
• Differential skill levels • Setups
• Worker unavailability • Change orders
• Job differentiation • Rework
• Material shortages • Yield loss
• Work transfer • Equipment failures
Intuition question 1
Suppose customers arrive to a single teller on average
one every five minutes. However, there is quite a lot of
variability in the customers’ arrivals, as one would
expect in an unscheduled system. The teller takes
between four and five minutes, uniformly distributed, to
serve customers. No customers leave without service.
Approximately how long will arriving customers wait in
line on average?
• There will be no line
• Less than a minute
• Between 1 and 5 minutes
• Between 5 and 15 minutes
• More than 15 minutes
Intuition question 2

What is the 95th percentile of waiting times (in line); i.e.,

the number such that 95% of waits are less than it?

• There will be no line

• Less than 5 minutes
• Between 5 and 15 minutes
• Between 15 and 45 minutes
• More than 45 minutes
 Detailed activity

Source: Cachon, G. & Terwiesch, C. (2009). Matching supply with demand: An introduction to operations management. p.153, Figure 6.3.
How can we measure variability?
• Should be a relative measure!

• Example: standard deviation  = 10 minutes

– low variability if the mean  = 4 hours
– high variability if the mean  = 5 minutes

• Coefficient of Variation (CV):

CV =  / 
Dimensionless measure of variability
Example: Call center arrival variability
 Key take-away #5

• One of the key operations challenges is to

effectively manage logistics in the presence of
variability.
 Integrated Supply Chain
Management

Firms Can Be Fast Alone.

It’s Called Hurry Up And Wait.
The Goal is Supply Chain Synchronization.

• Consumer
• Retailer
• Distributor
• Service provider
• Manufacturer
• Material provider
 Supply chain synchronization

• Supply chain synchronization is the

operational integration of multiple firms across a
supply chain
– Seeks to coordinate the flow of materials,
products and information between supply chain
partners to reduce duplication and redundancy
– Seeks to reengineer internal operations of individual
firms to leverage overall supply chain capability
 An exceptional Industrial Manufacturing MRedPrairie
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Logistics performance cycle

• The performance cycle represents elements of

work necessary to complete the logistics related to
customer accommodation, manufacturing or
procurement
• The logistics performance cycle is the basic unit of
supply chain design and operational control
 Performance cycle uncertainty
• Major objective of logistics in all areas is to reduce
performance cycle uncertainty
• Operational variance is randomly introduced during
the cycle through
– The structure of the performance cycle itself
– Operating conditions
– The quality of logistical operations
Total time to complete the customer delivery
cycle is based on each task within the cycle

Figure 2.8 Performance Cycle Uncertainty 2-53

Performance cycle synchronization seeks to
achieve planned time performance

• Delayed or faster performance at any point along the

supply chain results in potential disruption of operations
• Once consistent operations are achieved,
managers can focus on reducing the time to complete
the performance cycle to a minimum
Logistical integration requires achieving
six objectives simultaneously

Responsiveness
Variance reduction
Inventory reduction
Shipment consolidation
Quality
Life cycle support
 Integrated logistics framework
• Goal is to achieve customer satisfaction at the
lowest Total Cost
• Decisions in one functional area will impact cost
of all others (interdependent)
• We integrate the logistical functions into a
coherent framework starting with the customer
(Order processing) and ending with the
customer (Transportation and Delivery)
The five functions of logistical work are
interrelated
 Order processing
• Order processing is the transmission of
customer requirements to the supply chain
• Accurate information is needed to achieve
superior logistical performance
• Responsive supply chains require accurate and
timely information about customer purchase
behavior
• Well-maintained customer relationship is
important for fast information flow
 Inventory
• Answers the questions of
– When to order
– How many to order/stock
– Where to stock
• The objective is to achieve desired customer service
with minimum inventory commitment.
• Inventory strategy is based on a combination of
– Core customer segmentation
– Product volume and profitability
– Transportation integration
– Time-based performance
– Competitive performance
 Transportation
• Transportation is the operational area that
geographically moves and positions inventory
• Different ways to satisfy transportation
requirements
– Operate a private fleet of equipment
– Contract with dedicated transport specialists
– Engage carriers that provide different transportation services
as needed on a per shipment basis

• Metrics: cost, speed, and consistency

 Warehousing, materials handling and
packaging
• These activities are integral parts of other logistical
functions
– Inventory typically needs to be warehoused at selected
times during the logistics process
– Transportation vehicles require materials handling for
efficient loading and unloading
– Individual products are most efficiently handled when
packaged together into shipping cartons
• Effective integration of these functions facilitates the
speed and overall ease of product flow throughout the
logistical system
 Facility network
• The number, size and geographical
relationship of facilities used to
perform logistical operations directly
impacts customer service capability
and cost
• Types of facilities in the logistics
network include
– Manufacturing plants, warehouses,
cross-dock operations and retail
stores
• Specific logistics activities are
performed within the facility network
The scope of integrated logistical
operations
 Logistical support units
• Customer relationship management is dealing with
the varied aspects of serving customers
• Manufacturing production concentrates on managing
work-in-process inventory as it flows between stages of
manufacturing
• Procurement is concerned with purchasing and
arranging inbound movement of materials, parts, and/or
finished inventory from suppliers into manufacturing or
assembly plants, warehouses or retail stores
Topics to cover
Learning objectives

– Understand what logistics management is, and why it’s important.

– Be able to define and explain the logistical value proposition.
– Be able to explain how to achieve the goal of logistics and satisfy
the value proposition.
– Understand the total cost perspective, and be able to evaluate
alternatives to find the lowest total cost.
– Understand the relationship between logistics and supply chain,
and understand why and how integration creates value.
– Be able to define and explain postponement and responsiveness.
– Understand the presence of uncertainty in logistics and operations.
– Understand economies of scale and be able to explain the drivers
and tradeoffs.
– Understand the integrated logistics framework, be able to explain
the major functions and the scope.